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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended July 31, 2002, or
¨ Transition report pursuant to Section 13 or 15(d) of
the Securities
Exchange Act of 1934
For the transition period from to
Commission File No. 0-49629
Quantum Fuel Systems Technologies Worldwide, Inc.
(Exact name of registrant as specified in its charter)
| Delaware (State of Incorporation) |
|
33-0933072 (IRS Employer I.D. No.) |
17872 Cartwright Road, Irvine, CA 92614
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (949) 399-4500
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes x No ¨
Number of shares outstanding of each of the issuer’s classes of common stock, as of September 13, 2002:
14,142,036 shares of Common Stock, $.001 par value per share, and 3,513,439 shares of Series A Common Stock, $.001 par value per share.
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
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3 |
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4 |
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5 |
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6 |
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7 |
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12 |
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17 |
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21 |
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
QUANTUM FUEL SYSTEMS TECHNOLOGIES
WORLDWIDE, INC.
CONDENSED BALANCE SHEETS
April 30, 2002 and
July 31, 2002
| |
|
April 30, 2002
|
|
|
July 31, 2002
|
|
| |
|
|
|
|
(Unaudited) |
|
| ASSETS |
|
|
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
177,414 |
|
|
$ |
14,293,203 |
|
| Accounts receivable, less allowance for doubtful accounts |
|
|
4,494,328 |
|
|
|
3,342,947 |
|
| Inventories: |
|
|
|
|
|
|
|
|
| Raw materials and parts |
|
|
8,483,374 |
|
|
|
7,556,572 |
|
| Work-in-process |
|
|
206,921 |
|
|
|
309,346 |
|
| Finished goods |
|
|
3,467,262 |
|
|
|
3,554,670 |
|
| Less reserve for obsolescence |
|
|
(2,530,941 |
) |
|
|
(2,503,223 |
) |
| |
|
|
|
|
|
|
|
|
| Total inventories |
|
|
9,626,616 |
|
|
|
8,917,365 |
|
| Other current assets |
|
|
87,713 |
|
|
|
151,401 |
|
| |
|
|
|
|
|
|
|
|
| Total current assets |
|
|
14,386,071 |
|
|
|
26,704,916 |
|
| Equipment and leasehold improvements: |
|
|
|
|
|
|
|
|
| Dies, molds and patterns |
|
|
2,676,538 |
|
|
|
2,704,009 |
|
| Machinery and equipment |
|
|
7,085,871 |
|
|
|
8,753,551 |
|
| Office furnishings and equipment |
|
|
7,145,671 |
|
|
|
7,173,942 |
|
| Automobiles and trucks |
|
|
121,979 |
|
|
|
101,144 |
|
| Leasehold improvements |
|
|
2,460,714 |
|
|
|
2,471,447 |
|
| Construction in process |
|
|
1,967,735 |
|
|
|
388,582 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
21,458,508 |
|
|
|
21,592,675 |
|
| Less accumulated depreciation and amortization |
|
|
8,039,155 |
|
|
|
8,879,848 |
|
| |
|
|
|
|
|
|
|
|
| Net equipment and leasehold improvements |
|
|
13,419,353 |
|
|
|
12,712,827 |
|
| Intangible asset, net of accumulated amortization of $31,000 at July 31,
2002 |
|
|
0 |
|
|
|
14,198,239 |
|
| Other assets |
|
|
354,000 |
|
|
|
117,529 |
|
| |
|
|
|
|
|
|
|
|
| |
|
$ |
28,159,424 |
|
|
$ |
53,733,511 |
|
| |
|
|
|
|
|
|
|
|
See accompanying notes to condensed financial statements.
3
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
April 30, 2002 and July 31, 2002
(Continued)
| |
|
April 30, 2002
|
|
July 31, 2002
|
|
| |
|
|
|
(Unaudited) |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
| Accounts payable |
|
$ |
6,761,294 |
|
$ |
5,686,972 |
|
| Accrued payroll obligations |
|
|
660,166 |
|
|
588,912 |
|
| Other accrued expenses |
|
|
1,526,230 |
|
|
1,381,317 |
|
| Current lines of credit |
|
|
8,625,000 |
|
|
0 |
|
| Current maturities of long-term debt and capital leases |
|
|
188,832 |
|
|
188,832 |
|
| |
|
|
|
|
|
|
|
| Total current liabilities |
|
|
17,761,522 |
|
|
7,846,033 |
|
| Capital lease obligations, less current portion |
|
|
127,355 |
|
|
83,805 |
|
| Invested and stockholders’ equity: |
|
|
|
|
|
|
|
| Invested equity |
|
|
10,270,447 |
|
|
— |
|
| Preferred stock, $.001 par value, 15,000,000 shares authorized at April 30, 2002; 20,000,000 shares authorized at July
31, 2002; none issued and outstanding at April 30, 2002 and July 31, 2002 |
|
|
— |
|
|
— |
|
| Series A common stock, $.001 par value, none authorized at April 30, 2002; 12,000,000 shares authorized at July 31,
2002; 0 shares issued and outstanding at April 30, 2002; 3,513,439 shares issued and outstanding at July 31, 2002 |
|
|
— |
|
|
3,513 |
|
| Series B common stock, $.001 par value, none authorized at April 30, 2002; 6,000,000 shares authorized at July 31, 2002;
0 shares issued and outstanding at April 30, 2002 and July 31, 2002 |
|
|
— |
|
|
— |
|
| Common stock, $.001 par value, 35,000,000 shares authorized at April 30, 2002; 42,000,000 shares authorized at July 31,
2002; 1,000 shares issued and outstanding at April 30, 2002; 14,142,036 shares issued and outstanding at July 31, 2002 |
|
|
1 |
|
|
14,142 |
|
| Additional paid-in capital |
|
|
99 |
|
|
46,154,162 |
|
| Accumulated deficit |
|
|
— |
|
|
(368,144 |
) |
| |
|
|
|
|
|
|
|
| Total invested and stockholders’ equity |
|
|
10,270,547 |
|
|
45,803,673 |
|
| |
|
|
|
|
|
|
|
| |
|
$ |
28,159,424 |
|
$ |
53,733,511 |
|
| |
|
|
|
|
|
|
|
See accompanying notes to condensed financial statements.
