-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LgbLjSBxftgxIyMVK1xzP68C8llaEfZOiNfQWkvevAAROJE+EFec/zWYGav4RWHe jIOvpKCmsNe0E+Esz4b31A== 0000927016-99-003527.txt : 19991029 0000927016-99-003527.hdr.sgml : 19991029 ACCESSION NUMBER: 0000927016-99-003527 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19991028 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLUG POWER INC CENTRAL INDEX KEY: 0001093691 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL INDUSTRIAL APPARATUS [3620] IRS NUMBER: 223672377 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-86089 FILM NUMBER: 99736314 BUSINESS ADDRESS: STREET 1: 968 ALBANY-SHAKER ROAD CITY: LATHAM STATE: NY ZIP: 12110 BUSINESS PHONE: 5187827700 MAIL ADDRESS: STREET 1: 968 ALBANY-SHAKER ROAD CITY: LATHAM STATE: NY ZIP: 12110 S-1/A 1 AMENDMENT #5 TO FORM S-1 As filed with the Securities and Exchange Commission on October 28, 1999 Registration Statement No. 333-86089 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- AMENDMENT NO. 5 TO FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 ---------------- PLUG POWER INC. (Exact Name of Registrant as Specified in its Charter) Delaware 3629 22-3672377 (Primary Standard Industrial (I.R.S. Employer (State or Other Classification Code Number) Identification No.) Jurisdiction of Incorporation or Organization) ---------------- 968 Albany-Shaker Road Latham, NY 12110 (518) 782-7700 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive office) ---------------- Gary Mittleman President and Chief Executive Officer Plug Power Inc. 968 Albany-Shaker Road Latham, NY 12110 (518) 782-7700 (Name, address, including zip code, and telephone number, including area code, of agent for service) ---------------- Copies to: Stuart M. Cable, P.C. David C. Chapin, Esq. Robert P. Whalen, Jr., P.C. Ropes & Gray Goodwin, Procter & Hoar llp One International Place Exchange Place Boston, Massachusetts 02110 Boston, Massachusetts 02109-2881 (617) 951-7000 (617) 570-1000 ---------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] ---------------- The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the SEC, acting pursuant to Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this preliminary prospectus is not complete and may be + +changed. These securities may not be sold until the registration statement + +filed with the Securities and Exchange Commission is effective. This + +preliminary prospectus is not an offer to sell nor does it seek an offer to + +buy these securities in any jurisdiction where the offer or sale is not + +permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion. Dated October 28, 1999. 6,000,000 Shares [Plug Power logo appears here] Common Stock ----------- This is an initial public offering of shares of Plug Power Inc. All of the shares of common stock are being sold by Plug Power. Before this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $13.00 and $15.00. Application has been made for quotation of the common stock on the Nasdaq National Market under the symbol "PLUG". See "Risk Factors" on page 8 to read about factors you should consider before buying shares of the common stock. ----------- Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. -----------
Per Share Total --------- ------- Initial public offering price................................. $ $ Underwriting discount......................................... $ $ Proceeds, before expenses, to Plug Power...................... $ $
To the extent that the underwriters sell more than 6,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 900,000 shares from Plug Power at the initial public offering price less the underwriting discount. ----------- The underwriters expect to deliver the shares against payment in New York, New York on , 1999. Goldman, Sachs & Co. Hambrecht & Quist Merrill Lynch & Co. FAC/Equities ----------- Prospectus dated , 1999. PROSPECTUS SUMMARY You should read the following summary together with the more detailed information and Plug Power's financial statements, the notes to those financial statements and the other financial information appearing elsewhere in this prospectus. In addition to historical information, the following summary and other parts of this prospectus 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 in the "Risk Factors" section and contained elsewhere in this prospectus. Plug Power Inc. Our Business We are a leading designer and developer of on-site, electricity generation systems utilizing proton exchange membrane (PEM) fuel cells for residential applications. We believe that the electricity our residential fuel cell systems will provide to homes can be less expensive, more reliable, more efficiently produced and environmentally cleaner than the electricity provided by the existing electric utility grid and other power generation technologies. We plan to bring our first residential fuel cell systems to market in 2001 and to become the first mass market producer of residential fuel cell systems by selling 100,000 systems per year by 2003. Our Product Our residential fuel cell system will be an appliance, initially about the size of a refrigerator, that will produce electricity through a clean, efficient process without combustion. Our system will receive fuel from a home's existing natural gas line or propane tank, convert the fuel into a hydrogen-rich stream, and then combine it with oxygen from the air in a chemical reaction that produces electric power. Our initial residential systems will be designed to supply 7 kilowatts (kW) of baseload power, 10 kW of peak power and 15 kW of surge load capacity, which will provide the full electricity needs of a home, although the home can remain connected to the electric grid for back-up purposes. To date, we have conducted successful demonstrations of hydrogen-, methanol-, and natural gas-fueled systems and expect to demonstrate a propane-fueled system during 2000. Our Alliance with General Electric Company General Electric Company has selected Plug Power to be its exclusive supplier of fuel cell systems for residential and commercial applications under 35 kW. Together with GE On-Site Power, Inc., a subsidiary of General Electric that operates within General Electric's GE Power Systems business, we formed GE Fuel Cell Systems, LLC, a joint venture dedicated to marketing, selling, installing and servicing Plug Power fuel cell systems. GE Fuel Cell Systems is the exclusive, global distributor and servicer of our systems (except in four states assigned to another distributor) and all systems that it sells will be co-branded with both the General Electric and Plug Power names and trademarks. We believe that our strength in fuel cell system design and development, coupled with General Electric's brand name, worldwide sales and distribution network, service capabilities, and commitment to the commercialization of our fuel cell technology, will allow us to bring the first and best residential fuel cell system to market and, by doing so, establish the industry standard for this new product. 3 Changes in the Power Industry Industrialized societies are dependent upon reliable, on-demand electric power to function. Demand for electricity is expected to continue to grow as the economies of the United States and other industrialized nations expand, particularly with the increased reliance on computers and other electronics. At the same time, developing nations will need additional electricity to improve their standards of living. Reliance upon the existing infrastructure has been and continues to be problematic due to capacity constraints, environmental concerns and other issues. In addition, utility deregulation is creating new challenges and opportunities in the electric power industry. This evolving competitive industry environment coupled with the consumer demand for more reliable, accessible and competitively priced sources of electric power, is driving traditional energy providers to develop new strategies and seek new technologies for electricity generation, transmission, and distribution. Our Solution We believe our residential fuel cell systems will offer the following benefits to energy providers and consumers: . Electric utilities and rural electric cooperatives will be able to lower capital expenditures by deploying our systems to meet increasing demand for electricity rather than expanding, repairing or replacing existing generation, transmission and distribution infrastructure. . Natural gas and propane distributors will be able to increase the utilization of their existing distribution infrastructure, and mitigate the seasonality of their businesses, by taking advantage of additional demand for the fuels used by our systems. . Energy providers will be able to satisfy stricter environmental regulations by using our fuel cell systems, which will generate electricity through an efficient chemical process that produces fewer harmful by-products than conventional combustion-based technologies. . Consumers will be able to lower their exposure to weather- and capacity- driven outages by utilizing our on-site systems to provide their residential electricity, and may also benefit from lower electricity costs. Our Strategy Our business strategy focuses on combining existing fuel cell technology with improvements in system integration, component design, and manufacturing processes to achieve the low-cost manufacturing capability necessary to bring our product to the mass market. The key components of this strategy are: . Focus on residential applications. We intend to focus on commercializing our fuel cell systems for the residential mass market, which we believe is the most accessible market for early fuel cell applications. . Develop low-cost manufacturing capability and processes. We seek to develop high-volume manufacturing capability by working closely with a network of carefully selected suppliers to develop and produce low-cost components and subsystems, while focusing internally on improving system design and integration. . Utilize General Electric's product development expertise and purchasing capabilities. We believe we can utilize General Electric's engineering, testing and analytical resources, as well as its purchasing power, to help us develop a superior product more rapidly and at lower cost. 4 . Leverage our strategic alliance with General Electric to achieve market leadership. We believe we can leverage General Electric's brand name and worldwide marketing, distribution and servicing capability to gain immediate recognition for our product and achieve market leadership. . Acquire or license complementary technologies. We regularly review strategic opportunities to acquire or license technologies that can advance the development of low-cost system components and subsystems. . Capitalize on our experience in the residential market to develop other fuel cell applications, including automotive applications. We believe that we can build on the experience and knowledge we will gain through the development of our residential fuel cell systems to develop other commercial applications of fuel cell technology, including automotive applications. We have a team of engineers dedicated to developing fuel cell power systems for automotive applications, but do not anticipate commercial production until at least 2006. Additional Equity Financing at Time of Offering Immediately before this offering and in addition to the shares of common stock to be sold in this offering, the following current stockholders of Plug Power will purchase additional shares of common stock as follows: . Our founding stockholders, Mechanical Technology Incorporated and Edison Development Corporation (a wholly owned subsidiary of DTE Energy Company), will purchase an aggregate of 5,466,666 shares of common stock for a total purchase price of $41.0 million, . GE On-Site Power, Inc. will purchase 3,000,000 shares of common stock for $37.5 million and . Two additional stockholders will purchase an aggregate of 750,000 shares of common stock for a total purchase price of $6.4 million. 5 The Offering Shares offered by Plug Power........................ 6,000,000 shares Common stock to be outstanding after this offering.. 42,208,480 shares(1) Estimated net proceeds to Plug Power................ $77,300,000 Use of Proceeds..................................... For general corporate purposes, including research and product development, manufacturing and market development, capital expenditures and potential acquisitions. See "Use of Proceeds". Proposed Nasdaq National Market symbol.............. "PLUG"
- -------- (1) The number of shares of our common stock that will be outstanding after this offering includes 26,991,814 shares outstanding as of September 30, 1999, plus 9,216,666 shares of common stock to be issued upon the exercise of outstanding warrants and other purchase rights immediately before this offering as described above under "--Additional Equity Financing at Time of Offering", plus 6,000,000 shares of common stock to be issued in this offering. This number excludes up to 900,000 shares of common stock issuable upon exercise of the overallotment option granted to the underwriters and up to 7,922,191 shares of common stock reserved for issuance under our stock option and employee stock purchase plans. ---------------- We were formed as a Delaware limited liability company on June 27, 1997 and will be merged into a newly-formed Delaware corporation immediately before this offering. Unless otherwise indicated, all information that we present in this prospectus for any date or period gives effect to the merger as if it had occurred on that date or as of the beginning of that period and all references to capital stock for periods before the merger mean our issued and outstanding membership interests. Our principal executive offices are located at 968 Albany-Shaker Road, Latham, New York 12110. Our telephone number at that location is (518) 782-7700 and our Internet address is www.plugpower.com. The information contained on our website is not incorporated by reference in this prospectus. The name Plug Power and our logo are names and trademarks that belong to us. This prospectus also contains the names of other entities which are the property of their respective owners. 6 Summary Financial Data The tables below present our statement of operations data for the period from June 27, 1997 (date of inception) to December 31, 1997, the year ended December 31, 1998, and the six month periods ended June 30, 1998 and 1999, and our balance sheet data at June 30, 1999. The balance sheet information is presented: . on an actual basis; . on a pro forma basis giving effect to the issuance of 533,334 shares of common stock for $4.0 million pursuant to a September 1999 capital call, the issuance of 9,216,666 shares of common stock to be issued for $84.9 million upon the exercise of outstanding warrants and other purchase rights immediately before this offering, and the acquisition of real estate from Mechanical Technology in July 1999 for $10.9 million (which includes our assumption of $6.2 million of debt), all as described in "Management's Discussion and Analysis of Financial Condition and Results of Operations". . on a pro forma, as adjusted basis to reflect the pro forma adjustments described above and the sale of 6,000,000 shares of common stock in this offering at an assumed initial public offering price of $14.00 per share, after deducting the estimated underwriting discounts and commissions and our estimated offering expenses.
Six months ended June 30, ----------------------------- Period from June 27, 1997 to Year ended December 31, December 31, 1997 1998 1998 1999 ------------ ------------ ------------ ------------- (Unaudited) (Unaudited) (In thousands, except per share data) Statement of Operations Data: Contract revenue........ $ 1,194 $ 6,541 $ 2,549 $ 3,696 Cost of contract revenue................ 1,227 8,864 3,439 5,118 ------- ------- ------------ ------------- Loss on contracts....... (33) (2,323) (890) (1,422) In-process research and development............ 4,042 -- -- -- Research and development expense................ 1,301 4,632 2,154 7,780 General and administrative expense................ 630 2,754 1,328 5,600 ------- ------- ------------ ------------- Operating loss......... (6,006) (9,709) (4,372) (14,802) Other income, principally interest... 103 93 42 218 ------- ------- ------------ ------------- Loss before equity in losses of affiliate... (5,903) (9,616) (4,330) (14,584) Equity in losses of affiliate.............. -- -- -- (501) ------- ------- ------------ ------------- Net loss............... $(5,903) $(9,616) $ (4,330) $ (15,085) ======= ======= ============ ============= Basic and diluted net loss per share......... $ (0.62) $ (0.71) $ (0.40) $ (0.71) ======= ======= ============ ============= Shares used in computing basic and diluted net loss per share......... 9,500 13,617 10,865 21,299 ======= ======= ============ =============
June 30, 1999 ---------------------------------- Pro Forma, Actual Pro Forma As Adjusted ------- -------------- ----------- (In thousands) Balance Sheet Data: Cash and cash equivalents.................... $17,243 $106,118 $183,418 Working capital.............................. 13,570 102,165 179,465 Total assets................................. 37,233 136,966 214,266 Long-term obligations........................ 155 6,035 6,035 Total stockholders' equity................... 32,306 125,879 203,179
7 RISK FACTORS You should carefully consider the following risks and all other information contained in this prospectus before purchasing our common stock. If any of the following risks occur, our business, prospects, results of operations or financial condition could be harmed. In that case, the trading price of our common stock could decline, and you could lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks described below and elsewhere in this prospectus. We have only been in business for a short time and your basis for evaluating us is limited We were formed in June 1997 to further the research and development of residential fuel cell systems. We do not expect to have a commercially viable product until at least 2001. Accordingly, there is only a limited basis upon which you can evaluate our business and prospects. An investor in our common stock should consider the challenges, expenses and difficulties that we will face as a development stage company seeking to develop and manufacture a new product. We have incurred losses and anticipate continued losses through at least 2003 As of June 30, 1999, we had an accumulated deficit of $30.6 million. We have not achieved profitability and expect to continue to incur net losses until we can produce sufficient revenues to cover our costs. We expect the cost to produce our pre-commercial systems during 1999 and 2000 to be higher than their sales price under the terms of our distribution arrangements with GE Fuel Cell Systems and Edison Development. Futhermore, even if we achieve our objective of bringing our first commercial product to market in 2001, we anticipate that we will continue to incur losses until we can cost-effectively produce and sell our residential fuel cell systems to the mass market, which we do not expect to occur until after 2002. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future. See "Selected Historical Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". We may never complete the research and development of a commercially viable residential fuel cell system We do not know when or whether we will successfully complete research and development of a commercially viable residential fuel cell system. We have produced and are currently demonstrating a number of test and evaluation systems and are continuing our efforts to decrease the costs of our systems' components and subsystems, improve their overall reliability and efficiency, and ensure their safety. However, we must complete substantial additional research and development on our systems before we will have a commercially viable product. In addition, while we are conducting tests to predict the overall life of our systems, we will not have run our systems over their projected useful life prior to commercialization. See "Business--Product Development and Commercialization Process". A mass market for residential fuel cell systems may never develop or may take longer to develop than we anticipate Fuel cell systems for residential use represent an emerging market, and we do not know whether our targeted distributors and resellers will want to purchase them or whether end-users will want to use them. If a mass market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred to develop our product and may be unable to achieve profitability. The development of a mass market for our systems may be impacted by many factors which are out of our control, including: . the cost competitiveness of fuel cell systems; 8 . the future costs of natural gas, propane and other fuels used by our systems; . consumer reluctance to try a new product; . consumer perceptions of our systems' safety; . regulatory requirements; and . the emergence of newer, more competitive technologies and products. We have no experience manufacturing residential fuel cell systems on a commercial basis To date, we have focused primarily on research and development and have no experience manufacturing fuel cell systems for the residential market on a commercial basis. We are currently constructing a 51,000 square foot manufacturing facility and are continuing to develop our manufacturing capability and processes. We do not know whether or when we will be able to develop efficient, low-cost manufacturing capability and processes that will enable us to meet the quality, price, engineering, design and production standards or production volumes required to successfully mass market our residential fuel cell systems. Even if we are successful in developing our manufacturing capability and processes, we do not know whether we will do so in time to meet our product commercialization schedule or to satisfy the requirements of our distributors or customers. See "Business--Manufacturing". We are heavily dependent on our relationship with GE Fuel Cell Systems and General Electric's commitment to develop the residential fuel cell market Substantially all of our revenue for the foreseeable future will be derived from sales of our products to GE Fuel Cell Systems. We have granted to GE Fuel Cell Systems exclusive worldwide rights to market, distribute, install and service Plug Power fuel cell systems designed for residential and commercial applications under 35 kW (other than the states of Illinois, Indiana, Michigan and Ohio, in which Edison Development has exclusive distribution rights). Under our distribution agreement, we will sell our systems directly to GE Fuel Cell Systems, which, in turn, will seek to sell them to selected resellers. We are also obligated under an amendment to our agreement to purchase $12.0 million of technical support services from General Electric during the next three years. Our distribution agreement expires in 2009, although General Electric may terminate the agreement earlier if, among other reasons, we fail to do any of the following: . remain in material compliance with the development schedule toward a January 1, 2001 product release; . produce competitive commercial fuel cell systems; . meet commercial production and cost requirements; . produce systems that comply with regulatory requirements; or . obtain all necessary approvals and certifications for our systems. Our ability to sell our systems to the mass market is heavily dependent upon General Electric's worldwide sales and distribution network and service capabilities. Even though we own a minority interest in GE Fuel Cell Systems, we cannot control its operations or business decisions. Any change in our relationship with General Electric, whether as a result of market, economic, or competitive pressures, including any decision by General Electric to alter its commitment to our fuel cell technology in favor of other fuel cell technologies, to develop fuel cell systems targeted at different markets than ours or to focus on different energy product solutions could harm our potential earnings by depriving us of the benefits of General Electric's worldwide sales and distribution network and service capabilities. See "Business--Our Strategy" and "Business--Distribution and Marketing". 9 We may not meet our product development and commercialization milestones We have established internal product development and commercialization milestones and dates for achieving development goals related to technology and design improvements. We use these internal milestones to assess our progress toward developing a commercially viable residential fuel cell system. For example, we established a milestone date of June 1998 for powering a home with a hydrogen-fueled residential fuel cell system and established a milestone date of October 1998 for demonstrating a methanol-fueled system and a natural gas- fueled system. While we successfully powered a three-bedroom home in June 1998 using a hydrogen-fueled system, our demonstration of the methanol-fueled system did not occur until November 1998 and our demonstration of the natural gas- fueled system did not occur until December 1998, in each case due to our increased focus during that period on growing our work force and expanding our physical plant and scope of operations. Neither of these delays, nor any other missed milestone, has had any material impact on our commercialization schedule to date. While we have been aggressive in setting our internal milestones and have been generally successful in meeting them, if we do experience delays in meeting our development goals or 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 beyond 2001. In such event, potential purchasers of our initial commercial systems may choose alternative technologies and any delays could allow potential competitors to gain market advantages. We cannot guarantee that we will successfully achieve our milestones in the future. See "Business--Product Development and Commercialization Process". We are dependent on third party suppliers for the development and supply of key components for our products While we have recently entered into relationships with suppliers of our key components, we do not know when or whether we will secure relationships with suppliers of all required components and subsystems for our fuel cell systems, or whether such relationships will be on terms that will allow us to achieve our objectives. Our business, prospects, results of operations, or financial condition could be harmed if we fail to secure relationships with entities who will supply the required components for our systems. Once we establish relationships with third party suppliers, we will rely on them to provide components for our fuel cell systems. 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 our inability to obtain substitute sources of these components on a timely basis or on terms acceptable to us, could harm our ability to manufacture our fuel cell systems. 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 face intense competition and may be unable to compete successfully The markets for electricity are intensely competitive. There are many companies engaged in all areas of traditional and alternative electric power generation in the United States, Canada and abroad, including, among others, major electric, oil, chemical, natural gas, and specialized electronics firms, as well as universities, research institutions and foreign government-sponsored companies. These firms are engaged in forms of power generation such as solar and wind power, reciprocating diesel engines and microturbines as well as grid- supplied electricity. Many of these entities have substantially greater financial, research and development, manufacturing and marketing resources than we do. There are a number of companies located in the United States, Canada, and abroad that are developing PEM fuel cell technology. We also compete with companies that are developing applications, residential and otherwise, using other types of fuel cells. Some of our competitors are 10 much larger than we are. If these larger competitors decide to focus on the development of residential fuel cell systems, they have the manufacturing, marketing, and sales capabilities to complete research, development and commercialization of a commercially viable residential fuel cell system more quickly and effectively than we can. See "Business--Competition". Changes in government regulations and electric utility industry restructuring may affect demand for our fuel cell systems The market for electricity generation products is heavily influenced by federal and state governmental regulations and policies concerning the electric utility industry. The loosening of current regulatory standards could deter further investment in the research and development of alternative energy sources, including fuel cells, and could result in a significant reduction in the potential market demand for our products. We cannot predict how the deregulation and restructuring of the industry will affect the market for residential fuel cell systems. See "Business--Changes in the Power Industry". Our business may become subject to future government regulation which may impact our ability to market our product We do not believe that our product will be subject to existing federal and state regulations governing traditional electric utilities and other regulated entities. We do believe that our product and its installation will be subject to oversight and regulation at the local level in accordance with state and local ordinances relating to building codes, safety, pipeline connections and related matters. Such regulation may depend, in part, upon whether a fuel cell system is placed outside or inside a home. At this time, we do not know which jurisdictions, if any, will impose regulations upon our product. We also do not know the extent to which any existing or new regulations may impact our ability to distribute, install and service our product. Once our product reaches the commercialization stage and we begin distributing our systems to our target early markets, federal, state or local government entities or competitors may seek to impose regulations. Any new government regulation of our product, whether at the federal, state or local level, including any regulations relating to installation and servicing of our products, may increase our costs and the price of our systems, and may have a negative impact on our revenue and profitability, and therefore, harm our business, prospects, results of operations, or financial condition. Utility companies could place barriers on our entry into the marketplace Utility companies commonly charge fees to industrial customers for disconnecting from the grid, for using less electricity, or for having the capacity to use power from the grid for back up purposes. Though these fees are not currently charged to residential users, it is possible that utility companies could in the future charge similar fees to residential customers. The imposition of such fees could increase the cost to residential customers of using our systems and could make our systems less desirable, thereby harming our revenue and profitability. Alternatives to our technology could render our systems obsolete prior to commercialization Our system is one of a number of alternative energy products being developed today as supplements to the electric grid that have potential residential applications, including microturbines, solar power and wind power, and other types of fuel cell technologies. Improvements are also being made to the existing electric transmission system. Technological advances in alternative energy products, improvements in the electric grid or other fuel cell technologies may render our systems obsolete. 11 The hydrocarbon fuels on which our systems rely may not be readily available or available on a cost-effective basis Our systems' ability to produce electricity depends on the availability of natural gas and propane. If these fuels are not readily available to the mass market or if their prices are such that electricity produced by our systems costs more than electricity provided through the grid, our systems would be less attractive to potential users. Our residential fuel cell systems use flammable fuels which are inherently dangerous substances Our residential fuel cell systems will utilize natural gas or propane in a catalytic reaction which produces less heat than a typical gas furnace. While our fuel cell system does not use these fuels in a combustion process, natural gas and propane are flammable fuels that could leak in a home and combust if ignited by another source. These dangers are present in any home appliance that uses natural gas or propane such as a gas furnace, stove or dryer. Since our fuel cell systems are a new product, any accidents involving our systems or other fuel cell-based products could impede demand for our products. We may be unable to raise additional capital to complete our product development and commercialization plans Our product development and commercialization schedule could be delayed if we are unable to fund our research and development activities or the development of our manufacturing capabilities. We expect that the net proceeds of this offering, together with the proceeds from our issuance of shares to current stockholders in September 1999 and immediately before the closing of this offering and all other existing sources of capital, will be sufficient to fund our activities through the end of 2001. We believe it is likely we will need to raise additional funds to achieve full commercialization of our product. We do not know whether we will be able to secure additional funding, or funding on terms acceptable to us, to pursue our commercialization plans through the mass market stage. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". We may have difficulty managing the expansion of our operations We are undergoing rapid growth in the number of our employees, the size of our physical plant and the scope of our operations. For example, we began with 22 employees in June 1997 and expect to have approximately 300 by the end of 1999. Such rapid expansion is likely to place a significant strain on our senior management team and other resources. Our business, prospects, results of operations or financial condition could be harmed if we encounter difficulties in effectively managing the budgeting, forecasting and other process control issues presented by such a rapid expansion. We face risks associated with our plans to market, distribute and service our products internationally We intend to market, distribute, and service our residential fuel cell systems internationally through GE Fuel Cell Systems. We have limited experience developing, and no experience manufacturing, our products to comply with the commercial and legal requirements of international markets. Our success in those markets will depend, in part, on GE Fuel Systems' ability to secure relationships with foreign resellers and our ability to manufacture products that meet foreign regulatory and commercial requirements. In addition, our planned international operations are subject to other inherent risks, including potential difficulties in enforcing contractual obligations and intellectual property rights in foreign countries and fluctuations in currency exchange rates. 12 We may not be able to protect important intellectual property PEM fuel cell technology was first developed in the 1950s and we do not believe we can achieve a significant proprietary position on the basic technologies used in fuel cell systems. However, our ability to compete effectively against other fuel cell companies will depend, in part, on our ability to protect our proprietary technology, systems designs and manufacturing processes. We do not know whether any of our pending patent applications will issue or, in the case of patents issued or to be issued, that the claims allowed are or will be sufficiently broad to protect our technology or processes. Even if all our patent applications are issued and are sufficiently broad, they may be challenged or invalidated. We could incur substantial costs in prosecuting or defending patent infringement suits. While we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be completely successful in doing so. Further, our competitors may independently develop or patent technologies or processes that are substantially equivalent or superior to ours. If we are found to be infringing third party patents, we do not know whether we will be able to obtain licenses to use such patents on acceptable terms, if at all. Failure to obtain needed licenses could delay or prevent the development, manufacture or sale of our fuel cell systems. We rely, in part, on contractual provisions to protect our trade secrets and proprietary knowledge. These agreements may be breached, and we may not have adequate remedies for any breach. Our trade secrets may also be known without breach of such agreements or may be independently developed by competitors. Our inability to maintain the proprietary nature of our technology and processes could allow our competitors to limit or eliminate any competitive advantages we may have and prevent us from being the first company to commercialize residential fuel cell systems, thereby harming our business prospects. See "Business--Proprietary Rights". Our government contracts could restrict our ability to effectively commercialize our technology Under some of our contracts, government agencies can require us to obtain or produce components for our systems from sources located in the United States rather than foreign countries. Our contracts with government agencies are also subject to the risk of termination at the convenience of the contracting agency, potential disclosure of our confidential information to third parties, and the exercise of "march-in" rights by the government. March-in rights refer to the right of the United States government or government agency to exercise its non-exclusive, royalty-free, irrevocable worldwide license to any technology developed under contracts funded by the government if the contractor fails to continue to develop the technology. The implementation of restrictions on our sourcing of components or the exercise of march-in rights could harm our business, prospects, results of operations, or financial condition. Our existing stockholders will control all matters requiring a stockholder vote Upon the completion of this offering, Edison Development, Mechanical Technology, and GE On-Site Power will retain approximately 77.4% of our outstanding stock. If all of these stockholders were to vote together as a group, they would have the ability to exert significant influence over our Board of Directors and its policies. For instance, these stockholders would be able to control the outcome of all stockholder votes, including votes concerning director elections, charter and by-law amendments and possible mergers, corporate control contests and other significant corporate transactions. See "Principal Stockholders" and "Description of Capital Stock". 13 Our future plans could be harmed if we are unable to attract or retain key personnel We have attracted a highly skilled management team and specialized workforce, including scientists, engineers, researchers, and manufacturing and marketing professionals. Based on our planned expansion, we will require a significant increase in the number of our employees and outside contractors. Our future success, therefore, will depend, in part, on attracting and retaining additional qualified management and technical personnel. We do not know whether we will be successful in hiring or retaining qualified personnel. Our inability to hire qualified personnel on a timely basis, or the departure of key employees, could harm our expansion and commercialization plans. There has been no prior public market for our common stock Before this offering, there has been no public market for our common stock. Although we expect our common stock to be quoted on the Nasdaq National Market, an active trading market for our shares may not develop or be sustained following this offering. Purchasers in this offering may not be able to resell their shares at prices equal to or greater than the initial public offering price. The initial public offering price will be determined through negotiations between us and the underwriters and may not be indicative of the market price for these shares following this offering. See "Underwriting". We may be subject to litigation if our stock price is volatile The stock market has, from time to time, experienced extreme price and volume fluctuations. Many factors may cause the market price for our common stock to decline, perhaps substantially, following this offering, including: . failure to meet our product development and commercialization milestones; . demand for our common stock; . revenues and operating results failing to meet the expectations of securities analysts or investors in any quarter; . downward revisions in securities analysts' estimates or changes in general market conditions; . technological innovations by competitors or in competing technologies; . investor perception of our industry or our prospects; or . general technology or economic trends. In the past, companies that have experienced volatility in the market price of their stock have been the subject of securities class action litigation. We may be involved in a securities class action litigation in the future. Such litigation often results in substantial costs and a diversion of management's attention and resources and could harm our business, prospects, results of operations, or financial condition. Provisions of Delaware 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 the Delaware corporate law may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt which 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. We also have a staggered Board of Directors which makes it difficult for stockholders to change the composition of the Board of Directors in any one year. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change in control or change our management and Board of Directors. See "Description of Capital Stock". 14 You will suffer immediate and substantial dilution The initial public offering price per share will be substantially higher than the net tangible book value per share immediately after the offering. If you purchase common stock in this offering, you will incur dilution of $9.19 per share from the price per share you paid based on pro forma as adjusted net book value at June 30, 1999. We also have a large number of outstanding stock options to purchase our common stock with exercise prices significantly below the initial public offering price of the common stock. To the extent these options are exercised, there will be further dilution. See "Dilution" and "Principal Stockholders". Future sales of our common stock could adversely affect our stock price Substantial sales of our common stock in the public market following this offering, or the perception by the market that such sales could occur, could lower our stock price or make it difficult for us to raise additional equity capital in the future. After this offering, we will have 42,208,480 shares of common stock outstanding. Of these shares, the 6,000,000 shares sold in this offering will be freely tradeable. All the remaining 36,208,480 shares are subject to 180-day lock-up agreements. Up to 25,049,850 shares may be available for sale in the public market 180 days after the date of this prospectus. In addition, after this offering, we also intend to register 5,671,191 shares of common stock for issuance under our stock option and grant plan and 1,000,000 shares of common stock under our employee stock purchase plan. As of September 30, 1999, options to purchase 3,377,189 shares of common stock were issued and outstanding, of which options to purchase 1,220,782 shares have vested. See "Underwriting" and "Shares Eligible for Future Sale". 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. We may experience Year 2000 compliance problems Our product development activities are dependent upon the use of computer systems. As a result, we are vulnerable to the "Year 2000" issue which means that our computer systems could fail or create erroneous data as a result of misinterpreting the year designation "00" on January 1, 2000. We have completed a review and evaluation of the potential impact of this issue on our computer systems and believe that all of our material computer systems will function properly although we can give no assurance in this regard. We have also completed a review and assessment to identify all other time dependent systems and have determined that all systems critical to our business have been verified to be Year 2000 compliant. We have not fully assessed the state of Year 2000 readiness of our suppliers and customers and do not know whether Year 2000 related difficulties of third parties could have a material impact on our business, prospects, results of operations, or financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". We will have broad discretion as to the use of the net proceeds from this offering Our Board of Directors and our management will have broad discretion over the use of the net proceeds of this offering. Investors will be relying on the judgment of our Board of Directors and our management regarding the application of the net proceeds of this offering. See "Use of Proceeds". 15 USE OF PROCEEDS We estimate that the net proceeds to us from the sale of 6,000,000 shares of our common stock in this offering will be $77.3 million, at an assumed initial public offering price of $14.00 per share, after deducting the estimated underwriting discounts and commissions and our estimated offering expenses. We will also receive proceeds of $84.9 million from the issuance of 9,216,666 shares of common stock upon the exercise of outstanding warrants and other purchase rights immediately before this offering. We estimate that our total net proceeds of $162.2 million will be used as follows: . approximately $20.0 million will be used for manufacturing equipment, facilities and other capital expenditures in support of commercialization activities during 1999 and 2000; and . approximately $142.2 million will be used for general corporate purposes, including working capital, funds for operations, research and product development, market development and capital expenditures after the year 2000 and potential acquisitions. Pending their use, we will invest these proceeds in government securities and other short-term, investment-grade securities. DIVIDEND POLICY We have never declared or paid any dividends on our common stock. We currently intend to retain our future earnings, if any, to finance the expansion of our business and do not expect to pay any dividends in the foreseeable future. Payment of future cash dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. 16 CAPITALIZATION The following table sets forth our capitalization as of June 30, 1999: . on an actual basis; . on a pro forma basis giving effect to the issuance of 533,334 shares of common stock for $4.0 million pursuant to a September 1999 capital call, the issuance of 9,216,666 shares of common stock to be issued for $84.9 million upon the exercise of outstanding warrants and other purchase rights immediately before this offering and the acquisition of real estate from Mechanical Technology in July 1999 for $10.9 million (which includes our assumption of $6.2 million of debt), all as described in "Management's Discussion and Analysis of Financial Condition and Results of Operations". . on a pro forma, as adjusted basis to reflect the pro forma adjustments described above and the sale of 6,000,000 shares of common stock in this offering at an assumed initial public offering price of $14.00 per share, after deducting the estimated underwriting discounts and commissions and our estimated offering expenses.
June 30, 1999 -------------------------------- Pro Forma, Actual Pro Forma As Adjusted -------- --------- ----------- (In thousands) Capital lease obligations...................... $ 246 $ 246 $ 246 Note payable................................... -- 6,160 6,160 -------- -------- -------- Total debt.................................... 246 6,406 6,406 -------- -------- -------- Stockholders' equity: Class A membership interest, no par value, 40,000,000 shares authorized, 26,458,480 shares issued and outstanding............... -- Class B membership interest, no par value, 3,000,000 shares authorized, none issued.... -- Membership interest subscribed............... (4,698) Preferred stock, $0.01 par value per share; 5,000,000 shares authorized, none issued and outstanding, actual, pro forma, and pro forma as adjusted........................... -- -- Common stock, $0.01 par value per share; 95,000,000 shares authorized; none issued and outstanding, actual; 36,208,480 shares issued and outstanding, pro forma; and 42,208,480 shares issued and outstanding, pro forma, as adjusted...................... 362 422 Paid-in capital................................ 67,608 156,121 233,361 Deficit accumulated during the development stage......................................... (30,604) (30,604) (30,604) -------- -------- -------- Total stockholders' equity .................... 32,306 125,879 203,179 -------- -------- -------- Total capitalization......................... $ 32,552 $132,285 $209,585 ======== ======== ========
17 DILUTION As of June 30, 1999, we had a pro forma net tangible book value of $125.9 million, or $3.48 per share of common stock. Pro forma net tangible book value per share is equal to our total tangible assets less total liabilities, divided by the pro forma number of shares of our outstanding common stock. After giving effect to the sale of the 6,000,000 shares of common stock offered hereby at an assumed initial public offering price of $14.00 per share, and after deducting the estimated underwriting discounts and commissions and our estimated offering expenses, our pro forma net tangible book value as adjusted, as of June 30, 1999, would have been $203.2 million, or $4.81 per pro forma share of common stock. This represents an immediate increase in pro forma net tangible book value as adjusted of $1.33 per share to our existing stockholders and an immediate dilution of $9.19 per share to new investors in this offering. If the initial public offering price is higher or lower than $14.00 per share, the dilution to new investors will be higher or lower, respectively. The following table illustrates this per share dilution: Assumed initial public offering price per share.................... $14.00 Pro forma net tangible book value per share before this offering........................................................ $3.48 Increase per share attributable to this offering................. 1.33 ----- Pro forma net tangible book value per share after this offering.... 4.81 ------ Dilution per share to new investors................................ $ 9.19 ======
The following table summarizes, on a pro forma basis as of June 30, 1999, the difference between existing stockholders and new investors with respect to the number of shares of common stock purchased, the total consideration paid and the average price per share paid. The table assumes that the initial public offering price will be $14.00. If the underwriters' over-allotment option is exercised in full, the percentage of the total number of shares of common stock held by existing stockholders will decrease from 85.8% to 84.0% of the total number of shares of common stock outstanding after the offering, and the percentage of the total number of shares of common stock held by new investors will increase from 14.2% to 16.0% of the total number of shares of common stock outstanding after the offering.
Shares Purchased Total Consideration ------------------ -------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ------------ ------- ------------- Existing stockholders..... 36,208,480 85.8% $156,482,964 65.1% $ 4.32 New investors............. 6,000,000 14.2 84,000,000 34.9% 14.00 ---------- ----- ------------ ----- Total................... 42,208,480 100.0% $240,482,964 100.0% ========== ===== ============ =====
The table excludes: . up to 900,000 shares that may be issued by us pursuant to the underwriters' overallotment option; . 3,377,189 shares of common stock issuable upon exercise of stock options outstanding at September 30, 1999 at a weighted average exercise price of $4.98 per share; . 2,561,002 shares of common stock available for future grant under our 1999 stock option plan as of September 30, 1999 (plus an additional 984,000 shares of common stock to become available for future grant under our 1999 stock option plan as a result of this offering); and . 1,000,000 shares of common stock reserved for purchase after this offering under our employee stock purchase plan. To the extent these shares are issued, there will be further dilution to new investors. See "Management" and the notes to our financial statements included elsewhere in this prospectus. 18 SELECTED HISTORICAL FINANCIAL DATA The following tables present selected historical financial data for the period from June 27, 1997 (date of inception) through December 31, 1997, the year ended December 31, 1998 and the six month periods ended June 30, 1998 and 1999. The balance sheet data as of December 31, 1997 and 1998 and the statement of operations data for the period from inception through December 31, 1997 and for the year ended December 31, 1998 have been derived from financial statements (including those set forth elsewhere in this prospectus) that have been audited by PricewaterhouseCoopers LLP, independent accountants. The statement of operations data for the six month periods ended June 30, 1998 and 1999 and the balance sheet data as of June 30, 1999 are derived from our unaudited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial condition for those periods. The data for the six-month period ended June 30, 1999 are not necessarily indicative of results for the year ending December 31, 1999 or any future period.
Period from June 27, 1997 to Year ended December 31, December 31, Six months ended June 30, ---------------- ------------ ----------------------------- 1997 1998 1998 1999 ---------------- ------------ ------------ ------------- (Unaudited) (Unaudited) (In thousands, except per share data) Statement of Operations Data: Contract revenue........ $ 1,194 $ 6,541 $ 2,549 $ 3,696 Cost of contract revenue................ 1,227 8,864 3,439 5,118 ------- ------- ------------ ------------- Loss on contracts....... (33) (2,323) (890) (1,422) In-process research and development............ 4,042 -- -- -- Research and development expense................ 1,301 4,632 2,154 7,780 General and administrative expense................ 630 2,754 1,328 5,600 ------- ------- ------------ ------------- Operating loss......... (6,006) (9,709) (4,372) (14,802) Other income, principally interest... 103 93 42 218 ------- ------- ------------ ------------- Loss before equity in losses of affiliate... (5,903) (9,616) (4,330) (14,584) Equity in losses of affiliate.............. -- -- -- (501) ------- ------- ------------ ------------- Net loss.............. $(5,903) $(9,616) $(4,330) $(15,085) ======= ======= ============ ============= Basic and diluted net loss per share......... $ (0.62) $ (0.71) $ (0.40) $ (0.71) ======= ======= ============ ============= Shares used in computing basic and diluted net loss per share......... 9,500 13,617 10,865 21,299 ======= ======= ============ ============= December 31, June 30, ------------------------- ------------- 1997 1998 1999 ------------ ------------ ------------- (Unaudited) (In thousands) Balance Sheet Data: Cash and cash equivalents................ $ 3,080 $ 3,993 $ 17,243 Working capital.......................... 2,667 2,692 13,570 Total assets............................. 4,847 8,093 37,233 Long-term obligations.................... -- -- 155 Total stockholders' equity............... 3,597 5,493 32,306
19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with Plug Power's financial statements, the notes to those financial statements and other financial information appearing elsewhere in this prospectus. In addition to historical information, the following discussion and other parts of this prospectus 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 in the "Risk Factors" section and contained elsewhere in this prospectus. Plug Power was formed in June 1997 as a Delaware limited liability company. Immediately before this offering, we will merge into a newly-formed Delaware corporation and all of our outstanding equity interests will be converted on a one-for-one basis into shares of common stock. Unless otherwise indicated, all information that we present in this prospectus for any date or period gives effect to the merger as if it had occurred on such date or as of the beginning of such period and all references to capital stock in this prospectus for periods prior to the merger mean our issued and outstanding membership interests. Overview Plug Power is a leading designer and developer of on-site, electricity generation systems utilizing proton exchange membrane (PEM) fuel cells for residential applications. GE Fuel Cell Systems, LLC, a joint venture 75% owned by General Electric's GE Power Systems business and 25% owned by Plug Power, will market, sell, service, and install our product. Plug Power was formed in June 1997 as a joint venture to further the development of fuel cells for electric power generation in residential and other applications. Through September 30, 1999, our existing stockholders in the aggregate have contributed $45.9 million in cash and $25.5 million in other contributions, consisting of in-process research and development, real estate, other in-kind contributions and a 25% interest in GE Fuel Cell Systems. Five of our eight existing stockholders have committed to invest an additional $84.9 million in cash upon the exercise of outstanding warrants and purchase commitments immediately before the closing of this offering. Since inception, we have devoted substantially all of our resources toward the development of our PEM fuel cell systems. We are a development stage company and expect to bring our first commercial product to market in 2001. Through June 30, 1999, we derived all of our revenue from government research and development contracts. Substantially all of these government contracts relate to PEM fuel cell research and development with a focus on automotive applications. We believe most of the technology developed under these government contracts is easily transferable to residential fuel cell applications. Since our inception in June 1997, we have raised capital through the issuance of equity, formed strategic alliances 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. In 1999, we expect to produce approximately 50 test and evaluation systems which will be installed in laboratory and field locations for field and market testing. Based on the system performance and market data provided by these field trials, we will determine the final design of our first pre-commercial product. During 2000 we expect to manufacture approximately 500 pre-commercial residential fuel cell systems to further our field testing activities and prepare for commercial production, which is planned to begin in 2001. We do not expect significant product sales until after we begin commercial production. 20 From inception through June 30, 1999 we incurred losses of $30.6 million. We 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 residential fuel cell systems successfully or ever achieve or sustain product revenues or profitability. Results of Operations Comparison of the Six Months Ended June 30, 1998 and June 30, 1999 Revenues. Through June 30, 1999, our revenues have been derived exclusively from cost reimbursement government contracts relating to the research and development of PEM fuel cell technology. These 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. Contract revenues increased from $2.5 million for the six months ended June 30, 1998 to $3.7 million for the six months ended June 30, 1999. As of June 30, 1999, we have three ongoing government contracts which we expect will produce approximately $7.6 million in contract revenue over the next eight quarters. We expect to continue to pursue government contracts that relate to the further development and commercialization of PEM fuel cells and have been awarded several additional contracts totaling $16.5 million that commenced in the quarter ending September 30, 1999 and continue through 2003. These are also cost reimbursement contracts in which the specific government agency will reimburse us for 50% of the costs we incur. As a result, we will report a loss on these contracts. We expect to continue to incur losses on future government contracts awarded while developing proprietary information that we expect will enhance our ability to commercialize our PEM fuel cell systems. We expect to begin manufacturing pre-commercial residential fuel cell systems during 2000. All users of these systems will be expected to participate in field trials and evaluations designed to test system performance, market conditions and customer preferences, including usage patterns, fuel availability, buying criteria, and regulatory matters. We intend to use this data to achieve optimal product design and speed commercialization and mass market acceptance. The information obtained from the field test results will be used to improve the design and performance of the commercial units planned for production and sale in the year 2001. GE Fuel Cell Systems has committed to purchase from us, on a take or pay basis, 485 of the pre-commercial residential fuel cell systems prior to December 31, 2000. The total sales price for these units will be approximately $10.3 million. Cost of revenues. Cost of contract revenues 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 general overhead costs directly allocable to specific government contracts. Cost of contract revenue was $3.4 million for the six months ended June 30, 1998 as compared to $5.1 million for the six months ended June 30, 1999. This increase relates to the additional staff and related support costs necessary to earn the additional contract revenue as reported. The result was a loss on contracts of $890,000 for the six months ended June 30, 1998 compared to a loss on contracts of $1.4 million for the six months ended June 30, 1999. We expect the cost to produce our initial systems to be higher than their sales price under the terms of our distribution arrangements with GE Fuel Cell Systems and Edison Development. We expect to continue to experience costs in excess of product sales until we achieve higher production levels, which we do not expect will occur until after 2002. 21 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 increased from $2.2 million for the six months ended June 30, 1998 to $7.8 million for the six months ended June 30, 1999. The increase was a result of the growth of Plug Power's research and development activities focused on residential PEM fuel cell systems. We expect to significantly increase our spending on research and development in the future in order to bring our residential PEM fuel cell systems to the marketplace by 2001. Beyond 2001, we plan to continue development activities related to performance improvements of the residential PEM fuel cell system and to develop other commercial PEM fuel cell applications. 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 from $1.3 million for the six months ended June 30, 1998 to $5.6 million for the six months ended June 30, 1999. The increase was primarily due to a $2.3 million charge for non-cash stock-based compensation and a $1.9 million write-off of deferred rent, both further explained below. We expect general and administrative expenses to increase in future years as we prepare for expected increased sales volume. The $2.3 million charge for non-cash stock-based compensation represents the aggregate fair value of stock granted to Mechanical Technology. Our original formation agreements provided for Mechanical Technology to earn non-cash credits relating to services it rendered prior to our formation in connection with securing future government contracts. Upon our formation, Mechanical Technology contributed its fuel cell operations to Plug Power and we received the right to these government contracts if ever awarded in the future. When these contracts were awarded to us, Mechanical Technology earned the non-cash credits, entitling it to receive 2,250,000 shares of common stock with a fair value at the time of grant of $2.3 million. Accordingly, we recognized $2.3 million in non-cash stock-based compensation expense during the first six months of 1999. In June 1999, we entered into a real estate purchase agreement with Mechanical Technology to acquire our current facility, a portion of which we previously leased from them. As a result, we wrote off deferred rent expense in the amount of $1.9 million. We originally recorded $2.0 million for deferred rent in October 1998, representing the value of a ten-year lease agreement with Mechanical Technology at favorable lease rates. See "Liquidity and Capital Resources--Capital Contributions by Initial Investors". Other Income. Other income consists principally of interest income earned on our cash and cash equivalents. Other income increased from $41,000 for the six months ended June 30, 1998 to $218,000 for the six months ended June 30, 1999. The increase was due to interest earned on higher balances of cash and cash equivalents available during the six months ended June 30, 1999. Equity in losses of affiliate. Equity in losses of affiliate of $500,448 is our proportionate share of the losses of GE Fuel Cell Systems ($31,698) and goodwill amortization ($468,750) for the period ended June 30, 1999, which we account for under the equity method of accounting. See "Liquidity and Capital Resources--GE Fuel Cell Systems". Income Taxes. No benefit for federal and state income taxes is reported in the financial statements, since before the merger, which will occur immediately before the closing of this offering, we had elected to be taxed as a partnership. Therefore, for the periods presented, the federal and state income tax benefits of our losses were recorded by our stockholders. Subsequent to our merger into a C corporation immediately before the closing of this offering, we will account for 22 income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes", and expect to be subject to an effective tax rate of 40%. Had we applied the provisions of SFAS 109 since inception, the deferred tax asset generated, primarily from net operating loss carryforwards, would have been offset by a full valuation allowance. We believe any tax benefit resulting from expected operating losses occurring after our conversion to a C corporation will also have a full valuation allowance. Comparison of the Period from June 27, 1997 (Date of Inception) to December 31, 1997 and the Year Ended December 31, 1998 Revenues. Our revenues during this period were derived exclusively from cost reimbursement government contracts relating to the development of PEM fuel cell technology. These 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. Contract revenues increased from $1.2 million for the period from inception through December 31, 1997 to $6.5 million for the year ended December 31, 1998. This increase was due to twelve months of activity in 1998 compared to six months in the period from inception through December 31, 1997, combined with increased government contract activities. 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 $1.2 million for the period from inception through December 31, 1997 as compared to $8.9 million for the year ended December 31, 1998. This increase in costs was due to twelve months of activity in 1998 compared to six months in the period from inception through December 31, 1997, combined with the additional staff and related support costs necessary to earn the additional contract revenue as reported. The result was a loss on contracts of $33,000 for the year ended December 31, 1997 compared to a loss on contracts of $2.3 million for the year ended December 31, 1998. 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 increased from $1.3 million in the period from inception through December 31, 1997 to $4.6 million for the year ended December 31, 1998, an increase of $3.3 million. This increase was related to Plug Power's research and development activities focused on residential PEM fuel cell systems in the year ended December 31, 1998 over that expensed for the period from inception through December 31, 1997. At inception, we recorded a $4.0 million in-process research and development expense related to Mechanical Technology's initial equity contribution. Two unaffiliated parties, Edison Development and Mechanical Technology, negotiated at arm's length to form Plug Power and determined that the total value of the in-process research and development, fixed assets, and trained workforce contributed by Mechanical Technology was $4.8 million. Accordingly, we have allocated the investment as follows (in thousands): In-process research and development $4,043 Fixed assets 357 Trained workforce 350
The in-process research and development contributed by Mechanical Technology upon our formation related exclusively to the development of PEM fuel cells and fuel cell systems. This project was the only one in process when it was contributed and was in its early stages of development. 23 The Mechanical Technology contribution included research and test results related to the validation of initial plate and flow field designs, as well as cooling and humidification schemes and initial designs regarding systems integration. This initial work provided the framework to facilitate our continuing efforts to commercialize the technology. At the time of Mechanical Technology's contribution, neither the cost nor the time required to complete this project and its successful commercialization was known. We have produced and are currently demonstrating a number of test and evaluation systems and are continuing our efforts to decrease the cost of our system's components and subsystems, improve its overall reliability and efficiency, and ensure its safety. We must complete substantial additional research and development on our fuel cell systems and secure relationships with suppliers of our required components and subsystems before we will have a commercially viable product. As of June 30, 1999, we have spent in excess of $13.0 million on this project, and we expect to spend an additional $60.0 million to $70.0 million on research and development related to the commercialization of the residential fuel systems prior to the end of 2001, when we plan to bring our first fuel cell systems to market. The amount allocated to the in-process research and development contributed to us by Mechanical Technology represents its estimated fair value based on the negotiations of the two parties and is consistent with its value under the cost valuation approach. Under the cost valuation approach, value is measured by quantifying the cost of replacing the future service capability of the acquired property without considering the amount of economic benefits that can be achieved, or the time period over which they might continue. The contributed in-process research and development was early development stage property, which did not and currently does not have commercial viability or any alternative future use and which will require substantial additional expenditures to commercialize. Accordingly, we charged the assigned value to operations at the time of contribution. 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 from $630,000 for the period from inception through December 31, 1997 to $2.8 million for the year ended December 31, 1998. The increase was due to twelve months of activity in 1998 compared to six months in the period from inception through December 31, 1997, combined with increased personnel cost and general expenses associated with expanding operations. Other Income. Other income consists principally of interest income earned on our cash and cash equivalents. Other income was $103,000 for the period from inception through December 31, 1997 and $93,000 for the year ended December 31, 1998. Income Taxes. No benefit for federal and state income taxes is reported in the financial statements, since before the merger, which will occur immediately before the closing of this offering, we had elected to be taxed as a partnership. Therefore, for the periods presented, the federal and state income tax benefits of our losses were recorded by our stockholders. Subsequent to our conversion from a limited liability company to a C corporation, we will account for income taxes in accordance with SFAS 109. Had we applied the provisions of SFAS 109 since inception, the deferred tax asset generated, primarily from net operating loss carryforwards, would have been offset by a full valuation allowance. 24 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 believe that our current cash balances, the proceeds we will receive in connection with the exercise by five of our eight existing stockholders of warrants and other purchase rights immediately before the closing of this offering, and the net proceeds from this offering will provide us with sufficient capital to fund operations through 2001. We have financed our operations through June 30, 1999 primarily from the sale of equity which has provided us cash of $41.9 million. We anticipate incurring substantial additional losses over at least the next several years. As of June 30, 1999, we had cash and cash equivalents totaling $17.2 million. As a result of our purchase of real estate from Mechanical Technology, we were required to escrow $6.2 million of the $17.2 million in cash to secure the debt assumed on the purchase. Since inception, net cash used in operating activities has been $16.4 million and cash used in investing activities has been $8.2 million. For the reasons stated above, we expect that our cash requirements will increase in future periods. Capital Contributions by Initial Investors Plug Power was formed in June 1997 as a joint venture between Mechanical Technology and Edison Development. At formation, Mechanical Technology contributed assets related to its fuel cell program, including intellectual property, 22 employees, equipment, and the right to receive government contracts for research and development of PEM fuel cell systems, if awarded. Edison Development contributed or committed to contribute $9.0 million in cash, expertise in distributed power generation and marketplace presence to distribute and sell stationary fuel cell systems. In June 1999 we entered into a real estate purchase agreement with Mechanical Technology to acquire approximately 36 acres of land, two commercial buildings, and a residential building located in Latham, New York. This property is the location of our current facilities and we are presently constructing our new production facility at this site. As part of the real estate transaction with Mechanical Technology, we assumed a $6.2 million letter of credit issued by KeyBank National Association for the express purpose of servicing $6.2 million of debt related to Industrial Development Revenue Bonds issued by the Town of Colonie Industrial Development Agency. As consideration for the purchase, we issued 704,315 shares of common stock to Mechanical Technology, valued at $6.67 per share. The transaction closed in July 1999 and a receivable for membership interests of $4.7 million was recorded as shares subscribed as of June 30, 1999. In connection with this transaction, we wrote off deferred rent expense in the amount of $1.9 million during the first six months of 1999. This deferred rent expense related to a 10-year facilities lease, at a favorable lease rate, on one of the purchased buildings. In connection with the July 1999 closing, we agreed to lease some of the office and manufacturing space back to Mechanical Technology on a short- term basis. In June 1999, Edison Development purchased 704,315 shares of common stock for $4.7 million in cash under provisions of our original formation documents that allowed Edison Development and Mechanical Technology to maintain equal ownership percentage in Plug Power. This equity contribution was recorded as of June 30, 1999. 25 As of June 30, 1999, Mechanical Technology had made aggregate cash contributions of $4.5 million plus non-cash contributions of $9.5 million and we had a receivable for membership interests from Mechanical Technology of $4.7 million, while Edison Development had made aggregate cash contributions of $18.7 million. Capital Calls In January 1999, we entered into an agreement with Mechanical Technology and Edison Development. Pursuant to this agreement, we have the right to require Edison Development and Mechanical Technology to contribute $7.5 million each in 1999 and $15.0 million each in 2000 in exchange for which each will receive common stock valued at $7.50 per share. The agreement terminates on the earlier of December 31, 2000 or upon an initial public offering of our shares at a price greater than $7.50 per share. The agreement permits Mechanical Technology and Edison Development to contribute any funds not previously called by us on the termination date in exchange for shares at a price of $7.50 per share. In September 1999, we made a capital call of $4.0 million, and Mechanical Technology and Edison Development each contributed $2.0 million in cash in exchange for 266,667 shares of common stock. Mechanical Technology and Edison Development have committed to contribute the remaining $41.0 million immediately before this offering in exchange for an aggregate of 5,466,666 shares of common stock. GE Fuel Cell Systems In February 1999, we entered into an agreement with GE On-Site Power to create GE Fuel Cell Systems, a joint venture owned 75% by GE On-Site Power and 25% by Plug Power, which is dedicated to marketing, selling, installing, and servicing Plug Power residential fuel cell systems on a worldwide basis (other than in the states of Illinois, Indiana, Michigan and Ohio). See "Business-- Distribution and Marketing". In connection with the formation of GE Fuel Cell Systems, we issued 2,250,000 shares of our common stock to GE On-Site Power in exchange for a 25% interest in GE Fuel Cell Systems. Of these, 750,000 shares vested immediately and the remaining 1,500,000 shares vested in August 1999. As of the date of issuance of such shares, we capitalized $11.3 million, the fair value of the shares issued, under the caption "Investment in affiliate" in our financial statements. We also issued a warrant to GE On-Site Power to purchase 3,000,000 additional shares of common stock at a price of $12.50 per share. GE On-Site Power has committed to exercise this warrant immediately before this offering for a total exercise price of $37.5 million in cash. General Electric has agreed to provide capital to GE Fuel Cell Systems, in the form of loans, to fund GE Fuel Cell Systems' commitment to purchase 485 pre-commercial systems during the period ending December 31, 2000. General Electric has also agreed to provide additional capital, in the form of a loan not to exceed $8.0 million, to fund GE Fuel Cell Systems' ongoing operations. Southern California Gas Company In April 1999, Southern California Gas Company purchased 1,000,000 shares of common stock for $6.7 million and agreed to spend $840,000 for market research and services related to distributed power generation technologies, including PEM fuel cell systems. In the event Southern California Gas does not expend these amounts by April 2002, up to 111,851 previously issued shares may be returned. Additionally, Southern California Gas received warrants to purchase an additional 350,000 shares of common stock at an exercise price of $8.50 per share. Southern California Gas has committed to exercise these warrants immediately before this offering for a total exercise price of $3.0 million in cash. 26 Private Investors In February 1999, two investors, including Michael J. Cudahy, a director of Plug Power, purchased 1,500,000 shares of common stock for a total of $10.0 million. In addition, Mr. Cudahy received a warrant to purchase 400,000 shares of common stock at a price of $8.50 per share. Mr. Cudahy has committed to exercise this warrant immediately before this offering for a total exercise price of $3.4 million in cash. In April 1999 an unrelated investor purchased 299,850 common shares for $2.0 million. Line of Credit In October 1999, we entered into a loan agreement for a $6.0 million line of credit from KeyBank, National Association. The line of credit bears interest at the prime rate in effect from time to time, matures upon the earlier of the closing of this offering or November 30, 1999, and is collateralized by an assignment of our right to call capital from Mechanical Technology and Edison Development. Year 2000 Readiness Disclosure The statements in the following section include "Year 2000 readiness disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998. The protections of this Act do not apply to claims under the anti-fraud provisions of the federal securities laws. Introduction The Year 2000 issue relates to the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and other machinery as the year 2000 is approached and reached. These problems arise from hardware and software unable to distinguish dates in the "2000s" from dates in the "1900s" and from other sources such as the use of special codes and conventions in software that make use of date fields. These problems could result in a system failure or miscalculations causing disruptions of operations, including a temporary inability to process transactions, send invoices or engage in other normal business activities. The Year 2000 issue may pose additional problems due to the fact that Year 2000 is a leap year and some computers and programs may fail to recognize the extra day. Our State of Readiness We have completed a review and evaluation of the potential impact that the change in the date to the Year 2000 will have on our computer systems. As a result of this review, we have determined that all of our major computer systems are able to recognize and appropriately process dates commencing in the Year 2000. Our computer systems are based upon commercial personal computer- based software packages. All such software packages have been examined for their compliance and appropriate upgrades are being purchased and installed. Existing personal computer systems that are not Year 2000 compliant are scheduled for replacement prior to October 1999. We have also completed a review and assessment to identify all other computer-related systems and time dependent processes and have determined that all of our business critical systems have been verified to be Year 2000 compliant. New systems acquired during 1999 have also been reviewed to verify that they are Year 2000 compliant. Cost to Address Year 2000 Issues Our historical costs to assess our Year 2000 readiness have been negligible. We are not currently able to estimate the final aggregate cost of addressing the Year 2000 issue because funds may be required as a result of future findings. The majority of the costs required to complete our 27 Year 2000 compliance process will be incurred as part of our normal capital asset acquisition program and would have been incurred without consideration of Year 2000 issues. We do not expect these costs to have an adverse effect on our business and financial results. Risks Presented by Year 2000 Issues Computer systems are also used to operate and monitor our fuel cell systems. However, due to the early stage of commercialization of our fuel cell systems, any potential failures of our test and evaluation systems related to the Year 2000 are not expected to have a material impact on our product development or commercialization schedule. During mid-1999, all key suppliers received a copy of our Year 2000 compliance questionnaire. To date approximately 40% have replied that they are or will be compliant prior to Year 2000. We are re- contacting suppliers that have not yet responded. We plan to have responses from all key suppliers by October 1999. We ask all new suppliers to confirm their Year 2000 compliance. We are contacting all suppliers of equipment and services that may be date- and time-sensitive to verify that their products and equipment will meet with Year 2000 standards. We are unable to fully assess the state of Year 2000 readiness of our suppliers and customers. Given our current development state and our pilot scale production volumes, we do not anticipate that Year 2000 related difficulties in third parties will have a material impact on our business activities or prospects. Our Contingency Plans We do not have, but we will continue to evaluate the need for, a contingency plan for business risks that might result from Year 2000-related events. As we progress with our Year 2000 readiness plan and identify specific risk areas, we intend to implement appropriate remedial actions and contingency plans. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosure about Segments of an Enterprise and Related Information." SFAS 131 establishes new standards for the way companies report information about operating segments in annual financial statements. The disclosures prescribed by SFAS 131 are effective for the year ended December 31, 1998. We do not believe we operate in more than one segment. Quantitative and Qualitative Disclosures About Market Risk We invest our excess cash in interest-bearing, investment-grade securities that we hold for the duration of the term of the respective instrument. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion. Accordingly, we believe that, while the investment-grade securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments. Forward-looking Statements This prospectus contains forward-looking statements. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue" or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition or state other "forward-looking" information. We believe that it is important to 28 communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including product development delays, changing environmental and governmental regulations, the ability to attract and retain employees and business partners, future levels of government funding, competition from other manufacturers of fuel cell systems and from other existing and advanced power technologies, evolving markets for generating electricity and power, the ability to provide the capital required for product development, operations and marketing, and Year 2000 readiness. These factors should be considered carefully and readers should not place undue reliance on our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in the "Risk Factors" section and elsewhere is this prospectus could harm our business, operating results and financial condition. 29 BUSINESS Overview We are a leading designer and developer of on-site, electricity generation systems utilizing proton exchange membrane (PEM) fuel cells for residential applications. Our goal is to become the first mass market producer of residential fuel cell systems by selling 100,000 of our systems per year by 2003. The continued growth in demand for electric power, coupled with the ongoing deregulation of the electric industry, is creating a market opportunity for a variety of distributed, or on-site, generation technologies. We believe that the electricity our residential fuel cell systems will provide to homes can be less expensive, more reliable, more efficiently produced and environmentally cleaner than the electricity provided by the existing electric utility grid and other power generation technologies. We intend to leverage our strategic alliances with General Electric Company and other leading energy companies, as well as with selected product component suppliers, to achieve leadership in residential fuel cell system design, manufacturing, and sales. Our Product Our residential fuel cell system will be an appliance, initially about the size of a refrigerator, that will produce electricity through a clean, efficient process without combustion. Our system will receive fuel from a home's existing natural gas line or propane tank, convert the fuel into a hydrogen-rich stream, and then combine it with oxygen from the air in a chemical reaction that produces electric power. Our initial residential systems will be designed to supply 7 kW of baseload power, 10 kW of peak power, and 15 kW of surge load capacity, which will provide the full electricity needs of a home, although the home can remain connected to the electric grid for back-up purposes. We plan to bring our first residential fuel cell systems to market in 2001, and, by 2003, we expect to offer different model sizes designed to meet the specific power needs of various market segments. Our Investors We were formed in June 1997 as a joint venture between Mechanical Technology Incorporated and Edison Development Corporation to further the development of fuel cells for electric power generation in residential and other applications. Mechanical Technology is a manufacturer of advanced test and measurement products for commercial and military customers and an early developer of fuel cell technology. Edison Development is a subsidiary of DTE Energy Company, a diversified energy company involved in the development and management of energy-related businesses and services and the parent company of Detroit Edison, Michigan's largest electric utility. At formation, Mechanical Technology contributed its fuel cell business, including 22 people, intellectual property, equipment, facilities and government contracts and grants related to automotive fuel cell research, while Edison Development contributed cash, expertise in distributed generation and the marketplace presence to distribute and sell fuel cell systems for residential applications. Based in part on Mechanical Technology's contributions, we have been awarded approximately $40.0 million in federal and state government contracts related to PEM fuel cell research and development, substantially all of which are focused on automotive applications. We believe most of the basic technology developed under these government contracts can be leveraged to further our residential fuel cell development and commercialization program. To date, our current stockholders, including Edison Development and Mechanical Technology, in the aggregate have contributed $45.9 million in cash and $25.5 million in other contributions, consisting of in-process research and development, real estate, other in-kind contributions and a 25% interest in GE Fuel Cell Systems. Five of our eight existing stockholders have committed to invest an additional $84.9 million in cash upon the exercise of outstanding warrants and purchase rights 30 immediately before the closing of this offering. In addition to Edison Development and Mechanical Technology, our current stockholders include: . GE On-Site Power, Inc., a subsidiary of General Electric Company that operates within General Electric's GE Power Systems business, one of the world's leading suppliers of power generation technology, energy services, and energy management systems; and . Southern California Gas Company, a subsidiary of Sempra Energy and the nation's largest regulated natural gas distribution utility in terms of customers served. Our Alliance with General Electric Company General Electric has selected Plug Power to be its exclusive supplier of fuel cell systems for residential and commercial applications under 35 kilowatts (kW). In February 1999, we entered into an agreement with GE On-Site Power to create GE Fuel Cell Systems, LLC, a joint venture owned 75% by GE On-Site Power and 25% by Plug Power, which is dedicated to marketing, selling, installing and servicing Plug Power fuel cell systems. Except for distribution rights we granted to Edison Development for the states of Illinois, Indiana, Michigan, and Ohio, GE Fuel Cell Systems is the exclusive global distributor and servicer of our systems. We believe that our strength in fuel cell system design and development, coupled with General Electric's brand name, worldwide sales and distribution network, service capabilities, and commitment to the commercialization of our fuel cell technology, will allow us to bring the first and best residential fuel cell system to market and, by doing so, establish the industry standard for this new product. Product Development We plan to achieve mass market distribution of our residential fuel cell systems by 2003, which we define as manufacturing and selling 100,000 units or more in a single year. To date, we have achieved the following major milestones along our product development and commercialization schedule:
Date Milestone ---- --------- June 1998 Powered a three-bedroom home with a hydrogen-fueled residential fuel cell system November 1998 Demonstrated a methanol-fueled residential fuel cell system December 1998 Selected to design and manufacture 80 test and evaluation residential fuel cell systems for the State of New York for installation at various test sites over the next two years December 1998 Demonstrated a natural gas-fueled residential fuel cell system February 1999 Entered into agreement with GE On-Site Power to distribute and service our residential fuel cell systems June 1999 Began construction of a state-of-the-art, 51,000 square foot manufacturing facility in Latham, New York June 1999 Hired our 250th employee, up from 22 employees at inception August 1999 Powered a three-bedroom home with a residential fuel cell system connected to its existing natural gas pipeline September 1999 Filed our 50th patent application relating to fuel cell technology, system designs and manufacturing processes
31 Changes in the Power Industry Industrialized societies are dependent upon reliable, on-demand electric power. Worldwide, electricity consumption has grown rapidly in response to economic development. Uses for electricity have grown as all segments of society have taken advantage of its general availability, reliability and convenience, particularly as movement towards service-based economies increases the reliance on computers and other electronics. According to the United States Department of Energy, electricity consumption in the United States has grown tenfold during the second half of the century, from approximately 300 million kilowatt-hours in 1949 to more than three billion kilowatt-hours in 1997. Demand for electricity is expected to continue to grow as the economies of the United States and other industrialized nations expand. At the same time, developing nations will need additional electricity and, in some cases, basic energy infrastructure to improve their standards of living. The Department of Energy reports that developing nations account for approximately 85% of the world population, but only 46% of the world's fossil fuel electricity consumption. Nearly two billion people in the world, approximately 35% of the global population, still do not have electricity. Historically, demand growth has been met by expansion of the existing infrastructure, including additional investments in centralized generating plants, high-voltage transmission lines and distribution wires. Reliance upon this infrastructure has been and continues to be problematic for a number of reasons. First, according to the Department of Energy, capacity reserve margins have decreased from 33% in 1982 to 15% in 1997, indicating the increased potential for power outages during peak periods. Second, some areas of the country are experiencing capacity constraints and weather-related outages due to the nature of the existing transmission and distribution system. Finally, there is difficulty in finding suitable locations for additional generating plants and transmission towers, because of environmental concerns regarding emissions from generating plants and local zoning laws. Utility deregulation is creating new challenges and opportunities in the electric power industry in the United States and internationally. Due in part to regulatory changes designed to encourage competition, vertically integrated utilities are being separated into their generation, transmission and distribution components. New entrants have become significant participants in the generation of electricity as the industry moves toward open competition. In the United States, regulatory organizations at the federal, state and local level are revising how electric service is provided. Customers in many states have or will soon have the chance to choose their electricity provider. Internationally, in countries such as the United Kingdom where deregulation of the electric industry has already occurred, industrial and commercial customers have been the primary beneficiaries of increased competition, while residential consumers have generally not benefited. The evolving competitive industry environment, coupled with consumer demand for more reliable, more accessible and more competitively priced sources of electric power, is driving traditional energy providers to develop new strategies and seek new technologies for electricity generation, transmission and distribution. Plug Power's Solution We believe our residential fuel cell systems will enable electric utilities and other energy suppliers to meet increasing residential electricity demand in a cost-effective, reliable, efficient and environmentally friendly manner while avoiding the costs and problems associated with installing and maintaining traditional generation, transmission, and distribution infrastructure. We believe residential consumers who acquire or utilize our systems will benefit from potential cost savings, as well as from high reliability and efficiency. 32 Benefits to Energy Providers We believe our systems will offer the following benefits to natural gas and propane distributors, rural electric cooperatives, electric utilities, and other energy providers: . Lower Capital Costs and Decreased Investment Risk. Our residential fuel cell systems will be installed on-site and will supply power directly to a home's electric system. Consequently, electric utilities can employ our fuel cell systems to decrease capital expenditures by deferring or eliminating the expansion, repair or replacement of generation, transmission and distribution assets. . Better Utilization of Existing Fuel Distribution Infrastructure. Use of our natural gas- and propane-fueled systems will increase consumption of these fuels over the course of the year, enabling distributors of these fuels to better utilize their existing assets and mitigate the seasonality of their businesses. . Environmental Benefits. Energy providers are facing increasing governmental pressures to provide environmentally clean power generation systems. Fuel cell systems generate electricity through a chemical process that produces water, useable heat, some carbon dioxide and negligible levels of other pollutants as by-products. By contrast, conventional power plants burn fossil fuels to create electricity, emitting sulfur and nitrogen oxides, relatively higher levels of carbon dioxide, particulate matter, unburned hydrocarbons and heat pollution. Benefits to Residential Consumers We believe our systems will offer the following benefits to residential consumers: . Potential Savings. Due to our system's high energy efficiency and on- site location, we expect that, following the beginning of mass market production of our residential fuel cell systems, the cost of electricity to consumers (including the consumer's cost to purchase the system and pay for routine maintenance and periodic replacement parts over the system's estimated 15- to 20-year life) who purchase our system directly, or who utilize a system purchased by an energy provider, will be equal to or less than residential grid rates in many regions. . Better Reliability. Our residential fuel cell system will generate electricity at the home. As a result, it will not be as susceptible to weather-related or capacity-driven outages, which are inherent problems for traditional central generation and/or transmission and distribution systems. . Higher Efficiency. Fuel cells convert fuel directly into electricity through an on-site chemical reaction. By contrast, a typical central generation combustion process requires a series of steps, each of which results in energy losses. As a result, fuel cells can deliver electricity to a home more efficiently than the grid. . Co-Generation Potential. Our systems will produce heat as a by-product. In the future, we plan to modify our basic system to use that excess heat to supplement traditional residential hot water and space heating systems, thereby significantly increasing total system efficiency and providing expected cost savings for consumers. Our Strategy Our business strategy focuses on combining existing fuel cell technology with improvements in system integration, component design, and manufacturing processes to achieve the low-cost manufacturing capability necessary to bring our product to the mass market. The key components of this strategy are: . Focus on residential applications. We have selected the residential market as our primary focus because we believe it will be the first mass market in which fuel cell products 33 will be economically viable. We also chose the residential market because of its large size, industry trends favoring distributed generation, and the range of benefits our fuel cell systems can provide to energy providers and consumers. We intend to continue to leverage our experience gained under government contracts and grants for research and development on automotive applications to further the development of our residential systems. We believe we can achieve manufacturing cost reductions that will make our systems commercially viable by the end of 2001. . Develop low-cost manufacturing capability and processes. We have focused our efforts on utilizing technology and designs that are conducive to low-cost mass manufacturing. Our strategy is to create a network of selected suppliers who, with our help, can design and develop subsystems and components that meet our cost, performance and quality specifications. Based on our commercialization schedule, we believe that we can purchase our components in larger volumes from these suppliers beginning in 2000, which should further lower costs. Internally, we will focus on overall system design, component and subsystem integration, final assembly and quality control. We have nearly completed construction of a 51,000 square foot manufacturing facility that will enable us to develop our manufacturing capabilities and implement more efficient manufacturing processes as we move toward the commercialization stage. . Utilize General Electric's product development expertise and purchasing capabilities. Under our product development agreement with General Electric, we will consult with appliance manufacturing and plant design experts from General Electric to complete the design of our first commercial system. To enhance our ability to meet General Electric's quality control standards, we will also purchase technical support services from General Electric in the areas of engineering, testing, manufacturing and quality control services. We believe this collaboration will provide us with the engineering, testing and analytical resources to develop a superior product more rapidly. We will also be able to utilize General Electric's purchasing power to lower our component costs. . Leverage our strategic alliance with General Electric to achieve market leadership. We believe our strategic alliance with General Electric gives us a substantial competitive advantage by providing an immediate worldwide marketing, distribution and servicing capability. GE Fuel Cell Systems is developing a global network of qualified resellers who will distribute our systems to consumers, co-branded with both the General Electric and Plug Power brand names. We believe that this co-branding strategy will give us immediate recognition in the market and speed consumer acceptance of our systems. Once in the market, GE Fuel Cell Systems' coordination of the installation, servicing and maintenance of our systems will also be an important factor in developing consumer confidence in a new, high-technology product. As a result, we expect to achieve our goals of being the first company to bring a residential fuel cell system to market and to become the market leader. . Acquire or license complementary technologies. Our goal is to manufacture the best residential fuel cell system as quickly as possible, whether we develop components and subsystems internally or obtain them from third party suppliers. Accordingly, we regularly review strategic opportunities to acquire or license technologies that can advance the development of low-cost system components and subsystems. . Capitalize on our experience in the residential market to develop other fuel cell applications, including automotive applications. We believe that the fuel cell technology, system designs and manufacturing processes that we develop and acquire during the course of commercializing our initial residential systems can be leveraged to develop and commercialize other fuel cell applications, including automotive applications, combined heat and power applications, and emergency back-up systems. Our existing automotive program, which is funded primarily by government contracts and grants, consists 34 of a team of 32 engineers and technicians focused on developing the smaller, more powerful, lower cost and lighter weight fuel cell systems that exhibit the rapid start-up and quick response necessary for automotive applications. Just as we have used our automotive research to enhance the development of the basic technologies of our residential systems, we believe that mass production of residential systems will give us the manufacturing experience and economies of scale needed to address these technological challenges and produce commercial automotive systems. We do not anticipate commercial production of automotive systems until at least 2006 and expect that contract revenues related to development of our initial automotive systems will be less than 10% of our total revenues in 2001 and less than 5% of our total annual revenues in 2002 through 2006. Product Development and Commercialization Process We are implementing our product development plan in four phases. Our cash requirements during this time period will depend on numerous factors, including the progress of our product commercialization activities, and the pace at which we hire and train our production staff, develop and expand our manufacturing capacity and expand our research and development activities. We believe that our current cash balances, the proceeds from the exercise of warrants and other purchase rights immediately before the closing of this offering, and the net proceeds from this offering will provide us with sufficient capital to fund operations through 2001. . Phase 1--Research, Development and Engineering. Our 56,000 square foot research and development facility, one of the largest fuel cell development laboratories in the world, contains over 70 test stations where we conduct design optimization and verification testing, rapid- aging testing, failure mode and effects analysis, multiple technology evaluations, and endurance testing in our effort to accelerate the development and commercialization of our fuel cell systems. Since our inception, we have shown considerable progress in our product development, including demonstrating laboratory systems running on methanol and natural gas and powering a three-bedroom home with a residential fuel cell system fueled from the home's existing natural gas line. Through the end of 1999, we will focus on developing and testing residential fuel cell systems, both in the laboratory and at selected test sites, to obtain data that can help us advance the design and construction of low-cost systems. We will also be selecting suppliers to provide components and subsystems for our pre-commercial and commercial systems on a long-term basis. During 1999, we expect to produce approximately 50 natural gas-fueled test and evaluation systems built to varying specifications in order to test different system design elements. These systems will be evaluated in our laboratories and at selected test sites. Based on the data we obtain from these field trials, we will determine the final design of our pre-commercial product. . Phase 2--Pre-Commercial Testing. In early 2000, we expect to begin small-scale production of our pre-commercial systems. GE Fuel Cell Systems has committed to purchase 485 of these systems and is expected to place them with its local market distribution partners. All of these partners will be expected to participate in field trials and evaluations designed to test system design and performance, as well as customer preferences. We intend to use this data to optimize product design and speed commercialization and mass market acceptance. During this period we also expect to complete development of a propane-fueled system. . Phase 3--Manufacturing and Commercialization. In 2001, we intend to begin producing our first commercial fuel cell systems for residential use. These systems will include any necessary modifications identified during pre-commercial testing. During this period, we also intend to expand our manufacturing capabilities, beginning large scale commercial production while continuing to refine our low-cost manufacturing processes. By 2003, we believe we will be manufacturing over 100,000 systems per year. 35 . Phase 4--Next Generation Models. In 2003, when we expect to have achieved mass market production of our basic systems, we intend to produce new models offering enhanced features, including models with co- generation capabilities. In July 1999, we entered into a Collaboration Agreement with Joh. Vaillant GmbH u. Co. to develop a residential combined heat and power system for commercial introduction in Europe. Vaillant is a leading European heating technology company and offers its customers a complete range of products for central heating and hot water. The Collaboration Agreement is contingent upon the successful negotiation and execution of supply and distribution arrangements, as well as product development arrangements, among Plug Power, Vaillant, and GE Fuel Cell Systems. Manufacturing Our goal is to mass manufacture reliable and safe residential fuel cell systems at the lowest cost. We have made, and expect to continue to make, technological improvements that reduce the cost to produce our systems. We are focusing our efforts on overall system design, component and subsystem integration, assembly, and quality control processes. We have also begun to establish a manufacturing infrastructure by hiring assembly and related support staff, installing a new management information system, and developing our manufacturing processes, including defining work centers and related responsibilities. In November 1999, we expect to complete construction of our new 51,000 square foot manufacturing facility, adjacent to our development laboratories, that will allow us to begin large-scale manufacturing of our pre- commercial and initial commercial systems. We plan to utilize third-party suppliers who, with our assistance, can design, develop and/or manufacture subsystems and components that achieve our cost and reliability targets. We plan to perform significant quality testing before we integrate any third-party subsystems and components into our final assembled fuel cell system. We will also take advantage of General Electric's volume purchasing capabilities to procure low-cost parts and components. As we move toward the commercialization stage we will begin to shift our focus from research and development to high volume production. Based on our commercialization plan, we anticipate that our existing facilities and our new manufacturing plant will provide sufficient capacity through 2001, and that we will need to develop or build additional capacity in order to achieve mass market production by 2003. 36 Distribution and Marketing Plug Power will serve as GE Fuel Cell Systems' exclusive worldwide supplier of fuel cell systems designed for residential and commercial applications under 35kW. We believe that most residential applications and many small commercial applications require less than 35kW. GE Fuel Cell Systems will have the exclusive worldwide rights to market, distribute, install and service our systems (other than in the states of Illinois, Indiana, Michigan and Ohio, in which Edison Development will be our exclusive distributor). Under this arrangement, we will sell our systems directly to GE Fuel Cell Systems, which, in turn, will utilize General Electric's worldwide sales and distribution network to identify qualified resellers who can distribute and service these systems. Plug Power systems sold through GE Fuel Cell Systems will be co- branded with both the General Electric and Plug Power names and trademarks, and may also carry the brand of the local reseller. The following chart summarizes how we expect GE Fuel Cell Systems to distribute our residential fuel cell systems to consumers: [A chart appears with a graphic depiction of the Plug Power and GE Fuel Cell Systems distribution with Plug Power at the top of the chart; GE Fuel Cell Systems, LLC (Distributor) on the next level; Natural Gas Distributors, Propane Distributors, Rural Electric Cooperatives, Electric Utilities and New Market Entrants listed as Resellers on the next level; and on the final level a box captioned "Markets" under which are listed (i) Early Target Markets (2001-2002) of Homes serviced by rural electric cooperatives, Homes in urban and suburban load packets, High-consumption households, Owners and builders of remote homes and Dissatisfied utility customers, and (ii) Mass Markets (2003 and beyond) of homes utilizing natural gas, new homes and homes in countries with inadequate or no existing electric power infrastructure. Each of these boxes is connected by downward arrows to the next level.] Targeted Resellers We expect that GE Fuel Cell Systems' resellers will have, on a regional and local basis, pre-existing customer bases, billing and service capabilities, brand recognition, market credibility, and regulatory expertise. Through the use of these qualified resellers, we believe that GE Fuel Cell Systems will be able to quickly penetrate multiple markets, avoid costly investment in sales and support resources, leverage its sales organization, and accelerate the technology acceptance process. 37 Potential resellers include the following: . Natural Gas Distributors. By marketing our natural gas-fueled residential fuel cell systems within their distribution territories, we believe natural gas distributors can increase overall gas consumption and pipeline utilization, enabling them to develop stronger customer relationships, mitigate the seasonality of their business and enhance their overall revenue stream. . Propane Distributors. Propane distributors also should be able to leverage their existing infrastructure to increase revenue and mitigate seasonality. Since propane is generally delivered by truck to a widespread customer base, the potential for increasing the number of customers serviced and/or the amount of propane distributed per delivery route should decrease distributors' marginal service costs. . Rural Electric Cooperatives. Generally, rural electric cooperatives serve a geographically dispersed customer base. We expect that our on- site, residential fuel cell systems will enable these cooperatives to meet their service obligations to customers without incurring the substantial cost of extending, maintaining or replacing electricity distribution lines. . Electric Utilities. Electric utilities can selectively install on-site fuel cell systems to meet increased electricity demand in remote areas or in urban and suburban areas referred to as "load pockets," which suffer from frequent capacity-driven outages. By doing so, they can reduce the costs associated with installing and operating new infrastructure or modifying or repairing existing infrastructure. . New Market Entrants. The ongoing deregulation of the electric utility industry and the accompanying introduction of consumer choice are spawning new market entrants into the retail electric market, including gas and power marketers, unregulated affiliates of utilities, appliance distributors, and energy service companies. As these new market entrants seek to achieve a market presence, we expect that the relatively low capital cost and ease of installation of our fuel cell systems will make this distributed form of electricity supply particularly attractive. Potential resellers will be required to purchase fuel cell systems only from GE Fuel Cell Systems and to commit to minimum purchase requirements. To date, GE Fuel Cell Systems has entered into memoranda of understanding with potential resellers, including NJR Energy Holdings Corporation, an affiliate of New Jersey Natural Gas Company, and Flint Energies, a Georgia-based rural electric cooperative. We expect GE Fuel Cell Systems to enter into similar arrangements with selected resellers around the world. GE Fuel Cell Systems will focus on creating brand and product awareness at the consumer level through media advertising, trade shows and other mass marketing channels. Resellers are expected to augment this effort through local advertising, mass mailings, catalog sales, educational seminars, promotional pricing for systems or fuel, and bundled service offerings. Resellers may also work with building contractors, financial institutions and other intermediaries to create cost-effective programs to reach consumers. Targeted Early Markets Together with GE Fuel Cell Systems, we have conducted a preliminary evaluation of target markets and potential customers, taking into account such factors as average household electricity usage, ability to pay, power availability and quality, availability of fuel, the prices of electricity and natural gas, penetration of competing distributed generation technologies, new capacity requirements and the cost of new capacity additions. Based on this evaluation, we intend to target the following market segments during 2001 and 2002 for our first commercial fuel cell systems, which we estimate will be priced to the consumer between $7,000 and $10,000, subject to market demand: 38 . Homes served by rural electric cooperatives. A rural electric cooperative may choose to install fuel cell systems in homes rather than incurring the cost to extend, maintain or replace existing power distribution lines. . Homes in urban and suburban load pockets. Electric utilities serving urban and suburban load pockets may install our systems in selected homes to lessen the frequency of capacity-driven outages. . High-consumption households. Many high-consumption households place importance on power quality, particularly with their increased use of home computers and other electronics. Our systems, which are designed to independently power the home while maintaining a grid connection as backup, should provide a compelling solution to power quality and reliability concerns. . Owners and builders of remote homes. Building contractors and homeowners often have the flexibility to choose how power will be provided to the home. For many of these homes in remote areas, fuel cell systems can be a cost effective and reliable alternative to new distribution infrastructure, backup generators, or other alternative power sources. . Dissatisfied utility customers. Some homeowners are dissatisfied with the reliability and expense of the electricity and service provided by the local utility company. We believe these homeowners will be willing to try an easy-to-install alternative that could provide added reliability without requiring them to disconnect from the grid altogether. Mass Markets After introducing our first commercial systems in 2001 to our targeted early markets, we believe that we will gain the experience and capabilities necessary to lower the estimated price of our systems to consumers to approximately $3,000 to $5,000, subject to market demand, expand our manufacturing capacity and, through GE Fuel Cell Systems, extend our sales efforts to the mass market beginning in 2003. Our targeted mass market segments will include: . Homes utilizing natural gas. According to the National Gas Supply Association, more than half of all homes in the United States and over 60% of newly constructed homes in the United States use natural gas for heating and appliances. In areas with existing natural gas lines, the cost of electricity from our natural gas-fueled residential fuel cell systems may compare favorably to the cost of electricity from the grid. . New homes. According to the United States Department of Housing and Urban Development, 1.2 million single family houses were constructed in the United States in 1998. Our residential fuel cell systems will offer contractors and homeowners the opportunity to build developments or individual homes powered by fuel cells rather than by the electric grid. . Homes in countries with inadequate or no existing electric power infrastructure. According to the World Bank, there are nearly two billion people worldwide without electricity. In addition, many countries have existing centralized electric power infrastructures that are unreliable and outdated. Many of these developing countries do not have the means to build or upgrade large, central power generation plants and accompanying transmission and distribution networks to serve a broad customer base. These countries may selectively purchase and deploy fuel cell systems to supply electricity where it is most needed as an alternative to major capital investment. Installation, Servicing and Maintenance GE Fuel Cell Systems has committed to provide complete product support for Plug Power systems through its own service structure, reseller service network, and contracts with third party service providers. We believe potential third party service providers will include companies with 39 existing national service infrastructures, as well as regional companies with strong reputations and service capabilities. Selected providers will be required to meet General Electric's quality standards and customer needs of timeliness, quality and cost-effectiveness. GE Fuel Cell Systems' service program is expected to be closely coordinated with the introduction of Plug Power's fuel cell systems, so that a sufficient level of installation, maintenance, and customer support service will be available in all areas where our systems are sold. We also expect that GE Fuel Cell Systems will provide the warranty service for our products according to terms to be mutually agreed upon by Plug Power and GE Fuel Cell Systems. We will review GE Fuel Cell Systems' service plan and suggest modifications based on the pace of product development and field test results. We expect that GE Fuel Cell Systems' service plan will be completed and the requisite service contracts in place prior to the release of our commercial units in 2001. Fuel Cell Technology and Fuel Cell Systems A fuel cell is a device that combines hydrogen, derived from a fuel such as natural gas, propane, methanol or gasoline, and oxygen from the air to produce electric power without combustion. Plug Power fuel cells consist principally of two electrodes, the anode and the cathode, separated by a polymer electrolyte membrane. Each of the electrodes is coated on one side with a platinum-based catalyst. Hydrogen fuel is fed into the anode and air enters through the cathode. Induced by the platinum catalyst, the hydrogen molecule splits into two protons and two electrons. The electrons from the hydrogen molecule are conducted around the membrane creating an electric current. Protons from the hydrogen molecule are transported through the polymer electrolyte membrane and combine at the cathode with the electrons and oxygen from the air to form water and produce heat. The following diagram illustrates how fuel cells work: [A Diagram appears with a graphic depiction demonstrating the process by which hydrocarbon fuels are passed through a PEM membrane in order to produce electricity, water and heat and the following words appear in the diagram: HOW FUEL CELLS WORK; Fuel cells extract hydrogen ions from hydrocarbon fuels and combine them with oxygen to generate power...; Hydrogen molecules; Electrons; Protons; Electricity; PEM Membrane; Electricity is generated via an electrochemical process versus traditional combustion...; Oxygen (from air); Water; Heat; The output from the process includes electricity, water and heat.] 40 To obtain the desired level of electric power, individual fuel cells are combined into a fuel cell stack. Increasing the number of fuel cells in a stack increases the voltage, while increasing the surface area of each fuel cell increases the current. Our initial residential systems will provide 7kW of baseload power, 10kW of peak power and 15kW of surge load capacity. We plan to design our fuel cell systems to last approximately 15 to 20 years, with major component maintenance and replacements scheduled to occur every four to seven years. Items such as air filters will require annual replacement. The chart below sets forth a brief description of our systems' components and subsystems:
Component or Subsystem Description ---------------------- ----------- Fuel reformer (processor) Converts or reforms the specified hydrocarbon fuel, such as natural gas, propane, methanol or gasoline, into a hydrogen-rich stream for use in the fuel cell stack. Design may differ based upon the type of fuel used. Fuel cell stack Produces electricity in a chemical reaction by combining hydrogen with oxygen. Power conditioner (inverter) Converts the direct current, or DC, electricity created by the fuel cell stack into alternating current, or AC, electricity for use in the home. Also designed to handle voltage spikes, as well as distortions caused by the concurrent use of multiple appliances. Design may differ based upon the country in which it will be used. Fuel supply subsystem Connects the fuel supply to the fuel reformer and filters out unwanted sulfur and other fuel contaminants. Air supply subsystem Supplies filtered air to both the fuel reformer and the fuel cell stack. Water management loop Supplies humidification water to the fuel cell stack to prevent the system from drying out and reaction water to the fuel reformer to facilitate the conversion of the fuel to hydrogen. Thermal management system Regulates the operating temperature of both the fuel reformer and the fuel cell stack to ensure optimum performance. Microprocessor-based control unit Monitors system parameters and provides control signals to the various subsystems to maintain efficient operation. Also signals need for service or maintenance. Battery Powers the system from initial start until the fuel cell stack warms up to appropriate temperature and also provides 3 kilowatt- hours of back-up power. Recharges while system is in use.
41 The following diagram illustrates how a Plug Power fuel cell system produces electricity: [A Chart appears showing the components of the residential fuel cell system, and the following words appear: Natural Gas; Air; Fuel Processor; Hydrogen; Fuel Cell Stack; Controller; DC Electricity; DC AC Inverter; 120/240 VAC Current; Heat and Water]. Proprietary Rights Fuel cell technology has existed since the 19th century, and PEM fuel cells were first developed in the 1950s. Consequently, we believe that neither we nor our competitors can achieve a significant proprietary position on the basic technologies used in fuel cell systems. For example, platinum catalysts have been a standard component of fuel cells for decades. Recently, companies have developed different formulations and methods for incorporating platinum into the fuel cell that increases overall performance of the fuel cell while reducing the amount of platinum required. While we have developed our own proprietary technology to incorporate platinum which we have chosen to protect as a trade secret, we currently purchase fuel cell components from several vendors who have their own patented and trade secret platinum incorporation technology. However, if these vendors were no longer willing or able to supply such components, our own platinum incorporation technology would be available for use, as would the platinum incorporation technologies of other potential vendors. Despite the inability to achieve a significant proprietary position on the basic technologies of fuel cell systems, we believe the design and integration of the system and system components, as well as some of the low-cost manufacturing processes that we have developed, can be protected. Accordingly, our overall intellectual property development and protection strategy has the following components: . Maximize protection of our internally developed processes and designs. Our goal is to encourage employees to develop promising ideas with potential business impact and then protect these ideas as patents or trade secrets. To date, we have three issued patents and 47 patents pending. These patents cover, among other things, fuel cell components that 42 reduce manufacturing part count, fuel cell system designs that lend themselves to mass manufacturing, improvements to fuel cell system efficiency, reliability, and longer system life, and control strategies, such as added safety protections and operation under extreme conditions. Each of our employees has agreed that all inventions made or conceived while an employee of Plug Power which are related to or result from work or research that Plug Power performs will remain the sole and exclusive property of Plug Power, whether patented or not. . Monitor relevant patents issued for their impact on the development of our systems. We actively monitor issued patents and other patent actions that may impact the development of fuel cell systems. We also seek to ensure that the components manufactured for us by third parties do not infringe on patents covered by others. Our experts in the various technical fields assess these inventions for possible interference with Plug Power technology. Based on our assessments to date, we do not believe that patents issued to other parties will prevent us from reaching our strategic goals. . Purchase selected intellectual property rights. We regularly review strategic opportunities to acquire or license technologies that can advance the development of low cost system components and subsystems. Competition There are a number of companies located in the United States, Canada and abroad that are developing PEM fuel cell technology. Ballard Power Systems Inc., a publicly traded company located in Vancouver, British Columbia, has been developing PEM fuel cell technology since the mid-1980s and has attracted substantial funding from a number of partners, including DaimlerChrysler AG and Ford Motor Company. A number of major automotive and manufacturing companies also have in-house PEM fuel cell development efforts. To the extent publicly disclosed, the primary efforts of many of these companies, including Ballard and International Fuel Cells Corporation, a subsidiary of United Technologies Corporation, appear to have been directed toward the development of fuel cell systems for automotive and large stationary power applications. Although we believe approximately 10 companies have established residential fuel cell system development programs, we believe they are still in the research and development stage and have not yet developed the product manufacturing and distribution infrastructure necessary to reach commercialization. We also compete with companies that are developing other types of fuel cells. There are four types of fuel cells other than PEM fuel cells that are generally considered to have viable commercial applications: phosphoric acid fuel cells, molten carbonate fuel cells, solid oxide fuel cells and alkaline fuel cells. Each of these fuel cells differs in the component materials, as well as in its overall operating temperature. While all fuel cell types have environmental and efficiency advantages over traditional power sources, we believe that PEM fuel cells can be manufactured less expensively and are more efficient and more practical in small-scale applications. Our systems will also compete with other distributed generation technologies, including microturbines and reciprocating engines, available at prices competitive with existing forms of power generation. We believe that our fuel cell systems will have a competitive advantage in that they can be more easily scaled to residential size and will be more efficient in handling the load profile of residential customers. We also believe that they will be quieter, environmentally cleaner, more efficient, and less expensive to install, service and maintain. Our systems will also compete with solar and wind-powered systems. Once we begin selling our systems, we intend to compete primarily on the basis of cost, reliability, efficiency and environmental considerations. 43 Government Regulation We do not believe that we will be subject to existing federal and state regulatory commissions governing traditional electric utilities and other regulated entities. We do believe that our product and its installation will be subject to oversight and regulation at the local level in accordance with state and local ordinances relating to building codes, safety, pipeline connections and related matters. Such regulation may depend, in part, upon whether a system is placed outside or inside a home. At this time, we do not know which jurisdictions, if any, will impose regulations upon our product or installation. We also do not know the extent to which any existing or new regulations may impact our ability to distribute, install and service our product. Once our product reaches the commercialization stage and we begin distributing our systems to our target early markets, federal, state or local government entities or competitors may seek to impose regulations. We intend to encourage the standardization of industry codes to avoid having to comply with differing regulations on a state-by-state or locality-by-locality basis. Facilities Our principal executive offices are located in Latham, New York. At our 36 acre campus, we own a 56,000 square foot research and development center and a 32,000 square foot office building that we are currently leasing to Mechanical Technology until December 1999, and are in the process of constructing a 51,000 square foot manufacturing facility. We own all of our facilities and believe that they are sufficient to accommodate our anticipated growth through at least 2001. Employees As of September 30, 1999, we had a total staff of approximately 280, including approximately 230 full-time employees, of which approximately 120 were engineers, scientists, and other degreed professionals. We consider our relations with our employees to be good. Legal Proceedings We may from time to time be involved in legal proceedings in the ordinary course of our business. We are not currently involved in any pending legal proceedings that, either individually or taken as a whole, could harm our business, prospects, results of operations, or financial condition. 44 MANAGEMENT Executive Officers, Key Employees and Directors Our executive officers, directors, director-nominees, and key employees, their positions and their ages as of September 30, 1999, are as follows:
Name Age Position - ---- --- -------- Executive Officers and Directors Gary Mittleman.......... 46 President, Chief Executive Officer and Director William H. Largent...... 44 Chief Financial Officer and Treasurer Gregory A. Silvestri.... 39 Senior Vice President--Operations Louis R. Tomson......... 59 Senior Vice President--Corporate Development Dr. William P. Acker.... 38 Vice President of Technology and Product Development Dr. Manmohan Dhar....... 52 Vice President and Chief Engineer of the Residential Program Michael J. Cudahy....... 75 Director Anthony F. Earley, Jr... 49 Director Larry G. Garberding..... 60 Director George C. McNamee....... 52 Chairman Dr. Walter L. Robb...... 71 Director Robert L. Nardelli...... 51 Director-nominee John M. Shalikashvili... 63 Director-nominee Key Employees Dr. Glenn A. Eisman..... 48 Chief Technology Officer Dr. William D. Ernst.... 60 Vice President and Chief Scientist Russel H. Marvin........ 32 Vice President of Component Engineering and Design Ana-Maria Galeano....... 31 General Counsel and Corporate Secretary
Gary Mittleman has served as President and Chief Executive Officer since June 1997 and as a director since August 1999. From October 1993 to June 1997, Mr. Mittleman was the President of Edison Development Corporation, a wholly owned subsidiary of DTE Energy Company, where he directed business development efforts. Mr. Mittleman previously served as Manager of Corporate Strategy at Ameritech, a telecommunications company. Prior to that he was employed at Booz Allen & Hamilton, a consulting firm, in its commercial practice area and at American Can Company. Mr. Mittleman received his Bachelor of Arts degree in Mathematics and Master of Science degree in Mechanical and Aerospace Engineering from the University of Rochester and a Master of Business Administration degree, with honors, from the University of Chicago. Mr. Mittleman is a trustee of the Albany Institute of History and Art and a trustee of the Eastern New York State Chapter of the Nature Conservancy. William H. Largent has served as Chief Financial Officer and Treasurer since May 1999. From May 1997 to May 1999, Mr. Largent served as Senior Vice President, Operations and Chief Financial Officer of Applied Innovation Inc., a leading provider of mediation and data communications products for the management of telecommunications providers' customer service networks. From 1994 to April 1997, Mr. Largent served as the Executive Vice President and Chief Financial Officer of Metatec Corporation, an information services company engaged in optical disc manufacturing and distribution, software development and network services. Mr. Largent also served as a director of Metatec from 1990 until 1997. From 1990 to 1993, Mr. Largent was President of Liebert Capital Management Corporation, a private investment management and consulting company. Mr. Largent is a director of Applied Innovation, Inc. and until July 1999, was also a director AmeriLink Corporation, a company (subsequently merged into Tandy Corp.) that designs, constructs, installs and maintains cabling systems for transmission of audio, video and data on a national basis. Mr. Largent, a certified public accountant, received his Bachelor of Science degree in accounting from Franklin University. 45 Gregory A. Silvestri has served as Senior Vice President--Operations since June 1999. In that capacity, Mr. Silvestri manages the full range of manufacturing activities, develops the strategy and structures alliances with key component suppliers, and manages the sales and marketing interactions with Plug Power's distribution partners. From May 1991 to May 1999, Mr. Silvestri served in a number of senior general management positions responsible for North American and Asia-Pacific operations for Norton Company, an operating unit of Saint-Gobain Corporation that supplies engineered materials to a variety of industries. Prior to that time, Mr. Silvestri served as an Engagement Manager within the Industrial Practice Group of McKinsey & Company. Mr. Silvestri received his Bachelor of Science and Engineering degree in Chemical Engineering from Princeton University and a Masters in Business Administration degree, with honors, from the University of Virginia. Louis R. Tomson has served as Senior Vice President--Corporate Development since January 1999. In that capacity, Mr. Tomson manages business development, government relations and legal affairs. From January 1995 to January 1999, Mr. Tomson was Deputy Secretary and subsequently First Deputy Secretary to Governor George E. Pataki of the State of New York. Mr. Tomson was also the Governor's Chief Policy Maker for energy and communications and served as the Governor's liaison to New York's Public Service Commission and to New York's more than 60 public authorities. From 1992 to December 1994, Mr. Tomson was a partner in the law firm of Plunkett & Jaffe in New York, New York. Mr. Tomson currently serves as the Chairman of the New York State Thruway Authority. Mr. Tomson received a Bachelor of Arts degree from Columbia College and a Bachelor of Law degree from Columbia Law School. Dr. William P. Acker has served as Vice President of Technology and Product Development since October 1997. In that capacity, Dr. Acker manages the development of Plug Power's fuel cell products as well as the ongoing development of next generation fuel cell technology. From 1990 to October 1997, Dr. Acker served in several positions for Texaco, including Global Manager for Engineering and Product Testing. Dr. Acker received a Bachelor of Science degree from Rensselaer Polytechnic Institute and a Master of Science, Master of Philosophy and Ph.D. in Applied Physics and Engineering from Yale University. Dr. Manmohan Dhar has served as Vice President and Chief Engineer of the Residential Program since November 1998. In that capacity, Dr. Dhar is responsible for managing the development of low-cost, highly reliable fuel cell systems for residential electric power generation. From June 1997 to November 1998, Dr. Dhar served as our Director of Residential Programs. From 1978 to June 1997, Dr. Dhar worked in various positions at Mechanical Technology Incorporated, including as Chief Engineer for its Stirling Space Power Program, an effort to develop a 12.5 kW power generation system as a backup power source for Space Station Freedom, and, from 1993 to 1997, as a key member of Mechanical Technology's fuel cell development efforts. Dr. Dhar has a Ph.D. in Systems Dynamics from Purdue University, and a Master of Science degree in Machine Design from the Indian Institute of Technology. Michael J. Cudahy has served as a member of the Board of Directors since February 1999. Mr. Cudahy co-founded and, prior to its sale to General Electric Company in 1998, served from 1965 to November 1998 as Chairman of the Board, and from 1965 to November 1997 as Chief Executive Officer, of Marquette Medical Systems, Inc., a developer and manufacturer of medical equipment and integrated systems for patient monitoring and diagnostic cardiology applications. Mr. Cudahy currently serves as a Special Advisor to GE Marquette Medical Systems, Inc. and as a director of Molecular OptoElectronics Corp., a developer and manufacturer of optoelectronic technologies relating to information systems. Anthony F. Earley, Jr. has served as a member of the Board of Directors since June 1997. Mr. Earley has served as a director of DTE Energy Company since 1994, as Chairman of the Board and Chief Executive Officer of DTE Energy Company and its subsidiary, The Detroit Edison 46 Company, since 1998, and as President and Chief Operating Officer of DTE Energy and Detroit Edison since 1994. From 1989 to 1994, Mr. Earley served as the President and Chief Operating Officer of Long Island Lighting Company. Mr. Earley currently serves as a director of Comerica Bank and Mutual of America Capital Management Corporation. Mr. Earley received a Bachelor of Science degree in physics, a Master of Science degree in engineering, and a Juris Doctorate from the University of Notre Dame. Larry G. Garberding has served as a member of the Board of Directors since June 1997. Mr. Garberding has served as a director of DTE Energy Company since 1990 and as Executive Vice President and Chief Financial Officer of DTE Energy and its subsidiary, The Detroit Edison Company, since 1995. Mr. Garberding received a Bachelor of Science degree in industrial administration from Iowa State University. Mr. Garberding is extensively involved with the United Way of Southern Michigan, is a director/trustee of the Detroit Medical Center and the Detroit Symphony Orchestra Hall, and is a Chairman of the Board of ArtServe Michigan. George C. McNamee has served as Chairman of the Board of Directors since June 1997. Mr. McNamee has served as Chairman since 1984 and as Co-Chief Executive Officer since 1993 of First Albany Companies, Inc., a publicly traded holding company the principal subsidiaries of which are First Albany Corporation, a specialty investment banking firm and an underwriter of this offering, and First Albany Asset Management. Mr McNamee previously served as President of First Albany Companies from 1975 to 1989. Mr. McNamee has served as a director of Mechanical Technology Incorporated since 1996 and as Chief Executive Officer since 1998, and previously served as Chairman of the Board from 1996 to 1998. Mr. McNamee also serves as a director of MapInfo Corporation, a maker of mapping software products, application development tools, and data products, and the META Group, Inc., a company that provides market assessments for clients in the information technology industry. Mr. McNamee is a member of the Board of Directors of the New York Stock Exchange, the New York State Science and Technology Foundation, and the New York Conservation Education Fund. Mr. McNamee received his Bachelor of Arts degree from Yale University. Dr. Walter L. Robb has served as a member of the Board of Directors of Plug Power since June 1997. He has been a member of the Board of Directors of Mechanical Technology since January, 1997. Since 1993, Dr. Robb has served as President of Vantage Management, Inc., a management consulting firm. Prior to 1993, Dr. Robb served as the Senior Vice President for Corporate Research and Development at General Electric Company. In that capacity, Dr. Robb directed the GE Research & Development Center, one of the world's largest and most diversified industrial laboratories, and served on General Electric's Corporate Executive Council. He serves on the Board of Directors of Cree Research, Inc., a developer and manufacturer of semiconductor materials and electronic devices, Celgene Corporation, a specialty pharmaceutical company engaged in the development and commercialization of human pharmaceuticals, and Neopath, Inc., a developer and marketer of visual intelligence technology designed to increase accuracy in medical testing. Robert L. Nardelli has been nominated and has agreed to serve as a member of the Board of Directors effective upon the offering. Since 1995, Mr. Nardelli has served as President and Chief Executive Officer of GE Power Systems, a $7.5 billion division of General Electric Company headquartered in Schenectady, New York and is a Senior Vice President of General Electric Company and a member of the Board of Directors of GE Capital Corporation. Previously, Mr. Nardelli served from 1992 to 1995 as President and Chief Executive Officer of GE Transportation Systems. From 1991 to 1992, Mr. Nardelli served as President and Chief Executive Officer of CAMCO, Inc., General Electric's Canadian appliance manufacturing company, and from 1988 to 1991, he served as an Executive Vice President and General Manager at Case Corporation, a designer, manufacturer 47 and distributor of farm and construction equipment. Mr. Nardelli received a Bachelor of Science degree in business from Western Illinois University and a Master of Business Administration degree from the University of Louisville. John M. Shalikashvili (U.S. Army-ret.) has been nominated and has agreed to serve as a member of the Board of Directors effective upon the offering. General Shalikashvili was the senior officer of the United States military and principal military advisor to the President of the United States, the Secretary of Defense and National Security Council by serving as the thirteenth Chairman of the Joint Chiefs of Staff, Department of Defense, for two terms from 1993 to 1997. Prior to his tenure as Chairman of the Joint Chiefs of Staff, he served as the Commander in Chief of all United States forces in Europe and as NATO's tenth Supreme Allied Commander, Europe. He has also served in a variety of command and staff positions in the continental United States, Alaska, Belgium, Germany, Italy, Korea, Turkey and Vietnam. General Shalikashvili is currently a director of L-3 Communications Holdings, Inc., a manufacturer of communications and related equipment, and United Defense Industries, Inc., a privately held manufacturer of military track equipment and naval armament. General Shalikashvili received a Bachelor of Science degree in Mechanical Engineering from Bradley University and a Master of Arts degree in International Affairs from George Washington University, and is a graduate of the Naval Command and Staff College and the United States Army War College. Dr. Glenn A. Eisman has served as Chief Technology Officer since November 1998. In that capacity, Dr. Eisman manages the development of fuel cell membranes and electrodes and other related technology. From June 1998 to November 1998, Dr. Eisman served as our Director of Technology. From 1984 to June 1998, Dr. Eisman held various technical positions at The Dow Chemical Company where, from 1984 to 1989, he directed and conducted research pertaining to all aspects of PEM fuel cell development efforts, including polymer materials science, catalysts, coatings technology and electrochemical techniques. From 1980 to 1983, Dr. Eisman was the Robert A. Welch Research Fellow in Materials Science and Engineering at the University of Texas-Austin. Dr. Eisman received a Bachelor of Science in Chemistry degree from Temple University and a Ph.D. in Physical Inorganic Chemistry from Northeastern University. Dr. William D. Ernst has served as Vice President and Chief Scientist since June 1997. In that capacity, Dr. Ernst is responsible for advancing our scientific, competitive and intellectual property position within the fuel cell industry and serves as Principal Investigator for government-sponsored programs. From 1989 to June 1997, Dr. Ernst held various positions at Mechanical Technology Incorporated, including Program Director for its automotive fuel cell development program and Manager of Power Systems, in which capacity he initiated their fuel cell development program and directed all fuel cell programs and technical development activities. Dr. Ernst received a Master of Science in Engineering degree from the Massachusetts Institute of Technology and a Ph.D. in Aeronautical Engineering from Rensselaer Polytechnic Institute. Russel H. Marvin has served as Vice President of Component Engineering and Design since November 1998. In that capacity Mr. Marvin manages Plug Power's design for manufacturing efforts to bring the residential product to market. From January 1998 to November 1998, Mr. Marvin served as our Vice President of Engineering and Manufacturing. From 1994 to January 1998, Mr. Marvin served as the Director of Engineering for two different divisions of Axiohm Transaction Solutions, Inc., a manufacturer and marketer of transaction printers. Mr. Marvin served from 1991 to 1994 as a Project Leader for Eastman Kodak Co.'s Clinical Products Division, a maker of blood analysers, and from 1989 to 1991 as a Senior Mechanical Engineer for NCR Corp.'s printer division. Mr. Marvin received a Bachelor of Science degree from Clarkson University and a Master of Science degree from Rensselaer Polytechnic Institute. 48 Ana-Maria Galeano has served as General Counsel and Corporate Secretary since April 1998. In that capacity, Ms. Galeano advises the company on legal issues in such areas as corporate law, contracts, strategic alliances and intellectual property. From September 1993 to April 1998, Ms. Galeano served as an attorney at the law firm of Whiteman, Osterman & Hanna in Albany, New York, where she participated in the formation of Plug Power. Ms. Galeano received a Bachelor of Arts degree from the State University of New York at Binghamton and a Juris Doctorate from Brooklyn Law School. Board Composition Effective upon the closing of this offering, the number of our directors will be fixed at nine. Initially we will have eight directors, with the one vacancy to be filled with an independent director selected by the Board of Directors. Effective upon the offering, Messrs. Nardelli and Shalikashvili, each a director-nominee, will be elected to our Board of Directors for an initial term of three years. Pursuant to our amended distribution agreement with GE Fuel Cell Systems, we have agreed to nominate Mr. Nardelli, or another designee of GE Power Systems, for election to the Board of Directors during the term of the agreement. Our Board of Directors will be divided into three classes, each of whose members will serve for a staggered three-year term. Our Board of Directors will consist of three Class I directors, Messrs. Mittleman, Robb and Earley, whose term of office will continue until the 2000 annual meeting of stockholders, three Class II directors, Messrs. McNamee, Cudahy and the independent director to be selected following the offering, whose term of office will continue until the 2001 annual meeting of stockholders, and three Class III directors, Messrs. Garberding, Nardelli and Shalikashvili, whose term of office will continue until the 2002 annual meeting of stockholders. At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. Vacancies on our Board of Directors may be filled solely by the Board of Directors. There are no family relationships among any of our directors or executive officers. Board Committees Effective upon the closing of this offering, our Board of Directors will establish an Audit Committee and a Compensation Committee. The members of the Audit Committee, which will include Mr. Cudahy, an independent director, and another independent director to be appointed to the committee after the offering, will be responsible for recommending to the Board of Directors the engagement of our outside auditors and reviewing our accounting controls and the results and scope of audits and other services provided by our auditors. The Compensation Committee, which will be made up of Messrs. McNamee and Earley, will be responsible for reviewing and recommending to the Board of Directors the amount and type of non-stock compensation to be paid to senior management and establishing and reviewing general policies relating to compensation and benefits of employees. The administration of our stock option plan will be conducted by the entire Board of Directors. Director Compensation Directors who are employees receive no additional compensation for their services as directors. Non-employee directors receive cash compensation of $1,000 for each Board meeting attended in person and $500 for each Board meeting attended by telephone. Non-employee directors are eligible to participate in our 1999 Stock Option and Incentive Plan at the discretion of the full Board of Directors. In accordance with a policy approved by our Board of Directors, upon initial election or appointment to the Board of Directors, new non-employee directors will receive non-qualified stock options to purchase 15,000 shares (50,000 shares for any new non-employee Chairman) of common stock which will be fully vested upon grant. Each year of a non-employee director's tenure, the 49 director will receive non-qualified options to purchase 10,000 shares (20,000 shares for any non-employee Chairman), plus non-qualified options to purchase an additional 5,000 shares for a non-employee director serving as chairman of the Audit Committee and non-qualified options to purchase an additional 2,000 shares for a non-employee director serving as chairman of any other committee, including the Compensation Committee. These annual options will fully vest on the first anniversary of the date of grant. Upon the effectiveness of the registration statement of which this prospectus is a part and including any options to be granted in accordance with this policy, (i) Messrs. Cudahy, Earley, Garberding, Robb, Nardelli and Shalikashvili will receive non-qualified options to purchase 25,000 shares of common stock at the initial public offering price with 15,000 shares vested upon grant and 10,000 shares vesting on the date of our 2000 annual meeting of stockholders, and (ii) Mr. McNamee will receive non-qualified options to purchase 70,000 shares of common stock at the initial public offering price with 50,000 shares vested upon grant and 20,000 shares vesting on the date of our 2000 annual meeting of stockholders. During 1998, options to purchase an aggregate of 20,000 shares were granted to Messrs. McNamee and Robb as compensation for their services as directors. Executive Compensation The following table sets forth the total compensation paid in the year ended December 31, 1998 to Messrs. Mittleman, Acker and Dhar, who were the only Plug Power executive officers whose aggregate compensation exceeded $100,000. Summary Compensation Table
Long-Term Compensation ------------- Number of Securities Annual Compensation Underlying All --------------------- Options Other Name Salary($) Bonus($) Granted(#) Compensation(1) - ---- ---------- --------- ------------- --------------- Gary Mittleman.............. $ 152,885 $ 45,000 100,000 $6,115 President and Chief Executive Officer Dr. William P. Acker........ 112,316 -- 55,000 2,877 Vice President of Product Development and Commercialization Dr. Manmohan Dhar........... 103,269 -- 30,000 2,692 Vice President and Chief Engineer of the Residential Program
- -------- (1) Amounts shown in this column represent the dollar value of matching contributions made by Plug Power under our 401(k) Savings and Retirement Plan. 50 Option Grants In Last Fiscal Year The following table sets forth information regarding stock options granted during 1998 to our executive officers listed in the Summary Compensation Table. During 1998, we granted options to purchase an aggregate of 597,650 shares of common stock to employees. The exercise price per share for these options was equal to the fair market value of the common stock as of the grant date as determined by the Board of Directors. Option Grants In Last Fiscal Year
Individual Grants ------------------------------------------------ Potential Realizable Value at Assumed Annual Rates of Number of Percent of Total Stock Price Securities Options Appreciation Name Underlying Granted to Exercise for Option Term(2) - ---- Options Employees in Price Expiration --------------------- Granted(1) Fiscal Year ($/Share) Date 5%($) 10%($) ---------- ---------------- --------- ---------- ---------- ---------- Gary Mittleman.......... 100,000 16.7% $5.00 7/16/08 $ 314,447 $ 796,871 Dr. William P. Acker.... 55,000 9.2% 1.00 2/27/08 34,589 87,656 Dr. Manmohan Dhar....... 20,000 3.3% 1.00 2/27/08 12,578 31,875 10,000 1.7% 1.00 6/29/08 6,289 15,937
- -------- (1) All options were granted under our 1997 stock option plan and have a ten year term. Of the options shown in this table, 20% vest after completion of 12 months of continuous employment service and an additional 20% vest at each 12 month anniversary over the four year period following the date of grant. Vested options become immediately exercisable upon a sale of the company or an initial public offering; otherwise, all vested options become exercisable on July 1, 2000. (2) Potential realizable value is based on the assumption that our common stock appreciates at the annual rate shown, compounded annually, from the date of grant until expiration of the ten-year term. These numbers are calculated based on Securities and Exchange Commission requirements and do not reflect our projection or estimate of future stock price growth. Potential realizable values are computed by multiplying the number of shares of common stock subject to a given option by the fair market value on the date of grant, as determined by our Board of Directors, assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rate shown in the table for the entire ten-year term of the option and subtracting from that result the aggregate option exercise price. At an assumed initial public offering price of $14.00 per share, the potential realizable value at the assumed annual rates of stock price appreciation will be higher than the values shown above. Mr. Mittleman's options to purchase 100,000 shares of common stock will have a potential realizable value of $1,780,452 and $3,131,239 at assumed annual rates of stock price appreciation of 5% and 10%, respectively. Dr. Acker's options to purchase 55,000 shares of common stock will have a potential realizable value of $1,199,249 and $1,942,182 at assumed annual rates of stock price appreciation of 5% and 10%, respectively. Dr. Dhar's options to purchase 20,000 shares of common stock will have a potential realizable value of $436,090 and $706,248 at assumed annual rates of stock price appreciation of 5% and 10%, respectively. Dr. Dhar's options to purchase 10,000 shares of common stock will have a potential realizable value of $218,045 and $353,124 at assumed annual rates of stock price appreciation of 5% and 10%, respectively. Fiscal Year-End Option Values The following table sets forth information concerning the number and value of unexercised options to purchase common stock held as of December 31, 1998 by our executive officers listed in the Summary Compensation Table. There was no public trading market for our common stock as of December 31, 1998. Accordingly, the values of the unexercised in-the-money options have been calculated on the basis of an assumed initial public offering price of $14.00 per share less the applicable exercise price multiplied by the number of shares that may be acquired on exercise. None of the executive officers listed in the Summary Compensation Table exercised any stock options in 1998. 51 Fiscal Year-End Option Values
Number of Securities Underlying Unexercised Value of Unexercised Options at Fiscal Year- In-The-Money Options End (#) at Fiscal Year-End (1) ------------------------- ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------- ----------- ------------- Gary Mittleman.............. -- 600,000 -- $7,400,000 Dr. William P. Acker........ -- 90,000 -- 1,170,000 Dr. Manmohan Dhar........... -- 50,000 -- 650,000
- -------- (1) There was no public market for the common stock on December 31, 1998. The value of exercisable and unexercisable in-the-money options at December 31, 1998 has been calculated using an assumed initial public offering price of $14.00 per share. Stock Option Plans Effective July 1, 1997, we established a stock option plan to provide employees, consultants, and members of the Board the ability to acquire an ownership interest in Plug Power. Options for employees generally vest 20% per year and expire ten years after issuance. Options granted to members of the Board vest 50% upon grant and 25% per year thereafter. Options granted to consultants vest one-third on the expiration of the consultant's initial contract term, with an additional one-third vesting on each anniversary thereafter. At September 30, 1999, there were a total of 3,377,189 options granted under this plan. Although no further options will be granted under this plan, the options previously granted will continue to vest in accordance with this plan and vested options will be exercisable for shares of common stock upon completion of the offering. Our Board of Directors and stockholders have adopted the 1999 Stock Option and Incentive Plan, which allows for the issuance of up to 2,561,002 shares of common stock and other awards. The number of shares of common stock available for issuance under our plan will be increased by the amount of any forfeitures under the 1999 Stock Option and Incentive Plan and under the 1997 Stock Option Plan. The number of shares of common stock under our plan will further increase January 1 and July 1 of each year by an amount equal to 16.4% of any net increase in the total number of shares of stock outstanding. This offering will result in an increase of 984,000 shares of stock available for issuance under our plan. The 1999 Stock Option and Incentive Plan permits us to: . grant incentive stock options; . grant non-qualified stock options; . grant stock appreciation rights; . issue or sell common stock with vesting or other restrictions, or without restrictions; . grant rights to receive common stock in the future with or without vesting; . grant common stock upon the attainment of specified performance goals; and . grant dividend rights in respect of common stock. These grants may be made to officers, employees, non-employee directors, consultants, advisors and other key persons of Plug Power. The 1999 Stock Option and Incentive Plan will be administered by our Board of Directors or by a committee designated by our Board of Directors consisting solely of two or more independent directors. Subject to the provisions of the plan, the Board or the committee may select the individuals eligible to receive awards, determine or modify the terms and conditions of the awards granted, accelerate the vesting schedule of any award and generally administer and interpret the plan. The exercise price of options granted under the 1999 Stock Option and Incentive Plan is determined by the Board or committee. Under present law, incentive stock options and options 52 intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986 may not be granted at an exercise price less than the fair market value of the common stock on the date of grant, or less than 110% of the fair market value in the case of incentive stock options granted to optionees holding more than 10% of the voting power. Non-qualified stock options may be granted at prices which are no less than 85% of the fair market value of the underlying shares on the date granted. Options are typically subject to vesting schedules, terminate ten years from the date of grant, may be exercised for specified periods after the termination of the optionee's employment or other service relationship with us, and are generally non-transferable. Upon the exercise of options, the option exercise price must be paid in full: . in cash or by certified or bank check or other instrument acceptable to the committee; . in the sole discretion of the committee, by delivery of shares of common stock that have been owned by the optionee free of restrictions for at least six months; . by promissory note if the loan of these funds to the optionee has been authorized by the Board of Directors and the optionee pays so much of the exercise price as represents the par value of the common stock acquired in a form other than a promissory note; and . by a broker under irrevocable instructions to the broker selling the underlying shares from the optionee. Upon certain events, including a merger, reorganization or consolidation, the sale of all or substantially all of our assets or all of our outstanding capital stock or a liquidation or other similar transaction, all outstanding awards issued under the 1999 Stock Option and Incentive Plan will become fully vested and exercisable upon the closing of the transaction. The 1999 Stock Option and Incentive Plan and all awards issued under the plan will terminate upon any of the transactions described above, unless Plug Power and the other parties to such transactions have agreed otherwise. All participants under the 1999 Stock Option and Incentive Plan will be permitted, for a period of time to be determined by the committee, to exercise before any termination all awards held by them which are then exercisable or will become exercisable upon the closing of the transaction. 1999 Employee Stock Purchase Plan We have adopted the Plug Power 1999 Employee Stock Purchase Plan under which employees will be eligible to purchase shares of our common stock at a discount through periodic payroll deductions. The plan is intended to meet the requirements of Section 423 of the Internal Revenue Code. After the initial period, purchases will occur at the end of six month offering periods at a purchase price equal to 85% of the market value of our common stock at either the beginning of the offering period or the end of the offering period, whichever is lower. The first offering period under the plan will begin on January 1, 2000 and will end on April 30, 2000. Participants may elect to have from 1% to 10% of their pay withheld for purchase of common stock at the end of the offering period, up to a maximum of $12,500 within any offering period. We have reserved 1,000,000 shares of common stock for issuance under this plan. Employment Agreements We have entered into the following agreements with our senior management: Gary Mittleman, our President and Chief Executive Officer, will receive 100% of his base salary, continuation of employee benefits and vesting of stock options for twelve months if we terminate his employment for any reason other than failure to perform, gross negligence and/or fraud. For 1999, Mr. Mittleman's base salary is $205,000. Dr. Manmohan Dhar, our Vice President and Chief Engineer of the Residential Program, will receive 100% of his base pay for twelve months if he voluntarily terminates his employment or if we terminate his employment for any reason other than gross misconduct, negligence, theft, dishonesty, or fraud. 53 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mechanical Technology Incorporated and Edison Development Corporation formed Plug Power in June 1997. In exchange for 4,750,000 shares of common stock each in Plug Power, Mechanical Technology contributed to Plug Power $4.75 million of in-process research and development and other assets and Edison Development contributed $4.75 million in cash. In June 1997, Plug Power and Edison Development Corporation entered into a distribution agreement which provides Edison Development with the exclusive right to distribute fuel cell systems of 2 kilowatts and higher to end-users for stationary applications in the states of Illinois, Indiana, Michigan and Ohio. The agreement expires in January 2010. In exchange for commitments to purchase pre-commercial fuel cell systems and meet minimum sales obligations during commercial production, we agreed to amend the distribution agreement to permit Edison Development to, among other things, sell fuel cell systems to resellers. In June 1997, we granted to Edison Development options to purchase 200,000 shares of common stock at an exercise price of $1.00 per share. In June 1998, we granted Edison Development an additional option to purchase 30,000 shares of common stock at an exercise price of $5.00 per share. On June 27, 1997, we entered into a management services agreement with Mechanical Technology to obtain services relating to the management of Plug Power and lease office space for a period of one year. The management services agreement terminated in June 1998. At the expiration of this agreement, we extended the existing facilities lease through September 30, 1998. In June 1998, we entered into a new facilities lease with Mechanical Technology which commenced on October 1, 1998, and had a term of ten years with an option to extend for an additional five years. We paid rent to Mechanical Technology of $79,000 for the period from June 27, 1997 to December 31, 1997, $378,000 for the year ended December 31, 1998, and $215,000 for the six months ended June 30, 1999. As part of the new facilities lease, Mechanical Technology reimbursed Plug Power $2.0 million for improvements made to the facilities. Our limited liability company agreement gave us the right to call upon Edison Development for additional contributions up to an aggregate of $4.25 million beginning on June 27, 1998, subject to achieving defined milestones relating to technology development and system production, and gave Mechanical Technology the right to match the contribution within a stated period to preserve its percentage ownership in Plug Power. We made such calls on Edison Development in April 1998 for $2.25 million and in June 1998 for $2.0 million, and Mechanical Technology matched these contributions by making in-kind contributions to us of a below-market lease valued at $2.0 million and research (non cash) credits valued at $2.25 million, as described below. In exchange for such contributions we issued 4,250,000 shares of our common stock to each of Mechanical Technology and Edison Development. In April 1998, Mechanical Technology purchased 2,000,000 shares of Plug Power common stock in exchange for a below-market lease for office and manufacturing facilities valued at $2.0 million. In April and June 1998, Mechanical Technology paid $191,250 for two one-year options which entitled Mechanical Technology to acquire a total of 2,250,000 shares of Plug Power at a price of $1.00 per share. In March 1999, we agreed that Mechanical Technology had earned research (non-cash) credits valued at $2.25 million which were used by Mechanical Technology to exercise their option to acquire the 2,250,000 shares, and the $191,250 was returned to Mechanical Technology in accordance with the terms of the option agreements. The research credits were earned by Mechanical Technology by assisting Plug Power in obtaining government grants and research contracts. 54 After receiving these $4.25 million contributions from Mechanical Technology and Edison Development, the limited liability company agreement required us to seek additional financing from Mechanical Technology and Edison Development, allowing them to maintain their ownership percentage, before seeking financing from new investors. In accordance with the agreement, in August 1998 we offered Mechanical Technology and Edison Development the opportunity to contribute additional funds. Mechanical Technology and Edison Development each committed to contribute an additional $5.0 million to Plug Power. Pursuant to this committment, in August 1998 Mechanical Technology purchased 200,000 shares of Plug Power common stock at a price of $5.00 per share in exchange for a contribution to capital of a $500,000 short-term loan and accounts receivable (totaling $500,000) owed by Plug Power to Mechanical Technology for management services under our management services agreement and rent. Between October 1998 and February 1999, Mechanical Technology purchased 800,000 additional shares of Plug Power at a price of $5.00 per share for $4.0 million in cash pursuant to its $5.0 million commitment. To match these contributions, in August 1998 Edison Development purchased 200,000 shares of Plug Power common stock at a price of $5.00 per share in exchange for a contribution to capital of two $500,000 short-term loans. Between October 1998 and February 1999, Edison Development purchased 800,000 shares of Plug Power common stock at a price of $5.00 per share for $4.0 million in cash. In January 1999, we entered into an agreement with Mechanical Technology and Edison Development, pursuant to which we have the right to call upon Edison Development and Mechanical Technology to contribute $7.5 million each in 1999 and $15.0 million each in 2000 in exchange for which each will receive common stock valued at $7.50 per share. The agreement terminates on the earlier of December 31, 2000 or upon an initial public offering of our shares at a price greater than $7.50 per share. An amendment to the agreement permits Mechanical Technology and Edison Development to contribute any funds not previously called by us on the termination date in exchange for shares at a price of $7.50 per share. Mechanical Technology and Edison Development committed to contribute $22.5 million each in exchange for an aggregate of 6,000,000 shares of common stock prior to the closing of this offering. In September 1999 Mechanical Technology and Edison Development contributed $2.0 million each pursuant to these agreements. Accordingly, Mechanical Technology and Edison Development will each contribute $20.5 million immediately before this offering. In July 1999, we acquired Mechanical Technology's 36 acre office facilities in Latham, New York, including all land and buildings, in exchange for 704,315 shares of Plug Power common stock valued at $6.67 per share or a total of $4.7 million and the assumption of approximately $6.2 million in debt. In accordance with the terms of our limited liability company agreement, Edison Development purchased 704,315 shares of Plug Power common stock at $6.67 per share for $4.7 million in cash. After giving effect to the offering and the additional investments contemplated, Mechanical Technology will beneficially own approximately 32.5% of Plug Power's outstanding common stock. FAC/Equities, a co-manager of this offering, is a division of First Albany Corporation, whose parent, First Albany Companies, Inc., owns approximately 34.0% of the outstanding common stock of Mechanical Technology. George C. McNamee, the Chairman and Co-Chief Executive Officer of First Albany Companies, the Chairman and Co-Chief Executive Officer of First Albany Corporation and the Chief Executive Officer and a director of Mechanical Technology, is currently the Chairman of the Board of Directors of Plug Power and will be the Chairman of the Board of Directors of Plug Power upon completion of the offering. In addition, Dr. Walter L. Robb, a director of Mechanical Technology, is a director of Plug Power and will be a director of Plug Power upon completion of this offering. 55 After giving effect to the offering, Edison Development will beneficially own approximately 32.8% of Plug Power's outstanding common stock. Anthony F. Earley, Jr., the Chairman, Chief Executive Officer, President and Chief Operating Officer of DTE Energy Company and its subsidiary, The Detroit Edison Company, is a director of Plug Power and will be a director of Plug Power upon completion of the offering. Detroit Edison is the parent company of Edison Development. In addition, Larry G. Garberding, a director of DTE Energy and the Executive Vice President and Chief Financial Officer of DTE Energy and Detroit Edison, is also director of Plug Power and will be a director of Plug Power upon completion of the offering. In February 1999, we granted a warrant to Mr. Michael Cudahy, a director of Plug Power, to purchase up to 400,000 shares of common stock at an exercise price of $8.50 per share and sold Mr. Cudahy 1,440,000 shares of common stock for a purchase price of $9,600,000. Mr. Cudahy committed to exercise his warrant to purchase 400,000 shares before the closing of this offering for a total purchase price of $3,400,000. In February 1999, we also entered into an agreement with GE On-Site Power to create GE Fuel Cell Systems, a joint venture owned 75% by GE On-Site Power and 25% by Plug Power, which is dedicated to marketing, selling, installing, and servicing Plug Power residential fuel cell systems on a worldwide basis (other than in the states of Illinois, Indiana, Michigan and Ohio). In connection with the formation of GE Fuel Cell Systems we issued 2,250,000 shares of our common stock to GE On-Site Power, of which 750,000 shares vested immediately. We have capitalized the fair value of these shares ($11.3 million) under the caption "Investment in Affiliate" in the financial statements. Before this agreement was amended, as described below, the remaining 1,500,000 shares were to vest ratably over the next four years. We also issued a warrant to GE On-Site Power to purchase 3,000,000 additional shares of common stock at a price of $12.50 per share. GE On-Site Power has committed to exercise this warrant immediately before the closing of this offering for a total exercise price of $37.5 million in cash. In February 1999 we entered into an agreement with General Electric pursuant to which General Electric agreed to provide capital to GE Fuel Cell Systems, in the form of loans, to fund GE Fuel Cell Systems' commitment to purchase 485 pre-commercial systems during the period ending December 31, 2000. General Electric also agreed to provide additional capital, in the form of a loan not to exceed $8.0 million, to fund GE Fuel Cell Systems' ongoing operations. In addition, the agreement provides that, as long as we are providing PEM fuel cell systems that are competitive, as determined by GE On-Site Power, in good faith, based on objective factors set forth in the joint venture agreement, GE Power Systems may not sell PEM fuel cell systems that compete with our fuel cell systems. If GE On-Site Power determines that our fuel cell systems are not competitive, we have 12 months to make them competitive before the noncompete provision terminates. Divisions or subsidiaries of General Electric Company other than GE Power Systems are not prohibited from selling competing fuel cell systems but, in the event that they do, we can terminate our agreements with GE Fuel Cell Systems or appoint additional distributors. In August 1999, we amended our agreement with GE On-Site Power to vest all remaining shares. In addition, we have agreed to purchase $12.0 million of technical support services from General Electric during the next three years and extended the term of the distribution agreement by 5 years to 2009. We also agreed with GE On-Site Power to use our best efforts to cause one individual nominated by GE Power Systems to be elected to our Board of Directors for as long as our distribution agreement with GE Fuel Cell Systems remains in effect. Robert L. Nardelli, President and Chief Executive Officer of GE On-Site Power, will be elected to our Board of Directors as a Class III Director effective upon this offering, with an initial term expiring in 2002. 56 As of September 30, 1999, we had granted options to purchase 3,377,189 shares of common stock under our 1997 stock option plan to our officers, directors, employees, consultants and advisors. We have reserved for issuance up to 2,561,002 additional options under our 1999 stock option plan and 1,000,000 shares of common stock for issuance under our 1999 employee stock purchase plan under which employees will be eligible to purchase shares of common stock at a discount through periodic payroll deductions. We have granted GE On-Site Power the right, on one occasion at any time after the second anniversary of this offering, to require us to register up to 3,000,000 shares of our common stock under the Securities Act. In addition, upon the closing of this offering, we will grant all of our eight current stockholders the right to include their shares of common stock in any of the first three registration statements we may file under the Securities Act. Plug Power has agreed to purchase power conditioners from Satcon Technology Corporation for our residential fuel cell systems. Mechanical Technology owns 16% of Satcon's outstanding stock on a fully diluted basis and has the right to appoint two members to Satcon's board of directors. We believe that each of the transactions described above was entered into on terms no less favorable to Plug Power than could be obtained with non- affiliated parties. For all future transactions, we have adopted a conflict of interest policy whereby all material transactions between Plug Power and our officers, directors and other affiliates must (i) be approved by a majority of the members of the Board of Directors, including a majority of the disinterested members and (ii) be on terms no less favorable to us than could be obtained from unaffiliated third parties. In addition, any loans to our officers, directors and other affiliates must be for bona fide business purposes only. 57 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of our common stock on a pro forma basis to reflect the issuance of shares to current stockholders immediately prior to the closing of this offering and on a pro forma, as adjusted basis to reflect the sale of the common stock offered hereby, by: . all persons known by us to own beneficially 5% or more of the common stock; . each of our directors; . the executive officers listed in the Summary Compensation Table; and . all directors and executive officers as a group. Unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to the shares of common stock beneficially owned by the stockholder. The address of Mechanical Technology Incorporated is 968 Albany-Shaker Road, Latham, NY 12110. The address of Edison Development Corporation is c/o DTE Energy Company, 2000 Second Avenue, 644 WCB, Detroit, Michigan 48226. The address of GE On-Site Power, Inc. is c/o GE Power Systems, One River Road, Schenectady, New York 12345. The address of Michael Cudahy is 10850 West Park Place, Suite 980, Milwaukee, Wisconsin 53224. The address of all other listed stockholders is c/o Plug Power Inc., 968 Albany-Shaker Road, Latham, New York 12110. The number of shares beneficially owned by each stockholder is determined under rules issued by the Securities and Exchange Commission and includes voting or investment power with respect to securities. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and includes any shares as to which the individual or entity has the right to acquire beneficial ownership within 60 days after September 30, 1999 through the exercise of any warrant, stock option or other right. The inclusion in this prospectus of such shares, however, does not constitute an admission that the named stockholder is a direct or indirect beneficial owner of such shares. The number of shares of common stock outstanding used in calculating the percentage for each listed person includes the shares of common stock underlying options held by such person that are exercisable within 60 days of September 30, 1999, but excludes shares of common stock underlying options held by any other person. Percentage of beneficial ownership is based on 36,208,480 shares of common stock outstanding as of September 30, 1999 on a pro forma basis.
Shares Beneficially Owned ------------------------------------------- Prior to the Offering After the Offering ------------------------------------------- Name of Beneficial Owners Number Percent Number Percent ------------------------- ------------- --------------------- ------- DTE Energy Company(1).......... 13,926,815 38.2% 13,926,815 32.8% Mechanical Technology Incorporated(2)............... 13,704,315 37.8 13,704,315 32.5 General Electric Company(3).... 5,250,000 14.5 5,250,000 12.4 Michael J. Cudahy(4)........... 1,840,000 5.1 1,840,000 4.4 Gary Mittleman(5).............. 380,000 1.0 380,000 * Dr. William P. Acker(5)........ 57,000 * 57,000 * Dr. Manmohan Dhar(5)........... 49,000 * 49,000 * Anthony F. Earley, Jr.(6) ..... 13,926,815 38.2 13,926,815 32.8 Larry G. Garberding(6)......... 13,926,815 38.2 13,926,815 32.8 George C. McNamee(7)........... 13,811,815 38.0 13,811,815 32.6 Dr. Walter L. Robb(5).......... 57,500 * 57,500 * Robert L. Nardelli(8).......... 5,250,000 14.5 5,250,000 12.4 John M. Shalikashvili.......... -- -- -- -- All executive officers, directors, and director- nominees as a group (13 persons)(9)................... 35,372,130 95.4 35,372,130 82.1
- -------- * Represents less than 1% of the outstanding shares of common stock 58 (1) Includes 13,926,815 shares owned of record by Edison Development Corporation, an indirect wholly-owned subsidiary of DTE Energy Company, of which 2,733,333 are shares of common stock that will be acquired upon the exercise of certain purchase rights immediately prior to the closing of this offering and 222,500 are shares of common stock that are issuable upon the exercise of outstanding options that are exercisable within 60 days of September 30, 1999. (2) Includes 2,733,333 shares of common stock to be acquired upon the exercise of certain purchase rights immediately before the closing of this offering. (3) Includes 5,250,000 shares of common stock owned of record by GE On-Site Power, Inc., an indirect wholly-owned subsidiary of General Electric that operates within its GE Power Systems business, of which 3,000,000 are shares of common stock that will be acquired upon the exercise of a warrant immediately before the closing of this offering. (4) Includes 400,000 shares of common stock to be acquired upon the exercise of a warrant immediately before the closing of this offering. (5) All shares shown represent shares of common stock issuable upon exercise of outstanding options that are exercisable within 60 days of September 30, 1999. (6) Includes 13,926,815 shares owned of record by Edison Development Corporation, an indirect wholly-owned subsidiary of DTE Energy Company, of which 2,733,333 are shares of common stock that will be acquired upon the exercise of certain purchase rights immediately before the closing of this offering and 222,500 are shares of common stock that are issuable upon the exercise of outstanding options that are exercisable within 60 days of September 30, 1999. Messrs. Earley and Garberding, who are directors and executive officers of DTE Energy, may be deemed the beneficial owners of these shares. Each of Messrs. Early and Garberding disclaim beneficial ownership of these shares. (7) Includes 13,704,315 shares of common stock owned of record by Mechanical Technology, of which 2,733,333 are shares of common stock to be acquired upon the exercise of certain purchase rights in connection with the closing of this offering. Mr. McNamee, a director and Chief Executive Officer of Mechanical Technology, may be deemed the beneficial owner of these shares. Mr. McNamee disclaims beneficial ownership of these shares. Also includes 107,500 shares of common stock issuable upon exercise of outstanding options held by Mr. McNamee that are exercisable within 60 days of September 30, 1999. (8) Includes 5,250,000 shares of common stock owned of record by GE On-Site Power, Inc., an indirect wholly-owned subsidiary of General Electric that operates within its GE Power Systems business, of which 3,000,000 are shares of common stock that will be acquired upon the exercise of a warrant immediately before the closing of this offering. Mr. Nardelli, a Senior Vice President of General Electric and the President and Chief Executive Officer of GE Power Systems, disclaims beneficial ownership of these shares. (9) Includes 873,500 shares of common stock issuable upon exercise of outstanding options held by the executive officers, directors and director- nominees as a group that are exercisable within 60 days of September 30, 1999. 59 DESCRIPTION OF CAPITAL STOCK Authorized and Outstanding Capital Stock As of September 30, 1999 there were 36,208,480 shares of common stock issued and outstanding after giving effect to the issuance of 9,216,666 shares of common stock upon the exercise of purchase rights and warrants by current stockholders immediately before this offering. Following the offering, our authorized capital stock will consist of 95,000,000 shares of common stock, of which 42,208,480 will be issued and outstanding, and 5,000,000 shares of undesignated preferred stock issuable in one or more series designated by our Board of Directors, of which no shares will be issued and outstanding. In addition, as of September 30, 1999, there were outstanding stock options to purchase 3,377,189 shares of common stock. Of the issued and outstanding common stock, 111,851 shares are subject to forfeiture by the holder. At September 30, 1999, there were eight holders of record of our common stock. Common Stock Voting Rights The holders of our common stock have one vote per share. Holders of our common stock are not entitled to vote cumulatively for the election of directors. Generally, all matters to be voted on by stockholders must be approved by a majority, or, in the case of election of directors, by a plurality, of the votes entitled to be cast at a meeting at which a quorum is present by all shares of common stock present in person or represented by proxy, voting together as a single class, subject to any voting rights granted to holders of any then outstanding preferred stock. Dividends Holders of common stock will share ratably in any dividends declared by our Board of Directors, subject to the preferential rights of any preferred stock then outstanding. Dividends consisting of shares of common stock may be paid to holders of shares of common stock. Other Rights On liquidation, dissolution or winding up of Plug Power, all holders of common stock are entitled to share ratably in any assets available for distribution to holders of shares of common stock. No shares of common stock are subject to redemption or have preemptive rights to purchase additional shares of common stock. Preferred Stock Our certificate of incorporation provides that shares of preferred stock may be issued from time to time in one or more series. Our Board of Directors is authorized to fix the voting rights, if any, designations, powers, preferences, qualifications, limitations and restrictions thereof, applicable to the shares of each series. Our Board of Directors may, without stockholder approval, issue preferred stock with voting and other rights that could adversely affect the voting power and other rights of the holders of the common stock and could have anti-takeover effects. We have no present plans to issue any shares of preferred stock. The ability of our Board of Directors to issue preferred stock without stockholder approval could have the effect of delaying, deferring or preventing a change of control of Plug Power or the removal of existing management. Indemnification Matters Our certificate of incorporation contains a provision permitted by Delaware law that generally eliminates the personal liability of directors for monetary damages for breaches of their fiduciary duty, 60 including breaches involving negligence or gross negligence in business combinations, unless the director has breached his or her duty of loyalty, failed to act in good faith, engaged in intentional misconduct or a knowing violation of law, paid a dividend or approved a stock repurchase in violation of the Delaware General Corporation Law or obtained an improper personal benefit. This provision does not alter a director's liability under the federal securities laws and does not affect the availability of equitable remedies, such as an injunction or rescission, for breach of fiduciary duty. Our by-laws provide that directors and officers shall be, and in the discretion of our board of directors, non-officer employees may be, indemnified by Plug Power to the fullest extent authorized by Delaware law, as it now exists or may in the future be amended, against all expenses and liabilities reasonably incurred in connection with service for or on behalf of Plug Power. Our by-laws also provide that the right of directors and officers to indemnification shall be a contract right and shall not be exclusive of any other right now possessed or hereafter acquired under any by-law, agreement, vote of stockholders or otherwise. We also have directors' and officers' insurance against certain liabilities. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling Plug Power as described above, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. At present, there is no pending material litigation or proceeding involving any director, officer, employee or agent of Plug Power in which indemnification will be required or permitted. Provisions of Certificate of Incorporation and By-laws which may have Anti- takeover Effect A number of provisions of our certificate of incorporation and by-laws which will be effective upon completion of this offering concern matters of corporate governance and the rights of stockholders. These provisions, as well as the ability of our Board of Directors to issue shares of preferred stock and to set the voting rights, preferences and other terms, may be deemed to have an anti- takeover effect and may discourage takeover attempts not first approved by our Board of Directors, including takeovers which stockholders may deem to be in their best interests. If takeover attempts are discouraged, temporary fluctuations in the market price of our common stock, which may result from actual or rumored takeover attempts, may be inhibited. These provisions, together with our classified Board of Directors and the ability of our Board of Directors to issue preferred stock without further stockholder action, also could delay or frustrate the removal of incumbent directors or the assumption of control by stockholders, even if the removal or assumption would be beneficial to our stockholders. These provisions also could discourage or make more difficult a merger, tender offer or proxy contest, even if favorable to the interests of stockholders, and could depress the market price of our common stock. Our Board of Directors believes that these provisions are appropriate to protect the interests of Plug Power and of our stockholders. Our Board of Directors has no present plans to adopt any further measures or devices which may be deemed to have an "anti-takeover effect." No Stockholder Action by Written Consent Our certificate of incorporation provides that any action required or permitted to be taken by our stockholders at an annual or special meeting of stockholders must be effected at a duly called meeting and may not be taken or effected by a written consent of stockholders. Meetings of Stockholders Our certificate of incorporation and by-laws provide that a special meeting of stockholders may be called only by the Chairman, if any, the President, the Chief Executive Officer or our Board of Directors unless otherwise required by law. Our by-laws provide that only those matters included in the notice of the special meeting may be considered or acted upon at that special meeting unless otherwise provided by law. In addition, our by-laws include advance notice and informational 61 requirements and time limitations on any director nomination or any new proposal which a stockholder wishes to make at an annual meeting of stockholders. Director Vacancies and Removal Our certificate of incorporation and by-laws provide that vacancies in our Board of Directors may be filled only by the affirmative vote of a majority of the remaining directors. Our certificate of incorporation provides that directors may be removed from office only with cause and only by the affirmative vote of holders of at least two-thirds of the shares then entitled to vote at an election of directors. Ability to Adopt Stockholder Rights Plan Our Board of Directors may in the future resolve to issue shares of preferred stock or rights to acquire such shares in order to implement a stockholder rights plan. A stockholder rights plan typically creates voting or other impediments to discourage persons seeking to gain control of Plug Power by means of a merger, tender offer, proxy contest or otherwise if our Board of Directors determines that such change in control is not in the best interests of Plug Power and our stockholders. Our Board of Directors has no present intention of adopting a stockholder rights plan and is not aware of any attempt to effect a change in control of Plug Power. Amendment of the Certificate of Incorporation Any amendment to our certificate of incorporation must first be approved by a majority of our Board of Directors and, if required by law, thereafter approved by a majority of the outstanding shares entitled to vote with respect to such amendment, except that any amendment to the provisions relating to stockholder action, directors, limitation of liability and the amendment of our certificate of incorporation must be approved by a super-majority of the outstanding shares entitled to vote with respect to such amendment. Amendment of By-laws Our certificate of incorporation and by-laws provide that our by-laws may be amended or repealed by our Board of Directors or by the stockholders. Such action by the Board of Directors requires the affirmative vote of a majority of the directors then in office. Such action by the stockholders requires the affirmative vote of at least two-thirds of the shares present in person or represented by proxy at an annual meeting of stockholders or a special meeting called for such purpose unless our Board of Directors recommends that the stockholders approve such amendment or repeal at such meeting, in which case such amendment or repeal shall only require the affirmative vote of a majority of the shares present in person or represented by proxy at the meeting. Statutory Business Combination Provision Following the offering, we will be subject to Section 203 of the Delaware General Corporation Law, which prohibits a publicly-held Delaware corporation from consummating a "business combination," except under certain circumstances, with an "interested stockholder" for a period of three years after the date such person became an "interested stockholder" unless: . before such person became an interested stockholder, the board of directors of the corporation approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination; . upon the closing of the transaction that resulted in the interested stockholder's 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 62 . following the transaction in which 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 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 prior three years, owned, 15% or more of a corporation's outstanding voting stock. The term "business combination" includes mergers, asset 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. A Delaware corporation may "opt out" of Section 203 with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or by-laws resulting from an amendment approved by holders of a least a majority of the outstanding voting stock. Neither our certificate of incorporation nor our by-laws contains any such exclusion. Trading on the Nasdaq National Market System We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol "PLUG". Transfer Agent and Registrar The transfer agent and registrar for our common stock will be the American Stock Transfer & Trust Company. 63 SHARES ELIGIBLE FOR FUTURE SALE Before this offering, there has been no public market for our common stock, and no prediction can be made as to the effect, if any, that sales of common stock or the availability of common stock for sale will have on the market price of our common stock prevailing from time to time. Nonetheless, substantial sales of common stock in the public market following this offering, or the perception that sales could occur, could lower the market price of our common stock or make it difficult for us to raise additional equity capital in the future. Following this offering, there will be 42,208,480 shares of our common stock outstanding on a fully diluted basis. Of these shares, the 6,000,000 shares which are being sold in this offering generally will be freely transferable without restriction or further registration under the Securities Act, except that any shares held by our "affiliates" as is defined in Rule 144 under the Securities Act may be sold only in compliance with the limitations described below. The remaining 36,208,480 shares of common stock which will be outstanding after the offering will be "restricted securities" as defined in Rule 144, and may be sold in the future without registration under the Securities Act subject to compliance with the provisions of Rule 144 or any other applicable exemption under the Securities Act. In connection with this offering, our existing officers, directors, and stockholders, who hold all of the currently outstanding shares of common stock and will own an aggregate of 36,208,480 shares of common stock after this offering, have agreed with the underwriters that, subject to exceptions, they will not sell or dispose of any of their shares for 180 days after the date of this prospectus. Goldman, Sachs & Co. may, in its sole discretion and at any time without notice, release all or any portion of the shares subject to such restrictions. Subject to these lock-up agreements, the shares of common stock outstanding upon the closing of the offering will be available for sale in the public market as follows:
Approximate Number of Shares Description ---------------- ------------------------------------------------------------ 6,000,000 After the date of this prospectus, freely tradeable shares sold in the offering. 25,049,850 After 180 days from the date of this prospectus, the lock-up period will expire and these shares will be saleable under Rule 144 (subject, in some cases, to volume limitations).
In general, under Rule 144 as currently in effect, assuming we are current in our public filings with the Securities Exchange Commission, a person or persons whose shares are required to be aggregated, including an affiliate of ours, and who has beneficially owned shares for at least one year is entitled to sell through a brokers transaction or in a transaction directly with a market maker, within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of 1% of the then outstanding shares of common stock, which is expected to be 422,085 shares upon the completion of this offering, or the average weekly trading volume of the common stock during the four calendar weeks preceding the date on which notice of such sale is filed, subject to certain restrictions. In addition, a person who is not deemed to have been an affiliate of ours at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years would be entitled to sell such shares under Rule 144(k) without regard to the requirements described above. To the extent that shares were acquired from an affiliate of ours, such person's holding period for the purpose of effecting a sale under Rule 144 commences on the date of transfer from the affiliate. We have agreed not to sell or otherwise dispose of any shares of common stock during the 180-day period following the date of this prospectus, except we may issue, and grant options to purchase, shares of common stock under the 1999 stock option plan and our employee stock purchase plan. 64 We have granted GE On-Site Power the right, on one occasion at any time after the second anniversary of this offering, to require us to register up to 3,000,000 shares of our common stock under the Securities Act. In addition, upon the closing of this offering, we will grant all of our eight current stockholders the right to include their shares of common stock in any of the first three registration statements we may file under the Securities Act. We intend to file a registration statement on Form S-8 with respect to the aggregate of shares of common stock issuable under our stock option plans and our employee stock purchase plan promptly following the consummation of this offering. Shares issued upon the exercise of stock options after the effective date of the Form S-8 resgistration statement will be eligible for resale in the public market without restriction, subject to Rule 144 limitations applicable to affiliates and the lock-up agreements described above. VALIDITY OF COMMON STOCK The validity of the shares of common stock offered hereby will be passed upon for Plug Power by Goodwin, Procter & Hoar LLP, Boston, Massachusetts. Various legal matters related to the sale of the common stock offered hereby will be passed upon for the underwriters by Ropes & Gray, Boston, Massachusetts. EXPERTS The financial statements as of December 31, 1997 and 1998, the period from June 27, 1997 (date of inception) to December 31, 1997, and for the year ended December 31, 1998, included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 (including the exhibits and schedules thereto) under the Securities Act and the rules and regulations thereunder, for the registration of the common stock offered hereby. This prospectus is part of the registration statement. This prospectus does not contain all the information included in the registration statement because we have omitted certain parts of the registration statement as permitted by the Securities and Exchange Commission's rules and regulations. For further information about us and our common stock, you should refer to the registration statement. Statements contained in this prospectus as to any contract, agreement or other document referred to are not necessarily complete. Where the contract or other document is an exhibit to the registration statement, each statement is qualified by the provisions of that exhibit. You can inspect and copy all or any portion of the registration statements or any reports, statements or other information we file at the public reference facility maintained by the Securities and Exchange Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may call the Securities and Exchange Commission at 1-800-SEC-0330 for further information about the operation of the public reference rooms. Copies of all or any portion of the registration statement can be obtained from the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the registration statement is publicly available through the Securities and Exchange Commission's site on the Internet's World Wide Web, located at http://www.sec.gov. 65 We will also file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You can also request copies of these documents, for a copying fee, by writing to the Securities and Exchange Commission. We intend to furnish to our stockholders annual reports containing audited financial statements for each fiscal year. 66 PLUG POWER, LLC (A Development Stage Enterprise) INDEX TO FINANCIAL STATEMENTS
Page ---- Report of independent accountants......................................... F-2 Balance sheets as of December 31, 1997 and 1998 and June 30, 1999 (unaudited).............................................................. F-3 Statements of operations for the period from June 27, 1997 (date of inception) to December 31, 1997, the year ended December 31, 1998, the six months ended June 30, 1998 (unaudited), the six months ended June 30, 1999 (unaudited), and cumulative amounts from inception (unaudited)...... F-4 Statements of stockholders' equity for the period from June 27, 1997 (date of inception) to December 31, 1997, the year ended December 31, 1998 and the six months ended June 30, 1999 (unaudited)........................... F-5 Statements of cash flows for the period from June 27, 1997 (date of inception) to December 31, 1997, the year ended December 31, 1998, the six months ended June 30, 1998 (unaudited), the six months ended June 30, 1999, and cumulative amounts from inception (unaudited).................. F-6 Notes to financial statements............................................. F-7
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Members and Holders of Membership Interests In our opinion, the accompanying balance sheets and the related statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Plug Power, LLC (a development stage enterprise), at December 31, 1997 and 1998, and the results of its operations and its cash flows for the period from June 27, 1997 (date of inception) to December 31, 1997, and for the year ended December 31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Albany, New York April 9, 1999 F-2 PLUG POWER, LLC (A Development Stage Enterprise) Balance Sheets
December 31, December 31, June 30, 1997 1998 1999 ------------ ------------ ----------- (Unaudited) Assets Current assets: Cash and cash equivalents, principally commercial paper..................... $3,080,181 $ 3,993,122 $17,242,734 Accounts receivable................... 803,557 599,955 1,016,402 Other current assets.................. 33,550 14,647 81,614 Due from investor..................... -- 685,306 -- ---------- ----------- ----------- Total current assets................ 3,917,288 5,293,030 18,340,750 Property, plant and equipment, net...... 737,613 2,753,492 8,142,513 Investment in affiliate................. -- -- 10,749,552 Other assets............................ 191,665 46,913 -- ---------- ----------- ----------- Total assets........................ $4,846,566 $ 8,093,435 $37,232,815 ========== =========== =========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable...................... $ 434,795 $ 568,007 $ 3,233,998 Accrued expenses...................... 797,864 1,746,239 1,439,454 Due to investor....................... 17,247 286,492 7,610 Current portion of capital lease obligation........................... -- -- 90,173 ---------- ----------- ----------- Total current liabilities........... 1,249,906 2,600,738 4,771,235 Capital lease obligation.............. -- -- 155,397 ---------- ----------- ----------- Total liabilities................... 1,249,906 2,600,738 4,926,632 ---------- ----------- ----------- Commitments and contingencies Stockholders' equity: Class A membership interest; no par value, authorized 18,000,000, 25,000,000 and 40,000,000 in 1997, 1998 and 1999, respectively; issued and outstanding; 9,500,000, 17,150,000 and 26,458,480 in 1997, 1998 and 1999, respectively.......... -- -- -- Class B membership interests; no par value, authorized 3,000,000, none issued............................... -- -- -- Paid-in capital....................... 9,500,000 21,012,000 67,607,964 Class A membership interests subscribed........................... -- -- (4,697,782) Deficit accumulated during the development stage.................... (5,903,340) (15,519,303) (30,603,999) ---------- ----------- ----------- Total stockholders' equity.......... 3,596,660 5,492,697 32,306,183 ---------- ----------- ----------- Total liabilities and stockholders' equity............................. $4,846,566 $ 8,093,435 $37,232,815 ========== =========== ===========
The accompanying notes are an integral part of the financial statements. F-3 PLUG POWER, LLC (A Development Stage Enterprise) Statements of Operations For the period from June 27, 1997 (date of inception) to December 31, 1997, the year ended December 31, 1998, the six months ended June 30, 1998, the six months ended June 30, 1999, and cumulative amounts from inception
Cumulative December 31, December 31, June 30, June 30, Amounts from 1997 1998 1998 1999 Inception ------------ ------------ ----------- ------------ ------------ (Unaudited) (Unaudited) (Unaudited) Contract revenue........ $ 1,193,530 $ 6,541,040 $ 2,548,653 $ 3,695,535 $ 11,430,105 Cost of contract revenue................ 1,226,443 8,863,845 3,438,301 5,117,834 15,208,122 ----------- ----------- ----------- ------------ ------------ Loss on contracts....... (32,913) (2,322,805) (889,648) (1,422,299) (3,778,017) In-process research and development............ 4,042,640 -- -- -- 4,042,640 Research and development expense................ 1,300,877 4,632,729 2,153,775 7,780,246 13,713,852 General and administrative expense................ 630,033 2,753,645 1,328,256 5,599,736 8,983,414 ----------- ----------- ----------- ------------ ------------ Operating loss......... (6,006,463) (9,709,179) (4,371,679) (14,802,281) (30,517,923) Other income, principally interest... 103,123 93,216 41,472 218,033 414,372 ----------- ----------- ----------- ------------ ------------ Loss before equity in losses of affiliate... (5,903,340) (9,615,963) (4,330,207) (14,584,248) (30,103,551) Equity in losses of affiliate.............. -- -- -- (500,448) (500,448) ----------- ----------- ----------- ------------ ------------ Net loss............... $(5,903,340) $(9,615,963) $(4,330,207) $(15,084,696) $(30,603,999) =========== =========== =========== ============ ============ Loss per membership interest: Basic and diluted...... $ (0.62) $ (0.71) $ (0.40) $ (0.71) =========== =========== =========== ============ Weighted average number of membership interests outstanding:........... 9,500,000 13,616,986 10,864,641 21,299,034 =========== =========== =========== ============
The accompanying notes are an integral part of the financial statements. F-4 PLUG POWER, LLC (A Development Stage Enterprise) Statements of Stockholders' Equity For the period from June 27, 1997 (date of inception) to December 31, 1997, the year ended December 31, 1998, and the six months ended June 30, 1999 (unaudited)
Deficit Accumulated Class A Additional Membership During the Total Membership Paid-in Interests Development Stockholders' Interests Capital Subscribed Stage Equity ---------- ----------- ----------- ------------ ------------- Balance, June 27, 1997.. -- $ -- $ -- $ -- $ -- Capital contributions... 9,500,000 9,500,000 9,500,000 Net loss................ (5,903,340) (5,903,340) ---------- ----------- ----------- ------------ ----------- Balance, December 31, 1997................... 9,500,000 9,500,000 (5,903,340) 3,596,660 Capital contributions... 7,650,000 13,250,000 13,250,000 Deferred rent expense... (2,000,000) (2,000,000) Amortization of deferred rent expense........... 50,000 50,000 Compensatory options.... 212,000 212,000 Net loss................ (9,615,963) (9,615,963) ---------- ----------- ----------- ------------ ----------- Balance, December 31, 1998................... 17,150,000 21,012,000 (15,519,303) 5,492,697 Capital contributions... 4,808,480 31,065,564 (4,697,782) 26,367,782 Shares issued for equity in affiliate........... 2,250,000 11,250,000 11,250,000 Stock based compensation........... 2,250,000 2,250,000 2,250,000 Amortization of deferred rent expense........... 100,000 100,000 Write-off deferred rent expense................ 1,850,000 1,850,000 Compensatory options.... 80,400 80,400 Net loss................ (15,084,696) (15,084,696) ---------- ----------- ----------- ------------ ----------- Balance, June 30, 1999.. 26,458,480 $67,607,964 $(4,697,782) $(30,603,999) $32,306,183 ========== =========== =========== ============ ===========
The accompanying notes are an integral part of the financial statements. F-5 PLUG POWER, LLC (A Development Stage Enterprise) Statements of Cash Flows For the period from June 27, 1997 (date of inception) to December 31, 1997, the year ended December 31, 1998, the six months ended June 30, 1998, the six months ended June 30, 1999 and cumulative amounts from inception
Cumulative December 31, December 31, June 30, June 30, Amounts from 1997 1998 1998 1999 Inception ------------ ------------ ----------- ------------ ------------ (Unaudited) (Unaudited) (Unaudited) Cash Flows From Operating Activities: Net loss........................ $(5,903,340) $(9,615,963) $(4,330,207) $(15,084,696) $(30,603,999) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.. 187,708 499,142 187,673 224,217 911,067 In-process research and development................... 4,042,640 -- -- -- 4,042,640 Equity in losses of affiliate.. -- -- -- 500,448 500,448 Amortization of deferred rent.. -- 50,000 -- 100,000 150,000 Write-off of deferred rent..... -- -- -- 1,850,000 1,850,000 In-kind services............... -- 500,000 -- -- 500,000 Stock based compensation....... -- -- -- 2,406,250 2,406,250 Compensatory options........... -- 212,000 106,000 80,400 292,400 Increases (decreases) in operating assets: Accounts receivable............ (803,557) 203,602 (267,915) (416,447) (1,016,402) Other current assets........... (33,550) 18,903 (26,703) (66,967) (81,614) Change in due from/due to investor...................... 17,247 (416,061) (367,759) 406,424 7,610 Accounts payable and accrued expenses...................... 1,184,551 1,081,587 1,066,239 2,359,206 4,625,344 Other assets................... -- -- -- 21,914 21,914 ----------- ----------- ----------- ------------ ------------ Net cash used in operating activities................... (1,308,301) (7,466,790) (3,632,672) (7,619,251) (16,394,342) ----------- ----------- ----------- ------------ ------------ Cash Flows From Investing Activities: Purchase of property, plant and equipment...................... (361,518) (2,370,269) (1,876,440) (5,498,919) (8,230,706) ----------- ----------- ----------- ------------ ------------ Cash used in investing activities................... (361,518) (2,370,269) (1,876,440) (5,498,919) (8,230,706) ----------- ----------- ----------- ------------ ------------ Cash Flows From Financing Activities: Contributed capital............. 4,750,000 10,750,000 4,250,000 26,367,782 41,867,782 ----------- ----------- ----------- ------------ ------------ Cash provided by financing activities................... 4,750,000 10,750,000 4,250,000 26,367,782 41,867,782 ----------- ----------- ----------- ------------ ------------ Increase (decrease) in cash...... 3,080,181 912,941 (1,259,112) 13,249,612 17,242,734 Cash and cash equivalents, beginning....................... -- 3,080,181 3,080,181 3,993,122 -- ----------- ----------- ----------- ------------ ------------ Cash and cash equivalents, ending.......................... $ 3,080,181 $ 3,993,122 $ 1,821,069 $ 17,242,734 $ 17,242,734 =========== =========== =========== ============ ============
The accompanying notes are an integral part of the financial statements. F-6 PLUG POWER, LLC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS June 30, 1998 and 1999 amounts are unaudited 1. Nature of Operations Plug Power, LLC (Company), was 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. The unaudited interim financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. 2. Significant Accounting Policies Use of estimates: The financial statements of the Company have been prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents: Cash and cash equivalents include cash on hand and short term investments with original maturities of three months or less. Inventories: Inventories are stated at lower of cost (first-in, first-out) or market. Property, plant and equipment, and long-lived assets: Property, plant and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives ranging from 2 to 10 years. The Company reviews long-lived assets and identifiable intangible assets for impairment whenever any events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Revenue recognition: The Company's contract revenue is derived from revenues earned under contracts principally with government agencies. Such contracts require the Company to deliver research and tangible developments in fuel cell technology and system design and prototype fuel cell systems for test and evaluation by the government agency. Revenues are recognized in proportion to the costs incurred. Total estimated cost to complete a contract in excess of the awarded contract amounts are charged to operations during the period such costs are estimated. While the Company's accounting for these contract costs are subject to audit by the sponsoring agency, in the opinion of management, no material adjustments are expected as a result of such audits. The Company generally is required to absorb from 25% to 50% of the total costs incurred on government contracts. At June 30, 1999 the Company has been awarded approximately $40 million of such government contracts. F-7 PLUG POWER, LLC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) June 30, 1998 and 1999 amounts are unaudited 2. Significant Accounting Policies, continued At December 31, 1998 and at June 30, 1999, $25,688 of retainage was owed to the Company and is included in accounts receivable. Recent Accounting Pronouncements: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information"(SFAS 131). SFAS 131 establishes new standards for the way companies report information about operating segments in annual financial statements. The disclosures prescribed by SFAS 131 are effective for the year ended December 31, 1998. We do not believe we operate in more than one segment. 3. Inventories Inventories at December 31, 1997 and 1998, and June 30, 1999 consist of unbilled work-in-progress on research contracts of $20,911 and $14,647, and $53,087 respectively, and are included in other current assets. 4. Property, Plant and Equipment Property, plant and equipment at December 31, 1997 and 1998 and June 30, 1999 consisted of the following:
December 31, December 31 1997 1998 June 30, 1999 ------------ ----------- ------------- Leasehold improvements.. $ 36,778 $ 97,889 $ 97,889 Machinery and equipment.............. 817,643 3,104,887 5,562,223 Construction in progress............... 3,287,153 --------- ---------- ---------- 854,421 3,202,776 8,947,265 Less accumulated depreciation........... (116,808) (449,284) (804,752) --------- ---------- ---------- Property, plant and equipment, net......... $ 737,613 $2,753,492 $8,142,513 ========= ========== ==========
Depreciation and amortization expense was approximately $29,375 for the period from June 27, 1997 (date of inception) to December 31, 1997, $332,476 for the year ended December 31, 1998, and $104,340 and $355,468 for the six months ended June 30, 1998 and 1999, respectively. As of June 30, 1999, the Company has committed to approximately $4 million of additional capital expenditures. The Company also leased equipment under a capital lease transaction subsequent to December 31, 1998 with a net book value at June 30, 1999 of $248,110 which is included in machinery and equipment. Future minimum non-cancelable lease payments are as follows:
1999.............................................................. $ 58,921 2000.............................................................. 93,022 2001.............................................................. 93,022 2002.............................................................. 34,068 2003.............................................................. 5,368 --------- 284,401 Less amounts representing interest................................ (38,831) --------- $ 245,570 =========
F-8 PLUG POWER, LLC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) June 30, 1998 and 1999 amounts are unaudited 5. Loss Per Membership Interest Loss per membership interest for the Company is as follows:
June 27, 1997 Six months to Year ended ended Six months December 31, December 31, June 30, ended 1997 1998 1998 June 30, 1999 ------------- ------------ ----------- ------------- Numerator: Net loss............... $(5,903,340) $(9,615,963) $(4,330,207) $(15,084,696) Denominator: Weighted average membership interests outstanding........... 9,500,000 13,616,986 10,864,661 21,299,034
No options, warrants, or contingently issuable membership interests were included in the calculation of diluted loss per membership interest because their impact would have been anti-dilutive. 6. Income Taxes The Company's income taxes or credits resulting from earnings or losses were payable by, or accrued to, its members. Therefore, no provision has been made for income taxes in these financial statements. 7. Stockholders' Equity The Company has two classes of membership interests, Class A voting and Class B non voting interests. All Class B membership interests will be converted to Class A membership interests on the earlier of (1) the date on which the Company (or its successor) files a registration statement for the public sale of interests in the Company (or shares of a successor), under the Securities Act of 1933; or (2) approval by a majority of the Class A membership interests, of (a) a sale, lease, assignment, transfer or other conveyance of all or substantially all of the assets of the Company, or (b) a merger, combination or dissolution of the Company. At December 31, 1998 and June 30, 1999, 3,000,000 Class B membership interests were reserved for issuance under the membership option plan. At June 30, 1999, 9,750,000 Class A membership interests are reserved for warrant exercises and capital calls. Subsequent to June 30, 1999, an additional 1,300,000 Class B membership interests were authorized for issuance, for a total of 4,300,000. In exchange for EDC's initial cash contribution of $4,750,000, the Company issued 4,750,000 Class A membership interests in the Company. MTI made noncash contributions of $4,750,000 consisting of in-process research and development ($4,042,640), and certain net assets, in exchange for 4,750,000 Class A membership interests. The amount allocated to the in-process research and development contributed to the Company by MTI represents its estimated fair value based on the negotiations of two parties and is consistent with its value under the cost valuation approach. Under the cost valuation approach, value is measured by quantifying the cost of replacing the future service capability of the acquired property without considering the amount of economic benefits that can be achieved, or the time period over which they might continue. Contributed in-process research and development was early development stage property, which did not and currently does not have commercial viability or any alternative future use and which will require substantial additional expenditures to commercialize. Accordingly, the assigned value was charged to operations at the time the Company was formed. F-9 PLUG POWER, LLC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) June 30, 1998 and 1999 amounts are unaudited 7. Stockholders' Equity, continued During the year ended December 31, 1998, EDC and MTI made additional total contributions of $13,250,000 in exchange for 7,650,000 Class A membership interests. EDC contributed $7,750,000 in cash for 4,950,000 Class A membership interests. MTI contributed $3,000,000 in cash, $2,000,000 of deferred rent related to a below market lease for office and manufacturing facilities, and $500,000 of in-kind services ($5,500,000 in total) for 2,700,000 Class A membership interests. In 1998, MTI purchased options for $191,250, which entitled MTI to acquire 2,250,000 Class A membership interests by June, 1999 for $2,250,000. According to the joint venture agreement, MTI may earn non-cash credits which will be applied toward the purchase price of Class A membership interests under option. MTI can earn these credits based on the Company obtaining certain defined levels of research contracts. In March 1999, all parties to the agreement mutually agreed that MTI had earned $2,250,000 of non-cash credit which were used to acquire 2,250,000 Class A membership interests. Accordingly, these interests were issued in March 1999, a charge to operations of $2,250,000 was recorded under the caption "General and Administrative Expense," and $191,250 was returned to MTI in accordance with the terms of the option agreement. A summary of equity transactions from inception through June 30, 1999 is as follows:
Membership Number of Price per Total Paid Interests Date Shares Share Cash Non-cash in Capital Subscribed ---- ---------- --------- ----------- ----------- ----------- ----------- June, 1997................... 4,750,000 $1.00 $ 4,750,000 $ $ 4,750,000 $ June, 1997................... 4,750,000 1.00 4,750,000 4,750,000 ---------- ----------- ----------- ----------- ----------- December 31, 1997............ 9,500,000 4,750,000 4,750,000 9,500,000 April and June, 1998......... 4,250,000 1.00 4,250,000 4,250,000 June, 1998................... 2,000,000 1.00 2,000,000 2,000,000 August, 1998................. 300,000 5.00 1,500,000 1,500,000 August, 1998................. 100,000 5.00 500,000 500,000 October, November, and December, 1998.............. 1,000,000 5.00 5,000,000 5,000,000 ---------- ----------- ----------- ----------- ----------- Capital contributions, 1998 7,650,000 10,750,000 2,500,000 13,250,000 Deferred rent expense........ (2,000,000) (2,000,000) Amortization of deferred rent expense..................... 50,000 50,000 Compensatory options......... 212,000 212,000 ---------- ----------- ----------- ----------- ----------- December 31, 1998............ 17,150,000 15,500,000 5,512,000 21,012,000 January and February, 1999... 600,000 5.00 3,000,000 3,000,000 February, 1999............... 1,500,000 6.67 10,000,000 10,000,000 April and June, 1999(a)...... 2,004,165 6.67 13,367,782 13,367,782 June, 1999................... 704,315 6.67 4,697,782 4,697,782 (4,697,782) ---------- ----------- ----------- ----------- ----------- Capital contributions, 1999...................... 4,808,480 26,367,782 4,697,782 31,065,564 (4,697,782) Share issued for equity in affiliate, February, 1999... 2,250,000 5.00 11,250,000 11,250,000 Stock based compensation, March 1999(b)............... 2,250,000 1.00 2,250,000 2,250,000 Amortization of deferred rent expense..................... 100,000 100,000 Write-off deferred rent expense..................... 1,850,000 1,850,000 Compensatory options......... 80,400 80,400 ---------- ----------- ----------- ----------- ----------- June 30, 1999................ 26,458,480 $41,867,782 $25,740,182 $67,607,964 $(4,697,782) ========== =========== =========== =========== ===========
- -------- (a) Excludes $840,000 of in-kind marketing services not yet provided. (b) Represents exercise of April, 1998 option. F-10 PLUG POWER, LLC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) June 30, 1998 and 1999 amounts are unaudited 8. Related Party Transactions On June 27, 1997, the Company entered into a distribution agreement with the EDC. Under the agreement, EDC was appointed the Company's exclusive independent distributor in Michigan, Ohio, Indiana and Illinois to promote and assist in the sale of products developed by the Company, subject to certain terms and conditions. On June 27, 1997, the Company entered into a management services agreement with MTI to obtain certain services and lease certain facilities for a period of one year. At the expiration of this agreement, the Company extended the existing facilities lease through September 30, 1998. In June 1998, the Company entered into a new facilities lease which commenced on October 1, 1998, and had a term of ten years with an option for an additional five years. Rental expense was $79,000 for the period from June 27, 1997 (date of inception) to December 31, 1997, and $378,000 for the year ended December 31, 1998. Rental expense was $256,000 and $215,000 for the six months ended June 30, 1998 and 1999, respectively. The total amount due MTI was $17,247, $286,492 and $7,610 at December 31, 1997, December 31, 1998 and June 30, 1999, respectively. As part of the new facilities lease, MTI agreed to reimburse the Company up to $2.0 million for improvements made to the Company's facilities. At December 31, 1998, $685,306 in Company expenditures had not yet been reimbursed by MTI, and is included in due from investor. Subsequent to June 30, 1999, the lease and the management agreement with MTI were terminated in connection with MTI's contribution of its real estate to the Company in exchange for Class A membership interests (see Note 10). 9. Employee Benefit Plans Membership Option Plan: Effective July 1, 1997, the Company established a Membership Option Plan (the Plan) to provide employees an option to purchase Class B membership interests. Employee options generally vest 20% per year and expire ten years after issuance. Options granted to the Board of Managers vest 50% upon grant and 25% per year thereafter. Options granted to consultants vest one-third on expiration of the consultant's initial contract term with an additional one- third vesting on each anniversary thereafter. Except as discussed below, no options can be exercised prior to July 1, 2000. All options granted shall become immediately vested and exercisable in the event of the sale of all or substantially all of the Company's assets, or in the event of the sale of all or substantially all of the Company's Class A Membership interests. All vested options shall become immediately exercisable in the event the Company's Class A membership interests become publicly traded. At June 30, 1999, there are 3,000,000 interests authorized for issuance under the Plan. Subsequent to June 30, 1999, an additional 1,300,000 interests were authorized for issuance, for a total of 4,300,000. The following table summarizes information about the membership options outstanding under the Plan at December 31, 1998:
Outstanding ---------------------------- Average Weighted Remaining Average Life Exercise Exercise Price Interests (Years) Price -------------- --------- --------- -------- $ 1.00.......................................... 1,435,200 8.9 $1.00 $ 5.00.......................................... 240,000 9.8 5.00 --------- --- ----- 1,675,200 9.1 1.57 --------- --- -----
F-11 PLUG POWER, LLC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) June 30, 1998 and 1999 amounts are unaudited 9. Employee Benefit Plans, continued The following table summarizes information about the membership options outstanding under the Plan at June 30, 1999:
Outstanding ---------------------------- Average Weighted Remaining Average Life Exercise Exercise Price Interests (Years) Price -------------- --------- --------- -------- $ 1.00.......................................... 1,435,200 8.4 $1.00 $ 5.00.......................................... 583,039 9.6 5.00 $ 6.67.......................................... 591,500 10.0 6.67 --------- 2,609,739 9.0 3.18 =========
The following table summarizes activity of the Plan:
Weighted Average Number of Exercise Interests Price Under Per Option Activity Option Interest --------------- --------- -------- Balance, June 27, 1997................................... -- $-- Granted at fair value.................................... 1,132,500 1.00 Forfeited or terminated.................................. (18,500) 1.00 --------- Balance December 31, 1997................................ 1,114,000 1.00 Granted below fair value................................. 197,000 1.00 Granted at fair value.................................... 460,650 3.09 Forfeited or terminated.................................. (96,450) 1.03 --------- Balance December 31, 1998................................ 1,675,200 1.57 --------- Granted at fair value.................................... 934,539 6.06 --------- Balance at June 30, 1999................................. 2,609,739 3.12 =========
Accounting for Stock Based Compensation: The per share weighted average fair value of the options granted during 1997, 1998 and 1999 was $0.26, $0.58 and $1.45, respectively, using the minimum value method of valuing stock options under Statement of Financial Accounting Standard No. 123 (SFAS No.123) "Accounting for Stock-Based Compensation". The dividend yield was assumed to be $0 for all periods. The risk free interest rate ranged from 5.8% to 6.1% in 1997 and 4.5% to 5.6% in 1998, and 5.1% to 5.7% in 1999. An expected life of five years was assumed. The Company applies Accounting Principles Board Opinion No. 25 in accounting for the Plan and does not record compensation cost for options granted at fair value. During 1998 the Company awarded 197,000 options to key employees for which issuance was contingent upon the attainment of specified performance objectives. Of those awarded, 51,500 were forfeited. The difference between the fair value of the membership interests at the measurement date and the exercise price of the options was $582,000, and will be charged to expense over the four F-12 PLUG POWER, LLC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) June 30, 1998 and 1999 amounts are unaudited 9. Employee Benefit Plans, continued year vesting period of the options. The charge to operations was $212,000 and $80,400 for the year ended December 31, 1998 and for the six months ended June 30, 1999, respectively. Had the Company determined compensation cost based on fair value in accordance with SFAS 123, the Company's net loss would have increased to the pro forma amounts indicated below:
Six months June 27, 1997 Year ended ended to December 31, December 31, June 30, 1997 1998 1999 --------------- ------------ ------------- Net loss, as reported............. $ (5,903,340) $ (9,615,963) $ (15,084,696) Proforma net loss................. (6,000,628) (9,775,441) (15,197,507) Proforma loss per membership in- terest, basic and diluted.......................... $ (0.63) $ (0.72) $ (0.71)
401(k) Savings & Retirement Plan: The Company offers a 401(k) Savings & Retirement Plan to eligible employees meeting certain age and service requirements. This plan permits participants to contribute up to 15% of their salary, up to the maximum allowable by the Internal Revenue Service regulations. Participants are immediately vested in their voluntary contributions plus actual earnings thereon. Participants are vested in the Company's matching contribution based on the years of service completed. Participants are fully vested upon completion of four years of service. The Company's expense for this plan was $23,000 for the period from June 27, 1997 (date of inception) to December 31, 1997 and $95,000 for the year ended December 31, 1998. The Company's expense for this plan was $34,000 and $90,000 for the six months ended June 30, 1998 and 1999, respectively. 10. Subsequent Events (Unaudited) Capital Call: Effective January 26, 1999, the Company entered into an agreement with MTI and EDC. The agreement provides that the Company has the right to call upon MTI and EDC to make capital contributions (Capital Call), at any time through December 31, 2000, if the Company determines that it requires additional funds, as follows: . The agreement requires both MTI and EDC to each fund capital calls of up to $7.5 million in 1999 and $15 million in 2000 (Capital Commitment). . In exchange for such Capital Commitment, MTI and EDC will receive Class A membership interests from the Company at $7.50 per interest. . MTI and EDC will share the Capital Commitment equally. . The Company's Board of Managers will determine when there is a requirement for additional funds. . MTI and EDC shall have sixty days from the date of such determination to tender their payment to the Company. The agreement will terminate on the earlier of i) December 31, 2000 or ii) an initial public offering of shares by the Company at a price of greater than $7.50 per share (Termination Date). F-13 PLUG POWER, LLC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) June 30, 1998 and 1999 amounts are unaudited 10. Subsequent Events (Unaudited), continued Under an amendment to the agreement, the Company has also agreed to permit MTI and EDC to make capital contributions on the Termination Date, whether or not such funds have been called, to the extent of their Capital Commitment. Such contributions will be made at a fixed price of $7.50 per Class A membership interest. If the Company makes a Capital Call and either MTI or EDC fail to make the required capital contribution (Defaulting Member), then such Defaulting Member shall permanently forfeit the right to receive the interests it is entitled to under the agreement (Defaulted Interests). Additionally, to the extent of outstanding Capital Commitments, the Defaulting Member shall forfeit the right to receive additional interests equal to two times the Defaulted Interests. The non-defaulting Member may then elect to fund the Defaulting Member's share of the Capital Call in exchange for membership interests at the fixed price of $7.50 per interest. Subsequent to June 30, 1999, the Company made a capital call on EDC and MTI in the amount of $4,000,005, representing 266,667 Class A membership interests each at $7.50 per share. GE On-Site Power: In February 1999, the Company entered into an agreement with 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 On-Site Power, Inc. owns 75% of the new entity and the Company owns 25% of the new entity. As part of the agreement, the Company will work closely with General Electric's Corporate Research and Development Center for product development and manufacturing support. GEFCS will market, sell, install and service fuel cells systems, designed and manufactured by the Company, world-wide (with the exception of EDC's exclusive four state territory of Michigan, Ohio, Indiana and Illinois) for residential and small business power applications up to 35kW. In addition, the Company entered into a ten year distribution agreement with GEFCS that requires GEFCS purchase from the Company a specified number of pre- commercial units by December 31, 2000. In accordance with the terms of the agreement, General Electric will provide capital, in the form of loans, to fund the purchase of pre-commercial units during the period ending December 31, 2000. General Electric will also provide additional capital, in the form of a loan not to exceed $8.0 million, to fund the operations of GEFCS. The Company has agreed to purchase a minimum of $12.0 million of technical support services over a three year period and extend the term of the distribution agreement by five years to 2009. In connection with the formation of GEFCS, the Company issued 2,250,000 Class A membership interests to GE On-Site Power, Inc. in exchange for a 25% interest in GEFCS. Of these, 750,000 interests vested immediately and the remaining 1,500,000 interests in August 1999. As of the date of the issuance of such interests, the Company capitalized $11,250,000, the fair value of the interests issued, under the caption "Investment in Affiliate". F-14 PLUG POWER, LLC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) June 30, 1998 and 1999 amounts are unaudited 10. Subsequent Events (Unaudited), continued 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 under the caption "Equity in losses of affiliate". From inception through June 30, 1999, GEFCS had no revenue and an operating and net loss of approximately $127,000. The unaudited balance sheet of GEFCS at June 30, 1999 included no assets, current liabilities of $117,000 (including $73,000 due to General Electric) and a members' deficit of $117,000. At June 30, 1999, the difference between the amount at which the investment is carried and the amount of the underlying equity in net assets of GEFCS is $10,749,552. Such amount is being amortized on the straight line basis over a ten year period. For the period ended June 30, 1999, equity in losses of affiliate were $500,448 including goodwill amortization of $468,750. The Company also issued warrants to purchase 3,000,000 additional Class A membership interests at $12.50 per interest. These warrants expire the later of i) December 31, 2000, ii) twelve months after an initial public offering of shares, by the Company, at a price less than $12.50 per share, or iii) an initial public offering of shares, by the Company, at a price of at least $12.50 per share. Other Financing Transactions: During the first quarter of 1999 MTI and EDC each purchased 300,000 Class A membership interests for $1.5 million each. In February 1999, two investors purchased 1,500,000 Class A membership interests for $10.0 million. In addition, one of the investors received a warrant to purchase 400,000 Class A membership interests at a price of $8.50 per interest. These warrants expire at the earliest of i) December 31, 2001, ii) an initial public offering of the Company, at a price of at least $8.50 per share, or iii) eighteen months after an initial public offering of shares by the Company at a price less than $8.50 per share. In April 1999 an investor purchased 299,850 Class A membership interests for $2.0 million. In April 1999, an investor purchased 1,000,000 Class A membership interests for $6.7 million. In connection with the purchase agreement, the investor is required to spend an aggregate of $840,000 for market research and related services on behalf of the Company. In the event such amounts are not expended by April, 2002, up to 111,851 of the previously issued interests may be returned to the Company. The Company will account for these services by recording a charge to earnings and a credit to paid-in capital as these services are rendered. As of June 30, 1999, no services had been provided. Additionally, the investor received warrants to purchase an additional 350,000 Class A membership interests at an exercise price of $8.50 per interest. These warrants terminate on the earliest of i) December 31, 2001, ii) an initial public offering of shares, by the Company, at a price of at least $8.50 per share, or iii) twelve months after an initial public offering of shares, by the Company, at a price less than $8.50 per share. On June 23, 1999, EDC purchased 704,315 interests of the Company's Class A membership interests for $4,697,782. Also, the Company entered into a purchase agreement with MTI to acquire approximately 36 acres of land, two commercial buildings and a residential building located in Latham, New York in exchange for 704,315 Class A membership interests. F-15 PLUG POWER, LLC (A Development Stage Enterprise) NOTES TO FINANCIAL STATEMENTS--(Continued) June 30, 1998 and 1999 amounts are unaudited As part of the transaction, the Company assumed a $6.2 million letter of credit to KeyBank National Association. In connection with the agreement, the Company was required to escrow $6.2 million. The KeyBank debt was issued for the express purpose of servicing debt related to $6.2 million of Industrial Development Revenue (IDR) Bonds issued by the Town of Colonie Industrial Development Agency. 10. Subsequent Events (Unaudited), continued The transaction closed on July 7, 1999, and a receivable for membership interests of $4,697,782 is recorded as membership interests subscribed as of June 30, 1999. Simultaneous with the July closing, the Company agreed to lease back to MTI certain office and manufacturing space on a short-term basis. In connection with the transaction with MTI, the Company has written off deferred rent expense in the amount of $1,850,000 relating to a 10-year facilities lease associated with the property. Option Remeasurement: Subsequent to June 30, 1999, the Company modified the terms of an employee's option. The impact of this modification will result in a charge to earnings of between $680,000 and $800,000 in the fourth quarter of 1999. Line of Credit: In October 1999, the Company entered into a loan agreement for a $6.0 million line of credit from KeyBank, N.A. The line of credit bears interest at the prime rate in effect from time to time, matures upon the earlier of the closing of the offering or November 30, 1999, and is collateralized by an assignment of our right to call capital from Mechanical Technology and Edison Development. Initial Public Offering: The Company is currently undertaking an initial public offering. In the event that the public offering becomes effective, the Company will be converted from a limited liability corporation to a C corporation with one class of common stock and authorization to issue preferred stock. In connection with this conversion, the Company would then be subject to state and federal income taxes and would account for income taxes under SFAS 109, "Accounting for Income Taxes". In addition, it is expected that the Company will revise its employee membership interest plan and implement an employee stock purchase plan. F-16 UNDERWRITING Plug Power and the underwriters named below have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co., Hambrecht & Quist LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and FAC/Equities, a division of First Albany Corporation, are the representatives of the underwriters.
