Unassociated Document
As
Filed with the Securities and Exchange Commission on May 11,
2005.
REGISTRATION
NO. 333-122216
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
AMENDMENT
NO. 3
TO
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
FUELCELL
ENERGY, INC. |
(Exact
Name of Registrant as Specified in Its Charter) |
Delaware |
(State
or Other Jurisdiction of Incorporation or
Organization) |
3629 |
(Primary
Standard Industrial Classification Code Number |
06-0853042 |
(I.R.S.
Employer Identification Number) |
3
Great Pasture Road
Danbury,
Connecticut 06813
(203)
825-6000 |
(Address,
Including Zip Code, and Telephone Number, Including Area
Code,
of
Registrant’s Principal Executive Offices) |
Jerry
D. Leitman
President
FuelCell
Energy, Inc.
3
Great Pasture Road
Danbury,
Connecticut 06813
(203)
825-6000 |
(Name,
Address, Including Zip Code, and Telephone Number, Including Area Code, of
Agent for Service) |
Copies
of All Communications to:
Richard
A. Krantz, Esq.
Robinson
& Cole LLP
Financial
Centre
695
East Main Street
Stamford,
Connecticut 06904
(203)
462-7500
Approximate
Date of Commencement of Proposed Sale to the Public: Promptly after the
effective date of this registration statement.
If
any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. x.
If
this form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If
this form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. o
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of Securities
to
Be Registered |
Amount
To
Be
Registered |
Proposed
Maximum
Offering
Price
Per Share(1
) |
Proposed
Maximum
Aggregate
Offering
Price(1) |
Amount
of
Registration
Fee |
Common
Stock |
300,000 |
$8.90 |
$2,670,000 |
$314.26(2)
|
(1)
Estimated
solely for the purpose of calculating the registration fee pursuant to Rule
457(c) under the Securities Act of 1933 based upon the average of the high and
low prices of the common stock of the Registrant as reported by the Nasdaq
National Market on January 19, 2005.
(2)
Previously
paid.
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 become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may
determine.
THE
INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT
TO COMPLETION, DATED MAY [__], 2005
PROSPECTUS
[LOGO]
1,800,000 Shares
of Common Stock
FuelCell
Energy, Inc. is filing this prospectus in connection with our offer of up to
300,000 shares of our common stock to certain of our employees as partial
payment of annual bonuses earned and to be earned with respect to our fiscal
year ended October 31, 2004 and our future fiscal years ended October 31,
2005 and October 31, 2006. This offering will commence promptly after the
effectiveness of the registration statement of which this prospectus forms a
part, and be made on a continuous basis thereafter for a period of two years
from the effective date of the registration statement. See “Plan of
Distribution” on page 86.
Our
common stock is quoted on the Nasdaq National Market under the symbol “FCEL”.
The last reported sale price of our common stock on the Nasdaq National Market
on May 9, 2005 was $8.08 per share.
Our
principal executive offices are located at 3 Great Pasture Road, Danbury,
Connecticut 06813, and our telephone number is (203) 825-6000.
Investing
in our common stock involves risks. See “Risk Factors” beginning on page 7.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The
date of this prospectus is May [__], 2005.
You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with different information. We are not making
an offer of these securities in any state where the offer is not permitted. You
should not assume that the information contained in this prospectus is accurate
as of any date other than the date on the front of this prospectus.
TABLE
OF CONTENTS
|
Page |
FORWARD-LOOKING STATEMENTS
|
ii |
ABOUT
THIS PROSPECTUS
|
ii |
BACKGROUND
|
iii |
SUMMARY
|
1 |
RISK
FACTORS
|
7 |
USE
OF PROCEEDS
|
18 |
PRICE
RANGE OF COMMON STOCK
|
19 |
DIVIDEND
POLICY
|
19 |
SELECTED
FINANCIAL DATA
|
19 |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
21 |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
39 |
BUSINESS
|
40 |
MANAGEMENT
|
63 |
EXECUTIVE
COMPENSATION
|
68 |
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
|
73 |
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
73 |
EQUITY
COMPENSATION PLAN AND WARRANT INFORMATION (1)
|
77 |
LIMITATION
ON LIABILITY AND INDEMNIFICATION MATTERS
|
77 |
DESCRIPTION
OF CAPITAL STOCK
|
78 |
PLAN
OF DISTRIBUTION
|
86 |
LEGAL
MATTERS
|
87 |
EXPERTS
|
87 |
WHERE
YOU CAN FIND MORE INFORMATION
|
87 |
INDEX
TO FINANCIAL STATEMENTS
|
89 |
FORWARD-LOOKING STATEMENTS
This
prospectus includes forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Words such as “expects,” “anticipates,” “approximates,” “believes,”
“estimates,” “intends” and “hopes” and variations of such words and similar
expressions are intended to identify such forward-looking statements. We
intend such forward-looking statements, all of which are qualified by this
statement, to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 and
are including this statement for purposes of complying with these safe harbor
provisions. We have based these statements on our current expectations and
projections about future events. These forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties that
could cause actual results to differ materially from those projected in these
statements. These risks and uncertainties include those set forth under
“Risk Factors.” The forward-looking statements contained in this
prospectus include, among others, statements about:
· |
the
development and commercialization schedule for our fuel cell technology
and products; |
· |
future
funding under government research and development
contracts; |
· |
the
expected cost competitiveness of our fuel cell technology and
products; |
· |
our
intellectual property; |
· |
the
timing and availability of our products; |
· |
the
electric power supply industry and the distributed generation
market; |
· |
our
business strategy; and |
· |
general
economic conditions in the electric power supply industry and our target
markets. |
Except
for our ongoing obligations to disclose material information under the federal
securities laws, we are not obligated to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this prospectus might not
occur.
ABOUT
THIS PROSPECTUS
This
prospectus is part of a registration statement that we filed with the Securities
and Exchange Commission, or SEC, using a “shelf” registration process or
continuous offering process. Under this shelf registration process, securities
may be offered by us on a continuous basis as described in this prospectus. This
prospectus provides you with a general description of the securities that may be
offered under this prospectus. Each time securities are offered, we will provide
you with this prospectus and, in certain cases, a prospectus supplement
containing specific information about the terms of the securities being offered.
That prospectus supplement may also add, update or change information in
this prospectus. If there is any inconsistency between the information in this
prospectus and any prospectus supplement, you should rely on the information in
that prospectus supplement. You should read both this prospectus and any
prospectus supplement together with additional information described in the
section entitled “Where You Can Find More Information.”
BACKGROUND
Unless
the context otherwise requires, references in this prospectus to “FuelCell,”
“we,” “us” and “our” refer to FuelCell Energy, Inc. Direct FuelCell®
and DFC®
are registered trademarks of FuelCell Energy, Inc.
Information
contained in this prospectus concerning the electric power supply industry and
the distributed generation market, our general expectations concerning this
industry and this market, and our position within this industry are based on
market research, industry publications, other publicly available information and
on assumptions made by us based on this information and our knowledge of this
industry and this market, which we believe to be reasonable. Although we believe
that the market research, industry publications and other publicly available
information are reliable, including the sources that we cite in this prospectus,
they have not been independently verified by us and, accordingly, we cannot
assure you that such information is accurate in all material respects. Our
estimates, particularly as they relate to our general expectations concerning
the electric power supply industry and the distributed generation market,
involve risks and uncertainties and are subject to change based on various
factors, including those discussed under the heading entitled “Risk
Factors”.
We
define distributed generation as small (typically 50 MW or less) electric
generation plants (combustion-based such as engines and turbines as well as
non-combustion-based such as fuel cells) located at or near the end use
customer. This is contrasted with central generation that we define as large
power plants (typically hundreds to 1,000 megawatts or larger) that deliver
electricity to end users through a comprehensive transmission and distribution
system.
As
used in this prospectus, all degrees refer to Fahrenheit (oF),
and kilowatt and megawatt numbers designate nominal or rated capacity of the
referenced power plant. As used in this prospectus, “efficiency” or “electrical
efficiency” means the ratio of the electrical energy (AC) generated in the
conversion of a fuel to the total energy contained in the fuel (lower heating
value, the standard for power plant generation, which assumes the water in the
product is in vapor form; as opposed to higher heating value, which assumes the
water in the product is in the liquid form); “overall energy efficiency” refers
to efficiency based on the electrical output plus useful heat output of the
power plant; “kilowatt” (kW) means 1,000 watts; “megawatt” (MW) means 1,000,000
watts; “gigawatt” (GW) means 1,000,000,000 watts; “terawatt” (TW) means
1,000,000,000,000 watts; “kilowatt hour” (kWh) is equal to 1 kW of power
supplied to or taken from an electric circuit steadily for one hour; “megawatt
hour” (MWh) is equal to 1 MW of power supplied to or taken from an electric
circuit steadily for one hour; “gigawatt hour” (GWh) is equal to 1 GW of
power supplied to or taken from an electric circuit steadily for one hour;
“terawatt hour” (TWh) is equal to 1 TW of power supplied to or taken from
an electric circuit steadily for one hour; and “MMBtu” is equal to one million
British Thermal Unit (the amount of heat necessary to raise one pound of pure
water from 59oF
to 60
oF
at a specified constant pressure).
All
dollar amounts are in U.S. dollars unless otherwise noted.
Additional
technical terms and definitions:
Availability
-An
industry standard (IEEE–The Institute of
Electrical and Electronics Engineers) 762, "Definitions for Use in Reporting
Electric Generating Unit Reliability, Availability and Productivity") used to
compute total operating period hours less the amount of time a power plant is
not producing electricity due to planned or unplanned maintenance.
"Availability" percentage is calculated as total operating hours since
commercial acceptance date (mutually agreed upon time period when our DFC power
plants have operated at a specific output level for a specified period of time)
less hours not producing electricity due to planned and unplanned maintenance
divided by total period hours. Grid disturbances, force majeur events and site
specific issues such as a lack of available fuel supply or customer
infrastructure repair do not penalize the calculation of availability according
to this standard.
Co-generation
Configuration - A
power plant configuration featuring simultaneous on-site
generation of electricity and recovery of waste heat to produce process steam or
hot water, or to use heat for space heating.
Ceramic
Electrolyte - An
active fuel cell component placed between the anode and cathode electrodes in a
ceramic (SOFC) fuel cell, in which current is carried by the movement of oxide
ions.
Cathode
- An
active fuel cell component functioning as a positive (electrically) electrode,
where reduction of oxidant occurs. Also referred to as “Oxidant Electrode”.
Anode
- An
active fuel cell component functioning as a negative electrode, where oxidation
of fuel occurs. Also referred to as “fuel electrode”.
Metallic
Bipolar Plates - The
conductive plates used in a fuel cell stack to provide electrical continuity
from active components of one cell to those in an adjacent cell. The plates also
provide isolation of fuel and air fed to the fuel cell.
Anaerobic
Digester Gas - Fuel
gas (rich in methane) produced in biomass digesters employing bacterial and
controlled oxygen environment, in a municipal or an industrial wastewater
treatment facility.
Humid
Flue Gas - Exhaust
gas from fuel cell and other power plants or a furnace. The gas typically
contains humidity (moisture).
Reforming
- Catalytic
conversion of hydrocarbon fuel (such as pipeline natural gas) to hydrogen-rich
gas, using steam. The hydrogen-rich gas serves as a fuel for the electrochemical
reaction.
Synthesis
Gas - A
gas mixture of hydrogen and carbon monoxide generally derived from gasification
of coal or other biomass. It can serve as a fuel for the fuel cell after any
required fuel clean up.
Microturbine
- A
gas turbine limited in power output to less than 200 kW. Microturbines are
characterized by low-pressure ratios (less than 5) and high-speed alternators.
Waste heat from fuel cell may be fed to a microturbine to generate additional
electricity. This system is referred to as “Hybrid” power plant.
SUMMARY
This
summary highlights information contained elsewhere in this prospectus and does
not contain all of the information you should consider in making your investment
decision. You should read this summary together with the more detailed
information, including our financial statements and the related notes, included
elsewhere in this prospectus. You should carefully consider, among other things,
the matters discussed in the section entitled “Risk Factors.”
FuelCell
Energy, Inc.
We
are a leader in the development and manufacture of fuel cell power plants for
clean, efficient and reliable electric power generation. We have been developing
fuel cell technology since our founding in 1969. We are currently
commercializing our core carbonate fuel cell products and continuing to develop
our next generation of fuel cell products.
Our
executive offices are located at 3 Great Pasture Road, Danbury, Connecticut
06813. Our telephone number is (203) 825-6000. We maintain a web site at
the following Internet address: www.fuelcellenergy.com.
The information on our web site is not part of this prospectus.
Direct
FuelCell (DFC) Power Plants
Our
proprietary DFC power plants electrochemically produce electricity from readily
available hydrocarbon fuels such as natural gas and wastewater treatment gas.
Our current commercial products, the DFC 300A, DFC 1500 and DFC 3000, are rated
in capacity at 250 kW, 1 MW and 2 MW, respectively, and are scalable for
distributed applications up to 50 MW. Our DFC products are designed to meet the
base load power requirements of a wide range of commercial and industrial
customers, including wastewater treatment plants, data centers, manufacturing
and industrial facilities, office buildings, hospitals, universities and hotels,
as well as for use in grid support applications for utility customers. In
addition, our DFC products produce high quality by-product heat energy that can
be harnessed for combined heat and power (CHP) applications. Through February
2005, more than 62 million kWh of electricity have been generated from power
plants incorporating our DFC technology at customer sites throughout the
world.
Our
primary focus is carbonate fuel cell technology, which we have advanced from the
laboratory into standard DFC products. We believe we have established a leading
position for our DFC products in the commercial distributed generation
marketplace due to a number of factors, including:
· |
We
are selling ‘ultra-clean’ high-temperature fuel cell power plants for
stationary base load power, which provide high fuel efficiency and
high-value waste heat for cogeneration
applications. |
· |
We
have strong global distribution partners, including original equipment
manufactures (OEMs) and energy service companies (ESCOs), with expertise
in selling and marketing energy products and services to commercial and
industrial customers worldwide. |
· |
We
obtained commercial product certifications for safety, interconnection,
installation and performance. |
· |
We
are operating a fleet of DFC power plants at customer sites throughout the
world, with a backlog that we expect will double the fleet in service in
the next 12-18 months. |
· |
We
have established production facilities, with equipment in place to produce
50 MW of DFC products annually. |
· |
We
achieved our 2004 value-engineering cost reduction target of 25 percent
and are confident we can continue to reduce
costs. |
· |
We
have expanded our sales and service capabilities to support our DFC
products. |
· |
We
have a strong balance sheet, with over $230 million in cash, cash
equivalents and investments (U.S. Treasury Securities) as of January 31,
2005 to support our growth. |
Strategically,
we are focused on developing sustainable markets targeting customer applications
with the greatest opportunity for multiple and repeat orders. Our success will
depend in part on reducing product cost and increasing operating experience for
our core DFC products. By reducing component costs and improving fuel cell stack
output, we believe we can lower the overall cost of electricity generated by our
products enabling the price of our DFC power plants to be competitive with
existing technologies. As more units are delivered, operating hours will
increase, which should allow us to refine our products, our manufacturing
processes and our marketing efforts. As a result of successes to date and
initiatives under way, we believe we can achieve operating break-even at annual
production volumes of approximately 100 MW. Our production volume was
approximately 6 MW for the fiscal year ended October 31, 2004.
Solid
Oxide Fuel Cells
In
April 2003, we were selected by the Department of Energy (DOE) to lead a project
team for its 10-year, $139 million Solid State Energy Conversion Alliance (SECA)
program. The goal of the SECA program is to accelerate the commercialization of
low-cost solid oxide fuel cells (SOFC) for residential, commercial and light
industrial applications ranging in product size from 3 kW to 10 kW each for
applications up to 100 kW. To strengthen our commercialization capabilities for
this contract, we have recently made strategic investments in SOFC technology
including our August 2003 investment of $2.0 million in Versa Power Systems,
Inc., (Versa), our November 2003 acquisition of the SOFC operations of Global
Thermoelectric Inc. (Global), and our November 2004 transfer of substantially
all of our SOFC assets (including those acquired in our acquisition of Global)
and operations to Versa in exchange for an additional equity interest in Versa.
Versa was formed to produce a range of products for the distributed generation
market incorporating its patented reduced temperature SOFC system. If
successfully commercialized, these products would be complementary to our larger
scale DFC product line.
Recent
Developments
On
November 3, 2003 we completed our acquisition of Global Thermoelectric Inc.
(Global) located in Calgary, Canada. At the time of acquisition, Global had been
developing solid oxide fuel cell (SOFC) power plants since 1997 with the goal of
commercializing its technology for residential, commercial and light industrial
applications ranging in size from 3 to 10 kW. Through its thermoelectric
generator (TEG) product line, Global also sold thermoelectric generators for use
as a source of electrical power in remote areas.
In
connection with the acquisition, we issued, in the aggregate, approximately 8.2
million of our common shares and exchangeable shares (exchangeable shares)
issued by FuelCell Energy, Ltd., our wholly-owned Canadian subsidiary (formerly
FCE Canada Inc.). We also assumed Global’s Series 2 preferred shares. Total
consideration for the acquisition was approximately $94.8 million.
