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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number 1-10446
LITHIUM TECHNOLOGY CORPORATION
(Name of Small Business Issuer in Its Charter)
DELAWARE 13-3411148
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5115 CAMPUS DRIVE, PLYMOUTH MEETING, PENNSYLVANIA
(Address of Principal Executive Offices)
19462
(Zip Code)
(610) 940-6090
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: NONE.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
PAR VALUE, $0.01
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB.[ ]
State issuer's revenues for its most recent fiscal year. NONE FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1996.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
$11,550,931 AS OF MARCH 31, 1997. THE AGGREGATE MARKET VALUE
WAS BASED UPON THE MEAN BETWEEN THE CLOSING BID AND ASKED
PRICE FOR THE COMMON STOCK AS QUOTED BY THE NASD ELECTRONIC
BULLETIN BOARD.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of March 31, 1997, 17,601,418
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security-holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). NONE.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TABLE OF CONTENTS
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PART I
Item 1. Description of Business.........................................................................1
Item 2. Description of Property........................................................................10
Item 3. Legal Proceedings..............................................................................10
Item 4. Submission of Matters to a Vote of Security Holders............................................11
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.........................11
Item 6. Management's Discussion and Analysis or Plan of Operation......................................13
Item 7. Financial Statements...........................................................................18
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..............................................................18
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..............................................18
Item 10. Executive Compensation.........................................................................20
Item 11. Security Ownership of Certain Beneficial Owners and Management.................................26
Item 12. Certain Relationships and Related Transactions.................................................28
Item 13. Exhibits and Reports on Form 8K................................................................31
FINANCIAL STATEMENTS
Independent Auditor's Report...........................................................................F-2
Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 1996........................................................F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996 and
1995, and the Period from July 21, 1989 (Date of Inception) to December 31, 1996....................F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) for the Two
Years Ended December 31, 1996 and 1995..............................................................F-5
Consolidated Statements of Cash Flows for the Two Years Ended December 31, 1996 and
1995, and the Period from July 21, 1989 (Date of Inception) to December 31, 1996....................F-6
Notes to Consolidated Financial Statements.....................................................F-7 to F-19
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW AND RECENT DEVELOPMENTS
Lithium Technology Corporation (the "Company" or "LTC") is a
development stage company engaged in the business of developing and seeking to
commercialize a unique, solid-state, lithium polymer rechargeable battery. The
Company believes that its battery technology, which is currently in the
prototype development phase, is capable of providing up to four times the
performance of current rechargeable batteries. The Company's objective is the
commercialization of such technology, inclusive of moving from laboratory-scale
product prototypes and related prototype processes to full scale market
introduction, achieving cost-competitiveness, and constructing a manufacturing
plant. The Company's commercialization focus is on the rapidly growing portable
electronics market segment (notebook and palmtop computers and wireless
communication devices). The Company's patented and proprietary composite cell
construction and low-cost manufacturing process are equally applicable to
lithium metal polymer technology and lithium-ion polymer technology. The Company
intends to pursue both chemistries -- "lithium metal polymer technology" and
"lithium-ion polymer technology" which are discussed and differentiated below --
for specific portable electronics applications.
Until 1993, the Company had been named Hope Technologies, Inc. (HTI),
consisting of two subsidiaries: Hope Industries, Inc. (Industries) and Lithion
Corporation. Industries was the operating arm of the Company and it manufactured
professional and industrial photoprocessing and X-ray equipment. Lithion was
engaged in rechargeable battery research and development. By the end of 1993,
Industries was divested and since such time the Company has focused on
commercialization of battery technology and developing strategic alliance
partners of global prominence who the Company believes will assist in bringing
the technology to the manufacturing stage and participate in the distribution
and sale of the Company's products on a worldwide basis.
During the last three years, the Company has recruited a new management
team and a core technical staff with commercialization and battery technology
expertise. A modern research facility has been leased and research and product
development is continuing at an accelerated pace. During 1996, the Company
entered into employment agreements pursuant to which Thomas R. Thomsen now
serves as the Company's Chief Executive Officer, David Cade serves as the
Company's President and Chief Operating Officer, and Dr. George Ferment serves
as the Company's Executive Vice President of Operations and Chief Technical
Officer. The Company currently has one subsidiary, Lithion Corporation, which is
wholly-owned by the Company.
The Company's operating results consist solely of operating losses
attributable to research and development and general and administrative
expenses. The Company has generated no revenues from operations.
The Company's strategy includes the development of strategic alliances
with partners of global prominence who the Company believes will assist in
bringing the technology to the manufacturing stage and participate in the
distribution and sale of the Company's products on a world-wide basis. To
advance this strategy, (i) in January 1995 the Company engaged Mitsubishi Trust
and Banking Corporation to serve as the Company's exclusive advisor in
establishing strategic alliances with Japanese companies and similarly, in
February 1997, the Company engaged Chase Manhattan Bank to serve as the
Company's exclusive advisor in establishing strategic alliances with Korean
companies and (ii) in March 1996, the Company entered into a Technology
Development Agreement with a Japanese Consortium based on the Company's
proprietary lithium metal polymer rechargeable battery technology.
In March 1996, the Company entered into a Technology Development
Agreement and Stock Purchase Agreement (the "March 1996 Agreements") with a
Japanese consortium consisting of Mitsubishi Materials Corporation ("Mitsubishi
Materials") and Mitsui & Co., Ltd. (collectively, the "Consortium"), based on
the
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Company's proprietary lithium-polymer rechargeable battery technology.
Mitsubishi Materials subsequently assumed all of Mitsui's rights and
responsibilities under the Technology Development Agreement. The Company
believes that the March 1996 Agreements are the first step in a broader
strategic alliance for the research and development, production, promotion and
distribution of lithium-metal polymer batteries worldwide. Mitsubishi Trust and
Banking Corporation, Mitsubishi Materials, and Chase Manhattan Bank are
continuing to seek additional strategic investors for the Company. There can be
no assurance that additional investors will provide capital for the Company or
do so on terms favorable and acceptable to the Company. Under the March 1996
Agreements, the investors provided equity capital and Mitsubishi Materials will
continue to provide technical resources to assist the Company in completing the
development of its high energy battery to meet specific performance requirements
for portable electronics applications. The principal objective is to take the
patented technology to the manufacturing scale-up stage. The Technology
Development Agreement gave the Consortium exclusive option rights to license the
Company's technology for manufacturing in the Far East and Oceania, and
co-exclusive option rights along with the Company for manufacturing in Europe
and the Americas, where the parties' strategy includes establishing joint
ventures for manufacturing operations. The Technology Development Agreement also
gave the Consortium an exclusive option for worldwide distribution and sales of
the Company's products.
In early 1996 the Company installed a continuous flow coating and
laminating pilot line, referred to as the Demonstration Manufacturing Facility
(DMF). The DMF has been undergoing trial runs and modifications/upgrades over
the past year and will be used to fabricate the Company's lithium-ion polymer
cell samples for distribution to selected OEMS which is anticipated to occur in
the second quarter of 1997. In early 1998, the DMF is expected to be used as
the initial production facility for specific OEM battery pack applications.
In October 1996, the Company completed a bridge loan financing pursuant
to which the Company issued $1.75 million principal amount convertible notes
(the "Convertible Notes") to two purchasers (the "Convertible Note Purchasers").
In connection with the issuance of the Convertible Notes, the Company issued
267,176 shares of Common Stock to the Convertible Note Purchasers in October
1996 pursuant to Regulation S under the Securities Act of 1933, as amended
("Regulation S"), the Company issued 66,794 shares plus a warrant to purchase
an additional 87,500 shares at an exercise price of $1.31 to the placement
agent and paid a $122,500 placement fee, and the Company has subsequently
issued to the Convertible Note Purchasers an additional 620,784 shares of
Common Stock through March 31, 1997 pursuant to Regulation S in accordance with
the terms of the Convertible Notes and related agreements. The Company and the
Convertible Note Purchasers have placed in escrow 6,201,550 shares of the
Company's common stock (the "Escrowed Shares") pursuant to the terms of the
Convertible Notes and related agreements. The Escrowed Shares are not
considered to be issued and outstanding securities pending actual payment for
such shares. The Company did not repay the $1.75 million principal of the
Convertible Notes on the March 24, 1997 maturity date and has not repaid the
Convertible Notes as of the date of this report. As a result of this nonpayment
default: (i) the Convertible Note Purchasers have the right to convert the
$1.75 million principal into the Escrowed Shares which would extinguish the
indebtedness and (ii) interest on the $1.75 million began to accrue at the rate
of ten percent (10%) per annum as of March 24, 1997. Such interest accrues and
is payable on September 24, 1997 and at monthly intervals thereafter. The
Convertible Note Purchasers have not taken any action to exercise any default
remedies as of the date of this report. There can be no assurance that the
Convertible Note Purchasers will continue to refrain from exercising available
default remedies. The Convertible Note Purchasers' right to convert the $1.75
million principal into the Escrowed Shares and the aforementioned 10% interest
terminate upon the earlier of (i) repayment of the Convertible Notes or
November 2, 1998. The conversion right is the Convertible Note Purchasers'
exclusive remedy in the event of the Company's failure to pay the principal
amount of the Convertible Notes.
In 1996, the Company entered into a letter of intent with an unrelated
third-party investor originally contemplating a $5.0 million equity private
placement and the Company also entered into a commitment letter contemplating an
underwritten public offering of $7.0 million to $10.0 million of the Company's
common stock. Neither transaction was completed and the Company is now pursuing
other financing strategies. The Company has no commitments for new capital
investment as of the date of this report. The Company had
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cash of $1,388,000 at December 31, 1996. In the absence of new capital,
currently available cash is sufficient to meet the Company's operating needs
through approximately June 30, 1997 and the Company has developed and is
implementing appropriate strategies to minimize expenses and conserve cash. As
noted above, there can be no assurance that the Company will obtain needed
capital on terms favorable and acceptable to the Company. For details see
"Management's Discussion and Analysis -- Liquidity, Capital Resources, and
Financial Condition."
The Company is a corporation organized under the laws of the State of
Delaware on December 28, 1995. The Company's predecessor -- Lithium Technology
Corporation (a Nevada corporation previously named Hope Technologies, Inc.) --
merged with and into the Company in a reincorporation merger that became
effective on February 8, 1996. In connection with the reincorporation on
February 8, 1996, the Company also implemented a recapitalization of its
outstanding Common Stock and convertible preferred stock, a reverse stock split,
the ratification of an amendment to the Company's 1994 Stock Incentive Plan, and
ratification of a Directors Stock Option Plan.
MARKET SUMMARY
The worldwide battery market consists of a variety of segments, such as
household "disposable" batteries, automotive batteries, and high performance
rechargeable batteries for portable electronic devices. Virtually all segments
are growing and experiencing a technological revolution with the important
driving forces being technology/portability and environmental issues. In
particular, miniaturization of electronic devices has fueled explosive market
growth in mobile electronic products, including notebook and palmtop computers,
wireless communications handsets, wireless multimedia devices, camcorders and
medical applications. Battery power, size and shape shortcomings have been the
limiting factors in product engineering and design. Improved batteries are
necessary to increase operating times and mobility. There is also increasing
demand for environmentally friendly batteries. Lead-acid, alkaline and nickel
cadmium (NiCd) batteries, unlike the Company's battery, contain metals such as
lead, mercury and cadmium, which have become environmental and public health
concerns.
This growth has created a worldwide search for advanced rechargeable
battery systems with much longer run times with lighter weights and lower costs,
and which are environmentally friendly. The Company believes that its
lithium-polymer battery technology may be capable of filling these demands.
There can be no assurance, however, that the Company will be able to achieve the
technological breakthroughs that will be necessary in order to ultimately
achieve commercialization and/or obtain financings or generate revenues in order
to sustain the Company's on-going research and development phase or to undertake
the design and construction of the Demonstration Manufacturing Facility
discussed below and other manufacturing-related facilities.
THE BATTERY TECHNOLOGY
The Company's lithium metal polymer rechargeable battery design is
based upon an integrated approach employing a patented and proprietary cell
construction using high performance fiber webs, and a flexible solid polymer
electrolyte. The Company's lithium metal technology incorporates a lithium alloy
foil anode and a composite vanadium oxide cathode. The Company's lithium-ion
polymer technology uses fiber webs for both the graphite anode and lithiated
cobalt oxide cathode. One advantage of this approach is the use of a solid
polymer electrolyte rather than the traditional liquid electrolyte technology.
Unlike the liquid electrolyte used in most batteries, the Company's battery
electrolyte is a thin, flat, solid plastic which reduces weight and volume, and
improves safety. The Company's research and development and marketing strategy
is to seek to distinguish the Company's battery products from competitors'
products as to the following features: energy density, self-discharge rate,
design flexibility, cost, user safety and environmental safety. The Company's
ability to implement this strategy is highly dependent upon the Company's
ability to achieve its technology research and development, manufacturing
scale-up, and financing objectives and overcome the related uncertainties as
discussed herein.
The ability to manufacture so called "laminated batteries" (See
"Glossary") with consistent high quality and low cost is a critical
commercialization challenge and the Company believes its strategic advantage
lies in its patented manufacturing approach. The Company's composite electrolyte
and composite electrode technology lends itself to
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the use of commonly used thin film manufacturing equipment and proven process
methodology. These composites act as traveling carriers in the manufacturing
process, starting as rolls that are then coated with electrolyte or oxide
materials using existing and proven coating technology. Such traveling carriers
are usually called "traveling webs" or simply "webs". "Web" processing is a
common practice in the paper, textile, thin film, barrier plastics, floor
covering, and packing industries. Other companies also attempting to
commercialize lithium-polymer batteries do not use this Company-patented and
proprietary approach and therefore use more complex and hence costly
manufacturing methods. The Company's approach, which involves fewer separate
operations, offers significant promise for lower production costs and consistent
quality. The Company's web-handling and coating techniques are expected to
result in a lower cost manufacturing process for lithium-ion polymer cells
because of: (1) fewer laminate components; (2) fewer processing steps; (3)
better bonding; (4) better structural stability; and (5) lower defect rates.
INTELLECTUAL PROPERTY
The Company holds 21 issued U.S. patents and 8 pending patent
applications on its technology. The Company also has other proprietary knowledge
that is in the patent disclosure stage or that it protects as trade secrets. The
Company's early patents relate to materials and construction for lightweight
solid-state rechargeable batteries. The later patents and applications relate to
improvements to the technology contained in the first patent or to other key
aspects of rechargeable battery technology.
There are other companies with lithium-polymer battery technology
patents; however, the Company believes its patents to be unique from those of
its competitors in that they focus upon composite cathode structure, composite
electrolyte structure, alloy anode and packaging. The earliest of the Company's
patents expires 2003. There is no current or, to the Company's knowledge,
threatened litigation on its patents. See "Description of Business-Competition".
The following table sets forth the patents currently held by the Company:
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Patent Number Description Year of Expiration
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4,576,883 Electrode Construction for Solid State Electrochemical Cell 2003
4,794,059 Lightweight Solid Rechargeable Batteries 2005
4,808,496 Electrode Construction for Solid State Electrochemical Cell 2006
4,816,357 Intensification of Ion Exchange in Lithium Batteries 2006
4,861,690 Lightweight Battery Construction 2006
4,888,206 Method and Apparatus for Coating a Substrate with Alkaline 2006
or Alkaline Earth Metals
4,960,655 Lightweight Batteries 2007
5,006,431 Solid State Polymer Electrolyte for Batteries 2008
5,053,295 Lightweight Electroconductive Solderless Internal Cell 2008
Connector for Alkaline or Alkaline Earth Metal Batteries
5,057,385 Battery Packing Construction 2008
5,057,651 Lightweight Electroconductive Wire 2008
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Patent Number Description Year of Expiration
- ------------- ----------- ------------------
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5,006,554 Fire and Moisture Proof Anode Construction for Alkaline 2008
Metal or Alkaline Earth Metal Batteries
5,102,752 Solid State Composite Electrolyte for Batteries 2009
5,350,647 Electrodes for Electrochemical Devices 2011
5,378,558 Solid State Composite Electrolyte for Electrochemical 2012
Devices
5,422,200 Battery Packaging Construction for Alkali Metal Multicell 2012
Batteries
5,443,602 Apparatus and Method for Automatic Mass Production and 2012
Packaging of Electrochemical Cells
5,521,023 Composite Electrolytes for Electrochemical Devices 2013
5,529,707 Lightweight Composite Polymeric Electrolytes for 2013
Electochemical Devices
5,597,658 Rolled Single Cell and Bi-Cell Electrochemical Devices and 2014
Method of Manufacturing Same
08/585,847 Battery Packaging Construction using Flexible Plastic Barrier 2014
Structures
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TECHNOLOGY DEVELOPMENT HISTORY
The Company's advanced rechargeable battery technology is based on
nearly twelve years of specific research and development and nearly forty years
of experience in plastics, thin films and emulsions. With the divestiture of
Hope Industries in late 1993, the Company successfully raised capital from
outside sources, narrowed the Company's focus, and renewed development of its
rechargeable battery technology. During 1994, the Company was re-staffed with
needed technical personnel, and critical research, including historical test
data such as capacity and cycle life, was reconfirmed. During 1995, the Company
concentrated its efforts on improving its base line technology in the crucial
areas of weight reduction, design flexibility, rechargeability, self-discharge,
safety, capacity and cycle life. The research and development effort has also
focused on the carbon fiber web used to build the cathode structure, the
proprietary lithium metal alloy used as the anode structure, the polymer
electrolyte structure, and thermal curing of the polymer as opposed to expensive
and complicated electron beam methodology. Improvements have also been made in
sealing which has resulted in a patented, fireproof anode concept and improved
current-collection technology has been developed through lightweight, embedded
fiber construction. The Company has also advanced its technology by developing a
solid state lithium-ion polymer battery using proprietary web structures in both
the anode and cathode with excellent cycle life and which demonstrate the
utility of the Company's manufacturing technology for use in other battery
chemistries. During 1996, the Company focused on proving in its patented
manufacturing approach which is unique to the battery industry. In March 1996, a
prototype continuous flow coating and laminating line -- referred to as the
Demonstration Manufacturing Facility (DMF) -- was installed. Since then the DMF
has been undergoing continuing upgrade and trial runs. During 1997, the DMF will
provide for market test sampling and for "stuffing" of prototype battery packs
for selected OEMs.
For the period July 1989 through October 1993, the Company had
accumulated net losses attributable to activities associated with the battery
technology of $1,801,000. For the period November 1993 through December
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1996, the Company had accumulated net losses of $9,056,000 of which $67,000 was
incurred during 1993, $2,133,000 was incurred during 1994, $2,472,000 was
incurred during 1995, and $4,384,000 was incurred during 1996. Therefore, the
Company's aggregate accumulated losses for the battery technology through
December 1996 are $10,857,000. The Company spent approximately $1,080,000 and
$1,079,000 on research and development activities during 1995 and 1996,
respectively. These funds were derived from the Company's debt and equity
financings as discussed in this report as opposed to operating revenues.
BUSINESS STRATEGY
The challenge facing the Company, as indicated above, is the
commercialization of its battery technology, i.e., moving from laboratory-scale
product prototypes and related prototype manufacturing processes to full scale
market introduction and the construction of a manufacturing plant.
Consummation of corporate alliances is an important step in the
commercialization plan. The Company's strategy contemplates that these corporate
partners will bring technology and funding support through equity, joint
technology and development programs, licensing of the technology, and
manufacturing and distribution rights. Extensive discussions have been held with
numerous potential corporate partners from the United States, the Pacific Rim
and Europe. As noted above, in March 1996, the Company entered into a Technology
Development Agreement with two Japanese investors. The investors were also
granted options on market specific, exclusive manufacturing and distribution
rights. The Company believes that the Technology Development Agreement is the
first step in a broad strategic alliance for the research and development,
manufacture, distribution, promotion and sale of the Company's lithium alloy
polymer batteries. It is the Company's strategy that Mitsubishi Materials will
assist the Company in the development, production and distribution of its
lithium metal polymer battery product line with the Company taking advantage of
Mitsubishi Materials' expertise and experience in the development of other
high-tech products, familiarity with the geographic markets for such products,
experience in developing new markets, and existing relationships with global
OEMs.
The Company is also actively seeking other strategic partners to assist
in the commercialization of its lithium-ion polymer technology and has had
discussions with a number of globally prominent companies in this regard,
although there can be no assurance as to the consummation of any such strategic
alliances. In February 1997, the Company retained the advisory services of Chase
Manhattan Bank to assist the Company in seeking suitable Korean strategic
partners.