4
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
CONDENSED STATEMENTS OF OPERATIONS Unaudited
Three months ended July 31, 2001 and 2002
| |
|
Three Months Ended July
31,
|
|
| |
|
2001
|
|
|
2002
|
|
| Net Revenue: |
|
|
|
|
|
|
|
|
| Product sales |
|
$ |
4,592,168 |
|
|
$ |
2,852,471 |
|
| Contract revenue |
|
|
2,337,823 |
|
|
|
1,765,978 |
|
| |
|
|
|
|
|
|
|
|
| Total revenue |
|
|
6,929,991 |
|
|
|
4,618,449 |
|
| Costs and expenses: |
|
|
|
|
|
|
|
|
| Cost of product sales |
|
|
6,590,194 |
|
|
|
3,684,120 |
|
| Research and development |
|
|
9,750,275 |
|
|
|
4,399,560 |
|
| Selling, general and administrative |
|
|
1,823,756 |
|
|
|
1,493,675 |
|
| |
|
|
|
|
|
|
|
|
| Total costs and expenses |
|
|
18,164,225 |
|
|
|
9,577,355 |
|
| Operating loss |
|
|
(11,234,234 |
) |
|
|
(4,958,906 |
) |
| Interest expense (income) |
|
|
(3,673 |
) |
|
|
96,489 |
|
| |
|
|
|
|
|
|
|
|
| Net loss applicable to common stock |
|
$ |
(11,230,561 |
) |
|
$ |
(5,055,395 |
) |
| |
|
|
|
|
|
|
|
|
| Net loss per share: |
|
|
|
|
|
|
|
|
| Basic |
|
$ |
(0.64 |
) |
|
$ |
(0.29 |
) |
| |
|
|
|
|
|
|
|
|
| Diluted |
|
$ |
(0.64 |
) |
|
$ |
(0.29 |
) |
| |
|
|
|
|
|
|
|
|
| Number of shares used in per share calculation: |
|
|
|
|
|
|
|
|
| Basic |
|
|
17,655,475 |
|
|
|
17,655,475 |
|
| |
|
|
|
|
|
|
|
|
| Diluted |
|
|
17,655,475 |
|
|
|
17,655,475 |
|
| |
|
|
|
|
|
|
|
|
See accompanying notes to condensed financial
statements.
5
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
CONDENSED STATEMENTS OF CASH FLOWS Unaudited
Three months ended July 31, 2001 and 2002
| |
|
Three Months Ended July
31,
|
|
| |
|
2001
|
|
|
2002
|
|
| Net cash used in operating activities |
|
$ |
(10,353,644 |
) |
|
$ |
(3,419,752 |
) |
| |
| Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| Purchases of equipment and leasehold improvements |
|
|
(1,243,042 |
) |
|
|
(155,003 |
) |
| Proceeds from sales of equipment |
|
|
— |
|
|
|
20,836 |
|
| |
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
|
(1,243,042 |
) |
|
|
(134,167 |
) |
| |
| Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| Proceeds (payments) on capital lease obligations |
|
|
(47,210 |
) |
|
|
(47,210 |
) |
| Contributions from IMPCO Technologies upon distribution |
|
|
— |
|
|
|
15,000,000 |
|
| Proceeds from issuance of common stock |
|
|
— |
|
|
|
3,513 |
|
| Net advances from parent prior to distribution |
|
|
11,147,841 |
|
|
|
2,713,405 |
|
| |
|
|
|
|
|
|
|
|
| Net cash provided by financing activities |
|
|
11,100,631 |
|
|
|
17,669,708 |
|
| |
|
|
|
|
|
|
|
|
| Net increase (decrease) in cash and cash equivalents |
|
|
(496,055 |
) |
|
|
14,115,789 |
|
| Cash and cash equivalents at beginning of period |
|
|
4,300 |
|
|
|
177,414 |
|
| |
|
|
|
|
|
|
|
|
| Cash and cash equivalents at end of period |
|
$ |
(491,755 |
) |
|
$ |
14,293,203 |
|
| |
|
|
|
|
|
|
|
|
| Supplemental schedule of non-cash activity: |
|
|
|
|
|
|
|
|
| Issuance of GM stock recorded as intangible asset |
|
|
— |
|
|
$ |
14,229,428 |
|
| Assumption of line of credit by IMPCO Technologies |
|
|
— |
|
|
|
8,625,000 |
|
| Conversion of owners net investment to stockholders’ equity |
|
|
— |
|
|
|
31,921,600 |
|
See accompanying notes to condensed financial
statements.
6
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS July 31, 2001 and 2002
1) BASIS OF PRESENTATION
On July 23, 2002, IMPCO Technologies, Inc. (IMPCO) completed
the distribution and spin-off of Quantum Fuel Systems Technologies Worldwide, Inc. (the Company) to its stockholders. The Company is focusing on enabling technologies for alternative propulsion and energy in emerging global markets. The Company
provides hydrogen and compressed natural gas (CNG) handling and storage system technologies to manufacturers of fuel cell and internal combustion engines.
On the date of the distribution and spin-off, IMPCO distributed the stock of the Company to stockholders of IMPCO based on a distribution ratio of one share of the Company’s common stock for every share of IMPCO common
stock outstanding on the record date. In addition, IMPCO contributed $15 million in cash to the Company and assumed the Company’s debt facility of $8.6 million on the date of distribution. Furthermore, as discussed in Note 7, immediately
following the spin-off the Company issued 3,513,439 shares of its Series A common stock to General Motors (GM) in connection with a strategic alliance between the Company and GM. The Company’s accumulated deficit at July 31, 2002 of $368,144
represents its operating results from the distribution date to July 31, 2002.
The financial statements include the Company, as well as
certain assets, liabilities, and related operations that were transferred to the Company (the Contribution) from IMPCO. The financial statements include the historical operations transferred to the Company by IMPCO (the Company’s Businesses).
The Contribution was completed prior to the distribution and resulted in a recapitalization of the Company.
The accompanying condensed
financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the financial position and operating results for the
interim periods. The condensed financial statements should be read in conjunction with the financial statements and notes thereto, together with management’s discussion and analysis of financial condition and the results of operations,
contained in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2002. The results of operations for the three months ended July 31, 2002 are not necessarily indicative of the results that may be expected for the entire
year ending April 30, 2003.
The financial statements include allocations of certain IMPCO corporate headquarters’ assets,
liabilities, and expenses relating to the Company’s Businesses that were transferred to the Company from IMPCO. General corporate overhead has been allocated either based on the ratio of the Company’s headcount to IMPCO’s total
headcount, on the Company’s revenue as a percentage of IMPCO’s total revenue, or specifically identified costs for the Company. General corporate overhead primarily includes salary and expenses for the executive management, finance, legal,
human resources, information services and investor relations departments and amounted to approximately $712,000 and $129,000 for the three months ending July 31, 2001 and 2002, respectively. Management believes the costs of these services charged to
the Company are a reasonable representation of the costs that would have been incurred if the Company had performed these functions as a stand-alone company. Following the spin-off from IMPCO, the Company is performing these functions using its own
resources or purchased services.
The balance sheet at April 30, 2002 has been derived from the audited financial statements at that date
but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and notes thereto included in the
Company’s annual report on Form 10-K for the year ended April 30, 2002.
Certain reclassifications have been made to prior period
balances in order to conform to the current period presentation.
2) EARNINGS PER SHARE
The Company computes net income (loss) per share in accordance with SFAS No. 128, “Earnings Per Share”, and SEC Staff Accounting Bulletin
(“SAB”) No. 98. Under the provisions of SFAS No. 128, basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net
income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period.