On
May 28, 2004, we sold Global’s TEG business for approximately $16 million. The
sale of the TEG business was effected through a sale of all of the outstanding
common shares of Global. Prior to the sale, Global transferred substantially all
of its assets and liabilities not relating to its TEG business (including
substantially all of Global’s assets and liabilities relating to its SOFC
business and substantially all of its cash) to FuelCell Energy, Ltd. In
addition, prior to the sale, the Global Series 2 preferred shares were cancelled
and replaced with substantially equivalent Class A cumulative redeemable
exchangeable preferred shares (which we refer to as the Series 1 preferred
shares) issued by FuelCell Energy, Ltd.
On
October 29, 2004, we redeemed all of the approximately two million issued and
outstanding exchangeable shares issued by FuelCell Energy, Ltd. The exchangeable
shares were redeemed in exchange for shares of our common stock on a one-for-one
basis. The redemption had no impact on the total number of shares of our common
stock deemed outstanding.
On
November 1, 2004, we transferred substantially all of FuelCell Energy, Ltd.’s
SOFC assets and operations to Versa Power Systems, Ltd., a Canadian corporation
and wholly-owned subsidiary of Versa Power Systems, Inc. (Versa). In exchange,
we received additional shares of Versa common stock, increasing our ownership
position in Versa to 42 percent. We also received a second seat on Versa’s
board, which was increased from six to seven members.
Following
the transaction, we pledged the Versa shares we received in the transaction to
Enbridge, Inc., the holder of all of the Series 1 preferred shares issued by
FuelCell Energy, Ltd. The pledge secures our guaranty of the obligations of
FuelCell Energy, Ltd. under the Series 1 preferred shares to Enbridge.
On
November 11, 2004 we entered into a purchase agreement with Citigroup Global
Markets Inc., RBC Capital Markets Corporation, Adams Harkness, Inc., and Lazard
Freres & Co., LLC (collectively referred to as the “Initial Purchasers”) for
the private placement under Rule 144A of up to 135,000 shares of our 5% Series B
Cumulative Convertible Perpetual Preferred Stock (Liquidation Preference
$1,000). On November 17, 2004, we closed on the sale of 100,000 shares of Series
B preferred stock to the Initial Purchasers. Under the terms of the purchase
agreement, the Initial Purchasers were granted an over-allotment option to
purchase up to an additional 35,000 shares of Series B preferred stock through
January 25, 2005.
On
January 14, 2005, we sold an additional 5,875 shares of our Series B preferred
stock to the Initial Purchasers as part of the over-allotment option. Net
proceeds to us were approximately $99 million.
The
Offering
Common
stock offered |
300,000
shares.
|
Common
stock to be outstanding after this offering |
48,498,161
shares.(1)
|
Use
of proceeds |
We
are registering 300,000 shares of our common stock on a registration
statement on Form S-1, for which this prospectus forms a part, which will
be offered to certain of our employees as partial payment for annual
bonuses earned and to be earned by such employees with respect to our
performance targets for our fiscal year ended October 31, 2004 and future
fiscal years ended October 31, 2005 and October 31, 2006. No proceeds will
be received by us from the offer and issuance of these shares. See section
entitled “Use of Proceeds”.
|
Risk
factors |
See
section entitled “Risk Factors” and other information in this prospectus
for a discussion of factors you should carefully consider before deciding
to invest in shares of our common stock.
|
Dividend
policy |
We
have never paid a cash dividend on our common stock and do not anticipate
paying any cash dividends on common stock in the foreseeable
future.
|
Nasdaq
National Market symbol |
FCEL. |
(1)
The above outstanding share information is based upon shares of our common stock
outstanding as of April 29, 2005. The above outstanding share information
excludes approximately 9,010,640 shares of our common stock issuable upon
conversion of 105,875 shares of our Series B preferred stock (see “Description
of Capital Stock - Series B Preferred Stock”), 225,286 shares of our common
stock issuable upon conversion of the Series 1 preferred shares issued by
FuelCell Energy, Ltd., our wholly-owned Canadian subsidiary (formerly known as
FCE Canada, Inc.) (see “Description of Capital Stock - Series 1 Preferred Shares
and Exchangeable Shares”); 1,500,000 shares of our common stock issuable upon
exercise of warrants outstanding at March 31, 2005 at a weighted average
exercise price of $16.75 per share; 5,493,659 shares of our common stock
issuable upon exercise of options outstanding at March 31, 2005 at a weighted
average exercise price of $10.52 per share under our stock option plans;
1,021,318 shares of our common stock available for future issuance under our
stock option plans; and 416,145 shares of our common stock available for future
issuance under our employee stock purchase plan.
Summary
Financial Information
The
selected consolidated financial data presented below for each of the years in
the five-year period ended October 31, 2004 and for the three month period ended
January 31, 2005 have been derived from our audited and unaudited consolidated
financial statements, respectively, together with the notes thereto included
elsewhere in this prospectus. The data set forth below is qualified by reference
to, and should be read in conjunction with, such financial statements and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this prospectus.
(Amounts
presented in thousands, except for per share amounts)
Consolidated
Statement of Operations Data:
|
|
Year
Ended October 31, |
|
Three
Months Ended January 31, |
|
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
2005 |
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development contracts |
|
$ |
18,750 |
|
$ |
17,709 |
|
$ |
33,575 |
|
$ |
20,882 |
|
$ |
17,986 |
|
$ |
2,522 |
|
$ |
5,366 |
|
Product
sales and revenue |
|
|
12,636 |
|
|
16,081 |
|
|
7,656 |
|
|
5,297 |
|
|
2,729 |
|
|
5,032 |
|
|
2,028 |
|
Total
revenues |
|
|
31,386 |
|
|
33,790 |
|
|
41,231 |
|
|
26,179 |
|
|
20,715 |
|
|
7,554 |
|
|
7,394 |
|
Costs
and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of research and development contracts |
|
|
27,290 |
|
|
35,827 |
|
|
45,664 |
|
|
19,033 |
|
|
12,508 |
|
|
2,814 |
|
|
7,471 |
|
Cost
of product sales and revenues |
|
|
39,961 |
|
|
50,391 |
|
|
32,129 |
|
|
16,214 |
|
|
4,968 |
|
|
13,713 |
|
|
7,623 |
|
Administrative
and selling expenses |
|
|
14,901 |
|
|
12,631 |
|
|
10,451 |
|
|
9,100 |
|
|
8,055 |
|
|
3,130 |
|
|
3,701 |
|
Research
and development expenses |
|
|
26,677 |
|
|
8,509 |
|
|
6,806 |
|
|
3,108 |
|
|
1,917 |
|
|
5,233 |
|
|
5,865 |
|
Purchased
in-process research and development |
|
|
12,200 |
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
12,200 |
|
Total
costs and expenses |
|
|
121,029 |
|
|
107,358 |
|
|
95,050 |
|
|
47,455 |
|
|
27,448 |
|
|
24,890 |
|
|
36,860 |
|
Loss
from operations |
|
|
(89,643 |
) |
|
(73,568 |
) |
|
(53,819 |
) |
|
(21,276 |
) |
|
(6,733 |
) |
|
(17,336 |
) |
|
(29,466 |
) |
License
fee income, net |
|
|
19 |
|
|
270 |
|
|
270 |
|
|
270 |
|
|
266 |
|
|
71 |
|
|
67 |
|
Interest
expense |
|
|
(137 |
) |
|
(128 |
) |
|
(160 |
) |
|
(116 |
) |
|
(141 |
) |
|
(42 |
) |
|
(37 |
) |
Loss
from equity investments |
|
|
--
|
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(340 |
) |
|
-- |
|
Interest
and other income, net |
|
|
2,472 |
|
|
6,012 |
|
|
4,876 |
|
|
5,684 |
|
|
2,138 |
|
|
875 |
|
|
918 |
|
Minority
interest |
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
11 |
|
|
-- |
|
|
-- |
|
Provision
for income taxes |
|
|
--
|
|
|
--
|
|
|
7 |
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Net
loss from continuing operations |
|
|
(87,289 |
) |
|
(67,414 |
) |
|
(48,840 |
) |
|
(15,438 |
) |
|
(4,459 |
) |
|
(16,772 |
) |
|
(28,518 |
) |
Discontinued
operations, net of tax |
|
|
846 |
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(1,252 |
) |
|
656 |
|
Net
loss |
|
$ |
(86,443 |
) |
$ |
(67,414 |
) |
$ |
(48,840 |
) |
$ |
(15,438 |
) |
$ |
(4,459 |
) |
$ |
(18,024 |
) |
$ |
(27,862 |
) |
Preferred
stock dividends |
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(1,342 |
) |
|
(240 |
) |
Net
loss to common shareholders |
|
$ |
--
|
|
$ |
--
|
|
$ |
--
|
|
$ |
--
|
|
$ |
--
|
|
$ |
(19,366 |
) |
$ |
(28,102 |
) |
Basic
and diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations |
|
$ |
(1.82 |
) |
$ |
(1.71 |
) |
$ |
(1.25 |
) |
$ |
(0.45 |
) |
$ |
(0.16 |
) |
$ |
(0.37 |
) |
$ |
(0.60 |
) |
Discontinued
operations |
|
$ |
0.01 |
|
$ |
-- |
|
$ |
-- |
|
$ |
-- |
|
$ |
-- |
|
$ |
(0.03 |
) |
$ |
0.01 |
|
Net
loss to common shareholders |
|
$ |
(1.81 |
) |
$ |
(1.71 |
) |
$ |
(1.25 |
) |
$ |
(0.45 |
) |
$ |
(0.16 |
) |
$ |
(0.40 |
) |
$ |
(0.59 |
) |
Basic
and diluted weighted average shares outstanding |
|
|
47,875 |
|
|
39,342 |
|
|
39,135 |
|
|
34,359 |
|
|
28,298 |
|
|
48,153 |
|
|
47,369 |
|
Consolidated
Balance Sheet Data:
|
|
As
of October 31, |
|
As
of January 31, |
|
|
|
2004 |
|
2005 |
|
2002 |
|
2001 |
|
2000 |
|
2005 |
|
Cash,
cash equivalents and short term investments (U.S. treasury
securities) |
|
$ |
152,395 |
|
$ |
134,750 |
|
$ |
205,996 |
|
$ |
274,760 |
|
$ |
74,754 |
|
$ |
220,438 |
|
Working
capital |
|
|
156,796 |
|
|
143,998 |
|
|
218,423 |
|
|
276,173 |
|
|
71,576 |
|
|
226,803 |
|
Total
current assets |
|
|
178,866 |
|
|
160,792 |
|
|
234,739 |
|
|
289,225 |
|
|
79,405 |
|
|
245,451 |
|
Long-term
investments (U.S. treasury securities) |
|
|
--
|
|
|
18,690 |
|
|
14,542 |
|
|
15,773 |
|
|
--
|
|
|
10,999 |
|
Total
assets |
|
|
236,510 |
|
|
223,363 |
|
|
289,803 |
|
|
334,020 |
|
|
91,028 |
|
|
312,700 |
|
Total
current liabilities |
|
|
22,070 |
|
|
16,794 |
|
|
16,316 |
|
|
13,052 |
|
|
7,588 |
|
|
18,648 |
|
Total
non-current liabilities |
|
|
1,476 |
|
|
1,484 |
|
|
1,785 |
|
|
1,252 |
|
|
--
|
|
|
1,217 |
|
Total
shareholders’ equity |
|
|
212,964 |
|
|
205,085 |
|
|
271,702 |
|
|
319,716 |
|
|
83,251 |
|
|
292,835 |
|
Book
value per share(1) |
|
$ |
4.42 |
|
$ |
5.20 |
|
$ |
6.93 |
|
$ |
8.20 |
|
$ |
2.65 |
|
$ |
6.08 |
|
(1) Calculated
as total shareholder’s equity divided by common shares issued and outstanding as
of the balance sheet date.
RISK
FACTORS
Investing
in our securities involves risks. Before investing in our securities, you should
carefully consider the following risk factors as well as the other information
included and incorporated by reference in this prospectus. If any of the
following risks actually occur, our business, financial condition, or results of
operations and could be materially and adversely affected. In such cases, the
trading price of our securities could decline, and you may lose all or part of
your investment.
We
have recently incurred losses and anticipate continued losses and negative cash
flow.
We
have been transitioning from a U.S. government contract research and development
company to a commercial products developer and manufacturer. As such, we have
not achieved profitability since our fiscal year ended October 31, 1997 and
expect to continue to incur net losses and generate negative cash flow until we
can produce sufficient revenues to cover our costs.
We
incurred net losses of $86.4 million and $18.0 million for the fiscal year ended
October 31, 2004 and the three months ended January 31, 2005, respectively. We
anticipate that we will continue to incur losses and generate negative cash flow
until we can cost-effectively produce and sell our Direct FuelCell products,
which we do not expect to occur for several years. We may never become
profitable. Even if we do achieve profitability, we may be unable to sustain or
increase our profitability in the future. For the reasons discussed in more
detail below, there are substantial uncertainties associated with our achieving
and sustaining profitability.
Our
cost reduction strategy may not succeed or may be significantly delayed, which
may result in our inability to offer our products at competitive prices and may
adversely affect our sales.
Our
cost reduction strategy is based on the assumption that a significant increase
in production will result in economies of scale. In addition, certain aspects of
our cost reduction strategy rely on advancements in our manufacturing process,
engineering design and technology (including projected power output) that, to a
large degree, are currently not ascertainable. Our failure to achieve a lower
Direct FuelCell product cost structure through economies of scale, improvements
in the manufacturing process and engineering design and technology maturation
would have a material adverse effect on our commercialization plans and,
therefore, our business, prospects, results of operations and financial
condition.
The
production costs of our initial commercial products are higher than their sales
prices. We recognize that successfully implementing our strategy and obtaining a
significant share of the distributed generation market requires that we offer
our Direct FuelCell products at competitive prices, which can only be
accomplished when production costs are cut substantially from current levels. If
we are unable to produce Direct FuelCell products at competitive prices relative
to alternative technologies and products, our target market customers will be
unlikely to buy our fuel cell products.
Our
products will compete with products using other energy sources, and if the
prices of the alternative sources are lower than energy sources used by our
products, sales of our products will be adversely
affected.
Our
Direct FuelCell has been operated using a variety of hydrocarbon fuels,
including natural gas, methanol, diesel, biogas, coal gas, coal mine methane and
propane. If these fuels are not readily available or if their prices increase
such that electricity produced by our products costs more than electricity
provided by other generation sources, our products would be less economically
attractive to potential customers. In addition, we have no control over the
prices of several types of competitive energy sources such as oil, gas or coal.
Significant decreases in the price of these fuels could also have a material
adverse effect on our business because other generation sources could be more
economically attractive to consumers than our products.
Commercialization
of our products depends on conducting successful field trials, and any delay,
performance failure or perceived problem with our field trials could have a
material adverse effect on our business, prospects, results of operations and
financial condition.
One
key aspect of our strategy is to leverage the success of our demonstration,
field trial and field follow projects into long-term distributor-type
relationships that will result in these distributors marketing our Direct
FuelCell products directly to energy customers. For example, we are operating
fourteen Direct FuelCell units in the United States and five Direct FuelCell
units in Japan and MTU CFC Solutions GmbH is currently field-testing eight 250
kW power plants in Germany and Spain that incorporate the Direct FuelCell as
their fuel cell components. We believe that our Direct FuelCell
commercialization program depends upon our conducting additional commercial
field trials and demonstration projects of our power plants and completing
substantial additional research and development.
Our
demonstration, field trial and field follow projects may encounter problems
and/or delays for a number of reasons, including the failure of our technology,
the failure of the technology of others (including our balance of plant
suppliers), the failure to combine these technologies properly (including
control system coordination) and the failure to maintain and service the test
prototypes properly. Many of these potential problems and delays are beyond our
control. A failure by us to conduct field trials and demonstration projects of
our megawatt class products or a failure to site the scheduled sub-megawatt
power plants and complete these commercial field trials and research and
development as currently planned could delay the timetable by which we believe
we can begin to commercially sell our Direct FuelCell products. The failure of
planned commercial field trials to perform as well as we anticipate could also
have a material adverse effect on our commercialization plans, including the
ability to enter into long-term distributor-type relationships for our Direct
FuelCell products. Any delay, performance failure or perceived problem with our
field trials could hurt our reputation in the distributed generation market and,
therefore, could have a material adverse effect on our business, prospects,
results of operations and financial condition.
We
currently face and will continue to face significant
competition.
Our
Direct FuelCell currently faces, and will continue to face, significant
competition. We compete on the basis of our products’ reliability, fuel
efficiency, environmental considerations and cost. Technological advances in
alternative energy products or improvements in the electric grid or other fuel
cell technologies may negatively affect the development or sale of some or all
of our products or make our products non-competitive or obsolete prior to
commercialization or afterwards. Other companies, some of which have
substantially greater resources than ours, are currently engaged in the
development of products and technologies that are similar to, or may be
competitive with, our products and technologies.
Many
companies in the United States are involved in fuel cell development, although
we believe we are the only domestic company engaged in significant manufacturing
and commercialization of carbonate fuel cells in the sub-megawatt and megawatt
classes. Emerging fuel cell technologies (and companies developing them) include
proton exchange membrane fuel cells (Ballard Power Systems, Inc.; United
Technologies Corp. or UTC Fuel Cells; and Plug Power), phosphoric acid fuel
cells (UTC Fuel Cells) and solid oxide fuel cells (Siemens Westinghouse Electric
Company, Sulzer Hexis, McDermott, GE/ Honeywell, Delphi and Accumentrics). Each
of these competitors has the potential to capture market share in our target
markets.