Underwriters Number of Shares ------------ ---------------- Goldman, Sachs & Co......................................... Hambrecht & Quist LLC....................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated....................................... FAC/Equities, a division of First Albany Corporation........ --------- Total..................................................... 6,000,000 =========
---------------- If the underwriters sell more shares than the total number set forth in the table above, the underwriters have an option to buy up to an additional 900,000 shares from Plug Power to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by Plug Power. Such amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares.
Paid by Plug Power ------------------ No Exercise Full Exercise ----------- ------------- Per Share.......................................... $ $ Total.............................................. $ $
Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $ per share from the initial offering price. If all the shares are not sold at the initial offering price, the representatives may change the offering price and the other selling terms. Plug Power, its directors, officers and persons owning its common stock have agreed with the underwriters not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of the representatives. This agreement does not apply to gifts or transfers to affiliates or transactions under any existing employee benefit plans. Please see "Shares Eligible for Future Sale" for a discussion of various transfer restrictions. At Plug Power's request, the underwriters have reserved up to 300,000 shares of the common stock offered hereby for sale, at the initial public offering price, to employees, customers and other friends of Plug Power through a directed share program. The number of shares available for sale to U-1 the general public will be reduced to the extent these persons purchase the reserved shares. There can be no assurance that any of the reserved shares will be so purchased. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same basis as other shares offered hereby. Prior to the offering, there has been no public market for the shares. The initial public offering price will be negotiated among Plug Power and the representatives. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be Plug Power's historical performance, estimates of the business potential and earnings prospects of Plug Power, an assessment of Plug Power's management and the consideration of the above factors in relation to market valuation of companies in related businesses. Application has been made for quotation of the common stock on the Nasdaq National Market under the symbol of "PLUG". In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. The underwriters may not confirm sales to discretionary accounts without the prior written approval of the customer. Plug Power estimates that its share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $820,000. Because of the relationships between First Albany Corporation and Plug Power, the offering is being conducted in accordance with Rule 2720 of the National Association of Securities Dealers. See "Certain Relationships and Related Transactions". That rule requires that the initial public offering price can be no higher than that recommended by a "qualified independent underwriter", as defined by the NASD. Goldman, Sachs & Co. has served in that capacity and performed due diligence investigations and reviewed and participated in the preparation of the registration statement of which this prospectus forms a part. Goldman, Sachs & Co. has received $10,000 from Plug Power as compensation for such role. Plug Power has agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933. U-2 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. --------------- TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 8 Use of Proceeds.......................................................... 16 Dividend Policy.......................................................... 16 Capitalization........................................................... 17 Dilution................................................................. 18 Selected Historical Financial Data....................................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 20 Business................................................................. 30 Management............................................................... 45 Certain Relationships and Related Transactions........................... 54 Principal Stockholders................................................... 58 Description of Capital Stock............................................. 60 Shares Eligible For Future Sale.......................................... 64 Validity of Common Stock................................................. 65 Experts.................................................................. 65 Where You Can Find More Information...................................... 65 Index to Financial Statements............................................ F-1 Underwriting............................................................. U-1
--------------- Through and including , 1999 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 6,000,000 Shares Common Stock --------------- PROSPECTUS --------------- Goldman, Sachs & Co. Hambrecht & Quist Merrill Lynch & Co. FAC/Equities Representatives of the Underwriters - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the estimated expenses payable by us in connection with the offering (excluding underwriting discounts and commissions):
Nature of Expense Amount ----------------- -------- SEC Registration Fee.................................................. $ 32,610 NASD Filing Fee....................................................... 12,230 Nasdaq National Market Listing Fee.................................... 66,875 Accounting Fees and Expenses.......................................... 180,000 Legal Fees and Expenses............................................... 310,000 Printing Expenses..................................................... 130,000 Blue Sky Qualification Fees and Expenses.............................. 35,000 Transfer Agent's Fee.................................................. 4,000 Miscellaneous......................................................... 49,285 -------- TOTAL............................................................... $820,000 ========
The amounts set forth above, except for the Securities and Exchange Commission and National Association of Securities Dealers, Inc. fees, are in each case estimated. Item 14. Indemnification of Directors and Officers In accordance with Section 145 of the Delaware General Corporation Law, Article VII of our amended and restated certificate of incorporation provides that no director of Plug Power shall be personally liable to Plug Power or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to Plug Power or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) in respect of unlawful dividend payments or stock redemptions or repurchases, or (4) for any transaction from which the director derived an improper personal benefit. In addition, our amended and restated certificate of incorporation provides that if the Delaware General Corporation Law is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Article V of our amended and restated by-laws provides for indemnification by Plug Power of its officers and certain non-officer employees under certain circumstances against expenses, including attorneys fees, judgments, fines and amounts paid in settlement, reasonably incurred in connection with the defense or settlement of any threatened, pending or completed legal proceeding in which any such person is involved by reason of the fact that such person is or was an officer or employee of the registrant if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of Plug Power, and, with respect to criminal actions or proceedings, if such person had no reasonable cause to believe his or her conduct was unlawful. Item 15. Recent Sales of Unregistered Securities Since its formation in June 1997, Plug Power has issued the following securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act"). The shares of capital II-1 stock and other securities issued in the following transactions were offered and sold in reliance upon the following exemptions: (i) in the case of the transactions described in (a) below, Section 4(2) of the Securities Act or Regulation D promulgated thereunder relative to sales by an issuer not involving a public offering; and (ii) in the case of the transactions described in (b) below, Section 3(b) of the Securities Act and Rule 701 promulgated thereunder relative to sales pursuant to certain compensatory benefits plans. (a) Issuance of Capital Stock: (i) In June 1997, Plug Power sold 4,750,000 shares of its common stock for an aggregate purchase price of $4,750,000 to Edison Development. (ii) In June 1997, Plug Power sold 4,750,000 shares of its common stock for an aggregate purchase price of $4,750,000 to Mechanical Technology. (iii) In April 1998, Plug Power sold 2,250,000 shares of its common stock for an aggregate purchase price of $2,250,000 to Edison Development. (iv) In April 1998, Plug Power sold options to purchase an aggregate of 250,000 shares of its common stock at an exercise price of $1.00 per share to Mechanical Technology for a purchase price of $21,250. (v) In June 1998, Plug Power sold 2,000,000 shares of its common stock for an aggregate purchase price of $2,000,000 to Edison Development. (vi) In June 1998, Plug Power sold 2,000,000 shares of its common stock in consideration of a below-market real estate leasehold interest to Mechanical Technology. (vii) In June 1998, Plug Power sold options to purchase an aggregate of 2,000,000 shares of its common stock at an exercise price of $1.00 per share to Mechanical Technology for a purchase price of $170,000. (viii) In August 1998, Plug Power sold 200,000 shares of its common stock for an aggregate purchase price of $1,000,000 to Edison Development. (ix) In August 1998, Plug Power sold 200,000 shares of its common stock for an aggregate purchase price of $1,000,000 to Mechanical Technology. (x) In October 1998, Plug Power sold 200,000 shares of its common stock for an aggregate purchase price of $1,000,000 to Edison Development. (xi) In October 1998, Plug Power sold 200,000 shares of its common stock for an aggregate purchase price of $1,000,000 to Mechanical Technology. (xii) In November 1998, Plug Power sold 200,000 shares of its common stock for an aggregate purchase price of $1,000,000 to Edison Development. (xiii) In November 1998, Plug Power sold 200,000 shares of its common stock for an aggregate purchase price of $1,000,000 to Mechanical Technology. (xiv) In December 1998, Plug Power sold 100,000 shares of its common stock for an aggregate purchase price of $500,000 to Edison Development. (xv) In December 1998, Plug Power sold 100,000 shares of its common stock for an aggregate purchase price of $500,000 to Mechanical Technology. (xvi) In January 1999, Plug Power sold 100,000 shares of Plug Power's common stock for an aggregate purchase price of $500,000 to Edison Development. (xvii) In January 1999, Plug Power sold 100,000 shares of Plug Power's common stock for an aggregate purchase price of $500,000 to Mechanical Technology. II-2 (xviii) In January 1999, pursuant to an Equity Contribution and Warrant Agreement, Plug Power granted each of Mechanical Technology and Edison Development warrants to purchase up to 3,000,000 shares of Plug Power's common stock at an exercise price of $7.50 per share. (xix) In February 1999, Plug Power sold 200,000 shares of Plug Power's common stock for an aggregate purchase price of $1,000,000 to Edison Development. (xx) In February 1999, Plug Power sold 200,000 shares of Plug Power's common stock for an aggregate purchase price of $1,000,000 to Mechanical Technology. (xxi) In February 1999, Plug Power sold 2,250,000 shares of Plug Power's common stock to GE On-Site Power, Inc. in consideration of Plug Power's receipt of a 25% interest in GE Fuel Systems, LLC. (xxii) In February 1999, Plug Power sold 1,440,000 shares of Plug Power's common stock for an aggregate purchase price of $9,600,000 to Michael Cudahy. (xxiii) In February 1999, Plug Power granted warrants to purchase an aggregate of 400,000 shares of Plug Power's common stock to Michael Cudahy at an exercise price of $8.50 per share. (xxiv) In February 1999, Plug Power sold 60,000 shares of Plug Power's common stock for an aggregate purchase price of $400,000 to Kevin Lindsey. (xxv) In February 1999, Plug Power granted a warrant to purchase up to 3,000,000 shares of Plug Power's common stock to GE On-Site Power, Inc. at an exercise price of $12.50 per share. (xxvi) In March 1999, Plug Power issued 2,250,000 shares of Plug Power's common stock to Mechanical Technology upon the exercise of its outstanding options in consideration of the application by Mechanical Technology of certain non-cash research credits towards the exercise price. (xxvii) In April 1999, Plug Power sold 299,850 shares of Plug Power's common stock for an aggregate purchase price of $2,000,000 to Antaeus Enterprises, Inc. (xxviii) In April 1999, Plug Power sold 1,000,000 shares of Plug Power's common stock for an aggregate purchase price of $6,670,000 to Southern California Gas Company. (xxix) In April 1999, Plug Power granted warrants to purchase an aggregate of 350,000 shares of Plug Power's common stock to Southern California Gas Company at an exercise price of $8.50 per share. (xxx) In June 1999, Plug Power sold 704,315 shares of Plug Power's common stock for an aggregate purchase price of $4,697,782 to Edison Development. (xxxi) In June 1999, Plug Power sold 704,315 shares of Plug Power's common stock in consideration of the net asset value of certain real estate to Mechanical Technology. (xxxii) In September 1999, Plug Power sold 266,667 shares of Plug Power's common stock at an exercise price of $7.50 per share to Mechanical Technology. (xxxiii) In September 1999, Plug Power sold 266,667 shares of Plug Power's common stock at an exercise price of $7.50 per share to Edison Development. (b) Grants of Stock Options (i) As of September 30, 1999, options to purchase 3,377,189 shares of common stock were outstanding under Plug Power's Membership Option Plan of which options to purchase 1,220,782 shares are exercisable within 60 days of such date. None of the outstanding options have been exercised. All such options were granted between June 1997 and July 1999 to officers, directors, employees, consultants and advisors of Plug Power. II-3 Item 16. Exhibits and Financial Statement Schedules
Exhibit Page Number Description No. ------- --------------------------------------------------------------- ---- .1.1 Form of Underwriting Agreement. .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. .3.1 Certificate of Incorporation of Plug Power. .3.2 Form of Amended and Restated Certificate of Incorporation of Plug Power. .3.3 By-laws of Plug Power. .3.4 Amended and Restated By-laws of Plug Power. .4.1 Specimen certificate for shares of common stock, $.01 par value, of Plug Power. .5.1 Opinion of Goodwin, Procter & Hoar LLP as to the legality of the securities being offered. +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. .10.2 Contribution Agreement, dated as of February 3, 1999, by and between GE On-Site Power, Inc. and Plug Power, LLC. +10.3 Trademark and Trade Name Agreement, dated as of February 2, 1999, between General Electric Company and GE Fuel Cell Systems, LLC. +10.4 Trademark Agreement, dated as of February 2, 1999, between Plug Power LLC and GE Fuel Cell Systems, LLC. +10.5 Distributor Agreement, dated as of February 2, 1999, between GE Fuel Cell Systems, LLC and Plug Power, LLC. .10.6 Side letter agreement, dated February 3, 1999, between General Electric Company and Plug Power LLC. .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. .10.8 LLC Interest Purchase Agreement, dated as of February 16, 1999, between Plug Power, LLC and Michael J. Cudahy. .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. .10.10 LLC Interest Purchase Agreement, dated as of February 16, 1999, between Plug Power, LLC and Kevin Lindsey. .10.11 LLC Interest Purchase Agreement, dated as of April 1, 1999, between Plug Power, LLC and Antaeus Enterprises, Inc. .10.12 LLC Interest Purchase Agreement, dated as of April 9, 1999, between Plug Power, LLC and Southern California Gas Company. .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. 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. +10.15 Agreement, dated as of January 25, 1999, between the New York State Energy Research and Development Authority and Plug Power LLC. +10.16 Agreement, dated as of September 30, 1997, between Plug Power LLC and the U.S. Department of Energy.
II-4
Exhibit Page Number Description No. ------- --------------------------------------------------------------- ---- +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. .10.18 Joint venture agreement, dated as of June 14, 1999 between Plug Power, LLC, Polyfuel, Inc., and SRI International. +10.19 Cooperative Research and Development Agreement, dated as of February 12, 1999, between Plug Power, LLC and U.S. Army Benet Laboratories. +10.20 Nonexclusive License Agreement, dated as of April 30, 1993, between Mechanical Technology Incorporated and the Regents of the University of California. +10.21 Development Collaboration Agreement, dated as of July 30, 1999, by and between Joh. Vaillant GMBH. U. CO. and Plug Power, LLC. .10.22 Agreement of Sale, dated as of June 23, 1999, between Mechanical Technology, Incorporated and Plug Power LLC. .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. .10.24 Replacement Reimbursement Agreement, dated as of July 1, 1999, between Plug Power, LLC and KeyBank, N.A. 10.25 1997 Membership Option Plan and amendment thereto dated September 27, 1999. .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. +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. .10.28 Agreement, dated as of June 27, 1999, between Plug Power, LLC and Gary Mittleman. .10.29 Agreement, dated as of June 8, 1999, between Plug Power, LLC and Louis R. Tomson. .10.30 Agreement, dated as of August 6, 1999, between Plug Power, LLC and Gregory A. Silvestri. .10.31 Agreement, dated as of August 12, 1999, between Plug Power, LLC and William H. Largent. .10.32 Agreement, dated as of August 20, 1999, between Plug Power, LLC and Dr. Manmohan Dhar. .10.33 1999 Stock Option and Incentive Plan. .10.34 Employee Stock Purchase Plan +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. .10.36 Form of Registration Rights Agreement to be entered into by the Registrant and the stockholders of the Registrant. .10.37 Form of Registration Rights Agreement to be entered into by Plug Power, L.L.C. and GE On-Site Power, Inc. .23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1 hereto). 23.2 Consent of PricewaterhouseCoopers LLP. .24.1 Powers of Attorney (included on signature page). 27.1 Financial Data Schedule. .99.1 Consent of Robert L. Nardelli. .99.2 Consent of John M. Shalikashvili
- -------- + Filed herewith; portions of this exhibit have been omitted pursuant to a request for confidential treatment. . Previously filed. II-5 (b) Financial Statement Schedules All schedules have been omitted because they are not required or because the required information is given in the Financial Statements or Notes to those statements. Item 17. Undertakings The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 5 to the Registration Statement (File No. 333-86089) to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Latham, State of New York, on October 28, 1999. Plug Power Inc. By: /s/ Gary Mittleman ----------------------------------- Gary Mittleman President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 4 to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Gary Mittleman President, Chief Executive October 28, 1999 ______________________________________ Officer and Director Gary Mittleman (Principal Executive Officer) /s/ William H. Largent Chief Financial Officer October 28, 1999 ______________________________________ (Principal Financial William H. Largent Officer and Principal Accounting Officer) * Director October 28, 1999 ______________________________________ Michael J. Cudahy * Director October 28, 1999 ______________________________________ Anthony F. Earley, Jr. * Director October 28, 1999 ______________________________________ Larry G. Garberding * Director October 28, 1999 ______________________________________ George C. McNamee * Director October 28, 1999 ______________________________________ Walter L. Robb
/s/ Ana-Maria Galeano *By: __________________________ Ana-Maria Galeano, Attorney-in-Fact II-7 EXHIBIT INDEX
Exhibit Number Description ------- ---------------------------------------------------------------------- .1.1 Form of Underwriting Agreement. .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. .3.1 Certificate of Incorporation of Plug Power. .3.2 Form of Amended and Restated Certificate of Incorporation of Plug Power. .3.3 By-laws of Plug Power. .3.4 Amended and Restated By-laws of Plug Power. .4.1 Specimen certificate for shares of common stock, $.01 par value, of Plug Power. .5.1 Opinion of Goodwin, Procter & Hoar LLP as to the legality of the securities being offered. +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. .10.2 Contribution Agreement, dated as of February 3, 1999, by and between GE On-Site Power, Inc. and Plug Power, LLC. +10.3 Trademark and Trade Name Agreement, dated as of February 2, 1999, between General Electric Company and GE Fuel Cell Systems, LLC. +10.4 Trademark Agreement, dated as of February 2, 1999, between Plug Power LLC and GE Fuel Cell Systems, LLC. +10.5 Distributor Agreement, dated as of February 2, 1999, between GE Fuel Cell Systems, LLC and Plug Power, LLC. .10.6 Side letter agreement, dated February 3, 1999, between General Electric Company and Plug Power LLC. .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. .10.8 LLC Interest Purchase Agreement, dated as of February 16, 1999, between Plug Power, LLC and Michael J. Cudahy. .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. .10.10 LLC Interest Purchase Agreement, dated as of February 16, 1999, between Plug Power, LLC and Kevin Lindsey. .10.11 LLC Interest Purchase Agreement, dated as of April 1, 1999, between Plug Power, LLC and Antaeus Enterprises, Inc. .10.12 LLC Interest Purchase Agreement, dated as of April 9, 1999, between Plug Power, LLC and Southern California Gas Company. .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. 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. +10.15 Agreement, dated as of January 25, 1999, between the New York State Energy Research and Development Authority and Plug Power LLC. +10.16 Agreement, dated as of September 30, 1997, between Plug Power LLC and the U.S. Department of Energy.
Exhibit Number Description ------- ---------------------------------------------------------------------- +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. .10.18 Joint venture agreement, dated as of June 14, 1999 between Plug Power, LLC, Polyfuel, Inc., and SRI International. +10.19 Cooperative Research and Development Agreement, dated as of February 12, 1999, between Plug Power, LLC and U.S. Army Benet Laboratories. +10.20 Nonexclusive License Agreement, dated as of April 30, 1993, between Mechanical Technology Incorporated and the Regents of the University of California. +10.21 Development Collaboration Agreement, dated as of July 30, 1999, by and between Joh. Vaillant GMBH. U. CO. and Plug Power, LLC. .10.22 Agreement of Sale, dated as of June 23, 1999, between Mechanical Technology, Incorporated and Plug Power LLC. .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. .10.24 Replacement Reimbursement Agreement, dated as of July 1, 1999, between Plug Power, LLC and KeyBank, N.A. 10.25 1997 Membership Option Plan and amendment thereto dated September 27, 1999. .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. +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. .10.28 Agreement, dated as of June 27, 1999, between Plug Power, LLC and Gary Mittleman. .10.29 Agreement, dated as of June 8, 1999, between Plug Power, LLC and Louis R. Tomson. .10.30 Agreement, dated as of August 6, 1999, between Plug Power, LLC and Gregory A. Silvestri. .10.31 Agreement, dated as of August 12, 1999, between Plug Power, LLC and William H. Largent. .10.32 Agreement, dated as of August 20, 1999, between Plug Power, LLC and Dr. Manmohan Dhar. .10.33 1999 Stock Option and Incentive Plan. .10.34 Employee Stock Purchase Plan +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. .10.36 Form of Registration Rights Agreement to be entered into by the Registrant and the stockholders of the Registrant. .10.37 Form of Registration Rights Agreement to be entered into by Plug Power, L.L.C. and GE On-Site Power, Inc. .23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1 hereto). 23.2 Consent of PricewaterhouseCoopers LLP. .24.1 Powers of Attorney (included on signature page). 27.1 Financial Data Schedule. .99.1 Consent of Robert L. Nardelli. .99.2 Consent of John M. Shalikashvili
- -------- + Filed herewith; portions of this exhibit have been omitted pursuant to a request for confidential treatment. . Previously filed. EX-10.1 2 AMENDED AND RESTATED LIMITED LIABILITY CO.AGRMNT. CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. EXHIBIT 10.1 AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF GE FUEL CELL SYSTEMS, L.L.C. between GE ON-SITE POWER, INC. and PLUG POWER, L.L.C. dated February 3, 1999 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS 1 Section 1.1 Definitions 1 ARTICLE II ORGANIZATION 1 Section 2.1 Formation; Name 1 Section 2.2 Certificate of Formation; Foreign Qualification 1 Section 2.3 No State Law Partnership; Liability to Third Parties 2 Section 2.4 Registered Office 2 Section 2.5 Representations and Warranties of the Members 2 ARTICLE III PURPOSES AND POWERS; TERM OF COMPANY 2 Section 3.1 Purposes and Powers 2 Section 3.2 Scope 2 Section 3.3 Term 2 ARTICLE IV MEMBERSHIP, DISPOSITIONS OF INTERESTS AND BANKRUPT MEMBER 2 Section 4.1 Members 2 Section 4.2 Additional Members 3 Section 4.3 Withdrawal 3 Section 4.4 Disposition of a Membership Interest 3 ARTICLE V CAPITAL CONTRIBUTIONS 5 Section 5.1 Initial Contributions 5 Section 5.2 Additional Members 5 Section 5.3 Guarantees 5 Section 5.4 Return of Contributions 5 Section 5.5 Member Affiliate Loans 6 ARTICLE VI PROFITS, LOSSES, ACCOUNTING, TAXES AND DISTRIBUTIONS 6 Section 6.1 Allocation of Profits and Losses 6 Section 6.2 Books; Fiscal Year 6 Section 6.3 Capital Accounts 7 Section 6.4 Tax Returns 8 Section 6.5 Tax Matters Partner 8 Section 6.6 Distributions 8 Section 6.7 Withdrawals 8 ARTICLE VII MANAGEMENT; CONDUCT OF BUSINESS 9 Section 7.1 Management by Committee 9 Section 7.2 Establishment of the Committee 9 Section 7.3 Officers 10
-i- Page ---- Section 7.4 Conduct of Business 10 Section 7.5 Conflicts of Interest 11 Section 7.6 Employment and Secondment Matters 11 ARTICLE VIII MEETINGS OF THE COMMITTEE 11 Section 8.1 Regular and Special Meetings 11 Section 8.2 Notices of Meetings 11 Section 8.3 Quorum 11 Section 8.4 Action by Written Consent or Telephone Conference 11 Section 8.5 Substitute Committee Members 12 ARTICLE IX ADDITIONAL COVENANTS 12 Section 9.1 Public Announcements, Etc. 12 Section 9.2 Confidentiality 12 Section 9.3 Protection of Business 13 Section 9.4 Promotion of the Company 14 Section 9.5 Ethical and Environmental Standards 14 Section 9.6 Tax Matters 14 Section 9.7 Other Covenants 15 Section 9.8 Further Assurances 15 Section 9.9 Ancillary Agreements 15 ARTICLE X DEADLOCK; TERMINATION OF THIS LLC AGREEMENT 15 Section 10.1 Resolution of Disputes 15 Section 10.2 Termination 16 Section 10.3 Effect of Termination 16 Section 10.4 Survival of Representations and Warranties 16 Section 10.5 Indemnifiable Claims 16 ARTICLE XI DISSOLUTION, LIQUIDATION AND TERMINATION OF THE COMPANY 18 Section 11.1 Dissolution 18 Section 11.2 Liquidation and Termination 18 Section 11.3 Payment of Debts 18 Section 11.4 Debts to Members 19 Section 11.5 Remaining Distribution 19 Section 11.6 Reserve 19 Section 11.7 Final Accounting 19 ARTICLE XII MISCELLANEOUS 20 Section 12.1 Relationship of the Parties 20 Section 12.2 Performance by the Company 20 Section 12.3 Agreement for Further Execution 20 Section 12.4 Notices 20
-ii- Page ---- Section 12.5 Amendments; No Waivers 21 Section 12.6 Successors and Assigns 21 Section 12.7 Governing Law 21 Section 12.8 Illegality and Severability 21 Section 12.9 Counterparts; Effectiveness 21 Section 12.10 Entire Agreement 22 Section 12.11 Captions 22 Section 12.12 Expenses 22 Section 12.13 Limitation of Liability 22 ANNEX A Definitions ANNEX B Representations and Warranties of the Members ANNEX C Employment and Secondment Matters PP Disclosure Schedule GEOSP Disclosure Schedule EXHIBIT 1 Membership Interests EXHIBIT 2 Allocation and Capital Account Provisions EXHIBIT 3 Strategic Plan and 1999 Operating Plan EXHIBIT 4 GE Company Policies EXHIBIT 5 Form of Contribution Agreement EXHIBIT 6 Form of Promissory Note and Security Agreement EXHIBIT 7 Form of GE Trademark and Tradename Agreement EXHIBIT 8 Form of PP Trademark Agreement EXHIBIT 9 Form of Distributor Agreement
-iii- Exhibit 10.1 AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT OF GE FUEL CELL SYSTEMS, L.L.C. A Delaware Limited Liability Company THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT (this "LLC Agreement") is made and entered into on the 3rd day of February, 1999, by and between GE ON-SITE POWER, INC., a Delaware corporation ("GEOSP"), a wholly owned subsidiary of GENERAL ELECTRIC COMPANY ("GE"), which is controlled by GE's Power Systems business ("GEPS"), having offices at One River Road, Schenectady, New York 12345, and PLUG POWER, L.L.C., a Delaware limited liability company ("PP"), having offices at 968 Albany-Shaker Road, Latham, New York 12110 (GEOSP and PP, collectively the "Members" and each individually, a "Member"), to join together to operate a limited liability company under the laws of the State of Delaware for the purposes and upon the terms and conditions set forth in this LLC Agreement. ARTICLE I DEFINITIONS Section 1.1 Definitions. Capitalized terms used in this LLC ----------- Agreement shall have the meanings specified herein or in Annex A. ARTICLE II ORGANIZATION Section 2.1 Formation; Name. The Members hereby enter into this LLC --------------- Agreement for the purpose of setting forth the rights and obligations of the Members. The name of the Company shall be GE Fuel Cell Systems, L.L.C. Section 2.2 Certificate of Formation; Foreign Qualification. GEOSP ----------------------------------------------- has caused to be filed for record the Certificate of Formation of the Company in the offices of the Secretary of State of the State of Delaware in accordance with (S) 18-201 of the Act. GEOSP shall file such amendments and other documents necessary to give effect to this LLC Agreement. Prior to the Company's conducting business in any jurisdiction other than the State of Delaware, the Members shall cause the Company to comply, to the extent procedures are available and those matters are reasonably within the control of the Members, with all requirements necessary to qualify the Company as a foreign limited liability company in that jurisdiction. Each Member shall execute, acknowledge, swear to, and deliver all certificates and other instruments conforming with this LLC Agreement that are necessary or appropriate to qualify, continue and terminate the Company as a foreign limited liability company in all such jurisdictions in which the Company may conduct business. -1- Section 2.3 No State Law Partnership; Liability to Third Parties. ---------------------------------------------------- The Members intend that the Company not be a partnership (including, without limitation, a limited partnership), and that no Member be a partner or joint venturer of any other Member, for any purposes other than federal and state tax purposes, and that this LLC Agreement not be construed otherwise. No Member shall be liable for the debts, obligations or liabilities of the Company, including under a judgment, decree or order of a court, except for the obligation to fund the working capital needs of the Company as set forth in Article V of this LLC Agreement. Section 2.4 Registered Office. The registered office and principal ----------------- place of business of the Company shall be located at 1 River Road, Schenectady, New York 12345, and the Company will also operate at such other places as it may determine. Section 2.5 Representations and Warranties of the Members. Each --------------------------------------------- Member represents and warrants to the other Member, as of the date of execution of this LLC Agreement, as set forth in Annex B, except as set forth in the applicable Disclosure Schedule. ARTICLE III PURPOSES AND POWERS; TERM OF COMPANY Section 3.1 Purposes and Powers. The Company has been formed for the ------------------- sole purpose of marketing and selling (as a distributor), in the Territory, Products, Pre-Commercial Units, and Test & Evaluation Units and performing Services in the Territory. The Company's business shall be limited to that which is described in this Section 3.1 and in Section 3.2 and any incidental activities. In furtherance of such business, the Company shall have all of the powers granted to a limited liability company under the laws of the State of Delaware, including, without limitation, the powers specifically enumerated in (S) 18-106 of the Act. Section 3.2 Scope. The Company will purchase, from PP, Products, ----- Pre-Commercial Units, Test & Evaluation Units, and such other PP products that the Members mutually agree to be marketed and sold, and will purchase Services from PP, GE and third parties as needed, in order to provide high quality, Products, Pre-Commercial Units, Test & Evaluation Units, such other PP products that the Members mutually agree to be marketed and sold, and Services in the Territory. The Company will hire or contract necessary manpower for distributing Products, Pre-Commercial Units, Test & Evaluation Units, and such other PP products that the Members mutually agree to be marketed and sold, and for providing Services, in accordance with the Strategic Plan and the Distributor Agreement. Section 3.3 Term. The Company as constituted in this LLC Agreement ---- shall continue until dissolved or terminated pursuant to law or the provisions of this LLC Agreement. ARTICLE IV MEMBERSHIP, DISPOSITIONS OF INTERESTS AND BANKRUPT MEMBER Section 4.1 Members. PP shall be admitted to the Company as a Member ------- of the Company effective as of the execution of this LLC Agreement. The Members will then have the Membership Interests set forth on Exhibit 1. -2- Section 4.2 Additional Members. Additional Persons may be admitted ------------------ to the Company as Members and Membership Interests may be created and issued to those Persons with the approval of five (5) members of the Committee on such terms and conditions as the Committee may determine at the time of admission. The terms of admission or issuance must specify the Capital Contribution and Membership Interest applicable thereto and may provide for the creation of different classes or groups of Members having different rights, powers and duties. Any such admission shall be effective only after the new Member has executed and delivered to the Committee a document including the new Member's notice address and its agreement to be bound by this LLC Agreement, with representations and warranties effective as of the date of such new Member's execution of such document. Upon the admission of new Members, Exhibits 1 and 2 shall be amended by the Committee to reflect the new Membership Interests and allocation and capital account provisions. Section 4.3 Withdrawal. Except as set forth in this LLC Agreement, a ---------- Member does not have the right or power to withdraw from the Company as a Member. Section 4.4 Disposition of a Membership Interest. ------------------------------------ (a) Prohibition. No Membership Interest, or any right, title or ----------- interest in or to such Membership Interest, now or hereafter owned, held or acquired by any Member shall be Disposed of voluntarily, involuntarily, by operation of law, with or without consideration, or otherwise except in accordance with the provisions of this Section 4.4. Any Disposition which does not comply with the provisions of this Section 4. 4 shall be void ab initio and -- ------ the Company shall not give effect to such attempted Disposition in its records. (b) Affiliates; Sale of Business. Any Member may Dispose of all ---------------------------- (but not less than all) of its right, title and interest in and to a Membership Interest as follows: (i) to an Affiliate of such Member, provided that such Affiliate is not a GEPS Competitor, (ii) by GEOSP to the purchaser, directly or indirectly, of GEOSP or GEPS (or substantially all of the assets of GEOSP or GEPS), or (iii) by PP to the purchaser, directly or indirectly, of PP (or substantially all of the assets o f PP); provided, however, that any Disposition -------- ------- pursuant to this clause (b) shall be made in compliance with the requirements of clauses (d), (e) and (f). GEOSP and PP shall remain responsible for the performance of this LLC Agreement by each Affiliate of such party to which a Membership Interest is transferred pursuant to this Section 4.4(b). If any Affiliate to which a Membership Interest is transferred pursuant to this Section 4.4 ceases to be an Affiliate of the Member from which it acquired such Membership Interest, such Person shall re-convey such Membership Interest to such transferring Member promptly upon such Person ceasing to be such an Affiliate (unless such Person ceases to be such an Affiliate in connection with a transfer otherwise permitted by this Section 4.4). (c) GEOSP Option to Purchase. ------------------------ (i) PP may, without restriction, Dispose of all or part of PP to a purchaser that is not a GEPS Competitor, and the provisions of this Section 4.4(c) shall not apply in the case of an initial public offering of securities by PP. Notwithstanding the provisions of Section 4.4(b), if: there is a proposal to Dispose, directly or indirectly, of an interest in PP (by merger, sale of stock or assets thereof or otherwise), including its -3- interest in the Company ("PP Interest"), to a GEPS Competitor, then PP shall provide prompt written notice (the "Transfer Notice") to GEOSP. The Transfer Notice shall identify the Person with which such transaction is proposed to be consummated and all other material terms of the proposed transaction, including the consideration to be paid for the PP Interest, and, in the case of an offer in which the consideration payable for the PP Interest consists in whole or in part of consideration other than cash, such information relating to such other consideration as is reasonably necessary for GEOSP to be informed of all material facts relating to such consideration. (ii) GEOSP shall have the right and option, for a period of 30 days after the date on which all information required to be provided to GEOSP has been so provided (the "Notice Period"), to deliver a notice to PP (the "Purchase Notice") of GEOSP's intention to purchase the PP Interest. The consideration to be paid by GEOSP for the PP Interest shall be cash in an amount equal to the price to be paid for the PP Interest by the proposed purchaser thereof. Notwithstanding the preceding sentence, if the consideration to be paid for the PP Interest is wholly or partially non-cash consideration, then GEOSP shall pay cash in lieu of the non-cash consideration, in an amount equal to the fair market value thereof, such amount to be determined by good faith negotiations between the Members (and, in the absence of agreement, using a procedure similar to that used to determine the Fair Market Value of an Interest in the Company). Delivery of the Purchase Notice by GEOSP shall constitute an irrevocable election by GEOSP to purchase the PP Interest for the consideration and on the other terms and conditions set forth in the proposed transaction and in this Section 4.4(c). (iii) The transfer of the PP Interest to GEOSP shall be consummated as soon as practicable following the giving of the Purchase Notice by GEOSP, but in no event more than 30 days thereafter (subject to any extension necessary to comply with any applicable regulatory requirement). If at the end of the Notice Period GEOSP shall not have given a Purchase Notice with respect to the PP Interest, GEOSP will be deemed to have waived its rights under this Section 4.4(c) with respect to the Disposition contemplated by the Transfer Notice. If GEOSP rejects the Transfer Notice, or is deemed to have waived its rights as set forth in the preceding sentence, PP shall have the right, for a period of 180 days following such rejection or waiver (subject to any extension necessary to comply with any applicable regulatory requirement), to dispose of the PP Interest to the proposed transferee identified in the Transfer Notice and on terms no more favorable to the proposed transferee than are set forth in the Transfer Notice. If, at the end of the 180-day period following the rejection or waiver, PP has not completed the sale of the PP Interest, such Disposition may not occur and PP and the PP Interest shall again be subject to the restrictions contained in this Section 4.4(c). (d) Delivery to the Company. The Company shall not recognize for ----------------------- any purpose any purported Disposition of a Membership Interest unless and until all applicable laws, including securities laws, -4- with respect to the Disposition have been complied with and the other applicable provisions of this Section 4.4 have been satisfied and the Committee has received, on behalf of the Company, a document (i) executed by both the Member effecting the Disposition and the Person to which the Membership Interest is transferred, (ii) including the notice address of any Person to be admitted to the Company as a Substitute Member and such Person's agreement to be bound by this LLC Agreement in respect of the Membership Interest being obtained, (iii) setting forth the Membership Interest after the Disposition of the Member effecting the Disposition and the Person to which the Membership Interest is transferred, and (iv) containing a warranty and representation that the Disposition was made in accordance with all applicable laws and regulations. Each Disposition and, if applicable, admission complying with the provisions of this Section 4.4(d) shall be effective as of the first day of the calendar month immediately succeeding the month in which the requirements of this Section 4.4 have been met. (e) Status as a Member. Upon compliance with the other applicable ------------------ requirements of this Section 4.4, the transferee shall be deemed a "Member" for the purposes of this LLC Agreement and a party to this LLC Agreement, and shall have the rights and be subject to the obligations of a Member hereunder and a party hereto with respect to the Membership Interest held by such transferee. (f) Costs. The Member effecting a Disposition and any Person ----- admitted as a Substitute Member in connection therewith shall pay, or reimburse the Company for, all reasonable costs incurred by the Company in connection with the Disposition (including, without limitation, any legal fees incurred in connection with the consideration of the implications thereof under applicable securities laws, the Code and other laws) on or before the tenth day after the receipt by that Person of the Company's invoice for the amount due. ARTICLE V CAPITAL CONTRIBUTIONS Section 5.1 Initial Contributions. GEOSP has previously contributed --------------------- $10,000 cash to the capital of the Company. Section 5.2 Additional Members. Each Additional Member shall make ------------------ the Capital Contribution determined by the Members to be made by such Additional Member at the time such Additional Member is admitted as a Member of the Company in accordance with Section 4.2 of this LLC Agreement. Section 5.3 Guarantees. Should guarantees be required by Customers ---------- to support the contracts entered into by the Company, then the Company shall, to the extent reasonably possible, arrange such guarantees with its own resources. Where necessary, and subject to mutual written agreement on a case by case basis, the Members may, but shall not be obligated to, guarantee the contracts in proportion to their respective interests in the Company. Section 5.4 Return of Contributions. No Member is entitled to the ----------------------- return of any part of its Capital Contributions or to interest in respect of either its Capital Account or its Capital Contributions. An unreturned Capital Contribution is not a liability of the Company or of any Member. -5- Section 5.5 Member Affiliate Loans. ---------------------- (a) GEOSP shall arrange for its Affiliate, GE, to provide, during the period ending December 31, 2000, in the form of loans to the Company (i) capital to fund the Company's purchase of $10,250,000 of Pre-Commercial Units in accordance with the Distributor Agreement, and (ii) additional capital as required to fund the Company's operations, in accordance with the Distributor Agreement, in an amount not to exceed $8,000,000. The loans shall be made to the Company pursuant to the terms of a non-recourse promissory note substantially in the form attached to this LLC Agreement as Exhibit 6. The loans referred to in this subsection (b) shall be conditioned upon (i) PP's materially complying with the terms and conditions of the Distributor Agreement so that no event of termination thereunder has occurred, and (ii) PP's remaining on schedule for a January 1, 2001 commercial release of the Products. Within 60 days of the effective date of this Agreement, the Members will mutually agree to a product development schedule for the period ending December 31, 2000, that will include milestones and objective measures of progress towards the January 1, 2001 Product release. The Members will meet not less than quarterly for the purpose of evaluating PP's compliance with the product development schedule. In the event that GEOSP determines, in good faith, that PP is not in material compliance with the product development schedule, GEOSP may after 120 days' written notice to PP (with such notice not to be given earlier than January 1, 2000), terminate this LLC Agreement if such noncompliance remains uncured. (b) In the event that further capital, in addition to that referred to in subsection (a) above, is required by the Company in order to meet any obligation or pay any liability of the Company, the Company may borrow such required capital from any Person, including any Member or any Affiliate of a Member, on such commercially reasonable terms as the Committee may determine; provided, that the Company shall offer to the Members the opportunity to lend such funds on such commercially reasonable terms pro rata in proportion to their respective Membership Interests. Any such transactions with Members or their Affiliates are subject to Section 7.1(b). ARTICLE VI PROFITS, LOSSES, ACCOUNTING, TAXES AND DISTRIBUTIONS Section 6.1 Allocation of Profits and Losses. Except as otherwise -------------------------------- provided in and subject to the provisions of Exhibit 2 to this LLC Agreement, Profits (including items of income and gain) and Losses (including items of expense, deduction and loss) of the Company for each Fiscal Year shall be determined as of the end of the Fiscal Year and shall be allocated to each Member pro rata in accordance with its Membership Interest. Section 6.2 Books; Fiscal Year. ------------------ (a) The Company shall maintain or cause to be maintained proper and complete books and records in which shall be entered fully and accurately all transactions and other matters relating to the Company's business in the detail and completeness customary and usual for businesses of the type engaged in by the Company. The Company's financial statements shall be kept on the accrual basis and in accordance with GE General Accounting Policies (as they may be modified from time to time) and GAAP, consistently applied. The Company's financial statements shall be audited annually by independent public -6- accountants selected by the Committee. The fact that such independent public accountants may audit the financial statements of one or more of the Members or their Affiliates shall not disqualify such accountants from auditing the Company's financial statements. (b) The fiscal year of the Company (the "Fiscal Year") shall be the calendar year (or such other 12-month period as the Committee may select) or, if applicable, that shorter period within the calendar year (or such other period) during which the Company had legal existence. (c) The Company shall prepare and distribute to each Member unaudited quarterly financial statements (including, without limitation, current Capital Account balances), prepared in accordance with Section 6.2(a). Such quarterly financial statements shall be distributed to the Members within a time that will permit, and shall provide such information concerning the operations of the Company as may be required for, the Members to prepare and timely file with the Securities and Exchange Commission their quarterly financial statements. (d) At a minimum, the Company shall keep at its principal executive office such books and records as may be required by the Act and such other books and records as are customary and usual for businesses of the type engaged in by the Company. (e) Each Member or its duly authorized representatives shall have the right, during normal business hours and in accordance with the Act, to inspect and copy the Company's books and records at the requesting Member's expense. Section 6.3 Capital Accounts. ---------------- (a) There shall be maintained a Capital Account for each Member in accordance with this Section 6.3 and the principles set forth in Exhibit 2 attached to this LLC Agreement. The amount of cash or the fair market value of property contributed to the Company by each Member (including the property deemed contributed to the Company by PP pursuant to Section 3 of the Contribution Agreement), net of liabilities assumed by the Company from such Member or to which the contributed property is subject, shall be credited to such Member's Capital Account, and from time to time, but not less often than at the end of each Fiscal Year, the allocations to each Member of Profits and Losses (including any special allocations made pursuant to the provisions of Exhibit 2) and the fair market value of property distributed to each Member, net of liabilities assumed by the Member or to which the property distributed is subject, shall be credited or debited to such Member's Capital Account. The determination of Members' Capital Accounts, and any adjustments thereto, shall be made consistent with tax accounting and other principles set forth in Section 704(b) of the Code and the applicable regulations thereunder. (b) Except as otherwise specifically provided in this LLC Agreement or any Ancillary Agreement, no Member shall be required to make any further contribution to the capital of the Company to restore a loss, to discharge any liability of the Company or for any other purpose, nor shall any Member personally be liable for any liabilities of the Company or of any other Member, except as provided by law. (c) Immediately following a permitted transfer of any Membership Interest, the Capital Account of the transferee Member shall equal the Capital Account of the transferor Member attributable to the -7- transferred Membership Interest and such Capital Account shall not be adjusted to reflect any basis adjustment under Section 743 of the Code. (d) For purposes of computing the amount of any item of income, gain, deduction or loss to be reflected in the Members' Capital Accounts, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal income tax purposes, taking into account any adjustments required pursuant to Section 704(b) of the Code and the applicable regulations thereunder as more fully described in Exhibit 2. Section 6.4 Tax Returns. The Members, through the Committee, shall ----------- cause to be prepared and filed all necessary federal and state income tax returns for the Company. Such tax returns shall be prepared by the Tax Matters Partner, as defined in Section 6.5. In preparing the tax returns for the Company, the Tax Matters Partner shall at all times act reasonably and in good faith taking into account the interests of all Members. The Tax Matters Partner shall permit any Member upon request reasonable opportunity to review the content of all tax returns at least 45 days prior to filing. The Tax Matters Partner shall be reimbursed, at cost, by the Company for any and all expenses incurred on behalf of the Company by the Tax Matters Partner while acting in its capacity as Tax Matters Partner. Each Member shall furnish to the Committee all pertinent information in its possession relating to Company operations that is necessary to enable the Company's income tax returns to be prepared and filed. Neither the Company, the Committee nor any Member may make an election for the Company to be excluded from the application of the provisions of subchapter K of chapter 1 of subtitle A of the Code or any similar provisions of applicable state law, and no provision of this LLC Agreement shall be construed to sanction or approve such an election. Section 6.5 Tax Matters Partner. GEOSP shall be the "Tax Matters ------------------- Partner" of the Company within the meaning of Section 6231(a)(7) of the Code and shall act in any similar capacity under applicable state, local or foreign law (in such capacity, the "Tax Matters Partner"). The Tax Matters Partner shall take such action as may be reasonably necessary to constitute each of the other Members a "notice partner" within the meaning of Section 6231(a)(8) of the Code. The Tax Matters Partner shall notify the other Members of all material matters that come to its attention in its capacity as Tax Matters Partner. The Tax Matters Partner will give the other Members not less than 15 days' prior notice as to any action to be taken or of any decision not to take action with respect to any such material matter. In acting in its capacity as Tax Matters Partner, GEOSP shall at all times act reasonably and in good faith, taking into account the interests of all Members. Section 6.6 Distributions. Except to the extent prohibited by ------------- applicable law and provided that the Company has positive cash flow from operations (after repayment of amounts due under loans made to the Company by a Member or an Affiliate of a Member, including, without limitation, as provided for in the Promissory Note) and the ability to continue its business without incurring additional debt, the Members, through the Committee, shall cause the Company to distribute available cash to each Member, on or prior to March 31 of each year, pro rata in proportion to its Membership Interest. Section 6.7 Withdrawals. No Member shall be entitled to make ----------- withdrawals from its Capital Account. -8- ARTICLE VII MANAGEMENT; CONDUCT OF BUSINESS Section 7.1 Management by Committee. ----------------------- (a) The powers of the Company shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed under the direction of, the Members. In managing the business and affairs of the Company and exercising its power, the Members shall act through their representatives on the Committee as described in Section 7.2. Any Member who binds or obligates the Company for any debt or liability or causes the Company to act, except in accordance with the immediately preceding sentence, shall be liable to the Company for any such debt, liability or act. Decisions or actions taken by Members in accordance with this LLC Agreement (whether through the Committee or otherwise) shall constitute decisions or actions by the Company and shall be binding on each Member (in its capacity as such). (b) Except as hereinafter provided, all decisions and actions of the Company shall require the approval of a majority of the Committee members meeting in accordance with Article VIII. Notwithstanding the foregoing provisions of this Article VII, the following actions (collectively, "Supermajority Transactions") shall require the consent of five (5) Committee members: (i) any merger/acquisition or sale or purchase of any material assets which are greater than 20% of the fair value of the total assets of the Company; (ii) any transaction with a Member or its Affiliates, except as expressly provided for in this LLC Agreement or in the Ancillary Agreements; (iii) changes, modifications and/or amendments to the Strategic Plan; (iv) approval of the Company's annual Operating Plan only if the aggregate expenditures for such Operating Plan differs by a material amount (e.g., greater than or equal to 20%) from the Strategic Plan; (v) any amendment to the Company's Certificate of Formation, this LLC Agreement, or any of the Ancillary Agreements; (vi) the entering into of any contract valued at more than $10 million; and (vii) the issuance or repurchase of Membership Interests or admission of additional Members in accordance with Section 4.2. Section 7.2 Establishment of the Committee. ------------------------------ (a) GEOSP and PP hereby establish the Committee. The Committee shall consist of seven members, three appointed by each of GEOSP and PP and a seventh member, who shall be the -9- Company's President and who shall be selected in accordance with Section 7.3(a) and treated for all purposes of this LLC Agreement as being appointed to the Committee by GEOSP. At any time the Company does not have a President, GEOSP may designate the seventh member, who shall serve until a President is appointed in accordance with Section 7.3 of this LLC Agreement. The Chairman of the Committee shall be designated by GEOSP from among the members of the Committee appointed by GEOSP, and the Vice-Chairman of the Committee shall be designated by PP from among the members of the Committee appointed by PP. The members of the Committee shall serve at the pleasure and on behalf of the party that appointed such member, until such member resigns or is removed by the party that appointed such member. All such members shall be officers, directors or employees of a Member or the Company. A member of the Committee may be removed, with or without cause, only by the party that appointed such member. (b) The Members shall act through their representatives on the Committee in the manner set forth below. Except as described in Section 7.1(b), decisions by the Committee will require majority approval of a quorum of the Committee members. (c) Each Member shall designate its representatives on the Committee to the other Members in writing, and such designation shall remain in effect until the revocation of such designation has been made in writing. Such writing will be signed by the chief executive officer of PP in the case of PP and by the president of GEOSP in the case of GEOSP. Section 7.3 Officers. -------- (a) The Company shall hire as its President such individual as may be designated from time to time by GEOSP for the compensation and on the other terms and conditions designated by GEOSP. The President shall be vested by the Committee with all necessary powers to conduct the normal business of the Company. The President will be removed at the request of GEOSP with or without cause at any time. Except as otherwise agreed to by GEOSP and PP, other primary management functions of the Company shall be assigned by the President. (b) The Committee may appoint such other officers as it may determine from time to time. Except as otherwise agreed, each officer of the Company shall hold office at the pleasure of the Committee, and the Committee may remove any officer at any time, with or without cause. If appointed by the Committee, the officers shall have the duties assigned to them by the Committee. Section 7.4 Conduct of Business. Except as otherwise specifically ------------------- provided in this LLC Agreement, the Committee shall have the authority to, and shall, conduct the affairs of the Company on behalf of, and as representatives of, the Members. The Committee shall conduct the Company's business and affairs pursuant to, and in accordance with, the Strategic Plan and annual Operating Plan in Exhibit 3 attached hereto and any other goals established by the Committee. The Committee shall review the Strategic Plan and Operating Plan not less frequently than annually and shall establish goals consistent therewith for the next Fiscal Year, not later than three months prior to the commencement of each Fiscal Year, in accordance with the requirements of Section 7.1(b)(iv). The Committee may delegate to such officers as it may appoint from time to time the authority to conduct the day-to-day operations of the Company's business. The Company hereby adopts, and the Committee shall cause the Company to be operated in accordance with, the GE Company Policies, attached hereto as Exhibit 4, and policies consistent with applicable laws, -10- including but not limited to U.S. export control laws. In carrying out their responsibilities, the Committee members and officers of the Company shall be indemnified by the Company to the fullest extent allowed by Delaware law. Section 7.5 Conflicts of Interest. Subject to the other express --------------------- provisions of this LLC Agreement, particularly Section 9.3, each Member and its respective Committee members and Affiliates may engage in and possess interests in other business ventures of any and every type and description, independently or with others, including ones in competition with the Company, with no obligation to offer to the Company or any other Member the right to participate in such other business ventures. Subject to Section 7.1(b)(ii) of this LLC Agreement and the provisions of any Ancillary Agreement, the Company may transact business with any Member, their Affiliates and their respective directors, officers, employees and agents, provided the terms of those transactions are substantially comparable to those the Company could obtain from unrelated third parties. Section 7.6 Employment and Secondment Matters. The Members agree as --------------------------------- to certain employment and employee secondment matters as set forth on Annex C. ARTICLE VIII MEETINGS OF THE COMMITTEE Section 8.1 Regular and Special Meetings. Regular meetings of the ---------------------------- Committee shall be held at such times and places, within or without the State of Delaware, as the Committee may from time to time determine. Special meetings of the Committee may be called by any four Committee Members, and shall be held at such times and places, within or without the State of Delaware, as may be specified in such call. Section 8.2 Notices of Meetings. Notice of the time and place of ------------------- each meeting of the Committee shall be given to each Committee member by the person or persons calling such meeting. Such notice need not specify the purpose or purposes of the meeting (unless a Supermajority Transaction is proposed for consideration) and may be given in any manner or method and at such time so that the Committee member receiving it may have reasonable opportunity to participate in the meeting. The giving of notice shall be deemed to have been waived by any Committee member who shall participate in such meeting and may be waived, in writing, by any Committee member either before or after such meeting. Section 8.3 Quorum. Six Committee members shall constitute a quorum ------ for the transaction of business by the Committee. Whenever less than a quorum is present at the time and place appointed for any meeting of the Committee, a majority of those present may adjourn the meeting from time to time, until a quorum shall be present. Section 8.4 Action by Written Consent or Telephone Conference. Any ------------------------------------------------- action permitted or required by the Act or this LLC Agreement to be taken at a meeting of the Committee may be taken without a meeting if a consent in writing, setting forth the action to be taken, is signed by all the members of the Committee. Such consent shall have the same force and effect as a unanimous vote at a meeting and may be stated as such in any document or instrument filed with the Secretary of State of Delaware, and the -11- execution of such consent shall constitute attendance or presence in person at a meeting of the Committee. Subject to the requirements of the Act or this LLC Agreement, members of the Committee may participate in and hold a meeting of the Committee by means of a conference telephone or similar communications equipment by means of which all participants can hear each other, and participation in such meeting shall constitute attendance and presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. Section 8.5 Substitute Committee Members. If a Committee member is ---------------------------- unavailable for any particular Committee meeting, the Member that appointed such Committee member shall have the right to appoint a substitute Committee member for such meeting. ARTICLE IX ADDITIONAL COVENANTS Section 9.1 Public Announcements, Etc. The Members shall consult ------------------------- with each other before issuing any press release or making any public statement with respect to this LLC Agreement or the organization of the Company and, except as may be required by Applicable Law or any national or international securities exchange, will not issue any such press release or make any such public statement without the consent of both Members. Notwithstanding the foregoing, no provision of this LLC Agreement shall relieve a Member from any of its obligations under Section 9.2. Section 9.2 Confidentiality. The Members agree to follow, and to --------------- cause the Company to follow, the following requirements regarding confidentiality: (a) Each Member and the Company (each, for purposes of this Section 9.2, a "Party") expects to furnish to one or more of the other Parties certain confidential information which will constitute trade secrets or other proprietary business or technical information belonging to the disclosing Party (including, but not limited to, components, processes, financial information, drawings, specifications and other data, whether in written, printed, oral or other form) and will be marked "Confidential" or "Proprietary" (such information is hereinafter referred to as "Confidential Information") at the time it is disclosed. Oral information which is confidential or proprietary shall be reduced to writing by the disclosing Party within ten (10) working days after disclosure, which writing shall specifically reference the date of disclosure and otherwise conform to the requirements of this paragraph. Any information which is disclosed in any other manner shall be deemed to be non-confidential. The receiving Party shall not disclose Confidential Information to anyone except its employees who have a need to know such Confidential Information in order to perform their work and shall inform such individuals of the confidential nature of the Confidential Information. Subject to the provisions of subsection (b), below, the receiving Party shall use the Confidential Information only for the purpose of such work and shall use efforts to protect the confidentiality of such Confidential Information commensurate with those which it employs for the protection of its own confidential information, but it shall not be liable for unauthorized revelations of such Confidential Information which occur in spite of such efforts. -12- (b) Notwithstanding the provisions of subsection (a) above, (i) the receiving Party shall not be subject to any restriction hereunder with respect to any part of such Confidential Information which appears in issued patents or publications, which is known or becomes generally known to the relevant public through no fault of the receiving Party, which is independently generated by the receiving Party without use of the Confidential Information, which is furnished to others by the disclosing Party without restriction on disclosure, which was or becomes known to the receiving Party through other sources free of any confidentiality restriction, which must be disclosed by requirements of law or valid legal or regulatory process, in which case the Party intending to make such disclosure shall notify the Party which designated the material as confidential in advance of any such disclosure and reasonably cooperate with any attempt to maintain the confidentiality of such materials; and (ii) any and all restrictions with respect to Confidential Information provided hereunder will expire three (3) years after the date that such Confidential Information is disclosed to the receiving Party. (c) When one Party no longer desires to use the Confidential Information of another Party, it shall return to the other Party any such Confidential Information and shall destroy all copies of such Confidential Information with the exception of one copy which may be retained exclusively for the purpose of documenting the disclosures made hereunder. (d) The Company will restrict access to any Confidential Information made available or disclosed by a Member to the Company hereunder only to those employees of the Company with a need to know such information in performance of their jobs with the Company. Section 9.3 Protection of Business. In consideration of the ---------------------- respective benefits of this LLC Agreement to the Members, and subject to the terms and conditions of the Distributor Agreement, a form of which is attached hereto as Exhibit 9, the Members hereby covenant and agree that during the term of this LLC Agreement (a) PP and its Affiliates will not compete with the Company, directly or indirectly, in the Territory, for the sale of Products, Pre- Commercial Units, and Test & Evaluation Units, and the provision of Services, so long as, and to the extent that, the Company is PP's exclusive distributor in the Territory under the Distributor Agreement (except for sales of Test & Evaluation Units and Pre-Commercial Units to federal, state, municipal and other governmental entities, the Gas Research Institute, Electric Power Research Institute, and such other industry groups mutually agreed to by SUPPLIER and DISTRIBUTOR, to the extent such entities and groups are purchasing the units for their research and development, as opposed to purchasing the units for resale); (b) GEOSP shall not sell PEM Fuel-Cell Powered Generator Sets, replacement parts, upgrades, accessories, and improvements that compete with the Products and Pre-Commercial Units in the Territory, directly or through any Person other than the Company, provided that the Products are competitive, as determined pursuant to this subsection (b), with non-PP manufactured PEM Fuel Cell-Powered Generator Sets. If GEOSP determines, in good faith, that the Products are not competitive, then PP will be allowed a period of 12 months to make the Products competitive, after which, if the products are still not competitive, GEOSP shall not be bound by the non-compete provisions of this subsection (b) and/or GEOSP may terminate this LLC Agreement. If GEOSP decides, in accordance with this subsection (b), to sell PEM Fuel-Cell Powered Generator Sets, replacement parts, upgrades, accessories, and improvements that compete -13- with the Products and Pre-Commercial Units in the Territory directly or through any other Person, then either Member may terminate this LLC Agreement. GEOSP will consider the following factors, in good faith and as a whole, in determining whether the Products are competitive: (i) the wholesale price of Products is no more than 5% greater than such price for non-PP manufactured PEM Fuel Cell-Powered Generator Sets; (ii) the lifetime end user cost per kWh generated by the Products is no more than 5% greater than that for non-PP manufactured PEM Fuel Cell-Powered Generator Sets, where end user cost per kWh will be calculated as the wholesale price plus installation, lifetime operations and maintenance cost, divided by the kWh consumption over the operating life; (iii) the Product's emissions (NOx and CO measured in parts per million), noise (in Db), and size (in cubic feet) are no more than 10% greater than that for non-PP manufactured PEM Fuel Cell-Powered Generator Sets; and (iv) the Product's reliability is no more than 5% worse than that for non-PP manufactured PEM Fuel Cell-Powered Generator Sets. Notwithstanding the preceding paragraph of subsection (b), for any particular year beginning in "2001" (as defined in Schedule D of the Distributor Agreement), if the Company achieves at least 50% of its Major Market Sales Commitment (as defined in Schedule D of the Distributor Agreement) in any Major Market in any year, then the Products will be deemed to be competitive in such Major Market for such year. Notwithstanding the failure of the Company to achieve at least 50% of its Major Market Sales Commitment in any Major Market for such year, if the Company achieves at least 66% of its Global Sales Commitment (as defined in Schedule D of the Distributor Agreement) for such year, then the Products will be deemed to be competitive for the entire Territory for such year. In any part of the Territory outside of the Major Markets, the Products shall be deemed competitive for such part of the Territory for such year if the Company achieves at least 50% of its Global Sales Commitment for such year. Section 9.4 Promotion of the Company. GEOSP and PP will use all ------------------------ reasonable efforts to (a) promote the use of the Products, Pre-Commercial Units, and Services in the Territory, (b) support the Company in obtaining government authorizations as may be necessary or appropriate to operate the Company, and (c) make available support in conducting the day to day operations of the Company, including but not limited to administration, sales support, warehousing administration, and financial planning and budgeting; provided, that all such -------- efforts shall be in accordance with this LLC Agreement and the Ancillary Agreements. This Section will not be construed to expand either party's obligations in respect of matters specifically addressed elsewhere in this LLC Agreement or in any Ancillary Agreement. Section 9.5 Ethical and Environmental Standards. Each Member shall ----------------------------------- ensure that all actions on its behalf in connection with the Company are in compliance with the highest ethical standards. In particular, each party shall ensure that no money or anything of value (such as a bribe or kickback) is offered, given or authorized to be given, directly or indirectly, to a customer or government official to influence or reward action or inaction with regard to the Company. GEOSP shall have the right to cause an environmental baseline study to be prepared, at the Company's cost, for any facilities to be used by the Company. Section 9.6 Tax Matters. The Members agree to cooperate to structure ----------- the operation of the Company in a manner which enables each party and the Company to optimize its tax position with respect to the joint venture. If during the course of the operation of the Company, United States tax laws change so as to have a significant impact on either of the Members or the Company, the Members agree -14- to cooperate to make such mutually acceptable changes to this LLC Agreement insofar as allowed under law as will enable the affected party to optimize its tax position resulting from the change in the law. Section 9.7 Other Covenants. --------------- (a) PP will train sufficient personnel in the Company, PP, GEOSP and GEOSP's Affiliates as may be needed in the conduct of the Company's operations, at terms and prices mutually agreed to between PP and the Company. (b) The Company will use its best efforts to hire marketing, sales, and service personnel and/or contract with third parties to market and sell Products and Pre-Commercial Units in the manner that its Affiliates market and sell similar products, and to provide Services to ensure a level of customer service consistent with that provided for other GE-branded products, taking into consideration the sales volumes of Products and Pre-Commercial Units. (c) Each Member's patents, trademarks, trade names, inventions, copyrights, know-how, trade secrets, licensed rights or other intellectual property rights ("Intellectual Property") now in existence or hereafter lawfully - acquired or developed by such Member shall not be deemed to be transferred to any other Member or to the Company by virtue of this LLC Agreement. Notwithstanding the foregoing provisions of this Section 9.7(c), GEOSP hereby grants to PP a perpetual non-exclusive, non-transferable, irrevocable, royalty- free, fully paid up license to use Product information regarding market size, demographics, demand, segmentation, design parameters sought by the market, and contact information (names, addresses, telephone numbers) for customers, resellers, service providers, code bodies, and similar information acquired or developed by the Company under this LLC Agreement. Section 9.8 Further Assurances. Subject to the terms and conditions ------------------ of this LLC Agreement, each Member will use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary or desirable under Applicable Law and otherwise to consummate the transactions contemplated by this LLC Agreement and to refrain from taking any action that would prevent or delay the consummation of the transactions contemplated by this LLC Agreement. The Members will execute and deliver such other documents, certificates, agreements and other writings and take such other actions as may be reasonable and necessary or desirable in order to consummate or implement expeditiously the transactions contemplated by this LLC Agreement. Section 9.9 Ancillary Agreements. Contemporaneously with or prior to -------------------- the execution of this LLC Agreement, the Members, as applicable, shall enter into or have entered into, or shall cause or have caused their Affiliates, as applicable, to enter into, the Ancillary Agreements. The termination of an Ancillary Agreement, without substitution with an agreement acceptable to the Members, shall result in termination of this LLC Agreement pursuant to Section 10.2. -15- ARTICLE X DISPUTES; TERMINATION OF THIS LLC AGREEMENT Section 10.1 Resolution of Disputes. If there shall exist a dispute ---------------------- between the Members relating to approval of any Supermajority Transaction which substantially impairs the Company's ability to operate and flourish in a manner consistent with that anticipated by this LLC Agreement or substantially constrains the Company's prospects, the Members shall negotiate in good faith for a period of thirty (30) days in an effort to resolve the dispute. If such negotiations are not successful, either party shall have the right and option to notify the other party that the provisions of this Section 10.1 shall be invoked (the "Dispute Notice"). If a Dispute Notice is given and if requested by either party within 10 days thereafter, the Members shall submit the matter in dispute to the chief executive officer of GEOSP and the chief executive officer of PP for their review and resolution in such manner as they deem necessary or appropriate. The Committee will be bound by any resolution reached by the officers to whom such matter is submitted. If such officers cannot resolve such matter within 30 days after submission to them, then this LLC Agreement shall terminate. Section 10.2 Termination. ----------- (a) This LLC Agreement may be terminated by either GEOSP or PP by giving 30 days' notice if (i) the other party is in Material Breach, or (ii) the Distributor Agreement or any other Ancillary Agreement is terminated and not replaced. (b) This LLC Agreement shall automatically be terminated upon: (i) the written consent of all Members; or (ii) the sale, exchange or other disposition of all or substantially all of the assets of the Company. (c) This LLC Agreement may be terminated in accordance with the provisions of Sections 5.5(a), 9.3(b), and 10.1 of this LLC Agreement. Section 10.3 Effect of Termination. If this LLC Agreement is --------------------- terminated, the Members shall have no further obligations hereunder, except that the provisions of Sections 9.1 and 9.2 shall survive the termination of this LLC Agreement. The Members will have additional obligations upon the termination of the Distributor Agreement, as set forth therein. Section 10.4 Survival of Representations and Warranties. ------------------------------------------ Notwithstanding any investigation made by GEOSP, PP or the Company, or such Member's or the Company's representative, with respect to the representations or warranties of the other party, the representations and warranties of the Members contained in this LLC Agreement or in any certificate or other writing delivered pursuant hereto or in connection herewith shall survive until the third anniversary of the execution hereof or (i) in the case of paragraphs 1, 2, 4 and 7 of Annex B, indefinitely, and (ii) in the case of paragraphs 5, 8 and 9 of Annex B, until expiration of the applicable statutory period of limitations (giving effect to any waiver, mitigation or extension thereof), if later. Notwithstanding the preceding sentence, any representation or warranty in respect of which indemnity may be sought under Section 10.5 shall survive the time at which it -16- would otherwise terminate pursuant to the preceding sentence, if notice of the inaccuracy or breach thereof giving rise to such right to indemnity shall have been given to the party against whom such indemnity may be sought prior to such time. All covenants and agreements contained in this LLC Agreement shall survive until fully performed in accordance with their terms. Section 10.5 Indemnifiable Claims. Subject to the limitations set -------------------- forth in any Ancillary Agreement, the Members agree to the following indemnifications and procedures: (a) Indemnification by the Members. Each Member hereby agrees to ------------------------------ indemnify the other Members and the Company (without duplication) and their respective Affiliates, directors, officers and employees against, and agree to hold them harmless from, any and all Damages incurred or suffered by any of them as a result of claims by third parties arising out of or related in any way to (i) any misrepresentation or breach of any representation or warranty made by the Members in this LLC Agreement, and (ii) the breach or non-performance of any covenant or obligation required by this LLC Agreement to be performed or observed the Member, provided, however, that no Member shall be required to pay -------- ------- any Damages arising under clause (i) of this Section 10.5(a) unless and until the aggregate amount of such Damages attributable to such Member shall reach $25,000, at which time such Member shall become responsible for all such Damages (including the initial $25,000); and provided further, that the indemnification -------- ------- obligations of the Members hereunder shall each be limited to $1,000,000. The foregoing indemnification shall not in any manner limit a Member's legal remedies against the other Member under applicable law. (b) Waiver of CERCLA Defense. The Members, on behalf of ------------------------ themselves and their respective Affiliates, and the Company expressly waive any claim or defense that the indemnifications contained in this LLC Agreement or in the Ancillary Documents are unenforceable under Section 107(e) of CERCLA. (c) Notice. Each party to this Agreement agrees to give prompt ------ notice to the other parties to this Agreement of the assertion of any claim, or the commencement of any suit, action or proceeding brought by a Person that is not a party to this Agreement ("Indemnified Claims") in respect of which the Members, the Company or their respective Affiliates, or their respective directors, officers, employees or agents seek indemnity under Section 10.5(a), after such Member of the Company becomes aware of the facts giving rise to such Indemnified Claim. The failure of any party to provide notice pursuant to this Section 10.5(d) shall not constitute a waiver of that party's claims to indemnification pursuant to Section 10.5 in the absence of material prejudice to the party that did not receive such notice. Any such notice to a party shall be accompanied by a copy of any papers theretofore served on the notifying party in connection with the Indemnified Claims. (e) Defense and Settlement of Claims. -------------------------------- (i) Assumption of Defense. Upon receipt of notice from a --------------------- party seeking and entitled to indemnification (an "Indemnified Party") pursuant to this Agreement, the party or parties against whom indemnification is sought (an "Indemnifying Party") will, subject to the provisions of Section 10.5(e)(ii), assume the defense and control of such Indemnified Claims but shall allow the Indemnified Party or Parties a reasonable opportunity to participate in the defense thereof with its -17- or their own counsel and at its or their own expense. The Indemnifying Party shall (A) select counsel, contractors and consultants of recognized standing and competence after consultation with the Indemnified Party or Parties, (B) take all steps necessary in the defense or settlement thereof and (C) at all times diligently and promptly pursue the resolution thereof. The Indemnified Party or Parties shall, and shall cause each of their respective Affiliates and their respective directors, members, officers, employees, and agents to, cooperate fully with the Indemnifying Party in the defense of any Indemnified Claim. (ii) Settlement of Claims. The Indemnifying Party shall be -------------------- authorized to consent to a settlement of, or the entry of any judgment arising from, any Indemnified Claims, without the consent of any Indemnified Party; provided, that the Indemnifying Party shall (A) pay or -------- cause to be paid all amounts arising out of such settlement or judgment concurrently with the effectiveness thereof, (B) not encumber any of the assets of any Indemnified Party or agree to any restriction or condition that would apply to such Indemnified Party or to the conduct of that party's business, (C) obtain, as a condition of any settlement or other solution, a complete release of each Indemnified Party and (D) provide to the Indemnified Party notice of the proposed settlement prior to such settlement. ARTICLE XI DISSOLUTION, LIQUIDATION AND TERMINATION OF THE COMPANY Section 11.1 Dissolution. The Company shall be dissolved and its ----------- affairs wound up on the first to occur of the following: (a) the Members shall agree in writing to dissolve the Company; (b) any Member shall become a Bankrupt Member or dissolve, or there shall occur any other event (other than a transfer of a Membership Interest in accordance with Article IV or Article X) that terminates the continued membership in the Company of any Member; (c) the entry of a decree of judicial dissolution of the Company under (S) 18-802 of the Act; and (d) the termination of this LLC Agreement. Section 11.2 Liquidation and Termination. On dissolution of the --------------------------- Company, the Committee shall appoint as liquidator one or more Persons that are not affiliated with the Members. The liquidator shall proceed diligently to wind up the affairs of the Company and make final distributions as provided in this LLC Agreement and in the Act. The costs of liquidation shall be borne as a Company expense. Until final distribution, the liquidator shall continue to operate the Company properties with all of the power and authority of a Required Interest. A reasonable time shall be allowed for the orderly liquidation of the assets of the Company and the discharge of liabilities to creditors so as to enable the liquidator to minimize any losses resulting from liquidation. The liquidator, as promptly as possible after dissolution and again after final liquidation, shall cause a proper accounting to be made by a recognized firm of certified public accountants of -18- the Company's assets, liabilities, and operations through the last day of the calendar month in which the dissolution occurs or the final liquidation is completed, as applicable, and shall apply the proceeds of liquidation as set forth in the remaining sections of this Article XI. Section 11.3 Payment of Debts. The assets shall first be applied to ---------------- the payment of the liabilities of the Company (other than any loans or advances that may have been made by Members to the Company) and the expenses of liquidation. Section 11.4 Debts to Members. The remaining assets shall next be ---------------- applied to the repayment of any loans made by any Member or Member Affiliate to the Company. Section 11.5 Remaining Distribution. The remaining assets shall then ---------------------- be distributed to the Members in the following order: (a) If non-cash property of the Company is to be distributed, the fair market value of such property as of the date of dissolution shall be determined by the Members pursuant to Part B.7(a) of Exhibit 2 using such reasonable methods of valuation as they may adopt. Such property shall be deemed to have been sold as of the date of dissolution for such fair market value, and the Capital Accounts of the Members shall be adjusted prior to the distribution of such property pursuant to Article VI of this LLC Agreement to reflect the manner in which gain or loss which would have been realized by the Company as a result of such deemed sale would have been allocated under Article VI and Exhibit 2 of this LLC Agreement. (b) Distributions shall be made according to the positive balance(s) (if any) of the Members' Capital Accounts (as determined after taking into account all Capital Account adjustments for the Company's Fiscal Year during which the liquidation occurs), either in cash or in kind, as determined by the Committee, with any assets distributed in kind being valued for this purpose at their fair market value as determined pursuant to Section 11.5(a). Any such distributions to the Members in respect of their Capital Accounts shall be made in accordance with the time requirements set forth in Treas. Reg. (S) 1.704-1(b)(2)(ii)(b)(2). (c) Notwithstanding anything to the contrary in this LLC Agreement, upon a liquidation within the meaning of Treas. Reg. (S) 1.704- 1(b)(2)(ii)(g), if any Member has a deficit Capital Account (after giving effect to all contributions, distributions, allocations, and other Capital Account adjustments for all Fiscal Years, including the year during which such liquidation occurs), the Member shall have no obligation to make any Capital Contribution, and the negative balance of such Capital Account shall not be considered a debt owed by the Member to the Company or to any other Person for any purpose whatsoever. Section 11.6 Reserve. Notwithstanding the provisions of Sections 11.4 ------- and 11.5, the liquidator may retain such amount as it deems necessary as a reserve for any contingent liabilities or obligations of the Company, which reserve, after the passage of a reasonable period of time, shall be distributed pursuant to the provisions of this Article XI. Section 11.7 Final Accounting. Each of the Members shall be ---------------- furnished with a statement prepared by the Company's certified public accountants, which shall set forth the assets and liabilities of the -19- Company as of the date of the complete liquidation. Upon the compliance by the liquidator with the foregoing distribution plan, the liquidator shall execute and cause to be filed a certificate of cancellation and any and all other documents necessary with respect to termination and cancellation of the Company under the Act. ARTICLE XII MISCELLANEOUS Section 12.1 Relationship of the Members. The relationship of the --------------------------- Members shall be limited solely to the purpose and scope of the Company as expressed in this LLC Agreement and in the Ancillary Agreements. This LLC Agreement shall not constitute the appointment of either party to this LLC Agreement as the legal representative or agent of the other party. Neither party to this LLC Agreement shall have any right or authority to assume, create or incur any liability or any obligation of any kind, express or implied, against or in the name of or on behalf of the other party to this LLC Agreement. Except as may be specifically provided in this LLC Agreement or any Ancillary Agreement, neither the Company nor either party shall assume or be responsible for any liability or obligation of any nature of, or any liability or obligation that arises from any act or omission to act of, any other party however or whenever arising. Section 12.2 Performance by the Company. The Members shall cause the -------------------------- Company to perform the obligations on the Company's part to be performed by it under this LLC Agreement and the Ancillary Agreements. Section 12.3 Agreement for Further Execution. At any time or times ------------------------------- upon the request of the Committee or either Member, each Member agrees to sign and swear to any certificate, any amendment to or cancellation of such certificate, acknowledge similar certificates or affidavits or certificates of fictitious firm name or the like (and any amendments or cancellations thereof) required by the laws of the State of Delaware, or any other jurisdiction in which the Company does, or proposes to do, business. This Section 12.3 shall not prejudice or affect the rights of the Members to approve certain amendments to this LLC Agreement pursuant to Section 12.5. Section 12.4 Notices. All notices, requests and other communications ------- to any party or to the Company hereunder shall be in writing (including telex, telecopy or similar writing) and shall be given, if to GEOSP: GE On-Site Power, Inc. One River Road Schenectady, NY 12345 Attention: President Telecopy: (518) 385-5704 with a copy to: GE Power Systems One River Road Schenectady, NY 12345 Attention: General Counsel Telecopy: (518) 385-4725 -20- if to PP: Plug Power, L.L.C. 968 Albany-Shaker Road Latham, NY 12110 Attention: President and CEO Telecopy: (518) 782-7914 or to such other address or telecopy number and with such other copies, as such party may hereafter specify by notice to the other parties. Each such notice, request or other communication shall be effective upon receipt, provided that if the day of receipt is not a Business Day then it shall be deemed to have been received on the next succeeding Business Day. Section 12.5 Amendments; No Waivers. ---------------------- (a) Any provision of this LLC Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by all the Members, or in the case of a waiver, by the party against whom the waiver is to be effective. (b) No failure or delay by any party in exercising any right, power or privilege under this LLC Agreement shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies in this LLC Agreement provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 12.6 Successors and Assigns. Neither party shall assign this ---------------------- LLC Agreement or any of its rights in and to this LLC Agreement, except that GEOSP may, upon notice to PP, assign its rights in this LLC Agreement to an Affiliate of GE. Subject to the preceding sentence and other provisions hereof, the provisions of this LLC Agreement shall be binding upon and inure to the benefit of the Members and their respective permitted successors and assigns. Section 12.7 Governing Law. The laws of the State of Delaware shall ------------- govern the validity, interpretation, construction, performance, and enforcement of this LLC Agreement, provided that any provision of such laws (e.g., choice of law provisions) invalidating any provision of this LLC Agreement or modifying the intent of the Members as expressed in the terms of this LLC Agreement shall not apply. It is further agreed that any and all litigation relating to this LLC Agreement or the Company shall be brought in a state or federal court located within the State of New York; and each Member, for the purpose of all such litigation, hereby submits to the exclusive jurisdiction and venue of such courts. Section 12.8 Illegality and Severability. If application of any one --------------------------- or more of the provisions of this LLC Agreement shall be unlawful under applicable law and regulations, then the parties will attempt in good faith to make such alternative arrangements as may be legally permissible and which carry out as nearly as practicable the terms of this LLC Agreement. Should any portion of this LLC Agreement be deemed unenforceable by a court of competent jurisdiction, the remaining portion hereof shall remain unaffected and be interpreted as if such unenforceable portions were initially deleted. -21- Section 12.9 Counterparts; Effectiveness. This LLC Agreement may be --------------------------- signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and to this LLC Agreement were upon the same instrument. This LLC Agreement shall become effective when each party to this LLC Agreement shall have received a counterpart hereof signed by the other party to this LLC Agreement. Section 12.10 Entire Agreement. This LLC Agreement and the Ancillary ---------------- Agreements (and any other agreements contemplated hereby or thereby) constitute the entire agreement among the Members with respect to the subject matter hereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the Members with respect to the subject matter hereof or thereof (including, without limitation, the Memorandum of Understanding of the Members dated July 2, 1998). No representation, inducement, promise, understanding, condition or warranty not set forth in this LLC Agreement has been made or relied upon by any party to this LLC Agreement. This LLC Agreement is not intended to confer upon any Person other than the Members and the Company any rights or remedies hereunder. Section 12.11 Captions. The captions in this LLC Agreement are -------- included for convenience or reference only and shall be ignored in the construction or interpretation hereof. Section 12.12 Expenses. All costs and expenses incurred in -------- connection with the transactions contemplated by this LLC Agreement shall be paid by the Member incurring such cost or expense, except as otherwise provided in this LLC Agreement or any Ancillary Agreement. Section 12.13 Limitation of Liability. In no case will a Member be ----------------------- liable to the other for special, incidental, or consequential damages, including, but not limited to, personal injury, property damage, loss of profit or revenues, or business interruption. IN WITNESS WHEREOF, the Members have hereunto set their hands on the day and year first above written. MEMBERS: ------- GE ON-SITE POWER, INC. By: /s/ Ricardo Artigas ----------------------------------------- Ricardo Artigas, President -22- PLUG POWER, L.L.C. By: /s/ Gary Mittleman ----------------------------------------- Gary Mittleman, President and CEO -23- Annex A ------- DEFINITIONS ----------- (a) Definitions. The following terms, as used in this LLC Agreement or ----------- any Ancillary Agreement, unless otherwise specifically defined therein, have the following meanings: "Act" means the Delaware Limited Liability Company Act, Del. Stat. (S)(S) 18-101 to 18-1107, inclusive, as in effect from time to time in the State of Delaware. "Additional Member" means any Person admitted as a Member of the Company after the date of original execution of this LLC Agreement in accordance with the provisions of Section 4.2 hereof. "Affiliate" means, with respect to any Person, any Person directly or indirectly controlling, controlled by, or under common control with such other Person, except that an Affiliate of PP shall only include any Person directly or indirectly controlled by PP. As used herein, control shall mean the ownership, either directly or by attribution, of more than 50% of the combined voting rights attributable to the equity interests of a Person or the ability, either direct or indirect, to control the composition of the majority of the Board of Directors or comparable management body of a person. "Ancillary Agreements" means the Contribution Agreement, Promissory Note and Security Agreement, GE Trademark and Tradename Agreement, PP Trademark Agreement, and Distributor Agreement contemplated by and executed in connection with this LLC Agreement, forms of which are attached to this LLC Agreement as Exhibits 5 through 9, respectively. "Applicable Law" means, with respect to any Person, any domestic or foreign, federal, state or local statute, law, ordinance, rule, administrative action, regulation, order, writ, injunction, judgment, decree or other requirement of any Governmental Authority (including any Environmental Law) applicable to such Person or any of its Affiliates or any of their respective properties, assets, officers, directors, employees, consultants or agents (in connection with such officer's, director's, employee's, consultant's or agent's activities on behalf of such Person or any of its Affiliates). "Bankrupt Member" means any Member (i) that (A) makes an assignment for the benefit of creditors; (B) files a voluntary petition in bankruptcy; (C) is adjudged bankrupt or insolvent, or has entered against such Member an order for relief, in any bankruptcy or insolvency proceedings; (D) files a petition or answer seeking for the Member any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation; (E) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the Member in any proceeding of the type described in subclauses (A) through (D) of this clause (i); or (F) seeks, consents to, or acquiesces in the appointment of a trustee, receiver or liquidator of the Member or of all or any substantial part of the Member's properties; or (ii) against which, a proceeding seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any statute, law or regulation has been commenced and one hundred twenty (120) days have expired without dismissal thereof or with respect to which, without the Member's consent or acquiescence, a trustee, receiver or liquidator of the Member or of all or any substantial part of the Member's properties has been appointed and ninety (90) days have expired -1- without the appointment having been vacated or stayed, or ninety (90) days have expired after the date of expiration of a stay, if the appointment has not previously been vacated. "Bankruptcy Code" means the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C. (S)(S) 101 et seq. -- --- "Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law to close. "Capital Account" means, as to a Member, the account established and maintained for such Member pursuant to Article VI hereof. "Capital Contribution" means the amount in cash or the value of property contributed by each Member (or its original predecessor in interest) to the capital of the Company in exchange for such Member's interest in the Company. "Code" means the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated thereunder. "Committee" means the committee established pursuant to Section 7.2 hereof. "Company" means "GE Fuel Cell Systems, L.L.C.," a Delaware limited liability company. "Contemplated Transactions" means the transactions contemplated by this LLC Agreement and the Ancillary Agreements. "Damages" means all assessments, losses, damages, costs, expenses, liabilities, judgments, awards, fines, sanctions, penalties, charges and amounts paid in settlement, including, without limitation, reasonable costs, fees and expenses of attorneys, experts, accountants, appraisers, consultants, witnesses, investigators and any other agents or representatives (with such amounts to be determined net of any resulting tax benefit and net of any refund or reimbursement of any portion of such amounts including, without limitation, reimbursement by way of third party insurance or third party indemnification) arising from or incurred in connection with any demand, claim, action, cause of action or proceeding. "Dispose," "Disposing," or "Disposition" means a sale, assignment, transfer, exchange, mortgage, pledge, grant of a security interest, or other disposition or encumbrance (including, without limitation, by operation of law). "Fair Market Value" means, with respect to a Membership Interest in the Company, the cash price that an unrelated party would pay for such Membership Interest, in light of all relevant factors in an arm's length transaction in which neither party is compelled to buy or sell. The Fair Market Value of Membership Interest in the Company shall be determined pursuant to the procedure set forth in the balance of this paragraph. Each party shall submit simultaneously to the other party a sealed proposal for the Fair Market Value within 30 days after the event which triggers the valuation. Following the delivery of the two proposals, -2- the amounts of the two proposals shall be compared. If the lower of the proposals is equal to or more than 90% of the higher of the proposals, the Fair Market Value shall be deemed to be the average of the two proposals. If the lower of the proposals is more than 10% less than the higher of the two proposals, the parties shall negotiate in good faith to determine the Fair Market Value. If the parties cannot agree on the Fair Market Value within 30 days of the opening of the sealed proposals, the parties shall each appoint, within ten days after the end of such period, an investment banking firm or other firm with significant experience in the valuation of businesses, in either case, of recognized standing, which firms need not be independent of the Company, PP and GE. Such firms shall negotiate in good faith to determine the Fair Market Value. If the firms cannot agree on the Fair Market Value within 30 days after the latter of them to be appointed, the two firms shall, within 10 days after the end of such 30-day period, (i) appoint a third such firm with significant experience in the valuation of businesses, of recognized standing, and independent of the Company, PP and GE, and (ii) share the results of their valuation analysis with such third firm. The third firm shall determine the Fair Market Value within 45 days after being appointed. The determination of Fair Market Value by this third firm shall be final and conclusive. The parties shall share equally the costs of compensating all of the foregoing firms. "Fiscal Year" has the meaning set forth in Section 6.2(b) of this LLC Agreement. "GAAP" means generally accepted accounting principles. "GE Company Policies" means the corporate policy statements relating to compliance with law, GE's General Accounting Practices and other matters adopted and published by GE, which are attached to this LLC Agreement as Exhibit 4, as amended and supplemented from time to time, or any successor policies adopted by GE. "GEOSP Disclosure Schedule" means the Disclosure Schedule provided by GEOSP to PP on the date of signing of this LLC Agreement. "GEPS Competitor" means any of the following Persons, provided that GEOSP may revise this list upon written notice to PP to include additional Persons involved directly, or indirectly through an Affiliate, in the manufacture, assembly, or provision of O & M services for, gas or steam turbines, regardless of origin or design: AAR Engine Group - USA; ABB - Switzerland; Advanced Materials Technologies, Inc. - USA; Aero & Industrial Technology - UK; Aetc Ltd./ - UK; Alfa Laval - UK; AlliedSignal - US; Bailey Automation PLC - UK; Baird Analtical - USA; Baker/MO Services Inc. - USA; Bales Scientific Inc. - USA; Bently Nevada - USA; Bosman Powersource B.V. - Netherlands; Boyce Engineering Int'l. Ltd. - UK; Boyce Engineering International - - USA; Brush Electrical Machines Ltd. - UK; Chromalloy Gas Turbine - USA; Concepts ETI, Inc. - USA; Conmec, Inc. - USA; Cooper Energy Services - USA; Cooper Rolls - USA; Demag Delaval Turbomachinery Corp. - USA; Dresser Rand Turbo Products Division - USA; Ebara Corporation - Japan; Elbar BV - Netherlands; European Gas Turbines Ltd. - UK; Fern Engineering, Inc. - USA; Fiat Avio S.P.A. - - Italy; Gas-Path Technology, Inc. - USA; Hickham Industries, Inc. - USA; Hitachi - Japan; Honeywell Solid State Electric Center - USA; HSDE - UK; IHI- Japan; John Brown / Kvearner Engineering - UK; Kawasaki - Japan; Liburdi Engineering Ltd. - Canada; Man Gutehoffnungshutte AG - Germany; Mannesmann Demag Veidichter - Germany; McGuffy Systems, Inc. - USA; Mitsubishi Heavy Industries - Japan; Moog Controls - USA; Natole Turbine Enterprises, Inc. - USA; Ormat Industries Ltd. - Israel; Petrotech, Inc. - USA; Polytec P.I. Inc. - USA; Powmat Ltd - USA; -3- Pratt & Whitney - USA; Precision Castparts Corp. - USA; Preco Turbine Services Inc. - USA; Rolls-Royce Industrial & Marine - UK; Senior Thermal Engineering - UK; Sermatech International Inc. - USA; Siemens-Westinghouse Power Corp. - USA; Solar Turbines Incorporated - USA; SPE Mashproekt - Ukraine; Stork RMO BV - Netherlands; Sulzer Turbo - Germany; Thomassen International B.V. -Netherlands; Toshiba - Japan; Triconex Systems, Inc. - USA; Turbine Controls Ltd. - UK; Turbine Technology Services Corp. - USA; Wilson & Daleo Inc. -Canada; Wood Group Gas Turbines Ltd. - UK. "Governmental Authority" means any foreign, federal, territorial, state or local governmental authority, quasi-governmental authority, instrumentality, court, commission or tribunal or any regulatory, administrative or other agency, or any political or other subdivision, department or branch of any of the foregoing. "IRS" means the U.S. Internal Revenue Service. "LLC Agreement" means this Amended and Restated Limited Liability Company Agreement, as it may be amended from time to time in accordance with its terms. "Majority Interest" means one or more Members having among them at least fifty-one percent (51%) of the Membership Interests of all Members. "Material Adverse Effect" means, with respect to any event, occurrence or condition, or series of events, occurrences or conditions, a material adverse effect on the operations, property or financial condition of the affected business or entity taken as a whole. "Material Breach" means a breach by GEOSP or PP, as the case may be, of this LLC Agreement which breach, if not cured, would have a Material Adverse Effect on the Company or the non-breaching party. A Material Breach shall not exist for purposes of this definition unless the non-breaching party has given written notice of such breach to the breaching party and (i) the party in Material Breach fails to cure the subject default within 120-days of the receipt of such notice or (ii) if such default cannot reasonably be cured within such 120-day period, (A) the party in Material Breach fails promptly to take and continue to take all reasonable steps to cure the default as promptly as practicable after receipt of such notice or (B) at the end of such 120-day period it appears that the breaching party will not be able to cure the Material Breach within a commercially reasonable time (not to exceed an additional 60 days); provided that the foregoing notice and cure periods shall not apply to a particular provision of this LLC Agreement if other such periods are specified in such provision. "Members" means GEOSP and PP and any Person hereafter admitted to the Company as a member as provided in this LLC Agreement. "Membership Interest" means the interest of a Member (expressed as a percentage) in the Company. Membership Interests will be varied only as specifically agreed by the parties and will not be affected by allocations of Profits and Losses or other changes in Members' Capital Accounts. "Officer" means any individual appointed to act as the President or any other officer appointed by the Committee pursuant to this LLC Agreement. -4- "Operating Plan" means the operating plan of the Company attached to this LLC Agreement in Exhibit 3. "PEM Fuel-Cell Powered Generator Set" means a proton exchange membrane ("PEM") fuel cell stack packaged with a fuel processor (to convert fuel at standard available pressure and quality to fuel usable by the fuel cell stack), with maximum continuous output no greater than 35 kW, and all of the ancillary components, systems, electronics, batteries, controls, protective relaying (e.g., over/under current, transfer switch), and enclosure(s) required to be ready for indoor or outdoor installation and operation for stand alone or grid interconnected stationary power applications. "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "PP Disclosure Schedule" means the Disclosure Schedule provided by PP to GEOSP on the date of signing of this LLC Agreement. "Pre-Commercial Unit" means a 7kW output PEM Fuel Cell-Powered Generator Set manufactured by PP and meeting the specifications outlined in Schedule B to the Distributor Agreement, without changes or additions (other than standard installation materials - e.g., ducting, pipe, wire) by the Company and/or the Company's designated service provider. "Products" means the following items manufactured by or on behalf of PP: PEM Fuel-Cell Powered Generator Sets, without changes or additions (other than standard installation materials - e.g., ducting, pipe, wire), and components (e.g., fuel processor, fuel cell stack, power electronics), replacement parts, upgrades, accessories (e.g., combined power and hot water packages), and improvements, of various sizes no larger than 35kW of maximum continuous output that (A) meet the Commercial Unit specifications set forth in Schedule B of the Distributor Agreement, and (B) are designed for use in residential, commercial, and industrial stationary power applications (e.g., base load power, peaking power, emergency back-up power, enhanced power quality, cogeneration, trailer-mounted units for temporary stationary power and/or rental power use); and "Products" excludes the following, regardless of their manufacturer: (i) PEM Fuel-Cell Powered Generator Sets and/or components designed for use in transportation or vehicle applications; (ii) PEM Fuel-Cell Powered Generator Sets and/or components designed for use in extended run, uninterruptible power supply ("UPS") systems for data centers applications, where the PEM Fuel-Cell Powered Generator Set (A) produces DC or AC premium (i.e., superior power quality to the grid) power for data center supporting information technology ("IT") equipment, (B) does not provide power to the entire facility, (C) is installed at a sub-panel downstream from the Customer's main distribution panel, (D) is designed to enable remote IT equipment shutdown and power cycling -5- for IT equipment that is no longer responding to commands, and (E) is designed to promote reliability over efficiency; (iii) PEM Fuel-Cell Powered Generator Sets and/or components for rack-mounted equipment in telecommunications, cellular, or cable television applications; and (iv) PEM Fuel-Cell Powered Generator Sets and/or components that are integrated with another device that utilizes all of the electrical output of the Fuel-Cell Powered Generator Set for that specific device only (e.g., an air conditioner powered by a Fuel-Cell Powered Generator Set, but not a combined Fuel-Cell Powered Generator Set-chiller cogen unit). "Profits" and "Losses" mean, for each Fiscal Year or other period, an amount equal to the Company's taxable income or loss for such year or period, determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss), with the following adjustments: (i) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be added to such taxable income or loss and any related expenses not allowed as a deduction pursuant to Section 265 of the Code shall be subtracted from such taxable income or loss; (ii) Any expenditures of the Company described in Section 705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B) of the Code expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be subtracted from such taxable income or loss; and (iii) Notwithstanding any other provision of this definition, any items which are specially allocated pursuant to Exhibit B to this LLC Agreement shall not be taken into account in computing Profits or Losses. "Seconded Employees" means the employees of GEOSP (or an Affiliate of GEOSP) or PP who are seconded to the Company pursuant to Annex C to this LLC Agreement. "Secondment" means the temporary assignment of an employee of GEOSP, its Affiliate, or PP to work for the Company pursuant to Annex C without changing such employee's status as an employee of GEOSP, its Affiliate, or PP, as the case may be. "Services" means the following activities associated with the Products: installation; permitting; application engineering; operation; routine maintenance; unscheduled maintenance; repair; overhaul (e.g., stack replacement); upgrade; remote monitoring, diagnostics and/or control (i.e., dispatch); operator and customer training; customer service; customer support. "Strategic Plan" means the strategic plan of the Company attached to this LLC Agreement in Exhibit 3. -6- "Substitute Member" means any Person not a Member of the Company (prior to the transfer of a Membership Interest to such Person) to whom a Membership Interest in the Company has been transferred and who has been admitted to the Company as a Member pursuant to and in accordance with the provisions of Section 4.4 of this LLC Agreement. "Supermajority Transaction" means a Supermajority Transaction defined as such in Section 7.1 of this LLC Agreement. "Territory" means every country, province, territory or other principality in the world, except the States of Michigan, Indiana, Ohio, and Illinois in the United States of America while Edison Development Corporation has exclusive rights to market and sell products similar to Products and provide services similar to Services therein. In the event that Edison Development Corporation ("EDC") shall lose all of its rights to market and sell similar products and provide similar services in the States of Michigan, Indiana, Ohio and Illinois (the "EDC Territory"), this definition of "Territory" shall be expanded to include the EDC Territory. In the event that EDC shall lose its exclusive rights to market and sell similar products and provide similar services in the EDC Territory, the Company will have the rights to market and sell Products and provide Services in the EDC Territory on a non-exclusive basis. "Test & Evaluation Unit" means a pre-commercial version of the Product with performance (e.g., efficiency, emissions, size, noise, reliability) below that of a Pre-Commercial Unit, which is intended to demonstrate proof of concept and provide the manufacturer with field test data. (b) "To the best of an entity's knowledge" or "to the knowledge of an entity" (or any similar phrase) means (i) with respect to GEOSP, to the best of the knowledge of (or to the knowledge of, as the case may be) the President of GEOSP, and (ii) with respect to PP, to the best of the knowledge of (or to the knowledge of, as the case may be) the President and CEO and the General Counsel of PP. -7- Annex B ------- REPRESENTATIONS AND WARRANTIES ------------------------------ The following representations and warranties which relate to PP, its assets and businesses are made solely by PP to and in favor of GEOSP and the Company, and the representations and warranties which relate to GEOSP, its assets and businesses are made solely by GEOSP to and in favor of PP and the Company. Neither GEOSP nor PP makes any representation with respect to representations of the other party: 1. Existence and Power. Each of GEOSP and PP is duly formed, ------------------- validly existing and in good standing under the laws of the state of its formation and has all power and authority and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, except where the failure to have such licenses, authorizations, consents and approvals would not, individually or in the aggregate, have a Material Adverse Effect on the Company. Each party is duly qualified to do business as a foreign limited liability company in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on the Company. 2. Authorization. The execution, delivery and performance by each ------------- party of this LLC Agreement and each of the Ancillary Agreements to which it is or will be a party and the consummation by such party of the Contemplated Transactions are within its corporate powers and have been duly authorized by all necessary corporate action on its part. This LLC Agreement and each of the Ancillary Agreements to which it is or will be a party constitutes a legal, valid and binding agreement of such party enforceable against such party in accordance with its terms, (i) except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting creditors' rights generally, including the effect of statutory and other laws regarding fraudulent conveyances and preferential transfers, and (ii) subject to the limitations imposed by general equitable principles (regardless of whether such enforceability is considered in a proceeding at law or in equity). 3. Governmental Authorization. The execution, delivery and -------------------------- performance by each party of this LLC Agreement and each of the Ancillary Agreements to which it is or will be a party require no action by or in respect of, or consent or approval of, or filing with, any Governmental Authority other than: (i) any actions, consents, approvals or filings otherwise expressly referred to in this LLC Agreement or in an Ancillary Agreement; or (ii) where the failure to take any such actions, obtain any such consents or approvals or make any such filings would not, individually or in the aggregate, have a Material Adverse Effect on the Company. 4. Non-Contravention. The execution, delivery and performance by ----------------- each party of this LLC Agreement and each of the Ancillary Agreements to which it is or will be a party and its completion of the Contemplated Transactions do not and will not (i) contravene or conflict with such party's organizational documents, (ii) assuming compliance with the matters referred to in Section 3 of this Annex B, contravene or conflict with or constitute a violation of any provision of any Applicable Law, (iii) assuming compliance with the matters referred to in Section 3 of this Annex B, constitute a default under, or give rise -1- to any right of termination, cancellation or acceleration of any right or obligation of GEOSP or PP, as the case may be, or to a loss of any benefit to which GEOSP or PP is entitled under, any agreement, contract or other instrument binding upon GEOSP or PP or by which any of its properties or assets is or may be bound or any license, franchise, permit or similar authorization held by GEOSP or PP except, in the case of clauses (ii) and (iii), for any such contravention, conflict, violation, default, termination, cancellation, acceleration or loss that would not, individually or in the aggregate, have a Material Adverse Effect on the Company. 5. Litigation; Disputes. There is no action, suit, investigation or -------------------- proceeding pending against, or, to the best of the knowledge of the applicable party, threatened against, or affecting PP or GEOSP before any court or arbitrator or any governmental body, agency, official or authority which, if adversely determined or resolved, may reasonably be expected to result in liability or loss to the Company in excess of $50,000 or which in any manner challenges or seeks to prevent, enjoin, alter or materially delay the Contemplated Transactions. No dispute or claim exists between PP or GEOSP and any of their respective customers, suppliers, packagers or distributors (including warranty claims) which is reasonably likely to have a Material Adverse Effect on the Company. 6. Distributor and Sales Representative Agreements. Except for the ----------------------------------------------- Distribution Agreement with Edison Development Corporation dated June 27, 1997, a true and complete copy of which has been delivered to GEOSP, PP has not entered into any distributor or sales representative agreements with respect to the Products or Pre-Commercial Units. Such agreement is in full force and effect, is a legal, valid and binding obligation of PP and, to the knowledge of PP, each other party thereto, enforceable against PP and, to the knowledge of PP, each such other party in accordance with its terms (except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting creditors' rights generally, including the effect of statutory and other laws regarding fraudulent conveyances and preferential transfers, and subject to the limitations imposed by general equitable principles regardless of whether such enforceability is considered in a proceeding at law or in equity), and neither PP nor, to the knowledge of PP, any other party thereto, is in material default or has failed to perform any material obligation thereunder, and there does not exist any event, condition or omission which would constitute a material breach or material default (whether by lapse of time or notice or both), except for any such default, failure or breach that would not have a Material Adverse Effect on either PP's fuel cell business or the Company. GEOSP has not entered into any distributor or sales representative agreements with respect to PEM Fuel Cell- Powered Generator Sets. 7. Finders' Fees. There is no investment banker, broker, finder or ------------- other intermediary which has been retained by or is authorized to act on behalf of such party who or which might be entitled to any fee or commission from such party or any of its Affiliates upon consummation of the Contemplated Transactions. 8. Compliance with Laws. Except for violations or infringements as -------------------- have not had and would not have a Material Adverse Effect on the Company, the operations of GEOSP's and PP's businesses have not violated or infringed, and do not violate or infringe, in any material respect, any Applicable Law or any order, writ, injunction or decree of any Governmental Authority. -2- 9. Investment Representation. Each party is acquiring its interest ------------------------- in the Company solely for investment purposes and not with a view to the distribution or resale thereof and acknowledges that its purchase of such interest is expressly subject to the conditions and limitations on transferability set forth in the LLC Agreement. 10. Ownership of PP. PP represents and warrants to GEOSP that (a) --------------- Edison Development Corporation and Mechanical Technology Incorporated ("MTI") own all of the outstanding membership interests in PP, free and clear of all liens, and (b) there is not outstanding any option or right of any party to acquire any equity interest in PP or any commitment to issue or deliver any such option or right or interest, except for (i) stock options issued to employees and board members (as of August 21, 1998, this amounted to 1,772,300 shares of Class B Membership Interest of PP) and (ii) options purchased by MTI to purchase 250,000 shares of Class A Membership Interest at $1.00 per share, which must be exercised by April 24, 1999, and to purchase 2,000,000 shares of Class A Membership Interest at $1.00 per share, which must be exercised by June 15, 1999. -3- Annex C ------- EMPLOYMENT AND SECONDMENT MATTERS --------------------------------- ARTICLE 1 DEFINED TERMS 1.1 Definitions. ----------- 1.1.1 Committee means the committee established by GEOSP and PP, in accordance with Section 7.2 of the Amended and Restated Limited Liability Company Agreement between GEOSP and PP dated February ___, 1999, to conduct the affairs of the Company on their behalf and as their representatives. 1.1.2 Employees means individuals employed directly by the Company itself, rather than individuals seconded to the Company, who remain employed by PP, GEOSP or their Affiliates (other than the Company). 1.1.3 GE, for purposes of this Annex C, means General Electric Company and its Affiliates, including GEOSP. 1.1.4 Governmental Regulations means any statute, rule, regulation, decree, executive order, preliminary or permanent injunction or court order issued by a Governmental Authority. A reference to a statutory provision includes the regulations and other instruments under it. 1.1.5 Party or Parties means, as the context may require, PP, GEOSP, or the Company or all of the foregoing. 1.1.6 Third Party means any Person other than a Party. 1.2 References to Exhibits, etc. The reference to Article, Exhibit or Schedule ---------------------------- shall be the Articles of this Annex C and the Exhibits and Schedules attached hereto which are incorporated as an integral part of this Annex C. 1.3 Other Capitalized Terms. Other capitalized terms used in this Annex C but ----------------------- not defined in this Article shall have the meanings given them in Annex A or wherever such terms first appear in this Annex C. ARTICLE 2 GENERAL PROVISIONS The purpose of this Annex C is to define the terms and conditions relating to the employment of Employees and the secondment of Seconded Employees by the Company. ARTICLE 3 RECRUITMENT AND SELECTION OF EMPLOYEES 3.1 Recruitment. PP and GEOSP may, if they desire, advertise open positions ----------- within their personnel management systems, route employment applications through appropriate channels in PP or GEOSP and forward such applications to the Company. In such cases the Company shall consult with PP or GEOSP about the job qualifications and service obligations of all such potential Company personnel. The Company may also advertise position openings in local newspapers and employment exchanges. The Persons listed on Exhibit A attached hereto are intended to constitute the initial management of the Company. GEOSP and PP shall use all reasonable efforts (which shall not require the incurrence of significant costs or expenses) to make such Persons available for employment by or secondment to the Company commencing on the Closing Date. 3.2 Selection of Employees and Seconded Employees. The Company President, or --------------------------------------------- his or her designee, shall be responsible for selecting job applicants from PP, GEOSP, their Affiliates, or from other sources to fill the open positions for Employees or Seconded Employees. Applicants for open positions shall be selected based on their qualifications for the positions. Prior to the secondment to the Company of any proposed Seconded Employee, such proposed Seconded Employee will be required to enter into a binding commitment in writing with PP or GEOSP (as the case may be) as trustee on behalf of the Company, in the form set forth in Exhibit B to this Annex C. 3.3 Termination of Employees and Seconded Employees. The Company President may ----------------------------------------------- terminate Employees, instruct PP to remove PP Seconded Employees and instruct GEOSP to remove GEOSP Seconded Employees; and, if so instructed, PP and GEOSP shall remove their respective Seconded Employees from the Company. 3.4 Transition. A transition plan will be developed and mutually agreed to by ---------- the Parties in order to provide an orderly transition of PP or GEOSP employees to the Company. ARTICLE 4 REMUNERATION OF COMPANY EMPLOYEES 4.1 Salaries of Company Employees. The Company shall remunerate its Employees ----------------------------- in accordance with a wage and salary structure which is competitive in the locality where the Employee will be working and consistent with the goals of the Company. An annual salary increase plan will be recommended by the Company President and implemented after approval of the Committee. 4.2 Benefits of Company Employees. Employees of the Company shall be entitled ----------------------------- to receive the benefits package recommended by the Company President and approved by the Committee. Such benefits package will be, at a minimum, that which is required by law and, where not required by law, in the Company's sole discretion. Changes in the benefits package shall be recommended by the Company President and implemented after approval of the Committee. -2- ARTICLE 5 COMPANY POLICIES AND TRAINING 5.1 Company Policies and Procedures. All personnel covered by this Annex C ------------------------------- shall be given written copies of all Company policies, and such policies of PP or GEOSP as required by PP or GEOSP, trained in the use and implementation of such policies, and required to agree that they will perform their duties in strict accordance with such policies. Similarly, all personnel covered by this Annex C shall have a written copy available to them of all Company procedures that may reasonably apply to such person and be trained in the use and implementation of such procedures 5.2 Training. The Parties agree that all personnel covered by this Annex C -------- shall be adequately trained to perform the duties of their job and to cooperate to assure that such training is provided by the Company. The Parties further agree that, in the event such training is not reasonably within the capability of the Company to provide, PP or GEOSP will provide such training and be reimbursed by the Company their reasonable or customary cost or fees, as the case may be, for such training. 5.3 Term of Employment. The Company shall enter employment agreements with ------------------ Employees who are designated to receive specialized training, which shall provide for a term of employment for a period equal to at least one year. ARTICLE 6 SECONDED EMPLOYEES 6.1 GEOSP Seconded Employees. GEOSP and each employee seconded from GEOSP or ------------------------ its Affiliate shall be responsible for resolving the manner in which the employee's period of secondment shall be treated with respect to that person's pension rights with GE or any of its Affiliates, years in service and what the seniority rights in GE or any of its Affiliates will be at the end of the secondment period. 6.1.2 Payment of GEOSP Seconded Employee's Salary and Benefits. During the -------------------------------------------------------- period of secondment, GEOSP shall be responsible for paying each GEOSP Seconded Employee's salary and benefits package, including employment taxes, to, in respect of, or on behalf of the GEOSP Seconded Employee consistent with the applicable salary and benefit payment policies of GE or any of its Affiliates. The Company shall pay GEOSP an amount equal to one hundred percent (100%) of each GEOSP Seconded Employee's salary (prior to the withholding of any taxes), benefits, and taxes paid by GEOSP to, in respect of, or on behalf of that employee during the period of the secondment. The foregoing amount paid for salary, benefits, and taxes shall be adjusted after actual increases in salary, benefits, and/or taxes paid by GE or any of its Affiliates to, in respect of, or on behalf of the GEOSP Seconded Employee, provided that GEOSP shall have produced evidence to the Company of any such actual increases in salary, benefits, and/or taxes paid by GE or any of its Affiliates. The Company shall make such payment at the end of the month for which the GEOSP Seconded Employee will be seconded to the Company. GEOSP shall deliver to the Company copies of the GEOSP Seconded Employee's most recent salary, benefit, and tax information at the beginning of the secondment period. GEOSP shall be responsible for filing all tax, social security and other similar statements for each GEOSP Seconded Employee as may be required under applicable Governmental Regulations. Upon request of the Company, GEOSP shall -3- provide the Company with copies of returns, receipts or similar documents showing that all the taxes and social security payments (if any) have been made to the applicable Governmental Authorities. GEOSP shall indemnify the Company against any claims by the GEOSP Seconded Employees or any applicable Governmental Authority with respect to the payment of wages, salaries, taxes, social security payments, other payments resulting from the termination of employment by GE or any of its Affiliates or the proper filing of returns with the applicable Governmental Authorities with respect to the foregoing. 6.1.3 GEOSP Right of Assignment. Rights and obligations with respect to the ------------------------- secondment of GEOSP Seconded Employees may be transferred (with appropriate notice to PP and the Company) from or to GEOSP or any of its Affiliates (other than the Company). 6.2.1 PP Seconded Employees. PP and each employee seconded from PP shall be --------------------- responsible for resolving the manner in which the employee's period of secondment shall be treated with respect to that person's pension rights with PP, years in service and what the seniority rights in PP will be at the end of the secondment period. 6.2.2 Term of Secondment. Seconded Employees shall be obligated to remain ------------------ seconded to the Company for a period of at least one year, unless agreed otherwise by the Parties. The Company, PP or GEOSP, as the case may be, and the Seconded Employee may agree to extend the secondment period for a mutually agreeable time upon completion of the first secondment period. 6.2.3 Payment of PP Seconded Employee's Salary and Benefits. During the period ----------------------------------------------------- of secondment, PP shall be responsible for paying the PP Seconded Employee's salary and benefits package, including employment taxes, to, in respect of, or on behalf of the PP Seconded Employee consistent with PP salary and benefits payment policies. The Company shall pay PP an amount equal to one hundred per cent (100%) of each PP Seconded Employee's salary (prior to withholding of any taxes), benefits, and taxes paid by PP to, in respect of, or on behalf of that employee during the period of the secondment. The foregoing amount paid for salary, benefits, and taxes shall be adjusted after actual increases in salary, benefits, and/or taxes paid by PP to, in respect of, or on behalf of the PP Seconded Employee, provided that PP shall have produced evidence to the Company of any such actual increases in salary, benefits, and/or taxes paid by PP. The Company shall make such payment at the end of the month for which the PP Seconded Employee will be seconded to the Company. The Company's benefit package shall not apply to Seconded Employees. PP shall deliver to the Company copies of the PP Seconded Employee's most recent salary, benefit, and tax information at the beginning of the secondment period. PP shall be responsible for filing all tax, social security and other statements for each PP Seconded Employee as may be required under applicable Governmental Regulations. Upon request of the Company, PP shall provide the Company with copies of returns, receipts or similar documents showing that all the taxes and social security payments (if any) have been made to the applicable Governmental Authorities. PP shall indemnify the Company against any claims by the PP Seconded Employees or any applicable Governmental Authority with respect to the payment of wages, salaries, taxes, social security payments, other payments resulting from the termination of employment by PP or the proper filing of returns with any applicable Governmental Authorities with respect to the foregoing. 6.2.4 PP Right of Assignment. PP shall have the right to assign its rights and ---------------------- obligations (with appropriate notice to GEOSP and the Company) with respect to the secondment of employees to one of its wholly owned Affiliates. -4- ARTICLE 7 LIMITATION OF LIABILITY 7.1 The Parties agree that each Seconded Employee to the Company by GEOSP or PP shall, in all respects, be acting for the Company and not GEOSP or PP, respectively. Nothing contained herein shall constitute or be construed to be or create a partnership or joint venture between the Company, GEOSP and/or PP. The debts and liabilities incurred by the Company are those of the Company and, subject to Clauses 6.1.2 and 6.2.3 above, neither GEOSP nor PP shall have any liability for them. 7.2 The Company hereby represents that in accepting the secondment of any GEOSP or PP employee to the Company, it has not relied on any projection of earnings, statements as to the possibility of future success or other similar matter which may have been prepared or presented by GEOSP, PP or their Affiliates, and understands that no guaranty is made or implied by GEOSP or PP as to the future financial success of the business of the Company. 7.3 Neither GEOSP nor PP shall have any liability to the Company or to any other Person for any act or omission of the Seconded Employees in connection with the operation or activities of the Company. Additionally, subject to Clauses 6.1.2 and 6.2.3 above, at GEOSP's or PP's request, the Company will, at its own cost and expense, assume the defense of any proceeding brought by any Third Party to establish any such liability and will indemnify and hold harmless GEOSP and PP from any such liability and all related costs and expenses, including attorney's fees. 7.4 As used in this Article, "liability" includes liability for any claim of any kind whether the claim is based on contract, indemnity, warranty, tort (including negligence of any degree), strict liability or otherwise for any loss or damage arising out of or connected with performance or breach of the provisions of this Annex C or operations of the Company. 7.5 As used in this Article, "GEOSP" and "PP" shall include GE or PP, as the case may be, and its respective Affiliates and any of their respective officers, employees or agents, including any officers, employees or agents also seconded to work in the Company as Seconded Employees. 7.6 The Company shall indemnify GEOSP and PP against Third Party claims arising out of the acts or omissions of its employees, including Employees and Seconded Employees. 7.7 The foregoing limitations and indemnity shall apply to the full extent permitted by law regardless of degree of fault or negligence, and, notwithstanding any other provisions of this Annex C, shall survive termination of this LLC Agreement. The limitations contained in Section 10.5(a) of this LLC Agreement shall also apply to all indemnity provisions of this Annex C, and the liability of GEOSP and the Company shall be considered together for purposes of the $1,000,000 limitation in Section 10.5(a). -5- EXHIBIT A Initial Management of the Company Barry Glickman President Frank Scovello Director of Sales Rick Robertson Director of Marketing -6- EXHIBIT B (Acknowledgment From Employees of GE and its Affiliates Concerning Secondment to the Company) _____________, 1999 _____________________________ _____________________________ _____________________________ RE: Secondment to GE Fuel Cell Systems, L.L.C. I refer to [our recent discussions/your letter dated _______] concerning my secondment to GE Fuel Cell Systems, L.L.C., for an initial period of ________. I hereby acknowledge and agree that I will not, by reason of my secondment, become an employee of GE Fuel Cell Systems, L.L.C., but shall, throughout my period of secondment, remain your employee. I hereby covenant with you (as trustee for and on behalf of GE Fuel Cell Systems, L.L.C.) that I shall not maintain any claim, nor institute any proceedings whatsoever against GE Fuel Cell Systems, L.L.C., whether in respect of breach of contract, redundancy, unfair dismissal, compensation for loss of office and any other ground whatsoever, whether under common law, statute or otherwise by reason of any termination of my secondment to GE Fuel Cell Systems, L.L.C., or the termination of my employment with you. I hereby confirm that I understand and have considered in full the effect of the foregoing (and in particular those provisions of this Acknowledgment which may deprive me of rights) and accept that this Acknowledgment is legally binding on me. I acknowledge that you have advised me to obtain independent legal advice prior to execution of this Acknowledgment and I confirm that I have had sufficient opportunity to take and that I have taken such advice or decided (without any influence having been brought to bear on me) not to obtain such advice. This Acknowledgment shall be governed by and construed in accordance with the Laws of the State of New York. Executed by: Witness: _____________________ _______________________________ -7- EXHIBIT B (Continued) (Acknowledgment From Employees of PP Concerning Secondment to the Company) ___________, 1999 Plug Power, L.L.C. 968 Albany-Shaker Road Albany, New York 12110 RE: Secondment to GE Fuel Cell Systems, L.L.C. I refer to [our recent discussions/your letter dated _______] concerning my secondment to GE Fuel Cell Systems, L.L.C., for an initial period of ________. I hereby acknowledge and agree that I will not, by reason of my secondment, become an employee of GE Fuel Cell Systems, L.L.C., but shall, throughout my period of secondment, remain an employee of Plug Power, L.L.C. I hereby covenant with Plug Power, L.L.C. (as trustee for and on behalf of GE Fuel Cell Systems, L.L.C.) that I shall not maintain any claim, nor institute any proceedings whatsoever against GE Fuel Cell Systems, L.L.C., whether in respect of breach of contract, redundancy, unfair dismissal, compensation for loss of office and any other ground whatsoever, whether under common law, statute or otherwise by reason of any termination of my secondment to GE Fuel Cell Systems, L.L.C., or the termination of my employment with Plug Power, L.L.C. I hereby confirm that I understand and have considered in full the effect of the foregoing (and in particular those provisions of this Acknowledgment which may deprive me of rights) and accept that this Acknowledgment is legally binding on me. I acknowledge that Plug Power, L.L.C., has advised me to obtain independent legal advice prior to execution of this Acknowledgment and I confirm that I have had sufficient opportunity to take and that I have taken such advice or decided (without any influence having been brought to bear on me) not to obtain such advice. This Acknowledgment shall be governed by and construed in accordance with the Laws of the State of New York. Executed by: Witness: ______________________ _______________________________ -8- EXHIBIT 1 --------- MEMBERSHIP INTERESTS NAME AND MEMBERSHIP NOTICE ADDRESS INTEREST - -------------- -------- GE On-Site Power, Inc. 75% One River Road Schenectady, NY 12345 Plug Power, L.L.C. 25% 968 Albany-Shaker Road Albany, NY 12110 -1- EXHIBIT 2 --------- ALLOCATION AND CAPITAL ACCOUNT PROVISIONS For purposes of interpreting and implementing the LLC Agreement, the following rules shall apply and shall be treated as part of the terms of the LLC Agreement: A. Special Allocation Provisions. ----------------------------- 1. For purposes of determining the amount of gain or loss to be allocated pursuant to Article VI of the LLC Agreement, any basis adjustments permitted pursuant to Section 743 of the Code shall be disregarded. 2. Income, loss, deductions and credits shall be allocated to the Members in accordance with the portion of the Fiscal Year during which the Members have held their respective interests. All items of income, loss and deduction shall be considered to have been earned ratably over the period of the Fiscal Year, except that gains and losses arising from the disposition of assets shall be taken into account as of the date thereof. 3. Notwithstanding any other provision of the LLC Agreement, to the extent required by law, income, gain, loss and deduction attributable to property contributed to the Company by a Member shall be allocated among the Members so as to take into account any variation between the basis of the property to the Company and the fair market value of the property at the time of contribution in accordance with the requirements of Section 704(c) of the Code and the applicable Treasury Regulations thereunder, as more fully described in Part B hereof. The Company shall use the traditional method with curative allocations described in Treasury Regulation Section 1.704-3(c) for purposes of complying with Section 704(c)(1)(A) of the Code. 4. Notwithstanding any other provision of the LLC Agreement, in the event the Company is entitled to a deduction for interest imputed under any provision of the Code on any loan or advance from a Member (whether such interest is currently deducted, capitalized or amortized), such deduction shall be allocated solely to such Member. 5. Notwithstanding any provision of the LLC Agreement to the contrary, to the extent any payments in the nature of fees made to a Member are finally determined by the IRS to be distributions to a Member for federal income tax purposes, there will be a gross income allocation to such Member in the amount of such distribution. 6. (a) Notwithstanding any provision of the LLC Agreement to the contrary and subject to the exceptions set forth in Section 1.704-2(f)(2)-(5) of the Treasury Regulations, if there is a net decrease in Partnership Minimum Gain during any Fiscal Year, each Member shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Member's share of the net decrease in Partnership Minimum Gain determined in accordance with Section 1.704-2(g)(2) of the Treasury Regulations. Allocations pursuant to the previous sentence shall be -1- made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(f)(6) and 1.704-2(j)(2) of the Treasury Regulations. This paragraph 6(a) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Treasury Regulations and shall be interpreted consistently therewith. To the extent permitted by such Section of the Treasury Regulations and for purposes of this paragraph 6(a) only, each Member's Adjusted Capital Account Balance shall be determined prior to any other allocations pursuant to Article VI of the LLC Agreement with respect to such Fiscal Year and without regard to any net decrease in Partner Minimum Gain during such Fiscal Year. (b) Notwithstanding any provision of the LLC Agreement to the contrary, except paragraph 6(a) of this Exhibit 2 and subject to the exceptions set forth in Section 1.704-2(i)(4) of the Treasury Regulations, if there is a net decrease in Partner Nonrecourse Debt Minimum Gain during any Fiscal Year, each Member who has a share of the Partner Nonrecourse Debt Minimum Gain, determined in accordance with Section 1.704-2(i)(5) of the Treasury Regulations, shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Member's share of the net decrease in Partner Nonrecourse Debt Minimum Gain, determined in accordance with Section 1.704-2(i)(4) of the Treasury Regulations. Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the Treasury Regulations. This paragraph 6(b) is intended to comply with the minimum gain chargeback requirement in such Sections of the Treasury Regulations and shall be interpreted consistently therewith. To the extent permitted by such Sections of the Treasury Regulations, and solely for purposes of this paragraph 6(b), each Member's Adjusted Capital Account Balance shall be determined prior to any other allocations pursuant to Article VI of the LLC Agreement with respect to such Fiscal Year, other than allocations pursuant to paragraph 6(a) hereof. 7. (a) Notwithstanding any provision of the LLC Agreement to the contrary, in the event any Member unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulation Section 1.704- 1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) or 1.704-1(b)(2)(ii)(d)(6), items of Company income and gain shall be specially allocated to such Members in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations, the deficits in their Adjusted Capital Account Balances created by such adjustments, allocations or distributions as quickly as possible, provided that an allocation pursuant to this paragraph 7(a) shall be made only if and to the extent that such Members would have a deficit Adjusted Capital Account Balance after all other allocations provided for in the LLC Agreement and this Exhibit 2 have been tentatively made as if this paragraph 7(a) were not in the LLC Agreement or incorporated thereinto. (b) In the event any Member has a deficit Capital Account at the end of any Fiscal Year which is in excess of the sum of (i) the amount such Member is obligated to restore pursuant to any provision of the LLC Agreement, and (ii) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Treasury Regulations, each such Member shall be specially allocated items of Partnership income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this paragraph 7(b) shall be made only if and to the extent that such Member would have a deficit Capital Account in excess of -2- such sum after all other allocations provided for in the LLC Agreement and this Exhibit 2 have been made as if paragraph 7(a) hereof and this paragraph 7(b) were not in the LLC Agreement or incorporated thereinto. 8. To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Section 734(b) or Section 743(b) of the Code is required, pursuant to Section 1.704-1(b)(2)(iv)(m)(2) or Section 1.704- 1(b)(2)(iv)(m)(4) of the Treasury Regulations, to be taken into account in determining Capital Accounts as the result of a distribution to a Member in complete liquidation of its interest in the Company, the amount of such adjustment to Capital Accounts shall be treated as a item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Members in accordance with their interest in the Company in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Member to whom such distribution was made in the event that Section 1.704-1(b)(2)(iv)(m)(4) of the Treasury Regulations applies. 9. No loss shall be allocated to any Member to the extent that such allocation would result in a deficit in its Adjusted Capital Account Balance while any other Member continues to have a positive Adjusted Capital Account Balance; in such event losses shall first be allocated to any Members with positive Adjusted Capital Account Balances, and in proportion to such balances, to the extent necessary to reduce their positive Adjusted Capital Account Balances to zero. Any allocation of loss pursuant to this paragraph 9 shall be offset in subsequent years on a last-in first-out priority basis by special allocations of income in the corresponding amounts. 10. Any special allocations of items pursuant to this Part A (the "Regulatory Allocations") shall be taken into account in computing subsequent allocations so that the net amount of any items so allocated and the Profits, Losses and all other items allocated to each such Member pursuant to Article VI of the LLC Agreement shall, to the extent possible, be equal to the net amount that would have been allocated to each such Member pursuant to the provisions of Article VI of the Agreement if such Regulatory Allocations had not occurred. 11. Notwithstanding any provision of the LLC Agreement to the contrary, Nonrecourse Deductions for any Fiscal Year or other period shall be specially allocated to the Members pro rata in accordance with their respective Membership Interests. 12. Notwithstanding any provision of the LLC Agreement to the contrary, any Member Nonrecourse Deduction for any Fiscal Year or other period shall be specially allocated to the Member who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Section 1.704-2(i) of the Treasury Regulations. B. Capital Account Adjustments. --------------------------- 1. For purposes of computing the amount of any item of income, gain, deduction or loss to be reflected in the Members' Capital Accounts, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for federal income tax purposes; provided, however, that: -3- (a) Any deductions for depreciation, cost recovery or amortization (other than depletion under Section 611 of the Code) attributable to property contributed by a Member to the capital of the Company shall be determined as if the adjusted basis of such property on the date it was acquired by the Company was equal to the fair market value of the property as determined by the Members pursuant to Part B.7(a) hereof using such reasonable methods of valuation as they may adopt. Upon an adjustment to the Carrying Value of any Company property (other than property subject to depletion under Section 611 of the Code), any further deductions for such depreciation, cost recovery or amortization attributable to such property shall be determined as if the adjusted basis of such property was equal to the Carrying Value of such property immediately following such adjustment. (b) Any income, gain or loss attributable to the taxable disposition of any property (including any property subject to depletion under Section 611 of the Code) shall be determined by the Company as if the adjusted basis of such property as of such date of disposition was equal in amount to the Company's Carrying Value with respect to such property as of such a date. (c) The computation of all items of income, gain, loss and deduction shall be made by the Company and, as to those items described in Section 705(a)(1)(B) or Section 705(a)(2)(B) of the Code, or treated as Section 705(a)(2)(B) expenditures pursuant to Section 1.704-1(b)(2)(iv)(i) of the Treasury Regulations, without regard to the fact that such items are not includable in gross income or are neither currently deductible nor capitalizable for federal income tax purposes. 2. A transferee of a Membership Interest will succeed to the Capital Account relating to the Membership Interest transferred. 3. Upon an issuance of additional Membership Interests for cash or property, the Capital Accounts of all Members (and the Carrying Values of all Company properties) shall, immediately prior to such issuance, be adjusted (consistent with the provisions hereof) upward or downward to reflect any unrealized gain or unrealized loss attributable to each Company property (as if such unrealized gain or unrealized loss had been recognized upon an actual sale of such property at the fair market value thereof, immediately prior to such issuance, and had been allocated to the Members, at such time, pursuant to Article VI of the Agreement). In determining such unrealized gain or unrealized loss attributable to the properties, the fair market value of Company properties shall be determined by the Members pursuant to Part B.7(a) hereof using such reasonable methods of valuation as they may adopt. 4. Immediately prior to the distribution of any Company property in liquidation of the Company, or the distribution by the Company to a Member of any Company property as consideration for an interest in the Company, the capital accounts of all Members (and the Carrying Values of all Company properties) shall be adjusted (consistent with the provisions hereof and Section 704 of the Code) upward or downward to reflect any unrealized gain or unrealized loss attributable to each Company property (as if such unrealized gain or unrealized loss had been recognized upon an actual sale of each such property, immediately prior to such distribution, and had been allocated to the Members, at such time, pursuant to Article VI of the Agreement). In determining such unrealized gain or unrealized loss attributable to the properties, the fair market value of Company properties shall be determined by the Members pursuant to Part B.7(a) hereof using such reasonable methods of valuation as they may adopt. -4- 5. In the event the value of any Company asset is adjusted as described in paragraph 3 or 4 above, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the value and the adjusted basis of such asset for federal income tax purposes in the same manner as under Section 704(c) of the Code and the Treasury Regulations thereunder. 6. Any elections or other decisions relating to such allocations shall be made by the Committee in any manner that reasonably reflects the purpose and intention of the LLC Agreement. 7. The following actions shall require the consent of the holder(s) of a majority of outstanding membership interests: (a) the valuation of any non-cash property contributed to the Company by a Member, or distributed to a Member by the Company, and the valuation of all the assets of the Company if required for purposes of computing the Members' Capital Accounts pursuant to the Regulations under Section 704 of the Code; and (b) the distribution by the Company to a Member of non-cash property which had been previously contributed by a Member to the capital of the Company, provided such distribution is made within the seven year period following the date on which the property was contributed to the Company and such distribution, if made, would cause the recognition of taxable income or gain under Section 704(c)(1)(B) or Section 737 of the Code. C. Definitions. For the purposes of this Exhibit 2, the following terms ----------- shall have the meanings indicated unless the context clearly indicates otherwise: "Adjusted Capital Account Balance": means the balance in the Capital -------------------------------- Account of a Member as of the end of the relevant Fiscal Year, after giving effect to the following: (a) credit to such Capital Account any amounts the Member is obligated to restore, pursuant to the terms of the Agreement or otherwise, or is deemed obligated to restore pursuant to the penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Treasury Regulations, and (b) debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Treasury Regulations. "Carrying Value": means (a) with respect to property contributed by a -------------- Member to the capital of the Company, the value of such property reduced (but not below zero) by all amortization, depreciation and cost recovery deductions charged to the Members' Capital Accounts with respect to such property, as well as any other charges for sales, retirements and other dispositions of assets included in property, as of the time of determination, and (b) with respect to any other property, the adjusted basis of that property for federal income tax purposes as of the time of determination. The Carrying Value of any property shall be adjusted in accordance with the principles set forth herein. "Nonrecourse Deductions": shall have the meaning set forth in Section ---------------------- 1.704-2(b)(1) of the Treasury Regulations. The amount of Nonrecourse Deductions for a Fiscal Year equals the excess, if any, of the net increase, if any, in the amount of Partnership Minimum Gain during that Fiscal Year over the aggregate amount of any distributions during that Fiscal Year of proceeds of a Nonrecourse Liability that are -5- allocable to an increase in Partnership Minimum Gain, determined according to the provisions of Section 1.704-2(c) of the Treasury Regulations. "Nonrecourse Liability": shall have the meaning set forth in Section --------------------- 1.704-2(b)(3) of the Treasury Regulations. "Partner Nonrecourse Debt Minimum Gain": means an amount, with ------------------------------------- respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section 1.704-2(i)(3) of the Treasury Regulations. "Partner Nonrecourse Debt": shall have the meaning set forth in ------------------------ Section 1.704-2(b)(4) of the Treasury Regulations. "Partner Nonrecourse Deductions": shall have the meaning set forth in ------------------------------ Sections 1.704-2(i)(1) and (2) of the Treasury Regulations. The amount of Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a Fiscal Year equals the excess, if any, of the net increase, if any, in the amount of Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt during that Fiscal Year over the aggregate amount of any distributions during the Fiscal Year to the Member that bears the economic risk of loss for such Partner Nonrecourse Debt to the extent such distributions are from the proceeds of such Partner Nonrecourse Debt and are allocable to an increase in Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.702-2(i)(2) of the Treasury Regulations. "Partnership Minimum Gain": shall have the meaning set forth in ------------------------ Sections 1.704-2(b)(2) and 1.704-2(d) of the Treasury Regulations. "Treasury Regulations" or "Treas. Reg." shall include temporary and -------------------- ----------- final regulations promulgated under the Code in effect as of the date of filing the Certificate and the corresponding sections of any regulations subsequently issued that amend or supersede those regulations. For purposes of this Exhibit, all other capitalized terms will have the same definition as in the LLC Agreement. -6- EXHIBIT 3 --------- STRATEGIC PLAN AND OPERATING PLAN (See Attached) GE FUEL CELL SYSTEMS, LLC OPERATING PLAN JANUARY 1999 CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. 1999 ---------- Unit Sales - # of Units [***] - Average Unit Size (kW) 7 - # of MW [***] - Installed Base (MW) [***] Transfer Price (= JV COGS per Unit) [***] Sales Price ($ per Unit)* [***] Revenues - Unit Sales ($MM) [***] - Installation ($MM) [***] - Revenue ($ per Unit) [***] - JV Market Share (%) [***] - Maintenance ($MM) [***] - Revenue ($ per Unit) [***] - JV Market Share (%) [***] - Franchise Fees ($MM) [***] - Total ($MM) [***] Gross Margin ($MM) - Unit Sales [***] - Installation [***] - Maintenance [***] - Franchise Fees [***] - Total [***] - Total (% of Revenues) [***] Operating Expenses ($MM)** - Sales [***] - # of Dedicated Sales People [***] - Salary (plus benefits)/Person [***] - Sales Commission (% of GM) [***] - Sales Commission [***] - Travel [***] - Technical Support [***] - # of People [***] - Salary (plus benefits)/Person [***] - Marketing (people, shows, brochures, etc.) [***] - R&D (electronics, testing) [***] - G&A (office space, legal/finance support) [***] - Consulting/Market Research [***] - Non-warranty service/unit replacements [***] - Total [***] - Total (% of Revenues) [***] Operating Margin ($MM) - Total [***] - Total (% of Revenues) [***] GE FUEL CELL SYSTEMS, LLC STRATEGIC PLAN JANUARY 1999 OVERVIEW GE Fuel Cell Systems, L.L.C. (hereafter the "Company") is being formed to market, install, and service proton exchange membrane (PEM) fuel cell systems designed and manufactured by Plug Power, L.L.C. (hereafter "PP"). The Company will be PP's distributor of fuel cell systems for residential and small commercial and industrial (C&I) power applications less than or equal to 35kW, certain defined exclusions. Except for the distribution rights previously granted to DTE Energy (parent company of Detroit Edison) for Michigan, Illinois, Indiana, and Ohio, the Company will be PP's exclusive, global distributor. Ownership of the Company is split 75%/25% between GE On-Site Power, Inc. (hereafter "GEOSP") and PP. PRODUCT The Company's initial efforts will focus on PP's residential-sized fuel cell product, the "Plug Power 7000." When fully commercialized this product this product will provide 100% of the power requirements of a target household, or approximately 2-4kW of baseload power, 10-15kW of peak power, and 10,000+ kWh/year of energy. Power will be generated from the fuel cell "stack" with batteries providing supplementary power to meet short-term power surges. The unit will run on natural gas, propane, or methanol, and will be 40% efficient (8,500 Btu/kWh) in typical baseload operation. Unlike traditional power generators, efficiency falls with increased output above the optimal design point. The Company expects to use 1999 to conduct additional market research on typical residential and C&I power usage, tariff structures, fuel availability, fuel prices, buying criteria, etc. in order to better understand (1) Requisite product features by geography and customer segment (e.g., baseload power requirement vs. instantaneous requirement), (2) Acceptable customer payback periods, and (3) Regulatory requirements, etc. The Company will use this data to define the optimal unit sizes, determine the mix between fuel cell-supplied and battery-supplied output, and revise, as needed, performance specifications by geography/customer segment, etc. RESIDENTIAL FUEL CELL MARKET The Company has conducted a preliminary evaluation of target markets and customers taking into account such factors as average household demand, ability to pay, power availability/quality, availability of fuel, grid power vs. fuel price spreads, penetration of competing distributed generation (DG) technologies (e.g., reciprocating engine generators), new capacity requirements, and the cost of new capacity additions (including transmission and distribution). Based on this evaluation, the Company believes the available global market for PP's residential-sized fuel cells will be over 20,000,000 households by 2005. The market size in the initial commercial period (i.e., 2001 to 2003) will be smaller due to customers' technology validation concerns and higher unit prices (driven by sub-scale PP production volumes). The Company estimates market size and retail prices as follows: Global Market Size--2001-2003*
Available Market Size Unit Price (Retail, Installed) --------------------- ------------------------------ 2001 1,700,000 $6,700 2002 5,000,000 $4,500 2003 11,000,000 $3,250
* PP and the Company plan to revisit this preliminary market assessment as additional market research provides better information about required customer savings, consumer willingness to pay for environmental and power quality benefits, impact of financing/ownership alternatives on capital costs and customer acceptance, rate of customer adoption, particularly in the developing world, and the costs of incremental transmission and distribution vs. new construction activity. GO-TO-MARKET STRATEGY The Company plans to use early 1999 to validate its market prioritization and develop detailed, country-specific go-to-market strategies consistent with each market's potential and the expected pace of market development. However, in general, the Company plans to pursue a sale-for-resale approach wherever possible. That is, the Company will seek to enter into agreements with "resellers", entities capable of reselling fuel cell systems to residential customers within defined territories. Potential resellers include electric utilities, local gas distribution companies, gas and/or Power marketers, propane distributors, rural cooperatives, gas and/or power regulatory bodies, government agencies, reciprocating engine generator distributors, and HVAC (heating, ventilation and air conditioning) and/or appliance dealers. These entities typically have, on a regional basis, an installed base of customers, billing and customer support capability, brand recognition, local market credibility, and regulatory expertise. By working through resellers the Company expects to be able to quickly penetrate multiple markets, avoid costly investment in sales and support resources and accelerate the technology acceptance process. The benefits to the reseller include margins on fuel cell system sales, service revenues (in certain instances), and sales of ancillary products (fuel, appliances). Due to the ease of fuel cell system installation relative to traditional generation/T&D, resellers can also quickly enter electricity markets beyond their existing customer footprint, thus significantly increasing both revenue opportunity and brand recognition. In 1999 and early 2000, the Company will have the option to offer to its resellers Test and Evaluation units. Resellers will either purchase these units directly or receive the units free as part of a broader commercial relationship that may include franchise fees, take-or-pay commitments, and territorial exclusivity. In either case the expectation is for the reseller to be a full participant in the Test and Evaluation Program, running the Test and Evaluation units through a prescribed regimen of tests, and providing data and feedback to the Company and PP. Any Test and Evaluation units purchased by the Company will be credited, dollar for dollars, against its obligation to purchase Pre- Commercial units in 2000. In 2000, the Company has a "take-or-pay" obligation to purchase 485 Pre- Commercial units from PP, for a total purchase price of $10.25 million. These units will meet the performance specifications included in the Distributor Agreement. The Company will be offering these units to its customers to allow them to get familiar with the performance, installation, operation, and maintenance of the units. Customers will be expected to provide test data to the Company and PP so that improvements can be incorporated into the commercial systems.