Under the provisions of SAB No. 98, common shares issued for nominal consideration, if any, would be included in the per share calculations as if they were outstanding for all periods
presented. The Company initially issued 1,000 shares of common stock to IMPCO in February 2002 for nominal consideration. The 3,513,439 Series A Common shares have been issued for nominal consideration. In July 2002, IMPCO’s Board of Directors
declared a 1-for-1 stock dividend whereby every shareholder of IMPCO Common Stock received a corresponding share of the Company’s common stock. Prior to the spin-off, the Company declared a stock split to increase the number of shares
outstanding to match the number of shares outstanding of IMPCO’s common stock. All share information has been retroactively restated to reflect
7
17,655,475 shares of common stock outstanding for all periods. The Company considers common equivalent
shares from the exercise of stock options in the instance where the shares are dilutive to net income of the Company by application of the treasury stock method. The effects of stock options were anti-dilutive for all periods presented.
The following table sets forth the computation of basic and diluted earnings per share:
| |
|
Three Months Ended July 31,
|
|
| |
|
2001
|
|
|
2002
|
|
| Numerator: |
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(11,230,561 |
) |
|
$ |
(5,055,395 |
) |
| Numerator for basic earnings per share—loss to common stockholders |
|
$ |
(11,230,561 |
) |
|
$ |
(5,055,395 |
) |
| Numerator for diluted earnings per share—loss to common stockholders |
|
$ |
(11,230,561 |
) |
|
$ |
(5,055,395 |
) |
| |
| Denominator: |
|
|
|
|
|
|
|
|
| Denominator for basic earnings per share—weighted-average shares |
|
|
17,655,475 |
|
|
|
17,655,475 |
|
| Denominator for diluted earnings per share—adjusted weighted-average shares |
|
|
17,655,475 |
|
|
|
17,655,475 |
|
| |
|
|
|
|
|
|
|
|
| Basic earnings per share |
|
$ |
(0.64 |
) |
|
$ |
(0.29 |
) |
| |
|
|
|
|
|
|
|
|
| Diluted earnings per share |
|
$ |
(0.64 |
) |
|
$ |
(0.29 |
) |
| |
|
|
|
|
|
|
|
|
3) BUSINESS SEGMENT INFORMATION
The Company classifies its business operations into four reporting segments: the Alternative Fuels division, Fuel Cell Systems division, Advanced Research & Product Development and
Corporate Expenses. The Alternative Fuels division generates revenues through the sale of compressed natural gas (CNG) and propane (LPG) fuel storage, fuel delivery and electronic control systems to OEMs, primarily General Motors, and the
installation of its products into OEM vehicles. The Alternative Fuels division also generates contract revenue by providing engineering design and support to the OEMs so that its fuel storage, fuel delivery and electronic control systems integrate
and operate with certain of their alternative fuel vehicles. The Fuel Cell Systems division generates limited revenues through the sale of fuel cell-related fuel storage, fuel delivery and electronic control systems to OEMs, and the installation of
its products into OEM vehicles. The Fuel Cell Systems division also generates contract revenue by providing engineering design and support to the OEMs so that its fuel storage, fuel delivery and electronic control systems integrate and operate with
certain of their fuel cell applications. The Fuel Cell Systems division is a new segment for this reporting period and prior year amounts have been restated to reflect the new presentation. The chief operating decision maker allocates resources and
tracks performance by the four reporting segments, which consist of: Alternative Fuels, Fuel Cell Systems, Advanced Research & Product Development and Corporate Expenses. The change in reporting aligns revenue and costs of sales from fuel cell
development contracts with the research and development of fuel cell applications. Previously, all revenue and related cost of sales was reported in the Alternative Fuels segment. The Fuel Cell Systems division also now includes the research and
development directly attributed to fuel cell applications. Previously, these expenses were reported in the Research and Development segment, which has now been changed to Advanced Research & Product Development.
All research and development is expensed as incurred. Research and development expense includes both customer-funded research and development and Company
sponsored research and development. Advanced research and product development is a sub-category of research and development expense and represents company-sponsored research and development that is not allocated to any of its reporting segments.
Customer funded research and development consists primarily of expenses associated with contract revenue. These expenses include applications development costs funded under customer contracts.
The Company recognizes revenue for product sales when products are shipped and title is transferred. Contract revenues are
8
recognized based on the percentage of completion method. Corporate expenses represent a sub-category of
selling, general and administrative expense. Corporate expenses consist of general and administrative expense incurred at the corporate level and includes the amortization of intangible assets.
The Company evaluates performance based on profit or loss from operations before interest and income taxes.
All of the Company’s product revenues are generated from alternative fuel systems for automotive OEM applications. The Company’s revenue to unaffiliated customers is derived from within the
United States. All of the Company’s long-lived assets are based in its offices in Sterling Heights, Michigan, Irvine, California, or Lake Forest, California.
Net revenues and operating loss for the Company’s business segments for the three months ended July 31, 2001 and 2002 are as follows:
| |
|
Revenues |
|
Operating Loss |
|
| |
|
|
|
|
|
| |
|
Three Months Ended July
31
|
|
Three Months Ended July
31
|
|
| |
|
2001
|
|
2002
|
|
2001
|
|
|
2002
|
|
| |
|
(in thousands) |
|
| |
| Alternative fuels |
|
$ |
6,411 |
|
$ |
3,471 |
|
$ |
(1,726 |
) |
|
$ |
(534 |
) |
| Fuel cell systems |
|
|
519 |
|
|
1,147 |
|
|
(4,186 |
) |
|
|
(1,365 |
) |
| Advanced research & product development |
|
|
— |
|
|
— |
|
|
(3,498 |
) |
|
|
(1,566 |
) |
| Corporate expenses (1) |
|
|
— |
|
|
— |
|
|
(1,824 |
) |
|
|
(1,494 |
) |
| |
|
|
|
|
|
| Total |
|
$ |
6,930 |
|
$ |
4,618 |
|
$ |
(11,234 |
) |
|
$ |
(4,959 |
) |
| |
|
|
|
|
|
| (1) Represents corporate expenses not
allocated to any of the reporting segments. |
The advanced research and product development segment of the total operating loss does not
include the product application development costs included in cost of contract revenues. In the statements of operations for the three months ended July 31, 2001 and 2002, the cost of contract revenues of $2,006,000 and $988,000 respectively, have
been included in research and development costs.
Identifiable assets for the Company’s business segments at April 30, 2002 and July
31, 2002 are as follows:
| |
|
Assets |
| |
|
|
| |
|
April 30 2002
|
|
July 31 2002
|
| |
|
(in thousands) |
| |
| Alternative fuels |
|
$ |
19,332 |
|
$ |
16,828 |
| Fuel cell systems |
|
|
1,320 |
|
|
3,285 |
| Advanced research & product development |
|
|
3,061 |
|
|
1,251 |
| Corporate |
|
|
3,827 |
|
|
3,609 |
| Total identifiable assets |
|
|
27,540 |
|
|
24,973 |
| Assets not specifically identifiable |
|
|
619 |
|
|
28,761 |
| |
|
|
|
|
|
|
| Total |
|
$ |
28,159 |
|
$ |
53,734 |
| |
|
|
|
|
|
|
4) WARRANTS
In connection with the spin-off from IMPCO, the Company expects to issue 300,000 warrants to purchase shares of the Company’s common stock to holders of outstanding IMPCO warrants as of the
distribution date, July 23, 2002. These warrants will be issued at an exercise price of $5.83 with a four-year term.
