10-Q 1 d10q.txt FORM 10-Q DATED JANUARY 31, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended January 31, 2002, or [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________________ to ____________________ Commission File No. 0-16115 IMPCO Technologies, Inc. (Exact name of registrant as specified in its charter) Delaware 91-1039211 -------- ---------- (State of Incorporation) (IRS Employer I.D. No.) 16804 Gridley Place, Cerritos, CA 90703 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (562) 860-6666 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Number of shares outstanding of each of the issuer's classes of common stock, as of March 11, 2002: 12,593,694 shares of Common Stock, $.001 par value per share. INDEX IMPCO TECHNOLOGIES, INC. Part I. Financial Information Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets - April 30, 2001 and January 31, 2002 Condensed consolidated statements of operations - Three and nine months ended January 31, 2001 and January 31, 2002 Condensed consolidated statements of cash flows - Nine months ended January 31, 2001 and January 31, 2002 Notes to condensed consolidated financial statements - January 31, 2002 Pro Forma condensed consolidated balance sheet - January 31, 2002 Pro Forma condensed consolidated statements of operations - January 31, 2002 Pro Forma condensed consolidated statements of operations - April 30, 2001 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure of Market Risk Part II. Other Information Item 1. Legal Proceedings Item 2. Changes in Securities and Use of Proceeds Item 6. Exhibits and Reports on Form 8-K Signatures 2 PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IMPCO TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS April 30, 2001 and January 31, 2002
April 30, January 31, 2001 2002 ------------ ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents ............................... $ 16,591,415 $ 22,198,699 Accounts receivable, less allowance for doubtful accounts 24,464,971 15,655,891 Inventories: Raw materials and parts ............................... 20,675,003 18,902,259 Work-in-process ....................................... 740,972 323,018 Finished goods ........................................ 9,935,020 13,304,295 ------------ ------------ Total inventories ................................ 31,350,995 32,529,572 Deferred tax assets ..................................... 2,168,679 2,698,311 Other current assets .................................... 5,060,028 3,905,362 ------------ ------------ Total current assets ................................... 79,636,088 76,987,835 Equipment and leasehold improvements Dies, molds and patterns ................................ 7,140,156 8,248,069 Machinery and equipment ................................. 12,388,246 14,234,495 Office furnishings and equipment ........................ 14,207,561 16,021,423 Automobiles and trucks .................................. 528,917 586,695 Leasehold improvements .................................. 4,478,685 4,808,286 ------------ ------------ 38,743,565 43,898,968 Less accumulated depreciation and amortization .......... 18,690,053 22,146,263 ------------ ------------ Net equipment and leasehold improvements ............... 20,053,512 21,752,705 Intangibles arising from acquisitions, net .................. 9,534,994 9,166,551 Deferred tax assets ......................................... 10,601,227 24,641,842 Other assets ................................................ 936,843 945,998 ------------ ------------ $120,762,664 $133,494.931 ============ ============
See accompanying notes to condensed consolidated financial statements. 3 IMPCO TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS April 30, 2001 and January 31, 2002 (Continued)
April 30, January 31, 2001 2002 ------------- ------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ......................................................... $ 11,713,680 $ 12,151,522 Accrued payroll obligations .............................................. 3,881,500 3,868,704 Other accrued expenses ................................................... 2,735,528 2,097,003 Income taxes payable ..................................................... -- 768,920 Current lines of credit .................................................. 6,078,205 14,145,882 Current maturities of long-term debt and capital leases .................. 3,680,158 4,391,513 ------------- ------------- Total current liabilities ............................................ 28,089,071 37,423,544 Term loans ................................................................. 6,870,693 5,951,348 Capital leases ............................................................. 1,127,583 733,729 Minority interest .......................................................... 2,044,122 2,318,811 Stockholders' equity: Preferred stock, $.001 par value, authorized 500,000 shares; none issued and outstanding at April 30, 2001 and January 31, 2002 ..................... -- -- Common stock, $.001 par value, authorized 100,000,000 shares; 12,593,694 issued and outstanding at January 31, 2002 (10,294,377 at April 30, 2001)... 10,294 12,594 Additional paid-in capital ................................................. 102,831,566 125,216,695 Shares held in trust ....................................................... (142,710) (308,077) Notes receivable from officers ............................................. (3,913,854) -- Accumulated deficit ........................................................ (12,434,966) (33,783,833) Accumulated other comprehensive loss ....................................... (3,719,135) (4,069,880) ------------- ------------- Total stockholders' equity ........................................... 82,631,195 87,067,499 ------------- ------------- $ 120,762,664 $ 133,494,931 ============= =============
See accompanying notes to condensed consolidated financial statements. 4 IMPCO TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited Three and Nine Months ended January 31, 2001 and 2002
Three Months Ended Nine Months Ended January 31, January 31, 2001 2002 2001 2002 ------------- ------------- ------------- ------------- Revenue: Product sales ................................................ $ 20,927,661 $ 15,948,077 $ 70,183,074 $ 62,276,055 Contract revenue ............................................. 1,115,919 1,367,776 6,480,061 4,952,676 ------------- ------------- ------------- ------------- Net revenue ................................................ 22,043,580 17,315,853 76,663,135 67,228,731 Costs and expenses: Cost of product sales ........................................ 14,918,342 13,977,859 48,778,541 51,420,612 Research and development expense ............................. 8,979,470 8,682,535 22,220,111 30,642,662 Selling, general and administrative expense .................. 6,175,489 6,099,761 16,784,999 19,384,963 ------------- ------------- ------------- ------------- Total costs and expenses .................................. 30,073,301 28,760,155 87,783,651 101,448,237 Operating loss .................................................. (8,029,721) (11,444,302) (11,120,516) (34,219,506) Interest expense (income), net .................................. (110,950) 349,655 136,499 904,124 ------------- ------------- ------------- ------------- Loss before income taxes and minority interest in income of consolidated subsidiaries ................................. (7,918,771) (11,793,957) (11,257,015) (35,123,630) Income tax benefit .............................................. (3,563,447) (4,728,816) (5,065,656) (14,049,452) Minority interest in income (loss) of consolidated subsidiaries (3,841) (44,701) 149,909 274,689 ------------- ------------- ------------- ------------- Net loss applicable to common stock ............................. $ (4,351,483) $ (7,020,440) $ (6,341,268) $ (21,348,867) ============= ============= ============= ============= Net loss per share: Basic ........................................................ $ (0.42) $ (0.64) $ (0.65) $ (2.01) ============= ============= ============= ============= Diluted ...................................................... $ (0.42) $ (0.64) $ (0.65) $ (2.01) ============= ============= ============= ============= Number of shares used in per share calculation: Basic ........................................................ 10,277,551 10,966,474 9,823,173 10,601,230 ============= ============= ============= ============= Diluted ...................................................... 10,277,551 10,966,474 9,823,173 10,601,230 ============= ============= ============= =============
See accompanying notes to consolidated financial statements. 5 IMPCO TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited Nine Months Ended January 31, 2001 and 2002