Reseller Approach From Company From Reseller Full range of fuel cell products (less than)35kW Testing of prototype units GE-PP branded products Local customer base Application/engineering expertise Brand Marketing/sales support Dedicated sales force Sales/service training Gas/power commodity sales Financing (where needed and Financing (where needed and cost-effective) cost-effective) Extended Warranties Relationship with regulators Marketing materials Local billing, call/customer care Service (where cost-effective, through center contracts with GE and/or Service (where qualified and third party suppliers) cost-effective)
The Company is in the process of incorporating customer feedback into the reseller contract offering. However, the Offering will likely include the following elements: . Defined territories and terms of reseller's exclusivity . Pricing and delivery schedules . Equipment performance specifications . Installation and maintenance support and documentation . Product verification testing and test period support . Equipment guarantees and warranties . Training support and documentation . Initial and long term product technical support Sales Strategy and Target Customers Target customers are residential and small commercial consumers and/or the gas and electric its, government agencies, and independent power producers that deliver energy sources to those consumers. During the first one to two years of commercialization, virtually all customer demand is expected to come from the U.S. and W. Europe, where household electricity utilization is highest. As cell system capital costs fall, the Company will sell product to serve residential customers worldwide. The Company will sell to consumers through a reseller network, but will also create brand product awareness at the consumer level through media advertising, trade shows and other mass marketing. Resellers will augment this effort through local advertising, mass mailings, catalog sales, and educational seminars, promotional pricing for systems or fuel, and bundled service offerings that provide "premium" power packages. Resellers will also work with building contractors, financial institutions and other intermediaries to create cost- effective mechanisms to reach consumers. The sales strategy will highlight three core benefits of residential fuel cell systems: . Grid Displacement -- Electricity at lower than grid power delivered to the home. High efficiency, low capital cost and low transmission and distribution requirements enable fuel cell systems to produce electricity at costs below the existing grid in regions covering tens of millions of homes in the U.S., Western Europe and Latin America. . Power Quality -- Highly reliable power that is also environmentally friendly. Growth in information technology in the home for entertainment and business use (there are an estimated 20 million home offices in the U.S alone) has increased the inconvenience and the economic impact of weather- related as well as capacity-driven power outages. In the developing world, such outages can occur daily for extended periods. Fuel cells are an environmentally friendly, low cost, low noise, small, modular, etc. solution to power reliability concerns. . Electricity Access -- Electricity supply where grid does not exist or is expensive to extend and maintain. The World Bank estimates that 40% of the world's population does not have electricity today; most of this unelectrified population is in the developing nations. In many low density and/or rugged terrain areas, the capital cost of building a distributed network of fuel cell systems will over time fall substantially below the investments required for central station generation, transmission and distribution. Service Strategy The Company is committed to provide complete product support, through its own service infrastructure and/or through contracts with third party service providers. Potential third party service providers include those companies with an existing national service infrastructure (e.g., Honeywell, GE Appliances), or regional companies with strong service capabilities (e.g., HVAC companies). In either case, the Company will seek to ensure that the service is: 1) provided at a comparable level of quality to other GE-branded products; and 2) sufficient to meet reasonable customer needs in the areas of timeliness, quality, and cost- effectiveness. The roll-out of the Company's service offering will be closely coordinated with the introduction of the fuel cell products, such that where the product is available, a sufficient level of installation, maintenance, and customer support service is also available. The Company, through its service contracts, will also provide the warranty service for the PP fuel cell systems covered by the Distributor Agreement, according to terms to be mutually agreed between PP and the Company. By late 1999, the Company expects to have identified an overall service strategy for each high-priority market. By year-end 1999, the Company expects to have the overall service strategy translated to a comprehensive service plan that addresses the following: . Installation, operation, and maintenance requirements . Service standards (e.g. response time, rework, customer support, etc.) . Geographic coverage . Technical qualifications . Call center operations . Training program . Warrant support At all times the Company will review its service plan with PP, and make modifications as needed based on the pace of product development and field test results. The Company expects the service plan to be finalized no later than June 2000, with all requisite service contracts in place at least 3 months prior to the expected release of commercial units in January 2001. ORGANIZATION GE Fuel Cell Systems (Within GEPS) The Company will be organized and operated as a stand-alone entity, with 25% owned by Plug Power, and the remaining 75% owned by GE On-Site Power, Inc., a wholly owned subsidiary of General Electric Company that is controlled by GE's Power Systems business ("GEPS"). The Company will compensate PP and GEPS for any use of parent company resources, services, facilities, etc. The Company's financial results will be consolidated by GEOSP, with Plug Power's ownership accounted for as a distribution to minority interest. The Company will have access (under a sales and services agreement) to the Energy Services Sales organization (under Ellen Smith), and the GE Global Sales division (under Del Williamson). These two groups work closely, together, with Services focused on after-market sales, and Global Sales on new turbine and generator equipment. Both groups work closely with the Company's target Customers (e.g., electric utilities, gas companies, power and gas marketers). The Company plans to Utilize the Services and Global Sales groups to introduce the Company's products to the widest Possible market of potential reseller customers. Working through the existing GEPS sales forces allows the Company to capitalize on GEPS' credibility and existing customer relationships, and avoid the cost and time-to-market delays in creating a new market channel. In addition, the Company will employ a small number of full-time sales people who will be dedicated exclusively to the Company's products. These dedicated sales people will train the GEPS sales force, and, after the Services and Global Sales groups have generated reseller interest, work with the Services/Global Sales teams to structure the specific transactions. The Company sales people will also be responsible for developing markets outside the GEPS market focus (e.g., propane distributors). GE Fuel Cell Systems (Internal) In year 1, the Company expects to have a small group of core professionals, supplemented by consultants and contract employees as needed. As PP nears commercial production, the Company add significantly to its dedicated sales force and "technical support" group. The technical support personnel will work with PP and the Company's resellers/customers to monitor alpha and testing, establish installation and operating procedures, coordinate product testing and development efforts with GE's Corporate Research and Development Center, obtain all requisite regulatory approvals and certifications, address all grid-interconnect issues, and provide technical expertise in support of the Company's sales efforts. The overall Company headcount plan is forecast as follows: Resources--1999-2003 1999 2000 2001 2002 2003 ---- ---- ---- ---- ---- Dedicated Sales 1.0 3.0 6.0 10.0 12.0 Technical Support 1.5 2.0 5.0 5.0 6.0 Marketing 2.0 3.0 4.0 5.0 5.0 General Management 1.0 1.0 1.0 1.0 1.0 Total 5.5 9.0 16.0 21.0 24.0
GE - Plug Power Fuel Cell JV - Projections 1999 2000 2001 2002 2003 ---- ---- ---- ---- ---- Unit Sales - # of Units [***] [***] [***] [***] [***] - Average Unit Size (kW) 7 7 7 7 7 - # of MW [***] [***] [***] [***] [***] - Installed Base (MW) [***] [***] [***] [***] [***] Transfer Price (= JV COGS per Unit) [***] [***] [***] [***] [***] Sales Price ($ per Unit) [***] [***] [***] 6,852 3,839 Revenues* - Unit Sales ($MM) [***] [***] [***] [***] [***] - Franchise Fees ($MM) [***] [***] [***] [***] [***] - Total ($MM) [***] [***] [***] [***] [***]
* Early year sales may be structured as a lower sales price plus a franchise fee Gross Margin ($MM) - Unit Sales [***] [***] [***] [***] [***] - Franchise Fees [***] [***] [***] [***] [***] - Total [***] [***] [***] [***] [***] - Total (% of Revenues) [***] [***] [***] [***] [***] Operating Expenses ($MM) - Sales [***] [***] [***] [***] [***] - # of Dedicated Sales People [***] [***] [***] [***] [***] - Salary (plus benefits)/ Person [***] [***] [***] [***] [***] - Sales Commission (%) [***] [***] [***] [***] [***] - Sales Commission [***] [***] [***] [***] [***] - Travel [***] [***] [***] [***] [***] - Technical Support [***] [***] [***] [***] [***] - # of People [***] [***] [***] [***] [***] - Salary (plus benefits)/ Person [***] [***] [***] [***] [***] - Marketing (people, shows, brochures, etc.) [***] [***] [***] [***] [***] - R&D (electronics, testing) [***] [***] [***] [***] [***] - G&A (office space, support) [***] [***] [***] [***] [***] - Consulting/Market Research [***] [***] [***] [***] [***] - Non-warranty service/unit replacements [***] [***] [***] [***] [***] - Total [***] [***] [***] [***] [***] - Total (% of Revenues) [***] [***] [***] [***] [***] Operating Margin ($MM) - Total [***] [***] [***] [***] [***] - Total (% of Revenues) [***] [***] [***] [***] [***]
[***] [Note: Some numbers in this table have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act] EXHIBIT 4 --------- GE COMPANY POLICIES POLICY 20.4: ETHICAL BUSINESS PRACTICES GE expects employees to use only ethical practices in selling goods and services and in representing the company to governmental authorities. This policy sets forth the ethical standards of conduct and practices which must be followed with respect to certain kinds of payments, entertainment and political contributions. GE will not authorize, involve itself in or tolerate any business practice that does not follow this policy. Scope This policy applies to employees of GE. Controlled affiliates must adopt corresponding policies. (A controlled affiliate is an affiliated company in which GE owns, directly or indirectly, more than 50% of the voting shares, or in which the power of control is possessed and exercised by or on behalf of GE.) We must encourage affiliated but non-controlled companies to follow practices consistent with this policy. We must require independent third parties to represent GE in a manner that is consistent with our commitment to integrity and the principles of this policy. Independent third parties include: consultants, agents, sales representatives, distributors, contractors and any other outside persons representing GE. Requirements General Never make or offer, directly or indirectly, anything of value (such as a bribe or kickback) to a customer or government official to influence or reward an action. A business courtesy, such as a gift, contribution or entertainment, should never be offered under circumstances that might create the appearance of an impropriety. Obey the laws of the United States and other countries that relate to matters covered by this policy. Third parties Require independent third parties to represent GE in accordance with this policy and to obey the laws of the U.S. and other countries related to matters covered by this policy. Be careful! Exercise due diligence when selecting a third party to represent GE, keeping in mind that GE and its employees may, in some circumstances, be held responsible for the actions of sales agents and other third parties. For example, if a sales agent makes an improper payment to a government official, the GE employee who works with that agent, as well as the Company, might be charged with a criminal violation of the Foreign Corrupt Practices Act if the employee a) knew about the payment (or consciously disregarded information that the payment likely took place); and b) authorized it, either explicitly or implicitly. When selecting a third party to represent GE, consider the following: Employ only reputable, qualified individuals and firms. Understand and obey any requirements governing the use of third parties (for example, funding agency restrictions, or customer, country or ministry prohibitions). Make sure that the compensation is reasonable for the services provided. Follow the implementing procedures or component guidelines for selecting and paying third parties. If you spot a "red flag" (an indication of a potential policy violation) involving a third party, make sure that it is promptly investigated and resolved. Seek the assistance of company legal counsel and management in exercising due diligence and resolving any red flags. Political contributions Obey the laws of the U.S. and host countries in promoting the company position to government authorities and in making political contributions. Political contributions by the company to U.S. federal, state or local candidates may be prohibited or regulated under the election laws. Any contribution of company funds or other assets for political purposes in the U.S. can only be made by GE's Vice President of Corporate Government Relations or Vice President of State Government Relations. . Never make or offer, directly or indirectly, a payment or anything of value (such as a bribe or kickback) to any political party, party official, or any candidate for political office of a country outside the U.S. to influence or reward any governmental act or decision. Permissible payments You may provide customers with ordinary and reasonable entertainment and gifts only if they are permitted by the law, the customer's own policies and procedures, and your business component's procedures. This policy does not prohibit lawful reimbursement for reasonable and bona fide expenditures - for example, travel and living expenses incurred by customers and directly related to the promotion of products or services, or the execution of a contract. Gifts and entertainment to officials and employees of the governments of the U.S. and other countries are highly regulated and often prohibited. Do not provide such gifts or entertainment unless you have determined that you are permitted by applicable laws and regulations, and your business component's policies and procedures to do so. The Foreign Corrupt Practices Act does allow facilitating payments. Facilitating payments are gratuities paid to officials or employees of non- U.S. governments to expedite a service or routine administrative action that these individuals ordinarily perform and to which GE is entitled under the laws of that country. This policy allows facilitating payments in some countries (but not all countries) and only to low-level officials or government employees when they are customary in those countries. Seek the advice of the National Executive or your business legal counsel before visiting a country. Make sure that these payments are clearly and accurately reflected in financial reports. Employee responsibilities Understand and keep up-to-date on the laws of the U.S. and other countries, funding agency regulations and customer requirements related to your job and each requirement of this policy. These requirements can be complex, and it is not unusual to have questions related to a transaction. If you have any questions related to matters covered by this policy, consult with business leaders, their designees, company legal counsel, component guidelines, implementing procedures or the GE National Executive in the country in which you are operating. Take the necessary steps to make sure any party acting on GE's behalf understands and agrees to follow the principles of this policy. Carefully watch for "red flags" which might indicate illegal activities or violations of GE policies. These include: a sales representative or other person representing GE or being considered to represent GE who: has been accused of improper business practices has influence on the buying decision and a reputation for bribes has a family or other relationship that could improperly influence the customer's decision approaches you near a customer's award decision and explains that he or she has a "special arrangement" with an official insists on receiving a commission payment before the customer announces the award decision a customer who suggests that a GE bid be made through a specific representative or partner any request that a commission or other payment be made in a third country or to another name a commission that seems unusually large in relation to the services provided. If these or any other signs of a possible violation come to your attention, be sure to promptly resolve your concern before proceeding with the transaction that relates to it. Resolution should include management review and should be well documented. Maintain timely, accurate and complete records of all expenditures of GE funds as spelled out in Financial Controls and Records - Policy 30.7. Learn and follow your component's guidelines for travel and living expense reimbursement, business entertainment and gifts. In addition, learn and respect the policies of customers and government agencies concerning acceptance of business entertainment and gifts. Seek assistance from your manager, company legal counsel, or other GE resources when you have questions about application of this policy. Promptly report: any concern that you may have about possible violations of this policy any concerns others may have about a possible violation of this policy any concerns about a possible request to violate this policy. You may report your concerns to a GE manager, or, if you prefer, to a company legal counsel, GE auditor, GE ombudsperson or other designated person. Your report may be written or oral, and may be anonymous. If you report a concern about this policy and the issue is not resolved, raise it with one of the other contacts listed above. Cooperate with GE investigations into concerns covered by this policy. GE employees at all levels are prohibited from taking retribution against anyone for reporting or supplying information about a policy concern. Additional Responsibilities Of Leaders Each business leader (business CEO) will set up and maintain an effective compliance program to prevent and detect violations of this policy and applicable laws. The business leader should tailor the compliance program to the specific circumstances of the business, and adopt policies and procedures, in addition to this policy, as needed. The compliance program should have the following elements: Set standards and procedures that are reasonably capable of reducing the prospect of violations of this policy and applicable laws. Assign overall responsibility for compliance to specific high-level personnel. Screen employees and agents to prevent discretionary authority from being delegated to persons who have demonstrated insensitivity to the requirements of this policy and the laws it covers. Implement educational and training programs that will enable employees to understand the basic requirements of this policy and applicable laws. Implement monitoring and auditing systems to detect violations of this policy and applicable laws. Establish and communicate a procedure for promptly reporting possible violations and concerns that protects against fear of retribution. Implement appropriate disciplinary mechanisms. Take remedial action to correct weaknesses and prevent recurrence of failures. Do not retain individuals or firms unless you are satisfied they will abide by the principles of this policy when representing GE. Pay them reasonably for services performed. Make sure the selection process includes a thorough consideration of the scope of activities, credentials, background, costs and compensation terms. Appropriate approvals should be obtained (for example, National Executive and appropriate management review). Make sure that the selection and payment process is consistent with the implementing procedures or other relevant component guidelines. Lead by example, using your own behavior as a model for all employees. Identify those persons inside and outside GE whose activities may involve issues covered by this policy. Carefully review and discuss the requirements of this policy with them and every individual or firm considered to represent GE. Make sure a program is in place to provide them with appropriate education and legal counseling on the requirements imposed by the law and this policy. Create a culture which promotes compliance, encourages employees to raise their policy questions and concerns, and prohibits retribution. Make sure employees understand that performance is never more important than compliance. Closely monitor and control business entertainment and gifts. Consult with company legal counsel in executing your responsibilities under this policy. Keep in mind that international operations may raise issues requiring familiarity with the laws and regulations of other countries. Promptly report employee concerns of possible violations of this policy according to your business' reporting procedures. . If you discover that a sales representative or other third party representing GE engages in improper business practices for other firms, you should consult with company legal counsel and take necessary remedial action. Take prompt remedial action when required. . Financial managers will make sure that accurate records are kept that show the amount and purpose of all payments. (See Financial Controls and Records - Policy 30.7) Gather feedback to evaluate and continually improve compliance with this policy. In evaluating and rewarding employees, consider their actions and judgments in promoting and complying with this policy. Each business CEO will: Review financial reports covered by this policy with the responsible financial manager. Request, as required, financial reviews of matters covered by this policy from finance managers or the Corporate Audit Staff. Review, as required, other matters covered by this policy with the responsible manager or with the Corporate Audit Staff. Review compliance concerns or possible violations of this policy with company legal counsel to determine the appropriate company response and disclosure requirements. Carefully consider the company's responsibilities under the Foreign Corrupt Practices Act in any investment decisions. Authorize the execution of any new international sales representative or sales consultant services agreement that is related to a government contract and involves commissions, contingent fees or retainer compensation greater than $200,000 (total contract value). Authorize (or designate a company officer to authorize) the execution of any international service agreement or subcontract that is greater than $2,000,000 in value and related to a government contract. Clearly delegate the responsibility for the approval of all third party agreements, government or commercial. Annually, each officer or manager reporting to a business leader (business CEO) will review compliance with this policy with his or her direct reports and provide the results of those reviews to the business leader. Periodically, the business leader will report on the results of those reviews in meetings to be scheduled by the Corporate Policy Compliance Review Board (PCRB). Penalties for violations Employees who violate the spirit or letter of this policy are subject to disciplinary action up to and including discharge. The following are examples of conduct which may result in discipline. Actions which violate this policy Requesting others to violate this policy Failure to promptly report a known or suspected policy violation Failure to cooperate in GE investigations of possible violations Retribution against another employee for reporting a policy concern Failure to demonstrate the leadership and diligence needed to ensure compliance with GE policies and applicable law. Violating this policy can also mean breaking the law and subjecting yourself or the company to criminal penalties (fines or jail sentences), or civil sanctions (damage awards or fines). The company could also lose its government contracting and defense export privileges. GE will terminate contracts with consultants, sales representatives, distributors, independent contractors and any other third parties who are unwilling or unable to represent GE in a manner consistent with this policy. Related policies: Following International Trade Controls - Policy 20.9 Working with Government Agencies - Policy 20.10 Customer Satisfaction - Policy 20.11 Avoiding Conflicts of Interest - Policy 30.5 Financial Controls and Records - Policy 30.7 Supplier Relationships - Policy 30.13 Resources: More information on matters covered by this policy is available through the Corporate Audit Staff, Corporate International Law and Policy, and company legal counsel EXHIBIT 5 --------- FORM OF CONTRIBUTION AGREEMENT (See Exhibit 10.2) EXHIBIT 6 --------- PROMISSORY NOTE --------------- $18,250,000.00 Schenectady, New York February 2, 1999 1. Payment of Principal and Interest. FOR VALUE RECEIVED, GE FUEL CELL --------------------------------- SYSTEMS, L.L.C., a Delaware limited liability company (the "Maker"), hereby promises to pay to the order of GENERAL ELECTRIC COMPANY, a New York corporation, and any subsequent holder of this Note ("Holder" or "Holders") in the manner hereinafter provided, the principal amount of Eighteen Million Two Hundred Fifty Thousand Dollars ($18,250,000.00) or such lesser amount as shall equal the aggregate unpaid principal amount of loans made by Holder to Maker under Section 5.5 of the Amended and Restated Limited Liability Company Agreement dated as of February 3, 1999, by and between GE On-Site Power, Inc., and Plug Power, L.L.C. (the "LLC Agreement"), in the form of cash disbursements (individually a "Disbursement" and collectively "Disbursements"), and to pay interest on the unpaid principal amount of each such Disbursement, for the period commencing on the date of such Disbursement until such Disbursement shall be paid in full, as follows: (a) For each Disbursement, interest will accrue from the date of such Disbursement on the unpaid balance of such Disbursement outstanding from time to time at a rate equal to the greater of the "Federal mid- term rate" in effect from time to time under Section 1274(d) of the Internal Revenue Code of 1986, as amended (the "Applicable Federal Rate"), which is 4.71% per annum on the date hereof or Holder's cost of debt which is 5.19% per annum on the date hereof (whichever is applicable shall be the "Contract Rate"). Holder shall notify Maker monthly of the Contract rate that will apply for the month then ended; (b) On each January 31, Maker will repay Holder an amount equal to the lesser of (i) the unpaid principal of all Disbursements and interest thereon, or (ii) 50% of Maker's cash available for distribution for the prior fiscal year in accordance with applicable law and provided that, following such distribution, Maker has positive cash flow from operations and the ability to continue its business without incurring additional debt; however, any principal and interest remaining unpaid after such January 31 payment date shall not be forgiven, and such unpaid interest shall also bear interest at the applicable Contract Rate from the January 1 preceding such payment date and thereafter; and (c) On December 31, 2003, Maker will repay the entire unpaid principal amount and any interest accrued but remaining unpaid and all other sums due under this Note. Interest shall be calculated on the basis of a 360-day year containing twelve 30-day months. All such payments on account of the indebtedness evidenced by this Note shall be first applied to all payments other than principal and interest due under this Note, second to interest accrued on the unpaid principal amount, and the remainder toward reduction of the unpaid principal amount. The date, amount, and interest rate of each Disbursement made by Holder to Maker, and each payment made on account of the principal thereof, shall be recorded by Holder on its books and, prior to any transfer of this Note, endorsed by Holder on the schedule attached hereto or any continuation thereof. Holder shall provide written notice to Maker upon each such disbursement. This Note is the Promissory Note referred to in Section 5.5 of the LLC Agreement and evidences the loans made by Holder thereunder. 2. Payment Information. All payments required to be made hereunder shall ------------------- be made during regular business hours to an account designated by Holder from time to time, with sufficient information to identify the source and application of such payment to this Note. All payments shall be made in currency of United States of America without presentment or surrender of this Note. Payments to Holder shall be made by transferring immediately available federal funds by bank wire or interbank transfer for the account of Holder provided, however, that any payment of principal or interest received after 2:00 p.m. New York time shall be deemed to have been received by Holder on the next business day and shall bear interest accordingly. If and so long as Holder directs Maker to make payments to a servicing agent, then payments may be made by check. Payments made by check will not be deemed made until such check has cleared and available funds for such check are received by Holder or the servicing agent. 3. Security For Note. The payment of this Note and all other sums due ----------------- Holder is secured by a Security Agreement of even date herewith between Maker and Holder, as secured party ("Security Agreement"), covering certain tangible and intangible personal property of Maker, and all proceeds thereof, accessions thereto and replacements thereof, wherever situated ("Property"), and described in the Security Agreement. Except as otherwise defined herein, all of the defined terms contained in the Security Agreement are hereby incorporated herein by express reference. 4. Interest Payable Upon Default. If there occurs an Event of Default ----------------------------- under this Note or the Security Agreement, then the unpaid principal amount of this Note, and all accrued and unpaid interest thereon shall bear interest at the lesser of either the Contract Rate plus five percent (5%) per annum compounded monthly or (ii) the highest rate allowed by applicable law ("Default Rate") from the date of expiration of any applicable cure or grace period until such time, if any, as the Event of Default is cured and this Note and the Security Agreement are reinstated as permitted by applicable law, or otherwise until such time as the unpaid principal amount of this Note and all other indebtedness evidenced by this Note are fully repaid, whichever is earlier. The additional payments called for under this paragraph 4 shall be in addition to, and shall in no way limit, any other rights and remedies provided for in this Note or the Security Agreement, as well as all other remedies provided by law. 5. Events of Default. An "Event of Default" shall exist under this Note ----------------- (a) in the event Maker shall fail to make the final payment when such payment is due; or (b) if Maker shall be dissolved. 6. Payment of Taxes and Expenses. ----------------------------- (a) Maker further promises to pay to Holder, immediately upon written notice from Holder: (i) all recordation, transfer, stamp, documentary or other fees or taxes levied on Holder (exclusive of Holder's income taxes) by reason of the making or recording of this Note, the Security Agreement, and any UCC-1 financing statement, and (ii) all intangible property taxes levied upon any Holder of this Note or secured party under the Security Agreement. (b) Maker further promises to pay to Holder, immediately upon written notice from Holder, all actual costs, expenses, disbursements, escrow fees, title charges and reasonable legal fees and expenses actually incurred by Holder and its counsel in (i) the collection, attempted collection, or negotiation and documentation of any settlement or workout of the principal amount of this Note, the interest thereon or any installment or other payment due hereunder, and (ii) any suit or proceeding whatsoever at all trial and appellate levels in regard to this Note or to protect, sustain or enforce the lien of any instrument securing this Note, including, without limitation, in any bankruptcy proceeding or judicial or nonjudicial foreclosure proceeding. It is the intent of the parties that Maker pay all expenses and reasonable attorneys' and paralegals' fees incurred by Holder as a result of Holder's entering into the loan transaction evidenced by this Note. -2- 7. Maker's Covenants. Maker agrees that (a) this instrument and the ----------------- rights and obligations of all parties hereunder shall be governed by and construed under the laws of the State of New York; (b) the obligation evidenced by this Note is an exempted transaction under the Truth-in-Lending Act, 15 U.S.C (S)1601, et seq. (1982); (c) said obligation constitutes a business loan for the -- ---- purpose of the application of any laws that distinguish between consumer loans and business loans and that have as their purpose the protection of consumers in the State of New York; (d) at the option of the Holder, the United States District Court for the Northern District of New York and any court of competent jurisdiction of the State of New York shall have jurisdiction in any action, suit or other proceeding arising out of or relating to any act taken or omitted hereunder or the enforcement of this Note or the Security Agreement, and Maker shall not assert in any such action, suit or other proceeding that it is not personally subject to the jurisdiction of the courts in (d) above, that the action, suit or other proceeding is brought in an inconvenient forum or that the venue of the action, suit or other proceeding is improper; and (e) it hereby waives any objections to venue. 8. Severability. The parties hereto intend and believe that each ------------ provision of this Note comports with all applicable local, state and federal laws and judicial decisions. However, if any provision or any portion of any provision contained in this Note is held by a court of law to be invalid, illegal, unlawful, void or unenforceable as written in any respect, then it is the intent of all parties hereto that such portion or provision shall be given force to the fullest possible extent that it is legal, valid and enforceable, that the remainder of the Note shall be construed as if such illegal, invalid, unlawful, void or unenforceable portion or provision was not contained therein, and that the rights, obligations and interests of Maker and Holder under the remainder of this Note shall continue in full force and effect. 9. Usury Laws. It is the intention of Maker and Holder to conform ---------- strictly to the usury laws now or hereafter in force in the State of New York, and any interest payable under this Note or the Security Agreement shall be subject to reduction to an amount not to exceed the maximum non-usurious amount for commercial loans allowed under the usury laws of the State of New York as now or hereafter construed by the courts having jurisdiction over such matters. In the event such interest (whether designated as interest, service charges, points, or otherwise) does exceed the maximum legal rate, it shall be (a) canceled automatically to the extent that such interest exceeds the maximum legal rate; (b) if already paid, at the option of the Holder, either be rebated to Maker or credited on the principal amount of the Note or (c) if the Note has been prepaid in full, then such excess shall be rebated to Maker. 10. Acceleration. Upon an Event of Default, Holder shall have the right, ------------ without demand or notice, to declare the entire principal amount of this Note then outstanding, all accrued and unpaid interest thereon and all other sums required under this Note or the Security Agreement to be immediately due and payable and, notwithstanding the stated maturity in this Note, all such sums declared due and payable shall thereupon become immediately due and payable. During the existence of such Event of Default, Holder may apply payments received on any amounts due under this Note or the Security Agreement as Holder may determine in its sole discretion. 11. Waivers by Maker. As to this Note, the Security Agreement, and any ---------------- other instruments securing the indebtedness, Maker and all guarantors, sureties and endorsers, severally waive all applicable exemption rights, whether under any state constitution, homestead laws or otherwise, and also severally waive diligence, valuation and appraisement, presentment for payment, protest and demand, notice of protest, demand and dishonor and diligence in collection and nonpayment of this Note and all other notices in connection with the delivery, acceptance, performance, default, or enforcement of the payment of this Note. To the extent permitted by law, Maker further waives all benefit that might accrue to Maker by virtue of any present or future laws exempting the Property, or any other property, real or personal, or the proceeds arising from any sale of any such property, from attachment, levy, or sale under execution, or providing for any stay of execution to be issued on any judgment recovered on this Note or in any action to foreclose the Security Agreement, injunction against sale pursuant to power of sale, exemption from civil process or extension of time for payment. Maker agrees that any real estate or any personalty that may be -3- levied upon pursuant to a judgment obtained by virtue of this Note, or any writ of execution issued thereon, may be sold in whole or in part in any order desired by Holder. 12. Maker Not Released. No delay or omission of Holder to exercise any of ------------------ its rights and remedies under this Note or the Security Agreement at any time following the happening of an Event of Default shall constitute a waiver of the right of Holder to exercise such rights and remedies at a later time by reason of such Event of Default or by reason of any subsequently occurring Event of Default. This Note, or any payment hereunder, may be extended from time to time by agreement in writing between Maker and Holder without in any other way affecting the liability and obligations of Maker and endorsers, if any. 13. Nonrecourse. Except as otherwise set forth in this paragraph, the ----------- liability of Maker under this Note and the Security Agreement shall be limited to and satisfied from the Property and the proceeds thereof, the rents and all other income arising therefrom, the other assets of Maker arising out of the Property which are given as collateral for the Loan, and any other collateral given in writing to Holder as security for repayment of this Note (all of the foregoing are collectively referred to as the "Loan Collateral"); provided, however, that nothing contained in this paragraph shall (a) preclude Holder from foreclosing the lien of the Security Agreement or from enforcing any of its rights or remedies in law or in equity against Maker except as stated in this paragraph, (b) constitute a waiver of any obligation evidenced by this Note or secured by the Security Agreement, (c) limit the right of Holder to name Maker as a party defendant in any action brought under this Note or the Security Agreement, (d) prohibit Holder from pursuing all of its rights and remedies against any guarantor or surety, or (e) limit the personal liability of Maker for misappropriation or misapplication of funds, fraud, waste, willful misrepresentation or willful damage to the Property. 14. Successors and Assigns. The provisions of this Note shall be binding ---------------------- upon Maker and its legal representatives, successors and assigns and shall inure to the benefit of any Holder and its successors and assigns. Holder may assign this Note to any of its wholly-owned subsidiaries. 15. Remedies Cumulative. The remedies of Holder as provided in this Note, ------------------- or in the Security Agreement, and the warranties contained herein shall be cumulative and concurrent, may be pursued singly, successively or together at the sole discretion of Holder, may be exercised as often as occasion for their exercise shall occur and in no event shall the failure to exercise any such right or remedy be construed as a waiver or release of such right or remedy. No remedy under this Note, conferred upon or reserved to Holder is intended to be exclusive of any other remedy provided in this Note or the Security Agreement or provided by law, but each shall be cumulative and shall be in addition to every other remedy given under the Security Agreement or hereunder or now or hereafter existing at law or in equity or by statute. 16. Notices. All notices, written confirmation of wire transfers and all ------- other communications with respect to this Note shall be directed as follows: if to Holder, to General Electric Company, 1 River Road, Schenectady, New York 12345, Attention: Finance Manager, Energy Services, with a copy to GE Power Systems, 1 River Road, Schenectady, New York 12345, Attention: General Counsel; if to Maker, GE Fuel Cell Systems, L.L.C., 1 River Road, Schenectady, New York 12345, Attention: President; or at such other place as Holder or Maker may from time to time designate in writing. All notices shall be in writing and shall be (a) hand-delivered, (b) sent by United States express mail or by private overnight courier, or (c) served by certified mail postage prepaid, return receipt requested, to the appropriate address set forth above. Notices served as provided in (a) and (b) shall be deemed to be effective upon delivery. Any notice served by certified mail shall be deposited in the United States mail with postage thereon fully prepaid and shall be deemed effective on the day of actual delivery as shown by the addressee's return receipt or the expiration of three (3) business days after the date of mailing, whichever is earlier in time. -4- 17. No Oral Modification. This Note may not be modified or discharged -------------------- orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, modification or discharge is sought. 18. Time. Time is of the essence with regard to the performance of the ---- obligations of Maker in this Note and each and every term, covenant and condition herein by or applicable to Maker. 19. Captions. The captions and headings of the paragraphs of this Note -------- are for convenience only and are not to be used to interpret, define or limit the provisions hereof. 20. Replacement Note. Upon receipt of evidence reasonably satisfactory to ---------------- Maker of the loss, theft, destruction or mutilation of this Note, and in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory to Maker or, in the case of any such mutilation, upon surrender and cancellation of this Note, Maker will execute and deliver to Holder in lieu thereof, a replacement note dated as of the date of this Note, identical in form and substance to this Note and upon such execution and delivery all references in the Security Agreement to this Note shall be deemed to refer to such replacement note. IN WITNESS WHEREOF, Maker has caused this Revolving Promissory Note to be duly executed on the date first written above. MAKER: GE FUEL CELL SYSTEMS, L.L.C. By: /s/ Barry Glickman ----------------------------------- Barry Glickman, President -5- SCHEDULE OF DISBURSEMENTS This Note evidences loan disbursements made to Maker under the LLC Agreement on the dates, in the principal amounts, and bearing interest at the rates set forth below, subject to the payments of principal set forth below: Principal Unpaid Date of Amount of Interest Amount Principal Notation Loan Loan Rate Paid Amount Made By ---- ---- ---- ---- ------ ------- -6- SECURITY AGREEMENT ------------------ In consideration of certain financial accommodations given by General Electric Company, a New York corporation (the "Secured Party"), GE Fuel Cell Systems, L.L.C., a Delaware limited liability company (the "Debtor"), as collateral security for the payment of that certain Promissory Note of Debtor to Secured Party of even date herewith, in the aggregate principal amount of $18,250,000.00, a copy of which is attached hereto as Exhibit "1" (the "Indebtedness"), Debtor, pursuant to the provisions of the Uniform Commercial Code of the State of New York (the "UCC") hereby grants Secured Party a security interest in and to all assets of Debtor whether now owned or hereafter acquired, including, but not limited to, all Accounts, Chattel Paper, Documents, Equipment, Fixtures, General Intangibles, Goods, Instruments, and Inventory (all as defined in the UCC), and all other tangible and intangible personal property of Debtor, and all proceeds thereof, accessions thereto and replacements thereof (the "Collateral"). Debtor hereby warrants and covenants that: 1. The security interest granted to Secured Party by Debtor shall apply to the Collateral whether or not title thereto or any part thereof shall have passed, or shall be deemed to have passed, to Debtor; Debtor is, or to the extent that this Agreement states that the Collateral is to be acquired after the date hereof, will be the owner of the Collateral free from any adverse lien, security interest or encumbrance; and Debtor will defend the Collateral against all claims and demands of all other persons at any time claiming the same or any interest therein. 2. The Collateral will be kept at the addresses designated at the conclusion of this Agreement. 3. At the request of Secured Party, Debtor will join with Secured Party in executing one or more financing statements, amendments, continuations and termination statements pursuant to the Uniform Commercial Code of the State of New York, in which Debtor is conducting business, in form satisfactory to Secured Party. 4. Debtor will not sell or offer to sell, or otherwise transfer the Collateral or any interest therein without having given Secured Party actual notice of any such sale and having received the written consent of Secured Party; provided, however, that if the Collateral is Debtor's merchandise inventory, Debtor shall be entitled to sell that portion of the Collateral which constitutes merchandise and inventory in the ordinary and usual course of business. 5. Debtor will, at all times, maintain in full force and effect insurance with respect to the Collateral against risks encompassed within the standard policy of fire insurance with extended coverage endorsement, theft and other risks as Secured Party may require, and written by such company or companies as may be satisfactory to Secured Party, such insurance to be payable to Secured Party and Debtor as their interests may appear. 6. Debtor will keep the Collateral free from any adverse lien, other than the lien specifically authorized above, security interest or encumbrance and in good order and repair and will not waste or destroy the Collateral or any part thereof (except that if the Collateral is merchandise inventory of Debtor, Debtor shall be entitled to sell that portion of the Collateral which constitutes merchandise and inventory in the ordinary and usual course of business). Secured Party may examine and inspect the Collateral at any reasonable time wherever located, provided, however, that no such inspection --------- ------- shall interfere with or inconvenience Debtor in the operations of its business. 7. Debtor will pay promptly when due all taxes and assessments upon the Collateral or for its use and operation. At its option, upon reasonable notice by Secured Party, and upon the failure of Debtor to comply with the terms set forth herein, Secured Party may discharge taxes, liens, security interests, or other encumbrances at any time levied or placed on the Collateral, may pay for insurance on the Collateral and may pay for the maintenance and preservation of the Collateral. Debtor agrees to reimburse Secured Party on demand for any payment made or any expense incurred by Secured Party pursuant to the foregoing authorization, together with interest thereon at the highest rate permitted by law. 8. Until default, Debtor may have possession of the Collateral and use it in any lawful manner not inconsistent with this Agreement. 9. Debtor shall be in default under this Agreement upon the happening of any of the following events or conditions (each an "Event of Default"): (a) Failure of Debtor to make final payment of the Promissory Note when such payment is due. (b) Dissolution of Debtor. Upon an Event of Default and at any time thereafter, Secured Party may declare the indebtedness secured hereby immediately due and payable and shall have the remedies of a secured party under the Uniform Commercial Code of the State of New York. 10. Should a lawsuit be brought to enforce the terms hereof or for any dispute arising out of this transaction, then the issues in any such action shall be determined pursuant to the laws of the State of New York, without regard to conflict of laws provisions thereof, and the parties hereto hereby consent to jurisdiction and venue in the courts of Schenectady County, New York, or the United States District Court for the Northern District of New York, at the option of Secured Party. The substantially prevailing party in such a lawsuit shall be entitled to recover from the substantially non-prevailing party its reasonable expenses, court costs, including taxed and untaxed costs, and reasonable attorneys' fees, whether suit be brought or not (jointly referred as to "Expenses"). As used herein, Expenses include expenses incurred in any appellate or bankruptcy proceeding. All such Expenses shall bear interest at the highest rate allowable under the laws of the State of New York from the date the substantially prevailing party pays such Expenses until the date the substantially non-prevailing party repays such Expenses. 11. No waiver by Secured Party of any Event of Default shall operate as a waiver of any other Event of Default or of the same Event of Default on a future occasion. 12. All rights of Secured Party hereunder shall inure to the benefit of its successors or assigns; and all obligations of Debtor shall bind Debtor's successors and assigns. Secured Party may assign this Security Agreement to one of its wholly-owned affiliates. 13. Secured Party acknowledges that the Collateral granted by Debtor shall not include any patents, trademarks, trade names, inventions, copyrights, know- how, trade secrets, licensed rights, or other intellectual property rights of any Member of Debtor, including any intellectual property now in existence or hereafter acquired or developed by any such Member. -2- IN WITNESS WHEREOF, Debtor and Secured Party have caused this instrument to be executed in duplicate by their authorized representatives this ____ day of February, 1999. Debtor: Secured Party: GE FUEL CELL SYSTEMS, L.L.C. GENERAL ELECTRIC COMPANY By: /s/ Barry Glickman By: /s/ Ricardo Artigas ------------------------------- ------------------------------------ Barry Glickman, President Ricardo Artigas President and CEO, GE Energy Service Address: 1 River Road Schenectady, New York 12345 -3- EXHIBIT 7 --------- FORM OF GE TRADEMARK AND TRADE NAME AGREEMENT (See Exhibit 10.3) EXHIBIT 8 --------- FORM OF PLUG POWER TRADEMARK AGREEMENT (See Exhibit 10.4) EXHIBIT 9 --------- FORM OF DISTRIBUTOR AGREEMENT (See Exhibit 10.5) EX-10.3 3 TRADEMARK & TRADENAME AGREEMENT CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. Exhibit 10.3 GE TRADEMARK AND TRADE NAME AGREEMENT This Agreement is dated and effective as of February 2, 1999, between GENERAL ELECTRIC COMPANY ("LICENSOR"), a New York corporation, and GE FUEL CELL SYSTEMS, LLC ("LICENSEE"), a Delaware limited liability company. A. Whereas, LICENSOR owns, directly or indirectly, in excess of fifty percent (50%) of the membership interests of LICENSEE and has the right or power to exercise effectively all of the rights or powers of ownership therein; B. Whereas, LICENSOR owns the LICENSED MARKS (hereinafter defined) and LICENSOR has common law and/or statutory rights therein, including applications to register and registrations therefor in certain countries throughout the world for various goods and services; C. Whereas, LICENSEE desires to use the LICENSED MARKS on or in connection with PRODUCTS, PRE-COMMERCIAL UNITS and SERVICES (each hereinafter defined); D. Whereas, LICENSOR is willing to grant licenses to LICENSEE to use the LICENSED MARKS on PRODUCTS and PRE-COMMERCIAL UNITS marketed and sold by or on behalf of LICENSEE, and for SERVICES performed by or on behalf of LICENSEE, in strict accordance with STANDARDS OF QUALITY (hereinafter defined); E. Whereas, LICENSEE has adopted the corporate name "GE Fuel Cell Systems, LLC", which corporate name contains LICENSOR's trademark and trade name, "GE" ("LICENSED NAME"). F. Whereas, LICENSOR is willing to permit the use of the LICENSED MARKS and the LICENSED NAME under the terms and conditions hereinafter set forth. NOW THEREFORE, the parties agree as follows: ARTICLE I DEFINITIONS The following terms as used in this Agreement shall have the meaning set forth in this Article I: A. The term "LICENSED MARKS" shall mean and be limited to the trademarks, service marks, and logos shown in Exhibit A attached hereto. B. The terms "PRODUCTS", "PRE-COMMERCIAL UNITS", and "SERVICES" shall have the respective meanings set forth in the Distributor Agreement between LICENSEE and Plug Power, L.L.C., of even date herewith (the "Distributor Agreement"). C. The term "STANDARDS OF QUALITY" shall mean and be limited to the specifications for PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES set forth in the Distributor Agreement. D. The term "LICENSED TERRITORY" shall mean and be limited to every country, province, territory, or other principality in the world, except the states of Michigan, Indiana, Ohio and Illinois in the United States of America while Edison Development Corporation has exclusive rights to market and sell products similar to Products and provide services similar to Services therein. In the event that Edison Development Corporation ("EDC") shall lose any of its rights to market and sell similar products and provide similar services in the States of Michigan, Indiana, Ohio and Illinois (the "EDC Territory"), this definition of "LICENSED TERRITORY" shall be expanded to include the EDC Territory. ARTICLE II LICENSE GRANT A. LICENSOR hereby grants to LICENSEE, during the term of this Agreement, a royalty-bearing, non-exclusive license to use the LICENSED MARKS in the LICENSED TERRITORY on or in connection with the PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES, in strict accordance with the STANDARDS OF QUALITY. LICENSEE is authorized to use the LICENSED MARKS only on or in connection with PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES, including use in packaging, labeling, general publicity, letterheads, signs and other forms of advertising, instruction books, and other literature relating to PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES. In no event, however, shall LICENSEE use the LICENSED MARKS as part of a trade name or authorize others to do so, except as may be expressly provided for in this Agreement. B. LICENSOR hereby grants to LICENSEE, during the term of this Agreement, a worldwide, non-exclusive license to use the LICENSED NAME in its corporate name and trade names. C. Notwithstanding the foregoing grants of license, LICENSEE acknowledges that the use of the LICENSED MARKS and the LICENSED NAME in the United Kingdom and the Republic of Ireland may be limited or prohibited in connection with some or all of the PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES as a result of prior agreements entered into by and between LICENSOR and The General Electric Company, p.l.c., an unrelated British company of similar name. LICENSOR shall provide LICENSEE, and LICENSEE agrees to fully comply with, all guidelines adopted from time to time by LICENSOR for the purpose of distinguishing its trademarks, service marks, trade names, and the like, and preventing confusion with any other entity, including The General Electric Company, p.l.c., and its affiliates and licensees. -2- ARTICLE III EXAMINATION OF PRODUCTS, PRE-COMMERCIAL UNITS, AND SERVICES A. LICENSEE shall use the LICENSED MARKS only on and in connection with PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES, and then only to the extent that such use is in strict accordance with the STANDARDS OF QUALITY. B. LICENSOR or its authorized representative shall have the right at any time or times to conduct during regular business hours an examination of LICENSEE's manner of marketing and selling PRODUCTS and PRE-COMMERCIAL UNITS and performing SERVICES under the LICENSED MARKS and of the facilities where PRODUCTS and PRE-COMMERCIAL UNITS are marketed and sold and SERVICES are performed. LICENSEE shall furnish to LICENSOR, from time to time as requested, representative samples of PRODUCTS and PRE-COMMERCIAL UNITS to which it affixes the LICENSED MARKS and representative samples showing all other uses of the LICENSED MARKS by LICENSEE. If, at any time, PRODUCTS, PRE-COMMERCIAL UNITS, or SERVICES sold or performed under the LICENSED MARKS by LICENSEE fail, in the sole opinion of LICENSOR, to conform to any of the required STANDARDS OF QUALITY or any other requirement in this agreement, and LICENSOR notifies LICENSEE of such failure, LICENSEE shall promptly cease marketing and performing such non- conforming PRODUCTS, PRE-COMMERCIAL UNITS and SERVICES. ARTICLE IV USE OF THE LICENSED MARKS AND LICENSE NAME A. LICENSEE shall comply with LICENSOR's written guidelines and rules provided to LICENSEE from time to time by LICENSOR with respect to the appearance and manner of use of the LICENSED MARKS and the LICENSED NAME. Any form of use of the LICENSED MARKS and the LICENSED NAME not specifically provided for by such guidelines and rules shall be adopted by LICENSEE only upon prior approval in writing by LICENSOR. Representative specimens showing the use of the LICENSED MARK and LICENSED NAME by LICENSEE shall be sent to LICENSOR from time to time upon request by LICENSOR. LICENSEE specifically agrees that the LICENSED NAME contained in the corporate name and trade names will not appear in any type face differing from, or in a size, color or emphasis differing from, the other words and elements of the corporate name and trade names. B. LICENSEE shall comply with all applicable laws and regulations, including those pertaining to the proper use and designation of trademarks, corporate names and trade names in the LICENSED TERRITORY and pertaining to the sale of PRODUCTS and PRE-COMMERCIAL UNITS and the rendering of SERVICES in the LICENSED TERRITORY. C. LICENSEE shall immediately cease use of the LICENSED MARKS and/or any corporate name or trade name containing the LICENSED NAME upon notice from LICENSOR that, in the sole opinion of LICENSOR, such use of the LICENSED MARKS or the LICENSED NAME (i) is in violation of LICENSOR's guidelines, rules, or STANDARDS OF QUALITY, or (ii) results or is likely to result in an adverse claim against either LICENSOR or LICENSEE by a third party. -3- D. If, in the sole discretion of LICENSOR, it is required or advisable for the purpose of making this Agreement enforceable, or for the purpose of maintaining, enhancing, or protecting LICENSOR's rights in the LICENSED MARKS or the LICENSED NAME, to record this Agreement or to enter LICENSEE as registered or authorized user of the LICENSED MARKS or the LICENSED NAME, LICENSOR will attend (at LICENSEE's expense) to such recording or entry. LICENSEE will execute and deliver to LICENSOR such additional instruments or documentation as LICENSOR may reasonably request, including without limitation execution and delivery of substitute or short-form license agreements, with terms consistent with this Agreement, for recordation or registration in specified countries in the event that this Agreement shall be deemed to be unsuitable for recordation or entry in such countries. The terms and conditions of this Agreement (and not the terms and conditions of such substitute or short-form license agreements entered into for recording or entry purposes) shall be binding between the parties throughout the world and shall govern and control any controversy that should arise with respect to each party's rights and obligations hereunder; provided, however, -------- ------- that if specific terms and conditions of any such substitute or short-form agreement differ from the comparable terms and conditions of this Agreement and enforcement of the comparable terms and conditions of this Agreement pursuant to this provision either would be improper under the laws of the applicable country or would adversely affect LICENSOR's rights in the LICENSED MARKS and LICENSED NAME in such country, then the specific terms and conditions of the substitute or short-form agreement shall be controlling in such country. E. LICENSEE shall supply LICENSOR, with such information concerning the use of the LICENSED MARKS and the LICENSED NAME by LICENSEE on or in connection with the PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES as LICENSOR may reasonably request to aid LICENSOR in the acquisition, maintenance, and renewal of registrations of the LICENSED MARKS, to record this Agreement and to enter LICENSEE as a registered or authorized user of the LICENSED MARKS, or for any other purpose. ARTICLE V OWNERSHIP AND VALIDITY OF LICENSED MARKS AND LICENSED NAME A. LICENSEE admits the validity, and LICENSOR's ownership, of the LICENSED MARKS and the LICENSED NAME and agrees that any and all rights that might be acquired by the use of the LICENSED MARKS or the LICENSED NAME by LICENSEE shall inure to the sole benefit of LICENSOR. LICENSEE admits and agrees that, as between the parties, LICENSEE has been extended only a mere permissive right to use the LICENSED MARKS and LICENSED NAME as provided in this Agreement which is not coupled with any ownership interest. B. Other than as expressly set forth in this Agreement, LICENSEE further agrees not to use or file any application to register, in any class and in any country, any trademarks, service marks, trade names, or corporate names resembling, similar to, or containing, in whole or in part, the LICENSED MARKS or the LICENSED NAME. Whenever the attention of LICENSEE is called by LICENSOR to any such confusion or risk of confusion, LICENSEE agree to take appropriate steps immediately to remedy or avoid such confusion or risk of confusion. -4- C. LICENSEE shall give LICENSOR notice of any known or presumed infringements of the LICENSED MARKS or unauthorized use of the LICENSED NAME by others, and LICENSEE shall render LICENSOR full cooperation for the protection of the LICENSE MARKS and the LICENSED NAME. LICENSOR shall have and retain all rights to bring all actions and proceedings in connection with infringement or unauthorized use of the LICENSED MARKS and LICENSED NAME at its sole discretion, and LICENSEE shall have no rights to make any such claims or bring any actions or proceedings, whether in its own name or on behalf of LICENSOR, without the express prior written consent of LICENSOR. If LICENSOR decides to enforce its rights in the LICENSED MARKS or the LICENSED NAME against an infringer, all costs incurred and recoveries made shall be for the account of LICENSOR. ARTICLE VI ROYALTIES AND REPORTS A. LICENSEE shall pay LICENSOR royalties at the rate of [***] of the net selling price of PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES sold or other disposed of or performed by a LICENSEE under one or more of the LICENSED MARKS. B. The term "net selling price" for the purpose of computing royalties means LICENSEE's gross invoice price for such PRODUCTS, PRE-COMMERCIAL UNITS, or SERVICES, less deduction, to the extent included in the gross invoice price, of regular trade and quantity discounts, insurance, shipping, sales taxes and return credits. PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES shall be considered to be sold when billed, except that upon any termination or expiration of this Agreement all SERVICES performed, and all shipments of PRODUCTS and PRE-COMMERCIAL UNITS made, on or prior to the date of such expiration or termination which have not been billed prior thereto shall be considered to have been sold (and therefore subject to royalty), Where PRODUCTS, PRE-COMMERCIAL UNITS, or SERVICES are not sold, but are otherwise disposed of or performed, the net selling price of such PRODUCTS, PRE-COMMERCIAL UNITS, or SERVICES shall be the net selling price of products or services of like kind and quality being offered for sale by LICENSEE or, in the event that LICENSEE is not offering such similar products or services, the net selling price that would reasonably be anticipated by LICENSOR in the event that such PRODUCTS, PRE-COMMERCIAL UNIT, or SERVICES where being offered by LICENSEE. The term "otherwise disposed of or performed" as used herein shall refer to (i) PRODUCTS or PRE-COMMERCIAL UNITS put into use by LICENSEE for any purpose other than routine testing (ii) PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES not sold but otherwise delivered to, or performed for, other regardless of the basis of compensation, if any, and (iii) PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES sold to others for compensation which is less than the compensation which be paid by a willing unaffiliated buyer to a willing unaffiliated seller in an arm's length transaction. In order to assure to LICENSOR the full royalty payments contemplated in this Agreement, LICENSEE agrees that, in the event that any PRODUCTS, PRE-COMMERCIAL UNITS, or SERVICES for which royalties are payable shall be sold for resale to a party that is affiliated with LICENSEE (or to and through a series of such affiliated parties), the royalties to be paid with respect to such PRODUCTS, PRE-COMMERCIAL UNITS, or SERVICES shall be computed upon the net selling price at which such PRODUCTS, PRE-COMMERCIAL UNITS, or SERVICES are finally sold to a non-affiliated party. CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. -5- C. LICENSEE agrees to make written reports to LICENSOR quarterly within thirty (30) days after the first days of each January, April, July, and October during the term of this Agreement, and effective as of such dates, stating in each such report the description and aggregate net selling prices of PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES sold or otherwise disposed of or performed during the preceding three (3) calendar months and upon which royalties are payable hereunder. The first such report shall include all such PRODUCTS, PRE- COMMERCIAL UNITS, and SERVICES sold or otherwise disposed of or performed between the effective date of this Agreement and the date of such first report. LICENSEE also agrees to make a written report to LICENSOR within thirty (30) days after any expiration or termination of this Agreement, stating in such report the description and aggregate net selling prices of PRODUCTS, PRE- COMMERCIAL UNITS, and SERVICES sold or otherwise disposed of or performed and upon which royalties are payable hereunder, but which have not been previously reported to LICENSOR. D. Concurrently with the making of each report pursuant to Paragraph VI.C. hereof, LICENSEE shall pay to LICENSOR royalties at the rate specified by Paragraph VI.A. hereof on all PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES included therein. All payments to be made under this Agreement shall be made in the City of New York, State of New York, U.S.A. in United States Dollars by electronic transfer to an account designated by LICENSOR. Where the provisions of this Agreement require the conversion into United States Dollars of an amount initially computed in the currency of another country, the amount of United States Dollars payable under this Agreement shall be determined on the basis of the applicable exchange rate quoted by The Wall Street Journal, Eastern Edition, most recently prior to the date each such payment is made or due, whichever is earlier. If no exchange rate is quoted for any period, LICENSOR shall determine the rate in accordance with an alternative LICENSOR deems reasonable. E. LICENSEE shall keep records, in sufficient detail to enable the royalties payable hereunder by LICENSEE to be determined, for at least a period of two years following the expiration or termination of this Agreement. LICENSEE shall permit its books and records to be examined from time to time upon reasonable written notice to the extent necessary to verify the reports provided for hereunder, such examination to be made at the expense of LICENSOR by any auditor appointed by LICENSOR who shall be acceptable to LICENSEE, or, at the option and expense of LICENSEE, by a certified independent accountant appointed by LICENSOR and approved by LICENSEE, which approval shall not be unreasonably withheld. ARTICLE VII TERMINATION A. Until terminated pursuant to any provision of this Article VII, this Agreement shall have a term of five (5) years from its effective date and shall thereafter be automatically renewed from year to year for one (1) year terms each commencing upon the expiration of the previous term. This Agreement may be terminated at the end of any such term by either LICENSOR or LICENSEE giving notice of termination at least ninety (90) days prior to the expiration of said term. Notwithstanding the foregoing, this Agreement shall automatically terminate without further notice in the event that the Distributor Agreement terminates without being replaced by another such agreement between the parties thereto. -6- B. This Agreement shall automatically terminate without further notice on the date that LICENSOR ceases to own, directly or indirectly, in excess of fifty percent (50%) of the outstanding voting securities or other membership interests of LICENSEE or ceases to have the right and power to exercise effectively all of the rights and powers of ownership therein. C. This Agreement shall terminate as to a particular country with notice on a date established by either LICENSOR or LICENSEE if a controlling substitute or short-form agreement is required in such country pursuant to Paragraph IV.D. hereof and such controlling replacement agreement contains provisions unacceptable to the party giving notice hereunder. D. In the event LICENSEE does not comply with any provisions of this Agreement and LICENSOR elects to give LICENSEE written notice of such non- compliance, LICENSEE shall have twenty (20) days from the receipt of such notice to remedy such non-compliance. If such non-compliance is not remedied within said twenty (20) days, LICENSOR shall have the right to terminate this Agreement at any time thereafter by giving LICENSEE written notice of the effective date of such termination. E. Upon any termination of this Agreement for any reason, LICENSEE agrees to cease and discontinue completely further use of the LICENSED MARKS and the LICENSED NAME; provided, however, that LICENSEE shall have a period of three (3) months from the date of such termination to (i) fill any outstanding orders for PRODUCTS, PRE-COMMERCIAL UNITS, or SERVICES placed prior to the effective date of termination (provided, however, such terminal use shall comply with the other provisions of this Agreement) (ii) change its corporate name and trade names to exclude the LICENSED NAME therefrom. At the expiration of such three (3) month period, LICENSEE shall have no further right to use the LICENSED MARKS and LICENSED NAME, or any mark or name the same as, substantially similar to, or likely to cause confusion with the LICENSED MARKS and LICENSED NAME. F. The following provisions of this Agreement shall survive any termination: Paragraph IV.D., Paragraph IV.E., Paragraph V.A., Paragraph V.B., Paragraph V.C. Article VI, Paragraph VII.E., Paragraph VII.F, and Paragraphs VIII.A., C., D., E., and F. ARTICLE VIII MISCELLANEOUS PROVISIONS A. LICENSEE shall fully indemnify and hold harmless LICENSOR against any and all claims, losses, damages, expenses or liability asserted against or suffered by LICENSOR and arising out of or relating to this Agreement or the sale or disposition of PRODUCTS or PRE-COMMERCIAL UNITS, or performance of SERVICES, by LICENSEE under the LICENSED MARKS or the conduct of business activities by LICENSEE under the LICENSED NAME, whether or not such PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES conform to the required STANDARDS OF QUALITY and whether or not LICENSOR has specifically approved sale of PRODUCTS or PRE- COMMERCIAL UNITS or the performance of SERVICES or the conduct of the business activities under the LICENSED NAME. B. This Agreement or any rights hereunder may not be assigned or otherwise transferred or extended by LICENSEE to any party including without limitation subsidiaries and affiliates of LICENSEE -7- without the written consent of LICENSOR, and any attempted assignment, transfer or extension without such consent shall be null and void. C. Any notices or requests with reference to this Agreement shall be in writing and shall be directed by one party to the other at its respective address as follows: LICENSOR GENERAL ELECTRIC COMPANY Attention: General Counsel One River Road Schenectady, NY 12345 LICENSEE GE FUEL CELL SYSTEMS, LLC Attention: President One River Road Schenectady, NY 12345 Any party may change its address to which notices or requests shall be directed by notice to the other party, but until such change of address has been received, any notices or requests sent to the above addresses shall be effective upon transmittal and shall be considered as having been received. D. This instrument contains the entire agreement between the parties hereto regarding the use of the LICENSED MARKS and the LICENSED NAME, and this Agreement supersedes and cancels all previous, understandings or agreements in regard to the subject matter hereof. This Agreement may not be released or modified in any manner, orally or otherwise, except by an instrument in writing signed by duly authorized representatives of the parties hereto. E. This Agreement shall be governed by the laws of the State of New York, United States of America, without regard to its rules regarding the conflict of laws. F. Failure by LICENSOR at any time to enforce or require strict compliance with any provision of this Agreement shall not affect or impair that provision in any way or the rights of LICENSOR to avail itself of the remedies it may have in respect of any subsequent breach of that or any other provision. -8- IN WITNESS WHEREOF, LICENSOR and LICENSEE have caused this instrument to be executed in duplicate by their duly authorized representatives as of the date first written above. GENERAL ELECTRIC COMPANY ATTEST: /s/ illegible /s/ Ronald E. Myrick _________________________________ By: ___________________________________ Ronald E. Myrick Name: _________________________________ General Patent Counsel Title: ________________________________ GE FUEL CELL SYSTEMS, L.L.C. ATTEST: /s/ Barry Glickman _________________________________ By: ___________________________________ Barry Glickman, President -9- EXHIBIT A LICENSED MARK REGISTRATION NO. ------------- ---------------- [GENERAL ELECTRIC LOGO APPEARS HERE] _______________ -10- EX-10.4 4 TRADEMARK AGREEMENT DATED FEBRUARY 2, 1999 CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. EXHIBIT 10.4 PLUG POWER TRADEMARK AGREEMENT This Agreement is dated and effective as of February 2, 1999, between PLUG POWER, L.L.C. ("LICENSOR"), a Delaware limited liability company, and GE FUEL CELL SYSTEMS, LLC ("LICENSEE"), a Delaware limited liability company. A. Whereas, LICENSOR owns the LICENSED MARKS (hereinafter defined) and LICENSOR has common law and/or statutory rights therein, including applications to register and registrations therefor in certain countries throughout the world for various goods and services; C. Whereas, LICENSEE desires to use the LICENSED MARKS on or in connection with PRODUCTS, PRE-COMMERCIAL UNITS and SERVICES (each hereinafter defined); D. Whereas, LICENSOR is willing to grant licenses to LICENSEE to use the LICENSED MARKS on PRODUCTS and PRE-COMMERCIAL UNITS marketed and sold by or on behalf of LICENSEE, and for SERVICES performed by or on behalf of LICENSEE, in strict accordance with STANDARDS OF QUALITY (hereinafter defined); E. Whereas, LICENSEE has adopted the corporate name "GE Fuel Cell Systems, LLC". F. Whereas, LICENSOR is willing to permit the use of the LICENSED MARKS under the terms and conditions hereinafter set forth. NOW THEREFORE, the parties agree as follows: ARTICLE I DEFINITIONS The following terms as used in this Agreement shall have the meaning set forth in this Article I: A. The term "LICENSED MARKS" shall mean and be limited to the trademarks, service marks, and logos shown in Exhibit A attached hereto, as such exhibit may be modified by LICENSOR, from time to time, in its sole discretion. B. The terms "PRODUCTS", "PRE-COMMERCIAL UNITS", and "SERVICES" shall have the respective meanings set forth in the Distributor Agreement between LICENSEE and LICENSOR, of even date herewith (the "Distributor Agreement"). C. The term "STANDARDS OF QUALITY" shall mean and be limited to the specifications for PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES set forth in the Distributor Agreement. D. The term "LICENSED TERRITORY" shall mean and be limited to every country, province, territory, or other principality in the world, except the states of Michigan, Indiana, Ohio and Illinois in the United States of America while Edison Development Corporation has exclusive rights to market and sell products similar to Products and provide services similar to Services therein. In the event that Edison Development Corporation ("EDC") shall lose any of its rights to market and sell similar products and provide similar services in the States of Michigan, Indiana, Ohio and Illinois (the "EDC Territory"), this definition of "LICENSED TERRITORY" shall be expanded to include the EDC Territory. ARTICLE II LICENSE GRANT A. LICENSOR hereby grants to LICENSEE, during the term of this Agreement, a royalty-bearing, non-exclusive license to use the LICENSED MARKS in the LICENSED TERRITORY on or in connection with the PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES, in strict accordance with the STANDARDS OF QUALITY. LICENSEE is authorized to use the LICENSED MARKS only on or in connection with PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES, including use in packaging, labeling, general publicity, letterheads, signs and other forms of advertising, instruction books, and other literature relating to PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES. In no event, however, shall LICENSEE use the LICENSED MARKS as part of a trade name or authorize others to do so, except as may be expressly provided for in this Agreement. B. LICENSEE shall have the right to sub-license the use of the LICENSED MARKS to third parties with which LICENSEE enters into authorized written sub- contracts for the marketing, sale, and resale of PRODUCTS and PRE-COMMERCIAL UNITS and the provision of SERVICES, subject to the terms and conditions of this Agreement and the Distributor Agreement. ARTICLE III EXAMINATION OF PRODUCTS, PRE-COMMERCIAL UNITS, AND SERVICES A. LICENSEE shall use the LICENSED MARKS only on and in connection with PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES, and then only to the extent that such use is in strict accordance with the STANDARDS OF QUALITY. B. LICENSOR or its authorized representative shall have the right at any time or times to conduct during regular business hours an examination of LICENSEE's manner of marketing and selling PRODUCTS and PRE-COMMERCIAL UNITS and performing SERVICES under the LICENSED MARKS and of the facilities where PRODUCTS and PRE-COMMERCIAL UNITS are marketed and sold and SERVICES are performed. LICENSEE shall furnish to LICENSOR, from time to time as requested, representative samples of PRODUCTS and PRE-COMMERCIAL UNITS to which it affixes the LICENSED MARKS and representative samples showing all other uses of the LICENSED MARKS by LICENSEE. If, at any time, PRODUCTS, PRE-COMMERCIAL UNITS, or SERVICES sold or performed under the LICENSED MARKS by LICENSEE fail, in the sole opinion of LICENSOR, to conform to any of the required STANDARDS OF QUALITY or any other requirement in this agreement, and LICENSOR notifies LICENSEE of such failure, LICENSEE shall promptly cease marketing and performing such non- conforming PRODUCTS, PRE-COMMERCIAL UNITS and SERVICES. -2- ARTICLE IV USE OF THE LICENSED MARKS A. LICENSEE shall comply with LICENSOR's written guidelines and rules provided to LICENSEE from time to time by LICENSOR with respect to the appearance and manner of use of the LICENSED MARKS. Any form of use of the LICENSED MARKS not specifically provided for by such guidelines and rules shall be adopted by LICENSEE only upon prior approval in writing by LICENSOR. Representative specimens showing the use of the LICENSED MARK by LICENSEE shall be sent to LICENSOR from time to time upon request by LICENSOR. B. LICENSEE shall comply with all applicable laws and regulations, including those pertaining to the proper use and designation of trademarks, corporate names and trade names in the LICENSED TERRITORY and pertaining to the sale of PRODUCTS and PRE-COMMERCIAL UNITS and the rendering of SERVICES in the LICENSED TERRITORY. C. LICENSEE shall immediately cease use of the LICENSED MARKS upon notice from LICENSOR that, in the sole opinion of LICENSOR, such use of the LICENSED MARKS (i) is in violation of LICENSOR's guidelines, rules, or STANDARDS OF QUALITY, or (ii) results or is likely to result in an adverse claim against either LICENSOR or LICENSEE by a third party. D. If, in the sole discretion of LICENSOR, it is required or advisable for the purpose of making this Agreement enforceable, or for the purpose of maintaining, enhancing, or protecting LICENSOR's rights in the LICENSED MARKS, to record this Agreement or to enter LICENSEE as registered or authorized user of the LICENSED MARKS, LICENSOR will attend (at LICENSEE's expense) to such recording or entry. LICENSEE will execute and deliver to LICENSOR such additional instruments or documentation as LICENSOR may reasonably request, including without limitation execution and delivery of substitute or short-form license agreements, with terms consistent with this Agreement, for recordation or registration in specified countries in the event that this Agreement shall be deemed to be unsuitable for recordation or entry in such countries. The terms and conditions of this Agreement (and not the terms and conditions of such substitute or short-form license agreements entered into for recording or entry purposes) shall be binding between the parties throughout the world and shall govern and control any controversy that should arise with respect to each party's rights and obligations hereunder; provided, however, that if specific -------- ------- terms and conditions of any such substitute or short-form agreement differ from the comparable terms and conditions of this Agreement and enforcement of the comparable terms and conditions of this Agreement pursuant to this provision either would be improper under the laws of the applicable country or would adversely affect LICENSOR's rights in the LICENSED MARKS in such country, then the specific terms and conditions of the substitute or short-form agreement shall be controlling in such country. E. LICENSEE shall supply LICENSOR with such information concerning the use of the LICENSED MARKS by LICENSEE on or in connection with the PRODUCTS, PRE- COMMERCIAL UNITS, and SERVICES as LICENSOR may reasonably request to aid LICENSOR in the acquisition, maintenance, and renewal of registrations of the LICENSED MARKS, to record this Agreement and to enter LICENSEE as a registered or authorized user of the LICENSED MARKS, or for any other purpose. -3- ARTICLE V OWNERSHIP AND VALIDITY OF LICENSED MARKS A. LICENSEE admits the validity, and LICENSOR's ownership, of the LICENSED MARKS and agrees that any and all rights that might be acquired by the use of the LICENSED MARKS by LICENSEE shall inure to the sole benefit of LICENSOR. LICENSEE admits and agrees that, as between the parties, LICENSEE has been extended only a mere permissive right to use the LICENSED MARKS as provided in this Agreement which is not coupled with any ownership interest. B. Other than as expressly set forth in this Agreement, LICENSEE further agrees not to use or file any application to register, in any class and in any country, any trademarks, service marks, trade names, or corporate names resembling, similar to, or containing, in whole or in part, the LICENSED MARKS. Whenever the attention of LICENSEE is called by LICENSOR to any such confusion or risk of confusion, LICENSEE agree to take appropriate steps immediately to remedy or avoid such confusion or risk of confusion. C. LICENSEE shall give LICENSOR notice of any known or presumed infringements of the LICENSED MARKS by others, and LICENSEE shall render LICENSOR full cooperation for the protection of the LICENSE MARKS. LICENSOR shall have and retain all rights to bring all actions and proceedings in connection with infringement or unauthorized use of the LICENSED MARKS at its sole discretion, and LICENSEE shall have no rights to make any such claims or bring any actions or proceedings, whether in its own name or on behalf of LICENSOR, without the express prior written consent of LICENSOR. If LICENSOR decides to enforce its rights in the LICENSED MARKS against an infringer, all costs incurred and recoveries made shall be for the account of LICENSOR. ARTICLE VI ROYALTIES AND REPORTS A. LICENSEE shall pay LICENSOR royalties at the rate of [***] of the net selling price of PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES sold or otherwise disposed of or performed by LICENSEE under one or more of the LICENSEE MARKS. B. The term "net selling price" for the purpose of computing royalties means LICENSEE's gross invoice price for such PRODUCTS, PRE-COMMERCIAL UNITS, or SERVICES, less deduction, to the extent included in the gross invoice price, of regular trade and quantity discounts, insurance, shipping, sales taxes and return credits. PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES shall be considered to be sold when billed, except that upon any termination or expiration of this Agreement, all SERVICES performed, and all shipments of PRODUCTS and PRE-COMMERICAL UNITS made, on or prior to the date of such expiration or termination which have not been billed prior thereto shall be considered to have been sold (and therefore subject to royalty). Where PRODUCTS, PRE-COMMERCIAL UNITS, or SERVICES are not sold, but are otherwise disposed of or performed, the net selling price of such PRODUCTS, PRE-COMMERICAL UNITS, or SERVICES shall be the net selling price of products or services of like kind and quality being offered for sale by LICENSEE or, in the event that LICENSEE is not offering such similar products or services, the net selling price that would reasonably be anticipated by LICENSOR in the event that such PRODUCTS, PRE-COMMERCIAL UNITS, or SERVICES were being offered by LICENSEE. The term "otherwise disposed of or performed" as used herein shall refer to (i) PRODUCTS or PRE-COMMERCIAL UNITS put into use by LICENSEE for any purpose other than routine testing, (ii) PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES not sold but otherwise delivered to, or performed for, others regardless of the basis of compensation, if any, and (iii) PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES sold to others for compensation which is less than the compensation which be paid by a willing unaffiliated buyer to a willing unaffiliated seller in an arm's length transaction. In order to assure to LICENSOR the full royalty payments contemplated in this Agreement, LICENSEE agrees that, in the event that any PRODUCTS, PRE-COMMERCIAL UNITS, or SERVICES for which royalties are payable shall be sold for resale to a party that is affiliated with LICENSEE (or to and through a series of such affiliated parties), the royalties to be paid with respect to such PRODUCTS, PRE-COMMERCIAL UNITS, or SERVICES shall be computed upon the net selling price at which such PRODUCTS, PRE-COMMERCIAL UNITS, or SERVICES are finally to a non-affiliated party. CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. -4- C. LICENSEE agrees to make written reports to LICENSOR quarterly within thirty (30) days after the first days of each January, April, July, and October during the term of this Agreement, and effective as of such dates, stating in each such report the description and aggregate net selling prices of PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES sold or otherwise disposed of or performed during the preceding three (3) calendar months and upon which royalties are payable hereunder. The first such report shall include all such PRODUCTS, PRE- COMMERCIAL UNITS, and SERVICES sold or otherwise disposed of or performed between the effective date of this Agreement and the date of such first report. LICENSEE also agrees to make a written report to LICENSOR within thirty (30) days after any expiration or termination of this Agreement, stating in such report the description and aggregate net selling prices of PRODUCTS, PRE- COMMERCIAL UNITS, and SERVICES sold or otherwise disposed of or performed and upon which royalties are payable hereunder, but which have not been previously reported to LICENSOR. D. Concurrently with the making of each report pursuant to Paragraph VI.C. hereof, LICENSEE shall pay to LICENSOR royalties at the rate specified by Paragraph VI.A. hereof on all PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES included therein. All payments to be made under this Agreement shall be made in the City of New York, State of New York, U.S.A. in United States Dollars by electronic transfer to an account designated by LICENSOR. Where the provisions of this Agreement require the conversion into United States Dollars of an amount initially computed in the currency of another country, the amount of United States Dollars payable under this Agreement shall be determined on the basis of the applicable exchange rate quoted by The Wall Street Journal, Eastern Edition, most recently prior to the date each such payment is made or due, whichever is earlier. If no exchange rate is quoted for any period, LICENSOR shall determine the rate in accordance with an alternative LICENSOR deems reasonable. E. LICENSEE shall keep records, in sufficient detail to enable the royalties payable hereunder by LICENSEE to be determined, for at least a period of two years following the expiration or termination of this Agreement. LICENSEE shall permit its books and records to be examined from time to time upon reasonable written notice to the extent necessary to verify the reports provided for hereunder, such examination to be made at the expense of LICENSOR by any auditor appointed by LICENSOR who shall -5- be acceptable to LICENSEE, or, at the option and expense of LICENSEE, by a certified independent accountant appointed by LICENSOR and approved by LICENSEE, which approval shall not be unreasonably withheld. ARTICLE VII TERMINATION A. Until terminated pursuant to any provision of this Article VII, this Agreement shall have a term of five (5) years from its effective date. Notwithstanding the foregoing, this Agreement shall automatically terminate without further notice in the event that the Distributor Agreement terminates without being replaced by another such agreement between the parties thereto. B. This Agreement shall terminate as to a particular country with notice on a date established by either LICENSOR or LICENSEE if a controlling substitute or short-form agreement is required in such country pursuant to Paragraph IV.D. hereof and such controlling replacement agreement contains provisions unacceptable to the party giving notice hereunder. C. In the event LICENSEE does not comply with any provisions of this Agreement and LICENSOR elects to give LICENSEE written notice of such non- compliance, LICENSEE shall have twenty (20) days from the receipt of such notice to remedy such non-compliance. If such non-compliance is not remedied within said twenty (20) days, LICENSOR shall have the right to terminate this Agreement at any time thereafter by giving LICENSEE written notice of the effective date of such termination. D. Upon any termination of this Agreement for any reason, LICENSEE agrees to cease and discontinue completely further use of the LICENSED MARKS; provided, however, that LICENSEE shall have a period of three (3) months from the date of such termination to fill any outstanding orders for PRODUCTS, PRE-COMMERCIAL UNITS, or SERVICES placed prior to the effective date of termination (provided, however, such terminal use shall comply with the other provisions of this Agreement). At the expiration of such three (3) month period, LICENSEE shall have no further right to use the LICENSED MARKS, or any mark the same as, substantially similar to, or likely to cause confusion with the LICENSED MARKS. E. The following provisions of this Agreement shall survive any termination: Paragraph IV.D., Paragraph IV.E., Paragraph V.A., Paragraph V.B., Paragraph V.C. Article VI, Paragraph VII.D., Paragraph VII.E, and Paragraphs VIII.A., C., D., E., and F. ARTICLE VIII MISCELLANEOUS PROVISIONS A. LICENSEE shall fully indemnify and hold harmless LICENSOR against any and all claims, losses, damages, expenses or liability asserted against or suffered by LICENSOR and arising out of or relating to this Agreement or the sale or disposition of PRODUCTS or PRE-COMMERCIAL UNITS, or performance of SERVICES, by LICENSEE under the LICENSED MARKS, whether or not such -6- PRODUCTS, PRE-COMMERCIAL UNITS, and SERVICES conform to the required STANDARDS OF QUALITY. B. This Agreement or any rights hereunder may not be assigned or otherwise transferred or extended by LICENSEE to any party including without limitation subsidiaries and affiliates of LICENSEE without the written consent of LICENSOR, and any attempted assignment, transfer or extension without such consent shall be null and void. C. Any notices or requests with reference to this Agreement shall be in writing and shall be directed by one party to the other at its respective address as follows: LICENSOR Plug Power, L.L.C. Attention: President and CEO 968 Albany-Shaker Road Albany, New York 12110 LICENSEE GE FUEL CELL SYSTEMS, L.L.C. Attention: President One River Road Schenectady, NY 12345 Any party may change its address to which notices or requests shall be directed by notice to the other party, but until such change of address has been received, any notices or requests sent to the above addresses shall be effective upon transmittal and shall be considered as having been received. D. This instrument contains the entire agreement between the parties hereto regarding the use of the LICENSED MARKS, and this Agreement supersedes and cancels all previous, understandings or agreements in regard to the subject matter hereof. This Agreement may not be released or modified in any manner, orally or otherwise, except by an instrument in writing signed by duly authorized representatives of the parties hereto. E. This Agreement shall be governed by the laws of the State of New York, United States of America, without regard to its rules regarding the conflict of laws. F. Failure by LICENSOR at any time to enforce or require strict compliance with any provision of this Agreement shall not affect or impair that provision in any way or the rights of LICENSOR to avail itself of the remedies it may have in respect of any subsequent breach of that or any other provision. -7- IN WITNESS WHEREOF, LICENSOR and LICENSEE have caused this instrument to be executed in duplicate by their duly authorized representatives as of the date first written above. PLUG POWER, L.L.C. ATTEST: /s/ Lou Thomson By: /s/ Gary Mittleman - --------------------------------- ------------------------------------- Gary Mittleman, President and CEO GE FUEL CELL SYSTEMS, LLC ATTEST: /s/ Lou Thomson By: /s/ Barry Glickman - --------------------------------- ------------------------------------- Barry Glickman, President -8- EXHIBIT A LICENSED MARK REGISTRATION NO. ------------- ---------------- [PLUG POWER LOGO APPEARS HERE] _______________ -9- EX-10.5 5 DISTRIBUTOR AGREEMENT DATED FEBRUARY 2, 1999 CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. EXHIBIT 10.5 DISTRIBUTOR AGREEMENT THIS DISTRIBUTOR AGREEMENT is made and entered into as of this 2nd day of February, 1999 (herein referred to as the "Effective Date"), between GE FUEL CELL SYSTEMS, L.L.C., a Delaware limited liability company located at 1 River Road, Schenectady, New York 12345 (hereinafter referred to as "DISTRIBUTOR"), and PLUG POWER, L.L.C., a Delaware limited liability company located at 968 Albany-Shaker Road, Latham, New York 12110 (hereinafter referred to as "SUPPLIER"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, DISTRIBUTOR and SUPPLIER intend to enter into this Agreement in order to set forth, in writing, DISTRIBUTOR's obligation to market and sell Products (defined below) and Pre-Commercial Units (defined below) and provide Services (defined below) in the Territory (defined below); and WHEREAS, the mission of DISTRIBUTOR and SUPPLIER through the term of this Agreement is to bring to customers the highest quality line of Products and Pre- Commercial Units and provide world-class Services for the purpose of increasing SUPPLIER's Product and Pre-Commercial Unit sales; NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, the mutual benefits to be derived herefrom, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE I - DEFINITIONS 1.1 Affiliate. The term "Affiliate" when used herein shall mean, with --------- respect to any Person, any Person directly or indirectly controlling, controlled by, or under common control with such other Person, except that an Affiliate of SUPPLIER shall only include any Person directly or indirectly controlled by SUPPLIER. As used herein, control shall mean the ownership, either directly or by attribution, of more than 50% of the combined voting rights attributable to the equity interests of a Person or the ability, either direct or indirect, to control the composition of the majority of the Board of Directors or comparable management body of a Person. 1.2 Agreement. The term "Agreement" when used herein shall mean this --------- document and any annex, exhibit, attachment, schedule, addendum, or modification hereto, unless the context otherwise indicates. 1.3 Commencement Date. The term "Commencement Date" when used herein shall ----------------- have the meaning ascribed in Section 4.1 hereof. 1.4 Customer. The term "Customer(s)" when used herein shall mean any -------- purchaser or potential purchaser of the Products, Pre-Commercial Units, Test & Evaluation Units, or Services from DISTRIBUTOR, directly or indirectly through third parties. 1.5 GEPS. The term "GEPS" when used herein shall mean the GE Power Systems ---- business of General Electric Company. 1.6 GEPS Competitor. The term "GEPS Competitor" when used herein shall --------------- mean any of the following Persons, provided that DISTRIBUTOR may revise this list upon written notice to SUPPLIER to include additional Persons involved directly, or indirectly through an affiliate, in the manufacture, assembly, or provision of O&M services for, gas or steam turbines, regardless of origin or design: AAR Engine Group - USA; ABB - Switzerland; Advanced Materials Technologies, Inc. -USA; Aero & Industrial Technology - UK; Aetc Ltd./ - UK; Alfa Laval - UK; AlliedSignal - US; Bailey Automation PLC - UK; Baird Analtical -USA; Baker/MO Services Inc. - USA; Bales Scientific Inc. - USA; Bently Nevada -USA; Bosman Powersource B.V. - Netherlands; Boyce Engineering Int'l. Ltd. - UK; Boyce Engineering International - USA; Brush Electrical Machines Ltd. - UK; Chromalloy Gas Turbine - USA; Concepts ETI, Inc. - USA; Conmec, Inc. - USA; Cooper Energy Services - USA; Cooper Rolls - USA; Demag Delaval Turbomachinery Corp. - USA; Dresser Rand Turbo Products Division - USA; Ebara Corporation -Japan; Elbar BV- Netherlands; European Gas Turbines Ltd. - UK; Fern Engineering, Inc. - USA; Fiat Avio S.P.A. - Italy; Gas-Path Technology, Inc. - USA; Hickham Industries, Inc. - USA; Hitachi - Japan; Honeywell Solid State Electric Center -USA; HSDE -UK; IHI-Japan; John Brown / Kvearner Engineering - UK; Kawasaki -Japan; Liburdi Engineering Ltd. - Canada; Man Gutehoffnungshutte AG - Germany; Mannesmann Demag Veidichter - Germany; McGuffy Systems, Inc. - USA; Mitsubishi Heavy Industries -Japan; Moog Controls - USA; Natole Turbine Enterprises, Inc. -USA; Ormat Industries Ltd. - Israel; Petrotech, Inc. - USA; Polytec P.I. Inc. -USA; Powmat Ltd - USA; Pratt & Whitney -USA; Precision Castparts Corp. - USA; Preco Turbine Services Inc. - USA; Rolls-Royce Industrial & Marine - UK; Senior Thermal Engineering - UK; Sermatech International Inc. - USA; Siemens-Westinghouse Power Corp. - USA; Solar Turbines Incorporated - USA; SPE Mashproekt - Ukraine; Stork RMO BV - Netherlands; Sulzer Turbo - Germany; Thomassen International B.V. -Netherlands; Toshiba - Japan; Triconex Systems, Inc. - USA; Turbine Controls Ltd. - UK; Turbine Technology Services Corp. - USA; Wilson & Daleo Inc. -Canada; Wood Group Gas Turbines Ltd.- UK. 1.7 PEM Fuel Cell-Powered Generator Set. The term "PEM Fuel Cell-Powered ----------------------------------- Generator Set" when used herein shall mean a proton exchange membrane fuel cell stack packaged with a fuel processor (to convert fuel at standard available pressure and quality to fuel usable by the fuel cell stack), with a maximum continuous output no greater than 35 kW, and all of the ancillary components, systems, electronics, batteries, controls, protective relaying (e.g., over/under current, transfer switch), and enclosure(s) required to be ready for indoor or outdoor installation and operation for stand-alone or grid-interconnected stationary power applications. 1.8 Person. The term "Person" when used herein shall mean an individual, a ------ corporation, a partnership, a limited liability company, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. 1.9 Pre-Commercial Unit. The term "Pre-Commercial Unit" when used herein ------------------- shall mean a 7kW output PEM Fuel Cell-Powered Generator Set manufactured by SUPPLIER and meeting the specifications outlined in Schedule B attached hereto. ---------- -2- 1.10 Product Quality and Safety Assurance Program. The term "Product -------------------------------------------- Quality and Safety Assurance Program" when used herein shall have the meaning ascribed in Section 6.8 of this Agreement. 1.11 Products. The term "Products" when used herein shall mean the PEM Fuel -------- Cell-Powered Generator Sets and other items manufactured by or on behalf of SUPPLIER described on Schedule A-1, attached hereto, and such other items which ------------ may, from time to time, be included on Schedule A-1 pursuant to the terms of ------------ this Agreement or by the mutual written consent of SUPPLIER and DISTRIBUTOR. 1.12 Proprietary Information. The term "Proprietary Information" when used ----------------------- herein shall have the meaning ascribed in Section 7.1 hereof. 1.13 Services. The term "Services" when used herein shall mean those -------- services listed on Schedule A-2 of this Agreement, attached hereto. ------------ 1.14 Term. The term "Term" when used herein shall mean the term of this ---- Agreement as defined pursuant to Section 4.1, including all extensions and renewals thereof. 1.15 Territory. The term "Territory" when used herein shall mean every --------- country, province, territory or other principality in the world, except the States of Michigan, Indiana, Ohio, and Illinois while Edison Development Corporation has exclusive rights to market and sell products similar to Products and provide services similar to Services therein. In the event that Edison Development Corporation ("EDC") shall lose all of its rights to market and sell similar products and provide similar services in the States of Michigan, Indiana, Ohio and Illinois in the United States of America (the "EDC Territory"), this definition of "Territory" shall be expanded to include the EDC Territory. In the event that EDC shall lose its exclusive rights to market and sell similar products and provide similar services in the EDC Territory, DISTRIBUTOR will have the rights to market and sell Products and provide Services in the EDC Territory on a non-exclusive basis. 1.16 Test & Evaluation Unit. The term "Test & Evaluation Unit" when used ---------------------- herein shall mean a pre-commercial version of the Product with performance (e.g., efficiency, emissions, size, noise, reliability) below that of a Pre- Commercial Unit, which is intended to demonstrate proof of concept and provide the manufacturer with field test data. ARTICLE II - APPOINTMENT AND SCOPE 2.1 Appointment. Subject to the terms and conditions and for the Term of ----------- this Agreement (as defined in Article IV hereof) SUPPLIER hereby appoints DISTRIBUTOR, and DISTRIBUTOR accepts such appointment, as SUPPLIER's distributor in the Territory to exclusively purchase, except as set forth in Section 2.2(a), Products, Pre-Commercial Units, and Test & Evaluation Units, and market and sell Products, Pre-Commercial Units, and Test & Evaluation Units to Customers for their own use or resale, and to provide Services to Customers. 2.2 Non-Compete. During the term of this Agreement and except as ----------- otherwise provided herein, -3- (a) SUPPLIER and its Affiliates shall not, directly or indirectly, market or sell PEM Fuel Cell-Powered Generator Sets, components, replacement parts, upgrades, accessories, or improvements that compete with Products, Pre- Commercial Units, or Test & Evaluation Units, market and sell the output of PEM Fuel Cell-Powered Generator Sets that compete with the Products, Pre-Commercial Units, or Test & Evaluation Units, or provide Services to Customers in the Territory, so long as, and to the extent that, DISTRIBUTOR is SUPPLIER's exclusive distributor in the Territory pursuant to this Agreement (except for sales of Test & Evaluation Units and Pre-Commercial Units to federal, state, municipal and other governmental entities, the Gas Research Institute, Electric Power Research Institute, and such other industry groups mutually agreed to by SUPPLIER and DISTRIBUTOR, to the extent such entities and groups are purchasing the units for their research and development, as opposed to purchasing the units for resale); (b) DISTRIBUTOR will utilize SUPPLIER as its sole supplier of PEM Fuel Cell-Powered Generator Sets, components, replacement parts, upgrades, accessories, and improvements therefor. 2.3 Third Parties. DISTRIBUTOR may appoint or contract with third parties ------------- (e.g., agents, distributors, sub-distributors) in connection with the marketing and sale of the Products, Pre-Commercial Units, and Test & Evaluation Units and the provision of Services, so long as any compensation to such third parties shall be the sole responsibility of DISTRIBUTOR. DISTRIBUTOR will use reasonable efforts to consult with SUPPLIER regarding any such appointments or contracts prior to entering into such appointments or contracts. 2.4 Independent Contractor Status. DISTRIBUTOR is an independent purchaser ----------------------------- and seller of the Products, Pre-Commercial Units, and Test & Evaluation Units. Nothing contained in this Agreement shall be construed to constitute DISTRIBUTOR as a partner, employee, agent or joint venturer of SUPPLIER, nor shall DISTRIBUTOR and SUPPLIER have any authority to bind the other in any respect, it being intended that each shall remain an independent contractor responsible for its own actions. Each party shall be responsible for all of its own expenses and employees, except as provided otherwise in this Agreement. 2.5 Provision of Services. To the extent SUPPLIER is engaged in providing --------------------- any Services, SUPPLIER hereby agrees to make available such Services requested by DISTRIBUTOR, in accordance with the provisions set forth in this Agreement, including Section 3.3 hereof. SUPPLIER hereby agrees that DISTRIBUTOR shall be the sole provider of Services to DISTRIBUTOR's Customers with respect to the Products and that DISTRIBUTOR may utilize any service provider to provide such Services. 2.6 Resale of Products by DISTRIBUTOR or Customer. Other than as expressly --------------------------------------------- set forth in this Agreement, the DISTRIBUTOR and its Customers shall not have any restrictions, in any manner, with respect to the resale of any Product, Pre- Commercial Unit, or Test & Evaluation Unit acquired pursuant to this Agreement, including restrictions as to the price at which they elect to resell any such Products, Pre-Commercial Units, or Test & Evaluation Units. -4- ARTICLE III - TERMS AND CONDITIONS OF SALE OF THE PRODUCTS 3.1 Product Purchase Orders; Terms and Conditions. The terms and --------------------------------------------- conditions for all orders for the Products and Pre-Commercial Units shall be subject to all of the provisions set forth in this Article III and in Schedules --------- B, C, and D, attached hereto. - ------------ 3.2 Service Orders; Terms and Conditions. The terms and conditions for all ------------------------------------ orders for the provision of Services shall be subject to all the provisions set forth in this Article III, in Schedule B, and as otherwise negotiated between ---------- the parties. 3.3 Prices; Products and Services. ----------------------------- (a) The prices charged to DISTRIBUTOR for all Products purchased hereunder shall be the lower of (i) those prices set forth on Schedule C, ---------- attached hereto, or (ii) the lowest prices charged by SUPPLIER to any other purchaser for the same such Product in similar quantities during the four months preceding an order. To the extent that SUPPLIER's direct cost per unit for the Products exceeds that set forth on Schedule C, SUPPLIER and DISTRIBUTOR shall ---------- agree to an increase in the price to DISTRIBUTOR and a decrease to DISTRIBUTOR's Sales Commitments. If SUPPLIER and DISTRIBUTOR cannot reach such agreements, then this Agreement shall terminate. The prices charged to DISTRIBUTOR for all Pre-Commercial Units purchased hereunder shall be those prices set forth on Schedule C, and such prices are not subject to adjustment even if SUPPLIER sells - ---------- Pre-Commercial Units to another purchaser at a lower price. (b) The prices charged to DISTRIBUTOR for all Services ordered hereunder shall be the lowest prices charged by SUPPLIER to any other person or entity, other than Edison Development Corporation or an affiliate thereof, for the same such Services in similar quantities during the four months preceding an order, provided, however, in the event that any Services are included in -------- ------- the price of a Product or Pre-Commercial Unit or are not charged for, a reasonable price allocation shall be made with respect to such Services for purposes of this pricing formula. (c) All prices for the Products, Pre-Commercial Units, Test & Evaluation Units, and Services shall be expressed in United States Dollars. All payments for Products, Pre-Commercial Units, Test & Evaluation Units, and Services shall be made in United States Dollars. (d) To the extent DISTRIBUTOR assists SUPPLIER in sourcing components for the manufacturing of Products or Pre-Commercial Units, DISTRIBUTOR will receive 50% of any savings realized by SUPPLIER, for components of like quality and quantity, where savings is defined as the difference between the best quote obtained by SUPPLIER and the quote obtained by DISTRIBUTOR. DISTRIBUTOR's share of any savings will be applied as a credit against DISTRIBUTOR's purchases of Products or Pre-Commercial Units from SUPPLIER. ARTICLE IV - TERM AND TERMINATION 4.1 Term. Except as otherwise provided in this Agreement, the term of this ---- Agreement shall begin thirty (30) days after the execution of this Agreement (the "Commencement Date") and shall continue -5- for a five (5) year term ending on the fifth anniversary of the Commencement Date. The parties intend to negotiate an amendment to this Agreement which shall set forth purchase prices for Products and DISTRIBUTOR's purchase commitments for the period beyond the initial term. SUPPLIER and DISTRIBUTOR will initiate negotiations on the amendment no later than January 1, 2002. 4.2 Termination for Cause. This Agreement shall terminate immediately in --------------------- the event that DISTRIBUTOR is dissolved or the Limited Liability Company Agreement under which DISTRIBUTOR is governed terminates, whichever occurs first. This Agreement may be terminated by a party hereto prior to expiration of the initial five (5) year term or any renewal term hereof by furnishing prior written notice to the other party, as follows: (a) Termination by a party, in the event the other party should fail to perform any of its obligations hereunder and such failure results in a material adverse effect to the terminating party, provided such other party shall fail to remedy any such nonperformance within 120 days after receiving written demand therefor, except as otherwise specified in Schedule D; ---------- (b) Termination by a party, if the other party should become a subject of any voluntary or involuntary bankruptcy, settlement, receivership, reorganization or other insolvency proceedings, unless such proceedings are terminated within one month from their formal opening; or (c) Termination by a party, if the other party should attempt to sell, assign (in violation of this Agreement), delegate or transfer any of its rights and obligations under this Agreement without having obtained the other party's prior written consent thereto. 4.3 Rights of Parties on Termination or Expiration. The following ---------------------------------------------- provisions shall apply on the termination or expiration of this Agreement (the date of termination or expiration being the "Termination Date"): (a) DISTRIBUTOR shall cease all purchases from SUPPLIER and shall return to SUPPLIER and immediately cease all use of Confidential Information previously furnished by SUPPLIER and then in DISTRIBUTOR's possession; provided, -------- however, notwithstanding the forgoing, (i) SUPPLIER shall fulfill any and all - ------- orders for Products, Pre-Commercial Units or Services firmly committed to by DISTRIBUTOR, in accordance with Schedule D, and (ii) DISTRIBUTOR shall have the ---------- right to continue to use such Confidential Information in connection with such orders. SUPPLIER shall return to DISTRIBUTOR and immediately cease all use of any Confidential Information previously furnished by DISTRIBUTOR, except as needed to fulfill orders for Products, Pre-Commercial Units or Services firmly committed to by DISTRIBUTOR, in accordance with Schedule D. ---------- (b) Except as otherwise provided herein, all rights granted to DISTRIBUTOR under or pursuant to this Agreement shall cease, and where appropriate, revert to SUPPLIER; similarly, all rights granted to SUPPLIER under or pursuant to this Agreement shall cease, and where appropriate, revert to DISTRIBUTOR. (c) The provisions of this Agreement that are expressed to survive this Agreement or to apply notwithstanding termination or expiration hereof shall be followed by the parties hereto. -6- (d) Termination or expiration of this Agreement shall not prejudice or otherwise affect the rights or liabilities of the parties with respect to the Products, Pre-Commercial Units or Services theretofore sold or rendered hereunder, or any indebtedness then owing by either party to the other; nor shall termination or expiration relieve the parties of any obligations imposed by the provisions of this Agreement which are expressed to survive the termination or expiration of this Agreement or any liability for damages resulting from breach of such provisions. ARTICLE V - OBLIGATIONS OF DISTRIBUTOR 5.1 Sales and Promotion; Services; Facilities, Personnel and Advertising. -------------------------------------------------------------------- DISTRIBUTOR shall (a) use best efforts to market and sell Products and Pre- Commercial Units and provide Services within the Territory; and (b) maintain, at its own expense, such office space and facilities, and hire and train such personnel as DISTRIBUTOR may deem necessary to carry out its obligations under this Agreement. DISTRIBUTOR will use its best efforts to market and sell Products and Pre-Commercial Units in the manner that its Affiliates market and sell similar products, and to provide Services to ensure a level of customer service consistent with that provided for other GE-branded products, taking into consideration the lower sales volumes of Products and Pre-Commercial Units. Within 60 days after the effective date of this Agreement, SUPPLIER and DISTRIBUTOR will mutually agree to a marketing and Services development schedule for the period ending December 31, 2000, which will include milestones and objective measures of progress towards the January 1, 2001, Product release. SUPPLIER and DISTRIBUTOR will meet not less than quarterly for the purpose of evaluating DISTRIBUTOR's progress against the development schedule. 5.2 Purchase Volume Goal. During the Term of this Agreement, DISTRIBUTOR -------------------- shall use its best efforts to achieve minimum Global Sales Commitments and Major Market Sales Commitments as defined and specified in Schedule D. DISTRIBUTOR ---------- shall provide SUPPLIER with a 12-month rolling forecast of monthly purchases in accordance with Schedule D. In the event that DISTRIBUTOR fails to achieve the ---------- minimum purchase volume goals set forth in Schedule D, SUPPLIER may appoint ----------- additional distributors and/or terminate this Agreement under the provisions specified in Schedule D. In the event that SUPPLIER appoints any additional ---------- distributors pursuant to the preceding sentence, DISTRIBUTOR may terminate this Agreement upon 120 days written notice. 5.3 Expenses. Except as otherwise provided in this Agreement, DISTRIBUTOR -------- shall bear all expenses associated with DISTRIBUTOR's marketing and sale of Products and Pre-Commercial Units and provision of Services under this Agreement. 5.4 DISTRIBUTOR Intelligence. DISTRIBUTOR shall make intelligence (e.g., ------------------------ Product applications, customer demand) related to the sale and use of Products and Pre-Commercial Units to Customers available to SUPPLIER (collectively, "DISTRIBUTOR Intelligence"). 5.5 Pre-Commercial Units. DISTRIBUTOR shall purchase, on a take or pay -------------------- basis, 485 Pre-Commercial Units, as specified in Schedule B, for delivery by ---------- December 31, 2000, at a purchase price of $21,134 per unit, with no more than 250 units to be delivered in any one quarter. One-fourth of the purchase price shall be paid to SUPPLIER as a deposit six months prior to delivery but no earlier than January 1, 2000, and the balance of the purchase price shall be paid on delivery. To the extent DISTRIBUTOR elects to purchase units available prior to the Pre-Commercial Units, DISTRIBUTOR's purchases will be credited against its take-or-pay commitment on a dollar-for-dollar basis (e.g., if DISTRIBUTOR purchases $1,000,000 of Test & Evaluation Units available in 1999, DISTRIBUTOR'S take-or- pay commitment on the Pre-Commercial Units will be reduced by $1,000,000). DISTRIBUTOR will make reasonable efforts to have its Customers for Pre- Commercial Units perform certain testing as prescribed by SUPPLIER, provide SUPPLIER with all data generated by such testing, and provide SUPPLIER with reasonable on-site access to the Pre-Commercial Units. 5.6 Assistance. DISTRIBUTOR shall, if required by SUPPLIER, provide ---------- SUPPLIER with reasonable access to and assistance of its sales and marketing personnel. Such assistance shall be without charge to SUPPLIER except as may be otherwise mutually agreed. 5.7 Regulatory Approvals. In conjunction with SUPPLIER's obligations in -------------------- Section 6.6, DISTRIBUTOR shall be responsible for the administration and field work necessary to obtain any regulatory approvals for DISTRIBUTOR to conduct its operations in the Territory. DISTRIBUTOR shall provide assistance to SUPPLIER in order to assist SUPPLIER in complying with registration requirements in the Territory, obtain such other approvals from governmental authorities of the Territory as may be necessary to comply with any and all governmental laws, regulations, and orders that may be applicable to DISTRIBUTOR by reason of the execution of this Agreement, and assist SUPPLIER in taking those actions necessary for DISTRIBUTOR to be registered as SUPPLIER's independent distributor with any governmental authority. Without limiting the foregoing, DISTRIBUTOR shall furnish SUPPLIER with such documentation as SUPPLIER may request to confirm DISTRIBUTOR's compliance with this Section, and DISTRIBUTOR agrees that it shall not engage in any course of conduct that would cause SUPPLIER to be in violation of the laws of any jurisdiction within the Territory. DISTRIBUTOR shall comply fully with, and shall be solely responsible for, all safety standards, health code requirements and regulations, specifications, and other requirements imposed by law, regulation, or order in the Territory and applicable to the marketing and sale of the Products and Pre-Commercial Units, and to the provision of Services provided by DISTRIBUTOR. ARTICLE VI - OBLIGATIONS OF SUPPLIER 6.1 Sales Support. SUPPLIER shall, at its expense, provide DISTRIBUTOR ------------- with reasonable amounts of technical materials (e.g., drawings, schematics, installation manuals, operating procedures, available marketing materials, field test results, training materials) and available information regarding product applications and customer demand pertaining to the Products and Pre-Commercial Units as are requested by DISTRIBUTOR from time to time. All such information and materials will be furnished in the English language. 6.2 Notification of Changes. SUPPLIER shall notify DISTRIBUTOR of any ----------------------- material changes in or affecting the Products, Pre-Commercial Units, projected delivery dates and schedule changes that may reasonably be expected to affect the business of DISTRIBUTOR; provided, that no such notification shall relieve -------- SUPPLIER of any of its obligations hereunder. 6.3 Assistance. SUPPLIER shall, if required by DISTRIBUTOR, provide ---------- DISTRIBUTOR with reasonable access to and assistance of its technical support personnel. Such assistance shall be without charge to DISTRIBUTOR except as may be otherwise mutually agreed. -8- 6.4 Insurance. SUPPLIER shall maintain in effect at all times product --------- liability insurance with policy limits as described in Schedule E attached ---------- hereto, as such exhibit may be revised from time to time upon the mutual agreement of SUPPLIER and DISTRIBUTOR, and DISTRIBUTOR shall be named as an additional insured to each such policy. In the event that SUPPLIER cannot obtain such insurance on commercially reasonable terms, SUPPLIER shall notify DISTRIBUTOR, and DISTRIBUTOR may terminate this Agreement. 6.5 Third Party Inquiries. If SUPPLIER is contacted, or has been --------------------- contacted, by third parties concerning purchase of the Products by Customers in the Territory, SUPPLIER will use its best efforts to refer such persons to DISTRIBUTOR, provided that SUPPLIER has not named any additional distributors to the relevant market area in accordance with this Agreement. 6.6 Governmental Approvals; Compliance. SUPPLIER shall comply with all ---------------------------------- registration requirements in the Territory that are applicable to SUPPLIER, obtain such other approvals from governmental authorities of the Territory as may be necessary to comply with any and all governmental laws, regulations, and orders that may be applicable to SUPPLIER by reason of the execution of this Agreement, and take those actions necessary for DISTRIBUTOR to be registered as SUPPLIER's independent distributor with any governmental authority. At DISTRIBUTOR's request, SUPPLIER shall perform all tests for all certifications (regulatory or otherwise) required to certify use of the Products and Pre- Commercial Units sold by DISTRIBUTOR for stand-alone and/or grid-interconnected stationary power applications. Without limiting the foregoing, SUPPLIER shall furnish DISTRIBUTOR with such documentation as DISTRIBUTOR may request to confirm SUPPLIER's compliance with this Section, and SUPPLIER agrees that it shall not engage in any course of conduct that would cause DISTRIBUTOR to be in violation of the laws of any jurisdiction within the Territory. If the cost of compliance with regulatory requirements outside of the U.S. causes SUPPLIER's direct cost per unit to exceed SUPPLIER's direct cost as shown on Schedule C, ---------- then SUPPLIER and DISTRIBUTOR will mutually agree to adjust the prices as shown on Schedule C, and the Sales Commitments as shown on Schedule D, for any units ---------- ---------- purchased by DISTRIBUTOR for sale outside of the U.S. that require such compliance. 6.7 Production Capability; Minimum Volume. ------------------------------------- (a) SUPPLIER will use best efforts to maintain a minimum annual Product supply of [***] units per year in "2001," as defined in Schedule D, plus ---------- any additional capacity required to fill any of DISTRIBUTOR'S firm purchase orders; provided that DISTRIBUTOR stays on schedule, as determined in good faith by SUPPLIER, in developing the infrastructure necessary to market, sell, and provide Services to such volume of Products; and provided further that SUPPLIER will not be obligated to increase Product supply by more than 100% between any two quarters, and, in any event, SUPPLIER will not be obligated to increase Product supply beyond the Global Sales Commitments. (b) SUPPLIER will use best efforts to produce 485 Pre-Commercial Units during the year 2000, and use best efforts to front load production in the first half of the year. (c) Supplier shall supply Products to DISTRIBUTOR at the lower of (i) the pricess set forth on Schedule C, or (ii) [***]. Supplier shall supply Pre- Commerical Units to DISTRIBUTOR at the prices set forth on Schedule C. To the extent that [***], Supplier and Distributor shall agree to [***]. If SUPPLIER and DISTRIBUTOR cannot reach such agreements, then this Agreement shall terminate. CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. -9- 6.8 Legal Standards. SUPPLIER shall comply fully with, and shall be solely --------------- responsible for, all safety standards, health code requirements and regulations, specifications, and other requirements imposed by law, regulation, or order in the Territory, that are applicable to the design, manufacturing, and testing of the Products and Pre-Commercial Units and the provision of Services by SUPPLIER. SUPPLIER shall establish and maintain a program, to the mutual satisfaction of SUPPLIER and DISTRIBUTOR, in order to create ongoing product design, manufacturing, testing, inspection, and other safety and quality-related processes that are adequate to assure the safety and reliability of SUPPLIER's Products and Pre-Commercial Units (the "Product Quality and Safety Assurance Program"). 6.9 Replacement Parts. SUPPLIER shall sell replacement parts to ----------------- DISTRIBUTOR for the lower of (a) those prices set forth on Schedule C, attached hereto, or (b) [***]. SUPPLIER shall maintain a reasonable supply of replacement parts for the Products and Pre-Commercial Units throughout the design life of the Products and Pre-Commercial Units, as set forth in SUPPLIER'S Product and Pre-Commercial Unit Specifications. 6.10 Funding of GE Corporate Research and Development Support. SUPPLIER -------------------------------------------------------- will enter into a separate service agreement with General Electric Company, under which SUPPLIER will pay or obtain outside funding to pay General Company $500,000 per year during the pre-commercial period (i.e., the period up to the commercial release of Products) in exchange for support by the Corporate Research and Development Department of General Electric Company of the development and testing of Products, Pre-Commercial Units, and Test & Evaluation Units, with specific projects to be specified by SUPPLIER in such separate agreement. The failure of SUPPLIER to enter into such agreement shall constitute cause for termination of this Agreement pursuant to Section 4.2(a), without regard to materiality considerations. SUPPLIER will use reasonable efforts to enter into such agreement within 90 days following the execution date of this Agreement. ARTICLE VII - CONFIDENTIAL INFORMATION AND PROPRIETARY RIGHTS 7.1 Confidentiality. SUPPLIER and DISTRIBUTOR agree to follow the --------------- following requirements regarding confidentiality: (a) Each party hereto expects to furnish to the other party certain confidential information which will constitute trade secrets or other proprietary business or technical information belonging to the disclosing party (including, but not limited to, components, processes, financial information, drawings, specifications and other data, whether in written, printed, oral or other form) and will be marked "Confidential" or "Proprietary" (such information is hereinafter referred to as "Confidential Information") at the time it is disclosed. Oral information which is confidential or proprietary shall be reduced to writing by the disclosing party within ten (10) working days after disclosure, which writing shall CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. -10- specifically reference the date of disclosure and otherwise conform to the requirements of this paragraph. Any information which is disclosed in any other manner shall be deemed to be non-confidential. The receiving party shall not disclose Confidential Information to anyone except its employees who have a need to know such Confidential Information in order to perform their work and shall inform such individuals of the confidential nature of the Confidential Information. Subject to the provisions of subsection (b), below, the receiving party shall use the Confidential Information only for the purpose of such work and shall use efforts to protect the confidentiality of such Confidential Information commensurate with those which it employs for the protection of its own confidential information, but it shall not be liable for unauthorized revelations of such Confidential Information which occur in spite of such efforts. (b) Notwithstanding the provisions of subsection (a) above, (i) the receiving party shall not be subject to any restriction hereunder with respect to any part of such Confidential Information which appears in issued patents or publications, which is known or becomes generally known to the relevant public through no fault of the receiving party, which is independently generated by the receiving party without use of the Confidential Information, which is furnished to others by the disclosing party without restriction on disclosure, which was or becomes known to the receiving party through other sources free of any confidentiality restriction, which must be disclosed by requirements of law or valid legal or regulatory process, in which case the party intending to make such disclosure shall notify the party which designated the material as confidential in advance of any such disclosure and reasonably cooperate with any attempt to maintain the confidentiality of such materials; and (ii) any and all restrictions with respect to Confidential Information provided hereunder will expire three (3) years after the date that such Confidential Information is disclosed to the receiving party. (c) When one party no longer desires to use the Confidential Information of another party, it shall return to the other party any such Confidential Information and shall destroy all copies of such Confidential Information with the exception of one copy which may be retained exclusively for the purpose of documenting the disclosures made hereunder. (d) The receiving party will restrict access to any Confidential Information made available or disclosed by the disclosing party to the receiving party hereunder only to those employees of the receiving party with a need to know such information in performance of their jobs with the receiving party. 7.2 SUPPLIER's Trademark. All of the Products and Pre-Commercial Units -------------------- sold by DISTRIBUTOR shall bear one or more of SUPPLIER's trademarks, copies of which are set forth on Schedule F, attached hereto. Such trademarks shall be ---------- affixed to the Products and Pre-Commercial Units by SUPPLIER, in a manner to be mutually determined, with the understanding that SUPPLIER's trademarks will be readily visible, but less prominent than DISTRIBUTOR's trademarks. All resulting use of SUPPLIER's trademarks shall inure solely to the benefit of SUPPLIER. DISTRIBUTOR shall not directly or indirectly use SUPPLIER's trademarks (or part thereof), or any mark or name confusingly similar thereto, as part of its corporate or business name, except that (a) DISTRIBUTOR shall co-brand (i.e., affixing DISTRIBUTOR's Trademark (defined below), a copy of which is also set forth on Schedule F, to a Product or Pre-Commercial Unit that also bears the ---------- trademark of SUPPLIER) each of the Products and Pre-Commercial Units with its own trademark or otherwise identify itself as an "authorized distributor" of SUPPLIER and (b) DISTRIBUTOR shall use SUPPLIER's trademarks relating to the Products and Pre-Commercial Units, for display, promotional, or advertising purposes in connection with solicitation of orders for Products and Pre- Commercial Units from -11- Customers in the Territory and in any other manner approved by SUPPLIER in writing. In addition, DISTRIBUTOR shall not register or attempt to register any of SUPPLIER's trademarks or any mark or name closely resembling them, unless requested to do so by SUPPLIER in writing. SUPPLIER represents and warrants to DISTRIBUTOR that (a) SUPPLIER's trademarks pertaining to the Products and Pre-Commercial Units are subject to and protected by United States trademark law, applications for registration of trademarks pertaining to the Products and Pre-Commercial Units have been filed in the United States, and similar applications will be filed by SUPPLIER in other countries of the Territory designated by DISTRIBUTOR; provided that in the event that SUPPLIER does not agree to file any such application in any country or other jurisdiction in the Territory, DISTRIBUTOR shall, in SUPPLIER's sole discretion, (i) sell the Products or Pre-Commercial Units in such country or other jurisdiction without SUPPLIER's trademark affixed, (ii) sell the Products or Pre-Commercial Units in such country or other jurisdiction with a different SUPPLIER trademark affixed (in which event, all of SUPPLIER's representations, warranties, covenants, and indemnities herein shall apply to such substitute trademark and the use thereof), or (iii) continue to sell the Products and Pre- Commercial Units in such country or other jurisdiction with SUPPLIER's trademark affixed (in which event, SUPPLIER shall indemnify DISTRIBUTOR against any and all damages resulting from such sale in accordance with Sections 7.4 and 8.1(f); (b) to SUPPLIER's knowledge, the trademarks set forth on Schedule F are owned by ---------- SUPPLIER; (c) to SUPPLIER's knowledge, SUPPLIER owns free and clear of any mortgage, security interest, financing statement, royalty obligation, lien, encumbrance, charge, option, equity or restriction, all right, title and interest in and to the trademarks set forth on Schedule F and all patents that ---------- it owns or uses in connection with the Products and Pre-Commercial Units as of the date hereof (except for a patent royalty obligation to the Los Alamos National Laboratory); and (d) to SUPPLIER's knowledge, none of such trademarks or patents infringes any existing intellectual property right of any third party and there are no trademarks or trademark applications included in such intellectual property rights which are invalid or unenforceable. 7.3 Intellectual Property. Each party's patents, trademarks, trade names, --------------------- inventions, copyrights, know-how, trade secrets, licensed rights or other intellectual property rights ("Intellectual Property") now in existence or - hereafter lawfully acquired or developed by such party shall not be deemed to be transferred to any other party by virtue of this Agreement. DISTRIBUTOR shall not have the right pursuant to this Agreement to manufacture, duplicate, or otherwise copy or reproduce any of the Products, Pre-Commercial Units, or any parts thereof. The use by either party of any Intellectual Property of the other party is authorized only for the purposes herein set forth; and upon termination of this Agreement for any reason, such authorization shall cease. Notwithstanding the foregoing provisions of this Section 7.3, DISTRIBUTOR hereby grants to SUPPLIER a perpetual non-exclusive, non-transferable, irrevocable, royalty-free, fully paid up license to use Product information regarding market size, demographics, demand, segmentation, design parameters sought by the market, and contact information (names, addresses, telephone numbers) for customers, resellers, service providers, code bodies, and similar information acquired or developed by DISTRIBUTOR under this Agreement. 7.4 DISTRIBUTOR's Trademark. At the election of DISTRIBUTOR, SUPPLIER ----------------------- shall (a) identify DISTRIBUTOR as an "authorized distributor" of SUPPLIER, (b) affix to the Products and Pre-Commercial Units the General Electric Company trademark licensed to DISTRIBUTOR ("DISTRIBUTOR's Trademark") as directed by DISTRIBUTOR for the purpose of co-branding Products and Pre-Commercial Units sold by DISTRIBUTOR (i.e., affixing DISTRIBUTOR's Trademark to a Product or Pre- Commercial Unit that also bears the trademark of SUPPLIER), and (c) permit DISTRIBUTOR's marketing and selling of co-branded Products -12- and Pre-Commercial Units. In the event that DISTRIBUTOR elects not to have SUPPLIER affix DISTRIBUTOR's Trademark to the Products and Pre-Commercial Units, DISTRIBUTOR will affix DISTRIBUTOR's Trademark to the Products and Pre- Commercial Units. DISTRIBUTOR shall use DISTRIBUTOR's Trademarks for display, promotional, or advertising purposes in connection with solicitation of orders for Products and Pre-Commercial Units from Customers in the Territory. The only Products and Pre-Commercial Units that may bear DISTRIBUTOR's Trademark are those that are sold by DISTRIBUTOR. SUPPLIER acknowledges that it is not authorized to use DISTRIBUTOR's Trademark for any purpose unless expressly permitted in writing to do so by DISTRIBUTOR. All resulting use of DISTRIBUTOR's Trademark shall inure solely to the benefit of General Electric Company. DISTRIBUTOR represents and warrants to SUPPLIER that (a) DISTRIBUTOR's Trademark is subject to and protected by United States trademark law; (b) to DISTRIBUTOR's knowledge, DISTRIBUTOR's Trademark is owned by General Electric Company, and DISTRIBUTOR has a valid license to use DISTRIBUTOR's Trademark; (c) to DISTRIBUTOR's knowledge, General Electric Company owns free and clear of any mortgage, security interest, financing statement, royalty obligation, lien, encumbrance, charge, option, equity or restriction, all right, title and interest in and to DISTRIBUTOR's Trademark set forth on Schedule F; and (d) to ---------- DISTRIBUTOR's knowledge, DISTRIBUTOR's Trademark does not infringe on any existing intellectual property right of any third party and is not invalid or unenforceable. 7.5 Protection of Intellectual Property. In addition to any obligation ----------------------------------- SUPPLIER may have under Article VIII hereof, SUPPLIER shall take all actions reasonably necessary to enforce and protect its trademarks, patents, and Intellectual Property Rights relating to the Products and Pre-Commercial Units. Without limiting the generality of the foregoing, SUPPLIER shall defend and indemnify DISTRIBUTOR against any suit, claim, or proceeding brought against DISTRIBUTOR that is based on a claim that any trademark owned or used by SUPPLIER directly in connection with any Product, Pre-Commercial Unit, or any part thereof (except for DISTRIBUTOR's Trademark), as such trademark was affixed to such Product, Pre-Commercial Unit, or part thereof in accordance with Section 7.2, infringes any intellectual property right of any third party in any country or other jurisdiction in the Territory, if notified promptly in writing and given authority, information, and assistance (at SUPPLIER's expense) for the defense of same, and provided that such infringement did not arise as a result of DISTRIBUTOR's unauthorized use of such trademark. SUPPLIER shall pay all damages and costs awarded with respect to any suit, claim, or proceeding for which SUPPLIER is required to provide indemnification pursuant to this Section 7.5. Without limiting the generality of the foregoing, SUPPLIER shall defend and indemnify DISTRIBUTOR against any suit, claim or proceeding brought against DISTRIBUTOR that is based on a claim that any Product or Pre-Commercial Unit, or any part thereof, furnished under this Agreement, as well as any device or process necessarily resulting from the use thereof, constitutes an infringement of any patent of the United States (or any other country or other jurisdiction in the Territory), if notified promptly in writing and given authority, information, and assistance (at SUPPLIER's expense) for the defense of same, and provided that such infringement did not arise as a result of (a) DISTRIBUTOR's developments, misuse, or modifications that were not approved by SUPPLIER, or (b) DISTRIBUTOR's combination, operation, or use with devices, data, equipment, systems, programs, or products not furnished by SUPPLIER, contemplated by the specifications in Schedule B, or approved by SUPPLIER, SUPPLIER shall pay all ---------- damages and costs awarded with respect to any suit, claim, or proceeding for which SUPPLIER is required to provide indemnification pursuant to this Section 7.5. In the event a claim is made or appears likely to be made that any Product or Pre-Commercial Unit, or any part thereof, furnished under this Agreement, as well as any device or process necessarily resulting from the use thereof, infringes upon a third party's patent, SUPPLIER shall, at its own expense and at its option, and in -13- addition to all other rights or remedies which the DISTRIBUTOR may have pursuant to this Agreement, (a) procure for DISTRIBUTOR the right to continue using said Product, Pre-Commercial Unit, part, device, or process; (b) replace same with a non-infringing equivalent; or (c) remove said Product, Pre-Commercial Unit, part, device, or process and refund the purchase price and the transportation and installation costs thereof. ARTICLE VIII - INDEMNIFICATION 8.1 SUPPLIER's Indemnification of DISTRIBUTOR. SUPPLIER agrees to ----------------------------------------- indemnify, defend and hold the DISTRIBUTOR, its officers, directors, employees, successors, and permitted assigns harmless against all third party claims, losses, costs, liabilities, judgments, damages, or expenses of whatever form or nature, including attorneys' fees and other costs of legal defense, whether direct or indirect, that they, or any of them, may sustain or incur as a result of any acts or omissions (except for acts or omissions caused by the acts or omissions of DISTRIBUTOR) of SUPPLIER or any of its directors, officers, employees, Affiliates, or agents, including, but not limited to, (a) material breach of any of the provisions of this Agreement; (b) negligence or other tortious conduct; (c) representations or warranties made by SUPPLIER herein; (d) violation by SUPPLIER or any of its directors, officers, employees, agents, dealers, or subdistributors of any applicable law, regulation, or order of the United States of America or of other countries in the Territory or other applicable law; (e) competition by SUPPLIER or any of its Affiliates in the Territory; (f) trademark infringement claims brought against DISTRIBUTOR pertaining to DISTRIBUTOR's use of SUPPLIER's trademarks in accordance with Section 7.5 hereof; or (g) patent infringement claims brought against DISTRIBUTOR in accordance with Section 7.5 hereof. 8.2 DISTRIBUTOR's Indemnification of SUPPLIER. DISTRIBUTOR agrees to ----------------------------------------- indemnify, defend and hold the SUPPLIER, its officers, directors, employees, successors, and permitted assigns harmless against all third party claims, losses, costs, liabilities, judgments, damages, or expenses of whatever form or nature, including attorneys' fees and other costs of legal defense, whether direct or indirect, that they, or any of them, may sustain or incur as a result of any acts or omissions (except for acts or omissions caused by the acts or omissions of SUPPLIER) of the DISTRIBUTOR or any of its directors, officers, employees, Affiliates, or agents, including, but not limited to, (a) material breach of any of the provisions of this Agreement; (b) negligence or other tortious conduct; (c) representations or warranties made by DISTRIBUTOR herein; (d) violation by DISTRIBUTOR or any of its directors, officers, employees or agents, agents, dealers, or sub-distributors of any applicable law, regulation, or order of the United States of America or of other countries in the Territory or other applicable law; (e) competition by DISTRIBUTOR in the Territory; or (f) trademark infringement claims brought against SUPPLIER pertaining to DISTRIBUTOR's Trademark. 8.3 Scope of Indemnity. The parties' foregoing obligations to indemnify ------------------ each other shall include, but not be limited to, indemnification against all expenses, including reasonable attorneys' and paralegals' fees at trial, on appeal or otherwise, incurred in investigating and/or defending against any claims, actions or liabilities for which indemnification is provided herein. Each party hereto agrees to defend the other party hereto against any and all claims, actions, and liabilities for which indemnification is provided herein, whether such claims or actions are rightfully or wrongfully brought or filed. Each party hereto further agrees to pay the amount of any compromise or settlement. No indemnifying party shall be required to pay the indemnified party any amount under this Article VIII unless and until the aggregate of such amounts payable to such indemnified party shall reach $25,000, at which time the indemnifying party shall become responsible for all such amounts (including the initial $25,000); and the indemnification obligations of each party hereunder shall -14- be limited to $1,000,000; provided, that this sentence shall not apply to the indemnification obligations set forth in Section 8.1 (f) and (g) and Section 8.2 (f). The foregoing indemnification shall not in any manner limit a party's legal remedies under applicable law against the other party for breaches of this Agreement. ARTICLE IX - GENERAL PROVISIONS 9.1 Disclosure. This Agreement may be discussed with, shown to, and filed ---------- with any government agency or official as determined to be appropriate by either party, so long as the party making such disclosure, filing or discussion of this Agreement provides the other party with ten (10) days prior written notice of such proposed action. 9.2 Waiver. Each party agrees that the failure of the other party at any ------ time to require performance of any of the provisions herein shall not operate as a waiver of the right of the other party to request strict performance of the same or like provisions, or any other provisions hereof, at a later time. 9.3 Expenses. Except as otherwise provided herein, each party hereto shall -------- bear its own costs and expenses associated with the negotiation, preparation, delivery and performance of this Agreement. 9.4 Notices and Consents. All notices or consents hereunder shall be in -------------------- the English language and shall be in writing and shall be deemed given (a) when delivered personally, (b) five (5) days after deposit, postage prepaid, if mailed by registered or certified mail, return receipt requested, or (c) upon transmission if transmitted by telex or facsimile (with an electronic confirmation thereof to the transmitter), to the parties at their respective addresses set forth in the preamble of this Agreement (or at such other address for a party as shall be specified by notice given hereunder): If to SUPPLIER: PLUG POWER, L.L.C. 968 Albany-Shaker Road Latham, New York 12110 Attn: Mr. Gary Mittleman If to DISTRIBUTOR: GE FUEL CELL SYSTEMS, L.L.C. 1 River Road Schenectady, New York 12345 Attn: Mr. Barry Glickman 9.5 Severability of Provisions. Wherever possible, each provision of this -------------------------- Agreement shall be interpreted in such manner as to be effective and valid, but if any provision of this Agreement shall be prohibited by applicable law, unenforceable in any jurisdiction or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition, unenforceability, or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement, or affecting the validity or enforceability of such provision in any other jurisdiction. 9.6 Survival. Sections 4.3, 6.6 and 6.8 and Articles VII, VIII and IX of -------- this Agreement shall continue and survive the termination hereof. -15- 9.7 Language. The English language text, and American usage thereof, shall -------- govern and control the interpretation of this Agreement and all writings between the parties. 9.8 Entire Agreement; Amendment. This Agreement (including the exhibits --------------------------- hereto and all documents and papers delivered pursuant hereto and any written amendments hereof executed by the parties to this Agreement, as specified herein) constitutes the entire agreement and supersedes all prior agreements and understandings, oral and written, among the parties hereto with respect to the subject matter hereof, it being understood and agreed that any business plan that may hereafter be compiled or delivered shall be for informational purposes only and shall not constitute any representation, warranty or covenant of DISTRIBUTOR or SUPPLIER and shall not be deemed to be a part of this Agreement. No course of prior dealings between the parties and no usage of trade shall be relevant or admissible to supplement, explain or vary any of the terms of this Agreement. This Agreement may be amended only by written agreement executed by all of the parties hereto. Time is of the essence of this Agreement and each of its provisions, and no extension of any time period shall be binding upon any of the parties hereto unless expressly provided herein or in writing and signed by all of the parties hereto. 9.9 Governing Law. The validity, construction, interpretation and ------------- performance of this Agreement and all transactions under it shall be governed by the laws of the State of New York exclusively (except that if any choice of law provision under New York law would result in the application of the law of a state or jurisdiction other than New York, such provision shall not apply). The parties hereto expressly agree and acknowledge that the United Nations Convention for the International Sale of Goods shall not apply to this Agreement. 9.10 Miscellaneous. This Agreement may be executed in any number of ------------- counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The parties hereto shall execute and deliver, or cause to be executed and delivered, such additional or further transfers, assignments, endorsements or other instruments as the other party or its counsel may reasonably request from time to time for purposes of carrying out the transactions contemplated by this Agreement. The article and section headings contained herein are for reference only and shall not be considered as substantive parts of this Agreement. The use of the singular or plural form shall include the other form and the use of the masculine, feminine or neutered gender shall include the other gender. The words "hereof," "herein," and "hereunder" and words of similar import when used in this Agreement, shall refer to this Agreement as a whole, including all exhibits hereto, and not to any particular provision of this Agreement unless otherwise specified; all references herein to paragraphs, sections, schedules or exhibits shall refer to paragraphs or sections of this Agreement, or schedules or exhibits to this Agreement. The parties hereto acknowledge and agree that the recitals immediately following the preamble of this Agreement are true and correct and are incorporated herein as a part of this Agreement. This Agreement shall be binding upon the parties hereto and their successors and permitted assigns and shall inure to the benefit of their successors and permitted assigns. 9.12 Force Majeure. If the performance by either party of any non-monetary ------------- obligation under this Agreement is delayed or prevented in whole or in part by any cause not reasonably within its control (including, without limitation, acts of God, war, civil disturbances, accidents, damage to its facilities, labor disputes, acts of any governmental body not attributable to such party's failure to comply with this Agreement, or failure or delay of third parties), it shall be excused, discharged, and released of performance to the extent -16- such performance is so limited or prevented, without liability of any kind. Each party shall use its reasonable efforts to minimize the duration and consequences of any failure of or delay in performance resulting from a "Force Majeure" event. 9.13 Limitation of Liability. In no case will SUPPLIER or DISTRIBUTOR be ----------------------- liable to the other for special, incidental, or consequential damages, including, but not limited to, personal injury, property damage, loss of profit or revenues, or business interruption arising out of the manufacture, marketing, distribution, sale, or supplying of the Products, Pre-Commercial Units, or Services. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. SUPPLIER: PLUG POWER, L.L.C. By:/s/ Gary Mittleman ------------------------------------------ Gary Mittleman, President & CEO DISTRIBUTOR: GE FUEL CELL SYSTEMS, L.L.C. By: /s/ Barry Glickman ------------------------------------------ Barry Glickman, President -17- TABLE OF SCHEDULES ------------------ Schedule A-1 - Products - ------------ Schedule A-2 - Services - ------------ Schedule B - Terms and Conditions of Purchase/Sale; Specifications - ---------- Schedule C - Product and Pre-Commercial Unit Prices - ---------- Schedule D - DISTRIBUTOR's Sales Commitments - ---------- Schedule E - SUPPLIER's Insurance - ---------- Schedule F - Trademark Registrations - ---------- -1- SCHEDULE A-1 ------------ DEFINITION OF PRODUCTS The term "Products" shall include the following items manufactured by or on behalf of SUPPLIER: Proton Exchange Membrane ("PEM") Fuel-Cell Powered Generator Sets, without changes or additions (other than standard installation materials - e.g., ducting, pipe, wire), and components (e.g., fuel processor, fuel cell stack, power electronics), replacement parts, upgrades, accessories (e.g., combined power and hot water packages), and improvements, of various sizes no larger than 35kW of maximum continuous output that (a) meet the Commercial Unit Specifications set forth in Schedule B, and (b) are designed for use in residential, commercial, and industrial stationary power applications (e.g., base load power, peaking power, emergency back-up power, enhanced power quality, cogeneration, trailer-mounted units for temporary stationary power and/or rental power use). The term "Products" excludes the following, regardless of their manufacturer: 1. PEM Fuel Cell-Powered Generator Sets and/or components designed for use in transportation or vehicle applications; 2. PEM Fuel Cell-Powered Generator Sets and/or components designed for use in extended run, uninterruptible power supply ("UPS") systems for data centers applications, where the PEM Fuel Cell-Powered Generator Set (a) produces DC or AC premium (i.e., superior power quality to the grid) power for data center supporting information technology ("IT") equipment, (b) does not provide power to the entire facility, (c) is installed at a sub-panel downstream from the customer's main distribution panel, (d) is designed to enable remote IT equipment shutdown and power cycling for IT equipment that is no longer responding to commands, and (e) is designed to promote reliability over efficiency; 3. PEM Fuel Cell-Powered Generator Sets and/or components for rack-mounted equipment in telecommunications, cellular, or cable television applications; and 4. PEM Fuel Cell-Powered Generator Sets and/or components that are integrated with another device that utilizes all of the electrical output of the Fuel Cell-Powered Generator Set for that specific device only (e.g., an air conditioner powered by a Fuel Cell-Powered Generator Set, but not a combined Fuel Cell-Powered Generator Set-chiller cogen unit). -2- SCHEDULE A-2 ------------ SERVICES -------- The term "Services" shall include the following activities associated with the Products and Pre-Commercial Units: Installation Permitting Application Engineering Operation Routine Maintenance Unscheduled Maintenance Repair Overhaul (e.g., stack replacement) Upgrade Remote monitoring, diagnostics, and/or control (i.e., dispatch) Operator and Customer Training Customer Service Customer Support -3- SCHEDULE B ---------- TERMS AND CONDITIONS OF PURCHASE/SALE 1. ACCEPTANCE OF TERMS AND CONDITIONS. (a) DISTRIBUTOR and SUPPLIER agree to be bound by and to comply with all the terms and conditions in and referred to in this Schedule B, as well as those appearing elsewhere in the Agreement (to ---------- which the section references contained herein apply), in any supplements hereto and in all specifications and other documents referred to herein. (b) An order by DISTRIBUTOR or the acceptance of an order by SUPPLIER does not constitute an acceptance by the DISTRIBUTOR or SUPPLIER of any offer to sell, any quotation, or any proposal, other than under the terms and conditions contained in this Agreement. ANY PURCHASE ORDER, ATTEMPTED ACKNOWLEDGMENT OF AN ORDER, OR ANY DOCUMENT CONNECTED THEREWITH, CONTAINING TERMS AND CONDITIONS INCONSISTENT WITH OR IN ADDITION TO THE TERMS AND CONDITIONS IN THIS SCHEDULE B IS NOT BINDING ---------- UPON DISTRIBUTOR OR SUPPLIER UNLESS SPECIFICALLY ACCEPTED BY DISTRIBUTOR AND SUPPLIER IN WRITING. 2. PRICES AND PAYMENTS. SUPPLIER's prices are firm, are as specified in Schedule C and shall not be subject to change, except as provided in this - ---------- Agreement and Schedule C. SUPPLIER's total price is FOB SUPPLIER's designated, ---------- continental U.S. manufacturing facility, unless otherwise agreed in writing by SUPPLIER and DISTRIBUTOR. All prices are exclusive of any applicable federal, state, or local sales, use, excise, or other similar taxes, provided, however, that any such taxes to which SUPPLIER becomes subject as a result of manufacturing, having manufactured, or procuring Products or Pre-Commercial Units, shall be borne by SUPPLIER. No extra charges of any kind will be allowed unless specifically agreed to in writing by DISTRIBUTOR. Unless otherwise agreed between SUPPLIER and DISTRIBUTOR, payments shall become due 45 days from receipt of invoice. In the event of delay in payment, DISTRIBUTOR will pay SUPPLIER a late fee equal to the lesser of 1.5%, or the maximum rate allowable by law, of any unpaid balance per month of delay or the maximum rate allowable by law. DISTRIBUTOR must make payment when due, without offset, deduction, or counterclaim, regardless of any claim by DISTRIBUTOR. 3. DELIVERY AND PASSAGE OF TITLE. Time is of the essence of all purchase orders, except that delivery dates will be framed in terms of calendar months and orders will not be deemed late until after the end of such calendar month. If SUPPLIER fails to deliver the Products or Pre-Commercial Units or to complete any Services furnished hereunder, then DISTRIBUTOR shall be entitled, in addition to the remedies available elsewhere under the Agreement, to assess an amount, as liquidated damages for delay, equal to 1% of the total dollar value of DISTRIBUTOR's order for the first month of delay and 2% of the total dollar value of DISTRIBUTOR's order per subsequent month of delay; provided, (a) that such remedy will be capped at 6%, (b) if the order is more than three months late, then DISTRIBUTOR may cancel the order, and (c) such liquidated damages will only be available to DISTRIBUTOR for those orders to the extent that DISTRIBUTOR has provided such remedy to its Customer. SUPPLIER agrees that such amounts are a reasonable pre-estimate of the damages which DISTRIBUTOR may suffer as a result of such delay, and are to be assessed as liquidated damages and not as a penalty. Where such liquidated damages are available to DISTRIBUTOR, they shall be DISTRIBUTOR's only remedy for SUPPLIER's failure to make timely delivery, other than the remedies for non-performance expressly set forth in this Agreement. Products or Pre-Commercial Units which will be shipped from within the United States for delivery within the United States shall be delivered FOB SUPPLIER's designated, continental U.S. manufacturing facility, unless otherwise agreed in writing by SUPPLIER and DISTRIBUTOR. Products or Pre-Commercial Units delivered to DISTRIBUTOR in advance of schedule may be returned to SUPPLIER at SUPPLIER's expense. Title shall pass to DISTRIBUTOR upon delivery to DISTRIBUTOR FOB SUPPLIER's designated, continental U.S. manufacturing facility. 4. CHANGES. The DISTRIBUTOR may at any time, in writing, request changes within the general scope of a purchase order in (a) specifications, where the Products or Pre-Commercial Units to be furnished are to be specifically manufactured in accordance therewith, (b) method of shipment or packing, or (c) place and time of delivery. Any such change shall be authorized only by an amendment executed by SUPPLIER and DISTRIBUTOR, with such amendment to specify any additional expense, to be borne by DISTRIBUTOR. 5. INSPECTION. (a) All Products and Pre-Commercial Units shall be subject to inspection and test by DISTRIBUTOR at reasonable times and places upon reasonable notice, including the place of manufacture (which SUPPLIER shall use reasonable efforts to arrange, including providing for such access in SUPPLIER's purchase orders to the manufacturer); (b) If any inspection or test is made on the premises of SUPPLIER, then SUPPLIER, without additional charge, shall provide reasonable facilities and assistance for the safety and convenience of the inspectors in the performance of their duties, provided that the inspectors must execute SUPPLIER's standard confidentiality agreement, must abide by such facility's rules and regulations, and must be covered by insurance for occurrences other than due to SUPPLIER's negligence or willful misconduct; and (c) SUPPLIER shall provide and maintain a program, to the mutual satisfaction of SUPPLIER and DISTRIBUTOR, in order to create ongoing product design, manufacturing, testing, inspection, and other safety and quality-related processes that are adequate to assure the safety and reliability of SUPPLIER's Products and Pre-Commercial Units (the "Product Quality and Safety Assurance Program"). Records of all inspection work by SUPPLIER shall be kept complete and available to DISTRIBUTOR during the performance of a purchase order and for three (3) years from the date of such inspection. SUPPLIER will allow representatives of DISTRIBUTOR access to the facilities involved in performing an order for purposes of reviewing the status and progress of production. 6. REJECTION. If any of the Products, Pre-Commercial Units or Services (to the extent that SUPPLIER is providing Services) ordered are found by DISTRIBUTOR within 30 days of delivery to be defective, or otherwise not in conformity with the requirements of the order, including any applicable specifications, SUPPLIER, at its option and sole discretion may: (a) instruct DISTRIBUTOR to return such goods at SUPPLIER's expense; (b) request that DISTRIBUTOR, with DISTRIBUTOR's written approval, take such actions as may be required to cure all defects and/or bring the Products or Pre-Commercial Units into conformity with all requirements, in which event any reasonable costs and expenses thereby incurred by DISTRIBUTOR, including material and handling charges, will be at SUPPLIER's expense; and (c) re-perform, at SUPPLIER's own expense, any defective portion of the Services performed, to the extent that SUPPLIER is performing Services. DISTRIBUTOR must notify SUPPLIER in writing of such defect or non-conformity within 30 days after delivery of the Products or Pre-Commercial Units or performance of Services, if applicable, or DISTRIBUTOR's rights under this Section 6 shall be waived. The remedies in this Section 6 shall be DISTRIBUTOR's exclusive remedies under this Section 6. 7. WARRANTIES. (a) SUPPLIER will convey clear title to all Products and Pre-Commercial Units to DISTRIBUTOR as provided hereunder; (b) SUPPLIER warrants and represents that all Products, Pre-Commercial Units and Services (to the extent that SUPPLIER provides Services) sold hereunder or pursuant hereto will be free from all material defects in workmanship and material, and that the Products, Pre-Commercial Units and Services (to the extent that SUPPLIER provides Services) are provided in strict accordance with the specifications set forth in Schedule B, and (c) Except as provided by this Agreement, any attempt ---------- by SUPPLIER to limit, disclaim, or restrict any such warranties or any remedies of DISTRIBUTOR, except as limited by this Agreement, by acknowledgment or otherwise, in accepting or performing an order, shall be null, void and ineffective without DISTRIBUTOR's written consent. For Products purchased under this Agreement, the foregoing warranties shall apply for a period of the lesser of twelve (12) months from the date of installation or eighteen (18) months from delivery to DISTRIBUTOR. For Pre-Commercial Units purchased under this Agreement, the foregoing warranties shall apply for a period of the lesser of one (1) month from the date of installation or two (2) months from delivery to DISTRIBUTOR. For any product or component purchased by SUPPLIER with a warranty coverage available to DISTRIBUTOR for the relevant components. The foregoing warranties are conditioned upon (a) proper storage, handling, transportation, installation, use, repair, and maintenance, and conformance with any reasonable recommendations of SUPPLIER, and (b) DISTRIBUTOR's promptly notifying SUPPLIER of any defects and, if required, promptly making the Product or Pre-Commercial Unit available for correction. The foregoing warranties are provided at no cost to DISTRIBUTOR or Customers. If any Product or Pre-Commercial Unit fails to meet the foregoing warranties during the warranty periods set forth above, SUPPLIER shall thereupon correct any such failure by either (with such choice to be solely SUPPLIER's) (a) repairing the defective Product or Pre-Commercial Unit, or (b) replacing the defective Product or Pre-Commercial Unit. All costs associated with such repair or replacement, including any transportation costs, shall be the sole responsibility of SUPPLIER, subject to the limitations set forth in the Service Agreement described in the next paragraph. DISTRIBUTOR will provide the labor, transportation, and other Services necessary for such repairs and replacements pursuant to a Service Agreement that will be mutually agreed between SUPPLIER and DISTRIBUTOR. If such Service Agreement is not agreed to by June 1, 2000, then this Distributor Agreement will terminate. The Service Agreement will set forth limits on SUPPLIER's reimbursement to DISTRIBUTOR for labor, transportation, and other Services. The Service Agreement will also set forth a warranty approval process that will include pre-approval of major warranty claims prior to commencement of work, submission of all warranty claims for review and approval by SUPPLIER, and return of all parts subject to warranty claims to SUPPLIER. For Products, SUPPLIER will provide DISTRIBUTOR with the option of purchasing an extension to the initial warranty period. Such additional warranty period will be for three years beyond the termination of the initial warranty period, and will cover the fuel cell stack, control system, power conditioning system (excluding batteries and recharger), and fuel processor (i.e., the extended warranty covers all components except for the air humidifier assembly, humidifier pump, system frame assembly, package skin assembly, manifold assemblies, electrical harness assemblies, coolant pump and fan, cooling system heat exchanger, fuel cell air blower, particulate air filter, air regulator, water deionizing and purification system, batteries, recharger, and fuel processing auxiliaries). The price for such warranty extension, if purchased, will not exceed $750, to be paid as a lump sum at the time of Product purchase, for Products purchased in "2001", as defined in Schedule D, and $500 for ---------- Products purchased thereafter. The extended warranty price for "2001" is not firm and will become firm no later than April 1, 2000. In the event that the extended warranty price for "2001" exceeds $750, then SUPPLIER and DISTRIBUTOR shall agree to a decrease to DISTRIBUTOR's Sales Commitments. If SUPPLIER and DISTRIBUTOR cannot reach such agreement, then this Agreement shall terminate. For Pre-Commercial Units, SUPPLIER will provide DISTRIBUTOR with the option of purchasing an extension to the initial warranty period. Such additional warranty period will be for one year beyond the termination of the initial warranty period, and SUPPLIER will provide a firm price no later than October 1, 1999. THE WARRANTIES SET FORTH IN THIS SECTION 7 ARE IN LIEU OF ALL OTHER WARRANTIES, WHETHER ORAL, WRITTEN, EXPRESS, OR IMPLIED, INCLUDING WITHOUT LIMITATION IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. SUPPLIER'S WARRANTY OBLIGATIONS AND DISTRIBUTOR'S REMEDIES UNDER THIS SECTION 7 (EXCEPT AS TO TITLE) ARE SOLELY AND EXCLUSIVELY AS STATED HEREIN. 8. PROPER BUSINESS PRACTICES. SUPPLIER and DISTRIBUTOR shall comply with all laws dealing with improper or illegal payments, gifts or gratuities, and SUPPLIER and DISTRIBUTOR agree not to pay, promise to pay or authorize the payment of any money or anything of value, directly or indirectly to any person for the purpose of illegally or improperly inducing a decision or obtaining or retaining business in connection with a purchase order. 9. COMPLIANCE WITH LAWS. SUPPLIER and DISTRIBUTOR agree to comply with the applicable provisions of any federal, state, provincial or local law or ordinance and all lawful orders, rules, and regulations issued thereunder. No forced or prison labor may be used in manufacturing the products to be supplied under this Agreement. If forced or prison labor is determined to have been used in the manufacture of the Products or Pre-Commercial Units supplied hereunder, the DISTRIBUTOR shall have the right to immediately terminate the purchase order and this Agreement without further compensation to the SUPPLIER; and, in such case, DISTRIBUTOR shall return to SUPPLIER any Products or Pre-Commercial Units for which it has not yet made payment. Provisions applicable to orders for work to be performed, goods to be produced, or services to be rendered within the United States. (a) SUPPLIER shall comply with any provisions, representations or agreements or contractual clauses required thereby to be included or incorporated by reference or operation of law in the contract resulting from acceptance of this order and dealing with: (i) Equal Opportunity (Executive Order 11246 as amended by Executive Orders 113575 and 10286 and applicable regulations promulgated pursuant thereto); (ii) Employment of Veterans (Executive Order 11701 and applicable regulations promulgated pursuant thereto); (iii) Employment of the Handicapped (Executive Order 11758 as amended by Executive Order 11867 and applicable regulations promulgated pursuant thereto); (iv) Employment Discrimination Because of Age (Executive Order 11141 and applicable regulations promulgated pursuant thereto); and (v) Utilization of Disadvantaged and Business Enterprises (Executive Order 11625, Public Law 95-507 and applicable regulations promulgated pursuant thereto). (b) SUPPLIER certifies that with respect to orders which exceed $10,000 it is in compliance with the requirements for non-segregated facilities set forth in 41 CFR Chapter 60-1.8. (c) SUPPLIER warrants that each chemical substance constituting or contained in goods sold or otherwise transferred to DISTRIBUTOR hereunder is on the list of chemical substances compiled and published by the Administrator of the Environmental Protection Administration pursuant to the Toxic Substances Control Act (P.L. 92-573 as amended, and the Federal Hazardous Substances Act (P.L. 92-516) as amended and lawful standards and regulations thereunder. (d) In accepting an order SUPPLIER represents that the goods to be furnished thereunder were or will be produced in compliance with the requirements of the Fair Labor Standards Act of 1938, as amended, including Section 12(a) and SUPPLIER shall insert a certificate to that effect on all invoices submitted in connection with such order. 10. PACKING, PRESERVATION AND MARKING. Packing, preservation and marking requirements will be in accordance with the specification drawing or as otherwise agreed by SUPPLIER and DISTRIBUTOR. If none are specified, SUPPLIER shall use the commercially accepted practice. 11. YEAR 2000 COMPLIANCE WITH DATE PROCESSING REQUIREMENTS. In addition to any other warranties and representations provided by SUPPLIER to DISTRIBUTOR, whether pursuant to this Schedule B, by law, equity, or otherwise, SUPPLIER ---------- represents, warrants and covenants that (a) any Product(s), Pre-Commercial Unit(s) and/or Service(s) provided by SUPPLIER hereunder, including, without limitation, each item of hardware, software, or firmware; any system, equipment, or products consisting of or containing one or more thereof; and any and all enhancements, upgrades, customizations, modifications, maintenance and the like, performed approved, or contained in official documentation provided by SUPPLIER ("Products/Services") shall be Year 2000 Compliant at the time of delivery and at all times thereafter and in all subsequent updates or revisions of any kind, and (b) SUPPLIER's supply of the Products/Services to DISTRIBUTOR shall not be interrupted, delayed, decreased, or otherwise materially affected by dates prior to, on, after or spanning January 1, 2000. For purposes of this purchase order, the term "Year 2000 Compliant" means that (1) the Products/Services accurately process, provide and/or receive date data, within, from, into, and between centuries (including without limitation, the twentieth and twenty-first centuries, the last year of a century (e.g., 1999) and the first year of the next century (e.g., 2000)), and leap year calculations, and (2) neither the performance nor the functionality nor SUPPLIER's supply to DISTRIBUTOR of the Products/Services will be materially affected by dates prior to, on, after, or spanning January 1, 2000. Moreover, SUPPLIER covenants and agrees that the design of said Products/Services to ensure compliance with the foregoing warranties, representations and covenants shall include, without limitation, date data century recognition, and date data interface values that reflect the century. In particular, but without limitation, (i) no value for current date will cause any error, interruption, or decreased performance in the operation of such Products/Services, (ii) all manipulations of date-related data (including, but not limited to, calculating, comparing, sequencing, processing, and outputting) will produce correct results for all valid dates, (iii) date elements in interfaces and data storage will specify the correct century to eliminate date ambiguity without human intervention, including leap year calculations, (iv) where any date element is represented without a century, the correct century will be unambiguous for all manipulations involving that element, (v) authorization codes, passwords, and zaps (purge functions) should function normally and in the same manner prior to, on, after and spanning January 1, 2000, including, without limitation, the manner in which they function with respect to expiration dates and CPU serial numbers. No obligation of SUPPLIER under a purchase order pursuant to this Agreement shall be excused by reason of the failure of SUPPLIER's or any other person's products or services to be Year 2000 Compliant, nor shall such occurrence(s) be deemed a force majeure event. As used herein or in a purchase order, the words "date" and "dates" shall be deemed to include "time". In the event of breach of this warranty, in addition to any other remedies DISTRIBUTOR may have, whether pursuant to this Schedule B, by law, equity or ---------- otherwise, DISTRIBUTOR shall, at SUPPLIER's option, be entitled to repair or replacement of any non-compliant Products/Services, at SUPPLIER's cost, within thirty (30) days after notice of breach from DISTRIBUTOR to SUPPLIER. In addition to SUPPLIER'S obligations as set forth above, SUPPLIER shall indemnify and hold DISTRIBUTOR harmless from and against any claims, costs, losses, damages, or expenses (including reasonable attorneys' fees) incurred by DISTRIBUTOR as a result of any failure of any Products/Services to be Year 2000 Compliant. Notwithstanding anything herein to the contrary, the liability of SUPPLIER for a breach of SUPPLIER's Year 2000 Compliant representation, warranty and agreement set forth herein shall not be subject to any limitations or exclusions of remedies or warranties, if any, contained in a purchase order or any other agreement between the parties. Notwithstanding anything in a purchase order or in this Agreement to the contrary, the period of the representations, warranties and covenants set forth in this section shall extend at least until January 31, 2001. Any statute of limitations that might be applicable to SUPPLIER's Year 2000 Compliant warranty and representation shall not accrue or begin to run until the later of January 31, 2001, or the time when such statute of limitations would otherwise accrue or begin to run, and, with respect to any claim based on any failure of the Products/Services to be Year 2000 Compliant, SUPPLIER shall not assert any defense based on or alleging the passage of time from the effective date of a purchase order to January 31, 2001. 12. LIMITATION OF LIABILITY. In no case will SUPPLIER or DISTRIBUTOR be liable for the other's special, incidental, or consequential damages, including, but not limited to, personal injury, property damage, loss of profit or revenues, or business interruption arising out of the manufacture, marketing, distribution, sale, or supplying of the Products, Pre-Commercial Units, or Services. The remedies available to DISTRIBUTOR hereunder may be asserted only by DISTRIBUTOR and by no other party. DISTRIBUTOR may not expand warranty coverage to Customers beyond the coverage specifically described herein, except as agreed in writing by SUPPLIER. SCHEDULE B (continued) ---------------------- Pre-Commercial Unit Performance Specifications Note: SUPPLIER and DISTRIBUTOR recognize that these specifications may change - ------------------------------------------------------------------------------- based on further analysis of residential load profiles and field testing. If - ----------------------------------------------------------------------------- SUPPLIER and DISTRIBUTOR mutually agree to change the specifications set forth - ------------------------------------------------------------------------------ below, SUPPLIER and DISTRIBUTOR agree to adjust the prices and purchase volumes - ------------------------------------------------------------------------------- set forth in Schedule C. - ------------------------ Testing protocol and acceptance criteria: - ----------------------------------------- On or before October 1, 1999, DISTRIBUTOR and SUPPLIER will agree on the specific testing protocol and acceptance criteria for all Pre-Commercial Units ("PCUs") purchased by DISTRIBUTOR. The protocol and acceptance criteria will (a) incorporate the field test results from the "Test and Evaluation Units" ("TEUs") that SUPPLIER expects to have available beginning the second quarter of 1999; and (b) address all aspects of PCU system and component performance that are expected to impact regulatory approvals and end-user economics, including, but not limited to, useful life, output, reliability, efficiency, operating environment requirements, power quality, load following capability, and emissions. In the event that DISTRIBUTOR and SUPPLIER are unable to agree on the testing protocol and/or acceptance criteria this Agreement will terminate. Packaging: - ---------- PCU product design will be complete to the point where interfaces between major components (e.g., stack, reformer, inverter, etc.) will be similar to that of the final Product. The overall PCU package size and weight must be suitable for installation outside of a typical single family residence (and, where practicable, inside a typical single family residence). Certifications: - --------------- Certifications (e.g., UL, NFPA, AGA, FCC Class B) are not required for the PCUs. However, PCUs must meet any customary local codes and regulations required for field testing by DISTRIBUTOR's Customers. To the extent the test site requires preparation to meet local codes, any site improvements will be at the Customer's expense. Technology: - ----------- Basic technology of all major PCU components must be the same as that of the Product; however, suppliers and manufacturers of the major components need not be the same as those for the Product. Interconnection: - ---------------- PCUs will be capable of interconnection to the electrical system of a typical single family residence; provided however that the PCU will operate isolated from the grid with the use of a transfer switch ("stand-alone operation"). The transfer switch will, in the event that the PCU fails or is interrupted, transfer the household load from the PCU back to the utility grid within no more than one-tenth of a second. Installation: - ------------- PCUs must be in compliance with any applicable NEC installation requirements. Documentation: - -------------- PCUs must be shipped with sufficient documentation (e.g., installation drawings, operating manuals, repair guides) to allow for start-up and Service by individuals with a skill level comparable to a typical HVAC technician, after such individual has completed the SUPPLIER training program or a training program approved by SUPPLIER. PCUs must be provided in strict accordance with samples, drawings, and/or designs provided by SUPPLIER and approved in writing by SUPPLIER and DISTRIBUTOR. Technical Support: - ------------------ SUPPLIER will make available by telephone to DISTRIBUTOR and its Customers PCU technical support during SUPPLIER's normal business hours. SUPPLIER will also establish a 24-hour telephone number to accommodate emergency calls from DISTRIBUTOR and its Customers. Shipping: - --------- SUPPLIER will prepare all PCUs to allow for standard commercial shipment (e.g., truck, rail, cargo ship) to Customer locations. Monitoring & Diagnostics: - ------------------------- PCUs will be designed to accommodate remote monitoring and diagnostics ("RM&D") equipment (e.g., modems, data collection/storage). RM&D equipment will be provided, installed, and operated at DISTRIBUTOR's or its Customers' expense. At a minimum, the PCU control system will allow the RM&D equipment to monitor the following parameters: Current System Status Output Power Voltage Current Others - TBD* Assumptions: - ------------- Plug Power assumed the following in developing the specifications set forth below: (a) Natural gas line pressure at [***] or greater; and (b) Average system usage of [***].
- ---------------------------------------------------------------------------------------------- Specification PCU - ---------------------------------------------------------------------------------------------- kW output rating 7kW continuous, [***] operating design point, [***] for [***] - ---------------------------------------------------------------------------------------------- Voltage/frequency [***] - ---------------------------------------------------------------------------------------------- Operating design point efficiency (i.e., [***] efficiency at 2kw output) - ---------------------------------------------------------------------------------------------- Continuous capacity output efficiency [***] (i.e., efficiency at 7kW output) - ---------------------------------------------------------------------------------------------- Phase [***] - ---------------------------------------------------------------------------------------------- Fuel capability ([***] by [***] SUPPLIER will be fueled by [***] will be fueled by [***] unless notified by DISTRIBUTOR in writing 12 months prior to PCU delivery) - ----------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------- Specification PCU - ---------------------------------------------------------------------------------------------- Allowable fuel contaminants Must be able to operate on [***]. For NG: Sulfur ___ TBD* Alkalis ___ TBD* Water ___ TBD* Nitrogen ___ TBD* Non-Methane Hydrocarbons ____ TBD* Methane ___ TBD* For LPG: _______ TBD* For Methanol: _______ TBD* - ---------------------------------------------------------------------------------------------- System make up water requirements Must be able to operate on [***]. Iron (PPM maximum) ___ TBD* Calcium (PPM maximum) ___ TBD* Chlorine (PPM maximum) ____ TBD* Particulate (PPM maximum) ___ TBD* Other ______ (PPM maximum) ____ TBD* - ---------------------------------------------------------------------------------------------- Noise ____ dBa (TBD*) [***] ____ dBa (TBD*) [***] - ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------- Specification PCU - ----------------------------------------------------------------------------------------------- Operating environment requirements Must be able to operate [***]. Humidity maximum ____% TBD* minimum ____% TBD* Salt in Air maximum ____% TBD* minimum ____% TBD* Particulate [***] maximum ____% TBD* minimum ____% TBD* Other Cathode contaminant(s) [***] maximum ____% TBD* minimum ____% TBD* - ----------------------------------------------------------------------------------------------- Emissions - TBD* _ NOx (NG) ____/____ (maximum/target) _ CO (NG) ____/____ (maximum/target) _ NOx (LPG) ____/____ (maximum/target) _ CO (LPG) ____/____ (maximum/target) _ NOx (Methanol) ____/____ (maximum/target) _ CO (Methanol) ____/____ (maximum/target) - ----------------------------------------------------------------------------------------------- Ambient temperature range [***] - ----------------------------------------------------------------------------------------------- Altitude [***] - ----------------------------------------------------------------------------------------------- Power conditioning system [***] - ---------------------------------------------------------------------------------------------- Overload [***] [***] - ----------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------- Specification PCU - ---------------------------------------------------------------------------------------------- Harmonics Harmonics at 7 kW continuous operation to satisfy [***], for harmonic voltages. Harmonics at [***] will be subject to [***]. - ---------------------------------------------------------------------------------------------- Power quality (isolated) - ---------------------------------------------------------------------------------------------- Voltage, steady state (up to [***] kW Reference [***] continuous) - ---------------------------------------------------------------------------------------------- Voltage, transient (up to overload [***] rating) - ---------------------------------------------------------------------------------------------- Control Suitable for isolated operation - ---------------------------------------------------------------------------------------------- Communications [***] similar as needed to establish communications links - ---------------------------------------------------------------------------------------------- Grid connection [***] - ---------------------------------------------------------------------------------------------- MTB stack replacement TBD* [***] - ---------------------------------------------------------------------------------------------- MTB system (i.e., PEM Fuel Cell-Powered TBD* Generator Set) failure - ---------------------------------------------------------------------------------------------- Performance degradation (e.g., TBD* efficiency, output) (e.g., degradation of system efficiency and output will not exceed [***] of rated values at the end of [***] hours of operation) - ---------------------------------------------------------------------------------------------- Non-fuel O&M ($/year up to first stack TBD* replacement) at [***] kWh/year - ---------------------------------------------------------------------------------------------- Product life with prescribed routine TBD* maintenance (including stack (e.g., less than [***]) replacement) at more than [***] kWh/year - ----------------------------------------------------------------------------------------------
* SUPPLIER and DISTRIBUTOR will mutually agree to the specific values for these areas no later than October 1, 1999 (e.g., based on TEU lab and field testing). Product ("Commercial Unit") Performance Specifications Note: SUPPLIER and DISTRIBUTOR recognize that these specifications may change - ------------------------------------------------------------------------------- based on further analysis of residential load profiles and field testing. If - ----------------------------------------------------------------------------- SUPPLIER and DISTRIBUTOR mutually agree to change the specifications set forth - ------------------------------------------------------------------------------ below, SUPPLIER and DISTRIBUTOR agree to adjust the prices set forth in Schedule - -------------------------------------------------------------------------------- C and the purchase volumes set forth in Schedule D. - --------------------------------------------------- Testing protocol and acceptance criteria: - ----------------------------------------- On or before June 1, 2000, DISTRIBUTOR and SUPPLIER will agree on the specific testing protocol and acceptance criteria for all Products purchased by DISTRIBUTOR. The protocol and acceptance criteria will (a) incorporate the field test results from the PCUs; and (b) address all aspects of Product system and component performance that are expected to impact regulatory approvals and end- user economics, including, but not limited to, useful life, output, reliability, efficiency, operating environment requirements, power quality, load following capability, and emissions. In the event that DISTRIBUTOR and SUPPLIER are unable to agree on the testing protocol and/or acceptance criteria this Agreement will terminate. Packaging: - ---------- Product package size and weight must be suitable for installation indoor or outside of a typical single family residence within the Major Markets. Certifications: - --------------- Commercial units, including packaging, must be compliant with all requisite standards (e.g., UL, NFPA, AGA, FCC Class B, CE) within the Major Markets. To the extent the installation site requires preparation to meet local codes, any site improvements will be at the Customer's expense. Interconnection: - ---------------- Products will be capable of interconnection to the electrical system of a typical single family residence; provided however that the Product will operate isolated from the grid with the use of a transfer switch ("stand-alone operation"). The transfer switch will, in the event that the Product fails or is interrupted, transfer the household load from the Product back to the utility grid within no more than one-tenth of a second. Should it be determined that DISTRIBUTOR's Customers require an interconnection scheme other than stand-alone operation (e.g., grid parallel), DISTRIBUTOR and SUPPLIER will jointly set the requirements of the new interconnection scheme. To the extent the new interconnection scheme results in an increase in SUPPLIER's Product cost, SUPPLIER will adjust DISTRIBUTOR's transfer price proportionately. In the event that SUPPLIER offers Products with a heat recovery option and such units require an interconnection scheme other than stand-alone operation, DISTRIBUTOR and SUPPLIER will jointly set the requirements of the new interconnection scheme. To the extent the new interconnection scheme results in an increase in SUPPLIER's Product cost, SUPPLIER will adjust DISTRIBUTOR's transfer price proportionately. Installation: - ------------- Products must be in compliance with any applicable installation requirements within the Major Markets. Documentation: - -------------- Products must be shipped with sufficient documentation (e.g., installation drawings, operating manuals, repair guides) to allow for start-up and Service by individuals with a skill level comparable to a typical HVAC technician, after such individual has completed the SUPPLIER training program or a training program approved by SUPPLIER. Products must be shipped with documentation sufficient for an average homeowner to perform routine maintenance. Products must be provided in strict accordance with samples, drawings, and/or designs provided by SUPPLIER and approved in writing by SUPPLIER and DISTRIBUTOR. Technical Support: - ------------------ SUPPLIER will make available by telephone to DISTRIBUTOR and its Customers Product technical support during SUPPLIER's normal business hours. SUPPLIER will also establish a 24-hour telephone number to accommodate emergency calls from DISTRIBUTOR and its Customers. Shipping: - --------- SUPPLIER will prepare all Products to allow for standard commercial shipment (e.g., truck, rail, cargo ship) to Customer locations. Monitoring & Diagnostics: - ------------------------- Products will be designed to accommodate remote monitoring and diagnostics (RM&D) equipment (e.g., modems, data collection/storage). RM&D equipment will be provided, installed, and operated at DISTRIBUTOR's or its Customers' expense. At a minimum, the Product control system will allow the RM&D equipment to monitor the following parameters: Current System Status Output Power Voltage Current Others - TBD* Assumptions: - ------------ Plug Power assumed the following in developing the specifications set forth below: (a) Natural gas line pressure at [***] of water or greater; and (b) Average system usage of [***].
- ------------------------------------------------------------------------------------------------- Specification Product - ------------------------------------------------------------------------------------------------- kW output rating 7kW continuous, [***] operating design point, [***] - ------------------------------------------------------------------------------------------------- Voltage/frequency [***] - ------------------------------------------------------------------------------------------------- Operating design point efficiency (i.e., [***] efficiency at 2kW output) - ------------------------------------------------------------------------------------------------- Continuous capacity output efficiency [***] (i.e., efficiency at 7kW output) - ------------------------------------------------------------------------------------------------- Phase [***] - ------------------------------------------------------------------------------------------------- Fuel capability [***] - -------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------- Specification Product - ------------------------------------------------------------------------------------------------- Allowable fuel contaminants Must be able to operate on [***] For NG: Sulfur ___ TBD* Alkalis ___ TBD* Water ___ TBD* Nitrogen ___ TBD* Non-Methane Hydrocarbons ____ TBD* Methane ___ TBD* For LPG: _______ TBD* For Methanol: _______ TBD* - ------------------------------------------------------------------------------------------------- System make up water requirements Must be able to operate on [***] Iron (PPM maximum) ___ TBD* Calcium (PPM maximum) ___ TBD* Chlorine (PPM maximum) ____ TBD* Particulate (PPM maximum) ___ TBD* Other(s) ______ (PPM maximum) ____ TBD* - ------------------------------------------------------------------------------------------------- Noise ____ dBa (TBD*) [***] meter for outdoor installations, not to exceed [***] ____ dBa (TBD*) [***] meter for indoor installations, not to exceed [***] - ---------------------------------------------------------------------------------------------- Operating environment requirements Must be able to operate [***] Humidity maximum ____% TBD* minimum ____% TBD* Salt in Air maximum ____% TBD* minimum ____% TBD* Particulate [***] maximum ____% TBD* minimum ____% TBD* Other Cathode contaminant(s) [***] - ----------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------- vapor) maximum ____% TBD* minimum ____% TBD* - ---------------------------------------------------------------------------------------------- Emissions - TBD* __ NOx (NG) ____/____ (maximum/target) __ CO (NG) ____/____ (maximum/target) __ NOx (LPG) ____/____ (maximum/target) __ CO (LPG) ____/____ (maximum/target) __ NOx (Methanol) ____/____ (maximum/target) __ CO (Methanol) ____/____ (maximum/target) - ----------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------- Specification Product - ---------------------------------------------------------------------------------------------- Ambient temperature range [***] - ---------------------------------------------------------------------------------------------- Altitude [***] - ---------------------------------------------------------------------------------------------- Power conditioning system [***] - ---------------------------------------------------------------------------------------------- Overload [***] [***] - ---------------------------------------------------------------------------------------------- Harmonics Harmonics at [***] continuous operation to satisfy [***] for harmonic voltages. Harmonics at [***], including [***] - ---------------------------------------------------------------------------------------------- Power quality (isolated) - ---------------------------------------------------------------------------------------------- Voltage, steady state (up to 7.0 kW [***] continuous load) - ---------------------------------------------------------------------------------------------- Voltage, transient (up to overload [***] rating) - ---------------------------------------------------------------------------------------------- Control [***] - ---------------------------------------------------------------------------------------------- Communications [***] or similar as needed to establish communications links - ---------------------------------------------------------------------------------------------- Grid Connection Suitable for isolated operation [***] - ---------------------------------------------------------------------------------------------- MTB stack replacement [***] - ----------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------- Specification Product - ---------------------------------------------------------------------------------------------- MTB system (i.e., PEM Fuel Cell-Powered TBD* Generator Set) failure [***] - ---------------------------------------------------------------------------------------------- Performance degradation (e.g., TBD* efficiency, output ) [***] - ---------------------------------------------------------------------------------------------- Non-fuel O&M ($/year up to first stack TBD* replacement) at [***] (e.g., [***]/year Assumptions ----------- Labor Hours: [***] Labor Rate: [***] Total Labor: [***] Materials: [***] - ---------------------------------------------------------------------------------------------- Product life with prescribed routine TBD* maintenance (including stack [***] replacement) at more than [***] - ----------------------------------------------------------------------------------------------
* SUPPLIER and DISTRIBUTOR will mutually agree to the specific values for these areas no later than June 1, 2000 (e.g., based on PCU lab and field testing). SCHEDULE C ---------- PCU AND PRODUCT PRICES
Pre-Commercial Units ------------------------------------------------------------------------------------------ SUPPLIER's estimated Cumulative # direct cost Price to DISTRIBUTOR of units # of units per unit per unit (US$) purchased by Lot # in Lot (US$) DISTRIBUTOR ------------------------------------------------------------------------------------------ 1 485* [***] [***] 485 2 All units ** [***] greater than 485 purchased after the first 485
* [***] ** The price per unit to DISTRIBUTOR for Lot #2 will be equal to [***] and SUPPLIER will provide DISTRIBUTOR with a firm cost/price quote no later than January 1, 2000.
Products (Commercial Units) -------------------------------------------------------------------------------------- SUPPLIER's estimated Cumulative # direct cost Price to of units # of units per unit DISTRIBUTOR per purchased by Lot # in Lot (US$) unit (US$) DISTRIBUTOR -------------------------------------------------------------------------------------- 1 [***-- Note: all numbers have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 under the Securities Act.] 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Prices shown are for the Products as specified in Schedule B. Any modification ---------- to the Schedule B specifications requested by DISTRIBUTOR that result in a ---------- change to SUPPLIER'S direct cost will cause the price to DISTRIBUTOR to be changed by an equal amount. Prices for the Pre-Commercial Units as shown are firm (i.e., not subject to change). Product prices as shown are not firm. On April 1 of each year, beginning April 1, 2000, SUPPLIER will provide DISTRIBUTOR with a 3-year forecast of Product prices for the period nine months hence (e.g., on April 1, 2000, SUPPLIER will provide DISTRIBUTOR with Product prices for the 3-year period beginning January 1, 2001). The first year of each of SUPPLIER's forecast will be a firm price commitment (i.e., in the forecast provided to DISTRIBUTOR on April 1, 2000, SUPPLIER's Product prices for 2001 will be firm). Prices are based upon cumulative quantity purchased (e.g., if DISTRIBUTOR purchases [***] Product units in year 1, the price for the first [***] units is [***] per unit, the price for the second [***] units is [***] per unit, and the price for the first [***] units purchased in year 2 is [***] per unit). On or before July 1, 2000, DISTRIBUTOR will provide SUPPLIER with a forecast of DISTRIBUTOR's monthly purchases for the 12 months beginning January 1, 2001. Each of the first 3 months of DISTRIBUTOR's forecast (i.e., January 1, 2001 to March 31, 2001) will be a firm order (i.e., subject to change at SUPPLIER's sole discretion). DISTRIBUTOR's forecast for the final 9 months of the forecast period (i.e., April 1, 2001 to December 31, 2001) is for SUPPLIER's planning purposes only. DISTRIBUTOR, at its sole discretion, may change the monthly purchase forecast in any month in the final 9-month forecast period by any amount. On the first business day of each month beginning October 1, 2000, DISTRIBUTOR will provide SUPPLIER with a 12-month rolling forecast of monthly purchases for the period beginning 3 months hence. Each of the first 3 months of DISTRIBUTOR's forecast will be a firm order. DISTRIBUTOR's forecast for the final 9 months of each forecast period is for SUPPLIER'S planning purposes only. DISTRIBUTOR, at its sole discretion, may change the monthly purchase forecast in any month in the final 9-month forecast period by any amount. Any Products that DISTRIBUTOR is obligated to purchase, but otherwise unable to sell, may be held in SUPPLIER's inventory at the request of DISTRIBUTOR. Electing to have SUPPLIER hold DISTRIBUTOR's inventory does not relieve DISTRIBUTOR of its obligation to purchase any of DISTRIBUTOR's units held in inventory. DISTRIBUTOR will reimburse SUPPLIER for its fully loaded inventory carrying cost, including warehouse expenses, interest, and any inventory carrying cost charged to SUPPLIER by SUPPLIER's vendors as a direct result of DISTRIBUTOR's request for SUPPLIER to hold inventory. On or before April 1, 2000, SUPPLIER will provide DISTRIBUTOR with a firm price for the monthly inventory carrying charge for 2001. On or before August 1 of each subsequent year, SUPPLIER will provide DISTRIBUTOR with a firm price for the monthly inventory carrying charge for the upcoming year. Prices to DISTRIBUTOR for Product and Pre-Commercial Unit replacement parts will not exceed SUPPLIER's fully loaded actual cost plus [***]. DISTRIBUTOR will have the right to audit SUPPLIER's financial records to the extent necessary to verify compliance with this provision. SCHEDULE D ---------- SALES COMMITMENTS DISTRIBUTOR'S Global Sales Commitments are as follows:
Calendar Total number of year units --------------- ----------------- 2001 [***] 2002 [***] 2003 [***]
DISTRIBUTOR'S Major Market Sales Commitments are as follows:
Total number of Total number of Calendar units sold in units sold in year U.S. and Canada Western Europe ----------- ------------------- -------------------- 2001 [***] [***] 2002 [***] [***] 2003 [***] [***]
Global Sales Commitments and Major Market Sales Commitments (collectively "Commitments") as shown are expressed in 7kW equivalent units based on maximum continuous output. If DISTRIBUTOR sells any units larger or smaller than 7kW, the sales targets will be adjusted accordingly (e.g., DISTRIBUTOR can satisfy its 2001 Global Sales Commitment with [***] units). The Commitment for any 1-month period will be equal to [***] of the annual Commitment. DISTRIBUTOR's Global Sales Commitments and Major Market Sales Commitments commence January 1, 2001, provided that SUPPLIER has designed and manufactured a "lock in" system that meets the Product specifications in Schedule B by January ---------- 1, 2000. To the extent SUPPLER has not designed and manufactured such lock-in system by January 1, 2000, DISTRIBUTOR's Global Sales Commitments and Major Market Sales Commitments will be deferred on a month-for-month basis (e.g., if SUPPLIER completes design and manufacturing of the lock-in system on April 1, 2000, then DISTRIBUTOR'S "calendar year" 2001 Global Sales Commitments and Major Market Sales Commitments will run from April 1, 2001 to March 31, 2002). Global Sales Commitments DISTRIBUTOR shall be deemed to have achieved the Global Sales Commitments if DISTRIBUTOR achieves global minimum sales of at least [***] of the Global Sales Commitment in each relevant 12-month period. In the event DISTRIBUTOR's total sales in the Territory in "2001" (defined herein as the 12-month period commencing 12 months after SUPPLIER completes design and manufacturing of the lock-in system, but no earlier than January 1, 2001) are less than [***], but more than [***], of the "2001" Global Sales Commitment, DISTRIBUTOR must achieve sales in "2002" (defined herein as the 12-month period after the completion of "2001") of not less than [***] of the "2002" Global Sales Commitment, or SUPPLIER shall have the right to name additional distributors in the Territory for "2003" (defined herein as the 12-month period after the completion of "2002"). In the event DISTRIBUTOR's total sales in "2001" are less than [***], but more than [***], of the "2001" Global Sales Commitment, DISTRIBUTOR must achieve sales in the first 6 months of "2002" of not less than [***] of the Global Sales Commitment for the first 6 months of "2002", or SUPPLIER shall have the right to name additional distributors in the Territory beginning in month 7 of "2002". In the event that DISTRIBUTOR's total sales in "2001" are less than [***], but more than [***], of the "2001" Global Sales Commitment, and DISTRIBUTOR achieves sales in the first 6 months of "2002" of not less than [***] of the Global Sales Commitment for the first 6 months of "2002", DISTRIBUTOR must also achieve sales for the 12-month period from month 7, "2002" through month 6, "2003" of not less than [***] of the Global Sales Commitment for such 12-month period, or SUPPLIER shall have the right to name additional distributors in the Territory for the last 6 months of "2003". In the event that, during any 12-month period, DISTRIBUTOR's total sales are less than [***] of the Global Sales Commitment for such period, SUPPLIER shall have the right to terminate this Agreement. Major Market Sales Commitments DISTRIBUTOR shall be deemed to have achieved the Major Market Sales Commitments if DISTRIBUTOR achieves sales of at least [***] of each Major Market Sales Commitment in each relevant 12-month period. In the event DISTRIBUTOR's sales in a "Major Market" (defined herein as U.S./Canada, and Western Europe) in "2001" are less than [***], but more than [***], of the "2001" Major Market Sales Commitment for such Major Market, DISTRIBUTOR must achieve sales in "2002" in such Major Market of not less than [***] of the Major Market Sales Commitment for such Major Market in "2002", or SUPPLIER shall have the right to name additional distributors in that Major Market for "2003". In the event that DISTRIBUTOR's sales in either Major Market in any 12-month period are less than [***] of the Major Market Sales Commitment for such Major Market for such period, SUPPLIER shall have the right to name additional distributors in that Major Market. However, in the event that DISTRIBUTOR's total sales exceed [***] of the Global Sales Commitment for "2001" or "2002", SUPPLIER shall not be allowed to name additional distributors in either Major Market for the following year (the "Extension") (e.g., if DISTRIBUTOR achieves greater than [***] of the Global Sales Commitment for "2001", then SUPPLIER may not name additional distributors to either Major Market in "2002", regardless of DISTRIBUTOR's sales in the Major Markets in "2001"). This Extension shall apply only one time, such that if this clause applies in the "2001", it shall not apply in "2002". SCHEDULE E ---------- SUPPLIER'S INSURANCE SUPPLIER shall maintain in effect at all times during the Term of this Agreement products liability insurance as set forth on the following certificate, with DISTRIBUTOR named as additional insured: Marshall & Sterling THIS CERTIFICATE Upstate Inc ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE 113 Saratoga Road HOLDER. THIS CERTIFICATE DOES NOT AMEND, EXTEND Glenville, NY 12302 OR ALTER THE COVERAGE AFFORDED BY POLICIES BELOW David P. Charnock COMPANIES AFFORDING COVERAGE 518-384-1100 518-384-0193 Company A Great Northern Insurance Company Company B Pacific Indemnity Plug Power LLC 968 Albany Shaker Road Company C First Rehabilitation Insurance Latham NY 12110 Company D American Int'l Specialty Lines
COVERAGES THIS IS TO CERTIFY THAT THE POLICIES LISTED BELOW HAVE BEEN ISSUED TO THE INSURED NAMED ABOVE FOR THE POLICY PERIOD INDCATED, NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS CERTIFICATE MAY BE ISSUED OR AMY PERTAIN, THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES. LIMITS SHOWN MAY HVAE BEEN REDUCED BY PAID CLAIMS.