9
5) STOCK OPTIONS
In connection with the spin-off from IMPCO, each IMPCO option holder received one option to purchase Quantum stock for every IMPCO option held at the record
date. The exercise price of both the IMPCO and Quantum stock options was adjusted based on the relative market values of the common stock of both companies on the first trading day following the spin-off. All vesting schedules remain the same and
the option holders will not be required to exercise their options concurrently. Accordingly, the adoption of the Company’s stock option plan did not give rise to a compensation charge. As of the distribution date, 1,358,280 options were granted
out of the Company’s 2002 Stock Incentive Plan to IMPCO stock option holders.
6) INCOME TAXES
Income taxes for the three months ended July 31, 2002 were computed using the effective tax
rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. The Company has established a full valuation allowance for deferred income tax assets due to the lack of earnings history.
7) INTANGIBLE ASSET
In connection with the Company’s strategic alliance with General Motors, the Company issued 3,513,439 shares of its Series A common stock to General Motors on July 24, 2002. This issuance has been
recorded at the estimated fair market value on the date of the distribution of approximately $14.2 million, in accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation,” and EITF 96-18,
“Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods or Services.” The intangible asset was recorded in accordance with the consensus reached by the Emerging Issues
Task Force during their November 2001 meeting with respect to EITF 00-18, “Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other than Employees.”
The Company has adopted the provisions of Statement of Financial Accounting Standards (SFAS) No.142, Goodwill and Other Intangible Assets, effective May 1, 2002. The SFAS requires
that intangible assets other than goodwill be amortized over their useful lives. Accordingly, the Company is amortizing the intangible asset, subject to periodic evaluations for impairment, over the ten-year term of the Corporate Alliance Agreement
with General Motors.
The amortization expense during the first quarter of fiscal year 2003 was approximately $31,000. The expected
amortization expense for the next five fiscal years is as follows:
| |
|
Amortization
Expense
|
| 2003 |
|
$ |
1,098,395 |
| 2004 |
|
|
1,422,943 |
| 2005 |
|
|
1,422,943 |
| 2006 |
|
|
1,422,943 |
| 2007 |
|
|
1,422,943 |
| Thereafter |
|
|
7,439,262 |
8) RESTRUCTURING CHARGES
Beginning in June 2000, following a successful follow-on offering of common stock by IMPCO, the Company developed a cost structure that included
substantial research and development activity, as well as investments in new facilities, to take advantage of its position in the emerging fuel cell industry. In September 2001, in reaction to prevailing market conditions, management enacted a plan
to, among other things, significantly reduce the Company’s operating costs.
In December 2001, the Company adopted a plan to close
its Guaymas, Mexico manufacturing operations, close one of its Sterling Heights, Michigan offices and terminate the employees supporting these facilities. Accordingly, the Company recorded a charge of approximately $1,162,000 during fiscal year 2002
for headcount reduction, lease and contract exit costs and other asset writedowns. In connection with these actions, the Company initiated involuntary separation plans that included headcount reductions of approximately 62 employees at a cost of
$180,000 for severance and related costs. Additional costs of $982,000 were recorded to include losses on asset writedowns, office leases, net of anticipated sublease income over the lease term and contract exit costs.
10
The major components of the restructuring charges and the remaining accrual balance as of July 31, 2002
are as follows (in thousands):
| |
|
Employee termination and severance costs
|
|
Lease exit costs
|
|
Contract exit costs
|
|
Asset writedowns
|
|
Total
|
| 2002 Charges |
|
$ |
180 |
|
$ |
394 |
|
$ |
114 |
|
$ |
474 |
|
$ |
1,162 |
| 2002 Activity |
|
|
180 |
|
|
116 |
|
|
114 |
|
|
474 |
|
|
884 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| April 30, 2002 balance |
|
|
— |
|
|
278 |
|
|
— |
|
|
— |
|
|
278 |
| 2003 Charges |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
| 2003 Activity |
|
|
— |
|
|
160 |
|
|
— |
|
|
— |
|
|
160 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| July 31, 2002 balance |
|
$ |
— |
|
$ |
118 |
|
$ |
— |
|
$ |
— |
|
$ |
118 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Report, including the Management’s Discussion and Analysis which follows,
contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our industry, our beliefs and
assumptions. We use words such as anticipate, expect, intend, plan, believe, seek, estimate and variations of these words and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and
are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.
These risks and uncertainties include, but are not limited to, the following: we have no history operating as an independent company, and we may be unable to make the changes necessary to operate successfully as a stand-alone business; our
historical financial information may not be representative of our results as a stand-alone company and, therefore, may not be reliable as an indicator of our historical or future results; as a result of the spin-off from IMPCO, we are no longer able
to access IMPCO’s cash flows or its ability to raise capital; we will need to raise additional capital in order to continue operations and complete our product development and commercialization plans beyond the near term; the market price and
trading volume of our common stock may be volatile; we may be liable for taxes arising in connection with the distribution, and the tax characteristics of the distribution may interfere with our ability to engage in desirable strategic transactions
and issue equity securities; we may never be able to introduce commercially viable fuel storage, fuel delivery or electronic control products for fuel cell systems; a mass market for fuel storage, fuel delivery and electronic control systems for
fuel cells may never develop or may take longer to develop than we anticipate; we cannot predict the long-term impact of our recent cost reduction measures; our revenue depends to a great extent on our relationship with General Motors and General
Motors’ commitment to the commercialization of the fuel cell and alternative fuel automotive OEM markets; we intend to make significant investments in the research and development of fuel cell enabling technologies, which may not result in any
corresponding increase in net revenue, and may contribute to continuing operating losses; our business depends on the growth of the fuel cell and alternative fuel markets; users of gaseous alternative fueled or fuel cell powered vehicles may not be
able to obtain fuel conveniently and affordably, which may adversely affect the demand for our products; we currently face and will continue to face significant competition, which could result in a decrease in our revenue; our business may be
subject to product liability claims, which could be expensive and could result in a diversion of management’s attention; our business may become subject to future product certification regulations, which may impair our ability to market our
products; new technologies could render our existing products obsolete; we depend on our intellectual property, and our failure to protect that intellectual property could adversely affect our future growth and success; we depend on third-party
suppliers for the supply of key materials and components for our products; we could lose or fail to attract the personnel necessary to run our business; our business could be harmed if we fail to meet OEM specifications; increased warranty claims
could materially affect our financial results; we may experience labor disputes at OEM facilities; changes in environmental policies could hurt the market for our products; and the development of uniform codes and standards for hydrogen fuel cell
vehicles and related hydrogen refueling infrastructure may not develop in a timely fashion. This list of factors is not intended to be exhaustive. Reference should also be made to the factors set forth from time to time in our SEC reports, including
but not limited to those set forth in the section entitled Risk Factors in our Annual Report on Form 10-K for the year ended April 30, 2002. You should not place undue reliance on these forward-looking statements, which reflect our view only as of
the date of this Report.
