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| FCEL > SEC Filings for FCEL > Form 10-K on 29-Jan-2004 | All Recent SEC Filings |
29-Jan-2004
Annual Report
Management's Discussion and Analysis of Financial Conditions 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, 2003, 2002 and 2001. In addition, a brief 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 Energy 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 and carbonate fuel cells since the mid-1970s. We are currently commercializing our core carbonate fuel cell products (Direct Fuel Cell (DFC ) Power Plants), continuing to develop our next generation DFC products and beginning the development process of solid oxide fuel cell (SOFC) technology.
Direct FuelCell (DFC) Power Plants
Increasing demand for reliable power worldwide supplemented by air pollution concerns caused by older, combustion power generation, and weak 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:
º High fuel efficiency. º Ultra-clean emissions. º High reliability. º Quiet operation. º Flexible siting and permitting requirements. º Scalability. º Potentially lower operating, maintenance and generation costs than alternative distributed power generation technologies.
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 50 MW. Our 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 in grid support applications for utility customers. We are currently operating 23 DFC power plants at customer sites throughout the U.S., Europe and Japan where they have generated more than 26 million kWh of electricity through January 15, 2004.
We see significant market potential for our products. A 2003 study by Allied Business Intelligence (ABI) projected that global stationary fuel cell cumulative shipments will 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) 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. Of this 77,000 MW CHP total in the U.S., 50 percent was identified in nine states - California, Florida, Illinois, Michigan, New Jersey, New York, Ohio, Pennsylvania and Texas.
Over the past 30 years, we have invested more than $400 million in the development of our fuel cell technology. This includes over $200 million funded by various U.S. government agencies, most notably the U.S. Department of Energy (DOE), which has supported our efforts since 1975. 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 commercializing our DFC products in the distributed generation marketplace due to a number of factors, including:
º We have developed and are selling standardized high-temperature fuel cell power plants for stationary base load power, which provide high fuel efficiency and high-value waste heat for cogeneration applications.
º 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.
º We have obtained commercial product certifications for safety, interconnection, installation and performance.
º We are operating a fleet of DFC power plants at customer sites throughout the world.
º We have established production facilities, with equipment in place to produce 50 MW of DFC products annually.
º We have created sales and service capabilities to support our DFC products.
º We have a strong balance sheet, with over $200 million in cash, cash equivalents and investments to support our growth.
In introducing our products to the marketplace, we face obstacles that can lengthen the sales cycle. At the macro-economic level, this includes varying energy demand, capital appropriation cycles and changing economic environments. At the company-level, the process of commercializing our DFC power plants combined with current annual order volume well below our annual production capabilities results in unsubsidized pricing for our products that is substantially higher than competing products that are more mature. Available subsidies make us more competitive with other sources of delivered electrical energy; however, the approval process for government incentive programs can be protracted. At the industry-specific level, there are various global regulatory market obstacles such as an uncertain regulatory environment for distributed generation, monopoly-based electricity markets, interconnect issues, disparate recognition of the location value and environmental benefits of distributed generation, standby power costs and stranded asset exit fees. We believe that the marketplace is responding favorably to these issues. Significant incentive programs are available in Japan, Europe and the U.S. Interconnect standards, standby charges and exit fees are being adjusted to accommodate newer technologies that generate electricity with greater fuel efficiency and reduced emissions. We expect that this trend will continue and help to accelerate the commercialization of our DFC power plants.
Strategically, we are focused on developing sustainable markets; reducing product cost and increasing operating experience for our core DFC products. Sustainable markets are target customer applications with the greatest opportunity for multiple and repeat orders. 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 further open up markets. We believe this focus will result in additional order volume and allow us to penetrate broader commercial and industrial markets for power generation with our DFC products. We believe that as a result of these efforts, we can achieve operating break-even at annual production volumes of approximately 100 MW.
SOFC
In April 2003, we were selected by the Department of Energy (DOE) to lead a project team for its $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 for residential, commercial and light industrial applications ranging in product size from 3 to 10 kilowatts each for applications up to 100 kWh. To strengthen our commercialization capabilities for this contract, we made two strategic investments in SOFC technology; our investment of $2.0 million in Versa Power Systems and our November 2003 acquisition of Global Thermoelectric Inc (Global). Versa Power Systems was formed to produce a range of products for the distributed generation market incorporating its patented reduced temperature SOFC system. Global has been developing SOFC power plants since 1997. 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. As consideration in this acquisition, we issued approximately 8.2 million shares of common stock (or equivalents) valued at approximately $80.8 million. We also assumed the Global stock option plan valued at approximately $1.0 million, preferred shares valued at approximately $9.1 million, and incurred transaction costs of approximately $2.8 million. Total consideration is calculated at approximately $93.7 million. Global's financial results will be consolidated with ours beginning in fiscal 2004.
During the twelve months ended October 31, 2003 Global had product sales totaling approximately $20.0 million related to its TEG product line. Global's total operating loss for the same period was approximately $(12.8) million which includes the results of the TEG product line, fuel cell research and development, selling general and administrative expenses as well as transaction costs expensed. Global's cash and investment balance at the date of acquisition was approximately $55.8 million.
