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 March 31, 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
of incorporation or organization) Identification No.)
2809 Interstate 35 South
San Marcos, Texas 78666
(Address of principal (Zip Code)
executive offices)
(512) 753-6500
(Registrant's telephone number, including area code)
3800-B Drossett Drive, Austin, Texas 78744-1131
(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: 3,983,475 shares as of May 15, 1997.
INDEX TO FINANCIAL STATEMENTS
March 31, 1997
Electrosource, Inc.
Commission file number 0-16323
Condensed Balance Sheets at March 31, 1997 (Unaudited)
and December 31, 1996 Page 3
Condensed Statements of Operations for the three months
ended March 31, 1997 and 1996 (Unaudited) Page 4
Condensed Statements of Cash Flows for the three months ended
March 31, 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 14
Index to Exhibits Page 15
Part I - Financial Information
Item I. Financial Statements
Electrosource, Inc.
Condensed Balance Sheets
March 31, December 31,
(Unaudited) 1996
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,891,701 $ 367,861
Trade receivables 441,657 247,631
Inventories 219,026 249,235
Prepaid expenses and other assets
178,982 164,319
TOTAL CURRENT ASSETS 4,731,366 1,029,046
PROPERTY AND EQUIPMENT (net of accumulated
depreciation
of $2,547,403 in 1997 and $2,316,995 in 4,578,589 4,787,019
1996)
INTANGIBLE ASSETS (net of accumulated
amortization of $2,855,373 in 1997
and $2,607,093 in 1996) 2,606,187 2,854,467
RESTRICTED CASH 744,824 744,824
DEBT ISSUANCE COSTS 1,523,363 72,950
TOTAL ASSETS $14,184,329 $9,488,306
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 864,907 $ 704,841
Accrued liabilities 1,106,086 1,103,751
Deferred revenue and advance payments
on batteries 1,090,217 1,157,028
Current portion of capital lease
obligations 676,491 658,226
Current portion of convertible notes
payable 250,000 250,000
TOTAL CURRENT LIABILITIES 3,987,701 3,873,846
CONVERTIBLE NOTES PAYABLE (less current 4,000,000 --
portion)
TECHNOLOGY LICENSE PAYABLE 1,016,353 1,248,684
CAPITAL LEASE OBLIGATIONS (less current 343,616 519,047
portion)
SHAREHOLDERS' EQUITY
Common stock par value $1.00 per share
authorized 50,000,000 shares; shares
issued and outstanding: 3,983,475
in 1997 and 3,857,912 in 1996 3,983,475 3,857,912
Warrants -- --
Paid in capital 48,147,892 45,876,668
Accumulated deficit (47,294,708)(45,887,851)
4,836,659 3,846,729
TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY $14,184,329 $ 9,488,306
See notes to condensed financial statements.
Electrosource, Inc.
Condensed Statements of Operations (Unaudited)
Three Months Ended March 31,
1997 1996
Revenues
Battery sales 543,235 327,968
Project revenue 464,496 60,152
Interest income 3,153 13,382
1,010,884 401,502
Costs and expenses
Manufacturing 847,078 861,912
Selling, general and
administrative 564,182 759,647
Research and development 449,508 469,787
Technology license and
royalties 25,000 25,000
Depreciation and
amortization 478,687 514,996
Interest expense 53,286 268,285
Loss on disposal of
equipment -- 171,895
2,417,741 3,071,522
Loss before income taxes (1,406,857) (2,670,020)
Income taxes -- --
Net loss $(1,406,857)$(2,670,020)
Net loss per common share $(0.36) $(0.80)
Average common shares
outstanding 3,937,921 3,354,428
See notes to condensed financial statements.
Electrosource, inc.
Condensed Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
1997 1996
OPERATING ACTIVITIES
Net loss $(1,406,857) $(2,670,020)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Equity instruments issued for
consulting services 28,200 16,200
Depreciation and amortization 490,775 527,083
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 compensation and
other accruals 21,650 93,605
Changes in operating assets and
liabilities:
(Increase) decrease in trade
receivables (194,026) 287,758
Decrease in inventories 30,209 106,467
Increase in prepaid expenses
and other assets (14,663) (95,341)
Increase (decrease) in accounts
payable and accrued liabilities169,152 (571,478)
Decrease in deferred revenue
and advance payments
on batteries (66,811) --
CASH USED IN OPERATING ACTIVITIES (942,371) (1,933,777)
INVESTING ACTIVITIES
Purchases of property and equipment, net (21,978) (101,301)
CASH USED IN INVESTING ACTIVITIES (21,978) (101,301)
FINANCING ACTIVITIES
Payments on capital lease obligations (157,166 (97,693)
Proceeds from issuance of common stock,net 645,355 898,242
Proceeds from issuance of convertible
notes payable 4,000,000 --
CASH PROVIDED BY FINANCING ACTIVITIES 4,488,189 800,549
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,523,840 (1,234,529)
Cash and cash equivalents at beginning
of period 367,861 2,083,032
CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,891,701 $ 848,503
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
March 31, December 31,
1997 1996
Raw Materials $165,526 $151,841
Work In Progress 45,809 31,406
Finished Goods 7,691 65,988
$219,026 $249,235
NOTE C - PROPERTY AND EQUIPMENT
March 31, December 31,
1997 1996
Office Equipment 755,347 751,342
Production and Lab Equipment 5,080,448 5,062,475
Leasehold Improvements 1,290,197 1,290,197
7,125,992 7,104,014
Less: Accumulated depreciation
and amortization (2,547,403) (2,316,995)
Total Property and Equipment $4,578,589 $4,787,019
NOTE D - CONVERTIBLE NOTES PAYABLE
Convertible Notes Payable consist of the following:
March 31, December 31,
1997 1996
Convertible Notes - 5% $4,000,000 $ --
Convertible Notes - 10% 250,000 250,000
4,250,000 250,000
Less Current Maturities (250,000) (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 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. Interest was
payable quarterly. As of March 31, 1997 April Debentures with a
total principal amount of $5,750,000 had been 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 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 quarter ended March 31, 1996, as presented herein, have
been restated to reflect an additional $141,750 in interest
expense ($0.04 per share).
NOTE E - COMMON STOCK
During the quarter ended March 31, 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 $645,355, 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.
The Company filed a registration statement to register on Form S-
3 the shares purchased in the private placement for those
purchasers who were not executive officers. The registration
statement has not yet gone effective. The executive officers'
share and warrant purchase is subject to shareholder approval at
the next Annual Meeting of Shareholders. If the purchase by
executive officers is not approved, their purchase price will be
refunded, with interest at the prime rate, and the shares and
warrants returned.
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, the proceeds of which will be used to satisfy the lease
obligations (approximately $970,000 as of March 31, 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
securitize 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 March 31, 1997, but were not
recorded as shareholders' equity in the financial statements
because the aggregate amount of consideration for the transaction
had not been determined and the lease obligation had not been
satisfied at March 31, 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 has filed a
petition in Travis County, Texas, seeking, among other things, a
declaratory judgment that HBTL has no right to arbitration or
monetary relief. HBTL is contesting jurisdiction and has removed
the proceedings to the U.S. Federal Courts. The Company has not
recorded a liability in the financial statements at March 31,
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 three months
ended March 31, 1997. During the three months ended March 31,
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 $645,355 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).
As of April 30, 1997, the Company had approximately $2,800,000 of
unrestricted cash available. Management is continuing to control
costs and believes that it has sufficient cash to continue
operations at current levels through 1997. 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 designing and building prototype batteries.
Due to weakened government mandates requiring automakers to sell
zero-emission vehicles, management does not expect sales from
Chrysler in the near-term to reach levels originally projected.
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 debt and equity financing
obtained during the first quarter of 1997) will generate
sufficient funds to support its overall working capital and
capital expenditure needs through 1997; however, unless
significant battery orders are received, additional debt and/or
equity financing could be necessary in the first quarter of 1998
to sustain operations. 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 finance, conversion of
existing debt, exercise of stock options or other transactions
that increase shareholder 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
$543,000 for the three months ended March 31, 1997 compared to
$328,000 for the three months ended March 31, 1996.
