CALGARY, April 11, 2003 — Global Thermoelectric Inc., a developer of solid oxide fuel cell (SOFC) products, announced operational and financial results for the fourth quarter and year ended December 31, 2002.
In November 2002 Global announced a plan to maximize shareholder value in light of the significant decline in Global’s market capitalization and the increasing risk arising from the adverse conditions in North American financial markets.
As a key part of this plan, the company retained Salomon Smith Barney for the purpose of reviewing a broad range of strategic alternatives to maximize shareholder value. The process with Salomon Smith Barney is ongoing. On March 19, 2003, at the request of the Toronto Stock Exchange, the company announced it was in discussions with another party regarding a possible business combination. There can be no assurance that any transaction will be completed. Global will report any material developments if and when they arise.
The company’s operational focus during the course of 2002 has been the execution of its technology and engineering plans for the purpose of commercializing its SOFC technology. In this respect, as detailed below, in 2002 the company accomplished important milestones. The company’s generator business also had a solid year contributing $4.2 million in divisional pre-tax earnings.
Finally, in November 2002, Global implemented a downsizing to reduce the cash burn rate of its fuel cell and corporate divisions.
Results of operations
Fuel cells and stacks: 2002 was a productive year as the company surpassed challenging technological targets, in particular objectives relating to stack performance. By year-end, long-term stack testing (in excess of 2,600 hours) demonstrated that a stack service life of 12,000 – 15,000 hours of continuous operation can be projected.
Global also achieved complementary advances in cell membrane performance. In particular, the company reported a 34 percent improvement in power density (a measure of electricity generated as a function of surface area) to 1.475 W/cm(2). In addition, long-term (lasting more than one year) cell membrane testing confirmed that Global’s cell membrane may be expected to have a service life of approximately 25,000 hours (nearly 3 years).
Fuel cell system development: In 2002 Global assembled five natural gas prototype fuel cell systems (model “RP-2”). The test results achieved in 2002 significantly advanced the system performance achieved in 2001. Between May 2002 and the end of March 2003 Global’s five RP-2 systems collectively operated for approximately 14,200 hours with one system achieving over 4,100 hours of operation.
The RP-2 design exceeded our expectations in terms of both durability and efficiency by demonstrating a net peak AC electrical efficiency (after all parasitic losses are deducted) of 29 percent and peak power output of 2.9 kW using Global’s latest generation stack design.
All RP-2 systems operate on conventional natural gas as it is supplied by a gas utility to any commercial or residential customer. Of the five systems, two are currently undergoing testing at Enbridge’s facilities in Toronto.
On the strength of these results, late in 2002, the company began development of its next generation prototype system — “Aurora” — which is expected to be ready for initial testing in the third quarter of 2003.
Aurora is expected to embody further improvements in performance, cost and size and provide a stable platform for demonstrations and testing with Global’s business partners. In addition, the Aurora design is flexible, permitting a 2 kW to 5 kW system configuration consistent with the evolution of Global’s stack technology.
Other fuel cell achievements: As a result of continued progress with the development of propane reforming solutions, part of a project funded by the U.S. Propane Education and Research Council (“PERC”), Global received payment of US$350,000 of the total US$500,000 awarded to the company. This project is scheduled for completion in mid-2003.
Global’s ongoing success with its SOFC technology is evidenced in the company’s growing intellectual patent portfolio. By the end of 2002, the company had filed 59 U.S. and international patent applications (30 cell, 15 stack and 14 system).
Generator division: In 2002 the generator division posted excellent financial results. The division achieved total revenues of $21.8 million, a 42 percent improvement over 2001. In addition, 2002 pre-tax earnings for the generator division of $4.2 million represents a significant increase compared with pre-tax earnings of $1.2 million realized in the prior year.
The generator division entered 2003 with a solid backlog of orders and significant sales opportunities in India and China among other countries. The company is also continuing its development of a “hazardous approved generator” — a generator specifically designed for use in hazardous environments such as offshore drilling platforms.
In 2002 the generator division evaluated numerous strategic opportunities to leverage its international marketing experience, brand and manufacturing expertise. To date the company did not identify opportunities which met appropriate return on investment criteria.
Other: The company wishes to announce that Glynn Davies has tendered his resignation from Global’s Board of Directors. The company wishes to thank Davies for his contributions to the organization over the last eight years.