Co TYPE OF INSURANCE POLICY NUMBER POLICY POLICY LIMITS Ltr EFFECTIVE EXPIRATION DATE DATE A GENERAL LIABILITY 35365127CCG 06/27/98 06/27/99 GENERAL AGGREGATE $ 2,000,000 [_] COMMERCIAL GENERAL LIABILITY [_][_] CLAIMS MADE [X] OCCUR PRODUCTS-COMMON COMP/AGG $ 2,000,000 [_] OWNERS AND CONTRACTORS [_] PERSONAL AND ADV INJURY $ 1,000,000 [_]___________________________ [_] EACH OCCURRENCE $ 1,000,000 Fire DAMAGE $ INCLUDED Med Exp $ 10,000 A AUTOMOBILE 35365127CCG 06/27/98 06/27/99 $ 1,000,000 LIABILITY SINGLE UNIT [_] ANY AUTO [_] ALL OWNED AUTOS BODILY INJURY $ [_]SCHEDULED AUTOS per person [X] AUTOS [X] NON-OWNED AUTOS BODILY INJURY $ [_]___________________________ per accident [_] PROPERTY DAMAGE $ GARAGE LIABILITY AUTO ONLY-EA ACCIDENT $ [_] ANY AUTO [_]____________________________ OTHER THAN AUTO ONLY $ [_] EACH ACCIDENT $ AGGREGATE $ D EXCESS LIABILITY 8189611 (BTE 08/01/98 08/01/98 EACH OCCURRENCE $ 25,000,000 [X] .UMBRELLA FORM ENERGY CO) [_] OTHER THAN UMBRELLA FORM AGGREGATE $ 25,000,000 B WORLDWIDE COMPENSATION AND statutory limits EMPLOYEE LIABILITY 71644855 06/27/98 06/27/99 EACH ACCIDENT $ 100,000 DISEASE POLICY LIMIT $ 500,000 THE PROTECTIONS AFFECTING [_]incl EXECUTIVE OFFICERS ARE [_]exel disease-each employee $ 100,000 OTHER A PROPERTY 35365127CCG 06/27/98 06/27/99 Limit $ 1,200,000 A TRANSPORTATION 35365127CCG 06/27/98 06/27/99 LIABILITY $ 500,000
-22- SCHEDULE F ---------- COPIES OF TRADEMARK REGISTRATIONS DISTRIBUTOR'S TRADEMARK [GENERAL ELECTRIC LOGO APPEARS HERE] SUPPLIER'S TRADEMARK [PLUG POWER LOGO APPEARS HERE] -23- EX-10.14 6 AGREEMENT DATED JUNE 26, 1997 EXHIBIT 10.14 Agreement No: 4633-ERTER-TR-99 Amount: $1,191,478 Type: Cost-Sharing RESTATED AGREEMENT This Restated Agreement dated this 26th day of June, 1997 by and between the NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY ("NYSERDA"), a New York public benefit corporation having its principal office and place of business at Corporate Plaza West, 286 Washington Avenue Extension, Albany, New York 12203-6399, and MECHANICAL TECHNOLOGY, INC., a New York corporation having its principal office and place of business at 968 Albany-Shaker Road, Latham, New York (the "Contractor"). WHEREAS, NYSERDA and the Contractor have previously worked together under NYSERDA and MECHANICAL TECHNOLOGY, INC. Agreements 1791-ERER-ER-92, 4087-ERTER- TR-95 and 4540-ERTER-TR-97 to support the development, demonstration and commercialization of the Proton Exchange Membrane ("PEM") Fuel Cell (the "Project"); WHEREAS, in an effort to streamline and consolidate all of the rights and obligations under the aforementioned Project, NYSERDA and the Contractor desire to terminate Agreements 1791-ERER-ER-92, 4087-ERTER-TR-95, and 4540-ERTER-TR-97 and have all of the rights and obligations of NYSERDA and the Contractor under the aforementioned Agreements contained in this Agreement No. 4633-ERTER-TR-98; and WHEREAS, NYSERDA and the Contractor desire to continue to work together to support the successful commercialization of the Project. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, the parties do hereby agree as follows: Article I Definitions ----------- Section 1.01. Definition. Unless the context otherwise requires, the terms ---------- defined below shall have, for all purposes of this Agreement, the respective meanings set forth below, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined. (a) General Definitions: ------------------- Agreement: This Agreement and Exhibits A, B, C, and D hereto, all of which --------- are made a part hereof as though herein set forth in full. Budget: The Budget set forth in Exhibit A hereto. ------ Contract Administration: NYSERDA's Director of Contract Management, Robert ----------------------- G. Callender, or such other person who may be designated, in writing, by NYSERDA. Effective Date: The effective date of this Agreement shall be the date in -------------- the first paragraph of page one, above. Final Report: The Final Report required by the Statement of Work hereof. ------------ Person: An individual, a corporation, an association or partnership, an ------ organization, a business or a government or political subdivision thereof, or any governmental agency or instrumentality. Progress Reports: The Progress Reports required by the Statement of Work ---------------- hereof. Statement of Work: The Statement of Work attached hereto as Exhibit. A. ----------------- Subcontract: An agreement for the performance of Work by a Subcontractor, ----------- including any purchase order for the procurement of permanent equipment or expendable supplies in connection with the Work. Subcontractor: A person who performs Work directly or indirectly for or on ------------- behalf of the Contractor (and whether or not in privity of contract with the Contractor) but not including any employees of the Contractor or the Subcontractors. Work: The Work described in the Exhibit A (including the procurement of ---- equipment and supplies in connection therewith) and the performance of all other requirements imposed upon the Contractor under this Agreement. (b) Data Rights and Patents Definitions: ----------------------------------- Contract Data: Technical Data first produced in the performance of the ------------- Agreement or Agreements numbered 1791-ERER-ER-92, 4087-ERTER-TR-95, or 4540- ERTER-TR-97, or Technical Data actually delivered in connection with the Agreement or Agreements numbered 1791-ERER-ER-92, 4087-ERTER-TP-95, or 4540- ERTER-TR-97. Practical Application: To manufacture in the case of a composition or --------------------- product, to practice in the case of a process or method, or to operate in the case of a machine or system, and under conditions which indicate that the benefits of the invention are available to the public on reasonable terms. Proprietary Data: Technical Data which embody trade secrets developed at ---------------- private 2 expense, such as design procedures or techniques. chemical composition of materials, or manufacturing methods, processes, or treatments, including minor modifications thereof, provided that such data: (i) are not generally known or available from other sources without obligation concerning their confidentiality, (ii) have not been made available by the owner to others without obligation concerning its confidentiality; and (iii) are not already available to NYSERDA without obligation concerning their confidentiality. Subject Invention: Any invention or discovery of the Contractor conceived ----------------- or first actually reduced to practice in the course of or under this Agreement or Agreements numbered 1791-ERER-ER-92, 4087-ERTER-TR-95 or 4540-ERTER-TR-97, and includes any art, method, process, machine, manufacture, design, or composition of matter, or any new and useful improvement thereof, or any variety of plants, whether patented or unpatented, under the Patent Laws of the United States of America or any foreign country. Technical Data: Recorded information regardless of form or characteristic, -------------- of a scientific or technical nature. It may, for example, document research, experimental or developmental, or demonstration, or engineering work, or be usable or used to define a design or process, or to procure, produce, support, maintain, or operate material. The data may be graphic or pictorial delineations in media such as drawings or photographs, text in specifications or related performance or design type documents or computer software (including computer software programs, computer software data bases, and computer software documentation.). Examples of Technical Data include research and engineering data, engineering drawings and associated lists, specifications, standards, process sheets, manuals, technical reports, catalog item identification, and related information. Technical Data as used herein does not include financial reports, cost analyses, and other information incidental to contract administration. Unlimited Rights: Rights to use, duplicate, or disclose Technical Data, in ---------------- whole or in part, in any manner and for any purpose whatsoever, and to permit others to do so. (c) Payments to NYSERDA Definitions: ------------------------------- PEM Fuel Cell: The Proton Exchange Membrane ("PEM") Fuel Cell is a ------------- electrochemical device designed to convert hydrogen and oxygen to electricity with high efficiency and is characterized by high power density in terms of weight and size and as designed, developed, assembled and tested pursuant to this Agreement. 3 PEM Fuel Cell Stack: The PEM Fuel Cell Stack consists of multiple PEM fuel ------------------- cells arranged in a layer manner to provide an integrated structure. Product: The Product includes the PEM Fuel Cell and the PEM Fuel Stack, ------- whether used individually or together and regardless of application. New York State Manufacturer: Any manufacturer which provides (1) in excess --------------------------- of 25% value added to the manufacture of the Product, or (2) provides in excess of 75% value added for the assembly and R&D required for the manufacture of the Product and/or (3) any manufacturer which provides in excess of 25% of value added to the manufacture of a Subject Invention, or (4) provides in excess of 75% value added for the assembly and R&D required for manufacture of the Subject Invention as developed in this Project, within the geographical boundaries of the State of New York. Such value added shall be capable of being proven by an audit conducted in accordance with generally accepted auditing standards. "Value added" for manufacturing means any separable component of the Product or a Subject Invention, paid for by the Contractor to others, for parts, components, and services, all manufacturing costs, including but not limited to labor, labor overhead, materials, and G&A, but excluding profit. "Value added" for assembly and R&D means all assembly and R&D costs, including but not limited to assembly and R&D labor, assembly and R&D labor overhead and general and administrative services, excluding profit, assembly and R&D materials, and all manufactured component costs used in the manufacturing process. Sale: A sale or lease of a Product. ---- Sale Price: The Contractor's manufacturing cost of the Product, including ---------- the cost of all materials, direct labor, manufacturing overhead, and general and administrative expenses, excluding returns, and allowances such as sales tax, freight, commissions and insurance, if applicable, derived from a Sale. Seller: The Contractor, or any franchisee, licensee or assignee thereof. ------ Article II Performance of Work ------------------- Section 2.01. Manner of Performance. Subject to the provisions of Article --------------------- XII hereof, the Contractor shall perform all of the Work described in the Statement of Work, or cause such Work to be performed in an efficient and expeditious manner and in accordance with all of the terms and provisions of this Agreement. The Contractor shall perform the Work in accordance with the current professional standards and with the diligence and skill expected for the performance of work of the type described in the Statement of Work. The Contractor shall furnish such personnel and shall procure such materials, machinery, supplies, tools, equipment and other items as may reasonably be necessary or appropriate to perform the Work in accordance with this Agreement. 4 Section 2.02. Project Personnel. It is understood and agreed that ----------------- Mr. William Ernst shall serve as Project Director and as such shall have the responsibility of the overall supervision and conduct of the Work on behalf of the Contractor and that the persons described in the Statement of Work shall serve in the capacities described therein. Any change of Project Director by the Contractor shall be subject to the prior written approval of NYSERDA. Such approval shall not be unreasonably withheld, and, in the event that notice of approval or disapproval is not received by the Contractor within thirty days after receipt of request for approval by NYSERDA, the requested change in Project Director shall be considered approved. Article III Deliverables ------------ Section 3.01. Deliverables. All deliverables shall be provided in ------------ accordance with the Exhibit A Statement of Work. Article IV Compensation ------------ Section 4.01. Cost-Sharing. It is understood and agreed that NYSERDA and ------------ the Contractor are sharing the costs for the Work to be performed. In consideration for this Agreement and as full compensation for NYSERDA's share of the costs for the performance of all Work, and in respect of all other direct and indirect costs, charges or expenses incurred in connection therewith, NYSERDA shall pay to the Contractor a maximum amount of $1,191,478 for the cost elements identified in the Budget to be funded with NYSERDA funds, subject to the provisions and restrictions contained herein. Such amount shall be paid only to the extent that costs are incurred by the Contractor in performance of the Work in accordance with the provisions of this Agreement, the Budget and the following: (a) Staff Charges: The Contractor shall be compensated for the services ------------- performed by its employees under the terms of this Agreement at the employee's actual wage rate. In the event that any of the Contractor's rates are reduced to the benefit of any client of the Contractor as a result of any audit or for any other reason, the Contractor shall so notify NYSERDA and the appropriate reductions shall be made to the rates utilized hereunder. (b) Direct Charges: The Contractor shall be reimbursed for reasonable and -------------- necessary actual direct costs incurred (e.g., equipment, supplies, travel and other costs directly associated with the performance of the Agreement) to the extent required in the performance of the Work in accordance with the provisions of the Budget. Travel, lodging, meals and 5 incidental expenses shall be reimbursed for reasonable and necessary costs incurred. Costs should generally not exceed the daily per diem rates, published in the Federal Travel Regulations. Reimbursement for the use of personal vehicles shall be limited to the Internal Revenue Service business standard mileage rate. (c) Indirect Costs: The Contractor shall he reimbursed for fringe -------------- benefits, overhead, general and administrative (G&A), and other indirect costs and profit included in the Budget at such rates as the Contractor may periodically calculate, consistent with appropriate federal guidelines or generally accepted accounting principles. (d) Remaining Funds: NYSERDA and the Contractor agree that the cost to --------------- complete all of the Work under this Agreement is $1,191,478. NYSERDA and the Contractor agree that the Contractor has completed Work under the Project and has been reimbursed by NYSERDA. NYSERDA and the Contractor agree that $317,633 is available to complete the Work under this Agreement. Section 4.02. Title to Equipment. Title shall vest in the Contractor to all ------------------ equipment purchased hereunder. Section 4.03. Progress Payments. The Contractor may submit invoices for ----------------- progress payment no more than once each month or no less than once each calendar quarter for Work performed during such period. Invoices shall be addressed to NYSERDA, "Attention: Accounts Payable." Such invoices shall make reference to the Agreement number shown on the upper right hand corner of page one of the Agreement. Invoices shall set forth total project costs incurred. These shall be broken down into NYSERDA's Funding share and into the Cost-Share and other Cofunding share, and they shall be in a format consistent with the cost categories set forth in the Budget. Invoices shall provide reasonable documentation for the above to provide evidence of costs incurred, including: (a) Staff charges: for each employee, the name, title, number of hours worked, hourly rate and labor extension; (b) Direct charges: all direct costs shall be itemized on the invoice and supported by documentation, such as vendor invoices, travel vouchers or other documentation; and (c) Indirect charges: indirect cost rates and method by which rates are applied. The Contractor shall be notified by NYSERDA in accordance with Section 5.04.4 (b)(2) of NYSERDA's Prompt Payment Policy Statement, attached hereto as Exhibit D, of any such information or documentation which the Contractor did not include with such invoice. In accordance with and subject to the provisions of such Exhibit D, NYSERDA shall pay to the Contractor, within the prescribed time after receipt of an invoice for a progress 6 payment, 90% of NYSERDA's share of the amount so requested, unless NYSERDA should determine that any such payment or any part thereof is otherwise not properly payable pursuant to the terms of the Agreement or the Budget. Section 4.04. Final Payment. Upon final acceptance by NYSERDA of the Final ------------- Report and all other deliverables contained in Exhibit A, Statement of Work, pursuant to Section 6.02 hereof, the Contractor shall submit an invoice for final payment with respect to the Work, together with such supporting information and documentation as, and in such form as, NYSERDA may require. An invoice for final payment shall include, in addition to the material required pursuant to Section 4.03 hereof, a statement as to whether any invention or patentable devices have resulted from the performance of the Work. All invoices for final payment hereunder must, under any and all circumstances, be received by NYSERDA prior to September 30, 1998. In accordance with and subject to the provisions of NYSERDA's Prompt Payment Policy Statement, attached hereto as Exhibit D, NYSERDA shall pay to the Contractor within the prescribed time after receipt of such invoice for final payment, the total amount payable pursuant to Section 4.01 hereof, less all progress payments previously made to the Contractor with respect thereto and subject to the maximum commitment of $1,191,478 set forth in Section 4.07 hereof. Section 4.05. Release by the Contractor. The acceptance by the Contractor ------------------------- of final payment shall release NYSERDA from all claims and liability that the Contractor, its representatives and assigns might otherwise have relating to this Agreement. Section 4.06. Maintenance of Records. The Contractor shall keep, maintain, ---------------------- and preserve at its principal office throughout the term of the Agreement and for a period of three years after acceptance of the Work, full and detailed books, accounts, and records pertaining to the performance of the Agreement, including without limitation, all bills, invoices, payrolls, subcontracting efforts and other data evidencing, or in any material way related to, the direct and indirect costs and expenses incurred by the Contractor in the course of such performance. Further, the Contractor shall keep, maintain, and preserve at its principal office until such time as the Contractor's payment obligations to NYSERDA pursuant to Section 8.03 of the Agreement have been met, full and detailed books, accounts, and records in connection with Sales, and shall require licensees to maintain records of Sales. Section 4.07. Maximum Commitment. The maximum aggregate amount payable by ------------------ NYSERDA to the Contractor hereunder is $1,191,478. NYSERDA shall not be liable for any costs or expenses in excess of such amount incurred by the Contractor in the performance and completion of the Work. Section 4.08. Audit. NYSERDA shall have the right from time to time and at ----- all reasonable times during the term of the Agreement and such period thereafter to inspect and audit any and all books, accounts, and records at the office or offices of the Contractor where they are then being kept, maintained and preserved pursuant to Section 4.06 hereof. Any 7 payment made under the Agreement shall be subject to retroactive reduction for amounts included therein which are found by NYSERDA on the basis of any audit of the Contractor by an agency of the United States, State of New York or NYSERDA not to constitute an allowable charge or cost hereunder. Further, the Contractor shall provide to NYSERDA, on a reasonable basis, access to its books and records and those of any parent, subsidiary, affiliate, franchisee, licensee, or assignee to assure compliance with the payment provisions contained in Section 8.03 of the Agreement. Article V Assignments, Subcontracts and Purchase Orders --------------------------------------------- Section 5.01. General Restrictions. Except as specifically provided -------------------- otherwise in this Article, the assignment, transfer, conveyance, subcontracting or other disposal of this Agreement or any of the Contractor's rights, obligations, interests or responsibilities hereunder, in whole or in part, without the express consent in writing of NYSERDA shall be void and of no effect as to NYSERDA. Such consent shall not be unreasonably withheld, and, in the event that notice of approval or disapproval is not received by the Contractor within thirty days of receipt of the request for approval, the assignment, transfer, conveyance, subcontracting or other disposal of this Agreement or any of the Contractor's rights, obligations, interests, or responsibilities hereunder. in whole or in part, shall be considered approved. In the event that NYSERDA requires additional time for considering approval, NYSERDA shall notify the Contractor within thirty days of receipt of the request for approval that additional time is required and shall specify the additional amount of time necessary up to sixty (60) days. Section 5.02. Subcontract Procedures. Without relieving it of, or in any ---------------------- way limiting, its obligations to NYSERDA under this Agreement, the Contractor may enter into Subcontracts for the performance of Work or for the purchase of materials or equipment. Except for a subcontractor or supplier specified in a team arrangement with the Contractor in the Contractor's original proposal, and except for any subcontract or order for equipment, supplies or materials from a single subcontractor or supplier totaling under $10.000, the Contractor shall select all subcontractors or suppliers through a process of competitive bidding or multi-source price review. A team arrangement is one where a subcontractor or supplier specified in the Contractor's proposal is performing a substantial portion of the Work and is making a substantial contribution to the management and/or design of the Project. In the event that a competitive bidding or multi- source price review is not feasible, the Contractor shall document an explanation for, and justification of, a sole source selection. The Contractor shall document the process by which a subcontractor or supplier is selected by making a record summarizing the nature and scope of the work, equipment, supplies or materials sought, the name of each person or organization submitting, or requested to submit, a bid or proposal, the price or fee bid, and the basis for selection of the 8 subcontractor or supplier. An explanation for, and justification of, a sole source selection must identify why the work, equipment, supplies or materials involved are obtainable from or require a subcontractor with unique or exceptionally scarce qualifications or experience, specialized equipment, or facilities not readily available from other sources, or patents, copyrights, or proprietary data. All Subcontracts shall contain provisions comparable to those set forth in this Agreement applicable to a subcontractor or supplier, and those set forth in Exhibit B to the extent required by law, and all other provisions now or hereafter required by law to be contained therein. The Contractor shall submit to NYSERDA's Contract Administrator for review and written approval any subcontract(s) specified in the Statement of Work as requiring NYSERDA approval. The Contractor shall submit to NYSERDA a copy of all fully executed subcontracts and purchase orders that total greater than $10,000. Section 5.03. Performance. The Contractor shall promptly and diligently ----------- comply with its obligations under each Subcontract and shall take no action which would impair its rights thereunder. The Contractor shall not assign, cancel or terminate any Subcontract without the prior written approval of the Contract Administrator as long as this Agreement remains in effect. Such approval shall not be unreasonably withheld and, in the event that notice of approval or disapproval is not received by the Contractor within thirty days after receipt of request for approval by NYSERDA, the requested assignment, cancellation, or termination of the Subcontract shall be considered approved by NYSERDA. In the event that NYSERDA requires additional time for considering approval, NYSERDA shall notify the Contractor within thirty days of receipt of the request for approval that additional time is required and shall specify the additional amount of time necessary up to sixty (60) days. Section 5.04. Assignment to Plug Power, L.L.C. NYSERDA hereby expressly ------------------------------- consents, in writing, to the assignment of this Agreement, NYSERDA Agreements 1791-ERER-ER-92, 4087-ERTER-TR-95, and 4540-ERTER-ER-97, as modified and restated by this Agreement, and any and all rights, title, interests, duties, liabilities and obligations in connection therewith, to Plug Power, L.L.C. NYSERDA agrees to take any and all action requested by the Contractor or Plug Power, L.L.C., to effect such transfer as a matter of law. Article VI Schedule: Acceptance of Work ---------------------------- Section 6.01. Schedule. The Work shall be performed as expeditiously as -------- possible in conformity with the schedule requirements contained herein and in the Statement of Work. The draft and final versions of the Final Report shall be submitted by the dates specified in the Exhibit A Schedule. It is understood and agreed that the delivery of the draft and final versions 9 of such reports by the Contractor shall occur in a timely manner and in accordance with the requirements of the Exhibit A Schedule. Section 6.02. Acceptance of Work. The completion of the Work shall be ------------------ subject to acceptance by NYSERDA in writing of the Final Report and all other deliverables as defined in Exhibit A, Statement of Work. Article VII Force Majeure ------------- Section 7.0.1. Force Majeure. Neither party hereto shall be liable for any ------------- failure or delay in the performance of its respective obligations hereunder if and to the extent that such delay or failure is due to a cause or circumstance beyond the reasonable control of such party, including, without limitation, acts of God or the public enemy, expropriation or confiscation of land or facilities, compliance with any law, order or request of any Federal, State, municipal or local governmental authority, acts of war, rebellion or sabotage or damage resulting therefrom, fires, floods, storms, explosions, accidents, riots, strikes, or the delay or failure to perform by any Subcontractor by reason of any cause or circumstance beyond the reasonable control of such Subcontractor. Article VIII Technical Data: Patents- Payments to NYSERDA -------------------------------------------- Section 8.01. Rights in Technical Data ------------------------ (a) Technical Data: Rights in Technical Data shall be allocated as follows: (1) NYSERDA shall have: (i) rights in Contract Data and Proprietary Data in order to exercise license rights, as provided in paragraph (a)(2)(iii) below; and (ii) no rights under this Agreement in any Technical Data which are not Contract Data. (2) The Contractor shall have: (i) unlimited rights in all Technical Data, Contract Data and Proprietary Data subject to paragraph (iii) below; (ii) the right to withhold Proprietary Data except as otherwise provided in paragraph (iii) below; and 10 (iii) the right to make, use and sell the Product. In the event the Contractor fails to make, use, or sell any Subject Invention within 10 years from the Contractor's receipt of Final Payment as described in Section 4.04 hereof, so that the benefits of such Subject Invention are available to the public and after written notice to the Contractor and a period of not less than six months in which the parties shall negotiate in good faith in order to resolve any disputes, NYSERDA shall be granted a royalty-free, non-exclusive, worldwide license sufficient in scope to allow NYSERDA to make, use or sell the Subject Invention and to allow others to do so. NYSERDA shall keep any Proprietary Data concerning such Subject Invention confidential, and may disclose such Proprietary Data to its sublicensees who have agreed to keep such Proprietary Data confidential. The Contractor agrees that to the extent it receives or is given access to Proprietary Data or other technical, business or financial data in the form of recorded information from NYSERDA or a NYSERDA contractor or subcontractor, the Contractor shall treat such data in accordance with any restrictive legend contained thereon, unless another use is specifically authorized by prior written approval of the Contract Administrator. Section 8.02. Patents. ------- (a) The Contractor retains the entire right, title and interest throughout the world in each Subject Invention of the Contractor conceived or first actually reduced to practice in the performance of the Work under the Agreement; except, that with respect to any Subject Invention in which the Contractor elects to retain title, NYSERDA shall have a non-exclusive, non-transferrable, irrevocable, paid-up license for itself, the State of New York and all political subdivisions and other instrumentalities of the State of New York, to practice or have practiced for or on their behalf the Subject Invention throughout the world, exclusively for their own use of the Subject Invention. (b) Effective on the date of this Agreement, the Contractor shall submit to NYSERDA, not less frequently than annually, written reports which indicate the status of utilization of Subject Inventions. The reports shall include information regarding the status of development, date of first commercial sale or use, and gross royalties received by the Contractor. Such report shall be furnished to NYSERDA not later than February 1 following the calendar year covered by the report. The Contractor may include the information required by this Section in the Annual Report required by Section 8.03 of this Agreement. Section 8.03. Payments to NYSERDA. -------------------- (a) (1) When a Sale is made by a Seller when the Seller is a New York State Manufacturer: .5% of the Sale Price; The Contractor's obligation to make payments to NYSERDA under this subparagraph (1) shall extend for a period of fifteen (15) years or until the Contractor has paid NYSERDA $1,200,000, whichever occurs first, commencing with the date of the filing of the Fiscal Report with NYSERDA. (2) When a Sale is made by a Seller when the Seller is not a New York State Manufacturer: 3% of the Sale Price. The Contractor's obligation to make payments to NYSERDA under this subparagraph (2) shall extend for a period of ten (10) years or until the Contractor has paid NYSERDA $2,400,000, whichever occurs first, commencing with the date of the filing of the Final Report with NYSERDA. In the event the Contractor is obligated to make payments in accordance with the requirements of this subparagraph, any payments made to NYSERDA as a result of the sale of the Product pursuant to the conditions of subparagraph (1) hereof shall be applied to the Contractor's revised maximum payment obligation to NYSERDA of $2,400,000. Also, after the fifteen (15) year payment period or dollar cap under subparagraph (1) has been met of the ten (10) year payment period or dollar cap under subparagraph (2) has been met, whichever obligation occurs first, the Contractor's obligation to make payments to NYSERDA shall extend for another period of ten (10) years and the Contractor shall make payments to NYSERDA of .1% of the Sale Price for any Sale made by any Seller if the Contractor's annual net sales for that year exceed $1,000,000,000. All payments due pursuant to this Section 8.03 shall be payable in annual installments and shall be paid by the first day of March in the calendar year immediately following the year during which the Contractor receives revenues as described above (the "Due Date") and such annual installments to NYSERDA shall not exceed $200,000, in the aggregate, for any given year. Any payment not received by the applicable Due Date shall be deemed delinquent. A delinquent payment shall be made with interest with such interest computed commencing with the Due Date of such payment. The interest rate payable shall be the "Prime Rate" existing as of the due date of such payment plus five (5) percentage points. Such interest shall be compounded monthly. amounts: (b) Annual Reports. The Contractor shall provide NYSERDA an annual report -------------- detailing, by manufacturer, the number of items sold or leased, or the payment or other 12 receipts received, and the resultant amount earned by, and paid to, NYSERDA in accordance with paragraph (a) hereof. Such report shall be furnished to NYSERDA not later than February 1 following the calendar year covered by the report. The Contractor's obligation to provide Annual Reports shall commence on February 1 of the calendar year following either the Contractor's receipt of Final Payment pursuant to Section 4.04 hereto, or upon the first Sale, whichever event occurs first. In the event that, for a period of five consecutive years, the annual reports indicate that no Sales are made and no payment is due to NYSERDA, the Contractor may cease submittal of annual reports. If, however, Sales are made in subsequent years, the Contractor's obligation to submit annual reports shall resume. (c) Licensing or Franchise Agreements. The Contractor shall not enter into --------------------------------- any agreement with any party with respect to the licensing, franchising, or assignment of rights in the Product or any Subject Invention which contains provisions inconsistent with the Contractor's obligation as set forth in this Section. The Contractor shall provide copies of any proposed licensing or franchise agreements to NYSERDA and shall not execute any such agreements without the prior written consent of NYSERDA. Such consent shall not be unreasonably withheld, and, in the event that notice of consent or disapproval is not received by the Contractor within thirty days after receipt of request for approval by NYSERDA, such licensing or franchise agreement shall be considered approved. Article IX Warranties and Guarantees ------------------------- Section 9.01. Warranties and Guarantees. The Contractor warrants and ------------------------- guarantees that: (a) it is financially and technically qualified to perform the Work; (b) it is familiar with and will comply with all general and special Federal, State, municipal and local laws, ordinances and regulations, if any, that may in any way affect the performance of this Agreement; (c) the design, supervision and workmanship furnished with respect to performance of the Work shall be in accordance with sound and currently accepted scientific standards and engineering practices; (d) all materials, equipment and workmanship furnished by it and by Subcontractors in performance of the Work or any portion thereof shall be free of defects in design, material and workmanship, and all such materials and equipment shall be of first-class quality, shall conform with all applicable codes, specifications, standards and ordinances and shall have service lives and maintenance characteristics suitable for their intended purposes in accordance with sound and currently accepted scientific standards and engineering practices; 13 (e) neither the Contractor nor any of its employees, agents, representatives or servants has actual knowledge of any patent issued under the laws of the United States or any other matter which could constitute a basis for any claim that the performance of the Work or any part thereof infringes any patent or otherwise interferes with any other right of any Person; (f) there are no existing undisclosed or threatened legal actions, claims, or encumbrances, or liabilities that may adversely affect the Work or NYSERDA's rights hereunder; and (g) it has no actual knowledge that any information or document or statement furnished by the Contractor in connection with this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary to make the statement not misleading, and that all facts have been disclosed that would materially adversely affect the Work. Article X Indemnification --------------- Section 10.01. Indemnification. The Contractor shall protect, indemnify and --------------- hold harmless NYSERDA and the State of New York from and against all liabilities, losses, claims, damages, judgments, penalties, causes of action, costs and expenses (including, without limitation, attorneys' fees and expenses) imposed upon or incurred by or asserted against NYSERDA or the State of New York resulting from, arising out of or relating to the performance of this Agreement. The obligations of the Contractor under this Article shall survive any expiration or termination of this Agreement, and shall not be limited by any enumeration herein of required insurance coverage. Article XI Insurance --------- Section 11.01. Maintenance of Insurance Policy Provisions. The Contractor, ------------------------------------------ at no additional cost to NYSERDA, shall maintain or cause to be maintained throughout the term of this Agreement, insurance of the types and in the amounts specified in the Section hereof entitled Types of Insurance. All such insurance shall be evidenced by insurance policies, each of which shall: (a) name or be endorsed to cover NYSERDA, the State of New York and the Contractor as insureds, as their respective interests may appear; (b) provide that such policy may not be cancelled or modified until at least 30 days after receipt by NYSERDA of written notice thereof; and 14 (c) be reasonably satisfactory to NYSERDA in all other respects. Section 11.02. Types of Insurance. The types and amounts of insurance ------------------ required to be maintained under this Article are as follows: (a) Commercial general liability insurance for bodily injury liability, including death, and property damage liability, incurred in connection with the performance of this Agreement, with minimum limits of $1,000,000 in respect of claims arising out of personal injury or sickness or death of any one person, $1,000,000 in respect of claims arising out of personal injury, sickness or death in any one accident or disaster, and $1,000,000 in respect of claims arising out of property damage in any one accident or disaster; (b) Commercial automobile liability insurance in respect of motor vehicles owned, licensed or hired by the Contractor and the Subcontractors for bodily injury liability, including death and property damage, incurred in connection with the performance of this Agreement, with minimum limits of $500,000 in respect of claims arising out of personal injury, or sickness or death of any one person, $1,000,000 in respect of claims arising out of personal injury, sickness or death in any one accident or disaster, and $500,000 in respect of claims arising out of property damage in any one accident or disaster; and (c) Upon commencement of marketing of the Product, product liability insurance for bodily injury liability, including death, and property damage liability, arising out or the use of the Product with minimum limits of $1,000,000 in respect of claims arising out of personal injury or sickness or death of any one person, $1,000,000 in respect of claims arising out of personal injury, sickness or death in any one accident or disaster, and $1,000,000 in respect of claims arising out of property damage in any one accident or disaster. Product liability insurance naming the NYSERDA and State of New York as additional insureds required under This Agreement shall remain in effect for as long as the payment obligation pursuant to Section 8.03 of this Agreement is in effect. Section 11.03. Delivery of Policies; Insurance Certificates. Prior to -------------------------------------------- commencing the Work, the Contractor shall deliver to NYSERDA certificates of insurance issued by the respective insurers, indicating the Agreement number thereon, evidencing the insurance required by Sections 11.02 (a) and (b) hereof and bearing notations evidencing the payment of the premiums thereon or accompanied by other evidence of such payment satisfactory to NYSERDA. Upon commencement of marketing of the Product, the Contractor shall deliver to NYSERDA certificates of insurance issued by the respective insurers, indicating the Agreement number thereon, evidencing the insurance required by Section 11.02 (c) hereof and bearing notations evidencing the payment of the premiums thereon or accompanied by other evidence of such payment satisfactory to NYSERDA. In the event any policy furnished or carried pursuant to this Article will expire on a date prior to acceptance of the Work by NYSERDA pursuant to the section hereof entitled Acceptance of Work, the Contractor, not less than 15 days prior to such expiration date, shall deliver to NYSERDA certificates of 15 insurance evidencing the renewal of such policies, and the Contractor shall promptly pay all premiums thereon due. In the event of threatened legal action, claims, encumbrances, or liabilities that may affect NYSERDA hereunder, or if deemed necessary by NYSERDA due to events rendering a review necessary, upon request the Contractor shall deliver to NYSERDA a certified copy of each policy. Article XII Stop Work Order; Termination ---------------------------- Section 12.01. Stop Work Order. --------------- (a) NYSERDA may at any time, by written Order to the Contractor, require the Contractor to stop all or any part of the Work called for by this Agreement for a period of up to 90 days after the Stop Work Order is delivered to the Contractor, and for any further period to which the parties may agree. Any such order shall be specifically identified as a Stop Work Order issued pursuant to this Section. Upon receipt of Such an Order, the Contractor shall forthwith comply with its terms and take all reasonable steps to minimize the incurrence of costs allocable to the Work covered by the Order during the period of work stoppage consistent with public health and safety. Within a period of 90 days after a Stop Work Order is delivered to the Contractor, or within any extension of that period to which the parties shall have agreed, NYSERDA shall either: (i) by written notice to the Contractor, cancel the Stop Work Order, which shall be effective as provided in such cancellation notice, or if not specified therein, upon receipt by the Contractor, or (ii) terminate the Work covered by such order as provided in the Termination Section of this Agreement. (b) If a Stop Work Order issued under this Section is cancelled or the period of the Order or any extension thereof expires, the Contractor shall resume Work. An equitable adjustment shall be made in the delivery schedule, the estimated cost, the fee, if any, or a combination thereof, and in any other provisions of the Agreement that may be affected, and the Agreement shall be modified in writing accordingly, if: (i) the Stop Work Order results in an increase in the time required for, or in the Contractor's cost properly allocable to, the performance of any part of this Agreement, and (ii) the Contractor asserts a claim for such adjustments within 30 days after the end of the period of Work stoppage; provided that, if NYSERDA decides the facts justify such action, NYSERDA may receive and act 16 upon any such claim asserted at any time prior to final payment under this Agreement. (c) If a Stop Work Order is not cancelled and the Work covered by such Order is terminated, the reasonable costs resulting from the Stop Work Order shall be allowed by equitable adjustment or otherwise. (d) Notwithstanding the provisions of this Section 12.01, the maximum amount payable by NYSERDA to the Contractor pursuant to this Section 12.01 shall not be increased or deemed to be increased except by specific written amendment hereto. Section 12.02. Termination. ----------- (a) This Agreement may be terminated by NYSERDA at any time during the term of this Agreement with or without cause, upon 30 days prior written notice to the Contractor. In such event, compensation shall be paid to the Contractor for Work performed and expenses incurred prior to the effective date of termination in accordance with the provisions of the Article hereof entitled Compensation and in reimbursement of any amounts required to be paid by the Contractor pursuant to Subcontracts; provided, however, that upon receipt of any such notice of termination, the Contractor shall cease the performance of Work, shall make no further commitments with respect thereto and shall reduce insofar as possible the amount of outstanding commitments (including, to the extent requested by NYSERDA, through termination of subcontracts containing provisions therefor). Articles VIII, IX, and X shall survive any termination of this Agreement, and Article XVI shall survive until the payment obligations pursuant to Article VIII have been met. (b) In the event of termination, the Contractor's payment obligations set forth in Section 8.03 of the Agreement shall be adjusted as of the effective date of termination, with such payment obligations being calculated as follows: Total NYSERDA funds actually paid to the Contractor X Payments defined - ---------------------------------------- in Section 8.03 of the NYSERDA total maximum Agreement commitment set forth in Section 4.07 of the Agreement (c) Nothing in this Article shall preclude the Contractor from continuing to carry out the Work called for by the Agreement after receipt of a Stop Work Order or termination notice at its own election, provided that, if the Contractor so elects, (i) any such continuing Work after receipt of the Stop Work Order or termination notice shall be deemed not to be Work-pursuant to the Agreement and (ii) NYSERDA shall have no liability to the Contractor for any 17 costs of the Work continuing after receipt of the Stop Work Order or termination notice. Article XIII Independent Contractor ---------------------- Section 13.01. Independent Contractor. The status of the Contractor under ---------------------- this Agreement shall be that of an independent contractor and not that of an agent, and in accordance with such status, the Contractor, the Subcontractors, and their respective officers, agents, employees, representatives and servants shall at all times during the term of this Agreement conduct themselves in a manner consistent with such status and by reason of this Agreement shall neither hold themselves out as, nor claim to be acting in the capacity of, officers, employees, agents, representatives or servants of NYSERDA nor make any claim, demand or application for any right or privilege applicable to NYSERDA, including, without limitation, rights or privileges derived from workers' compensation coverage, unemployment insurance benefits, social security coverage and retirement membership or credit. Article XIV Compliance with Certain Laws ---------------------------- Section 14.01. Laws of the State of New York. The Contractor shall comply ----------------------------- with all of the requirements set forth in Exhibit B hereto. Section 14.02. All Legal Provisions Deemed Included. It is the intent and ------------------------------------ understanding of the Contractor and NYSERDA that each and every provision of law required by the laws of the State of New York to be contained in this Agreement shall be contained herein, and if, through mistake, oversight or otherwise, any such provision is not contained herein, or is not contained herein in correct form, this Agreement shall, upon the application of either NYSERDA or the Contractor, promptly be amended so as to comply strictly with the laws of the State of New York with respect to the inclusion in this Agreement of all such provisions. Section 14.03. Other Legal Requirements. The references to particular laws ------------------------ of the State of New York in this Article, in Exhibit B and elsewhere in this Agreement are not intended to be exclusive and nothing contained in such Article, Exhibit and Agreement shall be deemed to modify the obligations of the Contractor to comply with all legal requirements. Article XV Notices, Entire Agreement, Amendment, Counterparts -------------------------------------------------- Section 15.01. Notices. All notices, requests, consents, approvals and ------- other 18 communications which may or are required to be given by either party to the other under this Agreement shall be deemed to have been sufficiently given for all purposes hereunder when delivered or mailed by registered or certified mail, postage prepaid, return receipt requested, (i) if to NYSERDA, at Corporate Plaza West, 286 Washington Avenue Extension, Albany, New York 12203-6399 or at such other address as NYSERDA shall have furnished to the Contractor in writing, and (ii) if to the Contractor, at 968 Albany-Shaker Road, Latham, New York 12110-1487, or such other address as the Contractor shall have furnished to NYSERDA in writing. Section 15.02. Entire Agreement: Amendment. This Agreement embodies the --------------------------- entire agreement and understanding between NYSERDA and the Contractor and supersedes all prior agreements and understandings relating to the subject matter hereof. Except as otherwise expressly provided for herein, this Agreement may be changed, waived, discharged or terminated only by an instrument in writing, signed by the party against which enforcement of such change, waiver, discharge or termination is sought. Section 15.03. Counterparts. This Agreement may be executed in counterparts ------------ each of which shall be deemed an original, but all of which taken together will constitute one and the same instrument. Article XVI Business Reorganizations ------------------------ Section 16.01. Business Reorganizations. In the event the Contractor ------------------------ proposes to consolidate or merge into or with another corporation or entity, or to sell or dispose of all or a majority of the assets of the Contractor, or to otherwise undertake a reorganization which alters or changes the rights of NYSERDA as provided in this Agreement, before any such action shall be taken, the Contractor shall either: (a) buy out its obligation to make payments to NYSERDA as described in Section 8.03 of this Agreement by paying NYSERDA an amount equal to three times the amount of funds actually paid by NYSERDA to the Contractor under this Agreement; or (b) assign or otherwise transfer to a new entity the Contractor's obligations under this Agreement, including, but not limited to, the obligation to make payments to NYSERDA as described in Section 8.03 of this Agreement. Such assignment or transfer shall be subject to the prior written approval of NYSERDA. Such approval shall not be unreasonably withheld, and, in the event that notice of approval or disapproval is not received by the Contractor within thirty days after receipt of request for approval, the assignment or transfer shall be considered approved. In the event that NYSERDA requires additional time for considering approval, NYSERDA shall notify the Contractor within thirty days of receipt of the request for approval that additional time is required and shall specify the additional amount of time necessary up to sixty (60) days. 19 Article XVII Publicity --------- Section 17.01. Publicity. --------- (a) The Contractor shall collaborate with NYSERDA's Manager of Technical Communications to prepare any press release and to plan for any news conference concerning the Work. In addition the Contractor shall notify NYSERDA's Manager of Technical Communications regarding any media interview in which the Work is referred to or discussed. (b) It is recognized that during the course of the Work under this Agreement, the Contractor or its employees may from time to time desire to publish information regarding scientific or technical developments made or conceived in the course of or under this Agreement. In any such information, the Contractor shall credit NYSERDA's funding participation in the Project, and shall state that "NYSERDA has not reviewed the information contained herein, and the opinions expressed in this report do not necessarily reflect those of NYSERDA or the State of New York." Notwithstanding anything to the contrary contained herein, the Contractor shall have the right to use and freely disseminate project results for educational purposes, if applicable, consistent with the Contractor's policies. (c) Commercial promotional materials or advertisements produced by the Contractor shall credit NYSERDA, as stated above, and shall be submitted to NYSERDA for review and recommendations to improve their effectiveness prior to use. The wording of such credit can be approved in advance by NYSERDA, and, after initial approval, such credit may be used in subsequent promotional materials or advertisements without additional approvals for the credit, provided, however, that all such promotional materials or advertisements shall be submitted to NYSERDA prior to use for review, as stated above. Such approvals shall not be unreasonably withheld, and, in the event that notice of approval or disapproval is not received by the Contractor within thirty days after receipt of request for approval, the promotional materials or advertisement shall be considered approved. In the event that NYSERDA requires additional time for considering approval, NYSERDA shall notify the Contractor within thirty days of receipt of the request for approval that additional time is required and shall specify the additional amount of time necessary up to 60 days. If NYSERDA and the Contractor do not agree on the wording of such credit in connection with such materials, the Contractor may use such materials, but agrees not to include such credit. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day, month and year first above written. MECHANICAL TECHNOLOGY, INC. NEW YORK STATE ENERGY 20 RESEARCH AND DEVELOPMENT AUTHORITY By: /s/ Martin J. Mastroianni By /s/ F. William Valentino ----------------------------- ----------------------------------- F. William Valentino President Name: Martin J. Mastroianni --------------------------- Title: President -------------------------- (Seal) 21 STATE OF NEW YORK ) ) SS: COUNTY OF ALBANY ) On this 24th day of June , 1997, before me personally came ------ ------------------ ----- Martin J. Mastroianni , to me known, who being duly sworn, did depose and - ---------------------------- say that he resides at Saratoga Springs, N.Y. that he is the --------------------------------------- President of Mechanical Technology, Inc. , the - ---------------------------------------------------------------- corporation described in and which executed the foregoing instrument; that he knew the seal of said corporation; that the seal affixed to said instrument was such corporate seal; that it was so affixed by the order of the Board of Directors of said corporation, and that he signed his name thereto by like order. /s/ Gloria M. Edmund - ------------------------------- Notary Public State of New York Gloria M. Edmund Notary Public State of New York No. 4522548 Qualified in Albany County Commission Expires 1/31/99 ---------- 22 [NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY LETTERHEAD] December 17, 1997 Mr. William P. Sumigray Contract Manager Plug Power, L.L.C. 966 Albany-Shaker Road Latham, New York 12203-6399 Dear Mr. Sumigray: Subject: Modification No. 1 to Agreement No. 4633-ERTER-TR-98 - PEM Fuel Cell Power System Project Reference is made to the subject Agreement between us dated June 26, 1997 (the "Agreement"). WHEREAS, Plug Power, L.L.C. submitted a proposal to NYSERDA under competitive solicitation 380-97 to request NYSERDA's continued support of the Project; and WHEREAS, NYSERDA desires to provide additional funding in the amount of $256,578 under this Modification to support the Phase II effort delineated in the attached Exhibit A-1, Statement of Work, Budget, and Schedule attached hereto and made a part hereof. NOW, THEREFORE, the Agreement is hereby modified as follows: 1. Agreement, upper right-hand corner, Amount: Delete the amount "$1,191,478" ------ ------ and Substitute the amount "$1,448,046". ---------- 2. Article I, Definitions, Section 1.01, Definitions, (a) General Definitions, ----------- ----------- ------------------- Agreement: Delete the words "Exhibit A" and Substitute the words "Exhibits A, --------- ------ ---------- A-l". 3. Article I, Definitions, Section 1.01, Definitions, (a) General Definitions, ----------- ----------- ------------------- Budget: Delete the words "Exhibit A" and Substitute the words "Exhibits A ------ ------ ---------- and A-l". 4. Article I, Definitions, Section 1.01, Definitions, (a) General Definitions, ----------- ----------- ------------------- Statement of Work: Delete the words "Exhibit A" and Substitute the words ----------------- ------ ---------- "Exhibits A and A-l". 5. Article I, Definitions, Section 1.01, Definitions, (a) General Definitions, ----------- ----------- ------------------- Work: Delete the words "Exhibit A" and Substitute the words "Exhibits A and ---- ------ ---------- A". 6. Article III, Deliverables, Section 3.05, Deliverables. Delete the words ------------ ------------ ------ "Exhibit A, Statement of Work" and Substitute the words "Exhibits A and A-1, ---------- Statements of Work". 7. Article IV, Compensation, Section 4.01, Cost-Sharing. Delete the amount ------------ ------------ ------ "$1,191,478" and Substitute the amount "$1,448,056". ---------- 8. Article IV, Compensation, Section 4.01, Cost-Sharing, (d) Remaining Funds. ------------ ------------ --------------- . first sentence. Delete the amount "$1,191,478" and Substitute the amount ------ ---------- "$1,448,056". . third sentence. Delete the amount "$317,633" and Substitute the amount ------ ---------- "$256,578". 9. Article IV, Compensation, Section 4.04, Final Payment. ------------ ------------- . first sentence. Delete the words "Exhibit A, Statement of Work" and ------ Substitute the words "Exhibits A and A-1, Statements of Work". ---------- . third sentence. Delete the date "September 30, 1998" and Substitute the ------ ---------- date "December 31, 2000". . last sentence. Delete the amount "$1,191,478" and Substitute the amount ------ ---------- "$1,448,056". 10. Article IV, Compensation, Section 4.07, Maximum Commitment. Delete the ------------ ------------------ ------ amount "$1,191,478" and Substitute the amount "$1,448,056". ---------- 11. Article VI, Schedule; Acceptance of Work, Section 6.01, Schedule. ---------------------------- -------- . first sentence. Delete the words "Statement of Work" and Substitute the ------ ---------- words "Statements of Work". . second sentence and third sentence. Delete the words "Exhibit A Schedule" ------ and Substitute the words "Exhibits A and A-1 Schedules". ---------- !2. Article VI, Schedule; Acceptance of Work, Section 6.02, Acceptance of Work. ---------------------------- ------------------ Delete the words "Exhibit A, Statement of Work" and Substitute the words ------ ---------- "Exhibits A and A-1, Statements of Work". 13. Exhibit A, Statement of Work, Schedule and Budget. Add the attached Ex A-1, --- Statement of Work, Schedule and Budget dated December 17, 1997. No other provision of the Agreement is otherwise changed or modified. The parties hereto do hereby indicate their acceptance of and agreement to the foregoing by causing their duly authorized representatives to execute this Modification No. 1 in the respective spaces provided below. PLUG POWER, L. L.C. NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY By /s/ Gary Mittleman By /s/ F. William Valentino -------------------------- --------------------------------------- Name Gary Mittleman F. William Valentino ------------------------- President Title Pres & CEO. ----------------------- Jean M. Woodard Vice President and Treasurer [stamped] EXHIBIT A-1 ----------- CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. FUEL PROCESSOR INTEGRATION PROGRAM FOR TRANSPORTATION FUEL CELL POWER SYSTEMS A PROPOSAL TO THE NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY Prepared by: Plug Power L.L.C. 968 Albany Shaker Road Latham, New York 12110 March 18, 1998 This proposal contains proprietary information that may not be divulged outside the NYSERDA organization without prior written consent from Plug Power L.L.C. Executive Summary Fuel cell power systems for transportation applications hold great promise in meeting many areas of environmental concern, such as reduction of vehicle emissions and fuel conservation. While some fuel cell systems are being developed to run on pure hydrogen stored within the vehicle, more practical vehicle designs (aimed at running on, e.g., gasoline or methanol) require the incorporation of a fuel processor and a fuel cell that are tightly integrated to maximize efficiency and performance. However, the integration of fuel processors and fuel cells demands careful evaluation, analysis and attention to difficult system integration challenges. Comprehensive understanding of the issues associated with thermal integration, optimal system water management, control integration and fuel impurity effects are areas that Plug Power has identified as the most important and most critical for achieving successful commercialization of transportation power systems. This proposal requests NYSERDA's support for the establishment of a fuel cell, fuel processor integration testing program that will help to resolve several of these fundamental system integration issues. The proposed program includes the creation of a state-of-the-art reformate stack test stand that will be capable of supporting the testing needs of automotive sized fuel processor and fuel cell power systems. The test stand will support the operation of a variety of automotive fuel processor systems, and it will support the testing of Plug Power developed fuel cells. The test stand will also include a full complement of instrumentation and data acquisition equipment required for comprehensive testing and evaluation of alternative system configurations and components. Along with this unit, Plug Power will develop and establish a testing strategy that will be designed to evaluate critical fuel processor and fuel cell integration issues. Issues such as water balance, control strategy integration, reformate gas composition, and thermal balancing, of the integrated system will be primary focus areas for the testing program. Concurrent with the establishment of the testing program, Plug Power will begin testing fuel processors with Plug Power developed fuel cells. This program will also establish the foundation for continued system performance improvements resulting from continued integration testing and system design refinements. Data acquired from testing fuel cells integrated with fuel processors will be used to define a continuing and evolving series of technology improvement programs, continued re-definition of integration testing plans, and progressive refinements in system designs and performance. Program Goals and Objectives The ultimate goal of the proposed program is to establish a fundamental understanding of fuel processor and fuel cell integration technology and issues that need to be addressed to improve system performance. From this basic understanding of the issues, further refinement of technology development programs will emerge. As interim goals and objectives of this program, Plug Power intends to: . Construct a state-of-the-art test stand to permit testing of integrated fuel processor fuel/ cell systems . Improve our fuel processing technology base . Perform technical assessments of fuel processors . Evaluate reformate composition vs. fuel cell performance . Evaluate thermal management alternatives . Evaluate alternative methods of system water management . Observe the effects of varying reactant stoichiometries . Monitor the performance of alternative control strategies . Establish a fundamental understanding of transient operation . Begin to evaluate system start-up strategies Background Fuel cells have recently come into the spotlight as viable candidates for generating the electrical power required for all-electric and/or hybrid electric vehicles. Currently, there are several programs being conducted by Government agencies and private organizations, which are aimed at demonstrating the ability of fuel cells to provide the electrical power required for practical sized vehicles. Aside from the selection of vehicle size and type of vehicle power system for fuel cell powered vehicles, the decision regarding fuel is perhaps the one with the most profound implications. While hydrogen is the fuel of choice for Proton Exchange Membrane (PEM) fuel cells, most system developers acknowledge the problems associated with storing significant amount of hydrogen fuel on a vehicle. This combined with the associated lack of on-highway hydrogen re- fueling infrastructure and the difficult challenge of developing such a system in the short term, leads power system developers into the decision to incorporate fuel processors capable of deriving hydrogen from "popular" fuels, such as gasoline, diesel or methanol into their system designs. In simple terms, the fuel processor has to accomplish two goals and is usually thought of as two separate reactors: the reformer and the CO cleanup device. . Reformer: Reforms the hydrocarbon fuel into a hydrogen rich gas (reformate) and . Cleanup: Reduces the CO content of the reformate below 50 ppm. There are basically three different types of reformers: . Steam reformers, . Partial oxidation reformers, and . Catalytic autothermal reformers. The steam reformer has the benefit of being the most widely used reformer for large-scale commercial hydrogen production purposes, so there is a wealth of knowledge on the technology. Of the various types of reformers, steam reforming is also noted for being able to produce the most hydrogen per kg of input fuel. Another positive attribute of steam reformers is the hydrogen concentration of the reformate is the highest of all technologies, since steam reformers do not mix any air into the chamber that produces the reformate. The disadvantage with steam reforming is that it requires the most physical volume and consequently will be the heaviest of the reformer options. Since the steam reformer is the largest of the reactors, it is also most likely to have the highest capital cost. Steam reformers also have very slow start-up times, and are relatively slow to react to load changes. Partial Oxidation reforming is relatively a mature and well-understood technology; however there are significant engineering issues in reducing the reformer size from plant-size to automotive-size. Partial oxidation has the advantage of being compact, and having less weight than steam reforming. Partial oxidation reformers also have fast start-up times, and are fairly responsive to load changes. Another important advantage is that partial oxidation reformers are promising to be the most economical of all reformer technologies. Low hydrogen production efficiency is the main disadvantage of partial oxidation reformers. Because air is introduced into the reactor, N\2\ dilutes the reformate stream so the H\2\ concentration in the reformate is much lower than that of the steam reformer. Although the technology is mature, there is less commercial expertise with partial oxidation in comparison with steam reforming. Catalytic Autothermal Reformers (CAR) combine the catalytic steam reforming reaction and the partial oxidation reactions in a single reaction chamber. This yields relatively good response times for start-ups and load changes, and also encourages lighter weight construction, smaller volumes, and higher conversion efficiencies. The disadvantage with the CAR process is that it is the newest reformer technology with the least amount of commercial experience. As is the case for the partial oxidation system, air is introduced into the reactor, so the H\2\ concentration in the reformer will be low in comparison to the steam reformer. The cost for such a system is projected to fall between the costs of the partial oxidation reformer and the steam reformer. CO cleanup devices CO is a by-product of the reforming process, and CO in the reformate stream hurts the performance of PEM fuel cells. Consequently, CO levels in the reformate stream must be reduced to very low levels (10 to 50 parts-per-million, or ppm). There are several ways of eliminating or minimizing the levels of CO in the reformate stream. One way is to purify the hydrogen, meaning that the output from the device is pure hydrogen. The other method is to react the CO with another gas and convert it into another compound. There are two hydrogen purification methods being considered; pressure swing adsorption (PSA) and membrane separation, that can both provide extremely pure hydrogen (less than 100 ppm CO). The benefit of such systems is that fuel cells run more efficiently with pure hydrogen than with an H/2/-rich gas that has many diluents, such as CO/2/ and N/2/. Currently, both processes are accomplished at extremely high pressures (200 psi) and with fairly high capital investments. Parasitic compression losses from the required high-pressures, as well as the high capital costs for compressors, are the key disadvantages. There are also several cleaning, devices that chemically convert the CO to other compounds. One such device is a low temperature shift reactor that reacts CO ----------------------------- with H/2/O to form CO/2/ and H/2/. Another device is a preferential oxidizer --------------------- that reacts CO with O/2/ to get CO/2/. A third device is called a methanizer, ---------- and it reacts with CO and H/2/ to get CH/4/. Each of these devices has the advantage of not requiring high pressures to operate and are fairly inexpensive solutions. The disadvantages with each of these systems are that they all need extremely good temperature control to be able to clean the CO down to the required levels and that the final reformate feeding the fuel cell will be filled with diluents. The obvious challenge to developing an efficient and economical transportation fuel cell power system configuration is confident selection of the best reformer and CO cleanup devices. The selection process is fraught with system design trade-offs that can only be made using reliable data acquired under operating conditions. Other design selections need to be made based upon the results of parametric testing of alternative system configurations. The proposed program constructs the test stand required to test alternative fuel processor and fuel cell configurations, to acquire the data required to make the system design decisions. Statement of Work The proposed program consists of three tasks that will be conducted in parallel. The first task will be the design and construction of a world-class reformate fuel cell test stand, the second task will be to develop a testing program to evaluate system integration design in order to drive toward optimal system configurations. The third task will be dedicated to Program Management, and will ensure that the two technical activities are well coordinated, and that the technologies developed are coordinated with the needs of other automotive oriented programs within Plug Power. The two technical tasks will be coordinated through a series of design reviews and strategy development sessions that will ensure the testing facility reflects the needs of the testing program. The following paragraphs described the planned work for each task. TASK 1 -Test Stand Design and Construction Under this task, Plug Power will design and fabricate a state-of-the-art testing reformate fuel cell test stand for integrated fuel processor and fuel cell systems. Each test stand will be designed to meet all local safety codes, and will provide the support services demanded by comprehensive fuel cell power system testing. Task 1.1 - Test Stand Definition Under this effort, Plug Power personnel will define the performance requirements and corresponding system needs of the test stand. Specific requirements will be driven by the objectives of the testing engineers, and by capacities dictated by the anticipated needs of automotive sized systems. Such needs are expected to include, but will not be limited to: . Fuel storage and delivery . Air compression and delivery . Reformate composition and quality . Cooling system . Service water . Instrumentation and control . Safety system . Space requirements . Electrical . Data acquisition and storage Results of the test stand definition work will be summarized in the form of a "Test Stand Needs" document. This document will then be used to ensure that all needs are reflected in the test stand. Task 1.2 -Test Stand Design The test stand will be designed based upon the needs defined in Task 1.1. The initial design will be reviewed internally by Plug Power personnel to ensure conformance with the Test Stand Needs document developed in Task 1.1. After the design has been reviewed, a design package will be prepared and bids obtained. In addition to the test stand design, interfaces will be completed for both fuel processors and fuel cells. The test station design will include manual and automated controls for all fuel processor and fuel cell parameters, and will be based upon the recent Plug Power test station designs. Test equipment will be carefully selected for ease of incorporation into each of the test stations and will provide critical data concerning gas composition, reactant flow rates and pressures, coolant loop temperatures and pressures, and characteristics of the electrical load. Other instrumentation will be incorporated to permit the accurate measurement and analysis of critical system mass and flow balances. The test station is envisioned to incorporate a dedicated data acquisition processor for high-speed collection of critical performance data. The test station will then be connected, via a computer network, to a host computer for storage and post-test analysis of all the data. Task 1.3 -Test Stand Construction The test stand will be constructed according to design and its operation verified during commissioning tests. Wherever possible, the operation and performance of each component will be tested to ensure that all performance objectives have been met, and that the test stand will provide the desired capacities of flow, pressure, load, etc. for the test articles. It is envisioned that a fuel processor and a fuel cell will be made available to confirm the functionality of the various system elements. Task 2.0 - Integrated System Testing After completion of the test stand, the task of evaluating the various system integration issues will commence. Prior to the testing, however, a structured test strategy will be developed followed by detailed test plans. The following paragraphs detail the activities planned for the testing aspects of the integrated system program. Task 2.1 - Develop Testing Strategy and Methodology To ensure that all system development and testing requirements are addressed in all tests, a testing strategy and philosophy will be developed. If the testing is to provide useful data, it is essential that all system integration issues such as water balancing, thermal management, and integrated system control issues are addressed in a through and consistent manner. This task will strive to identify all the critical and essential testing objectives, and will develop a consistent set of testing methodologies to ensure that the objectives are consistently met. Results of this work will be used to ensure that the test stand designed in Task 1 supports all the testing objectives. Task 2.2 - Develop Test Plans General testing sequences will be developed during this task that utilize the testing methodology developed in Task 2.1, and are based upon the specific designs of the testing facilities. These test procedures will be established to ensure that consistent data will be acquired during all phases of testing. Several test plans will be prepared to address specific objectives. For example, a test plan for determining thermal balance throughout the integrated system will be developed. Another test plan will be developed to ensure that all anticipated control aspects of a system will be evaluated. Other general tests will be prepared to cover initial system start-up, steady state and transient modes of operation. It is the intent of this task to create "generic" test recipes that can be easily modified for use on specific fuel processors or system configurations. Task 2.3 - Enhance Plans for First Reformer Testing Specific test plans for a specific fuel processor and fuel cell system components will be developed as part of this task. The general test plans prepared in Task 2.2 will be modified and enhanced for the specific requirements of specific reformers and system configurations. It is anticipated that a methanol reformer will be the first device tested in the new facility. Task 2.4 - Conduct First Reformer Testing Utilizing the testing procedures developed in Task 2.3, the first reformer will be tested to prepare for incorporation with the test stand. Particular attention will be paid to the performance of the facilities and operation of the safety systems incorporated into the facility. Other test objectives will be to confirm expectations regarding gas composition of the reformer output stream, confirm projections of water requirements and output from system components, and confirm control strategies. Task 2.5 - Conduct Second Reformer Testing To meet the program objectives of acquiring a broad range of fuel processor testing experience, testing of a second reformer will be conducted. In preparation of testing the second reformer, testing plans originally developed in Task 2.3 will be modified as required, and testing will be conducted. Task 3.0 - Program Management Ensuring that program objectives are achieved, and that schedules are maintained, will be the responsibility of an active program manager. An essential role of the program manager will be to ensure coordination between the test stand designers and the test planners and designers. Additionally, the Program management activity will be responsible for preparing and delivering periodic reports to NYSERDA. and maintaining a line of frequent communications concerning program status, progress and areas requiring attention with representatives of NYSERDA. Program Schedule - Plug Power has planned this proposed program for a 6-month duration. The program plan is depicted in Figure 1 below. Plug Power promises to make our best effort with the financial resources being supplied by New York State to meet all targeted objectives. [Chart Appears Here Which Sets Forth the Schedule for Completion of Work Under the Program, as set forth below:]
2nd Quarter 3rd Quarter 4th Quarter --------------- --------------- --------------- Task Name Apr May Jun Jul Aug Sep Oct Nov Dec --------- --- --- --- --- --- --- --- --- --- NYSERDA REFORMER PROGRAM 1.0 Test Stand 1.1 Test Stand Definition [April through May] 1.2 Test Stand Design [April] 1.3 Test Stand Construction [Mid-April through Mid-May] 2.0 Integrated System Testing [Mid-April through Mid-October] 2.1 Develop Testing Methodology [Mid-April] 2.2 Develop Test Plans [Mid-April through May] 2.3 Enhance Plans for First Reformer Tests [Mid-May] 2.4 Conduct First Reformer Testing [August-October] 2.5 Conduct Second Reformer Testing [August-October] 3.0 Program Management [April through October]
Deliverables - After the completion of all work, Plug Power will submit two copies of the draft final report to NYSERDA for Review. Within thirty days after receipt of the annotated report from NYSERDA, Plug Power shall submit six copies of the final report, plus one reproducible copy. EXHIBIT A-1 -----------
- ------------------------------------------------------------------------------------------------------------------------------------ New York State Energy Research and Development Authority Solicitation/Contract No. Page Contract Pricing Proposal Form - ------------------------------------------------------------------------------------------------------------------------------------ Contractor: Name of Proposed Project: PLUG POWER, L.L.C. FUEL PROCESSOR INTEGRATION FOR TRANSPORTATION FUEL CELL POWER SYSTEMS. - ------------------------------------------------------------------------------- Address: 968 Albany-Shaker Road Latham, New York 12110 - ------------------------------------------------------------------------------------------------------------------------------------ Location (where work is to be performed): NYSERDA funding: SAME AS ABOVE - ------------------------------------------------------------------------------------------------------------------------------------ Total Project Cost: - ------------------------------------------------------------------------------------------------------------------------------------ Total Funding & Cost-sharing Project Co-funding & Other Cost Element Cost via NYSERDA Co-funding - ------------------------------------------------------------------------------------------------------------------------------------ 1. Direct Materials - ------------------------------------------------------------------------------------------------------------------------------------ a. Purchased Parts 204,000 106,958 97,042 - ------------------------------------------------------------------------------------------------------------------------------------ b. Other FUEL 15,000 7,864 7,136 - ------------------------------------------------------------------------------------------------------------------------------------ Total Direct Materials 219,000 114,822 104,178 ==================================================================================================================================== 2. Materials Overhead Rate: - ------------------------------------------------------------------------------------------------------------------------------------ 3. Direct Labor (specify names/titles) Hours Rate/hr 69,290 36,329 32,961 - ------------------------------------------------------------------------------------------------------------------------------------ ENGINEERING & 3250 $21.32 - ------------------------------------------------------------------------------------------------------------------------------------ TECHNICIAN - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Total Direct Labor 69,290 36,329 32,961 ==================================================================================================================================== 4. Labor Overhead Rate% $ Base - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Total Labor Overhead ==================================================================================================================================== 5. Outside Special Testing ==================================================================================================================================== 6. Equipment ==================================================================================================================================== 7. Travel ==================================================================================================================================== 8. Other Direct Costs ==================================================================================================================================== 9. Subcontractors/Consultants - ------------------------------------------------------------------------------------------------------------------------------------ BUILDING CONSULTANT 5,000 2,622 2,378 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Total Subcontractors/Consultants ==================================================================================================================================== 10. General & Administrative Expense Rate% Element(s) - ------------------------------------------------------------------------------------------------------------------------------------ 21.5 402,750 86,591 45,415 41,176 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ 11. Fee or Profit (0 for cost-sharing agreements) Rate: ==================================================================================================================================== 12. Total Estimated Project Cost 489,341 256,578 232,763 ==================================================================================================================================== This proposal reflects our best estimates of this date, in accordance with the instructions to proposers. - ------------------------------------------------------------------------------------------------------------------------------------ Typed Name and Title: WILLIAM P. SUMIGRAY Signature: Date: CONTRACT MANAGER /s/ William P. Sumigray 12/17/97 - ------------------------------------------------------------------------------------------------------------------------------------ Has any executive agency of the U.S. government performed any review of your records in connection with any prime contract or subcontract within the past twelve months: X Yes No --- ---- If yes, identify: - ------------------------------------------------------------------------------------------------------------------------------------
Meoh fuel processor testing program
April May June July August September October Totals Phase 1 Test stand design & fabrication J. Chen 40 40 40 120 E. White 20 20 20 60 Electrician 40 80 80 200 Electrical Engineer 40 20 60 FP engineer 80 80 80 240 Engineer *M. 60 40 20 120 Cusack) Technician 80 80 80 240 Technician 80 80 80 240 1280 Phase 2 Test planning and procedures J. Chen 40 40 80 E. White 20 20 40 J. Love 20 20 40 FP engineer 40 40 40 120 Engineer (M 40 40 40 120 Cusack) Test Engineer 40 40 80 480 Phase 3 Testing J. Chen 40 40 20 20 20 140 FP engineer 40 40 80 80 80 320 Test technician 40 40 80 80 80 320 Test technician 80 80 80 240 J. Love 20 20 20 20 20 100 1120 Phase 4 Program Mgmt D. Hicks 40 20 20 20 20 20 20 160 J. Law 20 20 20 20 20 20 20 140 D. Neuman 10 10 10 10 10 10 10 70 370 Materials Lab modifications $ 30,000 Fuel system $ 30,000 Fuel usage $ 15,000 FP station build $ 57,000 Computer $ 5,000 DAQ $ 7,000 Frame $ 4,000 Fittings $ 3,000 Meters $10,000 pumps $ 2,000 flow control $ 7,000 display flow controllers 7,000 gas conditioner 2,000 Infrared CO meter 10,000 Gas Chromatograph $ 45,000 FC station build $ 27,000 Computer@5,000 Frame@4,000 Fittings@3,000 Meters@5,000 Elec load@10,000 Cooling system $ 15,000 Building consultant $ 5,000 Total Direct Direct Material Cost $224,000 Materials $224,000 Direct Labor and Overhead ($55/hr) $178,750 G&A $ 86,591 (21.5%) TOTAL $489,341
INDIRECT RATES -------------- THE INDIRECT RATES APPLICABLE TO THIS BUDGET EXHIBIT A-1 ARE AS FOLLOWS: OVERHEAD 158% X DIRECT LABOR G&A 21.5% X DIRECT LABOR, OVERHEAD AND G&A [NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY LETTERHEAD] March 30, 1999 Mr. William P. Sumigray Contract Manager Plug Power,-L.L.C. 968 Albany-Shaker Road Latham, New York 12203-6399 SUBJECT: MODIFICATION NO. 2 TO AGREEMENT NO. 4633-ERTER-TR-98 -- PEM Fuel Cell Power System Project Dear Mr. Sumigray: Reference is made to the Agreement between us dated June 26, 1997 and Modification No. 1 dated December 17, 1997 ("the Agreement"), wherein the following changes are hereby incorporated: WHEREAS, NYSERDA has provided Plug Power L.L.C. with $1,448,056 for the development of the PEM Fuel Cell Power System under the Referenced Agreement and subsequent Modification; and WHEREAS, NYSERDA desires to provide additional funding from the 1996 Clean Water/Clean Air Bond Act in the amount of $3,000,000 under Agreement Number 4870-ERTER-BA-99 to undertake an air quality project and to support the Phase III effort; and WHEREAS, PLUG Power L.L.C. has a certain payment obligation to NYSERDA under Section 8.03 of the Subject Agreement. NOW, THEREFORE, the Agreement is hereby modified as follows: 1. Article VIII, Technical Data: Patents: Payments to NYSERDA. Section 8.03, -------------------------------------------- Payments to NYSERDA, (a), Payments to NYSERDA, subparagraph (1), second ------------------- ------------------- paragraph Delete the first sentence and Substitute the following sentence, ------ ---------- "The Contractor's obligation to make payments to NYSERDA under this subparagraph (1) shall extend for a period of 15 years thereafter or until the Contractor has paid to NYSERDA $4,200,000, whichever occurs first, commencing with the date of the filing of the Final Report to NYSERDA." 2. Article VIII, Technical Data: Patents: Payments to NYSERDA. Section 8.03, -------------------------------------------- Payments to NYSERDA, (a), Payments to NYSERDA, subparagraph (2), second ------------------- ------------------- paragraph. . Delete the first sentence and Substitute the following sentence, "The ------ ---------- Contractor's obligation to make payments to NYSERDA under this subparagraph (2) shall extend for a period of 10 years thereafter or until the Contractor has paid to NYSERDA $5,400,000, whichever occurs first, commencing with the date of the filing of the Final Report to NYSERDA." . Delete the amount "$2,400,000" from the last sentence and Substitute the ------ ---------- amount "$5,400,000." 3. Article VIII, Technical Data: Patents: Payments to NYSERDA. Section 8.03, -------------------------------------------- Payments to NYSERDA, (a), Payments to NYSERDA, sixth paragraph. Delete the ------------------- ------------------- ------ amount "$200,000" from the last sentence and Substitute the amount ---------- "$540,000." No other provision of this Agreement is otherwise modified or changed. The parties hereto do hereby indicate their acceptance of and agreement to the foregoing by causing their duly authorized representatives to execute this Modification No. 2 in the respective spaces provided below. PLUG POWER L.L.C. NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY By /s/Gary Mittleman By /s/ Jean M. Woodard ------------------------ -------------------------- Jean M. Woodard Name Gary Mittleman Vice President & Treasurer ---------------------- Title Pres & CEO --------------------- EX-10.15 7 AGREEMENT BETWEEN NYSE R&D & PLUG POWER LLC CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. EXHIBIT 10.15 Agreement No: 4870-ERTER-BA-99 Amount: $3,000,000 Type: Cost-Sharing Agreement Agreement dated this 25th day of January, 1999 by and between the NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY ("NYSERDA"), a New York public benefit corporation having its principal office and place of business at Corporate Plaza West 286 Washington Avenue Extension, Albany, New York 12203- 6399. and PLUG POWER L.L.C., having its principal office and place of business at 968 Albany-Shaker Road, Albany, New York 12110 (the "Contractor"). Whereas, the New York State Public Authorities Law empowers NYSERDA to develop and implement new energy technologies consistent with economic, social and environmental objectives, to develop and encourage energy conservation technologies, and to promote, develop encourage and assist special energy projects and thereby advance job opportunities, health, general prosperity and the economic welfare of the people of the State of New York; and Whereas, The New York State Department of Environmental Conservation ("NYSDEC"). pursuant to the 1996 Clean Water/Clean Air Bond Act, as specifically set forth in Environmental Conservation Law Section 56-0607 is authorized, in consultation with other state agencies as may be necessary, to make state assistance payments for projects which will enhance the quality of the State's environment and the State's air quality; and Whereas, in accordance with the requirements of the Environmental Conservation Law Section 56-0607, the NYSDEC in consultation with NYSERDA, has developed a program to improve air quality in New York State, by improving the performance of, or lowering product cost to accelerate the widespread use of ultra-clean, innovative, and advanced power-generation technologies; and Whereas, in an effort to implement this program, NYSERDA, in conjunction with the NYSDEC issued Program Opportunity Notice 425-98 entitled "Power- Generation Technologies Demonstrating Improvements to Air Quality" to solicit proposals under the Program; and Whereas, the Contractor submitted a proposal to manufacture, test, and evaluate pre-production prototype residential fuel cell systems based upon Plug Power's prototype 7000 PEM Fuel Cell (the "Project") and to demonstrate the practical applications of such technology for the purpose of providing air quality benefits through the accelerated deployment of the technology; and Whereas, NYSERDA and the NYSDEC desire to co-sponsor the further development of the Plug Power 7000 PEM Fuel Cell as described in the attached Exhibit A, Statement of Work of this Agreement, which shall be considered a continuation, enhancement, modification, and improvement to the Plug Power 7000 PEM Fuel Cell that the Contractor is continuing to develop. NOW, THEREFORE, in consideration of the premises and of the mutual promises of the parties herein expressed, the parties agree as follows: Article I Definitions Section 1.01. Definitions. Unless the context otherwise requires, the terms defined below shall have, for all purposes of this Agreement, the respective meanings set forth below, the following definitions to be equally applicable to both the singular and plural forms of any of the terms defined. (a) General Definition. Agreement: This Agreement and Exhibits A, B, C, and D hereto, all of which are made a part hereof as though herein set forth in full. Budget: The Schedule and Milestone Payments set forth in Exhibit A hereto. Contract Administrator: NYSERDA's Director of Contract Management, Robert G. Callender, or such other person who may be designated, in writing, by NYSERDA. Effective Date: The effective date of this Agreement shall be the date in the first paragraph of page one, above. Final Report: The Final Report required by the Statement of Work hereof. MWBE Goal Plan: The Plan required under Section 3.02 of this Agreement. MWBE Reports: The Reports required under Section 3.03 of this Agreement. Person: An individual, a corporation, an association or partnership, an organization, a business or a government or political subdivision thereof, or any governmental agency or instrumentality. Progress Reports: The Progress Reports required by the Statement of Work hereof. Statement of Work: The Statement of Work attached hereto as Exhibit A. Subcontract: An agreement for the performance of Work by a Subcontractor, including any purchase order for the procurement of permanent equipment or expendable supplies in connection with the Work. Subcontractor: A person who performs Work directly or indirectly for or on 2 behalf of the Contractor (and whether or not in privity of contract with the Contractor) but not including any employees of the Contractor or the Subcontractors. Work: The Work described in the Exhibit A (including the procurement of equipment and supplies in connection therewith) and the performance of all other requirements imposed upon the Contractor under this Agreement. (b) Data Rights and Patents Definition. Contract Data: Technical Data first produced in the performance of the contract, Technical Data which are specified to be delivered under the contract, or Technical Data actually delivered in connection with the contract. Practical Application: To manufacture in the case of a composition or product, to practice in the case of a process or method, or to operate in the case of a machine or system and under conditions which indicate that the benefits of the invention are available to the public on reasonable terms. Proprietary Data: Technical Data which embody trade secrets developed at private expense, such as design procedures or techniques, chemical composition of materials, or manufacturing methods, processes, or treatments, including minor modifications thereof provided that such data: (i) are not generally known or available from other sources without obligation concerning their confidentiality; (ii) have not been made available by the owner to others without obligation concerning its confidentiality; and (iii) are not already available to NYSERDA without obligation concerning their confidentiality. Subject Invention: Any invention or discovery of the Contractor conceived or first actually reduced to practice in the course of or under this Agreement, and includes any art, method, process, machine, manufacture, design, or composition of matter, or any new and useful improvement thereof, or any variety of plants, whether patented or unpatented, under the Patent Laws of the United States of America or any foreign country. Technical Data: Recorded information regardless of form or characteristic, of a scientific or technical nature. It may, for example, document research, experimental or developmental, or demonstration, or engineering work, or be usable or used to define a design or process, or to procure, produce, support, maintain, or operate material. The data may be graphic or pictorial delineations in media such as drawings or photographs, text in specifications or related performance or design type documents or computer software 3 (including computer software programs, computer software data bases, and computer software documentation). Examples of Technical Data include research and engineering data, engineering drawings and associated lists, specifications, standards, process sheets, manuals, technical reports, catalog item identification, and related information. Technical Data as used herein does not include financial reports, cost analyses, and other information incidental to contract administration. Unlimited Rights: Rights to use, duplicate, or disclose Technical Data, in whole or in part, in any manner and for any purpose whatsoever, and to permit others to do so. Article II Performance of Work Section 2.01. Manner of Performance. Subject to the provisions of Article XII hereof, the Contractor shall perform all of the Work described in the Statement of Work, or cause such Work to be performed in an efficient and expeditious manner and in accordance with all of the terms and provisions of this Agreement. The Contractor shall perform the Work in accordance with the current professional standards and with the diligence and skill expected for the performance of work of the type described in the Statement of Work. The Contractor shall furnish such personnel and shall procure such materials, machinery, supplies, tools, equipment and other items as may reasonably be necessary or appropriate to perform the Work in accordance with this Agreement. Section 2.02. Project Personnel. It is understood and agreed that Mr. John Law shall serve as Project Director and as such shall have the responsibility of the overall supervision and conduct of the Work on behalf of the Contractor and that the persons described in the Statement of Work shall serve in the capacities described therein. Any change of Project Director by the Contractor shall be subject to the prior written approval of NYSERDA. Such approval shall not be unreasonably withheld, and, in the event that notice of approval or disapproval is not received by the Contractor within thirty days after receipt of request for approval by NYSERDA, the requested change in Project Director shall be considered approved. In the event that NYSERDA requires additional time for considering approval, NYSERDA shall notify the Contractor within thirty days of receipt of the request for approval that additional time is required and shall specify the additional amount of time necessary up to 180 days. Article III Deliverables Section 3.01. Deliverables. All deliverables shall be provided in accordance with the Exhibit A Statement of Work. Section 3.02. MWBE Goal Plan. The Contractor shall deliver to NYSERDA its Plan to implement NYSERDA's goal of providing minority and women-owned subcontractors and 4 suppliers with at least 8.8% of subcontracts required to complete the Work as described in Exhibit A of this Agreement. Such Plan shall be approved by NYSERDA and NYSDEC and upon approval delivered to NYSERDA prior to commencing the Work set forth in Exhibit A of this Agreement. Section 3.03. MWBE Report. The Contractor shall deliver to NYSERDA quarterly reports outlining the Contractor's progress at meeting the goal described in Section 3.02 above. Article IV Compensation Section 4.01. Payments. The Contractor will be paid upon submission of proper invoices, the prices stipulated in the Budget for Work delivered or rendered and accepted, less deductions, if any, as herein provided. The total price NYSERDA shall pay to the Contractor provisions of Article XII hereof, as represents the price of the Work. Subject to the limiting, NYSERDA's price of the Work, NYSERDA shall pay the Contractor the total price of $3,000,000, according to the Budget, subject to the provisions, restrictions contained herein. Such amount shall be paid only to the extent that costs are incurred by the Contractor in performance of the Work in accordance with the provisions of this Agreement the Budget and the following: (a) Staff Charges: The Contractor shall be compensated for the services performed by its employees under the terms of this Agreement at the employee's actual wage rate. The Contractor represents and warrants to NYSERDA that such rates are, and during the period of this Agreement shall remain, the lowest rates being offered or charged by the Contractor to others for the performance of generally similar services. In the event that any of the Contractor's rates are reduced to the benefit of any client of the Contractor as a result of any audit or for any other reason, the Contractor shall so notify NYSERDA and the appropriate reductions shall be made to the rates utilized hereunder. (b) Direct Charges: The Contractor shall be reimbursed for reasonable and necessary actual direct costs incurred (e.g., equipment, supplies, travel and other costs directly associated with the performance of the Agreement) to the extent required in the performance of the Work in accordance with the provisions of the Budget. Travel, lodging, meals and incidental expenses shall be reimbursed for reasonable and necessary costs incurred. Costs should generally not exceed the daily per diem rates published in the Federal Travel Regulations. Reimbursement for the use of personal vehicles shall be limited to the Internal Revenue Service business standard mileage rate. (c) Indirect Costs: The Contractor shall be reimbursed for fringe benefits, overhead, general and administrative (G&A), and other indirect costs included in the Budget at such rates as the Contractor may periodically calculate, consistent with appropriate federal guidelines or generally accepted accounting principles. 5 Section 4.02. Schedule of Payment. At the completion of each Milestone Billing Event so identified in Exhibit A, the Contractor may submit invoices requesting payment by NYSERDA of the amounts corresponding to the amount identified in the Budget. NYSERDA shall make payment to the Contractor in accordance with and subject to its Prompt Payment Policy Statement attached hereto as Exhibit D. The Contractor shall be notified by NYSERDA in accordance with Section 5.04.4 (b)(2) of such Exhibit D, of any information or documentation which the Contractor did not include with such invoice. Section 4.03. Title to Equipment. Title shall vest in the Contractor to all equipment purchased hereunder subject to the provisions of the Demonstration Agreements required in Exhibit A, Statement of Work. Section 4.04. Final Payment. Upon final acceptance by NYSERDA of the Final Report and all other deliverables contained in Exhibit A, Statement of Work, pursuant to Section 6.02 hereof, the Contractor shall submit an invoice for final payment with respect to the Work together with such supporting information and documentation as, and in such form as, NYSERDA may require. An invoice for final payment shall include, in addition to the material required pursuant to Section 4.04 hereof, a statement as to whether any invention or patentable devices have resulted from the performance of the Work. All invoices for final payment hereunder must, under any and all circumstances, be received by NYSERDA prior to October 1, 2001. In accordance with and subject to the provisions of NYSERDA's Prompt Payment Policy Statement, attached hereto as Exhibit D, NYSERDA shall pay to the Contractor within the prescribed time after receipt of such invoice for final payment, the total amount payable pursuant to Section 4.01 hereof, less all progress payments previously made to the Contractor with respect thereto and subject to the maximum commitment of $3,000,000 set forth in Section 4.07 hereof. Section 4.05. Release by NYSDEC and the Contractor. The acceptance by the Contractor of final payment shall release NYSERDA, NYDEC, and the State of New York from all claims and liability that the Contractor, its representatives and assigns might otherwise have relating to this Agreement. Section 4.06. Maintenance of Records. The Contractor shall keep, maintain, and preserve at its principal office throughout the term of the Agreement and for a period of seven years after acceptance of the Work, full and detailed books, accounts, and records pertaining to the performance of the Agreement, including without limitation, all bills, invoices, payrolls, subcontracting efforts and other data evidencing, or in any material way related to, the direct and indirect costs and expenses incurred by the Contractor in the course of such performance. Section 4.07. Maximum Commitment. The maximum aggregate amount payable by NYSERDA to the Contractor hereunder is $3,000,000. NYSERDA shall not be liable for any costs or expenses in excess of such amount incurred by the Contractor in the performance and completion of the Work. 6 Section 4.08. Audit. NYSERDA shall have the right from time to time and at all reasonable times during the term of the Agreement and such period thereafter to inspect and audit any and all books, accounts and records at the office or offices of the Contractor where they are then being kept, maintained and preserved pursuant to Section 4.06 hereof. Any payment made under the Agreement shall be subject to retroactive reduction for amounts included therein which are found by NYSERDA on the basis of any audit of the Contractor by an agency of the United States, State of New York or NYSERDA not to constitute an allowable charge or cost hereunder. Article V Assignments, Subcontracts and Purchase Orders Section 5.01. General Restriction. Except as specifically provided otherwise in this Article, the assignment, transfer, conveyance, subcontracting or other disposal of this Agreement or any of the Contractor's rights, obligations, interests or responsibilities hereunder, in whole or in part, without the express consent in writing of NYSERDA shall be void and of no effect as to NYSERDA. Section 5.02. Subcontract Procedure . Without relieving it of, or in any way limiting, its obligations to NYSERDA under this Agreement, the Contractor may enter into Subcontracts for the performance of Work or for the purchase of materials or equipment. Except for a subcontractor or supplier specified in a team arrangement with the Contractor in the Contractor's original proposal, and except for any subcontract or order for equipment, supplies or materials from a single subcontractor or supplier totaling, under $5,000, the Contractor shall select all subcontractors or suppliers through a process of competitive bidding or multi-source price review. A team arrangement is one where a subcontractor or supplier specified in the Contractor's proposal is performing a substantial portion of the Work and is making a substantial contribution to the management and/or design of the Project. In the event that a competitive bidding or multi-source price review is not feasible, the Contractor shall document an explanation for, and justification of, a sole source selection. The Contractor shall document the process by which a subcontractor or supplier is selected by making a record summarizing the nature and scope of the work, equipment, supplies or materials sought, the name of each person or organization submitting, or requested to submit, a bid or proposal, the price or fee bid, and the basis for selection of the subcontractor or supplier. An explanation for, and justification of, a sole source selection must identify why the work, equipment, supplies or materials involved are obtainable from or require a subcontractor with unique or exceptionally scarce qualifications or experience, specialized equipment, or facilities not readily available from other sources, or patents, copyrights, or proprietary data. All Subcontracts shall contain provisions comparable to those set forth in this Agreement applicable to a subcontractor or supplier, and those set forth in Exhibit B to the extent required by law, and all other provisions now or hereafter required by law to be 7 contained therein. The Contractor shall submit to NYSERDA's Contract Administrator for review and written approval all subcontracts including the Phase II subcontracts, deemed necessary by NYSERDA, based on the results and accomplishments of Phase 1. NYSERDA's maximum commitment to the Project shall not be affected by costs incurred in subcontracting any of the Phase 11 tasks. The Contractor shall submit to NYSERDA a copy of all fully executed subcontracts and purchase orders that total greater than $5,000. Section 5.03. Performance. The Contractor shall promptly and diligently comply with its obligations under each Subcontract and shall take no action which would impair its rights thereunder. The Contractor shall not assign, cancel or terminate any Subcontract without the prior written approval of the Contract Administrator as long as this Agreement remains in effect. Such approval shall not be unreasonably withheld and, in the event that notice of approval or disapproval is not received by the Contractor within thirty days after receipt of request for approval by NYSERDA, the requested assignment, cancellation, or termination of the Subcontract shall be considered approved by NYSERDA. In the event that NYSERDA requires additional time for considering approval, NYSERDA shall notify the Contractor within thirty days of receipt of the request for approval that additional time is required and shall specify the additional amount of time necessary up to 180 days. Article VI Schedule: Acceptance of Work Section 6.01. Schedule. The Work shall be performed as expeditiously as possible in conformity with the schedule requirements contained herein and in the Statement of Work. The draft and final versions of the Final Report shall be submitted by the dates specified in the Exhibit A Schedule. It is understood and agreed that the delivery of the draft and final versions of such reports by the Contractor shall occur in a timely manner and in accordance with the requirements of the Exhibit A Schedule. Section 6.02. Acceptance of Work. The completion of the Work shall be subject to acceptance by NYSERDA in writing of the Final Report and all other deliverables as defined in Exhibit A, Statement of Work. Article VII Force Majeure Section 7.01. Force Majeure. Neither party hereto shall be liable for any failure or delay in the performance of its respective obligations hereunder if and to the extent that such delay or failure is due to a cause or circumstance beyond the reasonable control of such party, including, without limitation, acts of God or the public enemy, expropriation or confiscation of land or facilities, compliance with any law, order or request of any Federal, State, municipal or local governmental authority, acts of war, rebellion or sabotage or damage resulting 8 therefrom, fires, floods, storms, explosions, accidents, riots, strikes, or the delay or failure to perform by any Subcontractor by reason of any cause or circumstance beyond the reasonable control of such Subcontractor. Article VIII Technical Data, Patents Section 8.01. Rights in Technical Data. (a) Technical Data: Rights in Technical Data shall be allocated as follows: (1) NYSERDA shall have: (i) unlimited rights in Contract Data except as otherwise provided below with respect to Proprietary Data; and (ii) no rights under this Agreement in any Technical Data which are not Contract Data. (2) The Contractor shall have: (i) the right to withhold Proprietary Data in accordance with the provisions of this clause; and (ii) the right to make, use and sell the 7000 PEM Fuel Cell. If the Contractor fails to make, use, and sell the 7000 PEM Fuel Cell within five years from the Contractor's receipt of Final Payment as described in Section 4.04 hereof, under conditions which indicate that the benefits of the 7000 PEM Fuel Cell are available to the public on reasonable terms, NYSERDA shall have a royalty-free, exclusive, worldwide license sufficient in scope to allow NYSERDA to make, use or sell the 7000 PEM Fuel Cell and to allow others to do so, including a non-exclusive right in Proprietary Data incorporated into or necessary for use in connection with the making, use, or sale of the 7000 PEM Fuel Cell by NYSERDA or its sublicensees. The Contractor agrees to disclose such Proprietary Data to NYSERDA, and NYSERDA may disclose such Proprietary Data to its sublicensees who have agreed to keep such Proprietary Data confidential; and (iii) the right to use for its private purposes subject to patent, or other provisions of this Agreement, Contract Data it first produces in the performance of this Agreement provided the data requirements of this Agreement have been met as of the date of the private use of such data. The Contractor agrees that to the extent it receives or is given access to Proprietary 9 Data or other technical, business or financial data in the form of recorded information from NYSERDA or a NYSERDA contractor or subcontractor, the Contractor shall treat such data in accordance with any restrictive legend contained thereon, unless another use is specifically authorized by prior written approval of the Contract Administrator. Section 8.02. Patents. (a) The Contractor may elect to retain the entire right, title and interest throughout the world to each Subject Invention of the Contractor conceived or first actually reduced to practice in the performance of the Work under the Agreement; except, that with respect to any Subject Invention in which the Contractor elects to retain title, NYSERDA shall have a non-exclusive, non- transferrable, irrevocable, paid-up license for itself, the State of New York and all political subdivisions and other instrumentalities of the State of New York, to practice or have practiced for or on their behalf the Subject Invention throughout the world, exclusively for their own use of the Subject Invention. (b) Within six months of the time a Subject Invention is made, or as part of the request for final payment, whichever shall occur first, the Contractor shall submit to NYSERDA a written invention disclosure. Within twelve months of the time a Subject Invention is made, or as part of the request for final payment, whichever shall occur first, the Contractor shall advise NYSERDA in writing whether the Contractor elects to retain principal rights in the Subject Invention. The Contractor shall file the patent application for a Subject Invention within two years of the date of election. If the Contractor fails to disclose a Subject Invention, fails to elect to retain principal rights thereto, or to file a patent application within the time specified in this paragraph, or if the Contractor elects not to retain principal rights in a Subject Invention, the Contractor shall convey to NYSERDA title to the Subject Invention unless NYSERDA shall waive in writing its right to take title. In the event the Contractor elects not to retain principal rights in a Subject Invention, the Contractor shall retain a non-exclusive, royalty-free license throughout the world in such Subject Invention transferable only with the written approval of NYSERDA. Such approval shall not be unreasonably withheld, and, in the event that notice of approval or disapproval is not received by the Contractor within thirty days after receipt of request for approval, the requested transfer shall be considered approved. In the event that NYSERDA requires additional time for considering approval, NYSERDA shall notify the Contractor within thirty days of receipt of the request for approval that additional time is required and shall specify the additional amount of time necessary up to 180 days. (c) The Contractor shall submit to NYSERDA, not less frequently than annually, written reports which indicate the status of utilization of Subject Inventions in which the Contractor retains principal rights. The reports shall include information regarding the status of development, date of first commercial sale or use, and gross royalties received by the Contractor. Such report shall be furnished to NYSERDA not later than February 1 following the calendar year covered by the report. In the event the Contractor fails to demonstrate that the Contractor has taken effective steps within three years after a patent is issued to bring the 10 Subject Invention to the point of Practical Application, then NYSERDA shall have the right to grant a non-exclusive or exclusive license to responsible applicants under terms that are reasonable under the circumstances, or to require the Contractor to do so. (d) The Contractor shall include the foregoing patent clauses, suitably modified to identify the parties, in all subcontracts which involve the performance of Work under this Agreement. The Subcontractor shall retain all rights provided for the Contractor, and the Contractor shall retain all rights provided for NYSERDA, as set forth above. Article IX Warranties and Guarantees Section 9.01. Warranties and Guarantees. The Contractor warrants and guarantees that: (a) it is financially and technically qualified to perform the Work; (b) it is familiar with and will comply with all general and special Federal, State, municipal and local laws, ordinances and regulations, if any, that may in any way affect the performance of this Agreement; (c) the design, supervision and workmanship furnished with respect to performance of the Work shall be in accordance with sound and currently accepted scientific standards and engineering practices; (d) all materials, equipment and workmanship furnished by it and by Subcontractors in performance of the Work or any portion thereof shall be free of defects in material and workmanship, and all such materials and equipment shall be of first-class quality, shall conform with all applicable codes, specifications, standards and ordinances and shall have service lives and maintenance characteristics suitable for their intended purposes in accordance with sound and currently accepted scientific standards and engineering practices; (e) neither the Contractor nor any of its employees, agents, representatives or servants has actual knowledge of any patent issued under the laws of the United States or any other matter which could constitute a basis for any claim that the performance of the Work or any part thereof infringes any patent or otherwise interferes with any other right of any Person; (f) there are no existing undisclosed or threatened legal actions, claims, or encumbrances, or liabilities that may adversely affect the Work or NYSERDA's rights hereunder; and (g) it has no actual knowledge that any information or document or statement furnished by the Contractor in connection with this Agreement contains any untrue statement of a material fact or omits to state a material fact necessary to make the statement not 11 misleading, and that all facts have been disclosed that would materially adversely affect the Work. Article X Indemnification Section 10.01. Indemnification. The Contractor shall protect, indemnify and hold harmless NYSERDA, NYSDEC, and the State of New York from and against all liabilities, losses, claims, damages, judgments, penalties, causes of action, costs and expenses (including, without limitation, attorneys' fees and expenses) imposed upon or incurred by or asserted against NYSERDA, NYSDEC, or the State of New York resulting from, arising out of or relating to the performance of this Agreement. The obligations of the Contractor under this Article shall survive any expiration or termination of this Agreement and shall not be limited by any remuneration herein of required insurance coverage. Article XI Insurance Section 11.01. Maintenance of Insurance: Policy Provision . The Contractor, at no additional cost to NYSERDA and NYSDEC, shall maintain or cause to be maintained throughout the term of this Agreement, insurance of the types and in the amounts specified in the Section hereof entitled Types of Insurance. All such insurance shall be evidenced by insurance policies, each of which shall: (a) name or be endorsed to cover NYSERDA, NYSDEC, the State of New York and the Contractor as insureds, as their respective interests may appear; (b) provide that such policy may not be cancelled or modified until at least 30 days after receipt by NYSERDA of written notice thereof, and (c) be reasonably satisfactory to NYSERDA in all other respects. Section 11.02. Types of Insurance. The types and amounts of insurance required to be maintained under this Article are as follows: (a) Commercial general liability insurance for bodily injury liability, including death, and property damage liability, incurred in connection with the performance of this Agreement, with minimum limits of $1,000,000 in respect of claims arising out of personal injury or sickness or death of any one person, $1,000,000 in respect of claims arising out of personal injury, sickness or death in any one accident or disaster, and $1,000,000 in respect of claims arising out of property damage in any one accident or disaster; and (b) Commercial automobile liability insurance in respect of motor vehicles owned, licensed or hired by the Contractor and the Subcontractors for bodily injury liability, 12 including death and property damage, incurred in connection with the performance of this Agreement, with minimum limits of $500,000 in respect of claims arising out of personal injury, or sickness or death of any one person, $1,000,000 in respect of claims arising out of personal injury, sickness or death in any one accident or disaster, and $500,000 in respect of claims arising out of property damage in any one accident or disaster. Section 11.03. Delivery of Policies: Insurance Certificate. Prior to commencing the Work, the Contractor shall deliver to NYSERDA certificates of insurance issued by the respective insurers, indicating the Agreement number thereon, evidencing the insurance required by this Article and bearing notations evidencing the payment of the premiums thereon or accompanied by other evidence of such payment satisfactory to NYSERDA. In the event any policy furnished or carried pursuant to this Article will expire on a date prior to acceptance of the Work by NYSERDA pursuant to the section hereof entitled Acceptance of Work. The Contractor, not less than 15 days prior to such expiration date, shall deliver to NYSERDA certificates of insurance evidencing the renewal of such policies, and the Contractor shall promptly pay all premiums thereon due. In the event of threatened legal action, claims. encumbrances, or liabilities that may affect NYSERDA hereunder. or if deemed necessary by NYSERDA due to events rendering a review necessary, upon request the Contractor shall deliver to NYSERDA a certified copy of each policy. Article XII Stop Work Order: Termination Section 12.01. Stop Work Order. (a) NYSERDA may at any time, by written Order to the Contractor, require the Contractor to stop all or any part of the Work called for by this Agreement for a period of up to 90 days after the Stop Work Order is delivered to the Contractor, and for any further period to which the parties may agree. Any such order shall be specifically identified as a Stop Work Order issued pursuant to this Section. Upon receipt of such an Order, the Contractor shall forthwith comply with its terms and take all reasonable steps to minimize the incurrence of costs allocable to the Work covered by the Order during the period of work stoppage consistent with public health and safety. Within a period of 90 days after a Stop Work Order is delivered to the Contractor, or within any extension of that period to which the parties shall have agreed. NYSERDA shall either: (i) by written notice to the Contractor, cancel the Stop Work Order, which shall be effective as provided in such cancellation notice, or if not specified therein, upon receipt by the Contractor, or (ii) terminate the Work covered by such order as provided in the Termination Section of this Agreement. (b) If a Stop Work Order issued under this Section is cancelled or the period 13 of the Order or any extension thereof expires, the Contractor shall resume Work. An equitable adjustment shall be made in the delivery schedule, the estimated cost, the fee, if any, or a combination thereof, and in any other provisions of the Agreement that may be affected, and the Agreement shall be modified in writing accordingly, if: (i) the Stop Work Order results in an increase in the time required for, or in the Contractor's cost properly allocable to, the performance of any part of this Agreement, and (ii) the Contractor asserts a claim for such adjustments within 30 days after the end of the period of Work stoppage; provided that, if NYSERDA decides the facts justify such action, NYSERDA may receive and act upon any such claim asserted at any time prior to final payment under this Agreement. (c) If a Stop Work Order is not cancelled and the Work covered by such Order is terminated, the reasonable costs resulting from the Stop Work Order shall be allowed by equitable adjustment or otherwise. (d) Notwithstanding the provisions of this Section 12.01, the maximum amount payable by NYSERDA to the Contractor pursuant to this Section 12.01 shall not be increased or deemed to be increased except by specific written amendment hereto. Section 12.02. Termination. (a) This Agreement may be terminated by NYSERDA at any time during the term of this Agreement with or without cause, upon 30 days prior written notice to the Contractor. In such event, compensation shall be paid to the Contractor for Work performed and expenses incurred prior to the effective date of termination in accordance with the provisions of the Article hereof entitled Compensation and in reimbursement of any amounts required to be paid by the Contractor pursuant to Subcontracts; provided, however, that upon receipt of any such notice of termination, the Contractor shall cease the performance of Work, shall make no further commitments with respect thereto and shall reduce insofar as possible the amount of outstanding commitments (including, to the extent requested by NYSERDA, through termination of subcontracts containing provisions therefor). (b) Nothing in this Article shall preclude the Contractor from continuing to carry out the Work called for by the Agreement after receipt of a Stop Work Order or termination notice at its own election, provided that, if the Contractor so elects, (i) any such continuing Work after receipt of the Stop Work Order or termination notice shall be deemed not to be Work pursuant to the Agreement and (ii) NYSERDA shall have no liability to the Contractor for any costs of the Work continuing after receipt of the Stop Work Order or termination notice. Article XIII 14 Independent Contractor Section 13.01. Independent Contractor. The status of the Contractor under this Agreement shall be that of an independent contractor and not that of an agent, and in accordance with such status, the Contractor, the Subcontractors, and their respective officers, agents, employees, representatives and servants shall at all times during the term of this Agreement conduct themselves in a manner consistent with such status and by reason of this Agreement shall neither hold themselves out as, nor claim to be acting in the capacity of, officers, employees, agents, representatives or servants of NYSERDA nor make any claim, demand or application for any right or privilege applicable to NYSERDA, including, without limitation, rights or privileges derived from workers' compensation coverage, unemployment insurance benefits, social security coverage and retirement membership or credit. Article XIV Compliance with Certain Law Section 14.01. Laws of the State of New York. The Contractor shall comply with all of the requirements set forth in Exhibit B hereto. Section 14.02. All Legal Provisions Deemed Included. It is the intent and understanding of the Contractor and NYSERDA that each and every provision of law required by the laws of the State of New York to be contained in this Agreement shall be contained herein, and if, through mistake, oversight or otherwise, any such provision is not contained herein, or is not contained herein in correct form, this Agreement shall, upon the application of either NYSERDA or the Contractor, promptly be amended so as to comply strictly with the laws of the State of New York with respect to the inclusion in this Agreement of all such provisions. Section 14.03. Other Legal Requirements. The references to particular laws of the State of New York in this Article, in Exhibit B and elsewhere in this Agreement are not intended to be exclusive and nothing contained in such Article, Exhibit and Agreement shall be deemed to modify the obligations of the Contractor to comply with all legal requirements. Article XV Severability Section 15.01. Severability. This Agreement is intended to be performed in accordance with, and only to the extent permitted by, all applicable laws, ordinances, rules and regulations, and is intended, and shall for all purposes to be deemed to be, a single, integrated document setting forth all of the agreements and understandings of the parties hereto, and superseding all prior negotiations, understandings and agreements of such parties. If any term or provision of this Agreement or the application thereof to any person or circumstance shall for any reason and to any extent be held to be invalid or unenforceable, then such term or provision shall be ignored, and to the maximum extent possible, this Agreement shall continue 15 in full force and effect, but without giving effect to such term or provision. Article XVI Notices, Entire Agreement, Amendment, Counterpart Section 16.01. Notices. All notices, requests, consents, approvals and other communications; which may or are required to be given by either party to the other under this Agreement shall be deemed to have been sufficiently given for all purposes hereunder when delivered or mailed by registered or certified mail, postage prepaid, return receipt requested, (i) if to NYSERDA, at Corporate Plaza West 286 Washington Avenue Extension, Albany, New York 12203-6399 or at such other address as NYSERDA shall have furnished to the Contractor in writing, and (ii) if to the Contractor at 968 Albany-Shaker Road, Albany, New York 12110, or such other address as the Contractor shall have furnished to NYSERDA in writing. Section 16.02. Entire Agreement: Amendment. This Agreement embodies the entire agreement and understanding between NYSERDA and the Contractor and supersedes all prior agreements and understandings relating to the subject matter hereof. Except as otherwise expressly provided for herein, this Agreement may be changed, waived, discharged or terminated only by an instrument in writing, signed by the party against which enforcement of such change, waiver, discharge or termination is sought. Section 16.03. Counterparts. This Agreement may be executed in counterparts each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. Article XVII Publicity Section 17.01. Publicity. (a) For a period of fifteen years from the date of execution of this Agreement, the Contractor shall collaborate with NYSERDA's Manager of Technical Communications to prepare any press release and to plan for any news conference concerning the Work. In addition, the Contractor shall notify in advance NYSERDA's Manager of Technical Communications regarding any media interview in which the Work is referred to or discussed. Subsequent to the fifteen year period, the Contractor shall make every good faith effort to provide prompt notification to NYSERDA's Manager of Technical Communications of any press releases and media events. (b) In connection with any scientific or technical publications, the Contractor may from time to time desire to publish information regarding scientific or technical developments made or conceived in the course of or under this Agreement. In any such information the Contractor shall credit NYSERDA's funding participation in the Project, and 16 shall state that NYSERDA has not reviewed the information contained herein, and the opinions expressed in this report do not necessarily reflect those of NYSERDA or the State of New York. Notwithstanding anything to the contrary contained herein, the Contractor shall have the right to use and freely disseminate project results for educational purposes, if applicable, consistent with the Contractor's policies. (c) For a period of fifteen years from the date of execution of this Agreement, commercial promotional materials or advertisements produced by the Contractor concerning the Work shall credit NYSERDA, as stated above, and shall be submitted to NYSERDA for review and recommendations to improve their effectiveness prior to use. The wording of such credit can be approved in advance by NYSERDA and, after initial approval, such credit may be used in subsequent promotional materials or advertisements without additional approvals for the credit, provided, however, that all such promotional materials or advertisements shall be submitted to NYSERDA prior to use for review, as stated above. Such approvals shall not be unreasonably withheld, and, in the event that notice of approval or disapproval is not received by the Contractor within thirty days after receipt of request for approval, the promotional materials or advertisement shall be considered approved. In the event that NYSERDA requires additional time for considering approval, NYSERDA shall notify the Contractor within thirty days of receipt of the request for approval that additional time is required and shall specify the additional amount of time necessary up to 180 days. If at any time NYSERDA and the Contractor do not agree on the wording of such credit in connection with such materials, the Contractor may use such materials, but agrees not to include such credit. Article XVIII Availability of Funds Section 18.01. Availability of Funds. This Agreement is conditioned upon the continued availability of funds for its purposes. Should such funds become unavailable, the Contractor and NYSERDA shall be relieved of any obligations hereunder beyond the period for which funds have actually been obligated; provided, however, that the Contractor shall in all events remain responsible for the completion of all reporting and record retention requirements under this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day, month and year first above written. PLUG POWER, L.L.C. By: /s/ Gary Mittleman ----------------------- Title: President and CEO 17 NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY By: /s/ F. William Valentino ---------------------------- Title: President 18 EXHIBIT A STATEMENT OF WORK (SOW) 4870-ERTER-BA-99 FUEL CELL DEMONSTRATION PROJECT OBJECTIVES The overall objective is to manufacture, test, evaluate and demonstrate a total of 80 Plug Power 7000 PEM fuel cell power systems. The publicly accessible demonstration sites shall be spread across publicly-owned facilities in New York State for a variety of different applications that verify the ultra clean and environmentally friendly nature of PEM fuel cell power systems and garner public support for their early introduction. This Project accelerates the process of and acts as a catalyst for the wide scale deployment and commercialization of distributed fuel cell generation throughout the world. Data shall be collected on emissions and operating experience that quantify air quality improvement, fuel efficiency, and provide a basis for future product upgrade and cost reduction efforts. This effort consists of a three-phased Project that proceeds rapidly from laboratory evaluation of pre-production prototype units to initial field evaluation to large-scale field demonstration of production units. TASKS PHASE I - LABORATORY EVALUATION OF PRE-PRODUCTION PROTOTYPE UNITS A total of 24 Plug Power 7000 PEM fuel cell powers systems shall be built by the Contractor and evaluated demonstrated in conjunction with the New York State Center for Fuel Cell Science and Technology. The test/demonstration shall focus on increasing the experience database for failure mode effects analysis (FMEA) establishing operating strategies for the selected applications, and gaining endurance experience under simulated field conditions. Task I-1. Manufacture of Pre-production Prototype Units 24 - -------------------------------------------------------------- The Contractor shall deliver a set of complete draft performance specifications for the Plug Power 7000 unit to the NYSERDA Project Manager and NYSDEC for review, comment, and written acceptance from the NYSERDA Project Manager. The Contractor shall build 24 pre-production prototype units using the best available technology that is expected to represent the serial production commercial product to be manufactured by Plug Power as the Plug Power 7000 and that meets the performance specifications. These units shall be complete systems containing all three major subsystems (fuel processor, stack and power conditioner) except for the first six units which will not require reformers since they will operate on simulated reformate. The units may utilize different components or control strategies for comparative evaluation purposes. 19 Task I-2. Test and Evaluation Program - -------------------------------------- The Contractor shall develop a test plan to evaluate the reliability, endurance, and performance of the test units and their subcomponents in the laboratory under simulated field operating conditions, and shall submit the test plan to the NYSERDA Project Manager and NYSDEC for review, comment, and written approval from the NYSERDA Project Manager. The Contractor may amend the test plan from time to time throughout the test and evaluation program to accommodate changing design features or to more fully evaluate certain aspects of system performance; and each change to the test plan shall be submitted to the NYSERDA Project Manager and NYSDEC for review, comment, and written approval from the NYSERDA Project Manager. Test activities to be included in the plan are those of Tasks I-2, I-6, and I-7. The test plan shall include a list or brief description of test procedures, data to be collected, and success criteria. The target life for the commercial production system of 40,000 hours with planned maintenance requires extensive endurance testing at both the system and component level. Adequate repeat data shall be taken in such a manner as to facilitate the failure modes and effects analysis program. Accelerated life testing of specific components shall be used whenever feasible. The Contractor shall conduct testing, which will take place in conjunction with the New York State Center for Fuel Cell Science and Technology, in accordance with the approved test plan and amendments thereto. Task I-3. Failure Modes and Effects Analysis Program and Test Design - --------------------------------------------------------------------- The Contractor shall use test data and analysis to determine failure modes and effects. The Contractor shall adjust the test plan of Task I-2 to more fully address the findings, if needed, in accordance with the procedure specified in Task I-2. Task I-4. Performance Improvements - ----------------------------------- The Contractor shall use the results of Tasks I-2 and I-3 to identify design changes that allow use of the lowest cost components that meet the overall life, reliability, and other performance specifications and project requirements. The design improvements shall be incorporated in hardware and tested in Task I-2. When the improvement is verified it shall be incorporated into the production design. Task I-5. Cost Improvements - ---------------------------- The Contractor shall analyze data generated in Tasks I-2 and I-3 to identify design improvements that reduce cost without impacting performance relevant to the expected applications. The design improvements shall be incorporated in hardware and tested in Task I-2. When the improvement is verified it shall be incorporated into the production design. 20 Task I- 6. Environmental Testing - --------------------------------- The Contractor shall subject one or more units to environmental testing over the range of expected operating conditions in accordance with the approved test plan (Task I-2). Typical operating ranges include -40 degrees F to 120 degrees F, -600 ft to 6000 ft elevation, water and salt spray environment, electro-magnetic radiation (EMR), etc. The Contractor shall make and retest design improvements as needed to meet performance requirements and success criteria in accordance with the approved test plan. Task I-7. Emissions and Performance Certification - -------------------------------------------------- The Contractor shall submit to the NYSERDA Project Manager and NYSDEC, for written approval from the NYSERDA Project Manager, the name and address of qualified independent laboratories to perform testing in this task. The Contractor shall have tests, as identified in the approved test plan (Task I-2), conducted by an approved laboratory to determine overall performance, efficiency, emissions (CO, NMOG, NO/x/, particulates), electrical (i.e., EMR) and acoustical noise, etc. Where a value exceeds that considered to be acceptable in accordance with the approved test plan and accepted performance specifications, the Contractor shall take remedial action to correct the unacceptable parameter, and verify the impact of the action through retest. Task I-8. Interim Report - ------------------------- The Contractor shall document the results of Phase I in an Interim Report, including summary tables or graphs of data collected, the results of all testing, and FMEA, and submit the report to the NYSERDA Project Manager and NYSDEC. (Results shall also be presented at the end-of-phase review, in accordance with Task IV-2.) PHASE II - INITIAL FIELD EVALUATION Task II-1. Manufacture of Pre-production Prototype Units (6) - ----------------------------------------------------------- The Contractor shall manufacture six units using in the design, wherever possible, the information gained or design changes from Phase I that would improve performance or reduce cost. At a minimum, any design changes required to meet minimum performance requirements, in accordance with the accepted performance specification, shall be included. Task II-2. Site Selection and Design - ------------------------------------- The Contractor shall develop a Field Evaluation Plan, identifying in detail all tests to be accomplished, data to be collected, analysis to be performed and success criteria. The Contractor shall submit the Field Evaluation Plan to the NYSERDA Project Manager and NYSDEC for review, comments, and written approval from the NYSERDA Project Manager. The Contractor may amend the Field Evaluation Plan from time to time throughout the field evaluation period to accommodate needed design changes or to more fully evaluate some aspect of system performance; and the Contractor shall submit all changes to the NYSERDA Project 21 Manager and NYSDEC for review, comment, and written approval of the NYSERDA Project Manager. The plan shall identify intervals between emissions testing, data collection rates, and required monitoring, equipment, at a minimum. Analysis shall include a determination of air quality and energy benefits of the fully integrated system, at a minimum. The Contractor shall develop and submit to NYSERDA and NYSDEC for review, comment, and written approval from the NYSERDA Project Manager, a Standard Draft Site Operating Agreement which shall be the basis for negotiating individual site operating agreements. This Standard Draft Site Operating Agreement shall address issues such as the State Environmental Quality Review Act (SEQRA), site preparation, site operator training, site maintenance, fuel cell system maintenance, fuel type and availability, insurance, liability, restoration of the site at the end of field evaluation, associated costs and responsibilities for those costs, and other issues determined necessary by NYSERDA or NYSDEC. It shall also address the ownership and rights to use the fuel cell units and fixtures after the field evaluation. The Contractor shall coordinate with NYSERDA and NYSDEC during NYSDEC's site selection process. The Contractor shall develop specifications and requirements for potential field evaluation sites based on the fuel cell systems to be demonstrated, support requirements, and other factors, and shall provide those specifications and requirements to the NYSERDA Project Manager and NYSDEC. The Contractor shall work with the selected site owners/operators to establish the installation requirements, and shall develop a design that is adequate for a subcontractor to install the mounting pad, fuel supply, electrical connection, exhaust, and protective building, or any combination thereof. These requirements are expected to vary with the specific application and may include utility grid connection, choice of fuel, inside or outside installation, concrete pool, etc. The Contractor shall develop and enter into a Field Evaluation Site Operating Agreement, based on the Standard Draft Site Operating Agreement, with each site operator. Task II-3. System Installation - ------------------------------- The Contractor shall subcontract for the site modifications and installation of the fuel cell system. The Contractor shall verify that the site is ready before the system is installed. The Contractor shall provide and install a remote data acquisition and control system to obtain frequent updates on system operating data and performance. Task II-4. Commissioning - ------------------------- The Contractor shall examine the fuel cell system installation and verify that it is installed properly. The Contractor shall operate the system correcting all problems and certify that it is operating properly. The system shall then be turned over to the site owner/operator for use in accordance with the Field Evaluation Site Operating Agreement. 22 Task II-5. Field Support and Data Collection - --------------------------------------------- The systems are expected to operate for two to twelve months or until no further useful information can be obtained from them. The Contractor shall retain ownership of the system for the duration of the field evaluation period. The Contractor shall establish and implement a preventative maintenance plan for each system. The Contractor shall monitor, collect and maintain data to support analysis in accordance with the approved Field Evaluation Plan and to ensure maximum system availability by providing quick response to system failures. Task II-6. Troubleshooting - --------------------------- The Contractor shall maintain the capability to provide routine service and service for unanticipated failures within a short time of a problem being reported. The Contractor's service team shall carry a supply of all critical parts in order to make speedy repairs. The service team shall be supported by additional Contractor staff as required. Task II-7. Data Analysis - ------------------------- The Contractor shall analyze the data to determine overall unit operation, performance, areas for improvement, and other information in accordance with the approved Field Evaluation Plan. Task II-8. Field Evaluation Completion - --------------------------------------- Upon the completion of a particular demonstration, the Contractor shall perform the appropriate tasks as per the Field Evaluation Site Operating Agreement. Task II-9. Field Evaluation Report - ----------------------------------- Upon completion of Phase II, the Contractor shall write an interim report documenting the field evaluation results, including a summary of the data collected and the results of the analysis specified in the Field Evaluation Plan. The Contractor shall submit the report to the NYSERDA Project Manager and NYSDEC. (Results shall also be presented at the end-of-phase review, in accordance with Task IV.) The Contractor shall update the performance specification approved in Task I-1 to reflect design changes implemented in Phases I and II, and shall submit the revised performance specification to the NYSERDA Project Manager and NYSDEC for review, comment, and written acceptance of the NYSERDA Project Manager. PHASE III - DEMONSTRATION OF PRODUCTION UNITS (50) It is expected that the manufacturing design will have reached a level of maturity such that there is a significant confidence level for relatively unsupported operation. The demonstration program for this phase reflects that confidence level. 23 Task III-1. Manufacture of Production Units - -------------------------------------------- The Contractor shall manufacture fifty production units incorporating the information gained or design changes from Phases I and II that would improve performance or reduce cost, and that will meet the performance requirements of the accepted performance specification and accepted revisions thereto. Task III-2. Site Selection and Design - ------------------------------------- The Contractor shall develop a Demonstration Plan, identifying in detail all tests to be accomplished, data to be collected, and analysis to be performed during Phase III. The Contractor shall submit the Demonstration Plan to the NYSERDA Project Manager and NYSDEC for review, comment, and written approval of the NYSERDA Project Manager. The plan shall identify intervals between emissions testing, data collection rates, required monitoring equipment, and duration of the demonstration program, at a minimum. Analysis shall include a determination of air quality and energy benefits, at a minimum. The Contractor shall coordinate with NYSERDA and NYSDEC during NYSDEC's site selection process. The Contractor shall develop specifications and requirements for potential demonstration sites based on the fuel cell systems to be demonstrated, support requirements, and other factors, and shall provide those specifications and requirements to the NYSERDA Project Manager and NYSDEC. The Contractor shall work with the selected site owners/operators to establish the installation requirements, and shall develop a design that is adequate for a subcontractor to install the mounting pad, fuel supply, electrical connection, exhaust, and protective building, or any combination thereof. These requirements are expected to vary with the specific application and may include utility grid connection, choice of fuel, inside or outside installation, concrete pad, etc. The Contractor shall develop and enter into a Demonstration Site Operating Agreement, based on the Demonstration Plan and Standard Draft Site Operating Agreement (Task II-2), with each site owner. Task III-3. System Installation - -------------------------------- The Contractor shall subcontract for the site modifications and installation of the demonstration unit. The Contractor shall verify that the site is ready before the unit is installed. The Contractor shall provide and install a remote data acquisition and control system to obtain frequent updates on system operating data and performance. Task III-4. Commissioning - ------------------------- The Contractor shall examine the unit installation and verify that the unit is installed properly. The Contractor shall operate the unit correcting all problems and certify that it is operating properly. The unit shall then be turned over to the site owner, operator for use in accordance with the Demonstration Site Operating Agreement. 24 Task III-5, Field Support and Data Collection - --------------------------------------------- The systems are expected to operate for a minimum of two months. The Contractor shall retain ownership of the system for the duration of the demonstration period. The Contractor shall establish and implement a preventative maintenance plan for each system. The Contractor shall monitor, collect and maintain data to support analysis in accordance with the approved Demonstration Plan and to ensure maximum system availability by providing quick response to system failures. Task III-6. Troubleshooting - ---------------------------- The Contractor shall maintain the capability to provide routine service and service for unanticipated failures within a short time of a problem being reported. The Contractor's service team shall carry a supply of all critical parts in order to make speedy repairs. The service team shall be supported by additional Contractor staff as required. Task III-7. Data Analysis - -------------------------- The Contractor shall analyze the data to determine overall unit operation, performance, areas for improvement, and other information in accordance with the approved Demonstration Plan. Task III-8. Unit Decommissioning - --------------------------------- Upon the completion of a particular demonstration, the Contractor shall perform the appropriate tasks as per the Demonstration Site Operating Agreement developed in Task III-2. Task III-9. Demonstration Report - --------------------------------- Upon completion of Phase III, the Contractor shall write an interim report documenting the demonstration results, including a summary of the data collected and the results of the analysis specified in the Demonstration Plan. The Contractor shall submit the report to the NYSERDA Project Manager and NYSDEC. (Results shall also be presented at the wrapup meeting, in accordance with Task IV-2.) PROJECT MANAGEMENT Task I V-I. Progress Reports: The Contractor shall provide brief progress reports once each month during the period that the work is performed, which shall be submitted to the NYSERDA Project Manager and NYSDEC in duplicate no later than the 15th of each following month. Progress Reports shall be in a letter format and shall include the following subjects in the order indicated, with appropriate explanation and discussion: Title of project; 25 Agreement number; Reporting period; Progress of project during the reporting period; Identification of problems; Planned solutions; Schedule - percent or degree of tasks completed to date, critical path analysis, and ability to meet contract schedule, reasons for slippage, and path to recovery; and Cost - analysis of actual cost incurred in relation to budget and progress to date, and ability to complete project within contract budget. The Contractor shall immediately notify the NYSERDA Project Manager of any significant breakthroughs or problems. The Contractor shall, from time to time after completion of the project, provide at the request of NYSERDA data and information related to this project, including but not limited to energy and environmental data, system deployments, technology spinoffs, job creation, system limitations, and other information to assess the long-term effectiveness of this project. Task- IV-2. Meetings: The Contractor shall allow the NYSERDA Project Manager or other designated NYSERDA personnel, and designated NYSDEC personnel, to visit the facility to review work in progress on a non- interference basis, at the request of the NYSERDA Project Manager. In addition, the Contractor shall hold the following meetings as indicated in the schedule: Kickoff Meeting, End-of-Phase Review Meetings, and a wrap-up meeting. The Contractor shall schedule meetings at a time and place agreeable to the participants, provide-of-Phase Review Meetings, and a wrap-up meeting. The Contractor shall schedule meetings at a time and place agreeable to the participants, provide a written agenda five days in advance of the meeting, and document each meeting with minutes that shall be distributed to the project team members and other attendees no later than 10 business days following the meeting. Invited participants shall include the NYSERDA Project Manager and designated NYSDEC personnel. Task IV-3. Presentation of Results: Except for the Contractor's proprietary and business sensitive data, the Contractor shall publicize the technology and the results of the demonstration program in scientific journals and conference proceedings, as well as trade shows, magazines, and on the world- wide web, as appropriate. The Contractor shall work with the State, NYSERDA, NYSDEC, and the operators/managers of each State or other facility involved in the system demonstration to publicize and provide access to the general public, to the extent possible. Task IV-4. Final Report: The Contractor shall prepare a detailed final report covering all of the work performed, except for information that would impact the Contractor's competitive position. In particular, the report shall provide the findings regarding potential air quality and energy benefits of widespread deployment of the system, and shall identify appropriate applications for the technology based on performance achieved in the demonstration program. Four copies of the draft final report shall be submitted to the 26 NYSERDA Project Manager in accordance with the schedule. NYSERDA and NYSDEC shall provide their comments to the Contractor within 60 working days after receipt of the draft. Within 30 working days after receipt of NYSERDA's and NYSDEC's comments, the Contractor shall submit the Final Report, reflecting NYSERDA's and NYSDEC's comments, to the NYSERDA Manager of Technical Publications in conformance with the NYSERDA Report Format and Style Guide. 27 PROJECT 4870-ERTER-BA-99 SCHEDULE AND MILESTONE PAYMENTS ESTIMATED COSTS -- TOTAL PROGRAM Quarter 1 2 3 4 5 6 7 8 9 10 Total Fuel Cell Systems [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] Cost/unit [***] [***] Quantity [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] Total System [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] Labor (other) [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] Overhead [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] Materials (other) [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] G&A [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] Total [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] MILESTONE PAYMENT SCHEDULE Phase I Delivery of units (qty) [***] [***] [***] [***] Approved test plan [***] Task 4 progress reports [***] [***] [***] [***] [***] [***] [***] Task 4 meetings [***] [***] Interim report [***] [***] Est payments [***] [***] [***] [***] [***] [***] [***] [***] [***] Phase II Delivery of Units [***] Approved draft operating agreement [***] Approved site agreements [***] Task 4 progress reports [***] [***] [***] [***] [***] Task 4 meetings [***] Interim report [***] Est payments [***] [***] [***] [***] [***] [***] [***] Phase III Delivery of units (qty) [***] Approved site agreements Task 4 progress reports [***] [***] [***] Task 4 meetings [***] Final Report [***] Est payments [***] [***] [***] [***] [***] TOTAL PAYMENTS [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***]
28 EXHIBIT B REVISED 6/98 STANDARD TERMS AND CONDITIONS FOR ALL NYSERDA AGREEMENTS (Based on Standard Clauses for New York State Contracts) The parties to the attached agreement, contract, license, lease, amendment, modification or other agreement of any kind (hereinafter, "the Agreement" or "this Agreement") agree to be bound by the following clauses which are hereby made a part of the Agreement (the word "Contractor" herein refers to any party other than NYSERDA, whether a contractor, licensor, licensee, lessor, lessee or any other party): 1. NON-DISCRIMINATION REQUIREMENTS. In accordance with Article 15 of the Executive Law (also known as the Human Rights Law) and all other State and Federal statutory and constitutional non-discrimination provisions, the Contractor will not discriminate against any employee or applicant for employment because of race, creed, color, sex, national origin, age, disability or marital status. Furthermore, in accordance with Section 220-e of the Labor Law, if this is an Agreement for the construction, alteration or repair of any public building or public work or for the manufacture, sale or distribution of materials, equipment or supplies, and to the extent that this Agreement shall be performed within the State of New York, Contractor agrees that neither it nor its subcontractors shall, by reason of race, creed, color, disability, sex or national origin: (a) discriminate in hiring against any New York State citizen who is qualified and available to perform the work; or (b) discriminate against or intimidate any employee hired for the performance of work under this Agreement. If this is a building service Agreement as defined in Section 230 of the Labor Law, then, in accordance with Section 239 thereof, Contractor agrees that neither it nor its subcontractors shall, by reason of race, creed, color, national origin, age, sex or disability: (a) discriminate in hiring against any New York State citizen who is qualified and available to perform the work; or (b) discriminate against or intimidate any employee hired for the performance of work under this contract. Contractor is subject to fines of $50.00 per person per day for any violation of Section 220-e or Section 239 as well as possible termination of this Agreement and forfeiture of all moneys due hereunder for a second subsequent violation. 2. WAGE AND HOURS PROVISION. If this is a public work Agreement covered by Article 8 of the Labor Law or a building service Agreement covered by Article 9 thereof, neither Contractor's employees nor the employees of its subcontractors may be required or permitted to work more than the number of hours or days stated in said statutes, except as otherwise provided in the Labor Law and as set forth in prevailing wage and supplement schedules issued by the State Labor Department. Furthermore, Contractor and its subcontractors must pay at least the prevailing wage rate and pay or provide the prevailing supplements, including the premium rates for overtime pay, as determined by the State Labor Department in accordance with the Labor Law. 3. NON-COLLUSIVE BIDDING REQUIREMENT. In accordance with Section 29 2878 of the Public Authorities Law, if this Agreement was awarded based upon the submission of bids, Contractor warrants, under penalty of perjury, that its bid was arrived at independently and without collusion aimed at restricting competition. Contractor further warrants that, at the time Contractor submitted its bid, an authorized and responsible person executed and delivered to NYSERDA a non-collusive bidding certification on Contractor's behalf. 4. INTERNATIONAL BOYCOTT PROHIBITION. If this Agreement exceeds $5,000, the Contractor agrees, as a material condition of the Agreement, that neither the Contractor nor any substantially owned or affiliated person, firm, partnership or corporation has participated, is participating, or shall participate in an international boycott in violation of the Federal Export Administration Act of 1979 (50 USC App. Sections 2401 et seq.) or regulations thereunder. If such Contractor, or any of the aforesaid affiliates of Contractor, is convicted or is otherwise found to have violated said laws or regulations upon the final determination of the United States Commerce Department or any other appropriate agency of the United States subsequent to the Agreement's execution, such Agreement, amendment or modification thereto shall be rendered forfeit and void. The Contractor shall so notify NYSERDA within five (5) business days of such conviction, determination or disposition of appeal. (See and compare Section 220-f of the Labor Law, Section 139-h of the State Finance Law, and 2 NYCRR 105.4). 5. SET-OFF RIGHTS. NYSERDA shall have all of its common law and statutory rights of set-off. These ri2hts shall include, but not be limited to, NYSERDA's option to withhold for the purposes of set-off any moneys due to the Contractor under this Agreement up to any amounts due and owing to NYSERDA with regard to this Agreement, any other Agreement, including any Agreement for a term commencing prior to the term of this Agreement. plus any amounts due and owing to NYSERDA for any other reason including, without limitation, tax delinquencies, fee delinquencies or monetary penalties relative thereto. 6. CONFLICTING TERMS. In the event of a conflict between the terms of the Agreement (including any and all attachments thereto and amendments thereof) and the terms of this Exhibit B, the terms of this Exhibit B shall control. 7. GOVERNING LAW. This Agreement shall be governed by the laws of the State of New York except where the Federal supremacy clause requires otherwise. 8. NO ARBITRATION. Disputes involving this Agreement, including the breach or alleged breach thereof, may not be submitted to binding arbitration (except where statutorily required) without the NYSERDA's written consent, but must, instead, be heard in a court of competent jurisdiction of the State of New York. 9. SERVICE OF PROCESS. In addition to the methods of service allowed by the State Civil Practice Law and Rules ("CPLR"), Contractor hereby consents to service of process upon it by registered or certified mail, return receipt requested. Service hereunder 30 shall be complete upon Contractor's actual receipt of process or upon NYSERDA's receipt of the return thereof by the United States Postal Service as refused or undeliverable. Contractor must promptly notify NYSERDA, in writing, of each and every change of address to which service of process can be made. Service by NYSERDA to the last known address shall be sufficient. Contractor will have thirty (30) calendar days after service hereunder is complete in which to respond. 10. CRIMINAL ACTIVITY. If subsequent to the effectiveness of this Agreement, NYSERDA comes to know of any allegation previously unknown to it that the Contractor or any of its principals is under indictment for a felony, or has been, within five (5) years prior to submission of the Contractor's proposal to NYSERDA, convicted of a felony, under the laws of the United States or Territory of the United States, then NYSERDA may exercise its stop work right under this Agreement. If subsequent to the effectiveness of this Agreement, NYSERDA comes to know of the fact, previously unknown to it, that Contractor or any of its principals is under such indictment or has been so convicted, then NYSERDA may exercise its right to terminate this Agreement. If the Contractor knowingly withheld information about such an indictment or conviction, NYSERDA may declare the Agreement null and void and may seek legal remedies against the Contractor and its principals. The Contractor or its principals may also be subject to penalties for any violation of law which may apply in the particular circumstances. For a Contractor which is an association, partnership, corporation. or other organization, the provisions of this paragraph apply to any such indictment or conviction of the organization itself or any of its officers, partners, or directors or members of any similar governing body, as applicable. 11. PERMITS. It is the responsibility of the Contractor to acquire and maintain, at its own cost, any and all permits, licenses, easements, waivers and permissions of every nature necessary to perform the work. 12. PROHIBITION ON PURCHASE OF TROPICAL HARDWOOD . The Contractor certifies and warrants that all wood products to be used under this Agreement will be in accordance with, but not limited to, the specifications and provisions of State Finance Law Section 165 (Use of Tropical Hardwoods), which prohibits purchase and use of tropical hardwoods, unless specifically exempted by NYSERDA. 31 EXHIBIT C REPORT FORMAT AND STYLE GUIDE PURPOSE This document explains how to prepare a technical report for the New York State Energy Research and Development Authority (NYSERDA). It describes editorial and production procedures and gives electronic data-transfer information. NYSERDA's contractors prepare the reports describing NYSERDA research and development projects that NYSERDA publishes. Please direct questions about format and style to Paula Rosenberg of NYSERDA's Technical Publications unit: (518) 862-1090, ext. 3270; fax (518) 862-1091 - e-mail prlgnvserda.org COPYRIGHTS All material borrowed or adapted from other sources should be properly identified (i.e., document, source, date, and page). The contractor must obtain the copyright owner's written permission to use copyrighted illustrations, tables, or substantial amounts of text from another publication. REPORT FORMAT AND SEQUENCE The following items are required in all technical reports and should be paginated in the following sequence: Title page (no page number) Notice (no page number) Abstract (iii) Acknowledgments (optional) (iv) Table of Contents including listings of figures and tables (v or vii) Summary (S- 1) NOTE: the Abstract, Table of Contents, and each section begin on right-hand, odd-numbered pages. The following information is required (see sample on last page): Report title and type of report (i.e., final, interim or summary) Name of NYSERDA project manager(s) Corporate name, city, and state of contractor(s), including contact person(s) or project manager(s) Project cosponsors, including contact person(s) or project manager(s) Contract number (e.g., 3178-ERTER-MW-94) 32 Notices One of these legal notices or disclaimers is required: When NYSERDA is the project's sole sponsor, this notice must be used: NOTICE This report was prepared by in the course of performing work contracted for and sponsored by the New York State Energy Research and Development Authority (hereafter "NYSERDA"). The opinions expressed in this report do not necessarily reflect those of NYSERDA or the State of New York, and reference to any specific product., service, process, or method does not constitute an implied or expressed recommendation or endorsement of it. Further, NYSERDA, the State of New York, and the contractor make no warranties or representations, expressed or implied, as to the fitness for particular purpose or merchantability of product, apparatus, or service, or the usefulness, completeness, or accuracy of any processes, methods, or other information contained, described, disclosed, or referred to in this report. NYSERDA, the State of New York, and the contractor make no representation that the use of any product, apparatus, process, method, or other information will not infringe privately owned rights and will assume no liability for any loss, injury, or damage resulting from, or occurring in connection with, the use of information contained, described, disclosed, or referred to in this report. When there are other project cosponsors, use the following notice instead: NOTICE This report was prepared by in the course of performing work contracted for and sponsored by the New York State Energy Research and Development Authority and the (hereafter the "Sponsors"). The opinions expressed in this report do not necessarily reflect those of the Sponsors or the State of New York. and reference to any specific product, service, process, or method does not constitute an implied or expressed recommendation or endorsement of it. Further, the Sponsors and the State of New York make no warranties or representations. expressed or implied, as to the fitness for particular purpose or merchantability of any product, apparatus. or service, or the usefulness, completeness, or accuracy of any processes, methods, or other information contained, described, disclosed, or referred to in this report. The Sponsors, the State of New York, and the contractor make no representation that the use of any product, apparatus, process, method, or other information will not infringe privately owned rights and will assume no liability for any loss. injury, or damage resulting from, or occurring, in connection with, the use of information contained, described. disclosed, or referred to in this report. Abstract and Key Words - right-hand, odd-numbered page [iii]. An abstract is a brief, 200-word description of project objectives, investigative methods used, and research 33 conclusions or applications. This information will be used when NYSERDA registers the report with the National Technical Information Service (NTIS). A list of key words that describe the project and identify the major research concept should be submitted with the report. Four to six precise descriptors are generally sufficient and will be used for indexing, registering, and distributing the report through NTIS. Acknowledgments (optional) - left-hand, even-numbered page [iv] Acknowledgments precede the contents and should be no longer than two paragraphs. Table of Contents and Lists of Figures and Tables - begin on odd-numbered, right-hand pages [v. vii. ix, etc.]] The Table of Contents should list section numbers, titles, second-level headings, and their page numbers. Third-level headings also may be listed. If the report contains five or more figures or tables, they should be listed using the style of the Table of Contents. The following samples are boxed only to set them apart in this document. Summary - right-hand, odd-numbered page entitled The Summary, which immediately precedes the body of the text, should be written for a general audience. The Summary may be the only part of the technical report closely read by a number of people, many of whom lack a technical background. These may include industry and utility executives, government officials, legislators. the general public, and media representatives. The Summary should be 500-1000 words long. TABLE OF CONTENTS
Section Page SUMMARY................................................................ S-I I DESCRIPTION OF STUDY................................................. 1-1 Sources of Information................................................. 1-5 Bases of Evaluation................................................... 1-9 2 EXISTING CONDITIONS.................................................. 2-1 Architecture........................................................... 2-3 Mechanical and Electrical Systems...................................... 2-13 3 ANALYSIS OF PRESENT ENERGY USE....................................... 3-1 Analysis of Use by Systems............................................. 3-3
34 Analysis of Use by Hospital Services..................................... 3-17 APPENDIX A Comparison of Expenses for NYS Hospitals...................... A-1 APPENDIX B Forms for Energy Audits in Hospitals.......................... B-1 FIGURES Page 1-1 Comparative Energy Use Per Cubic Foot in Hospitals Under 200 Beds.... 1-2 2-1 View of Community Hospital from South................................ 2-1 2-2 Site Plan............................................................ 2.5
GENERAL INFORMATION The first reference to NYSERDA should read "the New York State Energy Research and Development Authority (NYSERDA)." Subsequent references should read simply "NYSERDA." When it is clear that you are referring to New York State, use State; otherwise, use New York State or the State of New York. COPY 9 Page format: . Margins should be 1.25 inches left and right; 1 inch top and bottom. . Use left-hand justification only. . Text should be in a 10-point serif font (i.e., Times Roman, Bookman, etc.); captions, tables, and figures should be in a sans-serif font (i.e., Helvetica, Arial, etc.). . Spacing should be 1.5 lines, printed on one side of the paper. . Block-style paragraphs should be used, with no indentation (except for fifth-level headings, which should be blocked on the left; see Heading Styles, below). . There should be two returns between a paragraph and the next heading. Material borrowed or extracted from external sources must be identified by document, 35 source, date, and page). Written permission to use copyrighted illustrations, tables. or text taken from another publication must be submitted with the report. Avoid half-page and one-sentence paragraphs. Do not use contractions. When referring to a specific figure or table, spell out and capitalize the words "Figure" and "Table." Indented lists of material should be set off with bullets: . If a typographical bullet is unavailable, the bullet is a lower case "o," not zero. . One blank line should precede and follow a list. . Bulleted items should be indented left and right. All new sections should begin on a right-hand, odd-numbered page (e.g., 1- 1, 2-1, A-1, etc.). . Percentages should be written as follows: 1%, 76%, etc. . Acronyms must be spelled out the first time used, followed by the acronym in parentheses. HEADING STYLES The heading styles illustrated below should be used. (Only section headings should be numbered.) FIRST-LEVEL HEADING Section I INTRODUCTION The heading is upper case, centered, and boldfaced: the text is below the heading at the left margin. SECOND-LEVEL HEADING The heading is upper case, at the left margin, and boldfaced: the text is at the left margin. 36 Third-Level Heading The heading is upper and lower case, at the left margin, boldfaced and underscored; the text is at the left margin. Fourth-Level Heading. The heading is upper and lower case, at the left margin, boldfaced, and underscored. with a period at the end. The text continues on the same line as the heading. The remaining text goes back out to the left margin. Fifth-Level Heading. The heading, is upper and lower case, indented, boldfaced, and underscored with a period at the end. The text continues on the same line, with the remaining text indented left and right. TABLES AND FIGURES Tables and figures must be numbered sequentially and titled individually. Place tables and figures as close as possible to the text in which they are mentioned. Distinguish tabular material from the text. Cite a source if the tabular material or figure content has not been generated by the contractor. Figure captions should be complete sentences when appropriate. Use "Figure I," not "Fig. I," or "Table I." in the text, as well as for captions. Examples: . Table I details demand-side management options. As shown in Figure 1, the demand-side management program offers numerous options. . Figure captions should be typed in boldface. - Figure 1. Demand-Side Management Options in New York State. . Unless generated by the contractor, a source should always be cited. The figure source should appear after the caption (e.g., Source: Lawrence Berkeley Laboratory); the table source should be noted with an asterisk and footnoted. 37 . Photographs and drawings should be limited in number, with the following guidelines: - Black-and-white line drawings or good-quality, clear halftones (black-and-white photographs) may be used. Color artwork and photos will be printed in black-and-white. - Slides should be converted to black-and-white photos before being submitted. - Photographs should be printed on glossy stock, preferably 5"x7" REFERENCES AND BIBLIOGRAPHIES The format in Manual of Style (University of Chicago Press, Chicago. Illinois) should be used for reference listings and bibliographies. Bibliographic entries should be listed alphabetically by author, as follows: Hawkins, R.R. Scientific, Medical, and Technical Books Published in the United States of America. 2d ed. New York: Bowker, 1958. REPORT REQUIREMENTS Two hard copies of the draft final report must be submitted to NYSERDA's Manager of Technical Publications. After review by the Project Manager and Technical Publications staff, the draft will be returned to the contractor for final corrections. The contractor is responsible for satisfactorily addressing technical comments from NYSERDA and other co-funders. When making editorial corrections, the contractor must ensure that technical content is not compromised. After editorial corrections have been made, the contractor must submit two hard copies of the final report (one a camera-ready original and the other a photocopy) and the report on a PC-formatted computer diskette to NYSERDA'S Manager of Technical Publications. Diskette Requirements Material must be submitted on an IBM personal computer-compatible 3.5-inch, double-sided (DS), high-density (HD) diskette that has been formatted for 1.44 megabytes (MB) of storage. A 3.5-inch IBM-PC-compatible diskette, double-sided, double-density, formatted for 720 kilobytes is acceptable only when the above requirements cannot be met. 38 Textual material should be created in a format compatible with WordPerfect 6.1.While other word-processing programs may be able to be converted, results may vary. Characteristics such as underlining, bold, italics, and many special characters that often appear in equations may be lost if WordPerfect 6.1 is not used. If you are unable to meet these electronic transfer requirements, before submitting your report please contact Paula Rosenberg of NYSERDA's Technical Publications unit at (518) 862-1090, ext. 3270; fax (518) 862-1091; e-mail prl@nyserda.org CITY OF LOCKPORT INFLUENT HYDROPOWER FEASIBILITY STUDY Final Report Prepared for THE NEW YORK STATE ENERGY, RESEARCH AND DEVELOPMENT AUTHORITY Albany, NY Lawrence J. Pakenas, P.E. Senior Project Manager Prepared by, CITY OF LOCKPORT Lockport, NY Michael Die, Project Manager and INIALCOLM PIPUNIE, INC. Buffalo, NY Vincent J. Funipiello. P.E. Project Manager Sample title page. Font is a serif font (Times Roman). Bold-faced text is 13 pt., small caps. The rest of the type is 11 pt., plain text. 4311 -ERTER-NfW-97 NYSERDA Report 98-11 July 1998 New York State Energy Research and Development Authority Technical Publications Corporate Plaza West 286 Washington Avenue Extension Albany, New York 12203-6399 November 1998 39 EXHIBIT D PROMPT PAYMENT POLICY STATEMENT Section 504.1 Purpose and applicability. (a) The purpose of this Part is to implement section 2880 of the Public Authorities Law by detailing NYSERDA's policy for making payment promptly on amounts properly due and owing by NYSERDA under contracts. This Part constitutes NYSERDA's prompt payment policy statement as required by that section. (b) This Part generally applies to payments due and owing by NYSERDA to a person or business in the private sector under a contract it has entered into with NYSERDA on or after May 1, 1988. This Part does not apply to payments due and owing: (1) under the Eminent Domain Procedure Law; (2) as interest allowed on judgments rendered by a court pursuant to any provision of law except Section 2880 of the Public Authorities Law; (3) to the Federal Government; to any state agency or its instrumentalities, to any duly constituted unit of local government, including but not limited to counties, cities, towns, villages, school districts, special districts or any of their related instrumentalities or any other public authority or public benefit corporation or to its employees when acting in, or incidental to, their public employment capacity; (4) if NYSERDA is exercising a legally authorized set-off against all or part of the payment; or (5) if other State or Federal law or rule or regulation specifically requires otherwise. Section 504.2 Definitions. As used in this Part, the following terms shall have the following meanings, unless the context shall indicate another or different meaning or intent: (a) "NYSERDA" means the New York State Energy Research and Development Authority. (b) "Contract" means an enforceable agreement entered into between NYSERDA and a contractor. (c) "Contractor" means any person, partnership, private corporation, or association: 40 (1) selling materials, equipment or supplies or leasing property or equipment to NYSERDA pursuant to a contract; (2) constructing, reconstructing, rehabilitating or repairing buildings, highways or other improvements for, or on behalf of, NYSERDA pursuant to a contract; or (3) rendering or providing services to NYSERDA pursuant to a contract. (d) "Date of payment" means the date on which NYSERDA requisitions a check from its statutory fiscal agent, the Department of Taxation and Finance, to make a payment. (e) "Designated payment office" means the Office of NYSERDA's Controller, located at Corporate Plaza West, 286 Washington Avenue Extension, Albany, New York 12203-6399. (f) "Payment" means provision by NYSERDA of funds in an amount sufficient to satisfy a debt properly due and owing to a contractor and payable under all applicable provisions of a contract to which this Part applies and of law, including but not limited to provisions for retained amounts or provisions which may limit NYSERDA's power to pay, such as claims, liens, attachments or judgments against the contractor which have not been properly discharged, waived or released. (g) "Prompt payment" means a payment within the time periods applicable pursuant to Sections 504.3 through 504.5 of this Part in order for NYSERDA not to be liable for interest pursuant to Section 504.6. (h) "Payment due date" means the date by which the date of payment must occur, in accordance with the provisions of Sections 504.3 through 504.5 of this Part, in order for NYSERDA not to be liable for interest pursuant to Section 506. (i) "Proper invoice" means a written request for a contract payment that is submitted by a contractor setting forth the description, price or cost, and quantity of goods, property or services delivered or rendered, in such form, and supported by such other substantiating documentation. as NYSERDA may reasonably require, including but not limited to any requirements set forth in the contract; and addressed to NYSERDA's Controller, marked "Attention: Accounts Payable." at the designated payment office. (1) "Receipt of an invoice" means: (i) if the payment is one for which an invoice is required, the later of: 41 (a) the date on which a proper invoice is actually received in the designated payment office during normal business hours; or (b) the date by which, during normal business hours, NYSERDA has actually received all the purchased goods, property or services covered by a proper invoice previously received in the designated payment office. (ii) if a contract provides that a payment will be made on a specific date or at a predetermined interval, without having to submit a written invoice the 30th calendar day, excluding legal holidays, before the date so specified or predetermined. (2) For purposes of this subdivision, if the contract requires a multifaceted, completed or working system, or delivery of no less than a specified quantity of goods, property or services and only a portion of such systems or less than the required goods, property or services are working, completed or delivered, even though the Contractor has invoiced NYSERDA for the portion working, completed or delivered, NYSERDA will not be in receipt of an invoice until the specified minimum amount of the systems, goods, property or services are working, completed or delivered. (k) "Set-off" means the reduction by NYSERDA of a payment due a contractor by an amount equal to the amount of an unpaid legally enforceable debt owed by the contractor to NYSERDA. Section 504.3 Prompt payment schedule. Except as otherwise provided by law or regulation or in Sections 504.4 and 504.5 of this Part, the date of payment by NYSERDA of an amount properly due and owing under a contract shall be no later than 30 calendar days, excluding legal holidays, after such receipt. Section 504.4 Payment procedures. (a) Unless otherwise specified by a contract provision, a proper invoice submitted by the contractor to the designated payment office shall be required to initiate payment for goods, property or services. As soon as any invoice is received in the designated payment office during normal business hours, such invoice shall be date-stamped. The invoice shall then promptly be reviewed by NYSERDA. (b) NYSERDA shall notify the contractor within 15 calendar days after receipt of an invoice of: (1) any defects in the delivered goods, property or services; 42 (2) any defects in the invoice, and (3) suspected improprieties of any kind. (c) The existence of any defects or suspected improprieties shall prevent the commencement of the time period specified in Section 504.3 until any such defects or improprieties are corrected or otherwise resolved. (d) If NYSERDA fails to notify a contractor of a defect or impropriety within the fifteen calendar day period specified in subdivision (b) of this section, the sole effect shall be that the number of days allowed for payment shall be reduced by the number of days between the 15th day and the day that notification was transmitted to the contractor. If NYSERDA fails to provide reasonable grounds for its contention that a defect or impropriety exists, the sole effect shall be that the payment due date shall be calculated using the original date of receipt of an invoice. (e) In the absence of any defect or suspected impropriety, or upon satisfactory correction or resolution of a defect or suspected impropriety, NYSERDA shall make payment, consistent with any such correction or resolution and the provisions of this Part. Section 504.5 Exceptions and extension of payment due date. NYSERDA has determined that, notwithstanding the provisions of Sections 504.3 and 504.4 of this Part, any of the following facts or circumstances, which may occur concurrently or consecutively, reasonably justify extension of the payment due date: (a) If the case of a payment which a contract provides will be made on a specific date or at a predetermined interval, without having to submit a written invoice, if any documentation, supporting data, performance verification, or notice specifically required by the contract or other State or Federal mandate has not been submitted to NYSERDA on a timely basis, then the payment due date shall be extended by the number of calendar days from the date by which all such matter was to be submitted to NYSERDA and the date when NYSERDA has actually received such matter. (b) If an inspection or testing period, performance verification, audit or other review or documentation independent of the contractor is specifically required by the contract or by other State or Federal mandate, whether to be performed by or on behalf of NYSERDA or another entity, or is specifically permitted by the contract or by other State or Federal provision and NYSERDA or other entity with the right to do so elects to have such activity or documentation undertaken, then the payment due date shall be extended by the number of calendar days from the date of receipt of an invoice to the date when any such activity or documentation has been completed, NYSERDA has actually received the results of such activity or documentation conducted by another entity, and any deficiencies identified or issues raised as a result of such activity or documentation have been corrected or otherwise 43 resolved. (c) If an invoice must be examined by a State or Federal agency, or by another party contributing to the funding of the contract, prior to payment, then the payment due date shall be extended by the number of calendar days from the date of receipt of an invoice to the date when the State or Federal agency, or other contributing party to the contract, has completed the inspection, advised NYSERDA of the results of the inspection, and any deficiencies identified or issues raised as a result of such inspection have been corrected or otherwise resolved. (d) If appropriated funds from which payment is to be made have not yet been appropriated or, if appropriated, not yet been made available to NYSERDA, then the payment due date shall be extended by the number of calendar days from the date of receipt of an invoice to the date when such funds are made available to NYSERDA. Section 504.6 Interest eligibility and computation. If NYSERDA fails to make prompt payment, NYSERDA shall pay interest to a contractor on the payment when such interest computed as provided herein is equal to or more than ten dollars. Interest shall be computed and accrue at the daily rate in effect on the date of payment, as set by the New York State Tax Commission for corporate taxes pursuant to Section 1096(e)(1) of the Tax Law. Interest on such a payment shall be computed for the period beginning on the day after the payment due date and ending on the date of payment. Section 504.7 Sources of funds to pay interest. Any interest payable by NYSERDA pursuant to this Part shall be paid only from the same accounts, funds, or appropriations that are lawfully available to make the related contract payment. Section 504.8 Incorporation of prompt payment policy statement into contracts. The provisions' of this Part in effect at the time of the creation of a contract shall be incorporated into and made a part of such contract and shall apply to all payments as they become due and owing pursuant to the terms and conditions of such contract, notwithstanding that NYSERDA may subsequently amend this Part by further rulemaking. Section 504.9 Notice of objection. Unless a different procedure is specifically prescribed in a contract, a contractor may object to any action taken by NYSERDA pursuant to this Part which prevents the commencement of the time in which interest will be paid by submitting a written notice of objection to NYSERDA. Such notice shall be signed and dated and concisely and clearly set forth the basis for the objection and be addressed to the Vice President, New York State Energy Research and Development Authority, Corporate Plaza West, 286 Washington Avenue Extension, Albany, New York 12203-6399. The Vice President of NYSERDA, or his or her designee, shall review the objection for purposes of affirming or modifying NYSERDA's action. Within 15 working days of the receipt of the objection, the Vice President, or his or her designee, shall notify the contractor either that NYSERDA's action is affirmed or that it is modified or that, due to the complexity of the issue, additional 44 time is needed to conduct the review; provided, however, in no event shall the extended review period exceed 30 working days. Section 504.10 Judicial Review. Any determination made by NYSERDA pursuant to this Part which prevents the commencement of the time in which interest will be paid is subject to judicial review in a proceeding pursuant to Article 78 of the Civil Practice Law and Rules. Such proceedings shall be commenced upon completion of the review procedure specified in Section 504.9 of this Part or any other review procedure that may be specified in the contract or by other law, rule, or regulation. Section 504.11 Court action or other legal processes. (a) Notwithstanding any other law to the contrary, the liability of NYSERDA to make an interest payment to a contractor pursuant to this Part shall not extend beyond the date of a notice of intention to file a claim, the date of a notice of a claim, or the date commencing a legal action for the payment of such interest, whichever occurs first. (b) With respect to the court action or other legal processes referred to in subdivision (a) of this section, any interest obligation incurred by NYSERDA after the date specified therein pursuant to any provision of law other than Public Authorities Law Section 2880 shall be determined as prescribed by such separate provision of law, shall be paid as directed by the court, and shall be paid from any source of funds available for that purpose. Section 504.12 Amendments. These regulations may be amended by resolution of NYSERDA, provided that the Chair, upon written notice to the other Members of NYSERDA, may from time to time promulgate nonmaterial amendments of these regulations. 45 EX-10.16 8 AGREEMENT BETWEEN PLUG POWER LLC & U.S. DEPT. OF E EXHIBIT 10.16 CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. ADDITIONAL SPECIAL PROVISIONS I. COST SHARE CONTRIBUTIONS It is the intention of the Government and the Participant to share the allowable and allocable costs of performance of the work during this Agreement as set forth herein. The Government's contribution and support for this Agreement during the project period September 30, 1997 through March 31, 2000 will be $11,178,423.00. The Participant will contribute $3,726,141.00 toward the aforementioned budget period. It is the intention of the Government and the Participant to share the total allowable and allocable costs of performance during the project period on a 75.0 percent (Government) and 25.0 percent (Participant) based on total cost of the project, see Block No. 16a.(6) of the Notice of Financial Assistance Award, face page. It is understood by the parties that the DOE share of this budget period is $11,178,423.00 and no additional Federal funding will be provided notwithstanding the total cost of the project at completion. The cost sharing formula zero percent (Government) and 100 percent (Participant) shall apply to any increase in the Total Approved Budget. 2. INDIRECT COST APPLIED TO TEAMING PARTNERS' COSTS Notwithstanding applicable cost principals, and allowable and allocable costs for performance of the work under this Agreement, indirect costs charged by the Participant to subaward(s) (Teaming Partners) shall not exceed 5% of the subaward total costs. Any indirect costs above the ceiling restriction shall be unallowable and shall be absorbed by the Applicant without reimbursement by the Government under any other Government contract, financial assistance or any subcontract under any other Government prime contract or financial assistance. 3. FEE No fee shall be paid to the Recipient or any subaward for performance under this Agreement. 4. ADEQUATE RECOGNITION It is agreed that the Participant shall obtain adequate recognition of the United States support for the technology developed under this cooperative agreement in any contract, licenses, or other agreements which involve the transfer to foreign entities of the fuel cell technology developed in whole or in part at Government expense. The Participant agrees to notify and obtain concurrence from the Assistant Secretary for Energy Efficiency and Renewable Energy or designee in writing of the adequate recognition obtained prior to entering into any such contracts, licenses, or other agreements. The Awardee shall not enter into any such contracts, licenses, or other agreements without the concurrence of the Assistant Secretary for Energy Efficiency and Renewable Energy or designee. The determination of whether to grant such concurrence shall be at the sole discretion of the Assistant Secretary for Energy Efficiency and Renewable Energy or designee and is not subject to litigation under 10 CFR (S)600.22, Disputes and Appeals. The determination shall be in writing and shall be furnished to the Awardee by the Contracting Officer. Examples of such an adequate recognition could include: (1) a commitment to manufacture in the U.S.A.; (2) a requirement to reimburse the U.S. Government for its R&D costs; and/or (3) a commitment to jointly sponsor the R&D program. 5. STATEMENT OF SUBSTANTIAL INVOLVEMENT The Department of Energy. (Department, DOE) will be substantially involved in all Tasks of the Statement of Work. The Department will collaborate with the participant in evaluating, accepting, and achieving the milestones for research as proposed by the respondent. The Department will provide technical direction to the overall program, as well as the individual program elements as it is determined to be necessary and appropriate by DOE. The Department will participate during the full duration of the project, and will have continuing rights to conduct ongoing negotiations with the participant regarding the technical direction of the work conducted under this Agreement. The Department staff members will attend meetings and participate in the formation and direction of scope of the key development activities. The DOE Project Officer, all participate in the development, review and approval of all proposed statements of work, including subcontractor statements of work, prior to the execution of any subcontract. The Department will review technical progress reports and provide input to these reports as deemed necessary. In addition, the Department will have the right to have National Laboratories or selected private organizations perform independent tests and evaluations of the cooperative agreement's deliverables, thus providing an additional measure of technical progress. The Department may collaborate with the participant in the allocation of funds budgeted for this Agreement. Further, as work progresses, funding needs may change and depending upon availability of funds, the Department may collaborate with the participant to reallocate funds budgeted between the different programs and projects. The Department will thus be actively monitoring all phases of the participant's research and development activities, including participation in the participant's reviews of its contractor's activities and review of the contractor's reports to the participant. The Department will actively participate in the participant's process of reviewing and approving each phase of the proposed programs and projects. The substantial involvement by the Department under this Agreement will remain in effect for the term of the cooperative agreement award unless otherwise requested in writing by the Contracting Officer. Moreover, this statement of substantial involvement by the Department does not increase the Department of Energy's liability under the Agreement award. 2 6. TECHNICAL DIRECTION A. The work to be performed by the Participant under this Cooperative Agreement is subject to the surveillance and written Technical Direction of a "DOE Project Officer," identified in block II of the face page. The term "Technical Direction" is defined to include, without limitation, the following: 1. Directions to the Participant which redirects the work effort, shifts work emphasis between work areas or tasks, require pursuit of certain lines of inquiry, fill in details or otherwise provide technical guidance to the Participant in order to accomplish the tasks and requirements stated in the Statement of Work as contained in the agreement. 2. Provision of information to the Participant which assists in the interpretation of drawings, specifications or technical portions of the Statement of Work as contained in the Agreement. 3. Review and, where required by the Cooperative Agreement, approval of technical reports, drawings, specifications or technical information to be delivered by the Participant to DOE under the Cooperative Agreement. 4. The DOE Project Officer shall monitor the Participant's performance with respect to compliance with the requirements of this Cooperative Agreement. B. Technical direction and management surveillance shall not impose tasks or requirements upon the Participant additional to or different from the tasks and requirements stated in the Statement of Work of this Agreement. The Technical Direction to be valid: 1. Must be issued in writing consistent with the tasks and requirements stated in the Statement of Work of this Agreement; and 2. May not: a. constitute an assignment of additional work outside the tasks and requirements stated in the Statement of Work of this Agreement; b. in any manner cause an increase or decrease in the total estimated project cost or the time required for project performance; c. change any of the expressed terms, conditions or specification of the Cooperative Agreement; or d. accept non-conforming work. 3 C. The Participant shall proceed promptly with the performance of Technical Directions duly issued by the DOE Project Officer in the manner prescribed by paragraph B. above and which are within his authority under the provisions of paragraph A. above; provided, however, that the Participant shall immediately cease the performance of any Technical Direction upon receipt of a written instruction to that effect from the Contracting Officer. D. If in the opinion of the Participant any Technical Direction issued by the DOE Project Officer is within one of the categories as defined in B.2. (a) through (d) above, the Participant shall not proceed but shall notify the Contracting Officer in writing within five working days after the receipt of any such Technical Direction and shall request the Contracting Officer to rescind such direction or mutually agree to modify the agreement accordingly. E. The only persons authorized to give Technical Direction to the Participant under this Agreement are the Contracting Officer and any "DOE Project Officer" as listed in Block II of the face page. Any action taken by the Participant in response to any direction given by any person other than the Contracting Officer or DOE Project Officer shall not be binding upon the Government. 4 Intellectual Property Provisions - Assistance LARGE BUSINESS, STATE AND LOCAL GOVERNMENTS OR FOREIGN ORGANIZATIONS (Research, Development or Demonstration)
CLAUSE REFERENCE TITLE PAGE - ------ --------- ----- ---- 01. 48 C.F.R. 52.227-1 Authorization and Consent (JUL 1995), Alternate ii 1 02. 48 C.F.R. 52.227-2 Notice and Assistance Regarding Patent and Copyright 1 Infringement (AUG 1996) This clause is not applicable if the award is for less then $100,000. 03. 48 C.F.R. 952.227-9 Refund or Royalties (FEB 1995) 04. 48 C.F.R. 952.227-13 Patent Rights - Acquisition by the Government 1 (FEB 1995) 05. 48 C.F.R. 52.227-14 Rights in Data - General (JUN 1987), with 10 Alternates ii and V, and paragraph (d)(3) as supplemented by 10 C.F.R. Part 600.27 If this award requires the use or delivery of limited data And/or restricted computer software, Alternates II and III are incorporated, unless modified upon recommendation Of Patent Counsel. 06. 48 C.F.R. 52.227.16 Additional Data Requirements (JUN 1987) 15 07. 48 C.F.R. 52.227-23 Rights to Proposal Data (Technical) (JUN 1987) 16 Attachment 1 (for reference): Patent Rights - Retention By Contractor (Short Form) (FED 1995); 48 C.F.R. 952.227-11
5 52.227-1 Authorization and Consent; Alternate ii (APR 1984) AUTHORIZATION AND CONSENT (a) The Government authorizes and consents to all use and manufacture of any invention described in and covered by a United States patent in the performance of this contract or any subcontract at any tier. (b) The Contractor agrees to include and require inclusion of, this clause, suitably modified to identify the parties, in all subcontracts at any tier for supplies or services (including construction, architect-engineer services, and materials, supplies, models, samples, and design or testing services expected to exceed the simplified acquisition threshold)--however, omission of this clause from any subcontract, including those at or below the simplified acquisition threshold, does not affect this authorization and consent. (End of clause) 52.227-2 Notice and Assistance Regarding Patent and Copyright Infringement. NOTICE AND ASSISTANCE REGARDING PATENT AND COPYRIGHT INFRINGEMENT (AUG 1996) (a) The Contractor shall report to the Contracting Officer, promptly and in reasonable written detail, each notice or claim of patent or copyright infringement based on the performance of this contract of which the Contractor has knowledge. (b) In the event of any claim or suit against the Government on account of any alleged patent or copyright infringement arising out of the performance of this contract or out of the use of any supplies furnished or work or services performed under this contract, the Contractor shall furnish to the Government, when requested by the Contracting Officer, all evidence and information in possession of the Contractor pertaining to such suit or claim. Such evidence and information shall be furnished at the expense of the Government except where the Contractor has agreed to indemnify the Government. (c) The Contractor agrees to include, and require inclusion of, this clause in all subcontracts at any tier for supplies or services (including construction and architect-engineer subcontracts and those for material, supplies, models, samples, or design or testing services) expected to exceed the simplified acquisition threshold at FAR 2.10 1. (End of clause) 6 952.227-9 Refund of Royalties REFUND OF ROYALTIES (FEB 1995) (a) The contract price includes certain amounts for royalties payable by the Contractor or subcontractors or both, which amounts have been reported to the Contracting Officer. (b) The term "royalties" as used in this clause refers to any costs or charges in the nature of royalties, license fees, patent or license amortization costs, or the like, for the use of or for rights in patents and patent applications in connection with performing this contract or any subcontract hereunder. The term also includes any costs or charges associated with the access to, use of, or other right pertaining to data that is represented to be proprietary and is related to the performance of this contract or the copying of such data or data that is copyrighted. (c) The Contractor shall furnish to the Contracting Officer, before final payment under this contract, a statement of royalties paid or required to be paid in connection with performing this contract and subcontracts hereunder together with the reasons. (d) The Contractor will be compensated for royalties reported under paragraph (c) of this clause, only to the extent that such royalties were included in the contract price and are determined by the Contracting Officer to be property chargeable to the Government and allocable to the contract. To the extent that any royalties that are included in the contract price are not, in fact, paid by the Contractor or are determined by the Contracting Officer not to be properly chargeable to the government and allocable to the contract, the contract price shall be reduced. Repayment or credit to the Government shall be made as the Contracting Officer directs. The approval by DOE of any individual payments or royalties shall not prevent the Government from contesting at any time the enforceability, validity, scope of, or title to, any patent or the proprietary nature of data pursuant to which a royalty or other payment is to be or has been made. (e) If, at any time within 3 years after final payment under this contract, the Contractor for any reason is relieved in whole or in part from the payment of the royalties included in the final contract price as adjusted pursuant to paragraph (d) of this clause, the Contractor shall promptly notify the Contracting Officer of that fact and shall reimburse the Government in a corresponding amount. (f) The substance of this clause, including, this paragraph (f), shall be included in any subcontract in which the amount of royalties reported during negotiation of the subcontract exceeds $250. (End of clause) 952.227-13 Patent Rights - Acquisition by the Government 7 PATENT RIGHTS-ACQUISITION BY THE GOVERNMENT (FEB 1995) (a) Definitions. "Invention", as used in this clause, means any invention or discovery which is or may be patentable or otherwise protectable under title 35 of the United States Code or any novel variety of plant that is or may be protectable under the Plant Variety Protection Act (7 U.S.C. 232 1, et seq.). "Practical application", as used in this clause, means to manufacture, in the case of a composition or product; to practice, in the case of a process or method; or to operate, in the case of a machine or system; and, in each case, under such conditions as to establish that the invention is being utilized and that its benefits are, to the extent permitted by law or Government regulations, available to the public on reasonable terms. "Subject invention", as used in this clause, means any invention of the Contractor conceived or first actually reduced to practice in the course of or under this contract. "Patent Counsel", as used in this clause, means the Department of Energy Patent Counsel assisting the procuring activity. "DOE patent waiver regulations", as used in this clause, means the Department of Energy patent waiver regulations at 41 CFR 9-9.109-6 or successor regulations. "Agency licensing regulations" and "applicable agency licensing regulations", as used in this clause, mean the Department of Energy patent licensing regulations at 10 CFR Part 781. (b) Allocations of principal rights. (1) Assignment to the Government. The Contractor agrees to assign to the Government the entire right, title, and interest throughout the world in and to each subject invention, except to the extent that rights are retained by the Contractor under subparagraph (b)(2) and paragraph (d) of this clause. (2) Greater rights determinations. (1) The contractor, or an employee-inventor after consultation with the Contractor, may request greater rights than the non-exclusive license and the foreign patent rights provided in paragraph (d) of this clause on identified inventions in accordance with the DOE patent waiver regulations. A request for a determination of whether the Contractor or the employee- inventor is entitled to acquire such greater rights must be submitted to the Patent Counsel with a copy to the Contracting Officer at the time of the first disclosure of the invention pursuant to subparagraph (e)(2) of this clause, or not later than 8 months thereafter, unless a longer period is authorized in writing by the 8 Contracting Officer for good cause shown in writing by the Contractor. Each determination of greater rights under this contract shall be subject to paragraph (c) of this clause, unless otherwise provided in the greater rights determination, and to the reservations and conditions deemed to be appropriate by the Secretary of Energy or designee. (ii) Within two (2) months after the filing of a patent application, the Contractor shall provide the filing date, serial number and title, a copy of the patent application (including an English-language version if filed in a language other than English), and, promptly upon issuance of a patent, provide the patent number and issue date for any subject invention in any country for which the Contractor has been granted title or the right to file and prosecute on behalf of the United States by the Department of Energy. (iii) Not less than thirty (30) days before the expiration of the response period for any action required by the Patent and Trademark Office, notify the Patent Counsel of any decision not to continue prosecution of the application. (iv) Upon request, the Contractor shall furnish the Government an irrevocable power to inspect and make copies of the patent application file. (c) Minimum rights acquired by the Government. With respect to each subject invention to which the Department of Energy grants the Contractor principal or exclusive rights, the Contractor agrees as follows: (ii) The Contractor hereby grants to the Government a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced each subject invention throughout the world by or on behalf of the Government of the United States (including any Government agency). (ii) The Contractor agrees that with respect to any subject invention in which DOE has granted it title, DOE has the right in accordance with the procedures in the DOE patent waiver regulations to require the Contractor, an assignee, or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances, and if the Contractor, assignee, or exclusive licensee refuses such a request, DOE has the right to grant such a license itself if it determines that-- (A) Such action is necessary because the Contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use; (B) Such action is necessary to alleviate health or safety needs which are not reasonably satisfied by the Contractor, assignee, or their licensees; 9 (C) Such action is necessary to meet requirements for public use specified by Federal regulations and such requirements are not reasonably satisfied by the Contractor, assignee, or licensees; or (D) Such action is necessary because the agreement required by paragraph (ii) of this clause has neither been obtained nor waived or because a licensee of the exclusive right to use or sell any subject invention in the United States is in breach of such agreement. (iii) The Contractor agrees to submit on request periodic reports no more frequently than annually on the utilization of a subject invention or on efforts at obtaining such utilization of a subject invention or on efforts at obtaining such utilization that are being made by the Contractor or its licensees or assignees. Such reports shall include information regarding, the status of development, date of first commercial sale or use, gross royalties received by the Contractor, and such other data and information as DOE may reasonably specify. The Contractor also agrees to provide additional reports as may be requested by DOE in connection with any march-in proceedings undertaken by that agency in accordance with subparagraph (c)(1)(ii) of this clause. To the extent data or information supplied under this section is considered by the Contractor, its licensee, or assignee to be privileged and confidential and is so marked, the Department of Energy agrees that, to the extent permitted by law, it will not disclose such information to persons outside the Government. (iv) The Contractor agrees, when licensing a subject invention, to arrange to avoid royalty charges on acquisitions involving Government funds, including funds derived through a Military Assistance Program of the Government or otherwise derived through the Government, to refund any amounts received as royalty charges on a subject invention in acquisitions for, or on behalf of, the Government, and to provide for such refund in any instrument transferring rights in the invention to any party. (v) The Contractor agrees to provide for the Government's paid-up license pursuant to subparagraph (c)(1)(ii) of this clause in any instrument transferring rights in a subject invention and to provide for the granting of licenses as required by subparagraph (c)(1)(ii) of this clause, and for the reporting of utilization information as required by subparagraph (c)(1)(iii) of this clause, whenever the instrument transfers principal or exclusive rights in a subject invention. (2) Nothing contained in this paragraph (c) shall be deemed to grant to the Government any rights with respect to any invention other than a subject invention. (d) Minimum rights to the Contractor. (1) The Contractor is hereby granted a revocable, nonexclusive, royalty-free license in each patent application filed in any country on a subject invention and any resulting patent in which the Government obtains title, unless the Contractor fails to disclose the subject invention within the times specified in subparagraph (e)(2) of this clause. The Contractor's license extends to its domestic subsidiaries and affiliates, if any, within the corporate structure of which the 10 Contractor is a part and includes the right to grant sublicenses of the same scope to the extent the Contractor was legally obligated to do so at the time the contract was awarded. The license is transferable only with the approval of DOE except when transferred to the successor of that part of the Contractor's business to which the invention pertains. (2) The Contractor's domestic license may be revoked or modified by DOE to the extent necessary to achieve expeditious practical application of the subject invention pursuant to an application for an exclusive license submitted in accordance with applicable provisions in 37 CFR Part 404 and agency licensing regulations. This license will not be revoked in that field of use or the geographical areas in which the Contractor has achieved practical applications and continues to make the benefits of the invention reasonably accessible to the public. The license in any foreign country may be revoked or modified at the discretion of DOE to the extent the Contractor, its licensees or its domestic subsidiaries or affiliates have failed to achieve practical application in that foreign country. (3) Before revocation or modification of the license, DOE will furnish the Contractor a written notice of its intention to revoke or modify the license, and the Contractor will be allowed 30 days (or such other time as may be authorized by DOE for good cause shown by the Contractor) after the notice to show cause why the license should not be revoked or modified. The Contractor has the right to appeal, in accordance with applicable agency licensing regulations and 37 CFR Part 404 concerning the licensing of Government-owned inventions, any decision concerning the revocation or modification of its license. (4) The Contractor may request the right to acquire patent rights to a subject invention in any foreign country where the Government has elected not to secure such rights, subject to the conditions in subparagraphs (d)(4)(ii) through (d)(4)(vii) of this clause. Such request must be made in writing to the Patent Counsel as part of the disclosure required by subparagraph (e)(2) of this clause, with a copy to the DOE Contracting Officer. DOE approval, if given, will be based on a determination that this would best serve the national interest. (ii) The recipient of such rights, when specifically requested by DOE, and three years after issuance of a foreign patent disclosing the subject invention, shall furnish DOE a report stating: (A) The commercial use that is being made, or is intended to be made, of said invention, and (B) The steps taken to bring the invention to the point of practical application or to make the invention available for licensing. (ii) The Government shall retain at least an irrevocable, nonexclusive, paid-up license to make, use, and sell the invention throughout the world by or on behalf of the Government (including any Government agency) and States and domestic municipal governments, unless the Secretary of Energy or designee determines that it would not be in the public interest to acquire the license for the States and domestic municipal governments. 11 (iii) If noted elsewhere in this contract as a condition of the grant of an advance waiver of the Government's title to inventions under this contract, or, if no advance waiver was granted but a waiver of the Government's title to an identified invention is granted pursuant to subparagraph (b)(2) of this clause upon a determination by the Secretary of Energy that it is in the Government's best interest, this license shall include the right of the Government to sublicense foreign governments pursuant to any existing or future treaty or agreement with such foreign governments. (iv) Subject to the rights granted in subparagraphs (d)(1), (2), and (3) of this clause, the Secretary of Energy or designee shall have the right to terminate the foreign patent rights granted in this subparagraph (d)(4) in whole or in part unless the recipient of such rights demonstrates to the satisfaction of the Secretary of Energy or designee that effective steps necessary to accomplish substantial utilization of the invention have been taken or within a reasonable time will be taken. (v) Subject to the rights granted in subparagraphs (d)(1), (2), and (3) of this clause, the Secretary of Energy or designee shall have the right, commencing four years after foreign patent rights are accorded under this subparagraph (d)(4), to require the granting of a nonexclusive or partially exclusive license to a responsible applicant or applicants, upon terms reasonable under the circumstances, and in appropriate circumstances to terminate said foreign patent rights in whole or in part, following a hearing upon notice thereof to the public, upon a petition by an interested person justifying such hearing: (A) If the Secretary of Energy or designee determines, upon review of such material as he deems relevant, and after the recipient of such rights or other interested person has had the opportunity to provide such relevant and material information as the Secretary or designee may require, that such foreign patent rights have tended substantially to lessen competition or to result in undue market concentration in any section of the United States in any line of commerce to which the technology relates; or (B) Unless the recipient of such rights demonstrates to the satisfaction of the Secretary of Energy or designee at such hearing that the recipient has taken effective steps, or within a reasonable time thereafter is expected to take such steps, necessary to accomplish substantial utilization of the invention. (vi) If the contractor is to file a foreign patent application on a subject invention, the Government agrees, upon written request, to use its best efforts to withhold publication of such invention disclosures for such period of time as specified by Patent Counsel, but in no event shall the Government or its employees be liable for any publication thereof. (vii) Subject to the license specified in subparagraphs (d)(1), (2), and (3) of this clause, the contractor or inventor agrees to convey to the Government, upon request, the entire right, title, and interest in any foreign country in which the contractor or inventor fails to have a patent application filed in a timely manner or decides not to continue prosecution or to pay any 12 maintenance fees covering the invention. To avoid forfeiture of the patent application or patent, the contractor or inventor shall, not less than 60 days before the expiration period for any action required by any patent office, notify the Patent Counsel of such failure or decision, and deliver to the Patent Counsel, the executed instruments necessary for the conveyance specified in this paragraph. (e) Invention identification, disclosures, and reports. (1) The Contractor shall establish and maintain active and effective procedures to assure that subject inventions are promptly identified and disclosed to Contractor personnel responsible for patent matters within 6 months of conception and/or first actual reduction to practice, whichever occurs first in the performance of work under this contract. These procedures shall include the maintenance of laboratory notebooks or equivalent records and other records as are reasonably necessary to document the conception and/or the first actual reduction to practice of subject inventions, and records that show that the procedures for identifying and disclosing the inventions are followed. Upon request, the Contractor shall furnish the Contracting Officer a description of such procedures for evaluation and for determination as to their effectiveness. (2) The Contractor shall disclose each subject invention to the DOE Patent Counsel with a copy to the Contracting Officer within 2 months after the inventor discloses it in writing to Contractor personnel responsible for patent matters or, if earlier, within 6 months after the Contractor becomes aware that a subject invention has been made, but in any event before any on sale, public use, or publication of such invention known to the Contractor. The disclosure to DOE shall be in the form of a written report and shall identify the contract under which the invention was made and the inventor(s). It shall be sufficiently complete in technical detail to convey a clear understanding, to the extent known at the time of the disclosure, of the nature, purpose, operation, and physical, chemical, biological, or electrical characteristics of the invention. The disclosure shall also identify any publication, on sale, or public use of the invention and whether a manuscript describing the invention has been submitted for publication and, if so, whether it has been accepted for publication at the time of disclosure. In addition, after disclosure to DOE, the Contractor shall promptly notify Patent Counsel of the acceptance of any manuscript describing the invention for publication or of any on sale or public use planned by the Contractor. The report should also include any request for a greater rights determination in accordance with subparagraph (b)(2) of this clause. When an invention is disclosed to DOE under this paragraph, it shall be deemed to have been made in the manner specified in Sections (a)(1) and (a)(2) of 42 U.S.C. 5908, unless the Contractor contends in writing at the time the invention is disclosed that is was not so made. (3) The Contractor shall furnish the Contracting Officer the following: (ii) Interim reports every 12 months (or such longer period as may be specified by the Contracting Officer) from the date of the contract, listing subject inventions during that period, and certifying that all subject inventions have been disclosed (or that there are not such 13 inventions) and that the procedures required by subparagraph (e)(1) of this clause have been followed. (ii) A final report, within 3 months after completion of the contracted work listing all subject inventions or certifying that there were no such inventions, and listing all subcontracts at any tier containing a patent rights clause or certifying that there were no such subcontracts. (4) The Contractor agrees to require, by written agreement, its employees, other than clerical and nontechnical employees, to disclose promptly in writing to personnel identified as responsible for the administration of patent matters and in a format suggested by the Contractor each subject invention made under contract in order that the Contractor can comply with the disclosure provisions of paragraph (c) of this clause, and to execute all papers necessary to file patent applications on subject inventions and to establish the Government's rights in the subject inventions. This disclosure format should require, as a minimum, the information required by subparagraph (e)(2) of this clause. (5) The Contractor agrees, subject to FAR 27.3020), that the Government may duplicate and disclose subject invention disclosures and all other reports and papers furnished or required to be furnished pursuant to this clause. (f) Examination of records relating to inventions. (1) The Contracting Officer or any authorized representative shall, until 3 years after final payment under this contract, have the right to examine any books (including laboratory notebooks), records, and documents of the Contractor relating, to the conception or first actual reduction to practice of inventions in the same field of technology as the work under this contract to determine whether: (ii) Any such inventions are subject inventions; (ii) The Contractor has established and maintains the procedures required by subparagraphs (e)(1) and (4) of this clause; (iii) The Contractor and its inventors have complied with the procedures. (2) If the Contracting Officer learns of an unreported Contractor invention which the Contracting Officer believes may be a subject invention, the Contractor may be required to disclose the invention to DOE for a determination of ownership rights. (3) Any examination of records under this paragraph will be subject to appropriate conditions to protect the confidentiality of the information involved. (g) Withholding of payment (NOTE: This paragraph does not apply to subcontracts). 14 (1) Any time before final payment under this contract, the Contracting Officer may, in the Government's interest withhold payment until a reserve not exceeding $50,000 or 5 percent of the amount of this contract, whichever is less, shall have been set aside if, in the Contracting Officer's opinion, the Contractor fails to: (i) Convey to the Government, using a DOE-approved form, the title and/or rights of the Government in each invention as required by this clause. (ii) Establish, maintain, and follow effective procedures for identifying and disclosing subject inventions pursuant to subparagraph (e)(1) of this clause; (iii) Disclose any subject invention pursuant to subparagraph (e)(2) of this clause; (iv) Deliver acceptable interim reports pursuant to subparagraph (e)(3)(ii) of this clause; or (v) Provide the information regarding subcontracts pursuant to subparagraph (h)(4) of this clause. (2) Such reserve or balance shall be withheld until the Contracting Officer has determined that the Contractor has rectified whatever deficiencies exist and has delivered all reports, disclosures, and other information required by this clause. (3) Final payment under this contract shall not be made before the Contractor delivers to the Contracting Officer all disclosures of subject inventions required by subparagraph (e)(2) of this clause, and acceptable final report pursuant to subparagraph (e)(3)(ii) of this clause, and the Patent Counsel has issued a patent clearance certification to tile Contracting Officer. (4) The Contracting Officer may decrease or increase the sums withheld up to the maximum authorized above. No amount shall be withheld under this paragraph while the amount specified by this paragraph is being withheld under other provisions of the contract. The withholding of any amount or the subsequent payment thereof shall not be construed as a waiver of any Government rights. (h) Subcontracts. (1) The contractor shall include the clause at 48 CFR 952.227-11 (suitably modified to identify the parties) in all subcontracts, regardless of tier, for experimental, developmental, demonstration, or research work to be performed by a small business firm or domestic nonprofit organization, except where the work of the subcontract is subject to an Exceptional Circumstances Determination by DOE. In all other subcontracts, regardless of tier, for experimental, developmental, demonstration, or research work, the contractor shall include this clause (suitably modified to identify the parties). The contractor shall not, as part of the consideration for awarding the subcontract, obtain rights in the subcontractor's subject inventions. 15 (2) In the event of a refusal by a prospective subcontractor to accept such a clause the Contractor--- (i) Shall promptly submit a written notice to the Contracting Officer setting forth the subcontractor's reasons for such refusal and other pertinent information that may expedite disposition of the matter; and (ii) Shall not, proceed with such subcontract without the written authorization of the Contracting Officer. (3) In the case of subcontracts at any tier, DOE, the subcontractor, and Contractor agree that the mutual obligations of the parties created by this clause constitute a contract between the subcontractor and DOE with respect to those matters covered by this clause. (4) The Contractor shall promptly notify the Contracting Officer in writing upon the award of any subcontract at any tier containing a Patent rights clause by identifying the subcontractor, the applicable patent rights clause, the work to be performed under the subcontract, and the dates of award and estimated completion. Upon request of the Contracting Officer the Contractor shall furnish a copy of such subcontract, and, no more frequently than annually, a listing of the subcontracts that have been awarded. (5) The contractor shall identify all subject inventions of the subcontractor of which it acquires knowledge in the performance of this contract and shall notify the Patent Counsel, with a copy to the contracting officer, promptly upon identification of the inventions. (ii) Preference United States industry, Unless provided otherwise, no Contractor that receives title to any subject invention and no assignee of any such Contractor shall grant to any person the exclusive right to use or sell any subject invention in the United States unless such person agrees that any products embodying the subject invention will be manufactured substantially in the United States. However, in individual cases, the requirement may be waived by the Government upon a showing by the Contractor or assignee that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. (j) Atomic energy (1) No claim for pecuniary award of compensation under the provisions of the Atomic Energy Act of 1954, as amended, shall be asserted with respect to any invention or discovery made or conceived in the course of or under this contract. (2) Except as otherwise authorized in writing by the Contracting Officer, the Contractor will obtain patent agreements to effectuate the provisions of subparagraph (e)(1) of this clause from 16 all persons who perform any part of the work under this contract, except nontechnical personnel, such as clerical employees and manual laborers. (k) Background Patents. (1) Background Patent means a domestic patent covering an invention or discovery which is not a subject invention and which is owned or controlled by the Contractor at any time through the completion of this contract: (i) Which the contractor, but not the Government, has the right to license to others without obligation to pay royalties thereon, and (ii) Infringement of which cannot reasonably be avoided upon the practice of any specific process, method, machine, manufacture, or composition of matter (including relatively minor modifications thereof) which is a subject of the research, development, or demonstration work performed under this contract. (2) The Contractor agrees to and does hereby grant to the Government a royalty- free, nonexclusive license under any background patent for purposes of practicing a subject of this contract by or for the Government in research, development, and demonstration work only. (3) The Contractor also agrees that upon written application by DOE, it will grant to responsible parties, for purposes of practicing a subject of this contract, nonexclusive licenses under any background patent on terms that are reasonable under the circumstances. If, however, the Contractor believes that exclusive rights are necessary to achieve expeditious commercial development or utilization, then a request may be made to DOE for DOE approval of such licensing by the Contractor. (4) Notwithstanding subparagraph (k)(3) of this clause, the contractor shall not be obligated to license any background patent if the Contractor demonstrates to the satisfaction of the Secretary of Energy or designee that: (i) a competitive alternative to the subject matter covered by said background patent is commercially available or readily introducible from one or more other sources; or (ii) the Contractor or its licensees are supplying the subject matter covered by said background patent in sufficient quantity and at reasonable prices to satisfy market needs, or have taken effective steps or within a matter. Reasonable time are expected to take effective steps to so supply the subject (1) Publication. It is recognized that during the course of the work under this contract, the Contractor or its employees may from time to time desire to release or publish information regarding scientific or technical developments conceived or first actually reduced to practice in 17 the course of or under this contract. In order that public disclosure of such information will not adversely affect the patent interests of DOE or the Contractor, patent approval for release of publication shall be secured from Patent Counsel prior to any such release or publication. (m) Forfeiture of rights in unreported subject inventions. (1) The Contractor shall forfeit and assign to the Government, at the request of the Secretary of Energy or designee all rights in any subject invention which the Contractor fails to report to Patent Counsel within six months after the time the Contractor: (i) Files or causes to be filed a United States or foreign patent application thereon; or (ii) Submits the final report required by subparagraph (e)(2)(ii) of this clause, whichever is later. (2) However, the Contractor shall not forfeit rights in a subject invention if, within the time specified in subparagraph (m)(1) of this clause, the Contractor: (i) Prepares a written decision based upon a review of the record that the invention was neither conceived nor first actually reduced to practice in the course of or under the contract and delivers the decision to Patent Counsel, with a copy to the Contracting Officer; or (ii) Contending that the invention is not a subject invention, the Contractor nevertheless discloses the invention and all facts pertinent to this contention to the Patent Counsel, with a copy to the Contracting Officer; or (iii) Establishes that the failure to disclose did not result from the Contractor's fault or negligence. (3) Pending written assignment of the patent application and patents on a subject invention determined by the Secretary of Energy or designee to be forfeited (such determination to be a final decision under the Disputes clause of this contract), the Contractor shall be deemed to hold the invention and the patent applications and patents pertaining thereto in trust for the Government. The forfeiture provision of this paragraph (m) shall be in addition to and shall not supersede other rights and remedies which the Government may have with respect to subject inventions. (End of clause) 52.227-14 Rights in Data - General, with Alternates I and V, and paragraph (d)(3) 18 RIGHTS IN DATA - GENERAL (JUN 1987) (a) Definitions. "Computer software" as used in this clause, means computer programs, computer data bases, and documentation thereof. "Data," as used in this clause, means recorded information, regardless of form or the media on which it may be recorded. The term includes technical data and computer software. The terms does not include information incidental to contract administration such as financial, administrative, cost or pricing, or management information. "Form, fit, and function data," as used in this clause, means data relating to items, components, or processes that are sufficient to enable physical and functional interchange ability, as well as data identifying source, size, configuration, mating, and attachment characteristics, functional characteristics, and performance requirements; except that for computer software it means data identifying source, functional characteristics, and performance requirements but specifically excludes the source code, algorithm, process, formula, and flow charts of the software. "Limited rights data," as used in this clause, means data (other than computer software) developed at private expense that embody trade secrets or are commercial or financial and confidential or privileged. "Technical data," as used in this clause, means data (other than computer software) which are of a scientific or technical nature. "Restricted computer software," as used in this clause, means computer software developed at private expense and that is a trade secret; is commercial or financial and is confidential or privileged; or is published copyrighted computer software; including minor modifications of such computer software. "Unlimited rights," as used in this clause, means the right of the Government to use, disclose, reproduce, prepare derivative works, distribute copies to the public, and perform publicly and display publicly, in any manner and for any purpose, and to have or permit others to do so. "Limited rights," as used in this clause, means the rights of the Government in limited rights data as set forth in the Limited Rights Notice of subparagraph (a) (2) if included in this clause. "Restricted rights," as used in this clause, means the rights of the Government in restricted computer software, as set forth in a Restricted Rights Notice of subparagraph (g)(3) if included in this clause, or as otherwise may be provided in a collateral agreement incorporated in and made part of this contract, including minor modifications of such computer software. 19 (b) Allocation of rights. (1) Except as provided in paragraph (c) below regarding copyright, the Government shall have unlimited rights in: (i) Data first produced in the performance of this contract; (ii) Form, fit, and function data delivered under this contract; (iii) Data delivered under this contract (except for restricted computer software) that constitute manuals or instructional and training material for installation, operation, or routine maintenance and repair items, components, or processes delivered or furnished for use under this contract; and (iv) All other data delivered under this contract unless provided otherwise for limited rights data or restricted computer software in accordance with paragraph (g) below. (2) The Contractor shall have the right to: (i) Use, release to others, reproduce, distribute, or publish any data, first produced or specifically used by the Contractor in the performance of this contract, unless provided otherwise in paragraph (d) below; (ii) Protect from unauthorized disclosure and use those data which are limited rights data or restricted computer software to the extent provided in paragraph (g) below; (iii) Substantiate use of, add or correct limited rights, restricted rights, or copyright notices and to take other appropriate action, in accordance with paragraphs (e) and (f) below; and (iv) Establish claim to copyright subsisting in data first produced in the performance of this contract to the extent provided in subparagraph (c)(1) below. (c) Copyright --------- (1) Data first produced in the performance of this contract. Unless provided otherwise in subparagraph (d) below, the Contractor may establish, without prior approval of the Contracting Officer, claim to copyright subsisting in scientific and technical articles based on or containing data first produced in the performance of this contract and published in academic, technical or professional journals, symposia proceedings or similar works. The prior, express written permission of the Contracting Officer is required to establish claim to copyright subsisting in all other data first produced in the performance of this contract. When claim to copyright is made, the Contractor shall affix the applicable copyright notices of 17 U.S.C. 401 or 402 and acknowledgment of Government sponsorship (including contract number) to the data when such data are delivered to the Government, as well as when the data 20 are published or deposited for registration as a published work in the U.S. Copyright Office. For data other than computer software the Contractor grants to the Government, and others acting on its behalf, a paid-up, nonexclusive, irrevocable worldwide license in such copyrighted data to reproduce, prepare derivative works, distribute copies to the public, and perform publicly and display publicly, by or on behalf of the Government. For computer software, the Contractor grants to the Government and others acting in its behalf, a paid-up nonexclusive, irrevocable worldwide license in such copyrighted computer software to reproduct, prepare derivative works, and perform publicly and display publicly by or on behalf of the Government. (2) Data not first produced in the performance of this contract. The Contractor shall not, without prior written permission of the Contracting Officer, incorporate in data delivered under this contract any data not first produced in the performance of this contract and which contains the copyright notice of 17 U.S.C. 401 and 402, unless the Contractor identifies such data and grants to the Government, or acquires on its behalf, a license of the same scope as set forth in subparagraph (1) above; provided, however, that if such data are computer software the Government shall acquire a copyright license as set forth in subparagraph (g)(3) below if included in this contract or as otherwise may be provided in a collateral agreement incorporated in or made part of this contract. (3) Removal of copyright notices. The Government agrees not to remove any copyright notices place on data pursuant to this paragraph (c), and to include such notices on all reproductions of the data. (d) Release, publication and use of data. (1) The Contractor shall have the right to use, release to others, reproduce, distribute, or publish any data first produced or specifically used by the Contractor in the performance of this contract, except to the extent such data may be subject to the Federal export control or national security laws or regulations, or unless otherwise provided below in this paragraph or expressly set forth in this contract. (2) The Contractor agrees that to the extent it receives or is given access to data necessary for the performance of this contract which contain restrictive markings, the Contractor shall treat the data in accordance with such markings. Unless otherwise specifically authorized in writing by the Contracting Officer. (3) The Contractor agrees not to establish claim to copyright in computer software first produced in the performance of this contract without prior written permission of the Contracting Officer. When such permission is granted the Contracting Officer shall specify appropriate terms to assure dissemination of the software. The Contractor shall promptly deliver to the Contracting Officer or to the Patent Counsel designated by the Contracting Officer a duly executed and approved instrument fully confirmatory of all rights to which the 21 Government is entitled and other terms pertaining to the computer software to which claim to copyright is made. (e) Unauthorized marking of data. ---------------------------- (1) Notwithstanding any other provisions of this contract concerning inspection or acceptance, if any data delivered under this contract are marked with the notices specified in subparagraphs (g)(2) or (g)(3) below and use of such is not authorized by this clause, or if such data bears any other restrictive or limiting markings not authorized by this contract, the Contracting Officer may at any time either return the data to the Contractor, or cancel or ignore the markings. However, the following procedures shall apply prior to canceling or ignoring the markings. (i) The Contracting Officer shall make written inquiry to the contractor affording the Contractor 30 days from receipt of the inquiry to provide written justification to substantiate the propriety of the markings; (ii) If the Contractor fails to respond or fails to provide written justification to substantiate the propriety of the markings within the 30-day period (or a longer time not exceeding 90 days approved in writing by the Contracting Officer for good cause shown), the Government shall have the right to cancel or ignore the markings at any time after said period and the data will not longer be made subject to any disclosure prohibitions. (iii) If the Contractor provides written justification to substantiate the propriety of the markings within the period set in subdivision (i) above, the Contracting Officer shall consider such written justification and determine whether or not the markings are to be canceled or ignore. If the Contracting Officer determines that the markings are authorized, the Contractor shall be so notified in writing. If the Contracting Officer determines, with concurrence of the Head of the Contracting Activity, that the markings are not authorized, the Contracting Officer shall furnish the Contractor a written determination, which determination shall become the final agency decision regarding the appropriateness of the markings unless the Contractor files suit in a court of competent jurisdiction within 90 days of receipt of the Contracting Officer's decision. The Government shall continue to abide by the markings under this subdivision (iii) until final resolution of the matter either by the Contracting Officer's determination becoming final (in which instance the Government shall thereafter have the right to cancel or ignore the markings at any time and the data will no longer be made subject to any disclosure prohibitions), or by final disposition of the matter by court decision if suit is filed. (2) The time limits in the procedures set forth in subparagraph (1) above may be modified in accordance with agency regulations implementing the Freedom of Information Act (5 U.S.C. 552) if necessary to respond to a request thereunder. (3) This paragraph (e) does not apply if this contract is for a major system or for support of a major system by a civilian agency other than NASA and the U.S. Coast Guard subject to the provisions of Title III of the Federal Property and Administrative Services Act of 1949. 22 (4) Except to the extent the Government's action occurs as the result of final disposition of the matter by a court of competent jurisdiction, the Contractor is not precluded by this paragraph (e) from bringing a claim under the Contract Disputes Act, including pursuant to the Disputes clause of this contract, as applicable, that may arise as the result of the Government removing or ignoring authorized markings on data delivered under this contract. (f) Omitted or incorrect markings. ----------------------------- (1) Data delivered to the Government without either the limited rights or restricted rights notice as authorized by paragraph (g) below, or the copyright notice required by paragraph (c) above, shall be deemed to have been furnished with unlimited rights, and the Government assumes no liability for disclosure, use, or reproduction of such data. However, to the extent the data has not been disclosed without restriction outside the Government, the Contractor may request, within 6 months (or a longer time approved by the Contracting Officer for good cause shown) after delivery of such data, permission to have notices placed on qualifying data at the Contractor's expense, and the Contracting Officer may agree to do so if the Contractor: (i) Identifies the data to which the omitted notice is to be applied; (ii) Demonstrates that the omission of the notice was inadvertent; (iii) Establishes that the use of the proposed notice is authorized; and (iv) Acknowledges that the Government has no liability with respect to the disclosure, use, or reproduction of any such data made prior to the addition of the notice or resulting from the omission of the notice. (2) The Contracting Officer may also (i) permit correction at the Contractor's expense of incorrect notices if the Contractor identifies the data on which correction of the notice is to be made, and demonstrates that the correct notice is authorized, or (ii) correct any incorrect notices. (g) Protection of limited rights data and restricted computer software. (1) When data other than that-listed in subparagraphs (b)(1)(i), (ii), and (iii) above are specified to be delivered under this contract and qualify as either limited rights data or restricted computer software, if the Contractor desires to continue protection of such data, the Contractor shall withhold such data and not furnish them to the Government under this Contract. As a condition to this withholding, the Contractor shall identify the data being withheld and furnish form, fit, and function data in lieu thereof. Limited rights data that are formatted as a computer data base for delivery to the Government is to be treated as limited rights data and not restricted computer software. (2) [Reserved.] 23 (3) [Reserved.] (h) Subcontracting. -------------- The Contractor has the responsibility to obtain from its subcontractors all data and rights therein necessary to fulfill the Contractor's obligations to the Government under this contract. If a subcontractor refuses to accept terms affording the Government such rights, the Contractor shall promptly bring such refusal to the attention of the Contracting Officer and not proceed with subcontract award without further authorization. (i) Relationship to patents. Nothing contained in this clause shall imply a license to the Government under any patent or be construed as affecting the scope of any license or other right otherwise granted to the Government. The Contractor agrees, except as may be otherwise specified in this contract for specific data items listed as not, subject to this paragraph, that the Contracting Officer or an authorized representative may, up to three years after acceptance of all items to be delivered under this contract, inspect at the Contractor's facility any data withheld pursuant to paragraph (g)(1) above, for purposes of verifying the Contractor's assertion pertaining to the limited rights or restricted rights status of the data or for evaluating work performance. Where the Contractor whose data are to be inspected demonstrates to the Contracting Officer that there would be a possible conflict of interest if the inspection where made by a particular representative, the Contracting Officer shall designate an alternate inspector. (End of clause) ALTERNATE II (g)(2) Notwithstanding subparagraph (g)(1) of this clause, the contract may identify and specify the delivery of limited rights data, or the Contracting Officer may require by written request the delivery of limited rights data that has been withheld or would otherwise be withholdable. If delivery of such data is so required, the Contractor may affix the following "Limited Rights Notice" to the data and the Government will thereafter treat the data, subject to the provisions of paragraphs (e) and (f) of this clause, in accordance with such Notice: LIMITED RIGHTS NOTICE (JUN 1987) (a) These data are submitted with limited rights under Government contract No. ______ (and subcontract No. ______ if appropriate). These data may be reproduced and used by the Government with the express limitation that they will not, without written permission of the Contractor, be used for purposes of manufacture nor disclosed outside the Government; except that the Government may disclose these data outside the Government for the following, 24 purposes, if any, provided that the Government makes such disclosure subject to prohibition against further use and disclosure: [Agencies may list additional, purposes as set forth in 27.404(d)(1) or if none, so state] (b) This Notice shall be marked on any reproduction of these data, in whole or in part. (End of notice) ALTERNATE III (g)(3)(i) Notwithstanding subparagraph (g)(1) of this clause, the contract may identify and specify the delivery of restricted computer software, or the Contracting Officer may require by written request the delivery of restricted computer software that has been withheld or would otherwise be withholdable. If delivery of such computer software is so required, the Contractor may affix the following "Restricted Rights Notice" to the computer software and the Government will thereafter treat the computer software, subject to paragraphs (e) and (f) of this clause, in accordance with the Notice: RESTRICTED RIGHTS NOTICE (JUN 1987) (a) This computer software is submitted with restricted rights under Government Contract No. _____ (and subcontract, if appropriate). It may not be used, reproduced, or disclosed by the Government except as provided in paragraph (b) of this Notice or as otherwise expressly stated in the contract. (b) This computer software may be: (1) Used or copied for use in or with the computer or computers for which it was acquired, including use, at any Government installation to which such computer or computers may be transferred; (2) Used or copied for use in a backup computer if any computer for which it was acquired is inoperative; (3) Reproduced for safekeeping (archives) or backup purposes; (4) Modified, adapted, or combined with other computer software, provided that the modified, combined, or adapted portions of the derivative software incorporating restricted computer software are made subject to the same restricted rights; (5) Disclosed to and reproduced for use by support service Contractors in accordance with subparagraphs (b)(1) through (4) of this clause, provided the Government makes such disclosure or reproduction subject to these restricted rights; and 25 (6) Used or copied for use in or transferred to a replacement computer. (c) Notwithstanding the foregoing, if this computer software is published copyrighted computer software, it is licensed to the Government, without disclosure prohibitions, with the minimum rights set forth in paragraph (b) of this clause. (d) Any others rights or limitations regarding the use, duplication, or disclosure of this computer software are to be expressly stated in, or incorporated in, the contract. (e) This Notice shall be marked on any reproduction of this computer software, in whole or in part. (End of notice) (ii) Where it is impractical to include the Restricted Rights Notice on restricted computer software, the following short-form Notice may be used in lieu thereof: RESTRICTED RIGHTS NOTICE SHORT FORM (JUN 1987) Use, reproduction, or disclosure is subject to restrictions set forth in Contract No. _____ (and subcontract ___, if appropriate) with __________________ (name of Contractor and subcontractor). (End of notice) (iii) If restricted computer software is delivered with the copyright notice of 17 U.S.C. 401, it will be presumed to be published copyrighted computer software licensed to the Government without disclosure prohibitions, with the minimum rights set forth in paragraph (b) of this clause, unless the Contractor includes the following statement with such copyright notice: "Unpublished-rights reserved under the Copyright Laws of the United States." (End of Clause) 48 CFR 52.227-16 Additional Data Requirements ADDITIONAL DATA REQUIREMENTS (JUN 1987) (a) In addition to the data (as defined in the clause at 52.227-14 Rights in Data-General clause or other equivalent include in this contract) specified elsewhere in this contract to be delivered, the Contracting Officer may, at any time during contract performance or within a period of 3 years after acceptance of all items to be delivered under this contract, order any data first produced or specifically used in the performance of this contract. 26 (b) The Rights in Data-General clause or other equivalent included in this contract is applicable to all data ordered under this Additional Data Requirements clause. Nothing contained in this clause shall require the Contractor to deliver any data the withholding of which is authorized by the Rights in Data-General or other equivalent clause of this contract, or data which are specifically identified in this contract as not subject to this clause. (c) When data are to be delivered under this clause, the Contractor will be compensated for converting the data into the prescribed form, for reproduction, and for delivery. (d) The Contracting Officer may release the Contractor from the requirements of this clause for specifically identified data items at any time during the 3-year period set forth in paragraph (a) of this clause. (End of clause) 48 CFR 52.227-23 Rights to Proposal Data RIGHTS TO PROPOSAL DATA (TECHNICAL) (JUN, 1987) Except for data contained on pages ____ it is agreed that as a condition of award of this contract, and notwithstanding the conditions of any notice appearing thereon, the Government shall have unlimited rights (as defined in the "Rights in Data--General" clause contained in this contract) in and to the technical data contained in the proposal dated 3-13-97 upon which this contract is based. 3 through 22 Attachment 1: 952.227-11 Patent Rights - Retention by the Contractor (short form) PATENT RIGHTS - RETENTION BY THE CONTRACTOR (SHORT FORM) (FEB 1995) (a) Definitions. (1) "Invention" means any invention or discovery which is or may be patentable or otherwise protectable under title 35 of the United States Code, or any novel variety of plant which is or may be protected under the Plant Variety Protection Act (7 U.S.C. 2321, et seq.). (2) "Made" when used in relation to any invention means the conception of first actual reduction to practice of such invention. (3) "Nonprofit organization" means a university or other institution of higher education or an organization of the type described in section 501(c)(3) of the Internal Revenue Code of 1954 27 (26 U.S.C. 501(c)) and exempt from taxation under section 501(a) of the Internal Revenue Code (26 U.S.C. 501(a)) or any nonprofit scientific or educational organization qualified under a state nonprofit organization statute. (4) "Practical application" means to manufacture, in the case of a composition or product; to practice, in the case of a process or method; or to operate, in the case of a machine or system; and, in each case, under such conditions as to establish that the invention is being utilized and that is benefits are, to the extent permitted by law or Government regulations, available to the public on reasonable terms. (5) "Small business firm" means a small business concern as defined at section 2 of Pub. L. 85-536 (15 U.S.C. 632) and implementing regulations of the Administrator of the Small Business Administration. For the purpose of this clause, the size standards for small business concerns involved in Government procurement and subcontracting at 13 CFR 121.3-8 and 13 CFR 121.3-12, respectively, will be used. (6) "Subject invention" means any invention of the contractor conceived or first actually reduced to practice in the performance of work under this contract, provided that in the case of a variety of plant, the date of determination (as defined in section 4 I(d) of the Plant Variety Protection Act, 7 U.S.C. 2401(d)) must also occur during the period of contract performance. (7) "Agency licensing regulations" and "agency regulations concerning the licensing of Government-owned inventions" mean the Department of Energy patent licensing regulations at 10 CFR Part 781. (b) "Allocation of principal rights." The Contractor may retain the entire right, title, and interest throughout the world to each subject invention subject to the provisions of this clause and 35 U.S.C. 20. With respect to any subject invention in which the Contractor retains title, the Federal Government shall have a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States the subject invention throughout the world. (c) Invention disclosure, election of title, and filing of patent application by Contractor. (1) The Contractor will disclose each subject invention to the Department of Energy (DOE) within 2 months after the inventor discloses it in writing to Contractor personnel responsible for patent matters. The disclosure to DOE shall be in the form of a written report and shall identify the contract under which the invention was made and the inventor(s). It shall be sufficiently complete in technical detail to convey a clear understanding to the extent known at the time of the disclosure, of the nature, purpose, operation, and the physical, chemical, biological or electrical characteristics of the invention. The disclosure shall also identify any publication, on sale or public use of the invention and whether a manuscript describing the invention has been submitted for publication and, if so, whether it has been accepted for publication at the time of 28 disclosure. In addition, after disclosure to the DOE, the Contractor will promptly notify that agency of the acceptance of any manuscript describing the invention for publication or of any on sale or public use planned by the Contractor. (2) The Contractor will elect in writing whether or not to retain title to any such invention by notifying DOE within 2 years of disclosure to DOE. However, in any case where publication, on sale or public use has initiated the 1-year statutory period wherein valid patent protection can still be obtained in the United States, the period for election of title may be shortened by DOE to a date that is no more than 60 days prior to the end of the statutory period. (3) The Contractor will file its initial patent application on a subject invention to which it elects to retain title within 1 year after election of title or, if earlier, prior to the end of any statutory period wherein valid patent protection can be obtained in the United States after a publication, on sale, or public use. The Contractor will file patent applications in additional countries or international patent offices within either 10 months of the corresponding initial patent application or 6 months from the date permission is granted by the Commissioner of Patents and Trademarks to file foreign patent applications where such filing has been prohibited by a Secrecy Order. (4) Requests for extension of the time for disclosure, election, and filing under subparagraphs (c)(1), (2), and (3) of this clause may, at the discretion of the agency, be granted. (d) Conditions when the Government may obtain title. The Contractor will convey to the Federal agency, upon written request, title to any subject invention: (1) If the Contractor fails to disclose or elect title to the subject invention within the times specified in paragraph (c) of this clause, or elects not to retain title; provided, that DOE may only request title within 60 days after learning of the failure of the Contractor to disclose or elect within the specified times. (2) In those countries in which the Contractor fails to file patent applications within the times specified in paragraph (c) of this clause; provided, however, that if the Contractor has filed a patent application in a country after the times specified in paragraph (c) of this clause, but prior to its receipt of the written request of the Federal agency, the Contractor shall continue to retain title in that country. (3) In any country in which the Contractor decides not to continue the prosecution of any application for, to pay the maintenance fees on, or defend in reexamination or opposition proceeding on, a patent on a subject invention. (e) Minimum rights to Contractor and protection of the Contractor right to file. 29 (1) The Contractor will retain a nonexclusive royalty-free license throughout the world in each subject invention to which the Government obtains title, except if the Contractor fails to disclose the invention within the times specified in paragraph (c) of this clause. The Contractor's license extends to its domestic subsidiary and affiliates, if any, within the corporate structure of which the Contractor is a party and included the right to grant sublicenses of the same scope to the extent the Contractor was legally obligated to do so at the time the contract was awarded. The license is transferable only with the approval of the Federal agency, except when transferred to the successor of that part of the Contractor's business to which the invention pertains. (2) The Contractor's domestic license may be revoked or modified by DOE to the extent necessary to achieve expeditious practical application of subject invention pursuant to an application for an exclusive license submitted in accordance with applicable provisions at 37 CFR Part 404 and agency licensing regulations. This license will not be revoked in that field of use or the geographical areas in which the Contractor has achieved practical application and continues to make the benefits of the invention reasonably accessible to the public. The license in any foreign country may be revoked or modified at the discretion of DOE to the extent the Contractor, its licensees, or the domestic subsidiaries or affiliates have failed to achieve practical application in that foreign country. (3) Before revocation or modification of the license, DOE will furnish the Contractor a written notice of its intention to revoke or modify the license, and the Contractor will be allowed 30 days (or such other time as may be authorized by DOE for good cause shown by the Contractor) after the notice to show cause why the license should not be revoked or modified. The Contractor has the right to appeal, in accordance with applicable regulations in 37 CFR Part 404 and actual regulations concerning the licensing of Government owned inventions, any decision concerning the revocation or modification of the license. (f) Contractor action to protect the Government's interest. (1) The Contractor agrees to execute or to have executed and promptly deliver to DOE all instruments necessary to (i) establish or confirm the rights the Government has throughout the world in those subject inventions to which the Contractor elects to retain title, and (ii) convey title to DOE when requested under paragraph (d) of this clause and to enable the government to obtain patent protection throughout the world in that subject invention. (2) The Contractor agrees to require, by written agreement, its employees, other than clerical and nontechnical employees, to disclose promptly in writing to personnel identified as responsible for the administration of patent matters and in a format suggested by the Contractor each subject invention made under contract in order that the Contractor can comply with the disclosure provisions of paragraph (c) of this 30 clause, and to execute all papers necessary to file patent applications on subject inventions and to establish the Government's rights in the subject inventions. This disclosure format should require, as a minimum, the information required by subparagraph (c)(1) of this clause. The Contractor shall instruct such employees, through employee agreements or other suitable educational programs, on the importance of reporting inventions in sufficient time to permit the filing of patent applications prior to U.S. or foreign statutory bars. (3) The Contractor will notify DOE of any decision not to continue the prosecution of a patent application, pay maintenance fees, or defend in a reexamination or opposition proceeding on a patent, in any country, not less than 30 days before the expiration of the response period required by the relevant patent office. (4) The Contractor agrees to include, within the specification of any United States patent application and any patent issuing thereon covering a subject invention, the following statement, "This invention was made with Government support under (identify the contract) awarded by the United States Department of Energy. The Government has certain rights in the invention." (g) Subcontracts. (1) The Contractor will include this clause, suitably modified to identify the parties, in all subcontracts, regardless of tier, for experimental, developmental, or research work to be performed by a small business firm or domestic nonprofit organization. The subcontractor will retain all rights provided for the Contractor in this clause, and the Contractor will not, as part of the consideration for awarding the subcontract, obtain rights in the subcontractor's subject inventions. (2) The contractor shall include in all other subcontracts, regardless of tier, for experimental, developmental, demonstration, or research work the patent rights clause at 952.227-13. (3) In the case of subcontracts, at any tier, DOE, subcontractor, and the Contractor agree that the mutual obligations of the parties created by this clause constitute a contract between the subcontractor and DOE with respect to the matters covered by the clause; provided, however, that nothing in this paragraph is intended to confer any jurisdiction under the Contract Disputes Act in connection with proceedings under paragraph (j) of this clause. (h) Reporting on utilization of subject inventions. The Contractor agrees to submit, on request, periodic reports no more frequently than annually on the utilization of a subject invention or on efforts at obtaining such utilization that are being made by the Contractor or its licensees or assignees. Such reports shall include information regarding the Development, date of first commercial sale or use, gross royalties received, by the Contractor, and such other data and 31 information as DOE may reasonably specify. The Contractor also agrees to provide additional reports as may be requested by DOE in connection with any march-in proceeding undertaken by that agency in accordance with paragraph (h) of this clause. As required by 35 U.S.C. 202(c)(5), DOE agrees it will not disclose such information to persons outside the Government without permission of the Contractor. (i) Preference for United States industry. Notwithstanding any other provision of this clause, the Contractor agrees that neither it nor any assignee will grant to any person the exclusive right to use or sell any subject invention in the United States unless such person agrees that any product embodying the subject invention or produced through the use of the subject invention will be manufactured substantially in the United States. However, in individual cases, the requirement for such an agreement may be waived by DOE upon a showing by the Contractor or its assignee that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. (j) March-in rights. The Contractor agrees that, with respect to any subject invention in which it has acquired title, DOE has the right in accordance with the procedures in 37 CFR 461.6 and any supplemental regulations of the agency to require the Contractor, an assignee or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances, and, if the Contractor, assignee, or exclusive licensee refuses such a request, DOE has the right to grant such a license itself if DOE determines that-- (1) Such action is necessary because the Contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use; (2) Such action is necessary to alleviate health or safety needs which are not reasonably satisfied by the Contractor, assignee, or their licensees; (3) Such action is necessary to meet requirements for public use specified by Federal regulations and such requirements are not reasonably satisfied by the Contractor, assignee, or licensees; or (4) such action is necessary because the agreement required by paragraph (i) of this clause has not been obtained or waived or because a licensee of the exclusive right to use or sell any subject invention in the United States is in breach of such agreement. (k) Special provisions for contracts-with nonprofit organizations. If the Contractor is a nonprofit organization, it agrees that-- (1) Rights to a subject invention in the United States may not be assigned without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions; provided, that such assignee will be subject to the same provisions as the Contractor; (2) The Contractor will share royalties collected on a subject invention with the inventor, including Federal employee co-inventors (when DOE deems it appropriate) 32 when the subject invention is assigned in accordance with 35 U.S.C. 202(e) and 37 CFR 401.10; (3) The balance of any royalties or income earned by the Contractor with respect to subject inventions, after payment of expenses (including payments to inventors) incidental to the administration of subject inventions will be utilized for the support of scientific research or education; and (4) It will make efforts that are reasonable under the circumstances to attract licensees of subject inventions that are small business firms, and that it will give a preference to a small business Finn when licensing a subject invention if the Contractor determines that the small business firm has a plan or proposal for marketing the invention which, if executed, is equally as likely to bring the invention to practical application as any plans or proposals from applicants that are not small business firms; provided, that the Contractor is also satisfied that the small business firm has the capability and resources to carry out its plan or proposal. The decision whether to give a preference in any specific case will be at the discretion of the contractor. However, the Contractor agrees that the Secretary of Commerce may review the Contractor's licensing program and decisions regarding small business applicants, and the Contractor will negotiate changes to its licensing, policies, procedures, or practices with the Secretary of Commerce when that Secretary's review discloses that the Contractor could take reasonable steps to more effectively implement the requirements of this subparagraph (k)(4). (1) Communications. (1) The contractor shall direct any notification, disclosure, or request to DOE provided for in this clause to the DOE patent counsel assisting the DOE contracting, activity, with a copy of the communication to the Contracting Officer. (2) Each exercise of discretion or decision provided for in this clause, except subparagraph (k)(4), is reserved for the DOE Patent Counsel and is not a claim or dispute and is not subject to the Contract Disputes Act of 1978. (3) Upon request of the DOE Patent Counsel or the contracting officer, the contractor shall provide any or all of the following: (i) a copy of the patent application, filing date, serial number and title, patent number, and issue date for any subject invention in any country in which the contractor has applied for a patent; (ii) a report, not more often than annually, summarizing, all subject inventions which were disclosed to DOE individually during the reporting period specified; or 33 (iii) a report, prior to closeout of the contract, listing all subject inventions or stating that there were none. (End of clause) 34 Amendment No. A000 to Cooperative Agreement No. DE-FC02-97EE50472 Page No.2 of 3 19. REMARKS (continued) Appropriation Data: 89X0215.91 EE-0603 $2,101,816.00 HA/CH/410 89X0215.91 EE-0501 $ 114,000.00 HA/CH/410 89X0215.91 EE-0601 $ 92,000.00 HA/CH/410 89X0215.91 EE-0602 $ 102,000.00 HA/CH/410 89X0215.91 EE-0603 $ 82,000.00 HA/CH/410 89X0215.91 EE-0701 $ 10,000.00 HA/CH/410 89X0215.91 EE-0702 $ 200,000.00 HA/CH/410 89X0215.91 EE-0801 $ 100,000.00 HA/CH/410 89X0242.91 NP062006 $ 7,752.00 TE/CH/410 1. The following terms and conditions, attached hereto, are made a part hereof: a. Budget Page - DOE F 4620.1, which sets forth the approved budget for the Project Period; b. Statement of Work; c. Special Terms and Conditions for Research Financial Assistance Awards, coded SPRG-0697/APM modified to include Provision No. 7. PARTIAL FUNDING; --------------- d. Additional Special Provisions; e. Federal Assistance Reporting Checklist, dated 3-12-97; and f. Intellectual Property Provisions - Assistance, Large Business, State and Local Governments, or Foreign Organizations (Research, Development or Demonstration), coded GLB-697. Alternates I, II, III, and V in Clause No. 05. RIGHTS IN DATA, are hereby made applicable and incorporated into the Intellectual Property Provisions, coded GLB-697. 2. The following Provision is added to the Additional Special Provisions, attached hereto and made a part hereof: "7. ADVANCED UNDERSTANDING ---------------------- Notwithstanding (S)600.127, Allowable Costs, reimbursement to the Participant for indirect costs shall be subject to the following ceiling rates and bases; File Name: FuelCell/50472; RENPG2LB.DOC Amendment No. A000 to Cooperative Agreement No. DE-FC02-97EE50472 Page No. 3 of 3 FY 1997 FY 1998 FY 1999 FY 2000 ------- ------- ------- ------- Overhead (a) 160.7% 158.2% 160.9% 157.7% G&A (b) 43.0% 21.5% 21.7% 21.9% (a) Applicable to direct labor (b) Applicable to total cost input Facilitates Capital Cost of Money (FCCM) is unallowable under this Cooperative Agreement. Any and all indirect costs in excess of the above specified ceilings shall be unallowable under this Cooperative Agreement and shall be absorbed by the Participant without reimbursement by the Government under this Agreement or any other Government contract or financial assistance or any subcontract under any other Government prime contract or financial assistance. However, in accordance with (S)600.123(b) unrecovered indirect costs may be included as part of cost sharing or matching. 3. All references to the terms "grant(s)" or "contracts(s)" shall be read as "cooperative agreement" or "agreement;" the terms "grantee" or "contractor" shall be read as "participant, recipient or awardee;" the term "subgrant" shall be read as "subaward;" and the terms "subcontract" or "contract" awarded under a grant shall be read as "contract" under a cooperative agreement. Special Terms and Conditions for Financial Assistance Awards ------------------------------------------------------------ The requirements of this attachment take precedence over all other requirements of this award found in regulations, the general terms and conditions, DOE orders, etc., except requirements of statutory law. Any apparent contradiction of statutory law stated herein should be presumed to be in error until recipient has sought and received clarification from the Contracting Officer. 1. PAYMENT OFFICE -------------- CR-54/CHO Account Payable Division U.S. Department of Energy P.O. Box 500 Germantown, MD 20874-0500 2. FINANCE OFFICE -------------- U.S. Department of Energy Chicago Operations Office Financial Services Group 9800 South Cass Avenue Argonne, Illinois 60439 3. PAYMENT - Advance Payment under this award will be made by: ------- [_] Department of Health & Human Services (DHHS) Payment Management System (PMS), formerly DOE Letter of Credit The recipient shall request cash only as needed for immediate disbursements, shall report cash disbursments in a timely manner, and shall impose the same standards of timing and amount, including reporting requirements, on secondary recipients. [XX] Treasury Check An original Request for Advance or Reimbursement, SF 270, shall be submitted as necessary to the Payment Office specified in Section 1. above, and one copy of the SF 270 shall be submitted to the Contract Specialist specified in Block - 12 of the Notice of Financial Assistance Award (DOE F 4600.1). The timing and amount of advances shall be as close as is administratively feasible to the actual disbursements. Such requests shall not be made in excess of reasonable estimates of Cash outlays for a 30 day period. An electronics funds transfer will be accomplished if the Finance Office has an Automated Clearing House (ACH) Vendor Miscellaneous Payment Enrollment Form of file for your organization. 4. DECONTAMINATION AND/OR DECOMMISSIONING D&D COSTS ------------------------------------------------ Notwithstanding any other provisions of this Agreement, including but not limited to FAR 31.205-31, when applicable, as incorporated by Financial Assistance Rule 600.127(a), the Government shall not be responsible for or have any obligation to the recipient for (i) Decontamination and/or Decommissioning (D&D) of any of the Recipient's facilities, or (ii) any costs which may be incurred by the Recipient in connection with the D&D of any of its facilities due to the performance of the work under this Agreement, whether said work was performed prior to or subsequent to the effective date of this Agreement. 5. FEDERALLY-OWNED PROPERTY ------------------------ If you acquire federally-owned property under this award whether fabricated, furnished or purchased with Capital Equipment Funds, then a listing of such property shall be submitted on DOE F 4300.3, Summary Report of DOE-Owned Plant & Capital Equipment, to the Contracting Officer within 30 days after February 28 of each year and within 30 days after the project period ends. The report must separately identify items which were fabricated, furnished, or purchased with Capital Equipment funds under this award. 6. PURCHASE OF AMERICAN-MADE EQUIPMENT AND PRODUCTS - SENSE OF CONGRESS - FISCAL ----------------------------------------------------------------------------- YEAR 1997 --------- It is the sense of the Congress that, to the greatest extent practicable, all equipment and products purchased with funds made available under this award should be American-made. 7. PARTIAL FUNDING --------------- This cooperative agreement is partially funded on a cost reimbursement basis without fee or profit. The total estimated cost of the project to be conducted during the current budget period is $14,904,564.00 of which the estimated cost to DOE is $11,178,423.00 and the estimated cost to the Participant is $3,726,141.00. The Cumulative DOE Obligation for the current budget period is $2,809,568.00 and, subject to the availability of additional funds, DOE anticipates obligating an additional $8,368,855.00 hereunder for the current budget period. The Participant shall not be obligated to continue performance of the project beyond the total of: (a) the amount of funds set forth as the Cumulative DOE Obligation for the current budget period in Block 16.b.(1) of the face page, (b) the amount, if any, set forth as DOE Funds Authorized for Carry Over in Block 16.a.(2) of the face page, and (c) the amount of the Participant's corresponding obligation for the current budget period, viz., $936,491.00; provided, however, that once the Cumulative DOE Obligations for the current budget period have been increased by DOE to $11,178,423.00, the Participants obligation for the current budget period shall be increased to a total of $3,726,141.00, and the Participant shall be expected to bring the project (covered by the current budget period) to its conclusion within the amount of $14,904,564.00, and there is no commitment by DOE to provide any additional funding to the Participant. This cooperative agreement is subject to a refund of unexpended funds to DOE. ADDITIONAL SPECIAL PROVISIONS TABLE OF CONTENTS CLAUSE SUBJECT PAGE - ------ ------- ---- 1. Cost Share Contributions......................... 1 2. Indirect Cost Applied to Teaming Partners' Costs.......................... 1 3. Fee.............................................. 1 4. Adequate Recognition............................. 1 5. Statement of Substantial Involvement............. 2 6. Technical Direction.............................. 2 CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. EXHIBIT A STATEMENT OF WORK STATEMENT OF WORK 1. Statement of Work The applicant shall research and develop an integrated fuel cell system that operates on common transportation fuels for automotive applications. The effort is directed toward development and delivery of a [***] (net) PEM fuel cell integrated with a [***] (equivalent) fuel-flexible fuel processor that can reform gasoline, methanol, ethanol, and natural gas. The fuel cell and compact fuel processor will be integrated with balance-of -plant components to form a complete, stand-alone power system capable of being tested and evaluated as a vehicle propulsion system under driving-cycle profiles. 2. Project Description The work to be performed consists of the following tasks: Phase 1: System Definition and Integration Task 1.1: [***] Evaluation Task 1.2: Stack Component Development Task 1.3: Fuel Processor Development Task 1.4: Initial CMEU Development Task 1.5: System Definition Phase 2: [***] Subsystem Development Task 2.1: [***] Stack Development Task 2.2: [***] Fuel Processor Development Task 2.3: [***] Auxiliaries Development Task 2.4: Control Strategy and Hardware Development Task 2.5: Subsystem Qualification Tests Phase 3: [***] Brassboard System Integration Task 3.1: System Design Task 3.2: Stack Fabrication Task 3.3: Fuel Processor Fabrication Task 3.4: System Assembly and Test Task 3.5: Subsystem Design Upgrade Task 3.6: Endurance Test Phase 4: [***] Prototype System Package Task 4.1: Package Design Task 4.2: Stack Fabrication Task 4.3: Fuel Processor Fabrication Task 4.4: System Assembly Task 4.5: System Shakedown and Test Task 4.6: Qualification Test and Delivery Task 5.1: Project Management; Task 5.2: Monthly Reports; Task 5.3: Final Report 3. Performance Schedule Tasks 1.1, 1.2, 1.3, 1.4, and 1.5 completed 7 months after start of work. Tasks 2.1, 2.2, 2.3, 2.4, and 2.5 completed 14 months after start of work. Task 3.1 completed 16 months after start of work; Tasks 3.2 and 3.3 completed 17 months after start of work. Tasks 3.4 and 3.5 completed 20 months after start of work; Tasks 4.1, 4.2, and 4.3 completed 23 months after start of work. Task 3.6 completed 24 months after start of work. Task 4.4 completed 25 months after start of work; Task 4.5 completed 29 months after start of work. Tasks 4.6, 5.1, 5.2, and 5.3 completed 30 months after start of work. 4. Reporting Requirement The applicant shall provide monthly technical and financial reports and a Final Report containing the data from the work performed according to the project tasks along with analyses and conclusions based on these data. a. Identification and Significance of the Problem The internal combustion engine (ICE) has reached a very high level of sophistication and technical excellence as an automotive power plant. This amazing device is relatively low in cost, highly responsive, has excellent power density, is very reliable, reasonably long lived, incredibly convenient to use, operates well over a range of ambient conditions, and tolerant of a surprising amount of user-inflicted abuse, It has set the standard against which any other competing automotive power plant will be judged. Despite these attributes, the easy gains in ICE performance are past, and future gains will be achieved at an ever-increasing cost. Unfortunately, the need to increase vehicular power train performance remains, both to reduce U.S. dependence on foreign energy and reduce the strain that a highly mobile population places on its surrounding environment and the planet as a whole. Consequently, as we reach the upper limits of cost- effective ICE performance, we must continue to mature alternative technologies with the potential to move significantly beyond current limits. The PNGV Program has recognized these challenges and established an automotive industry goal for a production prototype of 80 mpg by 2005. To accomplish this goal, automotive power systems based on proton exchange membrane (PEM) fuel cells are a critical technology. Current PEM fuel cell transportation systems under development include a methanol-fueled transit bus (Georgetown University), a hydrogen-fueled van (Daimler-Benz), and a hydrogen-fueled automotive power plant (Ford). However, to attract enough commercial funding for serious development, a demonstrator PEM fuel cell system is needed that more closely approximates the performance of ICEs with regard to weight, volume, and cost, exceeds their efficiency and emission performance, and operates on gasoline and other fuels such as methanol, ethanol, and natural gas. To address this need, Mechanical Technology Incorporated (MTI) and Arthur D. Little, Inc. (ADL), along with MascoTech and Texaco, propose a four-phase program to develop a PEM fuel cell power system that will meet the goals of Topic 1 of PRDA DE-RA02-97EE-50443. Based on U.S. technology, this highly integrated, stand-alone, hydrocarbon-fueled system will be the basis for the next-generation automotive power plant. The proposed program is both challenging and aggressive but well within the proven capabilities of MTI and ADL and their advanced technology base. The PRDA goals stretch the limits of existing technology, and, although the program duration is short and funds limited, they are sufficient to achieve these goals meaningfully. The salient technical development issues to be addressed include a low-cost, high-performance, automotive-ready stack optimized for gasoline reformate; a lightweight, high- performance compressor-motor-expander unit (CMEU) for the air supply; a lightweight, high-performance, durable stack bipolar plate and stack structure; a high-performance, low-emissions, fast-response, multifuel reformer; and integration of these components into a compact, rugged synergistic system that works. Although the program is not without risks, these are mitigated not only by the experience and existing technology base of MTI and ADL but by an effective work plan that combines parallel analysis, component development, and system integration paths in a staged, evolutionary fashion. A [***] integrated reformer and fuel cell stack brassboard based on existing MTI stack and ADL reformer hardware will be assembled early in the program to allow an immediate focus on system integration issues. Intensive component development is planned for stack humidification; bipolar plate design; membrane electrode assembly (MEA) and gas diffusion layer (GDL) design and fabrication; reformate clean-up; diluent effects; transient behavior; CMEU size, weight, and performance; and development of key automotive-ready auxiliaries (see the Technology Advancement Roadmap in Table 1). Developments in IVITI's other ongoing fuel cell programs will be incorporated to minimize cost and maximize technology gains. MascoTech's experience as a Tier 1 auto industry manufacturer will be applied to review designs and processes in conjunction with other auto industry experts to ensure that the final components, subsystems, and system are consistent with the cost requirement and needs of the automotive application. The proposed program will result in a highly integrated, stand-alone, fuel- flexible PEM fuel cell power system that provides the performance, operating characteristics, cost, durability, and reliability potential to make this system the power train choice for early 21st-century automobiles. The program will also enhance and advance the U.S. technology base so as to support the next stage of commercialization. This work will have a seminal impact on vehicular power plant development in the next century and provide a portion of the technology critical to regain and maintain U.S. industrial leadership in advanced automotive power train development. [***- Chart describing current performance of components of fuel cell stack system, work plan and PRDA goal is omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 under the Securities Act]. Mechanical Technology Incorporated b. Background, Technical Approach, and Potential Uses The PEM fuel cell has recently undergone rapid technology advancement and emerged as a viable alternative to the ICE. It promises to deliver electromotive power at high energy conversion efficiencies with very low emissions, operate at temperatures below [***], and generate high current densities [***] at elevated gas pressures. These attributes provide the potential for a compact, lightweight cell, with a fast start capability, and enhance the attractiveness of the PEM fuel cell for the automotive application. To realize this potential, several key technical issues must be addressed. Cost Issue. For the fuel cell to compete with ICEs in terms of cost, a high- performance system must be developed that is suitable for low-cost, high-volume manufacturing. This means development of mass-producible bipolar plates and inexpensive MEA and GDL. Over the past few years, MTI has made major advances in developing a high-performance, high-specific-power stack that uses double-foil, hydroformed, metallic bipolar plates configured to provide direct humidification and coolant to each cell. MTJ has already verified the flow field aerothermodynamics, humidification and cooling features, end plates and structure in a full-size [***] short stack. The MTI stack design approach is based on proven high-rate, low-cost manufacturing techniques such as [***] and automated assembly techniques such as [***]. Although [***]. With a fully automated process, labor costs are anticipated to be at the cents-per-cell level. MTI will use MascoTech's knowledge of high-speed, low-cost automotive tolerance manufacturing processes to achieve the projections of the [***] high- volume goal. The low operating temperature of PEM fuel cells requires use of costly platinum (Pt) catalyst, which has driven MTI's successful efforts to reduce Pt catalyst loading while maximizing current density. Figure 1 shows MTI's progress in achieving high power density at reduced Pt loading [***] - progress made due to our manufacturing improvements on Los Alamos National Laboratories' (LANL) low-loading technology, Our ongoing work to optimize catalyst distribution over the anode and cathode electrodes will foster use of even lower total loadings and thus lower cost. Reformate Issues. To use the existing infrastructure and provide easy refueling, the fuel cell will require onboard reforming of hydrocarbon fuel to reformate, which contains about [***]. Unfortunately, fuel cell performance, using platinum catalyst, drops markedly with increasing amounts of CO concentration, even with contamination of a few ppm. Therefore, approaches are needed to reduce CO concentration levels in the reformate to a cost-effective level and to modify the anode electrocatalyst to provide appropriate tolerance levels. [***] alloy electrocatalyst has been verified by LANL to provide superior CO tolerance, and IVITI has collaborated with LANL to scale-up the technology and use it in full- size cells. Figure 2 shows the [***] polarization and endurance curves indicating a minimal voltage reduction of approximately [***] at [***] and full cell recovery after injection of [***]. [Chart describing current density, power density and specific power is omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 under the Securities Act] Partial oxidation (POX) reformed fuel gas contains significant amounts of other process effluents. Gasoline reformate consists of [***]. Consequently, with this fuel, the partial pressure of hydrogen in the cell is about [***] of the total pressure. Computer code predictions at this low partial pressure indicate a [***] decrease in current density at the [***] design point for a stack operating at [***]. (Power, specific power and power densities shown in Tables 2 through 5 are based on use of gasoline reformate with only [***].) To ameliorate these effects, IVITI is developing, under another program, [***]. Other issues to consider are generation of [***]. The use of [***] significantly reduces adverse effects of [***]. The influence of reduced diffusion rate of hydrogen will be evaluated in Phase 1; however, because of the relative atomic sizes, cell performance reduction is expected to be small. ([***].) CMEU Issue. Although the efficiency of a fuel cell stack is very high, the parasitic power allocated to the complete system is an important consideration, with energy consumption of the air compressor required for high-specific-power applications particularly important. Significant energy savings can be realized by using the [***]. DOE is presently funding development of three very different approaches to the CMEU design: an advanced turbomachine, a piston compressor and piston expander, and a scroll compressor and scroll expander. Since none of these approaches meet the requirements for a successful automotive CMEU, either in weight, volume, or parasitic power draw, development of an alternative CMEU is an important issue. The alternative CMEU proposed by MTI is a [***] and combines their desirable features to provide high efficiency at relatively low weight. Driven by a [***] and designed to run at [***] at the full load operating point, this [***]. The [***] mechanism is inherently balanced and can operate at high speed without high inertia loads on the bearing and compressor structure; further, the rotor and casing can be made of [***] for low weight and cleanliness. A similar unit is already being used as an automotive supercharger and should provide the basis for a rugged, low-cost, automotive component. Table 6 illustrates the power, weight, mass flow, and volume advantages of the proposed MTI [***] approach as compared to others. However, should this advanced design not fulfill its promise, MTI will use either its [***]. [*** - Four charts demonstrating stack component weight/volume; stack system component weight/volume, integrated system parasitic power/efficiency and integrated fuel cell power system performance are omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act]. Specific Power and Power Density Issue. To prepare for this proposal, MTI completed a preliminary design of a [***] fuel cell power system based on our current technology and compatible with reformate containing [***]. Stack efficiencies of [***] were established at [***] and [***], respectively, which yielded a stack system specific power of [***] that exceeded the DOE goal but was less than that required to attain system power density. However, a [***] increase in stack system specific power to [***] has been projected for a design using [***]. Table 2 shows stack component weight and volume for the [***]. Table 3 shows weight and volume distribution of the stack system components, and Table 4 shows the parasitic power and efficiency projections at design operating point conditions. Finally, Table 5 shows the projected performance of the final integrated fuel cell power system that meets the PRDA goals. Fuel Processor Issue. ADL was the first to point out that conventional wisdom, which tended to discount any reforming technology other than steam reforming, failed to consider the very different requirements that distinguish transportation fuel processors from stationary ones. Over the last five years, ADL has used a multi disciplinary team to design, fabricate, and demonstrate several generations of multifuel processors in several applications and sizes. Such equipment is now being tested at the [***] level in a very compact, lightweight, fast-response, highly integrated design that combines all required reformers, shift reactors, heat exchangers, and steam generators in a transportation-suitable package that can meet the stringent PNG' goals of [***]. The ADL fuel processor has proven that gasoline, ethanol, methanol, and natural gas can be converted into a hydrogen-rich gas stream with CO exit concentrations on the order of [***]. Catalytic POX offers several advantages for vehicles compared to autothermal reforming and steam reforming. Specifically, the POX process developed by ADL exhibits the most favorable characteristics in terms of low weight and volume, low-cost: construction, multifuel capability, and rapid start-up and shutdown. Furthermore, it can [***]. The extent of the oxidation reaction is regulated by the quantity of oxygen addition. Without the benefit of the catalyst clean-up bed after the combustion zone, the POX process must operate at higher temperature [***] than the catalyst-assisted reforming process [***]. Separation of POX and catalyst zone provides a pure gas-phase front end to the reformer, allowing for multifuel operation. Process effluent from the POX react consists of [***]. The ADL multifuel reformer, like all other reformers, outputs approximately 0.5% CO along with the hydrogen-rich mixture therefore, to use any reformer with a PEM fuel cell, some CO clean-up is required. As the preferred approach, preferential oxidation (PROX) introduces a small quantity of oxygen, usually as a component in air, to the fuel stream, and then reacts that mixture on heterogeneous combustion catalysts. This PROX reaction can be very effective. [***]. At higher temperatures, the adsorption advantage [***] is less favorable, and the same catalyst also works to react [***]. Many have demonstrated PROX designs using Pt or Pt-alloy catalysts that achieve engineering success over a narrow 5 rate range at steady-state conditions. However, transient operation is far more difficult because designs must include features to alter the heat removal rate. Tight thermal control is needed to maintain optimal CO oxidation conditions. SL designs could result in very large heat exchangers and other solutions generally unfavorable for automotive applications. Another option to tight control over the heat removal rate is to develop a catalyst formulation that offers enhanced selectivity. Table 6. Comparison of CMEU Approaches.