Overview
We design, manufacture and supply components and systems that store gaseous fuels and monitor and control the pressure and flow of those fuels for use in fuel cells and internal combustion engines. Historically, most of our
revenues have been derived from the sale of products to automotive OEMs that enable their traditional internal combustion engines to run on clean burning alternative fuels, such as propane and natural gas, instead of gasoline. Our goal is to
commercialize systems that will provide fuel storage, fuel delivery and electronic controls for fuel cells and internal combustion engines in the automotive OEM market.
We supply our advanced gaseous fuel systems for alternative fuel vehicle applications to OEM customers for use by consumers and commercial and government fleets. Since 1997, we have sold over 14,000
fuel systems for alternative fuel vehicle applications. We also provide our integrated gaseous fuel systems for fuel cell applications to major OEMs through funded research and development contracts and on a prototype basis. We believe that a
significant portion of our revenues will be derived from our fuel storage and fuel metering products once those products are available on a commercially manufactured basis.
We classify our business operations into four reporting segments: the Alternative Fuels division, Fuel Cell Systems division, Advanced Research & Product Development and Corporate Expenses. The
Alternative Fuels division generates revenues through the sale of compressed natural gas (CNG) and propane (LPG) fuel storage, fuel delivery and electronic control systems to OEMs, primarily General Motors, and the installation of its products into
OEM vehicles. The Alternative Fuels division also generates contract revenue by providing engineering design and support to the OEMs so that its fuel storage, fuel delivery and electronic control systems integrate and operate with certain of their
alternative fuel vehicles. The Fuel Cell Systems division generates limited revenues through the sale of fuel cell-related fuel storage, fuel delivery and electronic control systems to OEMs, and the installation of its products into OEM vehicles.
The Fuel Cell Systems division also generates contract revenue by providing engineering design and
12
support to the OEMs so that its fuel storage, fuel delivery and electronic control systems integrate and operate with certain of their fuel cell
applications. The Fuel Cell Systems division is a new segment for this reporting period and prior year amounts have been restated to reflect the new presentation. The chief operating decision maker allocates resources and tracks performance by each
of the four operating segments, which consist of: Alternative Fuels, Fuel Cell Systems, Advanced Research & Product Development and Corporate Expenses. The change in reporting aligns revenue and costs of sales from fuel cell development
contracts with the research and development of fuel cell applications. Previously, all revenue and related cost of sales was reported in the Alternative Fuels segment. The Fuel Cell Systems division also now includes the research and development
directly attributed to fuel cell applications. Previously, these expenses were reported in the Research and Development segment, which has now been changed to Advanced Research & Product Development.
We recognize revenue for product sales when goods are shipped in accordance with our shipping terms. Contract revenues are recognized based on the percentage of
completion method. Corporate expenses represent a sub-category of selling, general and administrative expense. Corporate expenses consist of general and administrative expense incurred at the corporate level.
We expense all research and development when incurred. Research and development expense includes both customer-funded research and development and
company-sponsored research and development. Advanced research and product development is a sub-category of research and development expense and represents company-sponsored research and development that is not allocated to any of its reporting
segments. Customer-funded research and development consists primarily of expenses associated with contract revenue. These expenses include applications development costs in Quantum funded under customer contracts.
General Motors Relationship. Our strategic alliance with General Motors became effective upon completion of the spin-off. We
believe that our strategic alliance with General Motors will advance and commercialize, on a global basis, the integration of our gaseous storage and handling systems into fuel cell systems used in the transportation markets. Under the alliance,
General Motors will promote us as a recommended provider of hydrogen storage, hydrogen handling and associated electronic controls that meet OEM requirements. Additionally, we and General Motors will co-develop technologies that will aid in more
rapid commercialization of fuel cell applications. Furthermore, this experience will position us to be able to address the stationary power generation and portable power generation markets. Upon effectiveness of the strategic alliance, we issued to
General Motors shares of our Series A common stock representing 19.9% of our total outstanding capital stock after the distribution in consideration of a nominal cash contribution and access to certain General Motors proprietary information. General
Motors will be entitled to maintain its 19.9% equity interest at nominal cost until we complete an initial public offering for cash. However, additional shares that General Motors receives after the initial issuance of shares following the spin-off
as a result of our private or public issuance of additional securities (other than pursuant to employee plans) will not be entitled to vote, so long as they are held by General Motors or anyone affiliated with General Motors. The agreement calls for
revenue sharing payments, which do not commence until three years after the effective date of the agreement, on gross revenues from certain applications. Each party will retain the ownership of its existing technology and will jointly own technology
that is jointly created under the alliance. We are free to use jointly created technologies in certain aspects of our business but will be required to share revenues with General Motors on fuel cell system-related products that are sold to General
Motors or third parties.
Separation from IMPCO. We were incorporated under the laws of the State of
Delaware on October 13, 2000, as a wholly owned subsidiary of IMPCO. IMPCO conducted our business through various departments, first as a division (the Automotive OEM Division) and most recently as a subsidiary (Quantum Fuel Systems Technologies
Worldwide, Inc.). On July 23, 2002, IMPCO completed the distribution and spin-off of Quantum by distributing one share of Quantum common stock for every share of IMPCO common stock held on the record date, which was July 5, 2002. Prior to the
distribution, we entered into several agreements with IMPCO with respect to, among other things, intellectual property, interim services and a number of ongoing commercial relationships. The interim services agreement provides for specified charges
generally intended to allow the providing company to fully recover the allocated direct costs of providing the services, plus all out-of-pocket costs and expenses, but without any profit. With limited exceptions, these interim services are not
expected to extend beyond six months from the distribution date. The pricing terms for goods and services covered by the commercial agreements reflect negotiated prices.
Our financial statements, which are discussed below, reflect the historical financial position, results of operations and cash flows of the business transferred to us from IMPCO as part of the
distribution. The financial information included herein, however, may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have
been had we been a stand-alone company during the periods presented.
We will continue to require significant research and development
expenditures over the next several years in order to commercialize our products for fuel cell applications.
Income
Taxes. Income taxes were calculated as if we filed separate tax returns. However, IMPCO was managing its tax position for the benefit of its entire portfolio of businesses, and its tax strategies are not necessarily
reflective of the tax strategies that we would have followed or will follow as a stand-alone company.
13
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, warranty obligations, long-term service contracts, and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the
following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements:
We recognize revenue and profit as work progresses on long-term, fixed price contracts for product application development using the percentage-of-completion method, which relies on estimates of total expected contract revenue and
costs. We follow this method because we can make reasonably dependable estimates of the revenue and costs applicable to various stages of a contract. Recognized revenues and profit are subject to revisions as the contract progresses to completion.
Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known.
We
provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty
obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions
to the estimated warranty liability would be required.
