FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 of (I.R.S. Employer Identification
No.)
incorporation or organization)
2809 Interstate 35 South, San 78666
Marcos, Texas
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, (512) 753-6500
including area code:
Securities registered pursuant None
to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reported 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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 19, 1999, there were 9,085,698 common shares
outstanding and the aggregate market value of the common shares
held by non-affiliates (based on the closing price of these
shares of $1.469, as reported by NASDAQ at the close of business
on March 19, 1999) was approximately $13,346,890.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference
into the indicated part or parts of this report:
Portions of the Company's Definitive Proxy Statement for the
Annual Meeting of Shareholders scheduled to be held on May 18,
1999, are incorporated by reference into Part III hereof.
PART I
Item 1. Business.
General
Electrosource, Inc. ("ELSI" or the "Company"), is engaged in the
manufacture of advanced lead-acid, rechargeable storage batteries
and the development of related processes and technologies. The
Company's Horizon battery utilizes plate grids made from a
patented coextruded wire and a special paste mixture. The Company
is developing Horizon battery technology for use in many
applications including hybrid vehicles, electric vehicles,
neighborhood electric vehicles, electric scooters, lawn and
garden tools, power management and starting power.
The principal executive offices of the Company are located at
2809 Interstate 35 South, San Marcos, Texas 78666, and its
telephone number is (512) 753-6500.
Significant Events and Recent Financial Difficulties
The Company has had difficulty maintaining compliance with the
listing requirements of The Nasdaq Stock Marketr ("Nasdaq"),
including among other things, the minimum net tangible asset
requirement of $2,000,000. As of March 31, 1999, the Company was
again not in compliance with this requirement. There can be no
assurance that the Company will be able to meet the minimum
listing requirements of Nasdaq and remain listed in the future.
See Management's Discussion and Analysis of Financial Condition
and Results of Operations and Liquidity.
During 1998, the Company continued to operate at a cash deficit.
Existing battery orders and contract work were not adequate to
sustain the Company on an ongoing basis. As a result, in February
1998, the Company reduced its staffing by approximately 40% to
reduce costs and began to explore strategic alternatives such as
a business combination, the sale of substantially all of the
Company's assets or a strategic alliance.
In June 1998, the Company entered into an Agreement with Kamkorp
Limited ("Kamkorp"), a company organized in England, for up to
$6,000,000 of equity funding for 6,000,000 Common Shares at $1.00
per share. In 1998, 3,900,000 shares of the Company's Common
Stock were purchased by Kamkorp for $3,900,000. The Agreement
provided for Kamkorp to purchase up to an additional 2,100,000
shares of Common Stock at $1.00 per share at a minimum rate of
300,000 shares per month through July 1999. Kamkorp management
has stated that the remaining and future purchases of Common
Stock (which may be more or less than those defined in the
Agreement) will be made in the amount and timeframe they deem
necessary to sustain the Company's operations and execute the
business plan approved by Kamkorp, rather than as defined in the
schedule set forth in the Agreement. Payments to date have been
made in amounts necessary to meet the Company's payroll and rent
obligations, however, approximately 90% of projected 1999 battery
sales in the approved business plan are to Kamkorp affiliates and
the portion of those sales initially projected to occur in the
first quarter of 1999 did not occur (See "Customer Concentration"
section).
In accordance with the terms of the Agreement, Kamkorp nominated
three members to the Company's Board of Directors, who were
unanimously approved by the Board of Directors. As of December
31, 1998, Kamkorp held 46% of the Company's Common Stock and has
the ability to obtain greater than 50% of the outstanding shares
of Common Stock on a fully diluted basis and to ultimately have
control of the Board of Directors. Including options to purchase
Common Stock, Kamkorp is the beneficial owner of 9,000,000 shares
or 66.5% of the Company's Common Stock (assuming purchase of the
full 6,000,000 shares available under the Agreement and full
exercise of the option to purchase 3,000,000 shares).
Additionally, pursuant to the terms of the Agreement, the Company
must obtain approval from Kamkorp for all important management
policies and decisions, which include the following:
a. issuance of Common Stock or any security which provides for
the right to acquire Common Stock, or any other capital stock of
the Company;
b. overall policy decisions relating to business direction and
manufacturing capacity;
c. any agreement or commitment that materially affects or
modifies the intellectual property owned by the Company;
d. approval of the annual operating budget, capital budget,
overhead budgets and business plans of the Company;
e. approval of any merger, consolidation, partnership or joint
venture;
f. approval of transfer of any assets of the Company with a
fair market value greater than $100,000;
g. incurring indebtedness for borrowed money, granting any
material pledge or security interest in the assets of the
Company;
h. increasing the size of the Company's Board of Directors;
i. amending the Company's Certificate of Incorporation or
Bylaws;
j. entering into any transaction involving an amount greater
than, or having a value in excess of $100,000 or involving a term
or commitment for more than 12 months; and
k. other various management policies and decisions.
Sales of existing battery types did not increase as expected in
1998 due to delays in orders from Lockheed Martin and others
testing the battery for use in new products in emerging markets.
Generally, testing of products by customers has taken longer than
expected because of difficulties in integration of battery packs
in new products. Battery packs are being tested simultaneously
with other newly designed components in customer products.
Cash balances have been depleted and the Company is currently
dependent on cash payments from Kamkorp and its affiliates to
continue operations on a day-to-day basis. The Company has
approximately $800,000 of outstanding accounts payable greater
than thirty days past due, most of which is payable to raw
material suppliers, some of which date back to June 1998. Certain
of these vendors have threatened legal action for non-payment of
invoices. Cash generated from battery sales and contracts with
other customers is not sufficient to fund operations. Cash
payments from Kamkorp and its affiliates to date have been
sufficient to fund payroll and rent obligations, but not to pay
the outstanding accounts payable or raw material purchases. If a
significant battery order is received, significant funding will
be required to pay the outstanding accounts payable and to allow
ordering of additional raw materials. There is no assurance that
future payments from Kamkorp or its affiliates, if any, will be
made in a timeframe sufficient to sustain operations. Although
Kamkorp has provided substantial amounts of financing to the
Company to date, as a private company Kamkorp is not legally
required to, and has not, provided sufficient information to the
Company to allow the Company to determine the financial ability
of Kamkorp to make the remaining purchases of the Company's
Common Stock. Additionally, the minimum $300,000 funding per
month in accordance with the terms of the Agreement, will not, by
itself, be sufficient to continue operations, pay outstanding
obligations, or to maintain the minimum listing requirements of
Nasdaq. Funding beyond $300,000 per month, additional battery
orders, or other financing will be required in the second quarter
of 1999 to continue operations, and pay outstanding obligations.
The Company is discussing the possibility of accelerated or
additional financing from Kamkorp, which could be provided under
the terms of the Agreement, including Kamkorp's exercise of all
or a portion of its option to purchase 3,000,000 shares of the
Company's Common Stock at $1.00 per share. Absent additional
funding from Kamkorp or other sources, the Company will not have
the funds necessary to complete battery orders from Kamkorp
affiliates or other customers or to pay all outstanding
obligations and will not be able to continue as a going concern.
The Horizon Battery
The Company has concentrated its efforts on the design of a lead-
acid battery concept employing coextruded wire in plates oriented
in the horizontal plane, as opposed to the vertical plane
orientation of conventional batteries. This battery concept,
named "Horizon," enables design of a lead-acid battery with
significantly higher energy density than is possible with
conventional battery design. The Horizon battery design may also
be more economical to manufacture than conventional batteries due
to the elimination of several steps in the manufacturing process.
Testing by the Company and by third parties indicates that
various configurations of the battery meet or exceed some of the
performance goals established by major governmental and industry
groups for electric vehicle batteries. The Company also believes
the Horizon battery has a number of applications other than
electric vehicles, such as hybrid vehicles, portable power tools
such as lawn and garden tools, electric power management,
uninterruptible power and for starting, lighting and ignition
("SLI") batteries for automobiles and aircraft. The Company has
designed various prototype batteries for such applications which
are currently under evaluation by customers.
Coextrusion Technology
The Company holds an exclusive license for the development and
commercial exploitation of patented coextruded wire. Coextrusion
is a process by which one material is extruded, or forced through
a die, with uniform thickness onto a core material passing
simultaneously through the same die. The process is capable of
extruding lead (or lead alloy) onto any material having adequate
tensile strength to pass at high speed through the pressurized
dies. The Company refers to this process as C2M technology.
Successfully coextruded core materials include fiberglass, Kevlar
and cross-linked carbon fiber yarns, aluminum, copper and
titanium wire and polypropylene, polyester, nylon and
polyethylene monofilament.
Coextruded lead wire facilitates the use in lead-acid batteries
of pure lead or extremely high concentration lead alloys, which
are difficult to cast repeatedly at the high rates required in
production. The management of the Company believes that grids
made from such wire and used in lead-acid storage batteries have
improved corrosion resistance and, therefore, longer life, or
equivalent life with reduced total material content.
Energy-Active Material Formulation
The Company has developed a new type of energy-active material,
or paste, for use in lead-acid battery electrodes. The Company
also invented two additional paste formulations, each of which
may contribute to the reduction of battery manufacturing cost.
The Company has protected this proprietary technology as trade
secrets, and does not plan to apply for patents related to these
formulations. The Company is continuing the development of these
formulations in connection with the Horizon battery project, but
has no current plans for separate commercialization of the energy
active material.
Battery Grid
The Company has patented the use of its coextruded wire in
electrodes for lead-acid batteries. The claims in this patent
encompass not only the present method employed by the Company of
weaving the wire into a woven mesh to form the "bigrids" but also
any non-woven methods of using the coextruded wire in lead-acid
battery electrodes.
Compression Cage
During the development stage of the Company, it was learned
through battery life testing that the plates and separators in a
sealed lead-acid battery must be kept under a constant
compression in order to achieve high cycle life. The Company
developed and patented an idea to encase the plates and
separators in a "compression cage" to comply with this
requirement.
Marketing
The worldwide market for lead-acid batteries can be classified
into the following major segments:
Starting, Lighting and Ignition. For engine starting
applications used in aircraft and motorcycles.
Motive Power. For use in electric vehicles, hybrid
vehicles, industrial fork lifts, golf carts and neighborhood
electric vehicles. Such batteries undergo daily discharging and
overnight recharging.
Power Management. For use in utility emergency power,
telecommunications, uninterrupted computer and other power
supplies and cellular radio. Such batteries are typically used
as a secondary source of power.
Portable Power. Typically small, lead-acid batteries for
use in such items as portable power tools and outdoor power tool
products, as well as electrically driven medical equipment.
The Company has initiated strategic business relationships and
cooperative development agreements with companies and government
agencies in all of the above markets. Management believes that
in 1999 some of these customers could move from test phases to
integration of Horizon battery technology into their commercial
products.
Competition
The lead-acid battery industry is mature, well-established and
highly competitive. The industry is characterized by a few major
domestic and foreign producers including Exide, Delphi, Johnson
Controls, Inc., GNB, Hawker and Yuasa, all of which have
substantially greater financial resources than the Company.
Accordingly, the Company's ability to succeed in this market
depends upon its ability to demonstrate superior performance and
cost attributes of its technology. The Company has historically
concentrated its activities in the electric vehicle segment of
the market with a view to demonstrating improved energy-to-weight
and longer battery life in comparison to traditional lead-acid
batteries. The principal competitors of the Company in the
electric vehicle market (Ovonics and Saft) have directed their
efforts to other battery types, such as nickel-cadmium and nickel-
metal hydride, rather than lead-acid formulations. At least one
major automobile manufacturer and one major battery company are
known to have research and development projects underway to
develop lead-acid batteries for electric vehicles.
Patents and Protection of Technology
Prior to May 1990, the Company held an exclusive sublicense from
Tracor, Inc. ("Tracor") (now part of British Aerospace) under
several US patents covering the coextruded wire and the
coextrusion apparatus for producing composite wire for use only
in lead-acid battery applications. In May 1990, Tracor assigned
to the Company all rights under the original license agreement
between Tracor and Blanyer-Mathews, the inventors of the
coextrusion technology. This assignment terminated the
sublicense between Tracor and the Company and allowed the Company
to apply the technology outside of the area of lead-acid storage
batteries, if any such applications are available. The license
assigned to the Company expires concurrently with the patents,
the earliest of which expires in 2004, and requires payment of
annual minimum royalties to Blanyer-Mathews of the greater of
$100,000 or sales-based royalties equal to 1/2 percent of sales
for battery applications. The license becomes non-exclusive in
the event the Company defaults in its obligation to pay the
minimum royalty. The license may be terminated by the licensor
in the event that the Company defaults in its obligation to pay
sales-based royalties or enters bankruptcy. The Company is
responsible for the maintenance and administration of the
licensed patent. Under the terms of the assignment, the Company
is to pay Tracor a royalty of four percent on all technology
sales unrelated to lead-acid storage batteries for the term of
the license.
In March 1990, a patent was issued to the Company covering an
energy-active material formulation, including the processes for
manufacturing this material. In October 1990, a US patent was
issued to the Company for the Horizon battery design.
In September 1989, a patent was issued to the Company covering
the battery grid and its producing method. In April 1995, a
patent was issued to the Company covering the battery plate
compression assembly.
The know-how relating to the Company's energy-active material
formulation, the application of coextruded wire to battery
electrodes and certain manufacturing processes are confidential
and proprietary to the Company.
Research and Development
Initial research and development programs were directed toward
understanding the behavior of the wire in lead-acid battery
electrodes in various corrosive environments. With the
development of the Horizon C2M battery concept, the focus of
research work has been redirected toward improving the
performance of the battery in the following areas; longer cycle
life, longer shelf life, and increased specific energy. In
addition, programs are underway to reconfigure the Horizon
battery concept into a variety of applications. A limited number
of prototype Horizon batteries for specialized markets (see
"Marketing") continue to be built in attempts to optimize battery
electrical performance and life and to meet customer requests for
different battery configurations or performance. Additionally,
the Company has entered into a development agreement sponsored by
the United States Department of Energy to develop core technology
for a lithium polymer material eventually to be used in
batteries.
The Company incurred approximately $1,800,000, $2,500,000 and
$1,450,000 in research and development costs in the years ended
December 31, 1998, 1997, and 1996, respectively, of which
approximately $415,000, $1,400,000 and $450,000 related to
customer sponsored research activities in the years ended
December 31, 1998, 1997 and 1996, respectively.
Backlog
The Company's backlog was approximately $410,000, $210,000 and
$520,000, respectively, in battery orders at December 31, 1998,
1997 and 1996. The backlog at December 31, 1998 primarily relates
to battery orders from Chrysler and Lockheed Martin which have
been paid in advance. As of December 31, 1998, the Company has a
backlog of approximately $620,000 in project revenue. Essentially
all backlog at December 31, 1998 is expected to be completed in
1999.
Export Sales
During 1998, 1997 and 1996, the Company earned revenue of
approximately $360,000, $1,100,000 and $208,000, respectively,
from sales of Horizon batteries and project services to foreign
customers.
Customer Concentration
A significant portion of the Company's total revenue from battery
sales, project revenue and all other sources (39%, 37% and 81% in
1998, 1997 and 1996, respectively) was generated from Chrysler
Corporation ("Chrysler"). In December 1997, Chrysler announced
its decision to use nickel-metal hydride batteries made by a
competitor in its electric vehicles. Chrysler's purchase of a
significant number of batteries from the Company in the future is
uncertain.
Approximately 38% of the Company's 1998 battery sales were to
Electrosource International Limited ("EIL"), a wholly-owned
subsidiary of Kamkorp. Management of the Company believes that
sales to EIL will increase as a percentage of total sales. The
Company is actively seeking new customers and markets for its
products; however, it is currently economically dependent on this
affiliate and its parent company, Kamkorp. See "Significant
Events and Recent Financial Difficulties" section.
In July 1998, the Company received a non-cancelable purchase
order for 5,800 batteries for delivery during the second half of
1998 from EIL, a newly formed distribution company 100% owned by
Kamkorp. EIL, in turn, received a purchase order for 5,800
batteries from Perusahaan Otomobil Elektrik (Malaysia) Sdn. Bhd.
("POEM"), an emerging Malaysian joint venture company, in which
Kamkorp affiliates hold a significant minority interest, engaged
in the production of electric vehicles developed by companies
within the Kamkorp group. Electrosource delivered 2,062
batteries under the purchase order in 1998, which was less than
half of the scheduled deliveries under that order. The shortfall
in deliveries was due to the fact that the number of electric
vehicles produced and sold by POEM to date has been less than
anticipated. The electric vehicle market is an emerging market
and sales to date have taken longer than expected to negotiate
and finalize. Additionally, vehicle production has been slower
than expected. There have been no deliveries to EIL under the
5,800 battery purchase order in January, February or March 1999.
During February 1999, EIL and Electrosource management
renegotiated the payment terms for the 5,800 battery order.
Advance payments received from EIL were used to settle all
outstanding invoices for batteries previously delivered.
Approximately $40,000 of funds remaining from the advance
payments will be applied to future deliveries under the 5,800
battery purchase order as and when made or for various services
which may be performed. Kamkorp management has stated that they
believe deliveries under this order or another purchase order
will commence early in the second quarter of 1999, but has not
provided a definite delivery schedule. At this time, Kamkorp is
not obligated to purchase batteries under this order in a
specified timeframe.
Sales of existing battery types did not increase as expected in
1998 due to delays in orders from Lockheed Martin and others
testing the battery for use in new products in emerging markets.
Generally, testing of products by customers has taken longer than
expected because of difficulties in integration of battery packs
in new products. Battery packs are being tested simultaneously
with other newly designed components in customer products. An
order from Lockheed Martin for 230 batteries was received in the
first quarter of 1999.
Raw Materials
The basic raw materials of lead-acid batteries are lead, sulfuric
acid and plastic, each of which is readily available. The
Company has experienced no material delays in obtaining timely
delivery of these materials, although the Company's continued
ability to obtain these materials may be limited by its ability
to pay outstanding accounts payable for past raw materials
purchases.
Environmental Concerns
The Company's laboratory facility and manufacturing plant
includes an enclosed area specifically for the mixing of lead-
oxide paste and the application of such paste to battery
electrodes. The air in these areas is continuously filtered to
remove lead particles. Employees operating in these areas are
instructed in the use of safety equipment such as gloves,
protective aprons, and respirators and are required under
Occupational Safety and Health Administration ("OSHA") guidelines
to submit to blood monitoring tests on a periodic basis. The
analysis of these tests are undertaken by an outside, independent
and OSHA approved laboratory and the results thereof are
communicated to the Company's employees.
The management of the Company believes that the energy-active
material developed by the Company may be safer to manufacture
than energy-active materials currently in general use due to
reductions in potential environmental hazards. The active
material paste used in conventional batteries has a consistency
similar to wet cement and must be allowed to dry for two or three
days after being impressed into the grid of a battery plate.
When dried the plates produce fine lead dust as they are
transported in a plant through the battery assembly process.
This airborne dust poses a potential health risk to workers, and
there are OSHA regulations regarding allowable levels of airborne
lead in a battery plant for which manufacturers must devote
significant resources in prevention, treatment, and compliance.
The Company's energy-active material, on the other hand, has a
consistency similar to toothpaste and contains certain binders
which minimize the generation of lead dust, thus minimizing
worker exposure to airborne lead.
As a part of the battery manufacturing process, the Company
handles and disposes of various hazardous materials such as lead
and sulfuric acid. The Company is subject to strict environmental
regulations and has previously incurred significant costs in
installing equipment to manage and control hazardous substances
and pollution. As part of its on-going operations, the Company
incurred $68,000, $37,000 and $13,000 in non-capital expenditures
in 1998, 1997, and 1996, respectively, to properly dispose of
hazardous materials and waste. As a result of such preventive
measures, the Company has not incurred significant remediation
costs. The management of the Company believes that the Company
is currently in compliance with all applicable local, state, and
federal environmental rules and regulations in all material
respects.
Management is not currently aware of any material infrequent or
non-recurring clean-up expenditures to be incurred in the future
based on present circumstances and conditions.
Employees
As of March 19, 1999, the Company employed approximately 55 full-
time employees.
Item 2. Properties.
All of the Company's operations are located in an 88,000 square
foot facility located in San Marcos, Texas at 2809 Interstate 35
South. The monthly rental rate is currently $30,000 per month
and escalates over the life of the lease to $35,000 per month
until expiration in 2003. The Company believes this site is
adequate for low-rate production requirements and possesses
enough expansion capacity if the Company elects to expand
capacity at this site.
Management believes that all personal property used by the
Company is in good condition.
Item 3. Legal Proceedings.
In 1994, the Company signed a "Know-How License Agreement" (the
"Agreement") with Horizon Battery Technologies, Ltd. ("HBTL"), of
Bombay, India, calling for the completion of several detailed
subordinate agreements with the ultimate purpose to license the
manufacture and sale of batteries in India. The effectiveness of
the Agreement was conditioned upon the subsequent execution of
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 claimed damages of approximately $5.1 million for its
expenses and lost profits related to the Agreement. The Company
disputes the claim for damages and will vigorously defend any
action taken by HBTL to pursue the claims. The Company also
filed a petition in State Court in Travis County, Texas, seeking,
among other things, a declaratory judgment that HBTL had no right
to arbitration or monetary relief. HBTL contested jurisdiction
and removed the proceedings to the U.S. Federal Courts. The
Federal District Court to which the action was removed ruled that
it did not have personal jurisdiction over HBTL and therefore had
no power to hear the case. The Company filed an appeal in the
U.S. Fifth Circuit Court of Appeals from the final judgment and
rulings in the District Court, which denied jurisdiction. A
decision on the appeal is expected at any time. If the appeal is
successful, the U.S. Federal Court will have jurisdiction to hear
the case. No liability has been recorded in the financial
statements at December 31, 1998 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 terminated the employment of Gary Sams, an officer of
the Company, in January 1999. On March 10, 1999, Mr. Sams filed
an action in the 207th Judicial District Court (Hays County,
Texas), claiming that he is entitled to compensation under a
Severance Agreement entered into between the Company and Mr. Sams
in May 1998. The suit seeks damages representing, in summary,
compensation at his ending salary rate for the period of time
that Mr. Sams remains unemployed, the amount of premiums paid for
health and group life insurance coverage, housing costs and
attorneys fees. The Company disputes the claim for damages and
will vigorously defend the action. No liability has been recorded
in the financial statements at December 31, 1998 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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Shareholder Matters.
