FORM 10Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission file number 0-16323
ELECTROSOURCE, INC.
(Exact name of Registrant as specified in its charter.)
Delaware 742466304
(State or other jurisdiction(I.R.S. Employer Identification No.)
of incorporation or organization)
2809 Interstate 35 South
San Marcos, Texas 78666
(Address of principal executive offices) (Zip Code)
(512) 753-6500
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changes since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(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 __
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes __ No __
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date: 4,146,085 shares as of August 14, 1997.
INDEX TO FINANCIAL STATEMENTS
June 30, 1997
Electrosource, Inc. Commission file
number 0-16323
Condensed Balance Sheets at June 30, 1997 (Unaudited)
and December 31, 1996 Page 3
Condensed Statements of Operations for the three and six
months ended June 30, 1997 and 1996 (Unaudited) Page 4
Condensed Statements of Cash Flows for the three and six
months ended June 30, 1997 and 1996 (Unaudited) Page 5
Notes to Condensed Financial Statements Page 6
Management's Discussion and Analysis Page 9
Exhibits to Form 10Q Page 16
Index to Exhibits Page 17
Part I - Financial Information
Item 1. Financial Statements
Electrosource, Inc.
Condensed Balance Sheets
<TABLE>
June 30, 1997 December 31,
(Unaudited) 1996
ASSETS
<C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,641,445 $ 367,861
Trade receivables 766,088 247,631
Inventories 211,709 249,235
Prepaid expenses and other assets 172,464 164,319
TOTAL CURRENT ASSETS 2,791,706 1,029,046
PROPERTY AND EQUIPMENT (net of accumulated depreciation
of $2,776,395 in 1997 and $2,316,995 in 1996) 4,358,057 4,787,019
INTANGIBLE ASSETS (net of accumulated amortization
of $3,103,653 in 1997 and $2,607,093 in 1996) 2,357,907 2,854,467
RESTRICTED CASH 744,824 744,824
DEBT ISSUANCE COSTS 1,458,698 72,950
TOTAL ASSETS $11,711,192 $9,488,306
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 818,933 $ 704,841
Accrued liabilities 1,086,386 1,103,751
Deferred revenue and advance payments on batteries 994,805 1,157,028
Current portion of capital lease obligations 629,136 658,226
Current portion of convertible notes payable 250,000
--
TOTAL CURRENT LIABILITIES 3,529,260 3,873,846
CONVERTIBLE NOTES PAYABLE (less current portion) 4,000,000 --
TECHNOLOGY LICENSE PAYABLE 1,016,353 1,248,684
CAPITAL LEASE OBLIGATIONS (less current portion) 229,076 519,047
SHAREHOLDERS' EQUITY
Common stock par value $1.00 per share; authorized 50,000,000
shares; shares issued and outstanding: 4,110,975 in 1997 and
3,857,912 in 1996 4,110,975 3,857,912
Subscriptions receivable (867,000) --
Warrants -- --
Paid in capital 48,850,639 45,876,668
Accumulated deficit (49,158,111) (45,887,851)
2,936,503 3,846,729
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,711,192 $ 9,488,306
See notes to condensed financial statements.
</TABLE>
<TABLE>
Electrosource, Inc.
Condensed Statements of Operations (Unaudited)
Three Months ended June 30, Six Months ended June 30,
1997 1996 1997 1996
<C> <C> <C> <C> <C>
Revenues
Battery sales $119,820 $73,565 $663,055 $401,533
Project revenue 740,367 938 1,204,863 61,090
Interest income 52,353 28,161 55,506 41,543
912,540 102,664 1,923,424 504,166
Costs and expenses
Manufacturing 827,430 802,642 1,674,508 1,664,554
Selling, general and administrative 661,472 799,044 1,225,654 1,558,691
Research and development 616,153 531,901 1,065,661 1,001,688
Technology license and royalties 25,000 25,000 50,000 50,000
Depreciation and amortization 477,273 526,911 955,960 1,041,907
Interest expense 168,615 91,109 221,901 359,394
Loss on disposal of equipment -- -- -- 171,895
2,775,943 2,776,607 5,193,684 5,848,129
Loss before income taxes (1,863,403) (2,673,943) (3,270,260) (5,343,963)
Income taxes -- -- -- --
Net loss $(1,863,403) $(2,673,943) $(3,270,260) $(5,343,963)
Net loss per common share $(0.45) $(0.74) $(0.81) $(1.53)
Average common shares outstanding 4,096,964 3,635,403 4,017,882 3,494,239
See notes to condensed financial statements.
