AMENDMENT #4 TO FORM S-4
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As filed with the Securities and Exchange Commission on February 12, 2003

 

Registration No. 333-101567

 


SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

PRE-EFFECTIVE

AMENDMENT NO. 4 TO

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


 

PLUG POWER INC.

(Exact Name of Registrant as Specified in Its Charter)

 


 

Delaware

 

3629

 

22-3672377

(State or Other Jurisdiction of
Incorporation or Organization)

 

(Primary Standard Industrial
Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

968 Albany-Shaker Road

Latham, New York 12110

(518) 782-7700

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 


 

Roger Saillant

President and Chief Executive Officer

Plug Power Inc.

968 Albany-Shaker Road

Latham, New York 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.

Robert P. Whalen, Jr., P.C.

Goodwin Procter LLP

Exchange Place

Boston, Massachusetts 02109

(617) 570-1000

 

Merrill M. Kraines, Esq.

Fulbright & Jaworski, L.L.P.

666 Fifth Avenue

New York, NY 10103

(212) 318-3000

 

Approximate date of commencement of proposed sale to the public: As soon as possible after the effective date of this registration statement and the consummation of the merger described in this registration statement.

 

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. ¨

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement number for the same offering. ¨

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

 


 

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, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 



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LOGO

LOGO

 

 

The boards of directors of Plug Power Inc. and H Power Corp. have each approved an agreement and plan of merger that would result in H Power becoming a wholly-owned subsidiary of Plug Power.

 

The board of directors of each company believes that the merger is advisable and in the best interests of its stockholders. The board of directors of H Power unanimously recommends that its stockholders vote to adopt and approve the merger agreement and approve the transactions contemplated by the merger agreement, and the board of directors of Plug Power unanimously recommends that its stockholders vote to approve the issuance of shares of Plug Power common stock pursuant to the merger agreement.

 

If the merger agreement is adopted and approved and the merger is subsequently completed, and you are an H Power stockholder, it is estimated that you will receive approximately .84 shares of Plug Power common stock for each share of H Power common stock you own, which provides an estimated aggregate consideration value of $46,548,204, or $4.32 per share, based on the closing price per share of Plug Power’s common stock on February 11, 2003. The actual amount of shares of Plug Power common stock you will receive in the merger will depend upon certain factors described in the attached joint proxy statement/prospectus. The minimum aggregate consideration that H Power stockholders can receive in the merger is $29,675,000, or $2.75 per share, unless H Power determines not to exercise its right to terminate the merger agreement. In such event, H Power stockholders will not be guaranteed to receive any minimum consideration in the merger. You will also receive cash, without interest, rather than a fractional share of Plug Power common stock that you otherwise would be entitled to receive in the merger. Plug Power common stock is listed on the Nasdaq National Market under the symbol “PLUG.” At your stockholders meeting, you will be asked to vote on the merger agreement, the merger and the other transactions contemplated by the merger agreement.

 

If you are a Plug Power stockholder, after the merger you will continue to own your existing shares of Plug Power common stock. At your stockholders meeting, you will be asked to vote on the issuance of shares of Plug Power common stock in the merger.

 

Stockholders of Plug Power are also being asked to vote upon a proposal to permit Plug Power’s employees to exchange options to purchase shares of Plug Power common stock held by them for shares of restricted common stock of Plug Power, in accordance with the terms and conditions described in the accompanying joint proxy statement/prospectus. The board of directors of Plug Power believes that the proposed stock option exchange is advisable and in the best interests of its stockholders and unanimously recommends that Plug Power stockholders vote to approve the stock option exchange.

 

Your Vote is Very Important.    Whether or not you plan to attend your company’s stockholders’ meeting, please take the time to vote on the proposal(s) submitted for your company’s meeting by completing and mailing the enclosed proxy card to us. If you sign, date and mail your proxy card without indicating how you wish to vote, your proxy will be counted as a vote in favor of the proposal(s) submitted at your meeting. If you are an H Power stockholder, failure to return or sign your proxy card will have the effect of a vote against the merger agreement and the merger, unless you attend your stockholders meeting and vote in person. If you are a Plug Power stockholder, failure to return or sign your proxy card will have no effect on the proposal to issue shares of Plug Power common stock in the merger and no effect on the proposal to exchange Plug Power options for shares of restricted stock of Plug Power.

 

The dates, times and places of the stockholders meetings are as follows:

 

For Plug Power Inc. stockholders: March 25, 2003 at 10:00 a.m. local time at the Albany Marriott, 189 Wolf Road, Albany, New York.

 

For H Power Corp. stockholders: March 25, 2003 at 9:00 a.m. local time at the Courtyard Marriott Lyndhurst, 1 Polito Avenue, Lyndhurst, New Jersey.

 

Following this letter you will find a formal notice of the special meeting of your company’s stockholders and a joint proxy statement/prospectus. The joint proxy statement/prospectus provides you with detailed information concerning the merger agreement, the merger, the issuance of shares of Plug Power common stock pursuant to the merger agreement, the proposed stock option exchange and Plug Power and H Power. You may also obtain more information about Plug Power and H Power from documents that each company has filed with the Securities and Exchange Commission.

 

Dr. Roger B. Saillant

 

Dr. H. Frank Gibbard

President and Chief Executive Officer of Plug Power Inc.

 

Chief Executive Officer of H Power Corp.

 

Please give all of the information contained or incorporated by reference in the joint proxy statement/prospectus your careful attention. In particular, you should carefully consider the discussion in the section entitled “Risk Factors” beginning on page 27 of the joint proxy statement/prospectus. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the shares to be issued under, or passed upon the adequacy of, this joint proxy statement/prospectus. Any representation to the contrary is a criminal offense.

 

The accompanying joint proxy statement/prospectus is dated February 12, 2003 and was first mailed to stockholders of Plug Power and H Power on or about February 13, 2003.


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PLUG POWER INC.

968 Albany-Shaker Road

Latham, NY 12110

(518) 782-7700

 


 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

to be held on March 25, 2003

 


 

To the Stockholders of Plug Power Inc.:

 

A special meeting of stockholders of Plug Power Inc. will be held on March 25, 2003 at 10:00 a.m., local time, at the Albany Marriott, 189 Wolf Road, Albany, New York. The board of directors asks you to attend this meeting (in person or by proxy) for the following purposes:

 

  1.   To consider and vote on a proposal to approve the issuance of shares of common stock of Plug Power Inc. pursuant to the Agreement and Plan of Merger, dated as of November 11, 2002, by and among Plug Power Inc., a Delaware corporation, Monmouth Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Plug Power Inc., and H Power Corp., a Delaware corporation, as amended, a copy of which is attached as Annex A to the accompanying joint proxy statement/prospectus.

 

  2.   To consider and vote on a proposal to exchange options to purchase shares of common stock of Plug Power Inc. held by its employees for shares of restricted common stock of Plug Power Inc., in accordance with the terms and conditions described in the accompanying joint proxy statement/prospectus.

 

  3.   To transact any other business as may properly come before the special meeting and any adjournments or postponements of the special meeting.

 

Only stockholders of record of Plug Power Inc. as of the close of business on February 7, 2003 are entitled to notice of, and will be entitled to vote at, the special meeting or any adjournment or postponement thereof. Approval of each of the proposals will require the affirmative vote of the holders of a majority of the shares of Plug Power common stock present in person or by proxy at the special meeting.

 

We invite you to attend the special meeting because it is important that your shares be represented at the meeting. Whether or not you plan to attend the special meeting, please sign, date and return the enclosed proxy card in the accompanying postage-paid envelope. Please note that, by delivering a proxy to vote at the special meeting, you are also granting a proxy to vote at any adjournments or postponements of the special meeting. If you attend the meeting, you may vote in person, which will revoke a signed proxy if you have already sent one in. You may also revoke your proxy at any time before the meeting in the manner described in the accompanying joint proxy statement/prospectus.

 

BY THE ORDER OF THE BOARD OF DIRECTORS,

 

LOGO

Roger Saillant,

President and Chief Executive Officer

 

Latham, New York

February 12, 2003


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H POWER CORP.

60 Montgomery Street

Belleville, New Jersey 07109

(973) 450-4400

 


 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

to be held on March 25, 2003

 


 

To the Stockholders of H Power Corp.:

 

A special meeting of stockholders of H Power will be held on March 25, 2003, at 9:00 a.m., local time, at the Courtyard Marriott Lyndhurst, 1 Polito Avenue, Lyndhurst, New Jersey 07071, for the following purposes:

 

  1.   To consider and vote on a proposal to adopt and approve the Agreement and Plan of Merger, dated as of November 11, 2002, by and among Plug Power Inc., a Delaware corporation, Monmouth Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Plug Power, and H Power Corp., a Delaware corporation, as amended, a copy of which is attached as Annex A to the accompanying joint proxy statement/prospectus, and to approve the merger as contemplated by the merger agreement.

 

  2.   To transact any other business that may properly come before the special meeting and any adjournment or postponement of the special meeting.

 

Only stockholders of record of H Power common stock at the close of business on February 7, 2003 are entitled to notice of, and will be entitled to vote at, the special meeting or any adjournment or postponement thereof. Approval of the merger agreement will require the affirmative vote of the holders of a majority of the shares of H Power common stock entitled to vote at the special meeting.

 

Your vote is important. To ensure that your shares are represented at the special meeting, you are urged to complete, date and sign the enclosed proxy card and mail it promptly in the postage-prepaid envelope provided, whether or not you plan to attend the special meeting in person. You may revoke your proxy in the manner described in the accompanying joint proxy statement/prospectus at any time before it has been voted at the special meeting. If you attend the special meeting, you may vote in person even if you returned a proxy.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

LOGO

Dr. H. Frank Gibbard

Chief Executive Officer

Belleville, New Jersey

February 12, 2003

 

Please do not send your stock certificates at this time. If the merger is completed, you will be sent instructions regarding the surrender of your stock certificates.


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ADDITIONAL INFORMATION

 

This joint proxy statement/prospectus incorporates important business and financial information about Plug Power from other documents that are not included in or delivered with this document. We have listed the documents containing this information on page 167. This information is available to you without charge upon your written or oral request. You can obtain those documents relating to Plug Power, which are incorporated by reference in this joint proxy statement/prospectus, or any documents referred to in this joint proxy statement/prospectus relating to H Power by requesting them in writing or by telephone from the appropriate company at the following addresses and telephone numbers:

 

Plug Power Inc.

 

H Power Corp.

968 Albany-Shaker Road

 

60 Montgomery Street

Latham, New York 12110

 

Belleville, NJ 07109

Attn: David A. Neumann

Chief Financial Officer

 

Attn: William Zang

Chief Financial Officer

(518) 782-7700

 

(973) 450-4400

 

If you would like to request documents, you must do so by March 18, 2003 in order to receive them before the special meeting of your company’s stockholders. You will not be charged for any of these documents that you request.

 

For additional information regarding where you can find information about Plug Power and H Power, please see the section entitled “Where You Can Find Additional Information” beginning on page 166 of this joint proxy statement/prospectus. The information contained in this joint proxy statement/prospectus with respect to H Power and its subsidiaries was provided by H Power and the information contained in this joint proxy statement/prospectus with respect to Plug Power and its subsidiaries was provided by Plug Power.


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TABLE OF CONTENTS

    

Page


QUESTIONS AND ANSWERS ABOUT THE MERGER

  

1

SUMMARY

  

6

PLUG POWER SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA

  

15

H POWER SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA

  

17

SELECTED COMBINED COMPANY UNAUDITED PRO FORMA FINANCIAL
INFORMATION

  

19

COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA

  

21

COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND INFORMATION

  

23

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS JOINT PROXY STATEMENT/PROSPECTUS

  

25

RISK FACTORS

  

27

Risks Related to the Merger

  

27

Risks Related to Plug Power and the Combined Company

  

33

Risks Related to H Power

  

43

THE SPECIAL MEETING OF PLUG POWER’S STOCKHOLDERS

  

46

Date, Time and Place of Meeting

  

46

Purpose of the Special Meeting

  

46

Record Date

  

46

Votes Required for Approval of the Issuance of Shares of Common Stock of Plug Power

  

46

Quorum, Abstentions and Broker Non-Votes

  

47

Solicitation of Proxies and Expenses

  

48

Voting of Proxies at the Special Meeting and Revocation of Proxies

  

48

No Appraisal Rights

  

48

Other Matters to be Voted on

  

48

Recommendation of Plug Power’s Board of Directors

  

49

THE SPECIAL MEETING OF H POWER’S STOCKHOLDERS

  

49

Date, Time and Place of Meeting

  

49

Purpose of the Special Meeting

  

49

Record Date

  

49

Votes Required for Adoption and Approval of the Merger Agreement and Approval of the Merger

  

49

Quorum, Abstentions and Broker Non-Votes

  

50

Solicitation of Proxies and Expenses

  

51

Voting of Proxies at the Special Meeting and Revocation of Proxies

  

51

No Appraisal Rights

  

52

Other Matters to be Voted On

  

52

Recommendation of H Power’s Board of Directors

  

52

THE MERGER AND RELATED TRANSACTIONS

  

52

Background of the Merger

  

52

Consideration of the Merger by H Power’s Board of Directors

  

59

Interests of H Power’s Directors and Officers in the Merger

  

70

Consideration of the Merger by Plug Power’s Board of Directors

  

72

The Merger Agreement

  

79

Other Material Agreements Relating to the Merger

  

99

Material United States Federal Income Tax Consequences of the Merger

  

100

Accounting Treatment of the Merger

  

103

 

(i)


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Page


Post-Closing Capitalization

  

103

Regulatory Filings and Approvals Required to Complete the Merger

  

103

Restrictions on Sales of Plug Power Common Stock by Affiliates of H Power

  

104

Listing on the Nasdaq National Market of Plug Power Common Stock to be Issued in the Merger

  

104

Delisting and Deregistration of H Power Common Stock after the Merger

  

105

Dissenters’ Rights of Appraisal

  

105

Operations After the Merger

  

105

Director to be Appointed in Connection with the Merger

  

105

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

  

106

Unaudited Pro Forma Condensed Combined Balance Sheet

  

107

Unaudited Pro Forma Condensed Combined Statements of Operations

  

109

Unaudited Pro Forma Condensed Combined Statements of Operations

  

111

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

  

113

ADDITIONAL PROPOSAL TO BE ACTED ON BY PLUG POWER STOCKHOLDERS

  

118

Background and Description of the Exchange

  

118

Recommendation and Reasons for the Exchange

  

119

Required Vote

  

122

Benefits of the Exchange

  

122

Material United States Federal Income Tax Consequences of the Exchange

  

124

Summary of the Stock Option and Incentive Plans

  

124

Material Federal Income Tax Consequences of Transactions Under the Plan

  

126

Executive Compensation

  

127

RECENT DEVELOPMENTS RELATING TO PLUG POWER

  

127

INFORMATION ABOUT H POWER

  

128

H POWER MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

140

H POWER PRINCIPAL AND MANAGEMENT STOCKHOLDERS

  

151

PLUG POWER PRINCIPAL AND MANAGEMENT STOCKHOLDERS

  

155

COMPARISON OF RIGHTS OF HOLDERS OF PLUG POWER COMMON STOCK AND
H POWER COMMON STOCK

  

157

DESCRIPTION OF PLUG POWER CAPITAL STOCK

  

163

LEGAL MATTERS

  

165

EXPERTS

  

165

PLUG POWER STOCKHOLDER PROPOSALS

  

166

H POWER STOCKHOLDER PROPOSALS

  

166

WHERE YOU CAN FIND ADDITIONAL INFORMATION

  

166

INDEX TO H POWER FINANCIAL STATEMENTS

  

F-1

 

ANNEX A

 

—  

 

Agreement and Plan of Merger

ANNEX B

 

—  

 

Form of Voting Agreement

ANNEX C

 

—  

 

Opinion of Lehman Brothers Inc.

ANNEX D

 

—  

 

Opinion of Stephens Inc.

ANNEX EI

 

—  

 

Plug Power 1999 Stock Option and Incentive Plan

ANNEX EII

 

—  

 

Plug Power 1997 Membership Option Plan

 

(ii)


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QUESTIONS AND ANSWERS ABOUT THE MERGER

 

Q:   Why are Plug Power and H Power proposing the merger? (See pages 59 and 72)

 

A:   Plug Power and H Power are proposing the merger because they believe the resulting combined company will be a stronger, better capitalized and more competitive company. Plug Power and H Power believe that the merger will provide significant potential benefits and resources, including:

 

    cash resources to fund the combined company’s growth and development;

 

    benefits created from the complementary resources of Plug Power and H Power, including complementary financial, technology and intellectual property resources; and

 

    potential synergy benefits from cost savings and integration of the companies’ strategic partners and suppliers.

 

  Overall,   both Plug Power and H Power believe that the merger will provide added value to their respective stockholders. Achieving these anticipated benefits, however, is subject to certain risks discussed in the section entitled “Risk Factors” beginning on page 27.

 

Q:   What will I receive in the merger? (See page 79)

 

A:   H Power Stockholders:

 

       If the merger is completed, Plug Power and H Power estimate that each H Power stockholder will receive approximately .84 shares of Plug Power common stock for each share of H Power common stock. This amount is an estimate based on (1) an estimated transaction value price of $48,000,000 based on the estimated value of H Power’s net cash of $34,000,000 (as defined in the merger agreement) as of the date of this joint proxy statement/prospectus; (2) an estimated average trading price of $5.29 per share of Plug Power common stock and (3) 10,776,548 shares of H Power common stock outstanding as of the date of this joint proxy statement/prospectus. The estimated average trading price is based on the closing price of $5.13 per share of Plug Power common stock on February 11, 2003, adjusted to $5.29 per share due to the collar between $5.29 per share and $6.47 per share. As a result of the collar, the average trading price per share of Plug Power common stock for purposes of calculating the merger consideration can never be below $5.29 or above $6.47, and trading below or above these amounts, respectively, will have no effect on the average trading price for this purpose.

 

As further described below in this question and answer, the minimum aggregate consideration that H Power stockholders can receive in the merger is $29,675,000, or $2.75 per share, unless H Power determines not to exercise its right to terminate the merger agreement, which termination is subject to Plug Power’s right to issue additional shares such that the minimum aggregate consideration equals $29,675,000. If  H Power does not exercise its right to terminate the merger agreement, H Power stockholders will not be guaranteed to receive any minimum consideration because the amount that H Power stockholders will receive will decrease below $2.75 per share if (1) the trading price of Plug Power common stock declines, and/or (2) H Power’s net cash (as defined in the merger agreement) declines.

 

The actual number of shares of Plug Power common stock that each H Power stockholder will receive for each share of H Power common stock may be different than the estimated .84 as the exchange ratio for H Power common stock is determined based in part on:

 

    the transaction value price, which is determined based in part on the value of  H Power’s net cash (as defined in the merger agreement) at the effective time of the merger as calculated in accordance with the formula described on page 80 of this joint proxy statement/prospectus;

 

    the average trading price for shares of Plug Power common stock for 10 randomly selected days in the 20 trading day period ending on the second trading day prior to the effective time of the merger, subject to the collar adjustment; and

 

 

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    the number of shares of H Power common stock outstanding immediately prior to the effective time of the merger (which is not expected to change from the 10,776,548 shares outstanding as of the date of this joint proxy statement/prospectus).

 

       To illustrate the impact of changes in H Power’s net cash on the exchange ratio, if H Power’s net cash (as defined in the merger agreement) is equal to an amount between $32,000,000 and $36,000,000 then the number of shares of Plug Power common stock that each H Power stockholder will receive for each share of H Power common stock will, depending on the number of shares of H Power common stock outstanding immediately prior to the effective time of the merger and the average Plug Power common stock price, range between .66 and .88.

 

       To illustrate the impact of changes in Plug Power’s average trading price, if H Power’s net cash (as defined in the merger agreement) is equal to $34,000,000, the estimated value of H Power’s net cash as of the date of this joint proxy statement/prospectus as calculated in accordance with the formula described on page 80 of this joint proxy statement/prospectus, then the number of shares of Plug Power common stock that each H Power stockholder will receive for each share of H Power common stock will, depending on the number of shares of H Power common stock outstanding immediately prior to the effective time of the merger and the average Plug Power common stock price, range between .69 and .84.

 

       Each H Power stockholder will also receive cash, without interest, rather than a fractional share of Plug Power common stock that he, she or it would otherwise be entitled to receive in the merger.

 

In the event that H Power, during the period commencing 5 business days prior to the stockholder meetings of H Power and Plug Power to approve the transactions contemplated by the merger agreement and ending on the second business day prior to such meetings, notifies Plug Power that the product of (1) the anticipated number of shares of Plug Power common stock to be issued in the merger and (2) the reasonably anticipated average Plug Power common stock price is less than $29,675,000, then H Power may terminate the merger agreement. As further described under the section of this joint proxy statement/prospectus titled “The Merger and Related Transactions—The Merger Agreement—Payment of Termination Fee and Expenses,” such right of H Power to terminate the merger agreement is subject to Plug Power’s right to issue additional shares of Plug Power common stock such that the aggregate consideration received by H Power stockholders is equal to $29,675,000.

 

       For a description of how the exchange ratio will be determined, and examples of the exchange ratio based on assumptions regarding H Power’s net cash and the average Plug Power common stock price, each at the effective time of the merger, see the section of this joint proxy statement/prospectus titled “The Merger and Related Transactions—The Merger Agreement—Conversion of H Power Common Stock in the Merger.” Prior to each company’s respective special meeting of stockholders, the current estimated exchange ratio will be posted on Plug Power’s website at www.plugpower.com and on H Power’s website at www.hpower.com.

 

Plug Power Stockholders:

 

If you own shares of Plug Power common stock immediately prior to the merger, you will continue to own those shares immediately after the merger. Based on the estimated exchange ratio of .84, which is subject to potential adjustment, Plug Power stockholders immediately prior to the merger will hold approximately 84.9% of the outstanding shares of Plug Power common stock when the merger is complete.

 

Q:   What are the tax consequences to me of the merger? (See page 100)

 

A:  

In the opinion of counsel, it is unclear whether the merger will qualify as a tax-free reorganization. It is possible that the H Power stockholders will be required to recognize gain or loss for U.S. federal income tax purposes in connection with the merger, and H Power

 

 

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stockholders should vote to approve the merger only if they are willing to approve a taxable transaction in which they recognize gain or loss. However, Plug Power and H Power intend to treat the merger in such a manner that receipt of Plug Power’s common stock in the merger would be tax-free to H Power’s stockholders. We urge you to consider carefully the discussion of tax consequences related to the merger in this joint proxy statement/prospectus and to review these tax consequences with your tax advisor.

 

Q:   Will H Power stockholders be able to trade the Plug Power common stock that they receive in the merger? (See page 104)

 

A:   Yes. The Plug Power common stock issued in the merger will be registered with the Securities and Exchange Commission and listed on the Nasdaq National Market under the symbol “PLUG.” All shares of Plug Power common stock that you receive in the merger will be freely transferable unless you are deemed to be an affiliate of H Power prior to the completion of the merger or an affiliate of Plug Power after the completion of the merger, or your shares are subject to other contractual restrictions. Shares of Plug Power common stock received by persons deemed to be affiliates in the merger may only be sold in compliance with Rule 145 under the Securities Act or as otherwise permitted under the Securities Act.

 

Q:   When do Plug Power and H Power expect to complete the merger?

 

A:   Plug Power and H Power expect to complete the merger when all of the conditions to completion of the merger contained in the merger agreement have been satisfied or waived. The stockholders of H Power must approve the merger agreement and the merger at their special stockholders meeting and the stockholders of Plug Power must approve the issuance of shares of Plug Power common stock pursuant to the merger agreement at their special stockholders meeting.

 

Plug Power and H Power are working toward satisfying these conditions and completing the merger as soon as practicable. Plug Power and H Power currently plan to complete the merger in the first quarter of 2003 following the respective special meetings of Plug Power’s and H Power’s stockholders, assuming the H Power stockholders approve the merger and the merger agreement, the Plug Power stockholders approve the issuance of shares of Plug Power common stock pursuant to the merger agreement and the other merger conditions are satisfied. However, because the merger is subject to some conditions which are beyond Plug Power’s and H Power’s control, the exact timing cannot be predicted.

 

Q:   What happens if the merger is not completed? (See page 96)

 

A:   If the merger is not completed, each of Plug Power and H Power will continue as independent companies. In addition, under the terms of the merger agreement, H Power may be required to pay Plug Power a termination fee of $2,000,000. Also, each party may be required to reimburse the other for out-of-pocket expenses, including legal, accounting, investment banking, printing and other fees, related to this transaction if the merger is not completed. For a more complete discussion of requirements relating to payments of fees and expenses by each of Plug Power and H Power see the section entitled “The Merger and Related Transactions—The Merger Agreement—Payment of Termination Fee and Expenses” in this joint proxy statement/prospectus.

 

Q:   What vote is required to approve the merger? (See page 49)

 

A:  

Approval of the merger agreement and the transactions contemplated by the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of H Power common stock as of the record date. Although the approval of the stockholders of Plug Power is not required to effect the merger pursuant to Delaware general corporation law, Plug Power’s organizational documents or any other regulatory or listing requirements applicable to Plug Power, the board of directors of Plug Power has determined that the issuance of shares of Plug Power common stock pursuant to the merger agreement will be subject to, and the merger agreement requires, the affirmative vote of the holders of a majority of the shares of Plug Power common stock present in person or represented by proxy at the special meeting of

 

 

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Plug Power stockholders on such matter. In addition, approval of the stock option exchange is subject to the same voting requirement as the merger.

 

The board of directors of H Power has approved the merger agreement and the merger. The board of directors of Plug Power has approved the merger agreement and merger including, without limitation, the issuance of shares of Plug Power common stock pursuant to the merger agreement, and has approved the stock option exchange.

 

Q:   How do I vote on the merger? (See pages 48 and 51)

 

A:   First, please review the information contained or incorporated by reference in this joint proxy statement/prospectus, including the annexes, as it contains important information about Plug Power, H Power and the merger. It also contains important information about what each of the boards of directors of Plug Power and H Power, respectively, considered in evaluating the merger. Next, complete and sign the enclosed proxy card, and then mail it in the enclosed return envelope as soon as possible so that your shares can be voted at your company’s special meeting of stockholders at which, in the case of H Power, the merger agreement and the merger will be presented and voted upon, or, in the case of Plug Power, the issuance of shares of Plug Power common stock pursuant to the merger agreement and the approval of the stock option exchange will be presented and voted upon. You may also attend the special meeting of your company in person and vote at the special meeting instead of submitting a proxy.

 

Q:   What happens if I don’t indicate how to vote my proxy? (See pages 47 and 50)

 

A:   If you sign and send in your proxy, but do not include instructions on how to vote your properly signed proxy card, your shares will be voted FOR adoption and approval of the merger agreement and approval of the merger if you are an H Power stockholder or FOR the issuance of shares of Plug Power common stock pursuant to the merger agreement and FOR the stock option exchange if you are a Plug Power stockholder.

 

 

Q:   What happens if I don’t return a proxy card? (See pages 47 and 50)

 

A:   If you are a stockholder of H Power, not returning your proxy card will have the same effect as voting against adoption and approval of the merger agreement and against approval of the merger. If you are a stockholder of Plug Power, not returning your proxy card will have no effect as to the approval of the proposal to issue shares of Plug Power common stock pursuant to the merger agreement or the proposal to approve the stock option exchange.

 

Q:   Can I change my vote after I have mailed my signed proxy card? (See pages 48 and 51)

 

A:   Yes. You can change your vote at any time before your proxy is voted at the special meeting of your company’s stockholders at which, in the case of H Power, the merger agreement and the merger will be presented and voted upon, and in the case of Plug Power, the issuance of shares of Plug Power common stock pursuant to the merger agreement and the proposal to approve the stock option exchange will be presented and voted upon. You can do this in one of three ways:

 

    first, you can send a written notice stating that you would like to revoke your proxy to the appropriate address below;

 

    second, you can complete and submit a later-dated proxy card to the appropriate address below; or

 

    third, you can attend the special meeting of Plug Power or H Power, as appropriate, and vote in person. Your attendance at the special meeting alone will not revoke your proxy. You must vote at the special meeting in order to revoke your previously submitted proxy.

 

You should send any notice of revocation or your completed new proxy card, as the case may be, to:

 

For Plug Power Stockholders:

 

Plug Power Inc.

968 Albany-Shaker Road

Latham, New York 12110

Attn: David A. Neumann

Chief Financial Officer

 

 

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For H Power Stockholders:

 

H Power Corp.

60 Montgomery Street

Belleville, NJ 07109

Attn: William Zang

Chief Financial Officer

 

Q:   Can I submit my proxy by telephone or over the Internet?

 

A:   If you hold shares directly, then you may not vote by telephone or over the Internet. If you hold your shares through a bank or brokerage firm, you may be able to submit your proxy by telephone or over the Internet. You should refer to the proxy card provided by your bank or brokerage firm for instructions about how to vote. If you vote by telephone or over the Internet, you do not need to complete and mail your proxy card.

 

Q:   If my broker holds my shares in “street name,” will my broker vote my shares for me? (See pages 47 and 50)

 

A:   No. Your broker will not be able to vote your shares without instructions from you. If you do not provide your broker with voting instructions, your shares may be considered present at the special meeting for purposes of determining a quorum, but will not be considered to have been voted in favor of adoption and approval of the merger agreement or approval of the merger, in the case of H Power stockholders, or in favor of approval of the issuance of shares of Plug Power common stock pursuant to the merger agreement or approval of the stock option exchange, in the case of Plug Power stockholders. As a result, failure to provide your broker with voting instructions will have the effect of a vote against the merger agreement and against the approval of the merger if you are a stockholder of H Power, or the effect of a vote against approval of the issuance of shares of Plug Power common stock pursuant to the merger agreement and against the stock option exchange if you are stockholder of Plug Power. If you have instructed a broker to vote your shares and wish to change your vote, you must follow the directions received from your broker to change those instructions.

 

 

Q:   Should I send my H Power stock certificates now? (See page 83)

 

A:   No. If the merger is completed, Plug Power will send you written instructions for exchanging your H Power stock certificates for Plug Power stock certificates. In the meantime, you should retain your certificates as the H Power stock certificates are still valid. Please do not send in your stock certificates with your proxy. If you send your stock certificates to Plug Power, Plug Power assumes no risk of loss.

 

Q:   Am I entitled to appraisal rights in connection with the merger? (See page 105)

 

A:   No. Appraisal rights are not available under applicable law in connection with the merger.

 

Q:   Are there any risks I should consider in deciding whether to vote for the merger or the issuance of shares of Plug Power common stock in connection with the merger?

 

A:   Yes. In the section entitled “Risk Factors” beginning on page 27 of this joint proxy statement/prospectus, Plug Power and H Power have described a number of risk factors that you should consider.

 

Q:   Who can help answer my questions about the proposals?

 

A:   If you have any questions about the proposals presented in this joint proxy statement/prospectus, you should contact:

 

For Plug Power Stockholders:

 

Plug Power Inc.

968 Albany-Shaker Road

Latham, New York 12110

Attn: David A. Neumann

Chief Financial Officer

(518) 782-7700

 

For H Power Stockholders:

 

H Power Corp.

60 Montgomery Street

Belleville, NJ 07109

Attn: William Zang

Chief Financial Officer

(973) 450-4400

 

 

 

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SUMMARY

 

The following is a summary of the information contained in this joint proxy statement/prospectus. This summary may not contain all of the information that is important to you. You should carefully read this entire joint proxy statement/prospectus and the other documents referred to for a more complete understanding of the merger and related transactions. In particular, you should read the annexes attached to this joint proxy statement/prospectus, including the merger agreement, as amended, which is attached to this joint proxy statement/prospectus as Annex A. We have included page references in parentheses to direct you to a more complete description of the topics presented in this summary. In addition, Plug Power incorporates by reference into this joint proxy statement/prospectus important business and financial information. You may obtain the information incorporated by reference into this joint proxy statement/prospectus without charge by following the instructions in the section entitled “Where You Can Find Additional Information” beginning on page 166 of this joint proxy statement/prospectus.