During March 1996, a benchtop continuous flow coating/laminating line
- -- referred to above as the Demonstration Manufacturing Facility ("DMF") -- was
installed by the Company. This line will be used to further define the Company's
manufacturing technology, to sharpen manufacturing cost estimates, produce
market test samples and then serve as the initial production facility for
battery cells which will be manually assembled into battery packs for Original
Equipment Manufacturer ("OEMs"). The Company has already begun multi-cell
configuration designs for battery packs of two specific electronic devices of
two OEMs . Thereafter, based on design data obtained from the DMF, the Company
must successfully construct a pilot manufacturing line reflecting the cost,
quality, reliability, and performance required for the various target market
applications. It is anticipated that the pilot manufacturing line and associated
equipment will cost approximately $7.5 million to construct in the 1998 time
frame. The pilot manufacturing facility, according to the Company's current
strategy, will be located within the Company's existing facility in Plymouth
Meeting, Pennsylvania. Ultimately, the pilot manufacturing line would be
replaced with a larger scale second tier manufacturing capability. Construction
of the pilot manufacturing line will require approximately 12 months. The
Company intends to finance the overall estimated $22 million total capital
equipment and operating expense required to bring the Company to the initial
commercial production stage at approximately the end of 1998 (which $22 million
includes the aforementioned estimated $7.5 million cost of the pilot
manufacturing line).
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There can be no assurance that the Company will be able to meet the
technological objectives and/or satisfy the capital requirements that the
Company believes are necessary to convert its battery technology into successful
commercial products. There can be no assurance that the Company's products will
generate any revenues, will not encounter technical problems when used, will be
successfully marketed, will be produced at a competitive cost, or will achieve
customer acceptance or, if commercial products are developed and revenues
produced, that the Company will be profitable. The likelihood of the success of
the Company must be weighed against the problems, expenses, difficulties,
complications and delays frequently encountered in developing and marketing a
new product.
The Company believes that the "web" construction of its battery (See
"Glossary") is unique compared to other emerging lithium-polymer approaches. It
allows the Company to use proven and well understood equipment from the textile
and plastics industries. This manufacturing approach presents the flexibility to
utilize alternative component chemistries as required to meet specific OEMs'
application operating parameters. While the Company is confident that this
approach increases the probability of success in commercializing the technology,
there can be no assurances of that success.
While the Company's operating plan seeks to minimize the Company's
capital requirements, commercialization of the Company's battery technology will
require substantial amounts of additional capital. The Company has thus far
successfully raised approximately $8.96 million through the private sale of its
securities including $2,400,000 from the Consortium, prior to payment of
placement costs of $212,000. There can be no assurances that the incremental
capital needed for attaining commercial viability of the Company's battery
technology will be obtained (which the Company currently estimates at
approximately $22 million). If the Company is unable to raise sufficient
capital, it will be forced to curtail research and development expenditures
which, in turn, will delay, and could prevent, the completion of the
commercialization process. See "Management's Discussion and Analysis --
Liquidity, Capital Resources, and Financial Conditions".
COMPETITION
Competition in the battery industry is intense. The industry consists
of developmental stage companies and major domestic and international companies,
many of which have financial, technical, marketing, sales, manufacturing,
distribution and other resources significantly greater than those of the
Company, excluding the resources of the Company's Japanese Consortium partners.
The Company believes that its lightweight, thin, low-cost, high energy,
rechargeable battery is uniquely appropriate for the high-growth portable
electronics market (notebook computers, cellular telephones and other wireless
devices). Longer term, its technology may have significant potential for the
emerging Electric Vehicle (EV) market.
These markets are currently served mainly by Nickel-Cadmium ("NiCd")
batteries and Nickel-Metal-Hydride ("NiMH") batteries. NiCd batteries suffer
from lower energy density, memory effect, short shelf life, and environmental
problems. It is anticipated, however, that NiCd batteries will continue to be a
force in the marketplace for the foreseeable future.
NiMH batteries have a somewhat higher energy density than NiCd
batteries. However, they too have a short shelf life and they cost more than
NiCd batteries. Liquid electrolyte ("Lithium-Ion") batteries are just now
entering the marketplace in significant quantities. These batteries have higher
energy density but suffer from short shelf life and higher cost.
The Company's test data has demonstrated that the Company's lithium
metal polymer rechargeable battery test cells offer three to four times the
energy density of NiCd batteries, two to three times that of NiMH batteries, and
about two times that of lithium-ion batteries. Additionally, the Company
believes that its technology and approach to manufacturing offer significantly
lower production costs. The competition from these current
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technologies will be difficult because the products using such technologies are
entrenched and produced by large companies such as Sony, Eveready, Sanyo,
Duracell and Panasonic that have large resource bases.
Competition in the high energy density arena comes mainly from other
emerging companies such as AER (Air-Zinc), licensees of Bellcore lithium-ion
polymer technology, including Ultralife and Valence, Moltech (Li-Metal Polymer)
and Poly-Plus (Li-Metal Polymer). A number of these competitors are seeking to
move their technologies from the laboratory to commercialization and face
similar challenges that the Company faces. The Company believes that its focus
on the manufacturing process presents superior commercialization potential,
since it has a lower cost potential and can be readily adapted to run various
component chemistries including lithium-ion polymer. Additionally, its "web"
construction has the inherent ability to provide higher energy densities and to
accept future technological advances. The Company believes that its
lithium-polymer battery products also will be competitively superior from an
environmental point of view because the Company's batteries can be disposed of
with less risk of adverse impact on the environment due to the design features
and the materials utilized in the Company's product.
RAW MATERIALS
Certain materials used in the Company's products are available only
from a limited number of sources. The industry currently has sufficient capacity
to meet the Company's needs. However, there can be no assurances that the
currently adequate supply of raw materials will continue.
EQUIPMENT AND FACILITIES
The Company has outfitted a modern research and development facility
with appropriate equipment and instrumentation. At 12,400 square feet, this
modern facility has sufficient space to meet the Company's near-term needs,
including the DMF and pilot manufacturing line.
EMPLOYEES
During 1994, the Company hired a new management team and a core
technical staff that numbered thirteen full-time employees. The staff has the
required expertise in technology, commercialization, process, development,
battery engineering, electrochemistry and strategic alliance development. As of
March 31, 1997, the Company had a total of fourteen employees, of whom twelve
were employed full-time by the Company. The Company anticipates that it will
need to hire approximately three technical employees and approximately one
management employee in order to advance the Company's research and development
efforts and manufacturing scale-up in 1997, and that the Company will have
approximately twenty-one to twenty-eight employees by the end of 1997. The
Company believes that individuals having appropriate expertise are readily
available in the workforce at compensation levels consistent with the Company's
business plan and compensation policies.
GOVERNMENT REGULATION, SAFETY, ENVIRONMENTAL COMPLIANCE
The Company's products incorporate lithium, which is known to cause
explosions and fires if not properly handled. Although the Company believes that
its batteries do not present safety risks substantially different from those
inherent in currently marketed lithium ion batteries, there can be no assurance
that safety problems will not develop in the future. The Company intends to
incorporate safety policies in its manufacturing processes designed to minimize
safety risks, although there can be no assurance that an accident in its
facilities will not occur. Any accident, whether occasioned by the use of a
battery or the Company's manufacturing operations, could result in significant
production delays or claims for damages resulting from injuries, which would
adversely affect the Company's operations and financial condition.
Prior to the commercial introduction of the Company's batteries into a
number of markets, the Company will seek to obtain approval of its products by
one or more of the organizations engaged in testing product safety,
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<PAGE> 12
such as Underwriters Laboratories. Such approvals could require significant time
and resources from the Company's technical staff and, if redesign were
necessary, result in a delay in the introduction of the Company's products.
Pursuant to the regulations of the United States Department of
Transportation ("DOT"), a permit is required to transport lithium across state
lines. The International Air Transport Association ("IATA") similarly regulates
the international shipment of lithium. Although the Company believes that DOT
has granted permits for, and IATA has allowed, the transport of rechargeable
lithium-based batteries to be shipped or used by the general public, there can
be no assurance that DOT or IATA will grant such a permit to the Company or that
changes in such regulations, or in their enforcement, will not impose costly
requirements or otherwise impede the transport of lithium. In addition, the DOT
and IATA approval processes will require significant time and resources from the
Company's technical staff and if redesign were necessary, could delay the
introduction of the Company's products.
Various regulatory agencies will have jurisdiction over the operation
of any manufacturing facilities established by the Company. Because of the risks
generally associated with the use of lithium, the Company expects rigorous
enforcement. No assurance can be given that the Company will not encounter any
difficulties in complying with applicable health and safety regulations.
Federal, state and local regulations impose various environmental
controls on the storage, use and disposal of certain chemicals and metals used
in the manufacture of lithium-polymer batteries. Although the Company believes
its activities will conform to current environmental regulations, there can be
no assurances that changes in such regulations will not impose costly equipment
or other requirements. Any failure by the Company to adequately control the
discharge of hazardous wastes could also subject it to future liabilities.
GLOSSARY OF TECHNICAL TERMS
<TABLE>
<CAPTION>
<S> <C>
Alkaline Metals..................... The elements which are in Group 1A of the Periodic Table including
lithium, sodium and potassium.
Anode............................... The electrode in a battery which releases electrons to an external circuit
and ions into the electrolyte.
Cathode............................. The electrode in a battery which accepts electrons from the external circuit
and ions from the electrolyte.
Electrolyte......................... The medium in a battery which provides the ion transport mechanism
between the anode and cathode.
Electron............................ An elementary particle having a negative charge.
Energy Density...................... The total quantity of electrical energy in a battery, expressed as a function
of volume (e.g., Watt-hours per liter) or weight (e.g., Watt-hours per
kilogram).
Ion................................. An atom or a molecule that has acquired an electrical charge by the loss
or gain or electrons.
Laminated Battery................... A battery composed of thin sheets of anode, electrolyte and cathode that
have been bonded together.
Lead Acid Battery................... A rechargeable battery with electrodes made of lead compounds and with
an electrolyte containing acid.
Lithium............................. A soft, low density alkali earth metal with high electrochemical potential.
</TABLE>
9
<PAGE> 13
<TABLE>
<CAPTION>
<S> <C>
Lithium Polymer Battery............. A battery which has a polymer electrolyte rather than the liquid electrolyte
found in conventional batteries. Also known as "solid state" or "plastic"
batteries.
Lithium Metal Polymer Battery ...... A lithium polymer battery which uses pure lithium foil or lithium alloy
foil as the anode and lithiated oxides in the cathode.
Lithium-Ion Polymer Battery ........ A lithium polymer
battery which uses lithiated graphite or
carbon anode rather than lithium metal
foil and lithiated oxides in the cathode.
Memory Effect....................... The undesirable characteristic of NiCd batteries to lose energy storage
capacity on each recharge after a partial discharge.
Polymer............................. A large molecule that is made by bonding together many smaller identical
molecules.
Primary Battery..................... A battery that is not rechargeable.
Rechargeable Battery................ A battery that, after discharge, may be restored close to the fully charged
state by the passage of electric current through the battery in the opposite
direction to that of discharge.
Self-Discharge Rate................. The rate at which a charged battery loses energy while not in use.
Web................................. A non-woven net composed of thin fibers that have been randomly placed
in all directions and bonded together to form an open mesh structure of
continuous length.
</TABLE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases a 12,400 square foot research facility and corporate
headquarters in a free-standing building at 5115 Campus Drive in Plymouth
Meeting, Pennsylvania, near Philadelphia. This facility includes sufficient
laboratory and office space to allow the Company to expand its research efforts
and to construct its DMF. The lease commenced on November 1, 1994 for a term of
5 years with a base rent of $122,400 per year. Management expects that the
facility will be suitable for the Company's currently planned operations. The
Company believes that its properties and assets are adequately covered by
appropriate insurance.
ITEM 3. LEGAL PROCEEDINGS
In August 1996 civil actions were commenced against the Company by
Richard Perlman, a former director of the Company, and Christy & Viener, former
legal counsel to the Company, respectively. The two suits were commenced in the
United States District Court for the Southern District of New York. The Company
subsequently filed its own lawsuit against Christy & Viener and Mr. Perlman in
United States District Court for the Eastern District of Pennsylvania. Mr.
Perlman's complaint alleges that he is entitled to monetary damages and specific
performance of registration rights relating to certain warrants of the Company
that have not been registered and to which he claims entitlement. The Company
has declared such warrants and related documents void. Christy & Viener's
complaint alleges non-payment of legal fees incurred in connection with the
rendering of legal services. The Company believes these actions to be meritless
and intends to vigorously defend both actions and to assert all available
defenses and counterclaims.
The Company's lawsuit against Christy & Viener, a New York City law
firm, includes claims arising out of Christy & Viener's alleged fraud, legal
malpractice and conflicts of interest flowing from the fraudulent issuance of
the same warrants that form the basis of Perlman's action. The complaint asserts
claims for alleged violations
10
<PAGE> 14
of Federal securities laws, the Racketeer Influenced and Corrupt Organizations
Act, and fiduciary duties owed by the law firm and its partners to the Company.
The complaint names as defendants: Christy & Viener and William Gray, Steven
Berger, and Franklin Viele, each a partner in the firm. The complaint includes
similar claims against a fifth defendant, Mr. Perlman as noted above, a former
financial advisor to the Company and former member of its Board of Directors,
flowing from the fraudulent issuance of warrants to him.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Unless otherwise noted, the figures used in this Item have been
adjusted to reflect the effect of the Reverse Stock Split.
MARKET INFORMATION
The Company's Common Stock is traded only in the over-the-counter markets, and
"bid" and "asked" price quotations of dealers who make a market in the Common
Stock are quoted in the NASD Electronic Bulletin Board. The Company's Common
Stock is traded under the symbol "LITH". The following table sets forth certain
information with respect to the high and low bid prices for the Company's Common
Stock as of the close of each of the four calendar quarters of 1995 and 1996 and
as of the last practical date prior to the date of this Report. Such quotations
reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions,
and may not represent actual transactions. The price listed below have been
adjusted to reflect the 1 for 30 reverse stock on February 8, 1996.
<TABLE>
<CAPTION>
Bid Prices for Common Stock
High Low
---- ---
1996
<S> <C> <C>
Fourth Quarter $1.8125 $0.6875
Third Quarter $2.25 $1.125
Second Quarter $4.625 $2.125
First Quarter $7.50 $1.50
1995
Fourth Quarter $11.70 $2.55
Third Quarter $ 4.20 $1.80
Second Quarter $ 3.30 $0.90
First Quarter $ 3.90 $0.90
</TABLE>
As of March 31, 1997, there were approximately 647 holders of record of
the Company's Common Stock.
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<PAGE> 15
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does
not presently anticipate paying cash dividends in the foreseeable future. It is
anticipated that earnings, if any, will be retained for use in the business of
the Company for an indefinite period. Payments of dividends in the future, if
any, will depend, among other things, on the Company's ability to generate
earnings, its need for capital, and its financial condition. Additionally, the
Company's ability to pay dividends is limited by applicable state law.
Declaration of dividends in the future will remain within the discretion of the
Company's Board of Directors which will review its dividend policy from time to
time.
RECENT SALES OF COMMON STOCK
Between August 1994 and April 1995, the Company issued and sold 7%
convertible promissory notes in the aggregate principal amount of $1,467,750. As
of December 1995, $1,167,750 principal amount of notes were converted into
577,961 shares of Common Stock, after giving effect to the reverse split,
leaving $300,000 principal amount of notes outstanding. These remaining notes
(and related accrued interest) were converted into 152,038 shares of Common
Stock, after giving effect to the reverse stock split, during January 1996.
In August 1995 and October 1995, the Company issued and sold to a group
of private investors an aggregate principal amount of $1,000,000 12% convertible
promissory notes. On March 29, 1996, the Company entered into the Technology
Development Agreement and Stock Purchase Agreement with the Consortium, as
discussed above, and such notes, and accrued interest thereon, were converted
into 5,617,492 shares of Common Stock of the Company.
In December 1996, the Company issued and sold to a group of private
investors an aggregate principal amount of $800,000 12% convertible promissory
notes. On March 29, 1996, the Company entered into the Technology Development
Agreement and Stock Purchase Agreement with the Consortium, as discussed above,
and such notes, and accrued interest thereon, were converted into 1,385,954
shares of Common Stock of the Company.
Simultaneous with the March 29, 1996 Technology Development Agreement
and a Stock Purchase Agreement the Company sold an aggregate of 631,637 shares
of Common Stock to the Consortium for $2,400,000. See "Business -- Business
Strategy" and "Management's Discussion and Analysis or Plan of Operation".
In November 1995, the Company's Board of Directors authorized the
issuance of certain shares of the Company's Common Stock to certain employees in
exchange for such employees' forgiveness of specified accrued salaries and
bonuses. In July and August 1996 the Company completed these transactions which
resulted in the issuance of 54,336 shares of Common Stock (the "Restricted
Shares") to certain employees in exchange for such employees' forgiveness of
approximately $46,466 of accrued salaries and bonuses and in the issuance of
38,416 shares of Common Stock to an officer for $19,208 in cash.
In 1996, the Company agreed to issue shares of Common Stock to three
law firms in payment of agreed upon amounts of legal fees as follows: 31,111
shares in July 1996 for $30,000 in fees; and 323,854 shares in December 1996 for
$170,000 in fees. In June 1996 the Company issued a warrant to purchase 600,000
shares of Common Stock exercisable at $0.51 per share in connection with the
settlement of litigation. The settlement terms permit the warrantholder to apply
a credit of $100,000 to the payment of the warrant's exercise price. The
warrantholder exercised the warrant with respect to 196,079 shares in September
1996.
In 1996, the Company issued an aggregate of 453,575 shares of Common
Stock upon the conversion of previously issued shares of convertible preferred
stock.
In October 1996 the Company sold 193,322 shares of stock to a former
officer of the Company upon his exercise of stock options at an aggregate
exercise price of $96,854.
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<PAGE> 16
In May 1996 the Company issued an aggregate of 1,650,000 warrants to
two consultants pursuant to the terms of consulting agreements entered into by
the Company.
There were no underwriters involved in any of the transactions
described above. The sales and issuances of Common Stock described above were
deemed to be exempt from registration under the Securities Act by Section 4(2)
thereof based on the investor's suitability and/or representations furnished by
the securityholders.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
Prospectus.
GENERAL
The Company is a development stage company engaged in the business of
developing and seeking to commercialize a unique, solid state, lithium polymer
rechargeable battery. The Company has generated no revenues and has no
commercial operations to date. The Company has been unprofitable since inception
and expects to incur substantial additional operating losses over the next
several years. The Company does not expect to generate any revenues from
operations during the fiscal year ending December 31, 1997. The Company believes
that its battery technology, which is currently in the prototype development
phase, is capable of providing up to four times the performance of current
rechargeable batteries. The Company's objective is the commercialization of such
technology, inclusive of moving from current laboratory-scale product prototypes
and related demonstration manufacturing processes to full scale market
introduction, achieving cost-competitiveness, and constructing a large scale
manufacturing facility. The Company's product focus is on the rapidly growing
portable electronics market segment (notebook and palmtop computers and wireless
communications devices).
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
The Company has financed its operations from December 10, 1993 with
convertible debt and private placements of common and preferred stock and has
raised approximately $8.96 million, including, most recently, $1.75 million from
the October 1996 sale of convertible notes described herein.
At December 31, 1996, the Company had cash of $1,388,000, prepaid and
other current assets of $10,000, fixed assets of $624,000 and other assets of
$227,000. The Company's total liabilities were $3,028,000, consisting of
accounts payable and accrued expenses in the amount of $1,278,000 and
convertible notes due March 24, 1997 in the amount of $1,750,000. The $300,000
plus accrued interest due to holders of the 7% convertible promissory notes at
December 31, 1995 was converted into 152,038 shares of Common Stock during
January 1996. In addition, the Company converted $1,800,000 of debt plus accrued
interest at December 31, 1995 into 7,003,446 shares of Common Stock on March 29,
1996. The Company had a net working capital deficit of $1,630,000 on December
31, 1996.
The Company's net working capital deficit was reduced by approximately
$756,000 from December 31, 1995 to December 31, 1996. The Company's cash and
equivalents increased by approximately $1,171,000 from December 31, 1995 to
December 31, 1996. This reduction in net working capital deficit and increase in
cash is attributable primarily to the Company's sale of convertible notes in
October 1996 and the expenditure of cash obtained from equity investments and
the sale of such convertible notes to pay operating expenses, which have
increased during 1996 as compared to corresponding 1995 primarily for the
reasons discussed below in "Results of Operations".
