Thursday, July 03, 2008 7:51:34 AM
NEWS OUT!!! 10-K
Form 10-K for QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE INC
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3-Jul-2008
Annual Report
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations together with the consolidated financial statements and related notes included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those described under "Risk Factors" and elsewhere in this annual report.
Overview
We are a fully integrated alternative energy company and a leader in the development and production of advanced propulsion systems, energy storage technologies, and alternative fuel vehicles. We believe that we are uniquely positioned to integrate advanced fuel system, electric drive and battery control system technologies for fuel cell and hybrid vehicles based on our years of experience in vehicle-level design, vehicle electronics and system integration.
Our portfolio of technologies includes electronic controls, hybrid electric drive systems, hydrogen storage and metering systems, and alternative fuel technologies that enable fuel efficient, low emission hybrid, plug-in electric hybrid, fuel cell and alternative fuel vehicles. We provide powertrain engineering, system integration, manufacturing and assembly of packaged fuel systems and battery control systems for vehicles and other applications including fuel cells, hybrids, plug-in electric hybrid, alternative fuels, and hydrogen refueling. We also design, engineer and manufacture hybrid and fuel cell vehicles.
Our powertrain engineering, system integration, and assembly capabilities provide fast-to-market solutions to support the production of hybrid and plug-in hybrid, hydrogen-powered hybrid, fuel cell, and alternative fuel vehicles, as well as modular, transportable hydrogen refueling stations. Our customer base includes automotive Original Equipment Manufacturers (OEMs), military and governmental agencies, aerospace, and other strategic alliance partners.
We classify our business operations into two reporting segments: Quantum Fuel Systems and Corporate. The Corporate segment consists of general and administrative expenses incurred at the corporate level that are not directly attributable to the Quantum Fuel Systems segment. In prior years we had a third business segment-Tecstar Automotive Group business segment. As discussed more fully below under Recent Developments, the Tecstar Automotive Group business segment ceased operations on January 16, 2008, when we transferred substantially all of that segment's business operations to an affiliate of our lender. As a result of such transfer, the historical activities of the Tecstar Automotive Group business segment are now classified as discontinued operations. In addition, certain historical indirect expenses of the Corporate segment have been reclassified and are reported as discontinued operations.
The Quantum Fuel Systems business operations primarily consist of design, manufacture and supply of packaged fuel and electric drive and battery system technologies for use in fuel cell, hybrid, plug-in electric hybrid, hydrogen and other alternative fuel vehicles. This segment generates product revenues through the sale of hydrogen fuel storage, fuel delivery, and electronic control systems to OEMs, the installation of its systems into OEM vehicles, and the sale of transportable hydrogen refueling stations. Product revenues are also generated through the sale of compressed natural gas (CNG), propane (LPG), and hydrogen fuel storage, fuel delivery, and electronic control systems for internal combustion engine applications. In addition to product sales, the Quantum Fuel Systems segment generates contract revenue by providing engineering design and support to the OEMs so that its advanced propulsion systems integrate and operate with their fuel cell or hybrid applications. Contract revenue is also generated from customers in the aerospace industry, military and other government entities, and other strategic alliance partners.
Prior to its disposal, the Tecstar Automotive Group segment was comprised of virtually all of the business activities acquired via the merger with Tecstar Automotive Group in March 2005, and subsequent specialty
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vehicle business acquisitions. The Tecstar Automotive Group primarily consisted of second stage manufacturing of specialty equipment for General Motors' pick-up trucks and SUVs, engineering and design capabilities for concept vehicles, and distribution of conversion vehicles and automotive accessories through OEM dealer networks.
The chief operating decision maker allocates resources and tracks performance by the reporting segments, and evaluates performance based on profit or loss from operations before interest and income taxes.
Recent Developments
Disposal of Tecstar Business Segment
On January 11, 2008, Tecstar Automotive Group was in default of the January 1, 2008 semi-annual interest payment due to affiliates of our secured lender under terms of certain convertible note obligations (Tecstar Convertible Notes). As a result of the default, all the amounts due under the Tecstar Convertible Notes were immediately due and payable. On January 16, 2008, we completed a series of transactions with our secured lender that restructured our outstanding debt obligations and resulted in our transfer of substantially all of the assets of our Tecstar Automotive Group business segment to an affiliate of our secured lender, WB Automotive, Inc. (WB Automotive), as payment in full of the obligations due under the Tecstar Convertible Notes.
The transfer of the Tecstar business segment was structured as a strict foreclosure under Article 9 of the Uniform Commercial Code pursuant to which Tecstar Automotive Group and WB Automotive executed a Strict Foreclosure Agreement, pursuant to which, under Article 9 of the Uniform Commercial Code, Tecstar Automotive Group assigned to WB Automotive all of its right, title and interest in and to the equity interests in Tecstar's operating subsidiaries (the "Operating Subsidiaries"), Tecstar's interest in the Amstar joint venture, receivables owed to Tecstar by the Operating Subsidiaries and Tecstar's interest in a $1.0 million cash collateral account, in full payment and satisfaction of the amounts owed by Tecstar under the Tecstar Convertible Notes. WB Automotive also released Quantum from its guaranty of the Tecstar Convertible Notes and a $5.0 million term note provided to Tecstar Automotive Group by the Company's secured lender on November 6, 2007 (Tecstar Term Note). In exchange for the foregoing release, Quantum (i) caused Tecstar Automotive Group to enter into and complete the transactions described above, (ii) paid $1.0 million to WB Automotive and (iii) agreed to assume $0.7 million in unpaid interest owed under the Tecstar Convertible Notes. Our lender subsequently cancelled the Tecstar Term Note in a separate agreement.