Approximately 94% and 78% of 1997 and 1996 battery sales,
respectively, were to Chrysler Corporation to fill orders placed
in accordance with the terms of the production purchase order
received in December 1995. Due to weakened government mandates,
management does not expect sales from Chrysler in the near-term
to reach levels originally projected. The timing and amount of
future battery sales to Chrysler is uncertain. Current models of
the Horizon battery are being evaluated by certain original
equipment manufacturers for potential integration into their
products in late 1997/early 1998. Additionally, the Company is
currently completing work on several prototype batteries which
will be evaluated by customers in late 1997. The amount and
timing of battery sales to these potential customers is also
uncertain.
The Company had project revenue of approximately $464,000 for
the three months ended March 31, 1997 compared to $60,000 for the
three months ended March 31, 1996. Project revenue in 1997 was
derived from various customers with whom the Company is
developing and/or refining prototype batteries for various
electric vehicle and non-electric vehicle applications (Fiat
Auto, the Defense Advanced Research Projects Agency (DARPA), Blue
Bird Corporation, Black & Decker, Chrysler and others which
remain confidential.) In April 1997, the Company received Phase
A of a developmental contract from SMH Automobile, S.A. to
develop a prototype battery module for a hybrid-electric version
of the "smart Swatchmobil" being developed by SMH, the maker of
Swatch watches. The majority of these projects is expected to be
essentially complete by the end of the year at which time
customer testing of prototypes will begin/intensify. Revenue
from project agreements is expected to remain relatively constant
during the year. Essentially all project revenue generated
during the first quarter of 1996 was from Chrysler for various
environmental tests performed on the battery.
Costs and Expenses. Generally, total costs were lower in the
three months ended March 31, 1997, compared to March 31, 1996, as
a result of management's implementation of cost control measures
to conserve cash and reduce expenses. Manufacturing, selling,
general and administrative expenses and research and development
expenses were lower primarily due to personnel reductions made
throughout 1996 combined with cost savings associated with the
consolidation of the Austin and San Marcos facilities into one
location in the fourth quarter of 1996. Management expects
manufacturing costs to decrease as a percentage of battery sales
when volume production begins; however, the timing and amount of
battery orders remains uncertain. Management is continuing its
efforts to control costs and reduce monthly cash expenditures.
Depreciation and amortization costs were lower for the three
months ended March 31, 1997, compared to the same period in 1996
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 quarter ended March 31, 1996,
compared to March 31, 1997, due to the incurrance in late
November 1995 of $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 quarter ended March
31, 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 $940,000 in the quarter
ended March 31, 1997, (down from a use of $1.9 million for the
quarter ended March 31, 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 $645,355. Additionally, the Company received $4,000,000 in
March 1997 from the sale of a Convertible Promissory Note and
Option to Corning Incorporated. The Note bears interest at 5%
(payable in cash or in kind) and matures on March 26, 2002.
As of April 30, 1997, the Company had approximately $2,800,000 of
unrestricted cash available. Management is continuing to control
costs and believes that it has sufficient cash to continue
operations at current levels through 1997. Management expects
the level of battery sales to increase beginning in late
1997/early 1998 as the Company receives an increase in orders
primarily from those currently testing the battery and from
customers for which the Company is currently designing and
building prototype batteries. Due to weakened government zero-
emission vehicle mandates, management does not expect sales from
Chrysler in the near-term to reach levels originally projected.
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 debt and equity financing
obtained during the first quarter of 1997) will generate
sufficient funds to support its overall working capital and
capital expenditure needs through 1997; however, unless
significant battery orders are received, additional debt and/or
equity financing could be necessary in the first quarter of 1998
to sustain operations. The Company has historically been able to
raise funds on a repeated basis to sustain operations. There can
be no assurance that such funding can be obtained on acceptable
terms to the Company, if at all.
The Company does not anticipate significant capital expenditures
in 1997 in order to satisfy anticipated demand for battery
orders. There are no significant capital commitments at March
31, 1997.
$250,000 of Convertible Debentures matured in April 1997 and were
paid by the Company.
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 has filed a
petition in Travis County, Texas, seeking, among other things, a
declaratory judgment that HBTL has no right to arbitration or
monetary relief. HBTL is contesting jurisdiction and has removed
the proceedings to the U.S. Federal Courts. The Company has not
recorded a liability in the financial statements at March 31,
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 finance, conversion of
existing debt, exercise of stock options or other transactions
that increase shareholder 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
None
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
4.1 Note Purchase and Option Agreement dated as of March
27, 1997 between Electrosource, Inc. and Corning
Incorporated.
4.2 Subscription Agreements between participants and
Electrosource, Inc. dated January 23, 1997 (filed as
Exhibit 4.9 to Electrosource, Inc. Form S-3 on April
22, 1997, and incorporated herein by reference).
4.3 Letter of Agreement between Electrosource, Inc. and
Ally Capital Corporation dated December 18, 1996 (filed
as Exhibit 4.9 to Electrosource, Inc. Form S-3
Amendment No. 1 on April 18, 1997, and incorporated
herein by reference).
4.4 Amendment dated January 20, 1997, to Letter of
Agreement between Electrosource, Inc. and Ally Capital
Corporation dated December 18, 1996 (filed as Exhibit
4.10 to Electrosource, Inc. Form S-3 Amendment No. 1 on
April 18, 1997, and incorporated herein by reference).
4.5 Amendment dated April 10, 1997 to Letter Agreement
between Electrosource, Inc. and Ally Capital
Corporation dated December 18, 1996 (filed as Exhibit
4.11 to Electrosource, Inc. Form S-3 Amendment No. 1 on
April 18, 1997, and incorporated herein by reference).
27. Financial Data Schedule.
(b) Reports on Form 8-K.
Reports on Form 8-K filed during the quarter ended March
31, 1997 and up to the date of this filing on Form 10-Q
were:
March 10, 1997, Interim Loan Agreement and Promissory
Note for $500,000 (redacted copy of Loan Agreement and
Promissory Note filed on Form 8-KA1 on April 2, 1997).
April 3, 1997, Announcement of $4,000,000 Note Purchase
and Option Agreement with large domestic manufacturing
company.
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: May 15, 1997 ELECTROSOURCE, INC.
/s/
Michael G. Semmens
Chairman, President
and Chief Executive Officer
/s/
James M. Rosel
Chief Financial Officer
and General Counsel
/s/
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
March 31, 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
of incorporation or organization) Identification No.)
2809 Interstate 35 South
San Marcos, Texas 78666
(Address of principal (Zip Code)
executive offices)
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.
4.1 Note Purchase and Option Agreement dated as of March
27, 1997 between Electrosource, Inc. and Corning
Incorporated.
4.2 Subscription Agreements between participants and
Electrosource, Inc. dated January 23, 1997 (filed as
Exhibit 4.9 to Electrosource, Inc. Form S-3 on April
22, 1997, and incorporated herein by reference).
4.3 Letter of Agreement between Electrosource, Inc. and
Ally Capital Corporated dated December 18, 1996 (filed
as Exhibit 4.9 to Electrosource, Inc. Form S-3
Amendment No. 1 on April 18, 1997, and incorporated
herein by reference).
4.4 Amendment dated January 20, 1997, to Letter of
Agreement between Electrosource, Inc. and Ally Capital
Corporation dated December 18, 1996 (filed as Exhibit
4.10 to Electrosource, Inc. Form S-3 Amendment No. 1 on
April 18, 1997, and incorporated herein by reference).
4.5 Amendment dated April 10, 1997 to Letter Agreement
between Electrosource, Inc. and Ally Capital
Corporation dated December 18, 1996 (filed as Exhibit
4.11 to Electrosource, Inc. Form S-3 Amendment No. 1 on
April 18, 1997, and incorporated herein by reference).
27. Financial Data Schedule.
(b) Reports on Form 8-K.
Reports on Form 8-K filed during the quarter ended March
31, 1997 and up to the date of this filing on Form 10-Q
were:
March 10, 1997, Interim Loan Agreement and Promissory
Note for $500,000 (redacted copy of Loan Agreement and
Promissory Note filed on Form 8-KA1 on April 2, 1997).