13
<PAGE> 17
The Company's stockholder's deficiency was $779,000 at December 31,
1996, after giving effect to an accumulated deficit of $17,722,000 which
consisted of $10,857,000 accumulated deficit during the development stage from
July 21, 1989 through December 31, 1996 and $6,865,000 accumulated deficit from
prior periods. The Company expects to incur substantial operating losses as it
continues its commercialization efforts.
In March 1996, the Company entered into the Technology Development
Agreement and Stock Purchase Agreement, discussed in further detail elsewhere in
this report, based on the Company's proprietary lithium metal polymer
rechargeable battery technology, which agreements, among other things, required
that the $1,800,000 due to the holders of the 12% convertible promissory notes,
and accrued interest thereon, be converted into 7,003,446 shares of Common
Stock. All liens and security interests held by such noteholders were
simultaneously released and discharged.
Under the Technology Development Agreement and Stock Purchase
Agreement, the investors provided $2.4 million in equity funding to the Company.
In addition, Mitsubishi Materials has provided, and is providing, technical
resources to assist the Company in completing the development of its high energy
battery to meet specific performance requirements for portable electronics
applications. The Technology Development Agreement granted the investors
exclusive option rights to license the Company's technology for manufacturing in
the Far East and Oceania, and co-exclusive rights along with the Company for
manufacturing in Europe and the Americas, where the parties' strategy includes
establishing joint ventures for manufacturing operations. The Technology
Development Agreement also granted the investors an exclusive option for
worldwide distribution and sales of the Company's products. For these
considerations and 631,637 shares of the Company's Common Stock (representing a
then 4% equity position in the Company as of the closing) the investors paid
$2.4 million, prior to payment of placement costs of approximately $212,000.
In October 1996, the Company completed a bridge financing pursuant to
which the Company issued $1.75 million principal amount convertible notes (the
"Convertible Notes") to two purchasers (the "Convertible Note Purchasers"). In
connection with the issuance of the Convertible Notes, the Company issued
267,176 shares of Common Stock to the Convertible Note Purchasers in October
1996 pursuant to Regulation S under the Securities Act of 1933, as amended
("Regulations S"), the Company issued 66,794 shares plus a warrant to purchase
an additional 87,500 shares at an exercise price of $1.31 to the placement
agent and paid a $122,500 placement fee, and the Company has subsequently
issued to the Convertible Note Purchasers an additional 620,784 shares of
Common Stock through March 31, 1997 pursuant to Regulation S in accordance with
the terms of the Convertible Notes and related agreements.
The Company and the Convertible Note Purchasers have placed in escrow
6,201,550 shares of the Company's common stock (the "Escrowed Shares") pursuant
to the terms of the Convertible Notes and related agreements. The Escrowed
Shares are not considered to be issued and outstanding securities pending actual
payment for such shares. The Company did not repay the $1.75 million principal
of the Convertible Notes on the March 24, 1997 maturity date and has not repaid
the Convertible Notes as of the date of this report. As a result of this
nonpayment default: (i) the Convertible Note Purchasers have the right to
convert the $1.75 million principal into the Escrowed Shares which would
extinguish the indebtedness and (ii) interest on the $1.75 million began to
accrue at the rate of ten percent (10%) per annum as of March 24, 1997. Such
interest accrues and is payable on September 24, 1997 and at monthly intervals
thereafter. The Convertible Note Purchasers have not taken any action to
exercise any default remedies as of the date of this report. There can be no
assurance that the Convertible Note Purchasers will continue to refrain from
exercising available default remedies. The Convertible Note Purchasers' right to
convert the $1.75 million principal into the Escrowed Shares and the
aforementioned 10% interest terminate upon the earlier of (i) repayment of the
Convertible Notes or November 2, 1998. The conversion right is the Convertible
Note Purchasers' exclusive remedy in the event of the Company's failure to pay
the principal amount of the Convertible Notes. The Convertible Notes, if unpaid
on November 2, 1998, are automatically converted into the Escrowed Shares of the
Company's common stock. The Convertible Note agreements also provide that the
Company issue to the noteholders an additional $8,750 worth of the Company's
common stock each week after November 24, 1996 that a registration statement
contemplated under the Convertible Note agreements is not filed with the SEC
14
<PAGE> 18
(based on the value of the common stock at the beginning of each such week less
a discount factor). The Company terminated the issuance of these weekly shares
as of the Convertible Notes' March 24, 1997 maturity date in accordance with the
Company's interpretation of the Convertible Notes and related agreements. The
Convertible Note Purchasers have disputed such termination. There can be no
assurances that an offering will be successfully concluded to generate proceeds
to satisfy the Company's obligations under the Convertible Notes, or that the
Company will ever be able to repay the principal amount of the Convertible Notes
by March 24, 1997. Consequently, stockholders may incur a substantial dilution
of their equity interest if the Convertible Noteholder elect to convert the
principal amount of the notes into the Escrowed Shares.
While the Company's operating plan seeks to minimize the Company's
capital requirements, commercialization of the Company's battery technology and
repayment of the Company's bridge loan will require substantial amounts of
additional capital. Subject to the availability of necessary capital, the
Company expects that research and development and production expenses will
increase significantly as it continues to advance its battery technology and
develop products for commercial applications. The Company's working capital and
capital requirements will depend upon numerous factors, including, without
limitation, the progress of the Company's research and development program, the
levels and resources that the Company devotes to the development of
manufacturing and marketing capability, technological advances, the status of
competitors and the ability of the Company to establish collaborative
arrangements with other companies to provide research and development funding to
the Company and to manufacture and market the Company's products.
The Company believes that as of March 31, 1997 it has sufficient
capital resources to meet the Company's needs and satisfy the Company's
obligations through approximately June 1997 based on the Company's current
strategies and subject to the uncertainties discussed in this report. The
Company does not currently have sufficient cash to achieve all its development
and production objectives, including the 1998 installation of the pilot
manufacturing line and the repayment of the Convertible Notes. In order to raise
sufficient capital for its future growth and repayment of the Convertible Notes,
the Company will be required to sell additional debt or equity securities. See
"Plan of Operations for the Company."
There can be no assurances that the capital needed for attaining
commercial viability of the Company's battery technology, which the Company
currently estimates at $22 million, and repayment of the Company's Convertible
Notes can be obtained. If the Company is unable to raise sufficient capital, it
will be forced to curtail research and development expenditures which, in turn,
will delay, and could prevent, the completion of the commercialization process.
RESULTS OF OPERATIONS
The Company had no revenues for the years ended December 31, 1996 and
1995. Engineering, research and development expenses were $1,079,000 for the
year ended December 31, 1996 compared to $1,080,000 in 1995. Although expenses
were virtually unchanged, the Company decreased its internal development staff
by one person and increased its contract research activities by approximately
$100,000 to continue to accelerate its commercialization efforts.
General and administrative expenses were $3,216,000 for the year ended
December 31, 1996 compared to $1,307,000 in 1995. The increase of $1,909,000 was
due to increased legal costs of $1,182,000 associated with the termination of
certain investment banking services, the defense and settlement of litigation
and preparation of a registration statement related thereto, increased
amortization of debt issue costs of $56,000 relating to the 1995 sale of 12%
Convertible Promissory Notes and increased amortization of debt issue costs of
$438,000 relating to the 1996 sale of the $1,750,000 Convertible Notes, and
increased patent and accounting costs offset to a minor extent by discontinuance
of a director's consulting agreement and decreased employment costs.
15
<PAGE> 19
Interest expense increased to $89,000 (net of interest income of
$58,000) for the year ended December 31, 1996 compared to $85,000 (net of
interest income of $13,000) in 1995. The increase in interest expense for the
comparable periods is primarily attributable to the Company's convertible term
notes.
PLAN OF OPERATIONS FOR THE COMPANY
The Company's strategy is to commercialize its solid-state,
lithium-polymer, rechargeable battery with primary focus on high performance
portable electronic products (notebook computers, palmtop computers and wireless
communications devices). These market segments are large, growing rapidly, and
demand high performance batteries with a thin, flat form factor and long run
times. There can be no assurance, however, that the Company will be able to
achieve the technological breakthroughs that will be necessary in order to
ultimately achieve commercialization and/or obtain financings or generate
revenues in order to sustain the Company's on-going research and development
phase or to undertake the design and construction of the Demonstration
Manufacturing Facility discussed herein and other manufacturing-related
facilities.
During 1994, the Company recruited a new management team and a core
technical staff with commercialization and battery technology expertise. A
modern research facility was leased in late 1994 and product development has
continued at an accelerated pace. At March 31, 1997, the management team and
technical staff consisted of twelve full-time employees. The staff has the
required expertise in technology, commercialization, process development,
battery engineering, electrochemistry and strategic alliance development. During
1996 the Company entered into employment agreements with Thomas R. Thomsen as
the Company's Chief Executive Officer, David J. Cade as the Company's President
and Chief Operating Officer, and Dr. George R. Ferment as the Company's
Executive Vice President and Chief Technical Officer.
The Company's development and commercialization plan currently has the
following milestones:
(i) hand-made cell samples tested by potential strategic partners in
1995 (accomplished);
(ii) installation of a Demonstration Manufacturing Facility (DMF)
continuous flow coating and laminating unit in first quarter of 1996
(accomplished);
(iii) upgrade of the DMF in late 1996 (accomplished) and distribution
of cell samples to potential Original Equipment Manufacturer (OEM) customers in
early 1997;
(iv) complete manual assembly process on the back end of the DMF in
late 1997, which would enable initial production of hand made battery packs for
OEMs in 1998;
(v) construction of a larger scale pilot manufacturing line in early
1998 and commencement of trial runs;
(vi) augmentation of the pilot manufacturing line with an automated
backend assembly process in late 1998;
(vii) bringing the pilot manufacturing line "on line" as a commercial
production facility in early 1999; and
(viii) construction of a second tier manufacturing capability once
market demand exceeds initial manufacturing capacity.
The Company estimates that completion of phases (iv) through (vi) through the
end of 1998 will cost approximately $22 million in capital expenditures and
operating costs. There can be no assurances that the Company will meet these
development milestones on the time schedule outlined above.
16
<PAGE> 20
During March 1996, a continuous flow coating/laminating line --
referred to previously in this "Plan of Operation" as the Demonstration
Manufacturing Facility ("DMF") -- was installed by the Company. This line is
being used to further define the Company's manufacturing technology, to sharpen
manufacturing cost estimates, and then serve as the initial production facility
for battery cells which will be manually assembled into battery packs for
Original Equipment Manufacturer ("OEM") customers. Thereafter, based on design
data obtained from the DMF, the Company must successfully construct a pilot
manufacturing line reflecting the cost, quality, reliability, and performance
required for the various target market applications. It is anticipated that the
pilot manufacturing line and associated equipment will cost approximately $7.5
million to construct in the 1998 time frame. The pilot manufacturing line,
according to the Company's current strategy, will be located within the
Company's existing facility in Plymouth Meeting, Pennsylvania. Construction of
the pilot manufacturing line will require approximately 12 months. Ultimately,
the pilot manufacturing line would be replaced with a larger scale second tier
manufacturing line housed in the Company's existing facility, which could be
expanded if necessary. During the next twelve months after the date of this
report, the Company expects to incur expenses of approximately $2,000,000 for
the purchase of equipment based on the Company's current strategies and subject
to the uncertainties discussed in this report and the availability of capital.
The Company intends to finance the overall estimated $22 million total capital
equipment and operating expense required to bring the Company to the initial
commercial production stage at approximately the end of 1998 (which $22 million
includes the aforementioned estimated $7.5 million cost of the pilot
manufacturing facility and $2 million for equipment purchases) by means of
private and/or public equity or debt financings during the next two years.
The Company does not currently have sufficient cash to achieve all its
development and production objectives, including the 1998 installation of the
pilot manufacturing line and repayment of the Convertible Notes and $2 million
for equipment purchases. As noted above (See "Liquidity, Capital Resources, and
Financial Condition") the Company believes that as of March 31, 1997 it has
sufficient capital resources to meet the Company's needs and satisfy the
Company's obligations through approximately June 1997 based on the Company's
current strategies and subject to the uncertainties discussed in this report. In
order to raise sufficient capital for its future growth and repayment of the
Convertible Notes discussed above, the Company will be required to sell
additional debt or equity securities. Such new capital is planned to be sought
from several sources, including strategic partners, although the Company has no
commitments for new capital as of the date of this report. The Company is also
seeking to raise additional capital for its activities beyond 1997, which may
result in further dilution to the Company's existing stockholders. The Company
will seek to expand its strategic alliances which would provide capital from
joint development programs, license fees or an additional equity investment.
Discussions are continuing with companies in Japan, Korea, Europe and the United
States. However, there can be no assurances that additional capital will be
available to the Company on a timely basis or on acceptable terms. In addition,
there can be no assurance that the Company will be able to meet the
technological objectives and/or satisfy the capital requirements that the
Company believes are necessary to convert battery technology into successful
commercial products. There can be no assurance that the Company's products will
generate any revenues, will not encounter technical problems when used, will be
successfully marketed, will be produced at a competitive cost, or will achieve
customer acceptance or, if commercial products are developed and revenues
produced, that the Company will be profitable. The likelihood of the success of
the Company must be weighed against the problems, expenses, difficulties,
complications and delays frequently encountered in developing and marketing a
new product.
17
<PAGE> 21
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
The Company's financial statements, as itemized below, appear in a
separate section of this report following Item 13.
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 1996 F-3
Consolidated Statements of Operations for the Years Ended December 31, 1996
and 1995 and the Period from July 21, 1989 (Date of Inception) to December 31, 1996 F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) for the
Two Years Ended December 31, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Two Years Ended December 31, 1996
and 1995 and the Period from July 21, 1989 (Date of Inception) to December 31, 1996 F-6
Notes to Consolidated Financial Statements F-7 to F-19
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth information concerning the directors and
executive officers of the Company as of the date of this report:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Thomas R. Thomsen 61 Chairman of the Board and
Chief Executive Officer
Harry Edelson 60 Director
Stephen F. Hope 54 Director
Ralph D. Ketchum 70 Director
Gerald M. Labush 49 Director
John D. McKey, Jr. 53 Director
David J. Cade 59 President and Chief
Operating Officer
George R. Ferment 57 Executive Vice President
of Operations and Chief
Technical Officer
William D. Walker 55 Treasurer and Chief
Financial Officer
</TABLE>
18
<PAGE> 22
Thomas R. Thomsen was appointed Chief Executive Officer of the Company
on May 9, 1996. Mr. Thomsen was elected a director of the Company, effective
February 22, 1995, and was elected Chairman of the Board of the Company,
effective August 7, 1995. Mr. Thomsen was President of AT&T Technology Systems
from 1983 to 1990 and was a director of AT&T Credit Corp., Sandia Corporation
and Rennselear Polytechnic Institute from 1984 to 1990. Mr. Thomsen currently
serves as a director of Transcript International and the Pioneer Foundation and
is on the Executive Committee of the University of Nebraska Technology Park,
L.L.C.
Harry Edelson was elected a director of the Company, effective May 9,
1996. Since July 1984, Mr. Edelson has been the Managing Partner of Edelson
Technology Partners ("ETP"), a venture capital fund managing money for six
corporations: AT&T, Ford Motor, Paramount Communications, 3-M, Asea Brown Boveri
and Cincinnati Bell. ETP has invested in more than 70 companies involved in a
wide range of technologies including telecommunications, computers,
semi-conductors, specialty chemicals and environmental. Mr. Edelson has served
as a Director of Advanced Oxygen Technology since 1990.
Stephen F. Hope currently serves as a director of the Company and was a
President, Chairman of the Board and Treasurer of the Company from October 1990
through April 1994. He is a director of Lithion Corporation, a wholly-owned
subsidiary of the Company. Mr. Hope has an ongoing consulting arrangement with
the Company with respect to the battery technology that is being developed by
the Company. He received a B.A. from Dartmouth University in 1965 and is a
member of the Society of Manufacturing Engineers and the Society of
Photo-Finishing Engineers. Mr. Hope was a Director and the President of Hope
Industries, Inc., a previously wholly-owned subsidiary of the Company, from 1985
through December 1993. Hope Industries, Inc. filed for reorganization under the
Bankruptcy Code in April 1993 and its Plan of Reorganization was confirmed on
May 6, 1994.
Ralph D. Ketchum was elected a director of the Company, effective July
1, 1994. He has been President of RDK Capital, Inc. ("RDK Capital") since
January 1987. RDK Capital is the general partner of RDK Capital Limited
Partnership, an investment limited partnership. Mr. Ketchum served as Chief
Executive Officer and Chairman of the Board of Heintz Corporation ("Heintz"), a
majority owned subsidiary of RDK Capital Limited Partnership. In August 1993,
Heintz filed for protection under Chapter 11 of the United States Bankruptcy
Code in the Bankruptcy Court of the Eastern District of Pennsylvania. Mr.
Ketchum was Senior Vice President and Group Executive of the Lighting Group,
General Electric Company from 1980 to 1987. He also serves as a director of
Metropolitan Savings Bank, Oglebay-Norton Corporation, Thomas Industries and
Pacific Scientific, Inc.
Gerald M. Labush was elected a director of the Company, effective
December 6, 1995. Since 1979, he has been an attorney in private practice at the
law offices of Gerald M. Labush in New York City.
John D. McKey, Jr. was elected a director of the Company, effective
September 8, 1995. He has since September 1993, been a partner at the law firm
of McCarthy, Summers, Bobko & McKey, P.A., and, from June 1986 to September
1993, was a partner at Kohn, Bobko, McKey & Higgins, P.A. Mr. McKey currently
serves as a director of Publishing Company of North America and Consolidated
Capital of North America, Inc..
David J. Cade was appointed President and Chief Operating Officer of
the Company in May 1996. Mr. Cade served as the Company's Vice President of
Marketing from August 1994 to May 1996 and was elected as an officer in October
1994. Mr. Cade has over thirty years of experience in senior business
development, marketing, and sales in global telecommunications systems,
electronics and information technologies. From February 1988 to October 1992,
Mr. Cade was Vice President of Marketing and Business Development for COMSAT
Systems Division and from October 1992 until April 1994, Mr. Cade was Vice
President of Sales and Marketing at Interdigital Communications Corporation, a
Philadelphia company that manufactures wireless telephone systems for customers
worldwide. Previously, Mr. Cade held managerial positions with AT&T, Martin
Marietta (now Lockheed Martin) and the Department of Defense. Mr. Cade holds an
MBA from Syracuse University and an undergraduate degree from the University of
Illinois.
19
<PAGE> 23
George R. Ferment, Ph.D. was appointed Executive Vice President of
Operations and Chief Technical Officer of the Company in May 1996. Dr. Ferment
previously served as the Company's Vice President of Technology and Engineering
from October 1994 to May 1996 and from March 1994 through October 1994, as
Director of Technology Development. Dr. Ferment has over 25 years of technology
experience in product and process development with extensive background in
plastic and polymer science. His early experience was in research and
development of fibers and polymers at Celanese Corporation. Dr. Ferment spent 14
years at GAF/Tarkett Corporation where he rose to the position of General
Manager (October 1983 - May 1988). From October 1989 to October 1993, Dr.
Ferment was a Group Director of Campbell Soup Company where he had worldwide
responsibility for the company's diverse packaging technology development
programs. Dr. Ferment received his Master's Degree and Ph.D. in Chemical
Engineering from the New Jersey Institute of Technology.
William D. Walker was elected Treasurer and Chief Financial Officer of
the Company, effective September 8, 1995. Mr. Walker was Vice President of
Finance of Simon LG Industries, Inc., a manufacturer of machinery for the paper
industry, from October 9, 1990 to March 31, 1994. Mr. Walker was, from May 1994
until September 1995, an independent financial consultant, including to the
Company (from August, 1994 to his election as Treasurer and Chief Financial
Officer). On October 6, 1995, Mr. Walker was elected Chairman of LG Industries,
Inc., the successor of Simon LG Industries, Inc.
The Company's directors hold office until the next annual meeting of
the Company's stockholders and until their successors have been duly elected and
qualified. The Company's directors do not receive compensation for their
services in that capacity.