Trading Market for ELSI Common Stock
The Company's Common Stock has been traded in the over-the-
counter market and reported on NASDAQ under the symbol "ELSI"
since January 1988. The following table sets forth, for the
periods indicated, the high and low bid price per share of Common
Stock as reported by NASDAQ. Prices represent inter-dealer
quotations, without adjustment for retail markup, markdown or
commission, and may not represent actual transactions.
High Low
1997
First Quarter 8 3/8 4 5/8
Second Quarter 8 1/4 5 7/16
Third Quarter 7 1/2 5 5/8
Fourth Quarter 7 1/16 1 3/4
1998
First Quarter 2 5/8 3/8
Second Quarter 3 19/32
Third Quarter 2 9/16 7/8
Fourth Quarter 1 5/8 5/8
The transfer agent and registrar for the Common Stock of the
Company is Harris Trust Co. of New York, 88 Pine Street, 19th
Floor, New York, NY 10005.
The approximate number of record holders of Common Stock at March
19, 1999, was 3,492.
On June 2, 1998, the Company entered into an Agreement with
Kamkorp for up to $6,000,000 of equity funding. The Agreement
provided for Kamkorp to purchase an aggregate of 6,000,000 shares
of the Company's Common Stock for cash at $1.00 per share and
grants Kamkorp an option to purchase an additional 3,000,000
shares of the Company's Common Stock at $1.00 per share for cash
or, with the agreement of the Company, for services. Under the
terms of the Agreement, as of December 31, 1998, Kamkorp has
purchased 3,900,000 shares of Common Stock. The Agreement
requires, subject to certain conditions precedent, that Kamkorp
purchase up to an additional $2,100,000 of the Company's Common
Stock at $1.00 per share at a minimum of $300,000 per month
through July 1999. Kamkorp is currently making equity payments as
they deem necessary, rather than as defined in the schedule set
forth in the Agreement.
The securities described above were issued pursuant to exemptions
from registration under Section 4(2) of the Securities Act of
1933 and Rule 506 of Regulation D promulgated thereunder. The
securities were sold to "accredited investors," in offerings not
involving public solicitation or advertising.
Dividends and Dividend Policy
The Company has paid no dividends on its Common Stock to date and
does not anticipate, currently or in the foreseeable future,
paying dividends on the Common Stock. Further, the Company
currently has a deficit in its "surplus" account (defined as the
excess of net assets over par value of shares outstanding) which,
under Delaware corporate law, precludes any distributions to
shareholders in a given year unless the Company reports net
income in that year or the preceding year, in which case
dividends could be paid to the extent of net income for the year
in which the dividend is declared and net income for the fiscal
year immediately preceding the year of declaration. In the event
that the earnings of the Company permit payment of dividends
under Delaware law, the timing and amount of such dividends will
be determined by the Board of Directors in light of the Company's
earnings, financial condition and capital requirements.
Item 6. Selected Financial Data.
(In thousands, except per share data)
Year Ended December 31,
1998 1997 1996 1995 1994
Revenues $ 2,380 3,244 3,563 3,278 4,614
Extraordinary Gain,
net of tax 2,331 - - - -
Loss from Continuing
Operations $(5,862) $(7,833) $(7,825) $(20,508) $(8,543)
Net Loss $(3,530) $(7,833) $(7,825) $(20,508) $(8,543)
Basic (and diluted)
Loss per Share -
continuing
operations $ (0.95) (1.91) (2.13) (9.76) (6.05)
Basic (and diluted)
Loss per Share $ (0.57) (1.91) (2.13) (9.76) (6.05)
Dividends per Share None None None None None
As of Year Ended December 31,
1998 1997 1996 1995 1994
Working Capital
(Deficit) $(2,287) $(1,675) $(2,845) $ 1,556 $ 2,032
Total Assets $ 5,217 $ 8,006 $ 9,488 $ 15,277 $ 9,318
Shareholders' Equity
(Deficit) $ 2,162 $ 1,492 $ 3,847 $ 1,240 $ (685)
Long-Term
Obligations $ 72 $ 2,949 $ 1,768 $11,324 $ 7,107
See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations for discussion of material
uncertainties which may cause the data above not to be indicative
of the Company's future financial condition or results of
operations.
The foregoing should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Disclosure Regarding Forward-Looking Statements
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 completion of existing battery orders,
uncertainty as to receipt of additional orders, inability to
obtain additional debt or equity financing, continued willingness
and ability of Kamkorp and its affiliates to provide agreed-upon
financing, currency controls and other uncertainties arising from
Malaysia and Far East economies upon which the Company is
dependent for equity financing and battery sales, delisting of
the Company's Common Stock on NASDAQ, unanticipated costs or
problems relating to Y2K compliance, 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. Readers are also urged to carefully
review and consider the various disclosures made by the Company
which attempt to advise interested parties of the factors which
affect the Company's business in this report and in the Company's
periodic reports on Forms 10-Q and 8-K filed with the Securities
and Exchange Commission.
Results of Operations
As a result of delays in development work and sales of batteries
and its inability to successfully complete sufficient debt or
equity financing, in February 1998, the Company reduced its
staffing by approximately 40% to reduce costs. On June 2, 1998,
the Company entered into an Agreement with Kamkorp for up to
$6,000,000 of equity funding. The Agreement was structured with
the intent of providing additional equity capital combined with
battery orders for use in electric vehicles, neighborhood
electric vehicles and other applications. Kamkorp is the record
owner of 3,900,000 shares or 46% of the Company's 8,434,531
outstanding shares of Common Stock at December 31, 1998 and,
including options to purchase Common Stock is the beneficial
owner of 9,000,000 shares or 66.5% of the Company's Common Stock.
Kamkorp appointed three members to the Company's eight-member
Board of Directors in 1998.
In late 1998, as a result of delays in development work for new
battery designs, management made the decision to focus on sales
of its standard production battery and to limit the development
work on new battery designs, with the exception of designs using
technology in its standard production battery. The only
development programs which remain active are those with Fiat Auto
("Fiat Auto"), the Defense Advanced Project Agency ("DARPA"), the
Department of Energy ("DOE") and Horizon Aircraft. All others
have been terminated by the customer or the Company. Such
terminations did not have a material adverse effect on the
financial position of the Company.
Sales of existing battery types did not increase as expected in
1998 due to delays in orders from Lockheed Martin and others
testing the battery for use in new products in emerging markets.
Generally, testing of products by customers has taken longer than
expected because of difficulties in integration of battery packs
in new products. Battery packs are being tested simultaneously
with other newly designed components in customer products. An
order for 230 batteries was received from Lockheed Martin in the
first quarter of 1999.
In July 1998, the Company received a non-cancelable purchase
order for 5,800 batteries for delivery during the second half of
1998 from EIL, a newly formed distribution company 100% owned by
Kamkorp. EIL, in turn, received a purchase order for 5,800
batteries from POEM, an emerging Malaysian joint venture company,
in which Kamkorp affiliates hold a significant minority interest,
engaged in the production of electric vehicles developed by
companies within the Kamkorp group. Electrosource delivered
2,062 batteries under the purchase order in 1998, which was less
than half of the scheduled deliveries under that order. The
shortfall in deliveries was due to the fact that the number of
electric vehicles produced and sold by POEM to date has been less
than anticipated. The electric vehicle market is an emerging
market and sales to date have taken longer than expected to
negotiate and finalize. Additionally, vehicle production has been
slower than expected. There have been no deliveries to EIL under
the 5,800 battery purchase order in January, February or March
1999. During February 1999, EIL and Electrosource management
renegotiated the payment terms for the 5,800 battery order.
Advance payments received from EIL were used to settle all
outstanding invoices for batteries previously delivered.
Approximately $40,000 of funds remaining from the advance
payments will be applied to future deliveries under the 5,800
battery purchase order as and when made or for various services
which may be performed. Kamkorp management has stated that they
believe deliveries under this order or another purchase order
will commence early in the second quarter of 1999, but has not
provided a definite delivery schedule. At this time, Kamkorp is
not obligated to purchase batteries under this order in a
specified timeframe.
The Company continues to struggle with insufficient sales to fund
operations and is completely dependent on Kamkorp for funding day-
to-day operations. Although Kamkorp has provided substantial
amounts of financing to the Company to date, as a private company
Kamkorp is not legally required to, and has not, provided
sufficient information to the Company to allow the Company to
determine the financial ability of Kamkorp to make the purchases
of Company Common Stock in levels sufficient to sustain
operations and pay outstanding obligations, which are significant
or to regain and maintain compliance with Nasdaq minimum listing
requirements.
Revenue
The Company generated project revenue of approximately $736,000,
$2,234,000 and $295,000 for the years ended December 31, 1998,
1997 and 1996, respectively. During 1998, approximately $215,000
of revenue generated was from the final resolution and settlement
of a program with a customer which remains confidential. Battery
orders from this customer are not expected in the near future, if
at all. Essentially all the remaining revenue generated in 1998
was from cooperative development and research agreements with
DARPA and DOE for Hybrid Electric Vehicle ("HEV") and Electric
Vehicle ("EV") applications. The DARPA projects are for lead-acid
batteries, while the DOE program is for a lithium polymer which
may eventually be used for a wide variety of applications.
Development work continues on the Fiat program, however no
specific payment milestones were achieved during 1998 to permit
the recognition of revenue on this program. The Fiat program is
expected to be complete in late 1999. During 1997, approximately
$1,500,000 of revenue was generated from SMH Automobile S. A.
("SMH"), DARPA and Fiat for the development and/or evaluation of
batteries and battery packs for HEV and EV applications and
$645,000 was generated from Chrysler for various engineering,
environmental and other tests performed on the battery.
Approximately $115,000 in project revenue in 1996 was generated
from Chrysler for environmental and other tests performed on the
Horizon battery. The remainder of project revenue generated in
1996 was from DARPA, Fiat and various others for the development
of prototype batteries for EV, HEV and portable power tool
applications. The SMH program was terminated by the customer in
1998, and in late 1997, Chrysler announced its decision to use
nickel-metal-hydride batteries made by a competitor. Project
revenue is expected to continue to decline in 1999 as the Company
focuses its efforts on sales of its standard production battery.
The Company had battery sales of approximately $955,000, $915,000
and $823,000 for the years ending December 31, 1998, 1997 and
1996, respectively. Approximately 38% of 1998 battery sales were
to EIL. The Company is actively seeking new customers and markets
for its products, however, it is currently economically dependent
on Kamkorp and its affiliates (See Liquidity and Capital
Resources section below.) Management expects that sales to
companies within the Kamkorp group will increase as a percentage
of total battery sales and that those companies will remain the
largest customer for Horizon batteries in 1999. Approximately
28%, 56% and 50% of 1998, 1997 and 1996 battery sales,
respectively, were to Chrysler. Although Chrysler announced its
decision to use nickel-metal-hydride batteries in its electric
minivan for the 1999 model year, it has continued to order small
amounts of batteries from the Company. Management of the Company
believes Chrysler's purchase of a significant number of batteries
from the Company in the future is uncertain. Approximately 12%
and 28% of 1998 and 1997 battery sales, respectively, were to
Lockheed Martin for use in HEVs and EVs it is producing for fleet
consumers for testing and evaluation. Sales of batteries to
Lockheed Martin are expected to increase slightly in 1999.
Lockheed Martin produces a drive train used in hybrid buses
manufactured by the Orion Bus Company and others. The New York
Transit Authority is currently testing a hybrid diesel bus on the
streets of New York City manufactured by Orion, which is powered
by a Lockheed Martin drive train and Electrosource batteries. The
test is expected to conclude in the second quarter of 1999. If
the results of such tests are favorable, the New York Transit
Authority may place an order for the hybrid buses powered by
Horizon batteries in the second or third quarter of 1999;
however, the amount and timing of such orders remains uncertain.
The remainder of battery sales in all years were from numerous
customers requesting batteries for testing and evaluation.
Battery sales have remained very low in the first quarter of
1999. Management expects the level of battery sales to increase
beginning in the second quarter of 1999, and battery shipments to
EIL are expected to increase. Additionally, management expects to
receive Federal Aviation Administration ("FAA") certification of
its battery design used in helicopter starting applications, in
the second quarter of 1999, at which time sales of these
batteries are expected to commence. However, the amount and
timing of any of these sales remains uncertain. The majority of
these applications are in emerging markets and the entry of final
products into such markets is difficult to predict.
During 1998, the Company received a $1,104,275 purchase order
from Chrysler, which replaced an earlier purchase order for
$1,400,000. The $1,104,275 purchase order was paid in full in
1998. Chrysler designated $656,100 for the purchase order as a
cancellation fee from the previous order and $448,175 for
batteries to be delivered in the future. During 1998, the
Company recorded $656,100 as income as all tasks necessary to
earn the income were performed and there were no further
obligations related to such revenue. Approximately $300,000 of
the battery revenue remains deferred at December 31, 1998 (a
portion of the batteries were delivered in 1998) and will be
recognized upon shipment of the batteries.
In July 1996, the Company received a $3,000,000 payment from
Chrysler. Chrysler designated $2,366,000 of this payment as
compensation for continued capacity maintenance and ramp-up costs
incurred by the Company in relation to its role as a supplier to
the automaker for its EPIC Minivan Program and $634,000 for
various engineering, research and development ("ER&D") efforts.
During 1996, the Company recorded $2,366,000 as income as all
tasks necessary to earn the income were performed and there were
no further obligations related to such revenue. The Company
recorded $634,000 as deferred revenue which was recognized as
income in 1997 as the ER&D tasks were performed.
Costs and Expenses
Manufacturing costs increased by approximately $115,000 or 3%
during 1998 which correlates with the 4% increase in battery
sales for the same period. Manufacturing costs have remained high
as a percentage of battery sales primarily due to the fact that
the Company has not had the capital required to further automate
the production processes, materials are being purchased in low
volumes and the fixed facility costs of leasing and maintaining
its 88,000 square foot facility are significant. Management
expects that manufacturing costs can decrease as a percentage of
battery sales if, and when, volume production begins; however,
additional capital will be required for manufacturing tooling
required for higher production volumes in order to achieve
manufacturing efficiencies and to lower raw material costs. The
timing and amount of battery orders remains uncertain and the
capital which would be required for the related tooling for such
orders may not be available to the Company.
Selling, general and administrative costs decreased by
approximately $556,000 or 22% during 1998 primarily based on the
actions taken in February 1998 to reduce the workforce and
control costs and voluntary salary reductions taken by executive
management beginning in early 1998. Selling, general and
administrative costs decreased by approximately $640,000 or 21%
during 1997 primarily due to cost savings associated with the
consolidation of the Company's corporate and manufacturing
facilities into one location in late 1996, combined with cost
cutting efforts. Management expects selling, general and
administrative costs to remain relatively constant in 1999.
Research and development costs decreased by approximately
$687,000 or 28% in 1998 due to the decrease in work on programs,
primarily SMH and Chrysler. The amount of development work and
related costs have not decreased proportionately with revenue as
a larger proportion of development work and related costs were
incurred in 1998 on programs which did not generate revenue and
on cost-share programs which generate less revenue than
commercial programs. The Company incurred more costs in 1998 than
in 1997 on testing and evaluation of batteries (aircraft,
helicopter and lawnmower applications) and improvements in
manufacturing processes and joint research and development
efforts with Corning. Research and development costs increased by
approximately $1,040,000 or 72% in 1997 due to the significant
increase in development work in 1997 associated with the custom
design of numerous batteries and battery packs for customers
(SMH, Fiat, SMUD, Black & Decker, Chrysler and another which
remains confidential), testing and evaluation of batteries
(aircraft and helicopter starting applications) and costs
associated with joint research and development efforts with
Corning to improve the Company's products, production processes
and automation. It is anticipated that the current level of
research and development expenditures will decrease slightly in
1999 due to reductions in work on programs terminated in 1998.
Depreciation and amortization costs decreased by approximately
$216,000 or 11% during 1998. The majority of the decrease is due
to the full amortization of purchased technology in October 1998,
which resulted in a monthly decrease of approximately $67,000 in
amortization. As a result, amortization expense will decrease by
approximately $670,000 in 1999. The remainder of the decrease in
1998 is due to the full depreciation of various production pieces
of equipment in 1998 which remain in use.
Interest costs decreased slightly during 1998. Interest costs
relate primarily to the Company's previous debt obligations to
Corning and have greatly decreased due to the Company's
retirement of its obligations to Corning in June 1998. During
1997 and early 1998, the Company issued Convertible Notes Payable
to Corning with a principal balance of $6,202,500. Interest
expense consists of interest at the face rate of 5% and
amortization of discounts on the Convertible Notes Payable. In
June 1998, the Company paid Corning $1,500,000 in cash in full
settlement of its outstanding obligations to Corning. An
extraordinary gain on the early extinguishment of debt of
approximately $2,300,000, net of tax, was realized from this
transaction. As a result, interest costs are expected to decrease
significantly in 1999.
As a part of the battery manufacturing process, the Company
handles and disposes of various hazardous materials such as lead
and sulfuric acid. The Company is subject to strict
environmental regulations and has incurred significant costs in
installing equipment to manage and control hazardous substances
and pollution. As part of its on-going operations, the Company
incurred $68,000, $37,000 and $13,000 in non-capital expenditures
in 1998, 1997 and 1996, respectively, to properly dispose of
hazardous materials and waste. As a result of such preventive
measures, the Company has not incurred significant remediation
costs. Management is not currently aware of any material
infrequent or non-recurring clean-up expenditures to be incurred
in the future based on present circumstances and conditions.
The Company has completed an internal assessment of its
information technology systems' readiness for the Year 2000 and
currently believes that the internal modifications necessary for
the Year 2000 are not significant. This is because the Company's
information systems are not complex and have been
purchased/installed over the last few years and the Company
believes that most of the related software is Year 2000 compliant
or Year 2000 compliant replacements are readily available. The
Company also believes embedded software in its manufacturing
production equipment is either not year sensitive or was
developed considering the impact of the Year 2000 issues. The
Company began testing its systems for the Year 2000 readiness in
1998 and the project is estimated to be complete in late 1999,
prior to any estimated impact. The Company does not expect the
costs of this project to be material or for it to have a
significant effect on operations and believes that with
modifications to existing software and conversions to new
software, the Year 2000 issue will not pose significant
operational problems.
The Company has not completed its external assessment with key
customers and suppliers to determine their ability to achieve
timely and successful Year 2000 compliance with their
systems/equipment. The Company might be adversely affected by the
potential failure of its suppliers and customers to remediate
their Year 2000 issues. The Company expects to complete its
external assessment of Year 2000 compliance with key customers
and vendors in the second calendar quarter of 1999. The Company
has been and will continue to contact its key customers and
suppliers to inquire about their Year 2000 readiness. In the
event that a supplier will not be Year 2000 compliant in a timely
manner, the Company will contact alternate suppliers for the
respective parts. The Company has not determined the likelihood
of such events as of December 31, 1998.
The costs of the project and the date on which the Company
believes it will complete the Year 2000 modifications are based
on management's best estimates, which were derived utilizing
numerous assumptions of future events, including the continued
availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved
and actual results could differ materially from those
anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and
cost of personnel trained in this area and the ability to locate
and correct all relevant computer codes and similar
uncertainties.
During the years ended December 31, 1998, 1997 and 1996, the
Company issued approximately 3,900,000 shares, 677,000 shares and
844,000 shares of Common Stock, respectively. As a result of the
increase in shares for these years, the loss per share in each
was less than it would have been based on the shares outstanding
at the end of the preceding year. Management of the Company
believes that the issuance of shares in these years was necessary
to fund the increased working capital and capital expenditure
requirements.
Liquidity and Capital Resources
During 1998, the Company did not generate sufficient cash flow
from operations to fund its working capital needs. In January
and February 1998, the Company borrowed the remaining $1,000,000
of 5% Convertible Notes from Corning in accordance with the terms
of its $2,000,000 Note signed in December 1997. Existing battery
orders and contract work were not adequate to sustain the Company
on a ongoing basis. As a result, in February 1998, the Company
reduced its staffing by approximately 40% to reduce costs and
began to explore strategic alternatives.
On June 2, 1998, the Company entered into an Agreement with
Kamkorp for up to $6,000,000 of equity funding for 6,000,000
Common Shares at $1.00 per share. In 1998, 3,900,000 shares of
the Company's Common Stock were purchased by Kamkorp for
$3,900,000. The Agreement requires that Kamkorp purchase up to an
additional 2,100,000 shares of Common Stock at $1.00 per share at
a minimum rate of 300,000 shares per month through July 1999.
Kamkorp is currently making equity payments as they deem
necessary, rather than as defined in the schedule set forth in
the Agreement. Kamkorp's obligation to make these purchases is
dependent upon the absence of any material change in the
financial position, business or prospects of the Company and upon
certain other conditions precedent, such as the absence of
litigation, absence of defaults on other contracts and
agreements, and compliance with environmental regulations.
In accordance with the terms of the Agreement, Kamkorp has
nominated three members to the Company's corporate Board of
Directors. Kamkorp has the ability to obtain greater than 50% of
the outstanding Common Shares on a fully diluted basis and to
ultimately have control of the Board of Directors. Additionally,
the Company must obtain express approval from Kamkorp for all
important management policies and decisions.
Funds generated in 1998 from the fundraising activities above
were used to payoff the Convertible Notes Payable from Corning
(principal balance of $6,202,500 was fully satisfied with a cash
payment of $1,500,000), to maintain minimum production
capabilities and to sustain operations, to design and develop
custom batteries and battery packs for several applications and
to pay for the lease and maintenance of its 88,000 square foot
manufacturing facility. Capital expenditures of approximately
$87,000 were incurred in 1998, primarily related to further
automation.
The Company received a non-cancelable purchase order for 5,800
batteries for delivery during the second half of 1998 from EIL.
During July 1998, the Company received $507,500 as a down payment
in accordance with the terms of this purchase order. As of
December 31, 1998, 2,062 batteries have been delivered. There
were no deliveries to EIL under the order in January, February or
March 1999. At this time, Kamkorp is not obligated to purchase
batteries under this order in a specified timeframe. Vehicles
sales to date by POEM have been less than anticipated. Sales of
electric vehicles continue to be difficult to predict as they are
in emerging markets. It is anticipated that companies within the
Kamkorp group may place additional orders for delivery in 1999,
however, there is no guarantee or assurance that any additional
batteries will be ordered by, or delivered to, those companies.