April 3, 1997, Announcement of $4,000,000 Note Purchase
and Option Agreement with a large domestic manufacturing
company.
NOTE PURCHASE AND OPTION AGREEMENT
This Note Purchase and Option Agreement (the OAgreementO) is
made and entered into as of March 27, 1997, by and among
Electrosource, Inc., a Delaware corporation (the OCompanyO), and
Corning Incorporated, a corporation organized under the laws of
the State of New York (the OInvestorO).
WHEREAS, Investor wishes to purchase a note from the Company
with the right to convert the note to common stock and thereafter
have the right to further increase its equity interest by
exercise of a stock option;
NOW, THEREFORE, the parties hereto agree as follows:
1. Purchase and Sale of Note
Note. The Company agrees to sell to the Investor
and, subject to the terms and conditions set forth herein, the
Investor agrees to purchase from the Company a 5% Convertible
Promissory Note (the "Note") in the principal amount of Four
Million Dollars ($4,000,000.00) for the consideration of Four
Million Dollars ($4,000,000.00), payable as set forth in Section
3. The Note shall be for a five (5) year term, bearing interest
at 5% per annum, payable in kind and will be convertible into
common stock ("Common Stock") of the Company at a conversion
price of Five and 50/100 dollars ($5.50) per share for Seven
Hundred Twenty-seven Thousand Two Hundred Seventy-three (727,273)
shares of Common Stock, subject to adjustment of the conversion
price as provided in the Note. The form of the Note is set forth
in Exhibit "A" attached hereto.
2. Option to Purchase Common Stock
Investor shall also have the option ("Option") for a
period of two (2) years from the date hereof to purchase up to
Five Hundred Thousand (500,000) shares of original issue Common
Stock ("Common Stock") from the Company. The exercise prices
shall be Seven and No/100 Dollars ($7.00) per share for Two
Hundred Seventy-five Thousand (275,000) of such shares and Nine
and No/100 Dollars ($9.00) per share for Two Hundred Twenty-five
Thousand (225,000) of such shares, subject to adjustment of such
amounts as provided in the Option Agreement, which is attached
hereto as Exhibit "B." The Option may be exercised by providing
written notice to the Company and by delivery of the purchase
price as set forth in the Option Agreement. The Option may not
be exercised more than thirty (30) days after prepayment of the
Note in full. Upon full conversion of the Note and exercise of
the Option, Investor would hold One Million Two Hundred Twenty-
seven Thousand Two Hundred Seventy-three (1,227,273) shares of
Common Stock.
3. Closing
The closing of the purchase and sale of the Note (the
OClosingO) will take place by mail or as the Parties may
otherwise agree. At Closing, the Company will deliver to the
Investor the Note and Option upon payment of Four Million Dollars
($4,000,000.00) of which Three Million Five Hundred Dollars
($3,500,000) will be paid in the form of a check or by a wire
transfer of funds to an account designated by the Company, and
the balance of Five Hundred Thousand Dollars ($500,000) shall be
paid by a credit of the unpaid principal of that certain
Promissory Note of March 6, 1997 in the principal amount of Five
Hundred Thousand Dollars ($500,000) between Investor and the
Company (the "Interim Note"), which Interim Note shall be marked
"paid" and surrendered to the Company. The Closing will be held
on or before April 1, 1997, unless the parties otherwise agree.
Interest on the Interim Note accrued and unpaid at the date of
Closing shall be paid by the Company to Investor by check or wire
transfer immediately after Closing, or may be deducted by
Investor from the Three Million Five Hundred Thousand Dollars
($3,500,000) to be transferred at Closing, at the election of
Investor.
4. Covenants
The Company covenants and agrees with the Investor as
follows:
4A. Financial Statements and Other Information. The
Company will deliver to Investor so long as such Investor holds
the Note, Option or any other Notes issued in payment of accrued
interest thereon (sometimes referred to herein collectively with
the Note as the ONotesO) copies of all reports required to be
filed by the Company pursuant to sections 13 and 14 of the
Securities Exchange Act of 1934.
4B. Representation on Board of Directors and Investor
Information Meetings. At the election of Investor and when so
notified by the Investor, the Company shall use its best
reasonable efforts to appoint a qualified representative of the
Investor to the Company's Board of Directors and will nominate
such person, or his qualified replacement, for election at the
then next Annual General Meeting of the Shareholders of the
Company for which such seat stands for election. Additionally,
for so long as the Investor holds the Note or Option convertible
in the aggregate into shares of the CompanyOs Common Stock
representing at least one percent (1%) of the total shares of
Common Stock outstanding or holds shares of Common Stock
representing at least one percent (1%) of the total shares of
Common Stock outstanding, the Company shall hold meetings with
representatives of the Investor at reasonable intervals from time
to time to discuss the business and prospects of the Company.
4C. Reservation of Common Stock. The Company will at
all times reserve and keep available out of its authorized but
unissued shares of Common Stock, for the purpose of issuance upon
the conversion of the Note and exercise of the Option, such
number of shares of Common Stock as are issuable upon the
conversion of the Note and exercise of the Option. All shares of
Common Stock which are so issuable will, when issued, be duly and
validly issued, fully paid and non-assessable and free from all
taxes, liens and charges. The Company will take all such actions
as may be necessary to assure that all such shares of Common
Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic
securities exchange upon which shares of Common Stock may be
listed.
4D. Ranking of Note. The Company's obligations under
the Note will rank at least pari passu in priority of payment and
in all other respects with all other unsecured loans, debts or
obligations of the Company entered into after the date hereof.
The Company shall not, while any amount of the Note remains
outstanding, offer to borrow funds from any third party on terms
more favorable to the third party lender than those extended to
Investor for the Note with respect to security for the Note,
financial covenants or negative pledges of the Company in favor
of such third party, repayment terms, or other significant
matters, without offering such terms to Investor in writing.
5. Representations and Warranties
5A. Representations by Company. The Company
represents, warrants and agrees as follows:
(i) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State
of Delaware and is in good standing as a foreign corporation in
each jurisdiction where the properties owned, leased or operated,
or the business conducted by it require such qualification,
except for such failure to so qualify or be in such good
standing, which, when taken together with all other such
failures, is not reasonably likely to have a material adverse
effect on the financial condition, properties, business or
results of operations of the Company or the interest of
shareholders in the Company (a OMaterial Adverse EffectO). The
Company has the requisite corporate power and authority to carry
on its business as it is now being conducted.
(ii) The authorized capital stock of the Company
as of the date hereof consists of Fifty Million (50,000,000)
shares of $1.00 par value Common Stock, of which Four Million One
Hundred Forty-three Thousand Four Hundred Seventy-five
(4,143,475) shares were issued and outstanding as of March 20,
1997, none of which are held in treasury, and Ten Million
(10,000,000) shares of Preferred Stock, par value $1.00 per share
(OPreferred StockO), of which no shares were issued and
outstanding on the date hereof. All of the outstanding shares of
Common Stock have been duly authorized and are validly issued,
fully paid and nonassessable. As of March 20, 1997, there were
reservations for outstanding options, warrants and agreements to
purchase up to an aggregate of approximately Two Million Seventy-
two Thousand Three Hundred Eight (2,072,308) shares of Common
Stock, at prices ranging from Five and 25/100 Dollars ($5.25) to
Fifty-five and No/100 Dollars ($55.00) per share.
(iii) The Note and Option when issued in
compliance with the provisions of this Agreement, will be duly
authorized and validly issued. The issuance of the Note and
Option will not be subject to any preemptive rights or rights of
first refusal created by the Company. The shares of Common Stock
issuable upon conversion of the Note and exercise of the Option
have been duly and validly reserved. The shares of Common Stock
issuable upon conversion of the Note and exercise of the Option
are not subject to any preemptive rights or rights of first
refusal created by the Company, and upon conversion and
cancellation of the Note and exercise of the Option will be duly
authorized, validly issued, fully paid and nonassessable.