Mr. David Hughes voluntarily resigned from the Company's Board of
Directors on March 25, 1997 and Mr. Paul Bagley and Mr. L. Wayne Harber
voluntarily resigned from the Company's Board of Directors on April 3, 1997.
The Company is in the process of identifying candidates to fill these
vacancies.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent
(10%) of the registered class of the Company's equity securities, to file
reports of ownership and changes in ownership on Forms 3, 4 and 5 with the
Securities and Exchange Commission ("SEC") and the National Association of
Securities Dealers. Officers, directors and greater than ten percent (10%)
beneficial owners are required by SEC regulation to furnish the Company with
copies of all Forms 3, 4 and 5 they file.
Based solely on the Company's review of the copies of such forms it has
received, and written representations from certain reporting persons that they
were not required to file a Form 5 for specified fiscal years, the Company
believes that all of its officers, directors and greater than ten percent (10%)
beneficial owners complied with all filing requirements applicable to them with
respect to transactions during the fiscal year ended December 31 1996, except
for the following: Ralph D. Ketchum, Gerald M. Labush, John D. McKey, Jr., each
a Director of the Company, David Hughes (a former Director of the Company), and
William D. Walker, the Company's Treasurer and Chief Financial Officer, filed
Forms 5 in January or February 1997, in lieu of Forms 4, to report the
conversion of certain notes which were purchased from the Company between August
1995 and December 1995 and converted on March 29, 1996 into the Company's common
stock. Stephen F. Hope, a Director of the Company, filed a Form 5 in February
1997 in lieu of a Form 4 to report sales of shares of the Company's common stock
during April, May and October 1996 by his father's estate.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
paid by the Company during the three years ended on December 31, 1996 to (i) the
Chief Executive Officer of the Company and (ii) all other executive officers of
the Company, or any of its subsidiaries, who were serving in such capacity on
December 31,
20
<PAGE> 24
1996 and received total salary and bonus in excess of $100,000 during fiscal
year 1996 (collectively, "Named Executive Officers"). Unless otherwise noted,
the figures used in this "Executive Compensation" section have been adjusted to
reflect the effect of the Company's one-for-thirty reverse stock split.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Awards
Name and Principal Year Salary Bonus Securities Underlying
Position Options/SARs (#)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas R. Thomsen, 1996 $118,708(2) 0 413,334(3)
Chairman of the Board of 1995 0 0 13,334
Directors and Chief 1994 0 0 0
Executive Officer(1)
- ---------------------------------------------------------------------------------------------------------
David J. Cade, President 1996 $134,711 0 189,314(5)
and Chief Operating 1995 $125,000 $11,000 266,667
Officer(4) 1994 $ 45,413 0 66,667
- ---------------------------------------------------------------------------------------------------------
George R. Ferment, Exec. 1996 $126,474 0 221,370(7)
Vice President of 1995 $120,000 $28,000 200,001
Operations and Chief 1994 $94,385 0 133,333
Technical Officer(6)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Thomas R. Thomsen was appointed Chief Executive Officer of the Company
on May 9, 1996.
(2) Based on Mr. Thomsen's annual salary of $185,000 as provided for in his
employment agreement dated May 5, 1996. Mr. Thomsen has volunteered to
defer his annual salary until further notice. The Company has been
accruing the full amount.
(3) Mr. Thomsen was granted 13,334 (post-split) stock options on February
22, 1995 exercisable at $3.00 per share (post-split). These 13,334
stock options were cancelled on February 8, 1996 and replaced the same
day with a grant of 13,334 stock options exercisable at $0.90 per share
in connection with the repricing of directors' options. (See "Executive
Compensation - Stock Option Repricing" for details). On May 9, 1996,
Mr. Thomsen was granted 400,000 stock options exercisable at $2.5625
per share pursuant to Mr. Thomsen's employment agreement.
(4) David J. Cade was appointed the Company's President and Chief Operating
Officer on May 9, 1996.
(5) Mr. Cade was granted 133,333 stock options on July 24, 1996 at an
exercise price of $1.33 and 55,981 stock options on December 11, 1996
at an exercise price of $0.78.
(6) George R. Ferment was appointed the Company's Executive Vice President
of Operations and Chief Technical Officer on May 9, 1996.
(7) Dr. Ferment was granted 133,333 stock options on July 24, 1996 at an
exercise price of $1.33 and 88,037 stock options on December 11, 1996
at an exercise price of $0.78.
21
<PAGE> 25
OPTION GRANTS IN FISCAL YEAR 1996
The following table sets forth stock options granted to each of the
Named Executive Officers during fiscal year 1996 to purchase shares of Common
Stock (including options repriced during fiscal year 1996).
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL OPTIONS/
UNDERLYING SARS GRANTED TO EXERCISE MARKET PRICE
OPTIONS/SARS EMPLOYEES IN OR BASE ON DATE OF EXPIRATION
NAME GRANTED (#)(1) FISCAL YEAR(2) PRICE ($/Sh.) GRANT ($/Sh.) DATE
---- -------------- -------------- ------------- ------------- ----
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Thomas R. 13,334 1.3% $0.90 $0.90 2/22/05
Thomsen(3) 400,000 37.9% $2.5625 $2.5625 5/9/06
- -------------------------------------------------------------------------------------------------------------------------
David J. Cade(4) 133,333 12.7% $1.33 $1.33 7/24/06
55,981 5.3% $0.78 $0.78 12/11/06
- -------------------------------------------------------------------------------------------------------------------------
George R. Ferment(5) 133,333 12.7% $1.33 $1.33 7/24/06
88,037 8.4% $0.78 $0.78 12/11/06
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company's stock option plans contain provisions for the
acceleration of vesting rights upon the occurrence of certain events.
(2) The percentage of total options granted to each of the Named Executive
Officers takes into account stock options issued to directors as well
as those issued to employees. (See "Executive Compensation -- Directors
Stock Option Plan" for details).
(3) Mr. Thomsen was granted 400,000 stock options on February 22, 1995
exercisable at $0.10 per share. On February 8, 1996, these options were
cancelled and replaced with 13,334 new options with an exercise price
of $0.90 per share. (See "Executive Compensation -- Directors Stock
Option Plan"). These options are exercisable in equal amounts annually
over four years beginning on February 22, 1995. In addition, on May 9,
1996, the Company granted Mr. Thomsen an additional 400,000 stock
options at an exercise price of $2.5625 per share in connection with
his Employment Agreement. All of these options became exercisable in
1996.
(4) Mr. Cade was granted 133,333 stock options on July 24, 1996 at an
exercise price of $1.33 per share (exercisable in three equal amounts
on July 24, 1996, July 24, 1997 and July 24, 1998) and 55,981 stock
options on December 11, 1996 at an exercise price of $0.78 per share
(exercisable in equal amounts on December 11, 1996, December 11, 1997,
December 11, 1998 and December 11, 1999).
(5) Dr. Ferment was granted 133,333 stock options on July 24, 1996 at an
exercise price of $1.33 per share (exercisable in three equal amounts
on July 24, 1996, July 24, 1997 and July 24, 1998) and 88,037 stock
options on December 11, 1996 at an exercise price of $0.78 per share
(exercisable in equal amounts on December 11, 1996, December 11, 1997,
December 11, 1998 and December 11, 1999).
OPTIONS EXERCISED AND OPTIONS OUTSTANDING
The following table sets forth information with respect to (i) options
exercised by each of the Named Executive Officers in fiscal year 1996 (none) and
(ii) the number and value of options held by each of the Named Executive
Officers at the end of fiscal year 1996. The calculations to determine the
unexercised value of options held at December 31, 1996 are based on the closing
"bid" price of $.96875 per share of Common Stock on December 31, 1996.
22
<PAGE> 26
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR 1996 AND
DECEMBER 31, 1996 OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN THE
UNEXERCISED MONEY OPTIONS/SARs
OPTIONS/SARs AT FY- AT FY-END ($)
SHARES END (#) EXERCISABLE/
ACQUIRED ON VALUE EXERCISABLE/ UNEXERCISABLE
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE
- ---- ------------ ------------ -------------
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Thomas R.
Thomsen 0 0 403,333/10,001 $229/$688
- -------------------------------------------------------------------------------------------------------------------
David J. Cade 0 0 191,775/164,206 $11,809/$10,217
- -------------------------------------------------------------------------------------------------------------------
George R.
Ferment 0 0 166,457/221,581 $11,030/$17,047
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
STOCK INCENTIVE PLAN
In February 1994 the Board of Directors of the Company established the
1994 Stock Incentive Plan (the "Stock Plan") to aid the Company in attracting,
retaining and motivating officers and key employees, whether or not they are
directors of the Company, and consultants and other advisors to the Company by
providing them with incentives for making significant contributions to the
growth and profitability of the Company. In February 1994, Majestic Hopes, LLC,
as the majority stockholder of the Company at that time, approved the adoption
of the Stock Plan and on February 8, 1996 ratified an amendment to the Stock
Plan, increasing from 1,333,333 to 2,666,667 (after giving effect to the 1 for
30 reverse stock split on February 8, 1996) the number of shares available for
issuance of awards granted under the Stock Plan. The Stock Plan terminates in
February 2004.
Set forth below is a brief description of the principal features of the
Stock Plan.
The Stock Plan authorizes the Company to grant stock options, both
incentive stock options (within the meaning of Section 422 of the Internal
Revenue Code) and non-qualified stock options, SARs and awards payable in stock,
restricted stock or cash. All of such awards may be granted singly, in
combination or in tandem, or in substitution for awards granted previously under
the Stock Plan or any other Stock Plan of the Company. In addition, the Stock
Plan permits the Company to extend dividend equivalency rights to awards made
thereunder. The payment or exercise of any awards, including stock options,
under the Stock Plan may be conditioned on the satisfaction of various criteria,
such as the achievement of specific business objectives, attainment of growth
rates and other comparable measurements of the Company's performance. It is
expected that, while some or all of the awards referred to above may be made
from time to time, the Company will principally grant stock options pursuant to
the Stock Plan.
The Stock Plan makes available a maximum of 2,666,667 shares of the
Company's Common Stock for issuance for awards granted under the Stock Plan. The
aggregate number of shares of Common Stock which may be the subject of an award
for any participant may not exceed 666,667 shares in any fiscal year. Shares
related to awards (or portions thereof) that are forfeited, canceled,
terminated, expire unexercised, surrendered in exchange for other awards, or
settled in cash in lieu of shares or in any other manner such that shares
covered by an award are not and will not be issued, shall be restored to the
total number of shares available for issuance pursuant to awards granted under
the Stock Plan. As of December 31, 1996, there were outstanding options with
respect to 1,744,010
23
<PAGE> 27
shares of Common Stock under the Stock Plan. As of December 31, 1996, options
with respect to 1,154,894 shares of Common Stock were fully vested.
The Stock Plan provides that, in the event of a stock split, stock
dividend, combination or reclassification of shares, recapitalization, merger or
similar event, proportional adjustments will be made in (a) the number of shares
of the Company's Common Stock (i) reserved for issuance under the Stock Plan,
(ii) available for options or other awards and (iii) covered by outstanding
awards, (b) the prices related to outstanding awards, and (c) the appropriate
fair market value and other price determinations for such awards. In addition,
equitable adjustments will be made in the event of any other change affecting
the Company's Common Stock or any distribution (other than normal cash
dividends) to stockholders of the Company.
The Stock Plan provides that it shall be administered by a committee
designated by the Board of directors, and consist of at least two directors who
are not officers or employees of the Company or any of its subsidiaries. The
committee that administers the Stock Plan (the "Stock Plan Committee")
currently consists of Mr. Ketchum. A vacancy in this committee currently exists
as the result of Mr. Harber's resignation from the Board. The Stock Plan
Committee has the sole authority, among other things, to grant awards;
determine the term, conditions and limitations of awards; establish rules,
procedures, regulations and guidelines relating to the Stock Plan generally and
to interpret the Stock Plan and award agreements entered into pursuant to the
Stock Plan. The Stock Plan Committee may also effect the continuation,
acceleration or modification of awards under the Stock Plan in certain
circumstances including events that might constitute a change in control of the
Company.
Generally, a Stock Plan participant may exercise or receive payment of
an award only while employed by or associated with the Company or a subsidiary
of the Company, except that, under some circumstances, and subject to
restrictions and limitations imposed by the Stock Plan Committee, the Stock Plan
Committee may permit exercise by, or payment to, participants who have retired
or become disabled, or who otherwise have had their employment or association
terminated. In addition, if a participant dies while still employed or
associated with the Company or a subsidiary thereof, the estate, and heirs or
beneficiaries of the deceased participant may, subject to restrictions and
limitations imposed by the Stock Plan Committee, exercise or receive payment in
respect of awards held by the participant at the time of death. In general,
awards granted under the Stock Plan are not assignable or transferable by a
participant, except under the limited circumstances contemplated by the Stock
Plan.
The exercise price of an option granted under the Stock Plan will be
not less than the fair market value of the Company's Common Stock on the date of
grant. The exercise price of an option must be paid in full in cash at the time
of exercise, or, if permitted by the Stock Plan Committee, may be paid in whole
or in part by (a) tendering shares of Common Stock or surrendering another award
granted under the Stock Plan or another benefit Stock Plan of the Company, (b)
delivering a promissory note issued by the participant to the Company containing
terms and conditions determined by the Stock Plan Committee or (c) any other
means acceptable to the Stock Plan Committee. In order to enable the Company to
satisfy any tax payment obligations resulting from any exercise of, or other
payment on, an award under the Stock Plan, the Company has the right, among
other things, to withhold an appropriate amount from such payment or to withhold
an appropriate number of shares of the Company's Common Stock receivable by the
participant for payment thereof.
The Stock Plan may not, without the approval of the stockholders as set
forth therein, be amended to (i) materially increase the aggregate number of
shares of the Company's Common Stock that may be issued under the Stock Plan
(except for adjustment pursuant to Section 14 of the Stock Plan, as described
above) (ii) materially increase the benefits accruing to participants or (iii)
materially modify the eligibility requirements of the Stock Plan. The Stock Plan
may not be changed in such a way as to alter, impair, amend, modify, suspend or
terminate any rights of a participant or any obligations of the Company under
any award theretofore granted in any manner adverse to such participant without
the consent of such participant.
No options have been exercised since the Stock Plan was adopted.
24
<PAGE> 28
COMPENSATION OF DIRECTORS
Directors receive no cash compensation for serving on the Company's
Board of Directors. Each Non-Employee Director receives an option to purchase
13,334 shares of Common Stock as described below under the caption "Directors
Stock Option Plan" upon election to the Board.
DIRECTORS STOCK OPTION PLAN
In August 1995, the Board of Directors adopted the Directors Stock
Option Plan (the "Directors Plan") and on February 8, 1996, Majestic Hopes, LLC,
as the majority stockholder, ratified the adoption of the Directors Plan. The
Directors Plan authorizes the granting of up to 333,333 options. The members of
the Committee administering the Directors Plan are Thomas R. Thomsen and Ralph
Ketchum. The purpose of the Directors Plan is to aid the Company in attracting,
retaining and motivating independent directors by providing them with incentives
for making significant contributions to the growth and profitability of the
Company. The Directors Plan is designed to accomplish this goal by the granting
of stock options, thereby providing participants with a proprietary interest in
the growth, profitability and success of the Company.
Directors of the Company who are not officers or employees of the
Company or any subsidiary thereof ("Non-Employee Directors") are eligible to
receive grants of stock options pursuant to the Directors Plan. Under the
Directors Plan, non-qualified stock options to purchase shares of the Company's
Common Stock shall be granted automatically to Non-Employee Directors at the
times specified in the Directors Plan. Each Non-Employee Director receives an
initial option to purchase 13,334 shares of the Common Stock on the date on
which such director first becomes eligible to participate in the Directors Plan.
Thereafter, as long as a Non-Employee Director remains eligible to participate
in the Directors Plan, such director will receive on the date the Company
consummates a joint venture agreement with an investment in the Company of at
least $3,000,000, options to acquire up to an additional 20,000 shares.
Notwithstanding the foregoing, no stock option shall be granted to any person
whose service as a director of the Company has ceased. Mr. Thomsen received
13,334 stock options under the Directors Plan, prior to his employment with the
Company. Mr. Thomsen, as Chief Executive Officer, will no longer receive options
under the Directors Plan.
During the fiscal year ended December 31, 1996, Harry Edelson and L.
Wayne Harber, upon their election to the Company's Board, each were granted
13,334 stock options, which vest in equal increments over four years. In
addition, the 13,334 options held by Paul Bagley, David H. Hughes, Ralph D.
Ketchum, Gerald M. Labush, John D. McKey and Thomas R. Thomsen under the
Directors Plan were repriced on February 8, 1996 to $.90. See "Stock Option
Repricing" for details.
The exercise price of any stock option granted pursuant to the
Directors Plan is the fair market value of the Common Stock on the date of
grant. As of December 31, 1996, there were outstanding options under the
Directors Plan with respect to 106,672 shares of Common Stock, which have
exercise prices ranging from $.90 per share to $2.56 per share and options with
respect to 29,998 shares of Common Stock are fully vested as of December 31,
1996.
STOCK OPTION REPRICING
In February 1996, stock options which had previously been granted to
the then directors of the Company were cancelled and new options were reissued
at $.90 per option, the fair market value of the Common Stock as of the
effective date pursuant to the terms and conditions of the Directors Plan. The
stock options were repriced in order to sustain the incentivization of the
directors since the stock options held by the directors had exercise prices well
in excess of the then market price of the Company's Common Stock (ranging rom
$2.40 to $9.30). As a result of this stock option repricing, the Company
cancelled at total of 106,672 stock options and granted the same number of new
stock options at the aforementioned exercise price of $.90 per share.
25
<PAGE> 29
EMPLOYMENT AGREEMENTS AND CERTAIN EMPLOYEE MATTERS
On May 9, 1996, the Company entered into a one-year employment
agreement with Thomas R. Thomsen pursuant to which Mr. Thomsen is employed as
the Company's Chief Executive Officer at an annual salary of $185,000. Mr.
Thomsen has voluntarily elected to defer his compensation in the best interests
of the Company. Mr. Thomsen shall be eligible to receive a target bonus of up to
40% of his annual salary, the exact amount of such bonus to be determined by the
Board of Directors in accordance with performance thresholds to be agreed upon
by the Board of Directors and Mr. Thomsen. Mr. Thomsen's employment agreement
also provides for the issuance of a ten (10) year non-qualified option to
purchase 400,000 shares of the Company's common stock at an exercise price of
$2.5625 per share. If Mr. Thomsen's employment is terminated without cause and
other than due to disability or death, the Company will be obligated to (i)
continue Mr. Thomsen's salary for an additional six (6) months or the remainder
of the term on the contract, whichever is longer ("severance period"), (ii)
continue for such "severance period" all of Mr. Thomsen's benefits under the
Company's medical insurance, disability insurance, life insurance and other
benefit plans as are then in effect for executives of the Company, and (iii)
accelerate the vesting of all unexercisable options such that upon termination
all then exercisable and unexercisable options immediately become exercisable on
the date of termination, and all the same shall remain exercisable for a period
of three (3) years commencing on the date of termination.
On July 24, 1996, the Company entered into a one-year employment
agreement with David J. Cade pursuant to which Mr. Cade is employed as the
Company's President and Chief Operating Officer at an annual salary of $140,000.
Mr. Cade shall also be eligible to receive a target bonus of up to 20% of his
annual salary, the exact amount of such bonus to be determined by the Board of
Directors in accordance with performance thresholds to be agreed upon by the
Board of Directors and Mr. Cade. Mr. Cade's employment agreement also provides
for the issuance of a ten (10) year incentive option to purchase 133,333 shares
of the Company's common stock at an exercise price of $1.33 per share. If Mr.
Cade's employment is terminated without cause and other than due to disability
or death, the Company will be obligated to (i) continue Mr. Cade's salary for an
additional six (6) months or the remainder of the term on the contract,
whichever is longer ("severance period"), (ii) continue for such "severance
period" all of Mr. Cade's benefits under the Company's medical insurance,
disability insurance, life insurance and other benefit plans as are then in
effect for executives of the Company, and (iii) in the case of death or
disability, the option shall be exercisable to the extent then vested for a
period of three years.
On July 24, 1996, the Company entered into a one-year employment
agreement with George R. Ferment pursuant to which Dr. Ferment is employed as
the Company's Executive Vice President of Operations and Chief Technical Officer
at an annual salary of $130,000. Dr. Ferment shall also be eligible to receive a
target bonus of up to 20% of his annual salary, the exact amount of such bonus
to be determined by the Board of Directors in accordance with performance
thresholds to be agreed upon by the Board of Directors and Dr. Ferment. Dr.