As a result of the transactions described above that resulted in the disposal of the Tecstar businesses, the historical activities and balances of the Tecstar Automotive Group Business segment are reported as discontinued operations in the accompanying consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows for all periods presented in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets."
The disposal of the Tecstar businesses resulted in a gain of $8.6 million included in discontinued operations, net of taxes, for the year ended April 30, 2008 that resulted in part from concessions granted by our lender in restructuring the debt obligations. Prior to the restructuring, we had recorded significant losses for the Tecstar Automotive Group business segment attributable to the write-down of its long-lived assets and negative operating results reported in previous quarters.
Investment in Fisker Automotive
On August 7, 2007, our strategic partner, Fisker Coachbuild, LLC, and Quantum launched a new venture, Fisker Automotive, Inc. (Fisker Automotive), to produce premium plug-in hybrid automobiles. Initial deliveries of a four-door luxury sports sedan are anticipated to commence in the fourth quarter of calendar 2009. Upon formation, we owned 62% of Fisker Automotive. Through April 30, 2008, Fisker Automotive has raised a level of capital that has resulted in the dilution of our ownership interest down to 30.7%. We have two of Fisker
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Automotive's six seats on the Board of Directors. Fisker Automotive will need to raise additional capital in order to complete future phases of development, testing, and tooling for the new vehicle platform, which will further reduce our ownership percentage in Fisker Automotive.
We account for our equity interest in Fisker Automotive under the equity method of accounting in accordance with APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock," (APB 18). Due to the temporary nature of our majority interest in Fisker Automotive, we also accounted for our initial equity interest in Fisker Automotive under the equity method. Although Fisker Automotive is a variable interest entity as defined by Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46R), we are not the primary beneficiary as defined by FIN 46R.
Fisker Automotive has incurred accumulated deficits from inception through April 30, 2008 for design and development activities for the new vehicle platform. We have not contributed any cash or other assets with a historical cost basis to the venture and we have no obligation to fund deficit balances. As a result, our initial investment balance and balance as of April 30, 2008 is zero and there is no activity to be reported in our consolidated statement of operations for the year ended April 30, 2008.
We received $6.5 million in cash from Fisker Automotive during fiscal 2008 and recognized $2.2 million in contract revenue during this period. The cash received in excess of the revenue earned of $4.3 million is included as part of deferred revenue on the accompanying consolidated balance sheet as of April 30, 2008.
Investment in Asola
On January 4, 2008, we acquired a 24.9% ownership interest in asola Advanced and Automotive Solar Systems GmbH (Asola), a solar module manufacturer located in Erfurt, Germany. In exchange for the ownership interest, we (i) provided 0.3 million euro (US$0.4 million), (ii) committed to contribute an additional 1.2 million euro (US$1.9 million was contributed on May 8, 2008) to provide for capital equipment for the planned expansion of Asola's annual manufacturing capacity to approximately 40 to 45 mega watts peak (MWp), (iii) committed to provide a guaranty to Asola's bank of 1.0 million euro related to an anticipated expansion of Asola's bank financing arrangement, and (iv) committed to transfer 15.0% ownership interest in our solar venture in the United States, if and when such venture is established. The conversion rate of one euro to one U.S. dollar was 1.56 to 1 as of April 30, 2008. We account for our equity interest in Asola under the equity method of accounting in accordance with APB 18. Although Asola is a variable interest entity, we are not considered the primary beneficiary as defined by FIN 46R.
Asola has reported total assets of 11.3 million euro; total liabilities of 9.5 million euros, including debt obligations of 1.4 million euros, as of December 31, 2007 (unaudited); revenues of 24.9 million euro and net profits of 0.7 million euro for calendar year 2007 (unaudited); and revenues of 13.3 million euro and net profits of 0.9 million euro for the period January 1, 2008 to April 30, 2008 (unaudited). Our equity in earnings of Asola was US$0.3 million from the date of the equity investment through April 30, 2008.
On November 7, 2007 we entered into an agreement with Asola under which we agreed to purchase one-half of Asola's rights and obligations under a certain long-term solar cell supply agreement to which Asola is a party. Asola's obligations under the long-term solar cell supply agreement, dated November 1, 2007, includes the required purchase by Asola of solar cells with a cumulative power of 155 mega watts peak (MWp) for the period from January 1, 2008 through December 31, 2017 at predetermined fixed prices, with prepayments required by November 1, 2007 of 1.0 million euro, by September 1, 2008 of 3.0 million euro, and by September 1, 2009 of 5.0 million euro.
Our agreement to purchase one-half of Asola's rights and obligations under Asola's long-term solar cell supply agreement provides us with the rights to purchase 77.5 MWp. In consideration for Asola's sale of one-half
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of its contract rights to us, we paid Asola 1.0 million euro (US$1.4 million) on October 29, 2007 and agreed that we are responsible for up to 1.5 million euro of the prepayment due in 2008 and responsible for up to 2.5 million euro of the prepayment due in 2009. Our payment to Asola in October 2007 in connection with the solar cell arrangement is included in deposits and other assets on the accompanying consolidated balance sheet as of April 30, 2008. We anticipate that Asola will generate cash flows sufficient to cover a portion of the prepayments; however, if there is insufficient cash available within Asola operations, we will endeavor to raise funds specifically for Asola to cover the shortfall. We had not purchased any solar cells from Asola under the arrangement through April 30, 2008.