(iv) The Company has the requisite corporate power
and authority and has taken all corporate action necessary in
order to authorize, execute and deliver this Agreement and to
consummate the transactions contemplated hereby and to perform
the acts contemplated on its part hereunder. This Agreement is a
valid and legally binding agreement of the Company enforceable
against the Company in accordance with its terms except as such
enforcement may be limited by bankruptcy, insolvency, moratorium
or other similar laws affecting creditorsO rights generally or by
equitable principles.
(v) Except as the same shall have been made or
obtained at or prior to the Closing, and except for Form D and
related state securities law filings with the Securities and
Exchange Commission and applicable state securities boards to be
made following the Closing, no notices, reports or other filings
are required to be made by the Company with, nor are any
consents, registrations, approvals, permits or authorizations
required to be obtained by the Company from, any governmental or
regulatory authority, agency, commission, court or other entity,
domestic or foreign (OGovernmental EntityO), in connection with
the execution and delivery of this Agreement by the Company, the
consummation by the Company of the transactions contemplated
hereby and the performance of the acts contemplated on the part
of the Company hereunder.
(vi) The execution and delivery of this Agreement
by the Company do not, and the consummation by the Company of the
transactions contemplated hereby and the performance of the acts
contemplated on the part of the Company hereunder will not,
constitute or result in (A) a breach or violation of, or a
default under, the Certificate of Incorporation or By-Laws of the
Company, or (B) a breach, violation or event triggering a right
of termination of, or a default under, or the acceleration of or
the creation of a lien, pledge, security interest or other
encumbrance on assets (with or without the giving of notice or
the lapse of time or both) pursuant to any provisions of any
agreement, lease of real or personal property, contract, note,
mortgage, indenture, arrangement or other obligation
(OContractsO) of the Company or any law, rule, ordinance or
regulation, agreement, instrument or judgment, decree, order or
award to which the Company is subject or any governmental or non-
governmental authorization, consent, approval, registration,
franchise, license or permit under which the Company conducts its
business.
(vii) No investment banker, broker or finder
is entitled to any financial advisory, brokerage or finderOs fee
or other similar payment from either the Investor or the Company
based on agreements, arrangements or undertakings made by the
Company or any of its directors, officers or employees in
connection with the transactions and acts contemplated hereby.
(viii) In furnishing information to Investor
for purposes of this Agreement, it has not made any untrue
statements of a material fact to Investor or omitted to state a
material fact necessary to make such statements not misleading to
Investor in light of the circumstances under which they were
made.
5B. Representations by Investor
The Investor represents, warrants and agrees as
follows:
(i) Investor is purchasing the Note and Option
for its own account for the purpose of investment and not with a
view toward the redistribution or resale of any part thereof.
Investor has no present arrangement, understanding or agreement
for transferring or disposing of the Note;
(ii) Investor is aware that the purchase of the
Note and Option represent speculative investments;
(iii) Before executing this Agreement,
representatives of Investor were furnished all information with
respect to the Company that they requested and representatives of
Investor were given the opportunity to ask Company executives all
questions that such representatives had and to inspect the
Company's operations as well as meet with the Company's principal
customers;
(iv) Investor confirms that it is an OAccredited
Investor,O as such term is defined in Rule 501 of Regulation D
promulgated under the Securities Act;
(v) Investor confirms that it is able to bear the
economic risk inherent in its investment and understands that
there currently is no, and that there may not ever be any,
private or public market for the Note in the event that Investor
needs to liquidate its investment;
(vi) Investor agrees that it will not offer or
sell the Note, Option or any of the shares of Common Stock into
which the Note is convertible or which are issuable upon exercise
of the Option unless the Note or such shares of Common Stock are
registered under the Securities Act and under all applicable
state securities laws, unless Investor has established to the
reasonable satisfaction of the Company that no such registration
is required;
(vii) Investor agrees that appropriate
restrictive endorsements will be placed on the instrument
evidencing the Note, Option and on the certificate(s) evidencing
the shares of Common Stock into which the Notes are convertible
or which are issuable upon exercise of the Option to reflect the
foregoing and that the Company will give appropriate stop
transfer instructions to the person in charge of the transfer of
its securities, including the Note, Option and the Common Stock;
and
(viii) No investment banker, broker or finder
is entitled to any financial advisory, brokerage or finderOs fee
or other similar payment from either the Investor or the Company
based on agreements, arrangements or undertakings made by the
Investor or any of its directors, officers or employees in
connection with the transactions and acts contemplated hereby.
6. Registration Rights
6A. The Investor shall have the following demand
registration rights:
(i) Upon purchase of the Note, the Investor shall
have the right, by written notice to the Company, to require the
Company to use its best reasonable efforts to file within thirty
(30) days thereafter a Form S-3 registration statement for all
shares of Common Stock issued or issuable upon conversion of the
Note and exercise of the Option owned by the Investor (also
ODemand Covered SharesO). If a Form S-3 is not available, the
Company will attempt to use a Form S-2 or other Form as
appropriate.
(ii) The Company shall be entitled to defer filing
any such registration statement for a period of up to ninety (90)
days after such notice upon a good faith determination by the
CompanyOs management that the filing of a registration statement
at such time would be detrimental to the Company due to the
pendency of a material acquisition or financing or for other
reasonable cause. Investor may request that the Company withdraw
any such registration statement at any time prior to its
effectiveness; provided that, any such withdrawn registration
statement shall be treated as a completed registration fulfilling
the obligations of the Company pursuant to this section unless
the Investor shall reimburse the Company for all of the CompanyOs
costs and expenses incurred in connection with such withdrawn
registration within thirty days following the request to
withdraw.
(iii) The Investor may elect to have
conversion of the Note and exercise of the Option contingent upon
a registration statement hereunder being declared effective.
(iv) In the event a registration statement on Form
S-3 (or on another form at the Company's discretion) has not been
declared effective within one hundred fifty (150) days of demand,
then for each thirty (30) day period thereafter until a
registration statement becomes effective, the Company shall be
required to issue to Investor an additional five percent (5%) of
the shares issuable upon conversion of such Note and if the
Option has been exercised, five percent (5%) of those shares
also.
6B. The Investor shall also have "piggyback"
registration rights. If the Company proposes to sell shares of
Common Stock for its own account and to register the sale of such
shares under the Securities Act, or if the Company proposes to
register the sale of shares of Common Stock to be sold for the
account of any other shareholder Registration Statement, it shall
give written notice of such proposed registration to Investor as
promptly as possible and shall use its reasonable efforts to
include in the offering such number of shares of Common Stock
received by Investor upon conversion of the Note and exercise of
the Option ("Piggyback Covered Shares") then owned by Investor as
Investor shall request, within twenty-five (25) days after the
giving of such notice such offering to be upon the same terms
(including method of distribution) as the securities being sold
by the Company or any selling shareholder pursuant to any such
offering. The Company's obligation to include Piggyback Covered
Shares owned by Investor in any offering shall in all cases be
subject to the following limitations and qualifications:
(i) The Company shall not be required to give
notice to Investor or include such shares in any such
registration if the proposed registration is (A) a registration
of a stock option or compensation plan or of Common Stock issued
or issuable pursuant to any such plan, (B) a registration of
Common Stock proposed to be issued in exchange for securities or
assets of, or in connection with a merger or consolidation with,
another corporation, or (C) to be on a form of registration
statement for which the Piggyback Covered Shares are not
eligible;
(ii) The Company may require that the number of
Piggyback Covered Shares requested to be included in such
registration be reduced, or that all such shares be excluded from
any such registration, if it is advised in writing by its
managing underwriter (or, if the offering is not underwritten,
upon a good faith determination by the Company's board of
directors) that such reduction or exclusion, as the case may be,
is necessary to avoid materially adversely affecting the public
offering of the securities being offered by the Company. If the
Company shall require such a reduction, Investor shall have the
right to withdraw from the offering;
(iii) In the event that the number of shares
of Common Stock included in any registration is to be reduced
pursuant to Section 6B(ii):
(A) If the registration in question is one
initiated by the Company in order to allow the sale of Common
Stock for the account of the Company, then any reduction in the
number of shares to be included in such registration shall first
affect only shares other than the shares the Company proposes to
sell for its own account.