 

The Companies

 

PLUG POWER

968 Albany-Shaker Road

Latham, New York 12110

(518) 782-7700

www.plugpower.com

 

Plug Power was originally formed as a joint venture between Edison Development Corporation and Mechanical Technology Incorporated in the State of Delaware on June 27, 1997 and succeeded by merger to all of the assets, liabilities and equity of Plug Power, L.L.C. in November 1999.

 

Plug Power is a development stage enterprise formed to research, develop, manufacture and distribute on-site electric power generation systems utilizing proton exchange membrane fuel cells for stationary applications and is in the preliminary stages of field testing and marketing its initial commercial product to a limited number of customers, including utilities, government entities and its distribution partners, GE Fuel Cell Systems, LLC and DTE Energy Technologies, Inc. This initial product is a limited edition fuel cell system that is intended to offer complementary, quality power while demonstrating the market value of fuel cells as a preferred form of alternative distributed power generation. Plug Power anticipates subsequent enhancements to its fuel cell systems, including development of its next generation systems, which it expects will expand the market opportunity for fuel cells by lowering the installed cost, decreasing operating and maintenance costs, increasing efficiency, improving reliability, and adding features such as grid independence and co-generation of heat and electric power.

 

For more information on the business of Plug Power, please refer to Plug Power’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2001 and Form 10-Q for the quarterly period ended September 30, 2002. Please refer to the section of this joint proxy statement/prospectus entitled “Where You Can Find Additional Information” on page 166 in order to find out where you can obtain copies of Plug Power’s Annual Report as well as the other documents Plug Power files with the Securities and Exchange Commission.

 

H POWER CORP.

60 Montgomery Street

Belleville, NJ 07109

(973) 450-4400

www.hpower.com

 

H Power was organized on June 6, 1989 under the laws of the State of Delaware.

 

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H Power designs, develops, markets and manufactures proton-exchange membrane fuel cells and fuel cell systems. Fuel cells are devices that produce electrical energy without combustion and its associated environmental contaminants. The fuel cell systems H Power makes and markets are designed to complement or replace conventional power sources, such as batteries and electric power generators. The use of alternative electric power systems is desirable in situations where conventional power sources cannot adequately, economically or technologically supply the power required.

 

For more information on the business of H Power, please refer to the section of this joint proxy statement/prospectus entitled “Information About H Power” beginning on page 128.

 

MONMOUTH ACQUISITION CORP.

968 Albany-Shaker Road

Latham, New York 12110

(518) 782-7700

 

Monmouth Acquisition Corp. was formed on November 1, 2002 as a Delaware corporation and a wholly-owned subsidiary of Plug Power. Monmouth was formed solely to effect the merger and has not conducted any business during the period of its existence.

 

Voting Requirements for the Merger (See pages 46 and 49)

 

In order to complete the merger, the holders of a majority of the outstanding shares of H Power common stock as of the record date must vote to adopt and approve the merger agreement and approve the merger. Holders of H Power common stock will be entitled to cast one vote per share of H Power common stock owned as of February 7, 2003, the record date for the H Power special meeting of stockholders at which the merger agreement and the merger will be presented and voted upon.

 

Although the approval of the stockholders of Plug Power is not required to effect the merger pursuant to Delaware general corporation law, Plug Power’s organizational documents or any other regulatory or listing requirements applicable to Plug Power, the board of directors of Plug Power has determined that the issuance of shares of Plug Power common stock pursuant to the merger agreement shall be subject to, and the merger agreement requires, the affirmative vote of the holders of a majority of the outstanding shares of Plug Power common stock present in person or represented by proxy at the special meeting of Plug Power stockholders on such matter. Approval of the stock option exchange is subject to the same voting requirement. Holders of Plug Power common stock will be entitled to cast one vote per share of Plug Power common stock owned as of February 7, 2003, the record date for the Plug Power special meeting of stockholders at which the issuance of shares of Plug Power common stock pursuant to the merger agreement and the stock option exchange will be presented and voted upon.

 

Share Ownership of H Power Directors and Officers (See page 151)

 

As of the close of business on the record date for the special meeting of H Power stockholders at which the merger agreement and the merger will be presented and voted upon, directors and officers of H Power (and their respective affiliates) collectively owned approximately 2.0% of the outstanding shares of H Power common stock entitled to vote at the special meeting on the merger agreement and the merger. This does not include 305,126 shares of H Power common stock issuable upon the exercise of presently exercisable options which these directors and officers beneficially own. If all of these stock options had been exercised prior to the record date for the special meeting, the directors and executive officers of H Power (and their respective affiliates) would collectively own approximately 4.8% of the outstanding shares of H Power common stock entitled to vote at the special meeting. Two members of H Power management and an affiliate of H Power, who collectively own an aggregate of approximately 10.7% of the outstanding shares of H Power common stock entitled to vote at the special meeting, have entered into voting agreements with Plug Power under which they have agreed, among other things, to vote their shares of H Power common stock in favor of adoption and approval of the merger agreement and approval of the merger.

 

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Share Ownership of Plug Power Directors and Officers (See page 155)

 

As of the close of business on the record date for the special meeting of Plug Power stockholders at which the issuance of shares of Plug Power common stock pursuant to the merger and the stock option exchange will be presented and voted upon, directors and officers of Plug Power (and their respective affiliates) collectively owned approximately 49.6% of the outstanding shares of Plug Power common stock entitled to vote at the special meeting. Directors and officers of Plug Power own a minority of this amount.

 

This does not include 2,090,946 shares of Plug Power common stock issuable upon the exercise of presently exercisable options which these directors and officers beneficially own. If all of these stock options had been exercised prior to the record date for the special meeting, the directors and executive officers of Plug Power (and their respective affiliates) would collectively beneficially own approximately 51.6% of the outstanding shares of Plug Power common stock entitled to vote at the special meeting.

 

None of Plug Power’s directors, officers or affiliates have entered into a voting agreement or have otherwise agreed or given notice of their intention to vote their shares of Plug Power common stock in favor of the issuance of shares of Plug Power common stock in the merger. Accordingly, approval of the issuance of shares of Plug Power common stock in the merger by Plug Power’s stockholders is not assured.

 

Board Recommendations to Stockholders and Reasons for the Merger

 

Recommendation of H Power’s Board of Directors (See page 63)

 

After careful consideration, H Power’s board of directors unanimously determined that the merger is advisable, in the best interests of H Power’s stockholders, and is on terms that are fair to the stockholders of H Power. Accordingly, H Power’s board of directors unanimously approved the merger agreement and the merger and recommends that its stockholders vote FOR adoption and approval of the merger agreement and approval of the merger.

 

H Power’s Reasons for the Merger (See page 59)

 

In reaching its decision to approve the merger agreement and the transactions contemplated by the merger agreement, H Power’s board of directors identified several potential benefits and material factors pertaining to the merger, including the following:

 

    increased visibility and market capitalization of the combined entity;

 

    increased financial strength of the combined entity;

 

    greater intellectual property and technical resources of the combined entity;

 

    the fact that on November 10, 2002, the date the merger agreement was approved, the proposed exchange ratio offered a significant premium of 106% to H Power stockholders relative to H Power’s closing stock price on the previous trading day;

 

    the risks of remaining an independent entity, and the lack of definitiveness of any financing proposal; and

 

    the opinion of Lehman Brothers that, as of the date of such opinion and based upon and subject to the assumptions, limitations and qualifications set forth therein, the exchange ratio offered to the holders of  H Power common stock in the merger was fair from a financial point of view to such holders.

 

The H Power board of directors also identified a number of potentially negative factors, including the following:

 

    risks associated with fluctuations in Plug Power’s stock price prior to the merger;

 

    the risk of disruption of sales momentum and H Power’s operations as a result of uncertainties created by the announcement of the merger;

 

    the risk that certain conditions in the merger agreement may have the effect of discouraging alternative proposals for a business combination with another third party;

 

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    the interests of the directors and officers that are different from, or in addition to, those of H Power’s stockholders generally, including the receipt of change of control payments under the employment agreements with certain executive officers of H Power; and

 

    other applicable risks described in the section of this joint proxy statement/prospectus entitled “Risk Factors” on page 27.

 

The H Power board of directors did not believe that the negative factors were sufficient, individually or in the aggregate, to outweigh the potential benefits of the merger.

 

Recommendation of Plug Power’s Board of Directors (See page 74)

 

After careful consideration, Plug Power’s board of directors unanimously determined that the merger, including, without limitation, the issuance of shares of Plug Power common stock pursuant to the merger agreement, is advisable and in the best interests of Plug Power’s stockholders. Accordingly, Plug Power’s board of directors unanimously approved the merger agreement and the merger, including, without limitation, the issuance of shares of Plug Power common stock pursuant to the merger agreement, and recommends that its stockholders vote FOR the issuance of shares of Plug Power common stock in the merger pursuant to the merger agreement.

 

Plug Power’s Reasons for the Merger (See page 72)

 

In reaching its decision to approve the merger agreement and the transactions contemplated by the merger agreement, including, without limitation, the issuance of shares of Plug Power common stock pursuant to the merger agreement, Plug Power’s board of directors considered several potential benefits and material factors pertaining to the merger, including the following:

 

    the opinion of Stephens Inc., Plug Power’s financial advisor, to the effect that as of November 11, 2002, the exchange ratio set forth in the merger agreement was fair, from a financial point of view, to Plug Power;

 

    H Power’s cash reserves and Plug Power’s belief that the addition of such cash reserves to its own balance sheet would provide Plug Power with sufficient cash to help fund operations;

 

    H Power’s intellectual property, technical resources and other assets;

 

    the opportunity to enhance stockholder value by combining two complementary businesses;

 

    the belief that the merger represents the most favorable alternative currently available to Plug Power to increase its capital resources and further its financing and business objectives;

 

    the belief that the combined company will be in a better position to continue to compete effectively in the fuel cell industry;

 

    the terms of the merger agreement, including Plug Power’s right to receive a $2,000,000 termination fee or to be reimbursed for its expenses in the event that it terminates the merger agreement under certain circumstances; and

 

    potential synergy benefits, including cost savings and access to H Power’s partners and suppliers.

 

The Plug Power board of directors also considered a number of potentially negative factors, including the following:

 

    the risk that the potential benefits of the merger may not be realized, in part or at all;

 

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    the risk that the merger may not be consummated;

 

    the risk of management and employee disruption associated with the merger;

 

    the potential costs the combined company may incur to (1) terminate, renegotiate or amend H Power’s existing obligations, including real estate and facility leases, (2) streamline the combined company’s business, (3) reduce excess capacity, including terminating employees and (4) eliminate redundant operations, including the consolidation of H Power’s operations into Plug Power’s headquarters in Latham, New York.

 

    the dilutive effects of the merger upon existing Plug Power stockholders;

 

    the risk that the merger could adversely affect Plug Power’s stock price or Plug Power’s relationship with some of its existing or potential customers, suppliers or strategic partners;

 

    the significant costs involved in consummating the merger; and

 

    other applicable risks described in the section of this joint proxy statement/prospectus entitled “Risk Factors” on page 27.

 

The Plug Power board of directors did not believe that the negative factors were sufficient, individually or in the aggregate, to outweigh the potential benefits of the merger.

 

Opinions of Financial Advisors

 

Opinion of Financial Advisor to H Power (See page 63)

 

In deciding to approve the merger, the H Power board of directors considered an opinion from its financial advisor, Lehman Brothers Inc. On November 11, 2002, Lehman Brothers delivered its written opinion to the board of directors of H Power that, as of the date of such opinion and based upon and subject to the assumptions, limitations and qualifications set forth therein, the exchange ratio offered to the holders of H Power common stock in the merger was fair, from a financial point of view, to such holders.

 

The full text of the Lehman Brothers’ written opinion is attached to this joint proxy statement/prospectus as Annex C. We encourage you to read the opinion carefully as well as the section of this joint proxy statement/prospectus entitled “The Merger and Related Transactions—Consideration of the Merger by H Power’s Board of Directors—Opinion of H Power’s Financial Advisor.” The opinion of Lehman Brothers does not constitute a recommendation as to how any holder of H Power common stock should vote with respect to the merger agreement and the merger.

 

Opinion of Financial Advisor to Plug Power (See page 74)

 

In deciding to approve the merger, the Plug Power board of directors considered an opinion from its financial advisor, Stephens Inc. that, as of November 11, 2002, the exchange ratio set forth in the merger agreement was fair, from a financial point of view, to Plug Power.

 

The full text of Stephens’ written opinion is attached to this joint proxy statement/prospectus as Annex D. We encourage you to read the opinion carefully as well as the section of this joint proxy statement/prospectus entitled “The Merger and Related Transactions—Consideration of the Merger by Plug Power’s Board of Directors—Opinion of Plug Power’s Financial Advisor.” The opinion of Stephens does not constitute a recommendation as to how any holder of Plug Power common stock should vote on the merger.

 

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Interests of H Power’s Directors and Executive Officers in the Merger (See page 70)

 

Some of H Power’s directors and officers have interests in the merger that are different from, or in addition to, those of H Power stockholders generally. For instance:

 

    Dr. H. Frank Gibbard, chief executive officer of H Power, is a party to a Second Amended and Restated Employment Agreement, dated as of August 1, 2002, which provides that, among other things, (1) Dr. Gibbard must devote substantially all of his business time, ability and attention to H Power’s business and affairs and he receives an annual base salary of $240,000, (2) if Dr. Gibbard is terminated for reasons other than for cause, he may be entitled to receive benefits and payments of his salary through the end of his employment term and (3) if, within a year after a change in control, H Power terminates Dr. Gibbard or assigns him duties materially inconsistent with his position, he may be entitled to receive a lump sum payment equal to two times his then annual base salary and incentive compensation, currently aggregating approximately $480,000. H Power has delivered notice to Dr. Gibbard that H Power will not be renewing his employment agreement in July.

 

    Mr. William Zang, chief financial officer of H Power, is a party to an amended Officer’s Employment Agreement, effective as of August 1, 2002, which provides that, among other things, (1) Mr. Zang must devote substantially all of his business time, ability and attention to H Power’s business and affairs and he receives an annual base salary of $190,000, (2) if Mr. Zang is terminated for reasons other than for cause, he may be entitled to receive benefits and payments of his salary through the end of his employment term and (3) if, within a year after a change in control, H Power terminates Mr. Zang or assigns him duties materially inconsistent with his position, he may be entitled to receive a lump sum payment equal to one and one-half times his then annual base salary and incentive compensation, currently aggregating approximately $292,000.

 

    Mr. Dudley Wass, chief operating officer of H Power, is a party to an amended Officer’s Employment Agreement, effective as of August 1, 2002, which provides that, among other things, (1) Mr. Wass must devote substantially all of his business time, ability and attention to H Power’s business and affairs and receives an annual base salary of $215,000, (2) if Mr. Wass is terminated for reasons other than for cause, he may be entitled to receive benefits and payments of his salary through the end of his employment term and (3) if, within a year after a change in control, H Power terminates Mr. Wass or assigns him duties materially inconsistent with his position, he may be entitled to receive a lump sum payment equal to one and one-half times his then annual base salary and incentive compensation, currently aggregating $315,000.

 

    Mr. Paul McNeill, vice president of business development, marketing and sales of H Power, is a party to an amended Officer’s Employment Agreement, effective as of August 1, 2002, which provides that, among other things, (1) Mr. McNeill must devote substantially all of his business time, ability and attention to H Power’s business and affairs and he receives an annual base salary of $135,000, (2) if Mr. McNeill is terminated for reasons other than for cause, he may be entitled to receive benefits and payments of his salary through the end of his employment term and (3) if, within a year after change in control, H Power terminates Mr. McNeill or assigns him duties materially inconsistent with his position, he may be entitled to receive a lump sum payment equal to one and one-half times his then annual base salary and incentive compensation, currently aggregating $195,000. H Power has delivered notice to Mr. McNeill that H Power will not be renewing his employment agreement in July.

 

    In addition, Messrs. Zang and Wass are entitled to receive incentive bonuses of $150,000 and $50,000, respectively, relating to incentives to reduce H Power’s cash burn rate in order to maintain stockholder value.

 

    The vesting on 1,500 outstanding options held by each of 5 non-employee directors of H Power to purchase H Power common stock will accelerate immediately prior to the merger.

 

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    Lehman Brothers, which H Power has retained as an investment banker with respect to the merger, will receive a fee of $1.5 million in addition to reimbursement of reasonable expenses upon the closing of the merger transaction, net of monthly retainer fees received prior to the closing of the merger. Mr. Clark, a member of H Power’s board of directors, is currently a vice-chairman of Lehman Brothers.

 

The proposed merger will be considered a change in control under each of the foregoing employment agreements, as amended. As a result of the change in control and their expected termination of employment upon the closing of the merger, each of Messrs. Gibbard, Zang, Wass and McNeill will receive the payments described above under his respective employment agreement, as amended, upon the closing of the merger. The aggregate amount of such payments is approximately $1,282,000. Such payments have been included in the calculation of the estimated net cash amount as of the date of this joint proxy statement/prospectus and will be included in the calculation of the net cash (as defined in the merger agreement) of H Power at the effective time of the merger. H Power’s board of directors was aware of these interests and considered them, among other matters, when it approved the merger agreement and the merger.

 

Voting Agreements (See page 99)

 

Two executive officers and an affiliate of H Power who collectively held an aggregate of approximately 10.7% of H Power’s total outstanding shares of common stock as of February 10, 2003 have agreed to vote their shares of H Power common stock in favor of the merger agreement and the merger.

 

Structure and Effects of the Merger (See page 79)

 

At the completion of the merger, Monmouth will merge with and into H Power and H Power will survive the merger as a wholly-owned subsidiary of Plug Power.

 

As a result of the merger, each outstanding share of H Power common stock will be converted into the right to receive a specific number of shares of Plug Power common stock. The per share exchange ratio for H Power common stock will be determined based on, among other things, (1) the number of shares of H Power common stock outstanding immediately prior to the effective time of the merger; (2) the average Plug Power common stock price, which is calculated based on the daily volume weighted average price of shares of Plug Power common stock for 10 randomly selected trading days in the 20 trading day period ending on the second trading day prior to the effective time of the merger and (3) the transaction value price, which is determined based on, among other factors, H Power’s net cash (as defined in the merger agreement) at the effective time of the merger. The manner in which this exchange ratio will be calculated is described in this joint proxy statement/prospectus. The closing sale price of Plug Power common stock on February 11, 2003, the trading day prior to the date of printing of this joint proxy statement/prospectus, was $ 5.13 per share. Also, as of that date, there were 10,776,548 shares of H Power common stock outstanding. Accordingly, substituting the closing sale price of the Plug Power common stock on February 11, 2003, adjusted to $5.29 per share as a result of the collar, for the average Plug Power common stock price, and assuming the transaction value price is $48,000,000 (based on the estimated value of H Power’s net cash of $34,000,000 as of February 11 2003), there would result a hypothetical exchange ratio of approximately .84. This exchange ratio is an estimate, however, and may change at the completion of the merger as a result of the factors described above. H Power stockholders will also receive cash, without interest, rather than a fractional share of Plug Power common stock that each otherwise would be entitled to receive in the merger.

 

At the completion of the merger, holders of shares of H Power common stock will hold shares of Plug Power common stock. As a result, the rights of these holders following the merger will be governed by Plug Power’s certificate of incorporation and bylaws, rather than H Power’s certificate of incorporation and bylaws, as further described in this joint proxy statement/prospectus.

 

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Completion and Effectiveness of the Merger (See page 79)

 

Plug Power and H Power expect to complete the merger when all of the conditions to completion of the merger contained in the merger agreement have been satisfied or waived.

 

Plug Power and H Power are working toward satisfying these conditions and completing the merger as soon as practicable. Plug Power and H Power currently plan to complete the merger in the first quarter of 2003 following the respective special meetings of Plug Power stockholders and H Power stockholders, assuming the  H Power stockholders approve the merger and the merger agreement, the Plug Power stockholders approve the issuance of shares of Plug Power common stock pursuant to the merger agreement and the other merger conditions are satisfied. However, because the merger is subject to specified conditions, some of which are beyond Plug Power’s and H Power’s control, the exact timing cannot be predicted.

 

Assuming that the H Power stockholders approve the merger and the merger agreement, the Plug Power stockholders approve the issuance of shares of Plug Power common stock pursuant to the merger agreement and the other conditions to completion of the merger have been satisfied or waived, the merger will become effective upon the filing of a certificate of merger with the Secretary of State of the State of Delaware. Plug Power and H Power expect to file the certificate of merger shortly following the special meeting of H Power stockholders at which the merger agreement and the merger will be presented and voted upon and the special meeting of Plug Power stockholders at which the issuance of shares of Plug Power common stock in the merger will be presented and voted upon.

 

H Power Prohibited from Soliciting Other Offers (See page 88)

 

H Power has agreed that, while the merger is pending, it will not solicit, initiate or encourage, or, except with respect to an unsolicited superior proposal (as defined in the merger agreement), engage in discussions with any third parties regarding, certain types of extraordinary transactions, such as a tender offer, merger, consolidation or similar transaction involving H Power.

 

Conditions to Completion of the Merger (See page 93)

 

Plug Power’s and H Power’s obligations to complete the merger are subject to specified conditions described under “The Merger and Related Transactions—The Merger Agreement—Conditions to Completion of the Merger.”

 

Termination of the Merger Agreement and Payment of Termination Fee (See page 94)

 

Plug Power and H Power may terminate the merger agreement by mutual agreement and under other circumstances specified in the merger agreement. Plug Power and H Power have agreed that if the merger agreement is terminated under certain circumstances described under “The Merger and Related Transactions—The Merger Agreement—Payment of Termination Fees and Expenses,” H Power will pay Plug Power a termination fee of $2,000,000.

 

Plug Power and H Power have also agreed that if the merger agreement is terminated under certain circumstances, H Power or Plug Power, as applicable, will reimburse the other party for its out-of-pocket expenses.

 

Material United States Federal Income Tax Consequences of the Merger (See page 100)

 

For federal income tax purposes, the transaction is intended to be tax-free to H Power stockholders who receive shares of common stock of Plug Power in the merger (except with respect to cash received in lieu of

 

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fractional shares), although it is unclear as to whether the merger will qualify as a tax-free reorganization. No gain or loss will be recognized by Plug Power or its stockholders as a result of the merger.

 

This tax treatment may not apply to all H Power stockholders. Determining the actual tax consequences of the merger to you can be complicated. You should consult your own tax advisor for a full understanding of the tax consequences that are particular to you.

 

Accounting Treatment of the Merger (See page 103)

 

Plug Power will account for the merger using the purchase method of accounting and Plug Power will be considered the acquiror of H Power for accounting purposes. This method assumes that for financial reporting purposes, Plug Power will treat both companies as one company beginning as of the date of the merger. In addition, under this method, Plug Power will record the fair value of H Power’s net assets on its consolidated financial statements, with the remaining purchase price in excess of fair value of H Power’s net assets, if any, recorded as other intangibles.

 

Regulatory Approvals Required to Complete the Merger (See page 103)

 

Plug Power and H Power are subject to the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 with respect to the merger, which prevents specified transactions from being completed until required information and materials are furnished to the Antitrust Division of the Department of Justice and the Federal Trade Commission and specified waiting periods are terminated or expire. The Federal Trade Commission has granted early termination of the waiting period under the Hart-Scott-Rodino Act with respect to the merger, effective as of November 16, 2002. Neither Plug Power nor H Power is aware of any other material governmental or regulatory approval required for completion of the merger, other than compliance with applicable corporate law of the State of Delaware and federal and state securities laws.

 

Appraisal Rights (See page 105)

 

No appraisal rights are available to stockholders of Plug Power or H Power under applicable law in connection with the merger.

 

Restrictions on the Ability to Sell Plug Power Common Stock Received in the Merger (See page 104)

 

All shares of Plug Power common stock that you receive in the merger will be freely transferable unless you are deemed to be an affiliate of H Power prior to the completion of the merger or an affiliate of Plug Power after the completion of the merger or your shares are subject to other contractual restrictions. Shares of Plug Power common stock received by persons deemed to be affiliates in the merger may only be sold in compliance with Rule 145 under the Securities Act or as otherwise permitted under the Securities Act.

 

Listing of Plug Power Common Stock (See page 165)

 

The shares of Plug Power common stock issued in connection with the merger will be listed on the Nasdaq National Market under the symbol “PLUG.”

 

14


Table of Contents

PLUG POWER SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA

 

The following summary selected consolidated statement of operations data for each of the three fiscal years ended December 31, 1999, 2000 and 2001 and the summary selected consolidated balance sheet data as of December 31, 2000 and 2001 set forth below, are derived from the historical audited consolidated financial statements included in Plug Power’s Annual Report on Form 10-K/A for the year ended December 31, 2001. The summary selected consolidated statement of operations data for the period June 27, 1997 to December 31, 1997 and the year ended December 31, 1998 and the summary selected consolidated balance sheet data as of December 31, 1997, 1998 and 1999 are derived from Plug Power’s historical audited consolidated financial statements.

 

Plug Power derived the summary selected consolidated balance sheet and statement of operations data as of and for the nine month periods ended September 30, 2001 and 2002 from its unaudited condensed consolidated financial statements. These statements include, in the opinion of management, all normal and recurring adjustments that are necessary for a fair statement of results in accordance with generally accepted accounting principles. The operating results for the nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. When you read the following summary historical data, it is important that you read it along with the historical consolidated financial statements and related notes in Plug Power’s Annual Report on Form 10-K/A for the year ended December 31, 2001, Plug Power’s quarterly reports on Form 10-Q filed with the Securities and Exchange Commission and incorporated by reference into this joint proxy statement/prospectus and other Plug Power documents to which we refer. See “Where You Can Find Additional Information” on page 166.

 

    

Years Ended December 31,


    

Nine Months Ended September 30,


 
    

1997*


    

1998


    

1999


    

2000


    

2001


    

2001


    

2002


 
    

(in thousands, except per share data)

    

(unaudited)

 

Consolidated Statement of Operations:

                                                              

Product and service revenue

  

$

—  

 

  

$

—  

 

  

$

—  

 

  

$

—  

 

  

$

2,574

 

  

$

437

 

  

$

7,381

 

Contract revenue

  

 

1,194

 

  

 

6,541

 

  

 

11,000

 

  

 

8,378

 

  

 

3,168

 

  

 

2,800

 

  

 

1,060

 

    


  


  


  


  


  


  


Total revenue

  

 

1,194

 

  

 

6,541

 

  

 

11,000

 

  

 

8,378

 

  

 

5,742

 

  

 

3,237

 

  

 

8,441

 

Cost of contract revenue

  

 

1,226

 

  

 

8,864

 

  

 

15,498

 

  

 

13,055

 

  

 

11,291

 

  

 

6,579

 

  

 

7,726

 

In-process research and development

  

 

4,043

 

  

 

—  

 

  

 

—  

 

  

 

4,984

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

Research and development expense:

                                                              

Noncash stock-based compensation

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

248

 

  

 

1,301

 

  

 

375

 

  

 

520

 

Other research and development

  

 

1,301

 

  

 

4,633

 

  

 

20,506

 

  

 

65,657

 

  

 

59,299

 

  

 

46,690

 

  

 

29,406

 

General and administrative expense:

                                                              

Noncash stock-based compensation

  

 

—  

 

  

 

212

 

  

 

3,228

 

  

 

7,595

 

  

 

502

 

  

 

311

 

  

 

415

 

Other general and administrative

  

 

630

 

  

 

2,541

 

  

 

6,699

 

  

 

8,572

 

  

 

6,990

 

  

 

5,276

 

  

 

4,688

 

Interest expense

  

 

—  

 

  

 

—  

 

  

 

190

 

  

 

363

 

  

 

260

 

  

 

209

 

  

 

76

 

    


  


  


  


  


  


  


Operating loss

  

 

(6,006

)

  

 

(9,709

)

  

 

(35,121

)

  

 

(92,096

)

  

 

(73,901

)

  

 

(56,203

)

  

 

(34,390

)

Interest income

  

 

103

 

  

 

93

 

  

 

3,124

 

  

 

8,181

 

  

 

4,070

 

  

 

3,092

 

  

 

1,434

 

    


  


  


  


  


  


  


Loss before equity in losses of affiliate

  

 

(5,903

)

  

 

(9,616

)

  

 

(31,997

)

  

 

(83,915

)

  

 

(69,831

)

  

 

(53,111

)

  

 

(32,956

)

Equity in losses of affiliate

  

 

—  

 

  

 

—  

 

  

 

(1,472

)

  

 

(2,327

)

  

 

(3,281

)

  

 

(2,931

)

  

 

(1,544

)

    


  


  


  


  


  


  


Net loss

  

$

(5,903

)

  

$

(9,616

)

  

$

(33,469

)

  

$

(86,242

)

  

$

(73,112

)

  

$

(56,042

)

  

$

(34,500

)

    


  


  


  


  


  


  


Loss per share:

                                                              

Basic and diluted

  

$

(0.62

)

  

$

(0.71

)

  

$

(1.27

)

  

$

(1.99

)

  

$

(1.56

)

  

$

(1.23

)

  

$

(0.68

)

Weighted average number of common shares outstanding

  

 

9,500

 

  

 

13,617

 

  

 

26,283

 

  

 

43,308

 

  

 

46,840

 

  

 

45,712

 

  

 

50,558

 

 

15


Table of Contents
    

Years Ended December 31,


  

Nine Months Ended September 30,


    

1997*


  

1998


  

1999


  

2000


  

2001


  

2001


  

2002


    

(in thousands, except per share data)

  

(unaudited)

Consolidated Balance Sheet Data:

(at end of the period)

                                                

Cash, cash equivalents and marketable securities

  

$

3,080

  

$

3,993

  

$

171,496

  

$

86,733

  

$

92,682

  

$

104,106

  

$

66,011

Working capital

  

 

2,667

  

 

2,692

  

 

169,212

  

 

83,352

  

 

90,366

  

 

103,475

  

 

66,420

Total assets

  

 

4,846

  

 

8,093

  

 

216,126

  

 

150,829

  

 

151,374

  

 

164,819

  

 

119,647

Current portion of long-term obligations

  

 

—  

  

 

—  

  

 

553

  

 

577

  

 

530

  

 

330

  

 

317

Long-term obligations

  

 

—  

  

 

—  

  

 

6,517

  

 

6,707

  

 

6,172

  

 

6,534

  

 

6,018

Stockholders’ equity

  

 

3,597

  

 

5,493

  

 

201,407

  

 

134,131

  

 

135,003

  

 

150,548

  

 

104,655


*   For the period June 27, 1997 (date of inception) to December 31, 1997

 

16


Table of Contents

H POWER SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA

 

The following summary selected consolidated statement of operations data for each of the three fiscal years ended May 31, 2000, 2001 and 2002 and the summary selected consolidated balance sheet data as of May 31, 2001 and 2002 set forth below, are derived from the historical audited consolidated financial statements of H Power included in this joint proxy statement/prospectus. The summary selected consolidated statement of operations data for each of the two years ended December 31, 1998 and 1999 and the summary selected balance sheet data as of May 31, 1998, 1999 and 2000 are derived from H Power’s historical audited consolidated financial statements.

 

H Power derived the summary selected consolidated balance sheet and statement of operations data as of and for the six month periods ended November 30, 2001 and 2002 from its unaudited consolidated financial statements included in this joint proxy statement/prospectus. These statements include, in the opinion of management, all normal and recurring adjustments that are necessary for a fair statement of results in accordance with generally accepted accounting principles. The operating results for the six months ended November 30, 2002 are not necessarily indicative of the results that may be expected for the year ending May 31, 2003. When you read the following summary historical data, it is important that you read it along with the consolidated financial statements and the notes to those statements beginning on page F-1 of this joint proxy statement/prospectus and the section titled “Information About H Power—H Power Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this joint proxy statement/prospectus. All share and per share data presented below have been retroactively adjusted to reflect H Power’s 1-for-5 reverse stock split effective October 16, 2002.