</TABLE>
<TABLE>
Electrosource, inc.
Condensed Statements of Cash Flows (Unaudited)
Six Months Ended June 30,
1997 1996
<C> <C> <C>
OPERATING ACTIVITIES
Net loss $(3,270,260) $(5,343,963)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity instruments issued for consulting services 21,600 32,400
Depreciation and amortization 1,032,712 1,053,993
Interest expense paid in Common Stock -- 58,304
Non-cash interest expense (conversion discount) -- 141,750
Loss on disposal of equipment -- 171,895
Non-cash accruals 90,050 172,457
Changes in operating assets and liabilities:
(Increase) decrease in trade receivables (518,457) 502,085
Decrease in inventories 37,526 185,061
(Increase) decrease in prepaid expenses and other assets (8,145) 23,124
Increase (decrease) in accounts payable and accrued liabilities 6,677 (527,643)
Decrease in deferred revenue and advance payments on batteries (162,223) --
CASH USED IN OPERATING ACTIVITIES (2,770,520) (3,530,537)
INVESTING ACTIVITIES
Purchases of property and equipment (30,438) (226,552)
CASH USED IN INVESTING ACTIVITIES (30,438) (226,552)
FINANCING ACTIVITIES
Payments of notes payable and capital lease obligations (569,060) (244,438)
Proceeds from issuance of common stock, net 643,602 2,546,981
Proceeds from issuance of convertible notes payable 4,000,000 --
CASH PROVIDED BY FINANCING ACTIVITIES 4,074,542 2,302,543
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,273,584 (1,454,546)
Cash and cash equivalents at beginning of period 367,861 2,083,032
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,641,445 $ 628,486
See notes to condensed financial statements.
</TABLE>
Item 1. Notes to Condensed Financial Statements (Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they
do not include all of the information and notes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments,
consisting of normal recurring accruals, considered necessary for
a fair presentation have been included. These interim financial
statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996, and are
not necessarily indicative of results for the entire year.
Certain reclassifications have been made to the 1996 financial
statements to conform with the 1997 presentation.
NOTE B - INVENTORIES
June 30, December 31,
1997 1996
Raw Materials $167,502 $151,841
Work In Progress 30,915 31,406
Finished Goods 13,292 65,988
$211,709 $249,235
NOTE C - PROPERTY AND EQUIPMENT
June 30, December 31,
1997 1997
Office Equipment $ 762,470 $ 751,342
Production and Lab Equipment 5,081,785 5,062,475
Leasehold Improvements 1,290,197 1,290,197
7,134,452 7,104,014
Less: Accumulated depreciation (2,776,395) (2,316,995)
and amortization
Total Property and Equipment $4,358,057 $4,787,019
NOTE D - CONVERTIBLE NOTES PAYABLE
Convertible Notes Payable consist of the following:
June 30, December 31,
1997 1996
Convertible Notes - 5% $4,000,000 $ --
Convertible Notes - 10% -- 250,000
4,000,000 250,000
Less Current Maturities (250,000)
(--)
Convertible Notes Payable - Long Term $4,000,000 $ --
In March 1997, the Company entered into a Note Purchase and
Option Agreement and a Convertible Promissory Note and Option
(the "Agreements") with Corning Incorporated ("Corning"). The
Convertible Note is for $4,000,000, is unsecured and matures on
March 26, 2002. A $500,000 loan previously made by Corning to
the Company was canceled and refinanced as part of the $4,000,000
Note. Interest is payable at 5% per annum in cash or in kind at
the option of the Company. The conversion price is $5.50 per
share. The Company also granted Corning an option to purchase up
to 275,000 shares of Common Stock at $7.00 per share and an
option to purchase up to 225,000 shares of Common Stock at $9.00
per share. These options are exercisable until March 1999. The
fair market value of the options was estimated to be $1,462,500,
using the Black-Scholes Option Valuation model. This amount was
recorded as a Debt Issuance Cost and is being amortized to
interest expense over the term of the Note. The Company is
working on various research and development projects with Corning
and is also discussing other potential business arrangements with
Corning.
