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 September 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: 4,152,807 shares as of November 10, 1997.
INDEX TO FINANCIAL STATEMENTS
September 30, 1997
Electrosource, Inc. Commission file number 0-16323
Condensed Balance Sheets at September 30, 1997 (Unaudited)
and December 31, 1996 Page 3
Condensed Statements of Operations for the three and nine months
ended September 30, 1997 and 1996 (Unaudited) Page 4
Condensed Statements of Cash Flows for the nine months ended
September 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
September December 31,
30, 1997 1996
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,081,700 $ 367,861
Trade receivables 781,612 247,631
Inventories 234,236 249,235
Prepaid expenses and other assets 60,109 164,319
TOTAL CURRENT ASSETS 2,157,657 1,029,046
PROPERTY AND EQUIPMENT (net of accumulated depreciation
of $3,000,113 in 1997 and $2,316,995 in 1996) 4,337,755 4,787,019
INTANGIBLE ASSETS (net of accumulated amortization
of $3,351,933 in 1997 and $2,607,093 in 1996) 2,109,627 2,854,467
RESTRICTED CASH 81,604 744,824
DEBT ISSUANCE COSTS 1,364,840 72,950
TOTAL ASSETS $10,051,483 $9,488,306
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $1,078,315 $ 704,841
Accrued liabilities 1,200,788 1,103,751
Deferred revenue and advance payments on 850,114 1,157,028
batteries
Current portion of capital lease obligations 71,492 658,226
Current portion of convertible notes payable 250,000
0
TOTAL CURRENT LIABILITIES 3,200,709 3,873,846
CONVERTIBLE NOTES PAYABLE (less current portion) 4,100,000 0
TECHNOLOGY LICENSE PAYABLE 551,689 1,248,684
CAPITAL LEASE OBLIGATIONS (less current portion) 166,800 519,047
SHAREHOLDERS' EQUITY
Common stock par value $1.00 per share;
authorized 50,000,000
shares; shares issued and outstanding:
4,152,807 in 1997 and
3,857,912 in 1996 4,152,807 3,857,912
Warrants 0 0
Paid in capital 49,322,524 45,876,668
Accumulated deficit (51,443,046) (45,887,851)
2,032,285 3,846,729
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,051,483 $ 9,488,306
See notes to condensed financial statements.
Electrosource, Inc.
Condensed Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Revenues
Battery sales $122,526 $173,240 $ 785,581 $ 574,773
Project revenue 703,951 126,660 1,908,814 187,750
Capacity maintenance 0 2,365,535 0 2,365,535
revenue
Interest income 28,274 31,410 83,780 72,953
854,751 2,696,845 2,778,175 3,201,011
Costs and expenses
Manufacturing 955,381 952,086 2,629,889 2,616,640
Selling, general and 634,419 735,944 1,860,073 2,294,635
administrative
Research and 745,782 395,189 1,811,443 1,396,877
development
Technology license 25,000 25,000 75,000 75,000
and royalties
Depreciation and 471,997 523,991 1,427,957 1,565,898
amortization
Interest expense 117,791 47,467 339,692 406,861
Loss on payment of 189,316 0 189,316 0
capital lease
Loss on disposal of 0 0 0 171,895
equipment
3,139,686 2,679,677 8,333,370 8,527,806
Income (loss) before (2,284,935) 17,168 (5,555,195) (5,326,795)
income taxes
Income taxes 0 0 0 0
Net income (loss) $(2,284,935) $ 17,168 $(5,555,195) $(5,326,795)
Net income (loss) per $ (0.55) $ .00 $ (1.37) $ (1.48)
common share
Average common shares 4,132,804 3,829,031 4,056,612 3,607,548
outstanding
See notes to condensed financial statements.
Electrosource, inc.