 

    

Years Ended May 31,


    

Six Months Ended November 30,


 
    

1998


    

1999


    

2000


    

2001


    

2002


    

2001


    

2002


 
    

(in thousands, except per share data)

 

Consolidated statement of operations data:

                                                              

Revenues:

                                                              

Products

  

$

99

 

  

$

501

 

  

$

677

 

  

$

1,474

 

  

$

1,820

 

  

$

718

 

  

$

625

 

Contracts

  

 

619

 

  

 

517

 

  

 

3,003

 

  

 

2,169

 

  

 

756

 

  

 

77

 

  

 

27

 

    


  


  


  


  


  


  


Total revenues

  

 

718

 

  

 

1,018

 

  

 

3,680

 

  

 

3,643

 

  

 

2,576

 

  

 

795

 

  

 

652

 

    


  


  


  


  


  


  


Operating expenses:

                                                              

Cost of revenue—products

  

 

355

 

  

 

614

 

  

 

848

 

  

 

2,499

 

  

 

3,613

 

  

 

900

 

  

 

1,382

 

Cost of revenue—contracts

  

 

436

 

  

 

466

 

  

 

2,609

 

  

 

2,994

 

  

 

568

 

  

 

19

 

  

 

579

 

Research and development

  

 

2,813

 

  

 

3,051

 

  

 

5,339

 

  

 

13,466

 

  

 

18,905

 

  

 

4,694

 

  

 

4,678

 

Selling, general and administrative(1)

  

 

3,514

 

  

 

3,813

 

  

 

12,565

 

  

 

11,846

 

  

 

9,158

 

  

 

2,050

 

  

 

2,442

 

Other costs

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

677

 

  

 

370

 

  

 

1,164

 

    


  


  


  


  


  


  


Total operating expenses

  

 

7,118

 

  

 

7,944

 

  

 

21,361

 

  

 

30,805

 

  

 

32,921

 

  

 

8,033

 

  

 

10,245

 

    


  


  


  


  


  


  


Loss from operations

  

 

(6,400

)

  

 

(6,926

)

  

 

(17,681

)

  

 

(27,162

)

  

 

(30,345

)

  

 

(7,238

)

  

 

(9,593

)

Interest and other income, net

  

 

723

 

  

 

182

 

  

 

746

 

  

 

5,011

 

  

 

2,435

 

  

 

682

 

  

 

219

 

Interest expense

  

 

(41

)

  

 

(22

)

  

 

(77

)

  

 

—  

 

  

 

(5

)

  

 

—  

 

  

 

—  

 

    


  


  


  


  


  


  


Net Loss

  

 

(5,718

)

  

 

(6,766

)

  

 

(17,012

)

  

 

(22,151

)

  

 

(27,915

)

  

 

(6,556

)

  

 

(9,374

)

    


  


  


  


  


  


  


Net loss attributable to common stockholders

  

$

(5,928

)

  

$

(6,976

)

  

$

(17,222

)

  

$

(22,192

)

  

$

(27,915

)

  

$

(6,515

)

  

$

(9,339

)

    


  


  


  


  


  


  


Net loss per share, basic and diluted

  

$

(1.02

)

  

$

(1.20

)

  

$

(2.47

)

  

$

(2.20

)

  

$

(2.59

)

  

$

(.61

)

  

$

(.87

)

Weighted average shares outstanding, basic and diluted

  

 

5,802

 

  

 

5,803

 

  

 

6,976

 

  

 

10,083

 

  

 

10,771

 

  

 

10,771

 

  

 

10,777

 


(1)   Includes non-cash stock compensation expense of $4,400, $5,175 and $711 in the years ended May 31, 2001, 2000 and 1999, respectively.

 

17


Table of Contents

 

    

As of May 31,


  

As of November 30,


    

1998


    

1999


    

2000


    

2001


  

2002


  

2001


  

2002


    

(in thousands)

    

Consolidated Balance Sheet Data:

                                                      

(at end of the period)

                                                      

Cash, cash equivalents and short-term investments

  

$

4,961

 

  

$

242

 

  

$

11,257

 

  

$

93,372

  

$

59,758

  

$

75,357

  

$

44,806

Total assets

  

 

7,436

 

  

 

3,472

 

  

 

18,650

 

  

 

105,350

  

 

73,752

  

 

90,189

  

 

57,558

Long-term debt

  

 

4

 

  

 

69

 

  

 

67

 

  

 

65

  

 

125

  

 

129

  

 

119

Total stockholders’ equity (deficit)

  

$

(14,356

)

  

$

(20,464

)

  

$

(6,938

)

  

$

97,424

  

$

69,737

  

$

83,626

  

$

53,248

 

 

18


Table of Contents

SELECTED COMBINED COMPANY UNAUDITED PRO FORMA FINANCIAL INFORMATION

 

The following selected unaudited pro forma combined financial information has been derived from and should be read in conjunction with the Unaudited Pro Forma Condensed Combined Financial Information and related notes included in this joint proxy statement/prospectus on page 106. This information is based on the historical consolidated balance sheets and related historical consolidated statements of operations of Plug Power and the historical consolidated balance sheets and related historical consolidated statements of operations of H Power, using the purchase method of accounting for business combinations. This information is for illustrative purposes only. The companies may have performed differently had they always been combined. You should not rely on the selected unaudited pro forma combined financial information as being indicative of the historical results that would have been achieved had the companies always been combined or the future results that the combined company will experience after the merger.

 

Unaudited Pro Forma Condensed Combined Statements of Operations

 

      

Pro forma Combined twelve month period ended December 31, 2001


      

Pro forma Combined nine month period ended September 30, 2002


 

Revenue

                     

Product and service revenue

    

$

2,573,434

 

    

$

7,381,398

 

Research and development contract revenue

    

 

3,830,121

 

    

 

1,571,744

 

      


    


Total revenue

    

 

6,403,555

 

    

 

8,953,142

 

Cost of revenue and expenses

                     

Cost of revenues

    

 

13,276,893

 

    

 

8,500,212

 

In-process research and development

    

 

—  

 

    

 

—  

 

Research and development expense:

                     

Noncash stock-based compensation

    

 

1,300,807

 

    

 

520,006

 

Other research and development

    

 

77,497,018

 

    

 

41,373,410

 

General and administrative expense:

                     

Noncash stock-based compensation

    

 

4,902,370

 

    

 

415,308

 

Other general and administrative

    

 

15,530,807

 

    

 

11,983,645

 

Interest expense

    

 

259,958

 

    

 

81,109

 

      


    


Operating loss

    

 

(106,364,298

)

    

 

(53,920,548

)

Interest income

    

 

8,876,017

 

    

 

2,522,453

 

      


    


Loss before equity in losses of affiliates

    

 

(97,488,281

)

    

 

(51,398,095

)

Equity in losses of affiliates

    

 

(3,280,794

)

    

 

(1,544,051

)

      


    


Net loss

    

$

(100,769,075

)

    

$

(52,942,146

)

      


    


Loss per share:

                     

Basic and diluted (1)

    

$

(1.80

)

    

$

(0.89

)

      


    


Weighted average number of common shares outstanding(1)

    

 

55,913,815

 

    

 

59,631,862

 

      


    


 

19


Table of Contents

 

Unaudited Pro Forma Balance Sheet Data

(at end of the period, in thousands)

 

Cash, cash equivalents and marketable securities

    

$

118,697

Working capital

    

 

107,516

Total assets

    

 

178,297

Current portion of long-term obligations

    

 

454

Long-term obligations

    

 

5,120

Stockholders’ equity(1)

    

 

149,549


(1)   The estimated exchange ratio is .84 shares of Plug Power common stock for each share of H Power common stock based on (i) 10,776,548 shares of H Power common stock outstanding on the date of this joint proxy statement/prospectus, (ii) an average share price of $5.29 per share of Plug Power common stock (based on the closing price of $5.13 per share of Plug Power common stock on the last business day prior to the date of this joint proxy statement/prospectus and adjusted to $5.29 per share as a result of the collar) and (iii) an estimated net cash value of $34,000,000. This estimated exchange ratio has been used to present the pro forma information based on the latest information available; however, the actual exchange ratio for H Power common stock in the merger may be different than the estimated exchange ratio. The exchange ratio could range from .69 to .84, exclusive of any further adjustment required based upon H Power’s actual net cash at the effective time of the merger, as defined in the merger agreement. If the exchange ratio is .69 shares of Plug Power common stock for each share of H Power common stock, the number of shares of Plug Power common stock issued in connection with the merger would decrease to approximately 7.4 million shares from approximately 9.1 million shares and the pro forma loss per share, basic and diluted, for the twelve month period ended December 31, 2001 would be $(1.86) based on the weighted average number of shares outstanding, basic and diluted, of 54,258,947. If the exchange ratio is .69 shares of Plug Power common stock for each share of H Power common stock, the pro forma loss per share, basic and diluted, for the nine month period ended September 30, 2002 would be $(0.91) based on the weighted average number of shares outstanding, basic and diluted, of 57,976,994. Any change to the actual net cash at the effective time of the merger will affect the final transaction value and the exchange ratio as determined pursuant to the formula within the merger agreement. Further, the minimum aggregate consideration that H Power stockholders can receive in the merger is $29,675,000, or $2.75 per share, unless H Power determines not to exercise its right to terminate the merger agreement, which termination is subject to Plug Power’s right to issue additional shares such that the minimum aggregate consideration equals $29,675,000. If H Power does not exercise its right to terminate the merger agreement, H Power stockholders will not be guaranteed to receive any minimum consideration because the amount that H Power stockholders will receive will decrease below $2.75 per share if (1) the trading price of Plug Power common stock declines, and/or (2) H Power’s net cash (as defined in the merger agreement) declines. For a complete description of H Power’s termination right, see the section of this joint proxy statement/prospectus entitled “The Merger and Related Transactions—The Merger Agreement—Payment of Termination Fee and Expenses.” An additional summary of the effect of changes in net cash and the average Plug Power common stock price, both as determined pursuant to the merger agreement, is presented within note 3 on page 115 to further illustrate the impact to the relevant pro forma financial information. For further information concerning the estimated exchange ratio and the factors that may cause it to be adjusted, see the section of this document titled “The Merger and Related Transactions—The Merger Agreement—Collar Adjustment and Net Cash Adjustment.”

 

 

 

20


Table of Contents

COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA

 

The following tables set forth certain historical per share data of Plug Power and H Power and combined per share data on an unaudited pro forma basis after giving effect to the merger using the purchase method of accounting, and assuming that 0.84 shares of Plug Power common stock are issued in exchange for each share of H Power common stock in connection with the merger. It is expected that a total of approximately 9.1 million shares of Plug Power common stock will be issued in exchange for all of the outstanding shares of common stock of H Power. The actual exchange ratio for H Power common stock in the merger may be different than this assumed exchange ratio. The following data should be read in conjunction with the separate historical consolidated financial statements of H Power included in this joint proxy statement/prospectus and the separate historical consolidated financial statements of Plug Power incorporated by reference in this joint proxy statement/prospectus, as well as the unaudited pro forma condensed combined financial statements included in this joint proxy statement/prospectus. The unaudited pro forma combined per share data do not necessarily indicate the operating results that would have been achieved had the merger been completed as of the beginning of the earliest period presented and should not be taken as representative of future operations. The results may have been different if the companies had always been consolidated. All per share information has been restated, as applicable for stock splits, as discussed in each entity’s respective consolidated financial statements and notes thereto. No cash dividends have ever been declared or paid on Plug Power or H Power common stock.

 

      

Year ended December 31, 2001


      

Twelve month period ended
November 30,
2001


      

Nine months
ended
September 30,
2002


      

Nine month
period ended
August 31,

2002


 

Plug Power—Historical:

                                           

Basic and diluted loss per share

    

$

(1.56

)

    

 

—  

 

    

$

(0.68

)

    

 

—  

 

Book value per common share

    

$

2.68

 

    

 

—  

 

    

$

2.06

 

    

 

—  

 

H Power—Historical:

                                           

Basic and diluted loss per share

    

 

—  

 

    

$

(2.66

)

    

 

—  

 

    

$

(1.95

)

Book value per common share

    

 

—  

 

    

$

7.80

 

    

 

—  

 

    

$

5.81

 

Pro Forma—Combined:

                                           

Basic and diluted loss per share

    

$

(1.80

)(1)

    

 

—  

 

    

$

(0.89

)(2)

    

 

—  

 

Book value per common share

    

 

—  

 

    

 

—  

 

    

$

2.43

 

    

 

—  

 

Equivalent Pro Forma—Combined:(3)

                                           

Basic and diluted loss per share

    

$

(1.51

)

    

 

—  

 

    

$

(0.75

)

    

 

—  

 

Book value per common share

    

 

—  

 

    

 

—  

 

    

$

2.04

 

    

 

—  

 


No options or warrants outstanding are included in the calculation of diluted loss per share because their impact would have been anti-dilutive to loss per share for each period presented.

 

(1)  

The estimated exchange ratio is .84 shares of Plug Power common stock for each share of H Power common stock based on (i) 10,776,548 shares of H Power common stock outstanding on the date of this joint proxy statement/prospectus, (ii) an average share price of $5.29 per share of Plug Power common stock (based on the closing price of $5.13 per share of Plug Power common stock on the last business day prior to the date of this joint proxy statement/prospectus and adjusted to $5.29 per share as a result of the collar) and (iii) an estimated net cash value of $34,000,000. This exchange ratio has been used to present the pro forma information based on the latest information available; however, the actual exchange ratio for H Power common stock in the merger may be different than the assumed exchange ratio and may be subject to change on completion of the transaction. The exchange ratio could range from .69 to .84, exclusive of any adjustment required based upon H Power’s actual net cash at the effective time of the merger, as defined in the merger agreement. If the exchange ratio is .69 shares of Plug Power common stock for each share of H Power common stock, the loss per share, basic and diluted, for pro forma combined would be $(1.86) based on the weighted average number of shares outstanding, basic and diluted, of 54,258,947.

 

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In addition, any change to the actual net cash at the effective time of the merger will affect the final transaction value and exchange ratio as determined pursuant to the formula within the merger agreement. Further, the minimum aggregate consideration that H Power stockholders can receive in the merger is $29,675,000, or $2.75 per share, unless H Power determines not to exercise its right to terminate the merger agreement, which termination is subject to Plug Power’s right to issue additional shares such that the minimum aggregate consideration equals $29,675,000. If H Power does not exercise its right to terminate the merger agreement, H Power stockholders will not be guaranteed to receive any minimum consideration because the amount that H Power stockholders will receive will decrease below $2.75 per share if (1) the trading price of Plug Power common stock declines, and/or (2) H Power’s net cash (as defined in the merger agreement) declines. For a complete description of H Power’s termination right, see the section of this joint proxy statement/prospectus entitled “The Merger and Related Transactions—The Merger Agreement—Payment of Termination Fee and Expenses.” An additional summary of the effect of changes in net cash and the average Plug Power common stock price, both as determined pursuant to the merger agreement, is presented within note 3 on page 115 to further illustrate the impact to the relevant pro forma financial information. For further information concerning the estimated exchange ratio and factors that may cause it to be adjusted, see the section of this joint proxy statement/prospectus entitled “The Merger and Related Transactions—The Merger Agreement—Collar Adjustment and Net Cash Adjustment” on page 82.

 

(2)   The estimated exchange ratio is .84 shares of Plug Power common stock for each share of H Power common stock based on (i) 10,776,548 shares of H Power common stock outstanding on the date of this joint proxy statement/prospectus, (ii) an average share price of $5.29 per share of Plug Power common stock (based on the closing price of $5.13 per share of Plug Power common stock on the last business day prior to the date of this joint proxy statement/prospectus and adjusted to $5.29 per share as a result of the collar) and (iii) a net cash value of $34,000,000. This exchange ratio has been used to present the pro forma information based on the latest information available; however, the actual exchange ratio for H Power common stock in the merger may be different than the assumed exchange ratio and may be subject to change on completion of the transaction. The exchange ratio could range from .69 to .84, exclusive of any adjustment required based upon H Power’s actual net cash at the effective time of the merger, as defined in the merger agreement. If the exchange ratio is .69 shares of Plug Power common stock for each share of H Power common stock, the loss per share, basic and diluted, for the nine month period ended September 30, 2002 would be $(0.91) based on the weighted average number of shares outstanding, basic and diluted, of 57,976,994. In addition, any change to the actual net cash at the effective time of the merger will affect the final transaction value and exchange ratio as determined pursuant to the formula within the merger agreement. Further, the minimum aggregate consideration that H Power stockholders can receive in the merger is $29,675,000, or $2.75 per share, unless H Power determines not to exercise its right to terminate the merger agreement, which termination is subject to Plug Power’s right to issue additional shares such that the minimum aggregate consideration equals $29,675,000. If H Power does not exercise its right to terminate the merger agreement, H Power stockholders will not be guaranteed to receive any minimum consideration because the amount that H Power stockholders will receive will decrease below $2.75 per share if (1) the trading price of Plug Power common stock declines, and/or (2) H Power’s net cash (as defined in the merger agreement) declines. For a complete description of H Power’s termination right, see the section of this joint proxy statement/prospectus entitled “The Merger and Related Transactions—The Merger Agreement—Payment of Termination Fee and Expenses.” An additional summary of the effect of changes in net cash and the average Plug Power common stock price, both as determined pursuant to the merger agreement, is presented within note 3 on page 115 to further illustrate the impact to the relevant pro forma financial information. For further information concerning the estimated exchange ratio and the factors that may cause it to be adjusted, see the section of this joint proxy statement/prospectus entitled “The Merger and Related Transactions—The Merger Agreement—Collar Adjustment and Net Cash Adjustment” on page 82.

 

(3)   The unaudited equivalent pro forma per share amounts are calculated by multiplying the unaudited combined pro forma per share amounts by an assumed exchange ratio of .84 of a share of Plug Power common stock for each outstanding share of H Power common stock. The estimated exchange ratio of .84 shares of Plug Power common stock for each share of H Power common stock is based on 10,776,548 shares of H Power common stock outstanding, an average share price of $5.29 per share of Plug Power common stock (based on the closing price of $5.13 per share of Plug Power common stock on the last business day prior to the date of this joint proxy statement/prospectus and adjusted to $5.29 per share as a result of the collar) and an estimated net cash value of $34,000,000. This exchange ratio has been used to present the pro forma financial information based on the latest information available and may be subject to change on completion of the transaction.

 

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COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND INFORMATION

 

Plug Power common stock is traded on the Nasdaq National Market under the symbol “PLUG.” H Power common stock is traded on the Nasdaq National Market under the symbol “HPOW.” The following table shows the high and low sale prices per share of Plug Power common stock and H Power common stock as reported on the Nasdaq National Market for each of the two most recent fiscal years and the fiscal quarters during the current fiscal year. Plug Power common stock has been listed on the Nasdaq National Market since October 28, 1999, the date of Plug Power’s initial public offering. H Power’s common stock has been listed on the Nasdaq National Market since August 9, 2000, the date of H Power’s initial public offering. All share prices of H Power have been adjusted to give effect to the 1-for-5 reverse stock split of the outstanding common stock effected as of the close of business on October 16, 2002.

 

      

Plug Power


    

H Power


Fiscal Quarters


    

High


    

Low


    

High


    

Low


2000:

                                   

First Quarter

    

$

156.50

    

$

25.75

    

 

—  

    

 

—  

Second Quarter

    

 

97.00

    

 

38.00

    

 

—  

    

 

—  

Third Quarter*

    

 

71.63

    

 

36.00

    

$

179.69

    

$

63.16

Fourth Quarter

    

 

39.13

    

 

9.13

    

 

172.50

    

 

26.25

2001:

                                   

First Quarter

    

$

33.00

    

$

12.50

    

$

53.13

    

$

26.25

Second Quarter

    

 

38.00

    

 

12.88

    

 

80.00

    

 

31.88

Third Quarter

    

 

22.27

    

 

6.01

    

 

50.00

    

 

13.75

Fourth Quarter

    

 

10.70

    

 

7.19

    

 

17.70

    

 

12.55

2002:

                                   

First Quarter

    

$

13.10

    

$

8.26

    

$

22.15

    

$

11.15

Second Quarter

    

 

12.58

    

 

6.61

    

 

14.75

    

 

4.30

Third Quarter

    

 

8.00

    

 

4.05

    

 

6.40

    

 

2.95

Fourth Quarter

    

 

6.82

    

 

3.39

    

 

4.59

    

 

1.75

2003:

                                   

First Quarter

    

$

6.34

    

$

4.04

    

$

4.90

    

$

3.20

(through February 11, 2003)

                                   

*   Commencing on August 9, 2000 for H Power.

 

Recent Closing Prices

 

The following table shows the closing prices per share of Plug Power common stock and H Power common stock as reported on the Nasdaq National Market on (1) November 11, 2002, the business day preceding the public announcement that Plug Power and H Power had entered into the merger agreement and (2)  February 11, 2003, the last full trading day for which closing prices were available at the time of the printing of this joint proxy statement/prospectus.

 

The following table also includes the equivalent price per share of H Power common stock on those dates. This equivalent per share price reflects the value of the Plug Power common stock you would receive for each share of your H Power common stock if the merger was completed on any of these dates, applying the assumed exchange ratio of .855 shares of Plug Power common stock for each share of H Power common stock for November 11, 2002 and the assumed exchange ratio of .842 shares of Plug Power common stock for each share of H Power common stock for February 11, 2003. The assumed exchange ratios used in the presentation of the equivalent price per share amounts in the following table have been determined pursuant to the exchange ratio

 

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formula, as defined in the merger agreement, as if the merger was completed on November 11, 2002 and  February 11, 2003 based on (1) the closing price per share of Plug Power common stock on November 11, 2002 and February 11, 2003 (adjusted as a result of the collar); (2) the number of outstanding shares of H Power common stock of 10,776,548 on November 11, 2002 and February 11, 2003; and (3) an estimated transaction value of $50,675,000 (based on estimated net cash of $36,675,000) on November 11, 2002 and an estimated transaction value of $48,000,000 (based on estimated net cash of $34,000,000) on February 11, 2003. These amounts are based on the latest information available and may change at the completion of the merger as a result of those factors described in the section of this joint proxy statement/prospectus entitled “The Merger and Related Transactions—The Merger Agreement—Collar Adjustment and Net Cash Adjustment” on page 82.

 

      

Plug Power
Common
Stock


    

H Power
Common
Stock


    

Equivalent
Price Per
Share


November 11, 2002

    

$

5.50

    

$

2.19

    

$

4.70

February 11, 2003

    

$

5.13

    

$

4.24

    

$

4.32


 

Because the market price of Plug Power common stock and H Power common stock may increase or decrease before the completion of the merger, you are urged to obtain current market quotations.

 

As of February 10, 2003, there were approximately 1,829 stockholders of record of Plug Power who held an aggregate of 51,077,781 shares of Plug Power common stock.

 

As of January 27, 2003, there were approximately 392 stockholders of record of H Power who held an aggregate of 10,776,548 shares of H Power common stock.

 

Dividend Policy

 

Neither Plug Power nor H Power has ever declared or paid dividends on its common stock in the past and neither company intends to pay dividends in the foreseeable future. Any determination to pay dividends after consummation of the merger will be at the discretion of Plug Power’s board of directors and will depend on Plug Power’s financial condition, results of operations, capital requirements and other factors Plug Power’s board of directors deems relevant.

 

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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS JOINT PROXY STATEMENT/PROSPECTUS

 

This joint proxy statement/prospectus and the documents incorporated by reference into this joint proxy statement/prospectus contain forward-looking statements about the merger, Plug Power and H Power within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements containing the words “believes,” “anticipates,” “estimates,” “expects,” “intends,” “plans,” “seeks,” “will,” “may,” “should,” “would,” “projects,” “predicts,” “continues” and similar expressions or the negative of these terms constitute forward-looking statements that involve risks and uncertainties. Such statements are based on current expectations and are subject to risks, uncertainties and changes in condition, significance, value and effect, including those discussed in the section entitled “Risk Factors” beginning on page 27 of this joint proxy statement/prospectus, and, with respect to Plug Power, reports filed by Plug Power with the Securities and Exchange Commission, specifically forms 8-K, 10-K/A and 10-Q, incorporated into this document. Such risks, uncertainties and changes in condition, significance, value and effect could cause Plug Power’s or H Power’s actual results to differ materially from those anticipated events. In evaluating the merger agreement and the merger, you should carefully consider the discussion of risks and uncertainties discussed in the section entitled “Risk Factors”.

 

Although each company believes that its plans, intentions and expectations as reflected in or suggested by these forward-looking statements are reasonable, it can give no assurance that these plans, intentions or expectations will be achieved. H Power stockholders and Plug Power stockholders 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 risk factors described in the section entitled “Risk Factors”. Listed below and discussed elsewhere in this joint proxy statement/prospectus are some important risks, uncertainties and contingencies which could cause each company’s actual results, performances or achievements to be materially different from the forward-looking statements made in this joint proxy statement/prospectus, particularly if the merger is not completed. These risks, uncertainties and contingencies include, but are not limited to, the following:

 

    the satisfaction of the conditions to closing, including receipt of stockholder and regulatory approvals;

 

    the expected closing date of the merger;

 

    the risk that the merger will not close;

 

    the risk that the merger will not be treated as a tax-free reorganization for United States federal income tax purposes;

 

    the risk that Plug Power will not integrate and restructure the acquired business successfully;

 

    the risk that Plug Power will incur unanticipated costs to integrate and restructure the acquired business;

 

    the risk that H Power will require more cash than anticipated prior to closing;

 

    fluctuations in the trading price and volume of Plug Power’s common stock;

 

    the risk that continuity of H Power’s operations will be disrupted in the event the transaction does not close;

 

    Plug Power’s ability to develop a commercially viable fuel cell system;

 

    the cost and time required for Plug Power to develop fuel cell systems;

 

    market acceptance of Plug Power’s fuel cell systems;

 

    Plug Power’s reliance on its relationship with certain affiliates of General Electric;

 

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Table of Contents

 

    Plug Power’s ability to perform on its multi-generation product plan in a manner satisfactory to its distribution partners;

 

    Plug Power’s ability to manufacture fuel cell systems on a commercial basis;

 

    competitive factors, such as price competition, competition from other power technologies and competition from other fuel cell companies and the cost and availability of components and parts for Plug Power’s fuel cell systems;

 

    the ability to raise and provide the necessary capital to develop, manufacture and market Plug Power’s fuel cell systems;

 

    Plug Power’s ability to lower the cost of its fuel cell systems and demonstrate their reliability; and

 

    the cost of complying with current and future governmental regulations.

 

In addition, events may occur in the future that H Power or Plug Power are not able to accurately predict or control and that may cause actual results to differ materially from the expectations described in these forward-looking statements.

 

Readers should not place undue reliance on the forward-looking statements contained in this joint proxy statement/prospectus. These forward-looking statements speak only as of the date on which the statements were made and the companies assume no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In evaluating forward-looking statements, you should consider these risks and uncertainties, together with the other risks described from time to time in the companies’ respective reports and documents filed with the Securities and Exchange Commission.

 

 

26


Table of Contents

 

RISK FACTORS

 

By voting in favor of the adoption and approval of the merger agreement and the approval of the merger, stockholders of H Power will be choosing to invest in Plug Power common stock and by voting in favor of the issuance of shares of Plug Power common stock in connection with the merger, stockholders of Plug Power will be choosing to acquire H Power. An investment in Plug Power common stock, which after the merger will be the common stock of the combined companies, involves a high degree of risk. In addition to the other information contained in or incorporated by reference into this joint proxy statement/prospectus, you should carefully consider the following risk factors in deciding whether to vote in favor of adoption and approval of the merger agreement and approval of the merger, in the case of H Power stockholders, or in favor of the issuance of shares of Plug Power common stock pursuant to the merger agreement, in the case of Plug Power stockholders. In addition, you should keep the following risk factors in mind when you read forward-looking statements in this joint proxy statement/prospectus. Please refer to the section entitled “Cautionary Statements Regarding Forward-Looking Statements in this Joint Proxy Statement/Prospectus” beginning on page 25 of this joint proxy statement/prospectus.

 

Risks Related to the Merger

 

Fluctuations in the market price of Plug Power common stock may affect the value of the consideration that H Power stockholders receive in the merger and the corresponding amount paid by Plug Power to acquire H Power.

 

The value of the consideration that H Power stockholders will receive in the merger, and the number of shares of Plug Power common stock that H Power stockholders will receive in the merger, may depend on the market price of Plug Power common stock. In the merger, H Power stockholders are to receive a number of shares of Plug Power common stock that is based on a formula that divides a transaction value price (initially set at $50,675,000, subject to adjustment) by Plug Power’s average common stock price for 10 randomly selected trading days in the 20 trading day period ending on the second trading day prior to the merger. In turn, this result is divided by the number of shares of H Power common stock outstanding immediately prior to the merger. However, H Power stockholders are not guaranteed to receive value in Plug Power common stock equivalent to the transaction value price. This is because the exchange ratio is restricted by a 10% collar from an assumed Plug Power common stock price of $5.88 per share. Accordingly, if the average Plug Power common stock price is less than $5.29, the exchange ratio will be fixed at the ratio that would have been derived if the average Plug Power common stock price was equal to $5.29, and H Power stockholders will receive aggregate value in the merger less than the transaction value price. Conversely, if the average Plug Power common stock price is greater than $6.47, the exchange ratio will be fixed at the ratio that would have been derived if the average Plug Power common stock price was equal to $6.47, and H Power stockholders will receive aggregate value in the merger greater than the transaction value price.

 

In addition, because the market price of Plug Power common stock between the determination date for the average Plug Power common stock price and the effective time of the merger, as well as the date certificates representing shares of Plug Power common stock are delivered in exchange for shares of H Power common stock following consummation of the merger, will fluctuate and possibly decline, the value of Plug Power common stock actually received by holders of H Power common stock may be more or less than (A) the average Plug Power common stock price or (B) the value of the Plug Power common stock at the effective time of the merger resulting from the exchange ratio or any possible adjustment to the exchange ratio as illustrated in the section of this document titled “The Merger and Related Transactions—The Merger Agreement—Collar Adjustment and Net Cash Adjustment” on page 82.

 

Prior to each company’s respective special meeting of stockholders, the companies will post the current estimated exchange ratio on their respective websites. Plug Power’s website is at www.plugpower.com and H Power’s website is at www.hpower.com. We encourage you to consider the market price of Plug Power common stock before you make your voting decision regarding the merger. See the section of this joint proxy statement/prospectus titled “The Merger and Related Transactions—The Merger Agreement—Collar Adjustment and Net Cash Adjustment” on page 82.

 

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Table of Contents

Fluctuations in the net cash of H Power may affect the value of the consideration that H Power stockholders receive in the merger and the value of the assets acquired by Plug Power.

 

The value of the consideration that H Power stockholders will receive in the merger will depend on the net cash of H Power (as such term is defined in the merger agreement) at the effective time of the merger. As described below, net cash directly impacts the transaction value price, which is a key determinant in calculating the exchange ratio. In certain instances, the transaction value price will reflect the value of Plug Power common stock to be received by the H Power stockholders in the merger. At the effective time of the merger, the net cash of H Power may be higher or lower than the estimated net cash on the date that the merger agreement was signed, the date this document was mailed to you or the date of the H Power special meeting of stockholders; however, the net cash at the effective time of the merger is the only applicable measurement. Therefore, H Power stockholders cannot be assured prior to the merger of the definitive value of shares of Plug Power common stock they will be entitled to receive on the date of the merger. Correspondingly, Plug Power stockholders cannot be assured prior to the merger of acquiring any definitive value of assets of H Power. See the section of this document titled “The Merger and Related Transactions—The Merger Agreement—Collar Adjustment and Net Cash Adjustment” on page 82.

 

The right of H Power to terminate the merger based on the price of Plug Power common stock and the right of Plug Power to not complete the merger based on the net cash of H Power are limited.