We continue to evaluate Global's TEG product line in order to determine its strategic fit within the combined company. While we have solicited offers to sell this product line, we have not made a final determination as to whether or not to retain or monetize its value. Our future operating results and cash flows will be impacted by how quickly we integrate Global with our operations and any strategic decisions made on the TEG product line.
On November 4, 2003, we signed a distribution agreement with Enbridge Inc. The agreement with Enbridge introduces our products to Enbridge's portfolio of energy services in Canada. As part of the agreement, Enbridge received warrants to purchase 500,000 shares of our common stock.
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, oftentimes funding is provided incrementally on a year-by-year basis if contract terms are met and Congress has authorized the funds. As of October 31, 2003 research and development sales backlog totaled $31.1 million, of which 46 percent is funded. 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.
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 contacts 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. No discounts have been recorded to date, as our partners have not achieved the business levels outlined in our warrant agreements.
Inventories
During the procurement and manufacturing process of a fuel cell power plant, costs for material, labor and overhead are accumulated in raw material and work-in-process (WIP) inventory until they are transferred to a customer contract.
As our inventories are stated at the lower of recoverable cost or market price, we provide for a lower of cost or market (LCM) reserve against gross inventory values. This reserve is estimated by comparing the current sales prices of our fuel cell power plants to actual costs of completed power plants. As of October 31, 2003, our LCM reserve balance was approximately $10.8 million, which equates to a reduction of approximately 41 percent of our gross inventory value. As of October 31, 2002 our LCM reserve balance was approximately $7.9 million, which equated to a reduction of approximately 36 percent of the gross inventory value. The increase in the LCM reserve and percentage over the prior year is due to the higher balance of plant inventory in 2003. Future product sales prices and inventory mix and costs will affect our LCM reserve percentage and balance.
Internal Research and Development
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. As funding for research and development contracts fluctuates, we may allocate resources to conduct internally funded research and development activities in order to keep a balanced workforce while advancing our strategic initiatives.
RESULTS OF OPERATIONS
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 as well as the related ratio of costs to revenues for the years ended October 31, 2003 and 2002 (dollar amounts in thousands), respectively:
Revenues: Year Ended Year Ended Percentage
October 31, 2003 October 31, 2002 Increase /
Percent of Percent of (Decrease) in
Revenues Revenues Revenues Revenues 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 Year Ended Percentage
October 31, 2003 October 31, 2002 Increase /
Cost of Percent of Cost of Percent of (Decrease) in
Revenues Costs Revenues Costs 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 reduced activities 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. We expect to continue to participate in cost-share contracts in fiscal 2004 requiring us to make further cost-share investments in the technology being developed.
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.
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.
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. We expect increased research and development expenses in fiscal 2004 as we integrate Global into our operations and as our engineering teams continue implementing our cost out program
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. 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 then our current production costs, and invest in our cost out initiatives.
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. We do not expect significant tax credit income in fiscal 2004. 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. We expect to incur foreign income tax expense in fiscal 2004 as Global is integrated into our operations. During the twelve month's ended October 31, 2003 Global's tax expense was approximately $0.1 million.
Comparison of the Years Ended October 31, 2002 and October 31, 2001
Revenues and cost of revenues
The following tables summarize our revenue and cost mix as well as the related ratio of costs to revenues for the years ended October 31, 2002 and 2001 (dollar amounts in thousands), respectively:
Revenues: Year Ended Year Ended Percentage
October 31, 2002 October 31, 2001 Increase /
Percent of Percent of (Decrease) in
Revenues Revenues Revenues Revenues Revenues
Research and development $
contracts $ 33,575 81% 20,882 80% 61%
Product sales and revenues 7,656 19% 5,297 20% 45%
Total $
$ 41,231 100% 26,179 100% 57%
Cost of revenues: Year Ended Year Ended Percentage
October 31, 2002 October 31, 2001 Increase /
Cost of Percent of Cost of Percent of (Decrease) in
Revenues Costs Revenues Costs Costs
Research and development
contracts $ 45,664 59% $ 19,033 54% 140%
Product sales and revenues 32,129 41% 16,214 46% 98%
Total $ 77,793 100% $35,247 100% 121%
Total revenues increased 57 percent to $41.2 million in the 2002 period from $26.2 million in the 2001 period. Revenues from research and development contracts increased 61 percent to $33.6 million from $20.8 million in the 2001 period, while product sales increased 45 percent to $7.7 million from $5.3 million in the 2001 period. The additional $12.7 million of research and development contract revenue was related to King County, Clean Coal, Coal Mine Methane, and Navy Phase II. The additional $2.4 million of product sales revenue was related to the manufacture of DFC power plants for our distribution partners and sales of fuel cell components to MTU.
Cost of research and development contracts increased to $45.7 million in the 2002 period from $19.0 million in the 2001 period. This was due to sales on cost-shared research and development contracts, including King County, Clean Coal, Navy Phase II and Coal Mine Methane.