Characteristics MTI Twin Screw MTI Turbo ADL Scroll Vairex Reciprocating - ------------------------------------------------------------------------------------------- Required Shaft Power, kW [***] [***] [***] [***] - ------------------------------------------------------------------------------------------- Weight (excluding motor), kg [***] [***] [***] [***] - ------------------------------------------------------------------------------------------- Volume (excluding motor), (l) [***] [***] [***] [***] - ------------------------------------------------------------------------------------------- Compressor/Expander Mass [***] [***] [***] [***] Flow, g/sec - ------------------------------------------------------------------------------------------- Compressor/Expander Pressure [***] [***] [***] [***] Ratio - ------------------------------------------------------------------------------------------- Expander Inlet Temperature, C [***] [***] [***] [***] - ------------------------------------------------------------------------------------------- Estimated Motor [***] [***] [***] [***] Weight/Volume, kg/(l) - -------------------------------------------------------------------------------------------
over traditional Pt-based PROX catalysts. Over the past year, scientists at ADL have formulated a proprietary catalyst that has been tested with very encouraging results. This catalyst offers over [***] the selectivity and reactivity of platinum PROX catalysts. The greatly increased selectivity means that a PROX device using this catalyst is inherently more transient capable than a traditional PROX for two reasons: 1. tight control of heat generation is not necessary, and 2. less heat is produced because less hydrogen is consumed while converting the CO. The increased reactivity of the new catalyst will allow for a more compact PROX reactor. In recent research at ADL, we have devised a family of catalysts that remove CO from simulated reformate to the desired level of concentration via PROX using air as the oxidant. Extrapolation of our results from bench-scale testing suggest that a full-scale PROX reactor for a [***] fuel cell/fuel processor system capable of transient operation could be constructed to occupy a volume of about [***] and would operate at low temperatures compatible with the outlet temperature of a low-temperature-shift catalytic reactor. ADL has developed the most advanced small-scale fuel processor to date, but some refinement for the transportation application is still required, Inappropriate fuel processor design or incorrect system integration can result in poor start/stop characteristics, sensitivity to poisoning by fuel contaminants, and excessive system water consumption. Catalyst cost and mass, currently representing [***] of overall reformer cost and mass, must also be addressed. ADL has considered all these issues and has developed the simple, low-risk POX approach to providing the required hydrogen-rich stream to the fuel cell. Key System Design Features. MTI's preliminary design was based on a [***], shown in Figure 3. In this system, the twin-screw CMEU provides clean, oil-free air at [***] to the fuel processor and fuel cell stack at the rate of [***], respectively. The fuel processor supplies [***] of processed fuel [***] to an accumulator bottle, with a pressure regulator and a shut-off valve, incorporated at the interface of the fuel processor and the fuel cell stack. As hydrogen is consumed by the anode reaction, the regulator will admit sufficient makeup gas to maintain the inlet pressure at a premium above the [***]. This accumulator is intended to accommodate only short, fast transients. However, the gas flow rate time constant is a fraction of a second for both the stack and fuel processor subsystems. [***] [***] Commercial Potential. When accepted as a viable replacement for the ICE, the fuel cell power system developed in this program will create an entirely new manufacturing industry with billions of dollars in annual sales. Acceptance will require first and foremost that this new power system is cost competitive with the ICE. With a potential production cost of less than [***], including [***] for the fuel processor, and a rising value for the other features of fuel cells, that is, high efficiency and low emissions, the potential for such an industry and its impact on U.S. automotive leadership is becoming more real. It has often been said that the first application of a fuel cell power system will be in a stationary application and that only after its success in that application would the auto industry consider it a viable alternative to the ICE. MTI is currently negotiating with the Edison Development Corporation (EDC), the investment subsidiary of DTE Energy, Inc. (a major Midwestern utility holding company) and [***] for the creation of a new company to commercialize fuel-cell- based power systems for the stationary and other markets. [***] is a major designer and manufacturer of production and automated assembly line equipment for the automobile manufacturing industry, and will apply its expertise to develop low-cost methods for producing fuel cell systems. EDC will provide its strong marketing, sales, and distribution capabilities in the transfer and commercialization of fuel cell power systems for stationary applications. Initiation of this effort in conjunction with the PRDA would ensure "critical mass" for the establishment of a U.S. PEM fuel cell manufacturing presence. As well, the commercial potential of both the fuel processor and the PROX reactor is enormous if one considers the volumes associated with automotive production. The fuel processor has been analyzed for cost both by ADL and Chrysler. In both cases, production costs were consistent with automotive cost structures [***]. In fact, Chrysler has recently shown commercial interest in the POX by announcing their interest in producing a prototype fuel cell vehicle using the ADL technology, if it becomes sufficiently refined in the next two years. Finally, initial cost projections for the full-size [***] PROX reactor indicate that it will contain less than [***] in catalyst material. The outcome of the proposed program will be a fuel processor capable of satisfying the year 2000 PNGV targets. [***-Chart describing the integrated fuel cell stack/fuel cell processor system is omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act]. c. Technical Objectives 1. Functionally successful integrated stack/fuel processor system. Issues are: functionality of stack subsystem; functional integration between stack and fuel processor subsystems; and an adequate match between transient CO delivery of the fuel processor and stack CO tolerance. Risk will be mitigated by a stack subsystem design based on MTI's experience designing a complete automotive stack system for DOE Ford Phase 11 program; a fuel processor design directly based on ADL's existing [***] transportation fuel processor; Task 1.1, the integration and test of a [***] system, using existing hardware, which will occur during the first 7 months of the program. 2. Integrated system efficiency [***]. Issues are: hydrogen conversion efficiency of fuel processor with transportation fuels; fuel cell current density ([***]. Risk will be mitigated by an impressive body of prior work: ADL has already developed an ethanol fuel processor for transportation use with efficiency [***]; MTI has developed a [***] stack meeting combined efficiency and W/kg requirements with Pt loading [***]; MTI has demonstrated superior [***] alloy catalyst performance with [***] in short stack with LANL assistance. Other factors include determination of cell/catalyst/operating conditions to optimize [***] during the first 7 months of program; ADL/MTI close liaison with LANL and access to LANL's PROX technology for post-processor CO clean-up; [***] (fully developed commercial technology) identified and selected by MTI that will provide a more efficient system CMEU. 3. Stack subsystem efficiency [***]. Issues are: need for high fuel-cell current density [***]. Risk will be mitigated by the existing MTI [***] that meets combined efficiency and W/kg requirements with [***]. 4. Multifuel-capable fuel processor. Issues are: availability of catalysts that can reform hydrocarbons, with adequate life and acceptable cost. Risk will be mitigated by the several generations of fuel processors developed by ADL for transportation application with demonstrated successful reformation of gasoline, ethanol, methanol and natural gas. 5. Integrated system specific power [***]. Issues are: fuel processor catalysts that meet performance requirements with minimum mass; weight of stack bipolar plates and clamping structure; cell current density under reformate operating conditions, affecting total cell area required. Risk will be mitigated by ADL's experience in developing compact, lightweight fuel processors for transportation uses; the MTI [***]. 6. System up-power transient response time: [***]. Issues are: system design and control of fuel processor to maintain effluent composition during transients; response time of CMEU; response of stack humidification to load changes. Risk will be mitigated by ADL experience in development of fuel processors for transportation, where transient response has been a major driver for the research; MTI first-hand experience in engineering design of an automotive - stack subsystem and CMEU response considerations; MTI selection of [***] CMEU for fast transient response/high system efficiency; work with [***] to establish a vehicle model and evaluate transient performance in Task 4.1.1. 7. Manufacturing cost [***]. Issues are: costs for fuel processor catalysts, stack design architecture for manufacturability, and stack components. Risk will be mitigated by ADL identification of catalysts for fuel processor, estimated at [***] in high production; MTI development of bipolar plate design [***]. 8. System start-up to full power [***]. Issues are: thermal response time of fuel processor mass operating at higher temperature; chemical stability and control of CO during start-up transient; thermal response of stack in reaching [***] operating temperature. Risk will be mitigated by ADL experience in developing lightweight fuel processors with minimum thermal mass; MTI [***] stack for DOE Ford Phase H with lightweight bipolar plates and specific power [***]. MTI ongoing development of lighter-weight stack with specific power [***]; [***]. 9. Operating life [***]. Issues are: life of fuel processor catalysts; stack performance degradation due to CO poisoning of MEA catalyst. Risk will be mitigated by ADL demonstration of extended fuel processor operation; LANL demonstration of extended operation of PROX post-processor CO clean-up unit while maintaining [***]. 10. Subfreezing start-up and operation. Issues are: [***]. 11. System power density [***]. d. Work Plan Phase 1: System Definition and Integration Task 1.1., [***] Building and operating an integrated stack/fuel processor early in the program willl provide vital experience in the functional and control- requirements for the integrated system. To this end a [***] system based on existing hardware for the fuel processor and stack will be assembled and tested. All thermal and fluid-flow-stream aspects will be addressed. The air-handling system will not be addressed; rather, the effort will focus on close integration of the fuel processor and stack to evaluate efforts of varying key system operating parameters. The system will be assembled and tested at ADUs laboratories, using their superior facilities for fuel-gas analysis. Tests will include assessment of the effects on stack performance of reformer and [***] operating characteristics. Fuel processor effluent composition, mass flows and state-point conditions for air, fuel, and steam flows will be determined for operation [***]. Control and transient performance of the fuel processor will be addressed to the extent possible [***]. The following issues will also be explored: design, operation, and control of stack afterburner for efficient use of excess fuel from the anode exhaust; integration of air supplies for both stack and fuel processor; supply of feedwater from the stack water management subsystem to the fuel processor shift reactor; maintenance of constant system inventories of both "clean water" (for stack and shift reactor) and "dirty water" (condensed from fuel gas and supplied to fuel processor steam generator) at all conditions; and control of the fuel processor and fuel-gas composition during transients. The [***] system will also be used for verification tests of different candidate fuel processor catalyst and for evaluation of candidate system control strategies. Task 1.2: Stack Component Development. This task will involve initial component development work on certain aspects of the stack: [***] [***] will be tested over a range of loadings within the total allowance of [***] to identify the disposition of catalyst that provides the highest current density. Tolerance to CO contamination of the anode gas will also be determined for each anode catalyst mixture and loading tested, under both steady-state conditions and 3-sec transient excursions of CO content. After preferred membrane/catalyst and operating conditions have been identified, a number of cells will be set up to run long-term endurance tests at the selected conditions with the final design materials. Fuel Cell Bipolar Plate. A primary design path will be pursued based on use of a [***]. Alloys, surface treatments, and in-stack conditions will be identified that broaden the passive potential domain and minimize corrosion current density for these plates in service. A back-up design path based on use of a [***] will also be pursued. Preliminary designs will be made for [***] multicell stacks. The manufacturing processes required to make bipolar plates for these designs will be developed to the point where reliable production of [***] plates can be predicted. These processes include hydroforming of [***]. This work will be performed by MTI using a well established vendor team. The [***] stacks will be fabricated, assembled, and tested at MTI under the operating conditions selected in Task 1.5. This work will be performed for both primary and back-up designs. At the end of Task 1.2, one design will be selected as the final design based on cell performance and estimated manufacturing costs. [***] An alternative material will be developed for the [***]. The requirements for this material are: [***] MTI will develop the new [***] material using base stock of either [***] or other suitable substrates. Improvements in cell polarization curves and reduced stack cost are the anticipated benefits. Equipment for processing the base stock to produce the final [***] will be installed at MTI. Fuel Cell Sealing System and Gaskets, MTI will continue its ongoing work to identify a superior design and material [***]. The criteria for success are: [***]. The final seal design will be selected at the end of this task. Task 1.3: Fuel Processor Development. To ensure efficient system operation, the POX front end of the ADL fuel processor must be designed to convert a multitude of fuels [***]. ADL will work with Texaco R&D to speciate and quantify the output of the POX reactor by operating a [***] experimental POX reactor in the Texaco laboratories. Testing will be performed to determine POX operating points and fuel formulation effects on reformate quality, yielding an optimized POX design. In a parallel path, ADL will design an integrated [***] fuel processor based on existing hardware designs that will accept the optimized POX reactor design developed based on test data furnished by Texaco. The [***] design will include [***]. [***]. Using a [***], ADL will perform tests using the best currently available catalyst technology or catalyst technology identified from research studies. For the [***], ADL will perform a limited number of small-scale tests to refine the kinetics parameters needed to scale up the catalyst bed, and then construct a [***]. ADL will then operate the [***] reactor with the [***] to acquire data on reaction kinetics and heat and mass transfer. Task 1.4: Initial CMEU Development. An initial evaluation of a [***] compressor for application to a [***] system will be performed. A preliminary functional specification will be developed and reviewed with any one of three commercial supplier of these units for automotive supercharger duty. Two units will be selected from existing product lines which are close to the specification requirements. A [***] unit of appropriate size will be obtained and tested, [***]. [***]. Both effects will increase the compression efficiency and reduce the exit air temperature. [***]. Operating speed for these units is expected to be about [***]. The compressor will be tested at the required operating conditions, [***]. Concurrently, the expander unit will also be tested using [***]. These tests will both validate the suitability of the [***] compressor for fuel cell systems, and provide guidance for better adaptation of these units specifically for the final [***] system. These test results, together with the system definition produced in Task 1.5, will be used to develop a final design specification for the CMEU system, which will then be provided to the selected compressor manufacturer. This specification will include a device for [***]. Task 1.5: System Definition. This task will involve design analyses of the complete integrated system to identify all required system components, identify design operating conditions and system control strategy which best enable the system to meet the PRDA goals, and formulate functional and performance specifications for all components. Laboratory tests of single cells will also be conducted to develop performance data to support the system definition. Major Milestone: at the conclusion of Task 1.5, a system design review will be held with DOE. Task 1.5.1: Single-Cell Test Data. The current density [***] attainable from the PEM cell at the peak-power design voltage is the major determinant of the total cell area and stack size required. Current density is directly affected by catalyst constituents and loading; anode fuel gas composition; pressures of reactant gases; utilization of anode and cathode gases; attributes of the specific membrane used; the humidification water supplied to anode and cathode; and cell operating temperature and other material and operating parameters. Tests will be performed to develop polarization curves for a matrix of those variables affecting current density, stack size, and cost. These data are required to perform valid trade-off studies between conflicting parameters. MTI already has a significant library of such data, a large portion of which pertains to [***]. However, MTI has recently obtained additional test data and experience working with [***]. Additional data must be obtained on cells with different permutations of total [***]. A means to provide [***]. (By including a [***].) This will be evaluated by tests of [***]. This will identify the [***] before any power can be obtained [***]. Task 1.5.2: Operating Conditions and Control Strategy, ADL has conducted detailed computer simulations of PEM fuel cell systems for mobile applications. One such study modeled and examined the design point and off-design operation of POX, ethanol-fueled systems. The simulation model from this work will be modified using results from Task 1.1 to duplicate operation of the [***] hardware. The modified model will then be used to optimize component designs and operating conditions for the [***]. This work will include development of: a consistent approach for sizing fuel processor components; conceptual flow diagrams to identify and analyze heat- and mass-flow interactions between fuel processor and stack; critical dimensions and component arrangements; heat and mass balances for candidate system designs; and heat duties for required heat exchangers. MTI will perform parallel [***]. Cell test results from Task 1.5.1 will be fed into the system analysis as available. These results will define variations with operating conditions of attainable current density, which directly affects total cell area, stack size, weight, and cost. Trade-off studies will be performed to examine the effects on overall system efficiency, size, weight, and cost of: reactant gas pressure levels; anode and cathode gas uses; anode and cathode catalyst loading levels; CO content of fuel gas; combustion of excess fuel gas at stack exhaust and energy recovery in expander; water (steam) consumption in shift reactors of the fuel processor and for stack humidification; operating temperatures of fuel processor effluent versus stack requirements; and other operating and system design parameters. The trade-off studies will identify those specific system design and operating conditions that best enable attainment of the efficiency, weight, volume, and cost targets of Tables 1, 2 and 3 of PRDA Appendix A. The stack configuration will be determined in part by the required output voltage. As defined by DOE Ford Phase 11 technical requirements, an output voltage range of [***] will be targeted, which is compatible with the needs of vehicle traction-motor systems and should be applicable. The peak-power operating point of [***] per cell used on the DOE Ford work yielded an estimated stack system efficiency of [***] [***] required by the PRDA. Peak-power operating voltage for the proposed program will be altered to [***] to meet efficiency targets and will increase to approximately [***] power while simultaneously surpassing specific power and power density goals for stack and integrated power systems as shown in Tables 3 and 5. MTI and ADL will produce a system schematic identifying all system components such as heat exchangers, pumps, gas compressors, flow and pressure control valves, reactor vessels, and interconnecting pipes, tubes and signal- transmitting wires. After identification of components and associated operating conditions, process-flow diagrams for the complete system will be made for peak power, 1/4 power, and idle. These diagrams will show fluid mass flow, chemical composition, temperature, and pressure at all points throughout the system. Functional specifications will then be written for each component. These specifications will direct the work in Phase 2 to procure or design/develop all the system components. Candidate system designs for accomplishing subfreezing start-up will be evaluated. System configuration and shutdown procedures will be defined to bring the [***]. Close integration between the fuel processor and stack subsystems may allow use of the POX combustor to heat the coolant for start-up. The control strategy for system start-up, idle, and up-power transients will be defined during this task, to ensure that the selected system configuration and components will provide stable operation and the required transient response. Baseline control strategy and logic will be taken from the [***] test results of Task 1.1. More optimized control systems will be formulated and analyzed against this baseline. Preliminary estimates of transient response will be made for the fuel processor and the CMEU. The CMEU offers the potential to overcome a deficiency in transient response encountered with aerodynamic CMEU components during the DOE Ford Phase 11 work. A system control strategy documented by system state diagrams and logic-flow diagrams for system start-up, idle, power transients, and shutdown will be selected to be carried forward into Phase 3. Complete development of the control system will be accomplished in Task 2.5. Phase 2: [***] Subsystem Development This phase will address the design, development, and test of the subsystems and components identified in Task 1.5 and on the operating conditions selected during Task 1.5. Much of this work can be narrowly focused on single components. However, some aspects, e.g., successful start-up and operation at [***] C, must be approached on a broader, system-oriented basis as described in Task 3.1. Phase 2 will conclude with qualification tests of both the fuel processor and stack, addressing each item in Tables 2 and 3 of PRDA Appendix A. Manufacturing costs will be addressed during Phase 2 by frequent consultation with MascoTech and other automotive industry suppliers to review candidate component designs for manufacturability and by comparative cost estimates developed during Tasks 2.1 and 2.2. Task 2.1: [***] Stack Development. Task 2.1.1: Primary Stack. Since cell design, performance, and manufacturing processes will have been proven at a [***] size in Phase 1, the first step in this task will be the detailed analytical and layout design of the [***] stack, incorporating MTI proprietary components and technology, based on the peak-power process-flow diagram data generated in Task 1.5.2. In support of [***]. Sequential procurement of [***]. A previously assembled team of competent vendors will be used. MTI will also procure the membrane, substrate for the GDL material, and other materials for manufacturing the GDL and MEAs. Final manufacture of the MEAs and GDL will be done at MTIs facilities in a newly installed processing line. MTI's primary design for bipolar plates will consist of [***]. Sufficient [***] will be procured to assemble three short stacks of about [***]. These will be tested at MTI's lab on simulated reformate including [***] and the operating conditions selected in Task 1.5.2. One of the short stacks will be run for [***] under peak-power conditions. All of these tests will be done with [***] system. After performance of the other two short stacks has been characterized, one will be tested using [***]. Liquid in the anode and cathode exhaust gases will be sampled and analyzed by capillary gas chromatography in search of any trace of the [***] compound. Stack performance will be carefully monitored for any evidence of degradation. The third short stack will be-dedicated to further exploration of subfreezing start-up and operation. A [***] and large enough to contain the short stack, gas cooling coils, and associated instrumentation will be purchased and modified to serve as a test chamber. The short stack [***]. Tests similar to those done with single cells in Task 1.5.1 will be performed to define the variation of start-up performance capability with stack temperature. Confirmation of proper assembly and anticipated performance of the short stacks will lead to production of sufficient detail components, MEAs, and GDL to assemble the two stack modules comprising the [***] stack. The full [***] stack will also be tested at MTI on simulated reformate. The content of [***] will be formulated per analyses provided by [***] gas stream, so that a range of concentrations can be used to determine stack CO tolerance Stack polarization curves will be produced by test, applying the schedule of anode and cathode gas pressures and use versus power that were selected during Task 1.5.2. MTI's stack-test facility can supply cathode air flow for a [***] stack at pressures up to [***]. The simulated [***] Stack humidification water requirements will also be met by MTI's facilities. Start-up transient response of the stack itself at room temperature will be determined, operating from test facilities for air and fuel supply. These initial tests will be performed using [***] in the facility stack-cooling system. After all performance characterization testing is completed [***]. The [***]. After obtaining successful operation of the first module with [***], the second module will be included in the [***] for final tests of the two-module stack assembly. The intent of this task is the development of a robust, automotive-ready stack prototype. Task 2.1.2: Backup Stack. Steps similar to those described above will be taken to create two short stacks based on the backup design for bipolar plates. Testing will be performed to ensure that the backup design is adequately developed so that it could be quickly implemented in a full [***] stack if any impediment to use of the primary design were to arise. Task 2.2:[***] Processor Development. Task 2.2. 1: Hardware Configuration. Using the design output from Task 1.3, ADL will fabricate a multifuel fuel processor for testing. Working with MTI, ADL will develop a fuel processor specification. The specification will define mechanical, electrical, thermal, fluidic, and flowstream composition interfaces Special considerations related to testing, instrumentation, and safety will also be defined. ADL's multifuel fuel processor design will be modified to accommodate any changes dictated by the specification or results of ADL's ongoing test program. [***]. Based on previous experience, [***]. The fuel processor geometry and integration will be optimized to provide the maximum conversion efficiency of [***] while minimizing the CO output. ADL will work with Modine Manufacturing Company to perform a design of manufacturability and cost analysis on this design to identify cost savings for the final version of the fuel processor. Furthermore, Modine will supply all necessary heat exchangers for the complete system. Task 2.2.2: Catalyst Development. Using the steam reformer and WGS catalyst data from Task 1.3, ADL will work with [***], an industrial catalyst manufacturer, to further optimize, develop, and test catalyst for application in small-scale fuel processors. Using the PROX data from Task 1.3, ADL will design and construct a full-scale [***] PROX reactor and operate it to acquire data on its performance. ADL will test the second-generation prototype packaged reactor both as a stand-alone unit and as a part of the integrated system. The result of the PROX work will be a vehicle-ready device capable of handling transients and quick start that is [***]. Finally, ADL has standing agreements to test the [***] PROX devices of both [***] and [***] as they become available. These devices will provide additional backup technology should the ADL PROX device not perform as anticipated. Task 2.3: [***] Auxiliaries Development. Task 2.3.1: CMEU Development. The CMEU specification prepared in Task 1.4 will be used-to procure [***] machines. [***]. [***]. MTI will separately specify and procure the drive motor, inverter, and controller, as well as the actuation means for the slide valves to vary displacement. MTI will assemble and test the CMEU over the range of conditions anticipated during stack operation. Expander inlet conditions will be set to simulate effluent from the system afterburner. A schedule of [***] that results in superior performance will be determined. A control strategy using both [***] will be developed that best [***]. Coordinated use of the [***] will be explored to determine their usefulness in accommodating off-design excursions expander- inlet conditions. Code will be developed to control [***] control strategy. Task 2.3.2: Balance of Plant. Water Management Subsystem. A [***]. Water recovery will be effected by a [***]. The pressure-control device maintain a [***]; [***] may be used to meter required flow to the stack anode, stack cathode, and fuel-processor shift reactor. The reservoir will be designed to receive the [***]. Temperature Control Subsystem. [***] will also incorporate means for [***]. A first approach for this function will be to use the fuel processor PROX [***]. Task 2.4: Control Strategy and Hardware Development. The system schematic developed in Task 1.5.2 will be reviewed, and the required sensors and control elements specified. Existing [***] will be reviewed to determine if they can be adapted to serve the required functions. Devices will either be adapted from [***] or designed and built to serve all necessary sensing, actuation, or control functions. The total number of control inputs and outputs will be identified. The system control strategy conceived in Task 1.5.2 will be reviewed, and preliminary blocks of code required to implement the control identified, The microprocessor-based executive system control developed [***] will be upgraded and hardened for control of the integrated fuel cell power system interfacing with and supervising the ADL distributed controls. [***] will be used wherever possible. Task 2.5: Subsystem Qualification Tests. Task 2.5.1: Stack Subsystem. The stack, CMEU, water management, and temperature control subsystems will be assembled as a [***] and operated on [***] as a complete stack subsystem. Shakedown tests will be performed to achieve satisfactory functionality. A test procedure will be developed for tests to determine efficiency at [***]; CO tolerance during steady-state operation; [***]; time for start-up to max power at [***]; and capability to start up after [***]. An environmental chamber large enough to contain the subsystem and capable of [***] will be rented for this test. Task 2.5.2: Fuel Processor Subsystem. Using existing test facilities, test stand, support instrumentation, and test procedures from previous programs, ADL will evaluate the performance of the [***]. Major components (POX, shift reactors, sulfur removal, etc.) will be evaluated based on thermal and chemical analysis. Shakedown tests will be conducted to verify proper operation of instrumentation and test hardware. A test procedure will be developed by MTI and ADL Efficiency, [***] will be key system-level measurements. Intermediate temperature, pressure and chemistry measurements will be used to establish operating characteristics of important components and subsystems. The proposed testing will be developed to support the technology advancement roadmap shown in Table 1. Major Milestone: at the conclusion of Task 2.5, a subsystem design review will be held with DOE. Phase 3: [***] System Integration Task 3.1: System Design. Layout and piping drawings will be made to define physical disposition of components an interconnecting piping for integration of the stack/fuel processor subsystems in a [***] configuration. Emphasis will be placed on [***]. Integration of fuel processor control, stack control, and overall system executive control will be defined and implemented in both hardware and software. [***]. ([***] of the entire system will be carefully assessed during the ensuing test program.) The system layout will be compatible with installation at MTI's lab where electrical loading facilities with fast transient capabilities are available. Major milestone: at the conclusion of Task 3 a [***] performance and design review will be held with DOE. Task 3.2: Stack Fabrication. The intent is that the stack tested in Task 2.5.1 will demonstrate good operating characteristics and performance and will be carried forward intact into the integrated [***] system. Any significant operating or performance deficiency will be investigated to determine the cause. If readily correctable, this will be done. If necessary, the stack may be disassembled and rebuilt with new [***] or replacement components. [***] system testing will be a much more productive development activity if the components are performing at or near their intended level. Task 3.3: Fuel Processor Fabrication. It is also the intent that the fuel processor tested in Task 2.5.2 will demonstrate good operating characteristics and performance and will be carried forward intact into the integrated brassboard system. The same approach as described in Task 3.2 will pertain to the fuel processor. Task 3.4: System Assembly and Test. The integrated brassboard system will be assembled and installed at MTI's facilities, which include a computer- controlled, electric load system and a test cell incorporating the safety measures required for [***] and [***]. A test plan will be developed to guide the test procedures. A start-up procedure for the integrated system will be developed to ensure that [***] is supplied to the stack at all times. [***]. Steady-state operation of the system will be perfected at gradually increasing power levels. Power transients will then be practiced at gradually increasing rate of changes. Task 3.5: Subsystem Design Upgrade. After completing tests of the integrated [***] system and reviewing all test results, design modifications will be identified to improve system operation and performance. Design efforts will be directed toward the design target of achieving a reliable operating life of at least [***]. Task 3.5.1: Stack Upgrade. All data pertaining to operation of the CMEU will be reviewed with the supplier of the [***] units. This will include steady-state operations and efficiency over the entire operating range and transient response data. The possible merit of changing the max-efficiency design point will be discussed in the context of obtaining an efficiency curve better suited to the anticipated system duty cycle in automotive service. Any required improvements in operation of the [***] system will be noted for correction. In addition, any design modifications to facilitate integration of the [***] package will be identified. These modifications will be summarized in a modified procurement specification for an upgraded CMEU. Operation and performance data for the stack and water management and temperature control subsystems will also be reviewed, and any required upgrades made. The designs will also be reviewed with [***] manufacturing engineers for modifications to minimize manufacturing cost. Task 3.5.2: Fuel Processor Upgrade. ADL will review the complete library of operating and performance data pertaining to the fuel processor, and identify all design modifications which may improve performance or help reduce weight or size. This will include incorporation of improved catalysts identified during parallel investigations. ADL will also incorporate design modifications from [***] manufacturability study for minimizing manufacturing cost. Task 3.6: Endurance Test. A [***] endurance test will be conducted on the integrated [***] system, in its final configuration from Task 3.4. A computer- controlled load system will be programmed to impose a [***] that will be repeated continually during the test. [***] will also be included. Records will be maintained of any component malfunctions or system upsets which occur. Continuous records will also be kept of system power output compared to the power setpoint value. Phase 4. [***] Prototype System Package During Phase 4, a precommercial, prototype, [***] packaged, stand-alone system will be designed, built, and tested to demonstrate the level of achievement against the targets defined by Table 1, PRDA Appendix A. Task 4.1: Packaged Design. A system packaged design will be developed that best implements the [***] required for start-up and operation in subfreezing ambient temperatures. This capability will be given first priority during packaged design. The level of overall packaging integration will also reflect the functional relationship between components whether or not function will be favored by contiguous location of components. Components may be grouped in two or more subpackages which might be placed in separate locations when the system is installed in an automobile. The [***] is a good example of a subpackage that could be distant from the stack. Each subpackage will be designed for the maximum compactness attainable within the constraints of the existing component designs, and the time and resources available to the program. Particular attention will be given to the design of the stack subsystem to ensure that the [***] requirements for [***] start-up are met. Influence of this requirement on the design of [***] components will be reflected by changes to those designs, if necessary. Layout design drawings for the subpackages will be produced, together with new component manufacturing drawings where necessary. To the greatest extent possible, the package will be designed to be automotive ready, compact, light, and able to run in a stand-alone or over-the-road configuration. [***] will provide an independent assessment of progress toward this goal. Task 4.1.1: Vehicle Transient Model. This task anticipates the time when emissions test data will be taken for the final system. Those data must be presented in terms of grams/mile of the emission products, for comparison with EPA Tier II emissions limits. This can be done in one of two ways. First, [***]. The second method will be selected to avoid costs and time required to [***]. This requires the creation of a [***]. MTI will work with [***] to generate the [***] that will then be used for evaluation of transient operation and vehicle emissions. Texaco will define a likely configuration for the fuel-cell-powered vehicle and verify the model by comparison with known and measured field data. Task 4.1.2: Manufacturing Cost Estimate. A team consisting of MascoTech manufacturing engineers, MTI manufacturing and design engineers, and auto industry specialists will develop an estimate of manufacturing cost for the prototype. Further, MTI will use the results of existing manufacturing and cost analysis from the DOE Ford Phase II program to enhance and refine the manufacturing cost estimate. MTI will provide access to the manufacturing drawings for system components. Access will also be provided to MTI's and ADL's design engineering personnel if questions arise concerning drawing requirements or the suitability of contemplated manufacturing methods. Major milestone: at the conclusion of Task 4.1, a packaged design review will be held with DOE. Task 4.2: Stack Fabrication. A new stack will be built for the prototype system, incorporating all design upgrades identified during Task 3.5.1. Total loading of [***]. A new CMEU will be ordered from the supplier of this equipment. All design upgrades to these machines will also be incorporated. A complete complement of new [***] subsystem components will be fabricated, reflecting design modifications defined in Task 4.1. A new set of components for the [***] subsystem will be manufactured. Task 4.3: Fuel Processor Fabrication. Based on the results of Task 2.2, the [***] of Task 3.4, the design upgrades of Task 3.5.2, and the [***] manufacturability analysis, ADL will design and build a precommercial multifuel processor prototype for the final [***] packaged system. All improvements to catalyst designs available at this time will be incorporated. The PROX cleanup unit may be integrated into the packaged containing the balance-of the fuel processor and improved packaged integration of the afterburner/fuel vaporizer may be implemented. Task 4.4: System Assembly. The prototype system will be assembled at MTI. All components or subassemblies will be weighed. The rectangular volume required to enclose each subassembly or component will also be determined. The subpackages will be assembled using the structural supports and brackets designed in Task 4.1. Instrumentation required for monitoring subsystem and component performance will be installed. The subpackages will be united into an overall system package enabling convenient lifting and transport via fork-lift truck. The system will then be installed in MTI's [***]. Task 4.5: System Shakedown and Tests. As in Task 3.4, a test plan will be developed for the prototype system. Fuel will be obtained from [***] in accordance with specifications previously agreed to. The start-up procedure from Task 3.4 will be used initially. Steady-state system operation will again be perfected, at gradually increasing power levels, up to the maximum attainable steady-state power. Control code may be modified to accommodate differences between the [***] and prototype systems. Data will be taken at steady-state conditions to define heat and mass balance and energy efficiency data for the system. Performance data will be taken to define a plot of system efficiency versus net power from idle to the peak power point of [***]. System [***] at steady-state conditions will again be closely observed. Specific power and power density will be defined using the max power obtained during these tests. The summation of subassembly or component weights and volumes determined during Task 4.4 will be used in this determination of specific power and power density. Power transients will then be practiced, at gradually increasing rates. Measurements of fuel-gas CO content during power transients will be made to verify proper control of fuel processor operation during these events. Up-power transients from [***] power will be practiced, and the control code developed to achieve a transient response [***] for this transient event. The start-up sequence will then be developed by trials of successive modifications to the code, with intent to achieve [***]. Finally, observations will be made to determine whether or not the full system inventory of [***] is returned to the reservoir during shutdown. Any [***] that prevent this will be changed to ensure proper [***]. System provisions for [***] will be checked at room temperature for functionality. Task 4.6: Qualification Test and Delivery. The subcontract to Texaco's Beacon Laboratory cited under Task 4.1.1 will include performance of a qualification test at their site. The prototype packaged system will be shipped there, installed in a test cell, and connected to both a computer-controlled electric loading system and emissions-measuring equipment. Steady-state tests will be performed at [***] net output to verify the energy efficiency determinations made during Task 4.5. Transient runs from [***] power will also be performed to confirm the transient response data taken in Task 4.5. Simulated Federal Test Procedure (FTP) urban driving cycles and highway fuel economy cycles will be performed. The fuel cell vehicle model created in Task 4.1.1 will be used to simulate EPA driving cycles to generate fuel economy and emissions results that can be stated in terms of mpg and g/mile of emissions products. The FTP for these tests includes a [***]. This will initially be done at [***] ambient temperature. Additional [***] tests will be performed to determine [***].Upon demonstration to DOE, the packaged fuel cell system will be delivered to DOE for a 12-month test period. Project Management. The project management task (Task 5. 1) will ensure that MTI provides the required monthly technical and financial reports (Task 5.2) to DOE and a final project report (Task 5.3) containing data from the work performed according to the project tasks along with analyses and conclusions based on these data. e. Performance Schedule Table 7 presents the performance schedule for the proposed 30-month program. f. Related Research or R&D The unlimited potential of fuel cells as a low-cost, clean power source has created a fast-paced, competitive environment with many R&D opportunities. Much of this research is directly relevant to Topic 1 and some of the most significant advances have been made by MTI and ADL. A summary of a portion of this experience is presented in Table 8. g. Key Personnel and Bibliography of Directly Related Work The key MTI personnel are Dr. William Ernst, Principal Investigator; John Meacher, MTI Program Manager; Dr. Wayne Huang, Electrochemistry; Dr. Manmohan Dhar, System Modeling/Analysis; Daniel Jones, System Design and Test Engineer; and Gary Antonelli, Manufacturing Cost Analysis. Dr. Ernst has successfully initiated and directed over $120 million in research programs during his 35-year career. His most relevant research spans five years of fuel cell development programs, including the DOE Ford Direct Hydrogen PEM Fuel Cell Phase I and II programs. Dr. Ernst received a Ph.D. in aeronautical engineering from RPI, holds one patent and has six patent disclosures pending. A frequent speaker, reviewer, and attendee at national and international fuel cell conferences and workshops (1996 Fuel Cell Seminar, NASA Space 2000 Conference, Electric & Hybrid Vehicle Technology'95), he also served as a panelist on several fuel cell program reviews. Mr. Meacher has over 35 years of experience in power systems development, specializing in heat transfer analysis, heat exchanger design, and system integration. He has managed several of MTI's fuel cell development projects and specializes in simplification of complex power systems. He received a B.S. (mechanical engineering) from Texas A&M University. Dr. Huang has over six years experience in the design of high-performance catalysts, material characterization, electrocatalysis, and hands-on experience with single-cell and prototype fuel cell stacks from 5cm/2/ to 320 cm/2/. A former staff scientist at LANL and senior researcher at the DMFC research hub at the Illinois Institute of Technology, he has a Ph.D in analytical chemistry from the Ohio State University. Relevant publications by Dr. Huang include: "Preparation of Nanoscale Platinum (0) Clusters in Glassy Carbon and Their Catalytic Activity," Chem. Materials 5 (1993) 1727-38; "A New Composite Electrolyte System for Direct Methanol Fuel Cells," submitted to J. Phys Chem.; "The Structural Evolution of Carbon Supported Fuel Cell Catalysts Studied by in-situ X-ray Absorption Fine Structure Spectroscopy," submitted to Carbon; "Oxygen Reduction on Modified Glassy Carbon Electrodes in Alkaline Solution," submitted to J. Electroanal. Chem; and "Iron Doped Glassy Carbon: Synthesis, Characterization and Electrochemical Behavior," Abstract 57, Pittsburgh Conference, March 1993. Dr. Dhar has over 20 years experience in the modeling, analysis, and integration of complex power systems and performed the analytical work for the proposed preliminary system design. He has a Ph.D. (mechanical engineering) from Purdue University. Mr. Jones has 12 years of experience as a design and test engineer and is performing this role on the DOE Ford program. He has an M.S. in mechanical engineering from MTI. Mr. Antonelli has more than 25 years experience as a manufacturing engineer and most recently reduced MTI's fuel cell plate manufacturing costs by a factor of 3. He holds a B.S. in mechanical engineering from Union College. The key ADL personnel are Jeffrey Bentley, ADL Program Manager; Gus Block, Testing Support; James Cross, System Modeling; Bo He, Test Setup; William Mitchell, System Integration; Brian Norwicki, Data Analysis; Robert Weber, PROX development. Mr. Bentley will serve as the primary ADL interface with MTI. He has 15 years experience in managing complex, multimillion-dollar development programs. Mr. Block specializes in testing support/data acquisition for alternative energy systems, specifically hydrogen, and Mr. Cross performs system modeling with experience in chemical engineering analysis, energy systems modeling, and natural gas technologies. Mr. He supports test setup with experience in energy systems and emission control, process engineering, product development, and cost analysis. Mr. Mitchell specializes in system integration, with 7 years experience in advanced power systems, fuel cell technology and fuel processing, Mr. Norwicki performs data collection/analysis with experience in gas composition sampling techniques, and Mr. Weber specializes in PROX development/catalyst formulation with experience in catalyst characterization, chemical kinetics measurements, and chemical reaction engineering. Key personnel from other subcontractors are: Peter Liiva, Texaco; Richard Johnson and Vince Stempien of Masco. Mr. Lilva received an M.S.M.E. from Pennsylvania State University and has worked at Texaco since 1991 on various projects ranging from partial oxidation speciation studies to vehicle emissions and performance. He conducts electric vehicle performance testing and provides guidance to executive staff on advances in alternate fuels. A regular participant in DOE working group meetings and an organizer of technical sessions at industry conferences, Mr. Liiva is the author of numerous technical papers, Mr. Johnson is the Director of Research and Development for the Masco Corporation, and was previously employed for 33 years by the Chrysler Corporation in various engineering and management positions. He has an M.A.E. from the Chrysler Institute of Engineering. Mr. Stemplen, Director of Engineering at MascoTech, has been involved in the design, development, introduction, and manufacturing of new products with Tier 1 suppliers to the automotive market for 20 years. His manufacturing experience includes stamping, roll forming, stretch bending, fabrication, welding, finishing and assembly of light-gage stainless steel parts as well as production of TIG-welded stainless steel tubing. [Chart ("Table 7") describing performance schedule and tasks is omitted pursuant to Rule 406 under the Securities Act and has been filed separately with the Securities and Exchange Commission.] [Chart ("Table 8") lists MTI and ADL Related Research, as set forth below: Table 8. MTI and ADL Related Research Program Benefit to Proposed Program MTI Ford Motor Co. . Demonstrated 10-kWe PEM fuel cell (power density (greater than) 7.1 lb/kW, MEA performance (less than) 850 mA/cm/2/, (greater than) 0.17 mg/cm/2/ Pt loading. Cost projections for automotive volumes of S28/kW for materials. . Developing 50-kWe PEM fuel cell power system for automotive application with such advanced components as improved CMEU and lightweight and low-pitch reactant plates suitable for automated manufacturing. . Innovative modular power system concept similar to ICE concept enables compact system construction and facilitates system maintenance and stack module replacement. DOE . Developing and fabricating innovative CO and N/2/ separation membranes using metal deposition techniques in collaboration with the Center for Advanced Technology at the State University of Albany. NY State Energy Authority . Developed basic fuel cell technology including internal humidification. MTI IR&D . Advanced component development: reformate-tolerant catalysts, alternative reactant plate designs. . Extensive investment in new facilities for fuel cell manufacture and test. . Design for manufacturability: cost-effective plate fabrication processes similar to auto industry techniques. . Investigation of material interactions to eliminate formation of performance-degrading oxides on metallic plates. ADL DOE . Development of advanced fuel processing and hydrogen storage technologies. . Technical/market analysis of fuel cell applications in building cogeneration. . Development of commercialization policies. . Role of fuel cells in New Generation Vehicle strategy. Ford Motor Co. . Analyzed fuel chain efficiency and emissions for alternative-fueled vehicles. . Assessed investment cost of different alternative-fuel infrastructures. General Motors . PROX development. U.S. Tier 1 Auto. . Developed POX reformer capable of operation on Supplier petroleum fuels. . Developing a high-efficiency scroll compressor/expander for fuel cell vehicles. European Truck . Designed fully integrated auxiliary power unit for Manufacturer heavy-duty truck based on PEM technology. . Performed HAZOP analysis to identify and address any safety concerns. Industrial Gas . Developing advanced natural gas fuel processing Manufacturer technology. . Refinement of complete system integration. NREL . Assessed state of the art for polymer electrolyte fuel cells worldwide for transportation applications. h. Facilities/Equipment MTI has made an aggressive investment to design, install, and commission more than 4,000 ft/2/of new facilities to support the development, manufacture, and test of PEM fuel cell stacks and components. These include a 300 ft/2/ environmentally controlled stack assembly facility and a 600 ft/2/ chemical processing room for MEA preprocessing. Recently commissioned facilities include a 1700 ft/2/ facility for automated MEA and GDL manufacturing, a fully instrumented 600 ft/2/ CMEU test facility, and an 800 ft/2/ power system test facility certified for hydrogen and multifuel use and equipped with automated control and data acquisition systems and 70-kW, electrical load bank capability for real-time monitoring of 100 channels of stack data under LabView control. Other available equipment includes computerized stack test stations for 1-kW and 10-kW stacks, small cell test stations for MEAs, GDLs, and membranes as well as complete machine shop, quality control inspection, and electronics fabrication and testing facilities. A complete array of design and analysis tools are also available including AutoCAD, ProEngineer, ANSYS, and numerous proprietary codes for analysis of rotating equipment, fuel cells, stacks, and systems including control-level automotive simulations. Further, in 1998, MTI will complete a state-of-the-art fuel-flexible test facility for integrated power systems complete with reformate analysis capability. MTI owns and will make available these extensive fuel cell development facilities and equipment to support the proposed research. The ADL fuel processor test facility is a 1500 ft/2/ pilot plant equipped with liquid and gaseous fuel supply systems, continuous gas sampling and composition monitoring equipment, fuel cell load banks and support system, and the ability to simultaneously measure 50 channels of performance data at 10-Hz sample frequency. ADL also has a 13,300 ft/2/ facility for manufacturing and prototype development that is equipped with computer-aided data acquisition equipment, vacuum equipment, mass spectrometer leak detectors, and an assembly area as well as a fully-equipped precision metrology laboratory. The analytical chemistry facilities at ADL are equipped with instrumentation for organic and inorganic species analysis; computerized gas chromatography and nondispersive infraredCo2analyzer for CO, C02, N2 , and a range of HC species; computerized mass spectrometers; Fourier transform infrared spectrometers, liquid chromatographs, atomic absorption and plasma emission spectrometers; thermal analyzers X-ray fluorescence and diffraction spectrometers; and scanning and transmission electron microscopes. ADL researchers also have available a full complement of computer-aided design and analysis tools including ProEngineer and ComputerVision for mechanical design and engineering and Algor's Supersap, ACSL, MathCad, Mathematica, and PAPST and APES3D. To support its core competencies in fuel development and related refinery processing, the Texaco Beacon Laboratory has extensive resources for power plant and emissions testing, including more than 50 engine dynamometer test stands, 9 vehicle chassis dynamometers, and a staff of automotive engineers. Driven by strict pollution control regulations and a desire to develop new, environmentally friendly products, Texaco has also invested in and developed state-of-the-art emission diagnostics such as rapid sampling systems and in-cylinder laser diagnostics. Masco Corporation, through its Research Center and MascoTech Industrial Components, has a full complement of facilities appropriate for a $2-billion automotive industry Tier 1 supplier. Specifically, with respect to stack and system manufacture, most types of light- gage stainless steel sheet stack and tubing processing equipment are in use at their facilities. The Research Center and several Masco, divisions have full experimental, analytical, and engineering capabilities appropriate for product development. Further, their management and staff are thoroughly familiar with all aspects of the supply of high-volume automotive components. I. Consultants, Subcontractors, and Teaming Partners Three subcontractors will support MTI in the conduct of the proposed program: ADL, MascoTech, and Texaco. ADL will develop a [***] fuel processor; MascoTech will review candidate component designs for manufacturability, propose productivity improvements, and prepare comparative cost estimates; Texaco will assist ADL in the evaluation of the integrated fuel processor and will support MTI by performing transient and emission tests of the packaged [***] system and [***]. MTI has well established working relationships with all of its subcontractors. MTI and ADL have worked together since 1995 on the integration of PEM fuel cell and reformer technology and have a memorandum of understanding dating from 1996 for application of this technology to specific stationary power systems. As a former major stockholder in MTI, Masco has maintained a close business relationship with MTI for more than 30 years. MTI will work with MascoTech, a Tier 1 automotive supplier, and one of their subsidiaries, MascoTech Industrial Components, a manufacturer of stainless steel sheet and tube products. Their knowledge of state-of-the-art manufacturing processes and industry practices will help achieve manufacturing cost goals and provide a pathway to inclusion of other automotive-volume manufacturers in the PNGV program. Through our association with ADL, MTI has begun working with Texaco's Beacon Laboratory. Texaco brings an intimate knowledge of fuels, emissions, and EPA test procedures, as well as extensive test facilities with transient test data acquisition equipment and a fully equipped cold test facility. In addition to these subcontractors, MTI will also solicit support from several qualified U.S. suppliers: Courtauld (carbon composites), Gore (membrane), Hoechst Celanese (ultra-low-cost membrane, adhesives, conducting plastics), C. B. Kaup (metal forming), and Manning (carbon materials). MTI has existing business and/or proprietary agreements in place with these and other suppliers. j. Similar Financial Assistance Applications, Proposals, or Awards None. Mechanical Technology Incorporated SPECIAL TERMS AND CONDITIONS FOR FINANCIAL ASSISTANCE AWARDS ------------------------------------------------------------ The requirements of this attachment take precedence over all other requirements of this award found in regulations, the general terms and conditions, DOE orders, etc., except requirements of statutory law. Any apparent contradiction of statutory law stated herein should be presumed to be in error until recipient has sought and received clarification from the Contracting Officer. 1. PAYMENT OFFICE -------------- CR-54/CHO Account Payable Division U. S. Department of Energy P.O. Box 500 Germantown, MD 20874-0500 2. FINANCE OFFICE -------------- U. S. Department of Energy Chicago Operations Office Financial Services Group 9800 South Cass Avenue Argonne, Illinois 60439 3. PAYMENT - Advance Payment under this award will be made by: ------- [ ] Department of Health & Human Services (DHHS) Payment Management System (PMS), formerly DOE Letter of Credit. The recipient shall request cash only as needed for immediate disbursements, shall report cash disbursements in a timely manner, and shall impose the same standards of timing and amount, including reporting requirements, on secondary recipients. [X] Treasury Check An original Request for Advance or Reimbursement, SF 270, shall be submitted as necessary to the Payment Office specified in Section 1. above, and one copy of the SF 270 shall be submitted to the Contract Specialist specified in Block 12 of the Notice of Financial Assistance Award (DOE F 4600.1). The timing and amount of advances shall be as close as is administratively feasible to the actual disbursements. Such requests shall not be made in excess of reasonable estimates of cash outlays for a 30 day period. An electronic funds transfer will be accomplished if the Finance Office has an Automated Clearing House (ACH) Vendor Miscellaneous Payment Enrollment Form on file for your organization. Mechanical Technology Incorporated 4. DECONTAMINATION AND/OR DECOMMISSIONING D&D COSTS ------------------------------------------------ Notwithstanding any other provisions of this Agreement, including but not limited to FAR 31.205-31, when applicable, as incorporated by Financial Assistance Rule 600.127(a), the Government shall not be responsible for or have any obligation to the recipient for (i) Decontamination and/or Decommissioning (D&D) of any of the Recipient's facilities, or (ii) any costs which may be incurred by the Recipient in connection with the D&D of any of its facilities due to the performance of the work under this Agreement, whether said work was performed prior to or subsequent to the effective date of this Agreement. 5. FEDERALLY-OWNED PROPERTY ------------------------ If you acquire federally-owned property under this award whether fabricated, furnished or purchased With Capital Equipment Funds, then a listing of such property shall be submitted on DOE F 4300.3, Summary Report of DOE-Owned Plant & Capital Equipment, to the Contracting Officer within 30 days after February 28 of each year and within 30 days after the project period ends. The report must separately identify items which were fabricated, furnished, or purchased with Capital Equipment funds under this award. 6. PURCHASE OF AMERICAN-MADE EQUIPMENT AND PRODUCTS - SENSE OF CONGRESS - ---------------------------------------------------------------------- FISCAL YEAR 1998 ---------------- It is the sense of the Congress that, to the greatest extent practicable, all equipment and products purchased with funds made available under this award should be American-made. 7. NOTICE REGARDING UNALLOWABLE COSTS AND LOBBYING ACTIVITIES ---------------------------------------------------------- Recipients of financial assistance are cautioned to carefully review the allowable cost and other provisions applicable to expenditures under their particular award instruments. If financial assistance funds are spent for purposes or in amounts inconsistent with the allowable cost or any other provisions governing expenditures in an award instrument, the government may pursue a number of remedies against the recipient, including in appropriate circumstances, recovery of such funds, termination of the award, suspension or debarment of the recipient from future awards, and criminal prosecution for false statements. Particular care should be taken by the recipient to comply with the provisions prohibiting the expenditure of funds for lobbying and related activities. Financial assistance awards may be used to describe and promote the understanding of scientific and technical aspects of specific energy technologies, but not to encourage or support political activities such as the collection and dissemination of information related to potential, planned or pending legislation. 8. ADDITIONAL PROVISIONS --------------------- If the appropriation symbol contained in Block 14.a. of the Notice of Financial Assistance Award for this award is listed below, paragraph 8.a. is applicable to this award, otherwise paragraph 8.b. applies: 89X0213.91 8990216.91 89M0216.91 89M0217.91 89X9219.91 89X0215.91 8900216.91 89X0216.91 89X0218.91 89M0219.91 89X0214.91 8910216.91 8990217.91 89M0218.91 89X0235.91 a. Department of Interior Appropriations Act Funding: -------------------------------------------------- 1. Lobbying Restriction -------------------- The contractor or awardee agrees that none of the funds obligated on this award shall be made available for any activity or the publication or distribution of literature that in any way tends to promote public support or opposition to any legislative proposal on which Congressional action is not complete. This restriction is in addition to those prescribed elsewhere in statute and regulation. 2. Compliance With Buy American Act -------------------------------- In accepting this award, the recipient agrees to comply with sections 2 through 4 of the Act of March 3, 1933 (41 U.S.C. 10a-10c, popularly known as the "Buy American Act"). The recipient should review the provisions of the Act to ensure that expenditures made under this award are in accordance with it. b. Energy & Water Development Appropriations Act Funding: ------------------------------------------------------ Lobbying Restriction -------------------- The contractor or awardee agrees that none of the funds obligated on this award shall be expended, directly or indirectly, to influence congressional action on any legislation or appropriation matters pending before Congress, other than to communicate to Members of Congress as described in 18 U.S.C. 1913. This restriction is in addition to those prescribed elsewhere in statute and regulation. Mechanical Technology Incorporated 9. REPORTING --------- Failure to comply with the reporting requirements contained in this award will be considered a material noncompliance with the terms of the award. Noncompliance may result in a withholding of future payments, suspension or termination of the current award, and withholding of future awards. A willful failure to perform, a history of failure to perform or of unsatisfactory performance of this and/or other financial assistance awards, may also result in a debarment action to preclude future awards by Federal agencies. 10. PARTIAL FUNDING --------------- This cooperative agreement is partially funded on a cost reimbursement basis without fee or profit. The total estimated cost of the project to be conducted during the current budget period is $14,904,564.00 of which the estimated cost to DOE is $11,178,423.00 and the estimated cost to the Participant is $3,726,141.00. The Cumulative DOE Obligation for the current budget period is $3,601,816.00 and, subject to the availability of additional funds, DOE anticipates obligating an additional $7,576,607.00 hereunder for the current budget period. The Participant shall not be obligated to continue performance of the project beyond the total of: (a) the amount of funds set forth as the Cumulative DOE Obligation for the current budget period in Block 16.b.(I) of the face page, (b) the amount, if any, set forth as DOE Funds Authorized for Carry Over in Block 16.a.(2) of the face page, and (c) the amount of the Participant's corresponding obligation for the current budget period, viz., $1,200,563.00; provided, however, that once the Cumulative DOE Obligations for the current budget period have been increased by DOE to $11,178,423.00, the Participants obligation for the current budget period shall be increased to a total of $3,726,141.00, and the Participant shall be expected to bring the project (covered by the current budget period) to its conclusion within the amount of $14,904,564.00, and there is no commitment by DOE to provide any additional funding to the Participant. This cooperative agreement is subject to a refund of unexpended funds to DOE. ADDITIONAL SPECIAL PROVISIONS TABLE OF CONTENTS
CLAUSE SUBJECT PAGE - ------ ------- ---- I. Cost Share Contributions ....................................... 1 2. Indirect Cost Applied to Teaming Partners' Costs ................ 1 3. Fee I .......................................................... 1 4. Adequate Recognition ............................................ 1 5. U.S. Competitiveness ............................................ 5. Statement of Substantial Involvement ............................ 2 6. Technical Direction ............................................. 3
ADDITIONAL SPECIAL PROVISIONS 1. COST SHARE CONTRIBUTIONS ------------------------ It is the intention of the Government and the Participant to share the allowable and allocable costs of performance of the work during this Agreement as set forth herein. The Government's contribution and support for this Agreement during the project period September 30, 1997 through March 31, 2000 will be $11,178,423.00. The Participant will contribute $3,726,141.00 toward the aforementioned budget period. It is the intention of the Government and the Participant to share the total allowable and allocable costs of performance during the project period on a 75.0 percent (Government) and 25.0 percent (Participant) based on total cost of the project, see Block No. 16a.(6) of the Notice of Financial Assistance Award, face page. It is understood by the parties that the DOE share of this budget period is $11,178,423.00 and no additional Federal funding will be provided notwithstanding the total cost of the project at completion. The cost sharing formula zero percent (Government) and 100 percent (Participant) shall apply to any increase in the Total Approved Budget. 2. INDIRECT COST APPLIED TO TEAMING PARTNERS' COSTS ------------------------------------------------ Notwithstanding applicable cost principals, and allowable and allocable costs for performance of the work under this Agreement, indirect costs charged by the Participant to subaward(s) (Teaming Partners) shall not exceed 5% of the subaward total costs. Any indirect costs above the ceiling restriction shall be unallowable and shall be absorbed by the Applicant without reimbursement by the Government under any other Government contract, financial assistance or any subcontract under any other Government prime contract or financial assistance. 3. FEE --- No fee shall be paid to the Recipient or any subaward for performance under this Agreement. 4. ADEQUATE RECOGNITION -------------------- It is agreed that the Participant shall obtain adequate recognition of the United States support for the technology developed under this cooperative agreement in any contracts, licenses, or other agreements which involve the transfer to foreign entities of the fuel cell technology developed in whole or in part at Government expense. The Participant agrees to notify and obtain concurrence from the Assistant Secretary for Energy Efficiency and Renewable Energy or designee in writing of the adequate recognition obtained prior to entering into any such contracts, licenses, or other agreements. The Awardee shall not enter into any such contracts, licenses, or other agreements without the concurrence of the Assistant Secretary for Energy Efficiency and Renewable Energy or designee. The determination of whether to grant such concurrence shall be at the sole discretion of the Assistant Secretary for Energy Efficiency and Renewable Energy or designee and is not subject to litigation under 10 CFR (S)600.22, Disputes and Appeals. The determination shall be in writing and shall be furnished to the Awardee by the Contracting Officer. Examples of such an adequate recognition could include: (1) a commitment to manufacture in the U.S.A.; (2) a requirement to reimburse the U.S. Government for its R&D costs; and/or (3) a commitment to jointly sponsor the R&D program. 5. U.S. COMPETITIVENESS -------------------- The Contractor agrees that any products embodying any waived invention or produced through the use of any waived invention will be manufactured substantially in the United States, unless the Contractor can show to the satisfaction of DOE that it is not commercially feasible to do so. The Contractor further agrees to make the above condition binding on any assignee or licensee or any entity otherwise acquiring rights to any waived invention, including subsequent assignees or licensees. Should the Contractor or other such entity receiving rights in any waived invention undergo a change in ownership amounting to a controlling interest, then the waiver, assignment, license, or other transfer of rights in the waived invention is suspended until approved in writing by DOE. 6. STATEMENT OF SUBSTANTIAL INVOLVEMENT ------------------------------------ The Department of Energy (Department, DOE) will be substantially involved in all Tasks of the Statement of Work. The Department will collaborate with the participant in evaluating, accepting, and achieving the milestones for research as proposed by the respondent. The Department will provide technical direction to the overall program, as well as the individual program elements as it is determined to be necessary and appropriate by DOE. The Department will participate during the full duration of the project, and will have continuing rights to conduct ongoing negotiations with the participant regarding the technical direction of the work conducted under this Agreement. The Department staff members will attend meetings and participate in the formation and direction of scope of the key development activities. The DOE Project Officer will participate in the development, review and approval of all proposed statements of work, including subcontractor statements of work, prior to the execution of any subcontract. The Department will review technical progress reports and provide input to these reports as deemed necessary. In addition, the Department will have the right to have National Laboratories or selected private organizations perform independent tests and evaluations of the cooperative agreement's deliverables, thus providing an additional measure of technical progress. The Department may collaborate with the participant in the allocation of funds budgeted for this Agreement. Further, as work progresses, funding needs may change and depending upon availability of funds, the Department may collaborate with the participant to reallocate funds budgeted between the different programs and projects. The Department will thus be actively monitoring all phases of the participant's research and development activities, including participation in the participant's reviews of its contractor's activities and review of the contractor's reports to the participant. The Department will actively participate in the participant's process of reviewing and approving each phase of the proposed programs and projects. The substantial involvement by the Department under this Agreement will remain in effect for the term of the cooperative agreement award unless otherwise amended in writing by the Contracting Officer. Moreover, this statement of substantial involvement by the Department does not increase the Department of Energy's liability under the Agreement award. 7. TECHNICAL DIRECTION ------------------- A. The work to be performed by the Participant under this Cooperative Agreement is subject to the surveillance and written Technical Direction of a "DOE Project Officer," identified in block 11 of the face page. The term "Technical Direction" is defined to include, without limitation, the following: 1. Directions to the Participant which redirects the work effort, shifts work emphasis between work areas or tasks, require pursuit of certain lines of inquiry, fill in details or otherwise provide technical guidance to the Participant in order to accomplish the tasks and requirements stated in the Statement of Work as contained in the agreement. 2. Provision of information to the Participant which assists in the interpretation of drawings, specifications or technical portions of the Statement of Work as contained in the Agreement. 3. Review and, where required by the Cooperative Agreement, approval of technical reports, drawings, specifications or technical information to be delivered by the Participant to DOE under the Cooperative Agreement. 4. The DOE Project Officer shall monitor the Participant's performance with respect to compliance with the requirements of this Cooperative Agreement. B. Technical direction and management surveillance shall not impose tasks or requirements upon the Participant additional to or different from the tasks and requirements stated in the Statement of Work of this Agreement. The Technical Direction to be valid: 1. Must be issued in writing consistent with the tasks and requirements stated in the Statement of Work of this Agreement; and 2. May not: a. constitute an assignment of additional work outside the tasks and requirements stated in the Statement of Work of this Agreement; b. in any manner cause an increase or decrease in the total estimated project cost or the time required for project performance; C. change any of the expressed terms, conditions or specification of the Cooperative Agreement; or d. accept non-conforming work. C. The Participant shall proceed promptly with the performance of Technical Directions duly issued by the DOE Project Officer in the manner prescribed by paragraph B. above and which are within his authority under the provisions of paragraph A. above; provided, however, that the Participant shall immediately cease the performance of any Technical Direction upon receipt of a written instruction to that effect from the Contracting Officer. D. If in the opinion of the Participant any Technical Direction issued by the DOE Project Officer is within one of the categories as defined in B.2. (a) through (d) above, the Participant shall not proceed but shall notify the Contracting Officer in writing within five working days after the receipt of any such Technical Direction and shall request the Contracting Officer to rescind such direction or mutually agree to modify the agreement accordingly. E. The only persons authorized to give Technical Direction to the Participant under this Agreement are the Contracting Officer and any "DOE Project Officer" as listed in Block 11 of the face page. Any action taken by the Participant in response to any direction given by any person other than the Contracting Officer or DOE Project Officer shall not be binding upon the Government. Mechanical Technology Incorporated 36 U.S. Department of Energy FEDERAL ASSISTANCE REPORTING CHECKLIST 1. Identification Number: DE-FC02-97EE50472 2. Program/Project Title: Integrated Power System for Transportation 3. Recipient: Plug Power, LLC Pl William D. Ernst
4. Reporting Requirements: Frequency No. of Copies Addressees --------- ------------- ---------- PROGRAM/PROJECT MANAGEMENT REPORTING See Block 5 below [x] DOE F 4600.3, "Federal Assistance Milestone Plan" Y Orig + 2 Orig C & 2 cy to D [x] DOE F 4600.3A, "Milestone Log" M Orig + 2 Orig C, & 2 cy to D [x] DOE F 4600.4, "Federal Assistance Budget Information" A Orig + 2 Orig B, C, & D [x] Program Management Plan, (See Attachment 1) Y Orig + 4 Orig + 1cy C & 3 to D [x] DOE F 4600.6, "Federal Assistance Program/Project Status Report" M Orig + 2 Orig C, & 2 cy to D [x] SF-269A, "Financial Status Report" Long Form M Orig + 2 Orig B, C, & E TECHNICAL INFORMATION REPORTING [x] Biweekly Technical Progress Report Every Other FAX FAX to C and D below Week [x] Technical Progress Report** Q Orig + 4 Orig + 1cy C, 3 D [x] Topical Report** A Orig + 4 Orig + 1cy C, 3 cy D [x] Final Technical Report** F Orig + 4 Orig + 1cy B, 2 C, 1 D [x] Review Meeting/Meeting Agenda--10 days prior to any meeting. Q Orig + 2 Orig C, & 2cy to D
FREQUENCY CODES AND DUE DATES: A - As Necessary; within 5 calendar days after events. F - Final; 90 calendar days after the performance of the effort ends. Q - Quarterly; within 30 days after the end of calendar quarter or portion thereof. O - One time after project starts; within 30 days after award. X - Required with proposals or the application or with significant planning changes. Y - Yearly; 30 days after the end of program year. (Financial Status Reports 90 days). S - Semiannually; within 30 days after end of program fiscal half year. Special Instructions: ** All scientific, technical documents, and technical reports i.e. monthly, quarterly, annual progress reports, periodic scientific, topical, final report, and conference papers shall be submitted with 2 copies of DOE Form 1332.15, Recommendations for the Announcement and Distribution of -------------------------------------------------------- Department of Energy (DOE) Scientific and Technical Information (STI). --------------------------------------------------------------------- MAIL REPORTS TO: Original--Contracting Officer U.S. Department of Energy Chicago Operations Office 9800 South Cass Avenue Argonne, Illinois 60439 JoAnn Milliken, EE-32 D. Walt Podolski Department of Energy Argonne National Laboratory 1000 Independence Ave. Building No. 205 Washington, DC 20585-0121 Argonne, Illinois 60439 FAX: (202) 586-9811 FAX: (630) 252-4176 E. Financial Service Group Department of Energy 9800 S. Cass Avenue Argonne, Illinois 60439 - -------------------------------------- -------------------------------------- Prepared by: (Signature and Date) Reviewed by: (Signature and Date) /s/ Donna Lee Ho 12/22/97 - -------------------------------------- -------------------------------------- 37 Replaces Clause No. 04., 48 C.F.R. 952.227-13 Patent Rights 38 52.227-12 Patent Rights - Waiver (JUL 1996), as modified by 10 C.F.R. 784, DOE Patent Waiver Regulations PATENT RIGHTS - WAIVER (JUL 1996) (a) Definitions. As used in this clause: "Background patent" means a domestic patent covering an invention or discovery which is not a Subject Invention and which is owned or controlled by the Contractor at any time through the completion of this contract: (i) Which the Contractor, but not the Government, has the right to license to others without obligation to pay royalties thereon, and (ii) Infringement of which cannot reasonably be avoided upon the practice of any specified process, method, machine. manufacture or composition of matter (including relatively minor modifications thereof) which is a subject of the research, development, or demonstration work performed under this contract. "Contract" means any contract, grant, agreement, understanding, or other arrangement, which includes research, development, or demonstration work, and includes any assignment or substitution of parties. "DOE Patent Waiver regulations" means the Department of Energy patent waiver regulations at 10 CFR Part 784. "Invention" as used in this clause, means any invention or discovery which is or may be patentable or otherwise protectable under Title 33 J5 of the United States Code or any novel variety of plant that is or may be protectable under, the Plant Variety Protection Act (7 U.S. 2321 et seq.) "MADE" when used In relation to any invention means the conception or first actual reduction to the practice of such invention. Nonprofit Organization means a university or other institution of higher education or an organization of the type described in section .501(c)(3) of the Internal Revenue Code of 195426 U.S.C. 501(c) and exempt from taxation under section 301(a) of the Internal Revenue Code (26 U.S.C. 501 (a)) or any nonprofit scientific or educational organization qualified under a state nonprofit organization statute. Patent Counsel means the Department of Energy Patent Counsel assisting the procuring activity. Practical application means to manufacture, in the case of a composition or product; to practice in the case of a process or method, or to operate, in the case of a machine or system: and, in each case, under such conditions as to establish that the invention is being utilized and that its 39 benefits are, to the extent permitted by law or Government regulations, available to the public on reasonable terms. Secretary means the Secretary of Energy. Small business firm means a small business concern as defined at Section 2 of the Pub. L. 85-536 (15 U.S.C. 632) and implementing regulations of the Administrator of the Small Business Administration. For the purpose of this clause, the size standards for small business concerns involved in Government procurement and subcontracting at 13 CFR 121.3-8 and 13 CFR 121.3-12, respectively, will be used. Subject invention means any invention of the Contractor conceived or first actually reduced to practice in the course of or under this contract, provided that in the case of a variety of plant, the date of determination (as defined in section 4 1 (d) of the Plant Variety Protection Act (17 U.S.C. 21,10 1 (d)) must also occur during the period of contract performance. (b) Allocation of principal rights. Whereas DOE has granted a waiver of rights to subject inventions to the Contractor, the Contractor may elect to retain the entire right, title, and interest throughout he world to each subject invention subject to the provisions of this clause and 35 U.S.C. (S)(S)202 and 203. With respect to any subject invention in which the Contractor elects to retain title, the Federal Government shall have a nonexclusive, nontransferable, irrevocable. paid-up license to practice or have practiced for or on behalf of the United States the subject invention throughout the world. (c) Invention disclosure, election of title, and filing of patent applications by Contractor. (1) The Contractor shall disclose each subject invention to the Patent Counsel within six months after conception or first actual reduction to practice, whichever occurs first in the course of or under this contract, but in any event, prior to any sale, public use, or public disclosure of such invention known to the Contractor. The disclosure to the Patent Counsel shall be in the form of a written report and shall identify the inventors and the contract under which the invention was made. It shall be sufficiently complete in technical detail to convey a clear understanding, to the extent known at the time of the disclosure, of the patent, operation, and physical, chemical, biological, or electrical characteristics of the invention. The disclosure shall also identify any publication, on sale, or public use of the invention and whether a manuscript describing the invention has been submitted for publication and, if so, whether it has been accepted for publication at the time of disclosure. In addition, after disclosure to the Patent Counsel, the Contractor shall promptly notify the Patent Counsel of the acceptance of any manuscript describing the invention for publication or of any or, sale or public use planned by the contractor. (2) The Contractor shall elect in writing whether or not to retain title to any such invention by notifying the Patent Counsel at the time of disclosure or within 8 months of disclosure, as to those countries (including the United States), in which the Contractor will retain title; 40 provided, that in any case where publication, on sale, or public use has initiated the 1-year statutory period wherein valid patent protection can still be obtained in the United States, the period of election of title may be shortened by the Agency to a date that is no more than 60 days prior to the end of the statutory period. The Contractor shall notify the Patent Counsel as to those countries (including the United States) in which the Contractor will retain title not later than 60 days prior to the end of the statutory period. (3) The Contractor shall file its United States patent application within 1-year after election, but not later than at least 60 days prior to the end of any statutory period wherein valid patent protection can be obtained in the United States after a publication, on sale, or public use. The Contractor shall file patent applications in additional countries (including the European Patent Office and under the Patent Cooperation Treaty) within either 10 months of the corresponding initial patent application or 6 months from the date permission is granted by the Commissioner of Patents and Trademarks to file foreign patent applications where foreign filing has been prohibited by a Secrecy Order. (4) Requests for extension of the time for disclosure to the Patent Counsel, election, and filing may, at the discretion of DOE, be granted, and will normally be granted unless the Patent Counsel has reason to believe that a particular extension would prejudice the Governments interest. (d) Condition when the Government may obtain title notwithstanding an existing waiver. The Contractor shall convey to DOE, upon written request, title to any subject invention. (1) If the Contractor elects not to retain title to a subject invention. (2) If the Contractor fails to disclose or elect the subject invention within the times specified in paragraph (c) of this clause (provided that DOE may only request title within 60 days after learning of the Contractor's failure to report or elect within the specified times). (3) In those countries in which the Contractor falls to file patent applications within the times specified in paragraph (c) of this clause provided, however, that if the Contractor has filed, a patent application in a country after the times specified in paragraph (c) of this clause, but prior to its receipt of the written request of DOE, the Contractor shall continue to retain title in that country. (4) In any country in which the Contractor decides not to continue the prosecution of any application for, to pay the maintenance fees on, or defend in re-examination or opposition proceeding on, a patent on a subject invention, or (5) If the waiver authorizing the use of this clause is terminated as provided in paragraph (p) of this clause. 41 (e) Minimum Rights Contractor when the Government retains title. (1) The Contractor shall retain a non-exclusive Royalty-Free license throughout the world each subject invention to which the Government obtains title under paragraph (d) of this clause except if the Contractor fails to disclose the subject invention within times specified in paragraph (c) of this clause. The Contractor's license extends to its domestic subsidiaries and affiliates if any, within the corporate Structure of which the Contract or is a part and includes the right to grant sublicenses of the same scope to the extent the Contractor was legally obligated to do so at the time the contract was Awarded. The license is transferable only with the approval of DOE except when transferred to the successor of the part of the Contractor's business to which the invention pertains. (2) The Contractor's domestic license may be revoked or modified by DOE to the extent necessary to achieve expeditious practical application of the subject invention pursuant to an application for an exclusive license submitted in accordance with applicable provisions in 37 CFR part 404 and DOE licensing regulations. This license shall not be revoked in that field of use or the geographical areas in which the Contractor has achieved practical application and continues to make the benefits of the invention reasonably accessible to the public. The license in any foreign country may be revoked or modified at the discretion of DOE to the extent the Contractor, its licensees, or its domestic subsidiaries or affiliates have failed to achieve practical application in that foreign country. (3) Before revocation or modification of the license, DOE shall furnish the Contractor a written notice of its intention to revoke or modify the license, and the Contractor shall be allowed 30 days (or such other time as may be authorized by DOE for good cause shown by the Contractor) after the notice to show cause why the license should not be revoked or modified. The Contractor has the right to appeal, in accordance with applicable agency licensing regulations and 37 CFR part 404 concerning the licensing of Government-owned inventions, any decision concerning the revocation or modification of its license. (f) Contractor action to protect the Government's interest. (1) The Contractor agrees to execute or to have executed and promptly deliver to DOE all instruments necessary to: (i) establish or confirm the rights the Government has throughout the world in those subject inventions to which the Contractor elects to retain title, and (ii) convey title to DOE when requested under paragraphs (d) and (n)(2) of this clause, and to enable the Government to obtain patent protection throughout the world in that subject invention. (2) The Contractor agrees to require, by written agreement, its employees, other than clerical and nontechnical employees, to disclose promptly in writing to personnel identified as responsible for the administration of patent matters and in a format suggested by the Contractor 42 each subject invention made under contract in order that the Contractor can comply with the disclosure provisions of paragraph (c) of this clause, and to execute all papers necessary to file patent applications on subject inventions and establish the Government's right in the subject inventions. This disclosure format should require, as a minimum, the information required by paragraph (c)(1) of this clause. The Contractor shall instruct such employees through employee agreements or other suitable educational programs on the importance of reporting inventions in sufficient time to permit the filing of patent applications prior to U.S. Foreign statutory bars. (3) The Contractor shall notify DOE of any decision not to continue the prosecution of a patent Application, pay maintenance fees, or defend in a reexamination or opposition on a patent, in any Country, not less than 330 days before the expiration of the response period required by the relevant patent office. (4) The Contractor agrees to include, within the specification of any United States patent application and any patent issuing thereon Covering a subject invention, the following statement: this invention was made with Government support under (identify its Contract) awarded by DOE. The Government has certain rights in this invention. (5) The Contractor shall establish and maintain active and effective procedures to assure that subject, inventions are promptly identified and disclosed to Contractor personnel responsible for patent matters within 6 months of conception and/or first actual reduction to practice, whichever occurs first in the course of or under this contract. These procedures shall include the maintenance of laboratory notebooks or equivalent records and other records as are reasonably necessary to document the conception and/or the first actual reduction to practice of subject inventions, and records that show that the procedures for identifying and disclosing the inventions are followed. Upon request, the Contractor shall furnish the Patent Counsel a description of such procedures for evaluation and for determination as to their effectiveness. (6) The Contractor agrees, when licensing a subject invention, to arrange to avoid royalty charges on acquisitions involving Government funds, including funds derived through Military Assistance Program of the Government or otherwise derived through the Government; to refund any amounts received as royalty charges on the subject invention in acquisitions for, or on behalf of, the Government; and to provide for such refund in any instrument transferring rights in the invention to any party. (7) The Contractor shall furnish the Patent Counsel the following: (i) Interim reports every 12 months (or such longer period as may be specified by the Patent Counsel) from the date of the contract, listing subject inventions during that period and certifying that all subject inventions have been disclosed or that there are no such inventions. 43 (ii) A final report, within 3 months after completion of the contracted work, listing all subject inventions or certifying that there were no such inventions, and listing all subcontracts at any tier containing a patent rights clause or certifying that there were no such subcontracts. (8) The Contractor shall promptly notify the Patent Counsel in writing upon the award of any subcontract at any tier containing a patent rights clause by identifying the subcontractor, the applicable patent rights clause, the work to be performed under the subcontract, and the dates of award and estimated completion. Upon request of the Patent Counsel, the Contractor shall furnish a copy of such subcontract, and no more frequently than annually, a listing of the subcontracts that have been awarded. (9) The Contractor shall provide, upon request, the filing date, serial number and title, a copy of the patent application (including an English-language version if filed in a language other than English), and patent number and issue date for any subject invention for which the Contractor has retained title. (10) Upon request, the Contractor shall furnish the Government an irrevocable power to inspect and make copies of the patent application file. (g) Subcontracts. (1) Unless otherwise directed by the Contracting Officer, the Contractor shall include the Clause at 4S CM 952.227-T 1, suitably modified to identify the parties, in all subcontracts regardless of the tier for experimental, developmental, or research work to be performed by a small business firm or nonprofit organization except where the work of the subcontract is subject to Exceptional Circumstances Determination by DOE. In all other subcontracts, regardless of tier, for experimental, developmental, demonstrative or research work, the Contractor shall include the patent rights clause at 48 CFR 952.227-13 (suitably modified to identify the parties). (2) The Contractor shall not, as part of the consideration for awarding the subcontract, obtain rights in the subcontractor's subject inventions. (3) In the case of subcontractors at any tier, the Department, the subcontractor, and Contractor agree that the mutual obligations of the parties created by this clause constitute a contract between the subcontractor and the Department with respect to those matters covered by this clause. (4) The Contractor shall promptly notify the Contracting Officer in writing upon the award of any subcontract at any tier containing a patent rights clause by identifying the subcontractor, the applicable patent rights clause, the work to be performed under the subcontract, and the dates of award and estimated completion. Upon request of the Contracting Officer, the Contracting Officer shall furnish a copy of such subcontract, and, no more frequently than annually, a listing of the subcontracts that have been awarded. 44 (h) Reporting on utilization of subject inventions. The Contractor agrees to submit on request periodic reports no more frequently than annually on the utilization of a subject invention or on efforts at obtaining such utilization that are being made by the Contractor and any of its licensees or assignees. Such reports shall include information regarding the status of development, date of first commercial sale or use, gross royalties received by the Contractor, and such other data and information as DOE may reasonably specify. The Contractor also agrees to provide additional reports as may be requested by DOE in connection with any march-in proceedings undertaken by DOE in accordance with paragraph (0) of this clause. To the extent data or information supplied under this paragraph is considered by the Contractor, its licensee or assignee to be privileged and confidential and is so marked, DOE agrees that, to the extent permitted by law, it shall not disclose such information to persons outside the Government. (i) Preference for United States industry. Notwithstanding any other provision of this clause, the Contractor agrees that neither it nor any assignee will grant to any person the exclusive right to use or sell any subject invention in the United States unless such person agrees that any products embodying the subject invention will be manufactured substantially in the United States. However, in individual cases, the requirement for such an agreement may be waived by DOE upon a showing by the Contractor or its assignee that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. (j) March-lin rights. The Contractor agrees that with respect to any subject invention in which it has acquired title, DOE has the right in accordance with the procedures in 48 CFR 27.304-1 (g) to require the Contractor, an assignee, or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants upon terms that are reasonable under the circumstances, and if the Contractor, assignee, or exclusive licensee refuses such a request. DOE has the right to grant such a license itself if DOE determines that the Contractor or assignee has not taken, or is (1) Such action is necessary because the Contractor or assignee has not taken or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject Invention in such field of use; (2) Such action is necessary to alleviate health or safety needs which are not reasonably satisfied by the Contractor, assignee, or their licensees or (3) Such action is necessary to meet requirements for public use specified by Federal regulations and such requirements are not reasonably satisfied by the Contractor, assignee, or licensees; or 45 (4) Such action is necessary because the agreement required by paragraph (1) of this clause has not been obtained or waived or because a licensee of the exclusive right to use or sell any subject invention in the United States is in breach of such agreement. (k) Background Patents. (1) The Contractor agrees: (i) to grant to the Government a royalty-free, nonexclusive license under any Background Patent for purposes of practicing a subject of this contract by or for the Government in research, development, and demonstration work only. (ii) that, upon written application by DOE, it will grant to responsible parties for purposes of practicing a subject of this contract, nonexclusive licenses under any Background Patent on terms that are reasonable under the circumstances. If, however, the Contractor believes that exclusive or partially exclusive rights are necessary to achieve expeditious commercial development or utilization, then a request may be made to DOE for DOE approval of such licensing by the Contractor. (2) Notwithstanding paragraph (k)(1)(ii), the Contractor shall not be obligated to license any Background Patent if the Contractor demonstrates to the satisfaction of the Secretary or his designee that: (i) a competitive alternative to the subject matter covered by said Background Patent is commercially available from one or more other sources, or (ii) the Contractor or its licensees are supplying the subject matter covered by said Background Patent in sufficient quantity and at reasonable prices to satisfy market needs, or have taken effective steps or within a reasonable time are expected to take effective steps to so supply the subject matter. (1) Communications. All reports and notifications required by this clause shall be submitted to the Patent Counsel unless otherwise instructed. (m) Other Inventions. Nothing contained in this clause shall be deemed to grant to the Government any rights with respect to any invention other than a subject invention, except, with respect to Background Patents, above. (n) Examination of records relating to inventions. (1) The Contracting Officer or any authorized representative shall, until 3 years after final payment under this contract, have the right to examine any books (Including laboratory notebooks), records, and documents of the Contractor relating to the conception or first actual 46 reduction to practice of inventions in the same field of technology as the work under this contract to determines whether (ii) The Contractor has established and maintains the procedures required by paragraphs (f)(2) and (f)(5) of this clause, and (iii) The Contractor and its inventor have complied with the procedures. (2) If the Contracting Officer determines that an inventor has not disclosed a subject invention to the Contractor in accordance with the procedures required by paragraph (f)(5) of this clause, the Contracting Officer may, within 60 days after the determination, request title in accordance with paragraphs (d)(2) and (d)(3) of this clause. However, if the Contractor establishes that the failure to disclose did not result from the Contractor's fault or negligence, the Contracting Officer shall not request title. (3) If the Contracting Officer learns of an unreported Contractor invention which the Contracting Officer believes may be a subject invention, the Contractor may be required to disclose the invention to DOE for a determination of ownership rights. (4) Any examination of records under this paragraph shall be conducted in such a mariner as to protect the confidentiality of the information involved. (o) Withholding of payment. NOTE: This paragraph does not apply to subcontracts or grants. (1) Any time before final payment under this contract, the Contracting Officer may, in the Government's interest, withhold payment until a reserve nor exceeding $50,000 or 5 percent of the amount of the contract, whichever is less, shall have been set aside if, in the Contracting Officer's opinion, the Contractor fails to-- (i) Establish, maintain, and follow effective procedures for identifying and disclosing subject inventions pursuant to paragraph (f)(5) of this clause-, (ii) Disclose any subject invention pursuant to paragraph (c) (17) of this clause-, (iii) Deliver acceptable interim reports pursuant to paragraph (f)(7)(I) of this clause-, or (iv) Provide the information regarding subcontracts pursuant to paragraph (f)(6) of this clause, (v) Convey to the Government, using a DOE approved form, the title and/or rights of the Government in each subject invention as required by this clause. (2) Such reserve or balance shall be withheld until the Contracting Officer has determined that the Contractor has rectified whatever deficiencies exist and has delivered all reports, disclosures, and other information required by this clause. (3) Final payment under this contract shall not be made before the Contractor delivers to the Patent Counsel all disclosures of subject inventions required by paragraph (c)(1) of this clause, an acceptable final report pursuant to paragraph (ff)(7) 47 (ii) of this clause, and all past "DOE confirmatory instruments," and the Patent Counsel has issued a patent clearance certification to the Contracting Officer. (4) The Contracting Officer may decrease or increase the sums withheld up to the maximum authorized above. If the maximum amount authorized above is already being withheld under other provisions of the contract, no additional amount shall be withheld under this paragraph. The withholding of any amount or the subsequent payment thereof shall not be construed as a waiver of any Government right. (5) Waiver Terminations. Any waiver granted to the Contractor authorizing the use of this clause (including any retention of rights pursuant thereto by the Contractor under paragraph (b) of this clause) may be terminated at the discretion of the Secretary or his designee in whole or in part if the request for waiver by the Contractor is found to contain false material statements or nondisclosure of material facts, and such were specifically relied upon by DOE in reaching the waiver determination. Prior to any such termination, the Contractor will be given written notice stating the extent of such proposed termination and the reasons therefor, and a period of 30 days, or such longer period as the Secretary or his designee shall determine for good cause shown in writing, to show cause why the waiver of rights should not be so terminated. Any waiver termination shall be subject to the Contractor's minimum license as provided in paragraph (e) of this clause. (q) Atomic Energy. No claim for pecuniary award or compensation under the provisions of the Atomic Energy Act of 1954, as amended, shall be asserted by the Contractor or its employees with respect to any invention or discovery made or conceived in the course of or under this contract. (r) Publication. It is recognized that during the course of work under this contract, the contractor or its employees may from time to time desire to release or publish information regarding Scientific or technical developments conceived or first actually reduced to practice in the course of or under this contract. In order that public disclosure of such information will not adversely affect the patent interests of DOE or the contractor, approval for release of publication shall be secured from Patent Counsel prior to any such release or publication. In appropriate circumstances, and after consultation with the contractor, Patent Counsel, may waive the rights of prepublication review. (s) Forfeiture of rights in unreported subject inventions. (1) The contractor shall forfeit and assign to the Government, at the request of the Secretary of Energy or designee, all rights in any subject invention which the contractor fails to report to Patent Counsel within six months after the time the contractor: (i) Files or causes to be filed a United States or foreign patent application thereon, or (ii) Submits the final report required by paragraph (e)(2)(ii) of this clause, whichever is later. (2) However, the contractor shall not forfeit rights in a subject invention, if within the time specified in paragraph (m)(l) of this clause, the contractor: (i) Prepares a written decision based upon a review of the record that the invention was neither conceived nor first actually reduced to practice in the course of or under the contract and delivers the decision to Patent Counsel, with a copy to the Contracting Officer; (ii) Contending that the subject invention and all facts pertinent to this contention to the Patent Counsel, with a copy to the Contracting Officer, or (iii) Establishes that the failure to disclose did not result from the contractor's fault or negligence. (3) Pending written assignment of the patent application and patents on a subject invention determined by the Contracting Officer to be forfeited (such determination to be a Final Decision under the Disputes clause of this contract), the contractor shall be deemed to hold the invention and the patent applications and patents pertaining thereto in trust for the Government. The forfeiture provision of this paragraph shall be in addition to and shall not supersede any other rights and remedies which the Government may have with respect to subject inventions. (t) U.S. COMPETITIVENESS The Contractor agrees that any products embodying any waived invention or produced through the use of any waived invention will be manufactured substantially in the United States unless the Contractor can show to the satisfaction of the DOE that it is not commercially feasible to do so. The Contractor further agrees to make the above condition binding on any assignees or licensees or any entity otherwise acquiring rights to any waived invention, including subsequent assignees or licensees. Should the Contractor or other such entity receiving rights in any waived invention undergo a change in ownership amounting to a controlling interest, then the waiver, assignment, license or other transfer of rights in the waived invention is suspended until approved in writing by DOE. In the event DOE agrees to foreign manufacture, there will be a requirement that the Government's support of the technology be recognized in some appropriate manner, e.g., recoupment of the government's investment, etc. (End of clause) 48 MECHANICAL TECHNOLOGY INC. March 13, 1997 U.S. Department of Energy Chicago Operations Office 9800 South Cass Avenue Argonne, Illinois 60439 ATT: Mr. Brian Cass Executive Secretary Building. 201, Room 3E-19 Dear Mr. Cass: SUBJ: PRDA DE-RA02-97EE50443 Mechanical Technology Incorporated is pleased to submit herewith its proposal, "Integrated Power System for Transportation". Enclosed are eight (8) copies each of the cost and technical proposal, including all the supporting details Any technical matters pertaining to this proposal should be directed to Dr. William D. Ernst (518-785-2859); all other matters should be directed to Mr. William P. Surnigray (518-785-2276). Very truly yours, Dr. William D. Ernst, Manager Power & Energy Systems Enclosures MECHANICAL TECHNOLOGY INC. 96 ALBANY-SHAKER ROAD LATHAM, NEW YORK 12110518f785.2211 FAX (518) 785-2420 or 2127 EX-10.17 9 COOPERATIVE AGREEMENT CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. Exhibit 10.17 - -------------------------------------------------------------------------------- FORM CD-450 U.S. DEPARTMENT OF COMMERCE (REV. 10-93) COOPERATIVE DAO 203-26 |_| GRANT |X| AGREEMENT -------------------------- FINANCIAL ASSISTANCE AWARD ACCOUNTING CODE **SEE BELOW - -------------------------------------------------------------------------------- RECIPIENT NAME AWARD NUMBER Plug Power, LLC 70NANB8H4039 - -------------------------------------------------------------------------------- STREET ADDRESS FEDERAL SHARE OF COST 968 Albany-Shaker Road $ 4,737,848.00 - -------------------------------------------------------------------------------- CITY, STATE, ZIP CODE RECIPIENT SHARE OF COST Latham, NY 12110 $ 5,000,000.00 - -------------------------------------------------------------------------------- AWARD PERIOD TOTAL ESTIMATED COST 01/01/1999 - 12/31/2000 $ 9,737,848.00 - -------------------------------------------------------------------------------- DEPARTMENT OF COMMERCE OPERATING UNIT NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY GRANTS OFFICE BUILDING 301, ROOM B129, GAITHERSBURG, MARYLAND 20899-0001 - -------------------------------------------------------------------------------- AUTHORITY P.L.100-418, Section 5131 (codified at 15 USC 278n) as modified by P.L.102-245 - -------------------------------------------------------------------------------- PROJECT TITLE Distributed Premium Power Fuel Cell Systems Incorporating Novel Materials and Assembly Techniques under Advanced Technology Program (ATP) 98-03 - -------------------------------------------------------------------------------- This Award approved by the Grants Officer is issued in triplicate and constitutes an obligation of Federal funding. By signing the three documents, the Recipient agrees to comply with the Award provisions checked below and attached. Upon acceptance by the Recipient, two signed Award documents shall be returned to the Grants Officer and the third document shall be retained by the Recipient. If not signed and returned by the Recipient within 15 days of receipt, the Grants Officer may declare this Award null and void. |X| Department of Commerce Financial Assistance Standard Terms and Conditions |X| Special Award Conditions |X| Line Item Budget PLEASE RETAIN FOR YOUR RECORDS |_| 0MB Circular A-21, Cost Principles for Educational Institutions |_| 0MB Circular A-87, Cost Principles for State and Local Governments |X| 0MB Circular A-110, Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit Organizations Uniform Administrative Requirements |_| 0MB Circular A-122, Cost Principles for Nonprofit Organizations |_| 15 CFR Part 24, Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments |_| 15 CFR Part 29a, Audit Requirements for State and Local Governments |_| 15 CFR Part 29b, Audit Requirements for Institutions of Higher Education and Nonprofit Organizations |X| 48 CFR Part 31, Contract Cost Principles and Procedures |X| Other(s): General Terms and Conditions Advanced Technology Program-9/98, Program- Specific Audit Guidelines for Advanced Technology Program - Joint Venture - 11/96 **ACCOUNTING CODE: CC:8/474-0342 Obj. Cl. 4110 Req. No. 8/474-4273 $2,760,011.00 B-AE93-N-C-F-N-A-36-41399 EIN: 16-1528998 474/G. Ceasar - -------------------------------------------------------------------------------- SIGNATURE OF DEPARTMENT OF COMMERCE GRANT OFFICER TITLE DATE Shamim A. Shaikh /s/ Shamim A. Shaikh Grants Officer 9/30/98 - -------------------------------------------------------------------------------- TYPED NAME AND SIGNATURE OF AUTHORIZED RECIPIENT OFFICIAL TITLE DATE /s/ [ILLEGIBLE] Pres & CEO - -------------------------------------------------------------------------------- ELECTRONIC FORM 3 SPECIAL AWARD CONDITIONS ADVANCED TECHNOLOGY PROGRAM - JOINT VENTURE Plug Power, LLC COOPERATIVE AGREEMENT NO. 70NANB8H4039 1. RECIPIENT JOINT VENTURE ADMINISTRATOR CONTACT The Recipient Joint Venture Administrator Contacts' name, title, address, and telephone number are: (Technical) Dr. William Ernst Vice President & Technical Director Plug Power, LLC 968 Albany-Shaker Road Latham, NY 12110 (518) 785-2859 (Administrative) John Law Manager of Mobile & Government Programs Plug Power, LLC 968 Albany-Shaker Road Latham, NY 12110 (518) 785-2137 2. JOINT VENTURE MEMBER(S) The organization(s) named below have been approved as joint venture member(s) to conduct research described in the Recipient's proposal which is incorporated into this award. Any changes or new member(s) must be approved in writing by the Grants Officer: 1) Plug Power, LLC, Latham, NY 2) W.L. Gore & Associates, Inc., Elkton, MD 3. GRANTS OFFICER The Grants Officers name, address, and telephone number are: Shamim Shaikh National Institute of Standards and Technology Bldg. 301, Room B129 Gaithersburg, MD 20899-0001 (301) 975-6558 4. GRANTS SPECIALIST The Grants Specialist's name, address, and telephone number are: Timothy M. Lynch National Institute of Standards and Technology Bldg. 301, Room B129 Gaithersburg, MD 20899-0001 (301) 975-6621 5. PROJECT MANAGEMENT a. The Technical Project Manager's name, address, and telephone number are: Gerald Ceasar National Institute of Standards and Technology Bldg. 101, Room A225 Gaithersburg, MD 20899-0001 (301) 975-5069 b. The Business Project Manager's name, address, and telephone number are: Frank Power National Institute of Standards and Technology Bldg. 101, Room A225 Gaithersburg, MD 20899-0001 (301) 975-5057 6. PROJECT DESCRIPTION All research shall be conducted in accordance with the Recipient's proposal dated April 7, 1 998, and revised budget dated August 12, 1998. 7. FUNDING LIMITATIONS The scope of work and budget incorporated into this award covers a two-year period (referred to as the "project period") for a total amount of $4,737,848.00 in Federal funds. However, Federal funding available at this time is limited to $2,760,011.00 for the first year period (referred to as the "budget period"). Receipt of any additional funding up to the level projected under this award is contingent upon the availability of funds from Congress, satisfactory performance, and will be at the sole discretion the National Institute of Standards and Technology (NIST). The Recipient may not obligate, incur any expenditures, nor engage in any commitments which involve any amount in excess of the Federal amount presently available. No legal liability exists or will result on the part of the Federal Government for payment of any portion of the remaining funds which have not been made available under the award. If additional funds are not made available, any expenses incurred related to closeout activities must be funded from the amount already made available under this award. The notice of availability or non-availability of additional funding for the second and final year(s) will be made in writing by the Grants Officer. Only the Grants Officer is authorized to obligate funds. No other verbal or written notice should be relied upon by the Recipient. The Grants Officer's written notification shall be made prior to or no later than 30 days Special Award Conditions/ATP-JV/09-98 after the expiration of each year's activities. Anticipated Future Funding: Year 2: $1,977,837.00 (From 01/01/00 to 12/31/00) 8. JV CONTINGENCY: NO costs (Federal or Non-Federal) shall be incurred or charged to this cooperative agreement until the Grants Officer has received and approved in writing the following: A. The Joint Venture (JV) Agreement which must include, but is not limited to, the following provisions: (a) a Power of Attorney clause, which designates an organization to serve as the collaboration's Administrator and to enter into this cooperative agreement for and on behalf of the entire JV; (b) an Intellectual Property Plan, which delineates the disposition of the collaboration's intellectual property; (c) a Governmental Use License, which grants to the Government a right to use the intellectual property created under the ATP-sponsored project; (d) a Precedence clause, which relegates the terms of the JV agreement to those of the NIST cooperative agreement; (e) Addition, Withdrawal and Termination provisions, outlining the collaboration's intended mechanisms for each action; and (f) a Liability and/or Indemnification clause(s), stating the ways in which liability issues will be handled by the collaboration. B. A copy of the notification letter sent to both the Department of Justice and the Federal Trade Commission regarding the JV and its membership and proposed area of technical collaboration. The above documentation must be submitted to the Grants Office within ninety (90) days from the date of the execution of this cooperative agreement award by the Grants Officer. This cooperative agreement may be terminated by the Grants Officer for cause if the fully executed JV agreement is not submitted timely. 9. COST SHARE For the first year period, the cost sharing ratio applicable to this award is the Recipient's contribution of 51.24% ($2,900,000) and NIST's contribution of 48.76% ($2,760,011). Recipients must meet or exceed the cost share ratio on a quarterly financial reporting basis. Special Award Conditions/ATP-JV/09-98 GENERAL TERMS AND CONDITIONS ADVANCED TECHNOLOGY PROGRAM September 1998 1. Order of Precedence of Terms and Conditions of Award 2. Referenced Requirements 3. Modifications of the Award 4. Requirements for Continuing Financial Assistance 5. NIST Project Management Team 6. Substantial Involvement 7. Technical/Business Reports & Plan 8. Prior Approval Requirements 9. Unallowable Costs 10. Purchase of American-Made Equipment and Products 11. Non-Expendable Property 12. Termination 13. Refunds 14. Audits 15. Closeout of Cooperative Agreement 16. Use of Name or Endorsements 17. Publication Guidelines 18. Protection of Human Subjects 19. Care and Use of Vertebrate Animals 20. Bureau of Export Administration (BXA) Clearance 21. North American Free Trade Agreement Patent Notification Procedures 22. Liability 23. Intellectual Property GENERAL TERMS AND CONDITIONS ADVANCED TECHNOLOGY PROGRAM This document applies to all Recipients of the Advanced Technology Program (ATP) Cooperative Agreements. ATP Recipient is defined to include all single company Recipients and each individual company that is identified in the Special Award Conditions and is a signatory to the Joint Venture agreement (approved in writing by the NIST Grants Officer). 1. ORDER OF PRECEDENCE OF TERMS AND CONDITIONS OF AWARD Where the terms of the award and proposal differ, the terms of the award shall prevail. The Recipient is obligated to bring to the attention of the Grants Specialist any perceived difference between any terms and conditions and the proposal. 2. REFERENCED REQUIREMENTS The ATP Rule, 15 CFR Part 25; the ATP Notice of Availability of Funds, 62 Fed. Reg. 65679 (December 15, 1997); and the ATP Proposal Preparation Kit (December 1997), are hereby incorporated into the award by reference. 3. MODIFICATIONS OF THE AWARD The Grants Officer is the ONLY authorized agent at NIST with the authority to bind the Federal Government; and to take actions to amend, suspend, and terminate the cooperative agreement. If either party desires a modification to this award, the parties shall, upon reasonable notice of the proposed modification by the party desiring the change, confer in good faith to determine the desirability of such modification. Such modification shall not be effective until a written award amendment is signed by the Grants Officer and counter-signed by the Recipient. 4. REQUIREMENTS FOR CONTINUING FINANCIAL ASSISTANCE a. With respect to any technology arising from assistance provided by NIST under this award, the Recipient shall promote the manufacture of products resulting from that technology within the United States and shall procure parts and materials from competitive United States suppliers to the extent practical. b. At any time within the life of this award should the Recipient cease to have a majority control or ownership by individuals who are citizens of the United States, the Recipient shall notify the NIST Grants Officer of that fact, in writing, within FIFTEEN (15) days. c. NIST may, within thirty (30) days after notice to Congress, suspend a company from continued assistance under this award if NIST determines that the company or a parent company has failed to satisfy any of the criteria contained in paragraphs a. and b. of this term, and that it is in the national interest of the United States to do so. 5. NIST PROJECT MANAGEMENT TEAM The NIST Project Management Team (PMT) includes an ATP Project Manager, a NIST Grants Specialist, and one or more ATP technical and business specialists. The ATP Project Manager is responsible for working with the Recipient, including making recommendations to the NIST Grants Officer throughout the life of the project to ensure that the project progresses towards the objectives stated in the proposal in an optimal way. The ATP Project Manager (and other members of the PMT as appropriate) shall participate in a project start or kickoff meeting, annual reviews, and a close-out meeting prior to the expiration of the award. The ATP Project Manager is responsible for: a. General oversight and project management functions associated with this cooperative agreement. b. Arranging kickoff meetings, annual review meetings, and final closeout meetings. c. Monitoring the project to ensure that it is executed in accordance with the proposal and this award. Analyzing the quarterly, annual, and final reports, and consulting with other members of the team on issues so as to be able to assess progress or lack thereof. d. Recommending appropriate action to the NIST Grants Officer if the project is failing to meet its objectives or needs administrative assistance to propose modifications to this agreement for evaluation by the Project Team. 6. SUBSTANTIAL INVOLVEMENT A cooperative agreement has been selected as the funding instrument for this project, because of the planned substantial involvement of NIST in the following areas: a. Approval of go/no go decision points at various project stages before subsequent stages of a project may continue; b. Concurrence with subcontract plans in excess of $100,000; c. Approval of key personnel (including such positions as President, Chief Financial Officer, Principal Investigator, and/or Project Manager); d. Approval of changes in Joint Venture membership. General Terms and Conditions/ATP/09-98 7. TECHNICAL/BUSINESS REPORTS AND PLANS The Recipient shall provide access to information throughout the project life cycle that is required to assess the project's progress or lack thereof. In addition to monitoring the technical work, NIST requires business information, pertaining to the project during its life. In addition to monitoring the technical work, NIST requires business information, pertaining to the project during the course and for six years after its end in order to assess progress towards commercialization, the degree of adoption of the technology, and the impact of the project on the economy. When special economic studies or case studies are carried out that involve the Recipient, the ATP Project Manager may delegate the responsibility for coordinating the participation of the Recipient in such studies to a business specialist or the ATP Economic Assessment Office. a. TECHNICAL REPORTING: The Recipient shall submit technical performance reports in triplicate (one original and two copies). Two copies shall be submitted to the ATP Project Manager and the original report to the Grants Officer in the same frequency as the Financial Status Report (SF 269). Technical performance reports shall contain information as prescribed in OMB Circular A-110 Section ___.51. See Attachment A for an optional structure or format for compiling the technical report. The final technical report may not be consolidated with the technical report for the final quarter. b. BUSINESS REPORTING: The Recipient shall submit business reports in accordance with the "Guidelines for Reporting on Business Progress and Economic Impacts" (see Attachment B). 8. PRIOR APPROVAL REQUIREMENTS In addition to the requirements specified in OMB Circular A-110 Section __.25, the following changes require prior written approval from the NIST Grants Officer: a. The transfer of funds among direct cost categories exceeding 10% of the approved total annual budget for each single Recipient or joint venture participant for each approved project year. Recipients are not authorized to create new budget categories without prior approval. b. Revisions to Ownership and/or Dissolution of Recipients (Recipients include the single applicant company and all participants under a Joint Venture Agreement). These changes include but are not limited to: 1) when a company is acquired by, or merges with, any other company, including a foreign company; 2) when the company is no longer majority-owned by U.S. citizens; and 3) when only two for profit companies are participating in a JV and one of them ceases participation. In the first case, the Recipient should include in the written notification to the NIST Grants Officer the following information: date of final acquisition or merger; name and address of any new foreign parent and amount of ownership; whether the Recipient intends to complete its assigned tasks with the same commitment and at the same location; and how this change in ownership will affect the project's projected benefits to the United States. The NIST Grants Officer reserves the right to ask for clarification and/or additional information. In the second case, the Recipient should provide details of the change in ownership and whether it affects the Recipient's assigned tasks in any way. In the third case, the Recipient shall provide details regarding the circumstances of the departure, and plans for replacing the departing company with another for-profit organization. In the event a Recipient requests prior approval for any of the above, the Recipient must provide documentation of the Recipient's intent to notify the Department of Justice and the Federal Trade Commission of these changes and/or deletion of members. 9. UNALLOWABLE COSTS a. Construction of new buildings or extensive renovations of existing laboratory buildings. However, construction of experimental research and development facilities to be located within a new or existing building are allowable provided that the equipment or facilities are essential for carrying out the proposed scientific and technical project and are approved by the Grants Officer. b. Indirect costs for single companies. (However, if a joint venture proposer, indirect costs are allowable. If the company's indirect cost rate is over 100 percent of direct costs, NIST reserves the right to limit such costs.) c. Profit, management fees, interest on borrowed funds, or facilities capital cost of money. d. Bid and proposal (B&P) costs, tuition costs, marketing surveys or commercialization studies, and general business planning unless they are incorporated into a Federally approved indirect cost rate for a joint venture participant. (However, a university participating in an ATP project as a subcontractor or as a joint venture partner may charge ATP for tuition remission or other forms of compensation in lieu of wages paid to General Terms and Conditions/ATP/09-98 2 university students working on ATP projects only as provided in OMB Circular A-21, section J.41.) e. Single company and joint venture participants may not subcontract to another part of the same company or to another company with identical or nearly identical ownership. Work proposed by another part of the same company or by another company with identical or nearly identical ownership should be shown as funded through inter-organizational transfers that do not contain profit. Inter-organizational transfers should be broken down by budget categories in a similar manner to all other tasks. 10. PURCHASE OF AMERICAN-MADE EQUIPMENT AND PRODUCTS Recipients are encouraged, to the greatest extent practicable, to purchase American-made equipment and products with funding provided under this award. 11. NON-EXPENDABLE PROPERTY For Joint Venture awards, title to any equipment purchased under the award that may be in the name of a departing participant and that continues to be needed on the project shall be transferred to the Joint Venture Administrator for continued use on the project. The departing participant shall be compensated by the Joint Venture for its contribution to the purchase of the equipment by applying its percentage of the cost of the equipment to the current fair market value of the equipment. Should the equipment no longer be needed on the project, the departing participant shall request disposition instructions in accordance with OMB Circular A-110, Section __.34. 12. TERMINATION In accordance with OMB Circular A-110, Sections __.61(a)(2) and __.62, this award may be terminated by the mutual consent of NIST and the Recipient, in which case the parties shall agree upon the termination conditions, including the effective end date. In accordance with OMB Circular A-110, Section __.61(a)(1), NIST may also terminate this award if NIST determines that the statutory purposes under 15 USC 278n(a) of the research and technical development funded under the award can no longer be served or the recipient has been determined to be otherwise in material non-compliance with the terms and conditions of the award. 13. REFUNDS The Recipient shall submit all refund checks to the DoC accounting office identified below and notify the Grants Office upon submission. All checks must identify on their face that NIST is funding the award, the award number, and no more than a two-word description to identify the reason for the refund. Submit to: National Institute of Standards and Technology Accounts Receivable Bldg. 101, Room A825 Gaithersburg, MD 20899-0001 14. AUDITS a. ALL ATP Recipients are required to provide sufficient funds in the project multi-year budget to have project audits performed, including audits of all joint venture participants. Subrecipients and subcontractors, including universities, who receive funding under the ATP project totaling more than $300,000 each are also subject to audit to determine the appropriateness of direct and indirect costs charged to the ATP project. b. It is the responsibility of the Recipient to ensure that audits are performed within 90 days of the end of the project period to be audited. The audits may be performed by the Recipient's CPA firm. However, the Department of Commerce Office of Inspector General (DoC/OIG) reserves the right to carry out audits at any time it deems necessary and appropriate. ATP Recipients are required, when requested, to undergo audits (e.g., audits of cost-accounting systems, direct-cost expenditures, indirect cost rates, or other periodic reviews) by the DoC/OIG or a cognizant or oversight Federal agency. c. All audits shall be performed in accordance with the following: (1) For awards less than 24 months, an audit is required within 90 days from the project expiration date. (2) For 2-, 3-, or 4-year awards, an audit is required after the first year and within 90 days from the project expiration date. (3) For 5-year awards, an audit is required after the first year, third year, and within 90 days of the project expiration date. (4) Audits of withdrawing participants must be completed within 90 days of the last date of participation. Audits of all Recipients shall be conducted pursuant to: (1) For both single company and joint venture Recipients, the Government Auditing Standards (GAS), issued by the Comptroller General of the United States (the Yellow Book), in conjunction with two (2) or three (3) below. (2) For single company Recipients only, the NIST Program- General Terms and Conditions/ATP/09-98 3 Specific Audit Guidelines for Advanced Technology Program (ATP) Cooperative Agreements with Single Companies, issued by the DoC/OIG dated November 1996. (3) For joint venture Recipients, the NIST Program-Specific Audit Guidelines for Advanced Technology Program (ATP) Cooperative Agreements with Joint Ventures, issued by the DoC/OIG dated November 1996. The NIST ATP Audit Guidelines are designed to focus on the compliance element of the audit and on information needed by the financial and program managers of the ATP. The internal control element is similar to the requirement under Generally Accepted Government Auditing Standards (GAGAS) and a separate report on Internal Controls will not be required. The Recipient shall submit two copies of the audit report to the NIST Grants Officer and one copy to the Office of the Inspector General as identified in the ATP Audit Guidelines. In the event that the submission of the reporting of the audit conflicts the with Recipient's accounting schedules the Recipient may submit a proposal to the NIST Grants Officer for consideration of an alternative project audit schedule in order to complement the scheduling of commercial audits. The Recipient must submit an alternative schedule within ninety 90 days from the start date for the first budget year. Acceptance of an alternative audit schedule is at the discretion of the NIST Grants Officer and will be evaluated on a case by case basis. 15. CLOSEOUT OF COOPERATIVE AGREEMENT In accordance with the guidelines established in OMB Circular A-110, Subpart D-.71, and the Department of Commerce Standard Terms and Conditions dated November 1998, item number A.06, only those costs associated with compiling the final reports (technical, business, financial, patent, equipment inventory, and closeout audit), shall be allowed during the ninety (90) day closeout period. The closeout meeting with the ATP is not considered a closeout-related activity. Therefore, the Recipient must participate in a closeout (end-of-project) meeting with NIST officials prior to the expiration date of the award. The Recipient must provide adequate funds in the project budget to ensure participation by all appropriate members in the closeout meeting. The NIST Technical Project Manager will provide the Recipient with instructions for the closeout meeting. 16. USE OF NAME OR ENDORSEMENTS a. The Recipient or its subcontractors shall not, without the prior approval of NIST, use the name of NIST or the Department of Commerce on any product or service which is directly or indirectly related to either this award or any patent license or assignment agreement which relates to this award. b. By entering into this award, NIST does not directly or indirectly endorse any product or service provided or to be provided by the Recipient, its successors, assignees, or licensees. The Recipient, or its subcontractors, shall not in any way imply that this award is an endorsement of any such product or service. 17. PUBLICATION GUIDELINES In any publications, the Recipient shall acknowledge support of the technology development by NIST. Normally this is done by a footnote reading, "This work was performed under the support of the U.S. Department of Commerce, National Institute of Standards and Technology, Advanced Technology Program, Cooperative Agreement Number 70NANBXHXXXX," or words to that effect. 18. PROTECTION OF HUMAN SUBJECTS No research involving human subjects is permitted under this award unless expressly authorized by Special Award Condition or otherwise in writing by the Grants Officer. In accordance with Federal policy, a human subject is defined as a living individual about whom an investigator conducting research obtains 1) data through intervention or interaction with the individual, or 2) identifiable private information. Research means a systematic investigation, including research and development, testing and evaluation, designed to develop or contribute to generalizable knowledge. Department of Commerce Regulations, 15 CFR Part 27, require that recipients maintain appropriate policies and procedures for the protection of human subjects. In the event it becomes evident that human subjects may be involved in this project, the Recipient shall submit appropriate documentation to the Grants Officer for review and approval. This documentation may take the form of : a) Documentation establishing approval of the project by an Institutional Review Board qualified under Section 27.103 of Title 15 of the CFR; or b) Documentation to support an exemption for the project from 15 CFR Part 27. No work may be undertaken or conducted, or costs incurred or charged to the project, until the NIST Grants Officer's approval of the above documentation is provided in writing. Failure to meet the above requirements prior to the conduct of activities involving human subjects shall be considered material non-compliance with the terms of the award. The Grants Officer may take appropriate action under Article L.01 General Terms and Conditions/ATP/09-98 4 of the Department of Commerce Financial Assistance Standard Terms and Conditions, including termination of the award. 19. CARE AND USE OF VERTEBRATE ANIMALS No research involving vertebrate animals is permitted under this award unless expressly authorized by Special Award Condition or otherwise in writing by the Grants Officer. The Department of Commerce requires Recipients of financial assistance awards to comply, as applicable, with the Animal Welfare Act as amended, and implementing regulations (7 USC 2131 et seq., 9 CFR parts 1, 2, and 3), and other Federal statutes and regulations relating to animals. In the event it becomes evident that vertebrate animals may be involved in this project, the Recipient shall submit appropriate documentation to the ATP Program Manager: (1) A completed Extramural Animal Study Proposal Form (NIST-1258). (2) Copies of other governmental approvals for Recipient's animal care and use procedures showing the current status and expiration dates of Recipient's USDA Animal Welfare Act registration. A copy of the Animal Welfare assurance from the Office of Protection from Research Risk (OPRR) of the Public Health Service/National Institutes of Health (PHS/NIH) should be provided if available. [NOTE: Recipients housing only rodents or birds within their facilities may not have these assurances and must submit evidence of Association for the Assessment and Accreditation of Laboratory Animal Care (AAALAC) accreditation.] (3) A copy of the Institutional Animal Care and Use Committee (IACUC) approved Animal Study Proposal (ASP) with expiration date. Certification that the Principal Investigator and other personnel involved in the care and use of the animals are trained as required by NIST and the PHS/NIH Guide for the Care and Use of Laboratory Animals should be included in the ASP. No work involving vertebrate animals may be undertaken or conducted, or costs incurred or charged to the project until the NIST Grants Officer's approval of the above documentation is provided in writing. The Recipient must inform the ATP Project Manager in writing of any proposed deviation from procedures involving animals described in Form NIST-1258, any change in personnel and their training, and change in the status of their PHS/NIH assurance or other government inspecting bodies, and the results of any inspections of their animal care facilities that take place during the course of the award. 20. BUREAU OF EXPORT ADMINISTRATION (BXA) CLEARANCE a. The Recipient agrees to adhere to the U.S. Export Administration laws and regulations and shall not export or re-export, directly or indirectly, any technical data created with Government funding under this award to any country for which the United States Government or any agency thereof, at the time of such export or re-export requires an export license or other Governmental approval without first obtaining such licenses or approval and the written clearance of the NIST Grants Officer. b. The Bureau of Export Administration (BXA) shall conduct an annual review for any relevant information about the Recipient. NIST reserves the right to take appropriate action in accordance with Article L.01 of the Department of Commerce Financial Assistance Standard Terms and Conditions, in the event that significant adverse information about the Recipient is reported to the NIST Grants Officer by BXA. 21. NORTH AMERICAN FREE TRADE AGREEMENT PATENT NOTIFICATION PROCEDURES Pursuant to Executive Order 12889, the DoC is required to notify the owner of any valid patent covering technology whenever the DoC or its financial assistance Recipient, without making a patent search, knows (or has demonstrable reasonable grounds to know) that technology covered by a valid United States patent has been or will be used without a license from the owner. To ensure proper notification, if the Recipient uses or has used patented technology under this award without a license or permission from the owner, the Recipient must notify the DoC Patent Counsel at the following address, with a copy to the NIST Grants Officer: Department of Commerce Office of Chief Counsel for Technology Patent Counsel 14th Street and Constitution Avenue, NW Room H-4610 Washington, D.C. 20230 The notification shall include the following information: a. The award number b. The name of the DoC awarding agency c. A copy of the patent d. A description of how the patented technology was used e. The name of the Recipient contact, including an address and telephone number General Terms and Conditions/ATP/09-98 5 22. LIABILITY a. Property The U.S. Government shall not be responsible for damage to or resulting from any property provided to the Recipient, or its subrecipients and subcontractors, or acquired by the Recipient, or its subrecipients and subcontractors, pursuant to this award. b. No Warranty NIST makes no express or implied warranty as to any matter whatsoever, including the conditions of the research or any invention or product, whether tangible or intangible, made, or developed under this award, or the ownership, merchantability, or fitness for a particular purpose of the research or any invention or product made or developed under this award. c. Disclaimer (1) The United States expressly disclaims any and all responsibility to the Recipients or third persons for the actions of the Recipient or third persons resulting in death, bodily injury, property damage, or any other losses resulting in any way from the performance of this award or any subaward or subcontract under this award. (2) The acceptance of this award by the Recipient does not in any way constitute an agency relationship between the United States and the Recipient. d. Force Majeure Neither party shall be liable for any unforeseeable event beyond its reasonable control not caused by the fault or negligence of such party, which causes such party to be unable to perform its obligations under this award (and which it has been unable to overcome by the exercise of due diligence), including, but not limited to: flood, drought, earthquake, storm, fire, pestilence, lightning and other natural catastrophes, epidemic, war, riot, civic disturbance or disobedience, strikes, labor dispute, or failure, threat of failure, or sabotage of the Recipient or subcontractor facilities, or any order or injunction made by a court or public agency. In the event of the occurrence of such a force majeure event, the party unable to perform shall promptly notify the other party. It shall further use its best efforts to resume performance as quickly as possible and shall suspend performance only for such period of time as is necessary as a result of the force majeure event. 23. INTELLECTUAL PROPERTY a. Rights in Data (1) The Government shall have certain rights to use data first produced in the performance of the award, whether or not the data is copyrighted. The Recipient may establish claim to copyright subsisting in any data first produced in the performance of the award. When claim is made to copyright, the Recipient shall affix the applicable copyright notice of 17 U.S.C. 401 or 402 and acknowledgment of Government sponsorship to the data when and if the data are delivered to the Government, are published, or are deposited for registration as a published work in the U.S. Copyright Office. The Recipient shall grant to the Government, and others acting on its behalf, a paid up, nonexclusive, irrevocable, worldwide license for all such data to reproduce, prepare derivative works, perform and display publicly, and for data other than computer software to distribute to the public by or on behalf of the Government. (2) The licenses granted to the Government under this Term shall not be considered as a waiver of the publication of research results requirements of Section 278 n(d)6 of Title 15 of the United States Code: "Intellectual property owned or developed by any business receiving funding may not be disclosed by any officer or employee of the federal government except in accordance with a written agreement between the owner or developer and the Program." b. Patent Rights 1. Definitions a. "Company" means a for-profit organization, including sole proprietors, partnerships or corporations. b. "Invention" means any invention or discovery which is or may be patentable or otherwise protectable under Title 35 of the United States Code. c. "Made" means, when used in relation to any Invention, the conception or first actual reduction to practice of such invention. d. "Practical Application" means to manufacture in the case of a composition or product, to practice in the case of a process or method, or to operate in the case of a machine or system; and, in each case, under such conditions as to establish that the invention is being utilized and that its benefits are, to the extent permitted by law or government regulations, available to the public on reasonable terms. e. "Subject Invention" means any invention of the Recipient conceived or first actually reduced to practice in the performance of work under this award. (2) Ownership of Inventions The Recipient or, if appropriate, its contractor(s) and/or subcontractor(s), shall have the entire right, title, and interest throughout the world to each Subject Invention according to the provisions of this clause, provided that this party is a company or companies organized in the United States. Joint ventures shall provide to NIST a copy of their written General Terms and Conditions/ATP/09-98 6 agreement which defines the disposition of ownership rights among the members of the joint venture, and their contractor and/or subcontractors as appropriate, in accordance with the first sentence of this paragraph. However, the United States hereby reserves a nonexclusive, nontransferable, irrevocable paid-up license, to have practiced for or on behalf of the United States, in connection with any such invention. Title to any such invention shall not be transferred or passed, except to a company organized in the United States, until the expiration of the first patent obtained in connection with such invention. (3) Invention Disclosure, United State License and Filing of Patent Application by Recipient (a) The Recipient shall disclose each subject invention to NIST within two months after the inventor discloses it in writing to Recipient personnel responsible for patent matters. The disclosure to NIST shall be in the form of a written report and shall identify the award under which the invention was made and the inventor(s). It shall, at a minimum, contain the following information: o the title of the invention; o the names of all inventors; o the name and address of the assignee (if any; o an acknowledgement that the United States has rights in the subject invention (i.e., the Governmental Use License); o the filing date of the present invention; o an abstract of the disclosure; o a description or summary of the present invention; o the background of the present invention or the prior art; o a description of the preferred embodiments; and o what matter is claimed One original and two copies of all patent reports shall be submitted to: NIST Grants Office Bldg., 301 Room B129 Gaithersburg, MD 20899-0001 Cooperative Agreement No: ______________ Each report shall also include the use of the invention and whether a manuscript describing the invention has been submitted for publication and, if so, whether it has been accepted for publication at the time of disclosure. In addition, after disclosure to NIST, the Recipient will promptly notify NIST of acceptance of any manuscript describing the invention for publication or of any sale or public use planned by the Recipient. (b) The Recipient shall notify NIST within two years of disclosure to NIST whether or not the Recipient intends to file a patent application on any subject invention. In the event a patent application is filed on a subject invention, upon issuance of the patent, the Recipient shall promptly notify NIST, providing the Grants Officer with the Serial Number of the patent as issued, the date of issuance, a copy of the disclosure as issued, and if appropriate, the name, address, and telephone number(s) of an assignee. (c) Requests for extension of the time for disclosure, election, and filing under paragraphs b.(3)(a) and b.(3)(b) of this Term may be permitted at the discretion of NIST. (4) Recipient Action to Protect the Government's Interest (a) The Recipient agrees to execute or to have executed and promptly deliver to NIST all instruments necessary to establish or confirm the rights the United States Government has throughout the world in those subject inventions to which the Recipient has filed a patent application in which the United States has reserved a non-exclusive license. (b) The Recipient shall require, by written agreement, its employees, other than clerical and nontechnical employees, to disclose promptly in writing to personnel identified as responsible for the administration of patent matters and in a format suggested by the Recipient, each subject invention made under the award in order that the Recipient can comply with the disclosure provisions of paragraph b.3. of this Term, and to execute all papers necessary to file patent applications on subject inventions and to establish the Government's rights in the subject inventions. This disclosure format should require, as a minimum, the information required by b.3.(a) of this Term. The Recipient shall instruct such employees through employee agreements or other suitable education programs on the importance of reporting inventions in sufficient time to permit the filing of patent applications prior to United States or foreign statutory bars. (c) The Recipient shall promptly notify NIST of any decisions not to continue the prosecution of a patent application, the payment of maintenance fees, or the defense in a reexamination or opposition proceeding on a patent in any country. (d) The Recipient agrees to include, within the specification of any United States patent application and any patent issuing thereon covering a subject invention, the following statements: This invention was made with United States Government support under (identify the cooperative agreement number) awarded by NIST. The United States Government has certain rights in the invention. General Terms and Conditions/ATP/09-98 7 (5) Subcontracts The Recipient shall include in all subcontracts, regardless of tier , for experimental, developmental, or research work, a patent rights clause, as appropriately modified, comparable to this term. However, if the subcontractor is not a company or companies organized in the United States, the patent rights clause shall provide that title to each subject invention made by the subcontractor shall vest with the Recipient. (6) Reporting on Utilization of Subject Inventions The Recipient agrees to submit on request, no more frequently than annually, periodic reports on the utilization of a subject invention or on efforts at obtaining such utilization that are being made by the Recipient or its licensees or assignees. Such reports shall include information regarding the status of development, date of first commercial sale or use, gross royalties received by the Recipient, and such other data and information as NIST may reasonably specify. The Recipient also agrees to provide additional reports as may be requested by NIST in connection with any march-in proceeding undertaken by NIST in accordance with paragraph b.7. of this Term. Such information shall be treated by NIST as commercial and financial information and thus as privileged and confidential and not subject to disclosure under section 552 of Title 5 of the United States Code. (7) Preference for United States Industry Notwithstanding any other provision of this Term, the Recipient agrees that neither it nor any assignee will grant to any person the exclusive right to use or sell any subject inventions in the United States unless such person agrees that any products embodying the inventions will be manufactured substantially in the United States. However, in individual cases, the requirement for such an agreement may be waived by NIST upon a showing by the Recipient or its assignee that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that, under the circumstances, domestic manufacture is not commercially feasible. (8) March-in Rights The Recipient agrees that, with respect to any subject invention in which it has acquired title, NIST has the right, in accordance with procedures in 37 CFR 401.6 and any supplemental regulations of NIST, to require the Recipient, an assignee, or an exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances. If the Recipient, assignee, or exclusive licensee refuses such a request, NIST has the right to grant such a license itself if NIST determines that: (a) Such action is necessary because the Recipient or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use; (b) Such action is necessary to alleviate health or safety needs which are not reasonably satisfied by the Recipient, assignee, or licensees; (c) Such action is necessary to meet requirements for public use specified by Federal regulations and such requirements are not reasonably satisfied by the Recipient, assignee, or licensees; or (d) Such action is necessary because the agreement required by paragraph b.7. of this Term has not been obtained or waived or because a licensee of the exclusive right to use or sell any subject invention in the United States is in breach of the agreement required by paragraph b.7 of this Term. General Terms and Conditions/ATP/09-98 8 ESTIMATED MULTI-YEAR BUDGET - JOINT VENTURE YEAR: 1 CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. Note: all numbers have been omitted.
Plug Power Gore Total ---------- ---- ----- 1. Object Class Category A. Technical Personnel Salaries/Wages [***] [***] [***] B. Technical Personnel Fringe Benefits [***] [***] [***] C. Administrative Personnel Salaries/Wages [***] [***] [***] D. Administrative Personnel Fringe Benefits [***] [***] [***] E. Travel [***] [***] [***] F. Equipment [***] [***] [***] G. Materials/Supplies [***] [***] [***] H. Subcontracts [***] [***] [***] I. Other [***] [***] [***] J. Total Direct Costs (lines A thru L) [***] [***] [***] K. Total Indirect Costs [***] [***] [***] L. Total Costs (lines J & K) [***] [***] [***] M. Non ATP Funds [***] [***] [***] N. ATP Funds Requested [***] [***] [***] 2. Sources of Funds A. ATP (Same as line N) [***] [***] [***] B. Plug Power [***] [***] [***] C. Gore [***] [***] [***] D. E. Total Sources of funds (same as line L] [***] [***] [***] 3. Tasks A. Phase I [***] [***] [***] B. Phase II [***] [***] [***] C. Phase III [***] [***] [***] D. Phase IV [***] [***] [***] E. F. G. H. I. Total costs of all tasks (same as line L) [***] [***] [***]
ESTIMATED MULTI-YEAR BUDGET - JOINT VENTURE YEAR: 2 CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. Note: all numbers have been omitted.
Plug Power Gore Total ---------- ---- ----- 1. Object Class Category A. Technical Personnel Salaries/Wages [***] [***] [***] B. Technical Personnel Fringe Benefits [***] [***] [***] C. Administrative Personnel Salaries/Wages [***] [***] [***] D. Administrative Personnel Fringe Benefits [***] [***] [***] E. Travel [***] [***] [***] F. Equipment [***] [***] [***] G. Materials/Supplies [***] [***] [***] H. Subcontracts [***] [***] [***] I. Other [***] [***] [***] J. Total Direct Costs (lines A thru L) [***] [***] [***] K. Total Indirect Costs [***] [***] [***] L. Total Costs (lines J & K) [***] [***] [***] M. Non ATP Funds [***] [***] [***] N. ATP Funds Requested [***] [***] [***] 2. Sources of Funds A. ATP (Same as line N) [***] [***] [***] B. Plug Power [***] [***] [***] C. Gore [***] [***] [***] D. E. Total Sources of funds (same as line L] [***] [***] [***] 3. Tasks A. Phase I [***] [***] [***] B. Phase II [***] [***] [***] C. Phase III [***] [***] [***] D. Phase IV [***] [***] [***] E. F. G. H. I. Total costs of all tasks (same as line L) [***] [***] [***]
PAGE> ESTIMATED MULTI-YEAR BUDGET - JOINT VENTURE YEAR: TOTAL CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS.