From January 1 through March 19, 1999, Kamkorp purchased an
additional 600,000 shares of Common Stock at $1.00 per share.
Kamkorp management has stated that the remaining and future
purchases of Common Stock (more or less than those defined in the
Agreement) will be made in the amount and timeframe they deem
necessary to sustain the Company's operations and execute the
approved business plan. Payments to date have been made in
amounts necessary to meet the Company's payroll and rent
obligations, however, approximately 90% of projected 1999 battery
sales in the approved business plan are to Kamkorp affiliates and
the portion of those sales initially expected to occur in the
first quarter of 1999 did not occur. Although Kamkorp has
provided substantial amounts of financing to the Company to date,
as a private company Kamkorp is not legally required to, and has
not, provided sufficient information to the Company to allow the
Company to determine the financial ability of Kamkorp to make the
remaining purchases of Company Common Stock.
Cash balances have been depleted and the Company is currently
dependent on cash payments from Kamkorp and its affiliates to
continue operations on a day-to-day basis. The Company has
approximately $800,000 of outstanding accounts payable greater
than thirty days past due, most of which is payable to raw
material suppliers, some of which date back to June 1998. Certain
of these vendors have threatened legal action for non-payment of
invoices. Cash generated from battery sales and contracts with
other customers is not sufficient to fund operations. Cash
payments from Kamkorp and its affiliates to date have been
sufficient to fund payroll and rent obligations, but not to pay
the outstanding accounts payable or raw material purchases. If a
significant battery order is received, significant funding will
be required to pay the outstanding accounts payable to allow
ordering of additional raw materials. There is no assurance that
future payments from Kamkorp or its affiliates, if any, will be
made in a timeframe sufficient to sustain operations. Funding
beyond the minimum $300,000 per month, specified in the
Agreement, additional battery orders, or other financing will be
required in the second quarter of 1999 to continue operations,
pay outstanding obligations and regain and maintain compliance
with Nasdaq minimum listing standards. The Company is discussing
the possibility of accelerated or additional financing from
Kamkorp, which could be provided under the terms of the
Agreement, including Kamkorp's exercise of all or a portion of
its option to purchase 3,000,000 shares of the Company's Common
Stock at $1.00 per share. Absent additional funding from Kamkorp
or other sources, the Company will not have the funds necessary
to complete battery orders from Kamkorp affiliates or other
customers or to pay all outstanding obligations and will not be
able to continue as a going concern.
In December 1997, the Company issued 299,304 shares of Common
Stock to BDM as partial payment for past obligations owed to BDM
for occupancy related costs ($314,875, which the Company had
accrued) and as prepayment under operating leases for
manufacturing equipment which are guaranteed by BDM ($452,092).
The number of shares issued was determined based on the fair
market value of the shares at the date of the agreement ($2.56
per share). When the shares are sold by BDM, the proceeds will
be used to satisfy these obligations. If the proceeds from the
sale of such shares are not sufficient to satisfy the
obligations, the Company will issue additional shares of Common
Stock or pay cash to BDM to make up the deficiency. BDM has
agreed to accept a minimum of $1.00 per share or $299,304 for the
shares issued. BDM will retain any overage from the sale of such
shares in excess of the obligations. The Company recorded the
shares issued to BDM at fair market value on the date of the
agreement ($766,967) and recorded a subscription receivable for
the difference between the fair market value of the shares and
the minimum value for such shares accepted by BDM which will be
recorded as permanent equity upon final determination of the
number of shares to be issued. The Company's market price has
been below $2.56 per share for most of 1998. BDM has not notified
the Company of an intent to sell such shares in the near term;
however, unless the value of the Company's Common Stock improves
based on current market prices of the Company's Common Stock,
additional shares of Common Stock or cash will be required to
settle these obligations under the terms of this agreement.
Significant capital expenditures will be required in the future
to further automate and achieve consistency in the production
process; however, such expenditures are not expected to be
significant in 1999 to satisfy current battery orders. There
were no significant capital commitments at December 31, 1998.
The Company's Common Stock is traded in the Over-the-Counter
Market and is reported on The Nasdaq Stock Marketsr ("Nasdaq").
In order to maintain listing by Nasdaq under rules which went
into effect in February 1998, the Company must maintain a minimum
$2,000,000 of net tangible assets (total assets, excluding
goodwill, minus total liabilities). The Company was not in
compliance with the requirement before the completion of the
financing transactions and debt extinguishment completed in June
1998. In April 1998, the Company received notice from Nasdaq that
it must present a plan for compliance with listing standards on
or before April 16, 1998. The Company submitted such a plan on
April 15, 1998. On May 13, 1998, the Company was notified by
Nasdaq that its plan was not accepted and it would be delisted
from Nasdaq effective the close of business on May 20, 1998. The
Company filed a request for an oral hearing regarding the
decision. The hearing was held on June 18, 1998. On July 1, 1998,
the Company received written notice from Nasdaq that its shares
would continue to be listed on the Nasdaq Small Cap Market, as
the Company regained compliance with the financial listing
criteria and provided a plan for continued compliance. The
success of this plan is contingent upon equity funding
anticipated to be provided by Kamkorp in accordance with the
terms of the Agreement and successful execution of the Company's
business plan which includes increased revenues and reduced
operating losses and/or additional equity funding. If such
funding is not provided (by Kamkorp or other parties), the
Company will not be able to maintain the required $2,000,000 of
net tangible assets. Additionally, on February 1, 1999, the
Company received written notice from Nasdaq that the closing bid
price of its shares fell below $1.00 for 30 consecutive trade
dates and therefore did not meet the Nasdaq minimum listing
requirements. The written notification stated that within 90
calendar days of the notification, the Company's closing bid
price must be $1.00 or higher for ten consecutive trading days to
satisfy the requirement. This requirement was met on or about
February 18, 1999.
As of March 31, 1999, the Company's net tangible assets were
less than $2,000,000. As a result, the Company was not in
compliance with the minimum listing requirements of Nasdaq and
has advised Nasdaq of that fact. The failure to maintain net
tangible assets in excess of Nasdaq minimum levels has resulted
in part from the failure of the Company to complete battery
orders with EIL and others, resulting in larger than expected net
losses, and in part from the fact that Kamkorp did not make the
anticipated purchases of Company Common Stock as of March 31,
1999. Kamkorp had advised the Company it would make the required
equity investment by that date based on Kamkorp's belief that it
would by then have received a purchase order and downpayment from
EIL. EIL, in turn, was awaiting the receipt of a purchase order
and downpayment from POEM, a Malaysian joint venture in which
Kamkorp affiliates hold a significant minority interest. The
battery order was not finalized in time to make the equity
payment; in addition, the Company had not, at that date, provided
Kamkorp with the necessary information for the determination of
the minimum required additional equity investment. Since March
31, Kamkorp has provided approximately $200,000 in new equity
funds. Kamkorp has advised the Company that it will provide
additional equity funding sufficient to meet the Nasdaq minimum
requirements on receipt of the anticipated purchase order and
downpayment, through EIL, from POEM and of budget information
from the Company sufficient to allow Kamkorp to determine the
extent of funds required. Kamkorp expects that this will occur by
the end of April 1999. As of March 31, 1999, Kamkorp is the owner
of 4,500,000 shares or 49% of the Company's Common Stock and has
the ability to obtain greater than 50% of the outstanding shares
of Common Stock on a fully diluted basis and to ultimately have
control of the Board of Directors. At this time, the consequences
to the Company of the current non-compliance are unknown.
Ordinarily, before, delisting, Nasdaq will allow the Company
notice and an opportunity to present and carry out a plan for
compliance. There can be no assurance that the Company will be
able to meet the minimum listing requirements of Nasdaq and
remain listed in the future. In the event that the Common Stock
were no longer traded on the Nasdaq market, brokers and dealers
effecting trades in the Common Stock would become subject to the
Securities and Exchange Commission rules covering trading in
"penny stocks." These rules generally require that such broker-
dealers make specific disclosures to customers including
information on available bid and asked prices for the stock in
question and compensation to the broker-dealer and his associates
with respect to the proposed trade, and provide periodic reports
as to the market value of a customer's position in penny stocks.
The rules also impose heightened "know your customer"
requirements that require broker-dealers to obtain information,
including personal financial information, from customers
sufficient to allow the broker-dealer to make a determination
that the investment in penny stocks is suitable for the customer
and that the customer is capable of assessing the risks of such
an investment. Broker-dealers may be less willing to effect
trades in any security subject to these rules due to the
additional disclosure, record-keeping and other requirements
imposed by the rules. In addition, some potential investors in
penny stock may be reluctant to provided the required personal
financial information to broker-dealers, which may reduce the
number of potential investors. These factors would likely
further reduce trading liquidity in the Common Stock.
If the Company were delisted from Nasdaq, it would likely be more
difficult to obtain additional funding. There can be no assurance
that additional funding which will generate sufficient cash to
sustain operations can be obtained on terms acceptable to the
Company, if at all. The financial statements do not include any
adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible
inability of the Company to continue as a going concern.
Other
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 claimed damages of approximately $5.1 million for its
expenses and lost profits related to the Agreement. The Company
disputes the claim for damages and will vigorously defend any
action taken by HBTL to pursue the claims. The Company also
filed a petition in State Court in Travis County, Texas, seeking,
among other things, a declaratory judgment that HBTL had no right
to arbitration or monetary relief. HBTL contested jurisdiction
and removed the proceedings to the U.S. Federal Court. The
Federal District Court to which the action was removed ruled that
it did not have personal jurisdiction over HBTL and therefore had
no power to hear the case. The Company filed an appeal in the
U.S. Fifth Circuit Court of Appeals from the final judgment and
rulings in the Federal District Court, which denied jurisdiction.
A decision on the appeal is expected at any time. If the appeal
is successful, the U.S. Federal Court will have jurisdiction to
hear the case. No liability has been recorded in the financial
statements at December 31, 1998 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 terminated the employment of Gary Sams, an officer of
the Company, in January 1999. On March 10, 1999, Mr. Sams filed
an action in the 207th Judicial District Court (Hays County,
Texas), claiming that he is entitled to compensation under a
Severance Agreement entered into between the Company and Mr. Sams
in May 1998. The suit seeks damages representing, in summary,
compensation at his ending salary rate for the period of time
that Mr. Sams remains unemployed, the amount of premiums paid for
health and group life insurance coverage, housing costs and
attorneys fees. The Company disputes the claim for damages and
will vigorously defend the action. No liability has been recorded
in the financial statements at December 31, 1998 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.
Management of the Company believes that inflation does not have a
material effect on the Company's results of operations.
Item 7a. Qualitative and Quantitative Disclosures About Market
Risk.
The Company does not hold financial investments or instruments
subject to market risk, therefore disclosures about market risk
are not applicable.
Item 8. Financial Statements and Supplementary Data.
See Item 14(a) for an index of the financial statements and
schedules included as a part of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of Registrant.
Information with regard to directors and executive officers and
their business experience is set forth under "ELECTION OF
DIRECTORS" in the Company's Definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on May 18, 1999, and is
incorporated herein by reference.
Information with regard to the filing of reports of ownership and
changes of ownership by the Company's directors, officers, and
persons who beneficially own more than ten percent of a
registered class of the Company equity securities is set forth
under "ELECTION OF DIRECTORS - Section 16(a) Disclosure" in the
Company's Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 18, 1999, and is incorporated
herein by reference.
Item 11. Executive Compensation.
Information with regard to executive compensation and pension or
similar plans is set forth under "ELECTION OF DIRECTORS -
Compensation of Executive Officers and Directors" in the
Company's Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 18, 1999, and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Information with regard to security ownership of certain
beneficial owners and management is set forth under "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the
Company's Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 18, 1999, and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information with regard to certain transactions is set forth
under "ELECTION OF DIRECTORS - Compensation Committee Interlocks
and Insider Participation" and "ELECTION OF DIRECTORS - Certain
Relationships and Related Transaction" in the Company's
Definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on May 18, 1999, and is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
(a)(1) The following financial statements of the Company are
included in Item 8:
Page
No.
Balance Sheets -- December 31, 1998 F-3
and 1997
Statements of Operations -- For the
years ended
December 31, 1998, 1997 and 1996 F-4
Statements of Shareholders' Equity
- -- For the years ended
December 31, 1998, 1997 and 1996 F-5
Statements of Cash flows -- For the
years ended
December 31, 1998, 1997 and 1996 F-6
Notes to Financial Statements -- F-7
December 31, 1998
(a)(2) Financial Statement Schedules
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are included in the notes to financial statements, not required
under the related instructions or are inapplicable, and therefore
have been omitted.
(a)(3) Exhibits
3.1 Restated Certificate of Incorporation of
Electrosource, Inc. (filed as Exhibit 3.1 to
Electrosource, Inc., Registration Statement on Form 10
filed October 19, 1987, as amended by Form 8
Amendments filed January 8, 1988 and January 13, 1988
(hereinafter referred to as "Form 10") and
incorporated herein by reference).
3.2 Certificate of Designation, Preferences, Rights and
Limitations of 1992 Series A Preferred Stock and
Series A-1 Preferred Stock of Electrosource, Inc. as
filed of record with the Delaware Secretary of State
on January 15, 1992 (filed as Exhibit 4.1 to
Electrosource, Inc. Form 8-K Current Report for
Issuers Subject to the 1934 Act Reporting Requirements
filed December 24, 1991 and incorporated herein by
reference).
3.3 Amendment to Restated Certificate of Incorporation of
Electrosource, Inc., increase in authorized shares to
50,000,000 shares (filed as Exhibit 3.1 to
Electrosource, Inc., Quarterly Report on Form 10-Q for
quarter ended June 30, 1995 and incorporated herein by
reference).
3.4 Amendment to Restated Certificate of Incorporation of
Electrosource, Inc., elimination of Certificate of
Designation for Series A and Series A-1 Preferred
Stock (filed as Exhibit 3.2 to Electrosource, Inc.,
Quarterly Report on Form 10-Q for quarter ended June
30, 1995 and incorporated hereby by reference).
3.5 Amendment to the Restated Certificate of Incorporation
of Electrosource filed as of July 22, 1996 (filed as
Exhibit 3.1 to Electrosource, Inc. Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 and
incorporated herein by reference).
3.6 Bylaws of Electrosource, Inc. (filed as Exhibit 3.2 to
Form 10 and incorporated herein by reference).
3.7 Amendment to Bylaws of Electrosource, Inc., pursuant
to a Certificate of Secretary dated May 25, 1990
(filed as Exhibit 3.3 to Electrosource, Inc., Annual
Report on Form 10-K for the period ended December 31,
1991 and incorporated herein by reference).
3.8 Amendment to Bylaws of Electrosource, Inc. dated
November 3, 1993 (filed as Exhibit 3.5 to
Electrosource, Inc., Annual Report on Form 10-K for
the period ended December 31, 1993 and incorporated
herein by reference).
3.9 Amendment to Bylaws of Electrosource, Inc. dated June
23, 1994 (filed as Exhibit 3.6 to Electrosource, Inc.
Annual Report filed on Form 10-K for the period ended
December 31, 1994 and incorporated herein by
reference).
3.10 Amendment to Bylaws of Electrosource, Inc. dated
November 13, 1996 (filed as Exhibit 3.10 to
Electrosource, Inc. Annual Report filed on Form 10-K
for the period ended December 31, 1996 and
incorporated herein by reference).
4.1 Warrant to purchase up to 5,424 shares of
Electrosource, Inc. Common Stock issued to Rosehouse
Ltd., a Bermuda-based institutional buyer, dated April
5, 1995 (filed as an Exhibit to Electrosource, Inc.
Current Report on Form 8-K filed April 12, 1995 and
incorporated herein by reference).
4.2 Warrant to purchase up to 5,000 shares of
Electrosource, Inc. Common Stock issued to Ally
Capital Management, Inc. on April 17, 1995 (filed as
Exhibit 4.1 to Electrosource, Inc. Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995 and
incorporated herein by reference).
4.3 Warrant to purchase up to 25,000 shares of
Electrosource, Inc., Common Stock, issued to Rosehouse
Ltd., a Bermuda-based institutional buyer, dated July
27, 1995 (filed as Exhibit 4.4 to Electrosource, Inc.
Quarterly Report on Form 10-Q for quarter ended June
30, 1995 and incorporated herein by reference).
4.4 Warrant (Stock Option Agreement No. W12-101) to
purchase up to 20,000 shares of Electrosource, Inc.,
Common Stock, issued to Corning Incorporated dated
December 31, 1997 for payment of that certain Project
Annex dated October 20, 1997 (filed as Exhibit 4.16 to
Electrosource, Inc. Annual Report on Form 10-K for the
period ended December 31, 1997 and incorporated herein
by reference).
4.5 Warrant (Stock Option Agreement No. W12-102A) to
purchase up to 70,000 shares of Electrosource, Inc.,
Common Stock, issued to Corning Incorporated dated
December 31, 1997 for payment on that certain Project
Annex dated October 20, 1997 (filed as Exhibit 4.17 to
Electrosource, Inc. Annual Report on Form 10-K for the
period ended December 31, 1997 and incorporated herein
by reference).
4.6 Warrant (Stock Option Agreement No. W12-103A) to
purchase up to 70,000 shares of Electrosource, Inc.,
Common Stock, issued to Corning Incorporated dated
December 31, 1997 for payment on that certain Project
Annex dated October 20, 1997 (filed as Exhibit 4.18 to
Electrosource, Inc. Annual Report on Form 10-K for the
period ended December 31, 1997 and incorporated herein
by reference).
4.7 Warrant (Stock Option Agreement No. W12-102B) to
purchase up to 60,000 shares of Electrosource, Inc.
Common Stock, issued to Corning Incorporated dated May
29, 1998 for payment of that certain Project Annex
dated October 20, 1997.
4.8 Warrant (Stock Option Agreement No. W12-103B) to
purchase up to 60,000 shares of Electrosource, Inc.
Common Stock, issued to Corning Incorporated dated May
29, 1998 for payment of that certain Project Annex
dated October 20, 1997.
10.1 Sublicense Agreement dated as of October 5, 1987
between Electrosource, Inc. and Tracor, Inc. (filed as
Exhibit 10.4 to Form 10 and incorporated herein by
reference).
10.2 Patent and Technology Exclusive License Agreement
dated August 14, 1984 between Tracor, Inc. and Blanyer-
Mathews Associates, Inc. ("BMA") (filed as Exhibit
10.9 to Registration Statement [No 33-30486] on Form S-
1 filed August 14, 1989 hereinafter referred to as
"Form S-1" and incorporated herein by reference).
10.3 Amendment to Patent and Technology Exclusive License
Agreement dated May 29, 1987 between Tracor, Inc. and
BMA (filed as Exhibit 10.10 to Form S-1 and
incorporated herein by reference).
10.4 Bonus Royalty Agreement dated May 26, 1989 among
Electrosource, Inc., Tracor, Inc., and BMA (filed as
Exhibit 19 to Electrosource, Inc. Quarterly Report on
Form 10-Q for the quarter ended June 30, 1989 and
incorporated herein by reference).
10.5 Amendment to Bonus Royalty Agreement entered into as
of November 30, 1989 by and among BMA, Tracor, Inc.
and Electrosource, Inc. (filed as Exhibit 10.17 to
Post Effective Amendment No. 1 to Form S-1
Registration Statement [No. 33-34581] filed December
11, 1989 hereinafter referred to as "Post-Effective
Amendment" and incorporated herein by reference).
10.6 Assignment of Patent License dated as of May 14, 1990
by and between Electrosource, Inc. and Tracor, Inc.
(joined by BMA for limited purposes described therein)
(filed as Exhibit 10.20 to the Company's Annual Report
on Form 10-K for the period ended December 31, 1990
hereinafter referred to as the "1990 Form 10-K" and
incorporated herein by reference).
10.7 Letter Agreement dated as of January 15, 1991 between
Electrosource, Inc. and BMA (filed as Exhibit 10.21 to
the Company's 1990 Form 10-K and incorporated herein
by reference).
10.8 License Modification Agreement dated January 16, 1992
between Blanyer Mathews & Associates, Inc.,
Electrosource, Inc. and Battery Horizons, Ltd. (filed
as Exhibit 10.23 to Electrosource, Inc. Annual Report
on Form 10-K for the period ended December 31, 1991
and incorporated herein by reference).
10.9 First Amendment to Assignment of Patent License dated
April 2, 1992 between Electrosource, Inc. and Tracor,
Inc. (filed as Exhibit 10.58 to Company's Registration
Statement [No. 33-65248] on Form S-1 filed June 30,
1993 and incorporated herein by reference).
10.10 Lease Agreement between Aetna Life Insurance Company
and Electrosource, Inc. dated February 22, 1992 (filed
as Exhibit 10.25 to Electrosource, Inc. Annual Report
on Form 10-K for the period ended December 31, 1991
and incorporated herein by reference).
10.11 First Amendment to Lease Agreement between Aetna Life
Insurance Company and Electrosource, Inc. dated
February 24, 1993 (filed as Exhibit 10.27 to
Electrosource, Inc. Annual Report on Form 10-K for the
period ended December 31, 1992 and incorporated herein
by reference).
10.12 Second Amendment to Lease Agreement between Aetna Life
Insurance Company and Electrosource, Inc. dated March
1, 1996 (filed as Exhibit 10.14 to Electrosource, Inc.
Annual Report on Form 10-K for the period ended
December 31, 1995 and incorporated herein by
reference).
10.13 Sublease Agreement between Electrosource, Inc. and
Merit Printing, Inc. dated February 24 1997 (filed as
Exhibit 10.13 to Electrosource, Inc. Annual Report on
Form 10-K for the period ended December 31, 1997 and
incorporated herein by reference).
10.14 Lease Agreement between William D. McMorris and
Horizon Battery Technologies, Inc. dated August 17,
1993 (filed as Exhibit 10.42 to Electrosource Inc.
Annual Report on Form 10-K for the period ended
December 31, 1994 and incorporated herein by
reference).