We believe these agreements secure a ten-year supply of silicon photovoltaic solar cells that we and Asola anticipate to utilize for the manufacture of solar modules for commercial, residential, and automotive applications in both Europe and the United States.
Quantum Fuel Systems Segment
Our Quantum Fuel Systems segment supplies our advanced gaseous fuel systems for alternative fuel vehicles to OEM customers for use by consumers and for commercial and government fleets. Since 1997, we have sold approximately 20,000 fuel systems for alternative fuel vehicles, primarily to General Motors, which in turn have sold substantially all of these vehicles to its customers. We also provide our propulsion systems and hydrogen storage products for hybrid and fuel cell applications to major OEMs through funded research and development contracts and on a prototype and production intent basis. These systems and hydrogen products are not currently manufactured in high volumes and will require additional product development; however, we believe that a commercial market will begin to develop for our hybrid propulsion system, Q-Drive, within the next two years. We expect a commercial market to develop for our hydrogen and fuel cell vehicle products further in the future. We believe that these systems will reach production volumes only if OEMs produce fuel cell applications and hydrogen products using our systems on a commercial basis.
A number of domestic and international automotive and industrial manufacturers are developing alternative clean power systems using fuel cells, hybrid systems or clean burning gaseous fuels in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. Our products for these markets consist primarily of fuel storage, fuel delivery, electronic vehicle control systems and battery control systems, as well as system integration of our products into fuel cell, hybrid, and alternative fuel vehicles, and hydrogen refueling products, which includes the complete design of fuel cell and hybrid vehicles to demonstrate our advanced fuel systems expertise.
In May 2007, we were awarded a $4.9 million contract to develop a diesel hybrid electric version of our Alternative Mobility Vehicle (AMV) "Aggressor." This program is a follow on to our successful "Aggressor" vehicle, a high performance light-duty off-road fuel cell hybrid vehicle developed for TARDEC. The objective of this program is to develop a second generation high performance light-duty off-road hybrid electric vehicle platform based on the results of and feedback from the U.S. Army's testing and evaluation of the Aggressor. The propulsion system for this next phase of AMV development will focus on a JP-8 fuel-compatible diesel internal combustion engine based, battery dominant, series hybrid electric system, which would provide a cost-effective, near-term solution as fuel cell technology matures. The target mission profile is long range reconnaissance. Pre-production prototypes will be developed and built for testing and evaluation by selected commands to assess mission suitability, supportability, performance objectives, and guidance on final vehicle configuration.
In July 2007, we were awarded a contract to supply ten hydrogen hybrid Priuses to VistOrka for use in Iceland's SMART-H2 project. The SMART-H2 will be one of the largest hydrogen demonstrations in the world.
In September 2007, we received a letter from General Motors nominating us as their hydrogen storage vessel supplier for their next generation of hydrogen storage systems under their fuel cell vehicle program. On November 21, 2007 we received initial purchase orders totaling $4.2 million for the program.
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In October 2007, we received an order for six hydrogen hybrid vehicles for the U.S. Army's Tank Automotive Research, Development and Engineering Center.
In November 2007, we began providing services to our affiliate, Fisker Automotive, on an initial concept analysis program associated with powertrain and software control systems for a production intent hybrid-electric vehicle under a $1.0 million arrangement. In January 2008, Fisker Automotive previewed their new plug-in hybrid four-door sport sedan, known as the "Fisker Karma," at the North American International Auto Show. The Fisker Karma is being engineered to achieve 50 miles of zero emission, battery-only range while providing combined gasoline-electric hybrid operation to enable uncompromised vehicle range and performance. The services under the first contract were completed in January 2008. On February 14, 2008, we were awarded a second contract for $13.5 million for the second phase of the development. Under the second phase, we will develop the powertrain and software control systems and integrate our PHEV architecture that we call "Q-Drive" for the Fisker Karma production model that is expected to have initial deliveries beginning in the fourth quarter of calendar 2009.
In March 2008, we announced we were selected by the U.S. Department of Energy for final negotiations for a contract to develop next-generation manufacturing technologies for hydrogen storage vessels. The total value of this project, which will be done in partnership with The Boeing Company, is $5.6 million over a three year period.
Our Quantum Fuel Systems segment revenues and cash flows in the future will be dependent on the success of the Fisker Karma, further advancement of OEM fuel cell technologies and our OEM customers' internal plans, spending levels and timing for pre-production development programs and commercial production. This segment depends on the industry-wide growth of the hybrid hydrogen, plug-in electric hybrid, fuel cell, and other alternative fuel markets, which in turn is dependent on regulations, laws, hydrogen availability and refueling, technology advancements, and consumer adoption of alternative fuel and hydrogen technologies on a commercial scale.
Our fuel storage systems must be able to withstand rigorous testing as individual components and as part of the fuel system of the vehicles. The fuel system as a whole, including the tank, regulator and fuel lines, need to comply with OEM vehicle requirements and applicable safety standards. Our systems are generally designed, validated and certified for short-term life, approximately three years, and are produced in accordance with requirements specified by our OEM customers. We currently have programs with OEMs to design, validate and certify systems for longer durability and for vehicles designed for commercialization.