There
are other potential carbonate fuel cell competitors internationally. In Asia,
Ishikawajima Harima Heavy Industries is active in developing carbonate fuel
cells. In Europe, a company in Italy, Ansaldo Fuel Cells, is actively engaged in
carbonate fuel cell development and is a potential competitor. Our licensees in
Germany, MTU CFC Solutions GmbH, and its partners have been the most active in
Europe.
Other
than fuel cell developers, we must also compete with such companies as
Caterpillar, Cummins, and Detroit Diesel, which manufacture more mature
combustion-based equipment, including various engines and turbines, and have
well-established manufacturing, distribution, and operating and cost features.
Significant competition may also come from gas turbine companies like General
Electric, Ingersoll Rand, Solar Turbines and Kawasaki, which have recently made
progress in improving fuel efficiency and reducing pollution in large-size
combined cycle natural gas fueled generators. These companies have also made
efforts to extend these advantages to smaller sizes.
We
may not meet our product development and commercialization milestones, which may
have a material adverse effect on our operations and stock
price.
We
have established product development and commercialization milestones that we
use to assess our progress toward developing commercially viable Direct FuelCell
products. These milestones relate to technology and design improvements as well
as to dates for achieving development goals. To gauge our progress, we operate,
test and evaluate our Direct FuelCell products under actual conditions. If our
systems exhibit technical defects or are unable to meet cost or performance
goals, including power output, useful life and reliability, our
commercialization schedule could be delayed and potential purchasers of our
initial commercial Direct FuelCell products may decline to purchase them or
choose to purchase alternative technologies. We cannot be sure that we will
successfully achieve our milestones in the future or that any failure to achieve
these milestones will not result in potential competitors gaining advantages in
our target market. Failure to meet publicly announced milestones might have a
material adverse effect on our operations and our stock price.
We
have limited experience manufacturing our Direct FuelCell products on a
commercial basis, which may adversely affect our planned increases in production
capacity and our ability to satisfy customer
requirements.
To
date, we have focused primarily on research and development and conducting
demonstrations and field trials. We have limited experience manufacturing our
Direct FuelCell products on a commercial basis. We have installed equipment that
will allow us to produce 50 MW of Direct FuelCell products per year. We expect
that we will then increase our manufacturing capacity based on market demand. We
believe that we can expand our manufacturing capacity to between 125 and 150 MW
of Direct FuelCell products at our current facility. We cannot be sure that we
will be able to achieve our planned increases in production capacity. Also, as
we scale up our production capacity, we cannot be sure that unplanned failures
or other technical problems relating to the manufacturing process will not
occur.
Even
if we are successful in achieving our planned increases in production capacity,
we cannot be sure that we will do so in time to meet our product
commercialization schedule or to satisfy the requirements of our customers.
Given our dependence on government research and development contracts and the
necessity of providing government entities with substantial amounts of
information, our sales process has historically been long and time-consuming. We
will need to continue to shorten the time from initial contact to final product
delivery if we hope to expand production, reach a wider customer base and
forecast revenues with any degree of certainty. Additionally, we cannot be sure
that we will be able to develop efficient, low-cost manufacturing capabilities
and processes (including automation) that will enable us to meet our cost goals
and profitability projections. Our failure to shorten the sales cycle for our
Direct FuelCell products or to develop these advanced manufacturing capabilities
and processes, or meet our cost goals, could have a material adverse effect on
our business, prospects, results of operations and financial
condition.
Unanticipated
increases or decreases in business growth may result in adverse financial
consequences for us.
If
our business grows more quickly than we anticipate, our existing and planned
manufacturing facilities may become inadequate and we may need to seek out new
or additional space, at considerable cost to us. If our business does not grow
as quickly as we expect, our existing and planned manufacturing facilities
would, in part, represent excess capacity for which we may not recover the cost;
in that circumstance, our revenues may be inadequate to support our committed
costs and our planned growth and our gross margins and business strategy would
be adversely affected.
Our
commercialization plans are dependent on market acceptance of our Direct
FuelCell products.
Our
commercialization plans are dependent upon market acceptance of, as well as
enhancements to, those products. Fuel cell systems represent an emerging market,
and we cannot be sure that potential customers will accept fuel cells as a
replacement for traditional power sources. As is typical in a rapidly evolving
industry, demand and market acceptance for recently introduced products and
services are subject to a high level of uncertainty and risk. Since the
distributed generation market is new and evolving, it is difficult to predict
with certainty the size of the market and its growth rate. The development of a
market for our Direct FuelCell products may be affected by many factors that are
out of our control, including:
• the
cost competitiveness of our fuel cell products;
• the
future costs of natural gas and other fuels used by our fuel cell
products;
• consumer
reluctance to try a new product;
• consumer
perceptions of the safety of our fuel cell products;
• the
pace of utility deregulation nationwide, which could affect the market for
distributed generation;
• local
permitting and environmental requirements; and
• the
emergence of newer, more competitive technologies and products.
If
a sufficient market fails to develop or develops more slowly than we anticipate,
we may be unable to recover the losses we will have incurred in the development
of Direct FuelCell products and may never achieve profitability.
As
we continue to commercialize our Direct FuelCell products, we will continue to
develop warranties, production guarantees and other terms and conditions
relating to our products that will be acceptable to the marketplace, and
continue to develop a service organization that will aid in servicing our
products and obtain self-regulatory certifications, if available, with respect
to our products. Failure to achieve any of these objectives may also slow the
development of a sufficient market for our products and, therefore, have a
material adverse effect on our results of operations.
Our
government research and development contracts are subject to the risk of
termination by the contracting party and we may not realize the full amounts
allocated under the contracts due to the lack of Congressional
appropriations.
Our
fuel cell revenues have been principally derived from a long-term cooperative
agreement and other contracts with the U.S. Department of Energy (“DOE”), the
U.S. Department of Defense, the U.S. Navy and the National Aeronautics and Space
Administration. These agreements are important to the continued development and
commercialization of our technology and our products.
Generally,
our U.S. government research and development contracts, including the DOE
(Product Design Improvement) cooperative
agreement, are subject to the risk of termination at the convenience of the
contracting agency. Furthermore, these contracts, irrespective of the amounts
allocated by the contracting agency, are subject to annual congressional
appropriations and the results of government or agency sponsored audits of our
cost reduction efforts and our cost projections. We can only receive funds under
these contracts ultimately made available to us annually by Congress as a result
of the appropriations process. Accordingly, we cannot be sure whether we will
receive the full amount allocated by the DOE under our DOE cooperative
agreements or the full amounts awarded under our other government research and
development contracts. Failure to receive the full amounts under any of our
government research and development contracts could materially and adversely
affect our commercialization plans and, therefore, our business, prospects,
results of operations and financial condition.
The
United States government has certain rights relating to our intellectual
property, including restricting or taking title to certain
patents.
Many
of our United States patents relating to our carbonate fuel cell technology are
the result of government-funded research and development programs, including the
DOE cooperative agreement. Four of our patents that were the result of
DOE-funded research prior to January 1988 (the date that we qualified as a
“small business”) are owned by the United States government and have been
licensed to us. This license is revocable only in the limited circumstances
where it has been demonstrated that we are not making an effort to commercialize
the invention. We own all patents resulting from research funded by our DOE
contracts awarded after January 1988 to date, based on our “small business”
status when each contract was awarded. Under current regulations, patents
resulting from research funded by government agencies other than the DOE are
owned by us, whether or not we are a “small business.”
Fourteen
United States patents that we own have resulted from government-funded research
and are subject to the risk of exercise of “march-in” rights by the government.
March-in rights refer to the right of the United States government or a
government agency to exercise its non-exclusive, royalty-free, irrevocable
worldwide license to any technology developed under contracts funded by the
government if the contractor fails to continue to develop the technology. These
“march-in” rights permit the United States government to take title to these
patents and license the patented technology to third parties if the contractor
fails to utilize the patents. In addition, our DOE-funded research and
development agreements also require us to agree that we will not provide to a
foreign entity any fuel cell technology subject to that agreement unless the
fuel cell technology will be substantially manufactured in the U.S. Accordingly,
we could lose some or all of the value of these patents.
A
failure to qualify as a “small business” could adversely affect our rights to
own future patents under DOE-funded contracts.
Qualifying
as a “small business” under DOE contracts allows us to own the patents that we
develop under DOE contracts. A “small business” under applicable government
regulations generally consists of no more than 500 employees. If we continue to
grow, we will no longer qualify as a “small business” and no longer own future
patents we develop under contracts, grants or cooperative agreements funded by
the DOE based on such certification, unless we obtain a patent waiver from the
DOE. As a result of our acquisition of Global, the number of our employees
increased and therefore, we temporarily did not qualify as a “small business.”
Following the sale of Global and its TEG product line on May 27, 2004, we again
qualify as a “small business”; however, we cannot assure you that we will
continue to qualify as a “small business” in the future.
Our
future success and growth is dependent on our distribution
strategy.
We
do not plan to establish a direct distribution infrastructure for our Direct
FuelCell products. A key aspect of our strategy is to use multiple third-party
distribution channels to ultimately service our diverse customer base. Depending
on the needs of the customer, our Direct FuelCell products could be distributed
through a value-added distributor who could provide a package of our products
and various other components such as flywheels and battery storage devices;
through an energy services company that could arrange various ancillary services
for the customer; or through power generation equipment suppliers.
We
cannot assure you that we will enter into distributor relationships that are
consistent with, or sufficient to support, our commercialization plans or our
growth strategy or that these relationships will be on terms favorable to us.
Even if we enter into these types of relationships, we cannot assure you that
the distributors with which we form relationships will focus adequate resources
on selling our products or will be successful in selling them. Some of these
distributor arrangements have or will require that we grant exclusive
distribution rights to companies in defined territories. These exclusive
arrangements could result in us being unable to enter into other arrangements at
a time when the distributor with which we form a relationship is not successful
in selling our products or has reduced its commitment to marketing our products.
In addition, two of our current distributor arrangements include, and some
future distributor arrangements may also include, the issuance of equity and
warrants to purchase our equity, which may have an adverse effect on our stock
price. To the extent we enter into distributor relationships, the failure of
these distributors in assisting us with the marketing and distribution of our
products may adversely affect our results of operations and financial
condition.
We
cannot be sure that MTU will continue to, or original equipment manufacturers
(“OEMs”) will, manufacture or package products using our Direct FuelCell
components. In this area, our success will largely depend upon our ability to
make our products compatible with the power plant products of OEMs and the
ability of these OEMs to sell their products containing our products. In
addition, some OEMs may need to redesign or modify their existing power plant
products to fully incorporate our products. Accordingly, any integration,
design, manufacturing or marketing problems encountered by MTU or other OEMs
could adversely affect the market for our Direct FuelCell products and,
therefore, our business, prospects, results of operations and financial
condition.
We
depend on third party suppliers for the development and supply of key components
for Direct FuelCell products.
We
purchase several key components of our Direct FuelCell products from other
companies and rely on third-party suppliers for the balance-of-plant components
in our Direct FuelCell products. There are a limited number of suppliers for
some of the key components of Direct FuelCell products. A supplier’s failure to
develop and supply components in a timely manner or to supply components that
meet our quality, quantity or cost requirements or technical specifications or
our inability to obtain alternative sources of these components on a timely
basis or on terms acceptable to us could harm our ability to manufacture our
Direct FuelCell products. In addition, to the extent the processes that our
suppliers use to manufacture components are proprietary, we may be unable to
obtain comparable components from alternative suppliers.
We
do not know when or whether we will secure long-term supply relationships with
any of our suppliers or whether such relationships will be on terms that will
allow us to achieve our objectives. Our business, prospects, results of
operations and financial condition could be harmed if we fail to secure
long-term relationships with entities that will supply the required components
for our Direct FuelCell products.
We
depend on our intellectual property, and our failure to protect that
intellectual property could adversely affect our future growth and
success.
Failure
to protect our existing intellectual property rights may result in the loss of
our exclusivity or the right to use our technologies. If we do not adequately
ensure our freedom to use certain technology, we may have to pay others for
rights to use their intellectual property, pay damages for infringement or
misappropriation or be enjoined from using such intellectual property. We do not
currently conduct freedom to operate analyses. We rely on patent, trade secret,
trademark and copyright law to protect our intellectual property. The patents
that we have obtained will expire between 2005 and 2023 and the average
remaining life of our U.S. patents is approximately 10.7 years.
Some
of our intellectual property is not covered by any patent or patent application
and includes trade secrets and other know-how that is not patentable,
particularly as it relates to our manufacturing processes and engineering
design. In addition, some of our intellectual property includes technologies and
processes that may be similar to the patented technologies and processes of
third parties. If we are found to be infringing third-party patents, we do not
know whether we will able to obtain licenses to use such patents on acceptable
terms, if at all. Our patent position is subject to complex factual and legal
issues that may give rise to uncertainty as to the validity, scope and
enforceability of a particular patent. Accordingly, we cannot assure you
that:
•
any
of the U.S., Canadian or other foreign patents owned by us or other patents that
third parties license to us will not be invalidated, circumvented, challenged,
rendered unenforceable or licensed to others; or
•
any
of our pending or future patent applications will be issued with the breadth of
claim coverage sought by us, if issued at all.
In
addition, effective patent, trademark, copyright and trade secret protection may
be unavailable, limited or not applied for in certain foreign
countries.
We
also seek to protect our proprietary intellectual property, including
intellectual property that may not be patented or patentable, in part by
confidentiality agreements and, if applicable, inventors’ rights agreements with
our subcontractors, vendors, suppliers, consultants, strategic partners and
employees. We cannot assure you that these agreements will not be breached, that
we will have adequate remedies for any breach or that such persons or
institutions will not assert rights to intellectual property arising out of
these relationships. Certain of our intellectual property has been licensed to
us on a non-exclusive basis from third parties that may also license such
intellectual property to others, including our competitors. If our licensors are
found to be infringing third-party patents, we do not know whether we will be
able to obtain licenses to use the intellectual property licensed to us on
acceptable terms, if at all.
If
necessary or desirable, we may seek extensions of existing licenses or further
licenses under the patents or other intellectual property rights of others.
However, we can give no assurances that we will obtain such extensions or
further licenses or that the terms of any offered licenses will be acceptable to
us. The failure to obtain a license from a third party for intellectual property
that we use at present could cause us to incur substantial liabilities, and to
suspend the manufacture or shipment of products or our use of processes
requiring the use of that intellectual property.
While
we are not currently engaged in any material intellectual property litigation,
we could become subject to lawsuits in which it is alleged that we have
infringed the intellectual property rights of others or commence lawsuits
against others who we believe are infringing upon our rights. Our involvement in
intellectual property litigation could result in significant expense to us,
adversely affecting the development of sales of the challenged product or
intellectual property and diverting the efforts of our technical and management
personnel, whether or not that litigation is resolved in our favor.
Our
future success will depend on our ability to attract and retain qualified
management and technical personnel.
Our
future success is substantially dependent on the continued services and on the
performance of our executive officers and other key management, engineering,
scientific, manufacturing and operating personnel, particularly Jerry Leitman,
our President and Chief Executive Officer. The loss of the services of any
executive officer, including Mr. Leitman, or other key management, engineering,
scientific, manufacturing and operating personnel, could materially adversely
affect our business. Our ability to achieve our development and
commercialization plans will also depend on our ability to attract and retain
additional qualified management and technical personnel. Recruiting personnel
for the fuel cell industry is competitive. We do not know whether we will be
able to attract or retain additional qualified management and technical
personnel. Our inability to attract and retain additional qualified management
and technical personnel, or the departure of key employees, could materially and
adversely affect our development and commercialization plans and, therefore, our
business, prospects, results of operations and financial condition.
Our
management may be unable to manage rapid growth
effectively.
We
expect to rapidly expand our manufacturing capabilities, accelerate the
commercialization of our products and enter a period of rapid growth, which will
place a significant strain on our senior management team and our financial and
other resources. The proposed expansion will expose us to increased competition,
greater overhead, marketing and support costs and other risks associated with
the commercialization of a new product. Our ability to manage our rapid growth
effectively will require us to continue to improve our operations, to improve
our financial and management information systems and to train, motivate and
manage our employees. Difficulties in effectively managing the budgeting,
forecasting and other process control issues presented by such a rapid expansion
could harm our business, prospects, results of operations and financial
condition.
We
may be affected by environmental and other governmental
regulation.
As
we begin to commercialize our Direct FuelCell products, we will be subject to
federal, state, provincial or local regulation with respect to, among other
things, emissions and siting. Assuming no co-generation applications are used in
conjunction with our larger Direct FuelCell plants, they will discharge humid
flue gas at temperatures of approximately 700-800o
F, water at temperatures of approximately 10-20
o F
above surrounding air temperatures and carbon dioxide. These emissions will
require permits that we expect (but cannot ensure) will be similar to those
applicable to generating units.
In
addition, it is possible that industry-specific laws and regulations will be
adopted covering matters such as transmission scheduling, distribution and the
characteristics and quality of our products, including installation and
servicing. This regulation could limit the growth in the use of carbonate fuel
cell products, decrease the acceptance of fuel cells as a commercial product and
increase our costs and, therefore, the price of our Direct FuelCell products.
Accordingly, compliance with existing or future laws and regulations as we begin
to commercialize and site our products could have a material adverse effect on
our business, prospects, results of operations and financial
condition.
Utility
companies could impose customer fees or interconnection requirements on our
customers that could make our products less
desirable.