10.15 Lease Agreement between William D. McMorris and
Electrosource, Inc. dated May 29, 1998 (filed as
Exhibit 10.1 to Electrosource, Inc. Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998 and
incorporated herein by reference).
10.16 Amendment to Business Alliance and License Agreement
dated November 1, 1995 between Electric Power Research
Institute and Electrosource, Inc. (filed as Exhibit
10.2 to Electrosource, Inc. Quarterly Report on Form
10-Q for the quarter ended September 30, 1995 and
incorporated herein by reference).
10.17 Stock Purchase Agreement together with the Asset and
Technology License Agreement dated January 31, 1995
between BDM Technologies, Inc. and Electrosource, Inc.
(filed as Exhibit 10.46 to Electrosource, Inc. Annual
Report on Form 10-K for the period ended December 31,
1994 and incorporated herein by reference).
10.18 First Amendment to Asset and Technology License
Agreement between BDM International, Inc. and
Electrosource, Inc. dated December 18, 1997 (filed as
Exhibit 10.17 to Electrosource, Inc. Annual Report on
Form 10-K for the period ended December 31, 1997 and
incorporated herein by reference).
10.19 Termination Agreement between Electrosource, Inc. and
Mitsui Engineering and Shipbuilding Co., Ltd. Dated
March 6, 1996 (filed as Exhibit 10.36 to
Electrosource, Inc. Annual Report on Form 10-K for the
period ended December 31, 1995 and incorporated herein
by reference).
10.20 Purchase Agreement between Quantum Energy Systems and
Technology LLC and Electrosource, Inc., dated November
14, 1994, (filed as Exhibit 10.44 to Electrosource,
Inc., Annual Report on Form 10-K for the period ended
December 31, 1994 and incorporated herein by
reference).
10.21 Equipment Lease Agreement dated September 7, 1995,
between Salem Capital Corporation and Electrosource,
Inc. (filed as Exhibit 10.65 to Electrosource, Inc.
Annual Report on Form 10-K for the period ending
December 31, 1995 and incorporated herein by
reference).
10.22 Development Agreement and Agreement for Purchase of
Machinery and Supplies between Electrosource, Inc.,
and Charles L. Mathews ("Contractor") dated November
1, 1995 (filed as Exhibit 10.68 to Electrosource, Inc.
Annual Report on Form 10-K for the period ending
December 31, 1995 and incorporated herein by
reference).
10.23 Agreement for Aircraft Starting Battery Distribution
between Electrosource, Inc. and Horizon Aviation, Inc.
dated February 13, 1996 (filed as Exhibit 10.70 to
Electrosource, Inc. Annual Report on Form 10-K for the
period ending December 31, 1995 and incorporated
herein by reference).
10.24 Memorandum of Understanding between Electrosource,
Inc. and Lockheed Martin Corporation dated March 15,
1996 (filed as Exhibit 10.1 to Electrosource, Inc.
Quarterly Report on Form 10-Q for quarter ended March
31, 1996 and incorporated herein by reference).
10.25 Letter of Agreement between Electrosource, Inc. and
Ally Capital Corporated dated December 18, 1996 (filed
as Exhibit 4.9 to Electrosource, Inc. Registration
Statement [No. 333-20103] Form S-3 Amendment No. 1 on
April 18, 1997 and incorporated herein by reference).
10.26 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. Registration Statement
[No. 333-20103] Form S-3 Amendment No. 1 on April 18,
1997 and incorporated herein by reference).
10.27 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. Registration Statement
[No. 333-20103] Form S-3 Amendment No. 1 on April 18,
1997 and incorporated herein by reference).
10.28 Subscription Agreements between participants and
Electrosource, Inc. dated January 23, 1997 (filed as
Exhibit 4.9 to Electrosource, Inc. Registration
Statement [No. 333-25659] Form S-3 on April 23, 1997
and incorporated herein by reference).
10.29 Amendment Number One to Stock Purchase Warrant dated
August 18, 1998, issued under Subscription Agreements
between participants and Electrosource, Inc. dated
January 23, 1997 (filed as Exhibit 10.2 to
Electrosource, Inc. Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 and incorporated
herein by reference).
10.30 Note Purchase and Option Agreement for $4 million
dated March 27, 1997 between Electrosource, Inc. and
Corning Incorporated (filed as Exhibit 4.1 to
Electrosource, Inc. Quarterly Report on Form 10-Q for
quarter ended March 31, 1997 and incorporated herein
by reference).
10.31 5% Convertible Promissory Note for $100,000 dated
September 27, 1997 between Electrosource, Inc. and
Corning Incorporated for payment of interest due on
the Note Purchase and Option Agreement dated March 27,
1997 (filed as Exhibit 10.31 to Electrosource, Inc.
Annual Report on Form 10-K for the period ended
December 31, 1997 and incorporated herein by
reference).
10.32 5% Convertible Promissory Note for $102,500 dated
March 27, 1998 between Electrosource, Inc. and Corning
Incorporated for payment of interest due on the Note
Purchase and Option Agreement dated March 27, 1997 and
Promissory Note dated September 27, 1997 (filed as
Exhibit 10.32 to Electrosource, Inc. Annual Report on
Form 10-K for the period ended December 31, 1997 and
incorporated herein by reference).
10.33 Amendment No. 1 dated December 22, 1997 to Stock
Option Agreement dated March 27, 1997 between Corning
Incorporated and Electrosource, Inc. (filed as Exhibit
10.33 to Electrosource, Inc. Annual Report on Form 1o-
K for the period ended December 31, 1997 and
incorporated herein by reference).
10.34 Research and Development Umbrella Agreement dated July
1, 1997 between Corning Incorporated and
Electrosource, Inc. (filed as Exhibit 10.34 to
Electrosource, Inc. Annual Report on Form 10-K for the
period ended December 31, 1997 and incorporated herein
by reference).
10.35 Project Annex dated October 20, 1997 to the
Development Umbrella Agreement dated as of July 1,
1997 by and between Corning Incorporated and
Electrosource, Inc., being further defined in Exhibit
1, Project Proposal, Physical and Chemical Description
of Battery Electrode "Moss." (filed as Exhibit 10.35
to Electrosource, Inc. Annual Report on Form 10-K for
the period ended December 31, 1997 and incorporated
herein by reference).
10.36 Project Annex dated October 20, 1997 to the
Development Umbrella Agreement dated as of July 1,
1997 by and between Corning Incorporated and
Electrosource, Inc., being further defined in Exhibit
1, Project Proposal, Engineering Resources (filed as
Exhibit 10.36 to Electrosource, Inc. Annual Report on
Form 10-K for the period ended December 31, 1997 and
incorporated herein by reference).
10.37 Project Annex dated October 20, 1997 to the
Development Umbrella Agreement dated as of July 1,
1997 by and between Corning Incorporated and
Electrosource, Inc., being further defined in Exhibit
1, Project Proposal, Characterization of Electrode
Materials and Collector Grid Materials (filed as
Exhibit 10.37 to Electrosource, Inc. Annual Report on
Form 10-K for the period ended December 31, 1997 and
incorporated herein by reference).
10.38 Note Purchase Agreement for $2 million dated December
19, 1997 between Electrosource, Inc. and Corning
Incorporated (filed as Exhibit 10.39 to Electrosource,
Inc. Annual Report on Form 10-K for the period ended
December 31, 1997 and incorporated herein by
reference).
10.39 Agreement dated May 29, 1998 between Corning
Incorporated and Electrosource, Inc. terminating the
Note Purchase and Option Agreement dated March 27,
1997, the Note Purchase Agreement dated December 19,
1997 and the Research and Development Umbrella
agreement dated July 1, 1997 (filed as Exhibit 10.2 to
Electrosource, Inc. Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 and incorporated
herein by reference).
10.40 Amendment dated June 15, 1998 to May 29, 1998
Agreement terminating Notes between Corning
Incorporated and Electrosource, Inc. for a one-day
extension for payment (filed as Exhibit 10.3 to
Electrosource, Inc. Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 and incorporated
herein by reference).
10.41 Stock Purchase Agreement dated June 2, 1998 between
Kamkorp and Electrosource, Inc. (filed as Exhibit 4.1
to Electrosource, Inc. Form 8-K dated June 11, 1998
and incorporated herein by reference).
10.42 Registration Rights Agreement dated June 2, 1998
between Kamkorp and Electrosource, Inc. (filed as
Exhibit 4.2 to Electrosource, Inc. Form 8-K dated June
11, 1998 and incorporated herein by reference).
10.43 Severance Agreement between officers/key employees and
Electrosource, Inc. dated August 25, 1997 (filed as
Exhibit 10.38 to Electrosource, Inc. Annual Report on
Form 10-K for the period ended December 31, 1997 and
incorporated herein by reference).
10.44 Form of Severance Agreement between officers/key
employees and Electrosource, Inc. dated May 18, 1998
(filed as Exhibit 10.4 to Electrosource, Inc.
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 and incorporated herein by reference).
10.45 Purchase Order for Horizon Batteries Pack Development
Program between Fiat Auto and Electrosource, Inc.
dated September 30, 1996 (filed as Exhibit 10.40 to
Electrosource, Inc. Annual Report on Form 10-K for the
period ended December 31, 1997 and incorporated herein
by reference).
10.46 Frame-Development Contract dated March 14, 1997
between SMH Automobile S.A. and Electrosource, Inc.
(filed as Exhibit 10.41 to Electrosource, Inc. Annual
Report on Form 10-K for the period ended December 31,
1997 and incorporated herein by reference).
10.47 Summary Contract Amendment Terms dated November 12,
1997 for Frame-Development Contract dated March 14,
1997 between SMH Automobile S.A. and Electrosource,
Inc. (filed as Exhibit 10.42 to Electrosource, Inc.
Annual Report on Form 10-K for the period ended
December 31, 1997 and incorporated herein by
reference).
10.48 Severance Agreement between James M. Rosel and
Electrosource, Inc. effective August 31, 1998 (filed
as Exhibit 10.1 to Electrosource, Inc. Quarterly
Report on Form 10-Q for the quarter ended September
30, 1998 and incorporated herein by reference).
10.49 Purchase Order Number ES1001 between Electrosource
International and Electrosource, Inc. dated June 15,
1998 for 5,800 batteries.
10.50 Purchase Order Number ES1002 (amendment to Purchase
Order Number ES1001) between Electrosource
International and Electrosource, Inc. dated March 3,
1999.
The following exhibits filed under Paragraph 10 of Item 601 are
the Company's compensation plans and arrangements:
10.51 Form of Director Indemnification Agreement (filed as
Exhibit 10.8 to Electrosource, Inc., Annual Report on
Form 10-K for the period ended December 31, 1987 and
incorporated herein by reference).
10.52 Director Indemnification Agreement dated January 16,
1992 between Electrosource, Inc. and Charles Mathews
(filed as Exhibit 10.26 to Electrosource, Inc. Annual
Report on Form 10-K for the period ended December 31,
1991 and incorporated herein by reference).
10.53 Director Indemnification Agreement dated November 4,
1992, between Electrosource, Inc. and Thomas S. Wilson
(filed as Exhibit 10.41 to Electrosource, Inc. Annual
Report on Form 10-K for the period ended December 31,
1992 and incorporated herein by reference).
10.54 Director Indemnification Agreement dated September 1,
1993 between Electrosource, Inc. and Dr. Norman
Hackerman (filed as Exhibit 10.57 to Electrosource, Inc.
Annual Report on Form 10-K for the period ended December
31, 1993 and incorporated herein by reference).
10.55 Director Indemnification Agreement dated June 23, 1994
between Electrosource, Inc. and Michael G. Semmens
(filed as Exhibit 10.72 to Electrosource, Inc. Annual
Report on Form 10-K for the period ended December 31,
1994 and incorporated herein by reference).
10.56 Director Indemnification Agreement dated November 2,
1994 between Electrosource, Inc. and Richard S.
Williamson (filed as Exhibit 10.73 to Electrosource,
Inc. Annual Report on Form 10-K for the period ended
December 31, 1994 and incorporated herein by reference).
10.57 Director Indemnification Agreement dated June 22, 1995
between Electrosource, Inc. and Nathan Morton (filed as
Exhibit 10.2 to Electrosource, Inc. Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995 and
incorporated herein by reference).
10.58 Director Indemnification Agreement dated June 22, 1995
between Electrosource, Inc. and William R. Graham (filed
as Exhibit 10.1 to Electrosource, Inc. Quarterly Report
on Form 10-Q for the quarter ended June 30, 1995 and
incorporated herein by reference).
10.59 Director Indemnification Agreement dated March 3, 1997
between Electrosource, Inc. and Richard E. Balzhiser
(filed as Exhibit 10.51 to Electrosource, Inc. Annual
Report on Form 10-K for the period ended December 31,
1997 and incorporated herein by reference).
10.60 Director Indemnification Agreement dated August 26, 1997
between Electrosource, Inc. and Earl E. Gjelde (filed as
Exhibit 10.52 to Electrosource, Inc. Annual Report on
Form 10-K for the period ended December 31, 1997 and
incorporated herein by reference).
10.61 Director Indemnification Agreement dated June 2, 1998
between Electrosource, Inc. and Kamal Siddiqi (files as
Exhibit 10.5 to Electrosource, Inc. Quarterly Report on
Form 10-Q for the period ended June 30, 1998 and
incorporated herein by reference).
10.62 Director Indemnification Agreement dated June 2, 1998
between Electrosource, Inc. and Clifford Winkless (filed
as Exhibit 10.6 to Electrosource, Inc. Quarterly Report
on Form 10-Q for the period ended June 30, 1998 and
incorporated herein by reference).
10.63 Director Indemnification Agreement dated June 2, 1998
between Electrosource, Inc. and Roger Musson (filed as
Exhibit 10.7 to Electrosource, Inc. Quarterly Report on
Form 10-Q for the period ended June 30, 1998).
10.64 Director Indemnification Agreement dated December 23,
1998 between Electrosource, Inc. and William F. Griffin.
10.65 Director Indemnification Agreement dated December 23,
1998 between Electrosource, Inc. and James M. Rosel.
10.66 1987 Stock Option Plan of Electrosource, Inc. (filed as
Annex A, pages 44 to 48 of Electrosource, Inc.
Information Statement filed October 16, 1987 and
incorporated herein by reference).
10.67 Amendment No. 1 to 1987 Stock Option Plan of
Electrosource, Inc. dated February 19, 1992 (filed as
Exhibit 4.3 to Electrosource, Inc. Registration
Statement [No. 33-49049] on Form S-8 filed June 30, 1992
and incorporated herein by reference).
10.68 Amendment No. 2 to 1987 Stock Option Plan of
Electrosource, Inc. (filed as Exhibit 10.36 to
Electrosource, Inc. Annual Report on Form 10-K for the
period ended December 31, 1992 and incorporated herein
by reference).
10.69 1988 Non-Employee Director Option Plan of Electrosource,
Inc. (filed as Exhibit 4.2 to Electrosource, Inc.
Registration Statement [No. 33-22223] on Form S-8 filed
June 7, 1988 and incorporated herein by reference).
10.70 Amendment No. 1 to 1988 Non-Employee Director Stock
Option Plan (filed as Exhibit 4.3 to Electrosource, Inc.
Registration Statement [No. 33-35856] on Form S-8 filed
July 12, 1990 and incorporated herein by reference).
10.71 Amendment No. 2 to 1988 Non-Employee Director Stock
Option Plan (filed as Exhibit 4.4 to Electrosource, Inc.
Registration Statement [No. 33-49042] on Form S-8 filed
June 30, 1992 and incorporated herein by reference).
10.72 Amendment No. 3 to 1988 Non-Employee Director Stock
Option Plan (filed as Exhibit 4.4 to Electrosource, Inc.
Registration Statement [No. 33-64108] on Form S-8 filed
June 9, 1993 and incorporated herein by reference).
10.73 1993 Non-Employee Consultant Stock Option Plan for
Electrosource, Inc. (filed as Exhibit 4.2 to
Electrosource, Inc. Registration Statement [No. 33-
65386] on Form S-8 filed June 30, 1993 and incorporated
herein by reference).
10.74 1994 Stock Option Plan of Electrosource, Inc. (filed as
Exhibit 10.4 to Electrosource, Inc. Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995 and
incorporated herein by reference).
10.75 1996 Stock Option Plan for Electrosource, Inc. (filed as
Exhibit 4.2 to Registration Statement [No. 333-31101] on
Form S-8 and incorporated herein by reference).
24.1 Consent of Ernst & Young LLP
27. Financial Data Schedule
(b) Reports on Form 8-K.
Reports on Form 8-K filed during the quarter ended
December 31, 1998 were:
December 11, 1998, Announcement of
resignation of President, CEO and Chairman.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ELECTROSOURCE, INC.
By: /s/
Date: April 13, 1999 William F. Griffin, President
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/ Chairman, April 13, 1999
President and
William F. Griffin Chief Executive
Officer
Director April ___, 1999
Richard E. Balzhiser
Director April ___, 1999
Norman Hackerman
/s/ Director April 12, 1999
Nathan P. Morton
/s/ Director April 13, 1999
Roger G. Musson
/s/ Director April 12, 1999
James Rosel
/s/ Director April 13, 1999
Kamal Siddiqi
/s/ Director April 13, 1999
Clifford G. Winkless
/s/ Chief Financial April 13, 1999
Officer
Mary Beth Koenig
ELECTROSOURCE, INC.
Audited Financial Statements
December 31, 1998
Audited Financial Statements
Report of Independent Auditors F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Shareholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Electrosource, Inc.
We have audited the accompanying balance sheets of Electrosource,
Inc., as of December 31, 1998 and 1997, and the related statements
of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
Electrosource, Inc. at December 31, 1998 and 1997, and the results
of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully
described in Note O, the Company has incurred recurring operating
losses, has a working capital deficit and revenues have not
resulted in sufficient cash flow to sustain operations. These
conditions raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not
include any adjustments to reflect the possible future effects on
the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of
this uncertainty.
/s/ Ernst & Young LLP
Austin, Texas
March 5, 1999, except for Note O,
as to which the date is April 12, 1999
ELECTROSOURCE, INC.
Balance Sheets
December 31
1998 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 207,246 $ 782,918
Trade receivables 109,520 408,230
Inventories 350,464 322,289
Prepaid expenses and other assets 29,938 376,757
TOTAL CURRENT ASSETS 697,168 1,890,194
PROPERTY AND EQUIPMENT, Net 3,462,157 4,164,459
INTANGIBLE ASSETS
Technology license agreement 3,048,674 3,048,674
Purchased technology - 2,412,886
Less: accumulated amortization (2,046,397) (3,600,213)
NET INTANGIBLE ASSETS 1,002,277 1,861,347
RESTRICTED CASH - 81,604
OTHER ASSETS 55,500 8,500
TOTAL ASSETS $ 5,217,102 $ 8,006,104
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 948,528 $ 518,808
Accrued liabilities 1,308,346 1,668,718
Deferred revenue and advance
payments on batteries 649,893 432,599
Current portion of capital lease
obligations 77,006 72,685
Convertible notes payable - 871,920
TOTAL CURRENT LIABILITIES 2,983,773 3,564,730
CONVERTIBLE NOTES PAYABLE (less
current portion) - 2,800,554
CAPITAL LEASE OBLIGATIONS (less
current portion) 71,512 148,518
COMMITMENTS AND CONTINGENCIES (Notes
H, I and O)
SHAREHOLDERS' EQUITY
Common Stock, par value $1.00 per
share, authorized 50,000,000 shares;
issued and outstanding 8,434,531 in
1998 and 4,534,531 in 1997 8,434,531 4,534,531
Preferred Stock, par value $1.00 per
share; authorized 10,000,000 shares,
no shares issued or outstanding - -
Common Stock subscription receivable (467,663) (467,663)
Warrants (Note J) - -
Paid in capital 51,446,508 51,146,508
Accumulated deficit (57,251,559) (53,721,074)
2,161,817 1,492,302
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 5,217,102 $ 8,006,104
See notes to financial statements.
ELECTROSOURCE, INC.
Statements of Operations
For the years ended December 31,
1998 1997 1996
REVENUES
Battery sales $ 593,864 $ 914,901 $ 822,698
Battery sales - EIL 360,850 - -
Project revenue 735,719 2,233,923 295,015
Cancellation fee 656,100 - -
Capacity maintenance
revenue - - 2,365,535
Interest income 33,218 94,849 79,263
2,379,751 3,243,673 3,562,511
COSTS AND EXPENSES
Manufacturing 3,564,176 3,448,677 3,661,320
Selling, general and
administrative 1,913,128 2,468,778 3,108,909
Research and development 1,803,632 2,490,677 1,450,658
Technology license and
royalties 100,000 110,000 111,271
Depreciation and
amortization 1,699,305 1,915,942 2,042,007
Interest expense 362,040 453,506 487,717
Loss on payment of
capital lease - 189,316 -
Loss on disposal of
equipment - - 525,497
9,442,281 11,076,896 11,387,379
LOSS BEFORE INCOME TAXES (7,062,530) (7,833,223) (7,824,868)
INCOME TAX BENEFIT 1,200,895 - -
LOSS BEFORE EXTRAORDINARY
GAIN (5,861,635) (7,823,223) (7,824,868)
EXTRAORDINARY GAIN FROM
EARLY EXTINGUISHMENT OF
DEBT, NET OF TAX OF
$1,200,895 (NOTE F) 2,331,150 - -
NET LOSS $(3,530,485) $(7,833,223) $(7,824,868)
BASIC (AND DILUTED) LOSS
PER SHARE - CONTINUING
OPERATIONS $ (0.95) $ (1.91) $ (2.13)
BASIC (AND DILUTED) LOSS
PER SHARE $ (0.57) $ (1.91) $ (2.13)
AVERAGE SHARES OUTSTANDING 6,180,010 4,106,695 3,667,776
See notes to financial statements.
ELECTROSOURCE, INC.