 

If the aggregate value of the anticipated number of shares of Plug Power common stock to be issued in the merger based on the reasonably anticipated average Plug Power common stock price is less than $29,675,000 (which could occur if Plug Power’s common stock price declines significantly prior to the effective time of the merger), H Power has the right, in certain circumstances, to terminate the merger agreement, subject to Plug Power’s ability to prevent H Power from doing so. In order for Plug Power to prevent termination, it would have to increase the number of shares of Plug Power common stock to be issued in the merger (through an increase in the exchange ratio) such that the aggregate value of such shares, based on the average Plug Power common stock price, is equal to or greater than $29,675,000. If Plug Power elects not to exercise this “topping-up” right, the merger agreement could then be terminated by H Power. However, H Power may elect not to exercise its right to terminate the merger agreement. In that case, the aggregate value to be received by H Power stockholders will be less than $29,675,000.

 

Plug Power has the right to not consummate the merger based on the amount of net cash of H Power. However, this right is limited to the circumstance where such net cash is less than $27,500,000 at the effective time of the merger. There is no assurance that Plug Power will elect to exercise its right not to consummate the merger in such circumstances.

 

As a result of the merger, existing H Power obligations will become the obligations of the combined company, which Plug Power may determine not to honor and may be expensive to terminate or may result in litigation.

 

As a result of the merger, substantially all of H Power’s existing obligations, contractual and otherwise, will remain intact and will become obligations of Plug Power following the merger, as the parent entity to H Power. Plug Power expects that in many instances it will seek to terminate, renegotiate or otherwise amend these obligations, although in doing so it may incur substantial costs. For example, certain of these ongoing commitments may relate to H Power products that Plug Power will no longer produce or support. Plug Power may not be able to terminate or amend those agreements or negotiate an alternative solution at a reasonable cost or at all. If Plug Power does not perform under these agreements, it may become subject to litigation. If this occurs, and the plaintiffs prevail, or if the combined company is obligated to perform under such agreements, such outcomes could have a material adverse effect on the combined company’s financial condition, results of operations and liquidity.

 

Plug Power expects to have significant costs associated with combining the companies.

 

Plug Power presently expects to incur significant costs to streamline the combined company’s business, reduce excess capacity and eliminate redundant operations. For instance, in addition to terminating or amending

 

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certain H Power obligations, as discussed above, as part of the post-closing integration of the combined businesses, it is anticipated that all operations would be consolidated into Plug Power’s headquarters, located in Latham, New York. Also, Plug Power expects to incur significant costs associated with the termination of contracts, including leases and employee terminations, including, but not limited to, an estimated $1.8 million with respect to change of control agreements with H Power management that will result in one time and/or continuing payments upon or prior to the consummation of the merger. For additional discussion as to these expected costs, See “Unaudited Pro Forma Condensed Combined Financial Information” beginning on page 106. Accordingly, Plug Power believes the combined company may incur charges to operations, which are not currently reasonably estimable, in the quarter in which the merger is completed or the following quarters, to reflect costs associated with integrating and streamlining the businesses and operations of Plug Power and H Power. There can be no assurance that the costs associated with streamlining the business, reducing excess capacity and eliminating redundant operations will not exceed those projected by Plug Power, nor can there be any assurance that the combined company will not incur additional material charges in subsequent quarters to reflect additional costs associated with the merger.

 

Failure to complete the merger could negatively impact Plug Power’s and/or H Power’s stock prices, future business and operations.

 

If the merger is not completed for any reason, Plug Power and H Power may be subject to a number of material risks, including the following:

 

    H Power may be required, under certain circumstances, to pay to Plug Power a termination fee of $2,000,000;

 

    either Plug Power or H Power may be required, under certain circumstances, to pay to the other party particular out-of-pocket expenses incurred in connection with pursuing the merger;

 

    both companies may experience a negative reaction, from both the financial markets and customers, suppliers or partners of each company, to the termination of the merger;

 

    each company must pay its own costs related to the merger (subject to reimbursement by the other party in particular cases), such as amounts payable to legal and financial advisors and independent accountants, even if the merger is not completed;

 

    the price of Plug Power’s and/or H Power’s common stock may decline as a result of the costs associated with the merger and/or to the extent that the current market price of Plug Power’s and/or H Power’s common stock reflects a market assumption that the merger will be completed;

 

    either company may forego other opportunities which would otherwise be available had the merger agreement not been executed, including, without limitation, foregone opportunities as a result of certain affirmative and negative covenants made by H Power in the merger agreement, such as covenants affecting the conduct of its business outside the ordinary course of business; and

 

    either company may be unable to obtain additional sources of financing or conclude another sale or merger transaction on favorable terms, or at all, and the board of directors of either company may determine that the best alternative is to discontinue certain operations, liquidate certain assets, reduce expenditures, and take other actions required to limit operations in a manner inconsistent with current development and commercialization plans.

 

The anticipated benefits of the merger may not be realized in a timely fashion, or at all, and Plug Power’s operations may be adversely affected.

 

The success of the merger will depend, in part, on Plug Power’s ability to realize the anticipated enhancements to capital resources, growth opportunities and synergies of combining with H Power and to effectively utilize the increased cash and other resources Plug Power expects to have following the merger. The

 

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Table of Contents

merger involves risks related to the integration and management of acquired technology and operations and personnel. The integration of the businesses will be a complex, time-consuming and potentially expensive process and may disrupt Plug Power’s business if not completed in a timely and efficient manner. Some of the difficulties that may be encountered by the combined company include:

 

    the diversion of management’s attention from other ongoing business concerns;

 

    the inability to utilize the acquired resources effectively; and

 

    demonstrating to the combined company’s customers, suppliers and partners that the merger will not result in adverse changes in client service standards or business focus.

 

If Plug Power’s management focuses too much time, money and effort to integrate H Power’s operations and assets, they may not be able to execute Plug Power’s overall business strategy. Additionally, neither Plug Power nor H Power can assure the combined company will progress at the same rates as have been experienced by Plug Power and H Power, respectively, operating as separate companies in the past.

 

Customer, supplier, partner and employee uncertainty about the merger could harm the combined company, or the respective businesses of H Power and Plug Power if the merger is not completed.

 

Plug Power’s and/or H Power’s existing or potential customers may, in response to the announcement or consummation of the merger, delay or defer purchasing decisions. Plug Power’s and H Power’s suppliers or partners may experience uncertainty about their future relationship with the combined company and may limit their involvement with either company until or after the merger is completed. Similarly, Plug Power’s or H Power’s current or prospective employees may experience uncertainty about their future roles with the combined company until or after Plug Power announces and executes its strategies with regard to such employees. This may adversely affect the combined company’s, or each company’s, if the merger is not completed, ability to attract and retain key management, sales, and technical personnel and effectively operate its business.

 

Plug Power and H Power expect to incur significant costs associated with the merger, whether or not the merger is completed.

 

Plug Power estimates that it will incur direct transaction costs of approximately $1.4 million associated with the merger, which will be included as a part of the total purchase cost for accounting purposes, including fees and other expenses payable to Stephens in connection with the merger as described in the section entitled “The Merger and Related Transactions—Consideration of the Merger by Plug Power’s Board of Directors—Opinion of Plug Power’s Financial Advisor” beginning on page 74 of this joint proxy statement/prospectus. In addition, H Power estimates that it will incur direct transaction costs, which will be expensed as incurred for accounting purposes, of approximately $2.8 million, if the merger is completed, or approximately $2.2 million if the merger is not completed, including fees and other expenses payable to its advisors in connection with the merger as described in the section entitled “The Merger and Related Transactions—Consideration of the Merger by H Power’s Board of Directors—Opinion of H Power’s Financial Advisor” beginning on page 63 of this joint proxy statement/prospectus. Payment of certain of these fees are dependent on consummation of the merger.

 

The merger may fail to qualify as a reorganization for federal income tax purposes, resulting in recognition of taxable gain or loss in respect of shares of H Power common stock.

 

Both Plug Power and H Power intend to treat the merger as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. However, in the opinion of counsel, it is unclear as to whether the merger will qualify as a tax-free reorganization. If the merger fails to qualify as a reorganization, stockholders of H Power will generally recognize a gain or loss on each share of H Power common stock surrendered in an amount equal to the difference between the adjusted tax basis in that share and the fair market

 

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value of the Plug Power common stock (and cash in lieu of fractional shares) received in exchange for that share upon completion of the merger. H Power stockholders should vote to approve the merger only if they are willing to approve a taxable transaction in which they recognize gain or loss.

 

For a more detailed description of the consequences of the merger failing to qualify as a reorganization, see “The Merger and Related Transactions—Material United States Federal Income Tax Consequences of the Merger” beginning on page 100 of this joint proxy statement/prospectus.

 

The price of Plug Power common stock may be affected by factors different from those affecting the price of H Power common stock.

 

When the merger is completed, holders of H Power common stock will become holders of Plug Power common stock. Plug Power’s business differs from that of H Power, and Plug Power’s results of operations, as well as the price of Plug Power’s common stock, may be affected by factors that are different from those affecting H Power’s results of operations and the price of H Power’s common stock. The factors that may affect the price of Plug Power’s common stock include Plug Power’s reliance on its relationship with certain affiliates of General Electric, market acceptance of Plug Power’s fuel cell systems, Plug Power’s ability to lower the cost of its fuel cell systems and demonstrate their reliability, competitive factors, such as price competition and competition from other power technologies, and the cost and availability of components and parts for Plug Power’s fuel cell systems.

 

The market price of Plug Power common stock may decline as a result of the merger.

 

The market price of Plug Power common stock may decline as a result of the merger if:

 

    the integration of Plug Power and H Power is unsuccessful;

 

    Plug Power does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts or investors; or

 

    the effect of the merger on Plug Power’s financial results or condition is not consistent with the expectations of financial or industry analysts or investors.

 

The market price of Plug Power common stock could also decline as a result of factors related to the merger which may currently be unforeseen.

 

If H Power stockholders who receive Plug Power common stock in the merger sell that stock immediately, it could cause a decline in the market price of Plug Power common stock.

 

All of the shares of Plug Power common stock to be issued in the merger will be registered with the Securities and Exchange Commission and therefore will be immediately available for resale in the public market, except that shares issued in the merger to H Power stockholders who are affiliates of H Power before the merger or who become affiliates of Plug Power after the merger will be subject to certain restrictions on transferability. The estimated number of shares of Plug Power common stock to be issued to H Power stockholders in connection with the merger and immediately available for resale will equal approximately 17.8% of the number of outstanding shares of Plug Power common stock currently in the public market. H Power stockholders who are not affiliates may elect to sell the stock they receive immediately after the merger. As a result of future sales of such common stock, or the perception that these sales could occur, the market price of Plug Power common stock may decline and could decline significantly before or at the time the merger is completed or immediately thereafter. If this occurs, or if other holders of Plug Power common stock sell significant amounts of Plug Power common stock immediately after the merger is completed, these sales may cause a decline in the market price of Plug Power common stock.

 

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The termination fee and the restrictions on solicitation contained in the merger agreement and the terms of the voting agreements may discourage other companies from trying to acquire H Power.

 

Until the completion of the merger, and with some exceptions, H Power is prohibited from initiating or engaging in discussions with a third party regarding some types of extraordinary transactions involving H Power, such as a tender offer, merger, business combination or sale of any material assets or any securities of H Power. H Power has also agreed to pay a termination fee of $2,000,000 to Plug Power in specified circumstances and in certain other circumstances, to reimburse Plug Power’s out-of-pocket expenses, including legal, accounting, investment banking, printing and other fees, related to the merger. In addition, holders of approximately 10.7% of the outstanding H Power common stock as of February 10, 2003 have entered into agreements with Plug Power in which they agreed to vote in favor of the merger and against any competing proposal. These provisions could discourage other companies from trying to acquire H Power even though those other companies might be willing to offer greater value to H Power stockholders than Plug Power has offered in the merger. Payment of the termination fee or Plug Power’s out-of-pocket expenses could also have a material adverse effect on H Power’s financial condition.

 

Plug Power and H Power may waive one or more of the conditions to the merger without resoliciting stockholder approval for the merger.

 

Each of the conditions to Plug Power’s and H Power’s obligations to complete the merger may be waived, in whole or in part, to the extent permitted by applicable laws, by agreement of Plug Power and H Power. The boards of directors of Plug Power and H Power will evaluate the materiality of any such waiver to determine whether amendment of this document and resolicitation of proxies is warranted. In the event that the board of directors of Plug Power or H Power determines any such waiver is not sufficiently material to warrant resolicitation of stockholders, the applicable company will have the discretion to complete the merger without seeking further stockholder approval.

 

If the conditions to the merger are not met or waived, the merger will not occur.

 

Specified conditions must be satisfied or waived to complete the merger. These conditions are described in detail in the merger agreement. Plug Power and H Power cannot assure you that each of the conditions will be satisfied. If the conditions are not satisfied or waived, the merger will not occur or will be delayed, and Plug Power and H Power each may lose some or all of the intended benefits of the merger.

 

Certain directors and executive officers of H Power have special interests in the merger that may influence them to support and approve the merger.

 

Certain directors and executive officers of H Power have interests in the merger that are in addition to, or different than, their interests solely as H Power stockholders. These interests include the following:

 

    the accelerated vesting of certain stock options held by certain non-employee directors of H Power as a result of the merger;

 

    the receipt of severance payments by certain executive officers in the event that such individuals resign or terminate their employment with H Power subsequent to the signing of the merger agreement;

 

    the receipt of payments, pursuant to a termination agreement by Energy Co-Opportunity, Inc. and ECO Fuel Cells, LLC, which has a representative on the H Power board of directors;

 

    the engagement of Lehman Brothers, a vice-chairman of which is a director of H Power’s board of directors, as H Power’s financial advisor in connection with the merger; and

 

    the receipt of ongoing indemnification and insurance coverage with respect to acts taken and omissions to take action in their capacities as directors and officers of H Power prior to the effective time of the merger.

 

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The H Power board of directors was aware of these interests when it approved the merger agreement and the merger. For a more detailed description of these interests, see “The Merger and Related Transactions— Consideration of the Merger by H Power’s Board of Directors—Interests of H Power’s Directors and Officers in the Merger” beginning on page 70 of this joint proxy statement/prospectus.

 

After the merger, stockholders of H Power will have different rights that may be less advantageous than their current rights.

 

Upon completion of the merger, the stockholders of H Power will become Plug Power stockholders. Differences in H Power’s certificate of incorporation and bylaws and Plug Power’s certificate of incorporation and bylaws will result in changes to the rights of H Power stockholders when they become Plug Power stockholders. See “Comparison of Rights of Holders of Plug Power Common Stock and H Power Common Stock” beginning on page 157. A stockholder of H Power may conclude that his, her or its rights under Plug Power’s certificate of incorporation and bylaws are more limited than his, her or its current rights under H Power’s certificate of incorporation and bylaws.

 

Purchase accounting treatment and the impact of amortization of intangibles with definite lives relating to the merger could adversely affect Plug Power’s operating results.

 

The merger will be accounted for under the purchase method of accounting and Plug Power will be considered the acquiror of H Power for accounting purposes. Accordingly, the historical financial statements of Plug Power will continue to be the historical financial statements of the combined company following the merger and H Power will be included in the ongoing results of operations prospectively from the date of the consummation of the merger. Under purchase accounting, Plug Power will record the following as the cost of acquiring the business of H Power:

 

  (1)   the sum of the market value of Plug Power common stock issued in connection with the merger;

 

  (2)   the fair value of H Power stock options assumed by Plug Power; and

 

  (3)   the amount of direct transaction costs incurred by Plug Power.

 

Plug Power will allocate the cost of the items described in (1), (2) and (3) above to the individual assets acquired and liabilities assumed, including intangible assets such as acquired technology, based on their respective fair values. Intangible assets, including intangibles with indefinite lives from acquisitions are evaluated annually to determine whether any portion of the remaining balance of such indefinite lived intangibles may not be recoverable. The amount of purchase cost allocated to other intangibles for accounting purposes is estimated to be approximately $4.8 million, computed using the estimated purchase price of $48.4 million. If it is determined in the future that a portion of these intangibles is impaired, Plug Power will be required to write off that portion which could decrease the net income (or alternatively increase the net loss) of Plug Power in the future, and this could have a material adverse effect on the market value of Plug Power common stock following the completion of the merger. These amounts are only estimates, however, and actual amounts may differ from these estimates.

 

Risks Related to Plug Power and the Combined Company

 

The following risks relate to Plug Power prior to the merger as well as to the combined company of Plug Power and H Power subsequent to the merger. As a result, all references to Plug Power in this section shall be deemed to also be references to the combined company of Plug Power and H Power subsequent to the merger.

 

Plug Power may never complete the research and development of commercially viable stationary fuel cell systems.

 

Plug Power is a development stage company. Plug Power does not know when or whether it will successfully complete research and development of commercially viable stationary fuel cell systems. Plug Power

 

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has produced and is currently demonstrating a number of systems. Plug Power must decrease the costs of its components and subsystems, improve its overall reliability and efficiency, and ensure its safety. Although Plug Power has sold a limited number of its initial products, it must complete substantial additional research and development on its systems before it will have a large-scale commercially viable product. Because development of Plug Power’s fuel cell systems proceeded more slowly than it anticipated, Plug Power has amended its distribution agreement with GE Fuel Cell Systems on three occasions to revise the performance specifications and prices and to extend the delivery schedule for the products covered by that agreement. If development of Plug Power’s fuel cell systems proceeds more slowly than currently anticipated, additional amendments of Plug Power’s distribution agreement with GE Fuel Cell Systems may be necessary. There can be no assurance that GE Fuel Cell Systems will agree to such amendments on terms that are favorable to Plug Power, or at all. In addition, while Plug Power is conducting tests to predict the overall life of its systems, it will not have run its systems over its projected useful life prior to large-scale commercialization. As a result, Plug Power cannot be sure that its systems will last as long as predicted, resulting in possible warranty claims and commercial failures.

 

Plug Power has only been in business for a short time, and your basis for evaluating Plug Power is limited.

 

Plug Power was formed in June 1997 to further the research and development of stationary fuel cell systems. While Plug Power delivered its initial product in the third quarter of 2001, it does not expect to be profitable for at least the next several years. Accordingly, there is only a limited basis upon which you can evaluate Plug Power’s business and prospects. As an investor in Plug Power’s common stock, you should consider the challenges, expenses and difficulties that Plug Power will face as a development stage company seeking to develop and manufacture a new product.

 

Plug Power has incurred losses and anticipates continued losses for at least the next several years.

 

As of September 30, 2002, Plug Power had an accumulated deficit of $242.8 million. Plug Power has not achieved profitability and expects to continue to incur net losses until it can produce sufficient revenue to cover its costs. The total cost to produce Plug Power’s initial products is currently higher than its sales price. Furthermore, Plug Power anticipates that it will continue to incur losses until it can produce and sell its fuel cell systems on a large-scale and cost-effective basis. Even if Plug Power does achieve profitability, it may be unable to sustain or increase its profitability in the future.

 

Available market for fuel cell systems may never develop or may take longer to develop than Plug Power anticipates.

 

Fuel cell systems for residential, commercial and industrial applications represent an emerging market, and Plug Power does not know the extent to which its targeted distributors and resellers will want to purchase them and whether end-users will want to use them. If a viable market fails to develop or develops more slowly than Plug Power anticipates, it may be unable to recover the losses it will have incurred to develop its product and may be unable to achieve profitability. The development of a viable market for Plug Power’s systems may be impacted by many factors which are out of its control, including:

 

    the cost competitiveness of fuel cell systems,

 

    the future costs of natural gas, propane and other fuels expected to be used by Plug Power’s systems,

 

    consumer reluctance to try a new product,

 

    consumer perceptions of Plug Power’s systems’ safety,

 

    regulatory requirements, and

 

    the emergence of newer, more competitive technologies and products.

 

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Plug Power has no experience manufacturing fuel cell systems on a large-scale commercial basis.

 

To date, Plug Power has focused primarily on research and development and has no experience manufacturing fuel cell systems on a large-scale commercial basis. In 2000, Plug Power completed construction of its 50,000 square foot manufacturing facility, and it is continuing to develop its manufacturing capabilities and processes. Plug Power does not know whether or when it will be able to develop efficient, low-cost manufacturing capabilities and processes that will enable it to meet the quality, price, engineering, design and production standards or production volumes required to successfully market its fuel cell systems. Even if Plug Power is successful in developing its manufacturing capabilities and processes, it does not know whether it will do so in time to meet its product commercialization schedule or to satisfy the requirements of its distributors or customers.

 

Plug Power is heavily dependent on its relationship with GE Fuel Cell Systems and its commitment to develop the fuel cell market.

 

Plug Power believes that a substantial portion of its future revenue will be derived from sales of products to GE Fuel Cell Systems. Under the terms of Plug Power’s current distribution agreement, GE Fuel Cell Systems has worldwide rights to market, distribute, install and service Plug Power’s proton exchange membrane fuel cell systems designed for stationary applications other than in the states of Illinois, Indiana, Michigan and Ohio. Under Plug Power’s distribution agreement, it will serve as GE Fuel Cell Systems’ exclusive supplier of the proton exchange membrane fuel cell systems and related components meeting the specifications set forth in the distribution agreement.

 

Plug Power’s ability to successfully sell its fuel cell systems is heavily dependent upon GE Fuel Cell Systems’ sales, distribution and service capabilities. Although Plug Power owns a minority interest in GE Fuel Cell Systems, it cannot control the operations or business decisions of GE Fuel Cell Systems. Any change in Plug Power’s relationship with GE Fuel Cell Systems, whether as a result of market, economic or competitive pressures, including an inability to satisfy its contractual obligations to GE Fuel Cell Systems or any decision by General Electric to alter its commitment to GE Fuel Cell Systems or its fuel cell technology in favor of other fuel cell technologies, to develop fuel cell systems targeted at different markets than Plug Power’s or to focus on different energy product solutions could harm Plug Power’s reputation and potential earnings by depriving Plug Power of the benefits of GE Fuel Cell Systems’ sales and distribution network and service capabilities.

 

Plug Power’s distribution agreement with GE Fuel Cell Systems prohibits GE Fuel Cell Systems from selling or distributing proton exchange membrane fuel cell systems and related components manufactured by parties other than Plug Power. The distribution agreement, and therefore the prohibition, expires on December 31, 2014, subject to renewal, and terminates upon dissolution of GE Fuel Cell Systems or termination of GE Fuel Cell Systems’ limited liability company agreement. In addition, the distribution agreement may be terminated for cause, as defined in the limited liability company agreement. GE Fuel Cell Systems would be dissolved in the event of: (1) mutual consent of all of the members; (2) the bankruptcy of any member; (3) an involuntary bankruptcy or (4) termination of the limited liability company agreement of GE Fuel Cell Systems due to a material breach or upon termination of the distribution agreement or an ancillary agreement (as defined in the limited liability company agreement). Plug Power is not aware of any plans or intentions by GE Fuel Cell Systems to take any of these actions such that it may begin marketing products other than Plug Power products, including products that compete with Plug Power products. In addition, GE Power Systems, the division of General Electric Company which controls the majority owner of GE Fuel Cell Systems (GE MicroGen, Inc.), has agreed not to sell or distribute proton exchange membrane fuel cell systems and related components manufactured by parties other than Plug Power through any entity other than GE Fuel Cell Systems. However, GE Power Systems is not prohibited from developing non-proton exchange membrane fuel cell systems and distributed energy systems that would compete directly or indirectly against the proton exchange membrane fuel cell systems Plug Power manufactures. While at the present time Plug Power is not aware of any such current products, or plans or intentions to manufacture such

 

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products, by GE Power Systems, GE Power Systems may not provide Plug Power with information concerning such developments. The development of different energy product solutions by GE Power Systems could harm Plug Power’s reputation and potential earnings by providing potential customers with an alternative to Plug Power’s proton exchange membrane fuel cell systems.

 

Plug Power has not fully developed and produced the product that it has agreed to sell to GE Fuel Cell Systems.

 

Plug Power’s initial product does not meet the specifications required by its current agreement with GE Fuel Cell Systems. Economic and technical difficulties may prevent Plug Power from completing development of products meeting these specifications and delivering them on schedule to GE Fuel Cell Systems.

 

Plug Power’s distribution agreement with GE Fuel Cell Systems has been amended on three occasions. The most recent amendment in August 2001, further amended the distribution agreement to extend its term through 2014 and to replace the product specifications, prices and delivery schedule in the current agreement with a high-level, multi-generation product plan with subsequent modifications subject to mutual agreement.

 

Plug Power has not met in the past and may not meet in the future product development and commercialization milestones.

 

Plug Power has established both internally and in its distribution agreement with GE Fuel Cell Systems product development and commercialization milestones and dates for achieving development goals related to technology and design improvements. Plug Power uses these milestones to assess its progress toward developing commercially viable fuel cell systems. For example, 2000 was a milestone year for delivering to GE Fuel Cell Systems 485 units meeting pre-commercial specifications set forth in Plug Power’s agreement with them on a take-or-pay basis for a total of $10.3 million in revenue. During the second quarter of 2000, Plug Power determined that the specifications of the then current pre-commercial units did not conform to the specifications originally agreed upon with GE Fuel Cell Systems and that it would not meet that milestone. Additionally, Plug Power set internal milestones of building 500 developmental and pre-commercial units in 2000, having commercial units available in 2001 and achieving profitability by 2003. During 2000, Plug Power produced a total of only 113 systems, delayed availability of its initial product and announced that it would not be profitable for at least the next several years.

 

Delays in Plug Power’s product development will likely have a material impact on its commercialization schedule.

 

If Plug Power does experience delays in meeting its development goals or if its systems exhibit technical defects or if Plug Power is unable to meet cost or performance goals, including power output, useful life and reliability, its commercialization schedule will be delayed. In this event, potential purchasers of Plug Power’s initial commercial systems may choose alternative technologies and any delays could allow potential competitors to gain market advantages. Plug Power cannot assure you that it will successfully achieve its milestones in the future.

 

Plug Power depends on third parties for certain aspects of product development, manufacturing and the development and supply of key components for its products.

 

While Plug Power has entered into relationships with suppliers of key components, it does not know when or whether it will secure supply relationships for all required components and subsystems for its fuel cell systems, or whether such relationships will be on terms that will allow Plug Power to achieve its objectives. Plug Power’s business, prospects, results of operations or financial condition could be harmed if it fails to secure relationships with entities which can develop or supply the required components for its systems. Additionally, the agreements governing Plug Power’s current relationships allow for termination by its supply partners under a number of circumstances.

 

Plug Power will rely on its partners to develop and provide components for its fuel cell systems.

 

A supplier’s failure to develop and supply components in a timely manner, or to develop or supply components that meet Plug Power’s quality, quantity or cost requirements, or Plug Power’s inability to obtain substitute sources of these components on a timely basis or on terms acceptable to Plug Power, could harm its

 

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ability to manufacture its fuel cell systems. In addition, to the extent that Plug Power’s supply partners use technology or manufacturing processes that are proprietary, Plug Power may be unable to obtain comparable components from alternative sources.

 

In addition, platinum is a key material in Plug Power’s proton exchange membrane fuel cells. Platinum is a scarce natural resource and Plug Power is dependent upon a sufficient supply of this commodity. While Plug Power does not anticipate significant near or long term shortages in the supply of platinum, such shortages could adversely affect its ability to produce commercially viable fuel cell systems or significantly raise its cost of producing its fuel cell systems.

 

Plug Power faces intense competition and may be unable to compete successfully.

 

The markets for electric power generators are intensely competitive. There are a number of companies located in the United States, Canada and abroad that are developing proton exchange membrane fuel cells and other fuel cell technologies, such as phosphoric acid fuel cells, molten carbonate fuel cells, solid oxide fuel cells and alkaline fuel cells. Some of Plug Power’s competitors are much larger than it is and may have the manufacturing, marketing and sales capabilities to complete research, development and commercialization of a commercially viable fuel cell system more quickly and effectively than it can.

 

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 engines and microturbines, as well as grid-supplied electric power. Many of these entities have substantially greater financial, research and development, manufacturing and marketing resources than Plug Power does.

 

Changes in government regulations and electric utility industry restructuring may affect demand for Plug Power’s fuel cell systems.

 

The market for electric power generation products is heavily influenced by federal and state governmental regulations and policies concerning the electric utility industry. The loosening of current regulatory policies 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 demand for Plug Power’s products. Plug Power cannot predict how the deregulation and restructuring of the industry will affect the market for stationary fuel cell systems.

 

Plug Power’s business may become subject to future government regulation which may impact its ability to market its products.

 

Plug Power does not believe that its products will be subject to existing federal and state regulations governing traditional electric utilities and other regulated entities. Plug Power believes that its products and their installation will be subject to oversight and regulation at the local level in accordance with state and local ordinances relating to, among others, building codes, public safety and electrical and gas pipeline connections. Such regulation may depend, in part, upon whether a fuel cell system is placed outside or inside a home or facility. At this time, Plug Power does not know what requirements, if any, each jurisdiction will impose upon its products or their installation. Plug Power also does not know the extent to which any new regulations may impact its ability to distribute, install and service its products. In the future, federal, state or local government entities or competitors may seek to impose regulations. Any new government regulation of Plug Power’s products, whether at the federal, state or local level, including any regulations relating to installation and servicing of its products, may increase its costs and the price of its systems.

 

Utility companies could place barriers on Plug Power’s entry into the residential 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 Plug Power’s systems and could make its residential systems less desirable, thereby harming its revenue and profitability.

 

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Several states, including Texas, New York and California, have created and adopted or are in the process of creating or adopting their own interconnection regulations covering both technical and financial requirements for interconnection to utility grids. Depending on the complexities of the requirements, installation of Plug Power’s systems may become burdened with additional costs and have a negative impact on Plug Power’s ability to sell systems. There is also a burden in having to track the requirements of individual states and design equipment necessary to comply with the varying standards. Further, no universal standard has been adopted covering the connection of distributed generation devices to utility grids.

 

Alternatives to Plug Power’s technology could render its systems obsolete prior to commercialization.

 

Plug Power’s systems are one of a number of alternative energy products being developed as supplements to the electric power grid that have potential residential, commercial and industrial applications, including microturbines, solar power, 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 power grid or other fuel cell technologies may render Plug Power’s systems obsolete prior to commercialization.

 

The hydrocarbon fuels and other raw materials on which Plug Power’s systems rely may not be readily available or available on a cost-effective basis.

 

The ability of Plug Power’s systems to produce electric power depends largely on the availability of natural gas and propane. If these fuels are not readily available, or if their prices are such that electric power produced by Plug Power’s systems costs more than electric power provided through the grid, its systems would be less attractive to potential users.

 

Plug Power’s fuel cell systems use flammable fuels which are inherently dangerous substances.

 

Plug Power’s fuel cell systems use natural gas in a catalytic reaction which produces less heat than a typical gas furnace. While Plug Power’s fuel cell systems do not use this fuel in a combustion process, natural gas is a flammable fuel that could leak in a home or office and combust if ignited by another source. Further, while Plug Power is not aware of any accidents involving its products, any such accidents involving Plug Power’s products or other products using similar flammable fuels could materially suppress demand for, or heighten regulatory scrutiny of, Plug Power’s products.

 

Product liability or defects could negatively impact Plug Power’s results of operations.

 

Any liability for damages resulting from malfunctions or design defects could be substantial and could materially adversely affect Plug Power’s business and results of operations. In addition, a well-publicized actual or perceived problem could adversely affect the market’s perception of Plug Power’s products resulting in a decline in demand for its products and could divert the attention of its management, which may materially adversely affect its financial condition and results of operations.

 

Plug Power must lower the cost of its fuel cell systems and demonstrate its reliability.

 

The fuel cell systems Plug Power develops currently cost significantly more than the cost of many established competing technologies. If Plug Power is unable to produce fuel cell systems that are competitive with competing technologies in terms of price, reliability and longevity, consumers will be unlikely to buy products containing its fuel cell systems. The price of fuel cell systems depends largely on material and manufacturing costs. Plug Power cannot guarantee that it will be able to lower these costs to the level where it will be able to produce a competitive product or that any product produced using lower cost materials and manufacturing processes will not suffer from a reduction in performance, reliability and longevity.