Utility
companies commonly charge fees to larger, industrial customers for disconnecting
from the electric grid or for having the capacity to use power from the electric
grid for back up purposes. These fees could increase the cost to our customers
of using our Direct FuelCell products and could make our products less
desirable, thereby harming our business, prospects, results of operations and
financial condition.
Several
states (Texas, New York, California and others) have created and adopted or are
in the process of creating their own interconnection regulations covering both
technical and financial requirements for interconnection to utility grids.
Depending on the complexities of the requirements, installation of our systems
may become burdened with additional costs that might have a negative impact on
our ability to sell systems. There is also a burden in having to track the
requirements of individual states and design equipment to comply with the
varying standards. The Institute of Electrical and Electronics Engineers has
been working to create an interconnection standard addressing the technical
requirements for distributed generation to interconnect to utility grids. Many
parties are hopeful that this standard will be adopted nationally when it is
completed to help reduce the barriers to deployment of distributed generation
such as fuel cells; however this standard may be delayed or never completed
thereby limiting the commercial prospects and profitability of our fuel cell
systems.
Changes
in government regulations and electric utility industry restructuring may affect
demand for our Direct FuelCell products.
Our
target market, the distributed generation market, is driven by deregulation and
restructuring of the electric utility industry in the United States and
elsewhere and by the requirements of utilities, independent power producers and
end users. Deregulation of the electric utility industry is subject to
government policies that will determine the pace and extent of deregulation.
Many states have recently delayed the implementation of deregulation as a result
of power disturbances in California several summers ago. Changes in government
and public policy over time could further delay or otherwise affect deregulation
and, therefore, adversely affect our prospects for commercializing our Direct
FuelCell products and our financial results. We cannot predict how the
deregulation and restructuring of the electric utility industry will ultimately
affect the market for our Direct FuelCell products.
We
could be liable for environmental damages resulting from our research,
development or manufacturing operations.
Our
business exposes us to the risk of harmful substances escaping into the
environment, resulting in personal injury or loss of life, damage to or
destruction of property, and natural resource damage. Depending on the nature of
the claim, our current insurance policies may not adequately reimburse us for
costs incurred in settling environmental damage claims, and in some instances,
we may not be reimbursed at all. Our business is subject to numerous federal,
state and local laws and regulations that govern environmental protection and
human health and safety. These laws and regulations have changed frequently in
the past and it is reasonable to expect additional and more stringent changes in
the future.
Our
operations may not comply with future laws and regulations and we may be
required to make significant unanticipated capital and operating expenditures.
If we fail to comply with applicable environmental laws and regulations,
governmental authorities may seek to impose fines and penalties on us or to
revoke or deny the issuance or renewal of operating permits and private parties
may seek damages from us. Under those circumstances, we might be required to
curtail or cease operations, conduct site remediation or other corrective
action, or pay substantial damage claims.
We
may be required to conduct environmental remediation activities, which could be
expensive.
We
are subject to a number of environmental laws and regulations, including those
concerning the handling, treatment, storage and disposal of hazardous materials.
These environmental laws generally impose liability on present and former owners
and operators, transporters and generators for remediation of contaminated
properties. We believe that our businesses are operating in compliance in all
material respects with applicable environmental laws, many of which provide for
substantial penalties for violations. We cannot assure you that future changes
in such laws, interpretations of existing regulations or the discovery of
currently unknown problems or conditions will not require substantial additional
expenditures. Any noncompliance with these laws and regulations could subject us
to material administrative, civil or criminal penalties or other liabilities. In
addition, we may be required to incur substantial costs to comply with current
or future environmental and safety laws and regulations.
Our
products use inherently dangerous, flammable fuels, operate at high temperatures
and use corrosive carbonate material, each of which could subject our business
to product liability claims.
Our
business exposes us to potential product liability claims that are inherent in
hydrogen and products that use hydrogen. Hydrogen is a flammable gas and
therefore a potentially dangerous product. Hydrogen is typically generated from
gaseous and liquid fuels that are also flammable and dangerous, such as propane,
natural gas or methane, in a process known as reforming. Natural gas and propane
could leak into a residence or commercial location and combust if ignited by
another source. In addition, our Direct FuelCell products operate at high
temperatures and our Direct FuelCell products use corrosive carbonate material,
which could expose us to potential liability claims. Any accidents involving our
products or other hydrogen-using products could materially impede widespread
market acceptance and demand for our Direct FuelCell products. In addition, we
might be held responsible for damages beyond the scope of our insurance
coverage. We also cannot predict whether we will be able to maintain our
insurance coverage on acceptable terms.
We
are subject to risks inherent in international
operations.
Since
we plan to market our Direct FuelCell products both inside and outside the
United States and Canada, our success depends, in part, on our ability to secure
international customers and our ability to manufacture products that meet
foreign regulatory and commercial requirements in target markets. We have
limited experience developing and manufacturing our products to comply with the
commercial and legal requirements of international markets. In addition, we are
subject to tariff regulations and requirements for export licenses, particularly
with respect to the export of some of our technologies. We face numerous
challenges in our international expansion, including unexpected changes in
regulatory requirements, fluctuations in currency exchange rates, longer
accounts receivable requirements and collections, difficulties in managing
international operations, potentially adverse tax consequences, restrictions on
repatriation of earnings and the burdens of complying with a wide variety of
international laws. Any of these factors could adversely affect our operations
and revenues.
We
have large and influential stockholders, which may make it difficult for a third
party to acquire our common stock.
MTU
currently owns approximately 5.7% of our outstanding common stock (based upon
the number of shares of our common stock outstanding as of March 31, 2005).
James D. Gerson beneficially owns approximately 2.8% of our outstanding common
stock. Loeb Investors Co. LXXV and Warren Bagatelle (a managing director of an
affiliate of Loeb Investors Co. LXXV) collectively beneficially own
approximately 2.3% of our outstanding common stock (based upon the number of
shares of our common stock outstanding as of March 31, 2005). These ownership
levels could make it difficult for a third party to acquire our common stock or
have input into the decisions made by our board of directors, which include
Michael Bode (Chief Executive Officer of MTU CFC Solutions GmbH), James D.
Gerson, Warren Bagatelle and Thomas L. Kempner (Chairman and Chief Executive
Officer of an affiliate of Loeb Investors Co. LXXV). MTU is also a licensee of
our technology and a purchaser of our Direct FuelCell products. Therefore, it
may be in MTU’s interest to possess substantial influence over matters
concerning our overall strategy and technological and commercial development. In
addition, Wellington
Management Company, LLP owns
approximately 13.8% of our outstanding common stock and is therefore in a
position to substantially influence matters submitted to a vote of our security
holders.
MTU
may develop competing technologies for its own
products.
MTU
is currently developing carbonate fuel cell technologies based on the know-how
that we have provided to MTU under license. If MTU develops its own carbonate
fuel cell design before our license expires in 2010, it must use good faith
efforts to license the technology to us. If MTU is successful but does not grant
us a license, it may be directly competing with us while having a significant
ownership interest in us, and a seat on our board of directors. We have agreed
with MTU to continue developing products with as much commonality as possible.
However, the license agreement between us and MTU provides that each of us
retains the right to independently pursue the development of carbonate fuel cell
technologies.
Our
stock price has been and could remain volatile.
The
market price for our common stock has been and may continue to be volatile and
subject to extreme price and volume fluctuations in response to market and other
factors, including the following, some of which are beyond our
control:
• failure
to meet our product development and commercialization milestones;
• variations
in our quarterly operating results from the expectations of securities analysts
or investors;
• downward
revisions in securities analysts’ estimates or changes in general market
conditions;
• announcements
of technological innovations or new products or services by us or our
competitors;
• announcements
by us or our competitors of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
• additions
or departures of key personnel;
• investor
perception of our industry or our prospects;
• insider
selling or buying;
• demand
for our common stock; and
• general
technological or economic trends.
In
the past, following periods of volatility in the market price of their stock,
many companies have been the subjects of securities class action litigation. If
we became involved in securities class action litigation in the future, it could
result in substantial costs and diversion of management’s attention and
resources and could harm our stock price, business, prospects, results of
operations and financial condition.
Provisions
of Delaware and Connecticut law and of our charter and by-laws may make a
takeover more difficult.
Provisions
in our certificate of incorporation and by-laws and in Delaware and Connecticut
corporate law may make it difficult and expensive for a third party to pursue a
tender offer, change in control or takeover attempt that is opposed by our
management and board of directors. Public stockholders who might desire to
participate in such a transaction may not have an opportunity to do so. These
anti-takeover provisions could substantially impede the ability of public
stockholders to benefit from a change in control or change in our management and
board of directors.
We
depend on relationships with strategic partners, and the terms and
enforceability of many of these relationships are not
certain.
We
have entered into relationships with strategic partners for design, product
development and distribution of our existing products, and products under
development, some of which may not have been documented by a definitive
agreement. The terms and conditions of many of these agreements allow for
termination by the partners. Termination of any of these agreements could
adversely affect our ability to design, develop and distribute these products to
the marketplace. We cannot assure you that we will be able to successfully
negotiate and execute definitive agreements with any of these partners, and
failure to do so may effectively terminate the relevant
relationship.
Future
sales of substantial amounts of our common stock could affect the market price
of our common stock.
Future
sales of substantial amounts of our common stock, or securities convertible or
exchangeable into shares of our common stock, into the public market, including
shares of our common stock issued upon exercise of options and warrants, or
perceptions that those sales could occur, could adversely affect the prevailing
market price of our common stock and our ability to raise capital in the
future.
The
rights of the Series 1 preferred shares and Series B preferred shares could
negatively impact our company.
The
terms of the Series 1 preferred shares issued by FuelCell Energy, Ltd., our
wholly-owned, indirect subsidiary, provide rights to the holder, Enbridge, Inc.
(Enbridge), including dividend and conversion rights among others that could
negatively impact us. For example, the terms of the Series 1 preferred shares
provide that the holders are entitled to receive cumulative dividends for each
calendar quarter for so long as such shares are outstanding. Assuming the
exchange rate for Canadian dollars is Cdn.$1.3104 to U.S.$1.00 at the time of
the applicable dividend payment date, we could be required to pay a preferred
dividend of approximately $238,477 per calendar quarter, subject to reduction in
accordance with the terms of the Series 1 preferred shares. The terms of the
Series 1 preferred shares also require that the holder be paid any accrued and
unpaid dividends on December 31, 2010. To the extent that there is a significant
amount of accrued dividends that is unpaid as of December 31, 2010 and we do not
have sufficient working capital at that time to pay the accrued dividends, our
financial condition could be adversely affected. We have guaranteed these
dividend obligations, including paying a minimum of Cdn.$500,000 in cash
annually to Enbridge for so long as Enbridge holds the Series 1 preferred
shares. We have also guaranteed the liquidation obligations of FuelCell Energy,
Ltd. under the Series 1 preferred shares.
We
are also required to issue common stock to the holder of the Series 1 preferred
shares if and when the holder exercises its conversion rights. The number of
shares of common stock that we may issue upon conversion could be significant
and dilutive to our existing stockholders. For example, assuming the holder of
the Series 1 preferred shares exercises its conversion rights after July 31,
2020, the exchange rate for Canadian dollars is Cdn.$1.3104 to U.S.$1.00 at the
time of such conversion and our common stock price is $14.62 at the time of such
conversion, we would be required to issue approximately 1,373,615 shares of our
common stock.
The
terms of the Series B preferred shares also provide rights to their holders that
could negatively impact us. Holders of the Series B preferred shares
are entitled to receive cumulative dividends at the rate of $50 per share per
year, payable either in cash or in shares of our common stock. To
the extent the dividend is paid in shares, additional issuances could be
dilutive to our existing stockholders and the sale of those shares could have a
negative impact on the price of our common stock. The Series B preferred
stock is also convertible into common stock at a price of $11.75 per
share. Conversion of the Series B preferred stock at a time when the price
of our common stock is greater than $11.75 per share would also have a dilutive
impact on our existing stockholders. Furthermore, the conversion rate
applicable to the preferred stock is subject to adjustment upon the occurrence
of certain events.
USE
OF PROCEEDS
We are
registering 300,000 shares of our common stock on a registration statement on
Form S-1, for which this prospectus forms a part, which will be offered to
certain of our employees as partial payment for annual bonuses earned and to be
earned by such employees with respect to our performance targets for our fiscal
year ended October 31, 2004 and future fiscal years ended October 31, 2005 and
October 31, 2006. No proceeds will be received by us from the offer and issuance
of these shares.
PRICE
RANGE OF COMMON STOCK
Our
common stock has been publicly traded since June 25, 1992. From September 21,
1994 through February 25, 1997, it was quoted on the NASDAQ National Market, and
from February 26, 1997 through June 6, 2000 it was traded on the American Stock
Exchange.
Our
common stock has traded under the symbol “FCEL” on the Nasdaq Stock Market since
June 7, 2000. The following table sets forth the high and low closing sale
prices for our common stock for the fiscal periods indicated as reported by the
Nasdaq Stock Market during the indicated quarters.
|
|
Common
Stock Price |
|
|
|
High |
|
Low |
|
Fiscal
Year Ended October 31, 2002 |
|
|
|
|
|
First
Quarter |
|
$ |
21.85 |
|
$ |
13.55 |
|
Second
Quarter |
|
$ |
18.46 |
|
$ |
15.15 |
|
Third
Quarter |
|
$ |
16.73 |
|
$ |
6.62 |
|
Fourth
Quarter |
|
$ |
8.01 |
|
$ |
4.58 |
|
Fiscal
Year Ended October 31, 2003 |
|
|
|
|
|
|
|
First
Quarter |
|
$ |
9.05 |
|
$ |
5.39 |
|
Second
Quarter |
|
$ |
6.22 |
|
$ |
5.03 |
|
Third
Quarter |
|
$ |
9.90 |
|
$ |
6.28 |
|
Fourth
Quarter |
|
$ |
15.37 |
|
$ |
6.81 |
|
Fiscal
Year Ended October 31, 2004 |
|
|
|
|
|
|
|
First
Quarter |
|
$ |
17.25 |
|
$ |
11.44 |
|
Second
Quarter |
|
$ |
19.44 |
|
$ |
11.86 |
|
Third
Quarter |
|
$ |
17.23 |
|
$ |
8.36 |
|
Fourth
Quarter |
|
$ |
13.14 |
|
$ |
7.42 |
|
Fiscal
Year Ended October 31, 2005 |
|
|
|
|
|
|
|
First
Quarter |
|
$ |
13.01 |
|
$ |
8.02 |
|
Second
Quarter |
|
$ |
11.85 |
|
$ |
7.87 |
|
On April
29, 2005, the last reported sale price of our common stock on the Nasdaq Stock
Market was $8.08 per share. As of May 9, 2005, there were 818 holders of record
of our common stock.
DIVIDEND
POLICY
We
have never paid a cash dividend on our common stock and do not anticipate paying
any cash dividends on our common stock in the foreseeable future. In
addition, the terms of our Series B preferred shares prohibit the payment of
dividends on our common stock unless all dividends on the Series B preferred
stock have been paid in full.
SELECTED
FINANCIAL DATA
The
selected consolidated financial data presented below for each of the years in
the five-year period ended October 31, 2004 and for the three month period ended
January 31, 2005 have been derived from our audited and unaudited consolidated
financial statements, respectively, together with the notes thereto included
elsewhere in this prospectus. The data set forth below is qualified by reference
to, and should be read in conjunction with, such financial statements and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this prospectus.