Statements of Shareholders' Equity
Common
Stock Total
Common Paid In Subscrip Accumu- Share-
Stock Capital tions lated holders'
Receivable Deficit Equity
Balance at January 1,
1996 $3,013,782 $36,289,050 - $(38,062,983) $1,239,849
Shares issued in
Regulation S
offerings 292,084 2,254,908 - - 2,546,992
Conversion of
Convertible Notes
Payable 484,828 6,176,048 - - 6,660,876
Conversion discount
on Convertible
Notes Payable - 141,750 - - 141,750
Reverse Split -
Fractional Shares
(One-for-Ten) 1,353 (1,353) - - -
Shares issued for
Technology License 56,665 872,665 - - 929,330
Shares issued for
consulting services 6,000 58,800 - - 64,800
Shares issued for
equipment 3,200 14,800 - - 18,000
Stock options issued
for consulting
services - 70,000 - - 70,000
Net loss for year
ended December 31,
1996 - - - (7,824,868) (7,824,868)
Balance at December
31, 1996 3,857,912 45,876,668 - (45,887,851) 3,846,729
Shares issued in
Regulation D offering 109,397 545,453 - - 654,850
Shares issued for
Technology license 76,668 1,172,016 - - 1,248,684
Shares issued for
capital lease
obligations and
equipment purchases 127,500 708,945 - - 836,445
Shares issued for
operating lease 299,304 467,663 (467,663) - 299,304
Shares issued for
consulting services 6,000 58,800 - - 64,800
Exercises of stock
options and warrants 57,750 246,383 - - 304,133
Stock options issued for
technical and
consulting services - 480,000 - - 480,000
Stock options issued in
conjunction with
Convertible Notes
Payable - 1,590,580 - - 1,590,580
Net loss for year ended
December 31, 1997 - - - (7,833,223) (7,833,223)
Balance at December 31,
1997 4,534,531 51,146,508 (467,663) (53,721,074) 1,492,302
Shares issued to
Kamkorp (Note G) 3,900,000 - - - 3,900,000
Stock options issued
for technical and
consulting services - 300,000 - - 300,000
Net loss and compre-
hensive income for
year ended December
31, 1998 - - - (3,530,485) (3,530,485)
Balance at December
31, 1998 $8,434,531 $51,446,508 $(467,663) $(57,251,559) $2,161,817
See notes to financial statements.
ELECTROSOURCE, INC.
Statements of Cash Flows
1998 1997 1996
OPERATING ACTIVITIES
Net loss $(3,530,485) $(7,833,223) $(7,824,868)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Equity instruments issued
for consulting services 300,000 544,800 134,800
Depreciation of property,
plant and equipment 788,945 922,822 1,048,887
Amortization of intangible
assets 859,070 993,120 993,120
Amortization of prepaid
lease expense 299,304 - -
Extraordinary gain from early
extinguishment of debt, net
of tax (2,331,150) - -
Amortization of discounts on
convertible notes payable
and deferred financing costs 169,569 188,728 48,349
Interest expense paid in
convertible notes payable
or common stock 193,002 100,000 105,103
Non-cash interest expense
(conversion discount) - - 141,750
Loss on payment of capital
lease - 189,316 -
Loss on disposal of equipment - - 575,497
Deferred tax benefit (1,200,895) - -
Changes in operating assets and
liabilities:
(Increase) decrease in trade
receivables 298,710 (160,599) 288,118
(Increase) decrease in
inventories (28,175) (73,054) 155,520
(Increase) decrease in
prepaid expenses and
other assets (2,485) 86,865 80,814
Increase (decrease) in accounts
payable and accrued liabilities 69,348 378,934 (234,813)
Increase (decrease) in deferred
revenue and advance payments on 217,294 (724,429) 1,157,028
CASH USED IN OPERATING ACTIVITIES (3,897,948) (5,386,720) (3,330,695)
INVESTING ACTIVITIES
Purchases of property and
equipment, net (86,643) (134,458) (384,069)
CASH USED IN INVESTING ACTIVITIES (86,643) (134,458) (384,069)
FINANCING ACTIVITIES
Proceeds from issuances of
convertible notes payable and
warrants to purchase Common
Stock 1,000,000 5,000,000 -
Payment of notes payable and
capital lease obligations (1,572,685) (685,968) (547,399)
Proceeds from issuances of
common stock, net 3,900,000 958,983 2,546,992
Decrease in restricted cash 81,604 663,220 -
CASH PROVIDED BY FINANCING
ACTIVITIES 3,408,919 5,936,235 1,999,593
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (575,672) 415,057 (1,715,171)
Cash and cash equivalents at
beginning of period 782,918 367,861 2,083,032
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 207,246 $ 782,918 $ 367,861
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
ELECTROSOURCE, INC.
December 31, 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: Electrosource, Inc. (the "Company") was
incorporated as a Delaware corporation on June 3, 1987. The
Company designs and manufactures advanced lead-acid batteries for
use in motive power and starting applications. The majority of
revenue recognized through December 31, 1998, has been derived
from the development and sales of batteries for electric vehicles
and hybrid electric vehicles to automotive manufacturers in the
United States, Malaysia, Italy and Switzerland.
Cash and Cash Equivalents: The Company's cash and cash
equivalents consist of cash and short-term investments with a
maturity of three months or less when purchased.
Inventories: Inventories are stated at the lower of cost (on a
standard, direct materials and direct labor cost basis) or market
value.
Property and Equipment: Property and equipment are recorded at
cost. The Company has also capitalized equipment in accordance
with the terms of related leases. Depreciation of property and
equipment (including amounts recorded under capitalized leases)
is computed using the straight-line method over the estimated
useful lives of the assets or the respective lease term, ranging
from 3 to 10 years.
Technology License Agreement and Purchased Technology: The
Company has been assigned all license rights relating to
coextruded wire by the original licensee (See Note D.) The cost
of this license is being amortized over the legal life of the
patents on the technology (17 years). The patents expire
beginning in 2004. On November 1, 1995, the Company obtained
intellectual property rights (purchased technology) developed
under a Research and Development Agreement (See Note D.) The
cost of this purchased technology was fully amortized in 1998. On
an ongoing basis, the Company reviews the valuation and
amortization of its intangibles, taking into consideration any
events or circumstances which might have diminished their value.
Project Revenue: Projects are accounted for under the percentage
of completion method, wherein revenue is recognized based on
cumulative costs incurred and the estimated cost to complete as
such relates to total contract price. All costs are expensed as
incurred and losses on contracts are estimated and recognized
when it becomes apparent a loss is to be incurred. Certain
projects are billed quarterly or upon the completion of contract
milestones.
Stock Compensation: The Company accounts for its stock
compensation arrangements under the provisions of APB 25,
"Accounting for Stock Issued to Employees."
Basic and Diluted Loss Per Share: Basic and diluted loss per
share is based on the average number of shares of common stock
outstanding during each period. Since the Company has
experienced net operating losses, outstanding options and
warrants to purchase common stock have an antidilutive effect.
Therefore, such options and warrants were not included in the
diluted loss per share calculation.
Business Segments: The Company is engaged in the manufacture of
advanced lead-acid, rechargeable storage batteries and the
development of related processes and technologies. Accordingly,
the Company considers itself to be in one operating segment.
Comprehensive Income: In 1997 the Financial Accounting Standards
Board issued Statement 130, Reporting Comprehensive Income ("SFAS
130"). SFAS 130 establishes new rules for the reporting and
display of comprehensive income and its components. The Company
adopted SFAS 130 effective January 1, 1998, but did not have any
comprehensive income as defined in SFAS 130 during 1998, 1997 or
1996.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes: The Company reports income taxes in accordance
with the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires that deferred tax assets
and liabilities be determined based on the difference between the
financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the years in which the
differences are expected to reverse.
Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
NOTE B - INVENTORIES
1998 1997
Raw materials $147,235 $172,469
Work in progress 61,499 79,774
Finished goods 141,730
70,046
$350,464 $322,289
NOTE C - PROPERTY AND EQUIPMENT
1998 1997
Office equipment $ 801,610 $ 785,529
Production and lab equipment 5,388,291 5,317,729
Leasehold improvements 1,301,018 1,301,018
7,490,919 7,404,276
Less - accumulated
depreciation and amortization (4,028,762) (3,239,817)
Total Property and Equipment $3,462,157 $4,164,459
NOTE D - INTANGIBLE ASSETS
Technology License Agreement
At its inception, the Company obtained an exclusive sublicense
for the development, manufacture and commercial exploitation of
coextruded wire for lead-acid battery applications. The Company
is responsible for the maintenance and administration of the
licensed patent and has an obligation to pay the original
licensee a royalty of four percent on all technology sales
unrelated to lead-acid, storage batteries for the term of the
License Agreement. The Company is obligated to pay the licensor
a royalty of one-half of one percent of net sales of coextruded
wire and wire-related products, with a minimum annual royalty of
$100,000.
Purchased Technology
In November, 1995, the Company completed a research and
development agreement with the Electric Power Research Institute
("EPRI"). In accordance with the terms of a November 1995
amendment to the agreement, the Company issued 215,800 shares of
Common Stock in exchange for the transfer of intellectual
property rights (purchased technology) and the transfer of title
to certain equipment which had been purchased by EPRI in
connection with research activity undertaken by the Company. In
addition, pursuant to the terms of such agreement, certain member
utilities of EPRI have elected to receive royalties at the rate
of one-tenth of one percent on the Company's sales of products
containing licensed technology and on other revenues derived by
the Company from license fees, joint ventures and other
arrangements involving the licensed technology.
NOTE E - ACCRUED LIABILITIES
1998 1997
Payroll and related items $ 111,174 $ 336,461
Due to BDM (Note H) 722,774 614,875
Other 474,398 717,382
$1,308,346 $1,668,718
NOTE F - CONVERTIBLE NOTES PAYABLE
In June 1998, in conjunction with the terms of a Stock Purchase
Agreement ("Agreement") with Kamkorp Limited ("Kamkorp"), a
company organized in England, the Company executed a separate
agreement with Corning Incorporated ("Corning") to retire the
full $6,293,002 in outstanding Convertible Notes Payable and
accrued interest owed to Corning, in exchange for $1,500,000 in
cash. The transaction was completed on June 16, 1998. The
Convertible Notes Payable and accrued interest had a carrying
amount of $5,032,045 (after unamortized discount of $1,260,957),
resulting in an extraordinary gain from the early extinguishment
of debt of $2,331,150, net of tax of $1,200,895. Basic and
diluted earnings per share for the extraordinary gain from the
early extinguishment of debt were $0.38 for the year ended
December 31, 1998. The $1,500,000 was provided to the Company by
Kamkorp from the sale of 1,500,000 shares of Common Stock under
the terms of the Agreement (See Note G).
Cash interest paid by the Company was approximately $22,000,
$128,000 and $241,000 in 1998, 1997 and 1996, respectively.
NOTE G - COMMON STOCK AND CHANGE IN CONTROL
In June 1998, the Company entered into an Agreement with Kamkorp,
for up to $6,000,000 of equity funding. The Agreement was
structured with the intent of providing additional equity capital
combined with battery orders for use in electric vehicles,
neighborhood electric vehicles and other applications. The
Agreement requires Kamkorp to purchase an aggregate of 6,000,000
shares of the Company's Common Stock for cash at $1.00 per share
and grants Kamkorp an option to purchase an additional 3,000,000
shares of the Company's Common Stock at $1.00 per share for cash
or, with the agreement of the Company, for services. Under the
terms of the Agreement, Kamkorp purchased 1,200,000 shares of the
Company's Common Stock at $1.00 per share at closing on June 2,
1998. On June 16, 1998, Kamkorp purchased an additional 1,500,000
shares of the Company's Common Stock for $1,500,000. The proceeds
from the June 16, 1998 sale were used to retire all Convertible
Notes Payable and accrued interest owed to Corning (See Note F).
An additional $1,200,000 of the Company's Common stock was
purchased during September through December 1998 at $1.00 per
share. Such payments were generally past due. The Agreement
requires, subject to certain conditions precedent, that Kamkorp
purchase up to an additional $2,100,000 of the Company's Common
Stock at $1.00 per share at a minimum of $300,000 per month
through July 1999. Kamkorp management has stated that the
remaining and future purchases of Common Stock (more or less than
those defined in the Agreement) will be made in the amount and
timeframe they deem necessary to sustain the Company's operations
and execute the approved business plan approved by Kamkorp rather
than as defined in the schedule set forth in the Agreement (See
Note O).
In accordance with the terms of the Agreement, Kamkorp is
entitled to a number of representatives on the Company's Board of
Directors equal to at least one-third of the members of the
Board. On June 2, 1998, Kamkorp nominated, and the Company's
Board appointed, three (3) directors to the Board. At December
31, 1998, the three directors nominated by Kamkorp comprised
37.5% of the eight-member Board of Directors. As of December 31,
1998, Kamkorp held 46% of the Company's Common Stock and has the
ability to obtain greater than 50% of the outstanding Common
Stock of the Company on a fully-diluted basis under the terms of
the Agreement and to ultimately have control of the Company's
Board of Directors. Additionally, the Company must obtain express
approval of Kamkorp for all important management policies and
decisions, which include the following:
a. the issuance of Common Stock or any security which provides
for the right to acquire Common Stock, or any other capital stock
of the Company;
b. overall policy decisions relating to business direction and
manufacturing capacity;
c. any agreement or commitment that materially affects or
modifies the intellectual property owned by the Company;
d. approval of the annual operating budget, capital budget,
overhead budgets and business plans of the Company;
e. approval of any merger, consolidation, partnership or joint
venture;
f. approval of transfer of any assets of the Company with a
fair market value greater than $100,000;
g. incurring indebtedness for borrowed money, granting any
material pledge or security interest in the assets of the
Company;
h. increasing the size of the Company's Board of Directors;
i. amending the Company's Certificate of Incorporation or
Bylaws;
j. entering into any transaction involving an amount greater
than, or having a value in excess of $100,000 or involving a term
or commitment for more than 12 months; and
k. other various management policies and decisions.
As of December 31, 1998, Kamkorp is the record owner of 3,900,000
shares or 46% of the Company's 8,434,531 outstanding shares of
Common Stock and, including options to purchase Common Stock, the
beneficial owner of 9,000,000 shares or 66.5% of the Company's
Common Stock (assuming purchase of the full 6,000,000 shares
available under the Agreement and full exercise of the option to
purchase 3,000,000 shares). The Company granted Kamkorp demand
and piggyback registration rights with respect to all such
shares. Kamkorp has not yet requested registration.
During 1998, the Company received a non-cancelable purchase order
and a $507,500 down payment for 5,800 batteries for delivery
during the second half of 1998 from Electrosource International
Limited ("EIL"), a newly- formed distribution company 100% owned
by Kamkorp. EIL, in turn, received a purchase order for 5,800
batteries from Perusahaan Otomobil Elektrik (Malaysia) Sdn. Bhd.
("POEM"), an emerging Malaysian joint venture company in which
Kamkorp affiliates hold a significant minority interest, engaged
in the production of electric vehicles developed by companies
within the Kamkorp group. The number of electric vehicles
produced and sold by POEM to date have been less than
anticipated. The electric vehicle market is an emerging market
and sales to date have taken longer than expected to negotiate
and finalize.
As of December 31, 1998, Electrosource has delivered 2,062
batteries under the purchase order. There have been no deliveries
to EIL under the 5,800 battery purchase order in January,
February or March 1999. Kamkorp management has stated that they
believe deliveries under this order or another purchase order
will commence early in the second quarter of 1999. Even though
the economic environment throughout Asia has recently improved,
it remains uncertain and could adversely affect sales of electric
vehicles by POEM. Kamkorp management has stated their belief that
sales in Asia will continue to grow in addition to non-Asian
sales of vehicles. The Company has not obtained independent
information regarding such sales prospects and there is no
assurance that the sales will grow materialize as Kamkorp
anticipates. The possibility of additional orders is tied to the
sale of vehicles throughout the world in emerging markets. The
Company anticipates that companies within the Kamkorp group may
place additional orders for battery deliveries in 1999, however,
there is no guarantee or assurance that any additional batteries
will be ordered by, or delivered to, those companies.
During February 1999, EIL and Electrosource management
renegotiated the payment terms for the 5,800 battery order.
Advance payments received from EIL were used to settle all
outstanding invoices for batteries previously delivered.
Approximately $40,000 of funds remaining from the advance
payments will be applied to future deliveries under the 5,800
battery purchase order or for various services which may be
performed by Electrosource at the request of EIL. Kamkorp is not
obligated to purchase batteries under this order in a specified
timeframe.
NOTE H - LEASE AND OTHER COMMITMENTS
The Company leases various plant and office facilities, and
production, office and warehouse equipment under operating and
capital leases expiring between 1999 and 2003. Future minimum
annual rentals under lease arrangements at December 31, 1998 are
as follows:
Fiscal Year Capital Operating
Leases Leases
1999 $ 90,576 $ 471,070
2000 75,480 400,934
2001 - 365,000
2002 - 420,000
2003 - 385,000
Thereafter - -
166,056 $2,042,004
Less imputed interest (17,538)
Present value of $148,518
capital lease
obligations
The Company's monthly rental rate on its 88,000 square foot
facility is approximately $30,000 per month, escalating to
$35,000 per month in 2001. The lease expires in November 2003.
Rental expense for operating leases for the years ended December
31, 1998, 1997 and 1996 was approximately $905,000, $898,000 and
$824,000, respectively. Sublease rental income of approximately
$189,000 and $119,000 was received in 1998 and 1997,
respectively.
In December 1997, the Company issued 299,304 shares of Common
Stock to BDM Technologies, Inc. ("BDM") (now part of TRW) as
partial payment for past obligations owed to BDM for occupancy
related costs ($314,875, which the Company had accrued) and as
prepayment under operating leases for manufacturing equipment
which are guaranteed by BDM ($452,092). The number of shares
issued was determined based on the fair market value of the
shares at the date of the agreement ($2.56 per share). When the
shares are sold by BDM, the proceeds will be used to satisfy
these past and future obligations. If the proceeds from the sale
of such shares are not sufficient to satisfy the obligations, the
Company will issue additional shares of Common Stock or pay cash
to BDM to make up the deficiency. BDM has agreed to accept a
minimum of $1.00 per share or $299,304 for the shares issued.
BDM will retain any overage from the sale of such shares in
excess of the obligations. The Company recorded the shares issued
to BDM at fair market value on the date of the agreement
($766,967) and recorded a subscription receivable for the
difference between the fair market value of the shares and the
minimum value for such shares accepted by BDM which will be
recorded as permanent equity upon final determination of the
number of shares to be issued. The Company's market price has
been below $2.56 per share for most of 1998. BDM has not notified
the Company of an intent to sell such shares in the near term;
however, unless the value of the Company's Common Stock improves
based on current market prices of the Company's Common Stock,
additional shares of Common Stock or cash will be required to
settle these obligations under the terms of this agreement.
NOTE I - 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 claimed damages of approximately $5.1 million for its
expenses and lost profits related to the Agreement. The Company
disputes the claim for damages and will vigorously defend any
action taken by HBTL to pursue the claims. The Company also
filed a petition in State Court in Travis County, Texas, seeking,
among other things, a declaratory judgment that HBTL had no right
to arbitration or monetary relief. HBTL contested jurisdiction
and removed the proceedings to the U.S. Federal Court. The
Federal District Court to which the action was removed ruled that
it did not have personal jurisdiction over HBTL and therefore had
no power to hear the case. The Company filed an appeal in the
U.S. Fifth Circuit Court of Appeals from the final judgment and
rulings in the Federal District Court, which denied jurisdiction.
A decision on the appeal is expected at any time. If the appeal
is successful, the U.S. Federal Court will have jurisdiction to
hear the case. No liability has been recorded in the financial
statements at December 31, 1998 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 is also involved in certain other contingencies
incidental to its business. While the ultimate results of these
matters cannot be predicted with certainty, management does not
expect them to have a material adverse effect on the financial
position of the Company.
Trade receivables are composed of balances due from a limited
customer base. Although the Company has a concentration of
credit risk related to the industries in which its customers
participate and to the limited number of customers comprising the
trade receivable balance, the Company has not experienced
significant collection losses from these respective customers.
Activity in the Company's allowance for doubtful accounts was as
follows:
Additions
Balance Charged Charged Write- Balance
at to Costs to Off of at End
Description Beginning and Other Uncollec of
of Expense Accounts tible Period
Period Accounts
Year ended December - 0 - - 0 - - 0 - - 0 - - 0 -
31, 1998
Year ended December $15,599 ($15,599) - 0 - - 0 - - 0 -
31, 1997
Year ended December $36,223 $15,599 - 0 - $(36,223) $15,599
31, 1996
NOTE J - SHAREHOLDERS' EQUITY
Reverse Stock Split
On June 26, 1996, the Company's shareholders approved an
amendment to the Company's Restated Certificate of Incorporation
that effected a one-for-ten reverse stock split. Pursuant to
this amendment, each ten shares of Common Stock outstanding
immediately prior to the reverse split ("Old Shares") were
reclassified as one share of new Common Stock ("New Shares").
The par value per share of the Common Stock was correspondingly
increased from $0.10 per share to $1.00 per share. No fractional
New Shares were issued as a result of the reverse split. In lieu
thereof, each shareholder whose Old Shares were not evenly
divisible by ten received one additional New Share for the
fractional New Share that such shareholder would otherwise be
entitled to have received as a result of the reverse split. All
references in the financial statements to share and per share
amounts have been restated to retroactively reflect the reverse
split.
In 1997, the Company sold 109,397 shares of Common Stock
(combined with warrants to purchase Common Stock at prices
ranging from $5.25 to $7.56 per share) for net proceeds of
approximately $655,000. During 1998, the warrants were repriced
to $2.56 per share.
Stock Option Plans
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25") and related Interpretations in accounting for its employee
stock options because, as discussed below, the alternative fair
value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price
of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation
expense is recognized.
The Company has one stock option plan, the 1996 Stock Option Plan
("1996 Plan"), which received shareholder approval in 1997,
authorizing 960,000 shares. The 1996 Plan provides for the
grant/award of options to employees, directors and consultants at
the discretion of the Compensation/Stock Option Committee to
purchase shares of the Company's Common Stock at a price not less
than 100% of the market price of such stock on the date the
option is granted. These options generally become exercisable in
three stages in equal portions at six months, eighteen months and
thirty months after the date of grant and expire up to ten years
from the date of grant.
In August 1998, the Board of Directors approved the repricing of
all employee stock options effective on that date. Accordingly,
461,833 employee stock options with exercise prices ranging from
$5.28 to $37.50 per share were repriced to an exercise price of
$1.56 per share, the fair value of the Company's Common Stock on
that date. The repricing had no impact on vesting schedules.