In April 1995, the Company issued $6,000,000 of 10% Convertible
Debentures (the "April 1995 Debentures") resulting in net
proceeds to the Company of $5,375,000. The April 1995 Debentures
were convertible into Common Stock at a conversion price equal to
80% of the average closing price of the Common Stock for the five
business days immediately preceding such time as the debentures
were converted and matured on April 12, 1997. During 1995, April
Debentures with a total principal amount of $5,750,000 were
converted into 379,548 shares of Common Stock. The remaining
$250,000 of outstanding April 1995 Debentures matured on April
12, 1997, and were paid in cash by the Company.
During 1995 and the first quarter of 1996, the Company accounted
for the conversion of convertible debentures, issued with
conversion rights at a discount to market, as sales of securities
and treated the discount as a cost of capital. The Securities
and Exchange Commission subsequently announced that it believes
such discounts should be treated as interest expense.
Accordingly, the Company restated its financial statements for
the year ended December 31, 1995 to reclassify the discount
(generally 20-25%) as interest expense and record it as a cost of
borrowing. The discount was amortized over the period beginning
with the issuance of the debt to the first date that conversion
could occur (generally 60 days). The restatement increased the
net loss for the year ended December 31, 1995 by $2,603,250
($1.24 per share) and increased the accumulated deficit and paid
in capital by the same amount. This restatement is reflected in
the Company's financial statements for the year ended December
31, 1996 filed on Form 10-K. The Company's financial statements
for the six months ended June 30, 1996, as presented herein, have
been restated to reflect an additional $141,750 in interest
expense ($0.04 per share).
NOTE E - COMMON STOCK
In January, 1997, the Company completed a private placement of
Common Stock with certain of its executive officers and other
accredited investors which raised net proceeds of $643,602, net
of advisory fees. The offering was conducted in two parts. The
terms for the first part, in which the executive officers
participated, were $6.56 per share of Common Stock purchased
(80,897 shares) and one warrant at an exercise price of $7.56 per
share for each dollar invested (530,883 warrants) for gross
proceeds of $530,684 to the Company. The terms of the second
part were $5.25 per share of Common Stock purchased (28,500
shares), with three warrants per share (85,500 warrants), for
gross proceeds of $149,625. One-half of the warrants are
exercisable at a price of $5.25 per share and one half at $6.25
per share. All warrants have a two-year term from date of issue.
In April 1997, the Company filed an amended registration
statement on Form S-3 for the sale of 127,500 shares issued to
Ally Capital Corporation ("Ally") as prepayment for capital lease
obligations owed by the Company. The shares will be sold by
Ally, and the proceeds will be used to satisfy the lease
obligations (approximately $805,000 as of June 30, 1997). If the
proceeds from the sale of such shares are not sufficient to
satisfy the lease obligations due to fluctuations in market
prices, the Company will, on a one-time basis, issue additional
shares of Common Stock or pay cash to Ally to make up the
deficiency. Ally will retain any overage from the sale of such
shares in excess of the lease obligations. Upon payment of all
lease obligations, letters of credit for $663,000 which secure
the lease obligations will be canceled and certificates of
deposit of an equal amount that collateralize the letters of
credit will be released. The 127,500 shares were issued and
outstanding as of June 30, 1997 and were valued at $867,000 based
upon the quoted market price of the stock on the date the
agreement to issue the 127,500 shares was signed. The shares
were recorded as Subscriptions receivable at June 30, 1997 since
the lease obligation had not been satisfied at June 30, 1997.
NOTE F - CONTINGENCIES
In 1994, the Company signed a "Know-How License Agreement" (the
"Agreement") with Horizon Battery Technologies, Ltd., ("HBTL"),
of Bombay, India, calling for the completion of several detailed
subordinate agreements with the ultimate purpose to license the
manufacture and sale of batteries in India. The effectiveness of
the Agreement was conditioned upon the subsequent execution of
these six related agreements, none of which were executed. The
Company believes, therefore, the Agreement never became effective
and has no force or effect. Separately in 1995, HBTL agreed to
pay the Company $250,000 for a Preliminary Design Review ("PDR")
for a potential manufacturing facility in India which was
required to complete one of the subordinate agreements. The
Company received $100,000 from HBTL and completed the PDR in
1995. The remaining $150,000 was never paid by HBTL, in spite of
repeated demands by the Company.