(Amounts
presented in thousands, except for per share amounts)
Consolidated
Statement of Operations Data:
|
|
Year
Ended October 31, |
|
Three
Months Ended January 31, |
|
|
|
2004 |
|
2003 |
|
2002 |
|
2001 |
|
2000 |
|
2005 |
|
2004 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development contracts |
|
$ |
18,750 |
|
$ |
17,709 |
|
$ |
33,575 |
|
$ |
20,882 |
|
$ |
17,986 |
|
$ |
2,522 |
|
$ |
5,366 |
|
Product
sales and revenue |
|
|
12,636 |
|
|
16,081 |
|
|
7,656 |
|
|
5,297 |
|
|
2,729 |
|
|
5,032 |
|
|
2,028 |
|
Total
revenues |
|
|
31,386 |
|
|
33,790 |
|
|
41,231 |
|
|
26,179 |
|
|
20,715 |
|
|
7,554 |
|
|
7,394 |
|
Costs
and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of research and development contracts |
|
|
27,290 |
|
|
35,827 |
|
|
45,664 |
|
|
19,033 |
|
|
12,508 |
|
|
2,814 |
|
|
7,471 |
|
Cost
of product sales and revenues |
|
|
39,961 |
|
|
50,391 |
|
|
32,129 |
|
|
16,214 |
|
|
4,968 |
|
|
13,713 |
|
|
7,623 |
|
Administrative
and selling expenses |
|
|
14,901 |
|
|
12,631 |
|
|
10,451 |
|
|
9,100 |
|
|
8,055 |
|
|
3,130 |
|
|
3,701 |
|
Research
and development expenses |
|
|
26,677 |
|
|
8,509 |
|
|
6,806 |
|
|
3,108 |
|
|
1,917 |
|
|
5,233 |
|
|
5,865 |
|
Purchased
in-process research and development |
|
|
12,200 |
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
12,200 |
|
Total
costs and expenses |
|
|
121,029 |
|
|
107,358 |
|
|
95,050 |
|
|
47,455 |
|
|
27,448 |
|
|
24,890 |
|
|
36,860 |
|
Loss
from operations |
|
|
(89,643 |
) |
|
(73,568 |
) |
|
(53,819 |
) |
|
(21,276 |
) |
|
(6,733 |
) |
|
(17,336 |
) |
|
(29,466 |
) |
License
fee income, net |
|
|
19 |
|
|
270 |
|
|
270 |
|
|
270 |
|
|
266 |
|
|
71 |
|
|
67 |
|
Interest
expense |
|
|
(137 |
) |
|
(128 |
) |
|
(160 |
) |
|
(116 |
) |
|
(141 |
) |
|
(42 |
) |
|
(37 |
) |
Loss
from equity investments |
|
|
--
|
|
|
-- |
|
|
-- |
|
|
-- |
|
|
-- |
|
|
(340 |
) |
|
-- |
|
Interest
and other income, net |
|
|
2,472 |
|
|
6,012 |
|
|
4,876 |
|
|
5,684 |
|
|
2,138 |
|
|
875 |
|
|
918 |
|
Minority
interest |
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
11 |
|
|
-- |
|
|
-- |
|
Provision
for income taxes |
|
|
--
|
|
|
--
|
|
|
7 |
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Net
loss from continuing operations |
|
|
(87,289 |
) |
|
(67,414 |
) |
|
(48,840 |
) |
|
(15,438 |
) |
|
(4,459 |
) |
|
(16,772 |
) |
|
(28,518 |
) |
Discontinued
operations, net of tax |
|
|
846 |
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(1,252 |
) |
|
656 |
|
Net
loss |
|
$ |
(86,443 |
) |
$ |
(67,414 |
) |
$ |
(48,840 |
) |
$ |
(15,438 |
) |
$ |
(4,459 |
) |
$ |
(18,024 |
) |
$ |
(27,862 |
) |
Preferred
stock dividends |
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(1,342 |
) |
|
(240 |
) |
Net
loss to common shareholders |
|
$ |
--
|
|
$ |
--
|
|
$ |
--
|
|
$ |
--
|
|
$ |
--
|
|
$ |
(19,366 |
) |
$ |
(28,102 |
) |
Basic
and diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations |
|
$ |
(1.82 |
) |
$ |
(1.71 |
) |
$ |
(1.25 |
) |
$ |
(0.45 |
) |
$ |
(0.16 |
) |
$ |
(0.37 |
) |
$ |
(0.60 |
) |
Discontinued
operations |
|
$ |
0.01 |
|
$ |
-- |
|
$ |
-- |
|
$ |
-- |
|
$ |
-- |
|
$ |
(0.03 |
) |
$ |
0.01 |
|
Net
loss to common shareholders |
|
$ |
(1.81 |
) |
$ |
(1.71 |
) |
$ |
(1.25 |
) |
$ |
(0.45 |
) |
$ |
(0.16 |
) |
$ |
(0.40 |
) |
$ |
(0.59 |
) |
Basic
and diluted weighted average shares outstanding |
|
|
47,875 |
|
|
39,342 |
|
|
39,135 |
|
|
34,359 |
|
|
28,298 |
|
|
48,153 |
|
|
47,369 |
|
Consolidated
Balance Sheet Data:
|
|
As
of October 31, |
|
As
of January 31, |
|
|
|
2004 |
|
2005 |
|
2002 |
|
2001 |
|
2000 |
|
2005 |
|
Cash,
cash equivalents and short term investments (U.S. treasury
securities) |
|
$ |
152,395 |
|
$ |
134,750 |
|
$ |
205,996 |
|
$ |
274,760 |
|
$ |
74,754 |
|
$ |
220,438 |
|
Working
capital |
|
|
156,796 |
|
|
143,998 |
|
|
218,423 |
|
|
276,173 |
|
|
71,576 |
|
|
226,803 |
|
Total
current assets |
|
|
178,866 |
|
|
160,792 |
|
|
234,739 |
|
|
289,225 |
|
|
79,405 |
|
|
245,451 |
|
Long-term
investments (U.S. treasury securities) |
|
|
--
|
|
|
18,690 |
|
|
14,542 |
|
|
15,773 |
|
|
--
|
|
|
10,999 |
|
Total
assets |
|
|
236,510 |
|
|
223,363 |
|
|
289,803 |
|
|
334,020 |
|
|
91,028 |
|
|
312,700 |
|
Total
current liabilities |
|
|
22,070 |
|
|
16,794 |
|
|
16,316 |
|
|
13,052 |
|
|
7,588 |
|
|
18,648 |
|
Total
non-current liabilities |
|
|
1,476 |
|
|
1,484 |
|
|
1,785 |
|
|
1,252 |
|
|
--
|
|
|
1,217 |
|
Total
shareholders’ equity |
|
|
212,964 |
|
|
205,085 |
|
|
271,702 |
|
|
319,716 |
|
|
83,251 |
|
|
292,835 |
|
Book
value per share(1) |
|
$ |
4.42 |
|
$ |
5.20 |
|
$ |
6.93 |
|
$ |
8.20 |
|
$ |
2.65 |
|
$ |
6.08 |
|
(1) Calculated
as total shareholder’s equity divided by common shares issued and outstanding as
of the balance sheet date.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) is provided as a supplement to the accompanying financial statements
and footnotes to help provide an understanding of our financial condition,
changes in our financial condition and results of operations. The MD&A is
organized as follows:
Overview
and recent developments.
This section provides a general description of our business. We also briefly
summarize any significant events occurring subsequent to the close of the
reporting period.
Critical
accounting policies and estimates.
This section discusses those accounting policies and estimates that are both
considered important to our financial condition and operating results and
require significant judgment and estimates on the part of management in their
application.
Results
of operations.
This section provides an analysis of our results of operations for the years
ended October 31, 2004, 2003 and 2002, and the three months ended January 31,
2005 and 2004. In addition, a description is provided of transactions and events
that impact the comparability of the results being analyzed.
Liquidity
and capital resources.
This section provides an analysis of our cash position and cash
flows.
Recent
accounting pronouncements.
This section summarizes recent accounting pronouncements and their impact on the
company.
Factors
that may affect future results. In
this section, we detail risk factors that affect our quarterly and annual
results, but which are difficult to predict.
OVERVIEW
AND RECENT DEVELOPMENTS
Overview
FuelCell
is a world leader in the development and manufacture of fuel cell power plants
for clean, efficient and reliable electric power generation. We have been
developing fuel cell technology since our founding in 1969. We are currently
commercializing our core carbonate fuel cell products (Direct
FuelCell®
or DFC®
Power Plants), stationary applications for commercial and industrial customers,
and continuing to develop our next generation of carbonate fuel cell products.
In addition, we are beginning the development of another high temperature fuel
cell system, planar solid oxide fuel cell (SOFC) technology, as a prime
contractor in the U.S. Department of Energy’s (DOE) Solid State Energy
Conversion Alliance (SECA) Program and through our 42 percent ownership interest
in Versa Power Systems (Versa).
Direct
FuelCell Power Plants
Increasing
demand for reliable power worldwide, supplemented by air pollution concerns
caused by older, combustion power generation, and unreliable electrical grid
delivery systems present significant market opportunities for our core
distributed generation products. Our proprietary carbonate DFC power plants
electrochemically produce electricity directly from readily available
hydrocarbon fuels, such as natural gas and wastewater treatment gas. We
believe our products offer significant advantages compared to other power
generation technologies, including:
· |
Flexible
siting and permitting requirements; |
· |
Ability
to provide electricity and heat for cogeneration applications, such as
district heating, process steam, hot water and absorption chilling for air
conditioning; |
· |
Potentially
lower operating, maintenance and generation costs than alternative
distributed power generation technologies; and
|
· |
Because
our DFC power plants produce hydrogen from readily available fuels such as
natural gas and wastewater treatment gas, they can be used to
cost-effectively cogenerate hydrogen as well as electricity and
heat. |
Our
current products, the DFC300A, DFC1500 and DFC3000, are rated in capacity at 250
kW, 1 MW and 2 MW, respectively, and are scalable for distributed applications
up to 10 MW or larger. Our products are designed to meet the base load
power requirements of a wide range of commercial and industrial customers
including wastewater treatment plants (municipal, such as sewage treatment
facilities, and industrial, such as breweries and food processors), data
centers, manufacturing facilities, office buildings, hospitals, universities,
prisons, mail processing facilities and hotels, as well as in grid support
applications for utility customers. We are currently operating 29 power
plants that incorporate our DFC technology at customer sites throughout the
U.S., Europe and Japan. Through February 2005, more than 62 million kilowatt
hours of electricity have been generated by fuel cell power plants worldwide
incorporating our DFC technology. This is more than double the 27 million
kilowatt hours reported a year ago. Approximately 5 percent was generated from
our first megawatt DFC1500 power plant for King County. This increased operating
hours at customer sites has provided additional experience for improvement of
the performance and availability of DFC power plants. From January 2003 through
January 2005, the fleet availability for the our DFC power plants was 87
percent.
On
November 3, 2003, we completed our acquisition of Global located in Calgary,
Canada. At the time of the acquisition, Global had been developing SOFC power
plants since 1997 with the goal of commercializing its technology for
residential, commercial and light industrial applications ranging in size from 3
to 10 kW. Through its thermoelectric generator (TEG') product line, Global also
sold thermoelectric generators for use as a source of electrical power in remote
areas. In connection with the acquisition, we issued, in the aggregate,
approximately 8.2 million shares of our common stock and exchangeable shares,
the latter of which were issued by FuelCell Energy, Ltd., our wholly-owned
Canadian subsidiary (formerly FCE Canada Inc.). We also assumed Global's Series
2 Preferred Shares. Total consideration for the acquisition was approximately
$94.8 million.
On
May 28, 2004, we sold Global's TEG business for proceeds of approximately $16
million. The sale of the TEG business was affected through a sale of all of the
outstanding common shares of Global. Prior to the sale, Global transferred
substantially all of its assets and liabilities not relating to its TEG business
(including substantially all of Global's assets and liabilities relating to its
SOFC business and substantially all of its cash) to FuelCell Energy, Ltd. In
addition, prior to the sale, the Global Series 2 Preferred Shares were cancelled
and replaced with substantially equivalent Class A cumulative redeemable
exchangeable preferred shares (which we refer to as the Series 1 preferred
shares) issued by FuelCell Energy, Ltd.
On
October 31, 2004, we redeemed all of the approximately two million issued and
outstanding exchangeable shares issued by FuelCell Energy, Ltd. The exchangeable
shares were redeemed in exchange for shares of our common stock on a one-for-one
basis. The redemption had no impact on the total number of shares of our common
stock deemed outstanding.
Recent
Developments
Preferred
Share Offering
On
November 11, 2004 we entered into a purchase agreement with Citigroup Global
Markets Inc., RBC Capital Markets Corporation, Adams Harkness, Inc., and Lazard
Freres & Co., LLC (collectively referred to as the “Initial Purchasers”) for
the private placement under Rule 144A of up to 135,000 shares of our 5% Series B
Cumulative Convertible Perpetual Preferred Stock (Liquidation Preference
$1,000). On November 17, 2004, we closed on the sale of 100,000 shares of Series
B preferred stock to the Initial Purchasers. Under the terms of the purchase
agreement, the Initial Purchasers were granted an over-allotment option to
purchase up to an additional 35,000 shares of Series B preferred stock through
January 25, 2005.
On
January 14, 2005, we sold an additional 5,875 shares of our Series B preferred
stock to the Initial Purchasers as part of the over-allotment option. Net
proceeds to us were approximately $99 million.
Sale
of Canadian Solid Oxide Fuel Cell Operation to Versa Power Systems,
Inc.
On
November 1, 2004, pursuant to an asset purchase agreement, dated October 19,
2004, by and among us, our wholly-owned Canadian subsidiary, FuelCell Energy,
Ltd., Versa Power Systems, Inc. (Versa), a Delaware corporation, and Versa Power
Systems, Ltd., a Canadian corporation and wholly-owned subsidiary of Versa Power
Systems, Inc., FuelCell Energy, Ltd. transferred substantially all of its solid
oxide fuel cell (SOFC) assets and operations (including manufacturing and test
equipment, intellectual property and personnel) to Versa Power Systems, Ltd. In
exchange, we received 5,714 shares of Versa Power Systems, Inc. common stock,
increasing our ownership position in Versa to 7,714 shares, or 42 percent. No
cash was exchanged in the transaction.
Assets
sold to Versa totaled approximately $12.4 million and were classified as held
for sale on the balance sheet as of October 31, 2004. Upon closing of the sale
on November 1, 2004, our total investment in Versa was approximately $14.4
million and will be classified as “Equity investments”. We will account for this
investment under the equity method in future periods.
Pursuant
to the terms of the transaction, we expect to incur cash costs in the range of
approximately $1.0 million to $1.5 million related to severance and facility
consolidations in Calgary, Canada. Approximately
$0.1 million of this amount is related to severance payments to
employees paid
during the quarter ended October 31, 2004. The remaining payments are expected
to be made during fiscal year 2005. In
addition, we have
committed to paying future severance costs for time and service accrued up to
November 1, 2004 by employees that are moving to Versa in the event that they
are terminated by Versa
Power Systems, Ltd. (or its parent). Our liability for such severance costs is
limited to the
period commencing on November 1, 2004 through the earlier of (1) award of Phase
2 of the SECA
program
to FuelCell, (2) one year after completion of Phase 1 of the SECA program, or
(3) February 26, 2008. Subsequent to this period, Versa
Power Systems, Ltd. (or its parent) will be
responsible for the severance liability for such employees. We estimate this
liability at approximately $0.8 million.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Revenue
Recognition
We
contract with our customers to perform research and development or manufacture
and install fuel cell components and power plants under long-term contracts. We
recognize revenue on a method similar to the percentage-of-completion
method.
Revenues
on fuel cell research and development contracts are recognized proportionally as
costs are incurred and compared to the estimated total research and development
costs for each contract. In many cases, we are reimbursed only a portion of the
costs incurred or to be incurred on the contract. Revenues from government
funded research, development and demonstration programs are generally
multi-year, cost reimbursement and/or cost shared type contracts or cooperative
agreements. We are reimbursed for reasonable and allocable costs up to the
reimbursement limits set by the contract or cooperative agreement.
While
government research and development contracts may extend for many years, funding
is often provided incrementally on a year-by-year basis if contract terms are
met and Congress has authorized the funds. As of October 31, 2004 and January
31, 2005, research and development sales backlog totaled $16.4 million, of which
79 percent is funded, and $24.7 million, of which 58 percent is funded,
respectively. Should funding be temporarily delayed or if business initiatives
change, we may choose to devote resources to other activities, including
internally funded research and development.
Fuel
cell product sales and revenues include revenues from product sales and service
contracts. Revenues from fuel cell product sales are recognized proportionally
as costs are incurred and assigned to a customer contract by comparing the
estimated total manufacture and installation costs for each contract to the
total contract value. Revenues from service contracts are recognized ratably
over the contract term while costs are expensed as incurred. As our fuel cell
products are in their initial stages of development and market acceptance,
actual costs incurred could differ materially from those previously estimated.
Once we have established that our fuel cell products have achieved commercial
market acceptance and future costs can be reasonably estimated, then estimated
costs to complete an individual contract, in excess of revenue, will be accrued
immediately upon identification.
Warrant
Value Recognition
Warrants
have been issued as sales incentives to certain of our business partners. These
warrants vest as orders from our business partners exceed stipulated levels.
Should warrants vest, or when management estimates that it is probable that
warrants will vest, we will record a proportional amount of the fair value of
the warrants against related revenue as a sales discount. During the three
months ended April 30, 2004, a tranche of 200,000 warrants issued to one of our
business partners vested with the receipt of a 4 MW order. The fair value of
these warrants was determined to be $0.5 million. This has been recorded as
other current assets on the consolidated balance sheet with the offsetting entry
to additional paid in capital. In accordance with our warrant value recognition
policy, as we recognize the associated revenue for orders placed in accordance
with these sales agreements, a proportional amount of the fair value of the
warrants will be recorded against the revenue as a sales discount. To date,
approximately $0.1 million of sales discounts have been recognized.
Inventories
During
the procurement and manufacturing process of a fuel cell power plant, costs for
material, labor and overhead are accumulated in raw materials and
work-in-process (WIP) inventory until they are transferred to a customer
contract.
Our
inventories are stated at the lower of cost or market price. As we sell products
at or below cost, we provide for a lower of cost or market (LCM) adjustment to
the cost basis of inventory. This adjustment is estimated by comparing the
current sales prices of our power plants to estimated costs of completed power
plants. In certain circumstances, for long-lead time items, we will make advance
payments to vendors for future inventory deliveries, which are recorded as a
component of other current assets on the consolidated balance sheet. We also
provide for a LCM adjustment to the advance payments to vendors.
As
of January 31, 2005 and October 31, 2004, the LCM adjustment to cost basis of
inventory and advance payments to vendors was approximately $8.4 million and
$12.4 million respectively, each of which equates to a reduction of
approximately 36 and 42 percent respectively of the inventory value. As of
October 31, 2004, our balance of plant inventory and advances to vendors had
increased over the prior year-end due to our current production schedule.
However, as of January 31, 2005, our gross balance of plant and advances to
vendors balances declined from the October 31, 2004 balances due to plants being
completed for customer orders. As inventory levels increase or decrease,
appropriate adjustments to cost basis are made.
Internal
Research and Development Expenses
We
conduct internally funded research and development activities to improve current
or anticipated product performance and reduce product life-cycle costs. These
costs are classified as research and development expenses on our statements of
operations.