Cost of product sales and revenues increased 98 percent, to $32.1 million in the 2002 period from $16.2 million in the 2001 period, due to additional sales of fuel cell components to MTU, an overall increase in the procurement for and manufacturing of DFC power plants for our distribution partners, and development costs on our initial field trial units.
Administrative and selling expenses
Administrative and selling expenses increased 15 percent to $10.5 million in the 2002 period from $9.1 million in the 2001 period. These additional costs were driven by our commercialization efforts and consisted of employment costs of $0.6 million, professional services costs of $0.7 million related to hiring, systems implementation, and marketing efforts.
Research and development expenses
Research and development expenses increased to $6.8 million in the 2002 period from $3.1 million in the 2001 period. This was due to development costs associated with design improvements of our sub-megawatt products and first article testing and design costs related to our megawatt class products.
Loss from operations
Loss from operations increased to $53.8 million in the 2002 period from $21.3 million in the 2001 period. The additional losses resulted from our field trials and cost shared contracts, and a higher level of sales and marketing activity.
Interest and other income, net
Interest expense increased to $0.2 million in the 2002 period from $0.1 million in the 2001 period. This was attributable to additional borrowings in the 2002 period.
Interest and other income, net, decreased to $4.9 million in the 2002 period from $5.7 million in the 2001 period. This was due to our lower cash and investments balances and lower interest rates.
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.
LIQUIDITY AND CAPITAL RESOURCES
We had approximately $209 million of cash, cash equivalents and investments as of November 3, 2003, the date we acquired Global Thermoelectric, Inc. As of October 31, 2003, we had total cash, cash equivalents and investments in treasury securities of approximately $153 million. Subsequent to year-end on November 3, 2003, as further described throughout this document and in Note 16 of our financial statements, we acquired Global Thermoelectric, Inc., which had cash and investment balances totaling approximately $56 million.
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, cash generated from operations and borrowings. 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 increasing annual order volume, implementing our cost reduction efforts on our fuel cell products, and our future involvement in research and development contracts.
Reducing product cost is essential for us to penetrate the market for our high temperature fuel cell products. 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 and is critical to achieving profitability.
In 2003, we implemented a 'cost-out' program that focuses on three key areas:
º Increased performance output; º Increased stack life; and º Design simplification and materials replacement and/or elimination to reduce product cost.
In addition, we believe 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.
Previously, we have stated that we could reach operating break-even at 150 MW to
200 MW of annual production volume. As a result of successes to date and
initiatives underway in our cost reduction program, we believe that we can
achieve operating break-even at annual production volumes of approximately 100
MW.
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 for all of our product lines. To obtain contracts, we must continue to prove the benefits of our technologies and be successful in our competitive bidding.
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
During the year ended October 31, 2003, cash and cash equivalents and investments decreased by $67.1 million compared with a decrease of $70.0 million during the year ended October 31, 2002. We used a total of $61.5 million of cash and cash equivalents during the year ended October 31, 2003 as reported on our Statements of Cash Flows and total short and long-term investments declined by $5.6 million.
The key components of our cash use are as follows:
Operating Activities: During the year ended October 31, 2003, we used $58.8 million in cash in our operating activities, which consists of a net loss for the period of approximately $67.4 million, offset by non-cash adjustments (primarily depreciation) of $6.4 million and cash generated from working capital of approximately $2.2 million. This compares to an operating cash usage of $55.1 million during the year ended October 31, 2002. The increase in operating cash usage is due to higher net losses partially offset by higher depreciation and less working capital use compared to the prior period.
Investing Activities: Capital expenditures for the year ended October 31, 2003 were approximately $6.6 million lower than the prior year as we completed the majority of the Torrington facility machinery purchases in 2002. We also increased our total investment in Versa Power Systems from $0.5 million in fiscal 2002 to $2.0 million in fiscal 2003.
Financing Activities: During the year ended October 31, 2003, we generated $0.8 million from financing activities, through the exercise of stock options and purchases of shares in our employee stock purchase plan offset by repayments of debt. This compares with $1.4 million generated in 2002, which included borrowings of approximately $0.8 million.
Commitments and Significant Contractual Obligations
We have outstanding operating lease commitments of $3.7 million, payable over the next 7 years. We also have a term loan payable over the next five years totaling $1.9 million.
A summary of our significant future contractual obligations as of October 31, 2003 and their payments by fiscal year is summarized as follows (in thousands):
Payments Due by Period
Less More
than 1 - 3 3 - 5 than
Total 1 Year Years Years 5 Years
Contractual Obligation:
Operating lease commitments $ 3,722 $ 709 $ 964 $ 1,024 $ 1,025
Term loan (principal and interest) 1,932 414 828 690 -
Totals $ 5,654 $ 1,123 $ 1,792 $ 1,714 $ 1,025
Additionally, we have short-term purchase commitments with some suppliers for materials and supplies as part of the normal course of business.