 

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Failure of Plug Power’s field tests could negatively impact demand for its products.

 

Plug Power is currently field testing a number of its systems and it plans to conduct additional field tests in the future. Plug Power may encounter problems and delays during these field tests for a number of reasons, including the failure of its technology or the technology of third parties, as well as its failure to maintain and service its systems properly. Many of these potential problems and delays are beyond Plug Power’s control. Any problem or perceived problem with Plug Power’s field tests could materially harm its reputation and impair market acceptance of, and demand for, its products.

 

Plug Power may be unable to raise additional capital to complete its product development and commercialization plans.

 

Plug Power’s cash requirements depend on numerous factors, including completion of its product development activities, ability to commercialize its fuel cell systems and market acceptance of its systems. Plug Power expects to devote substantial capital resources to continue development programs, establish a manufacturing infrastructure and develop manufacturing processes. Plug Power believes that it will need to raise additional funds to achieve commercialization of its products. However, Plug Power does not know whether it will be able to secure additional funding, or funding on acceptable terms, to pursue its commercialization plans. If additional funds are raised through the issuance of equity securities or additional acquisitions of entities with cash reserves such as H Power, the percentage ownership of Plug Power’s then current stockholders will be reduced. If adequate funds are not available to satisfy either short- or long-term capital requirements, Plug Power may be required to limit operations in a manner inconsistent with its development and commercialization plans, which could affect operations in future periods.

 

Plug Power will need to establish additional strategic relationships to complete its product development and commercialization plans.

 

Plug Power believes that it will need to enter into additional strategic relationships in order to complete its current product development and commercialization plans on schedule. In particular, Plug Power may require a partner to assist in developing commercially viable fuel cell systems that produce in the range of 25 to 100 kW of electric power. If Plug Power is unable to identify or enter into a satisfactory agreement with potential partners, it may not be able to complete its product development and commercialization plans on schedule or at all. Plug Power may also need to scale back these plans in the absence of a partner, which would adversely affect its future prospects. In addition, any arrangement with a strategic partner may require Plug Power to issue a material amount of equity securities to the partner or commit significant financial resources to fund its product development efforts in exchange for their assistance or the contribution to Plug Power of intellectual property. Any such issuance of equity securities would reduce the percentage ownership of Plug Power’s then current stockholders.

 

Future acquisitions may disrupt Plug Power’s business, distract its management and reduce the percentage ownership of Plug Power stockholders.

 

Plug Power may engage in acquisitions. Plug Power may not be able to identify suitable acquisition candidates. If Plug Power does identify suitable candidates, it may not be able to acquire them on commercially acceptable terms or at all. If Plug Power acquires another company, it may not be able to successfully integrate the acquired business into its existing business in a timely and non-disruptive manner. Plug Power may have to devote a significant amount of time and management and financial resources to do so. Even with this investment of management and financial resources, an acquisition may not produce the desired revenues, earnings or business synergies. In addition, an acquisition may reduce the percentage ownership of Plug Power’s then current stockholders. If Plug Power fails to integrate the acquired business effectively or if key employees of that business leave, the anticipated benefits of the acquisition would be jeopardized. The time, capital and management and other resources spent on an acquisition that fails to meet Plug Power’s expectations could cause

 

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its business and financial condition to be materially and adversely affected. In addition, from an accounting perspective, acquisitions can involve non-recurring charges and amortization of significant amounts of intangible assets that could adversely affect Plug Power’s results of operations.

 

Plug Power may not be able to protect important intellectual property.

 

Proton exchange membrane fuel cell technology was first developed in the 1950s, and Plug Power does not believe that it can achieve a significant proprietary position in the basic technologies currently used in proton exchange membrane fuel cell systems. Similarly, fuel processing technology has been practiced on a large scale in the petrochemical industry for decades. However, Plug Power’s ability to compete effectively against other fuel cell companies will depend, in part, on its ability to protect its proprietary technology, systems designs and manufacturing processes. Plug Power does not know whether any of its 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 its technology or processes. Even if all of Plug Power’s patent applications are issued and are sufficiently broad, they may be challenged or invalidated. Plug Power could incur substantial costs in prosecuting or defending patent infringement suits. While Plug Power has attempted to safeguard and maintain its proprietary rights, Plug Power does not know whether it has been or will be completely successful in doing so. Moreover, patent applications filed in foreign countries may be subject to laws, rules and procedures that are substantially different from those of the United States, and any resulting foreign patents may be difficult and expensive to enforce.

 

Plug Power may have difficulty managing change in its operations.

 

Plug Power continues to undergo rapid change in the scope and breadth of its operations as it advances the development of its products. Such rapid change is likely to place a significant strain on Plug Power’s senior management team and other resources. Plug Power will be required to make significant investments in its engineering, logistics, financial and management information systems and to motivate and effectively manage its employees. Plug Power’s business, prospects, results of operations or financial condition could be harmed if it encounters difficulties in effectively managing the budgeting, forecasting and other process control issues presented by such a rapid change.

 

Plug Power faces risks associated with its plans to market, distribute and service its products internationally.

 

Plug Power intends to market, distribute and service its proton exchange membrane fuel cell systems for stationary applications internationally through GE Fuel Cell Systems. Plug Power has limited experience developing, and no experience manufacturing its products to comply with the commercial and legal requirements of international markets. Plug Power’s success in international markets will depend, in part, on GE Fuel Cell Systems’ ability to secure relationships with foreign sub-distributors and Plug Power’s ability to manufacture products that meet foreign regulatory and commercial requirements. Additionally, Plug Power’s 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.

 

Further, Plug Power’s competitors may independently develop or patent technologies or processes that are substantially equivalent or superior to Plug Power’s. If Plug Power is found to be infringing third party patents, Plug Power could be required to pay substantial royalties and/or damages, and Plug Power does not know whether it 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 Plug Power’s fuel cell systems, and could necessitate the expenditure of significant resources to develop or acquire non-infringing intellectual property.

 

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Plug Power relies, in part, on contractual provisions to protect its trade secrets and proprietary knowledge.

 

Confidentiality agreements to which Plug Power is a party may be breached, and Plug Power may not have adequate remedies for any breach. Plug Power’s trade secrets may also be known without breach of such agreements or may be independently developed by competitors. Plug Power’s inability to maintain the proprietary nature of its technology and processes could allow its competitors to limit or eliminate any competitive advantages Plug Power may have and prevent it from being the first company to commercialize residential fuel cell systems.

 

Plug Power’s government contracts could restrict its ability to effectively commercialize its technology.

 

Some of Plug Power’s technology has been developed under government funding by the United States and by other countries. In some cases, government agencies in the United States can require Plug Power to obtain or produce components for its systems from sources located in the United States rather than foreign countries. Plug Power’s contracts with government agencies are also subject to the risk of termination at the convenience of the contracting agency, potential disclosure of its 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 Plug Power’s sourcing of components or the exercise of march-in rights could harm its business, prospects, results of operations or financial condition. In addition, under the Freedom of Information Act, any documents that Plug Power has submitted to the government or to a contractor under a government funding arrangement are subject to public disclosure that could compromise Plug Power’s intellectual property rights unless such documents are exempted as trade secrets or as confidential information and treated accordingly by such government agencies.

 

Plug Power’s future plans could be harmed if it is unable to attract or retain key personnel.

 

Plug Power has attracted a highly skilled management team and specialized workforce, including scientists, engineers, researchers, manufacturing and marketing professionals. Plug Power’s future success will depend, in part, on its ability to attract and retain qualified management and technical personnel. Plug Power does not know whether it will be successful in hiring or retaining qualified personnel. Plug Power’s inability to hire qualified personnel on a timely basis, or the departure of key employees, could materially and adversely affect its development and commercialization plans and, therefore, its business, prospects, results of operations and financial condition.

 

GE MicroGen and DTE Energy have representatives on Plug Power’s board of directors.

 

Under Plug Power’s agreement with GE MicroGen it is required to use its best efforts to cause one individual nominated by GE Power Systems, an operating business of General Electric Company, to be elected to Plug Power’s board of directors for as long as its distribution agreement with GE Fuel Cell Systems remains in effect. GE MicroGen is the majority owner of GE Fuel Cell Systems, with Plug Power owning the remaining minority position. Currently, John G. Rice serves on Plug Power’s board of directors as the GE Power Systems nominee to its board. In addition, a current employee of DTE Energy, Anthony F. Earley, Jr., and a former employee of DTE Energy, Larry G. Garberding, currently serve on Plug Power’s board of directors. Both GE Fuel Cell Systems and DTE Energy Technologies, Inc., a wholly-owned subsidiary of DTE Energy, have entered into distribution agreements with Plug Power.

 

Plug Power is subject to a securities class action litigation.

 

In September 2000, a shareholder class action complaint was filed in the federal district court for the Eastern District of New York alleging that Plug Power and various of its officers and directors violated certain federal securities laws by failing to disclose certain information concerning Plug Power’s products and future prospects.

 

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The action was brought on behalf of a class of purchasers of Plug Power’s stock who purchased the stock between February 14, 2000 and August 2, 2000. Subsequently, fourteen additional complaints with similar allegations and class periods were filed. By order dated October 30, 2000, the court consolidated the complaints into one action, entitled Plug Power Inc. Securities Litigation, CV-00-5553(ERK)(RML). By order dated January 25, 2001, the Court appointed lead plaintiffs and lead plaintiffs’ counsel. Subsequently, the plaintiffs served a consolidated amended complaint. The consolidated amended complaint extends the class period to begin on October 29, 1999 and alleges claims under the Securities Act of 1933 and the Exchange Act of 1934, and Rule 10b-5 promulgated under the Exchange Act of 1934. Subsequently, plaintiffs withdrew their claims under the Securities Act of 1933. Plaintiffs allege that the defendants made misleading statements and omissions regarding the state of development of Plug Power’s technology in a registration statement issued in connection with Plug Power’s initial public offering (IPO) and in subsequent press releases. Plug Power served its motion to dismiss the claims in May 2001. By order dated January 21, 2003, the Court dismissed all claims relating to pre-IPO press releases, the IPO prospectus and all but three post-IPO press releases. The Court ruled that the three remaining press releases raised questions of fact that could not be resolved on a motion to dismiss. The Court also denied the motion to dismiss the claims against the individual defendants at this time. Plug Power believes that the allegations in the consolidated amended complaint are without merit and intends to vigorously defend against the claims. However, litigation is inherently uncertain and there can be no assurances as to the ultimate outcome or effect of these actions. If the plaintiffs were to prevail, such an outcome would have a material adverse effect on Plug Power’s financial condition, results of operations and liquidity.

 

Provisions of Delaware law and of Plug Power’s charter and by-laws may make a takeover of Plug Power difficult.

 

Provisions in Plug Power’s 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 of Plug Power which is opposed by Plug Power’s management and its board of directors. For example, Plug Power’s certificate of incorporation authorizes its board of directors to issue shares of Plug Power preferred stock in one or more series and to fix the designations, powers, preferences, rights, qualifications, limitations and restrictions of such preferred stock. As a result of such provisions, Plug Power stockholders who might desire to participate in a tender offer, change in control or takeover attempt may not have an opportunity to do so. Plug Power also has a staggered board of directors which makes it difficult for Plug Power stockholders to change the composition of the board of directors in any one year. These anti-takeover provisions could substantially impede the ability of Plug Power stockholders to benefit from a change in control or a change in the management of Plug Power or its board of directors.

 

Plug Power’s stock price has been and could remain volatile.

 

The market price of Plug Power’s common stock has historically experienced and may continue to experience significant volatility. Since Plug Power’s initial public offering in October 1999 through  February 11, 2003, the market price of its common stock has fluctuated from a high of $156.50 per share in the first quarter of 2000, to a low of $3.39 per share in the fourth quarter of 2002. Plug Power’s progress in developing and commercializing its products, its quarterly operating results, changes in general conditions in the economy or the financial markets and other developments affecting Plug Power or its competitors could cause the market price of its common stock to fluctuate substantially. In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has affected the market prices of securities issued by many companies for reasons unrelated to their operating performance and may adversely affect the price of Plug Power’s common stock. In addition, Plug Power may be the subject of additional securities class action litigation as a result of volatility in the price of its stock, which could result in substantial costs and diversion of management’s attention and resources and could harm its stock price, business, prospects, results of operations and financial condition.

 

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Plug Power’s failure to comply with Nasdaq’s listing standards could result in its delisting by Nasdaq from the Nasdaq National Market and severely limit the ability to sell Plug Power’s common stock.

 

Plug Power’s common stock is currently traded on the Nasdaq National Market. Under Nasdaq’s listing maintenance standards, if the closing bid price of Plug Power’s common stock is under $1.00 per share for 30 consecutive trading days, Nasdaq will notify Plug Power that it may be delisted from the Nasdaq National Market. If the closing bid price of Plug Power’s common stock does not thereafter regain compliance for a minimum of 10 consecutive trading days during the 90 days following notification by Nasdaq, Nasdaq may delist Plug Power’s common stock from trading on the Nasdaq National Market. There can be no assurance that Plug Power’s common stock will remain eligible for trading on the Nasdaq National Market. In addition, if Plug Power’s common stock is delisted, Plug Power’s stockholders would not be able to sell Plug Power’s common stock on the Nasdaq National Market, and their ability to sell any of Plug Power’s common stock would be severely, if not completely, limited.

 

Risks Related to H Power

 

The following matters, among others, may have a material adverse effect on the business, financial condition, liquidity, results of operations or prospects, financial or otherwise, of H Power, particularly if the stockholders of H Power do not vote to approve the merger agreement at the special meeting of H Power’s stockholders.

 

In order to maximize the merger consideration to be received by its stockholders, H Power is implementing a restructuring plan to reduce operating costs, which will negatively impact the operation of H Power’s business if the merger is not consummated.

 

Pursuant to the merger agreement, the merger consideration to be received by H Power’s stockholders will be increased or decreased depending on, among other things, the amount of cash and cash equivalents remaining in H Power prior to the effective date of the merger. See “The Merger and Related Transactions—The Merger Agreement—Conversion of H Power Common Stock in the Merger” beginning on page 79 of this joint proxy statement/prospectus for a discussion of the determination of the merger consideration. In this regard, H Power is enacting a restructuring plan to reduce the amount of cash it expends, including without limitation:

 

    the termination of employment arrangements with certain employees;

 

    reductions in expenditures for research and development;

 

    the closing of the New Jersey facilities;

 

    considering the disposal of certain non-cash tangible assets, the sublease of unused space, and the entering into of non-exclusive licenses of certain of its technologies, subject to Plug Power’s consent to the extent required; and

 

    the termination of certain customer contracts.

 

In the event the merger is not consummated, such actions will make it more difficult to continue the operation of H Power’s business at the same level as it existed prior to the execution of the merger agreement. Some of the difficulties H Power may encounter include, among other things:

 

    the inability to retain employees or hire new employees with similar qualifications on a timely basis;

 

    with regard to the closing of certain facilities, the inability of H Power to successfully transfer its fuel cell stack technology from the facility being closed to another facility;

 

    delays in further development of H Power’s residential fuel cell systems due to reductions in spending relating to research and development; and

 

    delays in the timely production of its fuel cell products due to the suspension of field testing pursuant to certain customer contracts.

 

If the merger is not consummated, these and other factors resulting from the implementation of the restructuring plan may negatively affect H Power’s business, prospects, results of operations and financial condition.

 

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H Power has agreed to terminate certain agreements with Energy Co-Opportunity, Inc. as of the effective date of the merger, and H Power’s relationship with Energy Co-Opportunity, Inc. may be negatively impacted if the merger is not consummated.

 

On November 8, 2002, H Power entered into a termination agreement with Energy Co-Opportunity, Inc., or ECO, which, among other things, terminates all of H Power’s prior agreements with ECO as of the effective date of the merger. Prior to executing this termination agreement, H Power anticipated that a substantial portion of H Power’s revenues over the next 2 to 3 years would be derived from sales of H Power’s fuel cell systems to ECO. H Power has been heavily dependent on ECO to effect the sale, distribution and servicing of H Power’s products. In anticipation of the merger, ECO has discontinued its sales and marketing effort relating to H Power’s products. In the event the merger is not consummated, H Power’s existing agreements with ECO would not be terminated. However, H Power’s business relationship with ECO will be negatively affected or discontinued due to the anticipated termination of H Power’s ECO relationship. If the merger does not occur, H Power’s entry into the termination agreement will have a detrimental effect on H Power’s ability to generate revenues for sales of H Power’s fuel cell products, not only with regard to ECO but also with regard to the development of H Power’s products for sales to other customers. See “The Merger and Related Transactions—Other Material Agreements Relating to the Merger—ECO Termination Agreement” beginning on page 100 of this joint proxy statement/prospectus.

 

H Power may never successfully complete the research and development required to commercialize H Power’s residential fuel cell systems.

 

H Power is currently in the research and development stage of its residential co-generation fuel cell systems. H Power has shipped and installed to ECO and other customers a limited number of alpha and beta fuel cell units for testing purposes. H Power must significantly decrease the costs of its fuel cell systems and improve their overall efficiency in order to begin viable commercialization of its residential fuel cell products. In addition, improvements to H Power’s residential fuel cell systems will be more difficult as H Power implements its restructuring plan, which among other things, will significantly reduce or eliminate spending relating to research and development of its residential systems. H Power has not yet produced a commercially viable residential fuel cell system. H Power may not successfully complete its research and development program and accordingly H Power may never have commercial sales of its residential co-generation fuel cell products.

 

H Power has a history of losses since its inception, H Power expects future losses and H Power may never achieve or sustain profitability.

 

H Power has incurred net losses each year since H Power’s inception in 1989 and had an accumulated loss of approximately $111 million through November 30, 2002. H Power expects to continue to incur net losses at least through H Power’s fiscal year 2007 and these losses may be substantial. To implement its business strategy, H Power will have to incur a high level of fixed operating expenses and will continue to incur considerable research and development expenses and capital expenditures. Further, H Power expects the cost to produce its initial products will continue to be higher than their sales price. Accordingly, if H Power is unable to generate substantial revenues and positive cash flows, H Power will not achieve profitability. Even if H Power does achieve profitability, it may not be able to sustain or increase its profitability on a quarterly or annual basis. H Power’s ability to generate future revenues will depend on a number of factors, many of which are beyond H Power’s control. These factors include the rate of market acceptance of H Power’s products, regulatory developments and general economic trends. Due to these factors, H Power cannot anticipate with any degree of certainty what H Power’s revenues, if any, will be in future periods. You have limited historical financial data and operating results with which to evaluate H Power’s business and its prospects. As a result, you should consider H Power’s prospects in light of the early stage of H Power’s business in a new and rapidly evolving market.

 

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H Power’s direct hydrogen products represent an emerging technology which may give rise to problems regarding supply of component parts, commercial acceptance and government regulation.

 

H Power’s direct hydrogen products, such as the Emergency Power-AC, or EPAC, operating system, are fueled in part through compressed hydrogen cylinders. Distribution channels for hydrogen for some of H Power’s intended markets are in their infancy, which may make it difficult or expensive for H Power’s customers to obtain hydrogen for use with H Power’s products, thereby potentially affecting the marketability and profitability of H Power’s direct hydrogen products. Distribution of hydrogen cylinders is currently subject to specific regulation by the U.S. government. Should the government decide to impose changes in the regulations on the handling of compressed hydrogen cylinders, such regulations may affect the cost or availability of such cylinders, which could affect the marketability and profitability of H Power’s direct hydrogen products. Building codes and standards relating to the use of hydrogen may make it expensive or impossible for H Power’s customers to use hydrogen as a fuel in some of H Power’s intended markets. As H Power’s direct hydrogen products contain emerging technologies, there are currently few competitors with similar product offerings and a commercial market has not yet been established. In addition, H Power’s products use components which incorporate new technology, and it is possible that these components might be in short supply or may be discontinued by H Power’s current suppliers.

 

H Power may not be able to develop the necessary technology to introduce and market H Power’s products in a timely fashion, if at all.

 

H Power’s product and technology development efforts are subject to unanticipated and significant delays, expenses and technical or other problems, as well as the possible lack of funding to complete this development. H Power’s success will depend upon H Power’s products and technologies meeting acceptable cost and performance criteria, and upon their timely introduction into the marketplace. None of H Power’s proposed products and technologies may ever be successfully developed, and even if developed, they may not actually perform as designed. Failure to develop or significant delays in the development of H Power’s products and technology would have a material adverse effect on H Power’s ability to both sell H Power’s products and to generate sufficient cash to achieve profitability.

 

Failure of H Power’s field tests could negatively impact demand for H Power’s products.

 

Although H Power has suspended its field test program, it is continuing to test a number of its products that were already in the field. Through February 2003, certain beta stage residential co-generation units were undergoing continued field tests. H Power has encountered and may continue to encounter problems and delays during these field tests for a number of reasons, including the failure of its technology or the technology of third parties, as well as H Power’s failure to maintain and service its prototypes properly. Accordingly, any further delays, problems or perceived problems with H Power’s field tests could materially harm H Power’s reputation and impair market acceptance of, and demand for, H Power’s products.

 

Alternatives to H Power’s technology could render H Power’s products obsolete prior to initial commercial sales of H Power’s products.

 

Proton exchange membrane fuel cells represent one of a variety of alternative energy products being developed as a supplement to the electric grid that have potential residential, commercial and industrial applications. Other such products include solar power, wind power and other types of fuel cell technologies. Improvements to the existing electric transmission system are also being implemented. Technological advances in alternative energy products or other fuel cell technologies and improvements in the electric grid may render H Power’s fuel cell systems obsolete prior to commercialization.

 

H Power has no experience manufacturing fuel cells on a commercial basis.

 

While H Power has successfully produced prototype models of H Power’s fuel cells, H Power has focused primarily on research and development and has no experience manufacturing fuel cell systems on a commercial basis. In July 2001, H Power opened a 90,000 square foot manufacturing facility and H Power is continuing to

 

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develop its manufacturing capabilities and processes. H Power does not know whether or when it will be able to develop efficient manufacturing capabilities and processes that will enable it to meet the quality, price, engineering, design and production standards or production volumes required to successfully market its fuel cell systems at lower production costs. Even if H Power is successful in developing its manufacturing capabilities and processes, H Power may not be able to meet its commercialization schedule or to satisfy the requirements of its distributors or customers.

 

THE SPECIAL MEETING OF PLUG POWER’S STOCKHOLDERS

 

Plug Power is furnishing this joint proxy statement/prospectus to all stockholders of record of Plug Power common stock in connection with the solicitation of proxies by the Plug Power board of directors for use at the special meeting of Plug Power stockholders to be held on March 25, 2003, and at any adjournment or postponement of the special meeting. This joint proxy statement/prospectus also is being furnished by Plug Power to H Power’s stockholders as a prospectus for Plug Power common stock to be issued in connection with the merger.

 

Date, Time and Place of Meeting

 

The special meeting will be held at the Albany Marriott, 189 Wolf Road, Albany, New York on  March 25, 2003, at 10:00 a.m., local time.

 

Purpose of the Special Meeting

 

At the special meeting, and any adjournment or postponement thereof, Plug Power stockholders will be asked:

 

  1.   to consider and vote upon a proposal to approve the issuance of shares of common stock of Plug Power pursuant to the merger agreement;

 

  2.   to consider and vote upon a proposal to exchange options to purchase shares of common stock of Plug Power held by its employees for shares of restricted common stock of Plug Power, in accordance with the terms and conditions described in this joint proxy statement/prospectus; and

 

  3.   to transact any other business that may properly come before the special meeting and any adjournment or postponement of the special meeting.

 

A copy of the merger agreement is attached to this joint proxy statement/prospectus as Annex A. Plug Power stockholders are encouraged to read the merger agreement in its entirety and the other information contained in this joint proxy statement/prospectus carefully before deciding how to vote.

 

Record Date

 

The Plug Power board of directors has fixed the close of business on February 7, 2003 as the record date for determination of Plug Power stockholders entitled to notice of and to vote at the special meeting.

 

Votes Required for Approval of the Issuance of Shares of Common Stock of Plug Power

 

Although the approval of the stockholders of Plug Power is not required to effect the merger under Delaware general corporation law, Plug Power’s organizational documents or any other regulatory or listing requirements applicable to Plug Power, the board of directors of Plug Power has determined that the consummation of the merger shall be subject to the affirmative vote of the holders of a majority of the shares of Plug Power common stock present in person or by proxy at the special meeting of Plug Power stockholders on such matter. Holders of Plug Power common stock will be entitled to cast one vote per share of Plug Power common stock owned as of February 7, 2003, the record date for the Plug Power special meeting of stockholders at which the issuance of shares of Plug Power common stock pursuant to the merger agreement will be presented and voted upon.

 

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As of the close of business on the record date for the special meeting, 51,077,781 shares of Plug Power common stock were outstanding, and held by approximately 1,825 stockholders of record.

 

As of the close of business on the record date for the special meeting, directors and executive officers of Plug Power (and their respective affiliates) collectively owned approximately 49.6% of the outstanding shares of Plug Power common stock entitled to vote at the special meeting on the issuance of shares of Plug Power common stock pursuant to the merger agreement. This does not include 2,090,946 shares of Plug Power common stock issuable upon the exercise of presently exercisable options which these directors and officers beneficially own. If all of these stock options had been exercised prior to the record date for the special meeting, the directors and executive officers of Plug Power (and their respective affiliates) would collectively beneficially own approximately 51.6% of the outstanding shares of Plug Power common stock entitled to vote at the special meeting. None of Plug Power’s directors, officers or affiliates have entered into a voting agreement or have otherwise agreed or given notice of their intention to vote their shares of Plug Power common stock in favor of the merger. Accordingly, approval of the merger by Plug Power’s stockholders is not assured. For a discussion of the vote required with respect to the proposal to approve the stock option exchange see “Additional Proposal to be Acted on by Plug Power Stockholders” on page 118.

 

Quorum, Abstentions and Broker Non-Votes

 

A majority of shares of Plug Power entitled to vote as of the record date, present in person or represented by proxy, constitutes a quorum for the transaction of business at the special meeting. Plug Power has appointed American Stock Transfer & Trust Company to function as the inspector of elections of the special meeting. The inspector of elections will ascertain whether a quorum is present, tabulate votes and determine the voting results on all matters presented to Plug Power stockholders at the special meeting. If less than a quorum is present at the special meeting, the holders of Plug Power voting stock representing a majority of the voting power present at the special meeting or the inspector of elections may adjourn the meeting. Persons named on the proxies will not use their discretionary authority to use proxies voting against the merger agreement to vote in favor of adjournment or postponement of the special meeting. At any subsequent reconvening of the special meeting, all proxies will be voted in the same manner as the proxies would have been voted at the original convening of the special meeting, except for any proxies that have been effectively revoked or withdrawn prior to the subsequent reconvening of the special meeting.

 

If you submit a proxy that indicates an abstention from voting on all matters presented at the special meeting, your shares will be counted as present for the purpose of determining the existence of a quorum at the special meeting, and will also be counted for the purpose of determining the number of shares present in person or by proxy. Consequently, your abstention will have the same effect as voting against approval of the proposal to issue shares of common stock of Plug Power in connection with the merger. In addition, the failure of a Plug Power stockholder to return a proxy will have no effect as to the approval of the proposal to issue shares of common stock of Plug Power in connection with the merger.

 

Under the rules that govern brokers who have record ownership of shares that are held in “street name” for their clients who are the beneficial owners of the shares, brokers have discretion to vote these shares on routine matters but not on non-routine matters. The approval of the issuance of shares of common stock of Plug Power in connection with the merger at the special meeting is not considered a routine matter. Accordingly, brokers will not have discretionary voting authority to vote your shares at the special meeting. A “broker non-vote” occurs when brokers do not have discretionary voting authority and have not received instructions from the beneficial owners of the shares. At the special meeting, broker non-votes will be counted for the purpose of determining the presence of a quorum and will also be counted for the purpose of determining the number of shares present in person or by proxy. Accordingly, at the special meeting, broker non-votes will have the same effect as voting against approval of the proposal to issue shares of common stock of Plug Power in connection with the merger. Consequently, Plug Power stockholders are urged to return the enclosed proxy card marked to indicate their vote or to instruct their brokers on how to vote their shares held in street name. For a discussion of the impact of abstentions or broker non-votes with respect to the proposal to approve the stock option exchange, see “Additional Proposal to be Acted on by Plug Power Stockholders” on page 118.

 

 

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Solicitation of Proxies and Expenses

 

Plug Power will bear its own expenses in connection with the solicitation of proxies for the special meeting, except that Plug Power and H Power will equally share all costs and expenses incurred in connection with the printing, filing and mailing of this joint proxy statement/prospectus.

 

In addition to solicitation by mail, directors, officers and employees of Plug Power may solicit proxies from stockholders by telephone, facsimile, e-mail or in person. No additional compensation will be paid to these individuals for those services. Plug Power may retain outside agencies for the purpose of soliciting proxies, in which case Plug Power will pay the fees and expenses of those agencies. Record holders such as brokerage houses, nominees, fiduciaries and other custodians will be requested to forward soliciting materials to beneficial owners and to request authority for the exercise of proxies, and, upon the request of such record holders, they will be reimbursed for their reasonable expenses incurred in sending proxy materials to beneficial owners.

 

Voting of Proxies at the Special Meeting and Revocation of Proxies

 

Plug Power requests that all holders of Plug Power common stock on the record date complete, date and sign the accompanying proxy card and promptly return it in the accompanying envelope or otherwise mail it to Plug Power. Brokers holding voting shares in “street name” may vote the shares only if the beneficial owner provides instructions on how to vote. Brokers will provide directions to beneficial owners on how to instruct your broker to vote the shares. Please note, however, that if the holder of record of your shares is your broker, bank or other nominee and you wish to vote at the special meeting, you must bring a letter from the broker, bank or other nominee confirming that you are the beneficial owner of the shares. All properly executed proxies that Plug Power receives prior to the vote at the special meeting, and that are not revoked, will be voted in accordance with the instructions indicated on the proxy card. If no direction is indicated on such proxies, such proxies will be voted in favor of the issuance of shares of Plug Power common stock pursuant to the merger agreement (except for broker non-votes, which are discussed above). (See “Additional Proposal to be Acted Upon by Plug Power Stockholders” on page 118 for a discussion of the impact of providing no direction on proxies with respect to the proposal to approve the stock option exchange.)

 

A Plug Power stockholder may revoke a previously submitted proxy at any time prior to its use by:

 

    delivering to the Secretary of Plug Power a later-dated signed notice of revocation;

 

    delivering to the Secretary of Plug Power a later-dated, signed proxy (which will automatically replace any earlier dated proxy card that you returned); or

 

    attending the special meeting and voting in person.

 

Attendance at the special meeting does not in itself constitute the revocation of a previously submitted proxy.

 

If your shares are held in “street name,” your broker or nominee may permit you to vote by telephone or electronically. Please check your proxy card or contact your broker or nominee to determine whether either of these methods of voting is available to you.

 

No Appraisal Rights

 

Holders of Plug Power common stock do not have dissenters’ appraisal rights under Delaware law in connection with the merger or the stock option exchange.

 

Other Matters to be Voted on

 

Plug Power knows of no matters that will be presented for consideration at the special meeting other than those stated in this joint proxy statement/prospectus. However, if any other matters do properly come before the

 

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special meeting, the proxy holders will vote proxies in accordance with their best judgment regarding such matters.

 

Recommendation of Plug Power’s Board of Directors

 

The Plug Power board of directors has unanimously determined that the merger including, without limitation, the issuance of shares of Plug Power common stock pursuant to the merger agreement, is advisable and in the best interests of Plug Power’s stockholders. Accordingly, the Plug Power board of directors has unanimously approved the merger agreement and the merger including, without limitation, the issuance of shares of Plug Power common stock in the merger pursuant to the merger agreement, and recommends that its stockholders vote FOR approval of the issuance of shares of Plug Power common stock in the merger pursuant to the merger agreement.

 

The matters to be considered at the special meeting are of great importance to the stockholders of Plug Power. Accordingly, Plug Power stockholders are urged to read and carefully consider the information presented in this joint proxy statement/prospectus, and to complete, date, sign and promptly return the enclosed proxy in the enclosed postage-paid envelope.