We write down our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Results of Operations
Net revenues and operating loss for our business for the three months ended July 31, 2001 and 2002 are as follows:
| |
|
Revenues |
|
Operating Loss |
|
| |
| |
|
Three Months Ended July 31
|
|
Three Months Ended July 31
|
|
| |
|
2001
|
|
2002
|
|
2001
|
|
|
2002
|
|
| |
|
(in thousands) |
|
| Alternative fuels |
|
$ |
6,411 |
|
$ |
3,471 |
|
$ |
(1,726 |
) |
|
$ |
(534 |
) |
| Fuel cell systems |
|
|
519 |
|
|
1,147 |
|
|
(4,186 |
) |
|
|
(1,365 |
) |
| Advanced research & product development |
|
|
— |
|
|
— |
|
|
(3,498 |
) |
|
|
(1,566 |
) |
| Corporate expenses (1) |
|
|
— |
|
|
— |
|
|
(1,824 |
) |
|
|
(1,494 |
) |
| |
|
|
|
|
|
| Total |
|
$ |
6,930 |
|
$ |
4,618 |
|
$ |
(11,234 |
) |
|
$ |
(4,959 |
) |
| |
|
|
|
|
|
| (1) Represents corporate expenses not
allocated to any of the reporting segments. |
|
|
|
|
Net revenues decreased $2.3 million, or 33.4%, from $6.9 million in the first quarter of
fiscal year 2002 to $4.6 million in the first quarter of fiscal year 2003.
Alternative
Fuels. Revenues for the Alternative Fuels segment decreased by $2.9 million, or 45.9% from $6.4 million for the first quarter of fiscal year 2002 to $3.5 million for the first quarter of fiscal year 2003. Product sales
decreased $1.7 million, or 37.9%, from $4.6 million in the first quarter of fiscal year 2002 to $2.9 million in the first quarter of fiscal year 2003. Product sales consist of those associated with General Motors’ mid-size automobiles, pick-up
trucks, and van platforms equipped with our bi-fuel and compressed natural gas fuel systems and General Motors’ medium duty trucks equipped with dedicated liquid propane gas kits. The decrease in product sales was due to lower sales of GM
midsize automobiles and van platforms, partially offset by higher
14
sales of pick-up trucks and medium duty truck platforms.
Cost of product sales decreased $2.9 million, or 44.1%, from $6.6 million in the first quarter of fiscal year 2002 to $3.7 million in the first quarter of fiscal
year 2003. The decrease in cost of product sales was due to a $1.2 million decrease in manufacturing overhead mainly due to cost cutting efforts during the second and third quarters of fiscal year 2002, a $1.0 million decrease in material costs
related to the lower sales, and a $0.8 million decrease in the amount reserved for inventory obsolescence.
Gross profits on product
sales increased $1.2 million, or 58.6%, from a negative $2.0 million in the first quarter of fiscal year 2002 to a negative $0.8 million in the first quarter of fiscal year 2003, due to a 14.4% decrease in cost of product sales as a percentage of
sales.
Contract revenues related to alternative fuels decreased $1.2 million, or 66.2%, from $1.8 million in the first quarter of fiscal
year 2002 to $0.6 million in the first quarter of fiscal year 2003. The decrease is due to a decline in the number and scope of General Motors’ compressed natural gas and propane developmental programs. Contract revenue is primarily for system
development and application engineering of our products under funded General Motors and other OEM contracts, and other funded contract work with state and federal agencies.
Research and development associated with cost of contract revenues included in our Alternative Fuels division unit decreased $1.2 million, or 79.2%, from $1.5 million in the first quarter of fiscal
year 2002 to $0.3 million in the first quarter of fiscal year 2003. The decrease is primarily due to the lower contract revenues, engineering efficiencies due to the model year rollover of the contracts and cost cutting measures instituted in the
second and third quarters of fiscal year 2002.
Fuel Cell Systems. Contract revenues increased $0.6 million, or 120.9%, from $0.5
million in the first quarter of fiscal year 2002 to $1.1 million in the first quarter of fiscal year 2003. The increase is due to new OEM fuel cell system developmental programs. Contract revenue is primarily for system development and application
engineering of our products under funded General Motors and other OEM contracts, and other funded contract work with state and federal agencies.
Research and development associated with cost of contract revenues included in our Fuel Cell Systems division increased $0.2 million, or 44.9%, from $0.5 million in the first quarter of fiscal year 2002 to $0.7 million in the first
quarter of fiscal year 2003. The increase is primarily due to the higher contract revenues.
Internally funded research and development
expense for fuel cell systems decreased by $2.2 million, or 53.3%, from $4.2 million in the first quarter of fiscal year 2002 to $2.0 million in the first quarter of fiscal year 2003. The decrease in research and development primarily relates to
cost cutting measures instituted in the second and third quarters of fiscal year 2002.
Advanced Research and Product Development.
Research and development expense decreased by $1.9 million, or 55.2%, from $3.5 million in the first quarter of fiscal year 2002 to $1.6 million in the first quarter of fiscal year 2003. The decrease in research and development primarily relates to
a $1.5 million decrease for fuel storage, fuel delivery systems, and vehicle integration for CNG-related OEM programs for internally funded alternate fuel system and component application development work, and a $0.4 million decrease in product
application development support costs.
Corporate Expenses. Corporate expenses decreased by $0.3 million, or 18.1%, from $1.8
million in the first quarter of fiscal year 2002 to $1.5 million in the first quarter of fiscal year 2003. The decrease was due to cost reduction efforts executed in the second and third quarters of fiscal year 2002, offset partially by $0.6 million
in non-recurring charges for legal and auditing services associated with the spin-off transaction. The amortization expense related to our intangible asset the first quarter of fiscal year 2003 was approximately $31,000. The expected amortization
expense for the full fiscal year is approximately $1.1 million.
Operating losses decreased by $6.2 million, or 55.9%, from $11.2 million
in the first quarter of fiscal year 2002 to $5.0 million in the first quarter of fiscal year 2003. The decrease in loss was attributable to a $5.4 million decrease in research and development expenses, a $1.2 million decrease in negative gross
profit on product sales, and a $0.3 million decrease in general and administrative expenses, partially offset by a $0.6 million decrease in contract revenue.
Interest Expense. Interest expense increased $0.1 million in the first quarter of fiscal year 2003 compared to the first quarter of fiscal year 2002.
Provision for Income Taxes. Income tax expense remained flat as no expense was charged due to our net losses during the period. A valuation allowance has been established for deferred tax assets
due to our lack of earnings history. We expect that income tax expense for fiscal year 2003 will be the same as last fiscal year as we expect to continue to incur operating losses.
15
Liquidity and Capital Resources
We have historically used cash generated from IMPCO’s operations, bank financings and investments from IMPCO to fund capital expenditures and research and development, as well as to invest in and
operate our existing operations and new businesses. Until fiscal year 2002, we had been funded entirely from IMPCO in the form of equity investments. In fiscal year 2002, we became a co-borrower with IMPCO of $12.0 million on a debt facility with
Bank of America. On April 30, 2001, IMPCO amended its credit facility with Bank of America NT&SA to include a $5 million line of credit for our use. We and IMPCO were co-borrowers on this line of credit, and it was secured by our assets. In
September 2001, the credit facility with Bank of America was amended to allow us to increase our use of the line of credit from $5.0 million to $15.0 million. On June 24, 2002, IMPCO amended its credit facility with Bank of America to remove us as a
co-borrower under the line of credit and to release the pledge of our assets under the facility, effective upon completion of the distribution.