Research and Development Cost-Share Contracts We have agreed to and 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 DFC3000 power plant operating on synthesis gas derived from coal has a total project value of $34.5 million. The DOE will reimburse 50 percent of the cost on this project and we will incur the balance. Thus, over the life of this program and, assuming 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, 2003 our research and development sales backlog totaled $31 million. As this backlog is funded in future periods, we will incur additional research and development cost-share totaling approximately $15 million for which we would not be reimbursed by the government.
Product Sales Contracts Our fuel cell power plant products are in their initial stages of development and market acceptance. As such, costs to manufacture and install our products exceed current market prices. In fiscal 2003 our product costs of $50.4 million exceeded our product revenues of $16.1 million. As of October 31, 2003 we had a product sales backlog of approximately $15 million. We do not currently expect sales from this backlog to be profitable, although we cannot predict, with certainty, what our product costs will be on these sales.
Global Thermoelectric Commitments We assumed the commitments of Global in connection with the November 3, 2003 acquisition. Global is required to pay quarterly dividends of Cdn. $312,500 on the Series 2 Preferred Shares (subject to possible reduction pursuant to the terms of the Series 2 Preferred Shares on account of increases in the price of FuelCell's Common Stock). We have agreed to guarantee Global's dividend obligations, including paying a minimum of Cdn. $500,000 in cash annually to Enbridge Inc. the holder of the Series 2 preferred Shares, so long as Enbridge holds the shares. Additionally, Global had future lease commitments totaling approximately Cdn. $1.8 million as of the date of acquisition.
Related Party Transactions
Three of our key business partners are shareholders of FuelCell Energy; MTU CFC Solutions GmbH (MTU), PPL EnergyPlus LLC (PPL) and Marubeni, Inc. (Marubeni). We recognized approximately $11.7 million, $7.2 million and $3.4 million, of revenues from these customers in the fiscal years ended October 31, 2003, 2002 and 2001, respectively. As of October 31, 2003 approximately $1.5 million of trade accounts receivable was due from these companies.
We also receive license fee income totaling approximately $0.3 million annually from an agreement with MTU, our European partner. This is an exclusive license granted MTU to use our Direct FuelCell patent rights and know-how in Europe and the Middle East, and a non-exclusive license in South America and Africa, subject to certain rights of others and us, in each case for a royalty. Michael Bode, a member of our Board of Directors, is an executive officer of an affiliate of MTU.
On November 4, 2003, we signed a distribution agreement with Enbridge Inc. (Enbridge). The agreement with Enbridge introduces our products to Enbridge's portfolio of energy services in Canada. As part of the agreement, Enbridge received warrants to purchase 500,000 shares of our common stock. The agreement calls for the warrants to be exercisable on a graduated scale based on order flow generated by Enbridge. The full quantity of warrants will vest with order commitments for 20 megawatts of DFC power plants. The exercise prices of the warrants range from $14.65 to $19.04 per share and the warrants will expire in November 2006. Enbridge also holds 1,000,000 Global Series 2 Preferred Shares, which are convertible into FuelCell common shares. George K. Petty, a member of our Board of Directors, is also a Director of Enbridge.
RECENT ACCOUNTING PRONOUNCEMENTS
On April 30, 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 149 is effective for contracts entered into or modified after June 30, 2003. This standard did not have a material impact on our financial statements.
On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The Statement requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, the Statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective for us beginning on August 1, 2003. We have not entered into any financial instruments within the scope of the Statement to date through October 31, 2003. This standard did not have a material impact on our financial statements. We currently do not expect this standard to have a material impact on our financial statements going forward.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. The Interpretation may have an effect on existing practice because it requires existing variable interest entities to be consolidated if those entities do not effectively disperse risks among the parties involved. The Interpretation is effective immediately for all variable interest entities created after January 31, 2003. We are required to apply the provisions of this Interpretation no later August 1, 2003 to all variable interest entities created before February 1, 2003. Based on our current structure, this statement will not have a material effect on our financial statements and disclosure.
FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following risk factors before making an investment decision. If any of the following risks actually occur, our business, financial condition, or results of operations could be materially and adversely affected. In such cases, the trading price of our common stock 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 are currently transitioning from a research and development company that has been primarily dependent on government contracts to a company focusing on commercial products. 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 $67.4 million for the fiscal year ended October 31, 2003. 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 and SOFC 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 us achieving and sustaining profitability.
Our cost reduction strategy may not succeed or may be significantly delayed.
Our cost reduction strategy is based on the assumption that a significant increase in production will result in the realization of 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. A failure by us to achieve a lower 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.
We expect the production costs of our initial commercial products to be higher than their sales prices. We recognize that successfully implementing our strategy and obtaining a significant share of the distributed generation market will require that we offer our Direct FuelCell and SOFC 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 or SOFC 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 demonstrated using a variety of hydrocarbon fuels, including natural gas, methanol, diesel, biogas, coal gas, coal mine methane and propane. Our SOFC fuel cells have been demonstrated using natural gas. If these fuels are not readily available or if their prices are such that electricity produced by our products costs more than electricity provided through other generation sources, our products would be less economically attractive to potential energy users. 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 inputs 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 is dependent on conducting successful field trials.