 

THE SPECIAL MEETING OF H POWER’S STOCKHOLDERS

 

H Power is furnishing this joint proxy statement/prospectus to all stockholders of record of H Power common stock in connection with the solicitation of proxies by H Power’s board of directors for use at the special meeting of H Power stockholders to be held on March 25, 2003, and at any adjournment or postponement of the special meeting. This joint proxy statement/prospectus also is being furnished by Plug Power to H Power stockholders as a prospectus for Plug Power common stock to be issued in connection with the merger.

 

Date, Time and Place of Meeting

 

The special meeting will be held at the Courtyard Marriott Lyndhurst, 1 Polito Avenue, Lyndhurst, New Jersey on March 25, 2003, at 9:00 a.m., local time.

 

Purpose of the Special Meeting

 

At the special meeting, and any adjournment or postponement thereof, H Power stockholders will be asked:

 

  1.   to consider and vote upon a proposal to adopt and approve the merger agreement and approve the merger; and

 

  2.   to transact any other business that may properly come before the special meeting and any adjournment or postponement of the special meeting.

 

A copy of the merger agreement is attached to this joint proxy statement/prospectus as Annex A. H Power stockholders are encouraged to read the merger agreement in its entirety and the other information contained in this joint proxy statement/prospectus carefully before deciding how to vote.

 

Record Date

 

The H Power board of directors has fixed the close of business on February 7, 2003 as the record date for determination of H Power stockholders entitled to notice of and to vote at the special meeting.

 

Votes Required for Adoption and Approval of the Merger Agreement and Approval of the Merger

 

As a condition to completion of the merger, the Delaware General Corporation Law and the merger agreement require that the holders of a majority of the voting shares of H Power as of the record date must vote

 

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to adopt and approve the merger agreement and approve the merger. Each share of H Power common stock entitles the holder to one vote per share with respect to the merger agreement and the merger. There are no other voting securities of H Power.

 

As of the close of business on the record date for the special meeting, 10,776,548 shares of H Power common stock were outstanding, and held by approximately 392 stockholders of record.

 

As of the close of business on the record date for the special meeting, directors and executive officers of H Power (and their respective affiliates) collectively owned approximately 2.0% of the outstanding shares of H Power common stock entitled to vote at the special meeting on the merger agreement and the merger. This does not include 305,126 shares of H Power common stock issuable upon the exercise of presently exercisable options which these directors and officers beneficially own. If all of these stock options had been exercised prior to the record date for the special meeting, the directors and executive officers of H Power (and their respective affiliates) would collectively own approximately 4.8% of the outstanding shares of H Power common stock entitled to vote at the special meeting.

 

Two executive officers and an affiliate of H Power have entered into voting agreements and delivered irrevocable proxies, pursuant to which they have agreed to vote their shares of H Power common stock in favor of adoption and approval of the merger agreement and approval of the merger, in favor of any matter that would be expected to facilitate the merger, and against any alternative proposals to the merger. At the close of business on the record date for the special meeting, these officers and affiliates collectively owned approximately 10.7% of the outstanding shares of H Power common stock entitled to vote at the special meeting. In addition, pursuant to a stockholders and voting agreement among H Power, Lehman Brothers, Mr. Norman Rothstein and Mr. Frederick Entman and certain of their affiliates, who collectively own 11.1%, in the case of the Rothstein family, and 7.2%, in the case of the Entman family, of H Power’s common stock, these investors have granted to H Power’s independent directors an irrevocable proxy for their shares, and such shares will be voted in the same proportion as those of H Power’s stockholders generally for approval of the merger agreement and the merger.

 

Quorum, Abstentions and Broker Non-Votes

 

A majority of all voting shares of H Power issued and outstanding as of the record date, represented in person or by proxy, constitutes a quorum for the transaction of business at the special meeting. H Power will appoint an officer of American Stock Transfer and Trust Company, H Power’s transfer agent, to function as the inspector of elections of the special meeting. The inspector of elections will ascertain whether a quorum is present, tabulate votes and determine the voting results on all matters presented to H Power stockholders at the special meeting. If a quorum is not obtained, or fewer voting shares of H Power are voted for the adoption and approval of the merger agreement and the approval of the merger than a majority of the voting shares eligible to vote at the special meeting in person or by proxy, the special meeting may be postponed or adjourned for the purpose of allowing additional time for obtaining additional proxies or votes. Persons named on the proxies will not use their discretionary authority to use proxies voting against the merger agreement to vote in favor of adjournment or postponement of the special meeting. At any subsequent reconvening of the special meeting, all proxies will be voted in the same manner as the proxies would have been voted at the original convening of the special meeting, except for any proxies that have been effectively revoked or withdrawn prior to the subsequent reconvening of the special meeting.

 

If you submit a proxy that indicates an abstention from voting on all matters presented at the special meeting, your shares will be counted as present for the purpose of determining the existence of a quorum at the special meeting, but will not be voted on any matter presented at the special meeting. Consequently, your abstention will have the same effect as a vote against the proposal to adopt and approve the merger agreement and to approve the merger. In addition, the failure of an H Power stockholder to return a proxy will have the effect of a vote against the proposal to adopt and approve the merger agreement and to approve the merger.

 

Under the rules that govern brokers who have record ownership of shares that are held in “street name” for their clients who are the beneficial owners of the shares, brokers have discretion to vote these shares on routine

 

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matters but not on non-routine matters. The adoption and approval of the merger agreement and the approval of the merger at the special meeting are not considered routine matters. Accordingly, brokers will not have discretionary voting authority to vote your shares at the special meeting. A “broker non-vote” occurs when brokers do not have discretionary voting authority and have not received instructions from the beneficial owners of the shares. At the special meeting, broker non-votes will be counted for the purpose of determining the presence of a quorum but will not be counted for the purpose of determining the number of votes cast on the merger agreement and the merger. Accordingly, at the special meeting, broker non-votes will have the same effect as a vote against the proposal to adopt and approve the merger agreement and to approve the merger. Consequently, H Power stockholders are urged to return the enclosed proxy card marked to indicate their vote.

 

Solicitation of Proxies and Expenses

 

H Power will bear its own expenses in connection with the solicitation of proxies for the special meeting, except that each of H Power and Plug Power will pay one-half of all costs and expenses incurred in connection with the printing, filing and mailing of this joint proxy statement/prospectus.

 

H Power has retained The Proxy Advisory Group of Strategic Stock Surveillance, LLC to assist in the solicitation of proxies by H Power. H Power will pay Strategic Stock Surveillance a fee that is not expected to exceed $25,000. H Power’s directors, officers or employees may solicit proxies from stockholders in person, by telephone, by electronic communication or by other means. These persons will not receive any additional compensation for these solicitation activities, although they will be reimbursed for the reasonable, out-of-pocket expenses they incur in connection with this solicitation. Strategic Stock Surveillance and H Power will also make arrangements with brokerage firms, fiduciaries and other nominees who are record holders of H Power common stock to forward solicitation materials to the beneficial owners of those shares. H Power will reimburse brokerage firms, fiduciaries and other nominees for their reasonable out-of-pocket expenses in connection with this solicitation.

 

Voting of Proxies at the Special Meeting and Revocation of Proxies

 

H Power requests that all holders of H Power common stock on the record date complete, date and sign the accompanying proxy card and promptly return it in the accompanying envelope or otherwise mail it to H Power. Brokers holding voting shares in “street name” may vote the shares only if the beneficial owner provides instructions on how to vote. Brokers will provide directions to beneficial owners on how to instruct your broker to vote the shares. Please note, however, that if the holder of record of your shares is your broker, bank or other nominee and you wish to vote at the special meeting, you must bring a letter from the broker, bank or other nominee confirming that you are the beneficial owner of the shares. All properly executed proxies that H Power receives prior to the vote at the special meeting, and that are not revoked, will be voted in accordance with the instructions indicated on the proxy card. If no direction is indicated on such proxies, such proxies will be voted in favor of adoption and approval of the merger agreement and approval of the merger (except for broker non-votes, which are discussed above).

 

An H Power stockholder may revoke a previously submitted proxy at any time prior to its use by:

 

    delivering to the Secretary of H Power a later-dated signed notice of revocation;

 

    delivering to the Secretary of H Power a later-dated, signed proxy (which will automatically replace any earlier dated proxy card that you returned); or

 

    attending the special meeting and voting in person.

 

Attendance at the special meeting does not in itself constitute the revocation of a previously submitted proxy.

 

If your shares are held in “street name,” your broker or nominee may permit you to vote by telephone or electronically. Please check your proxy card or contact your broker or nominee to determine whether either of these methods of voting is available to you.

 

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No Appraisal Rights

 

Holders of H Power common stock do not have dissenters’ appraisal rights under Delaware law that would give them the right to obtain the payment of cash in exchange for their shares of H Power common stock as a result of the merger.

 

Other Matters to be Voted On

 

H Power knows of no matters that will be presented for consideration at the special meeting other than those stated in this joint proxy statement/prospectus. However, if any other matters do properly come before the special meeting, the proxy holders will vote proxies in accordance with their best judgment regarding such matters.

 

Recommendation of H Power’s Board of Directors

 

The H Power board of directors has unanimously determined that the merger is advisable, in the best interests of H Power stockholders and on terms that are fair to the stockholders of H Power. Accordingly, the H Power board of directors has unanimously approved the merger agreement and the merger and recommends that stockholders vote FOR adoption and approval of the merger agreement and approval of the merger. In considering such recommendation, H Power stockholders should be aware that some H Power directors and officers have interests in the merger that are different from, or in addition to, those of H Power stockholders. For more information about these interests, see the section entitled “The Merger and Related Transactions—Consideration of the Merger by H Power’s Board of Directors—Interests of H Power’s Directors and Officers in the Merger” beginning on page 70 of this joint proxy statement/prospectus.

 

The matters to be considered at the special meeting are of great importance to the stockholders of H Power. Accordingly, H Power stockholders are urged to read and carefully consider the information presented in this joint proxy statement/prospectus, and to complete, date, sign and promptly return the enclosed proxy in the enclosed postage-prepaid envelope.

 

H Power stockholders should not send any stock certificates with their proxy cards. A transmittal form with instructions for the surrender of H Power common stock certificates will be mailed to you promptly following completion of the merger. For more information regarding the procedures for exchanging H Power stock certificates for Plug Power stock certificates, see the section entitled “The Merger and Related Transactions—The Merger Agreement—Exchange of H Power Stock Certificates For Plug Power Stock Certificates and Cash” beginning on page 83 of this joint proxy statement/prospectus.

 

THE MERGER AND RELATED TRANSACTIONS

 

The following is a description of the material aspects of the merger and related transactions, including the merger agreement and certain other agreements entered into in connection with the merger agreement. While we believe that the following description covers the material terms of the merger, the merger agreement and the related transactions and agreements, the description may not contain all of the information that is important to you. You should carefully read this entire document and the other documents we refer to for a more complete understanding of the merger and the related transactions. In particular, the following summary of the merger agreement, as amended, is not complete and is qualified in its entirety by reference to the copy of the merger agreement attached to this joint proxy statement/prospectus as Annex A and incorporated by reference herein. You should read the merger agreement carefully and in its entirety for a complete understanding of the terms of the merger and related transactions.

 

Background of the Merger

 

Since H Power’s initial public offering in August 2000, H Power’s board of directors has continually sought ways to enhance stockholder value, including encouraging management to seek additional strategic and financial partners relating to H Power’s business.

 

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In November, 2001, H Power entered into discussions with Company A, a large supplier of automotive systems, with respect to such company becoming the exclusive North American contract manufacturer of H Power’s products. The parties discussed a potential business relationship, including an exchange of equity; the transfer of certain technology and intellectual property for certain products of H Power; the potential sharing of technology; the transfer of certain employees; and the sale of certain assets to H Power of Company A’s distributed power generation business. After numerous meetings and discussions, H Power determined that the total consideration which would be required to be paid by H Power to Company A was in excess of the value to be received, and, as a result, the parties decided not to engage in any such transaction.

 

In early December 2001, an executive director of a major stockholder of Company B, a privately held fuel cell company, contacted William Zang, chief financial officer of H Power, to engage in general conversations regarding the fuel cell industry and H Power’s business.

 

Later in December 2001, representatives of Company B visited H Power to meet with Dr. H. Frank Gibbard, chief executive officer of H Power, and Mr. Zang. At this meeting, H Power presented public background information on H Power to Company B’s representatives, and the parties indicated mutual interest in maintaining contact.

 

During March, 2002, representatives of H Power met with representatives of Company B regarding the feasibility of a business combination involving H Power and Company B. The parties discussed the nature of a potential combination, and further discussed their respective businesses and potential synergies between the companies. Dr. Gibbard and Mr. Zang made presentations to Company B regarding the background of H Power, and representatives of Company B invited Mr. Zang to visit one of Company B’s facilities.

 

On April 12, 2002, Mr. Zang toured one of Company B’s facilities and further discussed a potential business combination with representatives of Company B.

 

On May 2, 2002, Dr. Gibbard and Mr. Zang met with representatives of Company B, including representatives of certain of its major stockholders, and Company B’s chief executive officer. Dr. Gibbard and Mr. Zang presented public information regarding H Power and the chief executive officer presented public information regarding Company B. The parties discussed possible synergies in a combination of their respective businesses. The parties agreed to proceed with high level due diligence reviews of each other, including visits to production facilities and limited exchanges of business information. For the remainder of May 2002, the parties continued with their respective diligence reviews.

 

In May and June 2002, a Canadian investment group initiated discussions with H Power regarding a possible financial investment in H Power. The primary focus of this investment group is to invest in businesses with operations in Quebec, Canada.

 

At the June 12, 2002, meeting of the H Power board of directors, the status of negotiations between H Power and Company B was presented to the board by management. The board agreed that as a condition to any potential business combination, the stockholders of Company B would be required to make a substantial capital infusion into the combined entity.

 

During the Fall of 2001 through Spring 2002, as part of their efforts to improve Plug Power’s business and enhance stockholder value, Plug Power’s management and its board of directors periodically considered various strategic alternatives. In addition, as Plug Power’s board and management began to focus on its future capital requirements, they investigated a variety of financial options, including follow-on public securities offerings, “shelf” registration statements, private investment in public equity transactions and private placements. Eventually, at a special board meeting on June 25, 2002, Plug Power’s board of directors authorized the establishment of a special committee, consisting of Mr. Douglas Hickey, Mr. Larry Garberding and Gen. John Shalikashvili, that was delegated the authority to consider and evaluate mergers, acquisitions and other corporate

 

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finance transactions involving Plug Power, to participate in the negotiation of the material terms and conditions of any such transaction, and to recommend to the Plug Power board of directors the advisability of entering into a definitive agreement with respect to any such transaction. The selections of Mr. Hickey, Mr. Garberding and Gen. Shalikashvili were primarily based on the status of each as a non-employee director, as well as the expectation that each would be disinterested in any such transaction to be considered and evaluated by Plug Power.

 

On July 2, 2002, Dr. Gibbard called Dr. Roger Saillant, president and chief executive officer of Plug Power. While the parties had previously communicated from time to time regarding possible joint development opportunities, none of such previous communications resulted in any material negotiations. Dr. Gibbard met with Dr. Saillant to inquire about Plug Power’s willingness to consider a strategic partnership or business combination between H Power and Plug Power.

 

At the July 25, 2002 meeting of the H Power board of directors, Dr. Gibbard informed the H Power board of directors that he had met with Dr. Saillant and that the parties would schedule initial meetings to explore the possibility of a strategic partnership or business combination. The board was also updated on the status of the Canadian investment group proposal and the discussions with Company B, and H Power’s strategies in the event funding initiatives were not successful.

 

On July 25, 2002, Plug Power engaged Stephens Inc. to serve as its financial advisor in connection with its efforts to effect one or more strategic business combinations with potential acquisition candidates within the fuel cell industry.

 

On August 2, 2002, Dr. Saillant made a presentation to the Plug Power special committee, with W. Mark Schmitz, Plug Power’s then vice president and chief financial officer, Ana-Maria Galeano, Plug Power’s corporate secretary, Mr. Silvestri, Plug Power’s chief operating officer, and a partner from Goodwin Procter LLP, Plug Power’s legal counsel, in attendance at the request of the committee, concerning the status of discussions with H Power. Dr. Saillant indicated that, at H Power’s request, key executives of Plug Power had scheduled a meeting with their counterparts from H Power at Plug Power’s Latham, New York offices for August 5, 2002.

 

On August 5, 2002, representatives of H Power, including Dr. Gibbard, Mr. Zang, Dudley Wass, chief operating officer of H Power, Arthur Kaufman, chief technology officer of H Power and David Elkaim, vice president of operations and general manager of H Power Enterprises of Canada, a wholly-owned subsidiary of H Power, and representatives of Lehman Brothers met with Dr. Saillant, Mr. Silvestri, Mark Sperry, Plug Power’s vice president and chief marketing officer, and Dr. John Elter, Plug Power’s vice president-research and systems architecture, at Plug Power’s executive offices in Latham, New York, to further discuss possibilities relating to a business combination between H Power and Plug Power and to further review Plug Power’s business operations, technology and intellectual property portfolio and facilities.

 

On August 12, 2002, Mr. Silvestri made a presentation to the Plug Power special committee, with Ms. Galeano, Dr. Saillant, Mr. Schmitz and David Neumann, Plug Power’s controller, in attendance at the request of the special committee, summarizing the discussions that occurred on August 5, 2002 with H Power executives. Based on this report, the special committee authorized Plug Power management to pursue entering into a confidentiality agreement with H Power to be followed by a period of due diligence in which Plug Power would be assisted by representatives of Stephens. On August 12, 2002, Plug Power and H Power entered into a confidentiality agreement. Beginning immediately thereafter and continuing through the remainder of summer 2002, each of Plug Power and H Power conducted preliminary due diligence on the other company and preliminary due diligence materials were exchanged between the parties and their financial advisors.

 

On August 14, 2002, the executive committee of the H Power board of directors met and approved the engagement of Lehman Brothers as H Power’s financial advisor on an exclusive basis to render financial advisory services concerning a strategic transaction with either Company B or Plug Power. H Power and Lehman Brothers executed an Engagement Letter on August 27, 2002.

 

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From August 19 through August 23, 2002, on-site business and technical due diligence was conducted on H Power by Plug Power’s representatives at H Power’s New Jersey, North Carolina, and Montreal facilities.

 

On August 22, 2002, Paul McNeill, H Power’s vice president-marketing and sales, and Mr. Zang presented H Power’s current business plan to Plug Power at a meeting in Lehman Brothers’ offices in New York City.

 

On August 29, 2002, Dr. Gibbard, Mr. Zang and the chief executive officer of Company B made a joint presentation to H Power’s executive committee and certain members of Company B’s board of directors regarding a potential business combination between H Power and Company B.

 

Also on August 29, 2002, Mr. Schmitz made a presentation to the Plug Power special committee, with Ms. Galeano, Dr. Saillant, Mr. Silvestri and representatives from Stephens in attendance at the request of the special committee, reporting upon the completion by management and Stephens of a preliminary due diligence review of H Power, and that H Power had likewise completed their due diligence review of Plug Power. Based on the results of the Plug Power review, the special committee authorized Plug Power management to deliver a non-binding indication of interest to H Power proposing a stock-for-stock business combination with a $42 to $50 million valuation range, and to propose that the parties immediately enter into an exclusivity agreement.

 

On August 30, 2002, Plug Power delivered to H Power a written non-binding preliminary expression of interest from Plug Power with respect to a possible business combination setting forth a proposed all-stock purchase price in the range of $42 million to $50 million. Also on that date, H Power disclosed in its proxy statement for its annual meeting of stockholders the engagement of Lehman Brothers as its investment bank with regard to certain strategic transactions.

 

On August 31, 2002, the management of H Power discussed the details of the expression of interest from Plug Power with Howard Clark, a member of H Power’s board and a vice chairman of Lehman Brothers. After consultation with Mr. Clark, it was determined that the offer did not present sufficient consideration to the stockholders of H Power. Mr. Clark then advised Mr. Garberding, a chairman of Plug Power’s special committee, that the proposal was inadequate, that H Power would not be making a counteroffer, and that no more management contact and technical due diligence exchange should take place. Plug Power returned to H Power the preliminary due diligence materials provided to it.

 

At the September 3, 2002 meeting of the H Power board of directors, the board reviewed the non-binding expression of interest received from Plug Power and was updated on the status of discussions with Company B and the Canadian investment group. Representatives of Lehman Brothers advised the board that they found the valuation range offered by Plug Power to be inadequate. The H Power board of directors authorized management to continue considering the other merger and acquisition and financing opportunities and to report back to the board on material developments.

 

In early September 2002, discussions with Company B were terminated when it was determined that the total consideration which would be received by H Power and its stockholders would not be sufficient. Although there was no firm offer provided to H Power at such time, H Power believed that the majority ownership of the combined entity requested by Company B was excessive in relation to the assets being contributed by Company B to the combined entity and that H Power had received no indication that the shareholders of Company B were willing to contribute $30 million, the amount which H Power deemed necessary to fund the combined company going forward.

 

On September 15, 2002, Mr. Schmitz made a presentation to the Plug Power special committee, with Mr. Elter, Ms. Galeano, Dr. Saillant, Mr. Silvestri, Mr. Sperry, William Ernst, Plug Power’s chief scientist, and representatives of Stephens in attendance at the request of the special committee, as to the status of negotiations with H Power. Representatives of Stephens made a presentation regarding the potential transaction with H Power as well as other strategic options that Plug Power might consider in the future so as to strengthen its balance sheet

 

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and enhance its positioning for commercial success. At the conclusion of the meeting, the Plug Power special committee decided to recommend to the Plug Power board of directors to authorize a non-binding offer to H Power with a valuation range of $50 million to $60 million in Plug Power common stock.

 

On September 17, 2002, at a special meeting of the Plug Power board of directors, Dr. Saillant updated the board as to the status of negotiations with H Power, management’s view as to the benefits to Plug Power from a business combination transaction with H Power, and the special committee’s authorization from September 15, 2002. Following discussion, the Plug Power board authorized management (1) to communicate to H Power a preliminary, non-binding offer for a business combination with Plug Power with a valuation range of $50 to $60 million in Plug Power common stock, contingent upon H Power having an adequate net cash value at the close of the transaction and (2) to negotiate and enter into an exclusivity agreement with H Power.

 

At the September 18, 2002 meeting of the H Power board of directors, representatives of Lehman Brothers reported that they continued to have conversations with Stephens, who told Lehman Brothers that they were reasonably confident that Plug Power was prepared to make an offer to merge with H Power for stock consideration in the $50 to $60 million range, but that Plug Power was requesting that H Power enter into an exclusivity agreement with Plug Power during which more extensive due diligence would be carried out by the parties. The board was also updated on the status of discussions with the Canadian investment group. The consensus of the board was to continue to evaluate the Plug Power proposal and to continue simultaneous discussions with Plug Power and the Canadian investment group.

 

On September 20, 2002, representatives of H Power met with representatives of Plug Power at Lehman Brothers’ offices in New York City. At this meeting, H Power and Plug Power agreed that they should enter into a mutual exclusivity agreement, based on Plug Power’s proposed valuation range of $50 to $60 million, with the intent of proceeding towards definitive documentation.

 

On September 23, 2002, Plug Power and H Power entered into an exclusivity agreement, pursuant to which H Power agreed not to solicit, initiate, knowingly encourage, participate in discussions with, provide any confidential information to, enter into any agreement with or otherwise cooperate in any way with any third party with respect to competing transactions, including mergers, sales of all or substantially all assets, tender offers or sales of equity securities, except with respect to the possible investment of the Canadian investment fund and potential investments by currently existing strategic partners or stockholders not exceeding $10 million per transaction and $20 million for all transactions. The exclusivity agreement originally remained in effect through the close of business on October 14, 2002 but was amended on October 15, 2002 to remain in effect through October 31, 2002.

 

During the period from September 23 through November 5, 2002, members of H Power’s management team, together with its accounting, financial and legal advisors, conducted business, financial, accounting and legal due diligence and participated in discussion with Plug Power’s advisors and management team on various issues.

 

During the period from September 23 through October 15, 2002, members of Plug Power’s management team, representatives of Goodwin Procter LLP, Plug Power’s legal counsel, and KPMG LLP, Plug Power’s independent auditors, conducted business, financial, accounting, tax and legal due diligence and participated in discussions with H Power, its legal counsel and management team on various issues.

 

On September 30, 2002, Plug Power and its counsel sent a draft merger agreement and voting agreement to H Power and its counsel with respect to the proposed transaction. The parties exchanged proposed revisions and revised drafts through November 11, 2002.

 

On October 3, 2002, representatives of Plug Power and H Power met in New York City to discuss each party’s direct hydrogen strategy.

 

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At an October 8, 2002 meeting (continuing until October 9, 2002) of the Plug Power board of directors in Detroit, Michigan, the board was updated by Stephens on the status, key transaction terms, and material outstanding issues with respect to the proposed transaction with H Power, including, without limitation, due diligence and valuation matters. It was the consensus of the board that Plug Power management should continue its due diligence process on H Power and that Plug Power’s advisors should continue transaction negotiations based on a valuation range of approximately $53 million, contingent on H Power having adequate net cash at closing.

 

At an October 9, 2002 meeting of the H Power board of directors, the board was updated on H Power management’s strategic plan and discussions with potential investors. Lehman Brothers updated the board on the status of indications of interest from Plug Power and the material outstanding issues on the Plug Power transaction. It was the consensus of the board that H Power should continue its due diligence process on Plug Power.

 

On October 10, Stephens verbally informed Lehman Brothers of Plug Power’s interest in moving forward with negotiations at the $53 million valuation range and on October 11, Lehman Brothers verbally informed Stephens that H Power was also willing to proceed on such basis.

 

At the October 15, 2002 meeting of the H Power board of directors, Dr. Saillant made a presentation to the board regarding the merits of a proposed transaction between H Power and Plug Power.

 

On October 17, 2002, a representative of Lehman Brothers and Mr. Zang attended a meeting in Plug Power’s offices in Latham, New York with representatives of GE Fuel Cell Systems (GEFCS) and H Power’s distribution partner, ECO Fuel Cells, LLC, regarding the status and outlook for the relationship between GEFCS, Plug Power and ECO Fuel Cells, LLC.

 

In October, 2002, at the request of a senior managing member of a large Japanese company, Dr. Gibbard met with representatives of the company in Japan to discuss a potential investment in H Power by the company. These discussions were initiated by the Japanese company. Dr. Gibbard presented certain public information to the company, and the parties agreed to engage in further discussions regarding this potential investment.

 

At the October 21, 2002 meeting of the H Power board of directors, Dr. Gibbard presented H Power’s 5 year operating plan and a consultant to the board presented his comments to H Power’s operating plan.

 

On October 28 through 29, 2002, representatives of H Power and Plug Power and their advisors met in the New York offices of Goodwin Procter to discuss the status of negotiations and the merger agreement and related documentation. On the evening of October 28, 2002, Plug Power’s special committee held a meeting at which Ms. Galeano, Dr. Saillant, Mr. Schmitz, Mr. Silvestri and representatives of Stephens and Goodwin Procter were in attendance at the special committee’s request. Dr. Saillant updated the special committee as to the status of negotiations and the due diligence review. Following discussions, the special committee directed Stephens to deliver to Lehman Brothers a detailed written proposal for a strategic transaction with H Power substantially as Stephens delivered the next day. At the conclusion of the meetings between the parties and their advisors on October 29, 2002, Stephens forwarded to Lehman Brothers a written proposal for a transaction valued at $53 million in Plug Power common stock, based on H Power’s net cash at closing of $41 million, subject to agreement upon a number of outstanding transaction issues.

 

On October 29, 2002, H Power received a letter from the senior managing director of the large Japanese company seeking to obtain the rights to an exclusive license to sell H Power’s products in Japan, with a primary focus on H Power’s 4.5 kilowatt residential co-generation unit, or RCU, product. The letter stated, among other things, that the managing director planned to recommend to his company’s executive committee an investment of $5 to $10 million in H Power. Upon approval of such executive committee, the proposal would be submitted to the company’s full board of directors for approval.

 

At an October 30, 2002 meeting of the H Power board of directors, the board was updated on the various strategic and financing alternatives being considered by H Power. Representatives of Lehman Brothers reviewed with the board the status of discussions with Plug Power, including the exchange ratio and pricing mechanics. The board compared the merits and risks of management’s business plan assuming H Power remained independent with the merits and risks of the proposed transaction with Plug Power.

 

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On October 31, 2002, representatives of Plug Power, H Power, their respective counsel and Lehman Brothers met with ECO. During the discussion, ECO proposed that its relationship with H Power be terminated upon the closing of the merger. The parties agreed to negotiate a termination agreement to provide that in consideration for the termination of all prior agreements between H Power and ECO (if and when the proposed merger between H Power and Plug Power occurred), H Power and Plug Power agreed to make payments to ECO including all payments required pursuant to existing agreements between H Power and ECO, plus a payment of $1.15 million in lieu of H Power’s obligations under the fuel cell testing agreement and other obligations and a $1 million termination payment (with certain payment obligations of Plug Power not due until and unless the proposed merger occurred).

 

After several meetings and due diligence reviews conducted by the Canadian investment group, H Power received a letter on November 4, 2002, consisting of a non-binding term sheet. The letter proposed a $10 million investment in H Power, contingent on, among other things, a simultaneous equivalent investment in H Power from an additional strategic partner. The investment was conditioned on various other factors, including finalization of due diligence reviews and proportional representation on the H Power board of directors.

 

On November 4, 2002, the H Power board of directors met to discuss the status of potential financing proposals, management’s business plan and the proposed merger transaction with Plug Power. At the meeting, H Power management presented its business plan providing for the continuation of H Power on a stand-alone basis if the transaction with Plug Power were not consummated. The plan presented proposed cost reductions in technology and materials, projected sales and financial projections. H Power management also discussed with the H Power board the letters from the Canadian investment group and the Japanese company relating to the provision of financing in the aggregate amount of $15 to $20 million. With respect to such letters, the board considered, among other things, the conditions and contingencies regarding such possible financings, the lack of definitiveness of the financing proposals, the high risk strategy in remaining independent, the absence of a major corporate and strategic partner, the potentially high dilutive effects of a financing at H Power’s present market capitalization, and the risk of losing shareholder value in the event that a financing was unsuccessful. The H Power board then reviewed the status of the Plug Power transaction and discussed the progress of the due diligence reviews and negotiations on the definitive agreement. Management and H Power’s legal counsel respectively summarized business and legal due diligence. Representatives of Lehman Brothers made a presentation to the board regarding the proposed merger consideration, key transactions points, and valuation analysis and stated that they would be prepared to issue an opinion that the exchange ratio is fair, from a financial point of view, to H Power’s stockholders. It was the consensus of the board that management should proceed to finalize the terms of the proposed transaction with Plug Power and report back to the board.

 

Also on November 4, 2002, the Plug Power board of directors met to discuss the status of the negotiations with H Power. Plug Power management updated the board as to events since the previous board meeting on October 8 and 9, 2002, including the process undertaken with respect to the conducting of mutual business, financial and legal due diligence of Plug Power and H Power, and negotiations of a definitive agreement. During the meeting, representatives of Stephens reviewed the financial aspects of the proposed transaction and confirmed their ability, if negotiations progressed as expected, to be able to issue an opinion that the exchange ratio in the merger agreement is fair, from a financial point of view, to Plug Power. Following this presentation and discussion, the board unanimously approved the merger agreement and the transactions contemplated by the merger agreement, including the issuance of Plug Power common stock in the merger, subject to any necessary or appropriate changes approved by specified Plug Power officers prominently involved in the negotiations.