Our Quantum Fuel Systems business is generally related to hybrid, fuel cell and alternative fuel vehicle development programs and product sales, which vary directly with the program timing and production schedules of our OEM and other customers. The market for these vehicles is sensitive to general economic conditions, government agency and commercial fleet spending and consumer preferences. The rate at which our customers sell hybrid, fuel cell or alternative fuel vehicles depends on their marketing and distribution strategy, as well as company specific inventory and incentive programs. Any significant reduction or increase in production of these vehicles by our OEM customers may have a material effect on our business. Our CNG program with General Motors was completed in November 2006. We anticipate that future programs for CNG applications will be in international markets, specifically Europe, China and India. In April, 2007, we signed a memorandum of understanding to establish a cooperative joint venture with a major automaker in China for the development and commercialization of hybrid and alternative fuel vehicles, manufacture of gaseous fuel components, and integration of advanced propulsion systems. We also signed a memorandum of understanding in May 2007 for the marketing, sales, and distribution in India of its leading alternative fuel vehicle products and systems for compressed natural gas (CNG), blends of natural gas and hydrogen, and liquid petroleum gas (LPG). We are currently in discussions with other parties to modify existing components and systems to meet specific vehicle applications for those markets.
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Our industry is also dependent upon a limited number of third party suppliers of materials and components for our products. Any quality problems or supply shortages with respect to these components could negatively impact our business.
Tecstar Automotive Group Segment
On January 16, 2008 we transferred substantially all the assets of the Tecstar Automotive Group, Inc. to an affiliate of our secured lender pursuant to a strict foreclosure under Article 9 of the Uniform Commercial Code. As a result of the transfer, the Tecstar Automotive Group business segment (formerly consisting of all of the Tecstar businesses and operating units) ceased operations for purposes of our financial reporting. The Tecstar Automotive Group segment, prior to its disposal, engineered and integrated specialty equipment products into motor vehicle applications, primarily General Motors' pick-up trucks and sport utility vehicles, provided vehicle build capabilities associated with military vehicle projects and provided design and powertrain services for high performance cars.
As a result of the disposal of the Tecstar businesses, all historical activities of the Tecstar Automotive Group business segment have been classified as discontinued operations in the accompanying consolidated statements of operations and consolidated statements of cash flows.
Financial Operations Overview
In managing our business, our management uses several financial and non-financial factors to analyze our performance. Financial factors include forecast to actual comparisons, analysis of revenue and cost trends, backlog of customer programs, and changes in levels of working capital. Non-financial factors include assessing the extent to which current programs are progressing in terms of timing and deliverables and the success to which our systems are interfacing with our customers' vehicle applications. We also assess the degree to which we secure additional programs or new programs from our current or new OEM customers and the level of government funding we receive for propulsion systems and storage solutions. We also evaluate the number of units shipped as part of current and new programs and evaluate the operations of our affiliates, Fisker Automotive, Asola and ALP.
For the fiscal years ended April 2006, 2007 and 2008, revenue related to sales of our products to and contracts with General Motors and its affiliates represented 71%, 70% and 64%, respectively, of our total consolidated revenue from continuing operations for these periods.
We recognize revenue for product sales upon shipment or when goods and systems are assembled on the vehicles and prepared and deliverable to our customers in accordance with our contract terms and collectibility is reasonably assured. Contract revenue is principally recognized based on the percentage of completion method. Revenues on certain other contracts are recognized on a time and materials basis as costs are incurred.
We expense all research and development when incurred. Research and development expense includes both customer-funded research and development and company-sponsored research and development. Customer-funded research and development consists primarily of expenses associated with contract revenue. These expenses include application development costs we funded under customer contracts. We will continue to require significant research and development expenditures over the next several years in order to commercialize our products for hybrid, hydrogen fuel cell and alternative fuel applications.
General Motors Relationship
In 2002, we entered into a ten-year strategic alliance with General Motors. We believe that our strategic alliance with General Motors will advance and commercialize, on a global basis, the integration of our gaseous storage and handling systems into fuel cell systems used in the transportation markets. Under the alliance, Quantum and General Motors have co-developed technologies that are designed to accelerate the
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commercialization of fuel cell applications. Additionally, General Motors will endorse Quantum as a recommended provider of hydrogen storage, hydrogen handling and associated electronic controls. This strategic alliance expands the relationship that has been in place between General Motors and Quantum since 1993, through which we provided packaged natural gas and propane fuel systems for General Motors' alternative fuel vehicle products.
Pursuant to the terms of our Amended and Restated Certificate of Incorporation, upon the completion of our January 2003 public offering, all of the outstanding 3,513,439 shares of Series A common stock held by General Motors converted on a one-for-one basis into Quantum common stock. We also issued an additional 999,969 shares of our non-voting Series B common stock to General Motors pursuant to General Motors' anti-dilution rights. As a result of the conversion of the Series A common stock, General Motors no longer has anti-dilution rights. We recorded the value of the shares issued to General Motors as an intangible asset at fair market value on the date of their respective issuance. We are amortizing this intangible asset over the ten-year term of the strategic alliance with General Motors, subject to periodic evaluation for impairment.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles and are included elsewhere in this report. The preparation of these consolidated . . .