Plug Power Gore Total ---------- ---- ----- 1. Object Class Category A. Technical Personnel Salaries/Wages [***] [***] [***] B. Technical Personnel Fringe Benefits [***] [***] [***] C. Administrative Personnel Salaries/Wages [***] [***] [***] D. Administrative Personnel Fringe Benefits [***] [***] [***] E. Travel [***] [***] [***] F. Equipment [***] [***] [***] G. Materials/Supplies [***] [***] [***] H. Subcontracts [***] [***] [***] I. Other [***] [***] [***] J. Total Direct Costs (lines A thru L) [***] [***] [***] K. Total Indirect Costs [***] [***] [***] L. Total Costs (lines J & K) [***] [***] [***] M. Non ATP Funds [***] [***] [***] N. ATP Funds Requested [***] [***] [***] 2. Sources of Funds A. ATP (Same as line N) [***] [***] [***] B. Plug Power [***] [***] [***] C. Gore [***] [***] [***] D. E. Total Sources of funds (same as line L] [***] [***] [***] 3. Tasks A. Phase I [***] [***] [***] B. Phase II [***] [***] [***] C. Phase III [***] [***] [***] D. Phase IV [***] [***] [***] E. F. G. H. I. Total costs of all tasks (same as line L) [***] [***] [***]
ATTACHMENT A NIST ADVANCED TECHNOLOGY PROGRAM OPTIONAL GUIDELINES FOR QUARTERLY R&D PERFORMANCE REPORTS OVERVIEW The Cooperative Agreement between your organization(s) and the Advanced Technology Program (ATP) calls for quarterly R&D performance reports which are the main source of information provided to the ATP. The content of these reports, as requested by ATP, is consistent with Office of Management and Budget (OMB) Circular A110, dated 11/29/93 (1). A suggested structure is outlined below and is designed to not be overly burdensome to your organization. This specific structure or format is optional, but the content is required. If your organization has its own format for such reports and all the requested information is provided, ATP will accept your format. ATP relies on these quarterly R&D performance reports to monitor technical developments in projects. In addition, we use them in preparing quick-response derivative reports to Congress and Executive Agencies of the Government which oversee ATP. ATP policy prohibits release of these reports and limits internal distribution to those directly involved in management and administration of the specific cooperative agreement. Information abstracted from the reports by ATP will be cleared through your organization in advance of release by ATP. The report format outlined here provides for a systematic and logical structuring of key progress elements, and promotes tracking of developments. For each performance year, a core report is initially established, and subsequent reports simply update this core. Besides keeping the ATP Project Manager up to date on progress, these reports will provide a history of the project over its life. CONTENT The quarterly R&D performance report should: a) Identify project objectives, the initial "baseline" for tracking project developments, and milestones through the end of the current performance year; b) Provide evidence that projects are attaining technical milestones necessary to meet the objectives of the original proposal; c) Identify and explain changes in the composition, direction, or key personnel associated with the project; d) Identify problems or special opportunities which are critical to the progress of the research, and areas which may benefit from consultation with specialists at NIST. - ---------- 1. OMB Circular A110 can be found through the ATP web site (http://www.atp.nist.gov) or directly at http://www.whitehouse.gov/WH/EOP/OMB/html/circulars/a110/a110.html 1 In the following sections, each element of the quarterly R&D performance report is discussed. PROJECT OBJECTIVES The first section of each quarterly R&D performance report should state the overall technical goal of the project and list specific objectives. These should be drawn from the proposal with amplification as required to provide quantitative bases for success, or additional detail. The objectives should remain unchanged throughout the project unless results dictate a shift or major technical problems require re-planning a portion of the work. Changes should be addressed in the section entitled Summary of Project Changes. PROJECT BASELINE In order to contrast the state of the art before and after completion of each ATP project, establish a baseline to describe the status of key elements of the technology at the project outset. Define the baseline in the context of specific targets which are expected to constitute success, and are consistent with project objectives. These may include initial per-unit-costs, physical performance characteristics, or specific technical capabilities. If quantitative measures are not applicable, provide qualitative statements describing the state of the art at the time of project initiation. Identify any changes since the proposal was prepared. The ATP Project Manager will assist you in identifying appropriate baseline characterization as part of the project kickoff. TECHNICAL MILESTONES The quarterly reports should present appropriate milestones through the current performance year and relate the contribution of current year milestones to the overall project milestones. Current year milestones are generally presented and/or modified during the kickoff meeting, and subsequently extended as part of each annual review. The level of detail will depend on the nature of each project, and the concurrence of the principal investigator and the ATP Project Manager. A time line chart of the current year and the overall project milestones may be included in this section with clear identification of major decision points. Once established, this list of milestones with appropriate due dates should not be changed unless technical results or new opportunities dictate. Such changes should be addressed in the section entitled Summary of Project Changes. TECHNICAL PROGRESS AND IMPACT This section includes a discussion of technical progress for the specific performance quarter for each of the current performance year milestones identified in the preceding section. This is the heart of the quarterly R&D performance report, and will occupy the majority of the text. Sufficient discussion should be provided to allow an accurate assessment of progress, and identification of both successes and technical difficulties. Discussion of progress (and technical setbacks) should include implications for the overall objectives of the project. At the end of this section please identify the most significant technical advance to date in the project, and include a short discussion of its significance. Please list any patent applications as well as major equipment purchases. Progress against milestones is to be keyed to each reporting quarter. This requires the identification of the reporting period (mm/yy to mm/yy) before each new field of reporting for each milestone. If no work is directed to a particular milestone for a given quarter, then this should be noted and appropriately dated. 2 SUMMARY OF PROJECT CHANGES In this section, succinctly summarize substantive changes in project planning, personnel, or execution which have occurred over the reporting quarter. These should be derived from the main elements of the report as this section is intended only as a summary. If approval of a change is being requested please note that specifically. All substantive changes to the technical scope of work or budget changes must be discussed in advance with the ATP Project Manager, who must recommend an amendment to the award by the NIST Grants Officer. Quoting from Section 7. Prior Approval Requirements, of the ATP General Terms and Conditions which were part of your original award: 8. Prior Approval Requirements The following change requests require prior written approval from the NIST Grants Officer: a. Budget transfers among direct cost categories or between major technical tasks exceeding 10% of the total annual budget for each approved project year. b. Capital expenditures in excess of $100,000. c. Changes to key personnel (as identified in the application or as named in ATP Special Award Conditions). d. Changes to the technical scope of work or the application focus of the technology. e. Revisions to Ownership and/or Dissolution of Recipients (this includes everyone participating under a Joint Venture Agreement). This includes but is not limited to for example 1) when a company is acquired by a foreign company; 2) when only two for profit companies are participating in a JV and one of the for profit companies ceases participation; or 3) when the two for profit companies are acquired by another company or merge. Therefore, in the event a Recipient requests prior approval, the Recipient must provide documentation of the Recipients intent to notify the Department of Justice and the Federal Trade Commission of any changes in the JV including new members, substantial changes in scope of work, and/or deletion of members. PROBLEMS AND OPPORTUNITIES This section should provide a synopsis of technical problems which must be resolved as well as developing technical and business opportunities. Please also make us aware of areas which may benefit from consultation with specialists at NIST. BUSINESS ISSUES This section is for any business developments that have arisen since your last Business Report. UPCOMING MEETINGS If you wish to set up a meeting at NIST, or to request the attendance of either or both of the ATP 3 Technical or Business Project Managers at any meeting, you may use this section to make the request and to provide an overview of the meeting. It is often helpful to present a proposed project coordination meeting schedule for the year in this section, to note when subcontractors progress will be reviewed, when input from "commercialization units" may occur, etc. The meeting calendar could include formal or informal meetings of the project principals, or formal technical meetings where work which is related to the project is addressed. It should include a planned general time frame and expected location for the annual project review, which is to be scheduled during the last quarter of the project year (not the calendar year). FORMAT The requested format for the ATP Quarterly R&D performance reports is that of a sequential series of updates. Thus, each report is to contain the information submitted in the previous report(s) as well as that provided for the quarter of interest. Each quarterly report is intended to comprise 6-10 single spaced pages of new information. This means that the length of the report may grow to 25-40 pages by the end of the performance year, but each submission will usually comprise only 6 to 10 pages of original text. Because each quarterly report will include the previous information for the entire performance year, the last will provide a complete record of progress and accomplishments. If the 4th quarter report does not include the report of previous quarters, please provide a summary of the year's work. If you wish to submit a more extensive report of technical progress for a given quarter, you may append it to the formal report. If there is no additional progress to report under a given heading, a statement to that effect should be included for the performance period. Please date all additions to the text file, and mark each page of the report "Proprietary." There may be a need in the future to have an electronic copy of project quarterly reports. If an interim electronic copy is needed the program manager will request it directly, otherwise a single electronic copy of the reports at the end of the project year is sufficient. The file should be readable by WordPerfect 6.1 for Windows or Microsoft Word. ASCII text is also acceptable. Please mark all diskettes as proprietary. 4 ATP Quarterly R&D Performance Report Date of Summary: mm/dd/yy -------- Project Title: Cooperative Agreement Number: Performing Organization(s): Address(es) Subcontractor(s): Address(es) Project Manager: Administrative Contact: Title: Title: Telephone Number: Telephone Number: Facsimile Number: Facsimile Number: Electronic Mail Address: Electronic Mail Address: Type of Project: Single Business _____ Joint Venture _____ Date Initiated mm/yy Duration months ----------- --------- Total ATP Funding Requested: ($M) Total Industry Funding Committed: ($M) Current Performance Year mm/yy-mm/yy Quarterly Report Period mm/yy-mm/yy ------------- ------------- ATP Project Manager: Project Objectives: Project Baseline: Technical Milestones: Technical Progress and Impact: (including Most Significant Technical Advance to Date) Summary of Project Changes: Problems and Opportunities: Business Issues: (not covered on business diskette) Upcoming Meetings: 5 ATTACHMENT B September 1997 GUIDELINES FOR REPORTING ON BUSINESS PROGRESS AND ECONOMIC IMPACTS The following reports should be prepared by the persons with primary responsibility for developing and executing business strategies leading to commercialization of the technologies resulting from the ATP-funded project. A questionnaire format is used to facilitate efficient reporting and analysis. Because members of a joint venture have different business goals and different roles in commercialization and diffusion of the ATP-funded technology, each member of a joint venture, as well as each single applicant, has a business reporting responsibility and must file a separate report. The Economic Assessment Office, ATP, will provide materials customized for the individual reporting organizations in time for preparation of the reports on a timely basis. Baseline Report When Due: Thirty days after the end of the first calendar quarter of ATP funding. If you begin your project during a calendar quarter, the Baseline Report is due thirty days after the end of that quarter. Contents: In this report we ask you to identify potential areas of application of the technology (e.g., consumer electronics, avionics, medical devices), key attributes of the technology needed to achieve these goals (e.g., quantitative cost, size, performance characteristics) and planned strategies for commercialization (e.g., in-house production, licensing, strategic alliances, etc.); to identify strategies for protecting intellectual property; and to identify plans for dissemination of non-proprietary information. Format: Electronic diskette containing ATP Business Reporting System software. Quarterly Short-Form Reports When Due: Thirty days after the end of the second, third, and fourth quarters annually. No Short-Form Report is due for the Baseline or Anniversary quarters. Contents: In this brief report we ask you to review the organization address/telephone/contact information currently recorded in the ATP database and to report significant business developments related to the ATP project for the quarter. Format: Hard copy, fax, or e-mail. Anniversary Report When Due: One year after the Baseline Report and subsequently on an annual basis over the duration of the ATP project. Contents: In this report, we ask you to update information provided in the Baseline or prior Anniversary Reports. The Anniversary Report expands upon the Baseline Report to cover progress towards implementing commercialization strategies (e.g., an agreement with company X--an end user--for testing laboratory prototypes); early economic impacts of the ATP project; collaboration experiences; attraction of new funding; new intellectual property created; dissemination of information through conferences, publications, and other mechanisms; and a summary of company financial data. Format: Electronic diskette containing ATP Business Reporting System software. Close-out Report When Due: Ninety days after end of ATP project performance period. Contents: In this part we ask you to review and update information presented in prior anniversary reports in light of your technical accomplishments. In addition, we ask you to identify anticipated remaining technical and business barriers to commercialization of the technology, to define your specific business goals related to the ATP funded technology for the five-year period following the end of ATP funding, and to consider future effects of the ATP project outside your organization. Format: Electronic diskette containing ATP Business Reporting System software. Post-Project Reports When Due: Report three times--once every two years following the end of ATP funding. Contents: In this report we ask you to report your actual progress in commercializing the technology, and the related impacts inside and outside your organization. Format: Electronic diskette containing ATP Business Reporting System software. DEPARTMENT OF COMMERCE FINANCIAL ASSISTANCE STANDARD TERMS AND CONDITIONS DEPARTMENT OF COMMERCE [SEAL] UNITED STATES OF AMERICA NOVEMBER 1993 DEPARTMENT OF COMMERCE FINANCIAL ASSISTANCE STANDARD TERMS AND CONDITIONS Page A. FINANCIAL REQUIREMENTS ............................................... 1 .01 Financial Reports ................................................ 1 .02 Award Payments ................................................... 1 .03 Federal and Non-Federal Sharing .................................. 2 .04 Budget Changes and Transfer of Funds Among Categories ............ 2 .05 Indirect Costs ................................................... 2 .06 Incurring Costs or Obligating Federal Funds Beyond the ........... Expiration Date .................................................. 4 .07 Tax Refunds ...................................................... 4 B. PROGRAMMATIC REQUIREMENTS ............................................ 4 .01 Performance (Technical) Reports .................................. 4 .02 Unsatisfactory Performance ....................................... 4 .03 Programmatic Changes ............................................. 5 .04 Other Federal Awards with Similar Programmatic Activities ........ 5 C. NON-DISCRIMINATION REQUIREMENTS ...................................... 5 .01 Statutory Provisions ............................................. 5 .02 Other Provisions ................................................. 6 D. AUDITS ............................................................... 6 .01 Organization-Wide and Project Audits ............................. 6 .02 Audit Resolution Process ......................................... 7 E. DEBTS ................................................................ 8 .01 Payment of Debts Owed the Federal Government ..................... 8 .02 Late Payment Charges ............................................. 8 F. NAME CHECK ........................................................... 9 .01 Results of Name Check ............................................ 9 .02 Action(s) Taken as a Result of Name Check Review ................. 9 G. GOVERNMENTWIDE DEBARMENT AND SUSPENSION (NONPROCUREMENT) ............. 9 H. DRUG-FREE WORKPLACE .................................................. 10 I. LOBBYING RESTRICTIONS ................................................ 10 .01 Statutory Provisions ............................................. 10 .02 Disclosure of Lobbying Activities ................................ 10 i 11/93 J. SUBAWARD, CONTRACT, AND SUBCONTRACT .................................. 10 .01 Applicability of Award Provisions to Subrecipients ............... 10 .02 Applicability of Provisions to Subawards, Contracts, and Subcontracts ................................................. 11 .03 Minority and Women-Owned Business Enterprise ..................... 12 .04 Subcontracting Reports ........................................... 12 .05 Subaward and/or Contract to a Federal Agency ..................... 12 K. PROPERTY ............................................................. 12 .01 Standards ........................................................ 12 .02 Rights to Inventions ............................................. 13 L. MISCELLANEOUS REQUIREMENTS ........................................... 13 .01 Non-Compliance With Award Provisions ............................. 13 .02 Prohibition Against Assignment ................................... 13 .03 Internal Revenue Service (IRS) Information ....................... 13 .04 Foreign Travel ................................................... 14 ii 11/93 A. FINANCIAL REQUIREMENTS .01 Financial Reports a. The Recipient shall submit a "Financial Status Report" (SF-269) on a calendar quarter basis for the periods ending March 31, June 30, September 30, and December 31, or any portion thereof, unless otherwise specified in a special award condition. Reports are due no later than 30 days following the end of each reporting period. A final SF-269 shall be submitted within 90 days after the expiration date of the award. b. The Recipient shall submit a "Federal Cash Transactions Report" (SF-272) for each award where funds are advanced to Recipients. The SF-272 is due 15 working days following the end of each calendar quarter for awards under $1 million dollars; or 15 working days following the end of each month for awards over $1 million dollars; or unless otherwise specified in a special award condition. c. All financial reports shall be submitted in triplicate (one original and two copies) to the Grants Officer. .02 Award Payments a. Unless otherwise specified in a special award condition, the method of payment for the award shall be through advance or reimbursement. b. The Recipient shall submit a "Request for Advance or Reimbursement" (SF-270) no more frequently than monthly to request payment. The SF-270 shall be submitted in triplicate (an original and two copies) to the Grants Officer. c. Payments will be made via wire transfer which transfers funds directly to a Recipient's bank account. The Recipient must complete the enclosed payment information form and return it to the Grants Officer. The award number must be included on the payment information form. If wire transfer is not available, payments shall be made by direct Treasury check. d. Advances shall be limited to the minimum amounts necessary to meet immediate disbursement needs. Advanced funds not disbursed in a timely manner will be promptly returned to the Department of Commerce (DoC). Advances shall be approved for periods not to exceed 30 days. The Grants Officer determines the appropriate method of payment. If a Recipient demonstrates an unwillingness or inability to establish procedures which will minimize the time elapsing between the transfer of funds and disbursement, the Grants Officer may change the method of payment to reimbursement only. 1 11/93 .03 Federal and Non-Federal Sharing a. Awards which include Federal and non-Federal sharing incorporate an estimated budget of shared allowable costs. If actual allowable costs are less than the total approved estimated budget, the Federal and non-Federal cost share ratio as reflected in the approved estimated budget shall apply. If actual allowable costs are greater than the total approved estimated budget, the Federal share shall not exceed the total Federal dollar amount as reflected in the Financial Assistance Award (CD-450) and Amendment to Financial Assistance Award (CD-451). b. The non-Federal share, whether in cash or in in-kind, is expected to be paid out at the same general rate as the Federal share. Exceptions to this requirement may be granted by the Grants Officer based on sufficient documentation demonstrating previously determined plans for or later commitment of cash or in-kind contributions. .04 Budget Changes and Transfer of Funds Among Categories a. Requests for budget changes to the approved estimated budget in accordance with the provision noted below must be submitted to the Federal Program Officer who shall review them and make a recommendation to the Grants Officer. The Grants Officer shall make the final determination on such requests and notify the Recipient in writing. b. For awards where the Federal share exceeds $100,000, transfer of funds by the Recipient among direct cost categories are permitted when the cumulative amount of such transfers does not exceed 10 percent of the current total budget. Cumulative transfers of funds of an amount above 10 percent of the total award must be approved by the Grants Officer in writing. The same criteria applies to the cumulative amount of transfer of funds among projects, functions, and activities when budgeted separately within an award, except transfers will not be permitted if such transfers would cause any Federal appropriation, or part thereof, to be used for purposes other than those intended. c. The Recipient is not authorized at any time to transfer amounts budgeted for direct costs to the indirect costs line item or vice versa, without written prior approval of the Grants Officer. .05 Indirect Costs a. Indirect costs will not be allowable charges against the award unless specifically included as a line item in the approved budget incorporated into the award. 2 Rev 03/95 b. Any actual indirect costs incurred by the Recipient which are greater than the indirect cost line item in the budget will not be treated as a cost of the award by the DoC for the purpose of final cost settlement. c. Excess indirect costs may not be used to offset unallowable direct costs. d. If the Recipient has not previously established an indirect cost rate with a Federal agency, the negotiation and approval of a rate is subject to the procedures in the applicable cost principles and the following subparagraphs: 1. The Office of Inspector General (OIG) is authorized to negotiate indirect cost rates on behalf of the DoC for those organizations for which the DoC is cognizant. The OIG will negotiate only fixed rates. The Recipient shall submit to the OIG within 90 days of the award start date, documentation (indirect cost proposal, cost allocation plan, etc.) necessary to establish such rates. The Recipient shall provide the Grants Officer with a copy of the transmittal letter to the OIG. 2. When a cognizant Federal agency other than the DoC has responsibility for establishing an indirect cost rate, the Recipient shall submit to that cognizant Federal agency within 90 days of the award start date the documentation (indirect cost proposal, cost allocation plan, etc.) necessary to establish such rates. The Recipient shall provide both the Grants Officer and the DoC OIG with a copy of the transmittal letter to the cognizant Federal agency. 3. If the Recipient fails to submit the required documentation to the OIG or other cognizant Federal agency within 90 days of the award start date, the Grants Officer shall amend the award to preclude the recovery of any indirect costs under the award. If the DoC OIG or cognizant Federal agency determines there is a finding of good and sufficient cause to excuse the Recipient's delay in submitting the documentation, an extension of the 90-day due date may be approved by the Grants Officer. 4. Regardless of any approved indirect cost rate applicable to the award at the time of award, the maximum dollar amount of allocable indirect costs for which the DoC will reimburse the Recipient shall be the lesser of: (a) The line item amount for the Federal share of indirect costs contained in the approved budget of the award; or (b) The Federal share of the total allocable indirect costs of the award based on the negotiated rate with the cognizant Federal agency as established by audit or negotiation. 3 11/93 .06 Incurring Costs or Obligating Federal Funds Beyond the Expiration Date a. The Recipient shall not incur costs or obligate funds for any purpose pertaining to the operation of the program or activities beyond the expiration date stipulated in the award. The only costs which are authorized for a period of up to 90 days following the award expiration date are those strictly associated with closeout activities. Closeout activities are limited to the preparation of final reports. b. Any extension of the award period can only be authorized by the Grants Officer. Verbal or written assurances of funding from other than the Grants Officer shall not constitute authority to obligate funds for programmatic activities beyond the expiration date. c. The DoC has no obligation to provide any additional prospective funding. Any renewal of the award to increase funding and to extend the period of performance is at the sole discretion of the DoC. .07 Tax Refunds Refunds of FICA/FUTA taxes received by the Recipient during or after the award period must be refunded or credited to the DoC where the benefits were financed with Federal funds under the award. The Recipient agrees to contact the Grants Officer immediately upon receipt of these refunds. The Recipient further agrees to refund portions of FICA/FUTA taxes determined to belong to the Federal Government, including refunds received after the expiration of the award. B. PROGRAMMATIC REQUIREMENTS .01 Performance (Technical) Reports a. The Recipient shall submit performance (technical) reports in triplicate (one original and two copies) to the Federal Program Officer in the same frequency as the Financial Status Report (SF-269). b. Unless otherwise specified in the award provisions, performance (technical) reports shall contain brief information as prescribed in the applicable uniform administrative requirements incorporated into the award. .02 Unsatisfactory Performance Failure to perform the work in accordance with the terms of the award and maintain at least a satisfactory performance rating may result in designating the Recipient as high risk and assigning 4 11/93 special award conditions or taking further action as specified in the standard term and condition entitled "Non-Compliance With Award Provisions." .03 Programmatic Changes a. The Recipient shall not make any programmatic changes to the award without prior written approval by the Grants Officer. b. Any requests by the Recipient for programmatic changes must be submitted to the Federal Program Officer who shall review and make recommendations to the Grants Officer. The Grants Officer shall make the final determination and notify the Recipient in writing. .04 Other Federal Awards with Similar Programmatic Activities The Recipient shall immediately provide written notification to the Federal Program Officer and the Grants Officer in the event that, subsequent to receipt of the DoC award, other Federal financial assistance is received relative to the scope of work of the DoC award. C. NON-DISCRIMINATION REQUIREMENTS No person in the United States shall, on the ground of race, color, national origin, handicap, religion, or sex, be excluded from participation in, be denied the benefits of, or be subject to discrimination under any program or activity receiving Federal financial assistance. The Recipient agrees to comply with the non-discrimination requirements below: .01 Statutory Provisions a. Title VI of the Civil Rights Act of 1964 (42 USC ss.ss. 2000d et seq.) and DoC implementing regulations published at 15 CFR Part 8 which prohibit discrimination on the grounds of race, color, or national origin under programs or activities receiving Federal financial assistance; b. Title IX of the Education Amendments of 1972 (20 USC ss.ss. 1681 et seq.) prohibiting discrimination on the basis of sex under Federally assisted education programs or activities; c. Section 504 of the Rehabilitation Act of 1973, as amended (29 USC ss. 794) and DoC implementing regulations published at 15 CFR Part 8b prohibiting discrimination on the basis of handicap under any program or activity receiving or benefitting from Federal assistance; 5 11/93 d. The Age Discrimination Act of 1975, as amended (42 USC ss.ss. 6101 et seq.) and DoC implementing regulations published at 15 CFR Part 20 prohibiting discrimination on the basis of age in programs or activities receiving Federal financial assistance; e. The Americans with Disabilities Act of 1990 (42 USC ss.ss. 12101 et seq.) prohibiting discrimination on the basis of disability under programs, activities, and services provided or made available by state and local governments or instrumentalities or agencies thereto, as well as public or private entities that provide public transportation; f. Any other non-discrimination provisions of statutory law. .02 Other Provisions Parts II and III of Executive Order 11246 (30 F.R. 12319, 1965) as amended by Executive Orders 11375 (32 F.R. 14303, 1967) and 12086 (43 F.R. 46501, 1978) requiring Federally assisted construction contracts to include the nondiscrimination provisions of ss.ss. 202 and 203 of that Executive Order and Department of Labor regulations implementing Executive Order 11246 (41 CFR ss. 60-1.4(b), 1991). D. AUDITS Under the Inspector General Act of 1978, as amended, 5 USC App. I, section 1 et seq., an audit of the award may be conducted at any time. The Inspector General of the DoC, or any of his or her duly authorized representatives, shall have access to any pertinent books, documents, papers and records of the Recipient, whether written, printed, recorded, produced or reproduced by any mechanical, magnetic or other process or medium, in order to make audits, inspections, excerpts, transcripts or other examinations as authorized by law. The OIG will usually make the arrangements to audit the award, whether the audit is performed by OIG personnel, an independent accountant under contract with the DoC, or any other Federal, state or local audit entity. .01 Organization-Wide and Project Audits a. Organization-wide audits shall be performed in accordance with 15 CFR Part 29a, "Audit Requirements for State and Local Governments," for Recipients that are state or local governments; and 15 CFR Part 29b, "Audit Requirements for Institutions of Higher Education and Other Nonprofit Organizations," for Recipients that are educational or nonprofit institutions. Additionally, when required under a special award condition, a project audit shall be performed in accordance with Federal Government auditing standards. 6 11/93 b. For-profit Recipients shall have a project audit performed no less than once every two years in accordance with Federal Government auditing standards. c. The Recipient shall submit copies of audits to each Federal agency that directly provides funds. Audits shall be submitted to the DoC OIG at the following address with a copy of the transmittal letter to the Grants Officer: Office of Inspector General U.S. Department of Commerce Atlanta Regional Office of Audits 401 West Peachtree Street, N.W., Suite 2342 Atlanta, GA 30308 d. Recipients receiving Federal awards over $100,000 shall also submit a copy of organization-wide audits to the Bureau of the Census, which has been designated by OMB as a central clearinghouse. The address is: Federal Audit Clearinghouse Bureau of the Census 1201 E. 10th Street Jeffersonville, IN 47132 .02 Audit Resolution Process a. An audit of the award may result in the disallowance of costs incurred by the Recipient and the establishment of a debt (account receivable) due DoC. For this reason, the Recipient should take seriously its responsibility to respond to all audit findings and recommendations with adequate explanations and supporting evidence whenever audit results are disputed. b. A Recipient whose award is audited has the following opportunities to dispute the proposed disallowance of costs and the establishment of a debt: 1. Unless the Inspector General determines otherwise, the Recipient has 30 days from the date of the transmittal of the draft audit report to submit written comments and documentary evidence. 2. The Recipient has 30 days from the date of the transmittal of the final audit report to submit written comments and documentary evidence. There will be no extension of this deadline. 3. The DoC shall review the documentary evidence submitted by the Recipient and shall notify the Recipient of the results in an Audit Resolution Determination Letter. The Recipient has 30 days from the date of receipt of the Audit Resolution Determination 7 11/93 Letter to submit a written appeal. There will be no extension of this deadline. The appeal is the last opportunity for the Recipient to submit written comments and documentary evidence that dispute the validity of the audit resolution determination. In addition, an appeal does not preclude the Recipient's obligation to pay a debt that may be established nor does the appeal preclude the accrual of interest on a debt. 4. The DoC shall review the Recipient's appeal and notify the Recipient of the results in an Appeal Determination Letter. After the opportunity to appeal has expired or after the appeal determination has been rendered, DoC will not accept any further documentary evidence from the Recipient. There will be no other administrative appeals available in DoC. E. DEBTS .01 Payment of Debts Owed the Federal Government Any debts determined to be owed the Federal Government shall be paid promptly by the Recipient. A debt will be considered delinquent if it is not paid within 30 days of the due date. Failure to pay a debt by the due date shall result in the imposition of late payment charges as noted below. In addition, failure to pay the debt or establish a repayment agreement by the due date will also result in the referral of the debt for collection action and may result in DoC taking further action as specified in the standard term and condition entitled "Non-Compliance With Award Provisions." The Recipient may also be suspended or debarred from further Federal financial and non-financial assistance and benefits, as provided in 15 CFR Part 26, "Governmentwide Debarment and Suspension (Nonprocurement) and Governmentwide Requirements for Drug-Free Workplace (Grants)" until the debt has been paid in full or until a repayment agreement has been approved and payments are made in accordance with the agreement. Payment of a debt may not come from other Federally sponsored programs. Verification that other Federal funds have not been used will be made during future program visits and audits. .02 Late Payment Charges a. An interest charge shall be assessed on the delinquent debt (over 30 days) as established by the Debt Collection Act of 1982. The minimum annual interest rate to be assessed is the Department of the Treasury's Current Value of Funds Rate. This rate is published in the Federal Register by the Department of the Treasury. The assessed rate shall remain fixed for the duration of the indebtedness. 8 11/93 b. A penalty charge shall be assessed on any portion of a debt that is delinquent for more than 90 days, although the charge will accrue and be assessed from the date the debt became delinquent. c. An administrative charge shall be assessed to cover processing and handling the amount due. d. State and local governments are not subject to penalty and administrative charges. F. NAME CHECK A name check review shall be performed by the OIG on key individuals associated with non-profit and for-profit organizations, unless an exemption has been authorized by the Inspector General. .01 Results of Name Check DoC reserves the right to take any of the actions described in section F.02 if any of the following occurs as a result of the name check review: a. A key individual fails to submit the required form "Identification - Applicant for Funding Assistance (CD-346); b. A key individual made an incorrect statement or omitted a material fact on the CD-346; or c. The name check reveals significant adverse findings that reflect on the integrity or responsibility of the Recipient and/or key individual. .02 Action(s) Taken as a Result of Name Check Review If any situation noted in F.01 occurs, DoC, at its discretion, may take one or more of the following actions: a. Terminate the award immediately for cause; b. Require the removal of any key individual from association with the management of and/or implementation of the award; and/or c. Make appropriate provisions or revisions at DoC's discretion with respect to the method of payment and/or financial reporting requirements. G. GOVERNMENTWIDE DEBARMENT AND SUSPENSION (NONPROCUREMENT) The Recipient shall comply with the provisions of Executive Order 12549, "Debarment and Suspension" and DoC's implementing 9 11/93 regulations published at 15 CFR Part 26, Subparts A through E, "Governmentwide Debarment and Suspension (Nonprocurement)," which generally prohibit entities that have been debarred, suspended, or voluntarily excluded from participating in Federal nonprocurement transactions either through primary or lower tier covered transactions. H. DRUG-FREE WORKPLACE The Recipient shall comply with the provisions of Public Law 100-690, Title V, Subtitle D, "Drug-Free Workplace Act of 1988," and DoC implementing regulations published at 15 CFR Part 26, Subpart F, "Governmentwide Requirements for Drug-Free Workplace (Grants)," which require that the Recipient take steps to provide a drug-free workplace. I. LOBBYING RESTRICTIONS .01 Statutory Provisions The Recipient shall comply with the provisions of Section 319 of Public Law 101-121, which added Section 1352 to Chapter 13 of Title 31 of the United States Code, and DoC implementing regulations published at 15 CFR Part 28, "New Restrictions on Lobbying." These provisions generally prohibit the use of Federal funds for lobbying the Executive or Legislative Branches of the Federal government in connection with the award, and require the disclosure of the use of non-Federal funds for lobbying. .02 Disclosure of Lobbying Activities The Recipient receiving in excess of $100,000 in Federal funding shall submit a completed "Disclosure of Lobbying Activities" (SF-LLL) regarding the use of non-Federal funds for lobbying. The SF-LLL shall be submitted within 30 days following the end of the calendar quarter in which there occurs any event that requires disclosure or that materially affects the accuracy of the information contained in any disclosure form previously filed. The Recipient must submit the SF-LLLs, including those received from subrecipients, contractors, and subcontractors, to the Grants Officer. J. SUBAWARD, CONTRACT, AND SUBCONTRACT .01 Applicability of Award Provisions to Subrecipients The Recipient shall require all subrecipients, including lower tier subrecipients, under the award to comply with the provisions of the award including applicable cost principles, administrative, and audit requirements. 10 11/93 .02 Applicability of Provisions to Subawards, Contracts, and Subcontracts a. The Recipient shall include the following notice in each request for applications or bids: Applicants/bidders for a lower tier covered transaction (except for goods and services under the $25,000 small purchase threshold and where the lower tier Recipient will have no critical influence on or substantive control over the award) are subject to 15 CFR Part 26, Subparts A through E, "Governmentwide Debarment and Suspension (Nonprocurement). In addition, applicants/bidders for a lower tier covered transaction for a subaward, contract, or subcontract greater than $100,000 of Federal funds at any tier are subject to 15 CFR Part 28, "New Restrictions on Lobbying." Applicants/bidders should familiarize themselves with these provisions, including the certification requirements. Therefore, applications for a lower tier covered transaction must include a "Certifications Regarding Debarment, Suspension, Ineligibility and Voluntary Exclusion--Lower Tier Covered Transactions and Lobbying" (CD-512) completed without modification. b. The Recipient shall include a statement in all lower tier covered transactions (subawards, contracts, and subcontracts), that the award is subject to Executive Order 12549, "Debarment and Suspension" and DoC implementing regulations published at 15 CFR Part 26, Subparts A through E, "Governmentwide Debarment and Suspension (Nonprocurement)." c. The Recipient shall include a statement in all lower tier covered transactions (subawards, contracts, and subcontracts) exceeding $100,000 in Federal funds, that the subaward, contract, or subcontract is subject to Section 319 of Public Law 101-121, which added Section 1352, regarding lobbying restrictions, to Chapter 13 of Title 31 of the United States Code as implemented at 15 CFR Part 28, "New Restrictions on Lobbying." The Recipient shall further require the subrecipient, contractor, or subcontractor to submit a completed "Disclosure of Lobbying Activities" (SF-LLL) regarding the use of non-Federal funds for lobbying. The SF-LLL shall be submitted within 15 days following the end of the calendar quarter in which there occurs any event that requires disclosure or that materially affects the accuracy of the information contained in any disclosure form previously filed. The SF-LLL shall be submitted from tier to tier until received by the Recipient. The Recipient must submit all disclosure forms received, including those that report lobbying activity on its own behalf, to the Grants Officer within 30 days following the end of the calendar quarter. 11 11/93 .03 Minority and Women-Owned Business Enterprise DoC encourages Recipients to utilize minority and women-owned firms and enterprises in contracts under financial assistance awards. The Office of Program Development, Minority Business Development Agency, will assist Recipients in matching qualified minority and women-owned enterprises with contract opportunities. For further information contact: U.S. Department of Commerce Minority Business Development Agency Office of Program Development Herbert C. Hoover Building 14th Street and Constitution Avenue, N.W. Washington, D.C. 20230 .04 Subcontracting Reports Recipients of awards which involve both Federal funding valued at $500,000 or more and procurement of supplies, equipment, construction, or services, shall submit the "MBE/WBE Utilization Under Federal Grants, Cooperative Agreements, and Other Federal Financial Assistance" (SF-334). The SF-334 shall be submitted quarterly for the periods ending March 31, June 30, September 30, and December 31. Reports are due no later than 30 days following the end of the reporting period during which any procurement in excess of $10,000 is executed under the award. The SF-334 shall be submitted in duplicate to the Federal Program Officer. .05 Subaward and/or Contract to a Federal Agency a. The Recipient, subrecipient, contractor, and/or subcontractor shall not sub-grant or sub-contract any part of the approved project to any agency of the DoC and/or other Federal department, agency or instrumentality, without the prior written approval of the Grants Officer. b. Requests for approval of such action must be submitted to the Federal Program Officer who shall review and make a recommendation to the Grants Officer. The Grants Officer shall make the final determination with the concurrence of legal counsel of the DoC agency making the award, and legal counsel of the other Federal department, agency or instrumentality receiving the subaward and/or contract. The Grants Officer will notify the Recipient in writing of the final determination. K. PROPERTY .01 Standards The Recipient shall comply with the property standards as stipulated in the applicable uniform administrative requirements. 12 11/93 Any inventory listings stipulated under the applicable uniform administrative requirements shall be submitted on the "Report of Government Property in Possession of Contractor" (CD-281). The CD-281 shall be submitted in triplicate (an original and two copies) to the Grants Officer. .02 Rights to Inventions The policy and procedures set forth in DoC regulations 37 CFR Part 401, "Rights to Inventions made by Nonprofit Organizations and Small Business Firms under Government Grants, Contracts, and Cooperative Agreements," shall apply to all grants and cooperative agreements made to nonprofit organizations and small business firms where the purpose of the award is to accomplish experimental, developmental, or research work. L. MISCELLANEOUS REQUIREMENTS 01. Non-Compliance With Award Provisions Failure to comply with any or all of the provisions of the award may be considered grounds for any or all of the following actions: establishment of an account receivable, withholding payments under any DoC awards to the Recipient, changing the method of payment from advance or reimbursement to reimbursement only, termination of any DoC active awards, and may have a negative impact on future funding by the DoC. .02 Prohibition Against Assignment Notwithstanding any other provision of the award, the Recipient shall not transfer, pledge, mortgage, or otherwise assign the award, or any interest therein, or any claim arising thereunder, to any party or parties, bank trust companies, or other financing or financial institutions. .03 Internal Revenue Service (IRS) Information a. A Recipient classified for tax purposes as an individual, partnership, proprietorship, or medical corporation is required to submit a taxpayer identification number (TIN) (either social security number or employer identification number as applicable) on Form W-9, "Payer's Request for Taxpayer Identification Number." Tax-exempt organizations and corporations (with the exception of medical corporations) are excluded from this requirement. Form W-9 shall be submitted to the Grants Officer within 60 days of the award start date. The TIN will be provided to the IRS by DoC on Form 1099-G, "Statement for Recipients of Certain Government Payments." Applicable Recipients who either fail to provide their TIN or provide an incorrect TIN may have funding suspended until the requirement is met. 13 Rev 02/94 b. Disclosure of a Recipient's TIN is mandatory for Federal income tax reporting purposes under the authority of 26 USC, Section 6011 and 6109(d), and 26 CFR, Section 301.6109-1. This is to ensure the accuracy of income computation by the IRS. This information will be used to identify an individual who is compensated with DoC funds or paid interest under the Prompt Payment Act. .04 Foreign Travel a. The Recipient shall comply with the provisions of the Fly America Act. The Fly America Act refers to provisions enacted by Section 5 of the International Air Transportation Fair Competitive Practices Act of 1974 (Public Law 93-623, January 3, 1975, 49 USC App. 1517), as amended by Section 21 of the International Air Transportation Competition Act of 1979 (Public Law 96-192, February 15, 1980, 94 Stat. 43). The implementing Federal Travel Regulations are published at 41 CFR Part 301-3.6. b. The Fly America Act requires that Federal travelers and others performing U.S. Government-financed foreign air travel must use U.S. flag air carriers, to the extent that service by such carriers is available. Foreign air carriers may be used only when a U.S. flag air carrier is unavailable, or use of U.S. flag air carrier service will not accomplish the agency's mission. c. Use of foreign air carriers may also be used only if bilateral agreements permit such travel pursuant to 49 USC App. S 1517(c) (1982). DoC is not aware of any bilateral agreements which meet these requirements, therefore, it is the responsibility of the Recipient to provide the Grants Officer with a copy of the applicable bilateral agreement if use of a foreign air carrier is anticipated. d. If a foreign air carrier is anticipated to be used for any part of foreign travel, the Recipient must receive prior approval from the Grants Officer. The Recipient must submit a justification to the Federal Program Officer explaining why service by a U.S. flag air carrier is not available, why it would be necessary to use a foreign air carrier, or if a bilateral agreement permits such travel and provide a copy of the agreement. The Federal Program Officer will review and make a recommendation to the Grants Officer. The Grants Officer shall make the final determination and notify the Recipient in writing. Failure to adhere to the provisions of the Fly America Act will result in the disallowance of the Recipient's air carrier expenses in an amount comparable to the loss of revenues suffered by the U.S. flag air carriers as a result of the Recipient's actions. This amount will be based on a formula in the Federal Travel Regulations. 14 11/93 federal register ================================================================================ Monday November 29, 1993 - -------------------------------------------------------------------------------- Part IV Office of Management and Budget - -------------------------------------------------------------------------------- Uniform Administrative Requirements for Grants and Agreements With Institutions of Higher Education, Hospitals and Other Non-Profit Organizations; Notice 62992 Federal Register / Vol. 58, No. 227 / Monday, November 29, 1993 / Notices ================================================================================ OFFICE OF MANAGEMENT AND BUDGET Uniform Administrative Requirements for Grants and Agreements With Institutions of Higher Education, Hospitals and Other Non-Profit Organizations AGENCY: Office of Management and Budget. ACTION: Final Revision to OMB Circular A-110. Uniform Administrative Requirements for Grants and Agreements With Institutions of Higher Education, Hospitals and Other Non-Profit Organizations." - -------------------------------------------------------------------------------- SUMMARY: Office of Management and Budget (OMB) Circular A-110 provides standards for obtaining consistency and uniformity among Federal agencies in the administration of grants and agreements with institutions of higher education, hospitals, and other nonprofit organizations. OMB issued Circular A-110 in 1976 and, except for a minor revision in February 1987, the Circular contains its original provisions. To update the Circular, OMB established an interagency task force to review the Circular. The task force solicited suggestions for changes to the Circular from university groups, non-profit organizations and other interested parties and compared, for consistency, the provisions of similar provisions applied to State and local governments. The revised Circular reflects the results of these efforts. DATES: Provisions that affect Federal agencies are effective December 29, 1993. Provisions that affect grantees will be adopted by agencies in codified regulations by May 30, 1994. Earlier implementation is encouraged. ADDRESSES: Office of Management and Budget. Office of Federal Financial Management, Financial Standards and Reporting Branch, room 10235, New Executive Office Building, Washington, DC 20503. For a copy of this Circular, contact Office of Administration. Publication Office, room 2200, New Executive Office Building. Washington, DC 20503, or telephone (202) 395-7332. FOR FURTHER INFORMATION CONTACT: Palmer Marcantonio, Financial Standards and Reporting Branch, Office of Federal Financial Management, Office of Management and Budget (telephone: 202-395-3993). SUPPLEMENTARY INFORMATION: A. Background OMB published a notice in the Federal Register (57 FR 39018) on August 27, 1992, requesting comments on proposed revisions to OMB Circular A-110. Interested parties were invited to submit comments. OMB received over 200 comments from Federal agencies, non-profit organizations, professional organizations and others. All comments were considered in developing this final revision. The following section presents a summary of the major comments, grouped by subject, and a response to each comment. Other changes have been made to increase clarity and readability. B. Comments and Responses General Comment: Provide Federal agendas the necessary discretion to grant waivers on a case-by-case basis. Response: Amended Circular to provide Federal agencies the authority to grant exceptions on a case-by-case basis. Comment: Clarify the provisions concerning the allowability of fees or profits. Response: No change. Generally fees and profits are not paid to recipients unless authorized by legislation. Fees and profits are discussed in the various cost principles. Pre-Award Requirements Comment: Delete or revise section on "Advance Public Notice and Priority Setting." Response: Amended the section to give Federal agencies more flexibility. Comment: Amend the section on "Special Award Conditions" to: (1) include quantifiable, objective measures which may trigger special award conditions; (2) provide for an appeals process; and, (3) conform to the grants management common rule covering State and local governments to the extent practicable. Response: OMB expanded this section to require Federal agencies to provide more information to recipients including an explanation of how recipients may request reconsideration of additional requirements. However, OMB does not believe it is practical to provide quantifiable measures. Most of the additional requirements are based on qualitative considerations rather than quantitative ones. Also, OMB amended this section to conform to the grants management common rule to the extent practicable. Post-Award Requirements Comment: The definition of "in-kind contribution" is not the same as the one used in the grants management common rule for State and local governments. Response: Redefined third party in-kind contributions to mean the value of non-cash contributions from third parties. All grantee contributions whether in the form of property or cash are referred to as "contributions" and are subject to the respective cost principles. This change is consistent with the provisions of the Common Rule. Comment: Allow grantees to use unrecovered indirect cost as cost sharing or matching. Response: Added a provision to the Circular which provides that unrecovered in direct cost may be included as part of cost sharing or matching with the Federal agency's prior approval. Comment: In identifying contributed services to federally-funded programs, university recipients should be entitled to assign fringe benefits on the same basis as they would if services were compensated, as long as such costs meet all other stated criteria. Response: No change. The Circular provides that paid fringe benefits for volunteer services that are reasonable, allowable and allocable may be included in the valuation of the services. This is a liberalization of the current Circular. It recognizes that some donated services originate from third parties that pay fringe benefits. Comment: The requirement to develop unit cost information is not applicable to scientific research and related activities. Response: No change. The Circular covers many programs, other than research where unit cost data are useful. The Circular does not require the development of unit cost data for those programs where it is not practical to do so. Comment: The criteria for informing the Federal agency of unneeded property should be changed to conform to the criteria in the grants management common rule for State and local governments. Response: Changed the criteria used for reporting unneeded property. The Circular now provides for recipients to use the fair market value of unneeded property rather than its acquisition cost to determine whether the property must be reported to the Federal agency. This change is consistent with the provisions of the Common Rule. Comment: Interest earned on Federal advances of grant funds should be returned to a single entity (e.g.. the Department of the Treasury) rather than each individual Federal awarding agency. Response: Amended Circular to provide that all interest earned on Federal Register / Vol. 58, No. 227 / Monday, November 29, 1993 / Notices 62993 ================================================================================ Federal advances shall be remitted to the Department of Health and Human Services (DHHS). DHHS is the largest granting agency and administers a sophisticated payment management System. Comment: The definition of program income should provide for deduction of costs incidental to program income. Response: No change. Because of the different amounts and types of program income, OMB believes the accounting for costs incurred in connection with program income should be considered on a program-by-program basis. Comment: All program income regardless of whether the deductive, matching, or additive alternative is authorized, should be used by recipients before they request additional cash payments. Response: Amended the Circular to clarify that all program income should be used by recipients before they request additional cash payments. Comment: The requirement for recipients to "... follow a procedure to avoid purchasing unnecessary or duplicative items" is resulting in costly delays in purchasing research equipment. Federal auditors have interpreted this requirement to mean recipients must establish a costly equipment screening process. Response: Amended the Circular to provide that recipients must determine, through an appropriate process, that existing equipment is not available to meet the new requirement. The original requirement was not intended to establish a costly equipment screening process. Comment: Authority to incur pre-award costs, to initiate one time extensions of assistance agreements, and to carry forward unobligated balances should not require prior approval unless specifically required by the Federal agency. Response: Amended the Circular to provide that recipients of research awards, because of the nature of the programs, are not required to obtain prior approval to: (1) incur pre-award costs; (2) extend an assistance program; or (3) carry forward unobligated balances unless specifically required by the Federal agency. After-the-Award Requirements Comment: The Circular allows Federal agencies to recover funds on the basis of a later audit or review. A number of commenters said the only way funds should be recovered after the closeout of an award is on the basis of an audit. Response: No change. Grantees which certify that rate agreements contain no unallowable cost are required to reimburse the Federal Government for any cost that is later found to be unallowable through legal means other than audit. John B. Arthur. Assistant Director for Administration Circular No. A-110 Revised To the Heads of Executive Departments and Establishments SUBJECT: Uniform Administrative Requirements for Grants and Agreements With Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations 1. Purpose. This Circular sets forth standards for obtaining consistency and uniformity among Federal agencies in the administration of grants to and agreements with institutions of higher education, hospitals, and other non-profit organizations. 2. Authority. Circular A-110 is issued under the authority of 31 U.S.C. 503 (the Chief Financial Officers Act), 31 U.S.C. 1111, 41 U.S.C. 405 (the Office of Federal Procurement Policy Act), Reorganization Plan No. 2 of 1970, and E.O. 11541 ("Prescribing the Duties of the Office of Management and Budget and the Domestic Policy Council in the Executive Office of the President"). 3. Policy. Except as provided herein, the standards set forth in this Circular are applicable to all Federal agencies. If any statute specifically prescribes policies or specific requirements that differ from the standards provided herein, the provisions of the statute shall govern. The provisions of the sections of this Circular shall be applied by Federal agencies to recipients. Recipients shall apply the provisions of this Circular to subrecipients performing substantive work under grants and agreements that are passed through or awarded by the primary recipient, if such subrecipients are organizations described in paragraph 1. This Circular does not apply to grants, contracts, or other agreements between the Federal Government and units of State or local governments covered by OMB Circular A-102, "Grants and Cooperative Agreements with State and Local Governments," and the Federal agencies' grants management common rule which standardized and codified the administrative requirements Federal agencies impose on State and local grantees. In addition, subawards and contracts to State or local governments are not covered by this Circular. However, this Circular applies to subawards made by State and local governments to organizations covered by this Circular. Federal agencies may apply the provisions of this Circular to commercial organizations, foreign governments, organizations under the jurisdiction of foreign governments, and international organizations. 4. Definitions. Definitions of key terms used in this Circular are contained in Section ___.2 in the Attachment. 5. Required Action. The specific requirements and responsibilities of Federal agencies and institutions of higher education, hospitals, and other non-profit organizations are set forth in this Circular. Federal agencies responsible for awarding and administering grants to and other agreements with organizations described in paragraph 1 shall adopt the language in the Circular unless different provisions are required by Federal statute or are approved by OMB. 6. OMB Responsibilities. OMB will review agency regulations and implementation of this Circular, and will provide interpretations of policy requirements and assistance to insure effective and efficient implementation. Any exceptions will be subject to approval by OMB, as indicated in Section ___.4 in the Attachment. Exceptions will only be made in particular cases where adequate justification is presented. 7. Information Contact. Further information concerning this Circular may be obtained by contacting the Office of Federal Financial Management, Office of Management and Budget, Washington, DC 20503, telephone (202) 395-3993. 8. Termination Review Date. This Circular will have a policy review three years from date of issuance. 9. Effective Date. The standards set forth in this Circular which affect Federal agencies will be effective 30 days after publication of the final revision in the Federal Register. Those standards which Federal agencies impose on grantees will be adopted by agencies in codified regulations within six months after publication in the Federal Register. Earlier implementation is encouraged. Leon E. Panetta Director. Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Non-Profit Organizations Subpart A - General Sec. ___.1 Purpose. ___.2 Definitions. ___.3 Effect on other issuances. ___.4 Deviations. ___.5 Subawards. Subpart B - Pre-award Requirements ___.10 Purpose. ___.11 Pre-award policies. ___.12 Forms for applying for Federal assistance. ___.13 Debarment and suspension. ___.14 Special award conditions. ___.15 Metric system of measurement. ___.16 Resource Conservation and Recovery Act. ___.17 Certifications and representations. Subpart C - Post-award Requirements Financial and Program Management ___.20 Purpose of financial and program management. ___.21 Standards for financial management systems. ___.22 Payment. ___.23 Cost sharing or matching. ___.24 Program income. ___.25 Revision of budget and program plans. 62994 Federal Register / Vol. 58, No. 227 / Monday, November 29, 1993 / Notices ================================================================================ ___.26 Non-Federal audits. ___.27 Allowable costs. ___.28 Period of availability of funds. Property Standards ___.30 Purpose of property standards. ___.31 Insurance coverage. ___.32 Real property. ___.33 Federally-owned and exempt property. ___.34 Equipment. ___.35 Supplies and other expendable property. ___.36 Intangible property. ___.37 Property trust relationship. Procurement Standards ___.40 Purpose of procurement standards. ___.41 Recipient responsibilities. ___.42 Codes of conduct. ___.43 Competition. ___.44 Procurement procedures. ___.45 Cost and price analysis. ___.46 Procurement records. ___.47 Contract administration. ___.48 Contract provisions. Reports and Records ___.50 Purpose of reports and records. ___.51 Monitoring and reporting program performance. ___.52 Financial reporting. ___.53 Retention and access requirements for records. Termination and Enforcement ___.60 Purpose of termination and enforcement. ___.61 Termination. ___.62 Enforcement. Subpart D - After-The-Award Requirements ___.70 Purpose. ___.71 Closeout procedures. ___.72 Subsequent adjustments and continuing responsibilities. ___.73 Collection of amounts due. Appendix A - Contract Provisions Subpart A - General ___.1 Purpose. This Circular establishes uniform administrative requirements for Federal grants and agreements awarded to institutions of higher education, hospitals, and other non-profit organizations. Federal awarding agencies shall not impose additional or inconsistent requirements, except as provided in Sections ___.4, and ___.14 or unless specifically required by Federal statute or executive order. Non-profit organizations that implement Federal programs for the States are also subject to State requirements. ___.2 Definitions. (a) Accrued expenditures means the charges incurred by the recipient during a given period requiring the provision of funds for: (1) goods and other tangible property received; (2) services performed by employees, contractors, subrecipients, and other payees; and, (3) other amounts becoming owed under programs for which no current services or performance is required. (b) Accrued income means the sum of: (1) earnings during a given period from (i) services performed by the recipient, and (ii) goods and other tangible property delivered to purchasers, and (2) amounts becoming owed to the recipient for which no current services or performance is required by the recipient. (c) Acquisition cost of equipment means the net invoice price of the equipment, including the cost of modifications, attachments, accessories, or auxiliary apparatus necessary to make the property usable for the purpose for which it was acquired. Other charges, such as the cost of installation, transportation, taxes, duty or protective in-transit insurance, shall be included or excluded from the unit acquisition cost in accordance with the recipient's regular accounting practices. (d) Advance means a payment made by Treasury check or other appropriate payment mechanism to a recipient upon its request either before outlays are made by the recipient or through the use of predetermined payment schedules. (e) Award means financial assistance that provides support or stimulation to accomplish a public purpose. Awards include grants and other agreements in the form of money or property in lieu of money, by the Federal Government to an eligible recipient. The term does not include: technical assistance, which provides services instead of money; other assistance in the form of loans, loan guarantees, interest subsidies, or insurance; direct payments of any kind to individuals; and, contracts which are required to be entered into and administered under procurement laws and regulations. (f) Cash contributions means the recipient's cash outlay, including the outlay of money contributed to the recipient by third parties. (g) Closeout means the process by which a Federal awarding agency determines that all applicable administrative actions and all required work of the award have been completed by the recipient and Federal awarding agency. (h) Contract means a procurement contract under an award or subaward, and a procurement subcontract under a recipient's or subrecipient's contract. (i) Cost sharing or matching means that portion of project or program costs not borne by the Federal Government. (j) Date of completion means the date on which all work under an award is completed or the date on the award document, or any supplement or amendment thereto, on which Federal sponsorship ends. (k) Disallowed costs means those charges to an award that the Federal awarding agency determines to be unallowable, in accordance with the applicable Federal cost principles or other terms and conditions contained in the award. (l) Equipment means tangible nonexpendable personal property including exempt property charged directly to the award having a useful life of more than one year and an acquisition cost of $5000 or more per unit. However, consistent with recipient policy, lower limits may be established. (m) Excess property means property under the control of any Federal awarding agency that, as determined by the head thereof, is no longer required for its needs or the discharge of its responsibilities. (n) Exempt property means tangible personal property acquired in whole or in part with Federal funds, where the Federal awarding agency has statutory authority to vest title in the recipient without further obligation to the Federal Government. An example of exempt property authority is contained in the Federal Grant and Cooperative Agreement Act (31 U.S.C. 6306), for property acquired under an award to conduct basic or applied research by a non-profit institution of higher education or non-profit organization whose principal purpose is conducting scientific research. (o) Federal awarding agency means the Federal agency that provides an award to the recipient. (p) Federal funds authorized means the total amount of Federal funds obligated by the Federal Government for use by the recipient. This amount may include any authorized carryover of unobligated funds from prior funding periods when permitted by agency regulations or agency implementing instructions. (q) Federal share of real property, equipment, or supplies means that percentage of the property's acquisition costs and any improvement expenditures paid with Federal funds. (r) Funding period means the period of time when Federal funding is available for obligation by the recipient. (s) Intangible property and debt instruments means, but is not limited to, trademarks, copyrights, patents and patent applications and such property as loans, notes and other debt instruments, lease agreements, stock and other instruments of property ownership, whether considered tangible or intangible. (t) Obligations means the amounts of orders placed, contracts and grants awarded, services received and similar transactions during a given period that require payment by the recipient during the same or a future period. (u) Outlays or expenditures means charges made to the project or program. They may be reported on a cash or accrual basis. For reports prepared on a cash basis, outlays are the sum of cash disbursements for direct charges for goods and services, the amount of indirect expense charged, the value of third party in-kind contributions applied and the amount of cash advances and payments made to subrecipients. For reports prepared on an accrual basis, outlays are the sum of cash disbursements for direct charges for goods and services, the amount of indirect expense incurred, the value of in-kind contributions applied, and the net increase (or decrease) in the amounts owed by the recipient for goods and other property received, for services performed by employees, contractors, subrecipients and other payees and other amounts becoming owed under programs for which no current services or performance are required. (v) Personal property means property of any kind except real property. It may be tangible, having physical existence, or intangible, having no physical existence, such as copyrights, patents, or securities. Federal Register / Vol. 58, No. 227 / Monday, November 29, 1993 / Notices 62995 ================================================================================ (w) Prior approval means written approval by an authorized official evidencing prior consent. (x) Program income means gross income earned by the recipient that is directly generated by a supported activity or earned as a result of the award (see exclusions in paragraphs ___.24 (e) and (h)). Program income includes, but is not limited to, income from fees for services performed, the use or rental of real or personal property acquired under federally-funded projects, the sale of commodities or items fabricated under an award, license fees and royalties on patents and copyrights, and interest on loans made with award funds. Interest earned on advances of Federal funds is not program income. Except as otherwise provided in Federal awarding agency regulations or the terms and conditions of the award, program income does not include the receipt of principal on loans, rebates, credits, discounts, etc., or interest earned on any of them. (y) Project costs means all allowable costs, as set forth in the applicable Federal cost principles, incurred by a recipient and the value of the contributions made by third parties in accomplishing the objectives of the award during the project period. (z) Project period means the period established in the award document during which Federal sponsorship begins and ends. (aa) Property means, unless otherwise stated, real property, equipment, intangible property and debt instruments. (bb) Real property means land, including land improvements, structures and appurtenances thereto, but excludes movable machinery and equipment. (cc) Recipient means an organization receiving financial assistance directly from Federal awarding agencies to carry out a project or program. The term includes public and private institutions of higher education, public and private hospitals, and other quasi-public and private non-profit organizations such as, but not limited to, community action agencies, research institutes, educational associations, and health centers. The term may include commercial organizations, foreign or international organizations (such as agencies of the United Nations) which are recipients, subrecipients, or contractors or subcontractors of recipients or subrecipients at the discretion of the Federal awarding agency. The term does not include government-owned contractor-operated facilities or research centers providing continued support for mission-oriented, large-scale programs that are government-owned or controlled, or are designated as federally-funded research and development centers. (dd) Research and development means all research activities, both basic and applied, and all development activities that are supported at universities, colleges, and other non-profit institutions. "Research" is defined as a systematic study directed toward fuller scientific knowledge or understanding of the subject studied. "Development" is the systematic use of knowledge and understanding gained from research directed toward the production of useful materials, devices, systems, or methods, including design and development of prototypes and processes. The term research also includes activities involving the training of individuals in research techniques where such activities utilize the same facilities as other research and development activities and where such activities are not included in the instruction function. (ee) Small awards means a grant or cooperative agreement not exceeding the small purchase threshold fixed at 41 U.S.C. 403(11) (currently $25,000). (ff) Subaward means an award of financial assistance in the form of money, or property in lieu of money, made under an award by a recipient to an eligible subrecipient or by a subrecipient to a lower tier subrecipient. The term includes financial assistance when provided by any legal agreement, even if the agreement is called a contract, but does not include procurement of goods and services nor does it include any form of assistance which is excluded from the definition of "award" in paragraph ___(e). (gg) Subrecipient means the legal entity to which a subaward is made and which is accountable to the recipient for the use of the funds provided. The term may include foreign or international organizations (such as agencies of the United Nations) at the discretion of the Federal awarding agency. (hh) Supplies means all personal property excluding equipment, intangible property, and debt instruments as defined in this section, and inventions of a contractor conceived or first actually reduced to practice in the performance of work under a funding agreement ("subject inventions"), as defined in 37 CFR part 401, "Rights to Inventions Made by Nonprofit Organizations and Small Business Firms Under Government Grants, Contracts, and Cooperative Agreements." (ii) Suspension means an action by a Federal awarding agency that temporarily withdraws Federal sponsorship under an award, pending corrective action by the recipient or pending a decision to terminate the award by the Federal awarding agency. Suspension of an award is a separate action from suspension under Federal agency regulations implementing E.O.s 12549 and 12689, "Debarment and Suspension." (jj) Termination means the cancellation of Federal sponsorship, in whole or in part, under an agreement at any time prior to the date of completion. (kk) Third party in-kind contributions means the value of non-cash contributions provided by non-Federal third parties. Third party in-kind contributions may be in the form of real property, equipment, supplies and other expendable property, and the value of goods and services directly benefiting and specifically identifiable to the project or program. (ll) Unliquidated obligations, for financial reports prepared on a cash basis, means the amount of obligations incurred by the recipient that have not been paid. For reports prepared on an accrued expenditure basis, they represent the amount of obligations incurred by the recipient for which an outlay has not been recorded. (mm) Unobligated balance means the portion of the funds authorized by the Federal awarding agency that has not been obligated by the recipient and is determined by deducting the cumulative obligations from the cumulative funds authorized. (nn) Unrecovered indirect cost means the difference between the amount awarded and the amount which could have been awarded under the recipient's approved negotiated indirect cost rate. (oo) Working capital advance means a procedure where by funds are advanced to the recipient to cover its estimated disbursement needs for a given initial period. ___.3 Effect on other issuances. For awards subject to this Circular, all administrative requirements of codified program regulations, program manuals, handbooks and other nonregulatory materials which are inconsistent with the requirements of this Circular shall be superseded, except to the extent they are required by statute, or authorized in accordance with the deviations provision in Section ___.4. ___.4 Deviations. The Office of Management and Budget (OMB) may grant exceptions for classes of grants or recipients subject to the requirements of this Circular when exceptions are not prohibited by statute. However, in the interest of maximum uniformity, exceptions from the requirements of this Circular shall be permitted only in unusual circumstances. Federal awarding agencies may apply more restrictive requirements to a class of recipients when approved by OMB. Federal awarding agencies may apply less restrictive requirements when awarding small awards, except for those requirements which are statutory. Exceptions on a case-by-case basis may also be made by Federal awarding agencies. ___.5 Subawards. Unless sections of this Circular specifically exclude subrecipients from coverage, the provisions of this Circular shall be applied to subrecipients performing work under awards if such subrecipients are institutions of higher education, hospitals or other non-profit organizations. State and local government subrecipients are subject to the provisions of regulations implementing the grants management common rule,"Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments," published at 53 FR 8034 (3/11/88). Subpart B - Pre-Award Requirements ___.10 Purpose. Sections ___.11 through ___.17 prescribes forms and instructions and other pre-award matters to be used in applying for Federal awards. ___.11 Pre-award policies. (a) Use of Grants and Cooperative Agreements, and Contracts. In each instance, the Federal awarding agency shall decide on the appropriate award instrument (i.e., grant, cooperative agreement, or contract). The Federal Grant and Cooperative Agreement Act (31 U.S.C. 6301-08) governs the use of grants, cooperative agreements and contracts. A grant or cooperative agreement shall be used only when the principal purpose of a transaction is to accomplish a public purpose of support or stimulation authorized by 62996 Federal Register / Vol. 58, No. 227 / Monday, November 29, 1993 / Notices ================================================================================ Federal statute. The statutory criterion for choosing between grants and cooperative agreements is that for the latter, "substantial involvement is expected between the executive agency and the State, local government, or other recipient when carrying out the activity contemplated in the agreement." Contracts shall be used when the principal purpose is acquisition of property or services for the direct benefit or use of the Federal Government. (b) Public Notice and Priority Setting. Federal awarding agencies shall notify the public of its intended funding priorities for discretionary grant programs, unless funding priorities are established by Federal statute. ___.12 Forms for applying for Federal assistance. (a) Federal awarding agencies shall comply with the applicable report clearance requirements of 5 CFR part 1320, "Controlling Paperwork Burdens on the Public," with regard to all forms used by the Federal awarding agency in place of or as a supplement to the Standard Form 424 (SF-424) series. (b) Applicants shall use the SF-424 series or those forms and instructions prescribed by the Federal awarding agency. (c) For Federal programs covered by E.O. 12372, "Intergovernmental Review of Federal Programs," the applicant shall complete the appropriate sections of the SF-424 (Application for Federal Assistance) indicating whether the application was subject to review by the State Single Point of Contact (SPOC). The name and address of the SPOC for a particular State can be obtained from the Federal awarding agency or the Catalog of Federal Domestic Assistance. The SPOC shall advise the applicant whether the program for which application is made has been selected by that State for review. (d) Federal awarding agencies that do not use the SF-424 form should indicate whether the application is subject to review by the State under E.O. 12372. ___.13 Debarment and suspension. Federal awarding agencies and recipients shall comply with the nonprocurement debarment and suspension common rule implementing E.O.s 12549 and 12689, "Debarment and Suspension." This common rule restricts subawards and contracts with certain parties that are debarred, suspended or otherwise excluded from or ineligible for participation in Federal assistance programs or activities. ___.14 Special award conditions. If an applicant or recipient: (a) has a history of poor performance, (b) is not financially stable, (c) has a management system that does not meet the standards prescribed in this Circular, (d) has not conformed to the terms and conditions of a previous award, or (e) is not otherwise responsible, Federal awarding agencies may impose additional requirements as needed, provided that such applicant or recipient is notified in writing as to: the nature of the additional requirements, the reason why the additional requirements are being imposed, the nature of the corrective action needed, the time allowed for completing the corrective actions, and the method for requesting reconsideration of the additional requirements imposed. Any special conditions shall be promptly removed once the conditions that prompted them have been corrected. ___.15 Metric system of measurement. The Metric Conversion Act, as amended by the Omnibus Trade and Competitiveness Act (15 U.S.C. 205) declares that the metric system is the preferred measurement system for U.S. trade and commerce. The Act requires each Federal agency to establish a date or dates in consultation with the Secretary of Commerce, when the metric system of measurement will be used in the agency's procurements, grants, and other business-related activities. Metric implementation may take longer where the use of the system is initially impractical or likely to cause significant inefficiencies in the accomplishment of federally-funded activities. Federal awarding agencies shall follow the provisions of E.O. 12770, "Metric Usage in Federal Government Programs." ___.16 Resource Conservation and Recovery Act (RCRA) (Pub. L. 94-580 codified at 42 U.S.C. 6962). Under the Act, any State agency or agency of a political subdivision of a State which is using appropriated Federal funds must comply with Section 6002. Section 6002 requires that preference be given in procurement programs to the purchase of specific products containing recycled materials identified in guidelines developed by the Environmental Protection Agency (EPA) (40 CFR parts 247-254). Accordingly, State and local institutions of higher education, hospitals, and non-profit organizations that receive direct Federal awards or other Federal funds shall give preference in their procurement programs funded with Federal funds to the purchase of recycled products pursuant to the EPA guidelines. ___.17 Certifications and representations. Unless prohibited by statute or codified regulation, each Federal awarding agency is authorized and encouraged to allow recipients to submit certifications and representations required by statute, executive order, or regulation on an annual basis, if the recipients have ongoing and continuing relationships with the agency. Annual certifications and representations shall be signed by responsible officials with the authority to ensure recipients' compliance with the pertinent requirements. Subpart C - Post-Award Requirements Financial and Program Management ___.20 Purpose of financial and program management. Sections ___.21 through ___.28 prescribe standards for financial management systems, methods for making payments and rules for: satisfying cost sharing and matching requirements, accounting for program income, budget revision approvals, making audits, determining allowability of cost, and establishing fund availability. ___.21 Standards for financial management systems. (a) Federal awarding agencies shall require recipients to relate financial data to performance data and develop unit cost information whenever practical. (b) Recipients' financial management systems shall provide for the following. (1) Accurate, current and complete disclosure of the financial results of each federally-sponsored project or program in accordance with the reporting requirements set forth in Section ___.52. If a Federal awarding agency requires reporting on an accrual basis from a recipient that maintains its records on other than an accrual basis, the recipient shall not be required to establish an accrual accounting system. These recipients may develop such accrual data for its reports on the basis of an analysis of the documentation on hand. (2) Records that identify adequately the source and application of funds for federally-sponsored activities. These records shall contain information pertaining to Federal awards, authorizations, obligations, unobligated balances, assets, outlays, income and interest. (3) Effective control over and accountability for all funds, property and other assets. Recipients shall adequately safeguard all such assets and assure they are used solely for authorized purposes. (4) Comparison of outlays with budget amounts for each award. Whenever appropriate, financial information should be related to performance and unit cost data. (5) Written procedures to minimize the time elapsing between the transfer of funds to the recipient from the U.S. Treasury and the issuance or redemption of checks, warrants or payments by other means for program purposes by the recipient. To the extent that the provisions of the Cash Management Improvement Act (CMIA) (Pub. L. 101-453) govern, payment methods of State agencies, instrumentalities, and fiscal agents shall be consistent with CMIA Treasury-State Agreements or the CMIA default procedures codified at 31 CFR part 205, "Withdrawal of Cash from the Treasury for Advances under Federal Grant and Other Programs." (6) Written procedures for determining the reasonableness, allocability and allowability of costs in accordance with the provisions of the applicable Federal cost principles and the terms and conditions of the award. (7) Accounting records including cost accounting records that are supported by source documentation. (c) Where the Federal Government guarantees or insures the repayment of money borrowed by the recipient, the Federal awarding agency, at its discretion, may require adequate bonding and insurance if the bonding and insurance requirements of the recipient are not deemed adequate to protect the interest of the Federal Government. (d) The Federal awarding agency may require adequate fidelity bond coverage where the recipient lacks sufficient coverage to protect the Federal Government's interest. (e) Where bonds are required in the situations described above, the bonds shall be obtained from companies holding certificates of authority as acceptable sureties, as prescribed in 31 CFR part 223, "Surety Companies Doing Business with the United States." ___.22 Payment. (a) Payment methods shall minimize the time elapsing between the transfer of funds Federal Register / Vol. 58, No. 227 / Monday, November 29, 1993 / Notices 62997 ================================================================================ from the United States Treasury and the issuance or redemption of checks, warrants, or payment by other means by the recipients. Payment methods of State agencies or instrumentalities shall be consistent with Treasury-State CMIA agreements or default procedures codified at 31 CFR part 205. (b) Recipients are to be paid in advance, provided they maintain or demonstrate the willingness to maintain: (1) written procedures that minimize the time elapsing between the transfer of funds and disbursement by the recipient, and (2) financial management systems that meet the standards for fund control and accountability as established in Section ___.21. Cash advances to a recipient organization shall be limited to the minimum amounts needed and be timed to be in accordance with the actual, immediate cash requirements of the recipient organization in carrying out the purpose of the approved program or project. The timing and amount of cash advances shall be as close as is administratively feasible to the actual disbursements by the recipient organization for direct program or project costs and the proportionate share of any allowable indirect costs. (c) Whenever possible, advances shall be consolidated to cover anticipated cash needs for all awards made by the Federal awarding agency to the recipient. (1) Advance payment mechanisms include, but are not limited to, Treasury check and electronic funds transfer. (2) Advance payment mechanisms are subject to 31 CFR part 205. (3) Recipients shall be authorized to submit requests for advances and reimbursements at least monthly when electronic fund transfers are not used. (d) Requests for Treasury check advance payment shall be submitted on SF-270, "Request for Advance or Reimbursement," or other forms as may be authorized by OMB. This form is not to be used when Treasury check advance payments are made to the recipient automatically through the use of a predetermined payment schedule or if precluded by special Federal awarding agency instructions for electronic funds transfer. (e) Reimbursement is the preferred method when the requirements in paragraph (b) cannot be met. Federal awarding agencies may also use this method on any construction agreement, or if the major portion of the construction project is accomplished through private market financing or Federal loans, and the Federal assistance constitutes a minor portion of the project. (1) When the reimbursement method is used, the Federal awarding agency shall make payment within 30 days after receipt of the billing, unless the billing is improper. (2) Recipients shall be authorized to submit request for reimbursement at least monthly when electronic funds transfers are not used. (f) If a recipient cannot meet the criteria for advance payments and the Federal awarding agency has determined that reimbursement is not feasible because the recipient lacks sufficient working capital, the Federal awarding agency may provide cash on a working capital advance basis. Under this procedure, the Federal awarding agency shall advance cash to the recipient to cover its estimated disbursement needs for an initial period generally geared to the awardee's disbursing cycle. Thereafter, the Federal awarding agency shall reimburse the recipient for its actual cash disbursements. The working capital advance method of payment shall not be used for recipients unwilling or unable to provide timely advances to their subrecipient to meet the subrecipient's actual cash disbursements. (g) To the extent available, recipients shall disburse funds available from repayments to and interest earned on a revolving fund, program income, rebates, refunds, contract settlements, audit recoveries and interest earned on such funds before requesting additional cash payments. (h) Unless otherwise required by statute, Federal awarding agencies shall not withhold payments for proper charges made by recipients at any time during the project period unless (1) or (2) apply. (1) A recipient has failed to comply with the project objectives, the terms and conditions of the award, or Federal reporting requirements. (2) The recipient or subrecipient is delinquent in a debt to the United States as defined in OMB Circular A-129, "Managing Federal Credit Programs." Under such conditions, the Federal awarding agency may, upon reasonable notice, inform the recipient that payments shall not be made for obligations incurred after a specified date until the conditions are corrected or the indebtedness to the Federal Government is liquidated. (i) Standards governing the use of banks and other institutions as depositories of funds advanced under awards are as follows. (1) Except for situations described in paragraph (i)(2), Federal awarding agencies shall not require separate depository accounts for funds provided to a recipient or establish any eligibility requirements for depositories for funds provided to a recipient. However, recipients must be able to account for the receipt, obligation and expenditure of funds. (2) Advances of Federal funds shall be deposited and maintained in insured accounts whenever possible. (j) Consistent with the national goal of expanding the opportunities for women-owned and minority-owned business enterprises, recipients shall be encouraged to use women-owned and minority-owned banks (a bank which is owned at least 50 percent by women or minority group members). (k) Recipients shall maintain advances of Federal funds in interest bearing accounts, unless (1), (2) or (3) apply. (1) The recipient receives less than $120,000 in Federal awards per year. (2) The best reasonably available interest bearing account would not be expected to earn interest in excess of $250 per year on Federal cash balances. (3) The depository would require an average or minimum balance so high that it would not be feasible within the expected Federal and non-Federal cash resources. (l) For those entities where CMIA and its implementing regulations do not apply, interest earned on Federal advances deposited in interest bearing accounts shall be remitted annually to Department of Health and Human Services, Payment Management System, Rockville, MD 20852. Interest amounts up to $250 per year may be retained by the recipient for administrative expense. State universities and hospitals shall comply with CMIA, as it pertains to interest. If an entity subject to CMIA uses its own funds to pay pre-award costs for discretionary awards without prior written approval from the Federal awarding agency, it waives its right to recover the interest under CMIA. (m) Except as noted elsewhere in this Circular, only the following forms shall be authorized for the recipients in requesting advances and reimbursements. Federal agencies shall not require more than an original and two copies of these forms. (1) SF-270, Request for Advance or Reimbursement. Each Federal awarding agency shall adopt the SF-270 as a standard form for all nonconstruction programs when electronic funds transfer or predetermined advance methods are not used. Federal awarding agencies, however, have the option of using this form for construction programs in lieu of the SF-271, "Outlay Report and Request for Reimbursement for Construction Programs." (2) SF-271, Outlay Report and Request for Reimbursement for Construction Programs. Each Federal awarding agency shall adopt the SF-271 as the standard form to be used for requesting reimbursement for construction programs. However, a Federal awarding agency may substitute the SF-270 when the Federal awarding agency determines that it provides adequate information to meet Federal needs. ___.23 Cost sharing or matching. (a) All contributions, including cash and third party in-kind, shall be accepted as part of the recipient's cost sharing or matching when such contributions meet all of the following criteria. (1) Are verifiable from the recipient's records. (2) Are not included as contributions for any other federally-assisted project or program. (3) Are necessary and reasonable for proper and efficient accomplishment of project or program objectives. (4) Are allowable under the applicable cost principles. (5) Are not paid by the Federal Government under another award, except where authorized by Federal statute to be used for cost sharing or matching. (6) Are provided for in the approved budget when required by the Federal awarding agency. (7) Conform to other provisions of this Circular, as applicable. (b) Unrecovered indirect costs may be included as part of cost sharing or matching only with the prior approval of the Federal awarding agency. (c) Values for recipient contributions of services and property shall be established in accordance with the applicable cost principles. If a Federal awarding agency authorizes recipients to donate buildings or land for construction/facilities acquisition 62998 Federal Register / Vol. 58, No. 227 / Monday, November 29, 1993 / Notices ================================================================================ projects or long-term use, the value of the donated property for cost sharing or matching shall be the lesser of (1) or (2). (1) The certified value of the remaining life of the property recorded in the recipient's accounting records at the time of donation. (2) The current fair market value. However, when there is sufficient justification, the Federal awarding agency may approve the use of the current fair market value of the donated property, even if it exceeds the certified value at the time of donation to the project. (d) Volunteer services furnished by professional and technical personnel, consultants, and other skilled and unskilled labor may be counted as cost sharing or matching if the service is an integral and necessary part of an approved project or program. Rates for volunteer services shall be consistent with those paid for similar work in the recipient's organization. In those instances in which the required skills are not found in the recipient organization, rates shall be consistent with those paid for similar work in the labor market in which the recipient competes for the kind of services involved. In either case, paid fringe benefits that are reasonable, allowable, and allocable may be included in the valuation. (e) When an employer other than the recipient furnishes the services of an employee, these services shall be valued at the employee's regular rate of pay (plus an amount of fringe benefits that are reasonable, allowable, and allocable, but exclusive of overhead costs), provided these services are in the same skill for which the employee is normally paid. (f) Donated supplies may include such items as expendable equipment, office supplies, laboratory supplies or workshop and classroom supplies. Value assessed to donated supplies included in the cost sharing or matching share shall be reasonable and shall not exceed the fair market value of the property at the time of the donation. (g) The method used for determining cost sharing or matching for donated equipment, buildings and land for which title passes to the recipient may differ according to the purpose of the award, if (1) or (2) apply. (1) If the purpose of the award is to assist the recipient in the acquisition of equipment, buildings or land, the total value of the donated property may be claimed as cost sharing or matching. (2) If the purpose of the award is to support activities that require the use of equipment, buildings or land, normally only depreciation or use charges for equipment and buildings may be made. However, the full value of equipment or other capital assets and fair rental charges for land may be allowed, provided that the Federal awarding agency has approved the charges. (h) The value of donated property shall be determined in accordance with the usual accounting policies of the recipient, with the following qualifications. (1) The value of donated land and buildings shall not exceed its fair market value at the time of donation to the recipient as established by an independent appraiser (e.g., certified real property appraiser or General Services Administration representative) and certified by a responsible official of the recipient. (2) The value of donated equipment shall not exceed the fair market value of equipment of the same age and condition at the time of donation. (3) The value of donated space shall not exceed the fair rental value of comparable space as established by an independent appraisal of comparable space and facilities in a privately-owned building in the same locality. (4) The value of loaned equipment shall not exceed its fair rental value. (5) The following requirements pertain to the recipient's supporting records for in-kind contributions from third parties. (i) Volunteer services shall be documented and, to the extent feasible, supported by the same methods used by the recipient for its own employees. (ii) The basis for determining the valuation for personal service, material, equipment, buildings and land shall be documented. ___.24 Program income. (a) Federal awarding agencies shall apply the standards set forth in this section in requiring recipient organizations to account for program income related to projects financed in whole or in part with Federal funds. (b) Except as provided in paragraph (h) below, program income earned during the project period shall be retained by the recipient and, in accordance with Federal awarding agency regulations or the terms and conditions of the award, shall be used in one or more of the ways listed in the following. (1) Added to funds committed to the project by the Federal awarding agency and recipient and used to further eligible project or program objectives. (2) Used to finance the non-Federal share of the project or program. (3) Deducted from the total project or program allowable cost in determining the net allowable costs on which the Federal share of costs is based. (c) When an agency authorizes the disposition of program income as described in paragraphs (b)(1) or (b)(2), program income in excess of any limits stipulated shall be used in accordance with paragraph (b)(3). (d) In the event that the Federal awarding agency does not specify in its regulations or the terms and conditions of the award how program income is to be used, paragraph (b)(3) shall apply automatically to all projects or programs except research. For awards that support research, paragraph (b)(1) shall apply automatically unless the awarding agency indicates in the terms and conditions another alternative on the award or the recipient is subject to special award conditions, as indicated in Section ___.14. (e) Unless Federal awarding agency regulations or the terms and conditions of the award provide otherwise, recipients shall have no obligation to the Federal Government regarding program income earned after the end of the project period. (f) If authorized by Federal awarding agency regulations or the terms and conditions of the award, costs incident to the generation of program income may be deducted from gross income to determine program income, provided these costs have not been charged to the award. (g) Proceeds from the sale of property shall be handled in accordance with the requirements of the Property Standards (See Sections ___.30 through ___.37). (h) Unless Federal awarding agency regulations or the terms and condition of the award provide otherwise, recipients shall have no obligation to the Federal Government with respect to program income earned from license fees and royalties for copyrighted material, patents, patent applications, trademarks, and inventions produced under an award. However, Patent and Trademark Amendments (35 U.S.C. 18) apply to inventions made under an experimental, developmental, or research award. ___.25 Revision of budget and program plans. (a) The budget plan is the financial expression of the project or program as approved during the award process. It may include either the Federal and non-Federal share, or only the Federal share, depending upon Federal awarding agency requirements. It shall be related to performance for program evaluation purposes whenever appropriate. (b) Recipients are required to report deviations from budget and program plans, and request prior approvals for budget and program plan revisions, in accordance with this section. (c) For nonconstruction awards, recipients shall request prior approvals from Federal awarding agencies for one or more of the following program or budget related reasons. (1) Change in the scope or the objective of the project or program (even if there is no associated budget revision requiring prior written approval). (2) Change in a key person specified in the application or award document. (3) The absence for more than three months, or a 25 percent reduction in time devoted to the project, by the approved project director or principal investigator. (4) The need for additional Federal funding. (5) The transfer of amounts budgeted for indirect costs to absorb increases in direct costs, or vice versa, if approval is required by the Federal awarding agency. (6) The inclusion, unless waived by the Federal awarding agency, of costs that require prior approval in accordance with OMB Circular A-21, "Cost Principles for Educational Institutions," OMB Circular A-122, "Cost Principles for Non-Profit Organizations," or 45 CFR part 74 Appendix E, "Principles for Determining Costs Applicable to Research and Development under Grants and Contracts with Hospitals," or 48 CFR part 31, "Contract Cost Principles and Procedures," as applicable. (7) The transfer of funds allotted for training allowances (direct payment to trainees) to other categories of expense. (8) Unless described in the application and funded in the approved awards, the subaward, transfer or contracting out of any work under an award. This provision does not apply to the purchase of supplies, material, equipment or general support services. Federal Register / Vol. 58, No. 227 / Monday, November 29, 1993 / Notices 63005 ================================================================================ the Federal awarding agency shall retain the right to recover an appropriate amount after fully considering the recommendations on disallowed costs resulting from the final audit. ___.72 Subsequent adjustments and continuing responsibilities. (a) The closeout of an award does not affect any of the following. (1) The right of the Federal awarding agency to disallow costs and recover funds on the basis of a later audit or other review. (2) The obligation of the recipient to return any funds due as a result of later refunds, corrections, or other transactions. (3) Audit requirements in Section ___.26. (4) Property management requirements in Sections ___.31 through ___.37. (5) Records retention as required in Section ___.53. (b) After closeout of an award, a relationship created under an award may be modified or ended in whole or in part with the consent of the Federal awarding agency and the recipient, provided the responsibilities of the recipient referred to in paragraph ___.73(a), including those for property management as applicable, are considered and provisions made for continuing responsibilities of the recipient, as appropriate. ___.73 Collection of amounts due. (a) Any funds paid to a recipient in excess of the amount to which the recipient is finally determined to be entitled under the terms and conditions of the award constitute a debt to the Federal Government. If not paid within a reasonable period after the demand for payment, the Federal awarding agency may reduce the debt by (1), (2) or (3). (1) Making an administrative offset against other requests for reimbursements. (2) Withholding advance payments otherwise due to the recipient. (3) Taking other action permitted by statute. (b) Except as otherwise provided by law, the Federal awarding agency shall charge interest on an overdue debt in accordance with 4 CFR Chapter II, "Federal Claims Collection Standards." Appendix A - Contract Provisions All contracts, awarded by a recipient including small purchases, shall contain the following provisions as applicable: 1. Equal Employment Opportunity - All contracts shall contain a provision requiring compliance with E.O. 11246, "Equal Employment Opportunity," as amended by E.O. 11375, "Amending Executive Order 11246 Relating to Equal Employment Opportunity," and as supplemented by regulations at 41 CFR part 60, "Office of Federal Contract Compliance Programs, Equal Employment Opportunity, Department of Labor." 2. Copeland "Anti-Kickback" Act (18 U.S.C. 874 and 40 U.S.C. 276c) - All contracts and subgrants in excess of $2000 for construction or repair awarded by recipients and subrecipients shall include a provision for compliance with the Copeland "Anti-Kickback" Act (18 U.S.C. 874), as supplemented by Department of Labor regulations (29 CFR part 3, "Contractors and Subcontractors on Public Building or Public Work Financed in Whole or in Part by Loans or Grants from the United States"). The Act provides that each contractor or subrecipient shall be prohibited from inducing, by any means, any person employed in the construction, completion, or repair of public work, to give up any part of the compensation to which he is otherwise entitled. The recipient shall report all suspected or reported violations to the Federal awarding agency. 3. Davis-Bacon Act, as amended (40 U.S.C. 276a to a-7) - When required by Federal program legislation, all construction contracts awarded by the recipients and subrecipients of more than $2000 shall include a provision for compliance with the Davis-Bacon Act (40 U.S.C. 276a to a-7) and as supplemented by Department of Labor regulations (29 CFR part 5, "Labor Standards Provisions Applicable to Contracts Governing Federally Financed and Assisted Construction"). Under this Act, contractors shall be required to pay wages to laborers and mechanics at a rate not less than the minimum wages specified in a wage determination made by the Secretary of Labor. In addition, contractors shall be required to pay wages not less than once a week. The recipient shall place a copy of the current prevailing wage determination issued by the Department of Labor in each solicitation and the award of a contract shall be conditioned upon the acceptance of the wage determination. The recipient shall report all suspected or reported violations to the Federal awarding agency. 4. Contract Work Hours and Safety Standards Act (40 U.S.C. 327-333) - Where applicable, all contracts awarded by recipients in excess of $2000 for construction contracts and in excess of $2500 for other contracts that involve the employment of mechanics or laborers shall include a provision for compliance with Sections 102 and 107 of the Contract Work Hours and Safety Standards Act (40 U.S.C. 327-333), as supplemented by Department of Labor regulations (29 CFR part 5). Under Section 102 of the Act, each contractor shall be required to compute the wages of every mechanic and laborer on the basis of a standard work week of 40 hours. Work in excess of the standard work week is permissible provided that the worker is compensated at a rate of not less than 1 1/2 times the basic rate of pay for all hours worked in excess of 40 hours in the work week. Section 107 of the Act is applicable to construction work and provides that no laborer or mechanic shall be required to work in surroundings or under working conditions which are unsanitary, hazardous or dangerous. These requirements do not apply to the purchases of supplies or materials or articles ordinarily available on the open market, or contracts for transportation or transmission of intelligence. 5. Rights to Inventions Made Under a Contract or Agreement - Contracts or agreements for the performance of experimental, developmental, or research work shall provide for the rights of the Federal Government and the recipient in any resulting invention in accordance with 37 CFR part 401, "Rights to Inventions Made by Nonprofit Organizations and Small Business Firms Under Government Grants, Contracts and Cooperative Agreements," and any implementing regulations issued by the awarding agency. 6. Clean Air Act (42 U.S.C. 7401 et seq.) and the Federal Water Pollution Control Act (33 U.S.C. 1251 et seq.), as amended - Contracts and subgrants of amounts in excess of $100,000 shall contain a provision that requires the recipient to agree to comply with all applicable standards, orders or regulations issued pursuant to the Clean Air Act (42 U.S.C. 7401 et seq.) and the Federal Water Pollution Control Act as amended (33 U.S.C. 1251 et seq.). Violations shall be reported to the Federal awarding agency and the Regional Office of the Environmental Protection Agency (EPA). 7. Byrd Anti-Lobbying Amendment (31 U.S.C. 1352) - Contractors who apply or bid for an award of $100,000 or more shall file the required certification. Each tier certifies to the tier above that it will not and has not used Federal appropriated funds to pay any person or organization for influencing or attempting to influence an officer or employee of any agency, a member of Congress, officer or employee of Congress, or an employee of a member of Congress in connection with obtaining any Federal contract, grant or any other award covered by 31 U.S.C. 1352. Each tier shall also disclose any lobbying with non-Federal funds that takes place in connection with obtaining any Federal award. Such disclosures are forwarded from tier to tier up to the recipient. 8. Debarment and Suspension (E.O.s 12549 and 12689) - No contract shall be made to parties listed on the General Services Administration's List of Parties Excluded from Federal Procurement or Nonprocurement Programs in accordance with E.O.s 12549 and 12689, "Debarment and Suspension." This list contains the names of parties debarred, suspended, or otherwise excluded by agencies, and contractors declared ineligible under statutory or regulatory authority other than E.O. 12549. Contractors with awards that exceed the small purchase threshold shall provide the required certification regarding its exclusion status and that of its principal employees. [FR Doc. 93-29077 Filed 11-26-93; 8:45 am] BILLING CODE 3110-01-P FAC 97-02 OCTOBER 10, 1997 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES Sec. 31.000 Scope of part. 31.001 Definitions. 31.002 Availability of accounting guide. Subpart 31.1--Applicability 31.100 Scope of subpart. 31.101 Objectives. 31.102 Fixed-price contracts. 31.103 Contracts with commercial organizations. 31.104 Contracts with educational institutions. 31.105 Construction and architect-engineer contracts. 31.106 Facilities contracts. 31.106-1 Applicable cost principles. 31.106-2 Exceptions to general rules on allowability and allocability. 31.106-3 Contractor's commercial items. 31.107 Contracts with State, local, and federally recognized Indian tribal governments. 31.108 Contracts with nonprofit organizations. 31.109 Advance agreements. 31.110 Indirect cost rate certification and penalties on unallowable costs. Subpart 31.2--Contracts with Commercial Organizations 31.201 General. 31.201-1 Composition of total cost. 31.201-2 Determining allowability. 31.201-3 Determining reasonableness. 31.201-4 Determining allocability. 31.201-5 Credits. 31.201-6 Accounting for unallowable costs. 31.201-7 Construction and architect-engineer contracts. 31.202 Direct costs. 31.203 Indirect costs. 31.204 Application of principles and procedures. 31.205 Selected costs. 31.205-1 Public relations and advertising costs. 31.205-2 [Reserved] 31.205-3 Bad debts. 31.205-4 Bonding costs. 31.205-5 Civil defense costs. 31.205-6 Compensation for personal services. 31.205-7 Contingencies. 31.205-8 Contributions or donations. 31.205-9 [Reserved] 31.205-10 Cost of money. 31.205-11 Depreciation. 31.205-12 Economic planning costs. 31.205-13 Employee morale, health, welfare, food service, and dormitory costs and credits. 31.205-14 Entertainment costs. 31.205-15 Fines, penalties, and mischarging costs. 31.205-16 Gains and losses on disposition or impairment of depreciable property or other capital assets. 31.205-17 Idle facilities and idle capacity costs. 31.205-18 Independent research and development and bid and proposal costs. 31.205-19 Insurance and indemnification. 31.205-20 Interest and other financial costs. 31.205-21 Labor relations costs. 31.205-22 Lobbying and political activity costs. 31.205-23 Losses on other contracts. 31.205-24 Maintenance and repair costs. 31.205-25 Manufacturing and production engineering costs. 31.205-26 Material costs. 31.205-27 Organization costs. 31.205-28 Other business expenses. 31.205-29 Plant protection costs. 31.205-30 Patent costs. 31.205-31 Plant reconversion costs. 31.205-32 Precontract costs. 31.205-33 Professional and consultant service costs. 31.205-34 Recruitment costs. 31.205-35 Relocation costs. 31.205-36 Rental costs. 31.205-37 Royalties and other costs for use of patents. 31.205-38 Selling costs. 31.205-39 Service and warranty costs. 31.205-40 Special tooling and special test equipment costs. 31.205-41 Taxes. 31.205-42 Termination costs. 31.205-43 Trade, business, technical, and professional activity costs. 31.205-44 Training and education costs. 31.205-45 Transportation costs. 31.205-46 Travel costs. 31.205-47 Costs related to legal and other proceedings. 31.205-48 Deferred research and development costs. 31.205-49 Goodwill. 31.205-50 [Reserved] 31.205-51 Costs of alcoholic beverages. 31.205-52 Asset valuations resulting from business combinations. Subpart 31.3--Contracts with Educational Institutions 31.301 Purpose. 31.302 General. 31.303 Requirements. Subparts 31.4 and 31.5--[Reserved] Subpart 31.6--Contracts with State, Local, and Federally Recognized Indian Tribal Governments 31.601 Purpose. 31.602 General. 31.603 Requirements. Subpart 31.7--Contracts with Nonprofit Organizations 31.701 Purpose. 31.702 General. 31.703 Requirements. 31.000 Scope of part. This part contains cost principles and procedures for-- (a) The pricing of contracts, subcontracts, and modifications to contracts and subcontracts whenever cost analysis is performed (see 15.404-1(c)), and 31-1 31.001 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- (b) The determination, negotiation, or allowance of costs when required by a contract clause. 31.001 Definitions. "Accrued benefit cost method" means an actuarial cost method under which units of benefit are assigned to each cost accounting period and are valued as they accrue; i.e., based on the services performed by each employee in the period involved. The measure of normal cost under this method for each cost accounting period is the present value of the units of benefit deemed to be credited to employees for service in that period. The measure of the actuarial liability at a plan's inception date is the present value of the units of benefit credited to employees for service prior to that date. (This method is also known as the unit credit cost method.) "Accumulating costs" means collecting cost data in an organized manner, such as through a system of accounts. "Actual cash value" means the cost of replacing damaged property with other property of like kind and quality in the physical condition of the property immediately before the damage. "Actual costs," as used in this part (other than Subpart 31.6), means amounts determined on the basis of costs incurred, as distinguished from forecasted costs. Actual costs include standard costs properly adjusted for applicable variances. "Actuarial assumption" means a prediction of future conditions affecting pension costs; e.g., mortality rate, employee turnover, compensation levels, pension fund earnings, and changes in values of pension funds assets. "Actuarial cost method" means a technique which uses actuarial assumptions to measure the present value of future pension benefits and pension fund administrative expenses, and which assigns the cost of such benefits and expenses to cost accounting periods. "Actuarial gain and loss" means the effect on pension cost resulting from differences between actuarial assumptions and actual experience. "Actuarial liability" means pension cost attributable, under the actuarial cost method in use, to years before the date of a particular actuarial valuation. As of such date, the actuarial liability represents the excess of the present value of the future benefits and administrative expenses over the present value of future contributions, for the normal cost for all plan participants and beneficiaries. The excess of the actuarial liability over the value of the assets of a pension plan is the unfunded actuarial liability. "Actuarial valuation" means the determination, as of a specified date, of the normal cost, actuarial liability, value of the assets of a pension fund, and other relevant values for the pension plan. "Allocate" means to assign an item of cost, or a group of items of cost, to one or more cost objectives. This term includes both direct assignment of cost and the reassignment of a share from an indirect cost pool. "Business unit" means any segment of an organization, or an entire business organization which is not divided into segments. "Compensated personal absence" means any absence from work for reasons such as illness, vacation, holidays, jury duty, military training, or personal activities for which an employer pays compensation directly to an employee in accordance with a plan or custom of the employer. "Cost input" means the cost, except general and administrative (G&A) expenses, which for contract costing purposes is allocable to the production of goods and services during a cost accounting period. "Cost objective," as used in this part (other than Subpart 31.6), means a function, organizational subdivision, contract, or other work unit for which cost data are desired and for which provision is made to accumulate and measure the cost of processes, products, jobs, capitalized projects, etc. "Cost of capital committed to facilities" means an imputed cost determined by applying a cost of money rate to facilities capital. "Deferred compensation" means an award made by an employer to compensate an employee in a future cost accounting period or periods for services rendered in one or more cost accounting periods before the date of the receipt of compensation by the employee. This definition shall not include the amount of year end accruals for salaries, wages, or bonuses that are to be paid within a reasonable period of time after the end of a cost accounting period. "Defined-benefit pension plan" means a pension plan in which the benefits to be paid, or the basis for determining such benefits, are established in advance and the contributions are intended to provide the stated benefits. "Defined-contribution pension plan" means a pension plan in which the contributions to be made are established in advance and the benefits are determined thereby. "Directly associated cost" means any cost which is generated solely as a result of the incurrence of another cost, and which would not have been incurred had the other cost not been incurred. "Estimating costs" means the process of forecasting a future result in terms of cost, based upon information available at the time. "Expressly unallowable cost" means a particular item or type of cost which, under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable. 31-2 (FAC 97-02) FAC 97-09 DECEMBER 29, 1998 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.001 - -------------------------------------------------------------------------------- "Facilities capital" means the net book value of tangible capital assets and of those intangible capital assets that are subject to amortization. "Final cost objective" as used in this part (other than Subparts 31.3 and 31.6), means a cost objective that has allocated to it both direct and indirect costs and, in the contractor's accumulation system, is one of the final accumulation points. "Fiscal year" as used in this part, means the accounting period for which annual financial statements are regularly prepared, generally a period of 12 months, 52 weeks, or 53 weeks. "Funded pension cost" means the portion of pension cost for a current or prior cost accounting period that has been paid to a funding agency. "General and administrative (G&A) expense" means any management, financial, and other expense which is incurred by or allocated to a business unit and which is for the general management and administration of the business unit as a whole. G&A expense does not include those management expenses whose beneficial or causal relationship to cost objectives can be more directly measured by a base other than a cost input base representing the total activity of a business unit during a cost accounting period. "Home office" means an office responsible for directing or managing two or more, but not necessarily all, segments of an organization. It typically establishes policy for, and provides guidance to, the segments in their operations. It usually performs management, supervisory, or administrative functions, and may also perform service functions in support of the operations of the various segments. An organization which has intermediate levels, such as groups, may have several home offices which report to a common home office. An intermediate organization may be both a segment and a home office. "Immediate-gain actuarial cost method" means any of the several actuarial cost methods under which actuarial gains and losses are included as part of the unfunded actuarial liability of the pension plan, rather than as part of the normal cost of the plan. "Independent research and development (IR&D) cost" means the cost of effort which is neither sponsored by a grant, nor required in performing a contract, and which falls within any of the following four areas-- (a) Basic research, (b) Applied research, (c) Development, and (d) Systems and other concept formulation studies. "Indirect cost pools," as used in this part (other than Subparts 31.3 and 31.6), means groupings of incurred costs identified with two or more cost objectives but not identified specifically with any final cost objective. "Insurance administration expenses" means the contractor's costs of administering an insurance program; e.g., the costs of operating an insurance or risk-management department, processing claims, actuarial fees, and service fees paid to insurance companies, trustees, or technical consultants. "Intangible capital asset" means an asset that has no physical substance, has more than minimal value, and is expected to be held by an enterprise for continued use or possession beyond the current accounting period for the benefits it yields. "Job" as used in this part, means a homogeneous cluster of work tasks, the completion of which serves an enduring purpose for the organization. Taken as a whole, the collection of tasks, duties, and responsibilities constitutes the assignment for one or more individuals whose work is of the same nature and is performed at the same skill/responsibility level--as opposed to a position, which is a collection of tasks assigned to a specific individual. Within a job, there may be pay categories which are dependent on the degree of supervision required by the employee while performing assigned tasks which are performed by all persons with the same job. "Job class of employees" as used in this part, means employees performing in positions within the same job. "Labor cost at standard" means a preestablished measure of the labor element of cost, computed by multiplying labor-rate standard by labor-time standard. "Labor market," as used in this part, means a place where individuals exchange their labor for compensation. Labor markets are identified and defined by a combination of the following factors-- (1) Geography, (2) Education and/or technical background required, (3) Experience required by the job, (4) Licensing or certification requirements, (5) Occupational membership, and (6) Industry. "Labor-rate standard" means a preestablished measure, expressed in monetary terms, of the price of labor. "Labor-time standard" means a preestablished measure, expressed in temporal terms, of the quantity of labor. "Material cost at standard" means a preestablished measure of the material elements of cost, computed by multiplying material-price standard by material-quantity standard. "Material-price standard" means a preestablished measure, expressed in monetary terms, of the price of material. "Material-quantity standard" means a preestablished measure, expressed in physical terms, of the quantity of material. "Moving average cost" means an inventory costing method under which an average unit cost is computed after each acquisition by adding the cost of the newly acquired units to the cost of the units of inventory on hand and dividing this figure by the new total number of units. "Nonqualified pension plan" means any pension plan other than a qualified pension plan as defined in this part. "Normal cost" means the annual cost attributable, under the actuarial cost method in use, to current and future years 31-3 FAC 97-09 DECEMBER 29, 1998 31.001 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- as a particular valuation date excluding any payment in respect of an unfunded actuarial liability. "Original complement of low cost equipment" means a group of items acquired for the initial outfitting of a tangible capital asset or an operational unit, or a new addition to either. The items in the group individually cost less than the minimum amount established by the contractor for capitalization for the classes of assets acquired but in the aggregate they represent a material investment. The group, as a complement, is expected to be held for continued service beyond the current period. Initial outfitting of the unit is completed when the unit is ready and available for normal operations. "Pay-as-you-go cost method" means a method of recognizing pension cost only when benefits are paid to retired employees or their beneficiaries. "Pension plan" means a deferred compensation plan established and maintained by one or more employers to provide systematically for the payment of benefits to plan participants after their retirements, provided that the benefits are paid for life or are payable for life at the option of the employees. Additional benefits such as permanent and total disability and death payments, and survivorship payments to beneficiaries of deceased employees, may be an integral part of a pension plan. "Pension plan participant" means any employee or former employee of an employer or any member or former member of an employee organization, who is or may become eligible to receive a benefit from a pension plan which covers employees of such employer or members of such organization who have satisfied the plan's participation requirements, or whose beneficiaries are receiving or may be eligible to receive any such benefit. A participant whose employment status with the employer has not been terminated is an active participant of the employer's pension plan. "Pricing" means the process of establishing a reasonable amount or amounts to be paid for supplies or services. "Profit center," as used in this part (other than Subparts 31.3 and 31.6), means the smallest organizationally independent segment of a company charged by management with profit and loss responsibilities. "Projected average loss" means the estimated long-term average loss per period for periods of comparable exposure to risk of loss. "Projected benefit cost method" means either -- (1) Any of the several actuarial cost methods that distribute the estimated total cost of all of the employees' prospective benefits over a period of years, usually their working careers; or (2) A modification of the accrued benefit cost method that considers projected compensation levels. "Proposal" means any offer or other submission used as a basis for pricing a contract, contract modification, or termination settlement or for securing payments thereunder. "Qualified pension plan" means a pension plan comprising a definite written program communicated to and for the exclusive benefit of employees that meets the criteria deemed esstial by the Internal Revenue Service as set forth in the Internal Revenue Code for preferential tax treatment regarding contributions, investments, and distributions. Any other plan is a nonqualified pension plan. "Residual value" means the proceeds, less removal and disposal costs, if any, realized upon disposition of a tangible capital asset. It usually is measured by the net proceeds from the sale or other disposition of the asset, or its fair value if the asset is traded in on another asset. The estimated residual value is a current forecast of the residual value. "Segment" means one of two or more divisions, product departments, plants, or other subdivisions of an organization reporting directly to a home office, usually identified with responsibility for profit and/or producing a product or service. The term includes Government-owned contractor-operated (GOCO) facilities, and joint ventures and subsidiaries (domestic and foreign) in which the organization has a majority ownership. The term also includes those joint ventures and subsidiaries (domestic and foreign) in which the organization has less than a majority of ownership, but over which it exercises control. "Self-insurance" means the assumption or retention of the risk of loss by the contractor, whether voluntarily or involuntarily. Self-insurance includes the deductible portion of purchased insurance. "Self-insurance charge" means a cost which represents the projected average loss under a self-insurance plan. "Service life" means the period of usefulness of a tangible capital asset (or group of assets) to its current owner. The period may be expressed in units of time or output. The estimated service life of a tangible capital asset (or group of assets) is a current forecast of its service life and is the period over which depreciation cost is to be assigned. "Spread-gain actuarial cost method" means any of the several projected benefit actuarial cost methods under which actuarial gains and losses are included as part of the current and future normal costs of the pension plan. "Standard cost" means any cost computed with the use of preestablished measures. "Tangible capital asset" means an asset that has physical substance, more than minimal value, and is expected to be held by an enterprise for continued use or possession beyond the current accounting period for the services it yields. "Termination of employment gain or loss" means an actuarial gain or loss resulting from the difference between the assumed and actual rates at which pension plan participants separate from employment for reasons other than retirement, disability, or death. 31-4 FAC 97-02 OCTOBER 10, 1997 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.104 - -------------------------------------------------------------------------------- "Unfunded pension plan," as used in this part, means a defined benefit pension plan for which no funding agency is established for the accumulation of contributions. "Variance" means the difference between a preestablished measure and an actual measure. "Weighted average cost" means an inventory costing method under which an average unit cost is computed periodically by dividing the sum of the cost of beginning inventory plus the cost of acquisitions by the total number of units included in these two categories. 31.002 Availability of accounting guide. Contractors needing assistance in developing or improving their accounting systems and procedures may request a copy of the guide entitled "Guidance for New Contractors" (DCAAP 7641.90). The guide is available from: Headquarters, Defense Contract Audit Agency Operating Administrative Office 8725 John J Kingman Road, Suite 2135 Fort Belvoir VA 22060-6219 Telephone No. (703) 767-1066 Telefax No. (703) 767-1061 Subpart 31.1--Applicability 31.100 Scope of subpart. This subpart describes the applicability of the cost principles and procedures in succeeding subparts of this part to various types of contracts and subcontracts. It also describes the need for advance agreements. 31.101 Objectives. In recognition of differing organizational characteristics, the cost principles and procedures in the succeeding subparts are grouped basically by organizational type; e.g., commercial concerns and educational institutions. The overall objective is to provide that, to the extent practicable, all organizations of similar types doing similar work will follow the same cost principles and procedures. To achieve this uniformity, individual deviations concerning cost principles require advance approval of the agency head or designee. Class deviations for the civilian agencies require advance approval of the Civilian Agency Acquisition Council. Class deviations for the National Aeronautics and Space Administration require advance approval of the Associate Administrator for Procurement. Class deviations for the Department of Defense require advance approval of the Director of Defense Procurement, Office of the Under Secretary of Defense for Acquisition and Technology. 31.102 Fixed-price contracts. The applicable subparts of Part 31 shall be used in the pricing of fixed-price contracts, subcontracts, and modifications to contracts and subcontracts whenever (a) cost analysis is performed, or (b) a fixed-price contract clause requires the determination or negotiation of costs. However, application of cost principles to fixed-price contracts and subcontracts shall not be construed as a requirement to negotiate agreements on individual elements of cost in arriving at agreement on the total price. The final price accepted by the parties reflects agreement only on the total price. Further, notwithstanding the mandatory use of cost principles, the objective will continue to be to negotiate prices that are fair and reasonable, cost and other factors considered. 31.103 Contracts with commercial organizations. This category includes all contracts and contract modifications for supplies, services, or experimental, developmental, or research work negotiated with organizations other than educational institutions (see 31.104), construction and architect-engineer contracts (see 31.105), State and local governments (see 31.107) and nonprofit organizations (see 31.108) on the basis of cost. (a) The cost principles and procedures in Subpart 31.2 and agency supplements shall be used in pricing negotiated supply, service, experimental, developmental, and research contracts and contract modifications with commercial organizations whenever cost analysis is performed as required by 15.404-1(c). (b) In addition, the contracting officer shall incorporate the cost principles and procedures in Subpart 31.2 and agency supplements by reference in contracts with commercial organizations as the basis for-- (1) Determining reimbursable costs under-- (i) Cost-reimbursement contracts and cost-reimbursement subcontracts under these contracts performed by commercial organizations and (ii) The cost-reimbursement portion of time-and-materials contracts except when material is priced on a basis other than at cost (see 16.601(b)(3)); (2) Negotiating indirect cost rates (see Subpart 42.7); (3) Proposing, negotiating, or determining costs under terminated contracts (see 49.103 and 49.113); (4) Price revision of fixed-price incentive contracts (see 16.204 and 16.403); (5) Price redetermination of price redetermination contracts (see 16.205 and 16.206); and (6) Pricing changes and other contract modifications. 31.104 Contracts with educational institutions. This category includes all contracts and contract modifications for research and development, training, and other work performed by educational institutions. 31-5 FAC 97-02 OCTOBER 10, 1997 31.105 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- (a) The contracting officer shall incorporate the cost principles and procedures in Subpart 31.3 by reference in cost-reimbursement contracts with educational institutions as the basis for-- (1) Determining reimbursable costs under the contracts and cost-reimbursement subcontracts thereunder performed by educational institutions; (2) Negotiating indirect cost rates; and (3) Settling costs of cost-reimbursement terminated contracts (see Subpart 49.3 and 49.109-7). (b) The cost principles in this subpart are to be used as a guide in evaluating costs in connection with negotiating fixed-price contracts and termination settlements. 31.105 Construction and architect-engineer contracts. (a) This category includes all contracts and contract modifications negotiated on the basis of cost with organizations other than educational institutions (see 31.104), State and local governments (see 31.107), and nonprofit organizations except those exempted under OMB Circular A-122 (see 31.108) for construction management or construction, alteration or repair of buildings, bridges, roads, or other kinds of real property. It also includes architect-engineer contracts related to construction projects. It does not include contracts for vessels, aircraft, or other kinds of personal property. (b) Except as otherwise provided in (d) below, the cost principles and procedures in Subpart 31.2 shall be used in the pricing of contracts and contract modifications in this category if cost analysis is performed as required by 15.404-1(c). (c) In addition, the contracting officer shall incorporate the cost principles and procedures in Subpart 31.2 (as modified by (d) below by reference in contracts in this category as the basis for-- (1) Determining reimbursable costs under cost-reimbursement contracts, including cost-reimbursement subcontracts thereunder; (2) Negotiating indirect cost rates; (3) Proposing, negotiating, or determining costs under terminated contracts; (4) Price revision of fixed-price incentive contracts; and (5) Pricing changes and other contract modifications. (d) Except as otherwise provided in this paragraph (d), the allowability of costs for construction and architect-engineer contracts shall be determined in accordance with Subpart 31.2. (1) Because of widely varying factors such as the nature, size, duration, and location of the construction project, advance agreements as set forth in 31.109, for such items as home office overhead, partners' compensation, employment of consultants, and equipment usage costs, are particularly important in construction and architect-engineer contracts. When appropriate, they serve to express the parties' understanding and avoid possible subsequent disputes or disallowances. (2) "Construction equipment," as used in this section, means equipment (including marine equipment) in sound workable condition, either owned or controlled by the contractor or the subcontractor at any tier, or obtained from a commercial rental source, and furnished for use under Government contracts. (i) Allowable ownership and operating costs shall be determined as follows: (A) Actual cost data shall be used when such data can be determined for both ownership and operations costs for each piece of equipment, or groups of similar serial or series equipment, from the contractor's accounting records. When such costs cannot be so determined, the contracting agency may specify the use of a particular schedule of predetermined rates or any part thereof to determine ownership and operating costs of construction equipment (see subdivisions (d)(2)(i)(B) and (C) of this section). However, costs otherwise unallowable under this part shall not become allowable through the use of any schedule (see 31.109(c)). For example, schedules need to be adjusted for Government contract costing purposes if they are based on replacement cost, include unallowable interest costs, or use improper cost of money rates or computations. Contracting officers should review the computations and factors included within the specified schedule and ensure that unallowable or unacceptably computed factors are not allowed in cost submissions. (B) Predetermined schedules of construction equipment use rates (e.g., the Construction Equipment Ownership and Operating Expense Schedule, published by the U.S. Army Corps of Engineers, industry sponsored construction equipment cost guides, or commercially published schedules of construction equipment use cost) provide average ownership and operating rates for construction equipment. The allowance for operating costs may include costs for such items as fuel, filters, oil, and grease; servicing, repairs, and maintenance; and tire wear and repair. Costs of labor, mobilization, demobilization, overhead, and profit are generally not reflected in schedules, and separate consideration may be necessary. (C) When a schedule of predetermined use rates for construction equipment is used to determine direct costs, all costs of equipment that are included in the cost allowances provided by the schedule shall be identified and eliminated from the contractor's other direct and indirect costs charged to the contract. If the contractor's accounting system provides for site or home office overhead allocations, all costs which are included in the equipment allowances may need to be included in any cost input base before computing the contractor's overhead rate. In periods 31-6 FAC 97-02 OCTOBER 10, 1997 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.106-2 - -------------------------------------------------------------------------------- of suspension of work pursuant to a contract clause, the allowance for equipment ownership shall not exceed an amount for standby cost as determined by the schedule or contract provision. (ii) Reasonable costs of renting construction equipment are allowable (but see paragraph (C) of this subsection). (A) Costs, such as maintenance and minor or running repairs incident to operating such rented equipment, that are not included in the rental rate are allowable. (B) Costs incident to major repair and overhaul of rental equipment are unallowable. (C) The allowability of charges for construction equipment rented from any division, subsidiary, or organization under common control, will be determined in accordance with 31.205-36(b)(3). (3) Costs incurred at the job site incident to performing the work, such as the cost of superintendence, timekeeping and clerical work, engineering, utility costs, supplies, material handling, restoration and cleanup, etc., are allowable as direct or indirect costs, provided the accounting practice used is in accordance with the contractor's established and consistently followed cost accounting practices for all work. (4) Rental and any other costs, less any applicable credits incurred in acquiring the temporary use of land, structures, and facilities are allowable. Costs, less any applicable credits, incurred in constructing or fabricating structures and facilities of a temporary nature are allowable. 31.106 Facilities contracts. 31.106-1 Applicable cost principles. The cost principles and procedures applicable to the evaluation and determination of costs under facilities contracts (as defined in 45.301), and subcontracts thereunder, will be governed by the type of entity to which a facilities contract is awarded. Except as otherwise provided in 31.106-2 of this section, Subpart 31.2 applies to facilities contracts awarded to commercial organizations; Subpart 31.3 applies to facilities contracts awarded to educational institutions; and 31.105 applies to facilities contracts awarded to construction contractors. Whichever cost principles are appropriate will be used in the pricing of facilities contracts and contract modifications if cost analysis is performed as required by 15.404-1(c). In addition, the contracting officer shall incorporate the cost principles and procedures appropriate in the circumstances (e.g., Subpart 31.2; Subpart 31.3; or 31.105) by reference in facilities contracts as the basis for-- (a) Determining reimbursable costs under facilities contracts, including cost-reimbursement subcontracts thereunder; (b) Negotiating indirect cost rates; and (c) Determining costs of terminated contracts when the contractor elects to "voucher out" costs (see Subpart 49.3), and for settlement by determination (see 49.109-7). 31.106-2 Exceptions to general rules on allowability and allocability. (a) A contractor's established accounting system and procedures are normally directed to the equitable allocation of costs to the types of products which the contractor produces or services rendered in the course of normal operating activities. The acquisition of, or work on, facilities for the Government normally does not involve the manufacturing processes, plant departmental operations, cost patterns of work, administrative and managerial control, or clerical effort usual to production of the contractor's normal products or services. (b) Advance agreements (see 31.109) should be made between the contractor and the contracting officer as to indirect cost items to be applied to the facilities acquisition. A contractor's normal accounting practice for allocating indirect costs to the acquisition of contractor facilities may range from charging all these costs to this acquisition to not charging any. When necessary to produce an equitable result, the contractor's usual method of allocating indirect cost shall be varied, and appropriate adjustment shall be made to the pools of indirect cost and the bases of their distribution. (c) The purchase of completed facilities (or services in connection with the facilities) from outside sources does not involve the contractor's direct labor or indirect plant maintenance personnel. Accordingly, indirect manufacturing and plant overhead costs, which are primarily incurred or generated by reason of direct labor or maintenance labor operations, are not allocable to the acquisition of such facilities. (d) Contracts providing for the installation of new facilities or the rehabilitation of existing facilities may involve the use of the contractor's plant maintenance labor, as distinguished from direct labor engaged in the production of the company's normal products. In such instances, only those types of indirect manufacturing and plant operating costs that are related to or incurred by reason of the expenditures of the classes of labor used for the performance of the facilities work may be allocated to the facilities contract. Thus, a facilities contract which involves the use of plant maintenance labor only would not be subject to an allocation of such cost items as direct productive labor supervision, depreciation, and maintenance expense applicable to productive machinery and equipment, or raw material and finished goods storage costs. (e) Where a facilities contract calls for the construction, production, or rehabilitation of equipment or other items (FAC 97-04) 31-7 FAC 97-04 APRIL 24, 1998 31.106-3 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- that are involved in the regular course of the contractor's business by the use of the contractor's direct labor and manufacturing processes, the indirect costs normally allocated to all that work may be allocated to the facilities contract. 31.106-3 Contractor's commercial items. If facilities constituting the contractor's usual commercial items (or only minor modifications thereof) are acquired by the Government under the contract, the Government shall not pay any amount in excess of the contractor's most favored customer price or the price of other suppliers for like quantities of the same or substantially the same items, whichever is lower. 31.107 Contracts with State, local, and federally recognized Indian tribal governments. (a) Subpart 31.6 provides principles and standards for determining costs applicable to contracts with State, local, and federally recognized Indian tribal governments. They provide the basis for a uniform approach to the problem of determining costs and to promote efficiency and better relationships between State, local, and federally recognized Indian tribal governments, and Federal Government entities. They apply to all programs that involve contracts with State, local, and federally recognized Indian tribal governments, except contracts with-- (1) Publicly financed educational institutions subject to Subpart 31.3; or (2) Publicly owned hospitals and other providers of medical care subject to requirements promulgated by the sponsoring Government agencies. (b) The Office of Management and Budget will approve any other exceptions in particular cases when adequate justification is presented. 31.108 Contracts with nonprofit organizations. Subpart 31.7 provides principles and standards for determining costs applicable to contracts with nonprofit organizations other than educational institutions, State and local governments, and those nonprofit organizations exempted under OMB Circular No. A-122. 31.109 Advance agreements. (a) The extent of allowability of the costs covered in this part applies broadly to many accounting systems in varying contract situations. Thus, the reasonableness, the allocability and the allowability under the specific cost principles at Subparts 31.2, 31.3, 31.6, and 31.7 of certain costs may be difficult to determine. To avoid possible subsequent disallowance or dispute based on unreasonableness, unallocability or unallowability under the specific cost principles at Subparts 31.2, 31.3, 31.6, and 31.7, contracting officers and contractors should seek advance agreement on the treatment of special or unusual costs. However, an advance agreement is not an absolute requirement and the absence of an advance agreement on any cost will not, in itself, affect the reasonableness, allocability or the allowability under the specific cost principles at Subparts 31.2, 31.3, 31.6, and 31.7 of that cost. (b) Advance agreements may be negotiated either before or during a contract but should be negotiated before incurrence of the costs involved. The agreements must be in writing, executed by both contracting parties, and incorporated into applicable current and future contracts. An advance agreement shall contain a statement of its applicability and duration. (c) The contracting officer is not authorized by this 31.109 to agree to a treatment of costs inconsistent with this part. For example, an advance agreement may not provide that, notwithstanding 31.205-20, interest is allowable. (d) Advance agreements may be negotiated with a particular contractor for a single contract, a group of contracts, or all the contracts of a contracting office, an agency, or several agencies. (e) The cognizant administrative contracting officer (ACO), or other contracting officer established in Part 42, shall negotiate advance agreements except that an advance agreement affecting only one contract, or class of contracts from a single contracting office, shall be negotiated by a contracting officer in the contracting office, or an ACO when delegated by the contracting officer. When the negotiation authority is delegated, the ACO shall coordinate the proposed agreement with the contracting officer before executing the advance agreement. (f) Before negotiating an advance agreement, the Government negotiator shall-- (1) Determine if other contracting offices inside the agency or in other agencies have a significant unliquidated dollar balance in contracts with the same contractor; (2) Inform any such office or agency of the matters under consideration for negotiation; and (3) As appropriate, invite the office or agency and the responsible audit agency to participate in prenegotiation discussions and/or in the subsequent negotiations. (g) Upon completion of the negotiation, the sponsor shall prepare and distribute to other interested agencies and offices, including the audit agency, copies of the executed agreement and a memorandum providing the information specified in 15.406-3, as applicable. (h) Examples of costs for which advance agreements may be particularly important are-- (1) Compensation for personal services, including but not limited to allowances for off-site pay, incentive pay, location allowances, hardship pay, cost of living differential, and termination of defined benefit pension plans; 31-8 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.201-3 - -------------------------------------------------------------------------------- (2) Use charges for fully depreciated assets; (3) Deferred maintenance costs; (4) Precontract costs; (5) Independent research and development and bid and proposal costs; (6) Royalties and other costs for use of patents; (7) Selling and distribution costs; (8) Travel and relocation costs, as related to special or mass personnel movements, as related to travel via contractor-owned, -leased, or - -chartered aircraft; or as related to maximum per diem rates; (9) Costs of idle facilities and idle capacity; (10) Severance pay to employees on support service contracts; (11) Plant reconversion; (12) Professional services (e.g., legal, accounting, and engineering); (13) General and administrative costs (e.g., corporate, division, or branch allocations) attributable to the general management, supervision, and conduct of the contractor's business as a whole. These costs are particularly significant in construction, job-site, architect-engineer, facilities, and Government-owned contractor operated (GOCO) plant contracts (see 31.203(f)); (14) Costs of construction plant and equipment (see 31.105(d)); (15) Costs of public relations and advertising; and (16) Training and education costs (see 31.205-44(h)). 31.110 Indirect cost rate certification and penalties on unallowable costs. (a) Certain contracts require certification of the indirect cost rates proposed for final payment purposes. See 42.703-2 for administrative procedures regarding the certification provisions and the related contract clause prescription. (b) If unallowable costs are included in final indirect cost settlement proposals, penalties may be assessed. See 42.709 for administrative procedures regarding the penalty assessment provisions and the related contract clause prescription. Subpart 31.2--Contracts with Commercial Organizations 31.201 General. 31.201-1 Composition of total cost. (a) The total cost of a contract is the sum of the direct and indirect costs allocable to the contract, incurred or to be incurred, less any allocable credits, plus any allocable cost of money pursuant to 31.205-10. In ascertaining what constitutes a cost, any generally accepted method of determining or estimating costs that is equitable and is consistently applied may be used, including standard costs properly adjusted for applicable variances. See 31.201-2(b) and (c) for Cost Accounting Standards (CAS) requirements. (b) While the total cost of a contract includes all costs properly allocable to the contract, the allowable costs to the Government are limited to those allocable costs which are allowable pursuant to Part 31 and applicable agency supplements. 31.201-2 Determining allowability. (a) The factors to be considered in determining whether a cost is allowable include the following: (1) Reasonableness. (2) Allocability. (3) Standards promulgated by the CAS Board, if applicable; otherwise, generally accepted accounting principles and practices appropriate to the particular circumstances. (4) Terms of the contract. (5) Any limitations set forth in this subpart. (b) Certain cost principles in this subpart incorporate the measurement, assignment, and allocability rules of selected CAS and limit the allowability of costs to the amounts determined using the criteria in those selected standards. Only those CAS or portions of standards specifically made applicable by the cost principles in this subpart are mandatory unless the contract is CAS-covered (see Part 30). Business units that are not otherwise subject to these standards under a CAS clause are subject to the selected standards only for the purpose of determining allowability of costs on Government contracts. Including the selected standards in the cost principles does not subject the business unit to any other CAS rules and regulations. The applicability of the CAS rules and regulations is determined by the CAS clause, if any, in the contract and the requirements of the standards themselves. (c) When contractor accounting practices are inconsistent with this Subpart 31.2, costs resulting from such inconsistent practices shall not be allowed in excess of the amount that would have resulted from using practices consistent with this subpart. (d) A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost which is inadequately supported. 31.201-3 Determining reasonableness. (a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent 31-9 31.201-4 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer's representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable. (b) What is reasonable depends upon a variety of considerations and circumstances, including-- (1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor's business or the contract performance; (2) Generally accepted sound business practices, arm's-length bargaining, and Federal and State laws and regulations; (3) The contractor's responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and (4) Any significant deviations from the contractor's established practices. 31.201-4 Determining allocability. A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. Subject to the foregoing, a cost is allocable to a Government contract if it-- (a) Is incurred specifically for the contract; (b) Benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received; or (c) Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown. 31.201-5 Credits. The applicable portion of any income, rebate, allowance, or other credit relating to any allowable cost and received by or accruing to the contractor shall be credited to the Government either as a cost reduction or by cash refund. See 31.205-6(j)(4) for rules related to refund or credit to the Government upon termination of an over-funded defined benefit pension plan. 31.201-6 Accounting for unallowable costs. (a) Costs that are expressly unallowable or mutually agreed to be unallowable, including mutually agreed to be unallowable directly associated costs, shall be identified and excluded from any billing, claim, or proposal applicable to a Government contract. A directly associated cost is any cost which is generated solely as a result of incurring another cost, and which would not have been incurred had the other cost not been incurred. When an unallowable cost is incurred, its directly associated costs are also unallowable. (b) Costs which specifically become designated as unallowable or as unallowable directly associated costs of unallowable costs as a result of a written decision furnished by a contracting officer shall be identified if included in or used in computing any billing, claim, or proposal applicable to a Government contract. This identification requirement applies also to any costs incurred for the same purpose under like circumstances as the costs specifically identified as unallowable under either this paragraph or paragraph (a) above. (c) The practices for accounting for and presentation of unallowable costs will be those as described in 48 CFR 9904.405, Accounting for Unallowable Costs. (d) If a directly associated cost is included in a cost pool which is allocated over a base that includes the unallowable cost with which it is associated, the directly associated cost shall remain in the cost pool. Since the unallowable costs will attract their allocable share of costs from the cost pool, no further action is required to assure disallowance of the directly associated costs. In all other cases, the directly associated costs, if material in amount, must be purged from the cost pool as unallowable costs. (e)(1) In determining the materiality of a directly associated cost, consideration should be given to the significance of-- (i) The actual dollar amount, (ii) The cumulative effect of all directly associated costs in a cost pool, or (iii) The ultimate effect on the cost of Government contracts. (2) Salary expenses of employees who participate in activities that generate unallowable costs shall be treated as directly associated costs to the extent of the time spent on the proscribed activity, provided the costs are material in accordance with subparagraph (e)(1) above (except when such salary expenses are, themselves, unallowable). The time spent in proscribed activities should be compared to total time spent on company activities to determine if the costs are material. Time spent by employees outside the normal working hours should not be considered except when it is evident that an employee engages so frequently in company activities during periods outside normal working hours as to indicate that such activities are a part of the employee's regular duties. (3) When a selected item of cost under 31.205 provides that directly associated costs be unallowable, it is intended that such directly associated costs be unallowable only if determined to be material in amount in accordance with the criteria provided in subparagraphs (e)(1) and (e)(2) 31-10 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.203 - -------------------------------------------------------------------------------- of this section, except in those situations where allowance of any of the directly associated costs involved would be considered to be contrary to public policy. 31.201-7 Construction and architect-engineer contracts. Specific principles and procedures for evaluating and determining costs in connection with contracts and subcontracts for construction, and architect-engineer contracts related to construction projects, are in 31.105. The applicability of these principles and procedures is set forth in 31.000 and 31.100. 31.202 Direct costs. (a) A direct cost is any cost that can be identified specifically with a particular final cost objective. No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective. Costs identified specifically with the contract are direct costs of the contract and are to be charged directly to the contract. All costs specifically identified with other final cost objectives of the contractor are direct costs of those cost objectives and are not to be charged to the contract directly or indirectly. (b) For reasons of practicality, any direct cost of minor dollar amount may be treated as an indirect cost if the accounting treatment-- (1) Is consistently applied to all final cost objectives; and (2) Produces substantially the same results as treating the cost as a direct cost. 31.203 Indirect costs. (a) An indirect cost is any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost objective. It is not subject to treatment as a direct cost. After direct costs have been determined and charged directly to the contract or other work, indirect costs are those remaining to be allocated to the several cost objectives. An indirect cost shall not be allocated to a final cost objective if other costs incurred for the same purpose in like circumstances have been included as a direct cost of that or any other final cost objective. (b) Indirect costs shall be accumulated by logical cost groupings with due consideration of the reasons for incurring such costs. Each grouping should be determined so as to permit distribution of the grouping on the basis of the benefits accruing to the several cost objectives. Commonly, manufacturing overhead, selling expenses, and general and administrative (G&A) expenses are separately grouped. Similarly, the particular case may require subdivision of these groupings, e.g., building occupancy costs might be separable from those of personnel administration within the manufacturing overhead group. This necessitates selecting a distribution base common to all cost objectives to which the grouping is to be allocated. The base should be selected so as to permit allocation of the grouping on the basis of the benefits accruing to the several cost objectives. When substantially the same results can be achieved through less precise methods, the number and composition of cost groupings should be governed by practical considerations and should not unduly complicate the allocation. (c) Once an appropriate base for distributing indirect costs has been accepted, it shall not be fragmented by removing individual elements. All items properly includable in an indirect cost base should bear a pro rata share of indirect costs irrespective of their acceptance as Government contract costs. For example, when a cost input base is used for the distribution of G&A costs, all items that would properly be part of the cost input base, whether allowable or unallowable, shall be included in the base and bear their pro rata share of G&A costs. (d) The contractor's method of allocating indirect costs shall be in accordance with standards promulgated by the CAS Board, if applicable to the contract; otherwise, the method shall be in accordance with generally accepted accounting principles which are consistently applied. The method may require examination when-- (1) Substantial differences occur between the cost patterns of work under the contract and the contractor's other work; (2) Significant changes occur in the nature of the business, the extent of subcontracting, fixed-asset improvement programs, inventories, the volume of sales and production, manufacturing processes, the contractor's products, or other relevant circumstances; or (3) Indirect cost groupings developed for a contractor's primary location are applied to offsite locations. Separate cost groupings for costs allocable to offsite locations may be necessary to permit equitable distribution of costs on the basis of the benefits accruing to the several cost objectives. (e) A base period for allocating indirect costs is the cost accounting period during which such costs are incurred and accumulated for distribution to work performed in that period. The criteria and guidance in 30.406 for selecting the cost accounting periods to be used in allocating indirect costs are incorporated herein for application to contracts subject to full CAS coverage. For contracts subject to modified CAS coverage and for non-CAS-covered contracts, the base period for allocating indirect costs will normally be the contractor's fiscal year. But a shorter period may be appropriate (1) for contracts in which performance involves only a minor portion of the fiscal year, or (2) when it is general 31-11 FAC 97--02 OCTOBER 10, 1997 31.204 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- practice in the industry to use a shorter period. When a contract is performed over an extended period, as many base periods shall be used as are required to represent the period of contract performance. (f) Special care should be exercised in applying the principles of paragraphs (b), (c), and (d) above when Government-owned contractor-operated (GOCO) plants are involved. The distribution of corporate, division, or branch office G&A expenses to such plants operating with little or no dependence on corporate administrative activities may require more precise cost groupings, detailed accounts screening, and carefully developed distribution bases. 31.204 Application of principles and procedures. (a) Costs shall be allowed to the extent they are reasonable, allocable, and determined to be allowable under 31.201, 31.202, 31.203, and 31.205. These criteria apply to all of the selected items that follow, even if particular guidance is provided for certain items for emphasis or clarity. (b) Costs incurred as reimbursements or payments to a subcontractor under a cost-reimbursement, fixed-price incentive, or price redeterminable type subcontract of any tier above the first firm-fixed-price subcontract or fixed-price subcontract with economic price adjustment provisions are allowable to the extent that allowance is consistent with the appropriate subpart of this Part 31 applicable to the subcontract involved. Costs incurred as payments under firm-fixed-price subcontracts or fixed-price subcontracts with economic price adjustment provisions or modifications thereto, when cost analysis was performed under 15.404-1(c), shall be allowable only to the extent that the price was negotiated in accordance with 31.102. (c) Section 31.205 does not cover every element of cost. Failure to include any item of cost does not imply that it is either allowable or unallowable. The determination of allowability shall be based on the principles and standards in this subpart and the treatment of similar or related selected items. When more than one subsection in 31.205 is relevant to a contractor cost, the cost shall be apportioned among the applicable subsections, and the determination of allowability of each portion shall be based on the guidance contained in the applicable subsection. When a cost, to which more than one subsection in 31.205 is relevant, cannot be apportioned, the determination of allowability shall be based on the guidance contained in the subsection that most specifically deals with, or best captures the essential nature of, the cost at issue. 31.205 Selected costs. 31.205-1 Public relations and advertising costs. (a) "Public relations" means all functions and activities dedicated to-- (1) Maintaining, protecting, and enhancing the image of a concern or its products; or (2) Maintaining or promoting reciprocal understanding and favorable relations with the public at large, or any segment of the public. The term public relations includes activities associated with areas such as advertising, customer relations, etc. (b) "Advertising" means the use of media to promote the sale of products or services and to accomplish the activities referred to in paragraph (d) of this subsection, regardless of the medium employed, when the advertiser has control over the form and content of what will appear, the media in which it will appear, and when it will appear. Advertising media include but are not limited to conventions, exhibits, free goods, samples, magazines, newspapers, trade papers, direct mail, dealer cards, window displays, outdoor advertising, radio, and television. (c) Public relations and advertising costs include the costs of media time and space, purchased services performed by outside organizations, as well as the applicable portion of salaries, travel, and fringe benefits of employees engaged in the functions and activities identified in paragraphs (a) and (b) of this subsection. (d) The only allowable advertising costs are those that are-- (1) Specifically required by contract, or that arise from requirements of Government contracts and that are exclusively for-- (i) Recruiting personnel required for performing contractual obligations, when considered in conjunction with all other recruitment costs (but see 31.205-34); (ii) Acquiring scarce items for contract performance; or (iii) Disposing of scrap or surplus materials acquired for contract performance. (2) Costs of activities to promote sales of products normally sold to the U.S. Government, including trade shows, which contain a significant effort to promote exports from the United States. Such costs are allowable, notwithstanding subparagraphs (f)(1), (f)(3), (f)(4)(ii), and (f)(5) of this subsection. However, such costs do not include the costs of memorabilia (e.g., models, gifts, and souvenirs), alcoholic beverages, entertainment, and physical facilities which are primarily used for entertainment rather than product promotion. (e) Allowable public relations costs include the following: (1) Costs specifically required by contract. (2) Costs of-- (i) Responding to inquiries on company policies and activities; (ii) Communicating with the public, press, stockholders, creditors, and customers; and 31-12 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.205-6 - -------------------------------------------------------------------------------- (iii) Conducting general liaison with news media and Government public relations officers, to the extent that such activities are limited to communication and liaison necessary to keep the public informed on matters of public concern such as notice of contract awards, plant closings or openings, employee layoffs or rehires, financial information, etc. (3) Costs of participation in community service activities (e.g., blood bank drives, charity drives, savings bond drives, disaster assistance, etc.). (4) Costs of plant tours and open houses (but see subparagraph (f)(5) of this subsection). (5) Costs of keel laying, ship launching, commissioning, and roll-out ceremonies, to the extent specifically provided for by contract. (f) Unallowable public relations and advertising costs include the following: (1) All public relations and advertising costs, other than those specified in paragraphs (d) and (e) of this subsection, whose primary purpose is to promote the sale of products or services by stimulating interest in a product or product line (except for those costs made allowable under 31.205-38(c)), or by disseminating messages calling favorable attention to the contractor for purposes of enhancing the company image to sell the company's products or services. (2) All costs of trade shows and other special events which do not contain a significant effort to promote the export sales of products normally sold to the U.S. Government. (3) Costs of sponsoring meetings, conventions, symposia, seminars, and other special events when the principal purpose of the event is other than dissemination of technical information or stimulation of production. (4) Costs of ceremonies such as-- (i) Corporate celebrations and (ii) New product announcements. (5) Costs of promotional material, motion pictures, videotapes, brochures, handouts, magazines, and other media that are designed to call favorable attention to the contractor and its activities. (6) Costs of souvenirs, models, imprinted clothing, buttons, and other mementos provided to customers or the public. (7) Costs of memberships in civic and community organizations. 31.205-2 [Reserved] 31.205-3 Bad debts. Bad debts, including actual or estimated losses arising from uncollectible accounts receivable due from customers and other claims, and any directly associated costs such as collection costs, and legal costs are unallowable. 31.205-4 Bonding costs. (a) Bonding costs arise when the Government requires assurance against financial loss to itself or others by reason of the act or default of the contractor. They arise also in instances where the contractor requires similar assurance. Included are such bonds as bid, performance, payment, advance payment, infringement, and fidelity bonds. (b) Costs of bonding required pursuant to the terms of the contract are allowable. (c) Costs of bonding required by the contractor in the general conduct of its business are allowable to the extent that such bonding is in accordance with sound business practice and the rates and premiums are reasonable under the circumstances. 31.205-5 Civil defense costs. (a) Civil defense costs are those incurred in planning for, and protecting life and property against, the possible effects of enemy attack. Costs of civil defense measures (including costs in excess of normal plant protection costs, first-aid training and supplies, fire fighting training and equipment, posting of additional exit notices and directions, and other approved civil defense measures) undertaken on the contractor's premises pursuant to suggestions or requirements of civil defense authorities are allowable when allocated to all work of the contractor. (b) Costs of capital assets acquired for civil defense purposes are allowable through depreciation (see 31.205-11). (c) Contributions to local civil defense funds and projects are unallowable. 31.205-6 Compensation for personal services. (a) General. Compensation for personal services includes all remuneration paid currently or accrued, in whatever form and whether paid immediately or deferred, for services rendered by employees to the contractor during the period of contract performance (except as otherwise provided for in other paragraphs of this subsection). It includes, but is not limited to, salaries; wages; directors' and executive committee members' fees; bonuses (including stock bonuses); incentive awards; employee stock options, and stock appreciation rights; employee stock ownership plans; employee insurance; fringe benefits; contributions to pension, other postretirement benefits, annuity, and employee incentive compensation plans; and allowances for off-site pay, incentive pay, location allowances, hardship pay, severance pay, and cost of living differential. Compensation for personal services is allowable subject to the following general criteria and additional requirements contained in other parts of this cost principle: 31-13 31.205-6 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- (1) Compensation for personal services must be for work performed by the employee in the current year and must not represent a retroactive adjustment of prior years' salaries or wages (but see 31.205-6(g), (h), (j), (k), (m), and (o) of this subsection). (2) The compensation in total must be reasonable for the work performed; however, specific restrictions on individual compensation elements must be observed where they are prescribed. (3) The compensation must be based upon and conform to the terms and conditions of the contractor's established compensation plan or practice followed so consistently as to imply, in effect, an agreement to make the payment. (4) No presumption of allowability will exist where the contractor introduces major revisions of existing compensation plans or new plans and the contractor-- (i) Has not notified the cognizant ACO of the changes either before their implementation or within a reasonable period after their implementation, and (ii) Has not provided the Government, either before implementation or within a reasonable period after it, an opportunity to review the allowability of the changes. (5) Costs that are unallowable under other paragraphs of this Subpart 31.2 shall not be allowable under this subsection 31.205-6 solely on the basis that they constitute compensation for personal services. (b) Reasonableness. The compensation for personal services paid or accrued to each employee must be reasonable for the work performed. Compensation will be considered reasonable if each of the allowable elements making up the employee's compensation package is reasonable. This paragraph addresses the reasonableness of compensation, except when the compensation is set by provisions of a labor-management agreement under terms of the Federal Labor Relations Act or similar state statutes. The tests for reasonableness of labor-management agreements are set forth in paragraph (c) of this subsection. In addition to the provisions of 31.201-3, in testing the reasonableness of individual elements for particular employees or job classes of employees, consideration should be given to factors determined to be relevant by the contracting officer. (1) Among others, factors which may be relevant include general conformity with the compensation practices of other firms of the same size, the compensation practices of other firms in the same industry, the compensation practices of firms in the same geographic area, the compensation practices of firms engaged in predominantly non-Government work, and the cost of comparable services obtainable from outside sources. The appropriate factors for evaluating the reasonableness of compensation depend on the degree to which those factors are representative of the labor market for the job being evaluated. The relative significance of factors will vary according to circumstances. In administering this principle, it is recognized that not every compensation case need be subjected in detail to the tests described in this cost principle. The tests need be applied only when a general review reveals amounts or types of compensation that appear unreasonable or unjustified. Based on an initial review of the facts, contracting officers or their representatives may challenge the reasonableness of any individual element or the sum of the individual elements of compensation paid or accrued to particular employees or job classes of employees. In such cases, there is no presumption of reasonableness and, upon challenge, the contractor must demonstrate the reasonableness of the compensation item in question. In doing so, the contractor may introduce, and the contracting officer will consider, not only any circumstances surrounding the compensation item challenged, but also the magnitude of other compensation elements which may be lower than would be considered reasonable in themselves. However, the contractor's right to introduce offsetting compensation elements into consideration is subject to the following limitations: (i) Offsets will be considered only between the allowable elements of an employee's (or a job class of employees') compensation package or between the compensation packages of employees in jobs within the same job grade or level. (ii) Offsets will be considered only between the allowable portion of the following compensation elements of employees or job classes of employees: (A) Wages and salaries. (B) Incentive bonuses. (C) Deferred compensation. (D) Pension and savings plan benefits. (E) Health insurance benefits. (F) Life insurance benefits. (G) Compensated personal absence benefits. However, any of the above elements or portions thereof, whose amount is not measurable, shall not be introduced or considered as an offset item. (iii) In considering offsets, the magnitude of the compensation elements in question must be taken into account. In determining the magnitude of compensation elements, the timing of receipt by the employee must be considered. (2) Compensation costs under certain conditions give rise to the need for special consideration. Among such conditions are the following: (i) Compensation to (A) owners of closely held corporations, partners, sole proprietors, or members of their immediate families, or (B) persons who are contractually committed to acquire a substantial financial interest in the contractor's enterprise. Determination should be made that 31-14 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.205-6 - -------------------------------------------------------------------------------- salaries are reasonable for the personal services rendered rather than being a distribution of profits. Compensation in lieu of salary for services rendered by partners and sole proprietors will be allowed to the extent that it is reasonable and does not constitute a distribution of profits. For closely held corporations, compensation costs covered by this subdivision shall not be recognized in amounts exceeding those costs that are deductible as compensation under the Internal Revenue Code and regulations under it. (ii) Any change in a contractor's compensation policy that results in a substantial increase in the contractor's level of compensation, particularly when it was concurrent with an increase in the ratio of Government contracts to other business, or any change in the treatment of allowability of specific types of compensation due to changes in Government policy. Contracting officers or their representatives should normally challenge increased costs where major revisions of existing compensation plans or new plans are introduced by the contractor, and the contractor-- (A) Has not notified the cognizant ACO of the changes either before their implementation or within a reasonable period after their implementation; and (B) Has not provided the Government, either before implementation or within a reasonable period after it, an opportunity to review the reasonableness of the changes. (iii) The contractor's business is such that its compensation levels are not subject to the restraints that normally occur in the conduct of competitive business. (iv) The contractor incurs costs for compensation in excess of the amounts which are deductible under the Internal Revenue Code and regulations issued under it. (c) Labor-management agreements. If costs of compensation established under "arm's length" negotiated labor-management agreements are otherwise allowable, the costs are reasonable if, as applied to work in performing Government contracts, they are not determined to be unwarranted by the character and circumstances of the work or discriminatory against the Government. The application of the provisions of a labor-management agreement designed to apply to a given set of circumstances and conditions of employment (e.g, work involving extremely hazardous activities or work not requiring recurrent use of overtime) is unwarranted when applied to a Government contract involving significantly different circumstances and conditions of employment (e.g., work involving less hazardous activities or work continually requiring use of overtime). It is discriminatory against the Government if it results in employee compensation (in whatever form or name) in excess of that being paid for similar non-Government work under comparable circumstances. Disallowance of costs will not be made under this paragraph (c) unless-- (1) The contractor has been permitted an opportunity to justify the costs; and (2) Due consideration has been given to whether unusual conditions pertain to Government contract work, imposing burdens, hardships, or hazards on the contractor's employees, for which compensation that might otherwise appear unreasonable is required to attract and hold necessary personnel. (d) Form of payment. (1) Compensation for personal services includes compensation paid or to be paid in the future to employees in the form of cash, corporate securities, such as stocks, bonds, and other financial instruments (see paragraph (d)(2) of this subsection regarding valuation), or other assets, products, or services. (2) When compensation is paid with securities of the contractor or of an affiliate, the following additional restrictions apply: (i) Valuation placed on the securities shall be the fair market value on the measurement date (i.e., the first date the number of shares awarded is known) determined upon the most objective basis available. (ii) Accruals for the cost of securities before issuing the securities to the employees shall be subject to adjustment according to the possibilities that the employees will not receive the securities and that their interest in the accruals will be forfeited. (e) Domestic and foreign differential pay. (1) When personal services are performed in a foreign country, compensation may also include a differential that may properly consider all expenses associated with foreign employment such as housing, cost of living adjustments, transportation, bonuses, additional Federal, State, local or foreign income taxes resulting from foreign assignment, and other related expenses. (2) Differential allowances for additional Federal, State, or local income taxes resulting from domestic assignments are unallowable. (f) Bonuses and incentive compensation. (1) Incentive compensation for management employees, cash bonuses, suggestion awards, safety awards, and incentive compensation based on production, cost reduction, or efficient performance are allowable provided the awards are paid or accrued under an agreement entered into in good faith between the contractor and the employees before the services are rendered or pursuant to an established plan or policy followed by the contractor so consistently as to imply, in effect, an agreement to make such payment and the basis for the award is supported. (2) When the bonus and incentive compensation payments are deferred, the costs are subject to the requirements of subparagraph (f)(1) of this subsection and of paragraph (k) of this subsection. 31-15 31.205-6 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- (g) Severance pay. (1) Severance pay, also commonly referred to as dismissal wages, is a payment in addition to regular salaries and wages by contractors to workers whose employment is being involuntarily terminated. Payments for early retirement incentive plans are covered in paragraph (j)(7). (2) Severance pay to be allowable must meet the general allowability criteria in subdivision (g)(2)(i) of this subsection, and, depending upon whether the severance is normal or abnormal, criteria in subdivision (g)(2)(ii) for normal severance pay or subdivision (g)(2)(iii) for abnormal severance pay also apply. In addition, paragraph (g)(3) of this subsection applies if the severance cost is for foreign nationals employed outside the United States. (i) Severance pay is allowable only to the extent that, in each case, it is required by (A) law; (B) employer-employee agreement; (C) established policy that constitutes, in effect, an implied agreement on the contractor's part; or (D) circumstances of the particular employment. Payments made in the event of employment with a replacement contractor where continuity of employment with credit for prior length of service is preserved under substantially equal conditions of employment, or continued employment by the contractor at another facility, subsidiary, affiliate, or parent company of the contractor are not severance pay and are unallowable. (ii) Actual normal turnover severance payments shall be allocated to all work performed in the contractor's plant, or where the contractor provides for accrual of pay for normal severances, that method will be acceptable if the amount of the accrual is reasonable in light of payments actually made for normal severances over a representative past period and if amounts accrued are allocated to all work performed in the contractor's plant. (iii) Abnormal or mass severance pay is of such a conjectural nature that measurement of costs by means of an accrual will not achieve equity to both parties. Thus, accruals for this purpose are not allowable. However, the Government recognizes its obligation to participate, to the extent of its fair share, in any specific payment. Thus, allowability will be considered on a case-by-case basis. (3) Notwithstanding the reference to geographical area in 31.205-6(b)(1), under 10 U.S.C. 2324(e)(1)(M) and 41 U.S.C. 256(e)(1)(M), the costs of severance payments to foreign nationals employed under a service contract performed outside the United States are unallowable to the extent that such payments exceed amounts typically paid to employees providing similar services in the same industry in the United States. Further, under 10 U.S.C. 2324(e)(1)(N) and 41 U.S.C. 256(e)(1)(N), all such costs of severance payments which are otherwise allowable are unallowable if the termination of employment of the foreign national is the result of the closing of, or the curtailment of activities at, a United States facility in that country at the request of the government of that country; this does not apply if the closing of a facility or curtailment of activities is made pursuant to a status-of-forces or other country-to-country agreement entered into with the government of that country before November 29, 1989. 10 U.S.C. 2324(e)(3) and 41 U.S.C. 256(e)(2) permit the head of the agency, or designee, to waive these cost allowability limitations under certain circumstances (see 37.113 and the solicitation provision at 52.237-8). (h) Backpay. (1) Backpay resulting from violations of Federal labor laws or the Civil Rights Act of 1964. Backpay may result from a negotiated settlement, order, or court decree that resolves a violation of Federal labor laws or the Civil Rights Act of 1964. Such backpay falls into two categories: one requiring the contractor to pay employees additional compensation for work performed for which they were underpaid, and the other resulting from other violations, such as when the employee was improperly discharged, discriminated against, or other circumstances for which the backpay was not additional compensation for work performed. Backpay resulting from underpaid work is compensation for the work performed and is allowable. All other backpay resulting from violation of Federal labor laws or the Civil Rights Act of 1964 is unallowable. (2) Other backpay. Backpay may also result from payments to employees (union and nonunion) for the difference in their past and current wage rates for working without a contract or labor agreement during labor management negotiations. Such backpay is allowable. Backpay to nonunion employees based upon results of union agreement negotiations is allowable only if-- (i) A formal agreement or understanding exists between management and the employees concerning these payments, or (ii) An established policy or practice exists and is followed by the contractor so consistently as to imply, in effect, an agreement to make such payment. (i) Compensation based on changes in the prices of corporate securities or corporate security ownership, such as stock options, stock appreciation rights, phantom stock plans, and junior stock conversions. (1) Any compensation which is calculated, or valued, based on changes in the price of corporate securities is unallowable. (2) Any compensation represented by dividend payments or which is calculated based on dividend payments is unallowable. (3) If a contractor pays an employee in lieu of the employee receiving or exercising a right, option, or benefit which would have been unallowable under this paragraph (i), such payments are also unallowable. 31-16 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.205-6 - -------------------------------------------------------------------------------- (j) Pension costs. (1) A pension plan is a deferred compensation plan that is established and maintained by one or more employers to provide systematically for paying benefits to plan participants after their retirement, provided that the benefits are paid for life or are payable for life at the option of the employee. Additional benefits such as permanent and total disability and death payments and survivorship payments to beneficiaries of deceased employees may be treated as pension costs, provided the benefits are an integral part of the pension plan and meet all the criteria pertaining to pension costs. (2) Pension plans are normally segregated into two types of plans: defined benefit or defined contribution pension plans. The cost of all defined benefit pension plans shall be measured, allocated, and accounted for in compliance with the provisions of 48 CFR 9904.412, Composition and Measurement of Pension Costs, and 48 CFR 9904.413, Adjustment and Allocation of Pension Cost. The costs of all defined contribution pension plans shall be measured, allocated, and accounted for in accordance with the provisions of 48 CFR 9904.412. Pension costs are allowable subject to the referenced standards and the cost limitations and exclusions set forth in subdivision (j)(2)(i) and in subparagraphs (j)(3) through (8) of this subsection. (i) Except for unfunded pension plans as defined in 31.001, to be allowable in the current year, pension costs must be funded by the time set for filing of the Federal income tax return or any extension thereof. Pension costs assigned to the current year, but not funded by the tax return time, shall not be allowable in any subsequent year. (ii) Pension payments must be reasonable in amount and be paid pursuant to (A) an agreement entered into in good faith between the contractor and employees before the work or services are performed and (B) the terms and conditions of the established plan. The cost of changes in pension plans which are discriminatory to the Government or are not intended to be applied consistently for all employees under similar circumstances in the future are not allowable. (iii) Except as provided for early retirement benefits in subparagraph (j)(7) of this subsection, one-time-only pension supplements not available to all participants of the basic plan are not allowable as pension costs unless the supplemental benefits represent a separate pension plan and the benefits are payable for life at the option of the employee. (iv) Increases in payments to previously retired plan participants covering cost-of-living adjustments are allowable if paid in accordance with a policy or practice consistently followed. (3) Defined benefit pension plans. This subparagraph covers pension plans in which the benefits to be paid or the basis for determining such benefits are established in advance and the contributions are intended to provide the stated benefits. The cost limitations and exclusions pertaining to defined benefit plans are as follows: (i)(A) Except for unfunded pension plans as defined in 31.001, normal costs of pension plans not funded in the year incurred, and all other components of pension costs (see 48 CFR 9904.412-40(a)(1)) assignable to the current accounting period but not funded during it, shall not be allowable in subsequent years (except that a payment made to a fund by the time set for filing the Federal income tax return or any extension thereof is considered to have been made during such taxable year). However, any part of a pension cost that is computed for a cost accounting period that is deferred pursuant to a waiver granted under the provisions of the Employee's Retirement Income Security Act of 1974 (ERISA) (see 48 CFR 9904.412-50(c)(3)), will be allowable in those future accounting periods in which the funding does occur. The allowability of these deferred contributions will be limited to the amounts that would have been allowed had the funding occurred in the year the costs would have been assigned except for the waiver. (B) Allowable costs for unfunded pension plans, as defined in 31.001, are limited to the amount computed in accordance with 48 CFR 9904.412 and 48 CFR 9904.413. (ii) Any amount paid or funded before the time it becomes assignable and allowable shall be applied to future years, in order of time, as if actually paid and deductible in those years. The interest earned on such premature funding, based on the valuation rate of return, may be excluded from future years' computations of pension costs in accordance with 48 CFR 9904.412-50(a)(7). (iii) Increased pension costs caused by delay in funding beyond 30 days after each quarter of the year to which they are assignable are unallowable. If a composite rate is used for allocating pension costs between the segments of a company and if, because of differences in the timing of the funding by the segments, an inequity exists, allowable pension costs for each segment will be limited to that particular segment's calculation of pension costs as provided for in 48 CFR 9904.413-50(c)(5). Determination of unallowable costs shall be made in accordance with the actuarial method used in calculating pension costs. (iv) Allowability of the cost of indemnifying the Pension Benefit Guaranty Corporation (PBGC) under ERISA Section 4062 or 4064 arising from terminating an employee deferred compensation plan will be considered on a case-by-case basis; provided that if insurance was required by the PBGC under ERISA Section 4023, it was so obtained and the indemnification payment is not recoverable under the insurance. Consideration under the foregoing circumstances will be primarily for the purpose of appraising the extent to which the indemnification payment is allocable to Government work. If a beneficial or other equi- (FAC 97-02) 31-17 FAC 97--02 OCTOBER 10, 1997 31.205-6 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- table relationship exists, the Government will participate, despite the requirements of 31.205-19(a)(3) and (b), in the indemnification payment to the extent of its fair share. (v) Increased pension costs resulting from the withdrawal of assets from a pension fund and transfer to another employee benefit plan fund are unallowable except to the extent authorized by an advance agreement. The advance agreement shall: (A) State the amount of the Government's equitable share in the gross amount withdrawn; and (B) Provide that the Government receive a credit equal to the amount of the Government's equitable share of the gross withdrawal. If a transfer is made without such an agreement, paragraph (j)(4) of this subsection will apply to the transfer as a constructive withdrawal and receipt of the funds by the contractor. (4) Termination of defined benefit pension plans. When excess or surplus assets revert to the contractor as a result of termination of a defined benefit pension plan, or such assets are constructively received by it for any reason, the contractor shall make a refund or give a credit to the Government for its equitable share of the gross amount withdrawn. The Government's equitable share shall reflect the Government's participation in pension costs through those contracts for which cost or pricing data (see 15.403-4) were submitted or which are subject to Subpart 31.2. (5) Defined contribution pension plans. This subparagraph covers those pension plans in which the contributions to be made are established in advance and the level of benefits is determined by the contributions made. It also covers profit sharing, savings plans, and other such plans provided the plans fall within the definition of a pension plan in subparagraph (j)(1) of this subsection. (i) The pension cost assignable to a cost accounting period is the net contribution required to be made for that period after taking into account dividends and other credits, where applicable. However, any portion of pension cost computed for a cost accounting period that is deferred pursuant to a waiver granted under the provisions of ERISA (see 48 CFR 9904.412-50(c)(3)) will be allowable in those future accounting periods when the funding does occur. The allowability of these deferred contributions will be limited to the amounts that would have been allowed had the funding been made in the year the costs would have been assigned except for the waiver. (ii) Any amount paid or funded to the trust before the time it becomes assignable and allowable shall be applied to future years, in order of time, as if actually paid and deductible in such years. (iii) The provisions of subdivision (j)(3)(iv) of this subsection concerning payments to PBGC apply to defined contribution plans. (6) Pension plans using pay-as-you-go methods. [Reserved] (7) Early retirement incentive plans. An early retirement incentive plan is a plan under which employees receive a bonus or incentive, over and above the requirement of the basic pension plan, to retire early. These plans normally are not applicable to all participants of the basic plan and do not represent life income settlements, and as such would not qualify as pension costs. However, for contract costing purposes, early retirement incentive payments are allow-able subject to the pension cost criteria contained in subdivisions (j)(3)(i) through (iv) provided-- (i) The costs are accounted for and allocated in accordance with the contractor's system of accounting for pension costs; (ii) The payments are made in accordance with the terms and conditions of the contractor's plan; (iii) The plan is applied only to active employees. The cost of extending the plan to employees who retired or were terminated before the adoption of the plan is unallowable; and (iv) The total of the incentive payments to any employee may not exceed the amount of the employee's annual salary for the previous fiscal year before the employee's retirement. (8) Employee stock ownership plans (ESOP). (i) An ESOP is an individual stock bonus plan designed specifically to invest in the stock of the employer corporation. The contractor's contributions to an Employee Stock Ownership Trust (ESOT) may be in the form of cash, stock, or property. Costs of ESOP's are allowable subject to the following conditions: (A) Contributions by the contractor in any one year may not exceed 15 percent (25 percent when a money purchase plan is included) of salaries and wages of employees participating in the plan in any particular year. (B) The contribution rate (ratio of contribution to salaries and wages of participating employees) may not exceed the last approved contribution rate except when approved by the contracting officer based upon justification provided by the contractor. When no contribution was made in the previous year for an existing ESOP, or when a new ESOP is first established, and the contractor proposes to make a contribution in the current year, the contribution rate shall be subject to the contracting officer's approval. (C) When a plan or agreement exists wherein the liability for the contribution can be compelled for a specific year, the expense associated with that liability is assignable only to that period. Any portion of the contribution not funded by the time set for filing of the Federal income tax return for that year or any extension thereof shall not be allowable in subsequent years. 31-18 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.205-6 - -------------------------------------------------------------------------------- (D) When a plan or agreement exists wherein the liability for the contribution cannot be compelled, the amount contributed for any year is assignable to that year provided the amount is funded by the time set for filing of the Federal income tax return for that year. (E) When the contribution is in the form of stock, the value of the stock contribution shall be limited to the fair market value of the stock on the date that title is effectively transferred to the trust. Cash contributions shall be allowable only when the contractor furnishes evidence satisfactory to the contracting officer demonstrating that stock purchases by the ESOT are or will be at a fair market price; e.g., makes arrangements with the trust permitting the contracting officer to examine purchases of stock by the trust to determine that prices paid are at fair market value. When excessive prices are paid, the amount of the excess will be credited to the same indirect cost pools that were charged for the ESOP contributions in the year in which the stock purchase occurs. However, when the trust purchases the stock with borrowed funds which will be repaid over a period of years by cash contributions from the contractor to the trust, the excess price over fair market value shall be credited to the indirect cost pools pro rata over the period of years during which the contractor contributes the cash used by the trust to repay the loan. When the fair market value of unissued stock or stock of a closely held corporation is not readily determinable, the valuation will be made on a case-by-case basis taking into consideration the guidelines for valuation used by the IRS. (ii) Amounts contributed to an ESOP arising from either-- (A) An additional investment tax credit (see 1975 Tax Reduction Act--TRASOP's); or (B) A payroll-based tax credit (see Economic Recovery Tax Act of 1981) are unallowable. (iii) The requirements of subdivision (j)(3)(ii) of this subsection are applicable to Employee Stock Ownership Plans. (k) Deferred compensation. (1) Deferred compensation is an award given by an employer to compensate an employee in a future cost accounting period or periods for services rendered in one or more cost accounting periods before the date of receipt of compensation by the employee. Deferred compensation does not include the amount of year-end accruals for salaries, wages, or bonuses that are paid within a reasonable period of time after the end of a cost accounting period. Subject to 31.205-6(a), deferred awards are allowable when they are based on current or future services. Awards made in periods subsequent to the period when the work being remunerated was performed are not allowable. (2) The costs of deferred awards shall be measured, allocated, and accounted for in compliance with the provisions of 48 CFR 9904.415, Accounting for the Cost of Deferred Compensation. (3) Deferred compensation payments to employees under awards made before the effective date of 48 CFR 9904.415 are allowable to the extent they would have been allowable under prior acquisition regulations. (l) Compensation incidental to business acquisitions. The following costs are unallowable: (1) Payments to employees under agreements in which they receive special compensation, in excess of the contractor's normal severance pay practice, if their employment terminates following a change in the management control over, or ownership of, the contractor or a substantial portion of its assets. (2) Payments to employees under plans introduced in connection with a change (whether actual or prospective) in the management control over, or ownership of, the contractor or a substantial portion of its assets in which those employees receive special compensation, which is contingent upon the employee remaining with the contractor for a specified period of time. (m) Fringe benefits. (1) Fringe benefits are allowances and services provided by the contractor to its employees as compensation in addition to regular wages and salaries. Fringe benefits include, but are not limited to, the cost of vacations, sick leave, holidays, military leave, employee insurance, and supplemental unemployment benefit plans. Except as provided otherwise in Subpart 31.2, the costs of fringe benefits are allowable to the extent that they are reasonable and are required by law, employer-employee agreement, or an established policy of the contractor. (2) That portion of the cost of company-furnished automobiles that relates to personal use by employees (including transportation to and from work) is unallowable regardless of whether the cost is reported as taxable income to the employees (see 31.205-46(f)). (n) Employee rebate and purchase discount plans. Rebates and purchase discounts, in whatever form, granted to employees on products or services produced by the contractor or affiliates are unallowable. (o) Postretirement benefits other than pensions (PRB). (1) PRB covers all benefits, other than cash benefits and life insurance benefits paid by pension plans, provided to employees, their beneficiaries, and covered dependents during the period following the employees' retirement. Benefits encompassed include, but are not limited to, postretirement health care; life insurance provided outside a pension plan; and other welfare benefits such as tuition assistance, day care, legal services, and housing subsidies provided after retirement. (2) To be allowable, PRB costs must be reasonable and incurred pursuant to law, employer-employee agreement, or an established policy of the contractor. In addition, to be allowable, PRB costs must also be calculated in accordance with paragraphs (o)(2)(i), (ii), or (iii) of this section. (FAC 97-04) 31-19 FAC 97-04 FEBRUARY 23, 1998 31.205-7 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- (i) Cash basis. Cost recognized as benefits when they are actually provided, must be paid to an insurer, provider, or other recipient for current year benefits or premiums. (ii) Terminal funding. If a contractor elects a terminal-funded plan, it does not accrue PRB costs during the working lives of employees. Instead, it accrues and pays the entire PRB liability to an insurer or trustee in a lump sum upon the termination of employees (or upon conversion to such a terminal-funded plan) to establish and maintain a fund or reserve for the sole purpose of providing PRB to retirees. The lump sum is allowable if amortized over a period of 15 years. (iii) Accrual basis. Accrual costing other than terminal funding must be measured and assigned according to Generally Accepted Accounting Principles and be paid to an insurer or trustee to establish and maintain a fund or reserve for the sole purpose of providing PRB to retirees. The accrual must also be calculated in accordance with generally accepted actuarial principles and practices as promulgated by the Actuarial Standards Board. (3) To be allowable, costs must be funded by the time set for filing the Federal income tax return or any extension thereof. PRB costs assigned to the current year, but not funded or otherwise liquidated by the tax return time, shall not be allowable in any subsequent year. (4) Increased PRB costs caused by delay in funding beyond 30 days after each quarter of the year to which they are assignable are unallowable. (5) Costs of postretirement benefits in subdivision (o)(2)(iii) of this subsection attributable to past service ("transition obligation") as defined in Financial Accounting Standards Board Statement 106, paragraph 110, are allowable subject to the following limitation: The allowable amount of such costs assignable to a contractor fiscal year cannot exceed the amount of such costs which would be assigned to that contractor fiscal year under the delayed recognition methodology described in paragraphs 112 and 113 of Statement 106. (6) The Government shall receive an equitable share of any amount of previously funded PRB costs which revert or inure to the contractor. Such equitable share shall reflect the Government's previous participation in PRB costs through those contracts for which certified cost or pricing data were required or which were subject to Subpart 31.2. (p) Limitation on allowability of compensation for certain contractor personnel. (1) Costs incurred after January 1, 1998, for compensation of a senior executive in excess of the benchmark compensation amount determined applicable for the contractor fiscal year by the Administrator, Office of Federal Procurement Policy (OFPP), under Section 39 of the OFPP Act (41 U.S.C. 435) are unallowable (10 U.S.C. 2324(e)(1)(P) and 41 U.S.C. 256(e)(1)(P)). This limitation is the sole statutory limitation on allowable senior executive compensation costs incurred after January 1, 1998, under new or previously existing contracts. This limitation applies whether or not the affected contracts were previously subject to a statutory limitation on such costs. (2) As used in this paragraph: (i) "Compensation" means the total amount of wages, salary, bonuses, deferred compensation (see paragraph (k) of this subsection), and employer contributions to defined contribution pension plans (see paragraphs (j)(5) and (j)(8) of this subsection), for the fiscal year, whether paid, earned, or otherwise accruing, as recorded in the contractor's cost accounting records for the fiscal year. (ii) "Senior executive" means-- (A) The contractor's Chief Executive Officer (CEO) or any individual acting in a similar capacity; (B) The contractor's four most highly compensated employees in management positions, other than the CEO; and (C) If the contractor is intermediate home offices or segments that report directly to the contractor's corporate headquarters, the five most highly compensated employees in management positions at each such intermediate home office or segment. (iii) "Fiscal year" means the fiscal year established by the contractor for accounting purposes. 31.205-7 Contingencies. (a) "Contingency," as used in this subpart, means a possible future event or condition arising from presently known or unknown causes, the outcome of which is indeterminable at the present time. (b) Costs for contingencies are generally unallowable for historical costing purposes because such costing deals with costs incurred and recorded on the contractor's books. However, in some cases, as for example, terminations, a contingency factor may be recognized when it is applicable to a past period to give recognition to minor unsettled factors in the interest of expediting settlement. (c) In connection with estimates of future costs, contingencies fall into two categories: (1) Those that may arise from presently known and existing conditions, the effects of which are foreseeable within reasonable limits of accuracy; e.g., anticipated costs of rejects and defective work. Contingencies of this category are to be included in the estimates of future costs so as to provide the best estimate of performance cost. (2) Those that may arise from presently known or unknown conditions, the effect of which cannot be measured so precisely as to provide equitable results to the contractor and to the Government; e.g., results of pending litigation. Contingencies of this category are to be excluded from cost estimates under the several items of cost, but should be disclosed separately (including the basis upon which the contingency is computed) to facilitate the negotiation of 31-20 FAC 97-04 APRIL 24, 1998 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.205-10 - -------------------------------------------------------------------------------- appropriate contractual coverage. (See, for example, 31.205-6(g), 31.205-19, and 31.205-24.) 31.205-8 Contributions or donations. Contributions or donations, including cash, property and services, regardless of recipient, are unallowable, except as provided in 31.205-1(e)(3). 