(B) If the registration in question is one
initiated by any person or persons other than the Company
exercising demand registration rights in order to allow the sale
of Common Stock for the account of such person or persons, then
any reduction in the number of shares to be included in such
registration shall first affect only shares other than the shares
of Common Stock requested to be included by the person or person
initiating the registration by the exercise of demand
registration rights requested to be included in the registration
by Holders; and
(C) Subject to subparagraphs (A) and (B)
above, in the event that the Company requires that the number of
shares to be included in a registration be reduced, such
reduction shall be applied pro rata among all parties having
registration rights in proportion to the number of shares
requested to be registered by each.
(iv) The Company shall not be required to include
any Piggyback Covered Shares in any registration to the extent
that the inclusion thereof would result in a reduction in the
number of shares requested to be included in the registration by
the person or persons (including the Company) initiating the
registration in question or would reduce the per share price of
the offering.
(v) The Company may, in its sole discretion and
without the consent of Investor, withdraw such registration
statement and abandon the proposed offering in which Investor had
requested to participate.
6C. In connection with a registration of Covered
Shares undertaken by the Company pursuant to this Part 6, the
Company shall:
(i) prepare and file with the Commission such
amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to
keep such registration statement current as long as is reasonably
possible as Investor shall request and to comply with the
provisions of the Securities Act with respect to the sale of all
Covered Shares covered by such registration statement during such
period;
(ii) provide Investor a reasonable opportunity to
review prior to filing any registration statement filed by the
Company in connection with a registration in which Investor is
participating, any amendments or supplements to such registration
statement and any prospectus used in connection therewith;
(iii) furnish to Investor such number of
conformed copies of such registration statement and of each such
amendment and supplement thereto (in each case including all
exhibits), such number of copies of the prospectus included in
such registration statement, in conformity with the requirements
of the Securities Act, and such other documents as Investor may
reasonably request in order to facilitate the sale of the Covered
Shares covered by such registration statement;
(iv) use its best efforts to register or qualify
the Covered Shares covered by such registration statement under
such other securities or blue sky laws of such jurisdictions as
Investor shall reasonably request, and do any and all other acts
and things which may be reasonably necessary or advisable to
enable Investor to consummate the sale in such jurisdictions of
such shares; provided that the Company shall not for any such
purpose be required to register or qualify the covered shares
covered by such registration statement in any jurisdiction in
which the Common Stock is not then qualified for public trading,
to qualify generally to do business as a foreign corporation in
any jurisdiction wherein it would not but for the requirements of
this section be obligated to be so qualified, to subject itself
to taxation in any such jurisdiction or to consent to general
service of process in any such jurisdiction;
(v) notify Investor at any time when a prospectus
relating to the Covered Shares covered by such registration
statement is required to be delivered under the Securities Act,
of the CompanyOs becoming aware that the prospectus included in
such registration statement, as then in effect, includes an
untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the
circumstances then existing, and at the request of Investor
promptly prepare and furnish to Investor a reasonable number of
copies of a prospectus supplemented or amended so that, as
thereafter delivered to the purchasers of such shares, such
prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading in light of the circumstances then existing;
(vi) use its best efforts to cause all of the
Covered Shares included in such registration statement to be
listed on each securities exchange on which securities of the
same class issued by the Company are then listed or, if there
shall then be no such listing, to be accepted for quotation on
NASDAQ;
(vii) provide a transfer agent and registrar
for the Covered Shares covered by such registration statement not
later than the effective date of such registration statement; and
6D. For as long as Investor shall continue to hold any
Covered Shares, the Company shall use reasonable efforts to file,
on a timely basis, all annual, quarterly and other reports
required to be filed by it under Sections 13 and 15(d) of the
Exchange Act, and the rules and regulations of the Commission
thereunder, as amended from time to time. In the event of any
proposed sale of Covered Shares by Investor pursuant to Rule 144
(or any successor rule) under the Securities Act, the Company
shall cooperate with Investor so as to enable such sales to be
made in accordance with applicable laws, rules and regulations,
the requirements of the CompanyOs transfer agents, and the
reasonable requirements of the broker through which the sales are
proposed to be executed.
6E. The costs and expenses of any registration
effected pursuant to this Part 6 shall be allocated as provided
in this Section 6E:
(i) "Registration Expenses" shall mean all
expenses incurred by the Company in complying with this Part 6,
including, without limitation, all registration, qualification
and filing fees, printing expenses, escrow fees, transfer agents'
and registrars' fees, fees and disbursements of counsel for the
Company, blue sky fees and expenses, and the expense the
Company's accountants, including the cost of any special audits
incident to or required by any such registration (but excluding
the compensation of regular employees of the Company which shall
be paid in any event by the Company);
(ii) "Selling Expenses" shall mean all
underwriting discounts and selling commissions applicable to the
sale and all fees and disbursements of counsel for any holder;
(iii) In connection with any registration
pursuant to Section 6A, the company shall pay all Registration
Expenses and Investor shall pay all Selling Expenses;
(iv) In connection with any registration initiated
by the Company in which Investor participates pursuant to Section
6B, the Company or other person initiating the registration shall
pay all Registration Expenses, and Investor shall pay all Selling
Expenses attributable to the inclusion in the offering of the
Covered Shares being sold by Investor.
6F. In the case of the registration effected by the
Company pursuant to this part, the Company agrees to indemnify
and hold harmless Investor, each underwriter of the Covered
Shares so registered and each person who controls any such
underwriter within the meaning of Section 15 of the Securities
Act, against any and all losses, claims, damages or liabilities
to which they or any of them may become subject under the
Securities Act or any other statute or common law, including any
amount paid in settlement of any litigation, commenced or
threatened, if such settlement is effected with the written
consent of the Company, and to reimburse them for any legal or
other expenses incurred by them in connection with investigating
any claims and defending any actions, insofar as any such losses,
claims, damages, liabilities or actions arise out of or are based
upon (i) any untrue statement or alleged untrue statement of a
material fact contained in the registration statement relating to
the sale of the Covered Shares, or any post-effective amendment
thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact
contained in any preliminary prospectus, if used prior to the
effective date of such registration statement, or contained in
the final prospectus (as amended or supplemented if the Company
shall have filed with the Commission any amendment thereof or
supplement thereto) if used within the period during which the
Company is required to keep the registration statement to which
such prospectus relates current, or the omission or alleged
omission to state therein (if so used) a material fact necessary
in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
provided, however, that the indemnification agreement contained
in this section shall not (x) apply to such losses, claims,
damages, liabilities or actions arising out of, or based upon,
any such untrue statement or alleged untrue statement, or any
such omission or alleged omission, if such statement or omission
was made in reliance upon and in conformity with information
furnished in writing to the Company by Investor or such
underwriter for use in connection with the preparation of the
registration statement, any preliminary prospectus or final
prospectus contained in the registration statement, or any
amendment or supplement thereto, or (y) inure to the benefit of
any underwriter or any person controlling such underwriter, if
such underwriter failed to send or give a copy of the final
prospectus to the person asserting the claim at or prior to the
delivery of certificates representing Covered Shares or of
written confirmation of the sale of Covered Shares to such person
and if the untrue statement or omission concerned had been
corrected in such final prospectus.
6G. In the case of a registration effected by the
Company pursuant to this part, Investor and each underwriter of
the Covered Shares to be registered shall agree in the same
manner and to the same extent as set forth above to indemnify and
hold harmless the Company, each person who controls the Company,
the directors of the Company and those of its officers who shall
have signed any such registration statement, with respect to any
untrue statement or alleged untrue statement in, or omission or
alleged omission from, such registration statement or any post-
effective amendment thereto or any preliminary prospectus or
final prospectus (as amended or as supplemented, if amended or
supplemented as aforesaid) contained in such registration
statement, if such statement or omission was made in reliance
upon and in conformity with information furnished in writing to
the Company by Investor or any such underwriter for use in
connection with the preparation of such registration statement or
any preliminary prospectus or final prospectus contained in such
registration statement or any such amendment or supplement
thereto.