Form 10-K for QUANTUM FUEL SYSTEMS TECHNOLOGIES WORLDWIDE INC
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3-Jul-2008
Annual Report
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations together with the consolidated financial statements and related notes included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those described under "Risk Factors" and elsewhere in this annual report.
Overview
We are a fully integrated alternative energy company and a leader in the development and production of advanced propulsion systems, energy storage technologies, and alternative fuel vehicles. We believe that we are uniquely positioned to integrate advanced fuel system, electric drive and battery control system technologies for fuel cell and hybrid vehicles based on our years of experience in vehicle-level design, vehicle electronics and system integration.
Our portfolio of technologies includes electronic controls, hybrid electric drive systems, hydrogen storage and metering systems, and alternative fuel technologies that enable fuel efficient, low emission hybrid, plug-in electric hybrid, fuel cell and alternative fuel vehicles. We provide powertrain engineering, system integration, manufacturing and assembly of packaged fuel systems and battery control systems for vehicles and other applications including fuel cells, hybrids, plug-in electric hybrid, alternative fuels, and hydrogen refueling. We also design, engineer and manufacture hybrid and fuel cell vehicles.
Our powertrain engineering, system integration, and assembly capabilities provide fast-to-market solutions to support the production of hybrid and plug-in hybrid, hydrogen-powered hybrid, fuel cell, and alternative fuel vehicles, as well as modular, transportable hydrogen refueling stations. Our customer base includes automotive Original Equipment Manufacturers (OEMs), military and governmental agencies, aerospace, and other strategic alliance partners.
We classify our business operations into two reporting segments: Quantum Fuel Systems and Corporate. The Corporate segment consists of general and administrative expenses incurred at the corporate level that are not directly attributable to the Quantum Fuel Systems segment. In prior years we had a third business segment-Tecstar Automotive Group business segment. As discussed more fully below under Recent Developments, the Tecstar Automotive Group business segment ceased operations on January 16, 2008, when we transferred substantially all of that segment's business operations to an affiliate of our lender. As a result of such transfer, the historical activities of the Tecstar Automotive Group business segment are now classified as discontinued operations. In addition, certain historical indirect expenses of the Corporate segment have been reclassified and are reported as discontinued operations.
The Quantum Fuel Systems business operations primarily consist of design, manufacture and supply of packaged fuel and electric drive and battery system technologies for use in fuel cell, hybrid, plug-in electric hybrid, hydrogen and other alternative fuel vehicles. This segment generates product revenues through the sale of hydrogen fuel storage, fuel delivery, and electronic control systems to OEMs, the installation of its systems into OEM vehicles, and the sale of transportable hydrogen refueling stations. Product revenues are also generated through the sale of compressed natural gas (CNG), propane (LPG), and hydrogen fuel storage, fuel delivery, and electronic control systems for internal combustion engine applications. In addition to product sales, the Quantum Fuel Systems segment generates contract revenue by providing engineering design and support to the OEMs so that its advanced propulsion systems integrate and operate with their fuel cell or hybrid applications. Contract revenue is also generated from customers in the aerospace industry, military and other government entities, and other strategic alliance partners.
Prior to its disposal, the Tecstar Automotive Group segment was comprised of virtually all of the business activities acquired via the merger with Tecstar Automotive Group in March 2005, and subsequent specialty
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vehicle business acquisitions. The Tecstar Automotive Group primarily consisted of second stage manufacturing of specialty equipment for General Motors' pick-up trucks and SUVs, engineering and design capabilities for concept vehicles, and distribution of conversion vehicles and automotive accessories through OEM dealer networks.
The chief operating decision maker allocates resources and tracks performance by the reporting segments, and evaluates performance based on profit or loss from operations before interest and income taxes.
Recent Developments
Disposal of Tecstar Business Segment
On January 11, 2008, Tecstar Automotive Group was in default of the January 1, 2008 semi-annual interest payment due to affiliates of our secured lender under terms of certain convertible note obligations (Tecstar Convertible Notes). As a result of the default, all the amounts due under the Tecstar Convertible Notes were immediately due and payable. On January 16, 2008, we completed a series of transactions with our secured lender that restructured our outstanding debt obligations and resulted in our transfer of substantially all of the assets of our Tecstar Automotive Group business segment to an affiliate of our secured lender, WB Automotive, Inc. (WB Automotive), as payment in full of the obligations due under the Tecstar Convertible Notes.
The transfer of the Tecstar business segment was structured as a strict foreclosure under Article 9 of the Uniform Commercial Code pursuant to which Tecstar Automotive Group and WB Automotive executed a Strict Foreclosure Agreement, pursuant to which, under Article 9 of the Uniform Commercial Code, Tecstar Automotive Group assigned to WB Automotive all of its right, title and interest in and to the equity interests in Tecstar's operating subsidiaries (the "Operating Subsidiaries"), Tecstar's interest in the Amstar joint venture, receivables owed to Tecstar by the Operating Subsidiaries and Tecstar's interest in a $1.0 million cash collateral account, in full payment and satisfaction of the amounts owed by Tecstar under the Tecstar Convertible Notes. WB Automotive also released Quantum from its guaranty of the Tecstar Convertible Notes and a $5.0 million term note provided to Tecstar Automotive Group by the Company's secured lender on November 6, 2007 (Tecstar Term Note). In exchange for the foregoing release, Quantum (i) caused Tecstar Automotive Group to enter into and complete the transactions described above, (ii) paid $1.0 million to WB Automotive and (iii) agreed to assume $0.7 million in unpaid interest owed under the Tecstar Convertible Notes. Our lender subsequently cancelled the Tecstar Term Note in a separate agreement.