31.205-9 [Reserved] 31.205-10 Cost of money. (a) Facilities capital cost of money--(1) General. (i) Facilities capital cost of money (cost of capital committed to facilities) is an imputed cost determined by applying a cost-of-money rate to facilities capital employed in contract performance. A cost-of-money rate is uniformly imputed to all contractors (see subdivision (a)(1)(ii) of this subsection). Capital employed is determined without regard to whether its source is equity or borrowed capital. The resulting cost of money is not a form of interest on borrowings (see 31.205-20). (ii) 48 CFR 9904.414, Cost of Money as an Element of the Cost of Facilities Capital, establishes criteria for measuring and allocating, as an element of contract cost, the cost of capital committed to facilities. Cost-of-money factors are developed on Form CASB-CMF, broken down by overhead pool at the business unit, using-- (A) Business-unit facilities capital data, (B) Overhead allocation base data, and (C) The cost-of-money rate, which is based on interest rates specified by the Secretary of the Treasury under Public Law 92-41. (2) Allowability. Whether or not the contract is otherwise subject to CAS, facilities capital cost of money is allowable if-- (i) The contractor's capital investment is measured, allocated to contracts, and costed in accordance with 48 CFR 9904.414; (ii) The contractor maintains adequate records to demonstrate compliance with this standard; (iii) The estimated facilities capital cost of money is specifically identified or proposed in cost proposals relating to the contract under which this cost is to be claimed; and (iv) The requirements of 31.205-52, which limit the allowability of facilities capital cost of money, are observed. (3) Accounting. The facilities capital cost of money need not be entered on the contractor's books of account. However, the contractor shall-- (i) Make a memorandum entry of the cost, and (ii) Maintain, in a manner that permits audit and verification, all relevant schedules, cost data, and other data necessary to support the entry fully. (4) Payment. Facilities capital cost of money that is-- (i) Allowable under subparagraph (2) of this subsection; and (ii) Calculated, allocated, and documented in accordance with this cost principle shall be an "incurred cost" for reimbursement purposes under applicable cost-reimbursement contracts and for progress payment purposes under fixed-price contracts. (5) The requirements of 31.205-52 shall be observed in determining the allowable cost of money attributable to including asset valuations resulting from business combinations in the facilities capital employed base. (b) Cost of money as an element of the cost of capital assets under construction--(1) General. (i) Cost of money as an element of the cost of capital assets under construction is an imputed cost determined by applying a cost-of-money rate to the investment in tangible and intangible capital assets while they are being constructed, fabricated, or developed for a contractor's own use. Capital employed is determined without regard to whether its source is equity or borrowed capital. The resulting cost of money is not a form of interest on borrowing (see 31.205-20). (ii) 48 CFR 9904.417, Cost of Money as an Element of the Cost of Capital Assets Under Construction, establishes criteria for measuring and allocating, as an element of contract cost, the cost of capital committed to capital assets under construction, fabrication, or development. (2) Allowability. (i) Whether or not the contract is otherwise subject to CAS, and except as specified in subdivision (ii) of this section, the cost of money for capital assets under construction, fabrication, or development is allowable if-- (A) The cost of money is calculated, allocated to contracts, and costed in accordance with 48 CFR 9904.417; (B) The contractor maintains adequate records to demonstrate compliance with this standard; (C) The cost of money for tangible capital assets is included in the capitalized cost that provides the basis for allowable depreciation costs, or, in the case of intangible capital assets, the cost of money is included in the cost of those assets for which amortization costs are allowable; and (D) The requirements of 31.205-52, which limit the allowability of cost of money for capital assets under construction, fabrication, or development, are observed. (ii) Actual interest cost in lieu of the calculated imputed cost of money for capital assets under construction, fabrication, or development is unallowable. (3) Accounting. The cost of money for capital assets under construction need not be entered on the contractor's books of account. However, the contractor shall (i) make a 31-21 31.205-11 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- memorandum entry of the cost and (ii) maintain, in a manner that permits audit and verification, all relevant schedules, cost data, and other data necessary to support the entry fully. (4) Payment. The cost of money for capital assets under construction that is allowable under subparagraph (2) above of this cost principle shall be an "incurred cost" for reimbursement purposes under applicable cost-reimbursement contracts and for progress payment purposes under fixed-price contracts. 31.205-11 Depreciation. (a) Depreciation is a charge to current operations which distributes the cost of a tangible capital asset, less estimated residual value, over the estimated useful life of the asset in a systematic and logical manner. It does not involve a process of valuation. Useful life refers to the prospective period of economic usefulness in a particular contractor's operations as distinguished from physical life; it is evidenced by the actual or estimated retirement and replacement practice of the contractor. (b) Contractors having contracts subject to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, must adhere to the requirement of that standard for all fully CAS-covered contracts and may elect to adopt the standard for all other contracts. All requirements of 48 CFR 9904.409 are applicable if the election is made, and its requirements supersede any conflicting requirements of this cost principle. Once electing to adopt 48 CFR 9904.409 for all contracts, contractors must continue to follow it until notification of final acceptance of all deliverable items on all open negotiated Government contracts. Paragraphs (c) through (e) below apply to contracts to which 48 CFR 9904.409 is not applied. (c) Normal depreciation on a contractor's plant, equipment, and other capital facilities is an allowable contract cost, if the contractor is able to demonstrate that it is reasonable and allocable (but see paragraph (i) of this section). (d) Depreciation shall be considered reasonable if the contractor follows policies and procedures that are-- (1) Consistent with those followed in the same cost center for business other than Government; (2) Reflected in the contractor's books of accounts and financial statements; and (3) Both used and acceptable for Federal income tax purposes. (e) When the depreciation reflected on a contractor's books of accounts and financial statements differs from that used and acceptable for Federal income tax purposes, reimbursement shall be based on the asset cost amortized over the estimated useful life of the property using depreciation methods (straight line, sum of the years' digits, etc.) acceptable for income tax purposes. Allowable depreciation shall not exceed the amounts used for book and statement purposes and shall be determined in a manner consistent with the depreciation policies and procedures followed in the same cost center on non-Government business (but see paragraph (o) of this subsection). (f) Depreciation for reimbursement purposes in the case of tax-exempt organizations shall be determined on the basis described in paragraph (e) of this section. (g) Special considerations are required for assets acquired before the effective date of this cost principle if, on that date, the undepreciated balance of these assets resulting from depreciation policies and procedures used previously for Government contracts and subcontracts is different from the undepreciated balance on the books and financial statements. The undepreciated balance for contract cost purposes shall be depreciated over the remaining life using the methods and lives followed for book purposes. The aggregate depreciation of any asset allowable after the effective date of this 31.205-11 shall not exceed the cost basis of the asset less any depreciation allowed or allowable under prior acquisition regulations. (h) Depreciation should usually be allocated to the contract and other work as an indirect cost. The amount of depreciation allowed in any accounting period may, consistent with the basic objectives in paragraph (a) above, vary with volume of production or use of multishift operations. (i) In the case of emergency facilities covered by certificates of necessity, a contractor may elect to use normal depreciation without requesting a determination of "true depreciation," or may elect to use either normal or "true depreciation" after a determination of "true depreciation" has been made by an Emergency Facilities Depreciation Board (EFDB). The method elected must be followed consistently throughout the life of the emergency facility. When an election is made to use normal depreciation, the criteria in paragraphs (c), (d), (e), and (f) of this section shall apply for both the emergency period and the post-emergency period. When an election is made to use "true depreciation", the amount allowable as depreciation-- (1) With respect to the emergency period (five years), shall be computed in accordance with the determination of the EFDB and allocated rateably over the full five year emergency period; provided no other allowance is made which would duplicate the factors, such as extraordinary obsolescence, covered by the Board's determination; and (2) After the end of the emergency period, shall be computed by distributing the remaining undepreciated portion of the cost of the emergency facility over the balance of its useful life provided the remaining undepreciated portion of such cost shall not include any amount of unrecovered "true depreciation." (j) No depreciation, rental, or use charge shall be allowed on property acquired at no cost from the 31-22 (FAC 97-04) PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.205-13 - -------------------------------------------------------------------------------- Government by the contractor or by any division, subsidiary, or affiliate of the contractor under common control. (k) The depreciation on any item which meets the criteria for allowance at a "price" under 31.205-26(e) may be based on that price, provided the same policies and procedures are used for costing all business of the using division, subsidiary, or organization under common control. (l) No depreciation or rental shall be allowed on property fully depreciated by the contractor or by any division, subsidiary, or affiliate of the contractor under common control. However, a reasonable charge for using fully depreciated property may be agreed upon and allowed (but see 31.109(h)(2)). In determining the charge, consideration shall be given to cost, total estimated useful life at the time of negotiations, effect of any increased maintenance charges or decreased efficiency due to age, and the amount of depreciation previously charged to Government contracts or subcontracts. (m) 48 CFR 9904.404, Capitalization of Tangible Assets, applies to assets acquired by a "capital lease" as defined in Statement of Financial Accounting Standard No. 13 (FAS-13), Accounting for Leases, issued by the Financial Accounting Standards Board (FASB). Compliance with 48 CFR 9904.404 and FAS-13 requires that such leased assets (capital leases) be treated as purchased assets; i.e., be capitalized and the capitalized value of such assets be distributed over their useful lives as depreciation charges, or over the leased life as amortization charges as appropriate. Assets whose leases are classified as capital leases under FAS-13 are subject to the requirements of 31.205-11 while assets acquired under leases classified as operating leases are subject to the requirements on rental costs in 31.205-36. The standards of financial accounting and reporting prescribed by FAS-13 are incorporated into this principle and shall govern its application, except as provided in subparagraphs (1), (2), and (3) of this paragraph. (1) Rental costs under a sale and leaseback arrangement shall be allowable up to the amount that would have been allowed had the contractor retained title to the property. (2) Capital leases, as defined in FAS-13, for all real and personal property, between any related parties are subject to the requirements of this subparagraph 31.205-11(m). If it is determined that the terms of the lease have been significantly affected by the fact that the lessee and lessor are related, depreciation charges shall not be allowed in excess of those which would have occurred if the lease contained terms consistent with those found in a lease between unrelated parties. (3) Assets acquired under leases that the contractor must capitalize under FAS-13 shall not be treated as purchased assets for contract purposes if the leases are covered by 31.205-36(b)(4). (n) Whether or not the contract is otherwise subject to CAS, the requirements of 31.205-52, which limit the allowability of depreciation, shall be observed. (o) In the event of a write-down from carrying value to fair value as a result of impairments caused by events or changes in circumstances, allowable depreciation of the impaired assets shall be limited to the amounts that would have been allowed had the assets not been written down (see 31.205-16(g)). However, this does not preclude a change in depreciation resulting from other causes such as permissible changes in estimates of service life, consumption of services, or residual value. 31.205-12 Economic planning costs. (a) This category includes costs of generalized long-range management planning that is concerned with the future overall development of the contractor's business and that may take into account the eventual possibility of economic dislocations or fundamental alterations in those markets in which the contractor currently does business. Economic planning costs do not include organization or reorganization costs covered by 31.205-27. (b) Economic planning costs are allowable as indirect costs to be properly allocated. (c) Research and development and engineering costs designed to lead to new products for sale to the general public are not allowable under this principle. 31.205-13 Employee morale, health, welfare, food service, and dormitory costs and credits. (a) Aggregate costs incurred on activities designed to improve working conditions, employer-employee relations, employee morale, and employee performance (less income generated by these activities) are allowable, except as limited by paragraphs (b), (c), and (d) of this subsection. Some examples of allowable activities are house publications, health clinics, wellness/fitness centers, employee counseling services, and food and dormitory services, which include operating or furnishing facilities for cafeterias, dining rooms, canteens, lunch wagons, vending machines, living accommodations, or similar types of services for the contractor's employees at or near the contractor's facilities. (b) Costs of gifts are unallowable. (Gifts do not include awards for performance made pursuant to 31.205-6(f) or awards made in recognition of employee achievements pursuant to an established contractor plan or policy.) (c) Costs of recreation are unallowable, except for the costs of employees' participation in company sponsored sports teams or employee organizations designed to improve company loyalty, team work, or physical fitness. (d) Losses from operating food and dormitory services may be included as costs only if the contractor's objective is to operate such services on a break-even basis. Losses sus- 31-23 31.205-14 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- tained because food services or lodging accommodations are furnished without charge or at prices or rates which obviously would not be conducive to the accomplishment of the above objective are not allowable. A loss may be allowed, however, to the extent that the contractor can demonstrate that unusual circumstances exist (e.g., where the contractor must provide food or dormitory services at remote locations where adequate commercial facilities are not reasonably available; or where charged but unproductive labor costs would be excessive but for the services provided or where cessation or reduction of food or dormitory operations will not otherwise yield net cost savings) such that even with efficient management, operating the services on a break-even basis would require charging inordinately high prices, or prices or rates higher than those charged by commercial establishments offering the same services in the same geographical areas. Costs of food and dormitory services shall include an allocable share of indirect expenses pertaining to these activities. (e) When the contractor has an arrangement authorizing an employee association to provide or operate a service, such as vending machines in the contractor's plant, and retain the profits, such profits shall be treated in the same manner as if the contractor were providing the service (but see paragraph (f) of this subsection). (f) Contributions by the contractor to an employee organization, including funds from vending machine receipts or similar sources, may be included as costs incurred under paragraph (a) of this subsection only to the extent that the contractor demonstrates that an equivalent amount of the costs incurred by the employee organization would be allowable if directly incurred by the contractor. 31.205-14 Entertainment costs. Costs of amusement, diversions, social activities, and any directly associated costs such as tickets to shows or sports events, meals, lodging, rentals, transportation, and gratuities are unallowable. Costs made specifically unallowable under this cost principle are not allowable under any other cost principle. Costs of membership in social, dining, or country clubs or other organizations having the same purposes are also unallowable, regardless of whether the cost is reported as taxable income to the employees. 31.205-15 Fines, penalties, and mischarging costs. (a) Costs of fines and penalties resulting from violations of, or failure of the contractor to comply with, Federal, State, local, or foreign laws and regulations, are unallowable except when incurred as a result of compliance with specific terms and conditions of the contract or written instructions from the contracting officer. (b) Costs incurred in connection with, or related to, the mischarging of costs on Government contracts are unallowable when the costs are caused by, or result from, alteration or destruction of records, or other false or improper charging or recording of costs. Such costs include those incurred to measure or otherwise determine the magnitude of the improper charging, and costs incurred to remedy or correct the mischarging, such as costs to rescreen and reconstruct records. 31.205-16 Gains and losses on disposition or impairment of depreciable property or other capital assets. (a) Gains and losses from the sale, retirement, or other disposition (but see 31.205-19) of depreciable property shall be included in the year in which they occur as credits or charges to the cost grouping(s) in which the depreciation or amortization applicable to those assets was included (but see paragraph (d) of this subsection). However, no gain or loss shall be recognized as a result of the transfer of assets in a business combination (see 31.205-52). (b) Gains and losses on disposition of tangible capital assets, including those acquired under capital leases (see 31.205-11(m)), shall be considered as adjustments of depreciation costs previously recognized. The gain or loss for each asset disposed of is the difference between the net amount realized, including insurance proceeds from involuntary conversions, and its undepreciated balance. The gain recognized for contract costing purposes shall be limited to the difference between the acquisition cost (or for assets acquired under a capital lease, the value at which the leased asset is capitalized) of the asset and its undepreciated balance (except see subdivisions (c)(2)(i) or (ii) of this section). (c) Special considerations apply to an involuntary conversion which occurs when a contractor's property is destroyed by events over which the owner has no control, such as fire, windstorm, flood, accident, theft, etc., and an insurance award is recovered. The following govern involuntary conversions: (1) When there is a cash award and the converted asset is not replaced, gain or loss shall be recognized in the period of disposition. The gain recognized for contract costing purposes shall be limited to the difference between the acquisition cost of the asset and its undepreciated balance. (2) When the converted asset is replaced, the contractor shall either-- (i) Adjust the depreciable basis of the new asset by the amount of the total realized gain or loss; or (ii) Recognize the gain or loss in the period of disposition, in which case the Government shall participate to the same extent as outlined in subparagraph (c)(1) of this subsection. (d) Gains and losses on the disposition of depreciable property shall not be recognized as a separate charge or credit when-- 31-24 FAC 97-03 FEBRUARY 9, 1998 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.205-18 - -------------------------------------------------------------------------------- (1) Gains and losses are processed through the depreciation reserve account and reflected in the depreciation allowable under 31.205-11; or (2) The property is exchanged as part of the purchase price of a similar item, and the gain or loss is taken into consideration in the depreciation cost basis of the new item. (e) Gains and losses arising from mass or extraordinary sales, retirements, or other disposition other than through business combinations shall be considered on a case-by-case basis. (f) Gains and losses of any nature arising from the sale or exchange of capital assets other than depreciable property shall be excluded in computing contract costs. (g) With respect to long-lived tangible and identifiable intangible assets held for use, no loss shall be allowed for a write-down from carrying value to fair value as a result of impairments caused by events or changes in circumstances (e.g., environmental damage, idle facilities arising from a declining business base, etc.). If depreciable property or other capital assets have been written down from carrying value to fair value due to impairments, gains or losses upon disposition shall be the amounts that would have been allowed had the assets not been written down. 31.205-17 Idle facilities and idle capacity costs. (a) "Costs of idle facilities or idle capacity," as used in this subsection, means costs such as maintenance, repair, housing, rent, and other related costs; e.g., property taxes, insurance, and depreciation. "Facilities," as used in this subsection, means plant or any portion thereof (including land integral to the operation), equipment, individually or collectively, or any other tangible capital asset, wherever located, and whether owned or leased by the contractor. "Idle capacity," as used in this subsection, means the unused capacity of partially used facilities. It is the difference between that which a facility could achieve under 100 percent operating time on a one-shift basis, less operating interruptions resulting from time lost for repairs, setups, unsatisfactory materials, and other normal delays, and the extent to which the facility was actually used to meet demands during the accounting period. A multiple-shift basis may be used in the calculation instead of a one-shift basis if it can be shown that this amount of usage could normally be expected for the type of facility involved. "Idle facilities," as used in this subsection, means completely unused facilities that are excess to the contractor's current needs. (b) The costs of idle facilities are unallowable unless the facilities-- (1) Are necessary to meet fluctuations in workload; or (2) Were necessary when acquired and are now idle because of changes in requirements, production economies, reorganization, termination, or other causes which could not have been reasonably foreseen. (Costs of idle facilities are allowable for a reasonable period, ordinarily not to exceed 1 year, depending upon the initiative taken to use, lease, or dispose of the idle facilities (but see 31.205-42)). (c) Costs of idle capacity are costs of doing business and are a factor in the normal fluctuations of usage or overhead rates from period to period. Such costs are allowable provided the capacity is necessary or was originally reasonable and is not subject to reduction or elimination by subletting, renting, or sale, in accordance with sound business, economics, or security practices. Widespread idle capacity throughout an entire plant or among a group of assets having substantially the same function may be idle facilities. (d) Any costs to be paid directly by the Government for idle facilities or idle capacity reserved for defense mobilization production shall be the subject of a separate agreement. 31.205-18 Independent research and development and bid and proposal costs. (a) Definitions. "Applied research," as used in this subsection, means that effort which (1) normally follows basic research, but may not be severable from the related basic research, (2) attempts to determine and exploit the potential of scientific discoveries or improvements in technology, materials, processes, methods, devices, or techniques, and (3) attempts to advance the state of the art. Applied research does not include efforts whose principal aim is design, development, or test of specific items or services to be considered for sale; these efforts are within the definition of the term "development," defined in this subsection. "Basic research," as used in this subsection, means that research which is directed toward increase of knowledge in science. The primary aim of basic research is a fuller knowledge or understanding of the subject under study, rather than any practical application thereof. "Bid and proposal (B&P) costs," as used in this subsection, means the costs incurred in preparing, submitting, and supporting bids and proposals (whether or not solicited) on potential Government or non-Government contracts. The term does not include the costs of effort sponsored by a grant or cooperative agreement, or required in the performance of a contract. "Company," as used in this subsection, means all divisions, subsidiaries, and affiliates of the contractor under common control. "Development," as used in this subsection, means the systematic use, under whatever name, of scientific and technical knowledge in the design, development, test, or evaluation of a potential new product or service (or of an improvement in an existing product or service) for the pur- 31-25 FAC 97-03 FEBRUARY 9, 1998 31.205-18 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- pose of meeting specific performance requirements or objectives. Development includes the functions of design engineering, prototyping, and engineering testing. Development excludes-- (1) Subcontracted technical effort which is for the sole purpose of developing an additional source for an existing product, or (2) Development effort for manufacturing or production materials, systems, processes, methods, equipment, tools, and techniques not intended for sale. "Independent research and development (IR&D)," as used in this subsection, means a contractor's IR&D cost that consists of projects falling within the four following areas: (1) basic research, (2) applied research, (3) development, and (4) systems and other concept formulation studies. The term does not include the costs of effort sponsored by a grant or required in the performance of a contract. IR&D effort shall not include technical effort expended in developing and preparing technical data specifically to support submitting a bid or proposal. "Systems and other concept formulation studies," as used in this subsection, means analyses and study efforts either related to specific IR&D efforts or directed toward identifying desirable new systems, equipment or components, or modifications and improvements to existing systems, equipment, or components. (b) Composition and allocation of costs. The requirements of 48 CFR 9904.420, Accounting for independent research and development costs and bid and proposal costs, are incorporated in their entirety and shall apply as follows-- (1) Fully-CAS-covered contracts. Contracts that are fully-CAS-covered shall be subject to all requirements of 48 CFR 9904.420. (2) Modified CAS-covered and non-CAS-covered contracts. Contracts that are not CAS-covered or that contain terms or conditions requiring modified CAS coverage shall be subject to all requirements of 48 CFR 9904.420 except 48 CFR 9904.420-50(e)(2) and 48 CFR 9904.420-50(f)(2), which are not then applicable. However, non-CAS-covered or modified CAS-covered contracts awarded at a time the contractor has CAS-covered contracts requiring compliance with 48 CFR 9904.420, shall be subject to all the requirements of 48 CFR 9904.420. When the requirements of 48 CFR 9904.420-50(e)(2) and 48 CFR 9904.420-50(f)(2) are not applicable, the following apply: (i) IR&D and B&P costs shall be allocated to final cost objectives on the same basis of allocation used for the G&A expense grouping of the profit center (see 31.001) in which the costs are incurred. However, when IR&D and B&P costs clearly benefit other profit centers or benefit the entire company, those costs shall be allocated through the G&A of the other profit centers or through the corporate G&A, as appropriate. (ii) If allocations of IR&D or B&P through the G&A base do not provide equitable cost allocation, the contracting officer may approve use of a different base. (c) Allowability. Except as provided in paragraphs (d) and (e) of this subsection, or as provided in agency regulations, costs for IR&D and B&P are allowable as indirect expenses on contracts to the extent that those costs are allocable and reasonable. (d) Deferred IR&D costs. (1) IR&D costs that were incurred in previous accounting periods are unallowable, except when a contractor has developed a specific product at its own risk in anticipation of recovering the development costs in the sale price of the product provided that-- (i) The total amount of IR&D costs applicable to the product can be identified; (ii) The proration of such costs to sales of the product is reasonable; (iii) The contractor had no Government business during the time that the costs were incurred or did not allocate IR&D costs to Government contracts except to prorate the cost of developing a specific product to the sales of that product; and (iv) No costs of current IR&D programs are allocated to Government work except to prorate the costs of developing a specific product to the sales of that product. (2) When deferred costs are recognized, the contract (except firm-fixed-price and fixed-price with economic price adjustment) will include a specific provision setting forth the amount of deferred IR&D costs that are allocable to the contract. The negotiation memorandum will state the circumstances pertaining to the case and the reason for accepting the deferred costs. (e) Cooperative arrangements. (1) IR&D costs may be incurred by contractors working jointly with one or more non-Federal entities pursuant to a cooperative arrangement (for example, joint ventures, limited partnerships, teaming arrangements, and collaboration and consortium arrangements). IR&D costs also may include costs contributed by contractors in performing cooperative research and development agreements, or similar arrangements, entered into under-- (i) Section 12 of the Stevenson-Wydler Technology Transfer Act of 1980 (15 U.S.C. 3710(a)); (ii) Sections 203(c)(5) and (6) of the National Aeronautics and Space Act of 1958, as amended (42 U.S.C. 2473(c)(5) and (6)); (iii) 10 U.S.C. 2371 for the Defense Advanced Research Projects Agency; or (iv) Other equivalent authority. (2) IR&D costs incurred by a contractor pursuant to these types of cooperative arrangements should be consid- 31-26 FAC 97-03 FEBRUARY 9, 1998 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.205-19 - -------------------------------------------------------------------------------- ered as allowable IR&D costs if the work performed would have been allowed as contractor IR&D had there been no cooperative arrangement. (3) Costs incurred in preparing, submitting, and supporting offers on potential cooperative arrangements are allowable to the extent they are allocable, reasonable, and not otherwise unallowable. 31.205-19 Insurance and indemnification. (a) Insurance by purchase or by self-insuring includes coverage the contractor is required to carry, or to have approved, under the terms of the contract and any other coverage the contractor maintains in connection with the general conduct of its business. Any contractor desiring to establish a program of self-insurance applicable to contracts that are not subject to 48 CFR 9904.416, Accounting for Insurance Costs, shall comply with the self-insurance requirements of that standard as well as with Part 28 of this Regulation. However, approval of a contractor's insurance program in accordance with Part 28 does not constitute a determination as to the allowability of the program's cost. The amount of insurance costs which may be allowed is subject to the cost limitations and exclusions in the following subparagraphs. (1) Costs of insurance required or approved, and maintained by the contractor pursuant to the contract, are allowable. (2) Costs of insurance maintained by the contractor in connection with the general conduct of its business are allowable, subject to the following limitations: (i) Types and extent of coverage shall follow sound business practice, and the rates and premiums must be reasonable. (ii) Costs allowed for business interruption or other similar insurance must be limited to exclude coverage of profit. (iii) The cost of property insurance premiums for insurance coverage in excess of the acquisition cost of the insured assets is allowable only when the contractor has a formal written policy assuring that in the event the insured property is involuntarily converted, the new asset shall be valued at the book value of the replaced asset plus or minus adjustments for differences between insurance proceeds and actual replacement cost. If the contractor does not have such a formal written policy, the cost of premiums for insurance coverage in excess of the acquisition cost of the insured asset is unallowable. (iv) Costs of insurance for the risk of loss of or damage to Government property are allowable only to the extent that the contractor is liable for such loss or damage and such insurance does not cover loss or damage that results from willful misconduct or lack of good faith on the part of any of the contractor's directors or officers or other equivalent representatives. (v) Contractors operating under a program of self-insurance must obtain approval of the program when required by 28.308(a). (vi) Costs of insurance on the lives of officers, partners, or proprietors are allowable only to the extent that the insurance represents additional compensation (see 31.205-6). (3) Actual losses are unallowable unless expressly provided for in the contract, except--(i) Losses incurred under the nominal deductible provisions of purchased insurance, in keeping with sound business practice, are allowable for contracts not subject to 48 CFR 9904.416 and when the [The next page is 31-29] 31-27 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.205-22 - -------------------------------------------------------------------------------- contractor did not establish a self-insurance program. Such contracts are not subject to the self-insurance requirements of 48 CFR 9904.416. For contracts subject to 48 CFR 9904.416, and for those made subject to the self-insurance requirements of that Standard as a result of the contractor's having established a self-insurance program (see paragraph (a) of this section), actual losses may be used as a basis for charges under a self-insurance program when the actual amount of losses will not differ significantly from the projected average losses for the accounting period (see 48 CFR 9904.416.50(a)(2)(ii)). In those instances where an actual loss has occurred and the present value of the liability is determined under the provisions of 48 CFR 9904.416-50(a)(3)(ii), the allowable cost shall be limited to an amount computed using as a discount rate the interest rate determined by the Secretary of the Treasury pursuant to 50 U.S.C. App. 1215(b)(2) in effect at the time the loss is recognized. However, the full amount of a lump-sum settlement to be paid within a year of the date of settlement is allowable. (ii) Minor losses, such as spoilage, breakage, and disappearance of small hand tools that occur in the ordinary course of doing business and that are not covered by insurance are allowable. (4) The cost of insurance to protect the contractor against the costs of correcting its own defects in materials or workmanship is unallowable. However, insurance costs to cover fortuitous or casualty losses resulting from defects in materials or workmanship are allowable as a normal business expense. (5) Premiums for retroactive or backdated insurance written to cover occurred and known losses are unallowable. (b) If purchased insurance is available, the charge for any self-insurance coverage plus insurance administration expenses shall not exceed the cost of comparable purchased insurance plus associated insurance administration expenses. (c) Insurance provided by captive insurers (insurers owned by or under the control of the contractor) is considered self-insurance, and charges for it must comply with the self-insurance provisions of 48 CFR 9904.416. However, if the captive insurer also sells insurance to the general public in substantial quantities and it can be demonstrated that the charge to the contractor is based on competitive market forces, the insurance will be considered purchased insurance. (d) The allowability of premiums for insurance purchased from fronting insurance companies (insurance companies not related to the contractor but who reinsure with a captive insurer of the contractor) shall not exceed the amount (plus reasonable fronting company charges for services rendered) which the contractor would have been allowed had it insured directly with the captive insurer. (e) Self-insurance charges for risks of catastrophic losses are not allowable (see 28.308(e)). (f) The Government is obligated to indemnify the contractor only to the extent authorized by law, as expressly provided for in the contract, except as provided in paragraph (a)(3) of this section. (g) Late premium payment charges related to employee deferred compensation plan insurance incurred pursuant to Section 4007 (29 U.S.C. 1307) or Section 4023 (29 U.S.C. 1323) of the Employee Retirement Income Security Act of 1974 are unallowable. 31.205-20 Interest and other financial costs. Interest on borrowings (however represented), bond discounts, costs of financing and refinancing capital (net worth plus long-term liabilities), legal and professional fees paid in connection with preparing prospectuses, costs of preparing and issuing stock rights, and directly associated costs are unallowable except for interest assessed by State or local taxing authorities under the conditions specified in 31.205-41 (but see 31.205-28). 31.205-21 Labor relations costs. Costs incurred in maintaining satisfactory relations between the contractor and its employees, including costs of shop stewards, labor management committees, employee publications, and other related activities, are allowable. 31.205-22 Lobbying and political activity costs. (a) Costs associated with the following activities are unallowable: (1) Attempts to influence the outcomes of any Federal, State, or local election, referendum, initiative, or similar procedure, through in kind or cash contributions, endorsements, publicity, or similar activities; (2) Establishing, administering, contributing to, or paying the expenses of a political party, campaign, political action committee, or other organization established for the purpose of influencing the outcomes of elections; (3) Any attempt to influence-- (i) The introduction of Federal, state, or local legislation, or (ii) The enactment or modification of any pending Federal, state, or local legislation through communication with any member or employee of the Congress or state legislature (including efforts to influence state or local officials to engage in similar lobbying activity), or with any government official or employee in connection with a decision to sign or veto enrolled legislation; (4) Any attempt to influence-- 31-29 31.205-23 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- (i) The introduction of Federal, state, or local legislation, or (ii) The enactment or modification of any pending Federal, state, or local legislation by preparing, distributing or using publicity or propaganda, or by urging members of the general public or any segment thereof to contribute to or participate in any mass demonstration, march, rally, fund raising drive, lobbying campaign or letter writing or telephone campaign; (5) Legislative liaison activities, including attendance at legislative sessions or committee hearings, gathering information regarding legislation, and analyzing the effect of legislation, when such activities are carried on in support of or in knowing preparation for an effort to engage in unallowable activities; or (6) Costs incurred in attempting to improperly influence (see 3.401), either directly or indirectly, an employee or officer of the Executive branch of the Federal Government to give consideration to or act regarding a regulatory or contract matter. (b) The following activities are excepted from the coverage of (a) of this section: (1) Providing a technical and factual presentation of information on a topic directly related to the performance of a contract through hearing testimony, statements or letters to the Congress or a state legislature, or subdivision, member, or cognizant staff member thereof, in response to a documented request (including a Congressional Record notice requesting testimony or statements for the record at a regularly scheduled hearing) made by the recipient member, legislative body or subdivision, or a cognizant staff member thereof; provided such information is readily obtainable and can be readily put in deliverable form; and further provided that costs under this section for transportation, lodging or meals are unallowable unless incurred for the purpose of offering testimony at a regularly scheduled Congressional hearing pursuant to a written request for such presentation made by the Chairman or Ranking Minority Member of the Committee or Subcommittee conducting such hearing. (2) Any lobbying made unallowable by paragraph (a)(3) of this subsection to influence state or local legislation in order to directly reduce contract cost, or to avoid material impairment of the contractor's authority to perform the contract. (3) Any activity specifically authorized by statute to be undertaken with funds from the contract. (c) When a contractor seeks reimbursement for indirect costs, total lobbying costs shall be separately identified in the indirect cost rate proposal, and thereafter treated as other unallowable activity costs. (d) Contractors shall maintain adequate records to demonstrate that the certification of costs as being allowable or unallowable (see 42.703-2) pursuant to this subsection complies with the requirements of this subsection. (e) Existing procedures should be utilized to resolve in advance any significant questions or disagreements concerning the interpretation or application of this subsection. 31.205-23 Losses on other contracts. An excess of costs over income under any other contract (including the contractor's contributed portion under cost-sharing contracts) is unallowable. 31.205-24 Maintenance and repair costs. (a) Costs necessary for the upkeep of property (including Government property, unless otherwise provided for) that neither add to the permanent value of the property nor appreciably prolong its intended life, but keep it in an efficient operating condition, are to be treated as follows (but see 31.205-11): (1) Normal maintenance and repair costs are allowable. (2) Extraordinary maintenance and repair costs are allowable, provided those costs are allocated to the applicable periods for purposes of determining contract costs (but see 31.109). (b) Expenditures for plant and equipment, including rehabilitation which should be capitalized and subject to depreciation, according to generally accepted accounting principles as applied under the contractor's established policy or, when applicable, according to 48 CFR 9904.404, Capitalization of Tangible Assets, are allowable only on a depreciation basis. 31.205-25 Manufacturing and production engineering costs. (a) The costs of manufacturing and production engineering effort as described in (1) through (4) of this paragraph are all allowable: (1) Developing and deploying new or improved materials, systems, processes, methods, equipment, tools and techniques that are or are expected to be used in producing products or services; (2) Developing and deploying pilot production lines; (3) Improving current production functions, such as plant layout, production scheduling and control, methods and job analysis, equipment capabilities and capacities, inspection techniques, and tooling analysis (including tooling design and application improvements); and (4) Material and manufacturing producibility analysis for production suitability and to optimize manufacturing processes, methods, and techniques. (b) This cost principle does not cover-- (1) Basic and applied research effort (as defined in 31.205-18(a)) related to new technology, materials, sys- 31-30 FAC 97-02 OCTOBER 10, 1997 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.205-28 - -------------------------------------------------------------------------------- tems, processes, methods, equipment, tools and techniques. Such technical effort is governed by 31.205-18, Independent research and development and bid and proposal costs; and (2) Development effort for manufacturing or production materials, systems, processes, methods, equipment, tools, and techniques that are intended for sale is also governed by 31.205-18. (c) Where manufacturing or production development costs are capitalized or required to be capitalized under the contractor's capitalization policies, allowable cost will be determined in accordance with the requirements of 31.205-11, Depreciation. 31.205-26 Material costs. (a) Material costs include the costs of such items as raw materials, parts, sub-assemblies, components, and manufacturing supplies, whether purchased or manufactured by the contractor, and may include such collateral items as inbound transportation and intransit insurance. In computing material costs, consideration shall be given to reasonable overruns, spoilage, or defective work (unless otherwise provided in any contract provision relating to inspecting and correcting defective work). These costs are allowable, subject to the requirements of paragraphs (b) through (e) of this section. (b) Costs of material shall be adjusted for income and other credits, including available trade discounts, refunds, rebates, allowances, and cash discounts, and credits for scrap, salvage, and material returned to vendors. Such income and other credits shall either be credited directly to the cost of the material or be allocated as a credit to indirect costs. When the contractor can demonstrate that failure to take cash discounts was reasonable, lost discounts need not be credited. (c) Reasonable adjustments arising from differences between periodic physical inventories and book inventories may be included in arriving at costs; provided, such adjustments relate to the period of contract performance. (d) When materials are purchased specifically for and are identifiable solely with performance under a contract, the actual purchase cost of those materials should be charged to the contract. If material is issued from stores, any generally recognized method of pricing such material is acceptable if that method is consistently applied and the results are equitable. When estimates of future material costs are required, current market price or anticipated acquisition cost may be used, but the basis of pricing must be disclosed. (e) Allowance for all materials, supplies, and services that are sold or transferred between any divisions, subdivisions, subsidiaries, or affiliates of the contractor under a common control shall be on the basis of cost incurred in accordance with this subpart. However, allowance may be at price when it is the established practice of the transferring organization to price interorganizational transfers at other than cost for commercial work of the contractor or any division, subsidiary, or affiliate of the contractor under a common control, and when the item being transferred qualifies for an exception under 15.403-1(b) and the contracting officer has not determined the price to be unreasonable. (f) When a commercial item under paragraph (e) of this subsection is transferred at a price based on a catalog or market price, the price should be adjusted to reflect the quantities being acquired and may be adjusted to reflect the actual cost of any modifications necessary because of contract requirements. 31.205-27 Organization costs. (a) Except as provided in paragraph (b) of this subsection, expenditures in connection with (1) planning or executing the organization or reorganization of the corporate structure of a business, including mergers and acquisitions, (2) resisting or planning to resist the reorganization of the corporate structure of a business or a change in the controlling interest in the ownership of a business, and (3) raising capital (net worth plus long-term liabilities), are unallowable. Such expenditures include but are not limited to incorporation fees and costs of attorneys, accountants, brokers, promoters and organizers, management consultants and investment counselors, whether or not employees of the contractor. Unallowable "reorganization" costs include the cost of any change in the contractor's financial structure, excluding administrative costs of short-term borrowings for working capital, resulting in alterations in the rights and interests of security holders, whether or not additional capital is raised. (b) The cost of activities primarily intended to provide compensation will not be considered organizational costs subject to this subsection, but will be governed by 31.205-6. These activities include acquiring stock for-- (1) Executive bonuses, (2) Employee savings plans, and (3) Employee stock ownership plans. 31.205-28 Other business expenses. The following types of recurring costs are allowable when allocated on an equitable basis: (a) Registry and transfer charges resulting from changes in ownership of securities issued by the contractor. (b) Cost of shareholders' meetings. (c) Normal proxy solicitations. (d) Preparing and publishing reports to shareholders. (e) Preparing and submitting required reports and forms to taxing and other regulatory bodies. (f) Incidental costs of directors' and committee meetings. (g) Other similar costs. 31-31 FAC 97-02 OCTOBER 10, 1997 31.205-29 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- 31.205-29 Plant protection costs. Costs of items such as-- (a) Wages, uniforms, and equipment of personnel engaged in plant protection, (b) Depreciation on plant protection capital assets, and (c) Necessary expenses to comply with military requirements, are allowable. 31.205-30 Patent costs. (a) The following patent costs are allowable to the extent that they are incurred as requirements of a Government contract (but see 31.205-33): (1) Costs of preparing invention disclosures, reports, and other documents. (2) Costs for searching the art to the extent necessary to make the invention disclosures. (3) Other costs in connection with the filing and prosecution of a United States patent application where title or royalty-free license is to be conveyed to the Government. (b) General counseling services relating to patent matters, such as advice on patent laws, regulations, clauses, and employee agreements, are allowable (but see 31.205-33). (c) Other than those for general counseling services, patent costs not required by the contract are unallowable. (See also 31.205-37.) 31.205-31 Plant reconversion costs. Plant reconversion costs are those incurred in restoring or rehabilitating the contractor's facilities to approximately the same condition existing immediately before the start of the Government contract, fair wear and tear excepted. Reconversion costs are unallowable except for the cost of removing Government property and the restoration or rehabilitation costs caused by such removal. However, in special circumstances where equity so dictates, additional costs may be allowed to the extent agreed upon before costs are incurred. Care should be exercised to avoid duplication through allowance as contingencies, additional profit or fee, or in other contracts. 31.205-32 Precontract costs. Precontract costs are those incurred before the effective date of the contract directly pursuant to the negotiation and in anticipation of the contract award when such incurrence is necessary to comply with the proposed contract delivery schedule. Such costs are allowable to the extent that they would have been allowable if incurred after the date of the contract (see 31.109). 31.205-33 Professional and consultant service costs. (a) Definition. "Professional and consultant services", as used in this subpart, are those services rendered by persons who are members of a particular profession or possess a special skill and who are not officers or employees of the contractor. Examples include those services acquired by contractors or subcontractors in order to enhance their legal, economic, financial, or technical positions. Professional and consultant services are generally acquired to obtain information, advice, opinions, alternatives, conclusions, recommendations, training, or direct assistance, such as studies, analyses, evaluations, liaison with Government officials, or other forms of representation. (b) Costs of professional and consultant services are allowable subject to this paragraph and paragraphs (c) through (f) of this subsection when reasonable in relation to the services rendered and when not contingent upon recovery of the costs from the Government (but see 31.205-30 and 31.205-47). (c) Costs of professional and consultant services performed under any of the following circumstances are unallowable: (1) Services to improperly obtain, distribute, or use information or data protected by law or regulation (e.g., 52.215-1(e), Restriction on Disclosure and Use of Data). (2) Services that are intended to improperly influence the contents of solicitations, the evaluation of proposals or quotations, or the selection of sources for contract award, whether award is by the Government, or by a prime contractor or subcontractor. (3) Any other services obtained, performed, or otherwise resulting in violation of any statute or regulation prohibiting improper business practices or conflicts of interest. (4) Services performed which are not consistent with the purpose and scope of the services contracted for or otherwise agreed to. (d) In determining the allowability of costs (including retainer fees) in a particular case, no single factor or any special combination of factors is necessarily determinative. However, the contracting officer shall consider the following factors, among others: (1) The nature and scope of the service rendered in relation to the service required. (2) The necessity of contracting for the service, considering the contractor's capability in the particular area. (3) The past pattern of acquiring such services and their costs, particularly in the years prior to the award of Government contracts. (4) The impact of Government contracts on the contractor's business. (5) Whether the proportion of Government work to the contractor's total business is such as to influence the contractor in favor of incurring the cost, particularly when the services rendered are not of a continuing nature and have little relationship to work under Government contracts. 31-32 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.205-35 - -------------------------------------------------------------------------------- (6) Whether the service can be performed more economically by employment rather than by contracting. (7) The qualifications of the individual or concern rendering the service and the customary fee charged, especially on non-Government contracts. (8) Adequacy of the contractual agreement for the service (e.g., description of the service, estimate of time required, rate of compensation, termination provisions). (e) Retainer fees, to be allowable, must be supported by evidence that-- (1) The services covered by the retainer agreement are necessary and customary; (2) The level of past services justifies the amount of the retainer fees (if no services were rendered, fees are not automatically unallowable); (3) The retainer fee is reasonable in comparison with maintaining an in-house capability to perform the covered services, when factors such as cost and level of expertise are considered; and (4) The actual services performed are documented in accordance with paragraph (f) of this subsection. (f) Fees for services rendered shall be allowable only when supported by evidence of the nature and scope of the service furnished. (See also 31.205-38(f).) However, retainer agreements generally are not based on specific statements of work. Evidence necessary to determine that work performed is proper and does not violate law or regulation shall include-- (1) Details of all agreements (e.g., work requirements, rate of compensation, and nature and amount of other expenses, if any) with the individuals or organizations providing the services and details of actual services performed; (2) Invoices or billings submitted by consultants, including sufficient detail as to the time expended and nature of the actual services provided; and (3) Consultants' work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports. 31.205-34 Recruitment costs. (a) Subject to paragraphs (b) and (c) below, and provided that the size of the staff recruited and maintained is in keeping with workload requirements, the following costs are allowable: (1) Costs of help-wanted advertising. (2) Costs of operating an employment office needed to secure and maintain an adequate labor force. (3) Costs of operating an aptitude and educational testing program. (4) Travel costs of employees engaged in recruiting personnel. (5) Travel costs of applicants for interviews. (6) Costs for employment agencies, not in excess of standard commercial rates. (b) Help-wanted advertising costs are unallowable if the advertising-- (1) Is for personnel other than those required to perform obligations under a Government contract; (2) Does not describe specific positions or classes of positions; (3) Is excessive relative to the number and importance of the positions or to the industry practices; (4) Includes material that is not relevant for recruitment purposes, such as extensive illustrations or descriptions of the company's products or capabilities; (5) Is designed to "pirate" personnel from another Government contractor; or (6) Includes color (in publications). (c) Excessive compensation costs offered to prospective employees to "pirate" them from another Government contractor are unallowable. Such excessive costs may include salaries, fringe benefits, or special emoluments which are in excess of standard industry practices or the contractor's customary compensation practices. 31.205-35 Relocation costs. (a) Relocation costs are costs incident to the permanent change of duty assignment (for an indefinite period or for a stated period, but in either event for not less than 12 months) of an existing employee or upon recruitment of a new employee. The following types of relocation costs are allowable as noted, subject to paragraphs (b) and (f) of this subsection: (1) Cost of travel of the employee and members of the immediate family (see 31.205-46) and transportation of the household and personal effects to the new location. (2) Cost of finding a new home, such as advance trips by employees and spouses to locate living quarters, and temporary lodging during the transition periods not exceeding separate cumulative totals of 60 days for employees and 45 days for spouses and dependents, including advance trip time. (3) Closing costs (i.e., brokerage fees, legal fees, appraisal fees, points, finance charges, etc.) incident to the disposition of actual residence owned by the employee when notified of transfer, except that these costs when added to the costs described in subparagraph (a)(4) of this section shall not exceed 14 percent of the sales price of the property sold. (4) Continuing costs of ownership of the vacant former actual residence being sold, such as maintenance of building and grounds (exclusive of fixing up expenses), utilities, taxes, property insurance, mortgage interest, after settlement date or lease date of new permanent residence, 31-33 31.205-35 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- except that these costs when added to the costs described in subparagraph (a)(3) of this section, shall not exceed 14 percent of the sales price of the property sold. (5) Other necessary and reasonable expenses normally incident to relocation, such as disconnecting and connecting household appliances; automobile registration; driver's license and use taxes; cutting and fitting rugs, draperies, and curtains; forfeited utility fees and deposits; and purchase of insurance against damage to or loss of personal property while in transit. (6) Costs incident to acquiring a home in a new location, except that-- (i) These costs will not be allowable for existing employees or newly recruited employees who, before the relocation, were not homeowners and (ii) The total costs shall not exceed 5 percent of the purchase price of the new home. (7) Mortgage interest differential payments, except that these costs are not allowable for existing or newly recruited employees who, before the relocation, were not homeowners and the total payments are limited to an amount determined as follows: (i) The difference between the mortgage interest rates of the old and new residences times the current balance of the old mortgage times 3 years. (ii) When mortgage differential payments are made on a lump sum basis and the employee leaves or is transferred again in less than 3 years, the amount initially recognized shall be proportionately adjusted to reflect payments only for the actual time of the relocation. (8) Rental differential payments covering situations where relocated employees retain ownership of a vacated home in the old location and rent at the new location. The rented quarters at the new location must be comparable to those vacated, and the allowable differential payments may not exceed the actual rental costs for the new home, less the fair market rent for the vacated home times 3 years. (9) Cost of canceling an unexpired lease. (b) The costs described in paragraph (a) of this section must also meet the following criteria to be considered allowable: (1) The move must be for the benefit of the employer. (2) Reimbursement must be in accordance with an established policy or practice that is consistently followed by the employer and is designed to motivate employees to relocate promptly and economically. (3) The costs must not otherwise be unallowable under Subpart 31.2. (4) Amounts to be reimbursed shall not exceed the employee's actual expenses, except that for miscellaneous costs of the type discussed in subparagraph (a)(5) of this section, a flat amount, not to exceed $1,000, may be allowed in lieu of actual costs. (c) The following types of costs are not allowable: (1) Loss on sale of a home. (2) Costs incident to acquiring a home in a new location as follows: (i) Real estate brokers fees and commissions. (ii) Cost of litigation. (iii) Real and personal property insurance against damage or loss of property. (iv) Mortgage life insurance. (v) Owner's title policy insurance when such insurance was not previously carried by the employee on the old residence (however, cost of a mortgage title policy is allowable). (vi) Property taxes and operating or maintenance costs. (3) Continuing mortgage principal payments on residence being sold. (4) Payments for employee income or FICA (social security) taxes incident to reimbursed relocation costs. (5) Payments for job counseling and placement assistance to employee spouses and dependents who were not employees of the contractor at the old location. (6) Costs incident to furnishing equity or nonequity loans to employees or making arrangements with lenders for employees to obtain lower-than-market rate mortgage loans. (d) If relocation costs for an employee have been allowed either as an allocable indirect or direct cost, and the employee resigns within 12 months for reasons within the employee's control, the contractor shall refund or credit the relocation costs to the Government. (e) Subject to the requirements of paragraphs (a) through (d) of this section, the costs of family movements and of personnel movements of a special or mass nature are allowable. The cost, however, should be assigned on the basis of work (contracts) or time period benefited. (f) Relocation costs (both outgoing and return) of employees who are hired for performance on specific contracts or long-term field projects are allowable if-- (1) The term of employment is not less than 12 months; (2) The employment agreement specifically limits the duration of employment to the time spent on the contract or field project for which the employee is hired; (3) The employment agreement provides for return relocation to the employee's permanent and principal home immediately prior to the outgoing relocation,or other location of equal or lesser cost; and (4) The relocation costs are determined under the rules of paragraphs (a) through (d) of this section. However, the costs to return employees, who are released from employment upon completion of field assignments pursuant to their employment agreements, are not subject to the refund or credit requirement of paragraph (d). 31-34 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.20-38 - -------------------------------------------------------------------------------- 31.205-36 Rental costs. (a) This subsection is applicable to the cost of renting or leasing real or personal property acquired under "operating leases" as defined in Statement of Financial Accounting Standards No. 13 (FAS-13), Accounting for Leases. Compliance with 31.205-11(m) requires that assets acquired by means of capital leases, as defined in FAS-13, shall be treated as purchased assets; i.e., be capitalized and the capitalized value of such assets be distributed over their useful lives as depreciation charges, or over the lease term as amortization charges, as appropriate (but see subparagraph (b)(4) of this section). (b) The following costs are allowable: (1) Rental costs under operating leases, to the extent that the rates are reasonable at the time of the lease decision, after consideration of-- (i) Rental costs of comparable property, if any; (ii) Market conditions in the area; (iii) The type, life expectancy, condition, and value of the property leased; (iv) Alternatives available; and (v) Other provisions of the agreement. (2) Rental costs under a sale and leaseback arrangement only up to the amount the contractor would be allowed if the contractor retained title. (3) Charges in the nature of rent for property between any divisions, subsidiaries, or organizations under common control, to the extent that they do not exceed the normal costs of ownership, such as depreciation, taxes, insurance, facilities capital cost of money, and maintenance (excluding interest or other unallowable costs pursuant to Part 31), provided that no part of such costs shall duplicate any other allowed cost. Rental cost of personal property leased from any division, subsidiary, or affiliate of the contractor under common control, that has an established practice of leasing the same or similar property to unaffiliated lessees shall be allowed in accordance with subparagraph (b)(1) of this subsection. (4) Rental costs under leases entered into before March 1, 1970 for the remaining term of the lease (excluding options not exercised before March 1, 1970) to the extent they would have been allowable under Defense Acquisition Regulation (formerly ASPR) 15-205.34 or Federal Procurement Regulations section 1-15.205-34 in effect January 1, 1969. (c) The allowability of rental costs under unexpired leases in connection with terminations is treated in 31.205-42(e). 31.205-37 Royalties and other costs for use of patents. (a) Royalties on a patent or amortization of the cost of purchasing a patent or patent rights necessary for the proper performance of the contract and applicable to contract products or processes are allowable unless-- (1) The Government has a license or the right to a free use of the patent; (2) The patent has been adjudicated to be invalid, or has been administratively determined to be invalid; (3) The patent is considered to be unenforceable; or (4) The patent is expired. (b) Care should be exercised in determining reasonableness when the royalties may have been arrived at as a result of less-than-arm's-length bargaining; e.g., royalties-- (1) Paid to persons, including corporations, affiliated with the contractor; (2) Paid to unaffiliated parties, including corporations, under an agreement entered into in contemplation that a Government contract would be awarded; or (3) Paid under an agreement entered into after the contract award. (c) In any case involving a patent formerly owned by the contractor, the royalty amount allowed should not exceed the cost which would have been allowed had the contractor retained title. (d) See 31.109 regarding advance agreements. 31.205-38 Selling costs. (a) "Selling" is a generic term encompassing all efforts to market the contractor's products or services, some of which are covered specifically in other subsections of 31.205. Selling activity includes the following broad categories: (1) Advertising. (2) Corporate image enhancement including broadly-targeted sales efforts, other than advertising. (3) Bid and proposal costs. (4) Market planning. (5) Direct selling. (b) Advertising costs are defined at 31.205-1(b) and are subject to the allowability provisions of 31.205-1(d) and (f). Corporate image enhancement activities are included within the definitions of public relations at 31.205-1(a) and entertainment at 31.205-14 and are subject to the allowability provisions at 31.205-1(e) and (f) and 31.205-14, respectively. Bid and proposal costs are defined at 31.205-18 and have their allowability controlled by that subsection. Market planning involves market research and analysis and generalized management planning concerned with development of the contractor's business. The allowability of long-range market planning costs is controlled by the provisions of 31.205-12. Other market planning costs are allowable to the extent that they are reasonable and not in excess of the limitations of subparagraph (c)(2) of this subsection. Costs of activities which are correctly classified and disallowed under cost principles referenced in this paragraph (b) are not to be reconsidered for reimbursement under any other provision of this subsection. 31-35 31.205-39 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- (c)(1) Direct selling efforts are those acts or actions to induce particular customers to purchase particular products or services of the contractor. Direct selling is characterized by person-to-person contact and includes such activities as familiarizing a potential customer with the contractor's products or services, conditions of sale, service capabilities, etc. It also includes negotiation, liaison between customer and contractor personnel, technical and consulting activities, individual demonstrations, and any other activities having as their purpose the application or adaptation of the contractor's products or services for a particular customer's use. The cost of direct selling efforts is allowable if reasonable in amount. (2) The costs of broadly targeted and direct selling efforts and market planning other than long-range, that are incurred in connection with a significant effort to promote export sales of products normally sold to the U.S. Government, including the costs of exhibiting and demonstrating such products, are allowable on contracts with the U.S. Government provided the costs are allocable, reasonable, and otherwise allowable under this Subpart 31.2. (d) The costs of any selling efforts other than those addressed in paragraphs (b) or (c) of this subsection are unallowable. (e) Costs of the type identified in paragraphs (b), (c), and (d) of this subsection are often commingled on the contractor's books in the selling expense account because these activities are performed by the sales departments. However, identification and segregation of unallowable costs is required under the provisions of 31.201-6 and 30.405, and such costs are not allowable merely because they are incurred in connection with allowable selling activities. (f) Notwithstanding any other provision of this subsection, sellers' or agents' compensation, fees, commissions, percentages, retainer or brokerage fees, whether or not contingent upon the award of contracts, are allowable only when paid to bona fide employees or established commercial or selling agencies maintained by the contractor for the purpose of securing business. 31.205-39 Service and warranty costs. Service and warranty costs include those arising from fulfillment of any contractual obligation of a contractor to provide services such as installation, training, correcting defects in the products, replacing defective parts, and making refunds in the case of inadequate performance. When not inconsistent with the terms of the contract, such service and warranty costs are allowable. However, care should be exercised to avoid duplication of the allowance as an element of both estimated product cost and risk. 31.205-40 Special tooling and special test equipment costs. (a) The terms "special tooling" and "special test equipment" are defined in 45.101. (b) The cost of special tooling and special test equipment used in performing one or more Government contracts is allowable and shall be allocated to the specific Government contract or contracts for which acquired, except that the cost of-- (1) Items acquired by the contractor before the effective date of the contract (or replacement of such items), whether or not altered or adapted for use in performing the contract, and (2) Items which the contract schedule specifically excludes, shall be allowable only as depreciation or amortization. (c) When items are disqualified as special tooling or special test equipment because with relatively minor expense they can be made suitable for general purpose use and have a value as such commensurate with their value as special tooling or special test equipment, the cost of adapting the items for use under the contract and the cost of returning them to their prior configuration are allowable. 31.205-41 Taxes. (a) The following types of costs are allowable: (1) Federal, State, and local taxes (see Part 29), except as otherwise provided in paragraph (b) of this section that are required to be and are paid or accrued in accordance with generally accepted accounting principles. Fines and penalties are not considered taxes. (2) Taxes otherwise allowable under subparagraph (a)(1) of this section, but upon which a claim of illegality or erroneous assessment exists; provided the contractor, before paying such taxes-- (i) Promptly requests instructions from the contracting officer concerning such taxes; and (ii) Takes all action directed by the contracting officer arising out of subparagraph (2)(i) of this section or an independent decision of the Government as to the existence of a claim of illegality or erroneous assessment, to-- (A) Determine the legality of the assessment or (B) Secure a refund of such taxes. (3) Pursuant to subparagraph (a)(2) of this section, the reasonable costs of any action taken by the contractor at the direction or with the concurrence of the contracting officer. Interest or penalties incurred by the contractor for non-payment of any tax at the direction of the contracting officer or by reason of the failure of the contracting officer to ensure timely direction after a prompt request. (4) The Environmental Tax found at section 59A of the Internal Revenue Code, also called the "Superfund Tax." (b) The following types of costs are not allowable: 31-36 FAC 97--02 OCTOBER 10, 1997 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.205-42 - -------------------------------------------------------------------------------- (1) Federal income and excess profits taxes. (2) Taxes in connection with financing, refinancing, refunding operations, or reorganizations (see 31.205-20 and 31.205-27). (3) Taxes from which exemptions are available to the contractor directly, or available to the contractor based on an exemption afforded the Government, except when the contracting officer determines that the administrative burden incident to obtaining the exemption outweighs the corresponding benefits accruing to the Government. When partial exemption from a tax is attributable to Government contract activity, taxes charged to such work in excess of that amount resulting from application of the preferential treatment are unallowable. These provisions intend that tax preference attributable to Government contract activity be realized by the Government. The term "exemption" means freedom from taxation in whole or in part and includes a tax abatement or reduction resulting from mode of assessment, method of calculation, or otherwise. (4) Special assessments on land that represent capital improvements. (5) Taxes (including excises) on real or personal property, or on the value, use, possession or sale thereof, which is used solely in connection with work other than on Government contracts (see paragraph (c) of this section). (6) Any excise tax in subtitle D, chapter 43 of the Internal Revenue Code of 1986, as amended. That chapter includes excise taxes imposed in connection with qualified pension plans, welfare plans, deferred compensation plans, or other similar types of plans. (7) Income tax accruals designed to account for the tax effects of differences between taxable income and pretax income as reflected by the books of account and financial statements. (c) Taxes on property (see subparagraph (b)(5) of this section) used solely in connection with either non-Government or Government work should be considered directly applicable to the respective category of work unless the amounts involved are insignificant or comparable results would otherwise be obtained; e.g., taxes on contractor-owned work-in-process which is used solely in connection with non-Government work should be allocated to such work; taxes on contractor-owned work-in-process inventory (and Government-owned work-in-process inventory when taxed) used solely in connection with Government work should be charged to such work. The cost of taxes incurred on property used in both Government and non-Government work shall be apportioned to all such work based upon the use of such property on the respective final cost objectives. (d) Any taxes, interest, or penalties that were allowed as contract costs and are refunded to the contractor shall be credited or paid to the Government in the manner it directs. If a contractor or subcontractor obtains a foreign tax credit that reduces its U.S. Federal income tax because of the payment of any tax or duty allowed as contract costs, and if those costs were reimbursed by a foreign government, the amount of the reduction shall be paid to the Treasurer of the United States at the time the Federal income tax return is filed. However, any interest actually paid or credited to a contractor incident to a refund of tax, interest, or penalty shall be paid or credited to the Government only to the extent that such interest accrued over the period during which the contractor had been reimbursed by the Government for the taxes, interest, or penalties. 31.205-42 Termination costs. Contract terminations generally give rise to the incurrence of costs or the need for special treatment of costs that would not have arisen had the contract not been terminated. The following cost principles peculiar to termination situations are to be used in conjunction with the other cost principles in Subpart 31.2: (a) Common items. The costs of items reasonably usable on the contractor's other work shall not be allowable unless the contractor submits evidence that the items could not be retained at cost without sustaining a loss. The contracting officer should consider the contractor's plans and orders for current and planned production when determining if items can reasonably be used on other work of the contractor. Contemporaneous purchases of common items by the contractor shall be regarded as evidence that such items are reasonably usable on the contractor's other work. Any acceptance of common items as allocable to the terminated portion of the contract should be limited to the extent that the quantities of such items on hand, in transit, and on order are in excess of the reasonable quantitative requirements of other work. (b) Costs continuing after termination. Despite all reasonable efforts by the contractor, costs which cannot be discontinued immediately after the effective date of termination are generally allowable. However, any costs continuing after the effective date of the termination due to the negligent or willful failure of the contractor to discontinue the costs shall be unallowable. (c) Initial costs. Initial costs, including starting load and preparatory costs, are allowable as follows: (1) Starting load costs not fully absorbed because of termination are nonrecurring labor, material, and related overhead costs incurred in the early part of production and result from factors such as-- (i) Excessive spoilage due to inexperienced labor; (ii) Idle time and subnormal production due to testing and changing production methods; (iii) Training; and 31-37 31.205-43 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- (iv) Lack of familiarity or experience with the product, materials, or manufacturing processes. (2) Preparatory costs incurred in preparing to perform the terminated contract include such costs as those incurred for initial plant rearrangement and alterations, management and personnel organization, and production planning. They do not include special machinery and equipment and starting load costs. (3) When initial costs are included in the settlement proposal as a direct charge, such costs shall not also be included in overhead. Initial costs attributable to only one contract shall not be allocated to other contracts. (4) If initial costs are claimed and have not been segregated on the contractor's books, they shall be segregated for settlement purposes from cost reports and schedules reflecting that high unit cost incurred during the early stages of the contract. (5) If the settlement proposal is on the inventory basis, initial costs should normally be allocated on the basis of total end items called for by the contract immediately before termination; however, if the contract includes end items of a diverse nature, some other equitable basis may be used, such as machine or labor hours. (d) Loss of useful value. Loss of useful value of special tooling, and special machinery and equipment is generally allowable, provided-- (1) The special tooling, or special machinery and equipment is not reasonably capable of use in the other work of the contractor; (2) The Government's interest is protected by transfer of title or by other means deemed appropriate by the contracting officer; and (3) The loss of useful value for any one terminated contract is limited to that portion of the acquisition cost which bears the same ratio to the total acquisition cost as the terminated portion of the contract bears to the entire terminated contract and other Government contracts for which the special tooling, or special machinery and equipment was acquired. (e) Rental under unexpired leases. Rental costs under unexpired leases, less the residual value of such leases, are generally allowable when shown to have been reasonably necessary for the performance of the terminated contract, if-- (1) The amount of rental claimed does not exceed the reasonable use value of the property leased for the period of the contract and such further period as may be reasonable; and (2) The contractor makes all reasonable efforts to terminate, assign, settle, or otherwise reduce the cost of such lease. (f) Alterations of leased property. The cost of alterations and reasonable restorations required by the lease may be allowed when the alterations were necessary for performing the contract. (g) Settlement expenses. (1) Settlement expenses, including the following, are generally allowable: (i) Accounting, legal, clerical, and similar costs reasonably necessary for-- (A) The preparation and presentation, including supporting data, of settlement claims to the contracting officer; and (B) The termination and settlement of subcontracts. (ii) Reasonable costs for the storage, transportation, protection, and disposition of property acquired or produced for the contract. (iii) Indirect costs related to salary and wages incurred as settlement expenses in (i) and (ii); normally, such indirect costs shall be limited to payroll taxes, fringe benefits, occupancy costs, and immediate supervision costs. (2) If settlement expenses are significant, a cost account or work order shall be established to separately identify and accumulate them. (h) Subcontractor claims. Subcontractor claims, including the allocable portion of the claims common to the contract and to other work of the contractor, are generally allowable. An appropriate share of the contractor's indirect expense may be allocated to the amount of settlements with subcontractors; provided, that the amount allocated is reasonably proportionate to the relative benefits received and is otherwise consistent with 31.201-4 and 31.203(c). The indirect expense so allocated shall exclude the same and similar costs claimed directly or indirectly as settlement expenses. 31.205-43 Trade, business, technical and professional activity costs. The following types of costs are allowable: (a) Memberships in trade, business, technical, and professional organizations. (b) Subscriptions to trade, business, professional, or other technical periodicals. (c) When the principal purpose of a meeting, convention, conference, symposium, or seminar is the dissemination of trade, business, technical or professional information or the stimulation of production or improved productivity-- (1) Costs of organizing, setting up, and sponsoring the meetings, conventions, symposia, etc., including rental of meeting facilities, transportation, subsistence, and incidental costs; (2) Costs of attendance by contractor employees, including travel costs (see 31.205-46); and (3) Costs of attendance by individuals who are not employees of the contractor, provided-- (i) Such costs are not also reimbursed to the individual by the employing company or organization, and 31-38 (FAC 97-02) PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.205-45 - -------------------------------------------------------------------------------- (ii) The individuals attendance is essential to achieve the purpose of the conference, meeting, convention, symposium, etc. 31.205-44 Training and education costs. (a) Allowable costs. Training and education costs are allowable to the extent indicated below. (b) Vocational training. Costs of preparing and maintaining a noncollege level program of instruction, including but not limited to on-the-job, classroom, and apprenticeship training, designed to increase the vocational effectiveness of employees, are allowable. These costs include-- (1) Salaries or wages of trainees (excluding overtime compensation), (2) Salaries of the director of training and staff when the training program is conducted by the contractor, (3) Tuition and fees when the training is in an institution not operated by the contractor, and/or (4) Training materials and textbooks. (c) Part-time college level education. Allowable costs of part-time college education at an undergraduate or postgraduate level, including that provided at the contractor's own facilities, are limited to-- (1) Fees and tuition charged by the educational institution, or, instead of tuition, instructors' salaries and the related share of indirect cost of the educational institution, to the extent that the sum thereof is not in excess of the tuition that would have been paid to the participating educational institution; (2) Salaries and related costs of instructors who are employees of the contractor; (3) Training materials and textbooks; and (4) Straight-time compensation of each employee for time spent attending classes during working hours not in excess of 156 hours per year where circumstances do not permit the operation of classes or attendance at classes after regular working hours. In unusual cases, the period may be extended (see paragraph (h) of this subsection). (d) Full-time education. Costs of tuition, fees, training materials and textbooks (but not subsistence, salary, or any other emoluments) in connection with full-time education, including that provided at the contractor's own facilities, at a postgraduate but not undergraduate college level, are allowable only when the course or degree pursued is related to the field in which the employee is working or may reasonably be expected to work and are limited to a total period not to exceed 2 school years or the length of the degree program, whichever is less, for each employee so trained. (e) Specialized programs. Costs of attendance of up to 16 weeks per employee per year at specialized programs specifically designed to enhance the effectiveness of managers or to prepare employees for such positions are allowable. Such costs include enrollment fees and related charges and employees' salaries, subsistence, training materials, textbooks, and travel. Costs allowable under this paragraph do not include costs for courses that are part of a degree-oriented curriculum, which are only allowable pursuant to paragraphs (c) and (d) of this subsection. (f) Other expenses. Maintenance expense and normal depreciation or fair rental on facilities owned or leased by the contractor for training purposes are allowable in accordance with 31.205-11, 31.205-17, 31.205-24, and 31.205-36. (g) Grants. Grants to educational or training institutions, including the donation of facilities or other properties, scholarships, and fellowships are considered contributions and are unallowable. (h) Advance agreements. (1) Training and education costs in excess of those otherwise allowable under paragraphs (c) and (d) of this subsection, including subsistence, salaries or any other emoluments, may be allowed to the extent set forth in an advance agreement negotiated under 31.109. To be considered for an advance agreement, the contractor must demonstrate that the costs are consistently incurred under an established managerial, engineering, or scientific training and education program, and that the course or degree pursued is related to the field in which the employees are now working or may reasonably be expected to work. Before entering into the advance agreement, the contracting officer shall give consideration to such factors as-- (i) The length of employees' service with the contractor; (ii) Employees' past performance and potential; (iii) Whether employees are in formal development programs; and (iv) The total number of participating employees. (2) Any advance agreement must include a provision requiring the contractor to refund to the Government training and education costs for employees who resign within 12 months of completion of such training or education for reasons within an employee's control. (i) Training or education costs for other than bona fide employees. Costs of tuition, fees, textbooks, and similar or related benefits provided for other than bona fide employees are unallowable, except that the costs incurred for educating employee dependents (primary and secondary level studies) when the employee is working in a foreign country where public education is not available and where suitable private education is inordinately expensive may be included in overseas differential. (j) Employee dependent education plans. Costs of college plans for employee dependents are unallowable. 31.205-45 Transportation costs. Allowable transportation costs include freight, express, cartage, and postage charges relating to goods purchased, in (FAC 97-03) 31-39 FAC 97-03 DECEMBER 9, 1997 31.205-46 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- process, or delivered. When these costs can be identified with the items involved, they may be directly costed as transportation costs or added to the cost of such items. When identification with the materials received cannot be made, inbound transportation costs may be charged to the appropriate indirect cost accounts if the contractor follows a consistent and equitable procedure. Outbound freight, if reimbursable under the terms of the contract, shall be treated as a direct cost. 31.205-46 Travel costs. (a) Costs for transportation, lodging, meals, and incidental expenses. (1) Costs incurred by contractor personnel on official company business are allowable, subject to the limitations contained in this subsection. Costs for transportation may be based on mileage rates, actual costs incurred, or on a combination thereof, provided the method used results in a reasonable charge. Costs for lodging, meals, and incidental expenses may be based on per diem, actual expenses, or a combination thereof, provided the method used results in a reasonable charge. (2) Except as provided in subparagraph (a)(3) of this subsection, costs incurred for lodging, meals, and incidental expenses (as defined in the regulations cited in (a)(2)(i) through (iii) of this subparagraph) shall be considered to be reasonable and allowable only to the extent that they do not exceed on a daily basis the maximum per diem rates in effect at the time of travel as set forth in the-- (i) Federal Travel Regulations, prescribed by the General Services Administration, for travel in the conterminous 48 United States, available on a subscription basis from the: Superintendent of Documents U.S. Government Printing Office Washington DC 20402 Stock No. 922-002-00000-2 (ii) Joint Travel Regulation, Volume 2, DoD Civilian Personnel, Appendix A, prescribed by the Department of Defense, for travel in Alaska, Hawaii, The Commonwealth of Puerto Rico, and territories and possessions of the United States, available on a subscription basis from the-- Superintendent of Documents U.S. Government Printing Office Washington DC 20402 Stock No. 908-010-00000-1; or (iii) Standardized Regulations (Government Civilians, Foreign Areas), Section 925, "Maximum Travel Per Diem Allowances for Foreign Areas," prescribed by the Department of State, for travel in areas not covered in (a)(2)(i) and (ii) of this subparagraph, available on a subscription basis from the-- Superintendent of Documents U.S. Government Printing Office Washington, DC 20402 Stock No. 744-008-00000-0 (3) In special or unusual situations, actual costs in excess of the above-referenced maximum per diem rates are allowable provided that such amounts do not exceed the higher amounts authorized for Federal civilian employees as permitted in the regulations referenced in (a)(2)(i), (ii), or (iii) of this subsection. For such higher amounts to be allowable, all of the following conditions must be met: (i) One of the conditions warranting approval of the actual expense method, as set forth in the regulations referenced in paragraphs (a)(2)(i), (ii), or (iii) of this subsection, must exist. (ii) A written justification for use of the higher amounts must be approved by an officer of the contractor's organization or designee to ensure that the authority is properly administered and controlled to prevent abuse. (iii) If it becomes necessary to exercise the authority to use the higher actual expense method repetitively or on a continuing basis in a particular area, the contractor must obtain advance approval from the contracting officer. (iv) Documentation to support actual costs incurred shall be in accordance with the contractor's established practices, subject to paragraph (a)(7) of this subsection, and provided that a receipt is required for each expenditure of $75.00 or more. The approved justification required by paragraph (a)(3)(ii) and, if applicable, paragraph (a)(3)(iii) of this subsection must be retained. (4) Subparagraphs (a)(2) and (a)(3) of this subsection do not incorporate the regulations cited in subdivisions (a)(2)(i), (ii), and (iii) of this subsection in their entirety. Only the maximum per diem rates, the definitions of lodging, meals, and incidental expenses, and the regulatory coverage dealing with special or unusual situations are incorporated herein. (5) An advance agreement (see 31.109) with respect to compliance with subparagraphs (a)(2) and (a)(3) of this subsection may be useful and desirable. (6) The maximum per diem rates referenced in subparagraph (a)(2) of this subsection generally would not constitute a reasonable daily charge-- (i) When no lodging costs are incurred; and/or (ii) On partial travel days (e.g., day of departure and return). Appropriate downward adjustments from the maximum per diem rates would normally be required under these circumstances. While these adjustments need not be calculated in 31-40 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.205-47 - -------------------------------------------------------------------------------- accordance with the Federal Travel Regulation or Joint Travel Regulations, they must result in a reasonable charge. (7) Costs shall be allowable only if the following information is documented-- (i) Date and place (city, town, or other similar designation) of the expenses; (ii) Purpose of the trip; and (iii) Name of person on trip and that person's title or relationship to the contractor. (b) Travel costs incurred in the normal course of overall administration of the business are allowable and shall be treated as indirect costs. (c) Travel costs directly attributable to specific contract performance are allowable and may be charged to the contract under 31.202. (d) Airfare costs in excess of the lowest customary standard, coach, or equivalent airfare offered during normal business hours are unallowable except when such accommodations require circuitous routing, require travel during unreasonable hours, excessively prolong travel, result in increased cost that would offset transportation savings, are not reasonably adequate for the physical or medical needs of the traveler, or are not reasonably available to meet mission requirements. However, in order for airfare costs in excess of the above standard airfare to be allowable, the applicable condition(s) set forth above must be documented and justified. (e)(1) "Cost of travel by contractor-owned, -leased, or -chartered aircraft," as used in this paragraph, includes the cost of lease, charter, operation (including personnel), maintenance, depreciation, insurance, and other related costs. (2) The costs of travel by contractor-owned, -leased, or -chartered aircraft are limited to the standard airfare described in paragraph (d) of this subsection for the flight destination unless travel by such aircraft is specifically required by contract specification, term, or condition, or a higher amount is approved by the contracting officer. A higher amount may be agreed to when one or more of the circumstances for justifying higher than standard airfare listed in paragraph (d) of this subsection are applicable, or when an advance agreement under subparagraph (e)(3) of this subsection has been executed. In all cases, travel by contractor-owned, -leased, or -chartered aircraft must be fully documented and justified. For each contractor-owned, - -leased, or -chartered aircraft used for any business purpose which is charged or allocated, directly or indirectly, to a Government contract, the contractor must maintain and make available manifest/logs for all flights on such company aircraft. As a minimum, the manifest/log shall indicate-- (i) Date, time, and points of departure; (ii) Destination, date, and time of arrival; (iii) Name of each passenger and relationship to the contractor; (iv) Authorization for trip; and (v) Purpose of trip. (3) Where an advance agreement is proposed (see 31.109), consideration may be given to the following: (i) Whether scheduled commercial airlines or other suitable, less costly, travel facilities are available at reasonable times, with reasonable frequency, and serve the required destinations conveniently. (ii) Whether increased flexibility in scheduling results in time savings and more effective use of personnel that would outweigh additional travel costs. (f) Costs of contractor-owned or -leased automobiles, as used in this paragraph, include the costs of lease, operation (including personnel), maintenance, depreciation, insurance, etc. These costs are allowable, if reasonable, to the extent that the automobiles are used for company business. That portion of the cost of company-furnished automobiles that relates to personal use by employees (including transportation to and from work) is compensation for personal services and is unallowable as stated in 31.205-6(m)(2). 31.205-47 Costs related to legal and other proceedings. (a) Definitions. "Conviction," as used in this subsection, is defined in 9.403. "Costs" include, but are not limited to, administrative and clerical expenses; the costs of legal services, whether performed by in-house or private counsel; the costs of the services of accountants, consultants, or others retained by the contractor to assist it; costs of employees, officers, and directors; and any similar costs incurred before, during, and after commencement of a judicial or administrative proceeding which bears a direct relationship to the proceeding. "Fraud," as used in this subsection, means-- (1) Acts of fraud or corruption or attempts to defraud the Government or to corrupt its agents, (2) Acts which constitute a cause for debarment or suspension under 9.406-2(a) and 9.407-2(a) and (3) Acts which violate the False Claims Act, 31 U.S.C., sections 3729-3731, or the Anti-Kickback Act, 41 U.S.C., sections 51 and 54. "Penalty," does not include restitution, reimbursement, or compensatory damages. "Proceeding," includes an investigation. (b) Costs incurred in connection with any proceeding brought by a Federal, State, local or foreign government for violation of, or a failure to comply with, law or regulation by the contractor (including its agents or employees) are unallowable if the result is-- (1) In a criminal proceeding, a conviction; 31-41 31.205-47 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- (2) In a civil or administrative proceeding, either a finding of contractor liability where the proceeding involves an allegation of fraud or similar misconduct or imposition of a monetary penalty where the proceeding does not involve an allegation of fraud or similar misconduct; (3) A final decision by an appropriate official of an executive agency to-- (i) Debar or suspend the contractor; (ii) Rescind or void a contract; or (iii) Terminate a contract for default by reason of a violation or failure to comply with a law or regulation. (4) Disposition of the matter by consent or compromise if the proceeding could have led to any of the outcomes listed in subparagraphs (b)(1) through (3) of this subsection (but see paragraphs (c) and (d) of this subsection); or (5) Not covered by subparagraphs (b)(1) through (4) of this subsection, but where the underlying alleged contractor misconduct was the same as that which led to a different proceeding whose costs are unallowable by reason of subparagraphs (b)(1) through (4) of this subsection. (c) To the extent they are not otherwise unallowable, costs incurred in connection with any proceeding under paragraph (b) of this subsection commenced by the United States that is resolved by consent or compromise pursuant to an agreement entered into between the contractor and the United States, and which are unallowable solely because of paragraph (b) of this subsection, may be allowed to the extent specifically provided in such agreement. (d) To the extent that they are not otherwise unallowable, costs incurred in connection with any proceeding under paragraph (b) of this subsection commenced by a State, local, or foreign government may be allowable when the contracting officer (or other official specified in agency procedures) determines, that the costs were incurred either: (1) As a direct result of a specific term or condition of a Federal contract; or (2) As a result of compliance with specific written direction of the cognizant contracting officer. (e) Costs incurred in connection with proceedings described in paragraph (b) of this subsection, but which are not made unallowable by that paragraph, may be allowable to the extent that: (1) The costs are reasonable in relation to the activities required to deal with the proceeding and the underlying cause of action; (2) The costs are not otherwise recovered from the Federal Government or a third party, either directly as a result of the proceeding or otherwise; and (3) The percentage of costs allowed does not exceed the percentage determined to be appropriate considering the complexity of procurement litigation, generally accepted principles governing the award of legal fees in civil actions involving the United States as a party, and such other factors as may be appropriate. Such percentage shall not exceed 80 percent. However, if an agreement reached under paragraph (c) of this subsection has explicitly considered this 80 percent rule, then the full amount of costs resulting from that agreement shall be allowable. (f) Costs not covered elsewhere in this subsection are unallowable if incurred in connection with: (1) Defense against Federal Government claims or appeals or the prosecution of claims or appeals against the Federal Government (see 33.201). (2) Organization, reorganization, (including mergers and acquisitions) or resisting mergers and acquisitions (see also 31.205-27). (3) Defense of antitrust suits. (4) Defense of suits brought by employees or ex-employees of the contractor under section 2 of the Major Fraud Act of 1988 where the contractor was found liable or settled. (5) Costs of legal, accounting, and consultant services and directly associated costs incurred in connection with the defense or prosecution of lawsuits or appeals between contractors arising from either-- (1) An agreement or contract concerning a teaming arrangement, a joint venture, or similar arrangement of shared interest; or (2) Dual sourcing, coproduction, or similar programs, are unallowable, except when (i) Incurred as a result of compliance with specific terms and conditions of the contract or written instructions from the contracting officer, or (ii) When agreed to in writing by the contracting officer. (6) Patent infringement litigation, unless otherwise provided for in the contract. (7) Representation of, or assistance to, individuals, groups, or legal entities which the contractor is not legally bound to provide, arising from an action where the participant was convicted of violation of a law or regulation or was found liable in a civil or administrative proceeding. (8) Protests of Federal Government solicitations or contract awards, or the defense against protests of such solicitations or contract awards, unless the costs of defending against a protest are incurred pursuant to a written request from the cognizant contracting officer. (g) Costs which may be unallowable under 31.205-47, including directly associated costs, shall be segregated and accounted for by the contractor separately. During the pendency of any proceeding covered by paragraph (b) and subparagraphs (f)(4) and (f)(7) of this subsection, the contracting officer shall generally withhold payment of such costs. However, if in the best interests of the Government, 31-42 FAC 97-04 APRIL 24, 1998 PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.602 - -------------------------------------------------------------------------------- the contracting officer may provide for conditional payment upon provision of adequate security, or other adequate assurance, and agreement by the contractor to repay all unallowable costs, plus interest, if the costs are subsequently determined to be unallowable. 31.205-48 Deferred research and development costs. "Research and development," as used in this subsection, means the type of technical effort which is described in 31.205-18 but which is sponsored by, or required in performance of, a contract or grant. Research and development costs (including amounts capitalized) that were incurred before the award of a particular contract are unallowable except when allowable as precontract costs. In addition, when costs are incurred in excess of either the price of a contract or amount of a grant for research and development effort, such excess may not be allocated as a cost to any other Government contract. 31.205-49 Goodwill. Goodwill, an unidentifiable intangible asset, originates under the purchase method of accounting for a business combination when the price paid by the acquiring company exceeds the sum of the identifiable individual assets acquired less liabilities assumed, based upon their fair values. The excess is commonly referred to as goodwill. Goodwill may arise from the acquisition of a company as a whole or a portion thereof. Any costs for amortization, expensing, write-off, or write-down of goodwill (however represented) are unallowable. 31.205-50 [Reserved] 31.205-51 Costs of alcoholic beverages. Costs of alcoholic beverages are unallowable. 31.205-52 Asset valuations resulting from business combinations. (a) For tangible capital assets, when the purchase method of accounting for a business combination is used, whether or not the contract or subcontract is subject to CAS, the allowable depreciation and cost of money shall be based on the capitalized asset values measured and assigned in accordance with 48 CFR 9904.404-50(d), if allocable, reasonable, and not otherwise unallowable. (b) For intangible capital assets, when the purchase method of accounting for a business combination is used, allowable amortization and cost of money shall be limited to the total of the amounts that would have been allowed had the combination not taken place. Subpart 31.3--Contracts with Educational Institutions 31.301 Purpose. This subpart provides the principles for determining the cost of research and development, training, and other work performed by educational institutions under contracts with the Government. 31.302 General. Office of Management and Budget (OMB) Circular No. A-21, Cost Principles for Educational Institutions, revised, provides principles for determining the costs applicable to research and development, training, and other work performed by educational institutions under contracts with the Government. 31.303 Requirements. (a) Contracts that refer to this Subpart 31.3 for determining allowable costs under contracts with educational institutions shall be deemed to refer to, and shall have the allowability of costs determined by the contracting officer in accordance with, the revision of OMB Circular A-21 in effect on the date of the contract. (b) Agencies are not expected to place additional restrictions on individual items of cost. Subparts 31.4 and 31.5--[Reserved] Subpart 31.6--Contracts with State, Local, and Federally Recognized Indian Tribal Governments 31.601 Purpose. This subpart provides the principles for determining allowable cost of contracts and subcontracts with State, local, and federally recognized Indian tribal governments. 31.602 General. Office of Management and Budget (OMB) Circular No. A-87, Cost Principles for State and Local Governments, Revised, sets forth the principles for determining the allowable costs of contracts and subcontracts with State, local, and federally recognized Indian tribal governments. These principles are for cost determination and are not intended to identify the circumstances or dictate the extent of Federal and State or local participation in financing a particular contract. 31-43 31.603 FEDERAL ACQUISITION REGULATION - -------------------------------------------------------------------------------- 31.603 Requirements. (a) Contracts that refer to this Subpart 31.6 for determining allowable costs under contracts with State, local and Indian tribal governments shall be deemed to refer to, and shall have the allowability of costs determined by the contracting officer in accordance with, the revision of OMB Circular A-87 which is in effect on the date of the contract. (b) Agencies are not expected to place additional restrictions on individual items of cost. However, under 10 U.S.C. 2324(e) and 41 U.S.C. 256(e), the following costs are unallowable: (1) Costs of entertainment, including amusement, diversion, and social activities, and any costs directly associated with such costs (such as tickets to shows or sports events, meals, lodging, rentals, transportation, and gratuities). (2) Costs incurred to influence (directly or indirectly) legislative action on any matter pending before Congress, a State legislature, or a legislative body of a political subdivision of a State. (3) Costs incurred in defense of any civil or criminal fraud proceeding or similar proceeding (including filing of any false certification) brought by the United States where the contractor is found liable or has pleaded nolo contendere to a charge of fraud or similar proceeding (including filing of a false certification). (4) Payments of fines and penalties resulting from violations of, or failure to comply with, Federal, state, local, or foreign laws and regulations, except when incurred as a result of compliance with specific terms and conditions of the contract or specific written instructions from the contracting officer authorizing in advance such payments in accordance with applicable regulations in the FAR or an executive agency supplement to the FAR. (5) Costs of any membership in any social, dining, or country club or organization. (6) Costs of alcoholic beverages. (7) Contributions or donations, regardless of the recipient. (8) Costs of advertising designed to promote the contractor or its products. (9) Costs of promotional items and memorabilia, including models, gifts, and souvenirs. (10) Costs for travel by commercial aircraft which exceed the amount of the standard commercial fare. (11) Costs incurred in making any payment (commonly known as a "golden parachute payment") which is-- (i) In an amount in excess of the normal severance pay paid by the contractor to an employee upon termination of employment; and (ii) Is paid to the employee contingent upon, and following, a change in management control over, or ownership of, the contractor or a substantial portion of the contractor's assets. (12) Costs of commercial insurance that protects against the costs of the contractor for correction of the contractor's own defects in materials or workmanship. (13) Costs of severance pay paid by the contractor to foreign nationals employed by the contractor under a service contract performed outside the United States, to the extent that the amount of the severance pay paid in any case exceeds the amount paid in the industry involved under the customary or prevailing practice for firms in that industry providing similar services in the United States, as determined by regulations in the FAR or in an executive agency supplement to the FAR. (14) Costs of severance pay paid by the contractor to a foreign national employed by the contractor under a service contract performed in a foreign country if the termination of the employment of the foreign national is the result of the closing of, or curtailment of activities at, a United States facility in that country at the request of the government of that country. (15) Costs incurred by a contractor in connection with any criminal, civil, or administrative proceedings commenced by the United States or a State, to the extent provided in 10 U.S.C. 2324(k) or 41 U.S.C. 256(k). Subpart 31.7--Contracts with Nonprofit Organizations 31.701 Purpose. This subpart provides the principles for determining the cost applicable to work performed by nonprofit organizations under contracts with the Government. A nonprofit organization, for purpose of identification, is defined as a business entity organized and operated exclusively for charitable, scientific, or educational purposes, of which no part of the net earnings inure to the benefit of any private shareholder or individual, of which no substantial part of the activities is carrying on propaganda or otherwise attempting to influence legislation or participating in any political campaign on behalf of any candidate for public office, and 31-44 (FAC 97-04) PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES 31.703 - -------------------------------------------------------------------------------- which are exempt from Federal income taxation under section 501 of the Internal Revenue Code. 31.702 General. Office of Management and Budget (OMB) Circular No. A-122, Cost Principles for Nonprofit Organizations, sets forth principles for determining the costs applicable to work performed by nonprofit organizations under contracts (also applies to grants and other agreements) with the Government. 31.703 Requirements. (a) Contracts which refer to this Subpart 31.7 for determining allowable costs shall be deemed to refer to, and shall have the allowability of costs determined by the contracting officer in accordance with, the revision of OMB Circular A-122 in effect on the date of the contract. (b) Agencies are not expected to place additional restrictions on individual items of cost. However, under 10 U.S.C. 2324(e) and 41 U.S.C. 256(e), the costs cited in 31.603(b) are unallowable. * * * * * * (FAC 97-04) 31-45 [GRAPHIC] U.S. DEPARTMENT OF COMMERCE [LOGO] Office of Inspector General --------------------------- National Institute of Standards and Technology Program-Specific Audit Guidelines for Advanced Technology Program (ATP) Cooperative Agreements with Joint Ventures November 1996 Office of Audits, Atlanta Regional Office TABLE OF CONTENTS Chapter 1 - General Guidance Audit Requirements ..................................................... 1 Objectives ............................................................. 2 Frequency .............................................................. 2 Engagement Letter ...................................................... 2 Protection of Confidential Information ................................. 2 Criteria ............................................................... 2 Chapter 2 - Reporting Requirements Report Package ......................................................... 4 Submission of Reports .................................................. 5 Chapter 3 - The Schedule of Fund Sources and Project Costs .................. 6 Chapter 4 - Auditor's Opinion on the Schedule of Fund Sources and Project Costs Overview ............................................................... 7 Cost Principles ........................................................ 7 Cost Limitations ....................................................... 7 Indirect Costs ......................................................... 8 Suggested Audit Procedures ............................................. 8 Chapter 5 - The Attestation Engagement Overview ............................................................... 11 Management Assertions, Compliance Requirements and Suggested Examination Procedures 1. Matching or Cost-Sharing ....................................... 11 2. Property Management ............................................ 12 3. Procurement .................................................... 13 4. Federal Reporting .............................................. 13 5. Subcontractors ................................................. 14 Appendices Appendix A ............................................................. 15 Appendix B ............................................................. 16 Appendix C ............................................................. 17 Chapter 1. General Guidance Audit Requirements: The Advanced Technology Program (ATP) is a cost-sharing program designed to assist United States industry and businesses pursue high risk, enabling technologies with significant commercial and economic potential. The statutory authority for ATP, incorporated into Section 28, Subpart C of the National Institute of Standards and Technology (NIST) Act of 1988, and as amended in 1991, requires that NIST establish procedures regarding financial reporting and auditing to ensure that cooperative agreements are used for their specified purposes. Federal legislation requires that all audits of financial assistance be performed in accordance with Government Auditing Standards issued by the Comptroller General of the United States. These audit requirements can be met by conducting an audit of the ATP financial statement, "Schedule of Fund Sources and Project Costs" and an examination-level attestation engagement of management's assertions regarding compliance with laws and regulations. The ATP financial statement will be audited using generally accepted auditing standards which have been incorporated into the Government Auditing Standards. The examination-level compliance attestation engagement will be conducted in accordance with Government Auditing Standards and the standards contained in the Statement on Standards for Attestation Engagement (SSAE) No. 3, Compliance Attestation, issued by the American Institute of Certified Public Accountants (AICPA). An engagement conducted in accordance with SSAE No. 3, Compliance Attestation, is a type of financial-related audit under Government Auditing Standards. With two exceptions, these guidelines are to be used by independent auditors to perform the required program-specific audit. The first exception is for ATP recipients covered under the Single Audit Act of 1984 and Office of Management and Budget (OMB) Circular A-128, "Audits of State and Local Governments." The second exception is for ATP recipients covered under the audit requirements of OMB Circular A-133, "Audits of Institutions of Higher Education and Other Nonprofit Institutions." For recipients covered by OMB Circular A-128 or OMB Circular A-133 audit requirements, these guidelines identify the allowability of specific cost elements and other programmatic compliance requirements that should be tested. These guidelines are not intended to be a complete manual of procedures, nor are they intended to supplant the auditor's judgment of the work required to meet the program-specific audit objectives. These guidelines may not cover all circumstances encountered while performing the program-specific audit, similarly not all procedures will apply to every situation. Auditors must use their professional judgment in determining the work necessary to render the required opinions. Different guidelines will be used by joint venture participants from those used by single companies because of differing requirements for each of these types of award recipients. The term joint venture refers to at least two separately owned for-profit companies, both of which are substantially involved in the R&D and contributing toward the cost-sharing or matching requirement per the terms of the cooperative agreement. The joint venture need not be a legally constituted entity. Each joint venture participant is considered to be a direct recipient of the ATP 1 award. As a result, each joint venture participant is required to have an examination conducted in accordance with these guidelines. All federal programs are assigned a number in the Catalog of Federal Domestic Assistance (CFDA). The CFDA number for the Advanced Technology Program is 11.612. Objectives: The opinions on the program financial statement and management's assertions regarding compliance will be used as a tool by program managers and grant officials in meeting their responsibilities for ensuring that federal funds were spent for their intended purposes and in accordance with laws and regulations. Frequency: ATP recipients shall have a program-specific audit performed in accordance with the following schedule: o For awards less than 24 months, a program-specific audit is required only at the end of the project. o For 2-, 3-, and 4-year awards, a program-specific audit is required after the first year and at the end of the project. o For 5-year awards, a program-specific audit is required after the first year, again after the third year, and at the end of the project. The program-specific audit is to cover the period elapsed since the last audit of the joint venture participant or since the project began if the audit is the initial audit. In the case of a no-cost extension to the first year of an award, the audit should include project funds and project costs for the first year and extension period. In the case of a no-cost extension to the third year of a 5-year award, the audit should include project funds and project costs since the last audit and the extension period. Engagement Letter: A letter of engagement between the joint venture participant and the auditor conducting the program-specific audit shall specifically include a provision that the auditor is required to provide the Secretary of Commerce, the Office of Inspector General, and the U.S. General Accounting Office or their representatives access to working papers or related documents. Access to working papers includes making necessary photocopies. Protection of Confidential Information: Certain information obtained in this engagement is exempt from disclosure under the Freedom of Information Act (FOIA). Exempt from FOIA disclosure is information on the business operation of any member of the business or joint venture; and trade secrets possessed by any business or any member of the joint venture. Criteria: The auditor should review the cooperative agreement which stipulates all required awards terms and conditions including the applicable administrative requirements and cost 2 principles. In addition, the following documents should be available: Department of Commerce Requirements Department of Commerce (DOC) Financial Assistance Standard Terms and Conditions. Financial Assistance Award (Form CD-450) and any amendment to the Financial Assistance Award (Form CD-451) which incorporates the approved budget, as described on Form NIST-1263. General Terms and Conditions - Advanced Technology Program. Special Award Conditions - Advanced Technology Program Advanced Technology Program Proposal Preparation Kit which includes: o Advanced Technology Program (ATP) Public Law 100-418 as amended by Public Law 102-245 o Advanced Technology Program (ATP) Rule - Title 15, CFR Part 295 Administrative Requirements (As Applicable) Office of Management and Budget (OMB), Circular A-110, "Uniform Administrative Requirements for Grants and Agreements with Institutions of Higher Education, Hospitals and Other Nonprofit Organizations." "Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments," (Common Rule) Title 15, CFR Part 24. Cost Principles (As Applicable) Federal Acquisition Regulations (FAR) System, Part 31, "Contract Cost Principles and Procedures." Office of Management and Budget (OMB), Circular A-21, "Cost Principles for Educational Institutions." Office of Management and Budget (OMB), Circular A-87, "Cost Principles for State, Local and Indian Tribal Governments." Office of Management and Budget (OMB), Circular A-122, "Cost Principles for Nonprofit Organization." 3 Chapter 2. Reporting Requirements Report Package: The report package should include the following: 1. A Schedule of Fund Sources and Project Costs including disclosure notes prepared by the NIST joint venture participant. The Schedule should include the most recently approved project budget. The budget information is found on Form NIST-1263. Chapter 3 of these guidelines provides further details on the preparation of the Schedule. Appendix A provides an illustrative example. 2. An opinion on the Schedule of Fund Sources and Project Costs of the ATP award. Chapter 4 of these guidelines includes a discussion of the cost principles governing the project costs. The auditor's opinion should be issued in accordance with the AICPA's Codification of Statement of Auditing Standards, Section 623, Paragraph 22, Special Purpose Financial Presentation to Comply with Contractual Agreement or Regulatory Provisions. Appendix B provides an illustrative example. 3. An opinion on management's assertions on the entity's compliance with specified requirements applicable to the ATP program. The practitioner's opinion should be issued in accordance with the AICPA's Statement on Standards for Attestation Engagements No. 3, Compliance Attestation. The management assertions are found in Chapter 5 of these guidelines. Appendix C provides an illustrative example. 4. A written communication of any reportable conditions or material weaknesses which were noted in the audit of the Schedule of Fund Sources and Project Costs or during the compliance attestation engagement that could adversely affect the entity's ability to report financial data or comply with the specified compliance requirements. AICPA Statement of Auditing Standards (SAS) No. 60, Communication of Internal Control Structure Related Matters Noted in an Audit, requires these internal control deficiencies be communicated to management. These guidelines require the communication be in writing. A report on the Internal Controls prepared in accordance with Government Auditing Standards is not required for financial-related audits. 5. A Schedule of Findings and Questioned Costs when applicable. This schedule will include all material findings and questioned costs resulting from the compliance testing or identified through the audit of the Schedule of Fund Sources and Project Costs. The findings should be developed with information necessary to facilitate the audit resolution process (i.e., the size of the universe and corresponding dollar amount, size and dollar amount of the sample, and number and corresponding dollar amount of the instances of noncompliance). Because independent auditors do not disallow costs, questioned costs are identified for possible disallowance by the Department of Commerce. 6. A Corrective Action Plan when applicable. Management should describe the corrective action taken or planned in response to the findings and questioned costs identified by the auditor. The plan should also include the status of corrective actions 4 taken on prior findings resulting from independent audits or audits performed by the Office of Inspector General. Submission of Reports: The report package should be submitted within 90 days of the end of the reporting period. The joint venture participants should submit with the report package the joint venture participant's most recent audited or reviewed financial statements. Two copies should be submitted to the Department of Commerce. One copy should be submitted to the NIST Grants Officer at the following address: NIST Grants Office Cooperative Agreement No. ______________ Building 301, Room B129 Gaithersburg, Maryland 20899-0001 The other copy should be forwarded to the Office of Inspector General at the following address: U.S. Department of Commerce Office of Inspector General ATTN: ATP Program-Specific Audit Report 401 West Peachtree Street, NW, Suite 2342 Atlanta, Georgia 30308 In the accompanying transmittal letter, please provide the name and phone number of the joint venture participant's designated contact person in the event of questions about the submitted reports. 5 Chapter 3. The Schedule of Fund Sources and Project Costs The Schedule of Fund Sources and Project Costs as presented in Appendix A will be prepared by the joint venture participant from their accounting records. The Schedule should report the latest approved budget as identified on Form NIST-1263, the total fund sources, and project costs for the reporting period. Projects costs include costs allowable under the applicable cost principles subject to all limitations and exclusions set forth in the award including the award's special and general terms and conditions, and DOC's financial assistance standard terms and conditions. In addition, the joint venture participant should review the guidance included in ATP's Proposal Preparation Kit for the allowability or valuation of a specific cost element. If the aforementioned documents are silent on the accounting for a specific item of cost, then generally accepted accounting principles should be used. The joint venture participant should prepare adequate disclosure notes to describe the basis of the schedule's presentation and any significant accounting policies used in preparing the schedule. In addition, the notes should include a general description of the company receiving the ATP award, a general project description, basic award terms such as the amount of federal funding, the recipient's required match and a list of the other joint venture members. When appropriate, disclosure notes should also include related party transactions, subsequent events, and material questioned costs. 6 4. The Auditor's Opinion on the Schedule of Fund Sources and Project Costs Overview: The Schedule of Fund Sources and Project Costs is the ATP financial statement. This program financial statement should be audited under generally accepted auditing standards incorporated into Government Auditing Standards. The opinion on the Schedule of Fund Sources and Project Costs should be prepared in accordance with the AICPA's Codification of Statement of Auditing Standards, Section 623, Paragraph 22, Special Purpose Financial Presentation to Comply with Contractual Agreement or Regulatory Provisions. The Schedule of Fund Sources and Project Costs is prepared in conformance with the terms of the award and consistent with the cost principles which govern the expenditures of funds. This presentation of project income and expenditures is referred to as an other comprehensive basis of accounting. If material questioned costs are found while the auditor is forming an opinion of the ATP financial statement or during the attestation engagement, the Schedule of Fund Sources and Project Costs should remain unchanged and include the total project costs incurred, including the material questioned costs. The costs questioned should be disclosed in the accompanying notes to the ATP financial statement. With adequate note disclosure, the auditor can issue an unqualified opinion with an explanatory paragraph following the opinion, as appropriate. Cost Principles: There are federal cost principles for each type of recipient receiving federal assistance. The cost principles applicable to the recipient are stated in the award document. Allowability of costs is determined as follows: For-profit organizations - Federal Acquisition Regulations (FAR) Part 31, "Contract Cost Principles and Procedures" Non-profit organizations - OMB Circular A-122, "Cost Principles for Nonprofit Organizations" Educational organizations - OMB Circular A-21, "Cost Principles for Educational Organizations" Government organizations - OMB Circular A-87, "Cost Principles for State, Local and Indian Tribal Governments" The ATP program was created as a cost reimbursement research and development vehicle. NIST built the cost reimbursement theory into the ATP regulation and cooperative agreements by requiring compliance with applicable federal administrative requirements and cost principles. Reimbursement claims to NIST using a basis other than cost (e.g., GSA Schedule, commercial price, list price, etc.) are not allowable under the terms of ATP cooperative agreements. The cost principles apply to the total ATP project cost, regardless of whether the cost element is part of the federal or nonfederal share. ATP recipients may not claim as part of their nonfederal cost share, the difference between actual cost and market price of products contributed to the joint venture. Cost Limitations: The following costs are not allowable under the ATP program regardless of whether they are allowable under the FAR or OMB cost principles: 7 1. Cost of tuition for students working on the ATP project. 2. Profit, management fees, interest on borrowed funds, and facilities capital cost of money 3. Marketing surveys, pre-commercialization or commercialization studies. 4. Bid and proposal costs. 5. Costs incurred in prior time periods, i.e. "sunk" costs. 6. Independent Research and Development (IR&D) costs when funded from Federal sources.. 7. Direct charges for the construction of new buildings or extensive renovations of existing laboratory buildings. Refer to the ATP Proposal Preparation Kit for further details regarding the unallowable costs cited above. The award terms and conditions stipulate prior approval requirements. As of the date of these guidelines, the following are allowable ONLY IF prior approval is obtained from the NIST Grants Officer. 1. All sole source subcontracts over $100,000. 2. Budget transfers among direct cost categories exceeding 10 percent of the total budget. 3. Capital expenditures in excess of $100,000. 4. Changes to key personnel. 5. Changes to the scope of work. 6. Changes in matching funds. 7. Changes to or new members of the joint venture. Indirect Costs: Costs claimed as indirect costs are subject to all the same limitations and prior approval requirements as direct costs. In order to be reimbursed for indirect costs, each joint venture participant must have an indirect cost rate or proposal approved by its federal cognizant agency. The indirect cost rate proposals provide a basis for allocating indirect costs to federal programs. They should be submitted by the joint venture participant to its cognizant federal agency within 90 days of receiving the ATP award. Costs claimed as indirect costs are subject to all the same limitations and prior approval requirements as direct costs. If the entity has received a final rate from its cognizant agency, there is no need for end of the year adjustments to reflect actual costs. However, if the entity has a negotiated provisional rate or approved indirect cost proposal allowing the organization to charge at their calculated provisional rate, then the indirect cost claimed should be adjusted to reflect actual indirect costs incurred and allocable to the award during the year. If the indirect costs were based on a fixed rate with carryover provisions, management must determine the correct carryforward adjustment based on any differences between costs claimed and actual costs incurred for the year. Regardless of any approved indirect cost rate applicable to the award, the maximum dollar amount of allocable indirect costs will not exceed the line item for indirect costs contained in the approved budget. Suggested Audit Procedures - The following are the suggested audit procedures for determining the allowability of costs in accordance with the cost principles: 8 1. Obtain the latest approved budget (Form NIST-1263) for the project period under audit. 2. Test that the costs are within the approved budget. 3. Test that the costs are allocable to the ATP award in accordance with the applicable cost principles. 4. Test that the cost conforms to any limitations or exclusions set forth in the cooperative agreement award, applicable terms and conditions incorporated in the award, i.e., Special Award Conditions, ATP General Terms and Conditions or DOC Financial Assistance Standard Terms and Conditions. 5. Ascertain that the cost has been given consistent accounting treatment within and between accounting periods. 6. Test on a sample basis that the cost charged to ATP is a net cost, i.e., all applicable credits, volume or cash discounts, refunds, rental income, trade-ins, scrap sales, etc., have been subtracted. 7. Examine on a sample basis the underlying documentation, i.e., time and attendance payroll records, time and effort records for employees charged to more than one activity, approved purchase orders, vendor invoices, canceled checks, etc., as appropriate, and determine that the cost is correctly charged as to project, account, amount and period. 8. For wages, salaries and fringe benefits, test on a sample basis that the employee's total compensation is consistent with established company practices for that category of employee. 9. For wages, salaries and fringe benefits, compare a representative sample of individual compensation levels to prior years and test that the escalation clause in the approved budget is not exceeded. 10. Test, on a sample basis, that charges for fringe benefits including sick leave, vacation leave, life and health insurance, and pension plans are supported by a plan and these benefits are distributed allocably to the ATP program. 11. Test, on a sample basis, that depreciation is not being claimed on assets or a portion of the assets purchased with federal funds. 12. Inquire of management, the valuation method used for software development costs and for valuation of software or other company assets contributed to the joint venture, or sold, given or exchanged to other joint venture members. NOTE: Any valuation in excess of cost should be questioned in the Schedule of Findings and Questioned Costs unless there was an advance financial understanding or other written approval from the NIST Grants 9 Office. If the Grants Office provided written approval for a valuation method other than cost, the valuation method should be disclosed in the notes to the financial statements. 13. Determine whether software development and other project expenses charged to the award are valued at cost; determine that the costs were incurred during the award period and are in conformance with the applicable cost principles. 10 Chapter 5. The Attestation Engagement Overview: The practitioner is required to obtain written assertions from management as part of the compliance attestation engagement performed in accordance with the AICPA's Statement on Standards for Attestation Engagement (SSAE) No. 3, Compliance Attestation. In addition to the five specific assertions that follow, management's written representations should include the general matters required by paragraph 70 of SSAE No. 3, Compliance Attestation. Management's written assertions are an integral part of the engagement. Materiality relates to each specific management assertion. Management Assertions, Compliance Requirements and Suggested Examination Procedures: 1. Matching or Cost-sharing Management Assertion. The matching funds required by the ATP award have been provided. These funds are not from a subcontractor or other federal sources. The matching funds claimed as ATP project costs were not also used as matching funds on other federally supported activities. The matching funds meet the definition provided in OMB Circular A-110, Subpart C, Paragraph 23 and conform to the limitations in Title 15, CFR Part 295.2(l). Compliance Requirement - The ATP statute and implementing regulations require joint ventures to provide a match that is more than 50 percent of the total project costs. ATP regulation has defined the term "matching funds" to include the following: 1) dollar contributions from state, county, city, company or other non-federal sources, 2) in-kind contributions of persons employed full time by the joint venture, 3) in-kind contributions of a pro-rata share of part-time personnel that the program deems essential and who devote at least 50 percent of their time to the program, and 4) in-kind value of equipment that the program deems essential and can be either the cost of new equipment or the depreciated value of previously purchased equipment. The value of equipment will be further pro-rated according to the share of total use dedicated to carrying out the proposed ATP work program. ATP has placed two additional dollar limits on the allowability of matching funds which is 1) the total in-kind value of part-time personnel cannot exceed 20 percent of the applicant's total annual share of matching funds, and 2) the total in-kind value of equipment expenditures cannot exceed 30 percent of the applicant's total annual share of matching funds. ATP requires that there are at least two separately owned for-profit members in a joint venture and the joint venture participants contribute toward the cost-sharing or matching requirement per the terms of the cooperative agreements. Subcontractors may not contribute towards the matching fund requirement. The joint venture participant cannot use funds received from other federal programs for the matching share to the ATP award. The joint venture participant cannot use the same cost as a charge or required match to two separate federal programs. 11 Suggested Examination Procedures 1. Ascertain the amount of match provided by the joint venture participant. Determine whether the recipient met the required match specified in the cooperative agreement. 2. Ascertain that the match provided did not come from a subcontractor to the project or from other federal sources. 3. Inquire of management whether the costs charged to the ATP project have been used to meet cost-sharing or matching requirements of other federally supported activities. 4. If in-kind contributions are part of the match, trace these contributions to the joint venture participant's accounting and summary records to determine that the value of the in-kind contribution is in accordance with OMB Circular A-110, Subpart C, Paragraph 23 and conforms to the limitations in ATP regulations. 2. Property Management Management Assertion. Equipment acquired with the ATP funds has been accounted for in accordance with federal property management standards found in OMB Circular A-110, Subpart C, Paragraphs 30-37. Compliance Requirement - Title to equipment acquired using federal financial assistance vests with the recipient. The recipient agrees to use the equipment for the authorized purpose of the project as long as it is needed and will not encumber the asset. There are no requirements pertaining to equipment with a cost of less than $5,000. NIST has disposition authority as described in OMB Circular A-110, Subpart C, Paragraph 34. While title to property and equipment vests with the recipient, the recipient has no cost basis in the assets purchased with government funds. The recipient's fixed asset system, therefore, must clearly identify that federal funds are the source of funding for the assets. The company is neither entitled to a depreciation deduction on their corporate tax return nor the R & D credit based on federal expenditures under this program. Suggested Examination Procedures 1. Ascertain that the recipient has a fixed asset system to identify equipment purchased, including the source of funds for equipment, percentage of federal ownership, location, cost and other pertinent information. 2. Ascertain that a physical inventory is conducted at least once every two years. 3. Inquire as to the disposal of ATP funded equipment during the award period. Ascertain whether disposition instructions were requested from NIST and, if so, were they followed. If disposition instructions were not requested, did the disposition of property meet the 12 requirements of OMB A-110, Subpart C, Paragraph 34. 3. Procurement Management Assertion. Federal procurement standards described in OMB Circular A-110, Subpart C, Paragraphs 40-48 have been incorporated into the purchasing policies and adhered to for ATP award expenditures. Compliance Requirement - The purpose of federal procurement requirements is to provide to the maximum extent practical open and free competition. Recipients will use their own written procurement procedures provided these procedures conform to federal law and regulations identified in OMB Circular A-110 Subpart C, Paragraphs 40-48. Suggested Examination Procedures 1. Review the recipient's written procurement policies. If the previous program-specific audit did not disclosed any problems with the recipient's procurement policies then examine only changes to those policies since the previous audit. 2. Test a representative sample of procurement transactions. Evaluate whether the contract files maintain sufficient detail to document the significant history of the procurement, including the rationale for method of procurement, selection of contract type, contractor selection or rejection, including contract modifications. 3. Inquire about the rationale for any procurement with limited competition. 4. Review correspondence to determine that documentation for procurement transactions exceeding $100,000 was submitted to the NIST grants officer for approval if any of the following conditions exist: 1) the award was made by noncompetitive negotiation, 2) only a single bid or offer was received, 3) the award was made to other than the apparent low bidder, or 4) a brand name product was specified. 4. Federal Reporting Management Assertion. The amounts in the quarterly financial status reports and the monthly and quarterly requests for reimbursements agree with the underlying accounting records and summary records. Compliance Requirement - Quarterly financial status report (SF 269) and a monthly or quarterly request for reimbursement (SF 270) are required. The financial status report and claims for reimbursement contain information that can be reconciled to the accounting records from which the Schedule of Fund Sources and Project Costs was prepared. A report of federal cash transactions (SF 272) is required if federal funds are provided under a cash advance. 13 Suggested Examination Procedures 1. Test that required reports are filed on a timely basis. 2. Obtain an understanding of the awardee's procedures for preparing and reviewing the financial status reports and the request for reimbursement. 3. Select a sample of financial status reports and requests for reimbursement to determine that the reports are prepared according to DOC instructions. For the sample, trace significant data to supporting documentation, i.e. summary worksheets, ledgers, etc. Report all material differences between financial reports and the company's accounting records. 4. Review the company's system for monitoring payment requests from subcontractors. Test for controls which will limit payments to actual reimbursements. 5. Review significant adjustments made to the general ledger accounts or other accounting records affecting the ATP award and evaluate for propriety. Ascertain whether amended federal reports were submitted for these adjustments. 5. Subcontractors Management Assertion. The contracts entered into with subcontractors, as defined below, require that the subcontractors adhere to federal laws and regulations as specified by the ATP award and sanctions are specified for the subcontractor's noncompliance. Compliance Requirement - The joint venture is ultimately responsible to NIST for funds passed to a subcontractor. For the purpose of these guidelines, a subcontractor is defined as an organization which receives a portion of the financial assistance from the awardee and assists the ATP awardee in meeting the project's goals. A subcontractor is not a joint venture recipient. The ATP awardee should include in each subcontract adherence to the federal laws and regulations required by the ATP project. Suggested Examination Procedures 1. Test subcontracts to determine that the ATP awardee required adherence to federal laws and regulations as specified by the ATP award. 2. Test subcontracts to determine that there are sanctions in place for noncompliance with laws and regulations as specified by the ATP award and if noncompliance was found that the sanctions were enforced. 3. Ascertain whether the ATP awardee received the subcontractor's audit reports and/or has performed other monitoring of the subcontractor. 14 Appendix A Schedule of Fund Sources and Project Costs for NIST's Cooperative Agreement 70xxxx#x#### CFDA 11.612 For the Period of xx/xx/xx - xx/xx/xx Approved Actual Receipts Budget & Project Costs ======== =============== Fund Sources ATP Award Funds --------------- --------------- Recipient's Contribution --------------- --------------- Program Income --------------- --------------- Other --------------- --------------- Total Fund Sources =============== =============== Project Costs Direct Costs Personnel Salaries Technical --------------- --------------- Administrative --------------- --------------- Fringe Benefits Technical --------------- --------------- Administrative --------------- --------------- Travel --------------- --------------- Equipment --------------- --------------- Materials/Supplies --------------- --------------- Subcontracts --------------- --------------- Other --------------- --------------- Total Direct Costs --------------- --------------- Total Indirect Costs --------------- --------------- Total Project Costs =============== =============== 15 Appendix B Independent Auditor's Report on The Schedule of Fund Sources and Project Costs for NIST ATP Cooperative Agreement Number 70xxxx#x#### For the Period of xx/xx/xx to xx/xx/xx Independent Auditor's Report [Addressee] We have audited the accompanying Schedule of Fund Sources and Project Costs of [joint venture participant] as of [date of this report]. This Schedule of Fund Sources and Project Costs is the responsibility of [joint venture participant's] management. Our responsibility is to express an opinion on the Schedule of Fund Sources and Project Costs based on our audit. We conducted our audit in accordance with generally accepted auditing standards and Government Auditing Standards issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Schedule of Fund Sources and Project Costs are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Schedule of Fund Sources and Project Costs. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Schedule of Fund Sources and Project Costs. We believe that our audit provides a reasonable basis for our opinion. The accompanying Schedule of Fund Sources and Project Costs was prepared for the purpose of complying with the award requirements of the ATP cooperative agreement number 70xxxx#x#### entered into by [joint venture participant] and the U.S. Department of Commerce as described in Note X. This Schedule was prepared in conformance with the award requirements which is a comprehensive basis of accounting other than generally accepted accounting principles. In our opinion, the Schedule of Fund Sources and Project Costs referred to above presents fairly, in all material respects(1), the source of funds and project costs of [joint venture participant] for the period [year end (date)/period from (date) to (date)] in conformity with the basis of accounting described in Note X. This report is intended solely for the information and use of the audit committee, management and the U.S. Department of Commerce and should not be used for any other purpose. [Signature] [Date] - ---------- (1) The auditor should modify the standard report and issue a qualified, adverse or disclaimer of opinion, as appropriate, in the following circumstances: - - The joint venture participant does not adjust the Schedule of Fund Sources and Project Cost or disclose the material questioned costs in the accompanying notes. - - In forming an opinion on the Schedule of Fund Sources and Project Costs the extent of other potentially unallowable costs in transactions not tested should be considered. 16 Appendix C Opinion on Management's Assertions on Compliance with Specified Requirements Applicable to the NIST Advanced Technology Program Cooperative Agreement Number 70xxxxx#x#### Independent Accountant's Report [Addressee] We have examined management's assertions included in its representation letter dated [date], that [joint venture participant] complied with [list specified compliance requirements or attach in accompanying schedule], relative to [joint venture participant' s] Schedule of Fund Sources and Project Costs which is part of this report package. As discussed in that representation letter, management is responsible for [joint venture participant's] compliance with those requirements. Our responsibility is to express an opinion on management's assertions about [joint venture participants] compliance based on our examination. Our examination was made in accordance with Government Auditing Standards, issued by the Comptroller General of the United States; standards established by the American Institute of Certified Public Accountants; and the NIST Program-Specific Audit Guidelines for Advanced Technology Program (ATP) Cooperative Agreements with Joint Ventures, issued by the U.S. Department of Commerce, Office of Inspector General, dated October 1996 and, accordingly, included examining, on a test basis, evidence about [joint venture participant's] compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Our examination does not provide a legal determination on [joint venture participant's] compliance with specified requirements. In our opinion, management's assertions that [joint venture participant] complied with the aforementioned requirements relative to the [joint venture participant's] ATP Award Cooperative Agreement No. 70xxxx#x#### during the [year ended (date)/period from(date) to (date)] are fairly stated, in all material respects(2). This report is intended solely for the information of the audit committee, management, and the U.S. Department of Commerce. [Signature] [Date] - ---------- (2) The practitioner should modify the standard report if any of the following conditions exist: - - There is a material noncompliance with specified requirements; - - There is a matter involving a material uncertainty; - - There is a restriction on the scope of the engagement, or - - The practitioner decides to refer to the report of another practitioner as the basis, in part, for the practitioner's report. When an examination of management's assertions about an entity's compliance with specified requirements discloses material noncompliance, the practioner should follow the guidance in paragraph 62 through 68 of SSAE No. 3. 17 - -------------------------------------------------------------------------------- FORM CD-451 U.S. DEPARTMENT OF COMMERCE (REV. 10-93) DAO 203-26 AMENDMENT TO FINANCIAL ASSISTANCE AWARD - -------------------------------------------------------------------------------- RECIPIENT NAME Plug Power, LLC - -------------------------------------------------------------------------------- STREET ADDRESS 968 Albany-Shaker Road - -------------------------------------------------------------------------------- CITY, STATE, ZIP CODE Latham, NY 12110 - -------------------------------------------------------------------------------- |_| GRANT |X| COOPERATIVE AGREEMENT - -------------------------------------------------------------------------------- ACCOUNTING CODE **SEE BELOW - -------------------------------------------------------------------------------- AWARD NUMBER 70NANB8H4039 - -------------------------------------------------------------------------------- AMENDMENT NUMBER 01 - -------------------------------------------------------------------------------- EFFECTIVE DATE JAN 11 1999 - -------------------------------------------------------------------------------- EXTEND WORK COMPLETION TO - -------------------------------------------------------------------------------- DEPARTMENT OF COMMERCE OPERATING UNIT NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY GRANTS OFFICE BUILDING 301, ROOM B129, GAITHERSBURG, MARYLAND 20899-0001 - -------------------------------------------------------------------------------- PREVIOUS TOTAL COSTS ARE REVISED AS FOLLOWS: ESTIMATED COSTS ADD DEDUCT ESTIMATED COST - -------------------------------------------------------------------------------- FEDERAL SHARE OF COST $4,737,848 $-0- $-0- $4,737,848 - -------------------------------------------------------------------------------- RECIPIENT SHARE OF COST $5,000,000 $-0- $-0- $5,000,000 - -------------------------------------------------------------------------------- TOTAL ESTIMATED COST $9,737,848 $-0- $-0- $9,737,848 - -------------------------------------------------------------------------------- REASON(S) FOR AMENDMENT Project Title: Distributed Premium Power Fuel Cell Systems Incorporating Novel Materials and Assembly Techniques under Advanced Technology Program (ATP) 98-03 This cooperative agreement is being amended to (1) change the project period from 01/01/99 - 12/31/00 to 02/28/99 - 02/27/01, per Recipient's requests dated 12/23/98 & 01/05/99; (2) provide Recipient a twenty-nine (29) day extension until 01/29/99, to submit documentation required under Article Eight (8) JV Contingency of the ATP Special Award Conditions; and (3) indicate on the attached, those terms and conditions affected by this action, and any administrative or statutory requirements. - -------------------------------------------------------------------------------- This Amendment approved by the Grants Officer is issued in triplicate and constitutes an obligation of Federal funding. By signing the three documents, the Recipient agrees to comply with the Amendment provisions checked below and attached, as well as previous provisions incorporated into the Award. Upon acceptance by the Recipient, two signed Amendment documents shall be returned to the Grants Officer and the third document shall be retained by the Recipient. If not signed and returned by the Recipient within 15 days of receipt, the Grants Officer may declare this Amendment null and void. |X| Special Award Conditions |_| Line Item Budget |_| Other(s): ----------------------------------------------------------- - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- **ACCOUNTING CODE: cc: 8/474-0342 Obj. Cl. 4110 Req. No. 8/474-4273 $0.00 - ------------------------------------------------------------------------- B-AE93-N-H-F-N-A-36-41399 EIN: 16-1528998 474/G. Ceasar - -------------------------------------------------------------------------------- SIGNATURE OF DEPARTMENT OF COMMERCE GRANTS OFFICER TITLE DATE Lois McDuffee /s/ Lois McDuffee Grants Officer 1/11/99 - -------------------------------------------------------------------------------- TYPED NAME AND SIGNATURE OF AUTHORIZED RECIPIENT OFFICIAL TITLE DATE /s/ [ILLEGIBLE] President & CEO 1/22/99 - -------------------------------------------------------------------------------- ELECTRONIC FORM 3 8. JV CONTINGENCY: No costs (Federal or Non-Federal) shall be incurred or charged to this cooperative agreement until the Grants Officer has received and approved in writing the following: A. By 01/29/99 the designation of a qualified replacement Joint Venture (JV) Partner, and an executed Joint Venture (JV) Agreement. B. The Joint Venture (JV) Agreement which must include, but is not limited to, the following provisions: (a) a Power of Attorney clause, which designates an organization to serve as the collaboration's Administrator and to enter into this cooperative agreement for and on behalf of the entire JV; (b) an Intellectual Property Plan, which delineates the disposition of the collaboration's intellectual property: (c) a Governmental Use License, which grants to the Government a right to use the intellectual property created under the ATP-sponsored project; (d) a Precedence clause, which relegates the terms of the JV agreement to those of the NIST cooperative agreement; (e) Addition, Withdrawal and Termination provisions, outlining the collaboration's intended mechanisms for each action; and (f) a Liability and/or Indemnification clause(s), stating the ways in which liability issues will be handled by the collaboration. C. A copy of the notification letter sent to both the Department of Justice and the Federal Trade Commission regarding the JV and its membership and proposed area of technical collaboration. D. In accordance with the ATP Proposal Preparation Kit (December 1997) the replacement Joint Venture (JV) Partner is required to submit the following executed forms -- accessible at http://www.atp.nist.gov/atp/kit-98/99pdfkit.htm: 1) SF-424B, 2) CD-346 (proposed technical and business project managers, as well as the key officer who will have fiduciary responsibility is required to complete), 3) CD-511, 4) NIST-1263 (working together with Joint Venture (JV) Partner, Plug Power, LLC) for entire project period, and 5) SF-LLL (if applicable) to all proposed joint venture participants. The above documentation must be submitted to the Grants Office within twenty-nine (29) days from the date of the execution of this amendment to the cooperative agreement award by the Grants Officer. This amendment to the cooperative agreement may be terminated by the Grants Officer for cause if the fully executed JV agreement is not submitted timely. Special Award Conditions/ATP-JV/01-99 [LOGO] Plug Power ================================================================================ 968 Albany-Shaker Rd, Latham, NY 12110 Gary Mittleman President and Chief Executive Officer ADDENDUM TO U.S. DEPARTMENT OF COMMERCE FINANCIAL ASSISTANCE AWARD By signing below, Plug Power, LLC ("Plug") concurs with the NIST Grants Office request to amend the U.S. Department of Commerce Financial Assistance Award Number 70NANB8H4039 such the proposal start date will be February 28, 1999. Signed: /s/ Gary Mittleman Date: Jan 5, 1999 ------------------ ----------- Gary Mittleman President and Chief Executive Officer Plug Power LLC - -------------------------------------------------------------------------------- FORM CD-451 U.S. DEPARTMENT OF COMMERCE (REV. 10-93) DAO 203-26 AMENDMENT TO FINANCIAL ASSISTANCE AWARD - -------------------------------------------------------------------------------- RECIPIENT NAME Plug Power, LLC - -------------------------------------------------------------------------------- STREET ADDRESS 968 Albany-Shaker Road - -------------------------------------------------------------------------------- CITY, STATE, ZIP CODE Latham, NY 12110 - -------------------------------------------------------------------------------- |_| GRANT |X| COOPERATIVE AGREEMENT - -------------------------------------------------------------------------------- ACCOUNTING CODE **SEE BELOW - -------------------------------------------------------------------------------- AWARD NUMBER 70NANB8H4039 - -------------------------------------------------------------------------------- AMENDMENT NUMBER 02 - -------------------------------------------------------------------------------- EFFECTIVE DATE May 10, 1999 - -------------------------------------------------------------------------------- EXTEND WORK COMPLETION TO - -------------------------------------------------------------------------------- DEPARTMENT OF COMMERCE OPERATING UNIT NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY, GRANTS OFFICE BUILDING 411, ROOM A143, 100 BUREAU DRIVE, STOP 3576, GAITHERSBURG, MARYLAND 20899-3576 - -------------------------------------------------------------------------------- PREVIOUS TOTAL COSTS ARE REVISED AS FOLLOWS: ESTIMATED COSTS ADD DEDUCT ESTIMATED COST - -------------------------------------------------------------------------------- FEDERAL SHARE OF COST $4,737,848 $-0- $-0- $4,737,848 - -------------------------------------------------------------------------------- RECIPIENT SHARE OF COST $5,000,000 $-0- $2,204 $4,997,796 - -------------------------------------------------------------------------------- TOTAL ESTIMATED COST $9,737,848 $-0- $2,204 $9,735,644 - -------------------------------------------------------------------------------- REASON(S) FOR AMENDMENT Project Title: Distributed Premium Power Fuel Cell Systems Incorporating Novel Materials and Assembly Techniques under Advanced Technology Program (ATP) 98-03 This cooperative agreement is being amended to (1) approve the substitution of Polyfuel, Inc. and SRI International for W.L. Gore as joint venture partners, as requested by Plug Power, LLC; (2) change the project date from 02/28/99 - 02/27/01 to 05/10/99 - 5/09/01, per the Recipient's request dated 05/05/99; (3) approve the changes to the statement of work (SOW) specified in the Recipient's 02/05/99 submission; (4) remove contingency A-D established in Article (8) JV Contingency of the ATP Special Award Conditions; (5) approve revised budgets for years one and two, per the Recipient's request dated April 16, 1999; and (6) indicate on the attached, those terms and conditions affected by this action, and any administrative or statutory requirements. - -------------------------------------------------------------------------------- This Amendment approved by the Grants Officer is issued in triplicate and constitutes an obligation of Federal funding. By signing the three documents, the Recipient agrees to comply with the Amendment provisions checked below and attached, as well as previous provisions incorporated into the Award. Upon acceptance by the Recipient, two signed Amendment documents shall be returned to the Grants Officer and the third document shall be retained by the Recipient. If not signed and returned by the Recipient within 15 days of receipt, the Grants Officer may declare this Amendment null and void. |X| Special Award Conditions |X| Line Item Budget PLEASE RETAIN FOR YOUR RECORDS |_| Other(s): ----------------------------------------------------------- - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- **ACCOUNTING CODE: cc: 8/474-0342 Obj. Cl. 4110 Req. No. 8/474-4273 $0.00 - ------------------------------------------------------------------------- B-AE93-N-H-F-N-A-36-41399 EIN: 16-1528998 474/G. Ceasar - -------------------------------------------------------------------------------- SIGNATURE OF DEPARTMENT OF COMMERCE GRANTS OFFICER TITLE DATE Lois McDuffee /s/ Lois McDuffee Grants Officer 5/18/99 - -------------------------------------------------------------------------------- TYPED NAME AND SIGNATURE OF AUTHORIZED RECIPIENT OFFICIAL TITLE DATE William Acker /s/ William Acker Vice President 6/21/99 - -------------------------------------------------------------------------------- ELECTRONIC FORM 3 SPECIAL AWARD CONDITIONS ADVANCED TECHNOLOGY PROGRAM - JOINT VENTURE PLUG POWER, LLC COOPERATIVE AGREEMENT NO. 70NANB8H4039 AMENDMENT NO. 2 THE FOLLOWING SPECIAL AWARD CONDITIONS ARE AMENDED: 2. JOINT VENTURE MEMBER(S) The organization(s) named below have been approved as joint venture member(s) to conduct research described in the Recipient's proposal which is incorporated into this award. Any changes or new member(s) must be approved in writing by the Grants Officer: 1) Plug Power, LLC, Latham, NY 2) SRI International 333 Ravenswood Avenue Menlo Park, CA 94025 3) Polyfuel, Inc. 333 Ravenswood Avenue Menlo Park, CA 94025 7. FUNDING LIMITATIONS The scope of work and budget incorporated into this award covers a two-year period (referred to as the "project period") for a total amount of $4,737,848.00 in Federal funds. However, Federal funding available at this time is limited to $2,529,644.00 for the first year period (referred to as the "budget period"). Receipt of any additional funding up to the level projected under this award is contingent upon the availability of funds from Congress, satisfactory performance, and will be at the sole discretion the National Institute of Standards and Technology (NIST). The Recipient may not obligate, incur any expenditures, nor engage in any commitments which involve any amount in excess of the Federal amount presently available. No legal liability exists or will result on the part of the Federal Government for payment of any portion of the remaining funds which have not been made available under the award. If additional funds are not made available, any expenses incurred related to closeout activities must be funded from the amount already made available under this award. The notice of availability or non-availability of additional funding for the second and final year(s) will be made in writing by the Grants Officer. Only the Grants Officer is authorized to obligate funds. No other verbal or written notice should be relied upon by the Recipient. Anticipated Future Funding: Year 2: $2,208,204.00* (From 05/10/00 to 05/09/01) 8. JV CONTINGENCY: The final executed Joint Venture Agreement is hereby approved by the Grants Officer: In addition the notification requirements are fulfilled: Accordingly, contingencies A.-D., shown in amendment number one (1) are deleted. 9. COST SHARE For the first year period, the cost sharing ratio applicable to this award is the Recipient's contribution of 51.25 ($2,659,370) and NIST's contribution of 48.75 ($2,529,644). Recipients must meet or exceed the cost share ratio on a quarterly financial reporting basis. - ---------- * Of this amount $230,367 was previously obligated in the original award. Special Award Conditions/ATP-JV/05-99 ESTIMATED MULTI-YEAR BUDGET - JOINT VENTURE YEAR: 1 CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS.
Polyfuel SRI Plug Power Total -------- ---------- ---------- ----- 1. Object Class Category A. Technical Personnel Salaries/Wages [***] [***] [***] [***] B. Technical Personnel Fringe Benefits [***] [***] [***] [***] C. Administrative Personnel Salaries/Wages [***] [***] [***] [***] D. Administrative Personnel Fringe Benefits [***] [***] [***] [***] E. Travel [***] [***] [***] [***] F. Equipment [***] [***] [***] [***] G. Materials/Supplies [***] [***] [***] [***] H. Subcontracts [***] [***] [***] [***] I. Other [***] [***] [***] [***] J. Total Direct Costs (Lines A thru I) [***] [***] [***] [***] K. Total Indirect Costs [***] [***] [***] [***] L. Total Costs (Lines J & K) [***] [***] [***] [***] M. Non ATP Funds [***] [***] [***] [***] N. ATP Funds Requested [***] [***] [***] [***] 2. Sources of Funds A. ATP (Same as Line N) [***] [***] [***] [***] B. Plug Power [***] [***] [***] [***] C. Gore [***] [***] [***] [***] D. E. Total Sources of Funds (Same as Line L] [***] [***] [***] [***] 3. Tasks A. Phase I [***] [***] [***] [***] B. Phase II [***] [***] [***] [***] C. Phase III [***] [***] [***] [***] D. Phase IV [***] [***] [***] [***] E. F. G. H. I. Total Costs of All Tasks (Same as Line L) [***] [***] [***] [***]
ESTIMATED MULTI-YEAR BUDGET - JOINT VENTURE YEAR: 2
Polyfuel SRI Plug Power Total -------- ---------- ---------- ----- 1. Object Class Category A. Technical Personnel Salaries/Wages [***] [***] [***] [***] B. Technical Personnel Fringe Benefits [***] [***] [***] [***] C. Administrative Personnel Salaries/Wages [***] [***] [***] [***] D. Administrative Personnel Fringe Benefits [***] [***] [***] [***] E. Travel [***] [***] [***] [***] F. Equipment [***] [***] [***] [***] G. Materials/Supplies [***] [***] [***] [***] H. Subcontracts [***] [***] [***] [***] I. Other [***] [***] [***] [***] J. Total Direct Costs (Lines A thru I) [***] [***] [***] [***] K. Total Indirect Costs [***] [***] [***] [***] L. Total Costs (Lines J & K) [***] [***] [***] [***] M. Non ATP Funds [***] [***] [***] [***] N. ATP Funds Requested [***] [***] [***] [***] 2. Sources of Funds A. ATP (Same as Line N) [***] [***] [***] [***] B. Plug Power [***] [***] [***] [***] C. Gore [***] [***] [***] [***] D. E. Total Sources of Funds (Same as Line L] [***] [***] [***] [***] 3. Tasks A. Phase I [***] [***] [***] [***] B. Phase II [***] [***] [***] [***] C. Phase III [***] [***] [***] [***] D. Phase IV [***] [***] [***] [***] E. F. G. H. I. Total Costs of All Tasks (Same as Line L) [***] [***] [***] [***]
ESTIMATED MULTI-YEAR BUDGET - JOINT VENTURE YEAR: TOTAL
Polyfuel SRI Plug Power Total -------- ---------- ---------- ----- 1. Object Class Category A. Technical Personnel Salaries/Wages [***] [***] [***] [***] B. Technical Personnel Fringe Benefits [***] [***] [***] [***] C. Administrative Personnel Salaries/Wages [***] [***] [***] [***] D. Administrative Personnel Fringe Benefits [***] [***] [***] [***] E. Travel [***] [***] [***] [***] F. Equipment [***] [***] [***] [***] G. Materials/Supplies [***] [***] [***] [***] H. Subcontracts [***] [***] [***] [***] I. Other [***] [***] [***] [***] J. Total Direct Costs (Lines A thru I) [***] [***] [***] [***] K. Total Indirect Costs [***] [***] [***] [***] L. Total Costs (Lines J & K) [***] [***] [***] [***] M. Non ATP Funds [***] [***] [***] [***] N. ATP Funds Requested [***] [***] [***] [***] 2. Sources of Funds A. ATP (Same as Line N) [***] [***] [***] [***] B. Plug Power [***] [***] [***] [***] C. Gore [***] [***] [***] [***] D. E. Total Sources of Funds (Same as Line L] [***] [***] [***] [***] 3. Tasks A. Phase I [***] [***] [***] [***] B. Phase II [***] [***] [***] [***] C. Phase III [***] [***] [***] [***] D. Phase IV [***] [***] [***] [***] E. F. G. H. I. Total Costs of All Tasks (Same as Line L) [***] [***] [***] [***]
[***] Note: All numbers in this chart have been omitted pursuant to Rule 406 under the Securities Act and filed separately with the Securities and Exchange Commission.
Program Year 1 Year 2 Total -------- -------- --------- Quarterly Costs Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total SRI International [***] Poly Fuel Poly Power Quarterly Cost Share SRI International Poly Fuel Poly Power Total Costs Quarterly ATP Funds Requested
EX-10.19 10 COOPERATIVE RESEARCH & DEVELOPMENT AGREEMENT CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. Exhibit 10.19 A COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENT Between PLUG POWER, L.L.C. and U. S. ARMY BENET LABORATORIES A. Whereas, the Federal Technology Transfer Act of 1986, 15 USC3710a, provides each Federal agency with the authority to permit the Directors of Government-operated Federal Laboratories to enter into Cooperative Research and Development Agreements (CRADA's) with Federal and non-Federal entities, including private firms and organizations. This authority allows Federal laboratories to accept, retain, and use funds, personnel, services, and property from collaborating parties and to provided personnel services, and property to collaborating parties. This authority also includes the disposition of patent rights in any inventions, which may result from such collaboration, or by delegation of the Assistant Secretary of the Army for Research, Development and Acquisition, other patent rights which are owned by the Government. B. Whereas, the U.S. Army BENET Laboratories (BENET) has an installation and extensive state-of-the art infrastructure required to support an array of unique technologies, in Armaments, Munitions and in enabling technologies. BENET has the responsibility to make its procedures, processes and technologies available for use and transfer to the private sector. BENET has unique technologies and facilities in specialized materials, simulation and analysis for prototype fabrication, which PLUG POWER desires to adapt for commercial application. C. Whereas, PLUG POWER, L.L.C. (PLUG POWER) desires to collaborate with BENET in the business of research, development, and engineering for the purpose of transferring unique process technologies from the United States Army for use and application by PLUG POWER for a commercial application. NOW, THEREFORE, the parties agree as follows: Article 1. Definitions. As used in this Agreement, the following terms shall have the following meanings, and such meanings should be equally applicable to both the singular and plural forms of the terms defined: 1.1 "Agreement" means this Cooperative Research and Development Agreement. 1.2 "Invention" means any invention or discovery, which is or may be patentable or otherwise protected, under Title 35 of the United States Code. 1.3 "Made" in relation to any Invention means the conception or first actual reduction to practice of such Invention. 1.4 "Proprietary Information" means any patent rights, copyrights, trademark rights, trade secrets, mask works, proprietary information or data, moral rights, and know-how developed by PLUG POWER prior to, in the course of or subsequent to, this Agreement that: (i) is not generally known or available from other sources without obligation concerning its confidentiality; (ii) has not been made available by the owners to others without obligation concerning its confidentiality; and (iii) is not already available to the Government without obligation concerning its confidentiality, and does not constitute a Subject Invention, Subject Data or Protected CRADA Information. 1.5 "Subject Data" means all recorded information first produced in the performance of this Agreement. 1.6 "Subject Invention" means any invention made in the performance of work under this Agreement. 1.7 "Protected CRADA Information" means any patent rights, copyrights, trademark rights, trade secrets, mask works, proprietary information or data, moral rights, and know-how, developed in the course of this Agreement and directly related to the Statement of Work, by a BENET or PLUG POWER employee assigned to this project by his or her employer. Article 2. Cooperate Research. 2.1 Statement of Work. Cooperative research performed under this Agreement shall be performed in accordance with the Statement of Work (SOW), incorporated as a part of this Agreement as Appendix A. Each party agrees to participate in the cooperative research and to utilize such personnel, resources, facilities, equipment, skills, know-how and information, as it considers necessary, consistent with its own policies, missions, and requirements. Work tasks will be added to Statement of Work and will become part of this Agreement and recorded as part of Appendix A. The work will be task-or-performance oriented. 2.2 Multiple Parties and Separate Technologies: BENET has unique technologies in several related but distinct areas to include, but not limited to: Mounts, Fire Control, and the enabling sciences and discipline. In addition, BENET has expertise located within Watervliet Arsenal. 2.3 Review of Work. Periodic conferences shall be held between BENET personnel and PLUG POWER personnel for the purpose of reviewing the progress of the work. It is understood that the nature of this cooperative research is such that completion within the limit of financial support allocated, cannot be guaranteed. Accordingly, it is agreed that all sponsored research is to be performed on a best efforts basis. It is agreed that individual work 2 tasks incorporated into the Statement of Work will make use of project management techniques detailing where appropriate, cost, schedule and technical milestone considerations to mitigate and control risk. 2.4 Change in Scope. The parties shall make a good faith effort to agree on any necessary changes to the SOW and make the changes by written notice. The parties agree that increases and decreases in effort may by mutual agreement not be considered a change in scope, minimizing administrative delays in the execution of effort. 2.5 Research and Development (R&D) Team. To the extent that the conduct of sponsored research requires a joint technical effort, PLUG POWER and BENET agree to establish a joint research and development team (the "TEAM"). The Team shall conduct cooperative research in accordance with the SOW. Each party shall pledge to make available to the Team such resources, facilities, equipment, skills, know-how, and information, as it considers necessary and appropriate. Both parties pledge to support the Team in a mutually cooperative manner, on a best effort basis, consistent with their respective policies, missions, and requirements. Each party may support changes to the SOW or to the scope and direction of the effort which, if agreed to by the other party, shall first be made to the SOW, and then implemented by the Team. While assigned to the Team, members shall continue to remain employed by their respective employers with full benefits and salary, and will not be considered to be employees of the other party for any reason. Each parties shall be solely responsible for the composition their of Team members. Article 3. Reports. 3.1 Progress Reports. After this Agreement enters into force, BENET and PLUG POWER shall exchange periodic written reports during the term of this Agreement on the progress of their work, and the results being obtained, and shall make available to the extent reasonably requested, other project information in sufficient detail to explain the progress of the work. Specific report content and timing will be defined in the Statement of Work. 3.2 Final Report. BENET and PLUG POWER shall prepare a written report within three (3) months after expiration of this Agreement. This report shall set forth the technical progress made, identifying such problems as may have been encountered, and establishing goals and objectives requiring further effort. Inclusion of Proprietary Information or Subject Information in deliverable reports shall be subject to the provisions of Article 7.2. In addition, a portion of the results not including Proprietary Information, may be prepared for publication in a journal or conference, as appropriate, by BENET or PLUG POWER, with co-authorship, as appropriate, subject to the provisions of 7.4. Article 4. Financial Obligation Salary and Travel. BENET and PLUG POWER shall provide support to their respective personnel in performance of this Agreement. Attached Statements of Work set forth 3 in Appendix A will detail financial terms and conditions. If or when appropriate and required by a scope of work, reimbursement required by BENET will be provided by PLUG POWER. It is noted that reimbursement does not constitute a sale or transfer of ownership of property. Article 5. Title to Property. 5.1 Equipment. All equipment first acquired under this Agreement, and all Government Furnished Equipment (GFE), if any, shall be the property of BENET except that title to items of equipment developed or purchased by PLUG POWER, or provided to BENET by PLUG POWER or acquired by BENET with funds supplied by PLUG POWER, shall remain or vest in PLUG POWER. ANY GFE shall be used solely for the performance of the effort contemplated by this Agreement. Upon completion of research under this Agreement, PLUG POWER shall be responsible for all costs attendant to the maintenance, removal, storage, and shipping of their equipment to their own facility. Prototype hardware, designed, produced and transferred by the Government to PLUG POWER will be considered GFE, with the Government retaining title. The applicable sections of Part 45 of the Federal Acquisition Regulations shall apply to PLUG POWER's management and disposition of GFE furnished under this Agreement. 5.2. Software 5.2.1. PLUG POWER Employee Software. Title to any copyright in software written by PLUG POWER employees necessary to perform this Agreement shall be held by PLUG POWER. PLUG POWER agrees to grant to the U.S. Government a non-exclusive, irrevocable, paid-up license for military applications only, to use or have used, throughout the world by, or on behalf of the U.S. Government, the copyright covering said software. 5.2.2. Joint Employee Software. Title to any copyright in software written jointly by BENET and PLUG POWER employees in the course of performance of this Agreement, shall be held by PLUG POWER. PLUG POWER agrees to grant to the U.S. Government a nonexclusive, irrevocable, paid-up license for military applications only, to use or have used, throughout the world by, or on behalf of the U.S. Government, the copyright covering said software. 5.2.3 Limited Scope. PLUG POWER shall retain ownership in any software or algorithms to which PLUG POWER has title prior to this Agreement, or written for its own requirements during the course of this Agreement which are not necessary for the performance of work under this Agreement. 5.2.4. BENET Employee Software. The U.S. Government hereby grants to PLUG POWER an exclusive, irrevocable, transferable, worldwide, paid-up license to make, use or sell any software written by BENET employees in the performance of this Agreement. 4 5.2.5 BENET Laboratories may provide interface drawings and other technical data to collaborators as required or negotiated for purposes other than for production of Large Caliber Cannon. In this instance Cannon is defined as consisting of the Cannon Tube, to include thermal management assembles, the Breech, Mechanism, to include breech actuation assemblies, the Bore evacuator and the Muzzle Break. Article 6. Inventions and Patents. 6.1 Reporting. The parties shall promptly report to each other all Subject Inventions made in the performance of work under this Agreement. All Subject Inventions made in the performance of work under this Agreement shall be listed in the Final Report required by this Agreement. 6.2 Employee Inventions. BENET, on behalf of the U.S. Government, agrees that PLUG POWER shall retain title to any PLUG POWER employee Subject Invention. PLUG POWER may file patent applications on such Subject Inventions at its own expense. PLUG POWER further agrees to grant to the U.S. Government on PLUG POWER Subject inventions a nonexclusive, irrevocable, paid-up license in the patents covering a Subject Invention, to practice or have practiced, throughout the world by, or on behalf of the U.S. Government, the Subject Inventions which are covered by a resulting patent except for any application related to fuel cells. Such non-exclusive license shall be evidenced by a confirmatory license agreement prepared by PLUG POWER in a form satisfactory to BENET. 6.3. BENET Employee Inventions. BENET, on behalf of the U.S. Government, shall have the initial option to retain title to, and file patents on, each Subject Invention made by its employees. BENET may file patent applications thereon at its own expense. BENET, on behalf of the U.S. Government, agrees to grant to PLUG POWER on those BENET employee Subject Inventions upon which the U.S. Government has exercised the option to retain title to, a nonexclusive, irrevocable, transferable, paid-up license in the patents covering a Subject Invention, to practice or have practiced, throughout the world by, or on behalf of PLUG POWER, the Subject Inventions, which are covered by a resulting patent. The license on Subject Inventions excludes the right to produce or have produced Large Caliber Cannon at any facility other than Watervliet Arsenal. 6.4 Joint Employee Inventions. PLUG POWER have the initial option to file patent applications at its own expense on joint inventions, subject to the conditions specified in Paragraph 6.5. PLUG POWER is hereby granted all rights to patents filed in its name for joint inventions for all applications related to fuel cells, and the U.S. Government is hereby granted an exclusive, irrevocable, paid-up U.S. Government license to practice or have practiced, throughout the world by, or on behalf of the U.S. Government, the invention which is covered by a resulting patent for all applications except those related to fuel cell applications. 5 6.5 Filing of Patent Applications. The party having the right to retain title and file patent applications on a specific Subject Invention may elect not to file patent applications, provided it so advises the other party within 300 days from the date it reports the Subject Inventions to the other party. Thereafter, the other party may elect to file patent applications on the Subject Invention and the party initially reporting the Subject Invention agrees to assign its right, title, and interest in the Subject Invention to the other party. The assignment of the entire right, title, and interest to the other party, pursuant to this paragraph, shall be subject to the retention by the party assigning title of a nonexclusive, irrevocable, transferable, paid-up license to practice, or have practiced, the Subject Invention the world. 6.6 Patent Expenses. The expenses attendant to the filing of patent applications shall be borne by the party filing the patent applications. Each party shall provide the other party with copies of the patent applications it files on any Subject Invention along with the power to inspect and make copies of all documents retained in the official patent application files by the applicable patent office. The parties agree to reasonably cooperate with each other in the preparation and filing of patent applications resulting from this Agreement. 6.7 Maintenance Fees. The fees payable to the U.S. Patent and Trademark Office, in order to maintain the patent's enforcement, will be payable by the owner of the patent, at that party's option. In the event that BENET is the owner of the patent and PLUG POWER holds an exclusive license in said patent, PLUG POWER shall pay all maintenance fees for said patent, but shall not be required to pay any litigation fees for said patent. If deciding not to pay the maintenance fee, PLUG POWER must relinquish their exclusive license rights in said patent and must give BENET reasonable notification so as to permit BENET the option of paying said fee. In the event that PLUG POWER elects not to pay the maintenance fees and BENET elects to exercise it's option to pay said fee, PLUG POWER will retain a non-exclusive, irrevocable, transferable, paid-up license in said patent 6.8 Exclusive License 6.8.1 BENET, on behalf of the U.S. Government, agrees to grant to PLUG POWER a limited term exclusive, transferable, worldwide license in each U.S. patent application, and patents issued thereon, covering a BENET employee Subject Invention, which is filed by BENET on behalf of the U.S. Government subject to the reservation of a non-exclusive, irrevocable, paid-up license to practice and have practiced the Subject Invention on behalf of the U.S. Government. 6.8.2 Exclusive License Terms. PLUG POWER shall elect or decline to exercise its rights to acquire a limited term exclusive license to any Subject Invention(s) within six (6) months of being informed by BENET of the Subject Invention(s). A reasonable royalty rate and other terms of license shall be negotiated promptly in good faith and in conformance with the laws of the United States. Such exclusive license shall be for an initial term ending seven (7) years from the date of each patent and with respect to each such patent shall be 6 automatically renewable for successive seven (7) year periods provided PLUG POWER or any PLUG POWER sublicensee: (i) is then conducting related research, or (ii) continues to commercialize the subject matter covered by such patent(s). 6.8.3 Other BENET Inventions. This Agreement does not grant an implied license to PLUG POWER with respect to any other government inventions, including any BENET inventions not covered by Article 6.8.2. BENET agrees to grant an exclusive, transferable, worldwide license to PLUG POWER to such other BENET Inventions if requested by PLUG POWER at fair and reasonable terms, if such an exclusive license is necessary for PLUG POWER to practice, or have practice, any BENET Subject Invention under this Agreement, but only to the extent that BENET has an unencumbered right and/or authority to do so. Nothing in this Agreement shall be construed as a grant or an agreement to grant any license with respect to any invention made by any other U.S. Army laboratory or any other Government agency or laboratory. 6.8.4 Subsidiaries and Affiliates. The license to PLUG POWER under this Agreement also extend to PLUG POWER's United States subsidiaries. 6.8.5 Other PLUG POWER Inventions. This Agreement does not grant an implied license to BENET with respect to any other PLUG POWER inventions, including any PLUG POWER inventions not covered by Section 6 of this Agreement. PLUG POWER agrees to grant a nonexclusive, transferable, worldwide license to BENET to such other PLUG POWER inventions if requested by BENET at fair and reasonable terms, if such an nonexclusive license is necessary for BENET to practice, or have practiced, any PLUG POWER Subject Invention under this Agreement, but only to the extent that PLUG POWER has an unencumbered right and/or authority to do so. Nothing in this Agreement shall be construed as a grant or an agreement to grant any license with respect to any invention made by PLUG POWER. Article 7. Data and Publication 7.1 Rights. Subject Data shall be individually owned by the parties hereto. Either party shall, upon request, have the right to review all Subject Data first produced under this Agreement which has not been delivered to the other party, except to the extent that such Subject Data is subject to a claim of confidence or privilege by a third party. 7.2 Proprietary Information. BENET agrees that any Proprietary Information furnished by PLUG POWER to BENET under this Agreement, or in contemplation of this Agreement, shall be used, reproduced and disclosed by BENET only for the purpose of carrying out this Agreement, and shall not be released by BENET to third parties unless 7 consent to the release is obtained from PLUG POWER. Proprietary Information which is disclosed verbally by PLUG POWER shall be identified as proprietary at the time of disclosure and then summarized in writing. Such summary shall be marked as Proprietary information and provided to BENET within ten (10) days after the verbal disclosure. PLUG POWER shall place a proprietary notice on all information it delivers to BENET under this Agreement which it asserts is proprietary. All Proprietary Information shall be protected for a period of five (5) years from disclosure to BENET. 7.3 Release Restrictions. BENET shall have the right to use all Subject Data for military purposes only, and shall not release such Subject Data publicly except when: (i) BENET in reporting results of sponsored research, may publish Subject Data in technical articles and other documents to the extent it determines to be appropriate unless such disclosure will adversely affect PLUG POWER's rights; and (ii) BENET may release such Subject Data where such release is required by law or court order provided that prior notice is provided to PLUG POWER to allow Plug POWER to obtain a Protective Order. 7.4 Publication. BENET and PLUG POWER agree to confer prior to the publication of Subject Data to assure that no Proprietary Information or protected CRADA information are released and that patent rights are not jeopardized. Prior written approval is required from the other party before a party hereto can submit a manuscript for review, which contains the results of the research under this Agreement, or prior to publication if no such review is made. Each party shall be offered an ample opportunity to review such proposed manuscript and to file patent applications in a timely manner. 7.5 Obligations as to Protected CRADA Information. Each party hereto may designate as Protected CRADA Information, as defined in Article 1, any Subject Data produced by its employees, and with the agreement of the other party, mark any Subject Data produced by the other party's employees. All such designated Protected CRADA Information shall be appropriately marked. For a period of five (5) years from the date Protected CRADA Information is produced, the parties hereto agree not to further disclose such Protected CRADA Information except: (1) as necessary to perform this CRADA; (2) as necessary for PLUG POWER to conduct its business; (3) as necessary for BENET to provide to other Government facilities, and only at those Government facilities with the same protection in place, or (4) as mutually agreed by the parties hereto in advance in writing. The obligations of the parties with respect to Protected CRADA Information, shall end sooner for any Protected CRADA Information which shall: (1) become publicly known without fault 8 of either party; (2) come into a party's possession without breach by that party of the obligations set forth in this Article; or (3) be independently developed by a party's employees who did not have access to the Protected CRADA Information. Article 8. Representations and Warranties. 8.1 Representations and Warranties of BENET. BENET hereby represents and warrants as follows: 8.1.1 Organization. BENET is a federal laboratory and is wholly owned by the Government of the United States and whose substantial purpose is the performance of research, development, and engineering. 8.1.2 Mission. The performance of the activities specified by this Agreement are consistent with the mission of BENET. 8.1.3 Authority. All prior reviews and approvals required by regulations or law have been obtained by BENET prior to the execution of this Agreement. The BENET official executing this Agreement has the requisite authority to do so. Notwithstanding the delegation of authority to execute this Agreement to the individual designated, that is the Director of BENET, the Secretary of the Army has reserved to the Assistant Secretary of the Army (Research, Development and Acquisition) the opportunity provided by 15 USC Sect. 3710a(c)(5)(A), to disapprove or require the modification of this Agreement within 30 days of the date it is presented to him or her by BENET. 8.1. Statutory Compliance. The BENET Director, prior to entering into this Agreement, has given special consideration to entering into CRADA's with small business firms and consortia involving small business firms. 8.2 Representations and Warranties. PLUG POWER hereby represents and warrants to BENET as follows: 8.2.1 Organization. PLUG POWER as of the date hereof, is duly organized, and incorporated in the state of Delaware, is in good standing and has the authority to operate as an entity; 8.2.2 POWER of Authority. PLUG POWER has the requisite power and authority to enter into this Agreement- and to perform according to terms thereof; 8.2.3 Due Authorization. PLUG POWER has taken all actions required to be taken by law, to authorize the execution and delivery of this Agreement; 8.2.4 No Violation. The execution and delivery of this Agreement does not contravene any material provision of, or constitute a material default under any material agreement binding on PLUG POWER or any valid order of any court, or any regulatory agency or other body having authority to which PLUG POWER is subject. 9 Article 9. Termination. 9.1 Termination by Mutual Consent. PLUG POWER and BENET may elect to terminate this Agreement, or portions thereof, at any time by mutual consent. 9.2 Termination by Unilateral Action. Either party may unilaterally terminate this entire Agreement at any time by giving the other party written notice, no less than 30 days prior to the desired termination date. Termination will consider any work in process and the financial effects on the parties. 9.3 Termination Procedures. In the event of termination, the parties shall specify by written notice the disposition of all property, patents, and other results of work accomplished or in progress, arising from or performed under this Agreement. Upon the receipt of written termination notice, the parties shall not take any new commitments that relate to this Agreement. Article 10. Disputes. 10.1 Settlement. Any dispute arising under this Agreement which is not disposed of by agreement of the co-principal investigators, shall be submitted jointly to the signatories of this Agreement. A joint decision of the signatories or their designees shall be the disposition of such dispute. However, nothing in this section shall prevent any party from pursuing any and all administrative and/or judicial remedies, which may be allowable. Article 11. Liability. 11.1 Property. Neither party shall be responsible for damages to any property provided to, or acquired by, the other party pursuant to this Agreement. 11.2 PLUG POWER Employees. PLUG POWER agrees to indemnify and hold harmless the U.S. Government for any loss, claim, damage, or liability of any kind involving any employee of PLUG POWER arising in connection with this Agreement, except to the extent that such loss, claim, damage, or liability is due to the negligence of BENET under the provision of the Federal Torts Claims Act. 11.3 No Warranty. Except as specifically stated elsewhere in this Agreement, BENET makes no express or implied warranty as to any matter whatsoever, including the conditions of the research or any invention or product, whether tangible or intangible; made, or developed under this Agreement, or the ownership, merchantability, or fitness for a particular purpose of the research or any invention or product. 11.4 Product and Other Liability as to the U.S. Government. PLUG POWER holds the U.S. Government harmless and indemnifies the U.S. government for all liabilities, demands, damages, expenses, and losses arising out of use by PLUG POWER of BENET's 10 research and technical developments or out of any use, sale, or other disposition by PLUG POWER of products made by the use of BENET's technical developments. 11.5 Indemnification. The U.S. government and PLUG POWER makes no express or implied warranty as to the conditions of the research or any intellectual property or product made, or developed under this Agreement, or the ownership, merchantability or fitness for a particular purpose of the research or resulting product. Neither the U.S. Government or PLUG POWER shall be liable for special, consequential, or incidental damages. Article 12. Miscellaneous 12.1 No benefits. No member of, or delegate to the United States congress, or resident commissioner, shall be admitted to any share or part of this Agreement, nor to any benefit that may arise therefrom; but this provision shall not be construed to extend to this Agreement, if made with a corporation for its general benefit. 12.2 Governing Law. This Agreement shall be governed by the laws of the United States Government. 12.3. Fair Access. This Agreement shall not restrict either party from entering into similar agreements. 12.4.a Notices. All notices pertaining to or required by this Agreement, shall be in writing and shall be signed by an authorized representative, and shall be delivered by hand or sent by certified mail, return receipt requested, with postage prepaid. 12.4.b Independent Contractors. The relationship of PLUG POWER to BENET/to this Agreement is-that of independent contractors and not as agents of-each or as joint ventures or partners. 12.5 Use of Name or Endorsement: (i) PLUG POWER shall not use the name of BENET, BENET Laboratories, Watervliet Arsenal or the Department of the Army, on any product or service which is directly or indirectly related to either this Agreement or any patent license or assignment agreement, which implements this Agreement without the prior approval of BENET; (ii) by entering into this Agreement, BENET does not directly or indirectly endorse any product or service provided, or to be provided, by PLUG POWER, its successors, assignees, or licensees. PLUG POWER shall not in any way imply that this Agreement is any endorsement of such products or service. 12.6 The rights specified in provision of this Agreement covering Inventions and Patents", "Exclusive License", "Data and Publication", "Product and Other Liability as to the U.S. Government" and "Indemnification" shall survive the termination or expiration of this Agreement. 11 Article 13. Duration of Agreement and Effective Date 13.1 Expiration of Agreement. This Agreement will automatically expire on 1 December 2003, unless it is revised by written notice and mutual consent. 13.2 Effective Date. This Agreement shall enter into force as of the date it is signed by -the last authorized representative of the parties. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as follows: For: PLUG POWER, L.L.C. /s/ Gary Mittleman ------------------------------------- Gary Mittleman President and Chief Executive Officer Date:_______________________ For: BENET and the U.S. Government /s/ Russell Fiscella ------------------------------------- Mr. Russell Fiscella Acting Director US Army BENET Laboratories Date:_______________________ 12 APPENDIX A STATEMENT OF WORK (SOW) The overall purpose of this CRADA is for PLUG POWER, L.L.C. to acquire from the US Army BENET Laboratories unique technology and services which will be applied by PLUG POWER for commercial applications. PLUG POWER desires to work with scientists and engineers of BENET to develop and commercialize new and innovative energy products. BENET scientists have unique knowledge in simulation and analysis, design and the application of- advanced materials. PLUG POWER is engaged in a commercial enterprise, which can apply BENET's technology to enhance product functionality, reliability and durability. This Agreement does not commit PLUG POWER to any expenditure of funds. Detailed work tasks and associated costs will be agreed to by the parties in advance of commencing work. Increases or decreases to this Agreement will be accomplished by a written amendment to this statement of Work, authorized by representatives of both PLUG POWER and BENET. 13 STATEMENT OF WORK Modification Number 001 Composite Plate Development Version 1.0 January 12, 1998 Background: PLUG POWER is investigating the use of conductive composite materials for commercial fabrication of PEM Fuel cell plates. Conductive plates can potentially offer the following benefits: . Low weight . Low piece cost . Corrosion resistance . Higher volume capability . Established manufacturing process and infrastructure . Ability to attain elaborate geometric features PLUG POWER has developed certain requirements and designs for the composition and geometry of composite plates and is progressing toward their development and eventual commercialization. PLUG POWER seeks to discover the material composition and molding process best suited for these composite plates. A successful composite plate design will have to attain acceptable electrical conductivity and mechanical properties. Short Term Test Plan 1 - To mold blocks of various material compositions for subsequent material property testing a. BENET Labs will fabricate a [***] simple mold plate. b. BENET Labs will use the mold plate to mold 4 plates from each of the following 6 composition formulas:
MIX 1 MIX 2 MIX 3 MIX 4 MIX 5 MIX 6 - ------------------------------------------------- [***] [***] [***] [***] [***] [***] [***] - ------------------------------------------------- [***] [***] [***] [***] [***] [***] [***] - ------------------------------------------------- [***] [***] [***] [***] [***] [***] [***] - ------------------------------------------------- [***] [***] [***] [***] [***] [***] [***] - -------------------------------------------------
c. Determine physical properties of the molded plates. d. PLUG POWER will perform conductivity and permeability tests on the plates. e. BENET Labs will perform mechanical testing on the plates including such tests as strength, toughness, creep, thermal expansion and thermal conductivity. f. BENET Labs will deliver to PLUG POWER all fabricated plates and test results. STATEMENT OF WORK Modification Number 001 Composite Plate Development Version 1.0 January 12, 1998 2 - Mold Plates using the material selected in the block testing a. PLUG POWER will fabricate low production volume molds. b. BENET Labs will use the PLUG POWER supplied molds to fabricate at least 04 plates using a PLUG POWER specified material formulation. c. BENET Labs will perform requested geometric and surface measurements of the formed plates. d. PLUG POWER will test plates and identify areas of improvement. e. BENET Labs will deliver to PLUG POWER all fabricated plates and test results. STATEMENT OF WORK Modification Number 001 Estimate of required time and materials Version 1.0 January 15, 1998 BENET Laboratories will assist PLUG POWER in investigating the use of [***] for commercial fabrication of PEM fuel cell plates. Reference PLUG POWER "[***] and Testing Version 1.0 Dated January 12, 1998." The following is an estimate of time and material costs required by BENET Laboratories to perform the work.
Task ID Task Name Materials Labor Estimate - ------- --------------------- --------- -------------- 2 Generate [***] mold drawing $ [***] [***] 3 Fabricate [***] mold $ [***] [***] 4 Procure Materials $ [***] [***] 5 Mold [***] trial plate $ [***] [***] 6 Mold [***] plates $ [***] [***] 7 Fabricate Property $ [***] [***] Specimens 8 Perform property tests $ [***] [***] 9 Specify property tests $ [***] [***] 10 Procure mold materials $ [***] [***] 12 Generate final mold drawings $ [***] [***] 13 Fabricate final molds $ [***] [***] 14 Inspect molds (WVA) $ [***] [***] 15 Mold Final plates $ [***] [***] 16 Inspect final plates (WVA) $ [***] [***] Total labor [***] Labor rate $ [***] Total Labor $ [***] Total Material $ [***] Grand Total $ [***]
Expenditures in excess of $ [***] by BENET Laboratories shall not be reimbursable unless authorized in advance by a written amendment to this Modification No. 1, executed by a representative of PLUG POWER. Approvals to Commence Work: For PLUG POWER: For BENET Laboratories ___________________________ ________________________________ ___________________________ ________________________________ STATEMENT OF WORK Modification Number 002 Plate Corrosion Investigation Version 1.0 February 17, 1998 Background: PLUG POWER is investigating the cause(s) of corrosion witnessed on fuel cell plates. Although the plates are fabricated from [***], a significant amount of "contamination" has been found on certain areas of cell plates. To ensure reliable fuel cell operation, the source(s) of this "contamination" must be identified and mitigated. PLUG POWER consequently seeks to enlist the assistance of BENET Laboratories to determine the origins and causes of this observed "contamination." Scope of Work BENET Laboratories personnel will utilize a variety of their metallurgical examination techniques, failure analysis skills, and analysis equipment to identify the species and causes of the observed contamination. a. PLUG POWER will provide to BENET Labs several contaminated fuel cell plates along with water samples and other components required to facilitate the investigation. b. PLUG POWER will familiarize BENET Labs personnel in the various functional aspects of the contaminated plates to permit comprehensive understanding of the potential corrosion mechanisms. c. BENET Labs will inspect the plates using non-destructive techniques in an effort to determine the origins and causes of the plate contamination. d. Only after receiving permission from PLUG POWER will BENET Labs be permitted to perform destructive examinations of the fuel cell plates. e. BENET Labs will provide interim reports of findings on an as required basis. f. BENET Labs will deliver to PLUG POWER an informal final of findings, along with all plate samples and associated materials upon completion of the investigation. STATEMENT OF WORK Modification Number 002 Estimate of required time and materials Version 1.0 January 15, 1998 BENET Laboratories will assist PLUG POWER in investigating the causes of contamination found on fuel cell plates. Reference PLUG POWER "Plate Corrosion Investigation Version 1.0 Dated February 17, 1998." The following is an estimate of time and material costs required by BENET Laboratories to perform the work.
Task ID Task Name Materials Labor Estimate - ------- --------- --------- -------------- 1 Analyze plates and write report $ [***] [***] Total Labor [***] Labor rate $ [***] Total Labor $ [***] Total Material $ [***] Grand Total $ [***]
Expenditures in excess of $[***] by BENET Laboratories shall not be reimbursable unless authorized in advance by a written amendment of this Modification No. 2, executed by a representative of PLUG POWER Approvals to Commence Work: For PLUG POWER: For BENET Laboratories ___________________________ ____________________________________ Date:______________________ Date:_______________________________ STATEMENT OF WORK Modification Number 003 Estimate of required time and materials Version 1.0 February 18, 1998 (modified 20 Feb 98; BENET estimates added) BENET Laboratories will assist PLUG POWER in analyzing components of the [***] test fuel cell. Reference PLUG POWER "[***] Test Study, Version 1.0 Dated February 18, 1998." The following is an estimate of time and material costs required by BENET Laboratories to perform the work.
Task ID Task Name Materials Labor Estimate - --------- ---------------------------------- --------- -------------- 1 Support and witnessing disassembly $[***] [***] 2 Analysis of Water Samples $[***] [***] 3 Analysis of Hardware Components $[***] [***] Total Labor [***] Labor rate $[***] Total Labor $[***] Total Material $[***] Grand Total $[***]
Expenditures in excess of $[***] by BENET Laboratories shall not be reimbursable unless authorized in advance by a written amendment to this Modification No. 3, executed by a representative of PLUG POWER Approvals to Commence Work: For PLUG POWER: For BENET Laboratories ___________________________________ ________________________________ Date:______________________________ Date:_______________________________ STATEMENT OF WORK Modification Number 003 [***] Test Study ---------------- Version 1.0 February 18, 1998 (modified 20 Feb 98; BENET estimates added) Background: PLUG POWER is investigating the effects of [***] on fuel cell components. To begin the study, PLUG POWER will be conducting a series of [***] long tests [***]. Each fuel cell will be operated under controlled conditions, and periodically monitored for electrical performance. Additionally, water samples from the fuel cell exhaust ports will be gathered on a periodic basis. At the conclusion of the [***], the fuel cell will be disassembled and inspected for a variety of mechanical, and electrochemical attributes. PLUG POWER wishes to enlist the assistance of BENET Laboratories in performing metallurgical and other physical analysis procedures. Scope of Work Following the conclusion of the first [***] test, PLUG POWER will disassemble the fuel cell. Components of the fuel cell, and a collection of water samples will be delivered to BENET Laboratories personnel for their examination and analysis as described below. Part 1 - Support and witnessing of the disassembly a. BENET laboratory personnel will attend the disassembly of the [***] test cell. By witnessing the disassembly, they will gain better first-hand knowledge of the condition of the assembly, and be able to advise potential analysis options on a "real-time" basis. b. PLUG POWER will provide to BENET labs the following: 1 - Water samples as defined below 2 - Two reactant flow field plates (anode and cathode) Part 2 - Analysis of Water samples a. BENET Labs personnel will analyze water samples provided to them by PLUG POWER for chemical content. The samples will consist of: 1 - [***] 2 - [***] 3 - [***] 4 - [***] Using appropriate techniques, BENET personnel will test each water sample for evidence of [***]. [***] will also be documented. Part 3 - Analysis of hardware components a. BENET Labs personnel will inspect the reactant flow field plates using non-destructive techniques in an effort to determine the origins and causes of any potential plate contamination. Plates will be provided to BENET Labs with components attached, and careful disassembly will be required. Plug Power will provide disassembly guidance as required. Photographs of the plates should be made documenting any areas of interest during the disassembly process. b. BENET Labs personnel will inspect the plates and components for unusual conditions (i.e., corrosion, pitting, stains, etc.) as required, using electron microscopic and other surface examination techniques. c. BENET Labs will provide interim reports of findings on an as required basis. d. BENET Labs will deliver to PLUG POWER an informal final report of findings, along with all plates and materials upon completion of the investigation. STATEMENT OF WORK Modification Number 004 [***] STUDY Version 2.0 June l, 1998 (Revised per May 29, 1998 Meeting) Background: PLUG POWER is investigating the effects of [***] on fuel cell components. To begin the study, PLUG POWER will be conducting a series of [***], long tests of [***] fuel cells. Each fuel cell will be operated under controlled conclusions, and periodically monitored for electrical performance. At the conclusion of the [***], the fuel cell will be disassembled and inspected for a variety of mechanical, and electrochemical attributes. PLUG POWER wishes to enlist the assistance of BENET Laboratories in performing chemical analysis procedures on the [***], and [***] components of one such test cell. Scope of Work Following the conclusion of the first [***] test, PLUG POWER will disassemble the fuel cell. Components of the fuel cell. ([***] material will be delivered to BENET Laboratories personnel for their examination and analysis as described below. Part 1 - [***] Level Analysis of the [***] a. BENET laboratory personnel will utilize [***] (or other appropriate) techniques to analyze the content of [***] supplied by PLUG POWER. Each sample must be properly [***]. All samples must be [***]. The instrument must be calibrated to include the expected level of [***] for the samples. b. PLUG POWER will provide to BENET labs the following: 1- Two (2) sample [***] each measuring approximately [***]. The total expected [***]. And the total expected [***] on each sample. One sample is labeled the "Control" [***], and the second [***] is labeled the Test Sample." Part 2 - [***] Analysis a. Sub-task a. is no longer needed and has been deleted. b. Sub-task b. is no longer needed and has been deleted. c. BENET Labs personnel will then determine the weight of [***] present in each sample of the [***] provided by PLUG POWER. d. PLUG POWER will provide to BENET labs the following: 1 - [***] labeled "[***]." 2 - [***] labeled "[***]." 3 - [***] labeled "[***]." STATEMENT OF WORK Modification Number 004 ESTIMATE OF REQUIRED TIME AND MATERIALS Version 1.0 February 18, 1998 BENET Laboratories will assist PLUG POWER in analyzing components of the [***] test fuel cell. Reference PLUG POWER "[***] Study, Version 1.0 Dated March 2, 1998." The following is an estimate of time and material costs required by BENET Laboratories to perform the work.
Task ID Task Name Materials Labor Estimate - ------------------ ----------------------------- ----------- -------------- 1 [***] level analysis $ [***] [***] 2 [***] analysis $ [***] [***] 3 Additional water sample tests $ [***] [***] Total Labor [***] Labor rate $[***] Total Labor $[***] Total Material $[***] Grand Total $[***]
Expenditures in excess of $[***] by BENET Laboratories shall not be reimbursable unless authorized in advance by a written amendment of this Modification No. 4, executed by a representative of PLUG POWER Approvals to Commence Work: For PLUG POWER: For BENET Laboratories ___________________________ ________________________________ Date:______________________ Date:_______________________________ STATEMENT OF WORK Task Number 005 WATER SAMPLE ANALYSIS August 10, 1998 Background: PLUG POWER is developing PEM fuel cell systems for residential application. In this work, water samples will be collected and analyzed at various locations in a residential fuel cell system to identify contamination sources in water. Scope of Work Plug Power will provide BENET lab with the following water samples for [***] and [***] analysis 1. Plug Power [***] water 2. [***] water from the [***] 3. [***] in the [***] 4. water from [***] 5. water from the [***] in the [***] 6. [***] water [***] should be used for [***] analysis, while [***] should be used for [***] analysis STATEMENT OF WORK Task Number 005 ESTIMATE OF REQUIRED TIME AND MATERIALS August 10, 1998 BENET Laboratories Will assist PLUG POWER in analyzing the water samples provided. The following is an estimate of time and material costs required by BENET Laboratories to perform the work.
Task ID Task Name Materials Labor Estimate - --------- --------- --------- -------------- 0 [***] [***] [***] 1 [***] [***] [***] Total Labor [***] Labor rate $[***] Total Labor $[***] Total Material $[***] Grand Total $[***]
Expenditures in excess of $[***] by BENET Laboratories shall not be reimbursable unless authorized in advance by a written amendment to this Statement of Work, Task Number 5, executed by a representative of PLUG POWER. Approvals to Commence Work: For PLUG POWER: For BENET Laboratories _________________________ ________________________ Date:____________________ Date:____________________ STATEMENT OF WORK Mod. 6 & 7 Composite Plate Development Version 1.0 June 9, 1998 Background: Plug Power is investigating the use of conductive composite materials for commercial fabrication of PEM Fuel Cell plates. Composite plates can potentially offer the following benefits: . Corrosion resistance . Low weight . Low price cost . High volume capability . Established manufacturing process and infrastructure . Ability to attain elaborate geometric features Plug Power plans to test and fabricate several fuel cell stacks composed of composite plates. Much research has been spent exploring which material compositions and molding processes are best suited for composite plates. The composite plates design must incorporate acceptable electrical conductivity and mechanical properties in order to function in a fuel cell stack. The information that has been gathered to date will be utilized to mold a) several small fuel cell stacks for testing purposes and b) a final [***] stack for automotive testing in late August. Scope of Work: 1. Replicate LANL's latest material mix: a. Benet Laboratories will set-up press b. Benet Laboratories will mold [***] using the latest LANL recipe 2. Mold sample plates using- LANL's latest mix: a. Benet Laboratories will use large plate mold supplied by Plug Power to mold sample plate at 3 web thicknesses. b. Benet will measure conductivity on molded samples. c. Benet Laboratories will perform geometric and surface measurements to ensure compatibility between plates produced and drawings provided. 3. Molding of [***] plates for testing in final [***] fuel cell stack. a. Benet Laboratories will mix the necessary materials based on compositions and procedure requested. b. Benet Laboratories will post-cure the molded plates for the required time to eliminate any material leakage after delivery to Plug Power. c. Benet laboratories will mold [***] with surface and material consistencies allowing them to be placed in final working fuel cell stack. STATEMENT OF WORK Estimate of required time and materials Version 1.0 June 9, 1998
Task ID Task Name Materials Labor Estimate - --------- ------------------------ --------- -------------- 1 Replicate LANL's latest material mix $[***] [***] 2 Mold Sample [***] Plates $[***] [***] 3 Mold [***] Plates $[***] [***] Total Labor [***] Labor rate $[***] Total Labor $[***] Total Material $[***] Grand Total $[***]
Expenditures in excess of $[***] by BENET Laboratories shall not be reimbursable unless authorized in advance by a written amendment to this Modification, executed by a representative of PLUG POWER. Approvals to Commence Work: For PLUG POWER: For BENET Laboratories ___________________________ _______________________ Date:_____________________ Date:___________________ STATEMENT OF WORK Task Number 008 ANALYSIS of MEA Surface Contamination September 24, 1998 Background: PLUG POWER is developing a series of high performance fuel cell MEAs for automotive applications. In this work, Plug Power has observed a build up of foreign matter within fuel cell stacks over a period of time. Plug Power wishes to get a better understanding of how these foreign materials are deposited onto the membrane surfaces. Scope of Work Plug Power will provide Benet Labs with 20 samples of membranes with that have been operated within fuel cells for various periods of time. Plug Power wishes to have an analysis performed on these samples for the following [***]. Additionally, Plug Power wishes [***] for: [***] The membranes will be scanned in plane and section. Sectional views will be mounted in plastic and polished. Pictures and trace-scans will be taken for each scan. Plug Power Contact Uriel Oko, 782-7700, Ext. 209 STATEMENT OF WORK Task Number 008 ESTIMATE OF REQUIRED TIME AND MATERIALS September 24, 1998 BENET Laboratories will assist PLUG POWER in analyzing material from fuel cells for the presence of various [***] build-ups on [***]
Task ID Task Name Materials Labor Estimate - ------- ----------------- --------- -------------- 1 2 scans (w/pictures & trace scans) per [***] sample (Total of 20 samples x 3 hours/ sample) Total Labor [***] Labor rate $[***] Total Labor $[***] Total Material $[***] Grand Total $[***]
Expenditures in excess of $[***] by BENET Laboratories shall not be reimbursable unless authorized in advance by a written amendment to this Statement of Work, Task Number 8, executed by a representative of PLUG POWER. Plug Power Project Number: 89,91-47011-200 Approvals to Commence Work: For PLUG POWER: For BENET Laboratories ________________________________ ________________________________ Date:___________________________ Date:_______________________________ STATEMENT OF WORK Modification Number 003 Estimate of required time and materials Version 1.0 February 18, 1998 (modified 20 Feb 98; Benet estimates added) BENET Laboratories will assist PLUG POWER in analyzing components of the [***] test fuel cell. Reference PLUG POWER "[***] Test Study. Version 1.0 Dated February 18, 1998," The following is an estimate of time and material costs required by BENET Laboratories to perform the work.