6H. Each indemnified party shall, with reasonable
promptness after its receipt of written notice of the
commencement of any action against such indemnified party in
respect of which indemnity may be sought from an indemnifying
party on account of an indemnity agreement contained in this
part, notify the indemnifying party in writing of the
commencement thereof. In case any such action shall be brought
against any indemnified party and it shall so notify an
indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent
it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so
to assume the defense thereof, the indemnifying party shall not
be liable to such indemnified party under this part for any legal
or other expenses subsequently incurred by such indemnified party
in connection with the defense thereof other than reasonable
costs of investigation. The indemnity agreements in this part
shall be in addition to any liabilities that the indemnifying
parties may have pursuant to law.
6I. If the indemnification provided for in this part
shall be unavailable to or insufficient to hold harmless an
indemnified party under sections above in respect of any losses,
claims, damages or liabilities (or actions in respect thereof)
referred to therein, then the indemnifying parties shall
contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportions as are
appropriate to reflect to the relative benefits received by the
respective indemnifying parties from the offering of the Covered
Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law, or if the
indemnified party failed to give the notice required under
section 6H above, then each indemnifying party shall contribute
to such amount paid by or payable by such indemnified party in
such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the indemnifying
parties in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or
actions in respect thereof) as well as any other relevant
equitable considerations. The relative benefits received by the
indemnifying parties shall be deemed to be in the same proportion
as the net proceeds to any such party bear to the total net
proceeds from the offering before deducting expenses. The
relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a
material fact relates to information supplied by the respective
indemnifying party and the partiesO relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission. Provided in no event shall Investor's
liability pursuant to these indemnity provisions be greater than
the amount paid for the Note and shares of Common Stock purchased
pursuant to this Agreement and the Exhibits.
7. Miscellaneous
7A. Successors and Assigns. Except as otherwise
expressly provided herein, all covenants and agreements contained
in this Agreement by or on behalf of any of the parties hereto
will bind and inure to the benefit of the respective successors
and assigns of the parties hereto whether so expressed or not;
provided that, the registration rights granted to the Investor
shall not be transferred or assigned by Investor.
7B. Severability. Whenever possible, each provision
of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of
this Agreement is held to be prohibited by or invalid under
applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating
the remainder of this Agreement.
7C. Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, any one of which need
not contain the signatures of more than one party, but all such
counterparts taken together will constitute one and the same
Agreement.
7D. Descriptive Headings. The descriptive headings of
this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
7E. Governing Law; Venue. The corporate law of
Delaware will govern all issues concerning the relative rights of
the Company and its stockholders. All other questions concerning
the construction, validity and interpretation of this Agreement
and the exhibits, including the Note and Option, and schedules
hereto will be governed by the internal law, and not the law of
conflicts, of Delaware. It is the intention of the parties that
proper venue for any action, suit or proceeding arising pursuant
to this Agreement or in connection with the transactions
contemplated herein shall be in Delaware. Each party agrees that
any such action, suit or proceeding shall be brought before a
state or federal court sitting in the State of Delaware and
waives any objection to venue in such court. Each party waives
the right to demand a jury in any action, suit or proceeding
arising pursuant to this Agreement.
7F. Notices. All notices, demands or other
communications to be given or delivered under or by reason of the
provisions of this Agreement (other than notice of a telephonic
meeting of the CompanyOs board of directors, which may be given
by telephone) will be in writing and will be deemed to have been
given either when delivered personally or three (3) business days
after having been mailed by certified or registered mail, return
receipt requested and postage prepaid, to the recipient. Such
notices, demands and other communications will be sent to the
Investor and to the Company at the address indicated below:
If to the Company:
Electrosource, Inc.
2809 Interstate 35 South
San Marcos, Texas 78666
Attention: President
With a copy to:
Bret Van Earp
Attorney-at-Law
100 Congress Avenue, Suite 1800
Austin, Texas 78701
If to the Investor:
Corning Incorporated
Attn: Howard Zingler, Vice President
MP-BH-03-1
Corning, New York 14831
or to such other address or to the attention of such other person
as the recipient party has specified by prior written notice to
the sending party.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first written above.
ELECTROSOURCE, INC. CORNING INCORPORATED
By: /s/ By: /s/
Michael G. Semmens Howard J. Zingler
President, CEO and Vice President, Finance
Chairman of the Board & Bus. Dev.
EXHIBIT A
5% CONVERTIBLE PROMISSORY NOTE
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE OACTO), OR UNDER THE
SECURITIES LAWS OF ANY STATE (OBLUE SKY LAWSO), AND MAY
NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR
DELIVERY TO THE COMPANY OF EVIDENCE SATISFACTORY TO THE
COMPANY TO THE EFFECT THAT AN EXEMPTION FROM
REGISTRATION THEREUNDER IS AVAILABLE.
Dated March 27, 1997 $4,000,000.00
FOR VALUE RECEIVED, Electrosource, Inc., a Delaware
corporation (the OCompanyO), hereby promises to pay to the order
of Corning Incorporated, a New York corporation (OCorningO or the
Ooriginal holderO), the principal sum of Four Million Dollars
($4,000,000.00) together with interest thereon calculated from
the date hereof, in accordance with the provisions of this Note.
This Note is the 5% Convertible Promissory Note (the ONoteO)
issued pursuant to a Note Purchase and Option Agreement dated as
of March 27, 1997, between the Company and Corning (the OPurchase
AgreementO). The Purchase Agreement contains terms governing the
rights and obligations of the holder of this Note, and all
provisions of the Purchase Agreement are incorporated herein by
reference. Unless otherwise indicated herein, capitalized terms
used in this Note have the same meanings as set forth in the
Purchase Agreement.
Part 1. Payment of Interest
lA. Rate of Interest. Interest shall accrue at the rate of
five percent (5%) per annum on the unpaid principal amount of
this Note outstanding from time to time. Interest shall be paid
in cash or, at the option of the Company, in additional Notes
having terms identical to this Note except in respect of
principal amount, dated as of the Payment Date (as defined below)
with respect to which such interest is payable and having a
principal amount equal to the amount of interest accrued and
unpaid as of that Payment Date.
lB. Payment Dates. On September 27, 1997, and on each
subsequent September 27 and March 27 (each of which dates shall
be a OPayment DateO), all unpaid interest that has accrued on the
unpaid principal amount of this Note on and prior to such Payment
Date or on any overdue interest on this Note shall become due and
payable.
lC. Payment upon Maturity or Prepayment. All accrued
interest that has not theretofore been paid shall be paid in full
on the date on which the entire principal amount outstanding
under this Note is paid, whether upon maturity or upon
prepayment. In the event that any portion less than the entire
outstanding principal amount of this Note is prepaid pursuant to
paragraph 2B, the accrued interest applicable to such portion
prepaid shall be paid as of the effective date of such partial
prepayment.
lD. Saving Clause. All agreements and transactions between
the Company and the holder of this Note, whether now existing or
hereafter arising, whether contained herein or in any other
instrument, and whether written or oral, are hereby expressly
limited so that in no contingency or event whatsoever, whether by
reason of acceleration of the maturity hereof, prepayment, demand
for prepayment or otherwise, shall the amount contracted for,
charged or received by the holder of this Note from the Company
for the use, forbearance or detention of the principal
indebtedness or interest hereof, which remains unpaid from time
to time, exceed the maximum amount permissible under applicable
law, it particularly being the intention of the parties hereto to
conform strictly to the applicable law of usury. Any interest
payable hereunder or under any other instrument relating to the
indebtedness evidenced hereby that is in excess of the legal
maximum, shall, in the event of acceleration of maturity,
prepayment, demand for prepayment or otherwise, be automatically,
as of the date of such acceleration, prepayment, demand or
otherwise, applied to a reduction of the principal indebtedness
hereof and not to the payment of interest, or if such excessive
interest exceeds the unpaid balance of such principal, such
excess shall be refunded to the Company. To the extent not
prohibited by law, determination of the legal maximum rate of
interest shall at all times be made by amortizing, prorating,
allocating and spreading in equal parts during the period of the
full stated term of the indebtedness, all interest at any time
contracted for, charged or received from the Company in
connection with the indebtedness, so that the actual rate of
interest on account of such indebtedness is uniform throughout
the term hereof.