Ferment's employment agreement also provides for the issuance of a ten (10) year
incentive option to purchase 133,333 shares of the Company's common stock at an
exercise price of $1.33 per share. If Dr. Ferment's employment is terminated
without cause and other than due to disability or death, the Company will be
obligated to (i) continue Dr. Ferment's salary for an additional six (6) months
or the remainder of the term on the contract, whichever is longer ("severance
period"), (ii) continue for such "severance period" all of Dr. Ferment's
benefits under the Company's medical insurance, disability insurance, life
insurance and other benefit plans as are then in effect for executives of the
Company, and (iii) in the case of death or disability, the option shall be
exercisable to the extent then vested for a period of three years.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 28, 1997 with
respect to the equity securities of the Company known by the Company to be
beneficially owned by each beneficial owner of more than five percent of the
Company's Common Stock, by each current director and Named Executive Officer (as
defined in applicable SEC regulations), and by all current directors and
executive officers as a group.
26
<PAGE> 30
<TABLE>
<CAPTION>
Name and Address Number of Shares
of Beneficial Owner(1) Beneficially Owned(2) Percent of Class(2)
- ------------------- ------------------ ----------------
<S> <C> <C>
Thomas R. Thomsen 406,667(3) 2.3
- ---------------------------------------------------------------------------------------------------
Harry Edelson 1,535,351(4) 8.7
- ---------------------------------------------------------------------------------------------------
Stephen F. Hope 1,926,946(5) 10.9
- ---------------------------------------------------------------------------------------------------
Ralph D. Ketchum 95,955(6) *
- ---------------------------------------------------------------------------------------------------
Gerald M. Labush 268,319(7) 1.5
- ---------------------------------------------------------------------------------------------------
John D. McKey, Jr. 562,534(8) 3.2
- ---------------------------------------------------------------------------------------------------
David J. Cade 191,775(9) 1.1
- ---------------------------------------------------------------------------------------------------
George R. Ferment 183,124(10) 1.0
- ---------------------------------------------------------------------------------------------------
Edelson Technology Partners III 1,532,018 8.7
- ---------------------------------------------------------------------------------------------------
Donald C. Taylor 1,832,500(11) 9.6
- ---------------------------------------------------------------------------------------------------
Group III Capital, Inc. 1,400,000 7.4
- ---------------------------------------------------------------------------------------------------
Estate of Henry Hope 1,509,335(12) 8.6
- ---------------------------------------------------------------------------------------------------
All Directors and Officers as a 5,702,742 31.0
Group (9 persons)+
- ---------------------------------------------------------------------------------------------------
</TABLE>
* Less than 1%.
+ Includes the Company's directors and officers as of March 31, 1997.
(1) The address of each beneficial owner is c/o Lithium Technology
Corporation, 5115 Campus Drive, Plymouth Meeting, PA 19462 except for
Edelson Technology Partners III: Whiteweld Centre, 300 Tice Boulevard,
Woodcliff Lake, NJ 07675; Group III Capital Ventures, Inc. and Donald
C. Taylor: 475 Park Avenue South, Suite 330, New York, NY 10016.
(2) Includes shares of Common Stock underlying outstanding warrants,
options and convertible securities which are exercisable by the
beneficial owner with respect to whom the calculation is made, but does
not include shares of Common Stock that may not be acquired within 60
days after March 31, 1997 upon the exercise or conversion of warrants,
options or convertible securities.
(3) Consists of options to acquire 406,667 shares of Common Stock.
(4) Includes 1,532,018 shares of Common Stock held by Edelson Technology
Partners III, L.P. ("ETP"). Mr. Edelson is a General Partner and
significant shareholder of ETP and, therefore, may be deemed to be the
beneficial owner of the Company's Common Stock held by ETP. Mr. Edelson
also has 3,333 options to acquire 3,333 shares of Common Stock.
(5) Consists of 193,334 shares of Common Stock held by Hope Lithographic
Enterprises, Inc. The Estate of Henry Hope owns 51%, and Stephen F.
Hope owns 36.5%, of the outstanding capital stock of Hope Lithographic
Enterprises, Inc., and therefore both may be deemed to be the
beneficial owners of the
27
<PAGE> 31
Company's stock held by that entity; 1,316,001 shares of Common Stock
owned by the Estate of Henry Hope; and 417,611 shares of Common Stock
held by Stephen Hope.
(6) Includes options to acquire 6,667 shares of Common Stock.
(7) Includes options to acquire 3,333 shares of Common Stock.
(8) Includes options to acquire 3,333 shares of Common Stock.
(9) Consists of options to acquire 191,775 shares of Common Stock.
(10) Consists of options to acquire 183,124 shares of Common Stock.
(11) Includes approximately 1,400,000 shares of Common Stock underlying a
warrant beneficially owned by Group III Capital, Inc., an entity
controlled by Mr. Taylor, and 192,500 shares of Common Stock held by a
limited partnership controlled by Mr. Taylor.
(12) Consists of 193,334 shares of Common Stock held by Hope Lithographic
Enterprises, Inc. The Estate of Henry Hope owns 51%, and Stephen F.
Hope owns 36.5%, of the outstanding capital stock of Hope Lithographic
Enterprises, Inc., and therefore both may be deemed to be the
beneficial owners of the Company's stock held by that entity; and
1,316,001 shares held by Hazel Hope, as Executrix of the Estate of
Henry Hope.
CHANGES IN CONTROL
Pursuant to the terms of the Convertible Notes issued in connection
with the Company's $1.75 million bridge loan financing (see -- "Description of
Business -- Overview and Recent Developments"), the Company may be required to
issue up to 6,201,550 shares of the Company's Common Stock to the Convertible
Note Purchasers depending on the occurrence of certain contingencies as
discussed above. These shares (referred to above as the "Escrowed Shares") are
not considered issued and outstanding and are currently in an escrow account.
These shares are issuable to the Convertible Note Purchasers in the event the
Convertible Note Purchasers elect to convert their Convertible Notes into the
Escrowed Shares of the Company's Common Stock. See "Description of Business --
Overview and Recent Developments" for details. Based on the number of shares
outstanding at March 31, 1997, the Convertible Note Purchasers could
beneficially own in the aggregate (though they are not affiliated with each
other) as much as 28.7% of the Company's Common Stock, as calculated in
accordance with Rule 13d, which may be deemed to constitute a potential change
in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Between August 1994 and April 1995, the Company issued and sold 7%
convertible promissory notes in the aggregate principal amount of $1,467,750. As
of December 1995, $1,167,750 principal amount of notes were converted into
577,961 shares of Common Stock, after giving effect to the reverse split,
leaving $300,000 principal amount of notes outstanding. These remaining notes
and accrued interest thereon were converted into 152,038 shares of Common Stock,
after giving effect to the reverse stock split, during January 1996. Mr. Labush,
a director of the Company, and Mr. Hughes, a former director, purchased a
portion of the promissory notes.
In August 1995 and October 1995, the Company issued and sold to a group
of private investors an aggregate principal amount of $1,000,000 12% convertible
promissory notes. On March 29, 1996, the Company entered into the Technology
Development Agreement and Stock Purchase Agreement with the Consortium, as
discussed above, and such notes, and accrued interest thereon, were converted
into 5,617,492 shares of Common Stock of the Company. Mr. McKey, a director of
the Company, Mr. Hughes, a former director, and Mr. Walker, the Treasurer
28
<PAGE> 32
and Chief Financial Officer of the Company, purchased a portion of such
convertible notes offering. See "Security Ownership of Directors and Officers".
In December 1995, the Company issued and sold to a group of private
investors an aggregate principal amount of $800,000 12% convertible promissory
notes. On March 29, 1996, the Company entered into the Technology Development
Agreement and Stock Purchase Agreement with the Consortium, as discussed above,
and such notes, and accrued interest thereon, were converted into 1,385,954
shares of Common Stock of the Company. Messrs. Ketchum and Labush, directors of
the Company, and Mr. Walker, the Treasurer and Chief Financial Officer of the
Company, purchased a portion of such convertible notes offering. See "Security
Ownership of Directors and Officers".
CONSULTING AGREEMENTS
Effective December 10, 1993, the Company entered into a consulting
agreement with Stephen F. Hope, pursuant to which the Company agreed to employ
Mr. Hope as an independent consultant at a rate of $150,000 per year, of which
compensation at the rate of only $50,000 per year shall be payable until such
time as the Company has sufficient capital. If, at any time in the future, the
Company has sufficient capital to employ Mr. Hope as a consultant at a rate of
$150,000 per year, Mr. Hope will not be entitled to any back compensation for
the difference between his $150,000 stated per annum consulting salary and the
$50,000 actually paid him during any such year. Mr. Hope will only act as a
battery technology consultant for so long as the Board of Directors determines
his services to be necessary. No consulting services were rendered by Mr. Hope
during 1995 and 1996 and no compensation has been paid to Mr. Hope for such
periods.
From December 1993 through April 1995, Matthew Stuart & Co., Inc.
("Matthew Stuart") provided certain consulting and advisory services to the
Company. For these services, Matthew Stuart has been paid approximately $112,000
exclusive of commissions and accrued amounts in connection with various private
placements. Matthew Stuart, Robert Pfeffer (a former principal in Matthew
Stuart) and Richard Perlman (a former principal in Matthew Stuart) commenced
litigation against the Company claiming they were also entitled to further fees
and certain warrants. The Company has disputed the issuance of these warrants to
Matthew Stuart, Mr. Pfeffer, and Mr. Perlman, and the Company has declared the
1993 warrant agreement and related warrant documents void. The Company has
settled the litigation with Matthew Stuart and Mr. Pfeffer. The litigation
between the Company and Mr. Perlman is continuing. See "Legal Proceedings" for
details. Mr. Perlman served as a director of the Company from July 1994 until
his resignation in September 1995. Effective April 1995, the Company terminated
any continuing relationship with Matthew Stuart. On June 20, 1996, the Company
entered into a Settlement Agreement with Matthew Stuart and Mr. Pfeffer thereby
terminating that litigation and pursuant to which the Company issued a warrant
entitling Mr. Pfeffer to purchase up to 600,000 shares of the Company's Common
Stock.
On May 9, 1996, the Company entered into a Consulting Agreement with
former director Donald C. Taylor who provides investment advisory services,
shareholder relations and related consulting services to the Company. As
consideration for such services, Mr. Taylor will receive $7,000 a month over the
term of the Consulting Agreement. The Consulting Agreement is for a period of
one year and is automatically renewable for not more than two additional years
unless either party to the Agreement provides notice to the contrary. In
addition, in consideration for past and prospective services provided to the
Company by Group III Capital, Inc., of which Mr. Taylor is the President and a
director, the Company issued to Group III Capital, Inc. a warrant to purchase
1,500,000 shares of the Company's Common Stock at an exercise price of $1.54 per
share. Mr. Taylor served as a director of the Company from August 1995 to May
1996.
In 1995 and 1996 the Company paid $36,000 and $75,000, respectively to
William D. Walker for services rendered to the Company as Treasurer and Chief
Financial Officer. Mr. Walker does not receive a salary from the Company.
29
<PAGE> 33
STOCK OPTIONS
As of December 31, 1996, the Company has issued and outstanding stock
options to purchase 1,857,770 shares of the Company's Common Stock, comprised of
(a) options to acquire 106,672 shares pursuant to the Directors Stock Option
Plan (the "Directors Plan") (See "Executive Compensation--Directors Stock Option
Plan" for details), (b) options to acquire 1,744,014 shares pursuant to the 1994
Stock Incentive Plan (the "Stock Plan") (See "Executive Compensation--Stock
Incentive Plan" for details), and (c) 7,084 options granted to consultants.
Pursuant to the Majority Consent of Stockholders dated February 8,
1996, the following directors each exchanged options to purchase 13,334 shares
of Common Stock, previously granted to each of them by the Company, for the same
number of options to be granted under the Directors Plan at a purchase price of
$0.90 per share, with vesting schedules substantially similar to the vesting
schedules of the surrendered options: Messrs. Paul Bagley; Anthony B.
Fisher; David H. Hughes; Ralph D. Ketchum; John D. McKey, Jr.; Donald C. Taylor
and Thomas R. Thomsen. Mr. Taylor has since waived his rights to such options.
In 1995, the Board of Directors approved the exchange by each employee,
including executive officers holding options under the Company's 1994 Stock
Incentive Plan of such outstanding options for new options with an exercise
price of $0.03 per share (without giving effect to the subsequent reverse stock
split). The Board of Directors determined such exchange to be appropriate in
order to sustain the incentivization of all of its employees since the
outstanding options had exercise prices well in excess of the then market price
of the Company's Common Stock. As a condition for such repricing, such new
options (including such options which had been exchange for vested options) do
not become exercisable until the later of July 1, 1996 (with respect to options
which had been vested previously) or the original vesting schedule of such
options. As a result of this stock option repricing, the Company cancelled a
total of 780,000 stock options having exercise prices in excess of the then
market price of the Company's Common Stock and granted the same number of new
stock options at the aforementioned $0.90 exercise price per share ($0.03
without taking into account the reverse stock split).
During 1995 and 1996, the Company issued options to purchase its Common
Stock to the following executive officers in the amounts listed in parenthesis
next to each executive officer's name: Thomas R. Thomsen (413,334); David J.
Cade (355,981); Dr. George R. Ferment (388,038); Susan M. Gustafson (126,668);
and William D. Walker (66,668).
CERTAIN EMPLOYEE MATTERS
In November 1995, the Company's Board of Directors authorized the
issuance of certain shares of the Company's Common Stock to certain employees in
exchange for such employees' forgiveness of specified accrued salaries and
bonuses. In July and August 1996 the Company completed these transactions which
resulted in the issuance of 54,336 shares of Common Stock (the "Restricted
Shares") to certain employees in exchange for such employees' forgiveness of
approximately $46,466 of accrued salaries and bonuses and in the issuance of
38,416 shares of Common Stock to an officer for $19,208 in cash.
OTHER COMPENSATION
In connection with assisting the Company in its efforts in 1995 to
restructure its finances, Anthony B. Fisher, a former director of the Company,
and Group III Capital, Inc., of which Donald C. Taylor, a former director of the
Company, is a principal stockholder, were paid consulting fees of $118,550 and
$205,725, respectively, plus a warrant to be issued to Mr. Fisher with respect
to 57,858 shares of Common Stock.
In connection with the Company's $1.75 million bridge loan in October
1996, the Company paid a placement fee of $122,500 to Stone Pine Atlantic,
L.L.C. Paul Bagley and L. Wayne Harber, each a former director of the Company,
and John D. McKey, Jr., a current director have a financial interest in Stone
Pine, L.L.C.
30
<PAGE> 34
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are filed as part of this Report:
<TABLE>
<CAPTION>
<S> <C>
3.1 Certificate of Incorporation.(3)
3.2 By-Laws, as amended.(3)
4.1 Specimen Common Stock Certificate.(3)
4.2 Credit Agreement dated August 3, 1995 between the Company and various Note Holders specified
therein.(6)
4.3 Credit Agreement dated December 1, 1995 between the Company and various Note Holders
specified therein.(6)
10.1 Memorandum of Agreement dated February 9, 1989, among Trinity American Corporation, Lithion,
Industries, Coastal Leasing and Investments, Inc., Hope Lithographic Enterprises, Inc., Henry F.
Hope and Stephen F. Hope, with Amendment dated May 24, 1989.(3)
10.2 Stock for Debt Exchange Agreement dated as of October 10, 1991 among the Company, Stephen
F. Hope and Hazel Hope as Executrix of the Estate of Henry Hope.(4)
10.3 Exchange Agreement and Patent Assignment among Industries, Henry Hope and Stephen F.
Hope.(3)
10.4 Exchange Agreement and Patent Assignment among Lithion, Stephen F. Hope and Henry Hope,
dated July 20, 1989.(3)
10.5 Stock Purchase Agreement, dated as of November 17, 1993, by and among Stephen F. Hope, the
Estate of Henry Hope, and Majestic Hopes, L.L.C., as amended on December 10, 1993.(3)
10.6 Stockholders Agreement, dated as of December 10, 1993, among Stephen F. Hope, Hope
Technologies, Inc., and Majestic Hopes, L.L.C.(3)
10.7 Reserved.
10.8 1994 Stock Incentive Plan, as amended.(1)
10.9 Directors Stock Option Plan.(1)
10.10 Agreement, dated as of May 31, 1994, by and among Stephen F. Hope, Hope Industries, Inc., Hope
Technologies, Inc., and Majestic Hopes, L.L.C.(3)
10.11 Consulting Letter Agreement, dated December 10, 1993, between Majestic Hopes, L.L.C. and
Stephen F. Hope.(3)
10.12 Employment Agreement, dated July 24, 1996, between David Cade and the Company.(8)
10.13 Employment Agreement, dated July 24, 1996, between George Ferment and the Company.(8)
</TABLE>
31
<PAGE> 35
<TABLE>
<CAPTION>
<S> <C>
10.14* Technology Development Agreement, dated March 29, 1996, between Mitsubishi Materials
Corporation, Mitsui & Co., Ltd. and the Company.(6)
10.15 Stock Purchase Agreement, dated March 29, 1996, between Mitsubishi Materials Corporation,
Mitsui & Co., Ltd. and the Company.(6) (without exhibits)
10.16 Form of Stock Option Agreement relating to the Company's 1994 Stock Incentive Plan, as
amended.(6)
10.17 Form of Stock Option Agreement relating to the Company's Directors Stock Option Plan.(6)
10.18 Lease Agreement, dated July 22, 1994, between PMP Whitemarsh Associates and the Company
and Addendum thereto dated July 22, 1994.(6)
10.19 Consulting Agreement, dated January 18, 1995, between Mitsubishi Trust and Banking Corporation
and the Company.(6)
10.20 Agreement between the Company and Coastal Leasing & Investment, Inc. dated November 1,
1994.(6)
10.21 Agreement dated June 6, 1994, by and among Stephen F. Hope, Hope Industries, Inc., Lithion
Corporation, Hope Technologies, Inc., Trinity American Corporation, with amendments dated
November 1, 1994.(6)
10.22 Separation Agreement, dated August 7, 1995 between James A. Elsner and the Company.(6)
10.23 Agreement and Plan of Merger of Lithium Technology Corporation (a Nevada corporation)
and Lithium Technology Corporation (a Delaware corporation) dated February 28, 1996.(1)
10.24 Warrant to Purchase Common Stock issued to Robert Pfeffer dated June 20, 1996.(6)
10.25 Agreement of Settlement and Release, dated June 20, 1996, by and between Matthew Stuart & Co., Inc.,
Robert Pfeffer and the Company.(7)
10.26 Employment Agreement, dated May 9, 1996, between Thomas R. Thomsen and the Company.(7)
10.27 Stock Option Agreement, dated May 9, 1996, between Thomas R. Thomsen and the Company.(7)
10.28 Consulting Agreement, dated May 9, 1996, between Donald Taylor and the Company.(7)
10.29 Warrant to Purchase Common Stock issued to Group III Capital, Inc. dated May 9, 1996.(7)
10.30 Warrant to Purchase Common Stock issued to Nanele Services, Inc., dated May 9, 1996.(7)
10.31 Stock Option Agreement, dated July 24, 1996, between David Cade and the Company.(8)
10.32 Stock Option Agreement, dated July 24, 1996, between George Ferment and the Company.(8)
10.33 Form of Restricted Stock Agreement relating to the Company's 1994 Stock Incentive Plan.(7)
10.34 Form of Convertible Note Purchase Agreement dated October 23, 1996 between the Company and
the Purchasers.(9)
</TABLE>
32
<PAGE> 36
<TABLE>
<CAPTION>
<S> <C>
10.35 Form of Convertible Note dated October 23, 1996 issued by the Company.(10)
10.36 Form of Stock Purchase Agreement dated October 23, 1996 between the Company and the
Purchasers.(11)
10.37 Form of Stock Purchase Agreement dated October 23, 1996 between the Company and the
Placement Agent.(12)
10.38 Form of Warrant Agreement dated October 23, 1996 between the Company and the Placement
Agent.(13)
10.39 Form of Registration Rights Agreement dated October 23, 1996 between the Company and the
Placement Agent.(14)
10.40 Letter Agreement dated February 5, 1997 between the Company and Chase Manhattan Bank.
21.1 List of Subsidiaries.(2)
99.1 Press Release dated October 14, 1996.(15)
99.2 Press Release dated October 28, 1996.(15)
</TABLE>
(1) Incorporated herein by reference to the exhibits contained in the
Company's Information Statement Pursuant to Section 14(c) of the
Securities Exchange Act of 1934, dated January 19, 1996.