Task ID Task Name Materials Labor Estimate - --------- ---------------------------------- --------- -------------- 1 Support and witnessing disassembly [***] [***] 2 Analysis of Water Samples [***] [***] 3 Analysis of Hardware Components [***] [***] Total Labor [***] Labor Rate [***] Total Labor [***] Total Material [***] Grand Total [***]
Expenditures in excess of [***] by BENET Laboratories shall not be reimbursable unless authorized in advance by written amendment to this Modification No. 3 executed by a representative of PLUG POWER. Approval to Commence Work: For PLUG POWER: For BENET Laboratories - --------------------------- -------------------------- Date: Date: - --------------------------- -------------------------- PLUG POWER Proprietary Information EX-10.20 11 NONEXCLUSIVE LICENSE AGREEMENT Exhibit 10.20 CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. NONEXCLUSIVE PATENT LICENSE AGREEMENT BETWEEN THE REGENTS OF THE UNIVERSITY OF CALIFORNIA AND MECHANICAL TECHNOLOGY INC. TABLE OF CONTENTS 1. DEFINITIONS...............................................1 2. GRANT.....................................................2 3. LICENSE FEE AND ROYALTY PAYMENTS..........................3 4. REPORTS...................................................4 5. BOOKS AND RECORDS.........................................4 6. TERM OF THE AGREEMENT.....................................4 7. TERMINATION OR MODIFICATION BY THE UNIVERSITY.............5 8. TERMINATION BY THE LICENSEE...............................5 9. USE OF NAMES, TRADENAMES, AND TRADEMARKS..................5 10. WARRANTY BY THE UNIVERSITY................................5 11. INFRINGEMENT..............................................6 12. ASSIGNABILITY AND SUBLICENSING............................6 13. INDEMNITY - PRODUCT LIABILITY.............................7 14. LATE PAYMENTS.............................................7 15. NOTICES...................................................7 16. FORCE MAJEURE.............................................8 17. EXPORT CONTROL LAWS.......................................8 18. PREFERENCE FOR UNITED STATES INDUSTRY.....................8 19. DISPUTE RESOLUTION........................................8 20. MISCELLANEOUS.............................................8 i NONEXCLUSIVE PATENT LICENSE AGREEMENT MECHANICAL TECHNOLOGY INC. THIS LICENSE AGREEMENT is entered into by and between THE REGENTS OF THE UNIVERSITY OF CALIFORNIA, a nonprofit educational institution and a public corporation of the State of California, hereinafter referred to as the "University;" and MECHANICAL TECHNOLOGY INC., 968 Albany-Shaker Road, Latham, New York 12110, a New York Corporation, hereinafter referred to as the "Licensee," the parties to this License Agreement being referred to individually as a "Party," and collectively as "Parties." BACKGROUND The University conducts research and development at the Los Alamos National Laboratory (LANL) for the U.S. Government under Contract No. W-7405-ENG-36 with the U.S. Department of Energy (DOE). Rights in inventions and technical data made in the course of the University's research and development at LANL are governed by the terms and conditions of said Contract. Certain Technology relating to Catalyst Layer Structure for PEM Fuel Cells has been developed in the course of the University's research and development at LANL. It is the policy of the University and the Department of Energy that such Technology be developed and utilized to the fullest extent possible so as to enhance the accrual of economic and technological benefits to the U.S. domestic economy, and the University is therefore willing to grant a nonexclusive license to Licensee for that part of the Technology to which the University has title. The Licensee desires to obtain from the University certain rights for the commercial development, manufacture, use, or sale of the Technology. NOW, THEREFORE, the Parties agree as follows: 1. DEFINITIONS 1.1 "Technology" as used herein, means technical information, know-how and data owned or controlled by the University and relating to catalyst loadings for solid polymer electrolyte fuel cells as applied in U.S. Patent Application Serial Number 07/656,329 (filed February 19, 1991) and U.S. Patent Application Serial Number 07/736,876 (filed February 19, 1991). 1.2 "Patent Rights" means the University's rights arising from the following: (1) U.S. Patent Application Serial Number 07/656,329, continuation-in-part, filed February 19, 1991, Membrane Catalyst Layer for Fuel Cells by Mahlon S. Wilson; and (2) U.S. Patent Application Serial Number 07/736,876, continuation-in-part, which is a continuation-in-part of U.S. Patent Application Serial Number 07/656,329, filed February 19, 1991, Membrane Catalyst Layer for Fuel Cells by Mahlon S. Wilson. including any continuation, divisional, reexamination or reissue thereof; and including any corresponding foreign patents issued prior to the effective date of this Agreement. 1.3 "Licensed Method" means any method, procedure or process covered by any subsisting claim of any patent identified in paragraph 1.2. 1.4 "Licensed Product" means any article of manufacture, machine or composition of matter covered by any subsisting claim of any patent identified in paragraph 1.2, and any article of manufacture, machine or composition of matter produced through the practice of a Licensed Method. 1.5 "Licensed Invention" means any Licensed Product or Licensed Method. 1.6 "Net Income" means the gross revenue from sales of Licensed Products or from the sales of services utilizing a Licensed Method by Licensee and sublicensees, less the following deductions where applicable: (a) sales returns; (b) allowances; (c) trade discounts, (d) transportation charges; (e) sales and excise taxes, and; (f) duties and tariffs. 2. GRANT 2.1 Subject to the reservations and conditions set forth elsewhere in this Agreement, the University hereby grants to the Licensee a nonexclusive, nontransferable license to make, use and sell, and have made for Licensee, Licensed Products and to practice Licensed Methods covered by the University's Patent Rights throughout the United States and its territories and in any foreign country for which the University has obtained patent protection as provided in paragraph 1.2 above. 2.2 The Licensee acknowledges and agrees that the U.S. Government has a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced throughout the world, for or on behalf of the United States, inventions covered by the University's Patent Rights, and has certain other rights under 35 USC 200-212 and applicable implementing regulations. 2 3. LICENSE FEE AND ROYALTY PAYMENTS 3.1 License Fee. Licensee shall pay to the University a one-time, nonrefundable license fee of [***], in consideration for the award of the license granted herein. License fee is due within thirty (30) days from the date of certified receipt, by Licensee, of a fully executed "Assignment and Confirmatory License" from Doe to the University for Technology covered by University's Patent Rights. 3.2 Earned Royalties. In addition to the License Fee payable under paragraph 3.1, Licensee agrees to pay to the University an earned royalty of [***] on Net Income received during the term of this License Agreement. 3.3 Notwithstanding Paragraph 3.1 above, Licensee shall have no obligation to pay any earned royalty on any sale of any Licensed Product to, or on the practice of any Licensed Method for,,the U.S. Government or any agency thereof, or any U.S. Government contractor who certifies that its use of the Licensed Product or Licensed Method is on behalf of the U.S. Government; and Licensee agrees that its selling price to any of the foregoing entities shall not include any royalty under this Agreement. 3.4 The first earned royalty payment due under this Agreement shall be calculated based on Net Income received by Licensee from the effective date of this Agreement through December 31 of the same calendar year, and shall be due and payable within one month from the end of such period. Subsequent earned royalty payments shall be calculated based on Net Income received by Licensee during the semiannual periods extending from January I through June 30 and from July 1 through December 31 of each year, for as long as this Agreement remains in effect. Such royalty payments shall be due and payable within one month from the end of the respective semiannual period. 3.5 In the event that any patent claim included within the University's Patent Rights shall be held invalid by a decision of a court of competent jurisdiction in any country, the obligation to pay earned royalties on sales in that country of products or methods covered by the invalidated claim and not covered by valid patent claims subsisting under the University's Patent Rights shall cease as of the date of such decision. Licensee shall not, however, be relieved from paying any earned royalties that have accrued before such decision or which are based on another patent claim within the University's Patent Rights which is not held invalid by such decision. 3.6 All payments due the University shall be payable in United States funds to the University of California, Los Alamos National Laboratory, at the address set forth in Paragraph 15. Net Income received in foreign currencies shall be converted into equivalent United States funds at the exchange rate for the foreign currency prevailing as of the last day of the reporting period, as reported in the Wall Street Journal. CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. 3 4. REPORTS 4.1 Progress Reports. Licensee agrees to submit on request, but no more frequently than annually, a report on Licensee's utilization of the Licensed Invention, including information on the status of any development efforts of the Licensee, the date of first sale or commercial use, and any other information the University may reasonably request. 4.2 Financial Reports. If earned royalty payments are required under this Agreement, Licensee agrees to submit a financial report on the dates that such payments are due, and shall submit such reports regardless of whether any payment is actually made. Such reports shall ' be certified by an officer of the Licensee, shall cover the period for which royalty payments are calculated, and shall show total sales or commercial uses made of Licensed Products or Licensed Methods by Licensee during the reporting period. If no sale or use of Licensed Products or Licensed Methods has been made during a reporting period, a statement to this effect shall be made. Reports marked by Licensee as proprietary financial or business information of the Licensee shall be treated as such by the University. 5. BOOKS AND RECORDS 5.1 The Licensee shall keep books and records accurately showing all sales of Licensed Products or practice of the-Licensed Method by Licensee under the terms of this License Agreement. Such books and records shall be open to inspection and audit on a proprietary basis by representatives of the University at reasonable times, but in no event more frequently than annually, for the purpose of verifying the accuracy of the financial reports and the royalties due. The fees and expenses of the representatives performing such an examination shall be borne by the University. Licensee may request that any such inspection and audit be conducted by an independent auditor, in which event, Licensee shall pay the reasonable costs of such auditor. 5.2 The books and records required by this article shall be preserved for at least three years from the date of the royalty payment to which they pertain. 6. TERM OF THE AGREEMENT 6.1 This License Agreement shall be effective as of the -later of the dates of execution by the Parties. 6.2 This License Agreement shall be in full force and effect from the effective date and shall remain in effect until the expiration of the last to expire of the patents included within the University's Patent Rights, unless sooner terminated by operation of law or by acts of the Parties in accordance with the terms of this License Agreement. 4 7. TERMINATION OR MODIFICATION BY THE UNIVERSITY 7.1 It is expressly agreed that, notwithstanding the provisions of Article 14 concerning late payments, if the Licensee should fail to deliver to the University any report when due, or fail to pay any royalty or fee when due, or if the Licensee should breach any material term of this License Agreement, the University may give written notice of default to the Licensee. If the Licensee fails to cure such default within ninety (90) days from the date of delivery of such notice to Licensee, the University shall have the right to terminate this License Agreement, and this License Agreement shall terminate upon delivery of written notice of termination to the Licensee. Such termination shall not relieve the Licensee of its obligation to pay any license fee or royalty due or owing at the time of such termination and shall not impair any accrued right of the University. 8. TERMINATION BY THE LICENSEE 8.1 The Licensee may terminate this License Agreement by giving written notice to the University. Such termination shall be effective ninety (90) days from the date of delivery of such notice, and the Licensee's rights under this Agreement shall cease as of the effective date of termination. 8.2 Any termination pursuant to the above paragraph shall not relieve the Licensee of any obligation or liability accrued hereunder prior to the effective date of such termination. 9. USE OF NAMES, TRADENAMES, AND TRADEMARKS 9.1 Nothing contained in this License Agreement shall be construed as conferring any right to the Licensee to use the name of the University of California or the name of any facility or campus of the University of California in advertising, publicity, or other promotional activities. 9.2 The University may disclose to third parties the existence of this License Agreement and the extent of the grant. in Article 2, but shall upon the request of Licensee withhold the amount of consideration paid for the license granted hereunder, except where the University is required to release such information under the California Public Records Act, University policy, the University's prime contract with DOE, or other applicable law. 10. WARRANTY BY THE UNIVERSITY 10.1 The University warrants that it has the lawful right to grant this license, subject to DOE assignment of rights in the Technology to the University in the event such rights have not yet been assigned to the University. 10.2 This license and the associated Technology and Patent Rights are provided WITHOUT warranty of merchantability or fitness for a particular purpose or any other 5 warranty, express or implied. The University makes no representation or warranty that any Licensed Products or Licensed Methods will not infringe any patent or other proprietary right of any third party. 10.3 IN NO EVENT WILL THE UNIVERSITY BE LIABLE FOR ANY INCIDENTAL, SPECIAL, OR CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THIS LICENSE OR THE USE OF LICENSED PRODUCTS OR LICENSED METHODS. 10.4 Nothing in this License Agreement shall be construed as: (a) a warranty or representation by the University as to the validity or scope of University's Patent Rights; or (b) an obligation to bring or prosecute actions or suits against third parties for patent infringement; or (c) conferring by implication, estoppel, or otherwise any license or rights under any patents of the University other than University's Patent Rights as defined herein; or (d) an obligation by University to furnish any know-how, technical assistance, or technical data that is unrelated or unnecessary to the transfer of the Technology to the Licensee -for the purpose of implementing this License Agreement. 11. INFRINGEMENT 11.1 In the event the Licensee shall learn of the substantial infringement of any of the University's Patent Rights by a third party, Licensee shall inform the University and shall provide the University with available evidence of such infringement. - The University shall use its best efforts to terminate such infringement without litigation, and may in its sole discretion initiate litigation at its own expense, but shall be under no obligation under this Agreement to bring any such legal action. 12. ASSIGNABILITY AND SUBLICENSING 12.1 This License Agreement is binding upon I and shall inure to the benefit of the University and Licensee, and their respective successors and assigns. This License Agreement shall be assignable by Licensee providing Licensee's assignee agrees, in writing, to assume all the outstanding obligations of the Licensee under this Agreement. 12.2 In the event that a controlling interest in Licensee is obtained by a foreign entity, the University may terminate this License Agreement at its discretion, which discretion 6 shall not be exercised unreasonably. Licensee agrees to notify the University of any such change in controlling interest within thirty days of its occurrence. 12.3 The Licensee may not grant sublicenses under this Agreement except with the prior written authorization of the University. 13. INDEMNITY - PRODUCT LIABILITY 13.1 The Licensee agrees to indemnify the U.S. Government and the University, their officers, employees, and agents, against any damages, costs and expenses, including attorneys' fees, arising from the commercialization and utilization of the Technology, by Licensee, including but not limited to the making, using, selling or exporting, by Licensee, of products, processes, or services derived therefrom. This indemnification will include, but will not be limited to, any product liability. 13.2 Licensee agrees that the U.S. Government is neither a party to this Agreement nor assumes any liability for activities of the University in connection with this Agreement. 14. LATE PAYMENTS 14.1 In the event any royalty payments or fees due under this Agreement are not received by the University within thirty (30) days of when due, the Licensee shall pay to the University interest charges at the rate of ten percent (10%) per annum on the amount of such royalties or fees overdue. 15. NOTICES 15.1 Any payment, notice, or other communication required or permitted to be given to either party hereto shall be deemed to have been properly given and to be effective on the date of delivery if delivered in person or by first-class certified mail, postage paid, to the respective address given below, or to such other address as it shall designate by written notice given to the other party as follows: In the case of the Licensee: Mechanical Technology Inc. 968 Albany-Shaker Road Latham, NY 12110 Attn: William P. Sumnigray 7 In the case of the University: Los Alamos National Laboratory Industrial Partnership Center P.O.-Box 1663, Mail Stop M899 Los Alamos, New Mexico 87545 Attn: Licensing Coordinator 16. FORCE MAJEURE 16.1 Neither party shall be responsible for delay or failure in performance of any of the obligations imposed by this License Agreement, provided such failure shall be occasioned by fire, flood, explosion, lightning, windstorm, earthquake, subsidence of soil, court order or government interference, civil commotion, riot, war, or by any cause of like or unlike nature beyond the control and without fault or negligence of such party. 17. EXPORT CONTROL LAWS 17.1 Licensee acknowledges and understands that the export of certain goods or technical data from the United States requires an export control license from the United States Government, and that failure to obtain such export control license may result in violation of U.S. laws. 18. PREFERENCE FOR UNITED STATES INDUSTRY 18.1 Licensee agrees that any products embodying Licensed Products or produced through the use of a Licensed Method will be manufactured substantially in the United States. 19. DISPUTE RESOLUTION 19.1 The Parties agree to exert their best efforts to resolve disputes arising from this Agreement. Any dispute that cannot be resolved by the Parties shall be resolved in accordance with the rules and procedures of the American Arbitration Association, acting in the state of New Mexico, and shall be enforceable in accordance with New Mexico law. 20. MISCELLANEOUS 20.1 The headings of the several sections of this Agreement are included for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this License Agreement. 20.2 No amendment or modification of this Agreement shall be binding on the Parties unless made in a writing executed by duly authorized representatives of the Parties. 8 20.3 This License Agreement embodies the entire understanding of the Parties and shall supersede all previous agreements, communications, representations, or understandings, either oral or written, between the Parties relating to the subject matter hereof. 20.4 In the event any one or more of the provisions of this License Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provisions hereof, and this License Agreement shall be construed as if such invalid or illegal or unenforceable provisions had never been contained herein. 20.5 This License Agreement shall be interpreted and construed in accordance with the laws of the New Mexico. IN WITNESS WHEREOF, both the University and the Licensee have executed this License Agreement, in duplicate originals, by their respective officers on the day and year hereinafter written. THE REGENTS OF THE UNIVERSITY OF CALIFORNIA By______________________________ Siegfried S. Hecker, Director Los Alamos National Laboratory Date______________________________ MECHANICAL TECHNOLOGY INC. By_______________________________ Printed Name:_____________________ Title:_____________________________ Date:_____________________________ 9 NONEXCLUSIVE PATENT LICENSE AGREEMENT MECHANICAL TECHNOLOGY INC. MODIFICATION NO. I THIS MODIFICATION to the License Agreement between THE REGENTS OF THE UNIVERSITY OF CALIFORNIA, a nonprofit educational institution and a public corporation of the State of California, hereinafter referred to as the "University" and MECHANICAL TECHNOLOGY INC., 968 Albany-Shaker Road, Latham, New York 12110, a New York Corporation, hereinafter referred to as the "Licensee," the parties to this License Agreement being referred to individually as a "Party" and collectively as "Parties." BACKGROUND The Parties have entered into a Nonexclusive License Agreement, hereinafter referred to as the "Agreement,", executed April 30, 1993, to grant to Licensee certain rights for t-he commercial development, manufacture, use, or sale of the Technology, as defined in the Agreement. The Parties desire that the Agreement be amended to include all of the Technology related to Catalyst Layer Structure for PEM Fuel Cells as covered by patent applications and patents subsisting on the effective date of the Agreement. NOW THEREFORE, the Parties agree to amend the Agreement as follows: AMENDMENTS 1. Amend Paragraph 1.1: 1.1 "Technology" as used herein, means technical information, know-how and data owned or controlled by the University and relating to catalyst loadings for solid polymer electrolyte fuel cells as applied in U.S. Patent Application Serial Number 07/656,329 (filed February 19, 1991), U.S. Patent Application Serial Number 07/736,876 (filed July 29, 1993, now U.S. Patent 5,234,777, issued August 10, 1993) and U.S. Patent 5,211,984 (issued May 18, 1993). 2. Amend Paragraph 1.2 1.2 "Patent Rights" means the University's rights arising from the following: (1) U.S. Patent Application serial Number 07/656,329, filed February 19, 1991, Membrane Catalyst Layer for Fuel Cells, by Mahlon S. Wilson, and now abandoned; (2) U.S. Patent Application Serial Number 07/736,876, filed July 29, 1991, which is a continuation-in-part of U.S. Patent Application 07/656,329, Membrane 10 Catalyst Layer for Fuel Cells, by Mahlon S. Wilson, now U.S. Patent 5,234,777, issued August 10, 1993; and (3) U.S. Patent Application Serial Number 07/811,220, filed December 20, 1991, Membrane Catalyst Layer for Fuel Cells, by Mahlon S. Wilson, and now U.S. Patent 5,211,984, issued May 18, 1992 including any continuation, divisional, reexamination, or reissue thereof; and including any corresponding foreign patents issued prior to the effective date of this Agreement. IN WITNESS WHEREOF, both the University and the Licensee have executed this License Agreement, in duplicate originals, by their respective officers on the day and year hereinafter written. THE REGENTS OF THE UNIVERSITY OF CALIFORNIA By____________________________ Kay V. Adams Industrial Partnership Center Los Alamos National Laboratory Date_____________________________ MECHANICAL TECHNOLOGIES INC. By:______________________________ Printed Name:_______________________ Title:_____________________________ Date:_____________________________ 11 EX-10.21 12 DEVELOPMENT COLLABORATION AGREEMENT EXHIBIT 10.21 CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. DEVELOPMENT COLLABORATION AGREEMENT This DEVELOPMENT COLLABORATION AGREEMENT (this "Agreement") is entered into as of July 30,1999, by and between JOH. VAILLANT GMBH U. CO., a German kommanditgesellschaft ("Vaillant"), having its principal place of business at Berghauser StraBe 40, 42859 Remscheid, Federal Republic of Germany, and PLUG POWER, LLC, a Delaware limited liability company ("PP"), having its principal place of business at 968 Albany-Shaker Road, Latham, New York 12110, USA. WHEREAS, Vaillant and PP are contemplating entering into an Umbrella Agreement (the "Umbrella Agreement") by and among Vaillant, PP and GE Fuel Cell Systems, LLC, a Delaware limited liability company ("GEFCS"), pursuant to which, among other things, Vaillant, PP and GEFCS would collaborate to develop, manufacture, sell, install and service certain FCHAs (as defined in Section 1 below) for providing heat, electricity and hot water for residential applications worldwide; and WHEREAS, in anticipation of entering into the Umbrella Agreement and the other agreements contemplated thereby, the parties hereto desire to confirm herein their understandings and agreements in respect to such collaboration and matters related to the development of FCHAs. NOW, THEREFORE, in consideration of the recitals and the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows. 1. Definitions. For purposes of this Agreement, capitalized terms used but not otherwise defined herein shall have the following meanings: "Effective Date" shall mean the date of this Agreement. "Energy Management System" shall mean a controller which communicates with the following: the FCHA subsystems (Fuel Cell Subsystem and Heater Subsystem), the components of the domestic heating system and the communication interface for the customer to ensure a technically and economically optimized operation of the FCHA. "Europe" shall mean those countries listed on Exhibit A attached hereto. "FCHA" shall mean a fuel-cell driven system that generates both usable heat and electricity, floor standing or wallmounted, packaged in one or more housings with an electric power output of less than or equal to 10KW, fueled with natural gas or bio gas, consisting of an integrated Fuel Cell System and Heater Subsystem. "Fuel Cell Subsystem" shall mean a subsystem of an FCHA comprised of the fuel cell stack, fuel processor, auxiliaries and subsystem controls to convert natural gas into unregulated DC current. "Heater Subsystem" shall mean a subsystem of an FHCA comprised of the heating components, subsystem controls, energy management system, inverter and auxiliaries. "IP" shall mean any invention, discovery, concept, expression or work, whether or not patented or patentable, including, but not limited to, discoveries, compositions, know-how, procedures, technical information, processes, methods, devices, formulas, protocols, techniques, designs and drawings, any physical embodiment thereof, and any patent (and applications therefor), trademark (and applications therefor), copyright (and applications therefor), trade name, trade secret, know-how or other intellectual property right related thereto. "Party" or "Parties" shall mean Vaillant or PP, or Vaillant and PP. "Product" shall mean the Initial Product, the Ultimate Product and any Additional Products (as each is defined in Section 2). "Prototype" shall mean a pre-commercial version of the Initial Product. "Regulatory Approval" shall mean, with respect to any country, filing, for and receipt of all regulatory agency registrations and approvals required for the marketing, installation and sale of a product for the application for which it is being marketed in such country. "Regulatory Filings" shall mean all applications, filings, materials, studies, data and documents of any nature whatsoever filed with, prepared in connection with or necessary to support any Regulatory Approval process in any country or territory. 2. Objectives; Relationship to Other Agreements. 2.1 Initial Product. The Parties will collaborate to develop a floor --------------- standing FCHA with an output of approximately [***] and an approximately {***] for use in Europe (the "Initial Product"). 2.2 Ultimate Product. The experience gained in the development and ---------------- production of the Initial Product will serve as a basis for the Parties' collaboration on the development, manufacture, sale, installation and service of an approximately [***] FCHA for use in Europe (the "Ultimate Product"), and such other FCHA products as the Parties shall mutually agree ("Additional Products"). The timing of such collaboration and work plan shall be mutually agreed upon by the Parties. 2.3 Relationship to Other Agreements. The Parties contemplate that all Products (including the Prototypes described in Section 4.1) to be manufactured pursuant to this Agreement will be marketed, distributed, sold, installed and serviced in accordance with the Umbrella Agreement and any ancillary agreements to the Umbrella Agreement. PP acknowledges that Vaillant shall be the exclusive manufacturer of FCHAs for distribution in Europe. Vaillant hereby acknowledges that GEFCS is the exclusive distributor of PP fuel cell CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INCLUDED WITH ASTERISKS. systems for certain specified stationary applications under 35kW. PP shall sell Fuel Cell Subsystems to GEFCS pursuant to a Distributor Agreement, dated as of February 2, 1999 (the "GEFCS Distribution Agreement"), between GEFCS and PP, and Vaillant shall purchase such Fuel Cell Subsystems from GEFCS. PP represents and warrants that (i) the sale of Fuel Cell Subsystems hereunder are subject to the terms and conditions of the GEFCS Distribution Agreement, pursuant to which GEFCS has exclusive worldwide distribution rights (with the exception of four states in the United States) and (ii) the Fuel Cell Subsystems supplied to GEFCS under the GEFCS Distribution Agreement are to be competitively priced. 3. Project Management. 3.1 Steering Committee. The activities of the collaboration shall be conducted under the direction of a steering committee (the "Steering Committee") comprised of two (2) named representatives of each Party. Each Party shall appoint its respective representatives to the Steering Committee from time to time, and may substitute one or more of its representatives, in its sole discretion, effective upon notice of such change to the other Party. The Steering Committee shall meet, in person or by telephone conference, not less than once each calendar quarter, on such date and at such times and places as agreed to by the Parties. At such meetings, the Steering Committee shall discuss and endeavor to resolve any issues that are acting as barriers to progress and achievement of milestones under the development program. The decisions of the Steering Committee shall be by unanimous vote, each member of the Steering Committee having one vote, provided that at least one representative of each Party is present at such meeting. The approval of the Steering Committee shall be required for the following actions: (1) any modification or amendment to this Agreement; (2) any modification to the development program outlined in Sections 4 and 5, the budget plans outlined in Section 7 or the Prototype Specifications or Initial Product Specifications as outlined in Section 4.3; or (3) any other decisions presented to the Steering Committee by either Party. 3.2 Project Managers. Each Party will designate a project manager (such person or his/her successor referenced herein as a "Project Manager"). The Project Managers will share overall responsibility for the coordination of the development of the Initial Product. Each Party's Project Manager will be the other Party's point of contact for the resolution of any problems which may arise in connection with this Agreement. Each Party will notify the other Party within 30 days after the execution of this Agreement of the appointment of its Project Manager and will notify the other Party as soon as practical upon changing such appointment. The Project Managers will report to and act on the direction of the Steering Committee. 4. Development Program. Project Phases. The development and production program will be conducted in accordance with the following two phases: 4.1 Phase I Prototype Development. Phase I will begin on October 1, 1999. Phase I will cover the development effort for a Prototype and production, sale, installation, service and field testing of [***] Prototype units. 4.2 Phase 2 Commercial Production. Phase 2 will begin after the successful field testing of the [***] Prototype units described in Phase 1. Phase 2 will include the production, sale, installation and servicing of commercial Initial Products. 4.3 Initial Product Specifications. Preliminary specifications for the Prototypes (the "Prototypes Specifications") shall be agreed upon by the Parties on or before July 1, 2000 and attached hereto as Exhibit Al. Specifications for the commercial Initial Products (the "Initial Product Specifications") shall be agreed upon by the Parties on or before January 1, 2001 and attached hereto as Exhibit A2. 5. Development Responsibilities. 5.1 Phase 1 Responsibilities. (1) PP will develop, manufacture and test the Fuel Cell Subsystem for the Prototypes and provide such test results to Vaillant. On or before November 30, 1999, PP shall prepare a detailed work plan for PP's development of the Fuel Cell Subsystem, including a timetable for achieving milestones under Phase 1 and a budget therefor pursuant to Section 7.1, which shall be attached hereto as Exhibit B (the "FCS Development Plan"). (2) Vaillant will develop, manufacture and test a Heater Subsystem for the Prototypes and provide such test results to PP. On or before November 30, 1999, Vaillant shall prepare a detailed work plan for Vaillant's development of the Heater Subsystem, including a timetable for achieving milestones under Phase I and a budget therefor pursuant to Section 7.1, which shall be attached hereto as Exhibit C (the "HS Development Plan"). (3) PP and Vaillant will cooperate to integrate the Fuel Cell Subsystem and the Heater Subsystem into the Prototypes. Vaillant will test the Prototypes and provide such test results to PP. On or before November 30, 1999, PP and Vaillant shall prepare a detailed work plan for the joint effort by PP and Vaillant to integrate the Fuel Cell Subsystem and the Heater Subsystem into the Prototypes, including a timetable for achieving milestones under Phase I and a budget therefor pursuant to Section 7.1, which shall be attached hereto as Exhibit D (the "Integration Development Plan"). 5.2 Phase 2 Responsibilities. The Parties shall conduct the activities below in order to produce the quantities of Initial Products set forth in the ancillary agreements to the Umbrella Agreement, (1) PP shall manufacture and quality test the Fuel Cell Subsystem for the Initial Product and provide such test results to Vaillant. On or before January 1, 2001, a detailed work plan for PP's development of manufacturing facilities for the Fuel Cell Subsystem, including a timetable for achieving milestones under Phase 2 and a budget therefor pursuant to Section 7.2, shall be attached hereto as Exhibit E (the "FCS Production Plan"). (2) Vaillant shall manufacture and quality test the Heater Subsystem for the Initial Product and provide such test results to PP. On or before January 1, 2001, Vaillant shall prepare a detailed work plan for Vaillant's development of manufacturing facilities for the Heater Subsystem, including a timetable for achieving milestones under Phase 2 and a budget therefor pursuant to Section 7.2, which shall be attached hereto as Exhibit F (the "HS Production Plan"). (3) (i) Vaillant shall manufacture the Initial Product by assembling the Fuel Cell Subsystem and the Heater Subsystem into the Initial Product. Vaillant shall quality, test the Initial Product and provide such test results to PP. On or before January 1, 2001, Vaillant shall prepare a detailed work plan for the development of manufacturing facilities for the Initial Product, including a timetable for achieving milestones under Phase 2 and a budget therefor pursuant to Section 7.2, which shall be attached hereto as Exhibit G (the "Initial Product Production Plan"). (ii) Vaillant's responsibility to sell, install and service Initial Products in [***] shall be set forth in the ancillary agreements to the Umbrella Agreement. 5.3 Revisions to Work Plans. Revisions to any of the work plans listed in this Section 5 shall require the approval of the Steering Committee. 6. Representations and Warranties. 6.1 PP represents and warrants that the IP owned by PP prior to the Effective Date with regard to the Fuel Cell Subsystem belongs to PP and is free of any third party rights. 6.2 Vaillant represents and warrants that the IP owned by Vaillant prior to the Effective Date with regard to the Heater Subsystem belongs to Vaillant and is free from any third party rights. 6.3 Neither Party makes any representations or warranties concerning its developmental efforts hereunder, including, without limitation, any warranties of fitness or warranties of merchantability with respect to any particular use or purpose. However both Parties undertake to make commercially reasonable efforts in order to achieve the objectives of this collaboration. 6.4 To achieve the defined milestones, (i) PP undertakes to spend at least the total budgeted amount provided for in Exhibit B, Exhibit E and portion allocated to it in Exhibit D and (ii) Vaillant undertakes to spend at least the total budgeted amount provided for in Exhibit C, Exhibit F, Exhibit G and the portion allocated to it in Exhibit D, unless: (1) all material objectives in reference to the work plans mentioned above can be achieved with lower expenditure; (ii) a Party intends not to spend the total budgeted amount, having determined that the milestone in issue is not commercially or technically practicable, such determination being based on reasonable substantiation; or (iii) a Party determines that the expenditure determined to be necessary to reach the milestone exceeds the budgeted amount by more than ten percent (10%). In such cases, as a result of such determination by a Party, the Steering Committee will promptly meet in order to decide whether to continue the collaboration. If the Steering Committee fails to reach a decision by unanimous vote within ten weeks from the date of the first such meeting of the Steering Committee, thereby resulting in a deadlock of the Steering Committee for purposes hereof, each Party shall be entitled to terminate this Agreement by notice to the other Party pursuant to clause (ii) of Section 16.3. 7. Development Budget. 7.1 Phase I Budget. (1) PP estimates that it will require approximately [***], which estimate shall be non binding, to fund PP's FCS Development Plan, including the direct manufacturing cost of [***] Prototypes. On or before November 30, 1999, PP shall provide Vaillant a detailed budget for the FCS Development Plan, which shall be included in Exhibit B. (2) Vaillant estimates that it will require approximately [***], which estimate shall be nonbinding, to fund Vaillant's HS Development Plan, including the direct manufacturing cost of [***] Prototype units. On or before November 30, 1999, Vaillant shall provide to PP a detailed budget for the HS Development Plan, which shall be included in Exhibit C. (3) On or before November 30, 1999, PP and Vaillant shall cooperate to develop a budget for the Initial Product Production Plan, which shall be included in Exhibit D. 7.2 Phase 2 Budget. (1) On or before September 30, 1999, PP shall provide Vaillant with an estimate, which estimate shall be nonbinding, of the amount of money required to fund the FCS Production Plan. On or before January 1, 2001, PP shall provide to Vaillant a detailed budget for the FCS Production Plan, which shall be included in Exhibit E. (2) Vaillant estimates that it will require approximately [***], which estimate shall be nonbinding, in order to fund the HS Production Plan. On or before January 1, 2001, Vaillant shall provide to PP a detailed budget for the HS Production Plan and the Initial Product Production which shall be included in Exhibits F and G, respectively. budget for the HS Production Plan and the Initial Product Production Plan, which shall be included in Exhibits F and G, respectively. 7.3 Phase I Funding Sources. PP shall obtain funding for the manufacture of [***] Fuel Cell Subsystems for Prototypes by selling such subsystems to GEFCS. Vaillant shall agree to purchase such subsystems from GEFCS. All prices, terms and conditions for such sale shall be determined among PP, Vaillant and GEFCS in the ancillary agreements to the Umbrella Agreement. Either Party may use government grants or subsidies to meet its own funding obligations. The Parties shall make reasonable efforts to support one another in obtaining such government grants or subsidies. Upon the completion of the detailed budgets completed by the Parties on or before November 30, 1999, PP may request that Vaillant fund a portion of its development cost. Any such funding will be mutually agreed upon on or before December 31, 1999. 8. Recovery of Investments. Vaillant and PP shall fund the development to achieve the objectives of this collaboration in accordance with the provisions stipulated herein. Both Parties consider this collaboration to be an entrepreneurial undertaking. Thus both Parties shall recover their funds by selling the Products and Prototypes resulting from this collaboration. Vaillant intends to recover its investment by manufacturing and selling FCHAs in accordance with the Umbrella Agreement and the ancillary agreements to the Umbrella Agreement. PP intends to recover its investment by manufacturing and selling Fuel Cell Subsystems through GEFCS in accordance with the Umbrella Agreement, the ancillary agreements to the Umbrella Agreement and the GEFCS Distributor Agreement. 9. Reporting. 9.1 Project Status Reports. The Project Manager of each Party shall provide quarterly written reports to the Steering Committee outlining the work performed during the preceding quarter, and the work to be completed during the succeeding quarter, in connection with such Party's development efforts under this Agreement. 9.2 IP Disclosure. During the term of this Agreement, each Party shall promptly disclose to the other Party any IP to be owned by or licensed to such other Party under this Agreement, the Umbrella Agreement or the ancillary agreements to the Umbrella Agreement. 10. Intellectual Property. 10.1 Any IP owned by either Party prior to the Effective Date or developed outside of the scope of this Agreement shall remain the sole property of such Party. 10.2 The ownership of any IP developed by either Party during the course of and directly as a result of the performance of this Agreement ("Developed IP"), regardless of the identity of the inventing Party, shall be allocated as follows: (1) Developed IP that relates to the Fuel Cell Subsystem, including, without limitation, the fuel cell stack and the fuel processor, and internal integration and control within such Fuel Cell Subsystem, shall be owned by PP. (2) Developed IP that relates to the Heater Subsystem, including, without limitation, the heater components, Energy Management System, inverter and internal integration and control within such Heater Subsystem shall be owned by Vaillant. Vaillant shall grant PP a non-exclusive license to make, have made, use, sell and service Energy Management Systems worldwide. The license fee for such license shall not exceed [***] of the net sales price of the Heater Subsystem and shall be mutually agreed upon by the Parties by January 1, 2001, taking into account the Parties' respective contributions to the development of such Energy Management System. (3) Developed IP that relates to the integration of the Fuel Cell Subsystem and the Heater Subsystem into the FCHA shall be jointly owned by PP and Vaillant ("Joint IP"). Each of PP and Vaillant may use and license the use of the Joint IP without any obligation to the other to account for profits, royalties or other revenue relating thereto. 10.3 Each Party agrees to assign, grant and convey to the appropriate Party all rights, title and interest to any Developed IP which is to be owned by the assignee Party pursuant to Section 10.2 (the "Owner"). Each Party shall execute and deliver (and have executed and delivered by its employees) any and all declarations, assignments and other documents, and provide all other reasonable assistance, that the Owner reasonably determines may be necessary or desirable to establish the Owner's ownership of, and to enforce thereafter any intellectual property rights in, such Developed IP. 10.4 PP hereby grants to Vaillant a royalty-free license, during the term of this Agreement, to incorporate the Fuel Cell Subsystems supplied by PP as components of FCHAs to be manufactured by Vaillant pursuant to the Umbrella Agreement and the ancillary agreements to the Umbrella Agreement. 11. Limitations on Liability. 11.1 Subject to Section 11.2, the liability of each Party to the other Party for damages, for any cause whatsoever, regardless of form of action, whether in contract or tort, including negligence, shall not exceed $ 1,000,000 and shall be limited to direct damages suffered by the injured Party and neither Party shall be liable to the other Party for any special, indirect or consequential damage, including lost profits, lost revenues, failure to realize expected savings, or other commercial or economic losses of any kind. 11.2 The foregoing limitation of liability shall not apply with respect to: (1) any loss, claim, demand, damage or cost arising as a result of any infringement of any IP; (2) any disclosure or use by either Party of the other Party's confidential information in violation of this Agreement; or (3) any willful misconduct or gross negligence by either Party in its performance under this Agreement. 12. Trademarks. During the term of this Agreement, Vaillant shall affix, in addition to the Vaillant trademark but separate from the Vaillant trademark and smaller than the Vaillant trademark, the Mark (as defined below) on all FCHAs manufactured by Vaillant and include the Mark in all of Vaillant's FCHA marketing literature, in each case subject to PP's reasonable quality control guidelines and procedures. The details shall be agreed upon by unanimous resolution of the Steering Committee, which shall take into account PP's standing in the business and the quality of the Mark. Upon the expiration or termination of this Agreement, Vaillant shall make no further use of the Mark. Except as set forth in this paragraph, this Agreement shall not grant to Vaillant any right, title or interest in the Mark. All use of the Mark by Vaillant shall inure to the benefit of PP. At no time during or after the term of this Agreement will Vaillant challenge or assist others to challenge PP's intellectual property rights in the Mark or attempt to register any trademarks, trade names or other proprietary indicia confusingly similar to the Marks. For the purposes of this Agreement, "Mark" will mean any proprietary indicia, trademark, trade name, symbol, logo or brand name that PP has adopted to identify it and/or its products and services. 13. Confidentiality. 13.1 Confidential Information. During the term and for a period ending five (5) years after expiration or termination of this Agreement, each Party shall maintain in confidence and not disclose to any third party or use for any purpose except for the purposes of performing under this Agreement, all confidential and proprietary information of the other Party ("Confidential Information"). Confidential Information shall include any information which is disclosed by a Party to the other Party in connection with the performance of this Agreement. The foregoing use and confidentiality restrictions shall not apply to (i) information that is or becomes a matter of public knowledge through no fault of the receiving Party; (ii) information which is obtained lawfully from a third party not bound to obligations of secrecy to the disclosing party; (iii) information known to the recipient at the time of disclosure as substantiated by documented evidence predating the disclosure; or (iv) information which is required to be disclosed by law or governmental order; provided that the Party seeking to retain the confidentiality of such information shall be given a reasonable opportunity to contest any such disclosure. 13.2 Disclosure of Confidential Information in Regulatory Filings. Nothing contained herein is intended to prevent either Party from using the Confidential Information to make Regulatory Filings and to obtain necessary or appropriate Regulatory Approvals or in disclosure documents prepared by either Party to comply with applicable securities laws. Either Party making such a disclosure shall provide the other Party a reasonable opportunity to review such disclosure. 13.3 Return of Confidential Information. Upon termination or expiration of this Agreement or upon the disclosing Party's request, whichever is earlier, the receiving Party shall return to the disclosing Party or, at the disclosing Party's request, destroy, all materials containing the Confidential Information of the disclosing Party (including, without limitation, any and all copies extracts and compilations thereof). 13.4 Disclosure of Confidential Information Not A License. The furnishing of the Confidential Information of the disclosing Party to the receiving Party shall not constitute any grant or license to the receiving Party under any legal rights now or hereinafter held-by the disclosing Party. 13.5 Subcontractors. Notwithstanding the foregoing, each Party may disclose to third party subcontractors Confidential Information for the purpose of performing such Party's obligations under this Agreement, provided that all such third party subcontractors shall have entered into a confidentiality agreement providing protection to Confidential Information at least equivalent to that contained in this Agreement. 14. Exclusive Arrangement; Non-Competition. 14.1 Exclusive Arrangement. During the term of this Agreement, neither Party shall collaborate, directly or indirectly, with any third party, or otherwise participate in any business involved in the development or production of FCHAs, except to the extent provided in this Agreement, the Umbrella Agreement or the ancillary agreements to the Umbrella Agreement. 14.2 No Sale Outside Certain Countries. Vaillant shall not, directly or indirectly, market, sell, service or have serviced FCHAs outside of Germany, Austria, The Netherlands and Switzerland. Vaillant shall not be deemed to sell or market, directly or indirectly, FCHAs outside of Germany, Austria, The Netherlands and Switzerland provided that Vaillant sells FCHAs to wholesalers or resellers subject to a condition which prohibits such wholesalers and resellers from offering FCHAs for sale outside the four countries listed above. Vaillant shall terminate its business relationship with any such wholesaler or reseller, if permitted by law, if such wholesaler or reseller breaches the aforementioned restriction. 15. Regulatory Approvals. 15.1 Regulatory Approvals. Vaillant shall be responsible for obtaining all Regulatory Approvals for all Products and Prototypes to be installed in Germany, Austria, The Netherlands and Switzerland and for ensuring compliance with present and future applicable statutes, laws, ordinances and regulations of European national, federal, state and local governments or other European regulatory authorities relating to the manufacture, marketing, sale, shipment and use of such Products and Prototypes in Germany, Austria, The Netherlands and Switzerland. 15.2 Fuel Cell Subsystem. PP shall be responsible for ensuring that the Fuel Cell Subsystem complies in all material respects with present and future applicable statutes, laws, ordinances and regulations of European national, federal, state and local governments or other European regulatory authorities relating to the manufacture of the Fuel Cell Subsystem that are identified in writing by Vaillant. In particular, PP will provide reasonable assistance to Vaillant with regard to research and negotiations with regulatory authorities and product certification bodies. 16. Term and Termination. 16.1 Term. The term of the Collaboration Agreement shall commence as of the Effective Date and shall continue in force until March 2, 2004 unless terminated earlier pursuant to this Section 16. The Parties hereto may, however, extend the term of this Agreement for additional periods under mutually agreeable terms and conditions evidenced in a written amendment to this Agreement. 16.2 Termination for Cause. If either Party commits any material breach of or default in any of the terms, conditions or provisions of this Agreement, and fails to remedy such breach or default within 60 days after receipt of written notice thereof from the other Party, the Party giving notice, at its option and in addition to any other remedies which it may have at law or in equity, may terminate this Agreement by sending written notice of termination to the breaching or defaulting Party, and such termination shall be effective as of the date such notice is received. 16.3 Other Termination. This Agreement shall terminate (i) automatically (x) in the event the Umbrella Agreement and the ancillary agreements thereto (as described in that certain Memorandum of Understanding dated as of July 2, 1999, among PP, Vaillant and GEFCS) are not entered into by the parties thereto on or before September 30, 1999, unless otherwise mutually agreed, or (y) upon the filing of a petition in bankruptcy, insolvency or reorganization against or by either Party, or either Party going into receivership or otherwise becoming insolvent or (ii) upon notice by either Party to the other that it desires to terminate this Agreement as a result of Steering Committee deadlock pursuant to Section 6.4. 16.4 Change of Control. Either Party may terminate this Agreement immediately upon giving notice in writing to the other Party of its intent to terminate if any direct competitor of the terminating Party acquires (whether by merger, consolidation, sale, assignment, lease, transfer or otherwise, in one transaction or a series of related transactions), or otherwise beneficially owns 20% or more of the outstanding voting securities of the other Party. 16.5 Survival. Sections 10.3, 13 and 17 shall survive the expiration or termination of this Agreement. 17. Miscellaneous. 17.1 Good Faith Negotiation. Both Parties shall negotiate in good faith in order to negotiate and execute the Umbrella Agreement and the ancillary agreements to the Umbrella Agreement on or before September 30, 1999. 17.2 Arbitration. (1) All disputes between the Parties arising out of or in connection with this Agreement shall be subject to arbitration by one or more arbitrators in accordance with the ICC arbitration rules. Arbitration shall take place in London, England. (2) Any award rendered by the arbitrators shall be final and binding upon the Parties hereto. Judgment upon the award may be entered in any court of record of competent jurisdiction. Each Party shall pay its own expenses of arbitration and the expenses of the arbitrators shall be equally shared unless the arbitrators assess as part of their award all or any part of the arbitration expenses of one Party (including reasonable attorneys' fees) against the other Party. 17.3 Compliance with Laws. Subject to Section 15, each Party shall perform all of their obligations under this Agreement in accordance with all applicable laws, rules and regulations. 17.4 Publicity. Without the prior written consent of the other Party hereto, neither Party shall, and each of the Parties will cause their respective representatives not to, make any release to the press or other public disclosure, or make any statement to any other person other than their respective representatives, with respect to either the fact that discussions or negotiations are taking place concerning the collaborations between the Parties hereto or the existence or contents of this Agreement, except for such public disclosure as may be necessary for the disclosing Party not to be in violation of or in default under any applicable law, regulation, government order or as may be necessary to apply for subsidies or to prepare and execute a collaboration with development partners of subsystems for the Heater Subsystem and/or Fuel Cell Subsystem. 17.5 Notice. Any notice or other communication required or permitted under this Agreement shall be sent by recognized international courier service, charges pre-paid, or by facsimile transmission, to the address or facsimile number specified below: If to Vaillant: Joh. Vaillant GmbH u. Co. Berghauser StraBe 40 42859 Remscheide Federal Republic of Germany Attn: Fax: If to PP: Plug Power, LLC 968 Albany-Shaker Road Latham, New York 12110 USA Attn: Ana Galeano Fax: (518) 782-7914 or to such other address or facsimile number as the person may specify in a notice duly given to the sender as provided herein. A notice will be deemed to have been given upon receipt. 17.6 Independent Contractors. The Parties hereto shall be independent contractors with respect to each other, and neither shall be deemed to be the agent, principal, employee, servant, joint venturer or partner of the other for any purpose which could impose liability upon one Party for the act or failure to act of the other Party. 17.7 Sole Agreement. Subject to the Umbrella Agreement and any ancillary agreements thereto, this Agreement and any Exhibits attached hereto constitute the entire agreement between the Parties concerning the subject matter hereof and supersedes all prior understandings and agreements, whether written or oral. 17.8 No Implied Licenses. No rights or licenses with respect to a Party's IP, Confidential Information, Trademarks or other proprietary rights are granted or deemed granted to the other Party hereunder or in connection herewith, other than those rights expressly granted in this Agreement. 17.9 Severability. In the event that any provision of this Agreement shall be held illegal, void or ineffective, the remaining portions hereof shall remain in full force and effect so long as such remaining portions do not materially change the intent of this Agreement or the right or obligations of the Parties hereunder. If any term or provision of this Agreement is in conflict with any applicable statute or law in any jurisdiction, then such term or provision shall be deemed inoperative in such jurisdiction to the extent of such conflict and the Parties will renegotiate the affected terms and conditions of this Agreement to resolve any inequities. It is the intention of the Parties that, if any court or other tribunal construes any provision or clause of this Agreement, or any portion thereof, to be illegal, void or unenforceable because of the duration of such provision or the area or matter covered thereby; such court shall reduce the duration, area or matter of such provision and enforce such provision in its reduced form. 17.10 No Third Party Benefits. Nothing in this Agreement, express or implied, is intended to confer on any person other than the Parties hereto or their permitted assigns, any benefits, rights or remedies. 17.11 Governing Law. This Agreement shall be governed and construed in the accordance with the laws of England without giving effect to any conflicts of laws or other principles of any jurisdiction which would result in the application of any law other than the law of England. 17.12 Assignments. Neither Party shall assign or transfer any right and/or obligation under this Agreement to any other third party, whether voluntarily or by operation of law, without the prior written consent of the other Party, provide that a Party, except in the case of an assignment to a competitor of the other Party, may assign this Agreement without the consent of the other Party in connection with a merger, consolidation or other change in control of such Party or a sale of all or substantially all of such Party's assets. Any prohibited assignment shall be null and void. Subject to the foregoing, this Agreement will inure to the benefit of the Parties and their respective permitted successors and assigns. 17.13 No Waiver. A waiver by either Party of a breach or violation of any provision of this Agreement will not constitute or be construed as a waiver of any subsequent breach or violation of that provision or as a waiver of any breach or violation of any other provision of this Agreement. 17.14 Amendments. This Agreement may not be amended, supplemented or otherwise modified except by an instrument in writing signed by both Parties. 17.15 Specific Performance. The Parties agree that breach by either Party of Sections 10, 12, 13 and 14 could result in irreparable harm to the other Party. Accordingly, in the event that either Party breaches its obligations hereunder, the other Party shall be entitled to enjoin any further breach in addition to any other rights such Party may have at law or in equity. 17.16 Headings. Any headings and captions included herein are for convenience of reference only and shall not be used to construe this Agreement. 17.17 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute but one in the same instrument. IN WITNESS WHEREOF, the Parties hereto, by their duly authorized officers, have executed this Agreement as of the date first above written. JOH. VAILLANT GMBH U. CO. By: /s/ Manfred Ahle ---------------------------------- Title: Managing Director PLUG POWER, LLC By: /s Gary Mittleman ---------------------------------- Title: President and CEO Exhibit A List of Countries Comprising Europe Albania Macedonia (The Former Yugoslav Republic of Macedonia) Andorra Malta Austria Moldova Belarus Monaco Belgium Netherlands Bosnia and Herzegovina Norway Bulgaria Poland Croatia Portugal Czech Republic Romania Denmark Russia Estonia San Marino Finland Slovakia France Slovenia Germany Spain Greece Sweden Hungary Switzerland Iceland Turkey Ireland Turkmenistan Italy Ukraine Latvia United Kingdom Liechtenstein Vatican City Lithuania Yugoslavia (Serbia and Montenegro) Luxembourg Exhibit A1 Prototype Specifications [To be attached on or before July 1, 2000.] Exhibit A2 Initial Product Specifications [To be attached on or before January 1, 2001.] Exhibit B FCS Development Plan [To be attached on or before November 30, 1999.] Exhibit C HS Development Plan [To be attached on or before November '30, 1999.] Exhibit D Integration Development Plan [To be attached on or before November 30, 1999.] Exhibit E FCS Production Plan [To be attached on or before January 1, 2001.] Exhibit F HS Production Plan [To be attached on or before January 1, 2001.] Exhibit G Initial Product Production Plan [To be attached on or before January 1, 2001.] EX-10.25 13 1997 MEMBERSHIP OPTION PLAN & AMENDMENT Exhibit 10.25 PLUG POWER, L.L.C. SECOND AMENDMENT AND RESTATEMENT OF THE MEMBERSHIP OPTION PLAN February 15, 1999 WHEREAS, Plug Power, L.L.C., a limited liability company organized under the laws of the State of Delaware ("Company") entered into a Membership Option Plan and Agreement, effective as of the 1st day of July, 1997 (the "Plan"); and WHEREAS, the Company desires to amend the Plan to provide consultants the opportunity to acquire Class B membership interests in the Company and to share in its success, with the added incentive to work effectively for and in the Company's interest; and WHEREAS, at a special meeting of the Members of Company held on January 26, 1999, at which all of the Members were present, either by person or by telephone, and acting with full authority, the Members unanimously agreed to amend the limited liability company agreement to permit the company to provide consultants the opportunity to acquire Class B membership interests in the Company, subject to the specific prior approval by the board of managers for each consulting contract that provides stock options as part of the contract; and WHEREAS, the Company desires to also amend the Plan to include in the definition of "Employees" eligible to participate in the Plan those employees of the Company who become directly employed by GE Fuel Cell Systems, L.L.C. ("GEFCS"); and WHEREAS, such former employees shall be subject to the same terms and conditions of the Plan; and NOW, THEREFORE, the text of the original Plan as amended is hereby amended and restated in its entirety to read as follows: Agreement, made and effective as of the 15th day of February, by Plug Power, L.L.C., a limited liability company organized under the laws of the State of Delaware ("Company"). WHEREAS, Company is a limited liability corporation with Class A membership interests and Class B membership interests, and WHEREAS, Company has determined that its interests will be advanced and best served by providing an incentive to its current employees, certain former employees and certain consultants, to acquire Class B membership interests in Company and to share in its success, with the added incentive to work effectively for and in Company's interest, NOW THEREFORE, Company hereby establishes the Plan as follows: ESTABLISHMENT OF PLAN The Plan shall be known as the Plug Power Membership Option Plan ("Plan"), and shall be effective on the date first above written. ELIGIBILITY Employees. All employees of Company shall participate in the Plan on its --------- effective date. An Employee who is eligible to participate in the Plan, as set forth on Exhibit "A" is hereinafter referred to as "Employee", or in the plural, as "Employees." Members of the Board of Managers ("Managers") of the Company and/or Corporations named in lieu of a Manager, as set forth on Exhibit "B", shall also participate in the Plan on its effective date. In addition, employees of the Company who become directly employed GE Fuel Cell Systems, L.L.C. ("GEFCS Employees") shall also be eligible to participate in the Plan. Hereafter, in this Plan, Managers and/or Corporations and/or GEFCS Employees shall be referred to as "Employees", and shall be subject to the remaining provisions of this Plan as though they were Employees, unless specifically provided otherwise. Consultants. The board of managers of the Company shall determine those ----------- consultants of Company, as set forth on Exhibit "C", eligible to participate in the Plan on its effective date. A Consultant who is eligible to participate in the Plan and who is shown on the attached Exhibit "C" is hereinafter referred to as "Consultants", or in the plural, as "Consultants." GRANT OF OPTIONS Employees. Company hereby grants to the Employees, as shown on Exhibit "A" --------- (Employees) and Exhibit "B" (Managers), as a matter of separate agreement and not in lieu of any other compensation to which such Employees may be otherwise entitled, the right and option, hereinafter called "Option", or "Options", to purchase the number shares of Class B membership interests of the Company, at such times, and in such amounts, as the Company shall determine, on the terms and conditions hereinafter set forth. Company may, from time to time, grant additional Options to Employees. Consultants. Company hereby grants to the Consultants, as shown on Exhibit ----------- "C", as a matter of separate agreement, the right and option, hereinafter called "Option" or "Options", to purchase the number shares of class B membership interests of the Company, at such times, and in such amounts, on the terms and conditions hereinafter set forth. Company may, from time to time, amend Exhibit "C", as may be required to add new Consultants who become eligible for the Plan, or to grant additional Options to Consultants, but not without the prior authorization of the board of managers. 2 OPTION PRICE The option exercise price for shares of Class B membership interests shall be set forth on Exhibit "A" for Employees, Exhibit "B" for Managers, and Exhibit "C" for Consultants, and shall be determined by the Company's board of managers and which price shall represent the fair value of Company stock on the grant date. WHEN OPTIONS ARE EXERCISABLE Employees. Options shall be exercisable by Employees only after such --------- Options have vested. Furthermore, no options may be exercised, even if vested, prior to July 1, 2000, except as provided in sub-paragraphs (f) and (a) below. Vesting under this Plan is determined by an Employee's length of service with the Employer, measured from an Employee's date of hire by the Employer, provided however, that if an Employee's direct prior employer was either Mechanical Technology, Inc. or Detroit Edison, such Employees prior service (measured from his date of hire) with either Mechanical Technology, Inc. or Detroit Edison shall be counted as service for purposes of this Plan. Options shall vest as follows. (a) If an Employee has completed 12 months of continuous service as of the date of the option grant, such Employee shall immediately be 20% vested in the Options granted. If an Employee has not completed 12 months of continuous service as of the date of Option grant, he shall become 20% vested in his Options once he has completed twelve months of continuous service. (b) An additional 20% of Options shall vest on the first 12 month anniversary from the date of original Option grant. (c) An additional 20% of Options shall vest on the second 12 month anniversary from the date of original Option grant. (d) An additional 20% of Options shall vest on the third 12 month anniversary from the date of original Option grant. (e) An additional 20% of Options shall vest on the fourth 12 month anniversary from the date of original Option grant. (f) All Options originally granted shall become immediately vested and exercisable in the event of the sale of all or substantially all of the Company's assets, or in the event of the sale of all or substantially all of the Company's Class A membership interests. 3 (g) All vested options shall become immediately exercisable in the event the Company's Class A membership interests become publicly traded. (h) Notwithstanding sub-paragraphs (a) through (e) above, Options granted to Managers, shall vest as follows: (1) 50% of Options granted to Managers shall vest immediately upon grant. (2) An additional 25% of Options granted to Managers shall vest 12 months following grant. (3) An additional 25% of Options granted to Managers shall vest 24 months following date of grant. Options granted under this Agreement shall automatically expire, and be null and void, ten (10) years after the date of grant, except in the death of an Employee. In the event that an Employee's employment shall be terminated for any reason except death, any Options held by the affected Employee, and exercisable, must be exercised, if at all, within a period of one (1) month following any such termination. Any Options outstanding and not exercised within such one (1) month period shall become void. In no event shall this one (1) month period be in addition to the ten (10) year option periods described in the paragraph immediately preceding, In the event of the death of an Employee while holding Options which were exercisable on the date of death, the estate or beneficiary of such Employee shall have the right to exercise any such outstanding Options for a period of one (1) year following death, even if such extended exercise period extends beyond the ten (10) year option period. The Options granted by this agreement shall not be transferable by the Employee other than by will or the laws of descent and distribution. Consultants. Options shall be exercisable by Consultants only after such ----------- Options have vested. Furthermore, no options may be exercised, even if vested, prior to July 1, 2000, except as provided in sub-paragraphs (d) and (e) below. Options shall vest as follows: (a) One-third (1/3) of the Options shall vest upon the expiration of Consultant's initial contract term. (b) An additional one-third (1/3) of the Options shall vest on the first 12 month anniversary of the expiration of the initial contract term. (c) The remaining one-third (1/3) of Options shall vest on the second 12 month anniversary of the expiration of the initial contract term. 4 Options shall vest in accordance with the foregoing schedule regardless of whether Consultant's initial contract terminates prior to the expiration of the contract term or whether Consultant's contract is renewed. Vesting, however, is subject to and contingent upon Consultant complying with the non-compete obligations set forth in his/her consulting contract. Additionally, should Consultant, at any time, provide services for, or work for a competing company, then all outstanding options, whether vested or not, become immediately null and void. If for any reason Consultant does not complete the contracted work as is evident by Consultant receiving less than the original contracted revenue, then the awarded options will be proportionately reduced to reflect the same percentage as cash paid versus original contract revenue. (d) Options originally granted shall become immediately vested and exercisable in the event of the sale of all or substantially all of the Company's assets, or in the event of the sale of all or substantially all of the Company's Class A membership interests. (e) All vested options shall become immediately exercisable in the event the Company's Class A membership interests become publicly traded. Options granted under this Agreement shall automatically expire, and be null and void, five (5) years after the date of grant, except in the death of a Consultant. In the event of the death of a Consultant while holding Options which were exercisable on the date of death, the estate or beneficiary of such Consultant shall have the right to exercise any such outstanding Options for a period of one (1) year following death, even if such extended exercise period extends beyond the five (5) year option period. The Options granted by this agreement shall not be transferable by the Consultant other than by will or the laws of descent and distribution. HOW OPTIONS ARE EXERCISABLE An Employee, Consultant or his/her estate or beneficiary shall exercise the Options granted by this agreement by written notice to the Company, which notice shall specify the number of Class B membership interests to be purchased, and which shall be accompanied by a check in full payment of the option price for such Class B membership interests. Until such payment, an Employee, Consultant or his/her estate or beneficiary shall have no rights in the optioned Class B membership interests. Until such time as the Company's membership interests or stock is publicly traded or until such time that the board of managers amend this agreement, the Employee and Consultant agrees that all interests purchased by him/her, his/her estate or beneficiary under the Plan are 5 acquired for investment and not for distribution. The Employee and Consultant also agrees that any notice of exercise of the Option shall become accompanied by a written representation, signed by the Employee and/or Consultant, to that effect. If the Company ever commences a public offering of its securities, it is likely the Company's membership interests will be reclassified into shares of common stock. Such reclassification will be structured so that Employee's and/or Consultant's percentage of ownership or interest in the Company is not diluted. Employees and Consultants also understand that should the Company's membership interests or stock become publicly traded, there may be certain restrictions placed on the sale of interests held by Employees and/or Consultants, and other insiders, for a period of up to one year or longer, as determined by the underwriter of any such transaction. Employees and Consultants further understand that neither the Company, its officers, nor its board of managers can guarantee or promise that the Company's membership interests or stock will ever be registered or publicly traded. Additionally, there may never be a market for any such Company membership interests or stock, and that such Company membership interests or stock may be unmarketable. The Company shall have no duty or obligation to repurchase any or all of its outstanding Class B membership interests. CONTINUED SERVICE Employees. Employee, in consideration of the granting of Options to --------- him/her, agrees that he/she will continue to render services to the Company except as he/she may be prevented from doing so by death, disability, retirement, or termination. Nothing in the Plan shall be deemed to confer to an Employee any guaranteed right to continue to be employed by the Company, or interfere in any way with the right of the Company to terminate his/her employment, as provided by the by- laws of the Company or as provided by law. Consultants. Nothing in the Plan shall be deemed to confer to a Consultant ----------- any guaranteed right to continue to be under contract by the Company, or interfere in any way with the right of the Company to terminate his/her contract, as provided by the by-laws of the Company or as provided by law. TAX EFFECTS Employees and Consultants understand that there may be both federal and state income tax consequences associated with the exercise of the Options granted by the Plan, including withholding requirements. Employees acknowledge that they have conferred with their 6 respective counsel regarding any and all such tax consequences, and that in no event shall Company be liable or responsible for any such tax liability. GOVERNING LAW The Plan shall be governed by the law of the State of New York. IN WITNESS WHEREOF, Corporation has caused this agreement to be executed on the date of first above written. Plug Power, L.L.C. By: /s/ Gary Mittleman ----------------------------------- Gary Mittleman President Chief Executive Officer 7 FIRST AMENDMENT TO SECOND AMENDMENT AND RESTATEMENT OF THE MEMBERSHIP OPTION PLAN PLUG POWER, L.L.C. This First Amendment to Second Amendment and Restatement of the Membership Option Plan (the "Option Plan") is effective as of first day of October, 1999, and amends the Option Plan, dated as of February 15, 1999; WHEREAS, Plug Power, L.L.C. (the "Company") desires to amend the Option Plan to provide for the ability of the Company to vary the terms of vesting and exercisability of options granted under the Option Plan; WHEREAS, at a meeting of the Members of the Company held on October 1, 1999, at which all Members were present, either by person or by telephone, and acting with full authority, the Members agreed to amend the Option Plan, as set forth below; NOW, THEREFORE, the Option Plan is hereby amended as follows: 1. On page 5 of the Option Plan, before the title "How Options Are Exercisable", insert the following sentence in a new paragraph: "Notwithstanding anything to the contrary provided herein, the Company may, at its option, provide for different time limitations for vesting and exercisability of Options by written agreement with the grantee of such options." 2. The remainder of the Option Plan shall continue in full force and effect. 8 Exhibit A Stock Option Plan Grant Option Employee Name Date Share Price - ------------- ----- ----------- ACKER, WILLIAM 02/27/98 $1.00 ACKER, WILLIAM 01/18/99 $5.00 ACKER, WILLIAM 10/01/97 $1.00 ACKERNECT, JON 01/11/99 $5.00 AGEN, CHRISTOPHER 05/17/99 $6.67 ALLEN, GEORGE 01/22/99 $5.00 ALVARO, ROBERT 02/18/98 $1.00 ALVARO, ROBERT 01/18/99 $5.00 ANTONELLI, GARY D. 10/01/97 $1.00 ANTONELLI, GARY D. 01/18/99 $5.00 AUSTIN, DOUG 12/21/98 $5.00 BARCOMB, CARLTON 03/29/99 $6.67 BARD, GREG 11/23/98 $5.00 BARROR, CHRISTOPHER 02/18/99 $6.67 BEBB, DAVID 07/14/98 $1.00 BEBB, DAVID 01/18/99 $5.00 BENNER, RONALD 02/22/99 $6.67 BETZ, BILL 06/22/98 $1.00 BETZ, BILL 01/18/98 $5.00 BISCEGLIA, BRYAN 03/23/98 $1.00 BISCEGLIA, BRYAN 01/18/99 $5.00 BISCHOFF, TOM 04/21/99 $6.67 BLY, JEFFREY 11/23/98 $5.00 BOICE, HAROLD 03/15/99 $6.67 BOILARD, JOSEPH 09/14/98 $5.00 BOILARD, JOSEPH 01/18/99 $5.00 BOMBARD, DENISE 04/05/99 $6.67 BOUCHEY, DARCY 03/08/99 $6.67 BOWEN, JOHN 10/06/98 $5.00 BOWEN, JOHN 01/18/99 $5.00 BOYER, JEFF 08/06/98 $5.00 BOYER, JEFF 01/18/99 $5.00 BREITENSTEIN, ADRIAN 06/07/99 $6.67 BROWNELL, ANDREW 04/19/99 $6.67 BRUCK, DANIEL 03/29/99 $6.67 BRUNNER, ADAM 10/01/97 $1.00 BRUNNER, ADAM 01/18/99 $5.00 BUCKNAM, ALLEN 02/27/98 $1.00 1 BUCKNAM, ALLEN 10/01/97 $1.00 BUCKNAM, ALLEN 01/18/99 $5.00 BUDESHEIM, ERIC 10/01/97 $1.00 BUDESHEIM, ERIC 01/18/99 $5.00 BUESING, DONALD G. 10/01/97 $1.00 BUESING, DONALD G. 01/18/99 $5.00 BUONOME, RALPH 03/01/99 $6.67 BRUCKHARD, RUSSELL 02/15/99 $5.00 CANFIELD, FRANK 07/27/98 $5.00 CANFIELD, FRANK 01/18/99 $5.00 CARLSTROM, CHUCK 01/06/98 $1.00 CARLSTROM, CHUCK 04/29/98 $1.00 CARLSTROM, CHUCK 06/29/98 $1.00 CARLSTROM, CHUCK 01/18/99 $5.00 CERVENY, JOHN 10/01/97 $1.00 CERVENY, JOHN 01/18/99 $5.00 CHEN, JEFFREY 02/04/98 $1.00 CHEN, JEFFREY 06/29/98 $1.00 CHEN, JEFFREY 01/18/98 $5.00 CHOW, OSCAR 01/04/99 $5.00 CHUMMERS, LAURA 12/02/97 $1.00 CHUMMERS, LAURA 01/18/99 $5.00 CLARK, PAUL 01/18/99 $5.00 COLON, DON 02/22/99 $6.67 COMI, CHRIS 01/11/99 $5.00 CROGAN, JASON 06/15/98 $1.00 CROGAN, JASON 01/18/99 $5.00 CRONIN, J. CHARLES 04/29/98 $1.00 CRONIN, J. CHARLES 01/18/99 $5.00 CROSIER, JENNIFER 12/14/98 $5.00 CURRY, JOHN 04/26/99 $6.67 CUSACK, MATTHEW J. 10/01/97 $1.00 CUSACK, MATTHEW J. 01/18/99 $5.00 CYPHERS, TAMARA 05/24/99 $6.67 DANNEHEY, CHRISTOPHER 04/21/98 $1.00 DANNEHEY, CHRISTOPHER 01/18/99 $5.00 DEAN, ROBERT 02/22/99 $6.67 DEMBROSKY, DANA 03/02/98 $1.00 DEMBROSKY, DANA 01/18/99 $5.00 DEMIRCI, OSMAN 04/05/99 $6.67 DHAR, MANMOHAN 05/14/99 $6.67 DHAR, MANMOHAN 02/27/98 $1.00 DHAR, MANMOHAN 06/29/98 $1.00 DHAR, MANMOHAN 10/01/97 $1.00 2 DHAR, MANMOHAN 01/18/99 $5.00 DISORDA, STEVE 01/05/98 $1.00 DISORDA, STEVE 01/18/99 $5.00 DORMOND, LOUIS 03/01/99 $6.67 DYNAN, DAVE 03/01/99 $6.67 EARLE, GEORGE 03/01/99 $6.67 EDISON DEVELOPMENT CORP. 07/10/97 $1.00 EDISON DEVELOPMENT CORP. 07/16/98 $5.00 EISMAN, GLENN 06/15/98 $1.00 EISMAN, GLENN 07/31/98 $5.00 EISMAN, GLENN 01/18/99 $5.00 EISMAN, GLENN 05/14/99 $6.67 ENFIELD, DARRYL 03/30/98 $1.00 ENFIELD, DARRYL 01/18/99 $5.00 ERNST, WILLIAM D. 10/01/97 $1.00 ERNST, WILLIAM D. 01/18/99 $5.00 ETHIER, ANNE 10/19/98 $5.00 ETHIER, ANNE 01/18/99 $5.00 EVANS, GLENN 01/19/98 $1.00 EVANS, GLENN 01/18/99 $5.00 FADELEY, SCOTT 03/16/98 $1.00 FADELEY, SCOTT 01/18/99 $5.00 FARKASH, RON 02/01/99 $5.00 FARRELL, WILLIAM 04/05/99 $6.67 FEDOROWICZ, GARTH 12/21/98 $5.00 FIORINI, LOU 03/08/99 $6.67 FOGARTY, JOHN 06/29/98 $1.00 FOGARTY, JOHN 01/18/99 $5.00 FRAKES, TIMOTHY 03/29/99 $6.67 GALEANO, ANA-MARIA 10/28/98 $5.00 GALEANO, ANA-MARIA 01/18/99 $5.00 GALEANO, ANA-MARIA 03/24/98 $1.00 GALEANO, JULIE 06/08/98 $1.00 GALEANO, JULIE 01/18/99 $5.00 GARVEY, CHING-HONG 01/11/99 $5.00 GECK, FRIEDRICH 06/07/99 $6.67 GENC, SUAT 05/31/99 $6.67 GIERISCH, GEORGIANA 12/22/97 $1.00 GIERISCH, GEORGIANA 01/18/99 $5.00 GLICKMAN, BARRY 04/26/99 $6.67 GLYNN, ROBERT 03/23/98 $1.00 GRAHAM, DAVID 10/20/97 $1.00 GRAHAM, DAVID 01/18/99 $5.00 HAACK, DAVID 03/29/99 $6.67 3 HALLUM, RYAN 03/01/99 $6.67 HAMM, ROBERT L. 10/01/97 $1.00 HAMM, ROBERT L. 01/18/99 $5.00 HARRINGTON, MARSHA 10/01/97 $1.00 HARRINGTON, MARSHA 01/18/99 $5.00 HARRIS, CHARLES 02/17/98 $1.00 HARRIS, CHARLES 01/18/99 $5.00 HEBERT, DAVID 11/16/98 $5.00 HOCKEY, BERNICE 03/22/99 $6.67 HOEHN, JAMES 03/15/99 $6.67 HOYT, ROBERT 04/26/98 $1.00 HOYT, ROBERT 01/18/99 $5.00 HUANG, WENHUA 10/01/97 $1.00 HUANG, WENHUA 01/18/99 $5.00 HULETT, JOE 06/07/99 $6.67 HULETT, SCOTT 05/24/99 $6.67 JAMES, DAVID 12/14/98 $5.00 JAMES, DAVID 01/18/99 $5.00 JOHNSON, DARIC 03/29/99 $6.67 JOHNSON, KATHLEEN 03/29/99 $6.67 JONES, DANIEL O. 10/01/97 $1.00 JONES, DANIEL O. 01/18/99 $5.00 JOURDIN, ALLAN 01/28/99 $5.00 KAN, WEI-PING 03/29/99 $6.67 KARUPPAIAH, CHOCKKALINGHAM 10/27/97 $1.00 KARUPPAIAH, CHOCKKALINGHAM 01/18/99 $5.00 KELLY, ALYSSON 03/02/98 $1.00 KELLY, ALYSSON 01/18/99 $5.00 KELLY, AMI 03/02/98 $1.00 KELLY, AMI 01/18/99 $5.00 KILCHER, JOHN 04/27/98 $1.00 KILCHER, JOHN 01/18/99 $5.00 KIRK, PETER 05/17/99 $6.67 KNAPP, KARL 10/01/97 $1.00 KNAPP, KARL 01/18/99 $5.00 KODESCH, STEVEN 04/19/99 $6.67 KRALICK, JAMES 02/09/98 $1.00 KRALICKM JAMES 01/18/99 $5.00 KRASTINS, KENNETH 09/28/98 $5.00 KRASTINS, KENNETH 01/18/99 $5.00 KUECKELS, ERIC 04/08/99 $6.67 LACY, ROBERT 05/11/98 $1.00 LACY, ROBERT 01/18/99 $5.00 LAPIETRO, ROBERT 06/14/99 $6.67 LARGENT, BILL 05/17/99 $6.67 LATTIMORE, MAURIE 11/16/98 $5.00 LATTIMORE, MAURIE 01/18/99 $5.00 LAW, JOHN 03/30/98 $1.00 LAW, JOHN 06/29/98 $1.00 LAW, JOHN 01/18/99 $5.00 LAW, JOHN 05/14/98 $6.67 LEE, MELANIE 04/29/99 $6.67 LEET, RANDY 11/13/97 $1.00 LEET, RANDY 01/18/99 $5.00 LEONARD, TINA S. 10/01/97 $1.00 LEONARD, TINA S. 10/28/98 $5.00 LEONARD, TINA S. 01/18/99 $5.00 LETKO, JOHN 02/01/99 $5.00 LEWIS, PHILIP 10/01/97 $1.00 LEWIS, PHILIP 01/18/99 $5.00 LOVE, JOHN 02/23/98 $1.00 LOVE, JOHN 01/18/99 $5.00 LYONS, SEAN 11/23/98 $5.00 MACCUE, SANDRA E. 10/01/97 $1.00 MACCUE, SANDRA E. 01/18/99 $5.00 MACCUE, SANDY 04/19/99 $6.67 MADDALONI, RICHARD E. 10/01/97 $1.00 MADDALONI, RICHARD E. 01/18/99 $5.00 MARONCELLI, MARK 06/07/99 $6.67 MARSHALL, DAVID 03/29/99 $6.67 MARVIN, RUSSEL 01/12/98 $1.00 MARVIN, RUSSEL 01/12/98 $1.00 MAS, CARL 06/07/99 $6.67 MASTERSON, NICOLE 04/05/99 $6.67 MATLOCK, RICHARD 03/23/98 $1.00 MATLOCK, RICHARD 01/18/99 $5.00 MATTICE, SHEILA 05/17/99 $6.67 MAYNARD, WILLIAM B. 10/01/97 $1.00 MAYNARD, WILLIAM B. 01/18/99 $5.00 MCARDLE, BILL 05/24/99 $6.67 MCELROY, JAMES 02/15/99 $5.00 MCNAMEE, GEORGE - BOARD 07/10/97 $1.00 MCNAMEE, GEORGE - BOARD 07/16/98 $5.00 MEASE, KEVIN 01/11/99 $5.00 MEIER, GARY 12/21/98 $5.00 MEREDITH, JON 01/18/99 $5.00 MIGIRDITCH, GREG M. 10/01/97 $1.00 MIGIRDITCH, GREG M. 01/18/99 $5.00 QUICK, ROBERT 08/10/98 $5.00 QUICK, ROBERT 01/18/99 $5.00 RATHBURN, ROBERT 03/30/98 $1.00 RATHBURN, ROBERT 01/18/99 $5.00 REMILLARD, MATTHEW 10/01/97 $1.00 REMILLARD, MATTHEW 01/18/99 $5.00 RHODES, THOMAS 10/01/97 $1.00 RHODES, THOMAS 01/18/99 $5.00 RIBSAMEN, FOSTER 02/10/98 $1.00 RIBSAMEN, FOSTER 01/18/99 $5.00 RICHARDSON, CURTIS 03/15/99 $6.67 ROBB, WALTER-BOARD 07/10/97 $1.00 ROBB, WALTER-BOARD 07/16/98 $5.00 ROBERTS, GRANT 02/17/98 $1.00 ROBERTS, GRANT 01/18/99 $5.00 ROBERTSON, RICHARD 05/04/98 $1.00 ROBERTSON, RICHARD 01/18/99 $5.00 ROBINSON, DAVID 07/27/98 $5.00 ROBINSON, DAVID 01/18/99 $5.00 ROCK, DEBRA 12/15/97 $1.00 ROCK, DEBRA 01/18/99 $5.00 RODRIGUEZ, DANIEL 02/22/99 $6.67 ROLLINS, DAVID 04/05/99 $6.67 ROSSI, EUGENE 12/14/98 $5.00 ROSSI, EUGENE 01/18/99 $5.00 RUSH, KENNETH 06/22/98 $1.00 RUSH, KENNETH 01/18/99 $5.00 SANDERSON, DEREK 05/26/99 $6.67 SANKEL, BRIAN 02/22/99 $6.67 SCHAFER, GUNTER 06/03/99 $6.67 SCHREIBER, DIANE 04/19/99 $6.67 SCOTT, BRUCE 03/30/98 $1.00 SCOTT, BRUCE 01/18/99 $5.00 SCOVELLO, FRANK 04/26/99 $6.67 SHAPIRO, CHANAN 07/13/98 $1.00 SHAPIRO, CHANAN 01/18/99 $5.00 SHERRY, JAMES 04/05/99 $6.67 SHERWIN, GREG 02/22/99 $6.67 SILER, DAVID N. 10/01/97 $1.00 SILER, DAVID N. 01/18/99 $5.00 SILVESTRI, GREG 06/14/99 $6.67 SKIDMORE, DUSTAN 05/18/99 $6.67 SKRZYCKE, DEAN 01/19/98 $1.00 SKRZYCKE, DEAN 01/18/99 $5.00 MIKLAS, RICHARD 01/28/99 $5.00 MILLER, MATTHEW 05/04/98 $1.00 MILLER, MATTHEW 01/18/99 $5.00 MITTLEMAN, GARY 06/28/97 $1.00 MITTLEMAN, GARY 07/16/98 $5.00 MOUSAW, JOHN 10/29/98 $5.00 MOUSAW, JOHN 01/18/99 $5.00 MUELLER, JOHN 01/25/99 $5.00 NELSON, MILTON 09/10/98 $5.00 NELSON, MILTON 01/18/99 $5.00 NELSON, CAROL 03/22/99 $6.67 NESTLER, EDWARD JR. 04/06/98 $1.00 NESTLER, EDWARD JR. 01/18/99 $5.00 NESTLER, EDWARD SR. 10/01/97 $1.00 NESTLER, EDWARD SR. 01/18/99 $5.00 NEUMANN, DAVID 10/28/98 $5.00 NEUMANN, DAVID 12/15/97 $1.00 NEUMANN, DAVID 01/18/99 $5.00 NIEDZIEJKO, EDWARD 05/24/99 $6.67 NOLAN, JOHN 04/26/99 $6.67 O'HARA, SCOTT 06/10/99 $6.67 OKO, URIEL 06/08/98 $1.00 OKO, URIEL 01/18/99 $5.00 OYEROKUN, FOLUSHO 01/12/98 $1.00 OYEROKUN, FOLUSHO 01/18/99 $5.00 PATTI, DAVID 02/15/99 $5.00 PESCHKE, NORM 12/07/98 $5.00 PESCHKE, NORM 01/18/99 $5.00 PICCIRILLO, NICK 11/23/98 $5.00 PICCIRILLO, NICK 01/18/99 $5.00 PIMENTEL, CHARLES 04/12/99 $6.67 PITTS, LARRY 07/27/98 $5.00 PITTS, LARRY 01/18/99 $5.00 POMYKAI, MICHAEL 10/19/98 $5.00 POWER, ROBERT 08/10/98 $5.00 POWER, ROBERT 01/18/99 $5.00 PRESCOTT, GARNET 02/08/99 $5.00 PRESTIPINO, JOHN 07/27/98 $5.00 PRESTIPINO, JOHN 01/18/99 $5.00 PREVISH, TOM 07/01/98 $1.00 PREVISH, TOM 01/18/99 $5.00 PURNER, JEFF 01/18/99 $5.00 PUSTOLKA, MARK 02/22/99 $6.67 QUERRARD, DAVID 05/24/99 $6.67 6 SMITH, DAVID 04/13/98 $1.00 SMITH, DAVID 01/18/99 $5.00 SMITH, DOUGLAS 02/08/99 $5.00 SPARGO, TRACY 04/12/99 $6.67 STANTON, ROBERT 03/02/98 $1.00 STANTON, ROBERT 01/18/99 $5.00 STERNLICHT, BENO-BOARD 07/10/97 $1.00 STERNLICHT, BENO-BOARD 07/16/98 $5.00 SUMIGRAY, WILLIAM P. 10/01/97 $1.00 SUMIGRAY, WILLIAM P. 01/18/99 $5.00 SUWALSKI, HENRY 03/22/99 $6.67 TANG, CHING-JEN 04/19/99 $6.67 THOMAS, MARK 06/14/99 $6.67 TOEPFER, TIM 01/25/99 $5.00 TOMSON, LOU 01/11/99 $5.00 TOMSON, LOU 05/14/99 $6.67 VANHEERTUM III, JOHN 10/01/97 $1.00 VANHEERTUM III, JOHN 01/18/99 $5.00 VARIN, ROGER 04/27/98 $1.00 VARIN, ROGER 01/18/99 $5.00 WARREN, DAVID 03/02/98 $1.00 WARREN, DAVID 01/18/99 $5.00 WHEELER, MARIE 05/24/99 $6.67 WHIPPLE, KATHRYN 03/16/98 $1.00 WHIPPLE, KATHRYN 01/18/99 $5.00 WHITE, ERIC 02/02/98 $1.00 WHITE, ERIC 07/07/98 $1.00 WHITE, ERIC 01/18/99 $5.00 WILSHIRE, SCOTT 03/08/99 $6.67 WINCHELL, JOHN 01/04/99 $5.00 WINSLOW, ALAN 07/30/98 $5.00 WINSLOW, ALAN 01/18/99 $5.00 WOOD, AMY 05/26/98 $1.00 WOOD, AMY 01/18/99 $5.00 WOOLLEY, DAN 01/13/99 $5.00 WU, YAOBANG 01/12/98 $1.00 WU, YAOBANG 01/18/99 $1.00 ZEMSKY, JEFF 01/18/99 $5.00 ZIELINSKI, WIESLAW 05/24/99 $6.67 MITTLEMAN, GARY 07/19/99 $11.00 CREWELL, GARY 07/26/99 $11.00 DAIGNEAULT, MARK 07/26/99 $11.00 HARDWICKE, TED 07/26/99 $11.00 TANGUAY, SCOTT 07/26/99 $11.00 8 DAGOSTINO, ANTHONY 07/26/99 $11.00 SCRIVEN, TROY 07/26/99 $11.00 DLEO, JAMES 07/26/99 $11.00 MARE, TRAVIS 07/26/99 $11.00 SCHIMER, JAMIE 07/26/99 $11.00 TRAVER, ROB 07/26/99 $11.00 WHALEN, BRYAN 07/26/99 $11.00 POWER, DAN 07/26/99 $11.00 BAGSTAD, BRUCE 07/26/99 $11.00 HIERONYMI, MARTIN 07/26/99 $11.00 POWELL, PARKER 07/26/99 $11.00 BECKER, JAMIE 07/26/99 $11.00 BUELTE, STEVE 07/26/99 $11.00 LATORRE, MARIA 07/26/99 $11.00 BARKALOW, TOM 07/26/99 $11.00 VAINAUSKAS, PAUL 07/29/99 $11.00 SCHAFER, JENNIFER 08/02/99 $11.00 GOLIBER, JOHN 08/09/99 $11.00 KIRCHOFF, DAVID 08/09/99 $11.00 LEZBERG, ROBERT 08/11/99 $11.00 PLUG POWER, L.L.C. Exhibit B Option Director Name Grant Date Share Price Shares - ------------- ---------- ----------- ------ Beno Sternlicht 07/10/97 $1.00 50,000 07/16/98 $5.00 10,000 George McNamee 07/10/97 $1.00 100,000 07/16/98 $5.00 10,000 Walter Robb 07/10/97 $1.00 50,000 $5.00 10,000 EDC 07/10/97 $1.00 200,000 07/16/98 $5.00 30,000 POWER PLUG, L.L.C. Exhibit C Option Consultant Grant Date Share Price Shares - ---------- ---------- ----------- ------ Jim Mcelroy 02/15/99 $ 5.00 15,000 07/26/99 $11.00 6,000 Mike Walsh 07/26/99 $11.00 6,000 EX-10.27 14 DISTRIBUTION AGREEMENT CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. EXHIBIT 10.27 DISTRIBUTION AGREEMENT ---------------------- This DISTRIBUTION AGREEMENT ("Agreement") is dated as of the 27th day of June, 1997, and entered into by and between Plug Power, L.L.C., a limited liability company organized and existing under the laws of the State of Delaware ("Company"), with its principal place of business at 968 Albany-Shaker Road, Latham, New York 12110, and Edison Development Corporation, a company organized and existing under the laws of the State of Michigan ("Distributor"), with its principal place of business at 2000 Second Avenue, Detroit, Michigan 48226. BACKGROUND STATEMENTS WHEREAS, the Company owns all right, title and interest in certain fuel cells with capacities of 2 kilowatts and higher, as is set out more fully in Exhibit 1 ("Products"); WHEREAS, the Distributor in consideration for and in reliance of the grant of the exclusive distributorship hereunder has or will expend considerable time and funds to establish a distribution network, plant and facilities and training its support and sales staff. WHEREAS, the parties desire Distributor to act in certain circumstances as Company's exclusive distributor for the Products to certain entities within the United States as hereinunder specified. NOW THEREFORE, in consideration of the mutual covenants and agreements hereinunder set forth, and other good and valuable consideration the receipt and sufficiency of which is acknowledged, the parties agree as follows: 1 . APPOINTMENT. ----------- a. Upon execution of this Agreement, Company hereby appoints Distributor as Company's exclusive independent distributor during the term of this Agreement to promote and assist Company in the sale of Products which are developed by Plug Power, to end-users for stationary applications in the Territory, as that term is defined below, and subject to the terms and conditions provided herein. b. Upon execution of this Agreement, Distributor hereby accepts the appointment, subject to the terms and conditions as provided herein. 2. TERRITORY. --------- a. Distributor's territory for this Agreement shall mean the states of Michigan, Ohio, Indiana and Illinois ("Territory"). b. Without the prior written consent of the Company, Distributor shall not solicit nor seek customers for the Products, or establish or maintain a branch facility or distribution facility for the sale, servicing, warehousing, or storage of the Products or spare parts thereof outside the Territory. c. Distributor may only sell the Products directly and not for resale. d. DISTRIBUTOR MAY NOT SELL OR DISTRIBUTE THE PRODUCTS TO ANY ENTITY FOR TRANSPORTATION APPLICATIONS. e. Distributor will be the sole person or entity acting in such capacity in the Territory; and Company shall not appoint any subdistributor, other agent or person to distribute or promote the Products, or otherwise undertake Distributor's obligations in the Territory. 3. EXCLUSIVITY. ----------- a. The term "Exclusive" means that under this Agreement as long as Distributor is in full compliance with its obligations, including the percentage sales requirements set forth in Section 5 herein, Company shall not appoint any other distributor, agent, representative, or dealer for promotion or sale of ~he Products to end users for stationary applications in the Territory and shall further refrain from selling Products to end users for stationary applications in the Territory directly, other than through Distributor. b. Company shall not be responsible for transgression of Distributor's exclusive rights hereunder by third parties not controlled by Company, but shall not sell or deliver Products to any other party outside of the Territory if Company has knowledge that the Products are to be sold or distributed by or through another party in the Territory. c. In the event that Distributor is in default of its obligations under this Agreement, or after January 1, 2010, then Company retains the right, in addition to any other rights and remedies, to engage another distributor, dealer, agent, or other such representative on a nonexclusive basis for all or part of the Territory. d. In the event that Distributor engages in the distribution of any fuel cell product to end users for stationary applications within the Territory that is competitive with the Products, then the Company retains the right, in addition to any other rights and remedies, to engage another distributor, dealer, agent, or other such representative on a nonexclusive basis for all or part of the Territory. 4. PRICE OF PRODUCT. ---------------- a. The purchase price for the Products purchased by Distributor shall be [***], but nothing shall preclude the parties from mutually agreeing on a different price. [***] available to Distributor hereunder shall be expressly limited to cash sales payable in full at delivery and shall not include price arrangements offered by Company to others involving the leasing or financing of the Products, revenue sharing, or other hybrid arrangements with Company's customers. b. Any and all orders from time to time submitted by Distributor shall be subject to Company's then-prevailing terms and conditions of sale, which may be changed or established from time to time by Company at its discretion on notice to Distributor, including late fees, and interest on any unpaid amounts. 5. MINIMUM SALES OBLIGATION. ------------------------ Beginning on the third full calendar year after the Products are ready for market, and for each successive year during the term hereof, Distributor's sales of the Products shall meet or exceed the lower of either (i) on an annual basis [***], or (ii) [***] ("Sales Obligations"). Should Distributor fail to meet its Sales Obligations, this Agreement shall automatically and without notice become nonexclusive, provided however, that such failure to meet the Sales Obligations shall not be the basis for a default under or the termination of this Agreement. [***] 6. DISTRIBUTOR COVENANTS AND REPRESENTATIONS. ----------------------------------------- Distributor represents, warrants, to Company (its members, agents, officers, directors) and agrees: a. To provide Company with monthly nonbinding good-faith forecasts of its anticipated requirements and shipping dates for the three month period following each forecast (or, if shorter, the remaining term of this Agreement). b. Distributor shall not sell the Product outside the Territory. To ensure compliance with this requirement, each Product shall be identified by a unique serial number. This serial number will be used to identify Products sold outside the Territory. Should Company's review of a Product's serial number lead to the conclusion that a Product has been sold outside the Territory, such sale will be considered a breach of this Agreement. c. Not to (i) disassemble, decompile or otherwise reverse engineer the Product or otherwise attempt to learn the ideas underlying the Product; (ii) take any action contrary to Company's license granted to Distributor, except as expressly and unambiguously allowed under this Agreement; (iii) copy, modify or enhance the Product; or (iv) allow others to do any of the foregoing. d. Distributor shall advertise, promote and label the products with Company's name and trademarks ("Branding Materials"). Distributor shall provide Company with all such Branding Materials for Company's approval prior to their use. Company shall not unreasonably withhold its approval of the Branding Materials. Distributor shall not design the Branding Materials in such a way as to either imply or state that Distributor's relationship with Company is greater than that of an independent distributor. e. TO KEEP COMPANY INFORMED AS TO ANY PROBLEMS ENCOUNTERED WITH THE PRODUCTS AND ANY RESOLUTIONS ARRIVED AT FOR THOSE PROBLEMS, AND TO COMMUNICATE PROMPTLY TO COMPANY ANY AND ALL MODIFICATIONS, DESIGN CHANGES OR IMPROVEMENTS OF THE PRODUCT SUGGESTED BY ANY CUSTOMER, EMPLOYEE OR AGENT. DISTRIBUTOR FURTHER AGREES THAT COMPANY SHALL HAVE AND IS HEREBY ASSIGNED ANY AND ALL RIGHT, TITLE AND INTEREST IN AND TO ANY SUCH SUGGESTED MODIFICATIONS, DESIGN CHANGES, OR IMPROVEMENTS OF THE PRODUCT, WITHOUT THE PAYMENT OF ANY ADDITIONAL CONSIDERATION THEREFOR EITHER TO DISTRIBUTOR, OR ITS EMPLOYEES, AGENTS OR CUSTOMERS. DISTRIBUTOR WILL ALSO PROMPTLY NOTIFY COMPANY OF ANY INFRINGEMENT OF ANY TRADEMARKS OR OTHER PROPRIETARY RIGHTS RELATING TO THE PRODUCT. f. To accept returns in accordance with procedures specified from time to time by Company. g. Distributor shall carry out all sales promotion work and solicitation of sales for the Products diligently, using its reasonable efforts for the account of Company. These efforts shall include, but shall not in any way be limited to: (i) advertising and promoting the Products effectively; (ii) ordering and keeping a representative selection of Company's up-to-date promotional sales literature, technical bulletins, price lists, manuals, catalogues and other promotion materials in good condition; (iii) maintaining the equipment and facilities to enable Distributor to demonstrate the Products to potential new customers; and (iv) assisting Company in securing and protecting any property rights in connection with the Products in the Territory. h. Distributor shall not make any representations as to the Products other than those, if any, contained in written information and data provided by Company. Distributor shall be totally responsible for any of its representations and shall hold Company harmless from any claims and expenses, including, but not limited to, reasonable attorneys' fees, resulting from such unauthorized representations. i. Distributor shall not manufacture the Products, nor engage any entity other than Company to do so. 7. COMPANY'S OBLIGATIONS. --------------------- a. Company shall supply Distributor with copies of brochures, catalogues, technical specification sheets, and promotional sales literature and such other information or materials as Company, in its sole judgment, believes will assist Distributor in promoting and assisting in the sale and acceptance of the Products in the Territory. These items shall be conveyed in English, unless the parties otherwise agree from time to time. b. In the event that Company receives an inquiry for the Products from the end users in the Territory, Company will refer the prospect to Distributor. c. Company shall, at all times maintain an adequate level of inventory to timely meet all current and anticipated orders for the Products. 8. OPERATIONS AND EXPENSES. ----------------------- The detailed operations of the Distributor under this Agreement are subject to its sole control and management, subject to compliance with the terms hereof. Distributor shall be responsible for all of its own expenses and employees. Distributor agrees that it shall incur no expense chargeable to Company except as may be specifically authorized, in advance, in writing, in each case by Company nor shall any such expenses, including taxes, fees, or similar charges, be deducted from any amounts due hereunder. 9. TRADEMARK LICENSE AND USE. ------------------------- a. Company grants to Distributor a non-exclusive, non-transferable license to use trademark(s) described in Exhibit 2 to this Agreement ("Authorized Trademarks") only in connection with the sale and promotion of the Products in the Territory and during the term of and pursuant to the terms and conditions of the Agreement. No trademark, trade name or other designations may be used without the written consent of Company except as expressly provided in this section. Company expressly allows Distributor to represent that it is a distributor of the Products, including on the Products themselves, advertising materials, stationary and letterhead. b. Distributor shall not assign or sub-license its rights to the Authorized Trademarks to any other person or entity. c. Distributor shall not remove, change, obscure, or add to the labels, markings, names or trademarks that Company has affixed to any of the Products. d. Distributor shall not attempt to, or register any of the Authorized Trademarks in any jurisdiction without the express consent of Company. e. Distributor acknowledges and agrees that Company's remedy at law for any breach of Company's obligations under this paragraph would be inadequate, and agrees and consents that temporary and permanent injunctive relief may be granted in any action or proceeding which may be brought to enforce any provision hereof without the necessity of proof of actual damages. 10. CONFIDENTIALITY. --------------- a. Without the prior written consent of Company, Distributor shall not disclose to any third party any confidential business information or trade secrets of Company, including but not limited to: the content of this Agreement; customer lists; product specifications; product technical manuals; service records; financial or sales reports; price lists; and any materials related to Company's customers, financial performance, or design of the Products, except for or in connection with any assignment permitted under Section 16 hereof. b . Distributor hereby acknowledges and agrees that the Products are proprietary to Company. Distributor agrees to use utmost diligence to protect the trade secrets and other proprietary rights of Company in the Products from disclosure to third parties. Distributor shall also promote compliance with the terms and conditions of this Agreement by employees and others with access to the Products. c. Distributor acknowledges and agrees that Company's remedy at law for any breach of Company's obligations under this paragraph would be inadequate, and agrees and consents that temporary and permanent injunctive relief may be granted in any action or proceeding which may be brought to enforce any provision hereof without the necessity of proof of actual damages. d. Distributor's obligations under this confidentiality provision shall survive termination or expiration of this Agreement. 11. THIS SECTION INTENTIONALLY DELETED. ---------------------------------- 12. ETHICAL CONDUCT. --------------- Distributor expressly agrees that it shall not be entitled to any commissions, fees, discounts or other compensation if facts are known to Company that reasonably support a belief that Distributor is in violation of any of the terms and conditions of paragraph 18 of this Agreement. 13. LIMITED WARRANTY; DISCLAIMER: INDEMNITY. --------------------------------------- a. Company provides only the warranty set forth in its warranty policy, as modified by this Section 13(a). Distributor will handle and be responsible for all warranty returns from its direct customers. Products obtained from Company that do not comply with the warranty and are returned (by Distributor only) to Company during the warranty period (as shown by appropriate documentation) will be repaired or replaced at Company's option, provided Distributor bears the cost of freight and insurance to the point of repair. Company will bear the cost of freight and insurance for return of goods to Distributor. If Company cannot, or determines that it is not practical to, repair or replace the returned Product, the price therefor paid by Distributor will be refunded or, at the Company's discretion, credited against other Distributor obligations or toward future purchases. COMPANY MAKES NO OTHER WARRANTIES WITH RESPECT TO THE PRODUCTS OR ANY SERVICES AND DISCLAIMS ALL OTHER WARRANTIES, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. ANY ACTION AGAINST COMPANY BASED ON THIS AGREEMENT MUST BE BROUGHT WITHIN ONE YEAR FOLLOWING INJURY. b. The above warranty does not extend to any Product that is modified or altered, is not maintained to Company's maintenance recommendations, is operated in a manner other than that specified by Company, has its serial number removed or altered or is treated with abuse, negligence or other improper treatment (including, without limitation, use outside the recommended environment). Distributor's sole remedy with respect to any warranty or defect is as stated above. c. Distributor may extend its own product warranty to its customers provided Distributor alone shall be responsible to such customer thereof and neither Distributor nor such customer shall have recourse against Company with respect thereto. Distributor hereby agrees to indemnify and hold Company harmless from any and against all claims, actions, losses, damages, costs, liabilities and expenses (including reasonable attorneys' fees) based upon any express or implied warranty made by Distributor to any customer. 14. LIMITED LIABILITY. ----------------- EXCEPT AS SET FORTH IN SECTION 13, COMPANY WILL NOT BE LIABLE TO DISTRIBUTOR OR THIRD PARTY WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY, OR OTHER LEGAL OR EQUITABLE THEORY FOR (I) ANY AMOUNTS IN EXCESS IN THE AGGREGATE, OF THE AMOUNTS PAID TO COMPANY HEREUNDER DURING THE TWELVE-MONTH PERIOD PRIOR TO DATE THE CAUSE OF ACTION AROSE OR (11) ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS OR BUSINESS OPPORTUNITIES) OR (III) COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY, OR SERVICES. COMPANY SHALL HAVE NO LIABILITY FOR ANY FAILURE OR DELAY DUE TO MATTERS BEYOND ITS REASONABLE CONTROL. 15. RELATIONSHIP OF PARTIES. ----------------------- The parties hereto expressly understand and agree that Distributor is an independent contractor in the performance of each and every part of this Agreement, is solely responsible for all of its employees and agents and its labor costs and expenses arising in connection therewith and is responsible for and will indemnify, defend and hold Company harmless from any and all claims, liabilities, damages, debts, settlements, costs, attorneys' fees, expenses, and liabilities of any type whatsoever that may arise on account of Distributor's activities, or those of its employees or agents, including, without limitation, providing unauthorized representations or warranties (or failing to disclose all limitations on warranties and liabilities set forth herein on behalf of Company) to its customers or breaching any term, representation or warranty of this Agreement. Company is in no manner associated with or otherwise connected with the actual performance of this Agreement on the part of Distributor, nor with Distributor's employment of other persons or incurring of other expenses. Except as expressly provided herein, Company shall have no right to exercise any control whatsoever over the activities or operations of Distributor. 16. ASSIGNMENT. ---------- Distributor shall not assign this Agreement or its rights under this Agreement to any other third party nor may Distributor sublicense the distribution of the Product to any subdistributor for further distribution, except that Distributor may assign its rights to and obligations under this Agreement to any entity that is 80% or more owned or controlled by DTE Energy Company or by any other entity that in turn is 80% or more owned or controlled by DTE Energy Company, provided that any such entity shall be bound, in writing, to all restrictions on Distributor contained in this Agreement. 17. TERM AND TERMINATION. -------------------- This Agreement may be terminated by a party for cause immediately by written notice upon the occurrence of any of the following events: i. If the other ceases to do business, or otherwise terminates it business operations or if there is a material change in control of the other; or ii. If the other shall fail to promptly secure or renew any license, registration, permit, authorization or approval for the conduct of its business in the manner contemplated by this Agreement or if any such license, registration, permit, authorization or approval is revoked or suspended and not reinstated within sixty days; or iii. If the other materially breaches any material provision of this Agreement and fails to substantially cure such breach within thirty days (ten days in the case of a failure to pay) of written notice describing the breach; or iv. If the other becomes insolvent or seeks protection under any bankruptcy, receivership, trust deed, creditors arrangement, composition or comparable proceeding, or if any such proceeding is instituted against the other (and not dismissed within 90 days); or v. If Distributor breaches any other agreement or contract with Company. b. On termination or expiration of this Agreement for any reason whatsoever including, but not limited to, termination or expiration by passage of time or nonrenewal, the parties expressly agree that the following shall take effect: (i) all rights granted to Distributor under or pursuant to this Agreement shall immediately cease; (ii) all contracts and orders placed by Distributor for the Products and accepted, but not filled or delivered by Company as of the date of termination, shall be filled or delivered by Company subject to the terms and conditions of this Agreement; (iii) all contracts or orders for the Products not accepted by Company on or before the date of termination shall, at Company's sole option, be canceled; (iv) Distributor shall forthwith return to Company all promotional Sales information materials or demonstration products that have been furnished by Company to Distributor during the term of this Agreement, it being understood that no copies of these foregoing materials may be retained by Distributor subsequent to the date of termination or expiration of this Agreement; and (v) Company shall repurchase from Distributor, at the then fair market value in the Territory, any Products purchased from Company by Distributor for inventory or other purpose directly related to furthering the purposes of this Agreement. c. Distributor acknowledges and expressly agrees that Company shall not be liable to Distributor, and Distributor hereby waives any claims for compensation or damages of any kind or character whatsoever, whether on account of the loss by Distributor of present or prospective compensation or anticipated compensation, or of expenditures, investments or commitments made either in connection therewith or in connection with the establishment, development or maintenance of establishment, development or maintenance of Distributor's business, or on account of any other cause or thing whatsoever. d. Termination is not the sole remedy under this Agreement and, whether or not termination is affected, all other remedies will remain available. 18. NO EXPORT. --------- The Products shall not be distributed for export nor sold to the end users for use outside the Territory. The parties further acknowledge and agree that all actions taken by the parties in furtherance of fulfillment of this Agreement shall be in full compliance with all applicable U.S. export control laws and regulations, as they are amended from time to time. The parties recognize that such laws may require, among other things, applying for export licenses for the export of information ("Technical Data"). Failure to obtain such licenses or otherwise comply with such laws could subject the parties to criminal sanctions including imprisonment. It is further acknowledged that the export of Technical Data, including the Products, software, know-how and other proprietary information, is "deemed" by the U.S. government to be exported: (i) upon transmission from the United States; (ii) upon oral release by a U.S. citizen in a foreign country; or (iii) by release in the United States to non- U.S. nationals. 19. AMENDMENT AND WAIVER. -------------------- Except as otherwise expressly provided herein, any provision of this Agreement may be amended and the observance of any provision of this Agreement may be waived (either generally or any particular instance and either retroactively or prospectively) only with the written consent of the parties. 20. GOVERNING LAW AND LEGAL ACTIONS. ------------------------------- This Agreement shall be governed by and construed under the laws of the State of Michigan and the United States without regard to conflicts of law provisions. Unless waived by Company in writing for the particular instance (which Company may do at its option), the sole jurisdiction and venue for actions related to the subject matter hereof shall be the State of Michigan and U.S. federal court for the Eastern District of Michigan. Both parties consent to the exhibit jurisdiction and venue of such courts and agree that process may be served in the manner provided herein for giving of notices or otherwise as allowed by Michigan or federal law. In any action or proceeding to enforce rights under this Agreement, the prevailing party shall be entitled to recover costs and reasonable attorneys' fees. 21. FORCE MAJEURE. ------------- Neither party shall be liable under this Agreement for any loss or damage of any nature incurred as a result of any failures of delays in performance because of any cause or circumstances beyond its control. This includes, but is not limited to, any failure or delays in performance caused by any strikes, lockouts, labor disputes, fires, acts of God or the public enemy, riots, incendiaries, interference by civil or military authorities, compliance with the laws, orders or policies of any government authority, delays in transit or delivery on the part of transportation companies or failures of communication facilities or sources of raw materials. However, the party claiming a Force Majeure Event must notify the other in writing within ten days of the beginning of such an event, and no Force Majeure Event shall extend for a period of greater than 45 days. 22. HEADINGS. -------- Headings and captions are for convenience only and are not to be used in the interpretation of this Agreement. 23. NOTICES. ------- Any notices or other communications required or permitted hereunder shall be in writing and shall be deemed sufficiently given if (i) delivered in person, (ii) sent by recognized overnight courier, or (iii) by registered or certified mail, postage prepaid, to the respective party at the address set out above or to such other address any party shall have given notice in accordance with this Section 23. Notices hand-delivered shall be deemed given the same day as delivery-notices sent by overnight mail shall be deemed given the day following delivery, and notices sent by mail shall be deemed given three business days after the date posted, provided however, that any change of address shall be effective only upon receipt. 24. ENTIRE AGREEMENT. ---------------- This Agreement supersedes all proposals and agreements whether oral or written, all negotiations, conversations, or discussions between or among parties relating to the subject matter of this Agreement and all past dealing or industry custom. 25. SEVERABILITY. ------------ If any provision of this Agreement is held by a court of competent jurisdiction to be illegal, invalid or unenforceable, that provision shall be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable. 26. CORPORATE AUTHORITY. ------------------- The individuals executing this Agreement on behalf of Company and Distributor do each hereby warrant and represent that they respectively have been and are on the date of this Agreement duly authorized by all necessary or appropriate corporate action to execute this Agreement. 27. COUNTERPARTS. ------------ To facilitate execution, this Agreement may be executed in more than one counterpart, each of which shall constitute an original and all of which shall constitute one and the same Agreement. 28. FACSIMILE. --------- Facsimile signatures to this Agreement shall be considered original signatures. 29. BASIS OF BARGAIN. ---------------- EACH PARTY RECOGNIZES AND AGREES THAT THE WARRANTY DISCLAIMERS AND LIABILITY AND REMEDY LIMITATIONS IN THIS AGREEMENT ARE MATERIAL, BARGAINED-FOR BASES OF THIS AGREEMENT, AND THAT THEY HAVE BEEN TAKEN INTO ACCOUNT AND REFLECTED IN DETERMINING THE CONSIDERATION TO BE GIVEN BY EACH PARTY UNDER THIS AGREEMENT AND IN THE DECISION BY EACH PARTY TO ENTER INTO THIS AGREEMENT. SIGNATURE PAGE FOLLOWS. EDISON DEVELOPMENT CORPORATION (a Michigan corporation) By: ____________________________________ Its: ____________________________________ "Distributor" PLUG POWER, L.L.C. (a Delaware limited liability company) By its Managing Member: ________________________________________ By: ____________________________________ Its: ____________________________________ "Company" Exhibit 1 "Products" The Products made by the Company are a range of fuel cell systems that are capable of generating electricity through electrochemical reactions. The components comprising the fuel cell systems include, but are not limited to, one or more of the following whether used alone or in combination: . A fuel processor that generates hydrogen gas and/or other gas(es). . A fuel cell stack(s) that generates electricity through electrochemical reactions. . An inverter system to convert direct current electricity to alternating current electricity. . A system controller for operation of the fuel cell system or any component thereof. . An energy storage system. . A heat exchanger. EXHIBIT 2 TO DISTRIBUTION AGREEMENT Authorized Trademarks Pursuant to the Plug Power, L.L.C. Distribution Agreement ("Agreement") dated ________________, _____, between Plug Power, L.L.C. ("Company") and Mechanical Technology, Inc., ("Distributor"), it is further agreed, effective________________, 1997 (the "Exhibit 2 Effective Date"), that the Authorized Trademarks of Plug Power which the Agreement grants Distributor a non-exclusive nontransferable license to use consists of the following names and graphic representations thereof: 1 . "Plug Power, L.L.C." 2. Stylized Plug Power Logo CONFIDENTIAL INFORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. AMENDED DISTRIBUTION AGREEMENT ------------------------------ This DISTRIBUTION AGREEMENT ("Agreement") is dated as of the 27th of September, 1999 and entered into by and between Plug Power, L.L.C., a limited liability company organized and existing under the laws of the State of Delaware ("Company"), with its principal place of business at 968 Albany-Shaker Road, Latham, New York 12110, and DTE Energy Technologies, Inc., a company organized and existing under the laws of the State of Michigan ("Distributor"), with its principal place of business at 37849 Interchange Drive, Farmington Hills, MI 48335. BACKGROUND STATEMENTS WHEREAS, the Company owns all right, title and interest in certain fuel cells with capacities of 2 kilowatts and higher, as is set out more fully in Exhibit 1; and WHEREAS, Edison Development Corporation has assigned all of its right, title, and interest in a previous Distribution Agreement between Plug Power, L.L.C. and Edison Development Corporation, dated June 27, 1997, to DTE Energy Technologies, Inc., an entity that is 80% or more owned or controlled by an entity that is 80% or more owned or controlled by DTE Energy Company; and WHEREAS, DTE Energy Technologies, Inc. (Distributor) has agreed in writing to all obligations and restrictions on Distributor contained in that Distribution Agreement as it may be amended from time to time; and WHEREAS, the Distributor in consideration for and in reliance of the grant of the exclusive distributorship hereunder has or will expend considerable time and funds to establish a distribution network, plant and facilities and training its support and sales staff; and WHEREAS, the parties desire Distributor to act in certain circumstances as Company's exclusive distributor for the Products to certain entities within the United States as hereinunder specified. NOW THEREFORE, in consideration of the mutual covenants and agreements hereinunder set forth, and other good and valuable consideration the receipt and sufficiency of which is acknowledged, the parties agree as follows: 1. APPOINTMENT. ----------- a. Upon execution of this Agreement, Company hereby appoints Distributor as Company's Exclusive independent distributor during the term of this Agreement to promote and assist Company in the sale of Products which are developed by Plug Power, to end-users for stationary applications in the Territory, as that term is defined below, and subject to the terms and conditions provided herein. For purposes of this Agreement, unless otherwise clear from the context, "Products" collectively means Pre-Commercial Product as specified on Exhibit 3 attached to this Agreement and Commercial Product as specified on Exhibit 4 attached to this Agreement. b. When the Company develops a specification for a commercial version of a stationary, stand-alone product for a new market, Company shall endeavor to deliver the specifications to Distributor at least six months prior to expected commercial production of such product, and Company shall notify Distributor of the expected beginning date for commercial production. The term "stand-alone" shall mean a packaged system substantially ready for a specific end-user purpose, as opposed to a sub-system or component which is intended to be combined with other parts or components and then packaged as a system for a specific end-user purpose. Distributor shall develop a marketing plan for the new product, including sales estimates and expected minimum sales obligations within three months of the delivery of the specifications and share the marketing plan with Company on a 1 confidential basis. Upon presentation of the marketing plan to the Company the parties shall negotiate in good faith to determine a reasonable minimum sales obligation for the new product. Upon agreement to the minimum sales obligation, Exhibit 4 shall be amended to include the new product developed by Company. If commercial production begins less than three months after delivery of the specifications, and Distributor is unfairly prejudiced thereby in terms of ability to meet sales objectives as defined in the marketing plan, parties agree to adjust Distributor's sales obligations in a reasonable fashion. c. Upon execution of this Agreement, Distributor hereby accepts the appointment, subject to the terms and conditions as provided herein. 2. TERRITORY. --------- a. Distributor's territory for this Agreement shall mean the states of Michigan, Ohio, Indiana and Illinois ("Territory"). b. Without the prior written consent of the Company, Distributor shall not solicit nor seek customers for the Products, or establish or maintain a branch facility or distribution facility for the sale, servicing, warehousing, or storage of the Products or spare parts thereof outside the Territory. c. Distributor may appoint or contract with third parties (e.g., agents, distributors, sub-distributors) in connection with the marketing and sale of the Products and the provision of services within the Territory, so long as any compensation to such third parties shall be the sole responsibility of Distributor. Any such agent, distributor, or sub-distributor shall be subject to, and agree to be bound by, the applicable terms and conditions of this Agreement. If any anticipatory breach or any breach of the terms and conditions of this Agreement by such agents, distributors or sub-distributors is identified, Distributor will take all reasonable actions to rectify such anticipatory breach or breach of this Agreement. d. Other than as expressly set forth in this Agreement, the Distributor and its agents, distributors, and sub-distributors shall not have any restrictions, in any manner, with respect to the resale of any Product acquired pursuant to this Agreement, including restrictions as to the price at which they may elect to resell any such Product. e. DISTRIBUTOR MAY NOT SELL OR DISTRIBUTE THE PRODUCTS TO ANY ENTITY FOR TRANSPORTATION APPLICATIONS. 3. EXCLUSIVITY. ----------- a. The term "Exclusive" means that under this Agreement as long as Distributor is in full compliance with its obligations, including the Minimum Sales Obligations set forth in Section 5 herein, Company shall not appoint any other distributor, agent, representative, or dealer for promotion or sale of the Products to end users for stationary applications in the Territory and shall further refrain from selling Products to end users for stationary applications in the Territory directly, other than through Distributor. b. Company shall not be responsible for transgression of Distributor's exclusive rights hereunder by third parties not controlled by Company, but shall not sell or deliver Products to any other party outside of the Territory if Company has knowledge that the Products are to be sold or distributed by or through another party in the Territory. c. Distributor shall not sell or deliver Products to any other party if Distributor has knowledge that the Products are to be sold or distributed by or through such party outside the Territory. 2 d. In the event that (i) Distributor is in default of its obligations under this Agreement, or (ii) after January 1, 2010, then Company retains the right, in addition to any other rights and remedies, to engage another distributor, dealer, agent, or other such representative on a nonexclusive basis for all or part of the Territory. e. In the event that Distributor engages in the distribution of any fuel cell product to any third party (including agents, distributors, sub- distributors and end users) within the Territory that is competitive with the Products, then the Company retains the right, in addition to any other rights and remedies, to engage another distributor, dealer, agent, or other such representative on a nonexclusive basis for all or part of the Territory. 4. PRICE OF PRODUCT. ---------------- a. Performance specifications for Pre-Commercial Product and for Commercial Product are set forth on attached Exhibits 3 and 4, respectively. The purchase price for Commercial Product and replacement parts purchased by Distributor shall be [***], but nothing shall preclude the parties from mutually agreeing on a different price. [***] available to Distributor hereunder shall be on similar payment terms as to other distributors, customers or agents, including pricing to GE as defined in the existing Distributor Agreement with GE Fuel Cell Systems, L.L.C. dated February 2, 1999, and set forth in Schedule A, Terms and Conditions of Purchase/Sale, but shall not include pricing arrangements offered by Company to others involving the leasing or financing of the Products, revenue sharing, or other hybrid arrangements with Company's distributors, customers, or agents. b. The Terms and Conditions for all orders for the Pre-Commercial Product and for Commercial Product shall be subject to all of the provisions set forth in this Section 4 and in Schedule A, and as otherwise negotiated between the parties. 5. MINIMUM SALES OBLIGATION. ------------------------ a. A Product will be deemed ready for market at the time it meets the commercial Product specifications set forth in Exhibit 4. The parties anticipate commercial production to begin by January 1, 2001; provided, however, for purposes of this Agreement, commercial production shall be considered to have begun when the first such Product is shipped by Company for commercial installation and Company notifies Distributor the first commercial Product has been shipped. Distributor shall have a Minimum Sales Obligation (subject to adjustments pursuant to sections 5.a, 5.c, and 7.g) of: [***] units in 2001 [***] units in 2002 [***] units in 2003 If commercial production is delayed beyond January 1, 2001, the Minimum Sales Obligation shall be extended one month for each full or partial month of delay in the start of commercial production. Prior to October 1, 2003, the Parties shall negotiate in good faith to determine Minimum Sales Obligations for the following two years. If the Parties do not reach agreement on a Minimum Sales Obligation for any 12-month period, then Distributor must be one of the top three sellers of residential fuel cell systems in the Territory for such period, based on the dollar value of new units and replacement parts actually sold by Distributor. If Distributor fails to be one of the top three sellers in the Territory, as defined herein, then this Agreement shall automatically become nonexclusive. 3 A long-term lease shall be deemed a sale for the purposes of this sub- Section. On the first business day of each month beginning three months prior to expected commercial production, Distributor will provide Company with a 12-month rolling forecast of monthly purchases for the period beginning 3 months hence. Each of the first 3 months of Distributor's forecast will be a firm order. Distributor's forecast for the final 9 months of each forecast period is for Company's planning purposes only. Distributor, at its sole discretion, may change the monthly purchase forecast in any month in the final 9-month forecast period by any amount. b. Except as otherwise provided for in Sections 5.c and 5.d below, if Distributor fails to meet its Minimum Sales Obligation this Agreement shall automatically and without notice become nonexclusive, provided however, that such failure to meet the Minimum Sales Obligation shall not be the basis for default under, or the termination of, this Agreement. If Company cannot meet Distributor's shipment requirements as evidenced by valid purchase orders, the Company and Distributor will mutually agree to adjust the Minimum Sales Obligations accordingly. c. Any failure of Distributor to meet its Minimum Sales Obligation in any year which is caused by Company's failure to deliver a competitive product (as defined below) shall not be grounds for Company to reduce or modify Distributor's distribution rights in any way. For the purposes of this Agreement, Distributor will consider the following factors, in good faith and as a whole, in determining whether the Products are competitive: (i) the wholesale price of Products is no more than 5% greater than such price for non-Company manufactured PEM fuel cell systems; (ii) the lifetime end user cost per kWh generated by the Products is no more than 5% greater than that for non-Company manufactured PEM fuel cell systems, where end user cost per kWh will be calculated as the wholesale price plus installation, lifetime operations and maintenance cost, divided by the kWh consumption over the operating life; (iii) the Product's emissions (NOx and CO measured in parts per million), noise (in Db), and size (in cubic feet) are no more than 10% greater than that for non- Company manufactured PEM fuel cell systems; and (iv) the Product's reliability is no more than 5% worse than that for non-Company manufactured PEM fuel cell systems. d. If Distributor fails to meet its Minimum Sales Obligation, Company will notify Distributor of that fact within 90 days of the end of the calendar year for which Distributor fails to meet its Minimum Sales Obligation. However, if Distributor's total sales exceed [***] of the Minimum Sales Obligation set forth above for any of the years 2001, 2002, or 2003, or as adjusted per Section 5.a, Company shall not name an additional distributor. For example, if Distributor achieves greater than [***] of the Minimum Sales Obligation for the year 2001, Company may not name an additional Distributor. This provision shall apply only one time during the first three years, such that if it applies to sales in 2001, it shall not apply to sales in 2002 or 2003; and if it applies to sales in 2002, it shall not apply to sales in 2003. e. Distributor agrees to purchase, on a take-or-pay basis, a minimum of [***] Test and Evaluation Units at a cost of [***] each, provided they are shipped prior to December 31, 1999. Distributor further agrees to purchase [***] Pre-Commercial Products at a cost of [***] each for the first [***] and [***] each for the remaining [***], provided they are shipped at least five (5) months prior to the shipment of the first commercial unit. 6. DISTRIBUTOR COVENANTS AND REPRESENTATIONS. ----------------------------------------- Distributor represents and warrants, to Company (its members, agents, officers, directors) and agrees: 4 a. To use its best efforts to market and sell Products and provide services within the Territory. Distributor shall maintain, at its own expense, such office space and facilities, and hire and train such personnel as Distributor may deem necessary to carry out its obligations under the Agreement. b. During the term of this Agreement to use its best efforts to achieve the Minimum Sales Obligation as defined and specified in Section 5 of this Agreement. c. Except as otherwise provided in this Agreement, to bear all expenses associated with Distributor's marketing and sale of Pre-Commercial and Commercial Product and the provision of services under this Agreement. d. To spend a minimum of [***] on technical research and marketing during the period beginning January 1, 1999 and ending July 1, 2001 or six (6) months following commercial production, whichever comes later. No later than one (1) year prior to expected commercial production, Distributor shall prepare for confidential review by Company a marketing and services development schedule which will include milestones and objective measures of progress toward the January 1, 2001 Product release. Distributor shall make available to Company on a confidential basis all market and product intelligence gathered as a result of its research and marketing, as related to the sale and use of the Products, including but not limited to product applications, customer response, and customer demand. e. In conjunction with Company's obligations in Section 7.f, Distributor shall be responsible for the administration and field work necessary to obtain any regulatory approvals for Distributor to conduct its operations in the Territory. Distributor shall provide assistance to the Company in order to assist Company in complying with registration requirements in the Territory, obtain such other approvals from governmental authorities of the Territory as may be necessary to comply with any and all governmental laws, regulations, and orders that may be applicable to Distributor by reason of the execution of this Agreement, and assist Company in taking those actions necessary for Distributor to be registered as Company's independent distributor with any governmental authority. Without limiting the foregoing, Distributor shall furnish Company with such documentation as Company may request to confirm Distributor's compliance with this Section, and Distributor agrees that it shall not engage in any course of conduct that would cause Company to be in violation of the laws of any jurisdiction within the Territory. Distributor shall comply fully with, and shall be solely responsible for all safety standards, health code requirements and regulations, specifications, and other requirements imposed by law, regulation, or order in the Territory and applicable to the marketing and sale of the Products and to the provision of services provided by Distributor. f. Not to (i) disassemble, decompile or otherwise reverse engineer the Product or otherwise attempt to learn the ideas underlying the Product; (ii) take any action contrary to Company's license granted to Distributor, except as expressly and unambiguously allowed under this Agreement; (iii) copy, modify or enhance the Product; or (iv) allow others to do any of the foregoing. g. To advertise and promote the Products labeled with Company's name and trademarks ("Branding Materials"). Distributor shall provide Company with all such Branding Materials for Company's approval prior to their use. Company shall not unreasonably withhold its approval of the Branding Materials. Distributor shall not design the Branding Materials in such a way as to either imply or state that Distributor's relationship with Company is other than that of an independent distributor. h. TO KEEP COMPANY INFORMED AS TO ANY PROBLEMS ENCOUNTERED WITH THE PRODUCTS AND ANY RESOLUTIONS ARRIVED AT FOR THOSE PROBLEMS, AND TO COMMUNICATE PROMPTLY TO COMPANY ANY AND ALL MODIFICATIONS, DESIGN CHANGES OR IMPROVEMENTS OF 5 THE PRODUCT SUGGESTED BY ANY CUSTOMER, EMPLOYEE OR AGENT. DISTRIBUTOR FURTHER AGREES THAT COMPANY SHALL HAVE AND IS HEREBY ASSIGNED ANY AND ALL RIGHT, TITLE AND INTEREST IN AND TO ANY SUCH SUGGESTED MODIFICATIONS, DESIGN CHANGES, OR IMPROVEMENTS OF THE PRODUCT, WITHOUT THE PAYMENT OF ANY ADDITIONAL CONSIDERATION THEREFOR EITHER TO DISTRIBUTOR, OR ITS EMPLOYEES, AGENTS OR CUSTOMERS. DISTRIBUTOR WILL ALSO PROMPTLY NOTIFY COMPANY OF ANY INFRINGEMENT OF ANY TRADEMARKS OR OTHER PROPRIETARY RIGHTS RELATING TO THE PRODUCT. i. To carry out all sales promotion work and solicitation of sales for the Products diligently, using its reasonable efforts for the account of Company. These efforts shall include, but shall not in any way be limited to: (i) advertising and promoting the Products effectively and requiring its distributors or sub-distributors to do the same; (ii) ordering and keeping a representative selection of Company's up-to-date promotional sales literature, technical bulletins, price lists, manuals, catalogues and other promotion materials in good condition; (iii) maintaining the equipment and facilities to enable Distributor to demonstrate the Products to potential new customers; and (iv) assisting Company in securing and protecting any property rights in connection with the Products in the Territory. j. To not make any representations as to the Products other than those, if any, contained in written information and data provided by Company. Distributor shall be totally responsible for any of its representations and shall hold Company harmless from any claims and expenses, including, but not limited to, reasonable attorneys' fees, resulting from such unauthorized representations. k. To not manufacture the Products, nor engage any entity other than Company to do so. 7. COMPANY'S OBLIGATIONS. --------------------- a. Company shall supply Distributor with copies of brochures, catalogues, technical specification sheets, and promotional sales literature and such other information or materials as Company, in its judgment, reasonably believes will assist Distributor in promoting and assisting in the sale and acceptance of the Products in the Territory. These items shall be conveyed in English, unless the parties otherwise agree from time to time. Company shall, at its expense, provide Distributor with reasonable amounts of technical materials (e.g., drawings, schematics, installation manuals, operating procedures, available marketing materials, field test results, training materials) and available information regarding Product applications and customer demand pertaining to the Products as are requested by Distributor from time to time. All such information and materials will be furnished in the English language. b. Company shall notify Distributor of any material changes in or affecting the Products, projected delivery dates and schedule changes that may reasonably be expected to affect the obligations of Distributor hereunder; provided, that no such notification shall relieve Company of any of its obligations hereunder. c. Company shall, if required by Distributor, provide Distributor with reasonable access to and assistance of its technical support personnel. Such assistance shall be without charge to Distributor except as may be otherwise mutually agreed. d. Company shall maintain in effect at all times product liability insurance with policy limits as described in Exhibit 5 attached hereto, as such Exhibit may be revised from time to time upon the mutual agreement of Company and Distributor, and Distributor shall be named as an additional insured to each such policy. In the event Company cannot obtain such insurance on commercially reasonable terms, Company shall notify Distributor, and Distributor may terminate the Agreement. 6 e. If Company is contacted, or has been contacted, by third parties concerning the possible purchase of Products by customers in the Territory, Company will use its best efforts to refer such persons to the Distributor, provided Company has not named any additional or replacement distributor in the Territory in accordance with this Agreement. f. Company shall comply with all registration requirements in the Territory that are applicable to the Company, obtain such other approvals from governmental authorities of the Territory as may be necessary to comply with any and all governmental laws, regulations, and orders that may be applicable to Company by reason of the execution of this Agreement, and take those actions necessary for Distributor to be registered as Company's independent distributor with any governmental authority. At Distributor's request, Company shall perform all tests for all certifications (regulatory or otherwise) required to certify use of the Products sold by Distributor for stand-alone and/or grid- connected stationary power applications. Without limiting the foregoing, Company shall furnish Distributor with such documentation as Distributor may request to confirm Company's compliance with this Section; and Company agrees that it shall not engage in any course of conduct that would cause Distributor to be in violation of the laws of any jurisdiction within the Territory. g. Company will use its best efforts to maintain a minimum annual Product production required to fill any of Distributor's firm purchase orders; provided that Distributor is in compliance with this Agreement and proceeds to develop the infrastructure necessary to market, sell, and provide services to the volume of Products equal to the Distributor's Minimum Sales Obligations. If Company is unable to maintain annual Product production required to fill Distributor's firm purchase orders, Company will ship a pro rata share of Product to Distributor, based on Distributor's firm purchase orders, as compared to firm purchase orders from other distributors. h. Company shall comply fully with, and shall be solely responsible for, all safety standards, health code requirements and regulations, specifications, and other requirements imposed by law, regulation, or order in the Territory, that are applicable to the design, manufacturing, and testing of the Products and the provision of services by Company. Company shall establish and maintain a program, to the mutual satisfaction of the Company and Distributor, in order to create ongoing product design, manufacturing, testing, inspection, and other safety and quality-related processes that are adequate to assure the safety and reliability of Company's Products. i. Company shall include the name of Distributor in its Internet home page. 8. OPERATIONS AND EXPENSES. ----------------------- The detailed operations of the Distributor under this Agreement are subject to its sole control and management, subject to compliance with the terms hereof. Distributor shall be responsible for all of its own expenses and employees. Distributor agrees that it shall incur no expense chargeable to Company except as may be specifically authorized, in advance, in writing, in each case by Company nor shall any such expenses, including taxes, fees, or similar charges, be deducted from any amounts due hereunder. 9. TRADEMARK LICENSE AND USE. ------------------------- a. Company grants to Distributor a non-exclusive, non-transferable license to use trademark(s) described in Exhibit 2 to this Agreement ("Authorized Trademarks") only in connection with the sale and promotion of the Products in the Territory and during the term of and pursuant to the terms and conditions of the Agreement. No trademark, trade name or other designations may be used without the written consent of Company except as expressly provided in this section. Company expressly allows Distributor to represent that it is a distributor of the Products, including on the Products themselves, advertising materials, stationary and letterhead. Company further 7 expressly allows Distributor to co-brand the Products, so long as Company branding and trading policies are not otherwise violated. b. Distributor shall not assign or sub-license its rights to the Authorized Trademarks to any other person or entity, except to agents, distributors or sub-distributors. Any such assignment or sub-license to use Authorized Trademarks to an agent, distributor or sub-distributor is subject to the approval of Company, which approval shall not be unreasonably withheld. Company shall have the right to control the nature and quality of the Distributor's or sub-licensee's use of an Authorized Trademark to protect Company's rights in the Authorized Trademarks. c. Distributor shall not remove, change, obscure, or add to the labels, markings, names or trademarks that Company has affixed to any of the Products. d. Distributor shall not register, or attempt to register any of the Authorized Trademarks in any jurisdiction without the express consent of Company. e. Distributor acknowledges and agrees that Company's remedy at law for any breach of Company's obligations under this paragraph would be inadequate, and agrees and consents that temporary and permanent injunctive relief may be granted in any action or proceeding which may be brought to enforce any provision hereof without the necessity of proof of actual damages. 10. CONFIDENTIALITY. --------------- a. Without the prior written consent of Company, Distributor shall not disclose to any third party any confidential business information or trade secrets of Company, including but not limited to: the content of this Agreement; customer lists; product specifications; product technical manuals; service records; financial or sales reports; price lists; and any materials related to Company's customers, financial performance, or design of the Products, except for or in connection with any assignments permitted under Sections 2.c and 15 hereof. b. Distributor hereby acknowledges and agrees that the Products are proprietary to Company. Distributor agrees to use utmost diligence to protect the trade secrets and other proprietary rights of Company in the Products from disclosure to third parties. Distributor shall also promote compliance with the terms and conditions of this Agreement by employees and others with access to the Products. c. Distributor acknowledges and agrees that Company's remedy at law for any breach of Company's obligations under this paragraph would be inadequate, and agrees and consents that temporary and permanent injunctive relief may be granted in any action or proceeding which may be brought to enforce any provision hereof without the necessity of proof of actual damages. d. Distributor's obligations under this confidentiality provision shall survive termination or expiration of this Agreement. 11. ETHICAL CONDUCT. --------------- Distributor expressly agrees that it shall not be entitled to any commissions, fees, discounts or other compensation if facts are known to Company that reasonably support a belief that Distributor is in violation of any of the terms and conditions of paragraph 17 of this Agreement. 8 12. LIMITED WARRANTY; DISCLAIMER; INDEMNITY. --------------------------------------- a. Company will convey clear title to all Products to Distributor as provided hereunder; Company warrants and represents that all Products sold pursuant to this Agreement will be free from all material defects in workmanship and material, and that the Products are provided in strict accordance with the specifications set forth in Exhibits 3 and 4. Except as provided by this Agreement, any attempt by the Company to limit, disclaim, or restrict any such warranties or any remedies of Distributor, except as limited by this Agreement, by acknowledgement or otherwise, in accepting or performing an order, shall be null, void, and ineffective without Distributor's written consent. For Commercial Product purchased under this Agreement, the foregoing warranties shall apply for a period of the lesser of [***] months from the date of installation or [***] months from delivery from Company to the Distributor or Distributor's sub-distributors. For Pre-Commercial Product purchased under this Agreement, the foregoing warranties shall apply for a period of the lesser of [***] from the date of installation or [***] months from delivery from Company to the Distributor or Distributor's sub- distributors. For any component product purchased by the Company with a warranty in excess of the terms described above, the Company shall make such extended warranty coverage available to the Distributor for the relevant component. The foregoing warranties are conditioned upon (a) proper storage, handling, transportation, installation, use, repair, and maintenance, and conformance with any reasonable recommendations of the Company; and (b) Distributor promptly notifying the Company of any defects and, if required, promptly making the Commercial Product or Pre-Commercial Product available for correction. The foregoing warranties are provided at no cost to the Distributor or the Distributor's customers. If any Product fails to meet the foregoing warranties during the warranty periods set forth above, the Company shall correct any such failure by either (a) repairing the defective Product, or (b) replacing the defective Product at its sole option. All costs associated with such repair or replacement, including transportation costs, shall be the sole responsibility of the Company, subject to the limitations set forth in the service agreement described in the next paragraph. Distributor will provide the labor, transportation, and other services necessary for such repairs and replacements pursuant to a Service Agreement that will be mutually agreed upon between Company and Distributor. Such Service Agreement shall contain terms and conditions not less favorable to Distributor than the terms and conditions of similar service agreements with other distributors of Company's Products. Distributor and Company will negotiate the terms and conditions of the Service Agreement in good faith. If such Service Agreement is not agreed to by July 1, 2000, then this Agreement shall become non-exclusive unless the parties otherwise mutually agree. The Service Agreement will set forth limits on Company's reimbursement to Distributor for labor, transportation, and other services. The Service Agreement will also set forth a warranty approval process that will include pre-approval of major warranty claims prior to commencement of work by the Distributor, submission of all warranty claims for review and approval by the Company, and return of all parts subject to warranty claims to the Company. For Commercial Product, Company will provide Distributor with the option of purchasing an extension to the initial warranty period. Such additional warranty will be for [***] years beyond the termination of the initial warranty period, and will cover [***]. The price for such warranty extension, if purchased, is expected to be a maximum of [***] for Commercial Product purchased during the first [***] of commercial production, and [***] for Commercial Product purchased thereafter, to be paid as a lump sum at the time of purchase. The Company may increase the price for warranty 9 extensions by a commercially reasonable amount if, in the good faith judgement of the Company, such increase is necessary based on prototype testing and repair experience. For Pre-Commercial Product, Company will provide Distributor with the option of purchasing an extension to the initial warranty period. Such additional warranty will be for [***] beyond the termination of the initial warranty period, and Company will provide a firm price no later than October 1, 1999. THE WARRANTIES SET FORTH IN THIS SECTION ARE IN LIEU OF ALL OTHER WARRANTIES, WHETHER ORAL, WRITTEN, EXPRESS, OR IMPLIED, INCLUDING WITHOUT LIMITATION IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THE COMPANY'S WARRANTY OBLIGATIONS AND DISTRIBUTOR'S REMEDIES UNDER THIS SECTION ARE SOLELY AND EXCLUSIVELY AS STATED HEREIN. b. The above warranty does not extend to any Product that is modified or altered, is not maintained to Company's maintenance recommendations, is operated in a manner other than that specified by Company, has its serial number removed or altered or is treated with abuse, negligence or other improper treatment (including, without limitation, use outside the recommended environment). c. Distributor may extend its own product warranty to its customers provided Distributor alone shall be responsible to such customer thereof and neither Distributor nor such customer shall have recourse against Company with respect thereto. Distributor hereby agrees to indemnify and hold Company harmless from any and against all claims, actions, losses, damages, costs, liabilities and expenses (including reasonable attorney's fees) based upon any express or implied warranty made by Distributor to any customer. 13. LIMITED LIABILITY. ----------------- EXCEPT AS SET FORTH IN SECTION 12, COMPANY WILL NOT BE LIABLE TO DISTRIBUTOR OR THIRD PARTY WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY, OR OTHER LEGAL OR EQUITABLE THEORY FOR (I) ANY AMOUNTS IN EXCESS IN THE AGGREGATE, OF THE AMOUNTS PAID TO COMPANY HEREUNDER DURING THE TWELVE-MONTH PERIOD PRIOR TO DATE THE CAUSE OF ACTION AROSE OR (II) ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS OR BUSINESS OPPORTUNITIES) OR (III) COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY, OR SERVICES. COMPANY SHALL HAVE NO LIABILITY FOR ANY FAILURE OR DELAY DUE TO MATTERS BEYOND ITS REASONABLE CONTROL. 14. RELATIONSHIP OF PARTIES. ----------------------- The parties hereto expressly understand and agree that Distributor is an independent contractor in the performance of each and every part of this Agreement, is solely responsible for all of its employees and agents and its labor costs and expenses arising in connection therewith and is responsible for and will indemnify, defend and hold Company harmless from any and all claims, liabilities, damages, debts, settlements, costs, attorneys' fees, expenses, and liabilities of any type whatsoever that may arise on account of Distributor's activities, or those of its employees or agents, including, without limitation, providing unauthorized representations or warranties (or failing to disclose all limitations on warranties and liabilities set forth herein on behalf of Company) to its customers or breaching any term, representation or warranty of this Agreement. Company is in no manner associated with or otherwise connected with the actual performance of this Agreement on the part of Distributor, nor with Distributor's employment of other persons or incurring of other expenses. Except as expressly provided herein, Company shall have no right to exercise any 10 control whatsoever over the activities or operations of Distributor. 15. ASSIGNMENT. ---------- Distributor shall not assign this Agreement or its rights under this Agreement to any other third party, except that Distributor may assign its rights to and ----------- obligations under this Agreement to any entity that is 80% or more owned or controlled by DTE Energy Company or by any other entity that in turn is 80% or more owned or controlled by DTE Energy Company, provided that any such entity shall be bound, in writing, to all restrictions on Distributor contained in this Agreement. Notwithstanding this Section 15, Distributor shall not transfer or assign this Agreement or any of the rights and obligations contained herein to a competitor of the Company without the prior written consent of the Company. In addition, the Company may assign its rights pursuant to this Agreement to any person who, by merger, operation of law, asset purchase or otherwise, acquires substantially all of the business of the Company to which this Agreement relates. 16. TERM AND TERMINATION. -------------------- a. This Agreement may be terminated by a party for cause immediately by written notice upon the occurrence of any of the following events: i. If the other ceases to do business, or otherwise terminates it business operations or if there is a material change in control of the other; or ii. If the other shall fail to promptly secure or renew any license, registration, permit, authorization or approval for the conduct of its business in the manner contemplated by this Agreement or if any such license, registration, permit, authorization or approval is revoked or suspended and not reinstated within sixty days; or iii. If the other materially breaches any material provision of this Agreement and fails to substantially cure such breach within thirty days (ten days in the case of a failure to pay) of written notice describing the breach; or iv. If the other becomes insolvent or seeks protection under any bankruptcy, receivership, trust deed, creditors arrangement, composition or comparable proceeding, or if any such proceeding is instituted against the other (and not dismissed within 90 days); or v. If Distributor breaches any other agreement or contract with Company, and the breach is not cured within thirty days of written notice describing the breach. b. On termination or expiration of this Agreement for any reason whatsoever including, but not limited to, termination or expiration by passage of time or nonrenewal, the parties expressly agree that the following shall take effect: (i) all rights granted to Distributor under or pursuant to this Agreement shall immediately cease; (ii) all contracts and orders placed by Distributor for the Products and accepted, but not filled or delivered by Company as of the date of termination, shall be filled or delivered by Company subject to the terms and conditions of this Agreement; (iii) all contracts or orders for the Products not accepted by Company on or before the date of termination shall, at Company's sole option, be canceled; (iv) Distributor shall forthwith return to Company all promotional Sales information materials or demonstration products that have been furnished by Company to Distributor during the term of this Agreement, it being understood that no copies of these foregoing materials may be retained by Distributor subsequent to the date of termination or expiration of this Agreement; and (v) Company shall repurchase from Distributor, at the then fair market 11 value in the Territory, any Products and replacement parts purchased from Company by Distributor for inventory or other purpose directly related to furthering the purposes of this Agreement. c. Distributor acknowledges and expressly agrees that Company shall not be liable to Distributor, and Distributor hereby waives any claims for compensation or damages of any kind or character whatsoever, whether on account of the loss by Distributor of present or prospective compensation or anticipated compensation, or of expenditures, investments or commitments made either in connection therewith or in connection with the establishment, development or maintenance of establishment, development or maintenance of Distributor's business, or on account of any other cause or thing whatsoever. d. Termination is not the sole remedy under this Agreement and, whether or not termination is affected, all other remedies will remain available. 17. NO EXPORT. --------- The Products shall not be distributed for export nor sold to the end users for use outside the Territory. The parties further acknowledge and agree that all actions taken by the parties in furtherance of fulfillment of this Agreement shall be in full compliance with all applicable U.S. export control laws and regulations, as they are amended from time to time. The parties recognize that such laws may require, among other things, applying for export licenses for the export of information ("Technical Data"). Failure to obtain such licenses or otherwise comply with such laws could subject the parties to criminal sanctions including imprisonment. It is further acknowledged that the export of Technical Data, including the Products, software, know-how and other proprietary information, is "deemed" by the U.S. government to be exported: (i) upon transmission from the United States; (ii) upon oral release by a U.S. citizen in a foreign country; or (iii) by release in the United States to non-U.S. nationals. 18. AMENDMENT AND WAIVER. -------------------- Except as otherwise expressly provided herein, any provision of this Agreement may be amended and the observance of any provision of this Agreement may be waived (either generally or any particular instance and either retroactively or prospectively) only with the written consent of the parties. 19. GOVERNING LAW AND LEGAL ACTIONS. ------------------------------- This Agreement shall be governed by and construed under the laws of the State of Michigan and the United States without regard to conflicts of law provisions. Unless waived by Company in writing for the particular instance (which Company may do at its option), the sole jurisdiction and venue for actions related to the subject matter hereof shall be the State of Michigan and U.S. federal court for the Eastern District of Michigan. Both parties consent to the exhibit jurisdiction and venue of such courts and agree that process may be served in the manner provided herein for giving of notices or otherwise as allowed by Michigan or federal law. In any action or proceeding to enforce rights under this Agreement, the prevailing party shall be entitled to recover costs and reasonable attorneys' fees. 20. FORCE MAJEURE. ------------- Neither party shall be liable under this Agreement for any loss or damage of any nature incurred as a result of any failures of delays in performance because of any cause or circumstances beyond its control. This includes, but is not limited to, any failure or delays in performance caused by any strikes, lockouts, labor disputes, fires, acts of God or the public enemy, riots, incendiaries, interference by civil or military authorities, compliance with the laws, orders or policies of any government authority, delays in transit or delivery on the part of transportation companies or failures 12 of communication facilities or sources of raw materials. However, the party claiming a Force Majeure Event must notify the other in writing within ten days of the beginning of such an event, and no Force Majeure Event shall extend for a period of greater than 45 days. 21. HEADINGS. -------- Headings and captions are for convenience only and are not to be used in the interpretation of this Agreement. 22. NOTICES. ------- Any notices or other communications required or permitted hereunder shall be in writing and shall be deemed sufficiently given if (i) delivered in person, (ii) sent by recognized overnight courier, or (iii) by registered or certified mail, postage prepaid, to the respective party at the address set out above or to such other address any party shall have given notice in accordance with this Section 22. Notices hand-delivered shall be deemed given the same day as delivery-notices sent by overnight mail shall be deemed given the day following delivery, and notices sent by mail shall be deemed given three business days after the date posted, provided however, that any change of address shall be effective only upon receipt. 23. ENTIRE AGREEMENT. ---------------- This Agreement supersedes all proposals and agreements whether oral or written, all negotiations, conversations, or discussions between or among parties relating to the subject matter of this Agreement and all past dealing or industry custom. 24. SEVERABILITY. ------------ If any provision of this Agreement is held by a court of competent jurisdiction to be illegal, invalid or unenforceable, that provision shall be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable. 25. CORPORATE AUTHORITY. ------------------- The individuals executing this Agreement on behalf of Company and Distributor do each hereby warrant and represent that they respectively have been and are on the date of this Agreement duly authorized by all necessary or appropriate corporate action to execute this Agreement. 26. COUNTERPARTS. ------------ To facilitate execution, this Agreement may be executed in more than one counterpart, each of which shall constitute an original and all of which shall constitute one and the same Agreement. 27. FACSIMILE. --------- Facsimile signatures to this Agreement shall be considered original signatures. 28. BASIS OF BARGAIN. ---------------- EACH PARTY RECOGNIZES AND AGREES THAT THE WARRANTY DISCLAIMERS AND LIABILITY 13 AND REMEDY LIMITATIONS IN THIS AGREEMENT ARE MATERIAL, BARGAINED-FOR BASES OF THIS AGREEMENT, AND THAT THEY HAVE BEEN TAKEN INTO ACCOUNT AND REFLECTED IN DETERMINING THE CONSIDERATION TO BE GIVEN BY EACH PARTY UNDER THIS AGREEMENT AND IN THE DECISION BY EACH PARTY TO ENTER INTO THIS AGREEMENT. SIGNATURE PAGE FOLLOWS. 14 DTE ENERGY TECHNOLOGIES, INC. (a Michigan corporation) By: ----------------------------------- Its: ----------------------------------- "Distributor" PLUG POWER, L.L.C. (a Delaware limited liability company) By its Managing Member: -------------------------------------- By: ----------------------------------- Its: ----------------------------------- "Company" 15 EXHIBIT 1 The Products made by the Company are a range of fuel cell systems that are capable of generating electricity through electrochemical reactions. The components comprising the fuel cell systems include, but are not limited to, one or more of the following whether used alone or in combination: . A fuel processor that generates hydrogen gas and/or other gas(es). . A fuel cell stack(s) that generates electricity through electrochemical reactions. . An inverter system to convert direct current electricity to alternating current electricity. . A system controller for operation of the fuel cell system or any component thereof. . An energy storage system. . A heat exchanger. 16 EXHIBIT 2 Authorized Trademarks 1. "Plug Power" Stylized Plug Power Logo 17 EXHIBIT 3 Pre-Commercial Product Company Specifications Note: Company and Distributor recognize that the definition of the Pre- - ----------------------------------------------------------------------- Commercial Product (PCP) may change based on further analysis of residential - ---------------------------------------------------------------------------- load profiles and field testing. If Company and Distributor mutually agree to - ------------------------------------------------------------------------------- change the specifications set forth below, Company and Distributor will mutually - -------------------------------------------------------------------------------- agree on the prices and purchase volumes set forth in Section 5. - ----------------------------------------------------------------- Packaging: PCP product design will be complete to the point where interfaces between major components (e.g., stack, reformer, inverter, etc.) will be similar to that of the final Product. Certifications: - --------------- Certifications (e.g., UL, NFPA, AGA, FCC Class B) are not required for the PCPs. However, PCPs must meet any customary local codes and regulations required for field testing by Distributor's Customers. To the extent the test site required preparation to meet local codes, any site improvements will be at the Customer's expense. Technology: - ----------- Basic technology of all major PCP components will be the same as that of the Commercial Product; however, suppliers and manufacturers of the major components need not be the same as those for the Commercial Product. Documentation: - --------------- PCPs must be shipped with sufficient documentation (e.g., installation drawings, operating manuals, repair guides) to allow for start-up and Service by individuals with a skill level comparable to a typical HVAC technician, after such individual has completed the Company training program or a training program approved by Company. PCPs must be provided in strict accordance with samples, drawings, and/or designs provided by Company and approved in writing by Company and Distributor. Technical Support: - ------------------ Company will make available by telephone to Distributor and its sub- distributors PCU technical support during Company's normal business hours. Company will also establish a 24-hour telephone number to accommodate emergency calls from Distributor and its sub-distributors. Shipping: - ---------- Company will prepare all PCPs to allow for standard commercial shipment (e.g., truck, rail, cargo ship) to Customer locations. Monitoring & Diagnostics: - ------------------------- 18 PCPs will be designed to accommodate remote monitoring and diagnostics ("RM&D") equipment (e.g., modems, data collection/storage). RM&D equipment will be provided, installed, and operated at Distributor's or its Customers' expense. At a minimum, the PCP control system will allow the RM&D equipment to monitor the following parameters: Current System Status Output Power Voltage Current Others - TBD* Assumptions: - ------------ Plug Power assumed the following in developing the specifications set forth below: Natural gas line pressure at [***] of water or greater; and Average system usage of [***] kWh/year.
- ------------------------------------------------------------------------------------------------- Specification PCP - ------------------------------------------------------------------------------------------------- kW output rating 7kW continuous, [***] operating design point, [***] all outputs [***] - ------------------------------------------------------------------------------------------------- Voltage/frequency [***] - ------------------------------------------------------------------------------------------------- Operating design point efficiency (i.e., [***] efficiency at [***] kW output) - ------------------------------------------------------------------------------------------------- Continuous output efficiency (i.e., [***] efficiency at 7kW output) - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- Phase [***] - ------------------------------------------------------------------------------------------------- Fuel capability [***] [***] unless notified by DISTRIBUTOR in writing 12 months prior to PCP delivery) - -------------------------------------------------------------------------------------------------
19 - ------------------------------------------------------------------------------------------------- Allowable fuel contaminants Must be able to operate on [***] For NG: Sulfur ___ TBD* Alkalis ___ TBD* Water ___ TBD* Nitrogen ___ TBD* Non-Methane Hydrocarbons ____ TBD* Methane ___ TBD* For LPG: _______ TBD* For Methanol: _______ TBD* - ------------------------------------------------------------------------------------------------- System make up water requirements Must be able to operate on [***] Iron (PPM maximum) ___ TBD* Calcium (PPM maximum) ___ TBD* Chlorine (PPM maximum) ____ TBD* Particulate (PPM maximum) ___ TBD* Other ______ (PPM maximum) ____ TBD* - ------------------------------------------------------------------------------------------------- Noise ____ dBa (TBD*) [***] ____ dBa (TBD*) [***] - -------------------------------------------------------------------------------------------------
20 - ------------------------------------------------------------------------------------------------- Operating environment requirements Must be able to operate [***] Humidity Maximum ____% TBD* Minimum ____% TBD* Salt in Air Maximum ____% TBD* Minimum ____% TBD* Particulate (e.g., pollen) Maximum ____% TBD* Minimum ____% TBD* Other Cathode contaminant(s) (e.g., hydrocarbon vapor) Maximum ____% TBD* Minimum ____% TBD* - ------------------------------------------------------------------------------------------------- Emissions - TBD* NOx (NG) ____/____ (maximum/target) CO (NG) ____/____ (maximum/target) NOx (LPG) ____/____ (maximum/target) CO (LPG) ____/____ (maximum/target) NOx (Methanol) ____/____ (maximum/target) CO (Methanol) ____/____ (maximum/target) - ------------------------------------------------------------------------------------------------- Ambient temperature range [***] - ------------------------------------------------------------------------------------------------- Altitude [***] - ------------------------------------------------------------------------------------------------- Power conditioning system [***] - ------------------------------------------------------------------------------------------------- Overload [***] [***] - -------------------------------------------------------------------------------------------------
21 - ------------------------------------------------------------------------------------------------- Harmonics Harmonics at 7.0 kW continuous operation to satisfy [***] for harmonic voltages. Harmonics at [***] of non linear connected load [***]. - ------------------------------------------------------------------------------------------------- Power quality (isolated) - ------------------------------------------------------------------------------------------------- Voltage, steady state (up to 7.0 [***] kW continuous) - ------------------------------------------------------------------------------------------------- Voltage, transient (up to overload [***] rating) - ------------------------------------------------------------------------------------------------- Control [***] - ------------------------------------------------------------------------------------------------- Communications [***] or similar as needed to establish communications links - ------------------------------------------------------------------------------------------------- Grid connection Suitable for isolated operation (via a transfer switch) in a grid-connected site. - -------------------------------------------------------------------------------------------------
22 MTB stack replacement TBD* [***] MTB system (i.e., PEM Fuel Cell- TBD* Powered Generator Set) failure - ------------------------------------------------------------------------------------------------- Performance degradation (e.g., TBD* efficiency, output) [***] - ------------------------------------------------------------------------------------------------- Non-fuel O&M ($/year up to first stack TBD* replacement) at [***] kWh/year - ------------------------------------------------------------------------------------------------- Product life with prescribed routine TBD* maintenance (including stack [***] replacement) at less than [***] kWh/year - ---------------------------------------------------------------------------------------------
* COMPANY and DISTRIBUTOR will mutually agree to the specific values for these areas no later than October 1, 1999 (e.g., based on TEU lab and field- testing). 23 EXHIBIT 4 Commercial Product Company Specifications Note: Company and Distributor recognize that the specification of Commercial - ----------------------------------------------------------------------------- Product may change based on further analysis of residential load profiles and - ----------------------------------------------------------------------------- field testing. If Company and Distributor mutually agree to change the - ----------------------------------------------------------------------- specifications set forth below, Company and Distributor will mutually agree on - ------------------------------------------------------------------------------ the prices and the purchase volumes set forth in Section 5. - ----------------------------------------------------------- Packaging: - ---------- Product package size and weight must be suitable for installation indoor or outside of a typical single family residence within the Territory. Certifications: - --------------- Commercial Product, including packaging, must be compliant with all requisite standards (e.g., UL, NFPA, AGA, FCC Class B, CE) within the Territory. To the extent the installation site requires preparation to meet local codes, any site improvements will be at the Customer's expense. Interconnection: - ---------------- Products will be capable of interconnection to the electrical system of a typical single family residence; provided however that the Product will operate isolated from the grid with the use of transfer switch ("stand-alone operation"). The transfer switch will, in the event that the Product fails or is interrupted, transfer the household load from the Product back to the utility grid within no more than one-tenth of a second. Should it be determined that the Distributor's Customers require an interconnection scheme other than stand-alone operation (e.g., grid parallel), Distributor and Company will jointly set the requirements of the new interconnection scheme. To the extent the new interconnection scheme results in an increase in Company's Product cost, Company will adjust Distributor's transfer price proportionately. Installation: - ------------- Products must be in compliance with any applicable installation requirements within the Territory. Documentation: - --------------- Products must be shipped with sufficient documentation (e.g., installation drawings, operating manuals, repair guides) to allow for start-up and Service by individuals with a skill level comparable to a typical HVAC technician, after such individual has completed the Company training program or a training program approved by Company. Products must be shipped with documentation sufficient for an average homeowner to perform routine maintenance. 24 Products must be provided in strict accordance with samples, drawings, and/or designs provided by Company and approved in writing by Company and Distributor. 25 Technical Support: - ------------------ Company will make available by telephone to Distributor and its sub- distributors Product technical support during Company's normal business hours. Company will also establish a 24-hour telephone number to accommodate emergency calls from Distributor and its sub-distributors. Shipping: - --------- Company will prepare all Products to allow for standard commercial shipment (e.g., truck, rail, cargo ship) to Customer locations. Monitoring & Diagnostics: - ------------------------- Products will be designed to accommodate remote monitoring and diagnostics (RM&D) equipment (e.g., modems, date collection/storage). RM&D equipment will be provided, installed, and operated at Distributor's or its Customers' expense. At a minimum, the Product control system will allow the RM&D equipment to monitor the following parameters: Current System Status Output Power Voltage Current Others - TBD* Assumptions: - ------------- Plug Power assumed the following in developing the specifications set forth below: Natural gas line pressure at [***] or greater; and Average system usage of [***].
- -------------------------------------------------------------------------------------------------- Specification Product - -------------------------------------------------------------------------------------------------- kW output rating 7kW continuous, [***] operating design point, [***] all outputs [***] - -------------------------------------------------------------------------------------------------- Voltage/frequency [***] - -------------------------------------------------------------------------------------------------- Operating design point efficiency (i.e., [***] efficiency at [***] output) - -------------------------------------------------------------------------------------------------- Continuous output efficiency (i.e., [***] efficiency at 7kW output) - --------------------------------------------------------------------------------------------------
26 - -------------------------------------------------------------------------------------------------- Phase [***] - -------------------------------------------------------------------------------------------------- Fuel capability [***] - -------------------------------------------------------------------------------------------------- Allowable fuel contaminants Must be able to operate on [***] For NG: Sulfur ___ TBD* Alkalis ___ TBD* Water ___ TBD* Nitrogen ___ TBD* Non-Methane Hydrocarbons ____ TBD* Methane ___ TBD* For LPG: _______ TBD* For Methanol: _______ TBD* - -------------------------------------------------------------------------------------------------- System make up water requirements Must be able to operate on [***] - -------------------------------------------------------------------------------------------------- Iron (PPM maximum) ___ TBD* Calcium (PPM maximum) ___ TBD* Chlorine (PPM maximum) ____ TBD* Particulate (PPM maximum) ___ TBD* Other(s) ______ (PPM maximum) ____ TBD* - -------------------------------------------------------------------------------------------------- Noise ____ dBa (TBD*) [***] ____ dBa (TBD*) [***] - --------------------------------------------------------------------------------------------------
27 - -------------------------------------------------------------------------------------------------- Operating environment requirements Must be able to operate [***] Humidity maximum ____% TBD* minimum ____% TBD* Salt in Air maximum ____% TBD* minimum ____% TBD* Particulate (e.g., pollen) maximum ____% TBD* minimum ____% TBD* Other Cathode contaminant(s) (e.g., hydrocarbon vapor) maximum ____% TBD* minimum ____% TBD* - -------------------------------------------------------------------------------------------------- Emissions - TBD* NOx (NG) ____/____ (maximum/target) CO (NG) ____/____ (maximum/target) NOx (LPG) ____/____ (maximum/target) CO (LPG) ____/____ (maximum/target) NOx (Methanol) ____/____ (maximum/target) CO (Methanol) ____/____ (maximum/target) - -------------------------------------------------------------------------------------------------- Ambient temperature range [***] - -------------------------------------------------------------------------------------------------- Altitude [***] - -------------------------------------------------------------------------------------------------- Power conditioning system [***] - --------------------------------------------------------------------------------------------------
28 - -------------------------------------------------------------------------------------------------- Overload [***] [***] - -------------------------------------------------------------------------------------------------- Harmonics Harmonics at 7.0 kW continuous operation to satisfy [***] for harmonic voltages. Harmonics at [***] of non linear connected load will be subject to [***]. - -------------------------------------------------------------------------------------------------- Power quality (isolated) - -------------------------------------------------------------------------------------------------- Voltage, steady state (up to 7.0 kW [***] continuous load) - -------------------------------------------------------------------------------------------------- Voltage, transient (up to overload rating) [***] - -------------------------------------------------------------------------------------------------- Control [***] or similar as needed to establish communication links. - -------------------------------------------------------------------------------------------------- Communications [***] - -------------------------------------------------------------------------------------------------- Grid Connection Suitable for isolated operation (via a transfer switch) in a grid-connected site. - -------------------------------------------------------------------------------------------------- MTB stack replacement [***] - -------------------------------------------------------------------------------------------------- MTB system (i.e., PEM Fuel Cell- TBD* Powered Generator Set) failure [***] - -------------------------------------------------------------------------------------------------- Performance degradation (e.g., TBD* efficiency, output ) [***] - --------------------------------------------------------------------------------------------------
29 - -------------------------------------------------------------------------------------------------- Non-fuel O&M ($/year up to first stack TBD* replacement) at [***] kWh/year ----------- Labor Hours: [***] Labor Rate: [***] Total Labor: [***] Materials: [***] - -------------------------------------------------------------------------------------------------- Product life with prescribed routine TBD* maintenance (including stack ([***]) replacement) [***] kWh/year) - --------------------------------------------------------------------------------------------------
* COMPANY and DISTRIBUTOR will mutually agree to the specific values for these areas no later than June 1, 2000 (e.g., based on PCP lab and field testing). 30 SCHEDULE A TERMS AND CONDITIONS OF PURCHASE/SALE 1. PRICES AND PAYMENTS. Company's total price is FOB Company's designated, continental U.S. manufacturing facility, unless otherwise agreed in writing by Company and Distributor. All prices are exclusive of any applicable federal, state or local sales, use, excise, or other similar taxes, provided, however, that any such taxes to which Company becomes subject as a result of manufacturing, having manufactured, or procuring Commercial Product or Pre- Commercial Product, shall be borne by Company. No extra charges of any kind will be allowed unless specifically agreed to in writing by Distributor. Unless otherwise agreed between Company and Distributor, payments shall become due 45 days from receipt of invoice. In the event of delay in payment, Distributor will pay Company a late fee equal to the lesser of [***], or [***], of any unpaid balance per month of delay or [***]. Distributor must make payment when due, without offset, deduction, or counterclaim, regardless of any claim by Distributor. 2. DELIVERY AND PASSAGE OF TITLE. Time is of the essence on all purchase orders, except that delivery dates will be framed in terms of calendar months and orders will not be deemed late until after the end of such calendar month. If Company fails to deliver the Commercial Product or Pre-Commercial Product or to complete any services furnished hereunder, then Distributor shall be entitled, in addition to the remedies available elsewhere under the Agreement, to assess an amount, as liquidated damages for delay, equal to [***] of the total dollar value of Distributor's order for the first month of delay and [***] of the total dollar value of Distributor's order per subsequent month of delay; provided, (a) that such remedy will be capped at [***], (b) if the order is more than three months late, then Distributor may cancel the order, and (c) such liquidated damages will only be available to Distributor for those orders to the extent that Distributor has provided such remedy to its Customer. Company agrees that such amounts are a reasonable pre-estimate of the damages which Distributor may suffer as a result of such delay, and are to be assessed as liquidated damages and not as a penalty. Where such liquidated damages are available to Distributor, they shall be Distributor's only remedy for Company's failure to make timely delivery, other than the remedies for non-performance expressly set forth in this Agreement. 31 Commercial Product or Pre-Commercial Product which will be shipped from within the United States for delivery within the United States shall be delivered FOB Company's designated, continental U.S. manufacturing facility, unless otherwise agreed in writing by Company and Distributor. Commercial Product or Pre-Commercial Product delivered to Distributor in advance of schedule may be returned to Company at Company's expense. Title shall pass to Distributor upon delivery to Distributor FOB Company's designated, continental U.S. manufacturing facility. 3. CHANGES. The Distributor may at any time, in writing, request changes within the general scope of a purchase order in (a) specifications, where the Commercial Product or Pre-Commercial Product to be furnished are to be specifically manufactured in accordance therewith, (b) method of shipment or packing, or (c) place and time of delivery. Any such change shall be authorized only by an amendment executed by Company and Distributor, with such amendment to specify any additional expense, to be borne by Distributor. 4. INSPECTION. (a) All Commercial Product and Pre-Commercial Product shall be subject to inspection and test by Distributor at reasonable times and places upon reasonable notice, including the place of manufacture (which Company shall use reasonable efforts to arrange, including providing for such access in Company's purchase orders to the manufacturer); (b) If any inspection or test is made on the premises of Company, then Company, without additional charge, shall provide reasonable facilities and assistance for the safety and convenience of inspectors in the performance of their duties, provided that the inspectors must execute Company's standard confidentiality agreement, must abide by such facility's rules and regulations, and must be covered by insurance for occurrences other than due to Company's negligence or willful misconduct; and (c) Company shall provide and maintain a program in order to create ongoing product design, manufacturing, testing, inspection, and other safety and quality-related processes that are adequate to assure the safety and reliability of Company's Commercial Product and Pre-Commercial Product (the "Product Quality and Safety Assurance Program"). Records of all inspection work by Company shall be kept complete and available to Distributor during the performance of a purchase order and for three (3) years from the date of such inspection. Company will allow representatives of Distributor access to the facilities involved in performing an order for purposes of reviewing the status and progress of 32 production. 5. REJECTION. If any of the Commercial Product, Pre-Commercial Product or services (to the extent that Company is providing services) ordered are found by Distributor within [***] of delivery to be defective, or otherwise not in conformity with the requirements of the order, including any applicable specifications, Company, at its option and sole discretion may: (a) instruct Distributor to return such goods at Company's expense; (b) request that Distributor, with Distributor's written approval, take such actions as may be required to cure all defects and/or bring the Commercial Product or Pre- Commercial Product into conformity with all requirements, in which event any reasonable costs and expenses thereby incurred by Distributor, including material and handling charges, will be at Company's expense; and (c) re-perform, at Company's own expense, any defective portion of the services performed, to the extent that Company is supplying services. Distributor must notify Company in writing of such defect or non-conformity within [***] after delivery of the Commercial Product or Pre-Commercial Product or performance of services, if applicable, or Distributor's rights under this Section 5 shall be waived. The remedies in this Section 5 shall be Distributor's exclusive remedies under this Section 5. 33
Products (Commercial Units) - -------------------------------------------------------------------------------- COMPANY'S estimated Cumulative # of direct cost Price to units # of units per unit DISTRIBUTOR per purchased by Lot # in Lot (US$) unit(US$) GEFCS - -------------------------------------------------------------------------------- 1 [***] [***] [***] [***] 2 [***] [***] [***] [***] 3 [***] [***] [***] [***] 4 [***] [***] [***] [***] 5 [***] [***] [***] [***] 6 [***] [***] [***] [***] 7 [***] [***] [***] [***] 8 [***] [***] [***] [***] 9 [***] [***] [***] [***] 10 [***] [***] [***] [***] 11 [***] [***] [***] [***] 12 [***] [***] [***] [***] 13 [***] [***] [***] [***] 14 [***] [***] [***] [***] 15 [***] [***] [***] [***] 16 [***] [***] [***] [***]
Note: All numbers have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 under the Securities Act]. 34 17 [***] [***] [***] [***] 18 [***] [***] [***] [***] 19 [***] [***] [***] [***] 20 [***] [***] [***] [***] 21 [***] [***] [***] [***] 22 [***] [***] [***] [***] 23 [***] [***] [***] [***] 24 [***] [***] [***] [***] 25 [***] [***] [***] [***] 26 [***] [***] [***] [***] 27 [***] [***] [***] [***] 28 [***] [***] [***] [***] 29 [***] [***] [***] [***] 30 [***] [***] [***] [***]
Prices shown are for the Products as specified in EXHIBIT 4. Any modification to the EXHIBIT 4 specification requested by Distributor that result in a change to the Company's direct cost will cause Distributor's price to change by an equal amount. EXHIBIT 5 COMPANY'S INSURANCE Company shall maintain in effect at all times during the Term of this Agreement products liability insurance as set forth on the following certificate, with Distributor named as additional insured. (See Attached) 35 EX-10.35 15 AGREEMENT DATED AS OF AUGUST 27, 1999 Exhibit 10.35 CONFIDENTIAL INTORMATION HAS BEEN OMITTED PURSUANT TO RULE 406 UNDER THE SECURITIES ACT AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. THE LOCATIONS OF THE OMITTED INFORMATION HAVE BEEN INDICATED WITH ASTERISKS. AGREEMENT This Agreement is made and entered into as of August 27, 1999, among Plug Power, L.L.C., a Delaware limited liability company ("PP"), Plug Power Inc., a Delaware corporation and wholly-owned subsidiary of PP ("PP Inc."), GE On-Site Power, Inc., a Delaware corporation ("GEOSP"), GE Power Systems business of General Electric Company, a New York corporation ("GEPS"), and GE Fuel Cell Systems, L.L.C., a Delaware limited liability company ("GEFCS"). In consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE 1 1.1 GEOSP shall by written notice to PP exercise the option granted to it by PP (the "Option"), pursuant to Section 2(b) of that certain Contribution Agreement, dated as of February 3, 1999 (the "Contribution Agreement"), between GEOSP and PP, to purchase from PP 3,000,000 newly issued shares of the Class A membership interests of PP at an exercise price of $12.50 per share, concurrently with or prior to an initial public offering ("IPO") of PP's securities (or those of PP Inc. following the merger of PP with and into PP Inc. (the "Merger") as described in the Registration Statement filed with the United States Securities and Exchange Commission on the date hereof, a copy of which is attached hereto as Exhibit A; provided, that (i) the IPO shall have been consummated on or before December 31, 1999; (ii) the price per share to the public of the securities offered in such IPO is greater than $12.50 and (iii) GEOSP shall have received all applicable governmental authorizations, consents and approvals and made all necessary governmental filings necessary for the valid consummation of the transactions contemplated hereby, including, without limitation, filings under, and expiration of the applicable waiting period (or early termination thereof) imposed by, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. 1.2 Failure by GEOSP to exercise the Option pursuant to Section 1.1 shall be deemed a surrender of such Option by GEOSP. ARTICLE 2 2.1 Effective upon the exercise by GEOSP of the Option: (A) PP shall (i) use its best efforts to cause one individual nominated by GEPS (the "GEPS Nominee") to be elected to the Management Committee of PP for an initial term of one (1) year and (ii) cause the GEPS Nominee to be elected to the Board of Directors of PP Inc. for an initial term of three (3) years; and (B) GEPS shall nominate Robert Nardelli or his successor as President and Chief Executive Officer of GEPS to serve as the GEPS Nominee; provided, however, that GEPS may nominate an individual other than Robert Nardelli or his successor as President and Chief Executive Officer of GEPS to serve as the GEPS Nominee, subject to the approval of PP and PP Inc., which approval shall not be unreasonably withheld. Each of PP and PP Inc. hereby agree to take all reasonable actions necessary to nominate the GEPS Nominee as a director, and to use best efforts to cause the election of the GEPS Nominee to the Board of Directors of PP Inc. following the IPO for so long as the Distributor Agreement (as defined below) remains in effect. Each of PP, PP, Inc. and GEPS agree to take all reasonable actions necessary to comply with the foregoing covenant. As used herein, the term "Management Committee" shall have the meanings ascribed to such term in the Limited Liability Company Agreement of Plug Power, L.L.C. made as of June 27, 1997, as amended (the "PP Operating Agreement"). 2.2 Effective as of the date hereof, the vesting/forfeiture provisions set forth in Section 2(a)(i)-(vi) of the Contribution Agreement shall be terminated and have no further force or effect and the 1,500,000 Shares (as defined in the Contribution Agreement) shall be fully vested, free of any restrictions set forth in the Contribution Agreement. Effective upon exercise by GEOSP of the Option, the Contribution Agreement shall be terminated. ARTICLE 3 3.1 Effective upon exercise by GEOSP of the Option, GEOSP shall have the right to include its shares of PP Class A membership interests or shares of common stock of PP Inc. (collectively, "Registrable Shares") in any of the first three registration statements (the "Piggyback Registration Statements") filed under the Securities Act of 1933 (the "Securities Act") by PP or PP Inc. after completion of the IPO (other than registration statements on Form S-4 or S-8 or any successor Form). The number of Registrable Shares sought to be included in any registration statement for an underwritten public offering shall be subject to reduction on a pro-rata basis with all other selling stockholders and before any shares sought to be registered by PP or PP Inc. are reduced, if in the reasonable judgment of the managing underwriters of such offering, marketing or other factors require such reduction in order to facilitate public distribution of the offering. In the event GEOSP is not permitted to include any Registrable Shares in a particular Piggyback Registration Statement as a result of the immediately preceding sentence, such Piggyback Registration Statement shall not be included in the three Piggyback Registration Statements in which GEOSP has the right to include Registrable Shares. In addition, effective upon exercise by GEOSP of the Option, GEOSP shall, at any time from and after the second anniversary of the consummation of the IPO, have the right on one occasion to require PP and PP Inc. to register for resale under the Securities Act up to 3,000,000 Registrable Shares (as appropriately adjusted for stock splits, stock dividends, mergers, recapitalizations and 2 similar transactions), less the total number of shares sold by GEOSP under the Piggyback Registration Statements. The parties shall, concurrently with or prior to the IPO, enter into a registration rights agreement substantially in the form of the August 24, 1999 draft provided to PP by GEOSP's counsel, provided that Section 2 of such draft shall be revised to reflect the terms hereof.. ARTICLE 4 4.1 Subject to the exercise by GEOSP of the Option and subject to Section 4.4 below, PP shall purchase a minimum of $12,000,000 of technical support services (e.g. engineering, testing, manufacturing, quality control) from GEOSP over a period of three years (the "Initial Period") in accordance with the Work Plan (as defined below) (the "PP Commitment") commencing on the earlier of (i) the date on which the Management Committee of GEFCS unanimously approves the Work Plan, as defined below, or (ii) September 30, 1999. Within 30 days of the date hereof, representatives of PP, GEFCS shall agree on the specific work scope, process for collaboration, resource/capability requirements and deliverables for a three-year period and submit such plan (the "Work Plan") to the Management Committee of GEFCS; provided, however, that each of PP and GEPS -------- ------- agree that the draft work plan dated July 23, 1999 submitted to PP by GEPS shall be the basis for the Work Plan and the Work Plan shall contain substantially the same fundamental terms (other than purchase commitments) as such draft work plan. PP shall purchase services from GEOSP only. GEOSP shall purchase services as needed by PP from other General Electric Company divisions and, except for services purchased from GEPS, GEOSP shall charge PP [***]. With respect to services purchased by GEOSP from GEPS, GEOSP shall charge PP a price equal to [***]. 4.2 In providing the services set forth in the Work Plan, GEOSP need not provide services directly, and may utilize resources as necessary from other divisions and affiliates of General Electric Company. 4.3 If on March 31, 2002 PP reasonably believes that it will fail to both (i) satisfy the PP Commitment during the time period set forth in Section 4.1 above (including amounts credited toward the PP Commitment in accordance with Section 4.4 below), and (ii) complete the Work Plan in accordance with its terms, then PP may, by written notice to GEOSP (which notice must be received by April 30, 2002), request an extension of the time within which to complete the Work Plan until a date not later than March 31, 2003 (the "Work Plan Extension Period"). Such notice must set forth (i) the reason for PP's belief that it will fail to complete the Work Plan, and (ii) PP's timetable and methodology for completion of the Work Plan. Upon GEOSP's receipt of any such extension request, the time within which PP may complete the Work Plan shall be automatically extended until the date requested by PP (not later than March 31, 2003). During the Work Plan Extension Period PP shall continue to purchase services from GEOSP in accordance with the provisions of Section 4.1 until the earlier of satisfaction of the PP Commitment or completion of the Work Plan in accordance with its terms. If at the end of the Work Plan Extension Period PP fails to both (i) satisfy the PP Commitment and (ii) complete the Work Plan in accordance with its terms, then PP shall pay GEOSP, as liquidated damages for such failure, the difference between $12,000,000 and the amount purchased during the Initial Period and the Work Plan Extension Period (including amounts paid to third parties in accordance with Section 4.4). 3 4.4 PP recognizes that in order to meet its overall production development obligations, it may be necessary to spend more than $12,000,000. GEOSP recognizes that if it is unable to deliver support in conformity with the Work Plan, PP may obtain such services from a third party subject to the provisions of this Section 4.4. If PP believes, in good faith that GEOSP cannot deliver support in conformity with the Work Plan, and provides GEOSP with written notice of such good faith belief, GEOSP shall have thirty (30) days after GEOSP's receipt of such notice to demonstrate that it can provide the requisite support. If GEOSP fails to sufficiently demonstrate such ability within thirty (30) days, PP may obtain such services from a third-party at reasonable and prevailing costs and credit such costs to the PP Commitment. Any third-party costs must be based on customary commercial practices and PP must provide evidence of such costs to GEOSP. 4.5 Unless otherwise agreed to by PP and GEOSP, PP agrees that at least $1,000,000 of the PP Commitment shall be for quality related initiatives (e.g. training, design for six sigma (DFSS) implementation, design and use of quality scorecards, design for reliability). In addition, PP agrees that the members of PP's senior management team shall be trained by General Electric Company personnel on six sigma/DFSS tools within 60 days of the date hereof. 4.6 In order to promote improved integration of the product development and market development activities, the Management Committee of GEFCS shall meet monthly to review key product and market development activities, progress to date, obstacles and other related items. ARTICLE 5 5.1 Effective upon exercise by GEOSP of the Option, PP and GEFCS hereby amend that certain Distributor Agreement, dated as of February 2, 1999 (the "Distributor Agreement"), between GEFCS and PP, to extend the term of the Distributor Agreement by five years (the "Extension Period") from March 4, 2004 until March 4, 2009. In order to supplement the Distributor Agreement with product transfer prices and purchase commitments applicable to the Extension Period, GEFCS and PP agree to begin discussions on such terms on October 1, 2002 and engage in negotiations to conclude such discussions and resolve such points by March 1, 2003. In the event GEFCS and PP fail to resolve such transfer prices and purchase commitments by March 1, 2003, the parties agree that the product transfer prices and purchase commitments in effect on March 4, 2004 shall remain in effect until such issues are resolved; provided, however, that if the product transfer prices in effect on March 4, 2004 (i) do not provide PP with a gross profit margin on such sells of at least [***] and (ii) provide GEFCS with a percentage of earnings before interest and taxes ("EBIT") to sales of greater than [***], then the product transfer prices in effect pending such resolution shall be adjusted to provide (A) PP with a gross profit margin on such sales of at least [***] and (B) GEFCS with a percentage of EBIT to sales of at least [***]. 5.2 PP and GEFCS shall use commercially reasonable efforts to be the most successful manufacturer, marketer and distributor of residential and small commercial fuel cell systems in every market in the world (other than Illinois, Indiana, Michigan and Ohio for so long as DTE Energy Company is the exclusive distributor for such states). 5.3 PP and GEFCS further agree that during the Extension Period: (a) GEFCS shall extend the distribution rights of John. Vaillant GMBH U. Co. ("Vaillant") for Vaillant manufactured fuel cell combined heat and power systems to include all countries that are included in the definitions of "Europe" as defined in the Vaillant Agreement (as defined below); provided, that (i) PP, Vaillant and GEFCS -------- complete the contemplated development, collaboration and distribution agreements contemplated by that certain memorandum of 4 understanding among PP and Vaillant (the "Vaillant Agreement"), (ii) Vaillant satisfies its obligations under the Vaillant Agreement and (iii) Vaillant and GEFCS mutually agree on transfer prices and purchase commitments for the time period; and (b) GEFCS shall retain its exclusive distribution rights pursuant to the Distribution Agreement in each year of the Extension Period, provided that GEFCS meets or exceeds the purchase commitment to be agreed upon for any given year during the Extension Period or GEFCS is one of the world's three largest sellers of PEM Fuel Cell-Powered Generator Sets as defined in the Distributor Agreement, based on the dollar value of new units and replacement parts actually sold by GEFCS for that year. However, any failure of GEFCS to meet its purchase commitment target in any year which is caused by PP's failure to deliver a competitive product, as defined under Section 9.3(b) of the Amended and Restated Limited Liability Company Agreement of GEFCS, dated February 3, 1999, between GEOSP and PP, for that year, shall not be grounds for PP to reduce or modify GEFCS's distribution rights in any way. ARTICLE 6 6.1 This Agreement shall be governed by and construed in accordance with the domestic laws of the State of New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New York. Each party agrees that any dispute relating to or arising from this Agreement or the transactions contemplated hereby shall be resolved only in the Courts of the State of New York. 6.2 In no case will any of the parties hereto be liable to any other party for special, incidental, or consequential damages, including, but not limited to, personal injury, property damage, loss of profit or revenues, or business interruption. 6.3 If the performance by any party hereto of any obligation under this Agreement is delayed or prevented in whole or in party by any cause not reasonably within its control (including, without limitation, acts of God, war, civil disturbances, accidents, damage to its facilities, labor disputes, acts of any governmental body not attributable to such party's failure to comply with this Agreement, or failure or delay of third parties), it shall be excused, discharged, and released or performance to the extent such performance is so limited or prevented, without liability of any kind. Each party shall use its reasonable efforts to minimize the duration and consequences of any failure of or delay in performance resulting from a "Force Majeure" event. 6.4 Each party agrees that the failure of any other party at any time to require performance of any of the provisions herein shall not operate as a waiver of the right of the other party to request strict performance of the same or like provisions, or any other provisions hereof, at a later time. 6.5 If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any 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 adverse to any party. Upon 5 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 a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the greatest extent possible. 6.6 This Agreement may not be amended or modified except by an instrument in writing signed by the parties hereto. 6.7 This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement. 6.8 This Agreement, the Distribution Agreement, the Contribution Agreement, the Registration Rights Agreement and the Operating Agreement constitute the entire agreement of the parties hereto with respect to the subject matter hereof. 6.9 This Agreement is for the sole benefit of the parties hereto and their permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person or entity any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. 6.10 Each party hereto shall bear its own costs and expenses associated with the negotiation, preparation, delivery and performance of this Agreement. 6.11 All notices or consents hereunder shall be in writing and shall be deemed given (a) when delivered personally, (b) five days after deposit, postage prepaid, if mailed by registered or certified mail, return receipt requested, or (c) upon transmission if transmitted by telex or facsimile (with an electronic confirmation thereof to the transmitter), to the parties at their respective addresses set forth below (or at such other address for a party as shall be specified by such party): If to PP or PP Inc. Plug Power, L.L.C. 968 Albany-Shaker Road Latham, New York 12110 Attn: Mr. Gary Mittleman Telecopy: (518) 782-7884 6 If to GEFCS: GE Fuel Cell Systems, L.L.C. 968 Albany-Shaker Road, Building 1 Latham, New York 12110 Attn: Mr. Barry Glickman Telecopy: (518) 785-2831 If to GEOSP: GE On-Site Power, Inc. 968 Albany-Shaker Road, Building 1 Latham, New York 12110 Attn: Mr. Barry Glickman Telecopy: (518) 785-2831 If to GEPS: GE Power Systems 4200 Wildwood Parkway Atlanta, Georgia 30339 Attn: Ms. Elizabeth K. Lanier Telecopy: (770) 859-7710 6.12 This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting or causing any instrument to be drafted. 6.13 To the extent permitted by applicable law, the parties hereto agree that irreparable damage will occur if any provision of this Agreement is not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity; provided that each of the parties agrees to provide the -------- other with written notice at least two business days prior to filing any motion or other pleading seeking a temporary restraining order, a temporary or permanent injunction, specific performance, or any other equitable remedy and to give the other and its counsel a reasonable opportunity to attend and participate in any judicial or administrative hearing or other proceeding held to adjudicate or rule upon any such motion or pleading. [Signatures on next page.] 7 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. PLUG POWER, L.L.C. By: /s/ Gary Mittleman --------------------------------- Name: Gary Mittleman Title: President & CEO PLUG POWER INC. By: /s/ Gary Mittleman --------------------------------- Name: Gary Mittleman Title: President & CEO GE FUEL CELL SYSTEMS, L.L.C. By: /s/ Barry Glickman --------------------------------- Name: Barry Glickman Title: President GE ON-SITE POWER, INC. By: /s/ Ricardo Artigas --------------------------------- Name: Ricardo Artigas Title: President GE POWER SYSTEMS division of GENERAL ELECTRIC COMPANY By: /s/ Robert L. Nardelli --------------------------------- Name: Robert L. Nardelli Title: CEO, GE Power Systems 8 EX-23.2 16 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 (File No. 333-86089) of our report dated April 9, 1999 relating to the financial statements of Plug Power LLC (a development stage enterprise), which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Historical Financial Data" in such Registration Statement. PricewaterhouseCoopers LLP Albany, New York October 27, 1999 EX-27 17 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PLUG POWER'S BALANCE SHEETS AND STATEMENTS OF OPERATIONS, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS YEAR 6-MOS DEC-31-1997 DEC-31-1998 DEC-31-1999 JUN-27-1997 JAN-01-1998 JAN-01-1999 DEC-31-1997 DEC-31-1998 JUN-30-1999 3,080,181 3,993,122 17,242,734 0 0 0 803,557 1,285,261 1,016,402 0 0 0 20,911 14,647 53,087 3,917,288 5,293,030 18,340,750 854,421 3,202,776 8,947,265 (116,808) (449,284) (804,752) 4,846,566 8,093,435 37,232,815 1,249,906 2,600,738 4,771,235 0 0 0 0 0 0 0 0 0 0 0 0 9,500,000 21,012,000 55,410,182 4,846,566 8,093,435 37,232,815 0 0 0 1,193,530 6,541,040 3,695,535 0 0 0 1,226,443 8,863,845 5,117,834 5,973,550 7,386,374 13,880,430 0 0 0 0 0 0 (5,903,340) (9,615,963) (15,084,696) 0 0 0 (5,903,340) (9,615,963) (15,084,696) 0 0 0 0 0 0 0 0 0 (5,903,340) (9,615,963) (15,084,696) (0.62) (0.71) (0.71) (0.62) (0.71) (0.71)
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