In September 1996, the Company received a demand from HBTL to
arbitrate damage claims for alleged breach of the Agreement.
HBTL claims damages of approximately $5,100,000 for its expenses
and lost profits related to the Agreement. The Company disputes
the claim for damages and will vigorously defend any actions
taken by HBTL to pursue the claims. The Company filed a petition
in state court in Travis County, Texas, seeking, among other
things, a declaratory judgment that HBTL has no right to
arbitration or monetary relief. HBTL contested jurisdiction and
removed the proceedings to the U.S. Federal Courts. The Federal
District Court to which the action was removed has ruled that it
cannot exercise personal jurisdiction over HBTL and therefore has
no power to hear the case. The Company asked for a re-hearing,
which was denied; the Company plans to appeal. No liability has
been recorded in the financial statements at June 30, 1997, for
this uncertainty as management is unable to determine the
likelihood of an unfavorable outcome of this matter or to
estimate the amount or range of potential loss should the outcome
be unfavorable. The resolution of this matter could have a
material adverse effect on the financial position of the Company.
NOTE G - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per
Share ("SFAS 128"), which is effective for financial statements
issued for periods after December 15, 1997. SFAS 128 will
require restatement of prior reported loss per share amounts.
Under SFAS 128, the dilutive effect of stock options, warrants
and similar securities is excluded in computing basic earnings
(loss) per share. Since the Company has reported net losses in
prior periods, Statement 128 is not expected to have a material
impact on the Company's prior reported loss per share amounts.
The method of calculating fully diluted earnings per share will
remain essentially unchanged.
NOTE H - LIQUIDITY
The Company has not generated sufficient cash flow from battery
sales and project revenue to fund operations for the six months
ended June 30, 1997. During the six months ended June 30, 1997,
the Company sold 109,397 shares of Common Stock (including
616,383 warrants with exercise prices ranging from $5.25 to $7.56
per share) which generated net proceeds of $643,602 to the
Company. In March 1997, the Company received $4,000,000 in the
form of a five-year unsecured convertible promissory note bearing
interest at 5%, including 500,000 options at exercise prices of
$9.00 per share (225,000 options) and $7.00 per share (275,000
options). The conversion price of the convertible promissory
note is $5.50 per share.
As of July 31, 1997, the Company had approximately $1,100,000 of
unrestricted cash available. Management expects the level of
battery sales to increase beginning in late 1997 as the Company
receives an increase in orders primarily from those currently
testing the battery and from customers for which the Company is
currently refining and delivering prototype batteries.
Discussions have begun with certain of these customers for the
manufacture of additional prototype batteries for further
testing. However, the timing and amount of battery sales is
uncertain. Revenue from project agreements is expected to remain
relatively constant during the year. Management believes that
sales from battery orders and services (combined with the release
of restricted cash related to the Ally lease) will generate
sufficient funds to support its overall working capital and
capital expenditure needs through 1997; however, if the
anticipated battery orders are not received in late 1997,
additional debt and/or equity financing could be necessary to
sustain operations. Debt and/or equity financing may be
necessary in early 1998 to fund working capital needs and to
further expand and automate the Horizon battery manufacturing
facility to meet the demand of anticipated battery orders from
customers currently testing prototype batteries. The Company has
historically been able to raise funds on a repeated basis to
sustain operations; however there can be no assurance that such
funding can be obtained on terms acceptable to the Company, if at
all.