Prior to the distribution, IMPCO made an additional capital investment of $15.0 million in cash, plus an assumption of the Company’s debt facility of $8.6 million. We believe the cash infusion will provide the necessary working
capital to fund operations for the near term. As of July 31, 2002, we had no material commitments for capital expenditures.
We currently
anticipate that we will require additional sources of financing in order to continue operations beyond the near term and complete the development and commercialization of our fuel cell enabling technologies. These additional sources of financing may
include bank borrowings or public or private offerings of equity or debt securities. We cannot assure you that such additional sources of financing will be available on acceptable terms, if at all.
Net cash used in operating activities was $3.4 million in first three months of fiscal year 2003 as compared to $10.4 million for the same period of fiscal year
2002. The decrease in cash used in operating activities resulted primarily from the net operating loss for the first three months of fiscal year 2003 of $5.1 million as compared to the net operating loss of $11.2 million for the same period in
fiscal year 2002. Also there was a decrease in cash used in operating activities due to a $1.2 million improvement in accounts receivable collections from the same period in fiscal year 2002. We expect that our use of cash in operating activities
for fiscal year 2003 will be lower than experienced in fiscal year 2002 as a result of staff and cost reductions implemented in the second and third quarters of fiscal year 2002.
Net cash used in investing activities in the first three months of fiscal year 2003 was $0.1 million, a decrease of $1.1 million from the same period in fiscal year 2002. The decrease is a result of
the completion of the initial expansion plans in the prior two fiscal years as well as a realigning of our investment priorities with our available liquidity.
Net cash provided by financing activities in the first three months of fiscal year 2003 was $17.7 million as compared to $11.1 million for the same period of fiscal year 2002. This increase was due to a $15.0 million cash
infusion from IMPCO partially offset by lower net advances from IMPCO as compared to the same period in the prior year.
The ratio of
current assets to current liabilities was 3.40:1 at July 31, 2002 and 0.81:1 at April 30, 2002. During the first three months of fiscal year 2003, our total working capital increased by $22.3 million from a negative $3.4 million at the end of fiscal
year 2002 to $18.9 million at July 31, 2002.
Derivative Financial Instruments
We are exposed to market risk from exposures to changes in interest rates due to our financing, investing and cash management activities. Specifically, our cash
and cash equivalents are subject to fluctuations in interest rates. Based on our cash balance at July 31, 2002, a 1% decrease in interest rates would result in reduced annual interest income of approximately $140,000.
To date, we have not used any derivative financial instruments for the purpose of reducing our exposure to adverse fluctuations in interest rates. We are not a
party to leveraged derivatives and do not hold or issue financial investments for speculative purposes.
Recent Accounting
Pronouncements
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets” (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. FAS 144 is effective
for fiscal years beginning after December 15, 2001, with earlier application encouraged. We adopted FAS 144 as of May 1, 2002 and the adoption of the Statement did not have a significant impact on our financial position and results of operations.
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001.
16
Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests
in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. We adopted FAS 141 and FAS 142 as of May 1, 2002. The adoption of FAS 141 did not have a significant impact on our financial position
and results of operations. The effect of adopting FAS 142 is described in the notes to condensed financial statements included in this Report.
In August of 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards 143, “Accounting for Asset Retirement Obligations.” SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The Company is in the process of assessing the effect of adopting SFAS 143, which is effective for fiscal years beginning after June 15,
2002.
In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 (“SFAS
146”), “Accounting for Exit or Disposal Activities”. SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring
activities that are currently accounted for under Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring).” The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002 but early application is
encouraged. The provisions of EITF Issue No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF Issue No. 94-3 prior to the adoption of SFAS 146. Adopting the provisions of SFAS 146 will
change, on a prospective basis, the timing of when restructuring charges are recorded from a commitment date approach to when the liability is incurred.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
Information relating to
Quantitative and Qualitative Disclosures About Market Risk appear under the heading Derivative Financial Instruments which is included in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
17
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
In August 2000, IMPCO proceeded with legal action in
federal court (Eastern District of Michigan, case # 00-73633) against GFI Control Systems Inc. and Dynetek Industries Ltd. for patent infringement (U.S. Patent No. 6,041,762), which covers a compressed gas fuel system that includes a tank with an
internal pressure regulator. GFI Control Systems Inc. filed a counter-claim for patent infringement. In connection with the spin-off, IMPCO assigned to us all of its rights under this litigation and we assumed all liabilities associated with this
litigation. We intend to vigorously enforce our intellectual property rights.
Item 2. Changes in Securities and Use of Proceeds
On July 24, 2002, we issued to
General Motors an aggregate of 3,513,439 shares of our Series A common stock, representing 19.9% of our total outstanding equity following such issuance, for consideration of a nominal cash contribution and access to certain General Motors’
proprietary information. The issuance was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof and Regulation D promulgated thereunder, as such issuance did not involve a public offering of
securities.
Item 5. Other Information
On August 1, 2002, we entered into an employment agreement
with Alan Niedzwiecki as our President and Chief Executive Officer. The employment agreement is for a term of three consecutive 12 month periods and provides for an annual base salary of $200,000, subject to annual increases. Mr. Niedzwiecki
may also be granted an annual bonus at the discretion of the board of directors. If we terminate Mr. Niedzwiecki's employment for any reason, (i) we will be obligated to pay a lump sum payment of the full amount of Mr. Niedzwiecki's base
salary and bonus remaining in the term of the agreement, (ii) the benefits specified in the agreement will continue for the remaining months of the fiscal year following the termination, and (iii) all stock options held by Mr. Niedzwiecki will
automatically vest.
On September 1, 2002, we entered into an employment agreement with Brian Olson as our Chief Financial Officer. The
employment agreement is for a term of three consecutive 12 month periods and provides for an annual base salary of $190,000, subject to annual increases. Mr. Olson may also be granted an annual bonus at the discretion of the board of directors. If
we terminate Mr. Olson's employment for any reason, (i) we will be obligated to pay a lump sum payment of the full amount of Mr. Olson's base salary and bonus remaining in the term of the agreement, (ii) the benefits specified in the agreement will
continue for a six month period following the termination, and (iii) all stock options held by Mr. Olson will automatically vest.