 

On November 8, 2002, Dr. Gibbard received an unsolicited letter of intent dated November 7, 2002 from a private equity fund which was affiliated with a mortgage banking firm. The letter stated that their interest in H Power was based primarily on H Power’s current market capitalization to balance sheet equity ratio. The letter set forth their intention to acquire all issued and outstanding shares of H Power for a price of approximately $3.41 per share in cash, totaling approximately $36.7 million, in a transaction which would have the support of

 

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both H Power management and the board of directors. This offer of $3.41 per share compares to $4.70 in per share value to H Power stockholders to be received in the transaction with Plug Power as of such date. The offer was subject to a due diligence investigation by both the fund and its financing sources, execution of a definitive merger agreement, approval of the respective boards of the fund and H Power, and other conditions. The letter stated that the fund anticipated that the aggregate amount necessary to purchase all of the common stock of H Power would be comprised of working capital of the fund and financing from its lender. Dr. Gibbard, together with H Power’s legal and financial advisors, called representatives of the fund on November 8, 2002. They reviewed with the fund the background of the fund, the types of transactions in which the fund invested, the fact that the fund had never consummated an acquisition of a public company, and the type and timing of the due diligence investigation they would undertake, including a review of scientific, accounting, legal, financial and contingent liability issues. The representatives of the fund indicated that they believed their offer constituted a significant premium to H Power’s market capitalization and would enable stockholders to achieve a liquidity event.

 

Between November 4, 2002 and November 10, 2002 the parties finalized negotiations regarding the amount of consideration to be offered in the merger. These negotiations related to insignificant changes in the estimate of net cash at closing, so that the terms of the merger agreement remained materially consistent with those discussed at the board meetings of both Plug Power and H Power on November 4, 2002.

 

On November 10, 2002, the H Power board of directors met to consider the final terms of the merger, as well as the letter of intent from the private equity fund. At the meeting, the board reviewed the letter of intent, noting that it was subject to substantial due diligence risks, offered a lower price than the proposed transaction with Plug Power and was subject to execution risks, including financial conditions. It was the consensus of the board that the transaction set forth in the letter of intent was not a viable alternative to the merger with Plug Power. Lehman Brothers then presented an update of its financial analyses and delivered and discussed its written fairness opinion regarding the exchange ratio with respect to the merger. Counsel for H Power updated the board regarding the legal and regulatory aspects of the proposed transaction, reviewed the fiduciary obligations of the H Power directors and described the terms of the merger agreement and related documents. The directors again discussed their views of the presentations and the transaction, including the potential advantages and risks associated with the merger. After discussion, the H Power board unanimously determined that the merger was advisable, in the best interests of the H Power stockholders, and on terms that are fair to the stockholders. The board unanimously approved the merger and the merger agreement and recommended that stockholders vote their shares in favor of adopting and approving the merger agreement and approving the merger, and further authorized the officers to execute and deliver the merger agreement to Plug Power.

 

Between November 4, 2002 and November 11, 2002, Plug Power’s management provided continual updates on the status of the negotiations and definitive documentation to the Plug Power board of directors, and indicated that the terms of the merger agreement remained materially consistent to those discussed at the November 4, 2002 Plug Power board meeting. Stephens delivered to the Plug Power board of directors its written fairness opinion, dated November 11, 2002, stating the exchange ratio in the merger agreement is fair, from a financial point of view, to Plug Power as of that date.

 

After the close of business on November 11, 2002, the parties executed the merger agreement and certain voting agreements and issued a joint press release announcing the transaction before the opening of business on November 12, 2002.

 

Consideration of the Merger by H Power’s Board of Directors

 

H Power’s Reasons for the Merger

 

H Power’s board of directors has unanimously approved the merger agreement and the transactions contemplated by the merger agreement and has determined that the merger agreement and the merger are in the best interests of H Power’s stockholders.

 

The following discussion of H Power’s reasons for the merger contains a number of forward-looking statements that reflect the current views of H Power with respect to future events that may have an effect on its future financial performance. Forward-looking statements are subject to risks and uncertainties. Actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements.

 

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Cautionary statements that identify important factors that could cause or contribute to differences in results and outcomes include those discussed or incorporated by reference in the section entitled “Cautionary Statements Regarding Forward-Looking Statements in this Joint Proxy Statement/Prospectus” beginning on page 25 of this joint proxy statement/prospectus, and the section entitled “Risk Factors” beginning on page 27 of this joint proxy statement/prospectus.

 

The decision by H Power’s board of directors was based on a number of potential benefits and material factors pertaining to the merger, including those set forth below:

 

Merger Consideration.    In addition to the analyses and presentations by H Power’s financial advisor described in the section entitled “—Opinion of H Power’s Financial Advisor” beginning on page 63 of this joint proxy statement/prospectus, the H Power board of directors looked at the exchange ratio represented by the proposed merger as of November 10, 2002, the date the merger agreement was approved, as representative of the consideration to be offered to the holders of H Power common stock in the merger. The board considered:

 

    the fact that the proposed exchange ratio as of the last trading day prior to November 10, 2002 offered a premium of 106% to H Power’s stockholders relative to the then current stock price for H Power,

 

    that given the competitive nature of the hydrogen fuel cell industry and H Power’s recent stock price performance, the exchange ratio gives H Power’s stockholders a value per share which may not be achievable within a reasonable time period; and

 

    that the merger was therefore an attractive opportunity for H Power’s stockholders.

 

H Power’s board of directors also considered the ability of H Power’s stockholders to continue to participate in the growth of the combined company since the consideration to be received by H Power’s stockholders consists of shares of Plug Power common stock.

 

Advice from H Power’s Financial Advisor.    H Power’s board of directors considered the detailed presentations made by Lehman Brothers, H Power’s financial advisor, with respect to the proposed exchange ratio to be offered to the holders of H Power’s common stock in the merger. The H Power board of directors also considered Lehman Brothers’ written opinion, that, as of the date of such opinion and based upon and subject to the assumptions, limitations and qualifications set forth therein, the exchange ratio offered to the holders of H Power common stock in the merger agreement was fair, from a financial point of view, to such holders.

 

Review of Prospects in Remaining Independent.    H Power’s board of directors considered H Power’s financial condition, results of operations and business and earnings prospects if it were to remain an independent entity, including the lack of a major corporate and strategic partner. The board also considered H Power’s financing prospects, including the lack of definitiveness of any financing proposal, the uncertainty of timing for the closing of any prospective financing transaction, the conditions and contingencies regarding a possible financing, and potential significant dilution to stockholders, given H Power’s market capitalization. It was the board’s assessment that remaining independent was not reasonably likely to present superior opportunities or create greater value for H Power’s stockholders than the prospects presented by the merger.

 

Certain Terms of the Merger Agreement Relating to Alternative Transactions.    In evaluating the adequacy of the consideration to be received, the H Power board of directors determined that the merger agreement did not preclude an unsolicited third party offer for H Power. In particular, in connection with an acquisition proposal more favorable from a financial point of view than the merger, subject to restrictions and the potential payment of a termination fee discussed more fully in the section entitled “—The Merger Agreement—Payment of Termination Fee and Expenses” beginning on page 96 of this joint proxy statement/prospectus, the merger agreement permits the H Power board of directors, if required by its fiduciary duties, to:

 

    provide information to, and engage in discussion or negotiations with, a third party that makes an unsolicited superior proposal (as defined in the merger agreement); and

 

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    withdraw or modify its recommendation that the stockholders vote in favor of adopting and approving the merger agreement and approving the merger.

 

Limited Closing Conditions.    The H Power board of directors considered the increased likelihood that the merger agreement would be approved by H Power’s stockholders in light of the limited nature of the closing conditions included in the merger agreement, and the significant premium offered to H Power’s stockholders by the exchange ratio.

 

Realization of Liquidity.    The H Power board of directors further considered the recent relative lack of liquidity of H Power’s common stock. The H Power board of directors believed that some of this lack of liquidity was due to the absence of material market analyst coverage and relatively small market capitalization of H Power. By providing for the exchange of H Power common stock for Plug Power common stock, the merger would enable existing H Power stockholders to experience the advantages of a more liquid investment, as Plug Power common stock has historically experienced higher average trading volumes than H Power common stock.

 

Other Potential Benefits.    In addition to the benefits discussed above, the board of directors identified a number of other potential benefits, including:

 

    increased visibility and market capitalization of the combined company;

 

    increased financial strength of the combined company; and

 

    greater intellectual property and technical resources of the combined company.

 

The H Power board of directors also identified and considered a number of potentially negative factors in its deliberations concerning the merger, including, but not limited to:

 

    the merger agreement permits Plug Power to terminate the agreement if the H Power board of directors withdraws its recommendation in favor of the merger with Plug Power or recommends another proposal;

 

    the merger agreement requires H Power to pay a termination fee to Plug Power if the merger agreement is terminated under some circumstances (See “—The Merger Agreement—Payment of Termination Fee and Expenses” on page 96);

 

    risks associated with fluctuations in Plug Power’s stock price prior to the merger;

 

    the risk of disruption of sales momentum and H Power’s operations as a result of uncertainties created by the announcement of the merger;

 

    the interests of the directors and officers that are different from, or in addition to, those of H Power’s stockholders generally, including the receipt of change of control payments under the employment agreements with certain executive officers of H Power; and

 

    other applicable risks described in the section of this joint proxy statement/prospectus entitled “Risk Factors” on page 27.

 

The H Power board of directors noted that the voting agreements and the termination payment provisions of the merger agreement could have the effect of discouraging alternative proposals for a business combination between H Power and a third party. However, the board of directors concluded that the amount of the fee that H Power may be obligated to pay, and the circumstances under which it may be payable are typical for transactions of this size and type, are not likely to discourage any such proposals and were necessary to induce Plug Power to enter into the merger agreement.

 

The H Power board of directors believed that the potential negative factors were not sufficient, individually or in the aggregate, to outweigh the potential advantages.

 

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Other Factors Considered by H Power’s Board of Directors

 

The H Power board of directors consulted with senior management and its financial and legal advisors and considered a number of other factors in its deliberations concerning the merger, including:

 

    the H Power board of directors’ familiarity with, and information provided by H Power’s management as to, the business, financial condition, results of operations, current business strategy and future prospects of H Power, as well as the risks involved in achieving those prospects and objectives in current industry and market conditions, the nature of the markets in which H Power operates, H Power’s position in such markets, and the historical and current market prices for H Power’s shares;

 

    the information provided to the H Power board of directors by the officers of H Power and Lehman Brothers with respect to the financial aspects of the merger and the advantages of a combination of Plug Power and H Power from the point of view of H Power and its stockholders;

 

    alternatives to the merger, as well as the risks, financial and otherwise, inherent in continuing as an independent public company in an industry that is changing rapidly as opposed to the strengths of a combination between Plug Power and H Power;

 

    the process engaged in by H Power’s management and financial advisor, which included discussions with another merger candidate and financing institutions, enabled the H Power board of directors to have what it believed to be an accurate sense of the values that could be achieved in a third party transaction;

 

    H Power’s need for financing, and the lack of definitive alternatives to the merger for available financing;

 

    the review of the material terms and conditions of the merger as reflected in the merger agreement, including (1) the provisions permitting H Power to respond to unsolicited inquiries and proposals from, provide confidential information to, and participate in any discussions and negotiations with, third parties concerning sales of assets and mergers or similar transactions with H Power to the extent required to satisfy the fiduciary obligations of its directors; (2) the break-up fee; (3) the collar; and (4) the conditions precedent to the consummation of the merger, including regulatory approval and the estimated length of time to consummate the merger;

 

    the premium offered to H Power’s stockholders relative to the current, historical and projected stock price for H Power, including the board’s conclusion that given the competitive nature of the fuel cell industry and H Power’s recent stock price performance, the exchange ratio gives H Power’s stockholders a value per share which may not be achievable within a reasonable time period and that the merger was thus an attractive opportunity for the stockholders;

 

    the structure of the merger, which is intended to permit holders of H Power common stock to exchange all their shares of H Power common stock on a tax-free basis;

 

    H Power’s low market capitalization, which further decreases financing options, and the fact that a higher market capitalization will provide the combined company with a wider array of financing options; and

 

    the strategic options available to H Power, including the option of continuing to operate H Power as an independent, publicly-traded company, and the assessment of H Power’s board of directors that none of these options were reasonably likely to present superior opportunities, or were reasonably likely to create greater value for H Power’s stockholders, than the prospects presented by the merger.

 

The foregoing discussion of the information and factors considered by H Power’s board of directors, while not exhaustive, includes the material factors considered by the board of directors. In view of the variety of factors considered in connection with its evaluation of the merger, H Power’s board of directors did not find it practicable to, and did not, quantify or otherwise assign relative or specific weight or values to any of these factors, and individual directors may have given different weights to different factors.

 

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Recommendation of H Power’s Board of Directors

 

The H Power board of directors has unanimously determined that the merger is advisable, in the best interests of H Power stockholders and on terms that are fair to the H Power stockholders. Accordingly, the H Power board of directors has unanimously approved the merger agreement and the merger and recommends that its stockholders vote FOR adoption and approval of the merger agreement and approval of the merger.

 

Opinion of H Power’s Financial Advisor

 

On August 27, 2002, the H Power board of directors engaged Lehman Brothers Inc. to act as its financial advisor with respect to pursuing a merger with Plug Power. On November 10, 2002, Lehman Brothers rendered its oral opinion (subsequently confirmed in writing on November 11, 2002) to the H Power board of directors that as of such date, and based upon and subject to certain matters stated in its written opinion, from a financial point of view, the exchange ratio offered to H Power’s stockholders in the merger was fair to H Power’s stockholders.

 

Although Lehman Brothers evaluated the fairness, from a financial point of view, of the exchange ratio to be offered to H Power’s stockholders in the merger, the exchange ratio itself was determined through arm’s length negotiations between H Power’s senior management and Plug Power’s senior management with the assistance of their advisors. H Power did not provide specific instructions to, or place any limitation on, Lehman Brothers with respect to the procedures to be followed or factors to be considered by Lehman Brothers in performing its analyses or providing its opinion.

 

The full text of the Lehman Brothers’ written opinion, dated November 11, 2002 is attached as Annex C to this joint proxy statement/prospectus. H Power stockholders may read Lehman Brothers’ opinion for a discussion of the assumptions made, procedures followed, factors considered and limitations upon the review undertaken by Lehman Brothers in rendering its opinion. The following is a summary of the material financial analyses presented by Lehman Brothers to the H Power board of directors on November 10, 2002 in connection with the rendering of its oral opinion on that date.

 

Lehman Brothers’ advisory services and opinion were provided for the information and assistance of H Power’s board of directors in connection with its consideration of the merger. Lehman Brothers’ opinion is not intended to be and does not constitute a recommendation to any stockholder of H Power as to how such stockholder should vote with respect to the merger agreement or the transactions contemplated in the merger agreement. Lehman Brothers was not requested to opine as to, and its opinion does not address, (1) H Power’s underlying business decision to proceed with or effect the merger or (2) the relative merit of the merger in comparison to other alternatives for H Power (including the continued operation of H Power or the liquidation of H Power).

 

In arriving at its opinion, Lehman Brothers reviewed and analyzed the following material information:

 

    the merger agreement and the specific terms of the merger, including H Power’s right to terminate the merger agreement in certain situations if the product of (1) the anticipated number of shares of Plug Power common stock to be issued in the merger and (2) the reasonably anticipated average Plug Power common stock price is less than $29,675,000, the estimated net cash of H Power as of the closing of the merger;

 

    publicly available information concerning H Power that Lehman Brothers believed to be relevant to its analysis, including H Power’s Annual Report on Form 10-K for the fiscal year ended May 31, 2002 and Quarterly Report on Form 10-Q for the quarter ended August 31, 2002;

 

    publicly available information concerning Plug Power that Lehman Brothers believed to be relevant to its analysis, including Plug Power’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 and Quarterly Reports on Form 10-Q for the quarter ended March 31 and June 30, 2002;

 

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    financial and operating information with respect to the business, operations and prospects of H Power furnished to Lehman Brothers by management of H Power, including financial projections of H Power on a stand-alone basis prepared by management of H Power;

 

    H Power’s balance sheet, information with respect to H Power’s anticipated capital and investment expenditures, the likelihood that H Power would be able to meet its operating costs and capital requirements beyond October 2004, and the various capital market financing transactions that would be available to H Power on a stand-alone basis to fund its operations beyond October 2004;

 

    financial and operating information with respect to the business, operations and prospects of Plug Power furnished to Lehman Brothers by management of Plug Power, including financial projections of Plug Power on a stand-alone basis prepared by management of Plug Power and financial projections of Plug Power after giving effect to the merger prepared by management of Plug Power and Plug Power’s representatives;

 

    the trading histories of H Power’s common stock and Plug Power’s common stock from October 2001 to November 8, 2002 and a comparison of these trading histories with those of other companies in the fuel cell power source industry that Lehman Brothers deemed relevant;

 

    a comparison of the historical financial results and present financial condition of H Power with those of other companies in the fuel cell power source industry that Lehman Brothers deemed relevant;

 

    a comparison of the historical financial results and present financial condition of Plug Power with those of other companies in the fuel cell power source industry that Lehman Brothers deemed relevant;

 

    the strategic benefits expected by Plug Power’s management and H Power’s management to result from a combination of the businesses of H Power and Plug Power;

 

    the relative financial contributions of H Power and Plug Power to the combined company following consummation of the merger;

 

    a possible liquidation of H Power, including the cash that would be distributed to H Power’s stockholders in connection with such liquidation;

 

    a comparison of the strategic and competitive positions of H Power and Plug Power with those of other companies in the fuel cell power source industry that Lehman Brothers deemed relevant; and

 

    a comparison of the financial terms of the merger with the financial terms of certain other recent transactions that Lehman Brothers deemed relevant.

 

In addition, Lehman Brothers had discussions with the management of H Power and of Plug Power concerning their respective businesses, operations, assets, financial condition and prospects.

 

In arriving at its opinion, Lehman Brothers assumed and relied upon the accuracy and completeness of the financial and other information used by Lehman Brothers without assuming any responsibility for independent verification of such information and further relied upon the assurances of management of H Power and Plug Power that they were not aware of any facts or circumstances that would make such information inaccurate or misleading. With respect to the financial projections of H Power on a stand-alone basis, upon advice of H Power, Lehman Brothers assumed that such projections had been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of H Power as to the future financial performance of H Power on a stand-alone basis and that H Power would perform in accordance with such projections on a stand-alone basis. With respect to the financial projections of Plug Power on a stand-alone basis and after giving effect to the merger, upon advice of Plug Power Lehman Brothers assumed that such projections had been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of Plug Power as to the future financial performance of Plug Power on a stand-alone basis and after giving effect to the merger, respectively, and that Plug Power would perform, and that the combined company will perform, in accordance with such projections. In arriving at its opinion, Lehman Brothers conducted only a limited physical inspection of the properties and facilities of H Power and of Plug Power and did not make or obtain any

 

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evaluations or appraisals of the assets or liabilities of H Power or of Plug Power. In addition, Lehman Brothers was not authorized to solicit, and did not solicit, any indications of interest from any third party with respect to the purchase of all or a part of H Power’s business. Lehman Brothers’ opinion necessarily is based upon market, economic and other conditions as they existed on, and can be evaluated as of, the date of its opinion.

 

In addition, Lehman Brothers expressed no opinion as to the prices at which shares of Plug Power common stock will trade at any time following the announcement of the merger or the consummation of the merger. Lehman Brothers’ opinion should not be viewed as providing any assurance that the market value of the shares of Plug Power common stock to be held by the stockholders of H Power after the consummation of the merger will be in excess of the market value of the shares of H Power common stock owned by such stockholders at any time prior to the announcement or the consummation of the merger. In addition, Lehman Brothers expressed no opinion as to the potential outcomes of the pending class action lawsuit against Plug Power in which the plaintiffs allege, among other things, that Plug Power violated certain federal securities laws by failing to disclose certain information relating to its products and prospects. However, in arriving at its opinion, Lehman Brothers, with H Power’s consent, assumed that such litigation will not have a material adverse effect on the financial position, stockholders’ equity, results of operations, business or prospects of Plug Power.

 

In connection with rendering its opinion, Lehman Brothers performed certain financial, comparative and other analyses as described below. In arriving at its opinion, Lehman Brothers did not ascribe a specific range of value to H Power or Plug Power, but rather made its determination as to the fairness, from a financial point of view, to H Power stockholders of the exchange ratio to be offered to such stockholders in the merger on the basis of financial and comparative analyses. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial and comparative analysis and the application of those methods to the particular circumstances, and therefore, such an opinion is not readily susceptible to summary description. Furthermore, in arriving at its opinion, Lehman Brothers did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Lehman Brothers believes that its analyses must be considered as a whole and that considering any portion of such analyses and factors, without considering all analyses and factors as a whole, could create a misleading or incomplete view of the process underlying its opinion. In its analyses, Lehman Brothers made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of H Power and Plug Power. None of H Power, Plug Power, Lehman Brothers or any other person assumes responsibility if future results are materially different from those discussed. In addition, analyses relating to the value of businesses do not purport to be appraisals or to reflect the prices at which businesses actually may be sold.

 

The following is a summary of the material financial analyses used by Lehman Brothers in connection with rendering its opinion to H Power’s board of directors. Some of the summaries of the financial and comparative analyses include information presented in tabular format. In order to fully understand the methodologies used by Lehman Brothers and the results of its financial and comparative analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial and comparative analyses. Accordingly, the information presented in the tables and described below must be considered as a whole. Considering any portion of such analyses and of the factors considered, without considering all analyses and factors as a whole, could create a misleading or incomplete view of the process underlying Lehman Brothers’ opinion.

 

Stock Trading History

 

Lehman Brothers considered historical data with regard to the trading prices of H Power common stock and Plug Power common stock for the period from October 31, 2001 to November 8, 2002 and the relative stock price performances during this same period of H Power, Plug Power, and a composite of power technology companies including:

 

    Plug Power;

 

    Ballard Power;

 

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    Hydrogenics;

 

    Fuel Cell Energy;

 

    Proton Energy; and

 

    H Power.

 

During this period, the closing stock price of H Power ranged from $1.75 to $22.15 per share, and the closing price of Plug Power ranged from $3.39 to $13.10 per share.

 

Specifically, Lehman Brothers considered the downward trend during the period from October 21, 2001 to November 8, 2002 of the trading prices per share of H Power common stock and the relative trend in the trading prices per share of Plug Power common stock and in the implied value of the power technology composite during the period considered. Lehman Brothers also considered the consistent decline in trading volumes of H Power common stock and the relative trend in trading volume of Plug Power stock during that period.

 

Lehman Brothers concluded that, based on the more pronounced relative decline in market value and trading liquidity of H Power common stock, and the resultant relative inability of H Power to access public equity financing to fund operations, when compared to Plug Power common stock or to a composite of selected companies which are comparable to H Power, this analysis was supportive of its opinion as to the fairness of the exchange ratio to be offered to H Power’s stockholders in the merger.

 

Historical Exchange Ratio Analysis

 

Lehman Brothers also compared the historical per share prices of H Power and Plug Power during different periods during the 6-month period prior to November 8, 2002 in order to determine the implied average exchange ratio that existed for those periods. The following table indicates the average exchange ratio of Plug Power common stock for H Power common stock during the previous 90-day period, the maximum and minimum exchange ratio based on daily closing prices for each stock during the previous 6 months, and the implied exchange ratio as of November 8, 2002. Lehman Brothers concluded that such analysis was supportive of its opinion as to the fairness of the exchange ratio to be offered to H Power’s stockholders in the merger.

 

    

As of 11/08/02


    

6-Month Max.


    

6-Month Min.


    

90-Day


 

Implied Exchange Ratio Analysis:

                           

Exchange Ratio

  

0.4014

 

  

0.9672

 

  

0.3390

 

  

0.6694

 

Implied H Power share of combined company

  

7.8

%

  

17.1

%

  

6.7

%

  

12.4

%

 

The exchange ratio to be affected by the merger is within the range of .7270 to .8886 assuming no adjustment to net cash at the effective time of the merger as outlined in the merger agreement.

 

Comparable Company Analysis

 

In order to assess how the public market values shares of similar publicly traded companies, Lehman Brothers reviewed and compared specific financial and operating data relating to H Power and Plug Power with selected companies that Lehman Brothers deemed comparable to the companies. In selecting comparable companies for both H Power and Plug Power, Lehman Brothers considered proton exchange membrane (PEM) and stationary application fuel cell companies, and in particular the bifurcation within the fuel cell industry between companies with well-known strategic and distribution partners and those without.

 

For H Power, Lehman Brothers included in its review of comparable companies the following fuel cell companies:

 

    FuelCell Energy, Inc.; and

 

    Proton Energy Systems, Inc.

 

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Using publicly available information, Lehman Brothers calculated for each of H Power and the selected fuel cell comparable companies listed above, the ratio of equity market value to net cash balances. As of November 8, 2002, the last trading date prior to the delivery of Lehman Brothers’ opinion, the comparable companies mean multiple of equity value to net cash ranged from 0.65x to 0.85x.

 

Lehman Brothers also compared selected financial data of Plug Power with similar data of selected companies engaged in businesses considered by Lehman Brothers to be comparable to that of Plug Power. Specifically, Lehman Brothers included in its review of comparable companies the following fuel cell companies:

 

    Ballard Power Systems, Inc.; and

 

    Hydrogenics Corp.

 

Again, using publicly available information, for each of Plug Power and the selected fuel cell comparable companies listed above, Lehman Brothers calculated the ratio of equity market value to net cash balances. As of November 8, 2002 , the comparable companies mean multiple of equity value to net cash ranged from 3.10x to 3.30x.

 

The relevant net cash multiples were applied to H Power and Plug Power’s current net cash balances, respectively. This analysis yielded an implied exchange ratio in the range of 0.6447 to 0.8975.

 

Because of the inherent differences between the businesses, operations, financial conditions and prospects of H Power and Plug Power and the businesses, operations, financial conditions and prospects of the companies included in their comparable company groups, Lehman Brothers believed that it was inappropriate to rely solely on the quantitative results of the analysis, and accordingly, also made qualitative judgments concerning differences between the financial and operating characteristics of H Power, Plug Power and the companies in their respective comparable company groups that would affect the public trading values of H Power, Plug Power and the comparable companies. Lehman Brothers concluded that such analysis was supportive of its opinion as to the fairness of the exchange ratio to be offered to H Power’s stockholders in the merger. For example, Lehman Brothers considered the following material characteristics in making such qualitative judgments:

 

    Financial resources of material strategic stockholders. Lehman Brothers considered the financial resources of the material strategic stockholders/partners of both Plug Power and H Power, as an indication of the strength of such stockholders/partners to provide distribution, operational, management and other support to Plug Power and H Power, respectively.

 

    Implied equity support for power technology companies with well-known strategic and financial partners. Lehman Brothers considered that power technology companies with well-known strategic partners and investors, such as General Electric’s partnership with Plug Power and General Motors’ partnership with Hydrogenics, traded at a significant premium to power technology companies, such as H Power, without well-known strategic partners and investors as measured by firm value to revenues.

 

Precedent Transaction Analysis

 

Using publicly available information, Lehman Brothers reviewed comparable technology transactions from January 1, 2001 to November 8, 2002 in which net cash as shown on the most recent balance sheet of the target company consisted of 100% or greater of the transaction value. Lehman Brothers undertook the precedent transaction analysis in order to ascertain:

 

    the prevalence in the current market of whole-company acquisition transactions in which consideration paid is less than or approximately equal to the “net cash” as shown on the acquisition target’s most recent publicly available balance sheet;

 

    the premium of consideration paid in such transactions to pre-announcement trading prices of the target’s publicly traded stock price; and

 

    the implied valuation multiples paid in such transactions.

 

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These transactions included:

 

    US RealTel Inc./Cypress Communications—January 10, 2002

 

    Exelixis Inc./Genomica Corp—November 19, 2002

 

    EM Holdings Inc./eMachines Inc.—November 9, 2001

 

    Divine Inc./Eprise Corp—September 18, 2001

 

    Cross Media Marketing/Lifeminders Inc.—July 19, 2001

 

    Kana Communications/Broadbase Software Inc.—April 9, 2001

 

    AmericanGreetings.com/Egreetings Network Inc.—February 5, 2001

 

    iVillage Inc. – Women.com Networks—February 5, 2001

 

Lehman Brothers calculated:

 

    the premium per share paid by the acquiror compared to the share price of the target company prevailing (1) one day and (2) 30 days prior to the announcement of the transaction;

 

    the premium per share paid by the acquiror compared to net cash on the target’s most recent publicly available balance sheet; and

 

    the transaction equity value paid by the acquiror compared to the one year fiscal year forward projected revenues of the target company.

 

Lehman Brothers compared the premiums paid in the transactions described above to the premium to be paid by Plug Power for H Power in the merger. The following table shows the mean and median 1-day and 30-day premiums, the premium to net cash as well as the ratio of transaction equity value to one year fiscal year forward projected revenues:

 

    

1-Day


    

30-Day


    

Cash Value


      

Equity Value / Fwd Rev Multiple


Comparable Transaction Premium Analysis:

                           

Merger (based on Plug Power base price at signing Nov. 11, 2002)

  

97.9

%

  

42.2

%

  

(3.7

)%

    

12.7x

Mean of selected transactions

  

57.5

%

  

89.8

%

  

(22.9

)%

    

1.7x

Median of selected transactions

  

43.9

%

  

89.0

%

  

(25.0

)%

    

1.8x

 

In the table above, the premium for the merger assumes a Plug Power base stock price of $5.88 per share, a transaction value of $50,675,000, and a corresponding exchange ratio of .80. Lehman Brothers concluded that such analysis was supportive of its opinion as to the fairness of the exchange ratio to be offered to H Power’s stockholders in the merger.

 

Equity Premium Analysis

 

Lehman Brothers performed an analysis of the implied premium represented by the merger, over current and historic equity trading levels, cash at closing, and net (post-liquidation) cash of H Power. Lehman Brothers concluded that such analysis was supportive of its opinion as to the fairness of the exchange ratio to be offered to H Power’s stockholders in the merger.

 

Premium Analysis:

  

Stock Price


    

Implied Premium to Equity Value


 

Stock Price as of 11/08/02

  

$

2.28

    

106

%

5 Day Average Price

  

$

2.68

    

76

%

15 Day Average Price

  

$

2.34

    

101

%

30 Day Average Price

  

$

2.70

    

74

%

60 Day Average Price

  

$

3.51

    

34

%

90 Day Average Price

  

$

3.71

    

27

%

 

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Cash


    

Implied Premium to H Power Cash Balance


 

Net (Post-Liquidation) Cash

  

$

30  M

    

77

%

Cash at Closing

  

$

37  M

    

33

%

 

In the table above, the net (post-liquidation) cash balance represents H Power management’s estimate of cash and cash equivalents that would remain if H Power were to cease operations immediately, satisfy all of its liabilities, and make any payments necessary for employee severance, facility sublet or payments for termination of leases, and other expenses potentially incurred in the liquidation of the business. Cash at closing represents H Power management’s estimate of cash and cash equivalents at the closing of the proposed merger, without taking into consideration the payment of any employee severance, facility or other liquidation expenses. The premium for the merger assumes a Plug Power base stock price of $5.88 per share, a transaction value of $50,675,000 and a corresponding exchange ratio of .80.

 

Discounted Cash Flow Analysis

 

As part of its analysis, Lehman Brothers prepared a discounted after-tax cash flow model that was based upon financial projections prepared by the management of H Power and Plug Power. Lehman Brothers compared the relative value represented by the two companies’ financial projections, although neither company has sufficient capital to achieve positive cash flow. This analysis yielded an implied exchange ratio in the range of 0.1097 to 0.5392. It should be noted that all long-term industry forecasts are highly uncertain, and discount rates used are correspondingly high. Lehman Brothers concluded that such analysis was supportive of its opinion as to the fairness of the exchange ratio to be offered to H Power’s stockholders in the merger.

 

Alternative Liquidation Analysis

 

Lehman Brothers also performed a liquidation analysis in order to understand the residual cash that might be available to stockholders of H Power following a hypothetical liquidation of H Power. Lehman Brothers estimated the residual value of H Power as defined to be the net remaining cash after liquidation of all H Power’s assets and the extinguishment of all liabilities, and concluded that such analysis was supportive of its opinion as to the fairness of the exchange ratio to be offered to H Power’s stockholders in the merger. The forecasts that underlie this analysis are subject to substantial uncertainty, and therefore, actual results would likely be substantially different.