January 31, January 31, 2001 2002 ------------ ------------ Net cash used in operating activities ........................ $ (7,279,566) $(22,330,043) Cash flows from investing activities: Purchases of equipment and leasehold improvements ....... (8,925,162) (5,398,157) Purchase of intangible assets ........................... (128,991) (127,432) Proceeds from sales of equipment ........................ 3,500 59,061 Purchase of available-for-sale securities ............... (14,761,461) -- Sale of available-for-sale securities ................... 7,171,794 -- ------------ ------------ Net cash used in investing activities ........................ (16,584,759) (5,522,089) Cash flows from financing activities: Increase (decrease) in borrowings under lines of credit.. (16,035,924) 8,204,805 Payments to acquire shares held in trust ................ (32,390) (165,368) Proceeds/payments on term loans ......................... 2,482,724 (538,170) Payments from capital lease obligations ................. (485,304) (332,525) Proceeds from issuance of common stock .................. 53,105,133 22,397,751 Receipt of notes receivable from officers ............... -- 3,913,854 ------------ ------------ Net cash provided by financing activities .................... 39,034,239 33,480,347 Translation adjustment ....................................... (74,853) (20,931) ------------ ------------ Net increase in cash and cash equivalents .................... 15,095,061 5,607,284 Cash and cash equivalents at beginning of period ............. 3,012,236 16,591,415 ------------ ------------ Cash and cash equivalents at end of period ................... $ 18,107,297 $ 22,198,699 ============ ============
See accompanying notes to consolidated financial statements. 6 IMPCO TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS January 31, 2001 and 2002 1) BASIS OF PRESENTATION The accompanying condensed consolidated financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the financial position and operating results for the interim periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and the results of operations, contained in our Annual Report on Form 10-K for the fiscal year ended April 30, 2001. The consolidated financial statements of IMPCO Technologies, Inc. ("IMPCO" or the "Company") as of January 31, 2002 include the accounts of the Company and its majority owned subsidiary IMPCO-BERU Technologies B.V. ("IMPCO BV"), its majority owned subsidiary Grupo I.M.P.C.O. Mexicano, S. de R.L. de C.V. ("IMPCO Mexicano"), and its wholly owned subsidiaries IMPCO Technologies, Pty. Limited ("IMPCO Pty"), IMPCO Tech Japan K.K. ("IMPCO Japan"), Quantum Fuel Systems Technologies Worldwide, Inc. ("Quantum"), previously Quantum Technologies Worldwide, Inc., and its joint venture companies Minda Impco Technologies, Ltd., and Minda Impco Limited. The results of operations for the three and nine months ended January 31, 2002 are not necessarily indicative of the results that may be expected for the entire year ending April 30, 2002. Certain reclassifications have been made to prior period balances in order to conform to the current period presentation. The balance sheet at April 30, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended April 30, 2001. 2) EQUITY OFFERING On January 11, 2002, the Company completed a private placement of 2,000,000 shares of common stock at a price of $11.25 per share for $22.5 million. The Company also issued to the investors warrants to purchase an aggregate of 200,000 shares of common stock at an exercise price of $13.25 per share. Each purchaser was issued a warrant to purchase one-tenth of a share of common stock for each share of common stock purchased under the agreement. In addition, the Company issued warrants to purchase an aggregate of 100,000 shares of common stock to the placement agent in connection with the transaction. The warrants are exercisable at any time until January 11, 2006. On February 15, 2002, a resale registration statement for the shares of common stock and common stock underlying the warrants was declared effective by the Securities and Exchange Commission. 3) CASH AND CASH EQUIVALENTS The cash and cash equivalents on the balance sheet at January 31, 2002 include restricted cash of approximately $225,000 (or EURO 261,552) held at our IMPCO-BERU subsidiary. 7 4) DEBT PAYABLE Our debt payable is summarized as follows:
April 30, Jan 31, 2001 2002 ----------- ----------- Bank of America NT&SA Revolving line of credit ............................. $ 3,914,000 $12,500,000 Mexican peso line of credit .......................... 541,000 -- Term loans for acquisitions and capital expenditures.. 8,894,000 8,629,000 Capital lease and expenditure facilities ............. 1,436,000 957,000 Credit facility - Fortis Bank (formerly Mees Pierson) ......... 1,461,000 1,345,000 The Hong Kong and Shanghai Banking Corporation Ltd Term loan for acquisition ............................ 776,000 542,000 Line of credit ....................................... 162,000 301,000 Other capital leases .......................................... 572,000 720,000 Derivative instruments ........................................ -- 228,000 ----------- ----------- 17,756,000 25,222,000 Less current portion ................................. 9,758,000 18,537,000 ----------- ----------- $ 7,998,000 $ 6,685,000 =========== ===========
Loan Covenants and Collateral. The Bank of America credit facility contains certain restrictions, as well as limitations on other indebtedness, and is secured by substantially all of the Company's assets. In February 2002, the credit facility with Bank of America was amended to extend the maturity date of the Company's line of credit and term loans to March 31, 2002. On February 11, 2002, the Company received a commitment letter from Bank of America to provide for a long term financing facility and to assist with the Company's spin off of Quantum. The Company is in compliance with the credit facility restrictions. In June 1998, the Financial Accounting Standards Board issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133, as amended by SFAS 138), which is required to be adopted in years beginning after June 15, 2000. The Company has adopted the new Statement effective May 1, 2001. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value and reflected as income or expense. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against commitments through earnings or recognized in other comprehensive income until the hedge item is recognized in earnings. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings. The Company had no derivative financial instruments outstanding on May 1, 2001. It is the Company's policy to enter into interest rate swap contracts only to the extent necessary to reduce exposure to fluctuations in interest rates. The Company does not enter into interest rate swap contracts for speculative purposes. In the unlikely event that a counter party to a swap agreement fails to meet the terms of an interest rate swap contract, the Company's exposure is limited to the interest rate differential on the notional amount. The Company does not anticipate non-performance by the counter party. The Company has entered into one interest rate swap contract, which matures on September 30, 2004. At January 31, 2002, the notional amount of the swap was approximately $7.0 million with a fixed payment rate of 5.6% and a fluctuating receiving rate based upon LIBOR. The Company's weighted-average cost of funds was 5.3%, absent this swap agreement the weighted-average cost of funds would have been 4.9%. At January 31, 2002 the carrying value of the interest rate swap was $228,000 and is recorded as a liability. During the nine months ended January 31, 2002, the Company recorded a loss of $137,000 net of an applicable income tax benefit of $91,000 in comprehensive income in order to account for the change in fair value. There is no impact to current earnings due to hedge ineffectiveness. 5) NOTES RECEIVABLE FROM OFFICERS On March 2, 2001, the Board of Directors authorized loans to three officers of the Company for the exercise of options to purchase Company common stock from former stockholders. Each of these loans was repaid in full in July 2001. 8 6) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Nine Months Ended January 31, January 31, 2001 2002 2001 2002 ------------- ------------- ------------- ------------- Numerator: Net loss ................................... $ (4,351,483) $ (7,020,440) $ (6,341,268) $(21,348,867) Numerator for basic earnings per share - loss to common stockholders ........... (4,351,483) (7,020,440) (6,341,268) (21,348,867) Numerator for diluted earnings per share - loss to common stockholders ........... (4,351,483) (7,020,440) (6,341,268) (21,348,867) Denominator: Denominator for basic earnings per share - weighted-average shares ............... 10,277,551 10,966,474 9,823,173 10,601,230 Denominator for diluted earnings per share - adjusted weighted-average shares ...... 10,277,551 10,966,474 9,823,173 10,601,230 ------------ ------------ ------------ ------------ Basic earnings per share ......................... $ (0.42) $ (0.64) $ (0.65) $ (2.01) ============ ============ ============ ============ Diluted earnings per share ....................... $ (0.42) $ (0.64) $ (0.65) $ (2.01) ============ ============ ============ ============
7) COMPREHENSIVE LOSS The components of comprehensive income for the three month and nine month periods ended January 31, 2001 and January 31, 2002, are as follows:
Three Months Nine Months Ended January 31, Ended January 31, ----------------------------- ----------------------------- 2001 2002 2001 2002 ------------- ------------- ------------- ------------- Net loss ...................................... $ (4,351,483) $ (7,020,440) $ (6,341,268) $(21,348,867) Foreign currency translation adjustment ....... 643,568 (20,512) (252,354) (213,739) Unrealized gain/(loss) on derivative instrument 36,211 56,440 36,211 (137,006) ------------ ------------ ------------ ------------ Comprehensive loss ........................... $ (3,671,704) $ (6,984,512) $ (6,557,411) $(21,699,612) ============ ============ ============ ============