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 and SOFC products directly to energy customers. For example, MTU is currently field-testing eight 250 kW power plants in Germany and Spain that incorporate the Direct FuelCell as their fuel cell components and we are operating seven Direct FuelCell units in the United States and one Direct FuelCell unit in Japan. We believe that our fuel cell commercialization program is dependent upon conducting additional commercial field trials and demonstration projects of our power plants and completing substantial additional research and development. We have planned several field trials and demonstration projects for our sub-megawatt and megawatt class Direct FuelCell stationary fuel cell power plants.
Demonstration, field trial and field follow projects may encounter problems and delays for a number of reasons, including the failure of our technology, the failure of the technology of others (including balance of plant), 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 and SOFC 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 and SOFC 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, as will any SOFC products introduced in the future. 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 us, are currently engaged in the development of products and technologies that are similar to, or may be competitive with, our products and technologies.
We compete on the basis of our products' reliability, fuel efficiency, environmental considerations and cost. We believe that the carbonate fuel cell offers competitive advantages over most other fuel cell designs for stationary base load power generation. These benefits include high fuel efficiency, significantly lower emissions, scalability and potentially lower operating, maintenance and generation costs. We believe that we are the most advanced high temperature stationary fuel cell company.
Several 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 PEM fuel cells (Ballard Power Systems, Inc.; 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 more established manufacturing, distribution, and operating and cost features. Significant competition may also come from gas turbine companies like General Electric, Ingersall 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 believe, however, that these smaller gas turbines will not be able to match our fuel efficiency or favorable environmental characteristics.
We may not meet our product development and commercialization milestones.
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 and will do the same with our SOFC products. 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 and future SOFC 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 and have no such experience with SOFC products.
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 and Global has no such experience with SOFC products. 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 can expand our manufacturing capacity to 100 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.
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 suffer.
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.
Our commercialization plans are dependent on market acceptance of our Direct FuelCell and SOFC 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 and SOFC products may be affected by many factors that are out of our control, including:
º the cost competitiveness of our fuel cell products;
º the future costs of natural gas and other fuels used by our fuel cell products;
º consumer reluctance to try a new product;
º consumer perceptions of the safety of our fuel cell products;
º the pace of utility deregulation nationwide, which could affect the market for distributed generation;
º local permitting and environmental requirements; and,
º 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 and SOFC products and may never achieve profitability.
As we continue to commercialize our Direct FuelCell products and work towards the future commercialization of our SOFC 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, 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.
We must lower the cost of our solid oxide fuel cell systems and demonstrate their reliability.
Global's solid oxide fuel cell systems are currently in the development stage. While proof of concept prototypes have been developed and tested in controlled conditions, these systems have not yet undergone extensive testing, nor have the designs been refined to the level of a commercial product. The prototypes incorporate specialty components that are produced in one-off or small batch quantities. The current prototypes cost significantly more and perform at a lower level than established competing technologies. Although we intend to remain committed to commercializing SOFC technology, if we are unable to develop and manufacture fuel cell systems that are competitive with competing technologies in terms of price, reliability and longevity, consumers will be unlikely to buy products containing solid oxide fuel cells and fuel cell systems. The price of fuel cell systems is dependent largely on material and manufacturing costs and the cost of balance of plant components. We cannot guarantee that we will be able to lower these costs to the level where we will be able to produce a competitive product or that any product produced using lower cost materials and manufacturing processes will not suffer from a reduction in performance, reliability and longevity.
Our government research and development contracts are important to the implementation of our commercialization plans.
Our fuel cell revenues have been principally derived from a long-term cooperative agreement and other contracts with the U.S. Department of Energy, the U.S. Department of Defense, the U.S. Navy and the U.S. Environmental Protection Agency. 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 Department of Energy 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 Department of Energy under the Department of Energy cooperative agreement or the full amounts allocated under our other government research and development contracts. Failure to receive the full amounts allocated under any of our government research and development contracts could materially 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.
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 Department of Energy cooperative agreement. Four of our patents that were the result of Department of Energy-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 Department of Energy 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 Department of Energy 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 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 Department of Energy-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.
We no longer qualify as a small business, which could adversely affect our rights to patents under DOE-funded contracts.
We no longer qualify as a small business under applicable government regulations because we have more than 500 employees after our acquisition of Global. This could affect our ability to own outright those patents we may develop under contracts, grants or cooperative agreements funded by the Department of Energy (DOE) in the future. The failure to qualify as a small business does not, however, affect our existing contracts, grants or cooperative agreements with the DOE, or our ownership of patents we developed with the DOE under contracts entered into while we qualified as a small business. As we are unable to certify in proposals to DOE that we qualify as a small business, we will not own patents we develop under contracts, grants or cooperative agreements funded by the Department of Energy based on such certification, unless we obtain a patent waiver from the Department of Energy. We believe we would be able to obtain patent waivers from the Department of Energy for future contracts, however, we can make no assurances or guarantees that we will be able to obtain such waivers. Without a waiver, we would retain only a nonexclusive license to those patents. We will continue to retain ownership of patents developed with governmental agencies other than the Department of Energy because non-Department of Energy contracts are not affected by a change in our small business status. Failure to continue to qualify as a small business will also eliminate our eligibility to participate in future U.S. Small Business Innovation Research program contracts.