As a result of the transactions described above that resulted in the disposal of the Tecstar businesses, the historical activities and balances of the Tecstar Automotive Group Business segment are reported as discontinued operations in the accompanying consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows for all periods presented in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets."
The disposal of the Tecstar businesses resulted in a gain of $8.6 million included in discontinued operations, net of taxes, for the year ended April 30, 2008 that resulted in part from concessions granted by our lender in restructuring the debt obligations. Prior to the restructuring, we had recorded significant losses for the Tecstar Automotive Group business segment attributable to the write-down of its long-lived assets and negative operating results reported in previous quarters.
Investment in Fisker Automotive
On August 7, 2007, our strategic partner, Fisker Coachbuild, LLC, and Quantum launched a new venture, Fisker Automotive, Inc. (Fisker Automotive), to produce premium plug-in hybrid automobiles. Initial deliveries of a four-door luxury sports sedan are anticipated to commence in the fourth quarter of calendar 2009. Upon formation, we owned 62% of Fisker Automotive. Through April 30, 2008, Fisker Automotive has raised a level of capital that has resulted in the dilution of our ownership interest down to 30.7%. We have two of Fisker
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Automotive's six seats on the Board of Directors. Fisker Automotive will need to raise additional capital in order to complete future phases of development, testing, and tooling for the new vehicle platform, which will further reduce our ownership percentage in Fisker Automotive.
We account for our equity interest in Fisker Automotive under the equity method of accounting in accordance with APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock," (APB 18). Due to the temporary nature of our majority interest in Fisker Automotive, we also accounted for our initial equity interest in Fisker Automotive under the equity method. Although Fisker Automotive is a variable interest entity as defined by Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46R), we are not the primary beneficiary as defined by FIN 46R.
Fisker Automotive has incurred accumulated deficits from inception through April 30, 2008 for design and development activities for the new vehicle platform. We have not contributed any cash or other assets with a historical cost basis to the venture and we have no obligation to fund deficit balances. As a result, our initial investment balance and balance as of April 30, 2008 is zero and there is no activity to be reported in our consolidated statement of operations for the year ended April 30, 2008.
We received $6.5 million in cash from Fisker Automotive during fiscal 2008 and recognized $2.2 million in contract revenue during this period. The cash received in excess of the revenue earned of $4.3 million is included as part of deferred revenue on the accompanying consolidated balance sheet as of April 30, 2008.
Investment in Asola
On January 4, 2008, we acquired a 24.9% ownership interest in asola Advanced and Automotive Solar Systems GmbH (Asola), a solar module manufacturer located in Erfurt, Germany. In exchange for the ownership interest, we (i) provided 0.3 million euro (US$0.4 million), (ii) committed to contribute an additional 1.2 million euro (US$1.9 million was contributed on May 8, 2008) to provide for capital equipment for the planned expansion of Asola's annual manufacturing capacity to approximately 40 to 45 mega watts peak (MWp), (iii) committed to provide a guaranty to Asola's bank of 1.0 million euro related to an anticipated expansion of Asola's bank financing arrangement, and (iv) committed to transfer 15.0% ownership interest in our solar venture in the United States, if and when such venture is established. The conversion rate of one euro to one U.S. dollar was 1.56 to 1 as of April 30, 2008. We account for our equity interest in Asola under the equity method of accounting in accordance with APB 18. Although Asola is a variable interest entity, we are not considered the primary beneficiary as defined by FIN 46R.
Asola has reported total assets of 11.3 million euro; total liabilities of 9.5 million euros, including debt obligations of 1.4 million euros, as of December 31, 2007 (unaudited); revenues of 24.9 million euro and net profits of 0.7 million euro for calendar year 2007 (unaudited); and revenues of 13.3 million euro and net profits of 0.9 million euro for the period January 1, 2008 to April 30, 2008 (unaudited). Our equity in earnings of Asola was US$0.3 million from the date of the equity investment through April 30, 2008.
On November 7, 2007 we entered into an agreement with Asola under which we agreed to purchase one-half of Asola's rights and obligations under a certain long-term solar cell supply agreement to which Asola is a party. Asola's obligations under the long-term solar cell supply agreement, dated November 1, 2007, includes the required purchase by Asola of solar cells with a cumulative power of 155 mega watts peak (MWp) for the period from January 1, 2008 through December 31, 2017 at predetermined fixed prices, with prepayments required by November 1, 2007 of 1.0 million euro, by September 1, 2008 of 3.0 million euro, and by September 1, 2009 of 5.0 million euro.
Our agreement to purchase one-half of Asola's rights and obligations under Asola's long-term solar cell supply agreement provides us with the rights to purchase 77.5 MWp. In consideration for Asola's sale of one-half
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of its contract rights to us, we paid Asola 1.0 million euro (US$1.4 million) on October 29, 2007 and agreed that we are responsible for up to 1.5 million euro of the prepayment due in 2008 and responsible for up to 2.5 million euro of the prepayment due in 2009. Our payment to Asola in October 2007 in connection with the solar cell arrangement is included in deposits and other assets on the accompanying consolidated balance sheet as of April 30, 2008. We anticipate that Asola will generate cash flows sufficient to cover a portion of the prepayments; however, if there is insufficient cash available within Asola operations, we will endeavor to raise funds specifically for Asola to cover the shortfall. We had not purchased any solar cells from Asola under the arrangement through April 30, 2008.