8) BUSINESS SEGMENT INFORMATION The Company classifies its business into three operating segments: the Quantum division (formerly known as the Automotive OEM division), Gaseous Fuel Products division and International Operations. The Quantum division generates revenues through the sale of fuel storage, fuel delivery, and electronic control systems to OEMs, primarily General Motors, and the installation of its products into OEM vehicles. Quantum also generates contract revenue by providing engineering design and support to the OEMs so that its fuel storage, fuel delivery and electronic control systems integrate and operate with certain of their alternative fuel vehicles. The Gaseous Fuel Products division sells products, including parts and conversion systems, for applications in the transportation, material handling, stationary and portable power generator and general industrial markets. The International Operations in Asia, Australia, Europe, Japan and Mexico provide distribution for the Company's products, predominantly from the Gaseous Fuel Products division and some product assembly. The Quantum division will continue to require significant research and development expenditures over the next several years in order to commercialize its products for fuel cell applications. The Quantum division will also require significant capital expenditures to construct additional manufacturing and assembly capacity required to support the production of its products. The Company recognizes revenue for product sales when products are shipped and title is transferred. Contract revenues are recognized based on the percentage of completion method. Corporate expenses represent a sub-category of selling, general and administrative expense. Corporate expenses consist of general and administrative expense incurred at the corporate level and includes 9 the amortization of goodwill and other intangible assets. Intersegment eliminations are primarily the result of intercompany sales from the Gaseous Fuel Products division to the International Operations. End markets for the Company's products include the transportation, material handling, and industrial and power generation industries. The Company expenses 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 applications development costs at Quantum funded under customer contracts. Net revenues and operating income for the Company's business segments for the three and nine months ended January 31, 2001 and 2002 are as follows:
================================================================================================ Revenues ------------------------------------------------------------------------------------------------ (in thousands) Three Months Ended Nine Months Ended January 31, January 31, ----------- ----------- 2001 2002 2001 2002 ---- ---- ---- ---- Quantum $ 3,898 $ 3,517 $ 15,756 $ 16,286 Gaseous Fuel Products 14,284 10,199 50,309 40,081 International Operations 7,751 6,805 23,547 24,462 Intersegment Elimination (3,889) (3,205) (12,949) (13,600) ------------ ------------ ------------ ------------ ------------------------------------------------------------------------------------------------ Total $22,044 $17,316 $ 76,663 $ 67,229 ================================================================================================
=============================================================================================== Operating Income/Loss ----------------------------------------------------------------------------------------------- (in thousands) Three Months Ended Nine Months Ended January 31, January 31, ----------- ----------- 2001 2002 2001 2002 ---- ---- ---- ---- Quantum $(8,381) $ (9,396) $(15,765) $ (32,289) Gaseous Fuel Products 2,171 73 8,963 3,172 International Operations 105 (448) 973 1,067 Corporate Expenses (1) (1,895) (1,601) (5,057) (6,318) Intersegment Elimination (30) (72) (235) 148 ----------------------------------------------------------------------------------------------- Total $(8,030) $ (11,444) $(11,121) $ (34,220) ===============================================================================================
(1) Represents corporate expenses not allocated to any of the operating segments. 9) INCOME TAXES Income taxes for the three and nine months ended January 31, 2002 were computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to ongoing review and evaluation by management. For the three months ended January 31, 2002 the Company received income tax refunds from fiscal years 1999, 2000, and 2001 totaling approximately $1.5 million. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes. The Company believes, based on its history of prior operating earnings, its intent to spin-off the Quantum division and its expectations of future earnings, that operating income of the Company will more likely than not be sufficient to recognize fully these net deferred tax assets. Should the spin-off of Quantum not occur, management will take appropriate action in an attempt to realize its deferred tax assets. 10 IMPCO TECHNOLOGIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS On June 12, 2001, we announced a strategic alliance between our Quantum subsidiary and General Motors in which General Motors would acquire an equity position in our Quantum subsidiary. The strategic alliance with General Motors is conditioned on our spin-off of Quantum, which we announced on June 14, 2001. On February 13, 2002, Quantum filed its Form 10 for the registration of its common stock under the Securities Exchange Act of 1934, as amended. We intend to accomplish the spin-off by means of a tax-free distribution of Quantum common stock to our stockholders prior to our fiscal 2002 year-end. The spin-off is subject to a number of conditions, including the receipt of an opinion from our tax counsel or a private letter ruling from the Internal Revenue Service that the spin-off will be tax-free to our stockholders for federal income tax purposes. We cannot assure you that the spin-off will occur as planned, if at all. In the event the spin-off of Quantum is not consummated, both Quantum and General Motors intend to establish an alliance in another arrangement. The following unaudited pro forma condensed consolidated financial statements have been prepared to illustrate the effect of our intended spin-off of Quantum in accordance with Article 11 of Regulation S-X. The unaudited pro forma condensed consolidated balance sheet illustrates the post spin-off balance sheet of IMPCO Technologies, Inc. as of January 31, 2002. The unaudited pro forma condensed consolidated statement of income illustrates the post spin-off statement of income of IMPCO Technologies, Inc. for the nine months ended January 31, 2002 as if the spin-off had occurred on May 1, 2001 and for the fiscal year ended April 30, 2001 as if the spin-off had occurred on May 1, 2000. The pro forma adjustments are based upon available information and upon certain assumptions that management believes are reasonable under the circumstances. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the historical financial statements of IMPCO Technologies, Inc., and the notes thereto. The unaudited pro forma condensed consolidated financial statements do not purport to represent what our actual results of operations or actual financial position would have been if the spin-off of Quantum in fact occurred on such dates or to project our results of operations or financial position for any such future period or date. 11 IMPCO TECHNOLOGIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS January 31, 2002
Pro Forma IMPCO Historical Pro Forma Excluding IMPCO Quantum (1) Adjustments Quantum ------------ ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents .................... $ 22,198,699 $ 1,059,735 $ 20,000,000(2) $ 1,138,964 Accounts receivable, less allowance for doubtful accounts .......................... 15,655,891 3,810,649 -- 11,845,242 Inventories .................................. 32,529,572 11,959,818 -- 20,569,754 Deferred tax assets .......................... 2,698,311 -- -- 2,698,311 Other current assets ......................... 3,905,362 1,781,908 -- 2,123,454 ------------ ------------ ------------ ------------ Total current assets ...................... 76,987,835 18,612,110 20,000,000 38,375,725 Equipment and leasehold improvements: Dies, molds and patterns ..................... 8,248,069 2,519,017 -- 5,729,052 Machinery and equipment ...................... 14,234,495 8,161,785 -- 6,072,710 Office furnishings and equipment ............. 16,021,423 7,990,527 -- 8,030,896 Automobiles and trucks ....................... 586,695 181,175 -- 405,520 Leasehold improvements ....................... 4,808,286 2,443,031 -- 2,365,255 ------------ ------------ ------------ ------------ 43,898,968 21,295,535 -- 22,603,433 Less accumulated depreciation and amortization 22,146,263 7,414,472 -- 14,731,791 ------------ ------------ ------------ ------------ Net equipment and leasehold improvements .. 21,752,705 13,881,063 -- 7,871,642 Intangibles arising from acquisitions, net ........ 9,166,551 -- -- 9,166,551 Deferred tax assets ............................... 24,641,842 -- -- 24,641,842 Other assets ...................................... 945,998 -- -- 945,998 ------------ ------------ ------------ ------------ $133,494,931 $ 32,493,173 $ 20,000,000 $ 81,001,758 ============ ============ ============ ============