We may be restricted in pursuing certain activity outside Canada or with certain partners in parts of Canada.
We are subject to the contractual terms of Global's existing agreements that restrict its ability to pursue certain commercial activities. Global entered into agreements with the National Research Council of Canada which require that, until at least March 2004, Global obtain prior written consent in order to conduct manufacturing using any results from the development of projects under these agreements outside of Canada or sell, assign, transfer or otherwise dispose of any rights to intellectual property arising out of such project to any person or organization outside of Canada, or to any government other than the Canadian government. Additionally, Global has entered into a development agreement with Natural Resources Canada/CANMET whereby Global may not license the intellectual property developed in performance of the project to any government other than the Canadian government, or to any person, corporation, partnership or business for the purpose of manufacturing outside Canada the products or processes resulting from the project without the prior consent of the applicable Canadian government agency. Global has also appointed an exclusive distributor for certain products in areas within Canada, thereby limiting our future ability to use any other distributors for those products in those areas.
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 or SOFC 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 and SOFC 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 who 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, three 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 or SOFC 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 or SOFC 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 and SOFC products.
We purchase several key components of our Direct FuelCell and SOFC products from other companies and rely on third-party suppliers for the balance-of-plant components in our Direct FuelCell and SOFC products. There are a limited number of suppliers for some of the key components of Direct FuelCell and SOFC 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 and SOFC 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 and SOFC 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 FuelCell has obtained will expire between 2003 and 2021 and the average remaining life of FuelCell's U.S. patents is approximately 9.7 years. The patent that Global has obtained will expire in 2019. 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:
º 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,
º 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.
There may be limitations on our right to exploit technology jointly developed between Global and strategic partners.
The extent to which we own or otherwise have the right to commercially exploit technology developed in connection with certain of Global's strategic alliances is not clear. Due to ambiguities under some of Global's applicable joint development agreements, it is unclear whether we have the right to exploit technology arising from these alliances (exclusively or otherwise) or whether we can stop competitors from exploiting the technology. In the event that a Global strategic partner challenges our use of certain technology, we could incur substantial litigation costs, be forced to make expensive products, pay substantial damages or royalties or even be forced to cease operations relating to such technology.
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, and Dr. Hansraj Maru and Christopher Bentley, Executive Vice Presidents. The loss of the services of any executive officer, including Mr. Leitman, Dr. Maru and Mr. Bentley, 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 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 and SOFC 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 700-800 F, water at temperatures of approximately 10-20 F above ambient 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 and SOFC products, decrease the acceptance of fuel cells as a commercial product and increase our costs and, therefore, the price of our Direct FuelCell and SOFC 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.
Department of Energy approval to use Global in the SECA program is uncertain.
Although the Department of Energy has selected FuelCell for the SECA project, the Department of Energy could restructure its grant based on our acquisition of Global. If the Department of Energy did restructure its grant, we could lose the opportunity to be awarded some or all of the funding for the SECA project. In addition, we are not guaranteed to receive any payments from the SECA project.
Utility companies could impose customer fees or interconnection requirements to 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 and SOFC 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 and SOFC 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 and SOFC 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 and SOFC 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. Except as set forth below, 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.
In late 2002, a site inspection at Global's manufacturing facility in Bassano, Alberta, Canada detected soil and groundwater contamination. The primary contaminants detected at this facility and adjacent property are components of a common degreasing agent used in the 1980s. Pursuant to the Environmental Protection and Enhancement Act (Alberta), the party responsible for contamination has a statutory obligation to take all reasonable measures to remediate a release of hazardous substances that may cause an adverse effect on human health, safety or the environment. Alberta Environment, the regulatory agency with jurisdiction over these matters in Alberta, has confirmed that a remediation strategy is required. Global has engaged a third party international environmental consulting firm to further evaluate the extent of the contamination and assist Global and Alberta Environment in developing a remediation strategy.
Based on the data available as of July 2003, Global's environmental consultant proposed a remediation strategy to prevent further offsite contaminant migration and to capture and remediate existing soil and groundwater contamination. Based on this strategy, Global has proposed a remediation program to Alberta Environment regarding the Bassano site and currently estimates that total costs for implementing and operating the remediation system for a period of ten years to be approximately Cdn.$1.2 million to Cdn.$1.4 million.