We believe these agreements secure a ten-year supply of silicon photovoltaic solar cells that we and Asola anticipate to utilize for the manufacture of solar modules for commercial, residential, and automotive applications in both Europe and the United States.
Quantum Fuel Systems Segment
Our Quantum Fuel Systems segment supplies our advanced gaseous fuel systems for alternative fuel vehicles to OEM customers for use by consumers and for commercial and government fleets. Since 1997, we have sold approximately 20,000 fuel systems for alternative fuel vehicles, primarily to General Motors, which in turn have sold substantially all of these vehicles to its customers. We also provide our propulsion systems and hydrogen storage products for hybrid and fuel cell applications to major OEMs through funded research and development contracts and on a prototype and production intent basis. These systems and hydrogen products are not currently manufactured in high volumes and will require additional product development; however, we believe that a commercial market will begin to develop for our hybrid propulsion system, Q-Drive, within the next two years. We expect a commercial market to develop for our hydrogen and fuel cell vehicle products further in the future. We believe that these systems will reach production volumes only if OEMs produce fuel cell applications and hydrogen products using our systems on a commercial basis.
A number of domestic and international automotive and industrial manufacturers are developing alternative clean power systems using fuel cells, hybrid systems or clean burning gaseous fuels in order to decrease fuel costs, lessen dependence on crude oil and reduce harmful emissions. Our products for these markets consist primarily of fuel storage, fuel delivery, electronic vehicle control systems and battery control systems, as well as system integration of our products into fuel cell, hybrid, and alternative fuel vehicles, and hydrogen refueling products, which includes the complete design of fuel cell and hybrid vehicles to demonstrate our advanced fuel systems expertise.
In May 2007, we were awarded a $4.9 million contract to develop a diesel hybrid electric version of our Alternative Mobility Vehicle (AMV) "Aggressor." This program is a follow on to our successful "Aggressor" vehicle, a high performance light-duty off-road fuel cell hybrid vehicle developed for TARDEC. The objective of this program is to develop a second generation high performance light-duty off-road hybrid electric vehicle platform based on the results of and feedback from the U.S. Army's testing and evaluation of the Aggressor. The propulsion system for this next phase of AMV development will focus on a JP-8 fuel-compatible diesel internal combustion engine based, battery dominant, series hybrid electric system, which would provide a cost-effective, near-term solution as fuel cell technology matures. The target mission profile is long range reconnaissance. Pre-production prototypes will be developed and built for testing and evaluation by selected commands to assess mission suitability, supportability, performance objectives, and guidance on final vehicle configuration.
In July 2007, we were awarded a contract to supply ten hydrogen hybrid Priuses to VistOrka for use in Iceland's SMART-H2 project. The SMART-H2 will be one of the largest hydrogen demonstrations in the world.
In September 2007, we received a letter from General Motors nominating us as their hydrogen storage vessel supplier for their next generation of hydrogen storage systems under their fuel cell vehicle program. On November 21, 2007 we received initial purchase orders totaling $4.2 million for the program.
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In October 2007, we received an order for six hydrogen hybrid vehicles for the U.S. Army's Tank Automotive Research, Development and Engineering Center.
In November 2007, we began providing services to our affiliate, Fisker Automotive, on an initial concept analysis program associated with powertrain and software control systems for a production intent hybrid-electric vehicle under a $1.0 million arrangement. In January 2008, Fisker Automotive previewed their new plug-in hybrid four-door sport sedan, known as the "Fisker Karma," at the North American International Auto Show. The Fisker Karma is being engineered to achieve 50 miles of zero emission, battery-only range while providing combined gasoline-electric hybrid operation to enable uncompromised vehicle range and performance. The services under the first contract were completed in January 2008. On February 14, 2008, we were awarded a second contract for $13.5 million for the second phase of the development. Under the second phase, we will develop the powertrain and software control systems and integrate our PHEV architecture that we call "Q-Drive" for the Fisker Karma production model that is expected to have initial deliveries beginning in the fourth quarter of calendar 2009.
In March 2008, we announced we were selected by the U.S. Department of Energy for final negotiations for a contract to develop next-generation manufacturing technologies for hydrogen storage vessels. The total value of this project, which will be done in partnership with The Boeing Company, is $5.6 million over a three year period.
Our Quantum Fuel Systems segment revenues and cash flows in the future will be dependent on the success of the Fisker Karma, further advancement of OEM fuel cell technologies and our OEM customers' internal plans, spending levels and timing for pre-production development programs and commercial production. This segment depends on the industry-wide growth of the hybrid hydrogen, plug-in electric hybrid, fuel cell, and other alternative fuel markets, which in turn is dependent on regulations, laws, hydrogen availability and refueling, technology advancements, and consumer adoption of alternative fuel and hydrogen technologies on a commercial scale.
Our fuel storage systems must be able to withstand rigorous testing as individual components and as part of the fuel system of the vehicles. The fuel system as a whole, including the tank, regulator and fuel lines, need to comply with OEM vehicle requirements and applicable safety standards. Our systems are generally designed, validated and certified for short-term life, approximately three years, and are produced in accordance with requirements specified by our OEM customers. We currently have programs with OEMs to design, validate and certify systems for longer durability and for vehicles designed for commercialization.