Condensed Statements of Cash Flows (Unaudited)
Nine Months Ended
September 30,
1997 1996
OPERATING ACTIVITIES
Net loss $(5,555,195) $(5,326,795)
Adjustments to reconcile net loss to net cash
used in operating activities:
Equity instruments issued for consulting 164,800 98,600
services
Depreciation and amortization 1,598,568 1,577,984
Interest expense paid in Common Stock or 100,000 105,103
Notes
Non-cash interest expense (conversion 0 141,750
discount)
Loss on payment of capital lease 189,316 0
Loss on disposal of equipment 0 171,895
Non-cash accruals 75,650 81,300
Changes in operating assets and liabilities:
(Increase) decrease in trade receivables (533,981) 332,004
Decrease in inventories 14,999 189,294
Decrease in prepaid expenses and other 65,434 48,048
assets
Increase (decrease) in accounts payable 294,863 (827,282)
and accrued liabilities
Increase (decrease) in deferred revenue (306,914) 695,353
and advance payments on batteries
CASH USED IN OPERATING ACTIVITIES (3,892,460) (2,712,746)
INVESTING ACTIVITIES
Purchases of property and equipment (68,049) (262,155)
CASH USED IN INVESTING ACTIVITIES (68,049) (262,155)
FINANCING ACTIVITIES
Payments of notes payable and capital lease (638,326) (394,830)
obligations
Proceeds from issuance of common stock, net 599,294 2,546,981
Proceeds from issuance of convertible notes 4,000,000 0
payable
Proceeds from exercise of stock options 50,160 0
Decrease in restricted cash 663,220 0
CASH PROVIDED BY FINANCING ACTIVITIES 4,674,348 2,152,151
INCREASE (DECREASE) IN CASH AND CASH 713,839 (822,750)
EQUIVALENTS
Cash and cash equivalents at beginning of 367,861 2,083,032
period
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,081,700 $1,260,282
See notes to condensed financial statements.
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
September 30, December 31,
1997 1996
Raw Materials $178,094 $151,841
Work In Progress 30,626 31,406
Finished Goods 25,516 65,988
$234,236 $249,235
NOTE C - Property And Equipment
September 30, December 31,
1997 1996
Office Equipment $ 782,801 $ 751,342
Production and Lab Equipment 5,254,049 5,062,475
Leasehold Improvements 1,301,018 1,290,197
7,337,868 7,104,014
Less: Accumulated (3,000,113) (2,316,995)
depreciation
Total Property and Equipment $4,337,755 $4,787,019
NOTE D - Convertible Notes Payable
Convertible Notes Payable consist of the following:
September 30, December 31,
1997 1996
Convertible Notes - 5% $4,100,000 $ 0
Convertible Notes - 10% 0 250,000
4,100,000 250,000
Less Current Maturities 0 (250,000)
Convertible Notes Payable - $4,100,000 $ 0
Long Term
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 5%
Convertible Note is for $4,000,000, is unsecured and matures on
March 26, 2002. Interest is payable semi-annually in cash or in
kind at the option of the Company. The conversion price is $5.50
per share. A note payable in the amount of $100,000 was issued
in September 1997 for interest for the six months then ended with
the same terms and conditions as the original note. 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.
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 nine months ended September 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") on behalf of its assignees as
prepayment for capital lease obligations owed by the Company.
The shares 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 sold by Ally on behalf of its
assignees, and the proceeds were used to satisfy the lease
obligations (approximately $550,000) and to exercise the option
to purchase the equipment for approximately $165,000.
Additionally, a loss of $189,316 was recorded upon the completion
of this transaction and the payment of the capital lease. Upon
payment of all lease obligations, letters of credit for $663,220
which secured the lease obligations were canceled and
certificates of deposit of an equal amount that collateralized
the letters of credit were released.
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. On August 22, 1997, the Company filed an
appeal in the U.S. Fifth Circuit Court of Appeals from the final
judgment and rulings in the District Court. On October 31, 1997,
HBTL's legal counsel filed a motion to withdraw as counsel for
HBTL for inability to reach an agreement with HBTL for payment of
legal services at the appellate level. No liability has been
recorded in the financial statements at September 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 earnings (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 nine months
ended September 30, 1997. During the nine months ended September
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 from the sale to Corning 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. In
September 1997, the Company completed a transaction with
equipment lessors through the issuance of 127,500 shares of
Common Stock which were sold by the lessors and the proceeds were
used to satisfy the lease obligations and to purchase the
equipment. Upon payment of the lease obligations, letters of
credit for $663,220 which secured the obligations were canceled
and certificates of deposit of an equal amount were released. As
of October 31, 1997, the Company had approximately $900,000 of
unrestricted cash available.
Management expects the level of battery sales to increase
beginning in late 1997/early 1998 from an anticipated increase in
orders, primarily from those currently testing batteries and from
customers for which the Company is currently developing and
delivering prototype batteries. Certain anticipated battery
orders have moved from 1997 into 1998 due to customer delays
associated with new product introduction and additional time
required to produce prototype batteries to meet specific customer
and regulatory requirements. Discussions are in process with
certain of these customers for the manufacture of additional
prototype batteries for further testing in early 1998. However,
the timing and amount of battery sales is uncertain. Revenue
from project agreements (or "services") is expected to remain
relatively constant during the fourth quarter of 1997 and into
1998. Management believes that revenues from battery sales and
services (combined with proceeds received from the exercise of
stock options in the fourth quarter) 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 or if cash receipts
from project revenue are delayed, additional debt and/or equity
financing will be necessary to sustain operations. Debt and/or
equity financing will be necessary in late 1997/early 1998 to
fund working capital needs and to further expand and automate the
manufacturing facility to meet anticipated battery orders. The
Company has historically been able to raise funds on a repeated
basis to sustain operations. However, there can be no assurance
that additional funding can be obtained in a timely manner and 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 which increases to $2 million on February
23, 1998. The Company is currently in compliance with this
requirement. There can be no assurance that the 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 amount 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
$123,000 and $786,000 for the three and nine months ended
September 30, 1997 compared to $173,000 and $575,000 for the
three and nine months ended September 30, 1996. Approximately
65% and 55% of battery sales for the nine months ended September
30, 1997 and 1996, respectively, were to Chrysler Corporation.