RESULTS
OF OPERATIONS
Management
evaluates the results of operations and cash flows using a variety of key
performance indicators. Indicators that management uses include revenues
compared to prior periods and internal forecasts, costs of our products and
results of our “cost-out” initiatives, and operating cash use. These are
discussed throughout the ‘Results of Operations’ and ‘Liquidity and Capital
Resources’ sections contained under the heading “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Comparison
of the Years Ended October 31, 2004 and October 31,
2003
Revenues
and costs of revenues
The
following tables summarize our revenue and cost mix for the years ended October
31, 2004 and 2003 respectively (dollar amounts in thousands):
|
|
Year
Ended
October
31, 2004 |
|
Year
Ended
October
31, 2003 |
|
Percentage
Increase
/ |
|
Revenues: |
|
Revenues |
|
Percent of
Revenues |
|
Product
Revenues |
|
Percent of
Revenues |
|
(Decrease) in
Revenues |
|
Research
and development contracts |
|
$ |
18,750 |
|
|
60 |
%
|
$ |
17,709 |
|
|
52 |
% |
|
6 |
% |
Product
sales and revenues |
|
|
12,636
|
|
|
40 |
% |
|
16,081
|
|
|
48 |
% |
|
(21 |
%) |
Total |
|
$ |
31,386 |
|
|
100 |
% |
$ |
33,790 |
|
|
100 |
% |
|
(7 |
%) |
|
|
Year
Ended
October
31, 2004 |
|
Year
Ended
October
31, 2003 |
|
Percentage
Increase / |
|
Cost
of revenues: |
|
Costs
of
Revenues |
|
Percent of
Costs of
Revenues |
|
Costs
of
Revenues |
|
Percent of
Costs of
Revenues |
|
(Decrease)
in
Costs of Revenues |
|
Research
and development contracts |
|
$ |
27,290 |
|
|
41 |
%
|
$ |
35,827 |
|
|
42 |
% |
|
(24 |
%) |
Product
sales and revenues |
|
|
39,961 |
|
|
59 |
% |
|
50,391 |
|
|
58 |
% |
|
(21 |
%) |
Total |
|
$ |
67,251 |
|
|
100 |
% |
$ |
86,21 |
|
|
100 |
% |
|
(22 |
%) |
Total
revenues for the year ended October 31, 2004 decreased by $2.4 million, or 7
percent, to $31.4 million from $33.8 million during the same period last year.
The components of our revenues and cost of revenues are further described as
follows:
Research
and development contracts
Revenue
from research and development contracts will vary from year to year depending on
government funding levels, new contracts and work on existing contracts. Revenue
from research and development contracts increased 6 percent during the year
ended October 31, 2004 to $18.8 million from $17.7 million in same period of the
prior year.
Revenues have increased on the Vision 21 and Solid State Energy Conversion
Alliance (SECA) contracts with the U.S. Department of Energy (DOE).
These increases were offset by lower revenue from the Clean Coal contract as the
installation phase for this two megawatt DFC3000 power plant was completed.
The
cost of research and development contract revenue declined by $8.5 million for
the year ended October 31, 2004 (fiscal 2004) compared to the prior year due to
the mix of cost shared contracts and reduced costs for the Clean Coal,
Product
Design Improvement (PDI), and King County
contracts as major tasks were completed on those contracts. The
ratio of costs to contract revenues was 1.5 to 1, which decreased from 2.0 to 1
when compared to the same period of the prior year. The primary driver of the
improved cost ratio was increased funding for the PDI program during fiscal
2004. Significant cost share contracts in fiscal 2004 included Clean Coal, PDI,
Vision 21, King County, Navy Phase II and SECA. We
concluded work on the PDI contract during the quarter ended October 31, 2004 and
do not expect significant future revenues or costs related to this
contract.
For
strategic reasons, we currently plan to continue to participate in government
cost share contracts that advance the development of fuel cells. As a result, we
expect that costs on these contracts will be higher than revenues
received.
Fuel
cell product sales and revenues and product costs
Fuel
cell product sales were $12.6 million for the year ended October 31, 2004
compared to $16.1 million in the same period of a year ago. The lower product
sales and revenues were due to production scheduling for customer requirements
and production on power plants for power purchase agreements where product
revenues are not recognized until power is sold to the customer over an extended
term. Power plant production was at approximately the same level as the prior
year (6 MW). As of October 31, 2004, product sales backlog totaled approximately
$26.3 million, compared to $14.4 million as of October 31, 2003. This backlog
does not include 1.5 MW of orders for power purchase agreements for Santa
Barbara and Sierra Nevada Brewing Co.
Product
costs decreased with lower revenue to $40.0 million from $50.4 million. The
ratio of costs to revenue increased slightly from 3.1 to 3.2 to 1 over the prior
year due to costs totaling approximately $2.0 million associated with the power
purchase agreements noted above. This increase was partially offset by lower
overall product costs recognized on power plants built in 2004 when compared to
the prior year due to progress on our cost out program.
Our
products do not ship on an even production schedule. The shipment date to
customers depends on a number of factors that are outside of our control,
including siting requirements, construction and permits. We do not have the
sales or order history to quantify trends as of yet.
Administrative
and selling expenses
Excluding
costs from our Canadian SOFC operations, administrative and selling expenses
increased by $1.1 million or 9 percent, to $13.7 million during the year ended
October 31, 2004 compared to $12.6 million in the prior year. Approximately $0.8
million of this increase was due to increased sales and marketing expenses and
$0.2 million was due to higher investor relations costs related to our increased
shareholder base. In addition, we incurred $1.2 million of administrative and
selling expenses in our Canadian SOFC operations as a result of our acquisition
during the year ended October 31, 2004. We do not expect to incur any
significant administrative and selling expenses related to the Canadian SOFC
operation in our fiscal year ending October 31, 2005 (fiscal 2005) as it was
sold effective November 1, 2004.
Research
and development expenses
Excluding
costs from our Canadian SOFC operations, research and development expenses
increased to $17.6 million during year ended October 31, 2004 compared to $8.5
million recorded in 2003. The increase is due to continued focus on our
“cost-out” program (implemented in fiscal 2003), product documentation and
engineering support for products in the field. During fiscal 2004, we expanded
our cost out program by hiring additional engineering employees. Our cost-out
program is
expected to: reduce material costs, simplify design, improve manufacturing
yields, reduce product assembly labor, and reduce production cycle time of our
DFC products.
In addition, we incurred $9.0 million of research and development expenses in
our Canadian SOFC operations as a result of our acquisition during the year
ended October 31, 2004. We
do not expect to incur any significant research and development expenses related
to the Canadian SOFC operation in fiscal 2005, as it was sold effective November
1, 2004.
Purchased
in-process research and development
The
$12.2 million in-process research and development (IPR&D) charge relates to
SOFC technology acquired in the Global transaction. In 1997, Global began
developing SOFC technology, which is still in development. The $12.2 million
allocated to IPR&D was determined using two established valuation
techniques. An average of the cost valuation and market valuation approaches
were used to determine the IPR&D amount. The amounts estimated in this
valuation were calculated using a risk-adjusted discount rate of 30 percent. As
the acquired technology has not yet reached technological feasibility and no
alternative future uses existed, it was expensed upon acquisition in accordance
with Statement of Financial Accounting Standards (SFAS) No. 2, “Accounting for
Research and Development Costs.”
The
IPR&D acquired was related to one project, the development of a solid oxide
fuel cell. Prior to the transaction date, Global spent approximately five years
developing this technology. In 2003, we received notice of an award to
participate in the DOE’s ten-year SECA program to develop low cost solid oxide
fuel cells for residential, commercial, and light industrial applications. We
currently estimate that it will take approximately five to ten years to complete
the development. The SECA program is a cost-share program totaling approximately
$139 million. This technology was subsequently sold to our partner in the SECA
program, Versa, along with fixed assets in exchange for stock, which increased
our ownership in Versa to approximately 42 percent.
Loss
from operations
The
loss from operations for the year ended October 31, 2004 totaled $89.6 million
compared to the $73.6 million recorded in 2003. The loss from operations for the
year ended October 31, 2004 totaled $67.2 million compared to the $73.6 million
recorded in 2003 or a reduction of approximately 9 percent excluding the
Canadian SOFC operation. The reduction in operating loss was due to lower cost
of research and development and product revenues partially offset by increased
administrative, selling and internal research and development costs.
We
expect to incur operating losses in future reporting periods as we continue to
participate in government cost share programs, sell products
at prices lower than our current production costs, and
invest in our “cost out” initiatives.
As a result of selling our Canadian SOFC operations, we expect to reduce our
annual cash use by approximately $10.0 million. The
Global and SOFC operations were part of Global, which was acquired by us in
November 2003, thus there are no comparable periods of the prior
year.
Interest
and other income, net
Interest
and other income, net, declined by $3.5 million when comparing the fiscal year
ended October 31, 2004 to the prior year. During the year ended October 31,
2003, we realized Connecticut state research and development incentives totaling
$3.4 million. We did not realize tax incentives during the year ended October
31, 2004 although we have applied for approximately $1.5 million of such
credits. During the year ended October 31, 2004, we realized foreign currency
gains totaling approximately $0.5 million, which offset a decline (compared to
the prior year) of interest income totaling approximately $0.9 million. The
reduction in interest income is due to reduced average interest rates on the
invested cash.
Provision
for income taxes
We
believe, that due to our efforts to commercialize our DFC technology, we will
continue to incur losses. Based on projections for future taxable income over
the period in which the deferred tax assets are realizable, management believes
that significant uncertainty exists surrounding the recoverability of the
deferred tax assets. Therefore, no tax benefit has been recognized related to
current year losses and other deferred tax assets.
Discontinued
operations, net of tax
Discontinued
operations reflects the net income of $0.8 million of the TEG business segment
that was sold on May 28, 2004. Refer also to Note 2 - Discontinued Operations of
our consolidated financial statements. The Global TEG business segment was
acquired by us in November 2003, thus there are no results from discontinued
operations in the comparable period of the prior year.
Comparison
of the Years Ended October 31, 2003 and October 31,
2002
Revenues
and cost of revenues
The
following tables summarize our revenue and cost mix for the years ended October
31, 2003 and 2002, respectively (dollar amounts in thousands):
Revenues: |
|
Year
Ended
October
31, 2003 |
|
Year
Ended
October
31, 2002 |
|
Percentage
Increase / |
|
|
|
Revenues |
|
Percent of
Revenues |
|
Revenues |
|
Percent of
Revenues |
|
(Decrease) in
Revenues |
|
Research
and development contracts |
|
$ |
17,709 |
|
|
52 |
%
|
$ |
33,575 |
|
|
81 |
% |
|
(47 |
%) |
Product
sales and revenues |
|
|
16,081 |
|
|
48 |
% |
|
7,656 |
|
|
19 |
% |
|
110 |
% |
Total |
|
$ |
33,790 |
|
|
100 |
% |
$ |
41,231 |
|
|
100 |
% |
|
(18 |
%) |
Cost
of revenues: |
|
Year
Ended
October
31, 2003 |
|
Year
Ended
October
31, 2002 |
|
Percentage |
|
|
|
Cost
of Revenues |
|
Percent of
Costs
of Revenues |
|
Cost
of Revenues |
|
Percent of
Costs
of Revenues |
|
in
Cost |
|
Research
and development contracts |
|
$ |
35,827 |
|
|
42 |
%
|
$ |
45,664 |
|
|
59 |
% |
|
(22 |
%) |
Product
sales and revenues |
|
|
50,391 |
|
|
58 |
% |
|
32,129 |
|
|
41 |
% |
|
57 |
% |
Total |
|
$ |
86,218 |
|
|
100 |
% |
$ |
77,793 |
|
|
100 |
% |
|
11 |
% |
Total
revenues for the year ended October 31, 2003 decreased by $7.4 million or 18
percent, to $33.8 million from $41.2 million during the prior year. This
decrease in total revenues was comprised of a 47 percent decrease in government
research and development contracts partially offset by a 110 percent increase in
product sales revenue.
Research
and development contracts
Fiscal
2002 research and development contract revenue included a large portion of our
one-megawatt and two megawatt power plants for King County, Washington and Clean
Coal, respectively. Combined revenue on these contracts was lower in 2003. Also,
in 2003, under budgetary constraints, funding from the U.S. government for
certain of our other contracts was delayed.
Cost
of research and development contracts decreased to $35.8 million during the year
ended October 31, 2003, compared to $45.7 million during fiscal 2002. The
decrease was partially due to completion of tasks on the King County, Washington
project and delayed funding on certain government contracts. While our funding
was reduced due to timing and budgetary constraints, we continue to participate
in cost-share contracts and invest in developing fuel cell technology. Our
significant cost share contracts during fiscal 2003 included Clean
Coal, Department of Energy, King County, and Navy Phase II. The
ratio of costs to contract revenues increased in 2003 as the mix of cost-share
contracts increased during the year.
Product
sales and revenues
The
fiscal 2003 increase in product sales revenue was related to increased
manufacturing and delivery of our DFC300A power plants for both our distribution
partners and direct customers. As a percent of total revenues, product revenues
comprised 48 percent compared to 19 percent in the prior year as we continue to
focus our business initiatives on the manufacture and delivery of our fuel cell
products.
Cost
of product sales and revenues increased to $50.3 million during the year ended
October 31, 2003 compared to $32.1 million during the prior year. This increase
was due to additional product sales recorded during the year. The ratio of costs
to contract revenues decreased in 2003 as we have reduced overall product costs
through our “cost-out” initiatives and incurred less “first time” costs
including qualifying multiple vendors for materials and components.
Administrative
and selling expenses
Administrative
and selling expenses increased by 21 percent, to $12.6 million during the year
ended October 31, 2003 compared to $10.5 million in the prior year. This
increase was primarily comprised of higher business insurance costs, sales and
marketing salaries and franchise taxes.
Research
and development expenses
Research
and development expenses increased 25 percent, to $8.5 million during the year
ended October 31, 2003 compared to the $6.8 million recorded in fiscal 2002.
This increase is primarily due to increased investment in development costs
associated with the design, engineering, fabrication and installation of our
products.
Loss
from operations
The
net result of our revenues and costs was a loss from operations during the year
ended October 31, 2003 totaling $73.6 million. This operating loss is
approximately 37 percent higher than the $53.8 million loss recorded in fiscal
2002. We continue to invest in the standardization of our DFC power plants. For
strategic reasons, we also continue to participate in government cost share
contracts to advance the development of fuel cells. These factors contributed to
our operating loss. Other factors impacting the operating loss included reduced
funding on certain government contracts, development of our distribution
network, and increases in operating costs including depreciation on new
production equipment, business insurance premiums, information systems and
infrastructure.
Interest
and other income, net
Interest
and other income, net, increased by 23 percent, to $6.0 million during
the year ended October 31, 2003 compared to the $4.9 million recorded in fiscal
2002.
We have participated in a program available from the State of Connecticut that
allows certain taxpayers to exchange the amount of research and development
credits generated during a taxable year for cash to be received over a
three-year period. The increase to interest and other income, net was due, in
part, to tax credits generated in fiscal years 2001 and 2002 totaling $3.4
million being recorded in fiscal 2003. There were no tax credits recorded during
fiscal 2002. Interest income for the year declined by $2.3 million or 47 percent
as a result of reduced interest rates and lower cash and investment balances
compared to the prior year.
Taxes
We
believe that due to our efforts to commercialize our DFC technology, we have and
will continue to incur losses. Based on projections for future taxable income
over the period in which the deferred tax assets are realizable, management
believes that significant uncertainty exists surrounding the recoverability of
the deferred tax assets. Therefore, no tax benefit has been recognized related
to current year losses and other deferred tax assets.
Comparison
of Three Months ended January 31, 2005 and January 31,
2004
Revenues
and costs of revenues
The
following tables summarize our revenue mix for the three months ended January
31, 2005 and 2004 (dollar amounts in thousands), respectively:
|
|
Three
Months Ended
January
31, 2005 |
|
Three
Months Ended
January
31, 2004 |
|
Percentage
Increase
/ |
|
Revenues: |
|
Revenues |
|
Percent of
Product Revenues |
|
Product
Revenues |
|
Percent of
Product Revenues |
|
(Decrease)
in
Product Revenues |
|
Fuel
cell product sales and revenues |
|
$ |
5,032 |
|
|
67 |
%
|
$ |
2,028 |
|
|
27 |
% |
|
148 |
% |
Research
and development contracts |
|
|
2,522 |
|
|
33 |
% |
|
5,366 |
|
|
73 |
% |
|
(53 |
%) |
Total |
|
$ |
7,554 |
|
|
100 |
% |
$ |
7,394 |
|
|
100 |
% |
|
2 |
% |
|
|
Three
Months Ended
January
31, 2005 |
|
Three
Months Ended
January
31, 2004 |
|
Percentage
Increase
/ |
|
Cost
of revenues: |
|
Costs
of
Revenues |
|
Percent of
Costs of
Revenues |
|
Costs
of
Revenues |
|
Percent of
Costs of
Revenues |
|
(Decrease)
in
Costs of Revenues |
|
Fuel
cell product sales and revenues |
|
$ |
13,713 |
|
|
83 |
%
|
$ |
7,623 |
|
|
51 |
% |
|
80 |
% |
Research
and development contracts |
|
|
2,814 |
|
|
17 |
% |
|
7,471 |
|
|
49 |
% |
|
(62 |
%) |
Total |
|
$ |
16,527 |
|
|
100 |
% |
$ |
15,094 |
|
|
100 |
% |
|
9 |
% |
Total
revenues for the three months ended January 31, 2005 increased by $0.2 million,
or 2 percent, to $7.6 million from $7.4 million during the same period last
year.