Director and consultant stock options were not repriced.
Pro forma information regarding net loss and loss per share is
required by FASB Statement 123 and has been determined as if the
Company had accounted for its employee stock options under the
fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: risk-free
interest rates of 5.0%, 5.3% and 6.0%; dividend yield of 0%;
volatility factors of the expected market price of the Company's
common stock of 1.76, .80 and 1.0; and a weighted-average
expected life of the option of five years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows:
1998 1997 1996
Pro forma stock-based
compensation expense $ 873,222 $1,320,661 $ 716,989
Pro forma net loss 4,403,707 9,153,884 8,541,857
Pro forma loss per share 0.71 2.23 2.33
The effects of applying Statement No. 123 for pro forma
disclosures are not necessarily indicative of future amounts due
to the prospective adoption of FASB Statement No. 123's effects
on reported net income for future years.
A summary of changes in common stock options during 1996, 1997
and 1998 is as follows:
Range of Weighted-
Shares Exercise Average
Prices ($) Exercise
Price ($)
Options outstanding 237,935 10.60 - 46.25 28.65
January 1, 1996
Granted 596,676 5.28 - 37.50 13.73
Exercised - - -
Surrendered (338,846) 5.28 - 46.25 23.62
Options outstanding 495,765 5.28 - 37.50 14.13
December 31, 1996
Granted 298,131 2.94 - 7.75 6.79
Exercised (31,500) 5.28 5.28
Surrendered (28,100) 5.28 - 35.00 9.50
Options outstanding 734,296 2.94 - 37.50 11.71
December 31, 1997
Granted 603,418 1.00 - 2.50 1.51
Exercised - - -
Surrendered (648,037) 1.56 - 37.50 10.82
Options outstanding 689,677 1.00 - 37.50 3.62
December 31, 1998
Options exercisable,
December 31,
1996 181,880 5.28 - 37.50 21.80
1997 525,145 2.94 - 37.50 13.37
1998 210,844 1.00 - 37.50 8.33
The weighted-average fair value of options granted during 1998,
1997 and 1996 was $1.42, $4.60 and $4.49 per share, respectively.
A summary of option information by exercise price as of December
31, 1998 follows:
Total Options Outstanding Currently
Exercisable
Weighted Weighted-
Number Average Average Number Weighted-
Exercise of Exercise Remaining of Average
Price ($) Options Price Contractual Options of Exercise
Life Price
Price
1.00 - 1.31 63,350 $ 1.01 9.56 46,350 $ 1.00
1.56 461,833 1.56 8.32 - -
1.62 - 6.69 117,893 5.48 8.14 117,893 5.48
6.75 - 27.50 35,601 18.70 7.98 35,601 18.70
35.00 5,500 35.00 7.83 5,500 35.00
37.50 5,500 37.50 7.83 5,500 37.50
1.00 - 37.50 689,677 $ 3.62 8.38 210,844 $ 8.33
Warrants
The Company has issued numerous warrants associated with various
debt and equity financings and other agreements with varying
expiration dates through 2005.
The Company entered into a technical development agreement with
Corning in September 1997 to jointly improve the Company's
products, production processes and automation. The Company paid
Corning for such services by issuing warrants at agreed upon
values and exercise prices. The Company expensed the warrants
issued in 1998 and 1997 at their estimated fair value of
approximately $300,000 and $400,000, respectively. The technical
development agreement was terminated in 1998.
The following table represents a summary of warrant activity for
the three years ended December 31, 1998:
Warrants Price Per
Warrant ($)
Warrants outstanding 394,423 15.30 - 55.00
January 1, 1996
Issued, Exercised or - -
Expired
Warrants outstanding 394,423 15.30 - 55.00
December 31, 1996
Issued 1,277,383 4.00 - 9.00
Exercised (26,250) 5.25
Expired (56,499) 16.13 - 55.00
Warrants outstanding 1,589,057 4.00 - 50.00
December 31, 1997
Issued 120,000 7.12
Exercised - -
Expired (300,000) 30.00 - 40.00
Warrants outstanding 1,409,057 4.00 - 50.00
December 31, 1998
Reserved Shares
At December 31, 1998, shares of the Company's Common Stock were
reserved as follows for issuance under:
Stock option plans 928,500
Exercise of warrants 1,409,057
Stock Purchase Agreement (Note 5,100,000
G)
BDM Agreement (Note H) 767,663
8,205,220
NOTE K - REVENUE
Project
Project revenue generated during 1998 was from the Defense
Advanced Research Projects Agency ("DARPA"), a commercial
customer that requests confidentiality, SMH Automobile S.A.
("SMH"), and the Department of Energy ("DOE") for the development
and/or evaluation of batteries for hybrid vehicle and electric
vehicle applications. All projects were for lead-acid batteries
with the exception of the DOE program in which the Company is
working on a lithium polymer which may eventually be used in
batteries for a wide variety of applications.
During 1996 and 1997, the Company generated project revenue of
approximately $115,000 and $645,000, respectively, from Chrysler
Corporation ("Chrysler") for various environmental and other
tests performed on the Horizon battery. The majority of remaining
project revenue generated in 1997 (approximately 65%) was from
SMH, DARPA and Fiat Auto for the development and/or evaluation of
batteries for hybrid and electric vehicle applications.
SMH is located in Switzerland, DARPA and DOE in the United States
and Fiat Auto in Italy.
Batteries
Approximately 38% of the Company's 1998 battery sales were to
EIL. The Company is economically dependent on Kamkorp and its
affiliates (See Notes G and O). Approximately 30%, 56% and 50% of
the Company's 1998, 1997 and 1996 battery sales, respectively,
were to Chrysler. In December 1997, Chrysler announced its
decision to use nickel-metal-hydride batteries made by a
competitor in its EPIC Minivan. Accordingly, Chrysler's purchase
of a significant number of batteries from the Company in the
future is uncertain.
Capacity Maintenance
In July 1996, the Company received a $3,000,000 payment from
Chrysler. Chrysler designated $2,366,000 of this payment as
compensation for continued capacity maintenance and ramp-up costs
incurred by the Company in relation to its role as a supplier to
the automaker for its electric vehicle EPIC Minivan Program and
$634,000 for various engineering, research and development (ER&D)
efforts. During 1996, the Company recorded $2,366,000
as income as all tasks necessary to earn the income were
performed and there were no further obligations related to such
revenue. The Company recorded $634,000 as deferred revenue which
was recognized in income in 1997 as the ER&D tasks were
performed.
Cancellation Fee
During 1998, the Company received a $1,104,275 purchase order
from Chrysler, which replaced an earlier purchase order for
$1,400,000. The $1,104,275 purchase order was paid in full in
1998. Chrysler designated $656,100 of the purchase order as a
cancellation fee from the previous order and $448,175 for
batteries to be delivered in the future. During 1998, the Company
recorded $656,100 as income as all tasks necessary to earn the
income were performed and there were no further obligations
related to such revenue. Approximately $300,000 of the battery
revenue remains deferred at December 31, 1998 (a portion of the
batteries were delivered in 1998) and will be recognized upon
shipment of the batteries.
During 1998, 1997 and 1996, the Company earned revenue of
approximately $360,000, $1,100,000 and $208,000 (15%, 34% and 6%
of total revenue), respectively, from sales of batteries and
project services to foreign customers. The majority of 1998
revenue from foreign customers was from EIL (See Note O). The
majority of 1997 revenue from foreign customers was from SMH
(Switzerland) and Fiat Auto (Italy).
NOTE L - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Company's deferred
tax asset at December 31, 1998 and 1997 are as follows:
1998 1997
Deferred Tax Assets:
Net operating loss and other
tax carry-forwards $16,165,976 $14,784,032
Book depreciation in excess
of tax depreciation 2,158,793 1,925,827
Inventory, accruals and
other 444,121 954,350
Total deferred tax assets 18,768,890 17,664,209
Less valuation allowance (18,768,890) (17,664,209)
Deferred tax assets, net $ - $ -
The significant component of the income tax benefit for the year
ended December 31, 1998 was a deferred tax benefit of $1.2
million. The reconciliation of income tax provision (benefit) on
continuing operations computed at the United States federal
statutory tax rates to income tax expense for the years ended
December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
Income tax benefit at
statutory U.S. federal
income tax rate (34.0%) (34.0%) (34.0%)
Operating losses not benefited 17.0% 34.0% 34.0%
Effective income tax rate (17.0%) 0.0% 0.0%
The Company's valuation allowance increased by $1.1 million in
1998, primarily as a result of net operating losses which were
generated but may not be realizable. At December 31, 1998, the
Company had net operating loss carry forwards of approximately
$46 million, which will expire from 2002 through 2018, research
and development credits of approximately $400,000 and foreign tax
credits of approximately $200,000 which expire beginning in 2002
and 1999, respectively. Ownership changes as defined in the
Internal Revenue Code have resulted in severe limitations on the
utilization of a significant portion of the Company's net
operating loss and other tax carry forwards.
NOTE M - RELATED PARTY TRANSACTIONS
During 1995, the Company entered into agreements with a director
of the Company for the development of certain machinery and
materials as well as general consulting. The Company paid
$32,000 and $103,000 under such agreements in 1997 and 1996,
respectively. The Company may also purchase machinery developed
in accordance with this agreement at its option for an additional
fee. During 1997, the Company also began purchasing certain raw
materials from the former director. The Company paid $44,000 and
$65,000 for such materials during 1998 and 1997, respectively.
In addition, the Company has leased approximately 4,000 square
feet in the former director's manufacturing facility for a
monthly cost of $400 and has paid $4,800 annually under such
agreement during 1997 and 1998.
NOTE N - EMPLOYEE BENEFIT PLAN
The Company sponsors a qualified defined contribution plan
covering all eligible employees. The Company matches twenty-five
percent of a participant's voluntary contributions up to a
maximum of four percent of a participant's compensation. The
Company's contribution expense was approximately $30,000, $33,000
and $18,000 in 1998, 1997 and 1996, respectively.
NOTE O - ABILITY TO CONTINUE AS A GOING CONCERN
The Company continues to operate at a cash deficit. In January
and February 1998, the Company borrowed the remaining $1,000,000
of 5% Convertible Notes from Corning in accordance with the terms
of its $2,000,000 Note signed in December 1997. Existing battery
orders and contract work were not adequate to sustain the Company
on an ongoing basis. As a result, in February 1998, the Company
reduced its staffing by approximately 40% to reduce costs and
began to explore strategic alternatives such as a business
combination, the sale of substantially all of the Company's
assets or a strategic alliance.
On June 2, 1998, the Company entered into an Agreement with
Kamkorp for up to $6,000,000 of equity funding for 6,000,000
Common Shares at $1.00 per share. As of December 31, 1998,
Kamkorp has purchased 3,900,000 shares of the Company's Common
Stock. The Agreement requires that Kamkorp purchase up to an
additional 2,100,000 shares of Common Stock at $1.00 per share at
a minimum rate of 300,000 shares per month through July 1999 (See
Note G). Kamkorp's obligation to make these purchases is
dependent upon the absence of any material change in the
financial position, business or prospects of the Company and upon
certain other conditions precedent, such as the absence of
litigation, absence of defaults on other contracts and
agreements, and compliance with environmental regulations.
From January 1 through March 19, 1999, Kamkorp purchased an
additional 600,000 shares of Common Stock at $1.00 per share.
Kamkorp management has stated that the remaining and future
purchases of Common Stock (more or less than those defined in the
Agreement) will be made in the amount and timeframe they deem
necessary to sustain operations and execute the approved business
plan approved by Kamkorp, rather than as defined in the schedule
set forth in the Agreement. Payments to date have been made in
amounts necessary to sustain the Company's operations, however,
approximately meet the Company's payroll and rent obligations.
90% of projected 1999 battery sales in the approved business plan
are to companies within the Kamkorp group and the portion of
those sales initially expected to occur in the first quarter of
1999 did not occur. Although Kamkorp has provided substantial
amounts of financing to the Company to date, as a private company
Kamkorp is not legally required to, and has not, provided
sufficient information to the Company to allow the Company to
determine the financial ability of Kamkorp to make the remaining
purchases of Company Common Stock. Additionally, approximately
90% of projected 1999 battery sales in the approved business plan
are to companies within the Kamkorp group and the portion of
those sales initially expected to occur in the first quarter of
1999 did not occur.
The Company received a non-cancelable purchase order for 5,800
batteries for delivery during the second half of 1998 from EIL.
During July 1998, the Company received $507,500 as a down payment
in accordance with the terms of this purchase order. As of
December 31, 1998, 2,062 batteries have been delivered. There
were no deliveries to EIL under the order in January, February or
March 1999. At this time, Kamkorp is not obligated to purchase
batteries under this order in a specified timeframe. Vehicles
sales to date by POEM have been less than anticipated. Sales of
electric vehicles continue to be difficult to predict as they are
in emerging markets. It is anticipated that companies within the
Kamkorp group may place additional orders for delivery in 1999,
however, there is no guarantee or assurance that any additional
batteries will be ordered by, or delivered to, those companies.
Additionally, even though the economic environment in Asia has
improved, it remains uncertain and could adversely affect the
anticipated sale of electric vehicles by POEM.
Cash balances have been depleted and the Company is currently
dependent on cash payments from Kamkorp and its affiliates to
continue operations on a day-to-day basis. The Company has
approximately $800,000 of outstanding accounts payable which is
greater than thirty days past due at December 31, 1998, most of
which is payable to raw material suppliers, some of which date
back to June 1998. Certain of these vendors have threatened legal
action for non-payment of invoices. Cash generated from battery
sales and contracts with other customers is not sufficient to
fund operations. Cash payments from Kamkorp and its affiliates to
date have been sufficient to fund payroll and rent obligations,
but not to pay the outstanding accounts payable or raw material
purchases. If a significant battery order is received,
significant funding will be required to pay the outstanding
accounts payable to allow ordering of additional raw materials.
There is no assurance that future payments from Kamkorp or its
affiliates, if any, will be made in a timeframe sufficient to
sustain operations. Funding beyond the minimum $300,000 per month
specified in the Agreement, additional battery orders, or other
financing will be required in the second quarter of 1999 to
continue operations and pay outstanding obligations. The Company
is discussing the possibility of accelerated or additional
financing from Kamkorp, which could be provided under the terms
of the Agreement, including Kamkorp's exercise of all or a
portion of its option to purchase 3,000,000 shares of the
Company's Common Stock at $1.00 per share. Absent additional
funding from Kamkorp or other sources, the Company will not have
the funds necessary to complete battery orders from Kamkorp
affiliates or other customers, or to pay all outstanding
obligations and will not be able to continue as a going concern.
The Company's Common Stock is traded in the Over-the-Counter
Market and is reported on The Nasdaq Stock Marketr ("Nasdaq"). In
order to maintain listing by Nasdaq under rules which went into
effect in February 1998, the Company must maintain a minimum
$2,000,000 of net tangible assets (total assets, excluding
goodwill, minus total liabilities). The Company was not in
compliance with the requirement before the completion of the
financing transactions and debt extinguishment completed in June
1998. In April 1998, the Company received notice from Nasdaq that
it must present a plan for compliance with listing standards on
or before April 16, 1998. The Company submitted such a plan on
April 15, 1998. On May 13, 1998, the Company was notified by
Nasdaq that its plan was not accepted and it would be delisted
from Nasdaq effective the close of business on May 20, 1998. The
Company filed a request for an oral hearing regarding the
decision. The hearing was held on June 18, 1998. On July 1, 1998,
the Company received written notice from Nasdaq that its shares
would continue to be listed on the Nasdaq Small Cap Market, as
the Company regained compliance with the financial listing
criteria and provided a plan for continued compliance. The
success of this plan is contingent upon equity funding
anticipated to be provided by Kamkorp in accordance with the
terms of the Agreement and successful execution of the Company's
business plan which includes increased revenues and reduced
operating losses and/or additional equity funding. If such
funding is not provided (by Kamkorp or other parties), the
Company will not be able to maintain the required $2,000,000 of
net tangible assets. Additionally, on February 1, 1999, the
Company received written notice from Nasdaq that the closing bid
price of its shares fell below $1.00 for 30 consecutive business
days and therefore did not meet the Nasdaq minimum listing
requirements. The written notification stated that within 90 days
of the notification, the Company's closing bid price must be
$1.00 or higher for ten consecutive calendar days to satisfy the
requirement. This requirement was met on February 18, 1999.
As of March 31, 1999, the Company's net tangible assets were less
than $2,000,000. As a result, the Company was not in compliance
with the minimum listing requirements of Nasdaq and Nasdaq was
advised accordingly. At this time, the consequences to the
Company of the current non-compliance with the minimum listing
requirements of Nasdaq are unknown. However, such non-compliance
could result in delisting of the Company's shares from the Nasdaq
Small Cap Market in the near future. As of March 31, 1999, the
Company's net tangible assets were less than $2,000,000. As a
result, the Company was not in compliance with the minimum
listing requirements of Nasdaq and has advised Nasdaq of that
fact. The failure to maintain net tangible assets in excess of
Nasdaq minimum levels has resulted in part from the failure of
the Company to complete battery orders with EIL and others,
resulting in larger than expected net losses, and in part from
the fact that Kamkorp did not make the anticipated purchases of
Company Common Stock as of March 31, 1999. Kamkorp had advised
the Company it would make the required equity investment by that
date based on Kamkorp's belief that it would by then have
received a purchase order and downpayment from EIL. EIL, in turn,
was awaiting the receipt of a purchase order and downpayment from
POEM, a Malaysian joint venture in which Kamkorp affiliates hold
a significant minority interest. The battery order was not
finalized in time to make the equity payment; in addition, the
Company had not, at that date, provided Kamkorp with the
necessary information for the determination of the minimum
required additional equity investment. Since March 31, Kamkorp
has provided approximately $200,000 in new equity funds. Kamkorp
has advised the Company that it will provide additional equity
funding sufficient to meet the Nasdaq minimum requirements on
receipt of the anticipated purchase order and downpayment,
through EIL, from POEM and of budget information from the Company
sufficient to allow Kamkorp to determine the extent of funds
required. Kamkorp expects that this will occur by the end of
April 1999. As of March 31, 1999, Kamkorp is the owner of
4,500,000 shares or 49% of the Company's Common Stock and has the
ability to obtain greater than 50% of the outstanding shares of
Common Stock on a fully diluted basis and to ultimately have
control of the Board of Directors. At this time, the consequences
to the Company of the current non-compliance are unknown.
Ordinarily, before, delisting, Nasdaq will allow the Company
notice and an opportunity to present and carry out a plan for
compliance. There can be no assurance that the Company will be
able to meet the minimum listing requirements of Nasdaq and
remain listed in the future. In the event that the Common Stock
were no longer traded on the Nasdaq market, brokers and dealers
effecting trades in the Common Stock would become subject to the
Securities and Exchange Commission rules covering trading in
"penny stocks." These rules generally require that such broker-
dealers make specific disclosures to customers including
information on available bid and asked prices for the stock in
question and compensation to the broker-dealer and his associates
with respect to the proposed trade, and provide periodic reports
as to the market value of a customer's position in penny stocks.
The rules also impose heightened "know your customer"
requirements that require broker-dealers to obtain information,
including personal financial information, from customers
sufficient to allow the broker-dealer to make a determination
that the investment in penny stocks is suitable for the customer
and that the customer is capable of assessing the risks of such
an investment. Broker-dealers may be less willing to effect
trades in any security subject to these rules due to the
additional disclosure, record-keeping and other requirements
imposed by the rules. In addition, some potential investors in
penny stock may be reluctant to provided the required personal
financial information to broker-dealers, which may reduce the
number of potential investors. These factors would likely
further reduce trading liquidity in the Common Stock.
If the Company were delisted from Nasdaq, it would likely be more
difficult to obtain additional funding. There can be no assurance
that additional funding which will generate sufficient cash to
sustain operations can be obtained on terms acceptable to the
Company, if at all. The financial statements do not include any
adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible
inability of the Company to continue as a going concern.
Washington, D.C. 20549
________________________________________
EXHIBITS TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File
December 31, 1998 Number 0-16323
__________________________________________
ELECTROSOURCE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 742466304
(State or other jurisdiction of (I.R.S. Employer Identification
No.)
incorporation or organization)
2809 Interstate 35 South, San 78666
Marcos, Texas
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, (512) 753-6500
including area code:
Securities registered pursuant None
to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
INDEX TO EXHIBITS
No. Description Page
3.1 Restated Certificate of Incorporation of --
Electrosource, Inc. (filed as Exhibit 3.1 to
Electrosource, Inc., Registration Statement on Form
10 filed October 19, 1987, as amended by Form 8
Amendments filed January 8, 1988 and January 13,
1988 (hereinafter referred to as "Form 10") and
incorporated herein by reference).
3.2 Certificate of Designation, Preferences, Rights and --
Limitations of 1992 Series A Preferred Stock and
Series A-1 Preferred Stock of Electrosource, Inc.
as filed of record with the Delaware Secretary of
State on January 15, 1992 (filed as Exhibit 4.1 to
Electrosource, Inc. Form 8-K Current Report for
Issuers Subject to the 1934 Act Reporting
Requirements filed December 24, 1991 and
incorporated herein by reference).
3.3 Amendment to Restated Certificate of Incorporation --
of Electrosource, Inc., increase in authorized
shares to 50,000,000 shares (filed as Exhibit 3.1
to Electrosource, Inc., Quarterly Report on Form 10-
Q for quarter ended June 30, 1995 and incorporated
herein by reference).
3.4 Amendment to Restated Certificate of Incorporation --
of Electrosource, Inc., elimination of Certificate
of Designation for Series A and Series A-1
Preferred Stock (filed as Exhibit 3.2 to
Electrosource, Inc., Quarterly Report on Form 10-Q
for quarter ended June 30, 1995 and incorporated
hereby by reference).
3.5 Amendment to the Restated Certificate of --
Incorporation of Electrosource filed as of July 22,
1996 (filed as Exhibit 3.1 to Electrosource, Inc.
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996 and incorporated herein by
reference).
3.6 Bylaws of Electrosource, Inc. (filed as Exhibit 3.2 --
to Form 10 and incorporated herein by reference).