See accompanying notes to pro forma condensed consolidated financial statements. 12 IMPCO TECHNOLOGIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS January 31, 2002 (Continued)
Pro Forma IMPCO Historical Pro Forma Excluding IMPCO Quantum (1) Adjustments Quantum ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................... $ 12,151,522 $ 8,423,452 -- $ 3,728,070 Accrued payroll obligations ................ 3,868,704 592,236 -- 3,276,468 Other accrued expenses ..................... 2,097,003 1,053,250 -- 1,043,753 Income taxes payable ....................... 768,920 -- -- 768,920 Current lines of credit .................... 14,145,882 12,000,000 -- 2,145,882 Current maturities of long-term debt and capital leases ......................... 4,391,513 188,832 -- 4,202,681 ------------- ------------- ------------- ------------- Total current liabilities .............. 37,423,544 22,257,770 -- 15,165,774 Term loans ...................................... 5,951,348 -- -- 5,951,348 Capital leases .................................. 733,729 170,388 -- 563,341 Minority interest ............................... 2,318,811 -- -- 2,318,811 Stockholders' equity: Preferred stock ............................ -- -- -- -- Common stock ............................... 12,594 -- -- 12,594 Additional paid-in capital ................. 125,216,695 10,065,015 20,000,000 95,151,680 Shares held in trust ....................... (308,077) -- -- (308,077) Accumulated deficit ........................ (33,783,833) -- -- (33,783,833) Accumulated other comprehensive income ..... (4,069,880) -- -- (4,069,880) ------------- ------------- ------------- ------------- Total stockholders' equity ............. 87,067,499 10,065,015 20,000,000 57,002,484 ------------- ------------- ------------- ------------- $ 133,494,931 $ 32,493,173 $ 20,000,000 $ 81,001,758 ============= ============= ============= =============
See accompanying notes to pro forma condensed consolidated financial statements. 13 IMPCO TECHNOLOGIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Nine months ended January 31, 2002
Pro Forma IMPCO Historical Pro Forma Excluding IMPCO Quantum (1) Adjustments Quantum ------------- ------------- ------------- ------------- Revenue: Product sales ................................ $ 62,276,055 $ 11,389,496 $ -- $ 50,886,559 Contract revenue ............................. 4,952,676 4,896,695 -- 55,981 ------------- ------------- ------------- ------------- Net revenue ............................. 67,228,731 16,286,191 50,942,540 Costs and expenses: Cost of product sales ........................ 51,420,612 18,512,553 -- 32,908,059 Research and development expense ............. 30,642,662 26,281,660 -- 4,361,002 Selling, general and administrative expense .. 19,384,963 3,781,487 1,307,390 (2) 14,296,086 ------------- ------------- ------------- ------------- Total costs and expenses .................. 101,448,237 48,575,700 1,307,390 51,565,147 Operating loss ..................................... (34,219,506) (32,289,509) (1,307,390) (622,607) Interest expense ................................... 904,124 291,748 -- 612,376 ------------- ------------- ------------- ------------- Loss before income taxes and minority interest in income of consolidated subsidiaries ..................... (35,123,630) (32,581,257) (1,307,390) (1,234,983) Income tax benefit ................................. (14,049,452) -- (13,555,459)(3) (493,993) Minority interest in income of consolidated subsidiaries ....................... 274,689 -- -- 274,689 ------------- ------------- ------------- ------------- Net loss applicable to common stock ........................................... $ (21,348,867) $ (32,581,257) $ (12,248,069) $ (1,015,679) ============= ============= ============= ============= Net loss per share: Basic ......................................... $ (2.01) $ (0.10) ============= ============= Diluted ....................................... $ (2.01) $ (0.10) ============= ============= Number of shares used in per share calculation: Basic ......................................... 10,601,230 10,601,230 ============= ============= Diluted ....................................... 10,601,230 10,601,230 ============= =============
14 IMPCO TECHNOLOGIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Year ended April 30, 2001
Pro Forma IMPCO Historical Pro Forma Excluding IMPCO Quantum (1) Adjustments Quantum ------------- ------------- ------------- ------------- Revenue: Product sales .............................. $ 95,986,664 $ 15,447,389 $ -- $ 80,539,275 Contract revenue ........................... 7,910,540 7,910,540 -- -- ------------- ------------- ------------- ------------- Net revenue ........................... 103,897,204 23,357,929 -- 80,539,275 Costs and expenses: Cost of product sales ...................... 68,951,003 19,452,343 -- 49,498,660 Research and development expense ........... 32,556,371 26,686,691 -- 5,869,680 Selling, general and administrative expense ................... 24,060,425 4,342,106 1,157,016 (2) 18,561,303 ------------- ------------- ------------- ------------- Total costs and expenses .............. 125,567,799 50,481,140 1,157,016 73,929,643 Operating income (loss) ....................... (21,670,595) (27,123,211) 1,157,016 6,609,632 Interest expense .............................. 1,417,281 (329,284) -- 1,087,997 Interest income ............................... (1,308,921) -- -- (1,308,921) ------------- ------------- ------------- ------------- Income (loss) before income taxes and minority interest in income of consolidated subsidiaries ................ (21,778,955) (27,452,495) 1,157,016 6,830,556 Income tax expense (benefit) .................. (8,929,370) -- (11,832,356)(3) 2,902,986 Minority interest in income of consolidated subsidiaries ................ 253,064 -- -- 253,064 ------------- ------------- ------------- ------------- Net income (loss) applicable to common stock .................................... $ (13,102,649) $ (27,452,495) $ (10,675,340) $ 3,674,506 ============= ============= ============= ============= Net income (loss) per share: Basic .................................... $ (1.32) $ 0.37 ============= ============= Diluted .................................. $ (1.32) $ 0.34 ============= ============= Number of shares used in per share calculation: Basic .................................... 9,934,700 9,934,700 ============= ============= Diluted .................................. 9,934,700 10,767,369 ============= =============
15 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Pro Forma Balance Sheet 1) Assets and liabilities directly attributable to Quantum at January 31, 2002. Additional paid-in capital represents the net book value of Quantum. 2) The adjustment to cash represents an $8.0 million cash infusion and a $12.0 million repayment of indebtedness at January 31, 2002. Pro Forma Statement of Income 1) Quantum historical operating results for the nine months ended January 31, 2002 and for the fiscal year ended April 30, 2001. 2) Specifically identified portion of corporate general and administrative expense directly attributable to Quantum for the six months ended January 31, 2002 and for the fiscal year ended April 30, 2001. The adjusted amount does not include any portion of expected on-going expenses of IMPCO. 3) The adjustment to income taxes represents the effect of Quantum research and development credits and operating losses. The effective income tax rate for IMPCO primarily represents the federal statutory rate plus state and foreign income taxes. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS -------------------------- This Report, including the Management's Discussion and Analysis which follows, contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our industry, our beliefs and assumptions. We use words such as "anticipate," "expect," "intend," "plan," "believe," "seek," "estimate," and variations of these words and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include, but are not limited to, the following: we may be unable to raise additional capital necessary to fund our operations and capitalize on market opportunities; our business depends on the growth of the alternative fuel market; Our proposed spin-off of our Quantum division is subject to various risks, including restrictions on our or Quantum's issuance of equity securities in order to maintain the tax-free status of the spin-off, and we could be subject to tax liability if the spin-off fails to qualify as tax-free under the Internal Revenue Code; our Quantum division depends on its relationship with General Motors and the commitment of General Motors to the development of the alternative fuel market; we may not be able to finalize documentation or meet terms and conditions on the Bank of America long term financing arrangement; we can not assure you that cost reduction measures at Quantum will reduce operating losses in that division; we face significant competition, which could decrease our revenue and market share; we face risks of operating internationally, including potential foreign currency exposure, difficulty and expense of complying with local laws and regulations, and political instability; new technologies could render our products obsolete; we may be unable to adequately protect our intellectual property rights; we depend on third-party suppliers to supply materials and components for our products; We may be subject to increased warranty claims due to the lengthened warranty periods being offered by our OEM customers; the market for our products could be adversely affected by changes in environmental and other policies and regulations; we may be subject to litigation if our stock price is volatile; and changes in general economic conditions could materially affect our results of operations. This list of factors is not intended to be exhaustive. Reference should also be made to the factors set forth from time to time in our SEC reports, including but not limited to those set forth in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended April 30, 2001. You should not place undue reliance on these forward-looking statements, which reflect our view only as of the date of this Report. 