Fuel
cell product sales and revenues
Fuel
cell product sales and revenue increased
$3.0 million to $5.0 million for the three months ended January 31, 2005,
compared to $2.0 million for the same period in 2004. As
of January 31, 2005, our fuel cell product sales backlog totaled approximately
$22.9 million, up from $16.3 million in the same period a year ago. Included in
these figures are $1.4 million and $0.7 million, respectively, related to
long-term service agreements.
Cost
of product sales and revenues increased to $13.7 million during the three months
ended January 31, 2005 compared to $7.6 million during the same period of the
prior year.
Included in cost of sales during the three
months ended January 31, 2005 was a
non-cash fixed asset impairment charge totaling $0.9 million. This was related
to a planned change in manufacturing processes that is expected to increase
electrical output (“uprate”) for improved product performance and reduced cost
in future periods.
The
increase in product sales and revenues and costs of product sales and revenues
was due to primarily to the progress on power plants for Marubeni and Chevron
Energy Solutions customers as well as DFC component shipments for MTU CFC
Solutions, GmbH. The
ratio of product cost to sales improved from 3.8-to-1 during the three months
ended January 31, 2004 compared to 2.5-to-1 during the three
months ended January 31, 2005 when adjusted
for the one-time asset impairment charge described above. This ratio is
inclusive of costs related to power purchase agreements that had no
corresponding revenues as if they were equipment sales. The ratio of costs to
product sales improved from the same quarter of a year ago as we recognized
savings related to its cost out program.
We
expect to continue to sell our DFC products at prices lower than our production
costs until such time as we are able to reduce product costs through our
engineering and manufacturing efforts and production volumes increase.
Research
and development contracts
Research
and development revenue decreased
$3.0 million to $2.5 million for the three months ended January 31, 2005,
compared to $5.4 million for the same period in 2004.
Cost of research and development contracts decreased to $2.8 million during the
three months ended January 31, 2005, compared to $7.5 million for the same
period in 2004.
Research
and development contract revenues and costs declined with the completion of the
U.S. Department of Energy’s (DOE’s) Product Design Improvement and Bath Iron
Works contracts, and lower revenues on the Clean Coal and U.S. Navy contracts.
Research and development contract revenue and costs were primarily related to
SOFC development under the DOE’s Solid State Energy Conversion Alliance Program,
the combined cycle Direct FuelCell/Turbine® development under DOE’s Vision 21
program, and the Ship Service Fuel Cell contract with the U.S. Navy. The ratio
of research and development cost to revenue improved over the same quarter a
year ago due to the current mix of cost share contracts. As of January 31, 2005,
our research and development sales backlog totaled approximately $24.7 million
of which Congress has authorized funding of $14.4 million. This compares
to research and development sales backlog totaling $25.7 million
($14.8 million funded) as of January 31, 2004.
Administrative
and selling expenses
Administrative
and selling expenses decreased by 26 percent, to $3.1 million during the three
months ended January 31, 2005 compared to $3.7 million in the same period of the
prior year. This decrease was primarily due to our acquisition of Global in
2003, which had increased the fiscal year 2004 amount by approximately $0.8
million and which was subsequently divested. We do not expect to incur any
significant administrative and selling expenses related to the Canadian SOFC
operation in our fiscal year ending October 31, 2005, as it was sold effective
in November 1, 2004.
Research
and development expenses
Research
and development expenses decreased, to $5.2 million during the three months
ended January 31, 2005 compared to $5.9 million recorded in the same period of
the prior year. This decreases was primarily due to the combining of our
Canadian SOFC operations with Versa Power Systems (Versa). We do not expect to
incur any significant research and development expenses related to the Canadian
SOFC operation in our fiscal year ending October 31, 2005, as it was sold
effective in November 1, 2004.
Purchased
in-process research and development
We
recorded a charge totaling $12.2 million during the three months ended January
31, 2004 for in-process research and development acquired in the Global
transaction. In 1997, Global began developing SOFC technology, which is still in
development. Global's SOFC is a ceramic planar (flat, square or rectangular)
cell, with a solid electrolyte that is anode supported (the thickest component
to which all other materials are subsequently mounted) and conducts oxygen ions.
Global has developed a proprietary microstructure that gives its fuel cells very
high power densities (the amount of power measured in watts per square
centimeter of surface area).
The
$12.2 million allocated to in-process research and development (IPR&D) was
determined using established valuation techniques through a qualified third
party valuation. As the SOFC technology is in the early stages of development,
the valuation was based, in part, on the cost approach. The cost approach was
used because the SOFC technology, while demonstrating substance, is nonetheless
so early in its development cycle that reliable forecasts of future benefit do
not exist. The valuation also used the market approach as a second method to
estimate the implied value of the SOFC business line, by estimating the fair
value of the generator product line, adding net cash assumed in the acquisition,
and then subtracting this total amount from the cash and stock consideration
paid, giving effect to the stage of completion at the acquisition date. An
average of these two valuation techniques was used to determine the IPR&D
amount. The amounts estimated in this valuation were calculated using a
risk-adjusted discount rate of 30 percent. As the acquired technology had not
yet reached technological feasibility and no alternative future uses exist, it
was expensed upon acquisition in accordance with Statement of Financial
Accounting Standards (SFAS) No. 2, “Accounting for Research and Development
Costs.”
The
acquisition had no impact on consolidated costs for the three month period
ending January 31, 2005.
Loss
from operations
The
net result of our revenues and costs was a loss from operations for the three
months ended January 31, 2005 totaling $17.3 million. This operating loss is
approximately 41 percent lower than the $29.5 million loss recorded in the
comparable period last year due primarily to the acquisition related charge of
purchased in-process research and development in the prior year totaling $12.2
million.
Other
factors impacting the operating loss included reduced funding on certain
government contracts, development of our distribution network, and increases in
operating costs including depreciation on new production equipment, business
insurance premiums, information systems and infrastructure. We expect to incur
operating losses in future reporting periods as we continue to participate in
government cost share programs, sell products
at prices lower than our current production costs, and
invest in our “cost out” initiatives.
Interest
and other income, net
Interest
and other income, net, was $0.9 million for the three months ended January 31,
2005, unchanged compared to the same period of the prior year. Interest income
increased from $0.6 million to $0.9 million due to higher cash balances and
interest rates. This increase was offset by a lower net foreign currency gain
totaling approximately $0.3 million. We recognized approximately $0.03 million
in foreign currency loss and $0.3 million in foreign currency gain during the
three months ended January 31, 2005 and 2004, respectively.
Discontinued
operations, net of tax
During
the three months ended January 31, 2005 we exited certain facilities in Canada
and as a result recorded fixed asset impairment charges totaling approximately
$0.9 million. In addition, we incurred approximately $0.4 million of exit costs
related to these facilities which resulted in total loss from discontinued
operations of approximately $1.3 million.
During
fiscal 2004, we acquired, Global Thermoelectric Inc. (Global) and subsequently
divested its generator business unit through the sale of Global on May 28, 2004.
As a result, historical results were reclassified as discontinued operations.
Income, net of taxes related to the generator business totaled approximately
$0.7 million for the three months ended January 31, 2004.
Provision
for income taxes
We
believe that due to our efforts to commercialize our DFC technology, we will
continue to incur losses. Based on projections for future taxable income over
the period in which the deferred tax assets are realizable, management believes
that significant uncertainty exists surrounding the recoverability of the
deferred tax assets. Therefore, no tax benefit has been recognized related to
current or prior year losses and other deferred tax assets.
LIQUIDITY
AND CAPITAL RESOURCES
We
had approximately $152.4 million of cash, cash equivalents and investments as of
October 31, 2004 compared to $153.4 million as of October 31, 2003. Net
cash and investments used during the year was $1.0 million, consisting of
approximately $70 million used in operations offset by $69 million of cash and
investments received in the Global Thermoelectric Inc. (Global) transactions.
Cash used during the year included approximately $10.9 million related to our
Canadian operations. As our Canadian operations were sold in fiscal 2004, we
expect reduced cash use in Canada in future periods.
Subsequent
to our fiscal year end, we received net proceeds of approximately $93.5 million
from our preferred stock sale, which closed on November 17, 2004.
We
had approximately $231.4 million of cash, cash equivalents and investments as of
January 31, 2005. Net
cash and investments provided during the past three months was $79.0 million,
consisting of approximately $99.0 million from the sale of preferred stock,
offset by approximately $19.0 million used for continuing operations, and
approximately $1.0 million used in our discontinued Canadian
operations.
Sources
and Uses of Cash and Investments
We
continue to invest in new product development and bringing our products to
market and, as such, we are not currently generating positive cash flow from our
operations. Our operations are funded primarily through sales of equity
securities and cash generated from operations. Cash from operations includes
revenue from government research and development contracts, product sales,
license fees and interest income. Our future cash requirements depend on
numerous factors including future involvement in research and development
contracts, implementing our cost reduction efforts on our fuel cell products and
increasing annual order volume.
Future
involvement in research and development contracts
Our
research and development contracts are generally multi-year, cost reimbursement
type contracts. The majority of these are U.S. Government contracts that
are dependent upon the government’s continued allocation of funds and may be
terminated in whole or in part at the convenience of the government. We will
continue to seek research and development contracts. To obtain these contracts,
we must continue to prove the benefits of our technologies and be successful in
our competitive bidding.
Implementing
our cost reduction efforts on our fuel cell products
We
believe that reducing product cost is essential for us to penetrate the market
for our fuel cell products and is critical to achieving profitability. We
believe this will reduce and/or eliminate the need for incentive funding
programs that are currently available to allow our product pricing to compete
with grid-delivered power and other distributed generation technologies. In
2003, we began a “cost-out” program that focuses on three key
areas:
· |
increased
performance output; |
· |
increased
stack life; and |
· |
design
simplification and materials replacement and/or elimination to reduce
product cost. |
Increasing
annual order volume
We
believe that increased production volumes will spread fixed costs over more
units of production, resulting in a lower per unit cost. Our manufacturing,
testing and conditioning facilities have equipment in place to accommodate 50 MW
of annual production. Our multi-disciplined cost reduction program is expected
to significantly reduce our product costs over time. We currently believe
that we can achieve operating break-even at annual production volumes of
approximately 100 MW. Our fiscal 2004 production volume was approximately 6
MW.
We
anticipate that our existing capital resources, together with anticipated
revenues, will be adequate to satisfy our planned financial requirements and
agreements through at least the next twelve months.
Cash
Inflows and Outflows
Year
Ended October 31, 2004
During
year ended October 31, 2004, total cash and cash equivalents and investments
decreased by $1.0 million, compared with a decrease of $67.1 million during the
year ended October 31, 2003. In fiscal 2004, we had a net cash use of
approximately $70.0 million offset by cash and investments acquired in the
Global acquisition and subsequent disposition (net of fees) totaling $69.0
million.
The
key components of our cash inflows and outflows from continuing operations were
as follows:
Operating
Activities:
During the year ended October 31, 2004, we used $64.6 million in cash in our
operating activities, which consists of a net loss for the period of
approximately $86.4 million, offset by non-cash adjustments totaling $20.6
million, cash generated from working capital of approximately $2.0 million and
income from discontinued operations of approximately $.8 million. This
compares to an operating cash usage of $58.8 million during the year ended
October 31, 2003.
Accounts
Receivable
Accounts
receivable as of October 31, 2004 increased by approximately $2.7 million from
October 31, 2003 due to approximately $3.2 million more in product receivables
offset by a decline of government accounts receivable totaling $0.5 million. The
increase in product receivables is due to greater milestone billings to
customers consistent with the expanded product backlog. We bill our fuel cell
contracts based upon certain milestones that generally commence with contract
signing and extend to commissioning of a completed power plant. We generally
bill our government contracts on a monthly basis as costs are incurred. As
revenues increase or decrease, billings and accounts receivable will increase or
decrease as well.
Accounts
Payable and Accrued Expenses
Accounts
payable and accrued expenses combined have increased by approximately $2.7
million since October 31, 2003 due to the timing of inventory payments related
to our current production schedule. In addition we had accrued approximately
$0.8 million in severance costs as of October 31, 2004 related to our sale of
the SOFC business to Versa.
Investing
Activities: We
acquired Global on November 3, 2003 by issuing, in total, approximately 8.2
million common and exchangeable shares. In connection with the
acquisition, we acquired $55.8 million of cash and investments. The cash
acquired from Global was offset by approximately $2.8 million of transaction and
professional fees. In May 2004, we completed our sale of the Global entity and
its TEG product line for net proceeds of approximately $16.0 million.
Capital
expenditures for the year ended October 31, 2004 were approximately $7.9 million
compared to $6.6 million in the prior period. Reductions in systems and
infrastructure spending during fiscal 2004 have been offset by capital
expenditures totaling approximately $4.7 million related to power plants being
built for power purchase agreements. In addition, there were capital
expenditures totaling approximately $1.0 million relating to one DFC300A that we
have provided to the Department of Defense (DoD) Fuel Cell Test and Evaluation
Center (FCTec).
Financing
Activities: During
the year ended October 31, 2004, we generated $2.7 million from financing
activities through the exercise of stock options, partially offset by repayments
of debt and preferred dividends. This compares with $0.5 million generated
in the year ended October 31, 2003.
Three
Months Ended January 31, 2005
During
three months ended January 31, 2005, total cash and cash equivalents and
investments increased by $79.0 million. During the quarter cash increased by
approximately $99.0 million as a result of our Series B Convertible share
offering which was offset by net cash use totaling $20 million.
The
key components of our cash inflows and outflows from continuing operations were
as follows:
Operating
Activities:
During the three months ended January 31, 2005, we used $16.7 million in cash in
our operating activities, which consists of a net loss for the period of
approximately $18.0 million, offset by non-cash adjustments totaling $3.2
million, cash used in working capital of approximately $2.0 million and loss
from discontinued operations of approximately $1.3 million. This compares
to an operating cash usage of $13.5 million during the three months ended
January 31, 2004.
. |
Investing
Activities: During
the three months ended January 31, 2005, net cash provided by investing
activities totaled $40.6 million. Capital expenditures totaled $3.3
million for the three months ended January 31, 2005. This included $2.8
million for equipment being built for power purchase agreements in our
Alliance entities. During the quarter approximately $59.2 million of
investments in U.S. Treasury Securities matured with new treasury
purchases totaling $15.4 million. Subsequent to January 31, 2005 we
invested approximately $90 million of money market funds in U.S.
Treasuries in order to increase investment yield. This compares with
approximately $54.4 million generated in the three months ended January
31, 2004. During the quarter ended January 31, 2004 we acquired Global
Thermoelectric, Inc. which resulted in a net increase to cash totaling
$53.0 million. |
. |
Financing
Activities: During
the three months ended January 31, 2005 we closed on a Series B cumulative
convertible preferred perpetual preferred stock offering which resulted in
net proceeds to us totaling $99.0 million. We generated $0.2 million from
financing activities through the exercise of stock options, partially
offset by repayments of debt totaling approximately $0.1 million.
This compares with approximately $0.8 million generated in the three
months ended January 31, 2004. |
Commitments
and Significant Contractual Obligations
Year
Ended October 31, 2004
A
summary of our significant future commitments and contractual obligations as of
October 31, 2004 and the related payments by fiscal year is summarized as
follows (in thousands):
|
|
Payments
Due by Period |
|
Contractual
Obligation: |
|
Total |
|
Less
than
1
Year |
|
1
- 3
Years |
|
3
- 5
Years |
|
More
than
5
Years |
|
Lease
commitments(1) |
|
$ |
5,222 |
|
$ |
1,328 |
|
$ |
1,751 |
|
$ |
1,545 |
|
$ |
598 |
|
Term
loan (principal and interest) |
|
|
1,580
|
|
|
433
|
|
|
864
|
|
|
283
|
|
|
-- |
|
Purchase
commitments(2) |
|
|
14,855
|
|
|
14,734
|
|
|
121
|
|
|
-- |
|
|
-- |
|
Preferred
dividends payable
(3) (4) |
|
|
20,452
|
|
|
379
|
|
|
758
|
|
|
758 |
|
|
18,557 |
|
Totals |
|
$ |
42,109 |
|
$ |
16,874 |
|
$ |
3,494 |
|
$ |
2,586 |
|
$ |
19,155 |
|
(1) |
Future
minimum lease payments on capital and operating
leases. |
(2) |
Short-term
purchase commitments with suppliers for materials supplies, and services
incurred in the normal course of business. |
(3) |
Quarterly
dividends of Cdn.$312,500 accrue on the Series 1 preferred shares (subject
to possible reduction pursuant to the terms of the Series 1 preferred
shares on account of increases in the price of FuelCell’s common stock).
We have agreed to pay a minimum of Cdn.$500,000 in cash or common stock
annually to Enbridge, Inc., the holder of the Series 1 preferred shares,
so long as Enbridge holds the shares. Interest accrues on cumulative
unpaid dividends at a 2.45 percent quarterly rate, compounded quarterly,
until payment thereof. Cumulative unpaid dividends and interest at October
31, 2004 were approximately $2.8 million. For the purposes of this
disclosure, we have assumed that the minimum dividend payments would be
made through 2010. In 2010, we would be required to pay any unpaid and
accrued dividends. From 2010 through 2020, we would be required to pay
annual dividend amounts totaling Cdn.$1.25
million. |
(4) |
We
have assumed a constant exchange rate for the purposes of this disclosure
at 0.76 U.S. dollars to 1.0 Canadian
dollar. |
On
June 29, 2000, we entered into a loan agreement, secured by machinery and
equipment, and have borrowed an aggregate of $2.2 million under the agreement.