 

Calculation of Net Liquidation Value:

        

(Dollars in millions, except per share amounts)

        

Cash and Cash Equivalents as of fiscal quarter ended August 31, 2002

  

$

52.7

 

Less: Cash “burn” through an assumed closing date of January 15, 2003

  

($

10.3

)

    


Estimated Cash through an assumed closing date of January 15, 2003

  

$

42.3

 

    


Plus: Liquidation Value of Assets.

  

$

2.3

 

Less: Liquidation Value of Liabilities

  

($

5.9

)

Less: Material Obligations / Contingent Liabilities

  

($

9.1

)

    


Estimated Net Liquidation Value

  

$

29.7

 

    


Estimated Net Liquidation Value Per Share

  

$

2.75

 

Value per share of H Power after giving effect to merger exchange ratio of ..80

  

$

4.70

 

    


 

Lehman Brothers is an internationally recognized investment banking firm and, as part of its investment banking activities, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. H Power selected Lehman Brothers because of its expertise, reputation and familiarity with H Power, Plug Power and the fuel cell

 

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industry generally and because its investment banking professionals have substantial experience in transactions comparable to the merger.

 

As compensation for services in connection with the merger, H Power has agreed to pay Lehman Brothers a monthly retainer fee and an advisory fee upon the consummation of the merger. Monthly retainer fees paid by  H Power to Lehman Brothers to date total approximately $375,000, and the advisory fee payable upon consummation of the merger is approximately $1,125,000. In addition, H Power has agreed to indemnify Lehman Brothers for certain liabilities that may arise out of the rendering of its opinion. Lehman Brothers also has performed various investment banking services for H Power in the past (including acting as lead manager for the initial public offering of H Power’s common stock in August 2000) and has received customary fees for such services. During the two year period ended December 31, 2002, no fees were paid by H Power to Lehman Brothers except for those disclosed in the Form S-4 in association with the merger. In the ordinary course of its business, Lehman Brothers may actively trade in the equity securities of H Power and Plug Power for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities. Howard L. Clark, Jr., currently a member of H Power’s board of directors, is a vice chairman of Lehman Brothers.

 

Interests of H Power’s Directors and Officers in the Merger

 

In considering the recommendation of H Power’s board of directors with respect to approving the merger agreement and the merger, H Power’s stockholders should be aware that some of the directors and executive officers of H Power have interests in the merger and participate in arrangements that are different from, or are in addition to, those of H Power stockholders generally. The H Power board of directors was aware of these interests and considered them, among other matters, when it approved the merger agreement and the merger. These interests include the following:

 

Accelerated Vesting of Options

 

The vesting on 1,500 outstanding options held by each of 5 non-employee directors of H Power to purchase H Power common stock will accelerate, which will cause those stock options to become fully vested and exercisable, immediately prior to the closing of the merger. The aggregate number of shares of H Power common stock issuable upon the exercise of unvested options that are subject to acceleration as a result of the merger and that are held by directors as of November 11, 2002, the date the merger agreement was executed, is 7,500 shares. At February 11, 2003, all such options had an exercise price that was less than the market price of the H Power common stock on that date. Pursuant to the terms of the merger agreement, all options to purchase H Power common stock will be converted into options to purchase Plug Power common stock. For further discussion about the treatment of H Power options in the merger, see the section entitled “The Merger and Related Transactions—The Merger Agreement—Treatment of H Power Stock Options” on page 84 of this joint proxy statement/prospectus.

 

Severance Agreements with H. Frank Gibbard and William Zang

 

The Second Amended and Restated Employment Agreement, dated as of August 1, 2002, between H Power and Dr. H. Frank Gibbard, a director and chief executive officer of H Power, provides that, among other things, (1) Dr. Gibbard must devote substantially all of his business time, ability and attention to H Power’s business and affairs and he receives an annual base salary of $240,000, (2) if Dr. Gibbard is terminated for reasons other than for cause, he may be entitled to receive benefits and payments of his salary through the end of his employment term and (3) if, within a year after a change in control, H Power terminates Dr. Gibbard or assigns him duties materially inconsistent with his position, he may be entitled to receive a lump sum payment equal to two times his then annual base salary and incentive compensation, currently aggregating approximately $480,000. Prior to the amendment of Dr. Gibbard’s agreement, such lump sum payment would have equaled one-half of his then annual base salary and incentive compensation, which would total approximately $120,000. H Power has delivered notice to Dr. Gibbard that H Power will not be renewing his employment agreement in July.

 

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Amendment No. 1 to Officer’s Employment Agreement, effective as of August 1, 2002, between H Power and William Zang, a director and chief financial officer of H Power, provides that, among other things, (1) Mr. Zang must devote substantially all of his business time, ability and attention to H Power’s business and affairs and he receives an annual base salary of $190,000, (2) if Mr. Zang is terminated for reasons other than for cause, he may be entitled to receive benefits and payments of his salary through the end of his employment term and (3) if, within a year after a change in control, H Power terminates Mr. Zang or assigns him duties materially inconsistent with his position, he may be entitled to receive a lump sum payment equal to one and one-half times his then annual base salary and incentive compensation, currently aggregating approximately $292,000. Prior to the amendment of Mr. Zang’s agreement, such lump sum payment would have equaled one-half of his then annual base salary and incentive compensation, which would total approximately $97,300. In addition, Mr. Zang is entitled to receive an incentive bonus of $150,000 relating to incentives to reduce H Power’s cash burn rate in order to maintain stockholder value.

 

Arrangements with Other Executive Officers

 

Amendment No. 1 to Officer’s Employment Agreement, effective as of August 1, 2002, between H Power and Dudley Wass, chief operating officer of H Power, provides that, among other things, (1) Mr. Wass must devote substantially all of his business time, ability and attention to H Power’s business and affairs and receives an annual base salary of $215,000, (2) if Mr. Wass is terminated for reasons other than for cause, he may be entitled to receive benefits and payments of his salary through the end of his employment term and (3) if, within a year after a change in control, H Power terminates Mr. Wass or assigns him duties materially inconsistent with his position, he may be entitled to receive a lump sum payment equal to one and one-half times his then annual base salary and incentive compensation, currently aggregating $315,000. Prior to the amendment of Mr. Wass’ agreement, such lump sum payment would have equaled one-half of his then annual base salary and incentive compensation, which would total approximately $105,000. In addition, Mr. Wass is entitled to receive an incentive bonus of $50,000 relating to incentives to reduce H Power’s cash burn rate in order to maintain stockholder value.

 

Amendment No. 1 to Officer’s Employment Agreement, effective as of August 1, 2002, between H Power and Paul McNeill, vice president of business development, marketing and sales of H Power, provides that, among other things, (1) Mr. McNeill must devote substantially all of his business time, ability and attention to H Power’s business and affairs and he receives an annual base salary of $135,000, (2) if Mr. McNeill is terminated for reasons other than for cause, he may be entitled to receive benefits and payments of his salary through the end of his employment term and (3) if, within a year after a change in control, H Power terminates Mr. McNeill or assigns him duties materially inconsistent with his position, he may be entitled to receive a lump sum payment equal to one and one-half times his then annual base salary and incentive compensation, currently aggregating $195,000. Prior to the amendment of Mr. McNeill’s agreement, such lump sum payment would have equaled one-half of his then annual base salary and incentive compensation, which would total approximately $65,000. H Power has delivered notice to Mr. McNeill that H Power will not be renewing his employment agreement in July.

 

The proposed merger will be considered a change in control under each of the foregoing employment agreements as amended. As a result of the change in control and their expected termination of employment upon the closing of the merger, each of Messrs. Gibbard, Zang, Wass and McNeill will receive the payments described above under his respective employment agreement, as amended, upon the closing of the merger. The aggregate amount of such payments is approximately $1,282,000. Such payments have been included in the calculation of the estimated net cash amount as of the date of this joint proxy statement/prospectus and will be included in the calculation of the net cash (as defined in the merger agreement) of H Power at the effective time of the merger.

 

Indemnification and Directors and Officers Insurance

 

H Power’s officers and directors are entitled to continuing indemnification against liabilities for matters occurring prior to the merger (including matters arising as a result of the merger) by virtue of provisions contained in H Power’s certificate of incorporation and bylaws for a period of not less than 6 years from the effective time of the merger. The merger agreement also provides that prior to the completion of the merger, H Power may spend up to $750,000 to purchase an extended “tail” policy under H Power’s existing director and officer insurance policy to provide the currently covered directors and officers of H Power with liability insurance coverage for 6 years following the completion of the merger; or, should such amount be insufficient for such coverage, to purchase a tail policy for such lesser period as may be purchased for such amount. Under the merger agreement, H Power may expend funds in excess of $750,000 if it determines that $750,000 is insufficient to obtain the extended coverage for a 3 year period.

 

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Arrangements with Directors

 

In connection with the merger, H Power and Plug Power entered into a termination agreement with ECO which provides for the termination of H Power’s prior agreements with ECO. The termination agreement further provides that the agreement will be effective as of the closing of the merger, and that at such time ECO will receive the balance of payments owed to ECO under the termination agreement, including a $2,150,000 million termination payment. Robert L. Hance, a director of ECO, currently serves as ECO’s representative on H Power’s board of directors. For a discussion of the termination agreement, see the section entitled “—Other Material Agreements Relating to the Merger—ECO Termination Agreement” beginning on page 100 of this joint proxy statement/prospectus.

 

H Power executed an engagement letter dated August 27, 2002 to retain Lehman Brothers Inc. as its investment bank with regard to certain strategic transactions which H Power might pursue. Mr. Clark, a member of H Power’s board of directors, is currently a vice-chairman of Lehman Brothers.

 

Consideration of the Merger by Plug Power’s Board of Directors

 

Plug Power’s Reasons for the Merger

 

Plug Power’s board of directors has unanimously approved the merger agreement and the transactions contemplated by the merger agreement, including the issuance of Plug Power common stock in the merger, and has determined that the terms of the merger agreement and the merger are in the best interests of Plug Power’s stockholders.

 

The following discussion of Plug Power’s reasons for the merger contains a number of forward-looking statements that reflect the current views of Plug Power with respect to future events. Forward-looking statements are subject to risks and uncertainties. Actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Cautionary statements that identify important factors that could cause or contribute to differences in results and outcomes include those discussed or incorporated by reference in the section entitled “Cautionary Statements Regarding Forward-Looking Statements in this Joint Proxy Statement/Prospectus” beginning on page 25 of this joint proxy statement/prospectus, and the section entitled “Risk Factors” beginning on page 27 of this joint proxy statement/prospectus.

 

The decision by Plug Power’s board of directors was based on several potential benefits of the merger that the Plug Power board of directors believes will contribute to the future success of the combined company. These potential benefits and material factors include:

 

    the opinion of Stephens Inc., Plug Power’s financial advisor, to the effect that as of November 11, 2002, the exchange ratio set forth in the merger agreement was fair, from a financial point of view, to Plug Power;

 

    H Power’s cash reserves and Plug Power’s belief that the addition of such cash to its own balance sheet would provide Plug Power with sufficient cash to help fund operations;

 

    H Power’s intellectual property rights, technical resources and other assets;

 

    the opportunity to preserve and enhance stockholder value by combining two complementary businesses;

 

    the belief that the merger represents the most favorable alternative currently available to Plug Power to increase its capital resources and further its business objectives;

 

    the belief that, while no assurances can be given, the merger is likely to be completed because of the limited nature of the closing conditions included in the merger agreement;

 

    the belief that the merger agreement will likely be approved by H Power’s and Plug Power’s stockholders based upon (1) the premium offered to H Power’s stockholders relative to the current and historical price of H Power common stock and (2) the potential benefits of the merger to Plug Power and its stockholders identified by the board of directors as described in this section of the joint proxy statement/prospectus, including, in particular, the addition of H Power’s cash reserves to help fund Plug Power’s operations;

 

    the benefits contemplated in connection with the merger, in particular the influx of capital resources, are likely to be achieved within a reasonable time frame;

 

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    the belief that the combined company will be in a better position to continue to compete effectively in the fuel cell industry;

 

    the terms of the merger agreement, including the ability of Plug Power to terminate the agreement if the H Power board of directors withdraws its recommendation in favor of the merger or approves or recommends any other acquisition proposal and the right to receive a $2,000,000 termination fee or to be reimbursed for Plug Power’s out-of-pocket expenses incurred in connection with the merger in the event that Plug Power terminates the merger agreement under certain circumstances;

 

    the potential cost savings through the consolidation of businesses and the elimination of duplicative costs; and

 

    the access to H Power’s portfolio of strategic partners and suppliers.

 

The Plug Power board of directors also identified and considered a number of potentially negative factors in its deliberations concerning the merger, including the following:

 

    the risk that the potential benefits of the merger may not be realized, in part or at all, including the risk that H Power’s net cash at the effective time of the merger may be less than at the signing of the merger agreement or the date of the special meeting of Plug Power stockholders;

 

    the risk that the merger may not be consummated, including the risks associated with obtaining the necessary approvals required to complete the merger, notwithstanding the voting agreements obtained from stockholders representing beneficial ownership of approximately 10.7% of H Power’s common stock as of February 10, 2003;

 

    the risk of management and employee disruption associated with the merger, including the risk that despite the efforts of the combined company, key technical, marketing and management personnel might not remain employed by the combined company;

 

    the potential costs the combined company may incur to (1) terminate, renegotiate or amend H Power’s existing obligations, including real estate and facility leases, (2) streamline the combined company’s business, (3) reduce excess capacity, including terminating employees and (4) eliminate redundant operations, including the consolidation of H Power’s operations into Plug Power’s headquarters in Latham, N.Y.;

 

    the dilutive effect of the merger on Plug Power’s existing stockholders;

 

    the risk that the merger could adversely affect Plug Power’s relationship with some of its existing or potential customers, suppliers or strategic partners;

 

    the potential negative effect on Plug Power’s stock price as a result of the public announcement of the merger;

 

    the significant costs involved in consummating the merger; and

 

    other applicable risks described in this joint proxy statement/prospectus under “Risk Factors.”

 

The Plug Power board of directors did not believe that the negative factors were sufficient, individually or in the aggregate, to outweigh the potential benefits of the merger.

 

Factors Considered by Plug Power’s Board of Directors

 

Plug Power’s board of directors consulted with senior management and its financial and legal advisors and considered a number of factors, including the following, in evaluating the merger:

 

    the potential benefits and potential negative factors associated with the merger;

 

    information concerning H Power’s business, financial performance and condition, particularly its cash position, operations, intellectual property, technology and management;

 

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    the timing of the financing provided by the merger;

 

    the relative inaccessibility and cost of other capital sources in the current economic environment;

 

    current financial market conditions and historical market prices, volatility and trading information with respect to Plug Power common stock and H Power common stock;

 

    the terms of the merger agreement and related agreements;

 

    the potential impact of the merger on the customers, suppliers, strategic partners and employees of Plug Power and the combined company;

 

    Plug Power’s management’s view as to the integration of H Power;

 

    the results of the due diligence investigation conducted by Plug Power’s management, accountants, financial advisors and legal counsel;

 

    the expected percentage ownership of the combined company by H Power’s stockholders;

 

    the strategic and financial alternatives available to Plug Power;

 

    the maturation cycle with respect to the fuel cell market generally;

 

    advice of Plug Power’s outside legal counsel, on the proposed terms of the merger agreement; and

 

    the analyses performed by Stephens, and its opinion (the full text of which is attached as Annex D to this joint proxy statement/prospectus).

 

The foregoing discussion of the information and factors considered by Plug Power’s board of directors, while not exhaustive, includes the material factors considered by the board of directors. In view of the variety of factors considered in connection with its evaluation of the merger, Plug Power’s board of directors did not find it practicable to, and did not, quantify or otherwise assign relative or specific weight or values to any of these factors, and individual directors may have given different weights to different factors.

 

Recommendation of Plug Power’s Board of Directors

 

The Plug Power board of directors has unanimously determined that the merger including, without limitation, the issuance of shares of Plug Power common stock is advisable and in the best interests of Plug Power’s stockholders. Accordingly, the Plug Power board of directors has unanimously approved the merger agreement and the merger and recommends that stockholders vote FOR approval of the issuance of shares of Plug Power common stock in the merger pursuant to the merger agreement.

 

Opinion of Plug Power’s Financial Advisor

 

The Plug Power board of directors engaged Stephens Inc. to provide a fairness opinion in connection with the proposed acquisition of H Power by Plug Power pursuant to the merger agreement.

 

On November 4, 2002, Stephens presented its oral fairness opinion and certain of its analyses to the Plug Power board of directors. From this date until November 11, 2002, the date upon which the merger agreement was executed, the material information and data upon which Stephens’ fairness opinion is based did not materially change. Stephens subsequently delivered its written opinion, dated November 11, 2002, to the Plug Power board of directors to the effect that, as of such date and subject to the qualifications set forth in the opinion, the exchange ratio, as defined in the merger agreement, was fair to Plug Power from a financial point of view.

 

The full text of the written fairness opinion of Stephens, which sets forth the assumptions made, general procedures followed, factors considered and limitations on the review undertaken by Stephens in rendering its opinion, is attached as Annex D and is incorporated into this joint proxy statement/prospectus by reference. You should read this opinion in its entirety.

 

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Stephens has consented to the use of its fairness opinion in this joint proxy statement/prospectus. Stephens provided the fairness opinion to the Plug Power board of directors for its information, and the fairness opinion is directed only to the fairness, from a financial point of view, of the exchange ratio to Plug Power. The fairness opinion does not constitute a recommendation to any stockholder of Plug Power as to how that stockholder should vote on the merger. The summary of the fairness opinion set forth in this joint proxy statement/prospectus is qualified in its entirety by reference to the full text of the fairness opinion.

 

In connection with rendering its opinion, Stephens performed the following, which include all of the material analyses performed by it:

 

  (1)   analyzed certain publicly available financial statements and reports regarding Plug Power and H Power;

 

  (2)   analyzed certain internal financial statements and other financial and operating data concerning Plug Power and H Power prepared by the management of each;

 

  (3)   analyzed, on a pro forma basis, the effect of the merger on Plug Power’s balance sheet, capitalization ratios, earnings and book value;

 

  (4)   reviewed and compared the reported prices and trading activity for the H Power shares and Plug Power shares, with that of certain other comparable publicly-traded companies and their securities;

 

  (5)   analyzed the assets, liabilities and operations of H Power;

 

  (6)   reviewed, to the extent publicly available, certain comparable transactions;

 

  (7)   reviewed the merger agreement and related documents;

 

  (8)   discussed with the management of Plug Power the operations of, and future business prospects for, Plug Power and the anticipated financial consequences of the merger to Plug Power, including the expected costs of integrating H Power into Plug Power and any expected synergies;

 

  (9)   assisted in Plug Power’s deliberations regarding the material financial terms of the merger and Plug Power’s negotiations with H Power; and

 

  (10)   considered certain financial and strategic alternatives available to Plug Power.

 

In preparing the fairness opinion, Stephens relied on the accuracy and completeness of the representations and warranties of each party to the merger agreement and other information and financial data provided to it by the parties, without independently verifying the same, and Stephens’ opinion is based, in part, upon such information. Stephens inquired into the reliability of such information and financial data only to the limited extent necessary to provide a reasonable basis for its opinion, recognizing that it was rendering only an informed opinion and not an appraisal or certification of value.

 

With respect to the financial projections prepared by management of each of Plug Power and H Power, including potential synergies, Stephens assumed that they have been reasonably prepared and reflect the best currently available estimates and judgments of the future financial performance of each company.

 

Stephens also assumed that in the course of obtaining the necessary regulatory or other consents or approvals (contractual or otherwise) for the merger, no restrictions, including any divestiture agreements or amendments or modification, would be imposed that would have a material adverse impact on the contemplated benefits of the merger.

 

Stephens was not asked to consider, and the fairness opinion does not in any manner address, the price at which Plug Power common stock or H Power common stock would trade following either the announcement or consummation of the merger. The fairness opinion is necessarily based upon market, economic and other conditions as they existed on, and could be evaluated on, and on the information made available to Stephens as of, the date of the opinion.

 

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Summary of Analyses

 

The following is a summary of the material financial analyses used by Stephens in connection with its fairness opinion.

 

The summary does not purport to be a complete description of all analyses performed and factors considered by Stephens. The preparation of a fairness opinion involves complex considerations and various determinations as to the most appropriate and relevant methods of financial analyses and the application of these methods to the particular circumstances and, therefore, an opinion is not readily susceptible to summary description. Each of the analyses conducted by Stephens was carried out in order to provide a different perspective on the transaction and to add to the total mix of information available. Stephens did not form a conclusion as to whether any individual analysis, considered in isolation, supported or failed to support an opinion as to the fairness of the exchange ratio from a financial point of view. Rather, in reaching its conclusion, Stephens relied upon the results of the analyses taken as a whole and also on application of Stephens’ own experience and judgment. Accordingly, notwithstanding the separate factors summarized below, Stephens has indicated to the Plug Power board of directors that it believes that consideration of some of the relevant analyses and factors, without considering all analyses and factors, could create an incomplete or inaccurate view of the evaluation process underlying the opinion. The analyses performed by Stephens are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses. Furthermore, as indicated below, the analyses focused, in part, on the value to Plug Power of H Power’s net cash and book value, among other assets, rather than discounted cash flow analysis or multiples of projected revenues and earnings, which Stephens deemed not as meaningful with respect to the contemplated merger.

 

Publicly Traded Company Analysis

 

Stephens analyzed the publicly available financial information of 7 selected publicly traded companies that Stephens believed to be appropriate for comparison to corresponding financial information and operating data of H Power. These companies, referred to as the “public comparables,” were:

 

•   Ballard Power Systems, Inc.;

 

•   Millennium Cell Inc.;

•   Fuel Cell Energy, Inc.;

 

•   Stuart Energy Systems Corporation; and

•   Hydrogenics Corporation;

 

•   Global Thermoelectric Inc.

•   Proton Energy Systems, Inc.;

   

 

Stephens compared, among other things, the net cash ratio, computed as the equity market capitalization divided by cash and cash equivalents less funded debt and capital lease obligations for the public comparables. Stephens also compared the book value ratio, computed as the equity market capitalization divided by total stockholders’ equity. These ratios are presented in the following table:

 

    

Public Comparable Multiples


    

Low


  

Median


  

High


Market Capitalization as a ratio of:

              

Net Cash

  

0.4x

  

1.1x

  

6.1x

Book Value

  

0.4

  

0.9

  

5.8

 

In light of this data and Stephens’ own experience and judgment, Stephens derived a range of implied exchange ratios for the merger of:

 

    .58-.99 based on a ratio of market capitalization to net cash

 

    .79-1.19 based on a ratio of market capitalization to book value

 

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The exchange ratio for the merger was initially calculated as approximately .80 but may vary and shall not exceed approximately .89 nor be less than approximately .73, assuming no adjustment to net cash at the effective time of the merger as outlined in the merger agreement.

 

Precedent Transaction Analysis

 

In light of the relevance of the increase in net cash that Plug Power may realize from the merger and the fact that there were no comparable transactions within the fuel cell industry, Stephens analyzed the transaction value multiples paid or proposed to be paid in selected precedent transactions in which the target’s net cash appeared to be a major component of the rationale for the transaction. These transactions, referred to as “transaction comparables” were:

 

    Valueclick Inc. / Be Free Inc. – March 11, 2002

 

    MCSi Inc. / Zengine Inc. – October 5, 2001

 

    Divine Inc. / Eprise Corp. – September 18, 2001

 

    Cross Media Marketing Corp. / Lifeminders Inc. – July 19, 2001

 

    Verso Technologies Inc. / Telemate Net Software Inc. – May 7, 2001

 

    Kana Software Inc. / Broadbase Software Inc. – April 9, 2001

 

Stephens compared, among other things, the net cash ratio, computed as the transaction value divided by cash and cash equivalents less funded debt and capital lease obligations for the transaction comparables. Stephens also compared the book value ratio, computed as the transaction value divided by total stockholders’ equity. These ratios are presented in the following table:

 

    

Transactions Comparable Multiples


    

Low


  

Median


  

High


Transaction Value as a ratio of:

              

Net Cash

  

0.7x

  

1.1x

  

1.4x

Book Value

  

0.6

  

1.0

  

1.6

 

In light of this data and Stephens’ own experience and judgment, Stephens derived a range of implied exchange ratios for the merger of:

 

    .74-.99 based on a ratio of transaction value to net cash

 

    .69-1.19 based on a ratio of transaction value to book value

 

The exchange ratio for the merger was initially calculated as approximately .80 but may vary and shall not exceed approximately .89 nor be less than approximately .73, assuming no adjustment to net cash at the effective time of the merger as outlined in the merger agreement.

 

Historical Exchange Ratio Analysis

 

Stephens compared the 30, 45 and 60-day closing stock price averages for Plug Power and H Power. Using these averages, Stephens derived implied exchange ratios for the 30, 45 and 60 day periods and then compared the implied exchange ratios to the estimated .80 exchange ratio contemplated in the merger agreement. The results of this analysis are summarized in the table below.

 

      

Implied Exchange Ratio


 
      

30 Day Average


      

45 Day Average


      

60 Day Average


 

Exchange Ratio

    

0.58

 

    

0.62

 

    

0.68

 

Estimated Exchange Ratio per Merger Agreement

    

0.80

 

    

0.80

 

    

0.80

 

Implied Premium Paid

    

38.4

%

    

29.2

%

    

17.4

%

 

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Stephens concluded that the premium to be paid in the merger is within a range of premiums paid in transactions of a like nature.

 

Net Cash Analysis

 

In light of Plug Power’s objective to improve its capitalization position, Stephens made an assessment of the capital markets environment as it might apply to Plug Power. Stephens, based partly on information provided to it by Plug Power, determined that, during the time period of the merger negotiations, such capital markets environment was extremely difficult and that it was highly unpredictable for the foreseeable future. Therefore, Stephens also analyzed the net cash that Plug Power might expect to receive in a public equity transaction, if feasible, versus the net cash that Plug Power believes it will realize from the merger after integration of H Power’s operations, based on various assumptions.

 

Stephens performed such net cash analysis taking into account H Power’s available cash and using various assumptions with respect to the realizable cash value of H Power’s non-cash assets, including accounts receivable, inventories, property, plant and equipment and other assets. Stephens also analyzed and made various assumptions regarding H Power’s estimated cash outlays prior to closing as well as those that would be assumed by Plug Power post-closing, including H Power’s normal operating expenses, transaction fees and expenses, and other obligations related to employment contracts, leases, insurance and other contractual commitments. Stephens’ assumptions were based on a combination of information provided to it by H Power and its advisors, Plug Power and, in some cases, the assessments of other third parties, which it deemed reliable. This analysis resulted in Stephens’ estimate that Plug Power would effectively realize approximately $29.7 million in net cash as a result of the merger after integration of H Power’s operations and assuming a closing date in early January 2003. While Stephens believes it used reasonable assumptions in making its estimates, it recognizes that the actual net cash realized by Plug Power after the merger could vary materially from that estimated and advised Plug Power’s Board of Directors accordingly.

 

In comparing the merger to a potential equity offering, Stephens also estimated discounts to the trading price of Plug Power’s common stock at which an offering might be consummated while advising Plug Power that completing an offering on reasonable terms would be highly unlikely, in light of current capital markets conditions. In doing so, Stephens assumed trading price discounts of up to 40%, which reflected estimated pricing discounts, likely pre-sale price drops, placement fees and expenses normally associated with private investments in public equity under similar circumstances and conditions, given Stephens experience and judgment. The results of such analysis indicated that one consequence of the merger is that it represents a comparable, if not superior, method of enhancing Plug Power’s capitalization, when compared to attempting to consummate a public equity transaction in the existing capital markets environment.

 

Fees

 

Pursuant to a letter agreement between Plug Power and Stephens, Plug Power agreed to pay Stephens a fee of $350,000 in connection with the delivery of the fairness opinion. In addition, Stephens will receive a fee estimated to be approximately $400,000 for services rendered in connection with the merger upon the closing of the merger. Stephens will also be reimbursed for its out-of-pocket expenses, including reasonable fees and disbursements of outside counsel. In addition, Plug Power has agreed to indemnify Stephens for liabilities related to or arising out of the engagement, including specified liabilities under the federal securities laws.

 

As part of Stephens’ investment banking business, it regularly issues fairness opinions and is continually engaged in the valuation of companies and their securities in connection with business reorganizations, private placements, negotiated underwritings, mergers and acquisitions and valuations for estate, corporate and other purposes. Stephens also provides other investment banking services to Plug Power. Stephens has received fees from Plug Power for those services during the past two years, all of which were provided during 2002, totaling $150,000. In the ordinary course of business, Stephens and its affiliates at any time may hold long or short positions, and may trade or otherwise effect transactions as principal or for the accounts of customers, in debt or equity securities or options on securities of Plug Power.

 

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The Merger Agreement

 

Structure of the Merger

 

Under the terms of the merger agreement, Monmouth Acquisition Corp. will be merged with and into H Power, and H Power will survive the merger as a wholly-owned subsidiary of Plug Power.

 

Completion and Effectiveness of the Merger

 

Plug Power and H Power expect to complete the merger when all of the conditions to completion of the merger contained in the merger agreement have been satisfied or waived. The merger will become effective upon the filing of a certificate of merger with the Secretary of State of the State of Delaware or at a subsequent date or time as specified in the certificate of merger. Subject to receiving their respective stockholders’ approvals, H Power and Plug Power expect to file the certificate of merger shortly following the special meeting of H Power stockholders at which the merger agreement and the merger will be considered and voted upon and the special meeting of Plug Power stockholders at which the issuance of Plug Power common stock pursuant to the merger will be considered and voted upon.

 

Plug Power and H Power are working toward satisfying these conditions and completing the merger as soon as practicable. Plug Power and H Power currently plan to complete the merger in the first quarter of 2003, following the special meetings of H Power stockholders and Plug Power stockholders assuming the H Power stockholders approve the merger and the merger agreement, the Plug Power stockholders approve the issuance of Plug Power common stock pursuant to the merger and the other merger conditions are satisfied. Because the merger is subject to specified conditions, some of which are beyond Plug Power’s and H Power’s control, the exact timing cannot be predicted.

 

Conversion of H Power Common Stock in the Merger

 

The merger agreement provides that each outstanding share of H Power common stock will be converted into the right to receive a fixed number of shares of common stock of Plug Power based on an exchange ratio calculated as follows:

 

exchange  ratio  =   (the transaction value price ÷ average Plug Power common stock price) ÷ the total number of shares of H Power common stock outstanding immediately prior to the effective time of the merger.

 

For purposes of the merger agreement, the average Plug Power common stock price will be computed from the daily volume weighted average price of Plug Power common stock based on trading between 9:30 a.m. and 4:00 p.m. Eastern Time as reported by Bloomberg Financial L.P. for 10 trading days selected by lot out of the 20 trading days ending on and including the second trading day preceding the effective time of the merger.

 

Collar Adjustment

 

The exchange ratio is subject to change depending on two adjustment mechanisms. First, the exchange ratio is restricted by a 10% collar from an assumed Plug Power common stock price of $5.88 per share, which provides that if the average Plug Power common stock price is:

 

    between $6.47 and $5.29 (or equal to such prices), there is no change to the exchange ratio as derived from the formula above;

 

    greater than $6.47, then the exchange ratio shall equal the exchange ratio that would be determined if the average Plug Power common stock price was $6.47; and

 

    less than $5.29, then the exchange ratio shall equal the exchange ratio that would be determined if the average Plug Power common stock price was $5.29.

 

Since many of the variables necessary to determine the exchange ratio will not be determined until shortly prior to the effective time of the merger, the precise exchange ratio will not be known until immediately prior to

 

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the effective time of the merger. The closing sale price of Plug Power common stock on February 11, 2003, the trading day prior to the date of printing of this joint pro