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 accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, investments, intangible assets, income taxes, financing operations, warranty obligations, long-term service contracts, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. We record estimated reductions to revenue for customer programs and incentive offerings including special pricing agreements, price protection, promotions and other volume-based incentives. If market conditions were to decline in any particular market or period, we may take actions to increase customer incentive offerings possibly resulting in an incremental reduction of revenue at the time the incentive is offered. We recognize revenue and profit as work progresses on long-term, fixed price contracts using the percentage-of-completion method, which relies on estimates of total expected contract revenue and costs. We follow this method since we can make reasonably dependable estimates of the revenue and costs applicable to various stages of a contract. Recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. We operate wholly owned and majority owned subsidiaries. We recorded goodwill from the investment 17 for the amount of the purchase price over book value. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the goodwill, thereby possibly requiring an impairment charge in the future. We recorded a deferred tax asset and believe that it is more likely than not to be realized. While we consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. OVERVIEW -------- We design, manufacture, and supply components that store gaseous fuels and monitor and control the pressure and flow of those fuels for use in fuel cells and internal combustion engines. Historically, most of our revenues have been derived from the sale of the products that enable traditional internal combustion engines to run on clean burning alternative fuels such as propane and natural gas instead of gasoline. Our future goal is to also commercialize systems that will provide fuel storage, fuel delivery, and electronic controls for fuel cells and internal combustion engines. We classify our business operations into three reporting segments: Our Quantum division (formerly known as the Automotive OEM division), the Gaseous Fuel Products division and International Operations. Our Quantum division generates revenues through the sale of fuel storage, fuel delivery and electronic control systems to OEMs, primarily General Motors, and the installation of our products into OEM vehicles. Quantum also generates contract revenue by providing engineering design and support to the OEMs so that our fuel storage, fuel delivery and electronic control systems integrate and operate with certain of their alternative fuel vehicles. The Gaseous Fuel Products division sells products, including parts and conversion systems, for applications in the transportation, material handling, stationary and portable power generator and general industrial markets. Our International Operations in Asia, Australia, Europe, Japan and Mexico provide distribution for our products, predominantly from our Gaseous Fuel Products division and some product assembly. Our Quantum division will continue to require significant research and development expenditures over the next several years in order to commercialize our products for fuel cell applications. Quantum will also require significant capital expenditures to construct additional manufacturing and assembly capacity required to support the production of our products. We recognize revenue for product sales when products are shipped and title is transferred. Contract revenues are recognized based on the percentage of completion method. Corporate expenses represent a sub-category of selling, general and administrative expense. Corporate expenses consist of general and administrative expense incurred at the corporate level and includes the amortization of goodwill and other intangible assets. Intersegment eliminations are primarily the result of intercompany sales from the Gaseous Fuel Products division to the International Operations. End markets for our products include the transportation, material handling, and industrial and power generation industries. 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 at Quantum funded under customer contracts. On February 13, 2002, Quantum Fuel Systems Technologies Worldwide, Inc. filed a Form 10 Registration Statement with the Securities and Exchange Commission relating to the anticipated spin-off of our Quantum division. We cannot assure you that the spin-off will occur as it will be subject to numerous conditions, including the receipt of a financial opinion from an underwriter, the receipt of an opinion from our tax counsel or a private letter ruling from the Internal Revenue Service to the effect that the spin-off will be tax-free to our stockholders for federal income tax purposes, a final assessment by us and our tax counsel that the proposed spin-off will be tax free to us for federal income tax purposes, and final Board approval. Our pro forma net revenues and operating loss for the nine months ended January 31, 2002, assuming the intended spin-off occurred at the beginning of fiscal 2002, totaled $50.9 million and $1.0 million, respectively. 18 RESULTS OF OPERATIONS Net revenues and operating income for our business for the three and nine months ended January 31, 2001 and 2002 are as follows: ================================================================================ Revenues -------------------------------------------------------------------------------- (in thousands) Three Months Ended Nine Months Ended January 31, January 31, ---------------------- ---------------------- 2001 2002 2001 2002 ---------- ---------- ---------- ---------- Quantum $ 3,898 $ 3,517 $ 15,756 $ 16,286 Gaseous Fuel Products 14,284 10,199 50,309 40,081 International Operations 7,751 6,805 23,547 24,462 Intersegment Elimination (3,889) (3,205) (12,949) (13,600) -------------------------------------------------------------------------------- Total $ 22,044 $ 17,316 $ 76,663 $ 67,229 ================================================================================ ================================================================================ Operating Income/Loss -------------------------------------------------------------------------------- (in thousands) Three Months Ended Nine Months Ended January 31, January 31, ---------------------- ---------------------- 2001 2002 2001 2002 ---------- ---------- ---------- ---------- Quantum $ (8,381) $ (9,396) $(15,765) $(32,289) Gaseous Fuel Products 2,171 73 8,963 3,172 International Operations 105 (448) 973 1,067 Corporate Expenses (1) (1,895) (1,601) (5,057) (6,318) Intersegment Elimination (30) (72) (235) 148 -------------------------------------------------------------------------------- Total $ (8,030) $(11,444) $(11,121) $(34,220) ================================================================================ (1) Represents corporate expenses not allocated to any of the operating segments. Net revenue decreased $4.7 million, or 21.4%, from $22.0 million in the third quarter of fiscal year 2001 to $17.3 million in the third quarter of fiscal year 2002. Net revenue decreased $9.4 million, or 12.3%, from $76.6 million in the nine months ended January 31, 2001 to $67.2 million in the nine months ended January 31, 2002. These decreases were primarily due to declines in material handling sales of $3.1 million and $9.6 million in the three month and the nine month periods ended January 31, 2002, respectively, as compared to the same periods in the prior fiscal year. The operating loss increased $3.4 million, or 42.5%, from $8.0 million in the third quarter of fiscal year 2001 to $11.4 million in the third quarter of fiscal year 2002. The operating loss increased $23.1 million, or 207.7%, from $11.1 million in the nine months period ended January 31, 2001 to $34.2 million in the nine months period ended January 31, 2002. Quantum division. For the three months and nine months ended January 31, ---------------- 2002, net revenues decreased by approximately $0.4 million, or 