The Company's Common Stock is traded on the Over-the-Counter
Market and is reported on NASDAQ. In order to maintain listing
by NASDAQ, the Company must maintain a minimum $1 million of
stockholders' equity. The Company is currently in compliance
with this requirement. There can be no assurance that this
minimum can be maintained throughout 1997 at the current level of
activity without additional equity financing, conversion of
existing debt, exercise of stock options or other transactions
that increase shareholders' equity. If the minimum required
balance is not maintained, the NASDAQ may choose to delist the
Common Stock of the Company from trading which would restrict the
liquidity of the Common Stock. Ordinarily, before delisting, the
NASDAQ would provide the Company notice and an opportunity to
present and carry out a plan for compliance.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Unaudited)
Results of Operations:
Revenues. The Company had battery sales of approximately
$120,000 and $663,000 for the three and six months ended June 30,
1997 as compared to $74,000 and $402,000 for the three and six
months ended June 30, 1996. Approximately 78% and 70% of battery
sales for the six months ended June 30, 1997 and 1996,
respectively, were to Chrysler Corporation to fill orders placed
in accordance with terms of the production purchase order
received in December 1995. Due to weakened government zero
emission vehicle mandates in California, management does not
expect sales from Chrysler in the near-term to reach levels
originally projected. Government zero emission vehicle mandates
in the state of New York which have recently been challenged and
upheld could result in an increase in battery orders beginning in
1998, primarily from Chrysler; however, the timing and amount of
future sales to Chrysler is uncertain. Current models of the
Horizon battery are being evaluated by certain other original
equipment manufacturers for potential integration into their
products in late 1997/early 1998. Additionally, the Company is
currently refining several prototype battery designs which are
being evaluated by customers. Discussions have begun with such
customers for additional prototype batteries for further
evaluation and testing. Management expects that sales of
batteries will increase in late 1997 and early 1998 as a result
of these efforts. However, the amount and timing of battery
sales to these potential customers is uncertain.
The Company had project revenue of approximately $740,000 and
$1,205,000 for the three and six months ended June 30, 1997, as
compared to $1,000 and $61,000 for the three and six months ended
June 30, 1996. Project revenue in 1997 was derived from various
customers with whom the Company is refining and/or manufacturing
evaluation prototype batteries for various hybrid, electric
vehicle, starting and outdoor product applications (Fiat Auto,
SMH Automobile, S.A. (SMH), the Defense Advanced Research
Projects Agency (DARPA), Blue Bird Corporation, Black & Decker,
Chrysler and others which remain confidential). The majority of
these projects are expected to be complete by the end of the year
at which time customer testing of additional prototypes is
expected to intensify. As a result of test results to date with
certain of these customers, the Company is currently discussing
follow-on prototype battery orders by these customers for further
evaluation and testing in late 1997/early 1998. Revenue from
project agreements is expected to remain relatively constant
during 1997. Essentially all project revenue generated during
1996 was from Chrysler for various environmental tests performed
on the battery.
Costs and Expenses. Generally, total costs and expenses were
approximately the same for the three months ended June 30, 1997
compared to the same period in 1996 and were lower for the six
months ended June 30, 1997 compared to the same period in 1996.
During 1996, management implemented cost control measures to
conserve cash and reduce cash expenditures. Personnel reductions
were made throughout 1996 primarily in manufacturing and the
Austin and San Marcos facilities were combined into one location
in the fourth quarter of 1996 to reduce costs. In the second
quarter of 1997, the Company began to add personnel primarily in
the manufacturing department due to the increased demands
associated with the manufacture of prototype batteries for
projects. The Company hired additional personnel in July and
anticipates modest increases in personnel primarily in the
manufacturing department to build additional prototype batteries
and production models for orders which are currently being
discussed with current and potential new customers.
Manufacturing costs are expected to continue to decrease as a
percentage of battery sales when volume production begins;
however, the timing and amount of such orders remains uncertain.
Depreciation and amortization costs were lower for the three and
six months ended June 30, 1997 compared to the same periods in
1996 due to the write-off of approximately $525,000 for equipment
in 1996 which was no longer in use.
Interest costs were higher in the quarter ended June 30, 1997
compared to the quarter ended June 30, 1996 due to the interest
incurred on the 5% $4,000,000 convertible promissory note entered
into in March 1997 and the related amortization of $1,462,500 of
options issued to the noteholder which are being amortized to
interest expense over the five year term of the note. Interest
costs were lower in the six months ended June 30, 1997 compared
to the six months ended June 30, 1996. In late November 1995,
the Company obtained $3,780,000 of Convertible Debt financing
which was converted into Common Stock in early 1996. Interest
costs in 1996 included $141,750 related to the 25% conversion
discount from market on the Convertible Debt. The discount was
amortized over the period beginning with the issuance of the debt
to the first date that conversion could occur.
Liquidity and Capital Resources. During the six months ended
June 30, 1997, the Company did not generate sufficient cash flow
from operations to fund its working capital needs. Net cash used
in operating activities was approximately $2,800,000 (down from
$3,500,000 for the six months ended June 30, 1996). In order to
fund operating activities the Company sold 109,397 shares of
Common Stock (and 616,383 warrants) which resulted in net
proceeds to the Company of approximately $640,000. Additionally,
the Company received $4,000,000 in March 1997 from the sale of a
Convertible Promissory Note and Option to Corning Incorporated
("Corning"). The Note bears interest at 5% (payable in cash or
in kind) and matures on March 26, 2002.