3.7 Amendment to Bylaws of Electrosource, Inc., --
pursuant to a Certificate of Secretary dated May
25, 1990 (filed as Exhibit 3.3 to Electrosource,
Inc., Annual Report on Form 10-K for the period
ended December 31, 1991 and incorporated herein by
reference).
3.8 Amendment to Bylaws of Electrosource, Inc. dated --
November 3, 1993 (filed as Exhibit 3.5 to
Electrosource, Inc., Annual Report on Form 10-K for
the period ended December 31, 1993 and incorporated
herein by reference).
3.9 Amendment to Bylaws of Electrosource, Inc. dated --
June 23, 1994 (filed as Exhibit 3.6 to
Electrosource, Inc. Annual Report filed on Form 10-
K for the period ended December 31, 1994 and
incorporated herein by reference).
3.10 Amendment to Bylaws of Electrosource, Inc. dated --
November 13, 1996 (filed as Exhibit 3.10 to
Electrosource, Inc. Annual Report filed on Form 10-
K for the period ended December 31, 1996 and
incorporated herein by reference).
4.1 Warrant to purchase up to 5,424 shares of --
Electrosource, Inc. Common Stock issued to
Rosehouse Ltd., a Bermuda-based institutional
buyer, dated April 5, 1995 (filed as an Exhibit to
Electrosource, Inc. Current Report on Form 8-K
filed April 12, 1995 and incorporated herein by
reference).
4.2 Warrant to purchase up to 5,000 shares of --
Electrosource, Inc. Common Stock issued to Ally
Capital Management, Inc. on April 17, 1995 (filed
as Exhibit 4.1 to Electrosource, Inc. Quarterly
Report on Form 10-Q for the quarter ended June 30,
1995 and incorporated herein by reference).
4.3 Warrant to purchase up to 25,000 shares of --
Electrosource, Inc., Common Stock, issued to
Rosehouse Ltd., a Bermuda-based institutional
buyer, dated July 27, 1995 (filed as Exhibit 4.4 to
Electrosource, Inc. Quarterly Report on Form 10-Q
for quarter ended June 30, 1995 and incorporated
herein by reference).
4.4 Warrant (Stock Option Agreement No. W12-101) to --
purchase up to 20,000 shares of Electrosource,
Inc., Common Stock, issued to Corning Incorporated
dated December 31, 1997 for payment of that certain
Project Annex dated October 20, 1997 (filed as
Exhibit 4.16 to Electrosource, Inc. Annual Report
on Form 10-K for the period ended December 31, 1997
and incorporated herein by reference).
4.5 Warrant (Stock Option Agreement No. W12-102A) to --
purchase up to 70,000 shares of Electrosource,
Inc., Common Stock, issued to Corning Incorporated
dated December 31, 1997 for payment on that certain
Project Annex dated October 20, 1997 (filed as
Exhibit 4.17 to Electrosource, Inc. Annual Report
on Form 10-K for the period ended December 31, 1997
and incorporated herein by reference).
4.6 Warrant (Stock Option Agreement No. W12-103A) to --
purchase up to 70,000 shares of Electrosource,
Inc., Common Stock, issued to Corning Incorporated
dated December 31, 1997 for payment on that certain
Project Annex dated October 20, 1997 (filed as
Exhibit 4.18 to Electrosource, Inc. Annual Report
on Form 10-K for the period ended December 31, 1997
and incorporated herein by reference).
4.7 Warrant (Stock Option Agreement No. W12-102B) to E-12
purchase up to 60,000 shares of Electrosource, Inc.
Common Stock, issued to Corning Incorporated dated
May 29, 1998 for payment of that certain Project
Annex dated October 20, 1997.
4.8 Warrant (Stock Option Agreement No. W12-103B) to E-14
purchase up to 60,000 shares of Electrosource, Inc.
Common Stock, issued to Corning Incorporated dated
May 29, 1998 for payment of that certain Project
Annex dated October 20, 1997.
10.1 Sublicense Agreement dated as of October 5, 1987 --
between Electrosource, Inc. and Tracor, Inc. (filed
as Exhibit 10.4 to Form 10 and incorporated herein
by reference).
10.2 Patent and Technology Exclusive License Agreement --
dated August 14, 1984 between Tracor, Inc. and
Blanyer-Mathews Associates, Inc. ("BMA") (filed as
Exhibit 10.9 to Registration Statement [No 33-
30486] on Form S-1 filed August 14, 1989
hereinafter referred to as "Form S-1" and
incorporated herein by reference).
10.3 Amendment to Patent and Technology Exclusive --
License Agreement dated May 29, 1987 between
Tracor, Inc. and BMA (filed as Exhibit 10.10 to
Form S-1 and incorporated herein by reference).
10.4 Bonus Royalty Agreement dated May 26, 1989 among --
Electrosource, Inc., Tracor, Inc., and BMA (filed
as Exhibit 19 to Electrosource, Inc. Quarterly
Report on Form 10-Q for the quarter ended June 30,
1989 and incorporated herein by reference).
10.5 Amendment to Bonus Royalty Agreement entered into --
as of November 30, 1989 by and among BMA, Tracor,
Inc. and Electrosource, Inc. (filed as Exhibit
10.17 to Post Effective Amendment No. 1 to Form S-1
Registration Statement [No. 33-34581] filed
December 11, 1989 hereinafter referred to as "Post-
Effective Amendment" and incorporated herein by
reference).
10.6 Assignment of Patent License dated as of May 14, --
1990 by and between Electrosource, Inc. and Tracor,
Inc. (joined by BMA for limited purposes described
therein) (filed as Exhibit 10.20 to the Company's
Annual Report on Form 10-K for the period ended
December 31, 1990 hereinafter referred to as the
"1990 Form 10-K" and incorporated herein by
reference).
10.7 Letter Agreement dated as of January 15, 1991 --
between Electrosource, Inc. and BMA (filed as
Exhibit 10.21 to the Company's 1990 Form 10-K and
incorporated herein by reference).
10.8 License Modification Agreement dated January 16, --
1992 between Blanyer Mathews & Associates, Inc.,
Electrosource, Inc. and Battery Horizons, Ltd.
(filed as Exhibit 10.23 to Electrosource, Inc.
Annual Report on Form 10-K for the period ended
December 31, 1991 and incorporated herein by
reference).
10.9 First Amendment to Assignment of Patent License --
dated April 2, 1992 between Electrosource, Inc. and
Tracor, Inc. (filed as Exhibit 10.58 to Company's
Registration Statement [No. 33-65248] on Form S-1
filed June 30, 1993 and incorporated herein by
reference).
10.10 Lease Agreement between Aetna Life Insurance
Company and Electrosource, Inc. dated February 22,
1992 (filed as Exhibit 10.25 to Electrosource, Inc.
Annual Report on Form 10-K for the period ended
December 31, 1991 and incorporated herein by
reference).
10.11 First Amendment to Lease Agreement between Aetna --
Life Insurance Company and Electrosource, Inc.
dated February 24, 1993 (filed as Exhibit 10.27 to
Electrosource, Inc. Annual Report on Form 10-K for
the period ended December 31, 1992 and incorporated
herein by reference).
10.12 Second Amendment to Lease Agreement between Aetna --
Life Insurance Company and Electrosource, Inc.
dated March 1, 1996 (filed as Exhibit 10.14 to
Electrosource, Inc. Annual Report on Form 10-K for
the period ended December 31, 1995 and incorporated
herein by reference).
10.13 Sublease Agreement between Electrosource, Inc. and --
Merit Printing, Inc. dated February 24 1997 (filed
as Exhibit 10.13 to Electrosource, Inc. Annual
Report on Form 10-K for the period ended December
31, 1997 and incorporated herein by reference).
10.14 Lease Agreement between William D. McMorris and --
Horizon Battery Technologies, Inc. dated August 17,
1993 (filed as Exhibit 10.42 to Electrosource Inc.
Annual Report on Form 10-K for the period ended
December 31, 1994 and incorporated herein by
reference).
10.15 Lease Agreement between William D. McMorris and --
Electrosource, Inc. dated May 29, 1998 (filed as
Exhibit 10.1 to Electrosource, Inc. Quarterly
Report on Form 10-Q for the quarter ended June 30,
1998 and incorporated herein by reference).
10.16 Amendment to Business Alliance and License --
Agreement dated November 1, 1995 between Electric
Power Research Institute and Electrosource, Inc.
(filed as Exhibit 10.2 to Electrosource, Inc.
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995 and incorporated herein by
reference).
10.17 Stock Purchase Agreement together with the Asset --
and Technology License Agreement dated January 31,
1995 between BDM Technologies, Inc. and
Electrosource, Inc. (filed as Exhibit 10.46 to
Electrosource, Inc. Annual Report on Form 10-K for
the period ended December 31, 1994 and incorporated
herein by reference).
10.18 First Amendment to Asset and Technology License --
Agreement between BDM International, Inc. and
Electrosource, Inc. dated December 18, 1997 (filed
as Exhibit 10.17 to Electrosource, Inc. Annual
Report on Form 10-K for the period ended December
31, 1997 and incorporated herein by reference).
10.19 Termination Agreement between Electrosource, Inc. --
and Mitsui Engineering and Shipbuilding Co., Ltd.
Dated March 6, 1996 (filed as Exhibit 10.36 to
Electrosource, Inc. Annual Report on Form 10-K for
the period ended December 31, 1995 and incorporated
herein by reference).
10.20 Purchase Agreement between Quantum Energy Systems --
and Technology LLC and Electrosource, Inc., dated
November 14, 1994, (filed as Exhibit 10.44 to
Electrosource, Inc., Annual Report on Form 10-K for
the period ended December 31, 1994 and incorporated
herein by reference).
10.21 Equipment Lease Agreement dated September 7, 1995, --
between Salem Capital Corporation and
Electrosource, Inc. (filed as Exhibit 10.65 to
Electrosource, Inc. Annual Report on Form 10-K for
the period ending December 31, 1995 and
incorporated herein by reference).
10.22 Development Agreement and Agreement for Purchase of --
Machinery and Supplies between Electrosource, Inc.,
and Charles L. Mathews ("Contractor") dated
November 1, 1995 (filed as Exhibit 10.68 to
Electrosource, Inc. Annual Report on Form 10-K for
the period ending December 31, 1995 and
incorporated herein by reference).
10.23 Agreement for Aircraft Starting Battery --
Distribution between Electrosource, Inc. and
Horizon Aviation, Inc. dated February 13, 1996
(filed as Exhibit 10.70 to Electrosource, Inc.
Annual Report on Form 10-K for the period ending
December 31, 1995 and incorporated herein by
reference).
10.24 Memorandum of Understanding between Electrosource, --
Inc. and Lockheed Martin Corporation dated March
15, 1996 (filed as Exhibit 10.1 to Electrosource,
Inc. Quarterly Report on Form 10-Q for quarter
ended March 31, 1996 and incorporated herein by
reference).
10.25 Letter of Agreement between Electrosource, Inc. and --
Ally Capital Corporated dated December 18, 1996
(filed as Exhibit 4.9 to Electrosource, Inc.
Registration Statement [No. 333-20103] Form S-3
Amendment No. 1 on April 18, 1997 and incorporated
herein by reference).
10.26 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. Registration
Statement [No. 333-20103] Form S-3 Amendment No. 1
on April 18, 1997 and incorporated herein by
reference).
10.27 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. Registration
Statement [No. 333-20103] Form S-3 Amendment No. 1
on April 18, 1997 and incorporated herein by
reference).
10.28 Subscription Agreements between participants and --
Electrosource, Inc. dated January 23, 1997 (filed
as Exhibit 4.9 to Electrosource, Inc. Registration
Statement [No. 333-25659] Form S-3 on April 23,
1997 and incorporated herein by reference).
10.29 Amendment Number One to Stock Purchase Warrant --
dated August 18, 1998, issued under Subscription
Agreements between participants and Electrosource,
Inc. dated January 23, 1997 (filed as Exhibit 10.2
to Electrosource, Inc. Quarterly Report on Form 10-
Q for the quarter ended September 30, 1998 and
incorporated herein by reference).
10.30 Note Purchase and Option Agreement for $4 million --
dated March 27, 1997 between Electrosource, Inc.
and Corning Incorporated (filed as Exhibit 4.1 to
Electrosource, Inc. Quarterly Report on Form 10-Q
for quarter ended March 31, 1997 and incorporated
herein by reference).
10.31 5% Convertible Promissory Note for $100,000 dated --
September 27, 1997 between Electrosource, Inc. and
Corning Incorporated for payment of interest due on
the Note Purchase and Option Agreement dated March
27, 1997 (filed as Exhibit 10.31 to Electrosource,
Inc. Annual Report on Form 10-K for the period
ended December 31, 1997 and incorporated herein by
reference).
10.32 5% Convertible Promissory Note for $102,500 dated --
March 27, 1998 between Electrosource, Inc. and
Corning Incorporated for payment of interest due on
the Note Purchase and Option Agreement dated March
27, 1997 and Promissory Note dated September 27,
1997 (filed as Exhibit 10.32 to Electrosource, Inc.
Annual Report on Form 10-K for the period ended
December 31, 1997 and incorporated herein by
reference).
10.33 Amendment No. 1 dated December 22, 1997 to Stock --
Option Agreement dated March 27, 1997 between
Corning Incorporated and Electrosource, Inc. (filed
as Exhibit 10.33 to Electrosource, Inc. Annual
Report on Form 1o-K for the period ended December
31, 1997 and incorporated herein by reference).
10.34 Research and Development Umbrella Agreement dated --
July 1, 1997 between Corning Incorporated and
Electrosource, Inc. (filed as Exhibit 10.34 to
Electrosource, Inc. Annual Report on Form 10-K for
the period ended December 31, 1997 and incorporated
herein by reference).
10.35 Project Annex dated October 20, 1997 to the --
Development Umbrella Agreement dated as of July 1,
1997 by and between Corning Incorporated and
Electrosource, Inc., being further defined in
Exhibit 1, Project Proposal, Physical and Chemical
Description of Battery Electrode "Moss." (filed as
Exhibit 10.35 to Electrosource, Inc. Annual Report
on Form 10-K for the period ended December 31, 1997
and incorporated herein by reference).
10.36 Project Annex dated October 20, 1997 to the --
Development Umbrella Agreement dated as of July 1,
1997 by and between Corning Incorporated and
Electrosource, Inc., being further defined in
Exhibit 1, Project Proposal, Engineering Resources
(filed as Exhibit 10.36 to Electrosource, Inc.
Annual Report on Form 10-K for the period ended
December 31, 1997 and incorporated herein by
reference).
10.37 Project Annex dated October 20, 1997 to the --
Development Umbrella Agreement dated as of July 1,
1997 by and between Corning Incorporated and
Electrosource, Inc., being further defined in
Exhibit 1, Project Proposal, Characterization of
Electrode Materials and Collector Grid Materials
(filed as Exhibit 10.37 to Electrosource, Inc.
Annual Report on Form 10-K for the period ended
December 31, 1997 and incorporated herein by
reference).
10.38 Note Purchase Agreement for $2 million dated --
December 19, 1997 between Electrosource, Inc. and
Corning Incorporated (filed as Exhibit 10.39 to
Electrosource, Inc. Annual Report on Form 10-K for
the period ended December 31, 1997 and incorporated
herein by reference).
10.39 Agreement dated May 29, 1998 between Corning --
Incorporated and Electrosource, Inc. terminating
the Note Purchase and Option Agreement dated March
27, 1997, the Note Purchase Agreement dated
December 19, 1997 and the Research and Development
Umbrella agreement dated July 1, 1997 (filed as
Exhibit 10.2 to Electrosource, Inc. Quarterly
Report on Form 10-Q for the quarter ended June 30,
1998 and incorporated herein by reference).
10.40 Amendment dated June 15, 1998 to May 29, 1998 --
Agreement terminating Notes between Corning
Incorporated and Electrosource, Inc. for a one-day
extension for payment (filed as Exhibit 10.3 to
Electrosource, Inc. Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998 and
incorporated herein by reference).
10.41 Stock Purchase Agreement dated June 2, 1998 between --
Kamkorp and Electrosource, Inc. (filed as Exhibit
4.1 to Electrosource, Inc. Form 8-K dated June 11,
1998 and incorporated herein by reference).
10.42 Registration Rights Agreement dated June 2, 1998 --
between Kamkorp and Electrosource, Inc. (filed as
Exhibit 4.2 to Electrosource, Inc. Form 8-K dated
June 11, 1998 and incorporated herein by
reference).
10.43 Severance Agreement between officers/key employees --
and Electrosource, Inc. dated August 25, 1997
(filed as Exhibit 10.38 to Electrosource, Inc.
Annual Report on Form 10-K for the period ended
December 31, 1997 and incorporated herein by
reference).
10.44 Form of Severance Agreement between officers/key --
employees and Electrosource, Inc. dated May 18,
1998 (filed as Exhibit 10.4 to Electrosource, Inc.
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 and incorporated herein by
reference).
10.45 Purchase Order for Horizon Batteries Pack --
Development Program between Fiat Auto and
Electrosource, Inc. dated September 30, 1996 (filed
as Exhibit 10.40 to Electrosource, Inc. Annual
Report on Form 10-K for the period ended December
31, 1997 and incorporated herein by reference).
10.46 Frame-Development Contract dated March 14, 1997 --
between SMH Automobile S.A. and Electrosource, Inc.
(filed as Exhibit 10.41 to Electrosource, Inc.
Annual Report on Form 10-K for the period ended
December 31, 1997 and incorporated herein by
reference).
10.47 Summary Contract Amendment Terms dated November 12, --
1997 for Frame-Development Contract dated March 14,
1997 between SMH Automobile S.A. and Electrosource,
Inc. (filed as Exhibit 10.42 to Electrosource, Inc.
Annual Report on Form 10-K for the period ended
December 31, 1997 and incorporated herein by
reference).
10.48 Severance Agreement between James M. Rosel and --
Electrosource, Inc. effective August 31, 1998
(filed as Exhibit 10.1 to Electrosource, Inc.
Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 and incorporated herein by
reference).
10.49 Purchase Order Number ES1001 between Electrosource E-16
International and Electrosource, Inc. dated June
15, 1998 for 5,800 batteries.
10.50 Purchase Order Number ES1002 (amendment to Purchase E-17
Order Number ES1001) between Electrosource
International and Electrosource, Inc. dated March
3, 1999.
The following exhibits filed under Paragraph 10 of Item 601 are
the Company's compensation plans and arrangements:
10.51 Form of Director Indemnification Agreement (filed --
as Exhibit 10.8 to Electrosource, Inc., Annual
Report on Form 10-K for the period ended December
31, 1987 and incorporated herein by reference).
10.52 Director Indemnification Agreement dated January --
16, 1992 between Electrosource, Inc. and Charles
Mathews (filed as Exhibit 10.26 to Electrosource,
Inc. Annual Report on Form 10-K for the period
ended December 31, 1991 and incorporated herein by
reference).
10.53 Director Indemnification Agreement dated November --
4, 1992, between Electrosource, Inc. and Thomas S.
Wilson (filed as Exhibit 10.41 to Electrosource,
Inc. Annual Report on Form 10-K for the period
ended December 31, 1992 and incorporated herein by
reference).
10.54 Director Indemnification Agreement dated September --
1, 1993 between Electrosource, Inc. and Dr. Norman
Hackerman (filed as Exhibit 10.57 to Electrosource,
Inc. Annual Report on Form 10-K for the period
ended December 31, 1993 and incorporated herein by
reference).
10.55 Director Indemnification Agreement dated June 23, --
1994 between Electrosource, Inc. and Michael G.
Semmens (filed as Exhibit 10.72 to Electrosource,
Inc. Annual Report on Form 10-K for the period
ended December 31, 1994 and incorporated herein by
reference).
10.56 Director Indemnification Agreement dated November --
2, 1994 between Electrosource, Inc. and Richard S.
Williamson (filed as Exhibit 10.73 to
Electrosource, Inc. Annual Report on Form 10-K for
the period ended December 31, 1994 and incorporated
herein by reference).
10.57 Director Indemnification Agreement dated June 22, --
1995 between Electrosource, Inc. and Nathan Morton
(filed as Exhibit 10.2 to Electrosource, Inc.
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995 and incorporated herein by
reference).
10.58 Director Indemnification Agreement dated June 22, --
1995 between Electrosource, Inc. and William R.
Graham (filed as Exhibit 10.1 to Electrosource,
Inc. Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995 and incorporated herein by
reference).
10.59 Director Indemnification Agreement dated March 3, --
1997 between Electrosource, Inc. and Richard E.
Balzhiser (filed as Exhibit 10.51 to Electrosource,
Inc. Annual Report on Form 10-K for the period
ended December 31, 1997 and incorporated herein by
reference).
10.60 Director Indemnification Agreement dated August 26, --
1997 between Electrosource, Inc. and Earl E. Gjelde
(filed as Exhibit 10.52 to Electrosource, Inc.
Annual Report on Form 10-K for the period ended
December 31, 1997 and incorporated herein by
reference).
10.61 Director Indemnification Agreement dated June 2, --
1998 between Electrosource, Inc. and Kamal Siddiqi
(files as Exhibit 10.5 to Electrosource, Inc.
Quarterly Report on Form 10-Q for the period ended
June 30, 1998 and incorporated herein by
reference).
10.62 Director Indemnification Agreement dated June 2, --
1998 between Electrosource, Inc. and Clifford
Winkless (filed as Exhibit 10.6 to Electrosource,
Inc. Quarterly Report on Form 10-Q for the period
ended June 30, 1998 and incorporated herein by
reference).
10.63 Director Indemnification Agreement dated June 2, --
1998 between Electrosource, Inc. and Roger Musson
(filed as Exhibit 10.7 to Electrosource, Inc.
Quarterly Report on Form 10-Q for the period ended
June 30, 1998).
10.64 Director Indemnification Agreement dated December E-18
23, 1998 between Electrosource, Inc. and William F.
Griffin.
10.65 Director Indemnification Agreement dated December E-25
23, 1998 between Electrosource, Inc. and James M.
Rosel.
10.66 1987 Stock Option Plan of Electrosource, Inc. --
(filed as Annex A, pages 44 to 48 of Electrosource,
Inc. Information Statement filed October 16, 1987
and incorporated herein by reference).