Our Quantum Fuel Systems business is generally related to hybrid, fuel cell and alternative fuel vehicle development programs and product sales, which vary directly with the program timing and production schedules of our OEM and other customers. The market for these vehicles is sensitive to general economic conditions, government agency and commercial fleet spending and consumer preferences. The rate at which our customers sell hybrid, fuel cell or alternative fuel vehicles depends on their marketing and distribution strategy, as well as company specific inventory and incentive programs. Any significant reduction or increase in production of these vehicles by our OEM customers may have a material effect on our business. Our CNG program with General Motors was completed in November 2006. We anticipate that future programs for CNG applications will be in international markets, specifically Europe, China and India. In April, 2007, we signed a memorandum of understanding to establish a cooperative joint venture with a major automaker in China for the development and commercialization of hybrid and alternative fuel vehicles, manufacture of gaseous fuel components, and integration of advanced propulsion systems. We also signed a memorandum of understanding in May 2007 for the marketing, sales, and distribution in India of its leading alternative fuel vehicle products and systems for compressed natural gas (CNG), blends of natural gas and hydrogen, and liquid petroleum gas (LPG). We are currently in discussions with other parties to modify existing components and systems to meet specific vehicle applications for those markets.
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Our industry is also dependent upon a limited number of third party suppliers of materials and components for our products. Any quality problems or supply shortages with respect to these components could negatively impact our business.
Tecstar Automotive Group Segment
On January 16, 2008 we transferred substantially all the assets of the Tecstar Automotive Group, Inc. to an affiliate of our secured lender pursuant to a strict foreclosure under Article 9 of the Uniform Commercial Code. As a result of the transfer, the Tecstar Automotive Group business segment (formerly consisting of all of the Tecstar businesses and operating units) ceased operations for purposes of our financial reporting. The Tecstar Automotive Group segment, prior to its disposal, engineered and integrated specialty equipment products into motor vehicle applications, primarily General Motors' pick-up trucks and sport utility vehicles, provided vehicle build capabilities associated with military vehicle projects and provided design and powertrain services for high performance cars.
As a result of the disposal of the Tecstar businesses, all historical activities of the Tecstar Automotive Group business segment have been classified as discontinued operations in the accompanying consolidated statements of operations and consolidated statements of cash flows.
Financial Operations Overview
In managing our business, our management uses several financial and non-financial factors to analyze our performance. Financial factors include forecast to actual comparisons, analysis of revenue and cost trends, backlog of customer programs, and changes in levels of working capital. Non-financial factors include assessing the extent to which current programs are progressing in terms of timing and deliverables and the success to which our systems are interfacing with our customers' vehicle applications. We also assess the degree to which we secure additional programs or new programs from our current or new OEM customers and the level of government funding we receive for propulsion systems and storage solutions. We also evaluate the number of units shipped as part of current and new programs and evaluate the operations of our affiliates, Fisker Automotive, Asola and ALP.
For the fiscal years ended April 2006, 2007 and 2008, revenue related to sales of our products to and contracts with General Motors and its affiliates represented 71%, 70% and 64%, respectively, of our total consolidated revenue from continuing operations for these periods.
We recognize revenue for product sales upon shipment or when goods and systems are assembled on the vehicles and prepared and deliverable to our customers in accordance with our contract terms and collectibility is reasonably assured. Contract revenue is principally recognized based on the percentage of completion method. Revenues on certain other contracts are recognized on a time and materials basis as costs are incurred.
We expense all research and development when incurred. Research and development expense includes both customer-funded research and development and company-sponsored research and development. Customer-funded research and development consists primarily of expenses associated with contract revenue. These expenses include application development costs we funded under customer contracts. We will continue to require significant research and development expenditures over the next several years in order to commercialize our products for hybrid, hydrogen fuel cell and alternative fuel applications.
General Motors Relationship
In 2002, we entered into a ten-year strategic alliance with General Motors. We believe that our strategic alliance with General Motors will advance and commercialize, on a global basis, the integration of our gaseous storage and handling systems into fuel cell systems used in the transportation markets. Under the alliance, Quantum and General Motors have co-developed technologies that are designed to accelerate the
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commercialization of fuel cell applications. Additionally, General Motors will endorse Quantum as a recommended provider of hydrogen storage, hydrogen handling and associated electronic controls. This strategic alliance expands the relationship that has been in place between General Motors and Quantum since 1993, through which we provided packaged natural gas and propane fuel systems for General Motors' alternative fuel vehicle products.
Pursuant to the terms of our Amended and Restated Certificate of Incorporation, upon the completion of our January 2003 public offering, all of the outstanding 3,513,439 shares of Series A common stock held by General Motors converted on a one-for-one basis into Quantum common stock. We also issued an additional 999,969 shares of our non-voting Series B common stock to General Motors pursuant to General Motors' anti-dilution rights. As a result of the conversion of the Series A common stock, General Motors no longer has anti-dilution rights. We recorded the value of the shares issued to General Motors as an intangible asset at fair market value on the date of their respective issuance. We are amortizing this intangible asset over the ten-year term of the strategic alliance with General Motors, subject to periodic evaluation for impairment.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles and are included elsewhere in this report. The preparation of these consolidated . . .
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