As of July 31, 1997, the Company had approximately $1,100,000 of
unrestricted cash available. Management expects the level of
battery sales to increase beginning in late 1997 as the Company
receives an increase in orders primarily from those currently
testing the battery and from customers for which the Company is
currently refining and delivering prototype batteries.
Discussions have begun with certain of these customers for the
manufacture of additional prototype batteries for further
testing. However, the timing and amount of battery sales is
uncertain. Revenue from project agreements is expected to remain
relatively constant during the year. Management believes that
sales from battery orders and services (combined with the
anticipated release of restricted cash related to the Ally lease)
will generate sufficient funds to support its overall working
capital and capital expenditure needs through 1997; however, if
the anticipated battery orders are not received in late 1997,
additional debt and/or equity financing could be necessary to
sustain operations. Debt and/or equity financing may be
necessary in early 1998 to fund working capital needs and to
further expand and automate the Horizon battery manufacturing
facility to meet the demand of anticipated battery orders from
customers currently testing prototype batteries. The Company has
historically been able to raise funds on a repeated basis to
sustain operations; however there can be no assurance that such
funding can be obtained on terms acceptable to the Company, if at
all.
In 1994, the Company signed a "Know-How License Agreement" (the
"Agreement") with Horizon Battery Technologies, Ltd., ("HBTL"),
of Bombay, India, calling for the completion of several detailed
subordinate agreements with the ultimate purpose to license the
manufacture and sale of batteries in India. The effectiveness of
the Agreement was conditioned upon the subsequent execution of
these six related agreements, none of which were executed. The
Company believes, therefore, the Agreement never became effective
and has no force or effect. Separately in 1995, HBTL agreed to
pay the Company $250,000 for a Preliminary Design Review ("PDR")
for a potential manufacturing facility in India which was
required to complete one of the subordinate agreements. The
Company received $100,000 from HBTL and completed the PDR in
1995. The remaining $150,000 was never paid by HBTL, in spite of
repeated demands by the Company.
In September 1996, the Company received a demand from HBTL to
arbitrate damage claims for alleged breach of the Agreement.
HBTL claims damages of approximately $5,100,000 for its expenses
and lost profits related to the Agreement. The Company disputes
the claim for damages and will vigorously defend any actions
taken by HBTL to pursue the claims. The Company filed a petition
in state court in Travis County, Texas, seeking, among other
things, a declaratory judgment that HBTL has no right to
arbitration or monetary relief. HBTL contested jurisdiction and
removed the proceedings to the U.S. Federal Courts. The Federal
District Court to which the action was removed has ruled that it
cannot exercise personal jurisdiction over HBTL and therefore has
no power to hear the case. The Company asked for a re-hearing,
which was denied; the Company plans to appeal. The Company has
not recorded a liability in the financial statements at June 30,
1997, for this uncertainty as management is unable to determine
the likelihood of an unfavorable outcome of this matter or to
estimate the amount or range of potential loss should the outcome
be unfavorable. The resolution of this matter could have a
material adverse effect on the financial position of the Company.
The Company's Common Stock is traded on the Over-the Counter-
Market and is reported on NASDAQ. In order to maintain listing
by NASDAQ, the Company must maintain a minimum $1 million of
stockholders' equity. The Company is currently in compliance
with this requirement. There can be no assurance that this
minimum can be maintained throughout 1997 at the current level of
activity without additional equity financing, conversion of
existing debt, exercise of stock options or other transactions
that increase shareholders' equity. If the minimum required
balance is not maintained, the NASDAQ may choose to delist the
Common Stock of the Company from trading which would restrict the
liquidity of the Common Stock. Ordinarily, before delisting, the
NASDAQ would provide the Company notice and an opportunity to
present and carry out a plan for compliance.