Global's consultant acknowledges that there are a number of uncertainties associated with the contamination at the Bassano facility, and the cost estimates are based on a number of key assumptions. If Alberta Environment promulgates remedial standards or guidelines for the suspected environmental contaminants in the future, Alberta Environment may require Global to remediate to such standards or guidelines (which could be more difficult and expensive). The proposed remedial system may not be accepted by Alberta Environment or other parties, and/or remediation may be required for more than ten years, both of which could significantly increase the cost of the remediation.
The remediation cost estimate provided above does not include costs that Global may incur for legal fees or for administrative expenses in connection with the remediation activities. As noted above, there are numerous uncertainties associated with environmental liabilities and no assurances can be given that Global's consultant's estimate of any environmental liability will not increase or decrease in the future. The uncertainties relate to the difficulty of estimating the ultimate cost of any remediation that may be undertaken, including the lateral and vertical extent of the contamination, any additional operating costs associated with remedial measures, the duration of any remediation required, the amount of consultants' or legal fees that may be incurred and any regulatory requirements that may be imposed by Alberta Environment.
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 and SOFC 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-based products could materially impede widespread market acceptance and demand for our Direct FuelCell and SOFC 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 and SOFC 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.
We have large and influential shareholders.
MTU currently owns approximately 5.8 percent of our outstanding common stock (based upon the number of shares of our common stock outstanding as of January 14, 2004). Loeb Investors Co. LXXV and Warren Bagatelle (a managing director of an affiliate of Loeb Investors Co. LXXV) collectively own approximately 3.4 percent of our outstanding common stock (based upon the number of shares of our common stock outstanding as of January 14, 2004). 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), 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, MTU's ownership interest could raise a conflict of interest if MTU is experimenting with competing technologies for its own products.
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:
º failure to meet our product development and commercialization milestones;
º variations in our quarterly operating results from the expectations of securities analysts or investors;
º downward revisions in securities analysts' estimates or changes in general market conditions;
º announcements of technological innovations or new products or services by us or our competitors;
º announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
º additions or departures of key personnel;
º investor perception of our industry or our prospects;
º insider selling or buying;
º demand for our common stock; and,
º 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. Where definitive agreements govern the relationships between us and our respective partners, 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. In many cases, these strategic relationships are governed by a memorandum of understanding or a letter of intent. 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.
Adverse market conditions related to Global's thermoelectric generators may impact future revenue and profits.
Demand for Global's thermoelectric generators depends primarily on the level of spending by oil and natural gas companies for gas exploration and development activities and on the level of gas pipeline construction activity. These activity levels are directly affected by fluctuations in world energy prices, world supply and demand for oil and natural gas and government regulations in Canada, the United States and internationally, all of which are beyond our and our customers' control. Reduced levels of activity in the oil and natural gas industry can intensify competition and result in lower revenue and operating profit margin.
Our acquisition of Global is expected to result in benefits to us, but we may not realize those benefits due to challenges associated with integrating the two companies.
The success of our acquisition of Global will be dependent in large part on the success of our management in integrating the operations, technologies and personnel of FuelCell and Global. The failure of the combined company to meet the challenges involved in successfully integrating the operations of FuelCell and Global or otherwise to realize any of the anticipated benefits of the acquisition, including anticipated cost savings, could seriously harm the results of operations of the combined company. In addition, the overall integration of FuelCell and Global may result in unanticipated operations problems, expenses and liabilities and diversion of management's attention. The challenges involved in this integration include the following:
º integrating successfully FuelCell and Global's operations, technologies, products and services;
º coordinating sales and marketing efforts to effectively communicate the capabilities of the combined company;
º demonstrating to the customers of FuelCell and Global that the acquisition will not result in adverse changes in business focus;
º coordinating and rationalizing research and development activities to enhance introduction of new products and technologies with reduced cost;
º preserving distribution, marketing or other important relationships of both FuelCell and Global and resolving potential conflicts that may arise;
º assimilating the personnel of FuelCell and Global and persuading employees that the business cultures of FuelCell and Global are compatible;
º maintaining employee morale and motivation, particularly given recent cost reduction initiatives undertaken by FuelCell and Global, and retaining key employees; and
º reducing the costs associated with FuelCell and Global's operations.
We may not be able to successfully integrate the operations of FuelCell and Global in a timely manner, or at all, and we may not realize the anticipated benefits or synergies of the acquisition to the extent or in the timeframe anticipated. The anticipated benefits and synergies include cost savings associated with anticipated restructuring efforts and other operational efficiencies, greater economies of scale and revenue enhancement opportunities. In addition, we anticipate that Global's cash reserves will provide the combined company with an increased ability to fund development and operations. However, these anticipated benefits and synergies are based on assumptions, not actual experience, and assume a successful integration. Our ability to realize these benefits and synergies could be adversely impacted to the extent that FuelCell's or Global's relationships with existing or potential customers, suppliers or strategic partners is adversely affected as a consequence of the acquisition, or by practical or legal constraints on our ability to combine operations or implement workforce reductions.