(2) Incorporated herein by reference to the exhibits contained in the
Company's Post-Effective Amendment No. 9 to the Registration Statement
on Form SB-2, File No. 33-9323 N.Y., which was filed with the
Securities and Exchange Commission on January 6, 1995.
(3) Incorporated herein by reference to the exhibits contained in the
Company's Annual Report on Form 10-K for the fiscal year ended October
31, 1989.
(4) Incorporated herein by reference to the exhibits contained in the
Company's Annual Report on Form 10-K for the fiscal year ended October
31, 1991.
(5) Incorporated herein by reference to the exhibits contained in the
Company's Report on Form 8-K, dated November 23, 1994.
(6) Incorporated herein by reference to the exhibits contained in the
Company's Form 10-KSB for the fiscal year ended December 31, 1995.
(7) Incorporated herein by reference to the exhibits contained in the
Company's Registration Statement on Form SB-2, File No. 333-08143,
which was filed with the Securities and Exchange Commission on July 15,
1996.
(8) Incorporated herein by reference to the exhibits contained in the
Company's Quarterly Report on Form 10- QSB for the quarter ended June
30, 1996.
(9) Incorporated herein by reference to Exhibit 10.29 contained in the
Company's Report on Form 8-K, dated October 25, 1996.
(10) Incorporated herein by reference to Exhibit 10.30 contained in the
Company's Report on Form 8-K, dated October 25, 1996.
(11) Incorporated herein by reference to Exhibit 10.31 contained in the
Company's Report on Form 8-K, dated October 25, 1996.
33
<PAGE> 37
(12) Incorporated herein by reference to Exhibit 10.32 contained in the
Company's Report on Form 8-K, dated October 25, 1996.
(13) Incorporated herein by reference to Exhibit 10.33 contained in the
Company's Report on Form 8-K, dated October 25, 1996.
(14) Incorporated herein by reference to Exhibit 10.34 contained in the
Company's Report on Form 8-K, dated October 25, 1996.
(15) Incorporated herein by reference to the exhibits contained in the
Company's Report on Form 8-K, dated October 25, 1996.
(b) Reports on Form 8-K:
8-K during 10/1/96 - 12/31/96 and thereafter
1. Form 8-K Report, dated October 25, 1996 with respect to Item 5
of such Report.
2. Form 8-K Report, dated November 25, 1996 with respect to Item 9
of such Report.
3. Form 8-K Report, dated December 20, 1996 with respect to Item 5
of such Report.
4. Form 8-K Report, dated December 24, 1996 with respect to Item 9
of such Report.
5. Form 8-K Report, dated January 14, 1997, with respect to Item 9
of such Report.
6. Form 8-K Report, dated February 4, 1997, with respect to Item 9
of such Report.
7. Form 8-K Report, dated February 25, 1997, with respect to Item 9
of such Report.
8. Form 8-K Report, dated March 18, 1997, with respect to Item 9
of such Report.
9. Form 8-K Report, dated April 8, 1997, with respect to Item 9
of such Report.
* Subject to order for confidential treatment as to certain portions thereof.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LITHIUM TECHNOLOGY CORPORATION
Date: April 15, 1997 By: /s/ THOMAS R. THOMSEN
-----------------------
Thomas R. Thomsen
Principal Executive Officer
and Chairman of the Board
By: /s/ WILLIAM D. WALKER
-----------------------
William D. Walker
Principal Financial Officer
and Treasurer
34
<PAGE> 38
In accordance with the Securities Exchange Act of 1934, this
report has been signed by the following persons and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Thomas R. Thomsen Chairman of the April 15, 1997
- ------------------------ Board
Thomas R. Thomsen
/s/ Harry Edelson Director April 15, 1997
- ------------------------
Harry Edelson
/s/ Stephen F. Hope Director April 15, 1997
- ------------------------
Stephen F. Hope
/s/ Ralph D. Ketchum Director April 11, 1997
- ------------------------
Ralph D. Ketchum
/s/ Gerald M. Labush Director April 14, 1997
- ------------------------
Gerald M. Labush
/s/ John D. McKey, Jr. Director April 10, 1997
- ------------------------
John D. McKey, Jr.
</TABLE>
35
<PAGE> 39
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
DECEMBER 31, 1996
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheet at December 31, 1996 F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1996 and 1995 and the Period from
July 21, 1989 (Date of Inception) to December 31, 1996 F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) for the Years Ended December 31, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995, and the Period from July 21,
1989 (Date of Inception) to December 31, 1996 F-6
Notes to Consolidated Financial Statements F-7 to F-19
</TABLE>
F-1
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Lithium Technology Corporation and Subsidiary
(Development Stage Companies)
We have audited the consolidated balance sheet of Lithium Technology Corporation
and subsidiary (Development Stage Companies) as of December 31, 1996, the
related consolidated statements of operations and cash flows for the years ended
December 31, 1996 and 1995 and for the period July 21, 1989 (date of inception)
to December 31, 1996, and the related consolidated statements of changes in
stockholders' equity (deficit) for the years ended December 31, 1996 and 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lithium Technology
Corporation and subsidiary (Development Stage Companies) as of December 31, 1996
and the results of their operations and their cash flows for the years ended
December 31, 1996 and 1995 and for the period July 21, 1989 (date of inception)
to December 31, 1996 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1 and 2 to the
financial statements, the Company is a development stage company, has suffered
recurring losses from operations and needs significant additional financing to
repay existing indebtedness and to continue the development of its technology.
These factors raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
WISS & COMPANY, LLP
Woodbridge, New Jersey
January 22, 1997
F-2
<PAGE> 41
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 1,388,000
Prepaid expenses and other current assets 10,000
------------
Total Current Assets $1,398,000
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION OF $363,000 624,000
OTHER ASSETS:
Restricted cash 65,000
Debt issue costs, less accumulated amortization of $438,000 142,000
Security deposits 20,000
------------
227,000
----------
$2,249,000
----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Convertible notes payable $ 1,750,000
Accounts payable and accrued expenses 1,046,000
Accrued salaries 232,000
------------
Total Current Liabilities $3,028,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Undesignated preferred stock:
Authorized 100,000 shares, issued and outstanding - None --
Common stock, par value $.01 per share:
Authorized - 50,000,000 shares
Issued and outstanding - 17,108,000 shares 171,000
Additional paid-in capital 16,772,000
Accumulated deficit (6,865,000)
Deficit accumulated during development stage (10,857,000)
------------
Total Stockholders' Equity (Deficiency) (779,000)
----------
$2,249,000
----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 42
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From
July 21, 1989
Year Ended (Date of
December 31, Inception) to
----------------------------- December 31,
1996 1995 1996
----------- ---------- ------------
(Unaudited)
<S> <C> <C> <C>
COSTS AND EXPENSES:
Engineering, research and development $ 1,079,000 $ 1,080,000 $ 3,713,000
General and administrative 3,216,000 1,307,000 6,959,000
Interest expense, net of interest income of $58,000
(1996) and $13,000 (1995) 89,000 85,000 185,000
----------- ----------- ------------
4,384,000 2,472,000 10,857,000
----------- ----------- ------------
NET LOSS $(4,384,000) $(2,472,000) $(10,857,000)
----------- =========== ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 14,029,000 6,923,000
=========== ==========
NET LOSS PER SHARE $ (.31) $ (.36)
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 43
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARIES
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Series B and Series C
Convertible Preferred Stock Class A Common Stock
--------------------------- ---------------------
Shares Amount Shares Amount
------- ------ --------- --------
<S> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1994 23,336 $-- 3,333,333 $ 10,000
YEAR ENDED DECEMBER 31, 1995:
Issuance of common stock:
Upon conversion of convertible
preferred stock (6,394) -- -- --
Upon conversion of 7% convertible promissory notes
and accrued interest thereon -- -- -- --
Upon exercise of warrants -- -- -- --
Recapitalization of common stock
(Note 7) -- -- (3,333,000) (10,000)
Net loss -- -- -- --
------- --- --------- --------
BALANCES AT DECEMBER 31, 1995 16,942 -- -- --
YEAR ENDED DECEMBER 31, 1996:
Issuance of common stock:
Upon conversion of convertible
preferred stock (16,942) -- -- --
Upon conversion of 7% convertible
promissory notes and accrued interest
($20,000) and related costs of $41,000 -- -- -- --
Upon conversion of 12% convertible
promissory notes and accrued interest
thereon of $100,000 net of related costs
of $218,000 -- -- -- --
For cash -
From consortium, net of placement costs
of $212,000 -- -- -- --
Upon exercise of stock options -- -- -- --
Other -- -- -- --
In payment of accrued salaries and accounts payable -- -- -- --
Upon exercise of warrants -- -- -- --
In connection with costs relating to the issuance of
10% convertible notes -- -- -- --
Issuance of warrants for services rendered -- -- -- --
Issuance of warrants in settlement of litigation -- -- -- --
Net loss -- -- -- --
------- --- --------- --------
BALANCES AT DECEMBER 31, 1996 -- $-- -- $ --
======= === ========= ========
</TABLE>
<TABLE>
<CAPTION>
Class B Common Stock Common Stock
-------------------------- -------------------------
Shares Amount Shares Amount
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1994 3,249,000 $ 10,000 -- $ --
YEAR ENDED DECEMBER 31, 1995:
Issuance of common stock:
Upon conversion of convertible
preferred stock 341,000 1,000 -- --
Upon conversion of 7% convertible promissory notes
and accrued interest thereon 500,000 1,000 -- --
Upon exercise of warrants 120,000 1,000 -- --
Recapitalization of common stock
(Note 7) (4,210,000) (13,000) 7,543,000 75,000
Net loss -- -- -- --
---------- -------- ---------- --------
BALANCES AT DECEMBER 31, 1995 -- -- 7,543,000 75,000
YEAR ENDED DECEMBER 31, 1996:
Issuance of common stock:
Upon conversion of convertible
preferred stock -- -- 454,000 4,000
Upon conversion of 7% convertible
promissory notes and accrued interest
($20,000) and related costs of $41,000 -- -- 152,000 2,000
Upon conversion of 12% convertible
promissory notes and accrued interest
thereon of $100,000 net of related costs
of $218,000 -- -- 7,004,000 70,000
For cash -
From consortium, net of placement costs
of $212,000 -- -- 632,000 7,000
Upon exercise of stock options -- -- 193,000 2,000
Other -- -- 38,000 --
In payment of accrued salaries and accounts payable -- -- 434,000 4,000
Upon exercise of warrants -- -- 196,000 2,000
In connection with costs relating to the issuance of
10% convertible notes -- -- 462,000 5,000
Issuance of warrants for services rendered -- -- -- --
Issuance of warrants in settlement of litigation -- -- -- --
Net loss -- -- -- --
---------- -------- ---------- --------
BALANCES AT DECEMBER 31, 1996 -- $ -- 17,108,000 $171,000
========== ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During
Paid-In Accumulated Development
Capital Deficit Stage
----------- ----------- ------------
<S> <C> <C> <C>
BALANCES AT DECEMBER 31, 1994 $10,220,000 $(6,865,000) $ (4,001,000)
YEAR ENDED DECEMBER 31, 1995:
Issuance of common stock:
Upon conversion of convertible
preferred stock (1,000) -- --
Upon conversion of 7% convertible promissory notes
and accrued interest thereon 1,050,000 -- --
Upon exercise of warrants 254,000 -- --
Recapitalization of common stock
(Note 7) (52,000) -- --
Net loss -- -- (2,472,000)
----------- ----------- ------------
BALANCES AT DECEMBER 31, 1995 11,471,000 (6,865,000) (6,473,000)
YEAR ENDED DECEMBER 31, 1996:
Issuance of common stock:
Upon conversion of convertible
preferred stock (4,000) -- --
Upon conversion of 7% convertible
promissory notes and accrued interest
($20,000) and related costs of $41,000 277,000 -- --
Upon conversion of 12% convertible
promissory notes and accrued interest
thereon of $100,000 net of related costs
of $218,000 1,612,000 -- --
For cash -
From consortium, net of placement costs
of $212,000 2,181,000 -- --
Upon exercise of stock options 95,000 -- --
Other 19,000 -- --
In payment of accrued salaries and accounts payable 260,000 -- --
Upon exercise of warrants 98,000 -- --
In connection with costs relating to the issuance of
10% convertible notes 520,000 -- --
Issuance of warrants for services rendered 175,000 -- --
Issuance of warrants in settlement of litigation 68,000 -- --
Net loss -- -- (4,384,000)
----------- ----------- ------------
BALANCES AT DECEMBER 31, 1996 $16,772,000 $(6,865,000) $(10,857,000)
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 44
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Year Ended July 21, 1989
December 31, (Date of Inception)
-------------------------- to December 31,
1996 1995 1996
----------- ----------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,384,000) $(2,472,000) $(10,857,000)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation 185,000 167,000 362,000
Amortization of debt issue costs 494,000 179,000 739,000
Common stock issued in lieu of interest 87,000 -- 112,000
Fair value of warrants and option granted for services rendered 83,000 -- 121,000
Common stock issued to certain persons for services provided 100,000 -- 206,000
Expenses paid by shareholder on behalf of Company -- -- 79,000
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 44,000 (30,000) (5,000)
Security deposits -- -- (20,000)
Accounts payable and accrued expenses 684,000 94,000 2,012,000
Due to related parties (327,000) 160,000 (118,000)
----------- ----------- ------------
Net cash provided by (used in) operating activities (3,034,000) (1,902,000) (7,369,000)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (156,000) -- (736,000)
Restricted cash (18,000) 183,000 (65,000)
Other -- -- 94,000
----------- ----------- ------------
Net cash provided by (used in) investing activities (174,000) 183,000 (707,000)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances repayable only out of proceeds of public offering -- -- 471,000
Proceeds received upon issuance of common stock 2,207,000 -- 3,239,000
Proceeds received from issuance of preferred stock, net of related
costs -- -- 100,000
Proceeds received upon exercise of options and warrants,
net of costs 97,000 343,000 569,000
Net advances by former principal stockholder -- -- 321,000
Proceeds from sale of convertible debt 2,266,000 1,760,000 5,374,000
Debt issue costs (191,000) (273,000) (610,000)
----------- ----------- ------------
Net cash provided by financing activities 4,379,000 1,830,000 9,464,000
----------- ----------- ------------
NET CHANGE IN CASH AND EQUIVALENTS 1,171,000 111,000 1,388,000
CASH AND EQUIVALENTS, BEGINNING OF YEAR 217,000 106,000 --
----------- ----------- ------------
CASH AND EQUIVALENTS, END OF YEAR $ 1,388,000 $ 217,000 $ 1,388,000
=========== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Contribution to capital by former principal stockholder $ -- $ -- $ 3,659,000
=========== =========== ============
Related party debt exchanged for convertible debt $ -- $ -- $ 321,000
=========== =========== ============
Exchange of indebtedness to former principal
stockholder for common stock $ -- $ -- $ 445,000
=========== =========== ============
Issuance of common stock for services and accrued salaries $ 264,000 $ -- $ 352,000
=========== =========== ============
Exchange of equipment and accrued rent for common stock $ -- $ -- $ 271,000
=========== =========== ============
Subordinated notes and related accrued interest
exchanged for Series A preferred stock $ -- $ -- $ 3,300,000
=========== =========== ============
Exchange of convertible debt for convertible preferred stock $ -- $ -- $ 356,000
=========== =========== ============
Conversion of convertible debt and accrued interest
into common stock, net of unamortized debt discount $ 2,053,000 $ 1,051,000 $ 3,268,000
=========== =========== ============
Exchange of advances repayable only out of
proceeds of public offering for common stock $ -- $ -- $ 471,000
=========== =========== ============
Deferred offering costs on warrants exercised $ -- $ 88,000 $ 88,000
=========== =========== ============
Issuance of warrants in settlement of litigation and for services rendered $ 160,000 $ -- $ 160,000
=========== =========== ============
Common stock issued for costs related to 10% promissory notes $ 525,000 $ -- $ 525,000
=========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 45
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - HISTORY OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
Lithium Technology Corporation ("LTC") and its wholly-owned
subsidiary, Lithion Corporation ("Lithion"), collectively
referred to as the "Company", are development stage companies
in the process of commercializing a unique, solid-state,
lithium-polymer rechargeable battery. The Company is engaged
in research and development activities to further develop and
exploit this battery technology and also hold various patents
relating to such batteries. The Company believes that its
battery technology, which is currently in the prototype
development phase, is capable of providing up to four times
the performance of current rechargeable batteries. The
Company's objective is the commercialization of such
technology, inclusive of moving from laboratory scale product
prototypes and related demonstration manufacturing processes
to full scale market introduction, achieving cost
competitiveness, and constructing a large scale manufacturing
facility. The Company's commercialization focus is on the
rapidly growing portable electronics market segment (notebook
and palmtop computers and wireless communications devices).
The Company has generated no revenues and has no commercial
operations to date. The Company has been unprofitable since
inception and expects to incur substantial additional
operating losses over the next several years. The Company does
not expect to generate any sales in commercial quantities in
the near term.
Effective February 1996, the Company's then majority
stockholder approved a merger agreement pursuant to which the
Company, a Nevada Corporation, merged with a newly formed
Delaware corporation in order to reincorporate the Company as
a Delaware corporation and effectuate a recapitalization,
principally the reverse stock split (see Note 7).
ESTIMATES AND UNCERTAINTIES - The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results, as determined at a later date, could
differ from those estimates.
DEVELOPMENT STAGE CORPORATION - The Company and its
technologies are currently in the development stage. These
technologies are undergoing laboratory testing and
manufacturing testing and to date, none have proven in actual
operations to be commercially viable. In addition, the Company
currently has no capacity for, or experience in, manufacturing
lithium-polymer rechargeable batteries in commercial
quantities. The Company will attempt to rely upon original
equipment manufacturers ("OEMS") who specialize in targeting
portable consumer electronics and telecommunication markets to
promote market acceptance of their products and
F-7
<PAGE> 46
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
provide a reliable manufacturing base. However, the success of
using OEMS for manufacturing and promotional support cannot be
determined. Further, the Company's products contain lithium,
which is known to cause explosions and fires if not properly
handled. Although the Company believes their strategies will
minimize these risks, there can be no assurance that the
Company will ever fully develop their technologies or put them
into full scale production in light of the aforementioned
circumstances.
FINANCIAL INSTRUMENTS - Financial instruments include cash and
equivalents, other assets, accounts payable and convertible
promissory notes payable. Management believes that the amounts
reported for financial instruments are considered to be
reasonable approximations of their fair values. The use of
alternative valuation assumptions and/or estimation
methodologies could have a material effect on the estimated
fair value amounts.
CONSOLIDATION - As indicated above, the consolidated financial
statements include the accounts of LTC and Lithion. All
significant intercompany accounts and transactions have been
eliminated.
CASH AND EQUIVALENTS - The Company considers all highly liquid
debt instruments purchased with a maturity of three months or
less to be cash equivalents.
PROPERTY AND EQUIPMENT - Property and equipment are recorded
at cost. Furniture and fixtures, computer equipment and
software and laboratory equipment are depreciated primarily
using the straight-line method over their estimated useful
lives of 3 to 7 years. Leasehold improvements are amortized
over the period of the respective lease using the
straight-line method.
CONCENTRATION OF CREDIT RISK - The Company maintains its cash
balances in several financial institutions. The accounts at
each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. At December 31, 1996, uninsured
balances were approximately $1,242,000.
DEBT ISSUE COSTS - Costs related to the issuance of
convertible promissory notes are capitalized. Such costs are
amortized over the term of the related debt.
ENGINEERING, RESEARCH AND DEVELOPMENT - Costs related to new
product development and improvement or support of existing
products are expensed as incurred.
INCOME TAXES - Deferred tax assets and liabilities are
computed annually for temporary differences between the
financial statement and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the
periods in which the temporary differences are expected to
affect taxable income. Valuation allowances are
F-8
<PAGE> 47
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
established when necessary to reduce deferred tax assets to
the amount expected to be realized.
STOCK OPTIONS - The Company accounts for stock option grants
using the intrinsic value based method prescribed by APB
Opinion No. 25. Since the exercise price equaled or exceeded
the estimated fair value of the underlying shares at the date
of grant, no compensation was recognized in 1996 and 1995.