The remainder of battery sales in both years were derived from
smaller orders from numerous companies for evaluation and testing
of the Horizon battery in their products. Sales to Chrysler in
1996 and 1997 have been less than projected due to weakened
government zero emission vehicle mandates in California.
However, government zero emission vehicle mandates in the state
of New York, which have recently been challenged and upheld, are
expected to result in an increase in battery orders beginning in
late 1997 or early 1998, primarily from Chrysler, as indicated by
Chrysler to the Company. Current models of the Horizon battery
are being evaluated by certain other original equipment
manufacturers and vehicle converters for potential integration
into their products in late 1997/early 1998 in Europe, Asia and
the United States. Aircraft starting battery prototypes are
undergoing testing for regulatory approval necessary for customer
delivery. Additionally, the Company currently has several
prototype battery configurations developed under contract which
are being evaluated by customers with a view towards commercial
purchase if tests are successful, specifications are met and
pricing can be agreed upon. Discussions are also ongoing with
such customers for orders of 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 potential customers is uncertain.
The Company had project revenue of approximately $704,000 and
$1,909,000 for the three and nine months ended September 30,
1997 compared to $127,000 and $188,000 for the three and nine
months ended September 30, 1996. Project revenue in 1997 was
derived from various customers with whom the Company is
developing and/or manufacturing evaluation batteries for various
hybrid vehicle, electric vehicle, starting and outdoor product
applications (Fiat Auto, SMH Automobile S.A. (SMH), the Defense
Advanced Research Projects Agency (DARPA), Black & Decker,
Chrysler and others which remain confidential). These contracts
were awarded to the Company in 1996 and 1997. 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. Revenue from project agreements is
expected to remain relatively constant during the fourth quarter
of 1997 and into early 1998. Essentially all project revenue
generated during 1996 was from Chrysler for various
environmental tests performed on the battery.
In July 1996, the Company received a $3,000,000 payment from
Chrysler. This payment was compensation for continued capacity
maintenance and ramp-up costs incurred by the Company in relation
to its role as a supplier to the automaker for its electric
vehicle EPIC Minivan Program ($2,365,000) and for various
engineering, research and development (ER&D) efforts ($635,000).
Accordingly, $2,365,000 was recorded as capacity maintenance
revenue in the third quarter of 1996 and $635,000 was recorded as
deferred revenue which is being recognized as project revenue as
the ER&D tasks are performed.
Costs and Expenses. Generally, total costs and expenses were
higher for the three months ended September 30, 1997 compared to
the three months ended September 30, 1996, and were lower for the
nine months ended September 30, 1997, compared to the same period
in 1996. Certain costs increased in 1997 compared to 1996 while
others decreased. Manufacturing costs were approximately the
same for the three and nine month periods ended September 30,
1997, compared to the same periods in 1996. At the current rate
of battery sales, manufacturing costs are not expected to
fluctuate significantly. Management expects manufacturing costs
will increase in total but decrease as a percentage of battery
sales when volume production begins; however, the timing and
amount of such orders remains uncertain. Selling, general and
administrative costs were lower for the three month and nine
month periods ended September 30, 1997, compared to the same
periods in 1996 primarily due to cost savings associated with a
consolidation of office and testing facilities into the
manufacturing facility in the fourth quarter of 1996. Research
and development costs were higher for the three and nine month
periods ended September 30, 1997 compared to the same periods in
1996 primarily due to a significant increase in project revenue
in 1997 as described above. The Company hired additional
engineering and manufacturing personnel in 1997 to support
contractual development and manufacture of prototype batteries to
meet specific customer product requirements (primarily SMH, Fiat,
DARPA and Black & Decker). Additionally, the Company entered
into a technical development agreement with Corning in the third
quarter of 1997 to jointly improve the Company's products,
production processes and automation. Corning began providing
services under the agreement late in the third quarter of 1997.