9.8%, and increased approximately $0.5 million, or 3.4%, respectively, as compared to the same periods in the prior fiscal year. Product sales in the third quarter of fiscal year 2002 decreased $0.6 million, or 20.7%, to $2.2 million compared to $2.8 million in the same quarter of fiscal year 2001. For the nine months ended January 31, 2001 product sales increased approximately $2.1 million, or 22.8% over the same period in the prior fiscal year. Product sales consist of those associated with General Motors' mid-size automobiles, pick-up trucks, and van platforms equipped with our bi-fuel and compressed natural gas fuel systems and General Motors' medium duty trucks equipped with dedicated liquid propane gas kits. The increase in product sales for the nine months ended January 31, 2002 was generated mainly by higher sales of midsize automobiles, medium duty trucks, and van platforms, partially offset by lower sales of pick-up trucks, as compared to the same period in the prior fiscal year. We believe the increase in product sales was driven by growth in the U.S. markets for OEM alternative fuel vehicles. For the three months and nine months ended January 31, 2002, cost of product sales increased $0.4 million, or 10.0%, and $6.9 million, or 60.0%, respectively, compared to the same periods in fiscal year 2001. The increase in cost of product sales for the third quarter of fiscal year 2002 was primarily due to $0.6 million in increased warranty reserves. The increase in warranty reserves was due to higher warranty claims experienced, primarily for medium duty applications. The increase in cost of product sales for the nine months ended January 31, 2002 was due to $2.4 million in higher material cost related to higher production volume, a $1.5 million increase in inventory reserves, of which $1.1 million is related to a provision to reduce inventories to their "lower of cost-or-market" for the General Motors' pick-up truck application, a $1.0 million increase in manufacturing overhead mainly due to pre-production efforts associated with fuel storage tanks, a $1.0 million increase in warranty reserves due to higher warranty claims experienced, primarily in medium duty applications, a $0.3 million increase in freight charges, and $0.2 million in additional direct labor for assembled products. The 19 "lower of cost-or-market" provision for the General Motors' pick-up truck application is due to a fixed sales price and a higher than expected material cost. The higher than expected material cost was caused by lower anticipated volumes and no firm sales commitment from General Motors. For the three months and nine months ended January 31, 2002, gross profits on product sales declined $1.0 million, or 81.5%, and $4.8 million, or 211%, respectively, compared to the same periods in fiscal year 2001. The increase in negative gross profit for the third quarter of fiscal year 2002 was primarily due to a $0.6 million decrease in product revenues and a $0.4 million increase in cost of product sales. The increase in negative gross profit for the nine months ended January 31, 2002 was due to a $2.1 million increase in product sales and a $6.9 million increase in cost of product sales. During the three and nine months ended January 31, 2002, contract revenues increased by $0.2 million, or 17.6%, and decreased $1.6 million, or 24.4%, respectively, as compared to the same periods in fiscal year 2001. The increase for the third quarter in fiscal year 2002 is primarily due to a $0.8 million increase in new contracts relating to fuel cell applications, partially offset by a $0.6 million decline in General Motors' alternative fuel model year program revenues. The decrease for the nine months ended January 31, 2002 is primarily due to a $3.2 million decline in General Motors' alternative fuel model year program revenues, which was partially offset by $1.6 million of these new fuel cell application contracts. Contract revenue is primarily for system development and application engineering of products under funded General Motors and other OEM contracts, and other funded contract work with state and federal agencies. For the three month and nine months ended January 31, 2002, research and development expense increased by $0.3 million, or 4.2%, and $9.0 million, or 52.0%, respectively from the same periods in fiscal year 2001. The increase in research and development for the nine months ended January 31, 2002 primarily relates to a $4.2 million increase attributable to additional facilities and additional research and development support activities, a $2.8 million increase for fuel storage, fuel delivery systems, and vehicle integration for fuel cell and CNG-related OEM programs for internally funded fuel cell and alternate fuel system and component application development work, and a $2.0 million increase in product application development costs. Product application development expense is primarily for system development and application engineering of products under funded General Motors and other OEM contracts, and other funded contract work with state and federal agencies. During the three and nine months ended January 31, 2002, general and administrative expenses decreased by $0.1 million, or 4.7%, and increased by $1.0 million, or 38.1%, respectively, as compared to the same periods in fiscal year 2001. The increase for the nine months ended January 31, 2002 was primarily due to charges of $1.6 million for legal and consulting services mainly due to one-time spin-off costs and our S-3 filing, which was withdrawn on September 20, 2001. During the three months ended January 31, 2002, the operating loss was approximately $9.4 million as compared to an operating loss of approximately $8.4 million in the same period of the prior fiscal year. The increase in loss of $1.0 million, or 12.1%, for the three months ended January 31, 2002 was mainly attributable to a $1.0 million increase in negative gross profits on product sales. During the nine months ended January 31, 2002, our operating loss was approximately $32.3 million as compared to an operating loss of approximately $15.8 million in the same period of the prior fiscal year. The increase in loss of $16.5 million, or 104.8%, for the nine months ended January 31, 2002 was mainly attributable to a $9.0 million increase in research and development expenses, a $4.8 million increase in negative gross profits on product sales, and a $1.0 million increase in general and administrative expenses. For the three month and nine month periods ended January 31, 2002, operating losses include $0.6 million in restructuring charges for the closure of our Mexico assembly operation, the closure of a Michigan facility, and associated personnel severance costs. We anticipate Quantum's operating loss for the fourth quarter of fiscal year 2002 will be less than experienced in the same period of the last fiscal year, as a result of staff and cost reductions implemented during the second and third quarters of fiscal year 2002. Gaseous Fuels Products Division. For the three months and nine months ended ------------------------------- January 31, 2002, net revenues decreased by approximately $4.0 million, or 28.6%, and approximately $10.2 million, or 20.3%, respectively, as compared to the same periods in the prior fiscal year. Revenues were lower in the three months and nine months periods due to declines in the material handling market and the small industrial engine market. During the third quarter of fiscal year 2002, sales decreased $3.1 million in the material handling market, $0.7 million in the small industrial engine market, and $0.2 million in the large industrial engine market, as compared to the same period in the prior year. For the nine month period, sales decreased $8.4 million in the material handling market, $2.2 million in the motor vehicle market, and $1.9 million in the small industrial engine market. We believe the decreases were caused by the current economic slowdown. These decreases were partially offset by an increase in sales of $2.2 million in the large industrial engine market, as compared to the same period in the prior year. Due to unfavorable economic conditions, we anticipate that overall revenues generated by this division in fiscal year 2002 will be lower than fiscal year 2001. Gross profit for the three and nine months ended January 31, 2002 decreased $2.2 million, or 47.4%, and $6.2 million, or 35.8%, respectively, as compared to the same periods in fiscal year 2001. For the three months and nine months periods, the decline in gross 20 profit attributable to the decline in revenue was $0.9 million and $2.6 million, respectively, while decreases of $1.3 million and $3.6 million, respectively, were due to product mix. For the three and nine months ended January 31, 2002, operating income decreased $2.1 million, or 96.6%, and $5.8 million, or 64.6%, respectively, as compared to the same periods in the prior fiscal year. For the nine months period, the decrease in operating income was mainly due to the decline in gross profit of $ 6.2 million, which was partially offset by $0.4 million in lower operating expenses. The overall decline in revenues were due to global economic slowdown has adversely affected gross profit and operating income. We anticipate that operating income will be lower for this division for the remainder of fiscal year 2002 