Had compensation cost been based upon the fair value of the
option on the date of grants, as prescribed by Statement of
Financial Accounting Standards No. 123, the Company's proforma
net loss and net loss per share would have been approximately
$(6,041,000) ($(.43) per share) in 1996 and $(2,950,000)
($(.43) per share) for the period ended December 31, 1995,
using the Black Sholes option pricing model.
NET INCOME (LOSS) PER COMMON SHARE - Net income (loss) per
common share is based upon the weighted average number of
outstanding common shares. The shares issuable upon the
exercise of outstanding warrants and options have been
excluded since the assumed conversion would be antidilutive
due to net losses for all periods presented.
NOTE 2 - OPERATING AND LIQUIDITY DIFFICULTIES AND MANAGEMENT'S PLANS TO
OVERCOME :
The Company has been unprofitable since inception and expects
to incur substantial additional operating losses over the next
several years. The Company has generated no revenues nor has
it had any commercial operations to date and does not expect
to generate any revenues from operations during 1997 or in the
near term.
The Company has experienced liquidity difficulties since
inception and in order to continue the development of the
Company's technology, needs significant additional financing.
The Company has financed its operations since December 1993
with the proceeds from the sale of convertible debt and
private placements of common and preferred stock.
MANAGEMENT'S PLANS - During 1994, the Company recruited a new
management team and a core technical staff with needed
commercialization and battery technology expertise. The staff
has expertise in technology, commercialization, process
development, battery engineering and strategic alliance
development. A modern research facility was leased and product
development commenced. The Company's operating results to date
are solely attributable to research and development activities
and general and administrative expenses.
Management's operating plan seeks to minimize the Company's
capital requirements, but commercialization of the Company's
battery technology will require substantial amounts of
additional capital. The Company expects that research and
development expenses will increase significantly as it
continues to advance its battery technology
F-9
<PAGE> 48
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and develop products for commercial applications. The
Company's working capital and capital requirements will depend
upon numerous factors, including, without limitation, the
progress of the Company's research and development program,
the levels and resources that the Company devotes to the
development of manufacturing and marketing capability,
technological advances, the status of competitors and the
ability of the Company to establish collaborative arrangements
with other companies to provide research and development
funding to the Company and to manufacture and market the
Company's products.
The Company has raised approximately $8,960,000 since
inception through various sales of convertible debt and common
and preferred stock. During 1996, the Company sold a then 4%
equity position to a Japanese Consortium for approximately
$2,400,000 and also sold 10% convertible promissory notes for
$1,750,000 (see Note 7). The Company believes that it only has
sufficient capital resources to meet the Company's needs and
satisfy the Company's obligations through approximately June
1997, based on the Company's current strategies, but excluding
repayment of the Company's existing $1.75 million bridge
financing.
There can be no assurance that the incremental capital needed
to attain commercial viability of the Company's battery
technology and repay existing indebtedness will be obtained,
which the Company currently estimates at approximately $22
million. If the Company is unable to raise sufficient capital,
it will be forced to curtail research and development
expenditures which, in turn, will delay, and could prevent,
the completion of the commercialization process.
Reference should be made to "Management's Discussion and
Analysis of Financial Condition and Results of Operations"
included elsewhere herein for additional information.
NOTE 3 - PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1996 is summarized as
follows:
<TABLE>
<S> <C>
Laboratory equipment $854,000
Furniture and office equipment 91,000
Leasehold improvements 41,000
--------
986,000
Less: Accumulated depreciation and amortization 362,000
--------
$624,000
========
</TABLE>
NOTE 4 - RELATED PARTY TRANSACTIONS:
CONSULTING AGREEMENTS - The Company entered into a consulting
agreement with Stephen Hope (its former principal stockholder)
in December 1993, effective January 1994. The agreement
provided for annual compensation of $50,000 for consulting
F-10
<PAGE> 49
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
services in connection with the battery technology for a
period to be determined by the Company's Board of Directors
and only if the Board determines his services to be necessary.
Upon the Company's raising of sufficient additional capital,
annual compensation was to be increased to $150,000. The
Company paid $44,000 to Stephen Hope during 1994 pursuant to
this agreement. No payments were made during 1995. No
consulting services were rendered by Mr. Hope during 1996 and
1995; accordingly, no compensation has been paid.
From December 1993 through April 1995, the Company had a
consulting agreement with an investment banking firm, whose
former Executive Vice-President was a former director of the
Company. The investment banking firm acted as the Company's
financial consultant providing advisory services with respect
to raising capital, developing an alliance strategy, resolving
outstanding obligations of the Company for periods prior to
1994 and recruiting key executives for the Company. The
investment banking firm provided services totaling $21,000 in
1995 and, in April 1995, the Company terminated its
relationship with the investment banking firm. In September
1995, the Executive Vice President of the investment banking
firm resigned as a director of the Company. See "Legal
Proceedings" included elsewhere herein and Note 6 -
"Commitments and Contingencies" for information regarding
certain claims filed against the Company by this former
director and another former principal in the investment
banking firm.
In connection with assisting the Company in its efforts in
1995 to restructure its finances, a consultant, who is a
former director of the Company, and a corporation, whose
principal stockholder is also a former director and a
stockholder of the Company, earned consulting fees of $119,000
and $206,000, respectively. In May 1996, the Company entered
into a one-year consulting agreement with the latter former
director who will provide investment advisory services,
shareholder relations and related consulting services to the
Company. As consideration for such services, such consultant
will receive $7,000 a month over the term of the agreement
($56,000 paid during 1996). The agreement is for a period of
one year and is automatically renewable for not more than two
additional years unless either party provides notice to the
contrary. In addition, in consideration for past and
prospective services provided to the Company by this former
director's corporation, the Company issued to such corporation
a warrant to purchase 1,500,000 shares of the Company's Common
Stock at an exercise price of $1.54 per share.
The Company also paid $75,000 and $36,000 during 1996 and
1995, respectively, to its Treasurer/Chief Financial Officer,
also a stockholder, for financial and administrative services
provided to the Company.
COMMISSIONS - The Company paid $122,500 to a company, whose
managing director is a former director of the Company, for
services provided relating to the sale of $1,750,000
convertible promissory notes as described in Note 7.
F-11
<PAGE> 50
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES:
Deferred income taxes reflect the net effects of temporary
differences between the amounts of assets and liabilities for
financial reporting purposes and the amounts used for income
tax purposes. The principal temporary difference arises from
the net operating loss carryforwards and results in a deferred
tax asset of approximately $4,238,000 and $2,444,000 at
December 31, 1996 and 1995, respectively.
A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax asset will not be
realized. The Company has determined, based on its recurring
net losses, lack of a commercially viable product and it being
a development stage company, that a full valuation allowance
is appropriate at December 31, 1996 and 1995.
A reconciliation of the provision (benefit) for income taxes
computed at the federal statutory rate of 34% and the
effective tax rate of income (loss) before income taxes is as
follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Computed tax on net loss at federal statutory rate $(1,452,000) $ (840,000)
State income taxes, net of federal income tax benefits (342,000) (200,000)
Tax effect of net operating losses not currently usable 1,794,000 1,040,000
----------- -----------
Provision (benefit) for income taxes $ -- $ --
----------- -----------
</TABLE>
At December 31, 1996, the Company had net operating loss
carryforwards of approximately $10,090,000 expiring in the
years 2004 through 2011.
Current tax law limits the use of net operating loss
carryforwards after there has been a substantial change in
ownership (as defined) during a three year period. Due to
substantial changes in ownership, the use of the Company's net
operating loss carryforwards is limited. As a result, use of
net operating losses each year is currently restricted to
approximately $3,600,000 ("annual limitation"); unused annual
limitations may then be carried forward for the remainder of
15 years from the year the losses were originally incurred.
F-12
<PAGE> 51
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
LEASES - The Company leases its principal operating facility
from an unrelated party providing for annual rent of $122,400
through November 1999 and contains an option to renew for an
additional 5 years.
EMPLOYMENT AGREEMENTS - In 1994, the Company entered into a
five year employment agreement with its former President/Chief
Executive Officer. The agreement provided for, among other
things, annual compensation, bonuses and stock options.
Effective August 1995, the President/Chief Executive Officer
resigned, received $185,000, and waived all claims against the
Company for back pay and accrued bonuses.
The Company also has a four year employment agreement with its
Director of Research providing for annual compensation of
$125,000 through January 1998.
In May 1996, the Company entered into a one year employment
agreement with its Chief Executive Officer at an annual salary
of $185,000 and other incentives, including performance
bonuses and stock options. The officer voluntarily elected
to defer his compensation and at December 31, 1996 such
deferral ($118,000) has been included in accrued payroll in
the accompanying financial statements.
In July 1996, the Company entered into one year employment
agreements with its President/Chief Operating Officer and its
Vice-President of Operations/Chief Technical Officer at annual
salaries of $140,000 and $130,000, respectively, plus other
incentives, including performance bonuses and stock options.
See Note 7 for information on certain stock options issued in
connection with the employment agreements.
LEGAL PROCEEDINGS - In August 1996, civil actions were
commenced against the Company by a former director of the
Company (Note 4), and by the Company's former legal counsel.
The director's complaint seeks monetary damages amounting to
approximately $4,500,000 and specific performance of
registration rights of certain warrants of the Company that
have not been registered and to which he claims entitlement.
The Company has declared such warrants and related documents
void. Former counsel's complaint alleges non-payment of legal
fees for services rendered. The Company has included the
unpaid legal fees in accounts payable, however, it believes
these actions to be without merit and intends to vigorously
defend both actions. Accordingly, the Company has filed its
own lawsuit against the former counsel alleging fraud, legal
malpractice and conflict of interest flowing from the
fraudulent issuance of the aforementioned warrants. In
addition, the complaint alleges violations of federal
securities laws, the Racketeer Influenced and Corrupt
Organizations Act ("RICO") and fiduciary duties owed by
counsel to the Company.
F-13
<PAGE> 52
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The complaint also includes similar allegations against the
former director, flowing from the fraudulent issuance of
warrants to him.
NOTE 7 - STOCKHOLDERS' EQUITY:
MERGER AND REVERSE STOCK SPLIT - Pursuant to the January 1996
merger, as described in Note 1, the Company's existing Class A
and Class B common stock were combined into a single new class
of common stock (the "New Common Stock"). Each 30 outstanding
shares of Class A and Class B common stock were automatically
converted into one share of New Common Stock, each share of
which has one vote. In addition, each outstanding share of
Series B and Series C Convertible Preferred Stock was
automatically converted into one share of newly issued Series
B Convertible Preferred Stock and Series C Convertible
Preferred Stock, respectively. Such recapitalization has been
reflected in the accompanying consolidated financial
statements as if it had occurred on December 31, 1995.
Retroactive effect has been given to the weighted average
number of shares outstanding for purposes of computing net
loss per share.
In January 1996, the Company revised its authorized shares of
common stock to 50,000,000 and its preferred stock to 100,000,
respectively, and changed the par value of its common stock
from $.0001 to $.01 per share.
PREFERRED STOCK - The Company is authorized to issue up to
100,000 shares of preferred stock, all of which is currently
undesignated and may be divided and issued from time to time
in one or more series as may be designated by the Board of
Directors. In the event of liquidation, dissolution or winding
up of the Company, the holders of the preferred stock will be
entitled to a liquidation preference over the Common Stock.
The preferred stock may be entitled to such dividends,
redemption rights, liquidation rights, conversion rights and
voting rights as the Board of Directors, in its discretion,
may determine, in a resolution or resolutions providing for
the issuance of any such stock. Rights granted by the Board of
Directors may be superior to those of existing shareholders,
(including the right to elect a controlling number of
directors as a class). Preferred stock can be issued without
the vote of the holders of Common Stock. No shares of
preferred stock are outstanding at December 31, 1996.
TECHNOLOGY DEVELOPMENT AGREEMENT - In March 1996, the Company
entered into a Technology Development Agreement and Stock
Purchase Agreement (the "Agreement") with a Japanese
Consortium consisting of two multi-billion dollar companies
(the "Consortium"), based on the Company's proprietary
lithium-polymer rechargeable battery technology. The parties
anticipate that this is the first step in a broader strategic
alliance for the research and development, production,
promotion and distribution of lithium-polymer batteries
worldwide. Under the Agreement, the Consortium provided funds
and will provide technical resources to assist the
F-14
<PAGE> 53
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company in completing the development of its high energy
battery to meet specific performance requirements or portable
electronics applications. The principal objective is to take
the patented technology to the manufacturing scale-up state.
For 631,637 shares of the Company's Common Stock (representing
a then 4% equity position in the Company), the Consortium paid
$2,400,000. In addition, $1,800,000 of convertible promissory
notes and related accrued interest were converted into
approximately 7,000,000 shares of the Company's common stock
in connection with the Agreement.
CONVERTIBLE DEBT - During September 1994 through April 1995,
the Company sold 7% convertible promissory notes totalling
approximately $1,468,000. A total of up to approximately
699,000 shares of the Company's common stock were issuable
upon conversion of these notes. Through December 1995
(including 1994), promissory notes totalling $1,168,000 were
converted to approximately 578,000 shares of common stock,
together with related accrued interest of $48,000. The
remaining $300,000 of these promissory notes and related
accrued interest of $20,000 was converted to 152,000 shares of
common stock in January 1996.
During August through October 1995, the Company issued and
sold to a group of private investors, including certain
Directors and an officer, an aggregate principal amount of
$1,000,000 12% convertible promissory notes. Such notes were
to mature on August 3, 1996 and were convertible into an
aggregate of 30% of the then outstanding common stock of the
Company on a fully diluted basis. Such notes, and related
accrued interest, were converted into 5,617,000 shares of
common stock in connection with the Company's March 1996
transaction with the Japanese Consortium.
The Company also issued and sold to a group of private
investors, including certain Directors and an officer, an
aggregate principal amount of $800,000 in convertible
promissory notes in December 1995 ($284,000) and January 1996
($516,000). Such notes bear interest at 12% per annum, were
scheduled to mature in November 1996 and were convertible into
1,333,000 shares of the Company's common stock. The shares
issued upon conversion were also adjusted for any additional
stock issuances by the Company due to antidilutive provisions.
Such notes, and related accrued interest, were converted into
1,386,000 shares of common stock in connection with the
Company's March 1996 transaction with the Japanese Consortium
(see above - Technology Development Agreement).
BRIDGE FINANCING - In October 1996, the Company completed a
bridge financing pursuant to which the Company issued
$1,750,000 of 10% convertible notes due January 23, 1997 (the
"convertible notes") and 267,176 shares of common stock in
exchange for $1,750,000 in cash. The Company also issued
66,794 shares of common stock, plus a warrant to purchase an
additional 87,500 shares (at an exercise price of $1.31), to
the placement agent and also paid a $122,500 commission. The
267,176 shares of common stock were issued in consideration of
F-15
<PAGE> 54
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the advance of the principal amount of the notes, for other
services to be rendered and in payment of all interest expense
through the anticipated repayment date in March 1996. These
shares and the shares issued to the placement agent (total of
333,970 shares), were recorded at their then fair value
totalling $437,500. This cost, together with the commission of
$122,500 and other related legal costs have been recorded as
debt issue costs. The Company also agreed to issue additional
shares of common stock to the Noteholders in the event a
registration statement relating to a certain contemplated
underwritten public offering is not filed within 30 days of
the effective date of the Convertible Note Agreement. As the
proposed registration statement was not filed, the Company was
required to issue an additional 87,500 shares of common stock
to the Noteholders through December 31, 1996, which issuance
was recorded at the then current market value per share with a
corresponding charge to interest expense. The Company issued
86,762 additional shares of common stock in January 1997
pursuant to such provision.
Pursuant to the terms of the Convertible Note Agreements,
additional shares were to be issued to the Noteholders in the
event of certain post-closing occurrences, including the
Company's exercise of its right to extend the maturity date
for repayment of the Convertible Notes to March 24, 1997
and/or the Company's failure to repay the Convertible Notes
when due. The terms of such agreements allowed the Company two
30-day extensions of the initial January 23, 1997 maturity
date, provided the Company issues to the Noteholders $175,000
worth of the Company's common stock (based on the value of the
common stock at the time of the extension less a discount
factor), for each such extension. In the event that the
principal amount of the Convertible Notes is not paid when due
the Noteholders may convert the Convertible Notes into as much
as $3.5 million worth of the Company's common stock (to be
valued as of the date of specified triggering events less a
discount factor). In the event of default, commencing on the
extended due date of the Convertible Notes and until the time
of such conversion, the Company is required to pay the
Noteholders 10% interest on the outstanding principal balance
of the Convertible Notes. The Noteholders' conversion rights
expire upon the earlier of (i) repayment of the Convertible
Notes or (ii) November 2, 1998, and such conversion rights are
the Noteholders' exclusive remedy in the event of the
Company's failure to repay the principal amount of the
Convertible Notes. The Convertible Notes, if unpaid on
November 2, 1998, are automatically converted into shares of
the Company's common stock.
See Note 8 for additional information regarding bridge
financing.
STOCK INCENTIVE PLAN - The Company's Board of Directors
adopted the 1994 Stock Incentive Plan (the "1994 Stock Plan")
in February 1994. The purpose of the 1994 Stock Plan is to aid
the Company in attracting, retaining and motivating officers,
key employees, consultants and other advisors of the Company
by providing them with incentives for making significant
contributions to the growth, profitability and success of the
Company. The 1994 Stock Plan shall terminate ten years after
its
F-16
<PAGE> 55
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
initial effective date, unless terminated earlier by the Board
of Directors. A total of 2,666,667 shares of common stock
shall be reserved and available for grants. Stock options
permitting the holder to purchase a specified number of shares
of common stock will be granted at an exercise price not less
than 100% of the fair value of such stock on the date of
grant. The stock options may be in the form of an incentive
stock option or a non-qualified stock option. Options granted
will be cancelled immediately upon termination of the
grantee's employment or association with the Company, except
in certain situations such as retirement, death or disability.
In February 1994, the Company granted to the former
President/Chief Executive Officer a ten-year non-qualified
stock option to purchase an aggregate of 522,020 shares of
common stock at an exercise price of $.50 per share of which
386,645 options vested upon his resignation in August 1995.
The expiration date of such options was extended until 90 days
following the registration of the underlying shares on a Form
S-8 Registration Statement. Such registration statement has
not yet been filed.
STOCK OPTION REPRICING - In September 1995, the Board of
Directors approved the exchange of options held by each
employee (including executive officers) under the Company's
Stock Plan for new options. The new options provide for an
exercise price of $0.03 per share, the then estimated fair
market value of the common stock. The Board of Directors
determined such change to be appropriate in order to sustain
the incentivization of all of its employees. As a condition
for such repricing, such new options do not become exercisable
until the later of July 1, 1996 or the original vesting
schedule of such options. As a result of this stock options
repricing, the Company cancelled a total of 780,000 stock
options and granted the same number of new stock options at
the aforementioned $.03 exercise price per share. Such
exercise price was adjusted to $.90 per share, pursuant to the
reverse stock split.
Options under the 1994 Stock Plan are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1995
--------- ---------
<S> <C> <C>
Options outstanding, beginning of year 1,100,000 816,000
Options granted ($.501 - $2.55 per share) 987,000 437,000
Options exercised (193,000) --
Options cancelled (150,000) (153,000)
--------- ---------
Options outstanding, end of year
($.501 -$.2.55 per share) 1,744,000 1,100,000
========= =========
Options available for grant, end of year 923,000 1,567,000
========= =========
Options exercisable, end of year 1,155,000 403,000
========= =========
</TABLE>
F-17
<PAGE> 56
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DIRECTORS STOCK OPTION PLAN- In August 1995, the Board of
Directors adopted the Directors Stock Option Plan (the
"Directors Plan"). The purpose of the Directors Plan is to aid
the Company in attracting, retaining and motivating
independent directors by providing them with incentives for
making significant contributions to the growth and
profitability of the Company. The Directors Plan shall
terminate ten years after its initial effective date, unless
terminated earlier by the Board of Directors. A total of
333,333 shares of the Company's common stock shall be reserved
and available for grant. Stock options permitting the holder
to purchase a specified number of shares of common stock will
be granted at an exercise price equaling the then fair market
value of the common stock on the date of grant. Upon the
termination of a participant's association with the Company,
options granted will remain exercisable for a period of three
months or until the stated expiration of the stock option, if
earlier.