Part 2. Payment of Principal
2A. Payment upon Maturity. The entire unpaid principal
amount hereof shall be due and payable on March 27, 2002.
2B. Prepayment. The Company may prepay all or any part of
this Note at any time in One Hundred Thousand Dollar ($100,000)
increments. The Company shall give not less than thirty (30)
days prior written notice of its intention to prepay this Note.
Part 3. Registration of Transfer
The Company shall keep at its principal office a register
for the registration of Notes, which shall contain the name and
address of the registered holder (herein referred to as the
holder) of the Note and the principal and interest of the Note.
No transfer of the Note or any right to receive payments under
the Note shall be permitted unless made upon the CompanyOs
register. Upon the surrender of any Note or Notes at such place,
the Company shall, at the request of the holder of such Note,
execute and deliver (at the CompanyOs expense) a new Note or
Notes in exchange therefor representing in the aggregate the
principal amount represented by the surrendered Note. Each such
new Note shall be registered in such name and shall represent
such principal amount of Note as is requested by the holder of
the surrendered Note and shall be substantially identical in form
to the surrendered Note, and interest shall accrue on such new
Note from the date to which interest has been fully paid on such
Note represented by the surrendered Note; provided that, if any
Note is to be registered in the name of a person or persons other
than the holder of the Note, there has been compliance with all
laws applicable to such change of registered holder, including
but not limited to federal and state securities laws.
Part 4. Replacement
Upon receipt of evidence reasonably satisfactory to the
Company of the ownership and the loss, theft, destruction or
mutilation of any Note, and in the case of any such loss, theft
or destruction, upon receipt of indemnity reasonably satisfactory
to the Company, or, in the case of any such mutilation upon
surrender of such Note, the Company shall (at its expense)
execute and deliver in lieu of such Note, a new Note of like kind
representing the principal amount of Note represented by such
lost, stolen, destroyed or mutilated Note and dated the date of
such lost, stolen, destroyed or mutilated Note, and interest
shall accrue on the Note represented by such new Note from the
date to which interest has been fully paid on such lost, stolen,
destroyed or mutilated Note.
Part 5. Cancellation
After all principal and accrued interest at any time owed on
this Note has been paid in full, this Note shall be surrendered
to the Company for cancellation and shall not be reissued.
Part 6. Waiver of Notice, etc.
The Company hereby waives presentment, demand, notice,
protest and all other demands and notice in connection with the
delivery, acceptance, performance and enforcement of this Note,
and assents to extension of the time of payment or forbearance or
other indulgence without notice.
Part 7. Events of Default
7A. Events of Default. Each of the following shall
constitute an Event of Default:
(i) the Company fails to pay when due the full amount
of any principal or interest on this Note whether at maturity or
by acceleration or otherwise;
(ii) the Company makes an assignment for the benefit of
creditors or admits in writing its inability to pay its debts
generally as they become due; or an order, judgment or decree is
entered adjudicating the Company bankrupt or insolvent; or the
Company petitions or applies to any tribunal for the appointment
of a trustee, receiver or liquidator of the Company or of any
substantial part of the assets of the Company, or commences any
proceeding under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation law
of any jurisdiction; or any such petition or application is
filed, or any such proceeding is commenced against the Company
and either the Company takes any action indicating its approval
thereof, consent thereto, or acquiescence therein or such
petition, application or proceeding is not dismissed within
ninety (90) days;
(iii) the sale by the Company of a material part of
the business or assets of the Company other than in the ordinary
course of business;
(iv) the taking, closing or nationalization of a
material part of the business or assets of the Company by
governmental or legal action. A "material part of the business
or assets of the Company" means more than one-third of the gross
assets of the Company as set forth in its most recent audited
consolidated financial statements;
(v) any representation or warranty of the Company set
forth in the Purchase Agreement is shown to be, or becomes false
or untrue as of the date of this Note.
7B. Remedies. Upon the occurrence and continuance of any
Event or Events of default, the holders of a majority of the
combined aggregate principal amount outstanding under this Note
and any Notes issued in payment of accrued interest on Notes may,
by written notice to the Company, declare all or any part of the
unpaid principal amount of the Notes then outstanding to be
forthwith due and payable, and thereupon such unpaid principal
amount or part thereof, together with interest accrued thereon,
shall become so due and payable without presentation,
presentment, protest, notice of intent to accelerate, notice of
acceleration, or further demand or notice of any kind, all of
which are hereby expressly waived, and such holder or holders may
proceed to enforce payment of such amount or part thereof in such
manner as it or they may elect. The Company hereby waives to the
extent not prohibited by applicable law which cannot itself be
waived (i) all presentments, demands for performance, notices of
nonperformance (except to the extent required by the provisions
hereof), (ii) any requirement of diligence or promptness on the
part of any holder of Notes in the enforcement of its rights
under the provisions of this Note, and (iii) any and all notices
of every kind and description which may be required to be given
by any statute or rule of law.
Part 8. Conversion
8A. Conversion Procedure.
(i) The holder of this Note may convert all or any
portion of the outstanding principal amount hereof (plus accrued
but unpaid interest on such principal amount or portion thereof)
held by such holder into a number of shares of the CompanyOs
Common Stock computed by dividing the principal amount of this
Note (plus accrued but unpaid interest thereon) to be converted
by the OConversion PriceO (as defined below in Part 8B).
(ii) Each conversion will be deemed to have been
effected as of the close of business on the date on which the
instrument representing this Note has been surrendered at the
principal office of the Company. At such time as such conversion
has been effected, the rights of the holder of this Note as such
holder will cease and the person or persons in whose name or
names any certificate or certificates for shares of Common Stock
are to be issued upon such conversion will be deemed to have
become the holder or holders of record of the shares of Common
Stock represented thereby.
(iii) As soon as possible after a conversion has
been effected (but in any event within three (3) business days in
the case of subparagraph (a) below), the Company will deliver to
the converting holder:
(a) a certificate representing the number of
shares of Common Stock issuable by reason of such conversion in
such name or names and such denomination or denominations as the
converting holder has specified (provided that, in the event that
the name specified by the converting holder is other than that of
the converting holder, the Company has received evidence
satisfactory to Company counsel that the transfer of Common Stock
from the converting holder to the person specified may be
accomplished without violation of applicable law);
(b) a replacement Note having terms identical to
those of this Note other than the principal amount, which shall
be equal to portion of the principal amount of the original Note
not converted; and
(c) the amount payable under subparagraph (vi)
below with respect to fractional shares of Common Stock otherwise
issuable upon such conversion.
(iv) The issuance of certificates for shares of Common
Stock upon conversion of this Note will be made without charge to
the holder of such Note for any issuance tax in respect thereof
or other cost incurred by the Company in connection with such
conversion and the related issuance of shares of Common Stock.
Upon conversion of this Note, the Company will take all such
actions as are necessary in order to insure that the Common Stock
issuable with respect to such conversion will be validly issued,
fully paid and nonassessable.
(v) The Company will not close its books against the
transfer of this Note or of Common Stock issued or issuable upon
conversion of this Note in any manner which interferes with the
timely conversion of this Note.
(vi) If any fractional interest in a share of Common
Stock would, except for the provisions of this subparagraph (vi),
be deliverable upon any conversion of this Note, the Company, in
lieu of delivering the fractional share therefor, may at its
option pay a cash adjustment for such fractional share equal to
such fraction times the fair market value per share of the Common
Stock at the close of business on the date of conversion, as
determined in good faith by the board of directors of the
Company.
(vii) The provisions of this part 8 shall be
subject to the limitations imposed by section 2B hereof.
8B. Conversion Price. The Conversion Price shall be Five
and 50/100 Dollars ($5.50). In order to prevent dilution of the
conversion rights granted under this part 8, the Conversion Price
will be subject to adjustment from time to time pursuant to this
part 8; provided that the Conversion Price will in no event be
less than One and No/100 Dollars ($1.00), the par value.