Copies
of these employment agreements are filed as Exhibits 10.19 and 10.20 hereto.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
| Exhibit
Number
|
|
Description
|
| 2.1 |
|
Contribution and Distribution Agreement, dated as of July 23, 2002, between IMPCO Technologies, Inc. and the Registrant (included as Exhibit 10.1
hereto) |
| |
| 10.1 |
|
Contribution and Distribution Agreement, dated as of July 23, 2002, between IMPCO Technologies, Inc. and the Registrant (1) |
| |
| 10.2 |
|
Tax Allocation and Indemnification Agreement, dated as of July 23, 2002, between IMPCO Technologies, Inc. and the Registrant (1) |
| |
| 10.3 |
|
Transition Services Agreement, dated as of July 23, 2002, between IMPCO Technologies, Inc. and the Registrant (1) |
| |
| 10.4 |
|
Employee Benefit Matters Agreement, dated as of July 23, 2002, between IMPCO Technologies, Inc. and the Registrant (1) |
| |
| 10.5 |
|
Strategic Alliance Agreement, dated as of July 23, 2002, between IMPCO Technologies, Inc. and the Registrant (1) |
| |
| 10.6* |
|
Quantum Fuel Systems Technologies Worldwide, Inc. 2002 Stock Incentive Plan (2) |
| |
| 10.7† |
|
Corporate Alliance Agreement dated June 12, 2001 between the Registrant and General Motors Corporation (3) |
| |
| 10.8 |
|
Master Technical Development Agreement dated June 12, 2001 between the Registrant and General Motors Corporation (3) |
| |
| 10.9 |
|
Stock Transfer Agreement dated June 12, 2001 between the Registrant and General Motors Corporation (3) |
| |
| 10.10 |
|
Registration Rights Agreement dated June 12, 2001 between the Registrant and General Motors Corporation (3) |
| |
| 10.14 |
|
Amendment Nos. 1, 2 and 3 to Memorandum of Understanding and Teaming Agreement, among the Registrant, IMPCO Technologies, Inc. and ATK Thiokol Propulsion
(1) |
| |
| 10.15 |
|
First Amendment to Corporate Alliance Agreement, dated as of July 19, 2002, between the Registrant and General Motors (1) |
| |
| 10.16 |
|
First Amendment to Stock Transfer Agreement, dated as of July 19, 2002, between the Registrant and General Motors (1) |
18
| 10.19* |
|
Employment Agreement, dated August 1, 2002, between the Registrant and Alan P. Niedzwiecki |
| |
| 10.20* |
|
Employment Agreement, dated September 1, 2002, between the Registrant and W. Brian Olson |
| |
| 99.1 |
|
Certification of the Chief Executive Officer of the Registrant pursuant to 18 U.S.C § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
| |
| 99.2 |
|
Certification of the Chief Financial Officer of the Registrant pursuant to 18 U.S.C § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
* |
|
The referenced exhibit is a compensatory contract, plan or arrangement. |
† |
|
Certain information in this exhibit has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been granted
with respect to the omitted portions. |
(1) |
|
Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended April 30, 2002 and incorporated herein by reference.
|
(2) |
|
Filed as Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8 (No. 333-96923) on July 23, 2002, and incorporated herein by reference.
|
(3) |
|
Filed as an exhibit to Amendment No. 1 to the Registration Statement on Form S-3 (No. 333-63726) of IMPCO Technologies, Inc., filed with the Commission on July
9, 2001, and incorporated herein by reference. |
(b) Reports on Form 8-K:
A report on Form 8-K, dated June 20, 2002 was filed reporting under Item 5 the approval of the spin-off by the board of directors of IMPCO and announcing the
record and effective dates of the spin-off.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE, INC.
Date: September 16, 2002
By: /s/ W. BRIAN OLSON
W. Brian Olson
Chief Financial Officer and Treasurer
[Authorized Signatory and Principal
Financial Officer]
I, Alan P. Niedzwiecki, certify that:
1. |
|
I have reviewed this quarterly report on Form 10-Q of Quantum Fuel Systems Technologies Worldwide, Inc.; |
2. |
|
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and |
3. |
|
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report |
Date: September 16, 2002
/s/ ALAN P. NIEDZWIECKI
Alan P. Niedzwiecki
President and Chief Executive Officer
19
I, W. Brian Olson, certify that:
| 1.
|
|
I have reviewed this quarterly report on Form 10-Q of Quantum Fuel Systems Technologies Worldwide, Inc.;
|
| 2.
|
|
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and |
| 3.
|
|
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. |
Date: September 16, 2002
/s/ W. Brian
Olson
W. Brian Olson
Chief Financial
Officer and Treasurer
20
| Exhibit
Number
|
|
Description
|
| 2.1 |
|
Contribution and Distribution Agreement, dated as of July 23, 2002, between IMPCO Technologies, Inc. and the Registrant (included as Exhibit 10.1
hereto) |
| |
| 10.1 |
|
Contribution and Distribution Agreement, dated as of July 23, 2002, between IMPCO Technologies, Inc. and the Registrant (1) |
| |
| 10.2 |
|
Tax Allocation and Indemnification Agreement, dated as of July 23, 2002, between IMPCO Technologies, Inc. and the Registrant (1) |
| |
| 10.3 |
|
Transition Services Agreement, dated as of July 23, 2002, between IMPCO Technologies, Inc. and the Registrant (1) |
| |
| 10.4 |
|
Employee Benefit Matters Agreement, dated as of July 23, 2002, between IMPCO Technologies, Inc. and the Registrant (1) |
| |
| 10.5 |
|
Strategic Alliance Agreement, dated as of July 23, 2002, between IMPCO Technologies, Inc. and the Registrant (1) |
| |
| 10.6* |
|
Quantum Fuel Systems Technologies Worldwide, Inc. 2002 Stock Incentive Plan (2) |
| |
| 10.7† |
|
Corporate Alliance Agreement dated June 12, 2001 between the Registrant and General Motors Corporation (3) |
| |
| 10.8 |
|
Master Technical Development Agreement dated June 12, 2001 between the Registrant and General Motors Corporation (3) |
| |
| 10.9 |
|
Stock Transfer Agreement dated June 12, 2001 between the Registrant and General Motors Corporation (3) |
| |
| 10.10 |
|
Registration Rights Agreement dated June 12, 2001 between the Registrant and General Motors Corporation (3) |
| |
| 10.14 |
|
Amendment Nos. 1, 2 and 3 to Memorandum of Understanding and Teaming Agreement, among the Registrant, IMPCO Technologies, Inc. and ATK Thiokol Propulsion
(1) |
| |
| 10.15 |
|
First Amendment to Corporate Alliance Agreement, dated as of July 19, 2002, between the Registrant and General Motors (1) |
| |
| 10.16 |
|
First Amendment to Stock Transfer Agreement, dated as of July 19, 2002, between the Registrant and General Motors (1) |
| |
| 10.19* |
|
Employment Agreement, dated August 1, 2002, between the Registrant and Alan P. Niedzwiecki |
| |
| 10.20* |
|
Employment Agreement, dated September 1, 2002, between the Registrant and W. Brian Olson |
| |
| 99.1 |
|
Certification of the Chief Executive Officer of the Registrant pursuant to 18 U.S.C § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
| |
| 99.2 |
|
Certification of the Chief Financial Officer of the Registrant pursuant to 18 U.S.C § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
* |
|
The referenced exhibit is a compensatory contract, plan or arrangement. |
† |
|
Certain information in this exhibit has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been granted
with respect to the omitted portions. |
(1) |
|
Filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended April 30, 2002 and incorporated herein by reference.
|
(2) |
|
Filed as Exhibit 10.1 to the Registrant’s Registration Statement on Form S-8 (No. 333-96923) on July 23, 2002, and incorporated herein by reference.
|
(3) |
|
Filed as an exhibit to Amendment No. 1 to the Registration Statement on Form S-3 (No. 333-63726) of IMPCO Technologies, Inc., filed with the Commission on July
9, 2001, and incorporated herein by reference. |
21