We presently expect to incur significant costs to streamline the combined company's business, reduce excess capacity and eliminate redundant operations. In addition, we may incur costs to the extent we choose to terminate, renegotiate or amend any of Global's existing obligations as part of the post-closing integration of the companies. Accordingly, we believe we may incur charges to operations, which are not currently reasonably estimable, in periods following the acquisition to reflect costs associated with integrating and streamlining the businesses and operations of FuelCell and Global. There can be no assurance that the costs associated with streamlining the business, reducing excess capacity and eliminating redundant operations will not exceed those projected, and we cannot assure you that the combined company will not incur additional material charges in subsequent quarters to reflect additional costs associated with the acquisition.
Purchase accounting treatment and the impact of amortization of intangibles with definite lives relating to the Global acquisition could adversely affect our operating results.
The acquisition of Global has been accounted for under the purchase method of accounting and we are considered the acquirer of Global for accounting purposes. Accordingly, our historical financial statements will continue to be the historical financial statements of the combined company and Global will be included in the ongoing results of operations prospectively from November 3, 2003, the date of the consummation of the acquisition. Under purchase accounting, we expect to record the following as the cost of acquiring the business of Global:
- the sum of the market value of our common stock issued in connection with the acquisition;
- the fair value of Global preferred stock assumed by us in connection with the acquisition;
- the fair value of Global stock options assumed by us in connection with the acquisition; and
- the amount of direct transaction costs incurred by us in connection with the acquisition.
We have allocated the cost of the items described above to the individual assets acquired and liabilities assumed, including intangible assets such as customer relationships, based on their respective fair values. Intangible assets, including intangibles with indefinite lives, from acquisitions are evaluated annually to determine whether any portion of the remaining balance of such indefinite lived intangibles may not be recoverable. If it is determined in the future that a portion of any intangibles recorded as a result of the transaction are impaired, we will be required to write off that portion which would decrease our net income (or alternatively increase our net loss) in the future, and this could have a material adverse effect on the market value of our common stock.
Future sales of substantial amounts of our common stock or exchangeable shares and the dilution associated with our acquisition of Global could affect the market price of our common stock.
Future sales of substantial amounts of our common stock or exchangeable shares 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.
In connection with our acquisition of Global, we:
º issued an aggregate of approximately 8.2 million shares of our common stock and exchangeable shares to the former holders of Global common shares, which shares are freely tradable unless they are held by affiliates of Global or FuelCell;
º assumed all outstanding options to purchase Global common shares; and
º assumed the obligation to issue our shares upon the conversion of the outstanding Global Series 2 Preferred Shares.
The issuance of the above-described shares of FuelCell common stock and exchangeable shares, and the issuance of FuelCell common shares upon the exercise of the above-described options or the conversion of the above described Global Series 2 Preferred Shares, may have a dilutive effect and hence decrease the market price of the shares of our common stock.
In addition, as of October 31, 2003, 7.5 million shares of our common stock were reserved for issuance under our stock option and other benefit plans and 2.9 million shares of our common stock were reserved for issuance pursuant to outstanding warrants. As of October 31, 2003, options to purchase 5.3 million shares of our common stock were issued under our stock option plans at a weighted average exercise price of $9.94 per share, of which options to purchase 3.3 million shares had vested. The outstanding warrants to purchase shares of our common stock have not yet vested.
The rights of the Global Series 2 Preferred Shares could negatively impact the combined company.
Following our acquisition of Global, Global's Series 2 Preferred Shares remained outstanding in Global, as a subsidiary of FuelCell. The terms of the Global Series 2 Preferred Shares provide rights to the holder, Enbridge Inc., including dividend and conversion rights among others that could negatively impact our company. For example, the terms of the Global Series 2 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 Global Series 2 Preferred Shares. The terms of the Global Series 2 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 are 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.
Upon the completion of the combination, we agreed to guarantee Global's dividend obligations, including paying a minimum of Cdn.$500,000 in cash annually to Enbridge for so long as Enbridge holds the Global Series 2 Preferred Shares.
As a result of the combination, we are required to issue common stock to the holder of the Global Series 2 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 shareholders. For example, assuming the holder of the Global Series 2 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.
Since the Global Series 2 Preferred Shares remain outstanding in Global, Global is not a wholly-owned subsidiary of FuelCell and we may not be able to take actions that would be adverse to the holder of the Global Series 2 Preferred Shares without approval of the holder thereof. In addition, to the extent that the terms of the Global Series 2 Preferred Shares restrict Global's ability to pay dividends or make other distributions to other common shareholders of Global, our ability to distribute cash from Global to FuelCell may be limited. For example, without the consent of the holder of the Global Series 2 Preferred Shares, Global is restricted from paying dividends to any other shareholders unless all required dividends have been paid, or set apart, up to the applicable dividend payment date for the Global Series 2 Preferred Shares.
Our future operating results may fluctuate, which could result in a lower price for our common stock.
The market price of our common stock may decline below currently prevailing levels. The market price of our common stock may be adversely affected by numerous factors, including:
º actual or anticipated fluctuations in our operating results;
º changes in financial estimates by securities analysts; and
º general market conditions and other factors.
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