From time to time, the Company may publish forward-looking
statements relating to such matters as anticipated financial
performance, business prospects, technological development, new
products, research and development activities and similar
matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order
to comply with the terms of the safe harbor, the Company notes
that a variety of factors could cause the Company's actual
results and experience to differ materially from the anticipated
results or other expectations expressed in the Company's forward-
looking statements. When used in this discussion, the words
"expects," "believes," "anticipates" and similar expressions are
intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. The
risks and uncertainties that may affect the operations,
performance, development and results of the Company's business
primarily include delays in shipment or cancellation of orders,
timing of future orders, customer reorganization, fluctuations in
demand primarily associated with governmental mandates for the
production of zero-emission vehicles and the ability to
successfully commercialize the Horizon battery. Readers are
cautioned not to place undue reliance on these forward-looking
statements which speak only as of the date hereof. The Company
undertakes no obligation to republish revised forward-looking
statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Part II - Other Information
Item 1. Legal Proceedings
In 1994, the Company signed a "Know-How License Agreement"
(the "Agreement") with Horizon Battery Technologies, Ltd.,
("HBTL"), of Bombay, India, calling for the completion of
several detailed subordinate agreements with the ultimate
purpose to license the manufacture and sale of batteries in
India. The effectiveness of the Agreement was conditioned
upon the subsequent execution of six related agreements,
none of which were executed. The Company believes,
therefore, that the Agreement never became effective and has
no force or effect. Separately in 1995, HBTL agreed to pay
the Company $250,000 for a Preliminary Design Review ("PDR")
for a potential manufacturing facility in India which was
required to complete one of the subordinate agreements. The
Company received $100,000 from HBTL and completed the PDR in
1995. The remaining $150,000 was never paid by HBTL, in
spite of repeated demands by the Company.
In September 1996, the Company received a demand from HBTL
to arbitrate damage claims for alleged breach of the
Agreement. HBTL claims damages of approximately $5,100,000
for its expenses and lost profits related to the Agreement.
The Company disputes the claim for damages and will
vigorously defend any actions taken by HBTL to pursue the
claims.
On December 19, 1996, the Company filed a petition in the
District Court of Travis County, Texas, seeking a
declaratory judgment that the Agreement is not effective and
HBTL has no right to arbitration or monetary relief and that
HBTL is not a licensee of the Horizon technology. HBTL
contested jurisdiction and removed the proceedings to the
United States District Court for the Western District of
Texas, Austin Division Case No. A-97-CA-080-JN. The Court
subsequently ruled that it has no personal jurisdiction over
HBTL. The Company asked for a re-hearing, which was denied,
and plans to appeal.
The Company has not recorded a liability in the financial
statements at June 30, 1997 for this uncertainty as
management is unable to determine the likelihood of an
unfavorable outcome of this matter or to estimate the amount
or range of potential loss should the outcome be
unfavorable. The resolution of this matter could have a
material adverse effect on the financial position of the
Company.
Item 2. Changes in Securities
None
Item 3. Defaults on Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on May
22, 1997, the following items were voted on:
PROPOSITION FOR AGAINST ABSTAIN NON-VOTE
1. Directors
Balzhiser, Richard E. 2,686,362 347,620 N/A N/A
Morton, Nathan 2,686,362 347,620 N/A N/A
Semmens, Michael G. 2,544,880 347,742 N/A N/A
2. Adopt the 1996 Stock Option Plan 1,162,080 147,927 193,895 1,538,090
3. Ratify Purchase of Company 1,158,060 144,886 205,931 1,536,115
Securities
4. Approve Ernst & Young as 2,626,057 178,440 5,085 232,410
independent auditors for fiscal 1997
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule.
(b) Reports on Form 8-K.
Reports on Form 8-K filed during the quarter ended June 30,
1997 and up to the date of this filing on Form 10-Q were:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereto duly authorized.
Date: August 14, 1997 ELECTROSOURCE, INC.
/s/ Michael G. Semmens
Michael G. Semmens
Chairman, President
and Chief Executive Officer
/s/ James M. Rosel
James M. Rosel
Chief Financial Officer
and General Counsel
/s/ Mary Beth Koenig
Mary Beth Koenig
Chief Accounting Officer
and Treasurer/Controller
Form 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
_____________________________________
EXHIBITS TO
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission file
June 30, 1997 Number 0-16323
________________________________________________
ELECTROSOURCE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 742466304
(State or other jurisdiction(I.R.S. Employer Identification
No.)
of incorporation or organization)
2809 Interstate 35 South
San Marcos, Texas 78666
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (512) 753-6500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
INDEX TO EXHIBITS
(a) Exhibits.
27. Financial Data Schedule.
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