compared to the same period in fiscal year 2001. International Operations. For the three months and nine months ended ------------------------ January 31, 2002, net revenues decreased by approximately $0.9 million, or 12.2%, and increased approximately $0.9 million, or 3.9%, respectively, as compared to the same periods in the prior fiscal year. For the three months ended January 31, 2002, revenues decreased a combined $1.5 million at our European, Australia, and Japan subsidiaries, as compared to the same period in the prior fiscal year. These decreases were partially offset by the increase in revenues of $0.5 million at our Mexico subsidiary. For the nine months ended January 31, 2002, revenues increased $4.1 million at our European and Mexico subsidiaries, as compared to the same period in the prior fiscal year. These increases in revenues were offset by a $2.4 million decline in revenue at the Australian subsidiary and a $0.8 million decline in revenue at the Japan subsidiary. In this fiscal year, the narrowing of the fuel price differential continued to be a factor in the automobile conversion for the Australian market as evidenced by the significant decline in the number of compliance plate sales and the OEM program kits. Revenues and profitability at our Japan subsidiary have been negatively affected by Japan's economic recession and the adverse impact of the strengthening U.S. dollar. Due to favorable market conditions in our European, India, and Mexico markets, we anticipate that revenues for the remainder of fiscal year 2002 will be slightly higher than that of fiscal year 2001. During the three months and nine months ended January 31, 2002, operating income decreased by approximately $0.6 million, or 525.3%, and increased $0.1 million, or 9.6%, as compared to the same periods in the prior fiscal year. For the three month period, the decrease in operating income is attributable to lower revenues. Assuming continued growth in revenues in our International Operations segment, we anticipate that operating income for the remainder of fiscal year 2002 will be higher than the same period in the prior fiscal year. Corporate Expenses. Corporate expenses consists of general and ------------------ administrative expenses at the corporate level to support our operating segments in areas such as executive management, finance, human resources, management information systems, legal services, and investor relations. Additionally, amortization of goodwill and other intangible assets is recorded as a corporate expense. Corporate expense for the three months ended January 31, 2002 decreased by approximately $0.3 million, or 15.5%, as compared to the same period in the prior fiscal year. For the nine month period, corporate expenses increased approximately $1.3 million, or 24.9% compared to that of fiscal year 2001. During this fiscal year, increases in corporate expenses were attributable to $2.0 million in legal fees and consulting services primarily related to Quantum spin-off costs and our S-3 filing in connection with a follow-on offering, which was withdrawn on September 20, 2001. We anticipate that corporate expenses for the remaining fiscal year 2002 will be lower than the same period of fiscal year 2001. Interest Expense. Interest expense for the three months ended January 31, ---------------- 2002 was $0.3 million compared to the interest income of approximately $0.1 million for the same period in the prior fiscal year. For the nine month period ended January 31, 2002, interest expense was $0.9 million compared to $0.1 million for the same period in the prior fiscal year. The increases were primarily due to a higher outstanding balance on our line of credit with Bank of America, as compared to the interest income generated from the proceeds from the July 2000 equity offering in the first quarter of the prior fiscal year. We anticipate that interest expense for fiscal year 2002 will be higher than that of fiscal year 2001. Provision For Income Taxes. The estimated effective annual tax benefit rate -------------------------- of 40% for fiscal year 2002 approximates the previous year's tax benefit rate of 41%. The effective tax benefit rate represents the federal statutory income tax rate, state income taxes and foreign income taxes increased by research and development credits. For the nine months ended January 31, 2002 we have incurred a $34.2 million operating loss. Also, we have federal and state research and development credit carryforwards aggregating approximately $8.6 million. Federal research and development credits totaling $5.4 million expire from 2009 to 2021. State research and development credits of $3.2 million have no expiration. As of January 31, 2002, the net deferred tax asset was $27.3 million. We believe that, based on our history of prior operating earnings, our announced intent to spin- off Quantum and our expectations for the future, our operating income will more likely than not be sufficient to recognize fully the deferred tax assets and that the estimated effective annual tax rate in the future years will approximate the statutory rate. 21 LIQUIDITY AND CAPITAL RESOURCES. ------------------------------- We use cash generated from our operations, equity capital, bank financings and sales of our equity securities to fund capital expenditures and research and development, as well as to invest in and operate our existing operations and new businesses. In January 2002, we completed a private placement of common stock and warrants in which we received $22.5 million in gross proceeds. We plan to use approximately $8.0 million of the net proceeds of this offering to fund the operations of Quantum. We also plan to use approximately $12.0 million to repay indebtedness under our loan facility with Bank of America. We currently anticipate that we will require additional sources of financing in order to fully support our operations, fund the operations of Quantum, capitalize on opportunities that we believe to exist in the emerging fuel cell market, and invest in long-term business opportunities. These additional sources of financing may include bank borrowings or public or private offerings of equity or debt securities. We cannot assure you that such additional sources of financing will be available on acceptable terms, if at all. If additional sources of financing are not available, we intend to implement measures to conserve cash and reduce costs. The ratio of current assets to current liabilities was 2.1:1 on January 31, 2002 and 2.8:1 at the end of fiscal year 2001. The decrease in the ratio of current assets to current liabilities was due mainly to the increases in the current portion of the lines of credit and other term loans from the end of fiscal year 2001 to January 31, 2002. Net cash used in operating activities was $22.3 million for the nine months ended January 31, 2002, compared to $7.3 million for the same period in the previous year. The increase in cash used in operating activities during the current period resulted primarily from the net loss of nearly $21.3 million compared to the net loss of $6.3 million for the same period in the prior fiscal year. During the nine months of fiscal year 2002, cash used in operating activities was also impacted by a $12.2 million increase in deferred tax assets and $4.1 million in depreciation and amortization. These uses of cash were partially offset by a $9.0 million decrease in accounts receivable for the nine months ended January 31, 2002. We anticipate cash used in operating activities will be reduced in the fourth quarter of fiscal year 2002, as a result of staff and cost reductions implemented during the second and third quarters of fiscal year 2002. Net cash used in investing activities in the first nine months of fiscal year 2002 was approximately $5.5 million, compared to $16.6 million reported for the same period in the previous year. The decrease in net cash used in investing activities was due to a reduction of $3.5 million in capital expenditures compared to the same period in the previous year. Net cash used in investing activities was higher last year compared to this fiscal year due primarily to a $7.5 million net investment in available-for-sale securities. Net cash provided by financing activities in the first nine months of fiscal year 2002 was approximately $33.5 million, a $5.5 million decrease as compared to $39.0 million for the same period in the previous year. The cash provided by financing activities during the current nine month period resulted primarily from a $22.5 million equity offering, increases on our lines of credit of $8.2 million and repayment of officer loans of $3.9 million. In the nine month period ended January 31, 2001, net cash provided by financing activities resulted primarily from a $53.0 million equity offering, $2.5 million proceeds from term loans, partially offset by a $16.0 million payment on the Bank of America working capital line of credit. At January 31, 2002, approximately $12.5 million was outstanding under the revolving line of credit with Bank of America. The Bank of America credit facility contains certain restrictions as well as limitations on other indebtedness, and is secured by substantially all of the Company's assets. In February 2002 the credit facility with Bank of America was amended to extend the maturity date of the line of credit and