Options under the Directors Plan are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
------- -------
<S> <C> <C>
Options outstanding, beginning of year 107,000 107,000
Options granted ($.90 per share) -- --
------- -------
Options outstanding, end of year
($.90 per share) 107,000 107,000
------- -------
Options available for grant, end of year 226,000 226,000
------- -------
Options exercisable, end of year 30,000 --
------- -------
</TABLE>
OTHER WARRANTS AND OPTIONS - During 1995, the Company had
outstanding 632,833 warrants which entitled the holders
thereof to purchase one share of common stock at $2.85 per
share, such price being reduced from $4.41 per share by a
Board of Directors' resolution in January 1995. During
February and March 1995, 120,167 warrants were exercised. The
remaining warrants expired March 17, 1995.
Warrants are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---------- --------
<S> <C> <C>
Warrants outstanding, beginning of year -- 633,000
Warrants granted ($.51 to $2.56 per share) 2,556,000 --
Warrants exercised (196,000) (120,000)
Warrants expired -- (513,000)
---------- --------
Warrants outstanding, end of year 2,360,000 --
---------- --------
Warrants exerciseable, end of year 1,073,000 --
---------- --------
</TABLE>
F-18
<PAGE> 57
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 1996, $175,000 was charged
to the consolidated statement of operations for compensation
in accordance with Statement of Financial Accounting Standards
No. 123 and $68,000 was charged as a litigation settlement.
NOTE 8 - EVENTS SUBSEQUENT TO DATE OF AUDITOR'S REPORT (UNAUDITED):
Bridge Financing - As described in Note 7, the Company
completed a bridge loan financing in October 1996 pursuant
to which the Company issued $1.75 million principal amount
convertible notes to two purchasers (the "Convertible Note
Purchasers"). Since the sale of the Convertible Notes the
Company has issued the Convertible Note Purchasers an
additional 620,784 shares of Common Stock through March 31,
1997 in accordance with the terms of the Convertible Note
Agreements. In addition, the Company and the Convertible Note
Purchasers have placed in escrow an additional 6,201,550
shares of the Company's common stock (the "Escrowed Shares")
pursuant to the terms of the Convertible Note Agreements.
The Escrowed Shares are not considered to be issued and
outstanding securities pending actual payment for such
shares. The Company did not repay the $1.75 million principal
of the Convertible Notes on the March 24, 1997 maturity date
and has not repaid the Convertible Notes as of April 14,
1997. As the result of this nonpayment default: (i) the
Convertible Note Purchasers have the right to convert the
$1.75 million principal into the Escrowed Shares which would
extinguish the indebtedness and (ii) interest on the $1.75
million began to accrue at the rate of ten percent (10%) per
annum as of March 24, 1997. Such interest accrued is
payable on September 24, 1997 and at monthly intervals
thereafter. The Convertible Note Purchasers have not taken
any action to exercise any default remedies to date. There
can be no assurance that the Convertible Note Purchasers
will continue to refrain from exercising available default
remedies. The Convertible Note Purchasers' right to convert
the $1.75 million principal into the Escrowed Shares and the
aforementioned 10% interest terminate upon the earlier of
repayment of the Convertible Notes or November 2, 1998. The
conversion right is the Convertible Note Purchasers' exclusive
remedy in the event of the Company's failure to pay the
principal amount of the Convertible Notes.
Strategic Adviser Agreement - In February 1997, the Company
engaged Chase Manhattan Bank to serve as the Company's
exclusive advisor in establishing strategic alliances with
Korean companies.
F-19
<PAGE> 1
Exhibit 10.40
February 5, 1997
PRIVATE AND CONFIDENTIAL
Lithium Technology Corporation
5115 Campus Drive
Plymouth Meeting, Pennsylvania 19462-1129
Attention: David J. Cade
President
Gentlemen:
This letter (the "Letter Agreement") will confirm our understanding that
the Chase Manhattan Bank ("Chase") has been retained as exclusive strategic
advisor by Lithium Technology Corporation (the "Company") in connection with a
potential Transaction (as defined below) involving Korean investors
("Investors").
1. Scope. As exclusive strategic advisor, Chase agrees to perform the
following advisory services, as appropriate:
(A) Familiarize itself to the extent Chase deems appropriate with the
financial and operating performance, current financial condition
and prospects of the Company and the Investor(s), it being
understood that Chase shall, in the course of such familiarization,
rely entirely upon publicly available information and such other
information as may be supplied by the Company or the Investor(s),
without independent investigation;
(B) Advise and assist the Company in identifying potential Investors
and on behalf of the Company, (i) make initial contact with such
potential Investors; (ii) arrange meetings by the Investor(s) with
the Company, if necessary; and (iii) facilitate communication
between the Company and the Investor(s);
(C) Advise and assist the Company in considering the desirability of
effecting a Transaction, and if the Company believes such a
Transaction to be desirable, in developing a general strategy for
accomplishing a Transaction.
In connection with such services, the Company agrees to refer to
Chase, during the term of this Letter Agreement, any Investors who may contact
the Company directly or through a source other than Chase concerning a potential
Transaction.
<PAGE> 2
2. Definitions. For purposes of this Letter Agreement:
(A) A Transaction shall include any consummated single transaction or
series or combination of transactions in excess of one-million dollars
($1,000,000) as the direct result of the services and efforts of Chase
pursuant to this Letter Agreement, other than in the ordinary course
of business whereby a material interest in the Company or any of its
businesses, securities or assets are acquired by the Investor in the
form of a capital stock purchase, a collaborative or joint venture,
strategic alliances, licensing agreement, minority investment or
partnership or any similar transaction or any other effort by the
Investor(s) to obtain control or investment in the Company.
3. Compensation. As compensation for Chase's services hereunder, the
Company agrees to pay Chase the following fees:
(A) A success fee (a "Success Fee") equal to 5% of the total consideration
provided by the Investor(s) in respect of the Transaction, payable at
the closing of the Transaction, provided that (i) a Transaction is
consummated during the period of Chase's engagement hereunder or within
eighteen (18) months of the date of any termination hereof or (ii) a
definitive agreement providing for a Transaction is executed within
eighteen (18) months of the date of termination and pursuant to which
agreement a Transaction is consummated thereafter, and further provided
that if any Transaction results in an on-going relationship for the
Company (such as, but without limitation, a collaborative or joint
venture, strategic alliance, licensing agreement, partnership or
similar transaction), then the Success Fee shall be based only on the
first five years of such relationship and no Success Fee shall arise or
be due thereafter.
4. Expenses. In addition to any fees that may be payable to Chase
hereunder and regardless of whether any Transaction is proposed or consummated,
the Company agrees to reimburse Chase from time to time upon request for all
reasonable out-of-pocket expenses incurred by Chase in connection with any
matter referred to in this Letter Agreement upon presentation of appropriate
written receipts and not exceeding one-thousand dollars ($1,000.00) per month.
Expenses in excess of one-thousand dollars ($1,000.00) per month shall be
reimbursable only if pre-approved in writing by the company. However, Chase will
not be entitled to reimbursement for any legal, accounting and other
professional consultants without the prior written consent of the Company except
pursuant to Attachment I. No travel/entertainment expense shall be reimbursable
unless approved in advance in writing by the company.
5. Indemnification. Chase and the Company agree to the provisions with
respect to Chase's indemnity and other matters set forth in Attachment I, the
terms of which are incorporated by reference into this Letter Agreement.
<PAGE> 3
6. Other Transactions. The Company acknowledges that Chase and its
affiliates may have and may in the future have investment and commercial
banking, trust and other relationships with parties other than the Company,
which parties may have interests with respect to the Transaction. Although Chase
in the course of such other relationships may acquire information about the
Transaction, potential investors or other parties, Chase shall have no
obligation to disclose such information to the Company. Furthermore, the Company
acknowledges that Chase may have fiduciary or other relationships whereby Chase
may exercise voting power over securities of various persons, which securities
may from time to time include securities of various persons, which securities
may from time to time include securities of the Company or of potential
purchasers. The Company acknowledges that Chase may exercise such powers and
otherwise perform its functions in connection with such fiduciary or other
relationships without regard to its relationship to the Company hereunder.
7. Miscellaneous. This Letter Agreement and all controversies
arising from or related to performance under this Letter Agreement shall be
governed by the laws of the State of New York without regard to the conflict of
laws principles thereof. This Letter Agreement contains the entire understanding
of the parties with respect to the subject matter hereof and supersedes all oral
statements and prior writings with regard to the subject matter hereof. The
Company recognizes that Chase has been retained only by the Company and that
the Company's engagement of Chase is not deemed to be on behalf of and is not
intended to confer rights upon any stockholder, owner, partner, employee or
creditor of the Company or any other person not a party hereto as against Chase
or any Indemnified Person (as defined in Attachment I). Unless otherwise
expressly stated in an opinion letter issued by Chase or otherwise expressly
agreed, the opinion and any other information or advice rendered by Chase or its
representatives in connection with this engagement is for the use of the
Company's Board of Directors and no one other than the Company is authorized to
rely upon this engagement of Chase or any statements or conduct by Chase.
ANY RIGHTS TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR PROCEEDING
RELATED TO, OR ARISING OUT OF, THIS LETTER AGREEMENT, ENGAGEMENT OR ANY
TRANSACTION OR CONDUCT IN CONNECTION HEREWITH, IS WAIVED.
Subject to the penultimate sentence of the last paragraph of
Attachment I, the Company and Chase hereby irrevocably and unconditionally
consent to the non-exclusive jurisdiction of the courts of the State of New
York and the United States District Courts located in the City of New York for
any actions, claims or other proceedings arising out of or relating to this
Letter Agreement and consent to service of process of such courts. The Company
and Chase hereby irrevocably and unconditionally waive any objection to the
laying of venue of any action, claim or other proceeding arising out of or
relating to this Letter Agreement in the courts of the State of New York or the
United States District Court located in the City of New York, and hereby
further and irrevocably and unconditionally waive and agree not to plead or
claim in any such court that any such action, claim or other proceeding brought
in any such court has been brought in an inconvenient forum.
<PAGE> 4
The Company agrees to furnish to Chase financial, operating and other
information pertinent to Chase's inquiry (all of which information will be
accurate and complete in all material respects) and not to withhold or omit any
material information and to assist Chase in inquiries of officers, employees,
auditors, attorneys and other agents of the Company and use best efforts to
cause them to supply Chase, on a timely basis, with all information about the
Company pertinent to Chase's inquiries, opinion or engagement hereunder (such
information to be accurate and complete in all material respects). The Company
recognizes and confirms that, in performing the services contemplated hereunder
and rendering any opinion, Chase may rely, without independent verification, on
the information furnished by the Company, or their respective officers,
employees, auditors, attorneys or other agents, and information available from
sources generally recognized to be reliable without independent verification
and Chase will not undertake to make an independent appraisal of any of the
assets of the Company and that any opinion may be in such form as Chase may
determine and Chase may qualify such opinion in any manner it chooses.
No oral or written advice, report or opinion may be quoted in part,
paraphrased, summarized or described in any writing including any proxy
statement or registration statement or provided to any person who is not an
employee, officer or director of the Company or an attorney, accountant or
financial or other advisor for the Company.
The Company agrees that under no circumstances shall the execution of
this Letter Agreement or any act of Chase hereunder commit or be deemed a
commitment by Chase (or any affiliate) to provide any Bank Financing or other
Debt Financing for any Transaction or to purchase any security in connection
therewith.
8. Termination. This Letter Agreement may be terminated by the
Company or Chase at any time upon written notice to the other party, provided
that the compensation, reimbursement, indemnification and contribution
provisions and the other provisions of paragraphs 2 through 6 of this Letter
Agreement shall survive such termination.
9. Counterparts. This Letter Agreement may be executed in
counterparts, all of which together shall be considered a single instrument.
This Letter Agreement shall be binding upon and inure to the benefit of the
Company, Chase, the other Indemnified Persons and their respective successors
and assigns.
10. Confidentiality. Chase hereby acknowledges that the
Confidential Information (as defined below) received by it from the Company has
value and is of a strictly confidential nature and that damage would result to
the Company if the information contained therein becomes known to any
third-party except third-parties to whom the Confidential Information is
furnished in order for such recipient to evaluate a potential Transaction,
provided that such recipient has previously agreed in writing with Chase and
the Company (such written confidentiality agreement to be obtained by Chase in
advance of the delivery of any Confidential Information) to maintain the
confidentiality of the Confidential Information on the same terms as are set
forth herein. For
<PAGE> 5
purposes of this Letter Agreement the term "Confidential Information" shall
mean any and all non-public, confidential, or proprietary information belonging
to the Company.
Chase under takes on behalf of itself, its directors, officers, and
employees that it will not disclose any such Confidential Information except
in accordance with this Agreement; provided that the foregoing provisions of
this Paragraph 10 and the other provisions of this Letter Agreement shall not
apply to information which:
(A) is at the time of its disclosure in the public domain;
(B) is independently developed or was already known to the recipient
at time of disclosure or, subsequent to its disclosure is lawfully
acquired by the recipient to which it has been disclosed; or
(C) falls into the public domain otherwise than through any breach of
the terms of this Letter Agreement on the part of the recipient to
which it has been disclosed.
The Confidential Information shall remain the sole and exclusive
property of the Company and neither this Letter Agreement nor any related
confidentiality agreement by and among Chase, the Company and the recipient
shall operate to transfer ownership of the information to the recipient.
Chase and any recipient who receives Confidential Information shall not
further copy, reproduce, distribute, pass or disclose any Confidential
Information or any third-party whatsoever without the prior written consent
of, and subject to such terms and conditions as may be required by, the Company.
Each of Chase and any recipient who receives Confidential Information
shall:
(A) ensure that its officers, directors and employees to whom any
Confidential Information is further disclosed shall be made aware
of the confidentiality provisions of this Letter Agreement or any
applicable confidentiality agreement; and
(B) take all reasonable steps to ensure that such officers, directors
and employees comply with the provisions of each such applicable
agreement.
Chase and any recipient who receives Confidential Information shall, at
the written request of the Company, forthwith return any Confidential
Information provided to them in written form or other permanent form together
with any and all copies thereof.
Chase and any recipient who receives Confidential Information hereby
acknowledges and agrees that the breach of this Letter Agreement or any
applicable confidentiality agreement would cause the Company to suffer
irreparable harm, and agrees that legal damages would not be a
<PAGE> 6
sufficient remedy for any breach of such agreement by itself, its agents,
representatives or employees. Accordingly, Chase and any recipient who receives
Confidential Information hereby consents to injunctive or other appropriate
equitable relief, including specific performance, upon the institution of legal
proceedings by the Company without the need to plead or prove the inadequacy of
money damages. Such remedy shall not be deemed to be the exclusive remedy for
any such breach of this Letter Agreement, but shall be in addition to all other
remedies available at law or in equity.
In the event that Chase or any of its Representatives are requested or
required by law to disclose any of the Confidential Information, Chase shall
provide the Company with prompt written notice, unless notice is prohibited by
law, of any such request or requirement so that the Company may seek a
protective order or other appropriate remedy.
<PAGE> 7
Please confirm that the foregoing is in accordance with your
understanding by signing and returning to us the enclosed duplicate, whereupon
it will constitute a binding agreement.
Very truly yours,
THE CHASE MANHATTAN BANK
By: /s/ Jae Yoo Kim
----------------------------
Jae Yoo Kim
Vice President
Agreed and Accepted
as of the date first
set forth above:
LITHIUM TECHNOLOGY CORPORATION
By: /s/ David J. Cade
------------------------------
David J. Cade
President
<PAGE> 8
Name of Client: Lithium Technology Corp.
Date: February 5, 1997
ATTACHMENT I
The Company will indemnify and hold harmless Chase and its affiliates,
and their respective officers, directors, advisors, representatives, agents,
employees and controlling persons (each of the foregoing an "Indemnified
Person") from and against any and all losses, claims, damages or liabilities,
joint or several, related to or arising out of any matter referred to in this
Letter Agreement, including an Indemnified Person's services hereunder, except
such losses, claims, damages or liabilities as are finally judicially determined
to have resulted primarily from an Indemnified Person's gross negligence or
willful misconduct.
The Company will also reimburse an Indemnified Person immediately for
reasonable legal or other expenses incurred in connection with investigating,
preparing to defend or defending any commenced or threatened action, claim,
proceeding or investigation (including usual and customary per diem
compensation for any Indemnified Person's involvement in discovery proceedings
or testimony) related to or arising out of any matter referred to in this
Letter Agreement, including an Indemnified Person's services hereunder;
provided, that if such Indemnified Person is finally judicially determined to
have acted with gross negligence or engaged in willful misconduct in performing
the services which are the subject of this Letter Agreement, the Indemnified
Person shall repay such portion of such reimbursed amounts that is attributable
to expenses incurred in relation to the act or omission of such Indemnified
Person which is the subject of such determination. No Indemnified Person shall
have any liability to the Company as a result of such Indemnified Person's
actions pursuant to this Letter Agreement except for liability for such losses,
claims, damages, liabilities or expenses which are finally judicially
determined to have been incurred primarily as a result of such Indemnified
Person's gross negligence or willful misconduct. In no event shall any
Indemnified Person be responsible for any indirect, special, or consequential
damages, even if it is advised of the possibility thereof. The Company will
promptly notify an Indemnified Person of the assertion against it or any other
person of any claim or the commencement of any action, proceeding or
investigation relating to or arising out of any matter referred to in this
Letter Agreement, including an Indemnified Person's services hereunder.
If the foregoing indemnification and reimbursement is unavailable to an
Indemnified Person or insufficient to hold it harmless, then the Company, in
lieu of indemnifying or reimbursing such Indemnified Person, shall contribute
to the amount paid or payable by such Indemnified Person as a result of such
losses, claims, damages, liabilities or expenses in such proportion as is
appropriate to reflect the relative benefits received (or anticipated to be
received) by the Company on the one hand and the Indemnified Person on the
other hand, as well as the relative fault of the Company on the one hand and
the Indemnified Person on the other hand, in connection with the acts which
resulted in such losses, claims, damages, liabilities or expenses,
<PAGE> 9
together with any other relevant equitable considerations; provided, that in no
event shall the amount to be contributed by an Indemnified Person hereunder
exceed the amount of any fee actually received by Chase pursuant to this Letter
Agreement. It is hereby agreed that the relative benefits to the Company on the
one hand and any Indemnified Person on the other hand with respect to Chase's
engagement shall be deemed to be in the same proportion as (i) the total value
paid, transferred, exchanged or received or proposed to be paid, transferred,
exchanged or received by the Company or its stockholders, as the case may be,
in connection with any transaction (whether or not consummated) to which the
foregoing indemnification and reimbursement relates to (ii) the fee paid or
payable to Chase in connection with such engagement.
The reimbursement, indemnity and contribution obligations of the
Company under this Letter Agreement shall be in addition to any liability which
the Company may otherwise have and shall be binding upon and inure to the
benefit of any successors, assigns, heirs and personal representatives of the
Company or an Indemnified Person. The Company agrees that it will not, without
the prior written consent of an Indemnified Person, settle any pending or
threatened action, claim, proceeding or investigation related to or arising out
of any matter referred to in this Letter Agreement, including an Indemnified
Person's services hereunder, unless such settlement includes a provision
unconditionally releasing such Indemnified Person from and holding such
Indemnified Person harmless against all liability in respect of claims by any
releasing party related to or arising out of any matter referred to in this
Letter Agreement, including an Indemnified Person's services hereunder. Solely
for purposes of this Attachment I, the Company consents to the jurisdiction and
service of process of any court in which any action, claim or proceeding which
is subject to the foregoing provisions is brought against an Indemnified Person
and hereby and irrevocably waives any objection to the laying of venue in any
court in which any such action, claim or proceeding is brought and hereby
further and irrevocably and unconditionally waives and agrees not to plead or
claim in any court that such action, claim or proceeding is brought in an
inconvenient forum. The foregoing provisions shall survive any termination of
this Letter Agreement.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,388
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,398
<PP&E> 987
<DEPRECIATION> 363
<TOTAL-ASSETS> 2,249
<CURRENT-LIABILITIES> 3,028
<BONDS> 0
0
0
<COMMON> 171
<OTHER-SE> (950)
<TOTAL-LIABILITY-AND-EQUITY> 2,249
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,384
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89
<INCOME-PRETAX> (4,384)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,384)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,384)
<EPS-PRIMARY> (.31)
<EPS-DILUTED> (.31)
</TABLE>