Financial results — Discussion and analysis
Revenue for the year ended December 31, 2002, totaled $22.3 million, comprised of thermoelectric generator sales and service revenue of $21.8 million and revenue from fuel cell contract research of $0.5 million. Revenue for 2001 was $15.4 million, which was comprised exclusively of thermoelectric sales and service.
During 2002 the company experienced an increase in demand of its generator products in international markets, notably the U.S., South America and the Middle East. Strong revenue growth in these markets offset sluggishness in western Canadian demand for the first three quarters of 2002. The company’s markets in Canada are principally driven by natural gas drilling and completion activity.
In the second quarter of 2002, the company received, and consequently recognized the remaining revenue of, $2.0 million of a $19.0 million contract with the Gas Authority of India Limited (“GAIL”). This amount represented the contractual holdback stipulated in the company’s agreement with GAIL, and its collection reflected the company’s operational success in completing this very large and engineering-intensive project.
In 2001 the company divested its military heater division to a U.S. based manufacturer. As part of the sales agreement, the company negotiated a royalty and supply contract with the purchaser for key components of the heater product.
In 2002 the purchaser was successful in obtaining follow-on orders from the U.S. military, which marked the commencement of the company’s supply agreement. In 2002 this supply contract generated $2.1 million of revenue. It is expected that this agreement will provide a multi-year revenue stream to the company, and in the process, add stability to its revenue base which historically has been dependent on securing larger intermittent orders.
The fuel cell division reported revenue of $0.5 million in 2002 which was derived from the company’s contract with the Propane Education and Research Council for contract research on propane-fuelled SOFC applications. The company expects to complete this US$500,000 contract in the first half of 2003.
A gross margin of $8.7 million (39.7 percent of revenue) was generated in 2002, an increase of 77 percent compared to the gross margin of $4.9 million (31.8 percent of revenue) in the prior year. International orders, primarily in the Middle East and South America, accounted for the margin improvement. The company’s generators typically attract premium pricing in certain applications and geographic regions due to their uniqueness as a very reliable remote power source.
The gross margin in 2002 was also positively affected by the receipt of the GAIL contract holdback due to the fact that most of its associated costs were expensed in the prior year because of their non-refundable nature.
Investment income of $2.9 million was generated in the current year on an average cash and short-term investment balance of $108.2 million. Lower money market returns together with a decreasing cash and short-term investment position accounted for the reduction in investment income from $5.9 million in the prior year.
Research, engineering and product development costs in aggregate were $23.3 million in the current year, of which the fuel cell division and generator division accounted for $22.2 million and $1.1 million respectively.
In the prior year these divisions reported expenditures of $14.0 million and $1.1 million respectively. In previous years and in the first nine months of 2002, Global strategically increased its fuel cell related expenditures for purposes of attaining its product commercialization targets with respect to timing, product cost and reliability.
To this end, Global increased its engineering and technical staff during 2001 and 2002. Furthermore, the company incurred manufacturing and material costs of producing eight prototypes for internal and external testing in 2002 and early 2003.
In late 2002, however, in recognition of difficult capital markets and the challenge they may pose to raising future equity capital, the company rationalized its expenditures on non-core fuel cell development programs. After implementing this downsizing in November 2002, the company ended 2002 with 148 personnel directly involved in fuel cell development, a decrease of 33 positions from our peak staffing levels in mid-2002 and a modest increase of four positions from the beginning of 2002.
General and administrative expenses increased to $5.3 million in the current year from $3.6 million in the prior year. Severance costs associated with the departure of former officers and other employees accounted for $0.9 million of this increase. An increase in personnel in the company’s various administration departments in late 2001 and early 2002 to support the growth of our fuel cell program also contributed to an increase in the current year general and administrative expenses. In late 2002 each of these departments were significantly reduced in size which is expected to yield cost reductions in 2003.
Business development expenditures increased to $2.7 million in the year from $1.1 million in the prior year. The increase in expenditures related to various business development initiatives undertaken throughout the year, including the retention of Salomon Smith Barney.
Marketing expenditures, which relate solely to the company’s generator division, increased to $1.9 million (8.9 percent of revenues) in 2002 from $1.7 million (11.1 percent of sales) in 2001. The reduction of marketing expenditures as a percentage of revenue reflected the economies of scale relative to the fixed component of our marketing program. The company utilizes a broad network of agents around the world in conjunction with an internal sales and contract administration group. As in prior years, agents’ commissions are reported in cost of sales, while all other sales related expenses are reported in marketing expenses.