term loans to March 2002. We are in compliance with the credit facility restrictions. On February 11, 2002, we received a commitment letter from Bank of America to provide a long-term borrowing facility for both us and Quantum. This facility, which is subject to certain terms and conditions and completion of final documentation, will provide Quantum with a $12 million revolving line of credit and us with a $1 million line of credit. The Quantum facility will be guaranteed by us and will be subject to covenants on Quantum and us such as funding limits, debt service coverage ratios and other financial ratios. In the event of a Quantum default or an inability to repay its obligation at maturity, we would be required to meet our guarantee, which may adversely affect our liquidity. In addition to our loan facilities with Bank of America, our subsidiary in the Netherlands has a EURO 5 million (approximately US $4.3 million at January 31, 2002) credit facility with Fortis Bank (formerly Mees Pierson) in the Netherlands. At January 31, 2002, there was an outstanding balance under this credit facility of approximately US $1.3 million. Our subsidiary in Japan has a (Y) 60 million (approximately US $0.5 million at January 31, 2002) revolving term loan facility with the Hong Kong and Shanghai Banking Corporation Ltd., Osaka Branch. At January 31, 2002, a balance of approximately US $0.3 million was outstanding. DERIVATIVE FINANCIAL INSTRUMENTS -------------------------------- We use derivative financial instruments for the purpose of reducing our exposure to adverse fluctuations in interest and foreign exchange rates. While these hedging instruments are subject to fluctuations in value, such fluctuations are generally offset by the value of the underlying exposures being hedged. We are not a party to leveraged derivatives and do not hold or issue financial instruments for speculative purposes. Foreign Currency Management. The results and financial condition of our international operations are affected by changes in exchange rates between certain foreign currencies and the U.S. Dollar. Our exposure to fluctuations in currency exchange rates has increased as a result of the growth of our international subsidiaries. The functional currency for all of our international subsidiaries is the local currency of the subsidiary. An increase in the value of the U.S. Dollar increases costs incurred by the subsidiaries because most of our international subsidiaries' inventory purchases are U.S. Dollar denominated. We monitor this risk and attempt to minimize the exposure through forward currency contracts and the management of cash disbursements in local currencies. At January 31, 2001 we had no currency forward contracts outstanding. We seek to hedge our foreign currency economic risk by minimizing our U.S. Dollar investment in foreign operations using foreign currency term loans to finance the operations of our foreign subsidiaries. The term loans are denominated in local currencies and translated to U.S. Dollars at period end exchange rates. Interest Rate Management. We use interest rate swap agreements with Bank of America to manage our exposure to interest rate changes and stabilize the cost of borrowed funds. When an agreement is executed, the swap is linked to a specific debt instrument. At January 31, 2002, we had approximately $7.0 million secured under a fixed interest rate agreement. The swap has a fixed payment rate of 5.6% and a fluctuating receiving rate based upon LIBOR. The Company's weighted-average cost of funds was 5.3%, absent this swap agreement the weighted-average cost of funds would have been 4.9%. At January 31, 2002, the fair value of this interest rate swap agreement approximated $(0.2) million. RECENT ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. We expect to adopt FAS 144 as of May 1, 2002 and do not expect that the adoption of the Statement will have a significant impact on our financial position and results of operations. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. We will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of fiscal year 2003. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of approximately $0.5 million ($.04 per share) per year. During 2002, we will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of May 1, 2002 and have not yet determined what the effect of these tests will be on our earnings and financial position. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information relating to Quantitative and Qualitative Disclosures About Market Risk appear under the heading "Derivative Financial Instruments" which is included in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations. 22 PART II - OTHER INFORMATION Item 1. Legal Proceedings. ----------------- In August 2000, we proceeded with legal action in Federal court (Eastern District of Michigan, case # 00-73633) against GFI Control Systems Inc. and Dynetek Industries Ltd. for patent infringement (U.S. Patent No. 6,041,762) which covers a compressed gas fuel system that includes a tank with an internal pressure regulator. GFI Control Systems Inc. filed a counter-claim for patent infringement. We intend to vigorously enforce our intellectual rights. Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- On January 11, 2002, we sold an aggregate of 2,000,000 shares of our common stock to institutional and accredited investors at a price of $11.25 per share for gross proceeds of $22.5 million. The investors also received warrants to purchase an aggregate of 200,000 shares of common stock. The warrants have an exercise price of $13.25 per share and are exercisable at any time prior to January 11, 2006. Ladenburg Thalmann & Co. Inc. acted as placement agent in connection with the transaction and received a fee of $1,575,000. We also issued warrants to purchase an aggregate of 100,000 shares of our common stock to the placement agent in connection with the transaction with terms similar to the investor warrants. The shares and warrants were issued in a private placement transaction pursuant to Section 4(2) and Regulation D under the Securities Act of 1933, as amended (the "Securities Act"). The private placement was made without any general solicitation or advertising and each investor represented to the Company in writing that it was an "accredited investor" as defined in Rule 501(a) of Regulation D under the Securities Act. In connection with the transaction, the Company agreed to register the shares sold in the transaction and the common stock underlying the warrants for resale under the Securities Act. A resale registration statement covering the shares issued in the private placement and the shares underlying warrants issued in the transaction was declared effective by the Securities and Exchange Commission on February 15, 2002. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits:
Exhibit Number Exhibit Description -------------- ------------------- 10.42 Common Stock and Warrants Purchase Agreement, dated January 11, 2002. (1) 10.43 Registration Rights Agreement, Dated January 11, 2002. (1) 10.44 Form of Stock Purchase Warrant, Dated January 11, 2002. (1) 10.45 Amendment No. 5 to Amended and Restated Business Loan Agreement, dated as of January, 2002, among Bank of America, N.A., the Registrant and Quantum Technologies, Inc. 10.46 Amendment No. 6 to Amended and Restated Business Loan Agreement, dated as of January 31, 2002, among Bank of America, N.A., the Registrant and Quantum Technologies, Inc. 10.47 Amendment No. 7 to Amended and Restated Business Loan Agreement, dated as of February 28, 2002, among Bank of America, N.A., the Registrant and Quantum Fuel Systems Technologies Worldwide, Inc.
____________ (1) Incorporated by reference to the Form 8-K filed by the Registrant on January 11, 2002. (b) Reports on Form 8-K: The Company filed a report on Form 8-K on January 11, 2002 during the third quarter ended January 31, 2002. Information regarding the items reported on is as follows: Item Reported On ---------------- . Common Stock and Warrants Purchase Agreement, dated January 11, 2002. . Registration Rights Agreement, Dated January 11, 2002. . Form of Stock PurchaSe Warrant, Dated January 11, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IMPCO Technologies, Inc. (Registrant) Date: March 18, 2002 By /s/William B. Olson -------------------------------- William B. Olson Chief Financial Officer and Treasurer [Authorized Signatory] 23 EXHIBIT INDEX
Exhibit Number Exhibit Description -------------- ------------------- 10.42 Common Stock and Warrants Purchase Agreement, dated January 11, 2002. (1) 10.43 Registration Rights Agreement, Dated January 11, 2002. (1) 10.44 Form of Stock Purchase Warrant, Dated January 11, 2002. (1) 10.45 Amendment No. 5 to Amended and Restated Business Loan Agreement, dated as of January, 2002, among Bank of America, N.A., the Registrant and Quantum Technologies, Inc. 10.46 Amendment No. 6 to Amended and Restated Business Loan Agreement, dated as of January 31, 2002, among Bank of America, N.A., the Registrant and Quantum Technologies, Inc. 10.47 Amendment No. 7 to Amended and Restated Business Loan Agreement, dated as of February 28, 2002, among Bank of America, N.A., the Registrant and Quantum Fuel Systems Technologies Worldwide, Inc.
(1) Incorporated by reference to the Form 8-K filed by the Registrant on January 11, 2002. 24