The Company will pay Corning for such services by issuing stock
options to Corning at agreed upon values and exercise prices.
The options are being expensed at their fair value, which was
approximately $100,000 for the quarter ended September 30, 1997.
Work under the agreement has intensified in the fourth quarter of
1997 and is expected to continue throughout 1998.
Depreciation and amortization costs were lower for the three and
nine month periods ended September 30, 1997, compared to the same
periods in 1996 primarily due to the write-off of approximately
$525,000 of equipment in 1996 which was no longer in use.
Interest costs were higher in the in the quarter ended September
30, 1997, compared to the quarter ended September 30, 1996, due
to interest incurred on the 5% $4,000,000 convertible promissory
note entered into in March 1997 with Corning and the related
amortization of $1,462,500 of options issued to Corning which are
being amortized to interest expense over the five year term of
the note. Interest costs were lower in the nine months ended
September 30, 1997 compared to the nine months ended September
30, 1996. In 1995, the Company obtained $3,780,000 of
convertible debt financing which was converted into Common Stock
in 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.
A loss of $189,316 was incurred in the third quarter of 1997
upon the prepayment of a capital lease obligation.
Liquidity and Capital Resources. During the nine months ended
September 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 $3,900,000. 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 options to Corning.
The Note bears interest at 5% (payable in cash or in-kind) and
matures on March 26, 2002. The Company also completed a
transaction with certain equipment lessors through the issuance
of 127,500 shares of Common Stock which were subsequently sold by
the lessors and the proceeds used to satisfy lease obligations
($550,000) and to purchase equipment ($165,000). Upon payment of
the lease obligations, letters of credit for $663,220 were
canceled and certificates of deposit of an equal amount were
released to the Company. As of October 31, 1997, the Company had
approximately $900,000 of unrestricted cash available.
Management expects the level of battery sales to increase
beginning in late 1997/early 1998 from an anticipated increase in
orders, primarily from those currently testing batteries and from
customers for which the Company is currently developing and
delivering prototype batteries. Certain anticipated battery
orders have moved from 1997 to 1998 due to customer delays
associated with new product introduction and additional time
required to produce prototype batteries to meet specific customer
requirements. Discussions are in process with certain of these
customers for the manufacture of additional prototype batteries
for further testing in early 1998. However, the timing and
amount of battery sales is uncertain. Revenue from project
agreements (or "services") is expected to remain relatively
constant during the fourth quarter of 1997 and into 1998.
Management believes that revenues from battery sales and services
(combined with the proceeds received from the exercise of stock
options in the fourth quarter) 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 or if cash receipts from project revenues
are delayed, additional debt and/or equity financing will be
necessary to sustain operations. Debt and/or equity financing
will be necessary in late 1997/early 1998 to fund working capital
needs and to further expand and automate the manufacturing
facility to meet anticipated battery orders. The Company has
historically been able to raise funds on a repeated basis to
sustain operations. However, there can be no assurance that
additional funding can be obtained in a timely manner and 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. On August 22, 1997, the Company filed an
appeal in the U.S. Fifth Circuit Court of Appeals from the final
judgment and rulings in the District Court. On October 31, 1997,
HBTL's legal counsel filed a motion to withdraw as counsel for
HBTL for inability to reach an agreement with HBTL for payment of
legal services at the appellate level. The Company has not
recorded a liability in the financial statements at September 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 which increases to $2 million on February
23, 1998. The Company is currently in compliance with this
requirement. There can be no assurance that the 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 amount 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.
On August 22, 1997, the Company filed an appeal in the U.S.
Fifth Circuit Court of Appeals from the final judgment and
rulings in the District Court. On October 31, 1997, HBTL's
legal counsel filed a motion to withdraw as counsel for HBTL
for inability to reach an agreement with HBTL for payment of
legal services at the appellate level.
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
None
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
September 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: November 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
September 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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,082
<SECURITIES> 0
<RECEIVABLES> 782
<ALLOWANCES> 0
<INVENTORY> 234
<CURRENT-ASSETS> 2,158
<PP&E> 7,338
<DEPRECIATION> (3,000)
<TOTAL-ASSETS> 10,051
<CURRENT-LIABILITIES> 3,201
<BONDS> 4,818
0
0
<COMMON> 4,153
<OTHER-SE> (2,121)
<TOTAL-LIABILITY-AND-EQUITY> 10,051
<SALES> 2,694
<TOTAL-REVENUES> 2,778
<CGS> 2,630
<TOTAL-COSTS> 5,363
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 340
<INCOME-PRETAX> (5,555)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,555)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,555)
<EPS-PRIMARY> (1.37)
<EPS-DILUTED> (1.37)
</TABLE>