Depreciation expense increased $1.2 million in 2002 from $1.8 million in 2001. Capital expenditures of $6.1 million in 2002 and $9.0 million in 2001 accounted for this increase.
Interest on long-term debt of $29,000 decreased in accordance with the repayment of capital lease obligations in the year. At December 31, 2002, remaining capital lease obligations totaled only $207,000, all of which were current.
Income tax expense comprised large corporation tax of $0.2 million and international income tax of $0.2 million. As in the prior year, and consistent with the expensing of fuel cell development expenses to which the losses relate, no benefit of the company’s unused tax deductions or credits were recognized as assets on the balance sheet at year end. At December 31, 2002, the company had $57.4 million in tax deductions available in Canada and $11.7 million of investment tax credits.
Despite significant improvement in profitability of the company’s generator division, the increase in fuel cell commercialization expenditures resulted in a net loss from continuing operations of $24.5 million ($0.89 per common share) for the year ended December 31, 2002, compared to a loss for the previous calendar year of $13.0 million ($0.49 per common share).
Discontinued operations, which relate to the company’s military heater division divested in 2001, reported earnings of $0.1 million ($0.01 per common share) as a result of the inclusion into income of a previous warranty provision, the liability for which has been assessed as nil.
Capital expenditures were $6.1 million for the year ended December 31, 2002 compared to $9.0 million in 2001. Expenditures of $5.6 million in the fuel cell division in the current year related primarily to fuel cell test stand equipment and other equipment used in the company’s pilot manufacturing facilities. Fuel cell capital expenditures in the prior year were $7.9 million.
The company has now incurred substantially all the capital cost to equip its approximately 100,000 square feet of fuel cell facilities located in Calgary, Alberta. Additional fuel cell capital expenditures will generally be limited to project specific equipment. Accordingly, capital expenditures for 2003 are expected to decrease substantially from 2002 and 2001 levels.
As in prior years, capital expenditures in the company’s thermoelectric generator division were nominal, totaling $0.2 million related to plant equipment and support. Similarly, $0.2 million of capital expenditures were incurred in the prior calendar year.
In November 2002 Global announced a Normal Course Issuer Bid (“Issuer Bid”) whereby the company may, at its discretion, buy back up to 1.45 million of its common shares over a twelve month period. To date, no Global common shares have been purchased by the company under the Issuer Bid.
At December 31, 2002, the company held cash and short-term investments of $95.3 million compared to $121.1 million at the end of 2001. The company maintains a very strict and conservative investment policy governing its cash and short-term investments. Investment of the company’s cash reserves are limited to Canadian bank and government securities and low credit risk, money market instruments.
Revenue for the quarter ended December 31, 2002 increased 97 percent to $6.1 million compared to $3.1 million for the fourth quarter of the prior year. Revenue comprised $6.0 million of generator sales and service while $0.1 million related to fuel cell contract research and development. International sales comprised 85 percent of the quarterly sales volume compared to 56 percent in the comparative quarter. Sales to the U.S. and South America were particularly strong in the quarter.
Gross margin increased to $1.8 million (29.1 percent of revenues) in the quarter compared to $0.7 million (22.5 percent of revenues) in the fourth quarter of 2001. Gross margins in both quarters were impacted by one-time provisions: a $0.6 million charge for site restoration costs in 2002 and $0.7 million in 2001 related to the deferral in revenue recognition of the GAIL contract.
Despite stronger revenues, an increase in business development costs of $1.2 million and an increase in fuel cell commercialization expenses of $0.6 million resulted in an increase in the loss from continuing operations to $6.7 million ($0.25 per common share) in the fourth quarter ended December 31, 2002 compared to $5.8 million ($0.21 per common share) in the fourth quarter ended December 31, 2001.
Capital expenditures in the fourth quarter decreased significantly on a year over year basis to $1.5 million from $3.9 million. These expenditures which predominately include fuel cell test stands and other pilot plant equipment are expected to decrease as the company nears full build out of its fuel cell facilities.
The following financial information has been derived from the audited financial statements for the years ended December 31, 2002 and 2001, except as noted.
Global Thermoelectric Inc. is a developer of SOFC products. The company is also a manufacturer and distributor of thermoelectric power generators for use in remote locations. Global is developing fuel cell products that are compatible with natural gas or propane. The company is currently prototyping systems to address residential and remote applications.