8C. Subdivision or Combination of Common Stock. If the
Company at any time subdivides (by any stock split, stock
dividend, recapitalization or otherwise) its outstanding shares
of Common Stock into a greater number of shares, the Conversion
Price in effect immediately prior to such subdivision will be
proportionately reduced, and if the Company at any time combines
(by reverse stock split or otherwise) its outstanding shares of
Common Stock into a smaller number of shares, the Conversion
Price in effect immediately prior to such combination will be
proportionately increased.
8D. Reorganization, Reclassification, Consolidation, Merger
or Sale. Any reorganization, reclassification, consolidation,
merger or sale of all or substantially all of the CompanyOs
assets to another Person which is effected in such a way that
holders of Common Stock are entitled to receive (either directly
or upon subsequent liquidation), stock, securities or amounts
with respect to or in exchange for Common Stock is referred to
herein as an OOrganic Change.O Prior to the consummation of any
Organic Change, the Company will make appropriate provisions (in
form and substance satisfactory to the holders of a majority of
the outstanding principal amount of Notes then outstanding) to
insure that each of the holders of Notes will thereafter (for so
long as such holders have the right to convert the Notes as
provided in this part 8) have the right to receive, in lieu of or
in addition to the shares of Common Stock immediately theretofore
issuable upon the conversion of such holderOs Notes, such shares
of stock, securities or assets as such holder would have received
in connection with such Organic Change if such holder had
converted his Notes immediately prior to such Organic Change. In
any such case, the Company will make appropriate provisions (in
form and substance satisfactory to the holders of a majority of
the outstanding principal amount of Notes then outstanding) to
insure that the provisions of this part 8 will thereafter (for so
long as such holders have the right to convert the Notes as
provided in this part 8) be applicable to the Notes.
8E. Notices. Until the maturity of this Note:
(i) Immediately upon any adjustment of the Conversion
Price, the Company will give written notice thereof to the holder
of this Note.
(ii) The Company will give written notice to the holder
of this Note at least twenty (20) days prior to the date on which
the Company closes its books or takes a record (a) with respect
to any dividend or distribution upon Common Stock, (b) with
respect to any pro rata subscription offer to holders of Common
Stock or (c) for determining rights to vote with respect to any
Organic Change, dissolution or liquidation.
(iii) The Company will also give written notice to
the holder of this Note at least thirty (30) days prior to the
date on which any Organic Change will take place.
Part 9. Amendment and Waiver
No amendment, modification or waiver shall be binding or
effective with respect to any provision of this Note without the
prior written consent of the holders of at least sixty-seven
percent (67%) of the combined aggregate principal amount of this
Note and any additional Notes issued in payment of accrued
interest then outstanding.
Part 10. Notices
Except as otherwise expressly provided, all notices
referred to herein will be in writing and will be delivered by
registered or certified mail, return receipt requested, postage
prepaid and will be deemed to have been given when so mailed (i)
to the Company, at its principal executive offices and (ii) to
any holder of this Note, at such holderOs address as it appears
in the Note register maintained pursuant to part 3 hereof (unless
otherwise indicated by any such holder).
IN WITNESS WHEREOF, the Company has executed and delivered
this Note on March 27, 1997.
ELECTROSOURCE, INC.
By:
James M. Rosel
Vice President Finance
and General Counsel
EXHIBIT B
Date of Grant: March 27, 1997
ELECTROSOURCE, INC.
STOCK OPTION AGREEMENT
THIS OPTION HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE OACTO), OR
UNDER THE SECURITIES LAWS OF ANY STATE (OBLUE SKY
LAWSO), AND MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT OR DELIVERY TO THE COMPANY OF EVIDENCE
SATISFACTORY TO THE COMPANY TO THE EFFECT THAT AN
EXEMPTION FROM REGISTRATION THEREUNDER IS AVAILABLE.
Corning Incorporated
Corning, New York 14831
The undersigned, Electrosource, Inc. (the "Company"), a
Delaware corporation, for good and valuable consideration desires
to grant to Corning Incorporated ("Corning" or "Holder") an
option to acquire shares of Common Stock in the Company. The
option covered hereby is granted pursuant to the terms of a Note
Purchase and Option Agreement ("Purchase Agreement") dated as of
March 27, 1997 between the Company and Corning, and all
provisions of that Agreement are incorporated herein by
reference. Defined terms shall have the same meaning as in the
Purchase Agreement.
1. Option. The Company does hereby grant to Corning the
exclusive option to purchase from the Company all or any part of
an aggregate of Five Hundred Thousand (500,000) shares ("shares")
of Common Stock of the Company. The exercise prices shall be
Seven and No/100 Dollars ($7.00) per share for Two Hundred
Seventy-five Thousand (275,000) shares and Nine and No/100
Dollars ($9.00) per share for Two Hundred Twenty-five Thousand
(225,000) shares.
2. Term. The Option shall be exercisable as provided in
the Purchase Agreement and otherwise at any time or times until
the option expires or terminates in accordance with the
provisions hereof. This Option shall in any event terminate at
5:00 o'clock P.M., San Marcos, Texas time two years after its
date of grant.
3. Exercise. To exercise this option or any part thereof,
Corning shall give written notice of such election to the Company
at its Corporate Headquarters, Attention Corporate Secretary, so
as to be received by the Company within the period this option is
exercisable, which notice shall specify the number of shares to
be purchased and be accompanied by payment in full. Payment for
such shares may be by check or wire transfer. Exercise of the
option may be made in multiple parts, but in amounts of at least
Five Hundred Thousand and No/100 Dollars ($500,000) per exercise.
4. Share Issue. Upon receipt by the Company of proper
notice of exercise of this Option, the Company as promptly as
practicable and subject to the other provisions in this Option,
shall deliver a certificate or certificates representing shares
so purchased, and shall pay all original issuance or transfer
taxes on the exercise of this Option, and all other fees and
expenses necessarily incurred by the Company in connection
therewith. Certificates evidencing such shares may have endorsed
thereon such language as may be deemed necessary or advisable by
counsel for the Company in order to ensure compliance with the
applicable securities laws or regulations. Registration rights
shall be as set forth in the Purchase Agreement.
5. Subdivision or Combination of Common Stock. If the
Company at any time subdivides (by any stock split, stock
dividend, recapitalization or otherwise) its outstanding shares
of Common Stock into a greater number of shares, the exercise
price in effect immediately prior to such subdivision will be
proportionately reduced, and if the Company at any time combines
(by reverse stock split or otherwise) its outstanding shares of
Common Stock into a smaller number of shares, the exercise price
in effect immediately prior to such combination will be
proportionately increased.
6. Reorganization, Reclassification, Consolidation, Merger
or Sale. Any reorganization, reclassification, consolidation,
merger or sale of all or substantially all of the CompanyOs
assets to another entity which is effected in such a way that
holders of Common Stock are entitled to receive (either directly
or upon subsequent liquidation), stock, securities or amounts
with respect to or in exchange for Common Stock is referred to
herein as an OOrganic Change.O Prior to the consummation of any
Organic Change, the Company will make appropriate provisions (in
form and substance satisfactory to the holder of the outstanding
principal amount of the Option then outstanding) to insure that
the holder of the Option will thereafter (for so long as such
holder has the right to exercise the Option) have the right to
receive, in lieu of or in addition to the shares of Common Stock
immediately theretofore issuable upon the exercise of the Option,
such shares of stock, securities or assets as such holder would
have received in connection with such Organic Change if such
holder had exercised the Option immediately prior to such Organic
Change. In any such case, the Company will make appropriate
provisions (in form and substance satisfactory to the holder of
the Option) to insure that the provisions of this part 6 will
thereafter (for so long as such holder has the right to exercise
the Option) be applicable to the Option.
IN WITNESS WHEREOF, the Parties have executed this
Agreement on the date first written above.
ELECTROSOURCE, INC. CORNING INCORPORATED
By: By:
James M. Rosel
Vice President Finance Printed Name:
and General Counsel
Its:
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<PERIOD-END> MAR-31-1997
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<RECEIVABLES> 442
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