The loan is payable over seven years, with payments of interest only for the
first six months and then repaid in monthly installments over the remaining six
and one-half years with interest computed annually based on the ten-year U.S.
Treasury note plus 2.5 percent. Our current interest rate at July 31, 2004 is
7.2 percent and the outstanding principal balance on this loan is approximately
$1.5 million.
Approximately
$0.6 million of our cash and cash equivalents have been pledged as collateral
for certain banking relationships in which we participate.
Research
and Development Cost-Share Contracts
We
have contracted with various government agencies as either a prime contractor or
sub-contractor on cost-share contracts and agreements. Cost-share terms require
that participating contractors share the total cost of the project in an agreed
ratio with the government agency. For example, our DOE sponsored demonstration
of our two-megawatt DFC 3000 power plant operating on synthesis gas derived from
coal has a total project value of $34.5 million. The DOE will reimburse us 50
percent of the cost on this project and we will incur the balance. Thus, over
the life of this program and assuming that funding is approved annually by
Congress, our share of the total research and development expenditures would be
approximately $17.3 million for this program. As of October 31, 2004, our
research and development sales backlog totaled $16.4 million. As this backlog is
funded in future periods, we will incur additional research and development
cost-share totaling approximately $15.5 million for which we would not be
reimbursed by the government.
Product
Sales Contracts
Our
fuel cell power plant products are in the initial stages of development and
market acceptance. As such, costs to manufacture and install our products exceed
current market prices. As of October 31, 2004, we had product sales backlog of
approximately $26.3 million. We do not expect sales from this backlog to be
profitable.
Three
Months Ended January 31, 2005
A
summary of our significant future commitments and contractual obligations as of
January 31, 2005 and the related payments by fiscal year is summarized as
follows (in thousands):
|
|
|
|
Payments
Due by Period |
Contractual
Obligation: |
|
Total |
|
Less
than
1
Year |
|
1
- 3
Years |
|
3
- 5
Years |
|
More
than
5
Years |
|
Capital
and Operating lease commitments
(1) |
$ |
4,566 |
|
$ |
1,028 |
|
$ |
1,590 |
|
$ |
1,480 |
|
$ |
468 |
|
Term
loans (principal and interest) |
|
1,505
|
|
|
447
|
|
|
891
|
|
|
167
|
|
|
-- |
|
Purchase
commitments(2) |
|
19,356
|
|
|
19,188
|
|
|
168
|
|
|
-- |
|
|
-- |
|
Series
I Preferred dividends payable
(3) |
|
20,449
|
|
|
378
|
|
|
757
|
|
|
758 |
|
|
18,556 |
|
Series
B Preferred dividends payable
(4) |
|
26,418
|
|
|
5,284
|
|
|
10,567 |
|
|
10,567
|
|
|
-- |
|
Totals |
$ |
72,294 |
|
$ |
26,325 |
|
$ |
13,973 |
|
$ |
12,972 |
|
$ |
19,024 |
|
(1) |
Future
minimum lease payments on capital and operating
leases. |
(2) |
Short-term
purchase commitments with suppliers for materials supplies, and services
incurred in the normal course of business. |
(3) |
Quarterly
dividends of Cdn.$312,500 accrue on the Series 1 preferred shares (subject
to possible reduction pursuant to the terms of the Series 1 preferred
shares on account of increases in the price of our common stock). We have
agreed to pay a minimum of Cdn.$500,000 in cash or common stock annually
to Enbridge, Inc. the holder of the Series 1 preferred shares, so long as
Enbridge holds the shares. Interest accrues on cumulative unpaid dividends
at a 2.45 percent quarterly rate, compounded quarterly, until payment
thereof. Cumulative unpaid dividends and interest at October 31, 2004 were
approximately $2.8 million. For the purposes of this disclosure, we have
assumed that the minimum dividend payments would be made through 2010. In
2010, we would be required to pay any unpaid and accrued dividends. From
2010 through 2020, we would be required to pay annual dividend amounts
totaling Cdn.$1.25 million. |
(4) |
Dividends
on Series B preferred stock accrue at an annual rate of 5% paid quarterly.
The obligations schedule assumes we will pay preferred dividends on these
shares through November 20, 2009, at which time the preferred shares may
be subject to mandatory conversion. We may pay the dividends in cash,
or at the option of the holder, in stock. |
On
June 29, 2000, we entered into a loan agreement, secured by machinery and
equipment, and have borrowed an aggregate of $2.2 million under the agreement.
The loan is payable over seven years, with payments of interest only for the
first six months and then repaid in monthly installments over the remaining six
and one-half years with interest computed annually based on the ten-year U.S.
Treasury note plus 2.5 percent. Our current interest rate at January 31, 2005 is
7.2 percent and the outstanding principal balance on this loan is approximately
$1.3 million.
Approximately
$0.6 million of our cash and cash equivalents have been pledged as collateral
for certain banking relationships in which we participate.
Research
and Development Cost-Share Contracts
We
have contracted with various government agencies as either a prime contractor or
sub-contractor on cost-share contracts and agreements. Cost-share terms require
that participating contractors share the total cost of the project in an agreed
ratio with the government agency. For example, our DOE sponsored demonstration
of our two-megawatt DFC 3000 power plant operating on synthesis gas derived from
coal has a total project value of $34.5 million. The DOE will reimburse us 50
percent of the cost on this project and we will incur the balance. Thus, over
the life of this program and assuming that funding is approved annually by
Congress, our share of the total research and development expenditures would be
approximately $17.3 million for this program. As of January 31, 2005, our
research and development sales backlog totaled $24.7 million. As this backlog is
funded in future periods, we will incur additional research and development
cost-share totaling approximately $11.7 million for which we would not be
reimbursed by the government.
Product
Sales Contracts
Our
fuel cell power plant products are in the initial stages of development and
market acceptance. As such, costs to manufacture and install our products exceed
current market prices. As of January 31, 2005, we had product sales backlog of
approximately $22.9 million. We do not expect sales from this backlog to be
profitable.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 123 (revised 2004) (SFAS No. 123R),
“Share-Based Payment” which revised SFAS No. 123, “Accounting for Stock-Based
Compensation. This statement supercedes APB Opinion No. 25, “Accounting for
Stock Issued to Employees.” The revised statement addresses the accounting for
share-based payment transactions with employees and other third parties,
eliminates the ability to account for share-based compensation transactions
using APB 25 and requires that the compensation costs relating to such
transactions be recognized in the consolidated statement of operations. The
revised statement is effective as of the first interim period beginning after
June 15, 2005. We are currently evaluating the provisions of SFAS No. 123R and
will adopt it on August 1, 2005 as required.
In
November 2004, the FASB ratified the consensus reached by the Emerging Issues
Task Force (EITF), on Issue No. 03-13, “Applying the Conditions in Paragraph 42
of FASB Statement No. 144 in Determining Whether to Report Discontinued
Operations”. The Issue provides a model to assist in evaluating (a) which cash
flows should be considered in the determination of whether cash flows of the
disposal component have been or will be eliminated from the ongoing operations
of the entity and (b) the types of continuing involvement that constitute
significant continuing involvement in the operations of the disposal component.
Should significant continuing ongoing involvement exist, then the disposal
component shall be reported in the results of continuing operations on the
consolidated statements of operations and cash flows. We applied the provisions
of this accounting standard to our financial statements.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which
amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. This Statement requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of “so abnormal.” In addition, this Statement requires that allocation
of fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. We are currently evaluating the
provisions of SFAS No. 151 and will adopt it on November 1, 2005,
as required.
In
December 2003, the FASB issued FIN No. 46R, “Consolidation of Variable
Interest Entities,” which requires an entity to consolidate a variable interest
entity if it is designated as the primary beneficiary of that entity even if the
entity does not have a majority of voting interests. A variable interest entity
is generally defined as an entity where its equity is inadequate to finance its
activities or where the owners of the entity lack the risk and rewards of
ownership. We have evaluated the provisions of FIN No. 46R, as
required, and determined that we did not have any material variable interest
entities and did not have any variable interest entities that require
consolidation into our financial statements.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
Rate Exposure
Our
exposure to market risk for changes in interest rates, relates primarily to our
investment portfolio and long term debt obligations. Our investment portfolio
includes both short-term United States Treasury instruments with maturities
averaging three months or less, as well as U.S. Treasury notes with fixed
interest rates with maturities of up to twenty months. Cash is invested
overnight with high credit quality financial institutions. Based on our overall
interest exposure at October 31, 2004 and January 31, 2005, including all
interest rate sensitive instruments, a near-term change in interest rate
movements of 1 percent would affect our results of operations by approximately
$0.5 and $1.7 million, respectively, annually.
Foreign
Currency Exchange Risk
We
are subject to foreign exchange risk although we have taken steps to mitigate
those risks where possible. As of October 31, 2004 and January 31, 2005
approximately $2.4 million (or 2 percent) and $1.5 million (or 0.06 percent),
respectively, of our total cash, cash equivalents and investments was in
currencies other than U.S. dollars.
Our
functional currency is the U.S. dollar as is our foreign subsidiary FuelCell
Energy, Ltd. as the majority of our cash is invested in U.S. dollar
investments.
We
recognized a foreign currency gain totaling $0.5 million during the year ended
October 31, 2004, and a foreign currency loss totaling $0.03 million during the
three months ended January 31, 2005. This has been recorded as a component of
interest and other income on our consolidated statement of operations. Although
we have not experienced significant foreign exchange rate losses to date, we may
in the future, especially to the extent that we do not engage in hedging
activities. We do not enter into derivative financial instruments. The economic
impact of currency exchange rate movements on our operating results is complex
because such changes are often linked to variability in real growth, inflation,
interest rates, governmental actions and other factors. These changes, if
material, may cause us to adjust our financing and operating strategies.
Consequently, isolating the effect of changes in currency does not incorporate
these other important economic factors.
BUSINESS
FuelCell
Energy, Inc. is a world leader in the development and manufacture of fuel cell
power plants for clean, efficient and reliable electric power generation.
We have been developing fuel cell technology since our founding in 1969. We are
currently commercializing our core carbonate fuel cell products (Direct
FuelCell®
or DFC®
Power Plants), offering stationary applications for commercial and industrial
customers and continuing to develop our next generation of carbonate fuel cell
products. In addition, we are beginning the development of another high
temperature fuel cell system, planar solid oxide fuel cell (SOFC) technology, as
a prime contractor in the U.S. Department of Energy’s (DOE) Solid State Energy
Conversion Alliance (SECA) Program and through our 42 percent ownership interest
in Versa Power Systems (Versa).
Direct
FuelCell (DFC) Power Plants
Increasing
worldwide demand for reliable power presents significant market opportunities
for our core distributed generation products. Our proprietary carbonate DFC
power plants electrochemically produce electricity directly from readily
available hydrocarbon fuels, such as natural gas and wastewater treatment
gas. We believe our products offer significant advantages compared to
other power generation technologies, including:
· |
Flexible
siting and permitting requirements; |
· |
Ability
to provide electricity and heat for cogeneration applications, such as
district heating, process steam, hot water and absorption chilling for air
conditioning; |
· |
Potentially
lower operating, maintenance and generation costs than alternative
distributed power generation technologies; and
|
· |
Because
our DFC power plants produce hydrogen from readily available fuels such as
natural gas and wastewater treatment gas, they can be used to
cost-effectively cogenerate hydrogen as well as electricity and
heat. |
Our
current products, the DFC300A, DFC1500 and DFC3000, are rated in capacity at 250
kW, 1 MW and 2 MW, respectively, and are scalable for distributed applications
up to 10 MW or larger. Our products are designed to meet the base load
power requirements of a wide range of commercial and industrial customers
including wastewater treatment plants (municipal, such as sewage treatment
facilities, and industrial, such as breweries and food processors),
telecommunications/data centers, manufacturing facilities, office buildings,
hospitals, universities, prisons, mail processing facilities, hotels and
government facilities, as well as in grid support applications for utility
customers. Through February 2005, more than 62 million kWh of electricity
has been generated from power plants incorporating our DFC technology at
customer sites throughout the world.
We
see significant market potential for our DFC products. In October 2004,
Energy User News reported that Allied Business Intelligence (ABI) projected
distributed generation to the grid may increase to 200,000 MW worldwide by 2011
compared with 65,000 MW currently, with 6 percent or 12,000 MW from fuel cells.
A year earlier, ABI reported that global stationary fuel cell cumulative
shipments would rise from 55 MW cumulative through 2003 to nearly 18,000 MW
cumulative through 2013,
according to its moderate forecast. Another study, prepared by the
DOE/Energy Information Administration (EIA) in 2000, estimated the potential
market for combined heat and power (CHP) plant installations in the United
States to be greater than 77,000 MW. This includes 6,500 MW for
hotels/motels, 8,000 MW for hospitals, 19,000 MW for
schools/colleges/universities, and over 18,600 MW for office
buildings.
We
have invested more than $450 million in the development of our fuel cell
technology, including funding from various U.S. government agencies such as the
DOE and the Environmental Protection Agency. Our primary focus is carbonate fuel
cell technology, which we have advanced from the laboratory into standard DFC
products. We believe we have established a leading position for our DFC products
in the commercial distributed generation marketplace due to a number of factors,
including:
· |
We
are selling ‘ultra-clean’ high-temperature fuel cell power plants for
stationary base load power, which provide high fuel efficiency and
high-value waste heat for cogeneration
applications. |
· |
We
have strong global distribution partners, including original equipment
manufactures (OEMs) and energy service companies (ESCOs), with expertise
in selling and marketing energy products and services to commercial and
industrial customers worldwide. |
· |
We
obtained commercial product certifications for safety, interconnection,
installation and performance. |
· |
We
are operating a fleet of DFC power plants at customer sites throughout the
world, with a backlog that we expect will double the fleet in service in
the next 12-18 months. |
· |
We
have established production facilities, with equipment in place to produce
50 MW of DFC products annually. |
· |
We
achieved our 2004 value-engineering cost reduction target of 25 percent
and are confident we can continue to reduce
costs. |
· |
We
have expanded our sales and service capabilities to support our DFC
products. |
· |
We
have a strong balance sheet, with over $230 million in cash, cash
equivalents and investments (U.S. Treasury Securities) as of January 31,
2005 to support our growth. |
We
believe there are positive trends within the distributed generation and fuel
cell markets that will benefit our DFC power plant business. Increasing
worldwide demand for reliable power, concerns over air pollution caused by
combustion power generation, and unreliable electrical grid delivery systems
present significant market opportunities for our core DFC products. Furthermore,
because of their non-combustion, non-mechanical power generation process, fuel
cells are more efficient, produce significantly less pollutant emissions, are
better suited to provide combined heat and power (CHP) and offer more quiet and
flexible siting distributed generation solutions than comparable conventional
power plants.
In
introducing our products to the marketplace, we face obstacles that can lengthen
the sales cycle. At the macro-economic level, these include varying energy
demand, capital appropriation cycles and changing economic environments such as
rising fuel prices. For example, in the short term, the sales effort for
DFC projects and other distributed generation projects operating on natural gas
were adversely affected in 2004 by higher fuel prices. Grid-delivered
electricity prices can have a regulatory lag of up to one year or more before
fuel costs are reflected in local utility rates. Over the longer term, our
higher fuel efficiency should result in customer preference for base load power
generation using our DFC products.
Other
market obstacles vary by region, but include regulatory uncertainty for
distributed generation, monopoly-based electricity markets, interconnect issues,
disparate recognition of the locational value and environmental benefits of
distributed generation, standby power costs and stranded asset exit fees.
We believe that the marketplace is responding to these issues.
In
the U.S., which is among the most difficult regulatory environments,
interconnect standards, standby charges and exit fees are being adjusted to
accommodate newer technologies that generate electricity with greater fuel
efficiency and reduced emissions. New York and Massachusetts adopted
exemptions from these charges for our DFC products in 2004, following
California’s lead in 2003. We expect that this trend will continue and help to
accelerate the market penetration of our DFC power plants.
To
further stimulate the market, significant incentive programs are available in
Asia, the U.S. and Europe, with many being renewed and new ones being
introduced. For example, new energy policies in Japan and Korea were announced
to meet clean energy requirements in those countries, and new initiatives in
Connecticut and New York are requesting large scale renewable projects of 10 MW
or larger. California renewed its Self Generation Incentive Program in 2004,
with funding approved for clean distributed generation projects through 2007.
European incentive programs are similar and our partner, MTU CFC Solutions, Gmbh
(MTU), a DaimlerChrysler subsidiary, has technology, manufacturing and
distribution rights for carbonate fuel cell power plants and is focused on the
European market.
High
product cost due to the early stage of commercializing our DFC power plants
results in our product pricing being substantially higher than competing
products that are more mature. Available government subsidies make us more
competitive with other sources of delivered electrical energy, but the approval
and funding process for these government incentive programs can be protracted.
We are beginning to see evidence that timing for this process is shortening,
e.g., in California, where we are participating with government agencies in an
increasing number of projects.
Our
products produce electricity and thermal energy which are commodities to end
users. While our products compete essentially on price, the attr