10.67 Amendment No. 1 to 1987 Stock Option Plan of --
Electrosource, Inc. dated February 19, 1992 (filed
as Exhibit 4.3 to Electrosource, Inc. Registration
Statement [No. 33-49049] on Form S-8 filed June 30,
1992 and incorporated herein by reference).
10.68 Amendment No. 2 to 1987 Stock Option Plan of --
Electrosource, Inc. (filed as Exhibit 10.36 to
Electrosource, Inc. Annual Report on Form 10-K for
the period ended December 31, 1992 and incorporated
herein by reference).
10.69 1988 Non-Employee Director Option Plan of --
Electrosource, Inc. (filed as Exhibit 4.2 to
Electrosource, Inc. Registration Statement [No. 33-
22223] on Form S-8 filed June 7, 1988 and
incorporated herein by reference).
10.70 Amendment No. 1 to 1988 Non-Employee Director Stock --
Option Plan (filed as Exhibit 4.3 to Electrosource,
Inc. Registration Statement [No. 33-35856] on Form
S-8 filed July 12, 1990 and incorporated herein by
reference).
10.71 Amendment No. 2 to 1988 Non-Employee Director Stock --
Option Plan (filed as Exhibit 4.4 to Electrosource,
Inc. Registration Statement [No. 33-49042] on Form
S-8 filed June 30, 1992 and incorporated herein by
reference).
10.72 Amendment No. 3 to 1988 Non-Employee Director Stock --
Option Plan (filed as Exhibit 4.4 to Electrosource,
Inc. Registration Statement [No. 33-64108] on Form
S-8 filed June 9, 1993 and incorporated herein by
reference).
10.73 1993 Non-Employee Consultant Stock Option Plan for --
Electrosource, Inc. (filed as Exhibit 4.2 to
Electrosource, Inc. Registration Statement [No. 33-
65386] on Form S-8 filed June 30, 1993 and
incorporated herein by reference).
10.74 1994 Stock Option Plan of Electrosource, Inc. --
(filed as Exhibit 10.4 to Electrosource, Inc.
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995 and incorporated herein by
reference).
10.75 1996 Stock Option Plan for Electrosource, Inc. --
(filed as Exhibit 4.2 to Registration Statement
[No. 333-31101] on Form S-8 and incorporated
herein by reference).
24.1 Consent of Ernst & Young LLP
27. Financial Data Schedule
EXHIBIT 4.7
Date of Grant: June 30, 1998
ELECTROSOURCE, INC.
STOCK OPTION AGREEMENT
THIS OPTION HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER THE SECURITIES LAWS OF ANY STATE ("BLUE SKY
LAWS"), 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 No. W12-102B
Corning, New York 14831 60,000 Shares
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 the
Research and Development Umbrella Agreement dated as of July 1,
1997 between the Company and Corning, and subsequent Agreement
dated May 29, 1998 (collectively, the "Umbrella Agreement"), and
all provisions of that Umbrella Agreement are incorporated herein
by reference. Defined terms shall have the same meaning as in
the Umbrella 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 Sixty Thousand (60,000) shares ("shares") of
Common Stock of the Company. The exercise price shall be Seven
and .125/100 Dollars ($7.125) per share for Sixty Thousand
(60,000) shares.
2. Term. The Option shall be exercisable at any time or
times until the option expires or terminates in accordance with
the provisions hereof. This Option shall in any event terminate
no later than 5:00 o'clock P.M., San Marcos, Texas time three
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
One Hundred Thousand and No/100 Dollars ($100,000.00) 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 Umbrella 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 Company's
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 "Organic Change." 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
/s/
By: By:
James M. Rosel
Vice President Finance Printed Name:
and General Counsel
Its:
EXHIBIT 4.8
Date of Grant: June 30, 1998
ELECTROSOURCE, INC.
STOCK OPTION AGREEMENT
THIS OPTION HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER THE SECURITIES LAWS OF ANY STATE ("BLUE SKY
LAWS"), 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 No. W12-103B
Corning, New York 14831 60,000 Shares
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 the Research and Development Umbrella Agreement dated
as of July 1, 1997 between the Company and Corning, and
subsequent Agreement dated May 29, 1998 (collectively, the
"Umbrella Agreement"), and all provisions of that Umbrella
Agreement are incorporated herein by reference. Defined terms
shall have the same meaning as in the Umbrella 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 Sixty Thousand (60,000) shares ("shares")
of Common Stock of the Company. The exercise price shall be
Seven and .125/100 Dollars ($7.125) per share for Sixty
Thousand (60,000) shares.
2. Term. The Option shall be exercisable at any time or
times until the option expires or terminates in accordance with
the provisions hereof. This Option shall in any event
terminate no later than 5:00 o'clock P.M., San Marcos, Texas
time three 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 One Hundred Thousand and
No/100 Dollars ($100,000.00) 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 Umbrella
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 Company's 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 "Organic Change." 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
/s/
By: By:
James M. Rosel
Vice President Finance Printed Name:
and General Counsel
Its:
EXHIBIT 10.49
PURCHASE ORDER
Electrosource International
The following number must appear on all related
Correspondence, shipping papers, and invoices: Order Serial Number: ES1001
Electrosource, Inc. P.O. DATE
2809 Interstate 35 South 15/06/98
San Marcos OUR REF.
Texas CBS/sg
UNITED STATES OF AMERICA TELEPHONE NO. FAX NO.
001 512 7536500 001 512 3533391
ITEM NO. QTY. DESCRIPTION UNIT PRICE TOTAL
Please Supply & Deliver.
1 5800 `Horizon' 12H85 High energy maintenance $ 175.00 $ 1,015,000
free battery including connecting pins
Schedule of supply:
600 Units in June 1998
600 Units in July 1998
800 Units in August 1998
900 Units in September 1998
900 Units in October 1998
1000 Units in November 1998
1000 Units in December 1998
Payment Terms: 50% - with order
Balance 50% of each
Shipment - 30 days after delivery
Price Ex works: Electrosource Inc, Texas
TOTAL PRICE $ 1,015,000
Please notify us immediately if you are unable to ship as specified.
Electrosource International Limited
Electron 5, The Bilton Centre
Business Park 5, Leatherhead,
Surrey KT22 7 NF
United Kingdom
Authorised by: /s/ Roger G. Musson 15/6/98
Registered Number 3581771
EXHIBIT 10.50
PURCHASE ORDER
Electrosource International
The following number must appear on all related
Correspondence, shipping papers, and invoices: Order Serial Number: ES1002
Electrosource, Inc. P.O. DATE
2809 Interstate 35 South 03/03/9
San Marcos OUR REF.
Texas CBS/sg
UNITED STATES OF AMERICA TELEPHONE NO. FAX NO.
001 512 7536500 001 512 3533391
ITEM NO. QTY. DESCRIPTION UNIT PRICE TOTAL
Please Supply & Deliver.
1 5800 `Horizon' 12H85 High energy maintenance $ 175.00 $ 1,015,000
free battery including connecting pins
Please note:
Modification of payment terms of our order:
ES1001
Payment Terms: 100% with releases on order
Price Ex works: Electrosource Inc, Texas
TOTAL PRICE $ 1,015,000
Electrosource International Limited
Electron 5, The Bilton Centre
Business Park 5, Leatherhead,
Surrey KT22 7 NF
United Kingdom
Authorised by: /s/ Roger G. Musson
Registered Number 3581771
EXHIBIT 10.64
DIRECTOR INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made this 23rd day of December, 1998,
between ELECTROSOURCE, INC., a Delaware corporation
("Corporation") and William F. Griffin ("Director").
WITNESSETH:
WHEREAS, Director is a member of the Board of Directors of
Corporation and in such capacity is performing a valuable service
for Corporation; and
WHEREAS, the Bylaws of the Corporation (the "Bylaws")
provide for the indemnification of the officers, directors,
agents and employees of Corporation; and
WHEREAS, such Bylaws and Section 145 of the Delaware General
Corporation Laws, as amended to date (the "State Statutes"),
specifically provide that they are not exclusive, and thereby
allow that contracts may be entered into between Corporation and
the members of its Board of Directors with respect to
indemnification of such directors; and
WHEREAS, in accordance with the authorization provided by
the State Statutes, Corporation has purchased and presently
maintains a policy or policies of Directors and Officers
Liability Insurance ("D&O Insurance") covering certain
liabilities which may be incurred by its directors and officers
in the performance of their services for Corporation; and
WHEREAS, recent developments with respect to the terms and
availability of D&O Insurance and with respect to the
application, amendment and enforcement of statutory and bylaw
indemnification provisions generally have raised questions
concerning the adequacy and reliability of the protection
afforded to directors thereby; and
WHEREAS, in order to resolve such questions and thereby
induce the Director to continue to serve as a member of the Board
of Directors of Corporation, Corporation has determined and
agreed to enter into this Agreement with Director.
NOW THEREFORE, in consideration of Director's continued
service as a Director after the date hereof, the parties hereto
agree as follows:
1. Indemnity of Director.
Corporation shall hold harmless and indemnify
Director to the full extent authorized or permitted by
the provisions of the State Statutes, or by any
amendment thereof or other statutory provisions
authorizing or permitting such indemnification which is
adopted after the date hereof.
2. Maintenance of Insurance and Self Insurance.
(a) Corporation represents that it presently has
in force and effect a policy of D&O Insurance with
the insurance company and in the amount as follows
(the "Insurance Policy"):
Insurer Policy No. Amount Deductible
National Union Fire 008565962 $2,000,000 $100,000/$250,000 SEC
Insurance Co.
Subject only to the provisions of Section 2(b)
hereof, Corporation hereby agrees that, so long as
Director shall continue to serve as a director of
Corporation (or shall continue at the request of
Corporation to serve as a director, officer,
employee or agent of another corporation,
partnership, joint venture, trust or other
enterprise) and thereafter so long as Director
shall be subject to any possible claim or
threatened, pending or completed action, suit or
proceeding, whether civil, criminal or
investigative, by reason of the fact that Director
was a director of Corporation (or served in any of
said other capacities), Corporation will purchase
and maintain in effect for the benefit of Director
one or more valid, binding and enforceable policy
or policies of D&O Insurance providing, in all
respects, coverage at least comparable to that
presently provided pursuant to the Insurance
Policy.
(b) Corporation shall not be required to maintain
said policy or policies of D&O Insurance in effect
if said insurance is not reasonably available or
if, in the reasonable business judgment of the
then directors of Corporation, either (i) the
premium cost for such insurance is substantially
disproportionate to the amount of coverage; or
(ii) the coverage provided by such insurance is so
limited by exclusions that there is insufficient
benefit from such insurance.
(c) In the event Corporation does not purchase
and maintain in effect said policy or policies of
D&O Insurance pursuant to the provisions of
Section 2(b) hereof, Corporation agrees to hold
harmless and indemnify Director to the full extent
of the coverage which would otherwise have been
provided for the benefit of Director pursuant to
the Insurance Policy.
3. Additional Indemnity.
Subject only to the limitations set forth in
Section 4 hereof, and without limitation to Section 1
above, Corporation shall further hold harmless and
indemnify Director:
(a) Against any and all expenses (including
attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably
incurred by Director in connection with any
threatened, pending or completed action, suit or
proceeding, whether civil, criminal,
administrative or investigative (including an
action by or in the right of the Corporation) to
which Director is or was a party or is threatened
to be made a party by reason of the fact that
Director is, was or at any time becomes a director
of the Corporation, or is or was serving or at any
time serves at the request of the Corporation as a
director, officer, employee or agent of another
corporation, partnership, joint venture, trust or
other enterprise; and
(b) Otherwise to the fullest extent that may be
provided to Director by Corporation under the
nonexclusivity provisions of Section 10.5 of the
Bylaws of the Corporation and the State Statutes.
4. Limitations on Additional Indemnity.
No indemnity pursuant to Section 3 hereof shall be paid
by Corporation:
(a) except to the extent the aggregate of losses
to be indemnified thereunder exceeds the amount of
such losses for which the Director is indemnified
either pursuant to Sections 1 or 2 hereof or
pursuant to any D&O Insurance purchased and
maintained by the Corporation; or
(b) in respect to remuneration paid to Director
if it shall be determined by the Reviewing Party
(as defined in Section 5 below), or by a final
judgment or other final adjudication, that such
remuneration was in violation of law; or
(c) if a determination of the Reviewing Party is
made, or if a judgment is rendered against a
Director, that an accounting must be made for
profits made from the purchase or sale by Director
of securities of Corporation in violation of the
provisions of Section 16(b) of the Securities
Exchange Act of 1934 and amendments thereto or
similar provisions of any federal, state or local
statutory law; or
(d) on account of Director's conduct which is
determined by the Reviewing Party, or by a final
judgment or other final adjudication, to have been
knowingly fraudulent, deliberately dishonest or of
willful misconduct; or
(e) if the Reviewing Party or a Court having
jurisdiction in the matter shall determine that
such indemnification is not lawful.
5. Reviewing Party.
"Reviewing Party" means:
(a) the Board of Directors, provided that a
majority of directors are not parties to the
claim, or
(b) special, independent counsel selected and
appointed by the Board of Directors; or
(c) special, independent counsel approved or
chosen pursuant to Section 6 below.
Any determination by the Reviewing Party shall be
conclusive and binding on Corporation and Director. If
the Reviewing Party determines that Director would not
be permitted to be indemnified in whole or in part,
Director shall have the right to commence litigation in
the State of Delaware in any court of proper
jurisdiction seeking an order or judgment by the court
equivalent to the determination of the Reviewing Party
or challenging any such determination by the Reviewing
Party or any aspect thereof.
6. Change in Control of Corporation.
If there is a change in control of Corporation (as
defined below), then with respect to all matters
thereafter arising concerning the rights of Director to
indemnity payments and expense advances under this
Agreement, or any other agreements or Bylaws now or
hereafter in effect relating to director
indemnification, Corporation shall seek legal advice
and shall retain a Reviewing Party only from special,
independent counsel selected by Director and approved
by Corporation (which approval shall not be
unreasonably withheld), and who has not otherwise
performed services for Corporation or Director. In the
event that Director and Corporation are unable to
agree on the selection of the special, independent
counsel, such special, independent counsel shall be
selected by lot from among at least five law firms
designated by Director, each of such law firms having
more than 35 attorneys and having a rating of "av" or
better in the then current Martindale-Hubbell Law
Directory. Such selection shall be made in the
presence of Director (and Director's legal counsel or
either of them, as Director may elect). Such special,
independent counsel, among other relevant appropriate
matters, shall determine whether and to what extent
Director would be permitted to be indemnified under
applicable law and shall render its written opinion to
Corporation and Director to such effect. Corporation
shall pay the reasonable fees of the special,
independent counsel and shall fully indemnify such
counsel against any and all costs and expenses arising
out of or relating to this Agreement or its engagement
pursuant hereto.
"Change in control" of Corporation shall be deemed
to have occurred if (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the "Act")), other
than a trustee or other fiduciary holding securities
under an employee benefit plan of Corporation, is or
becomes the "beneficial owner" (as defined in rule
13d-3 under the Act), directly or indirectly, of
securities of Corporation representing 20% or more of
the total voting power represented by Corporation's
then outstanding voting securities; (ii) during any
period of two consecutive years, individuals who at the
beginning of such period constitute the Board of
Directors of Corporation and any new director whose
election by the Board of Directors or nomination for
election by Corporation's shareholders was approved by
a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the
beginning of the period or whose election or nomination
for election was previously so approved, cease, for any
reason, to constitute a majority of the Board of
Directors; or (iii) the shareholders of Corporation
approve a merger or consolidation of Corporation with
any other corporation, other than a merger or
consolidation that would result in the voting
securities of Corporation outstanding immediately
prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting
securities of the surviving entity) at least 80% of the
total voting power represented by the voting securities
of Corporation or the surviving entity, as the case may
be, or an agreement for sale or disposition by
Corporation of all or substantially all Corporation's
assets.
7. Continuation of Indemnity.
All agreements and obligations of Corporation
contained herein shall continue during the period
Director is a director of Corporation (or is or was
serving at the request of Corporation as a director,
officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise),
and shall continue thereafter so long as Director shall
be subject to any possible claim or threatened, pending
or completed action, suit or proceeding, whether,
civil, criminal or investigative, by reason of the fact
that Director was a director of Corporation or serving
in any other capacity referred to herein.
8. Notification and Defense of Claim.
Promptly after receipt by Director of notice of
the commencement of any action, claim, suit or
proceeding, Director will, if a claim in respect
thereof is to be made against Corporation under this
Agreement, notify Corporation of the commencement
thereof; but the omission so to notify Corporation will
not relieve it from any liability which it may have to
Director otherwise than under this Agreement. With
respect to any such action, suit or proceeding as to
which Director notifies Corporation of the commencement
thereof;
(a) Corporation will be entitled to participate
therein at its own expense, and;
(b) Except as otherwise provided below, to the
extent that it may wish, Corporation jointly with
any other indemnifying party similarly notified
will be entitled to assume the defense thereof,
with counsel satisfactory to Director. After
notice from Corporation to Director of its
election so to assume the defense thereof,
Corporation will not be liable to Director under
this Agreement for any legal or other expenses
subsequently incurred by Director in connection
with the defense thereof other than reasonable
costs of investigation or as otherwise provided
below. Director shall have the right to employ
counsel in such action, suite or proceeding, but
the fees and expenses of such counsel incurred
after notice from Corporation of its assumption of
the defense thereof shall be at the expense of
Director unless (i) the employment of counsel by
Director has been authorized by Corporation; (ii)
Director shall have reasonably concluded that
there may be a conflict of interest between
Corporation and Director in the conduct of the
defense of such action; or (iii) Corporation
shall not in fact have employed counsel to assume
the defense of such action, in each of which cases
the fees and expenses of counsel shall be at the
expense of Corporation. Corporation shall not be
entitled to assume the defense of any action, suit
or proceeding brought by or on behalf of
Corporation or as to which Director shall have
made the conclusion provided for in (i) above.
(c) Corporation shall not be liable to indemnify
Director under this Agreement for any amounts paid
in settlement of any action or claim effected
without its written consent. Corporation shall
not settle any action or claim in any manner which
would impose any penalty or limitation on Director
without Director's written consent. Neither
Corporation nor Director will unreasonably
withhold its consent to any proposed settlement.
9. Advancement of Expenses.
Upon the request of Director, and except as
limited by paragraph 8(b) above, Corporation shall
reimburse Director for all reasonable expenses paid by
Director in defending any claim, civil or criminal
action, suit or proceeding for which Director is
entitled to be indemnified by Corporation for such
expenses under the provisions of the State Statutes,
the Bylaws, this Agreement or otherwise.
10. Repayment of Expenses.
Director shall reimburse Corporation for all
reasonable expenses paid or advanced to Director by
Corporation in defending any claim, civil or criminal
action, suit or proceeding against Director in the
event and only to the extent that it shall be
determined by the Reviewing Party that Director is not
entitled to be indemnified by Corporation for such
expenses under the provisions of the State Statutes,
the Bylaws, this Agreement or otherwise.
11. Enforcement.
(a) Corporation expressly confirms and agrees
that it has entered into this Agreement and
assumed the obligations imposed on Corporation
hereby in order to induce Director to continue as
a director of Corporation, and acknowledges that
Director is relying upon this Agreement in
continuing in such capacity.
(b) In the event Director is required to bring
any action to enforce rights or to collect moneys
due under this Agreement and is successful in
such action, Corporation shall reimburse Director
for all of Director's reasonable fees and expenses
in bringing and pursuing such action.
12. Severability.
Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the
others, so that if any provision hereof shall be held
to be valid or unenforceable for any reason, such
invalidity or unenforceability shall not affect the
validity or enforceability of the other provisions
hereof.
13. Governing Law; Binding Effect; Amendment and
Termination.
(a) This Agreement shall be interpreted and
enforced in accordance with the laws of the State
of Delaware.
(b) This Agreement shall be binding upon Director
and upon Corporation, its successors and assigns,
and shall inure to the benefit of Director, his
heirs, personal representatives and assigns and
to the benefit of Corporation, its successors and
assigns.
(c) No amendment, modification, termination or
cancellation of this Agreement shall be effective
unless in writing, signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the day and year first above written.
ELECTROSOURCE, INC. DIRECTOR
/s/ /s/
By:
Printed Name: Benny E. Jay Printed Name: William F. Griffin
Title: Executive Vice President
EXHIBIT 10.65
DIRECTOR INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made this 23rd day of December, 1998,
between ELECTROSOURCE, INC., a Delaware corporation
("Corporation") and JAMES M. ROSEL ("Director").
WITNESSETH:
WHEREAS, Director is a member of the Board of Directors of
Corporation and in such capacity is performing a valuable service
for Corporation; and
WHEREAS, the Bylaws of the Corporation (the "Bylaws")
provide for the indemnification of the officers, directors,
agents and employees of Corporation; and
WHEREAS, such Bylaws and Section 145 of the Delaware General
Corporation Laws, as amended to date (the "State Statutes"),
specifically provide that they are not exclusive, and thereby
allow that contracts may be entered into between Corporation and
the members of its Board of Directors with respect to
indemnification of such directors; and
WHEREAS, in accordance with the authorization provided by
the State Statutes, Corporation has purchased and presently
maintains a policy or policies of Directors and Officers
Liability Insurance ("D&O Insurance") covering certain
liabilities which may be incurred by its directors and officers
in the performance of their services for Corporation; and
WHEREAS, recent developments with respect to the terms and
availability of D&O Insurance and with respect to the
application, amendment and enforcement of statutory and bylaw
indemnification provisions generally have raised questions
concerning the adequacy and reliability of the protection
afforded to directors thereby; and
WHEREAS, in order to resolve such questions and thereby
induce the Director to continue to serve as a member of the Board
of Directors of Corporation, Corporation has determined and
agreed to enter into this Agreement with Director.
NOW THEREFORE, in consideration of Director's continued
service as a Director after the date hereof, the parties hereto
agree as follows:
1. Indemnity of Director.
Corporation shall hold harmless and indemnify
Director to the full extent authorized or permitted by
the provisions of the State Statutes, or by any
amendment thereof or other statutory provisions
authorizing or permitting such indemnification which is
adopted after the date hereof.
2. Maintenance of Insurance and Self Insurance.
(a) Corporation represents that it presently has
in force and effect a policy of D&O Insurance with
the insurance company and in the amount as follows
(the "Insurance Policy"):
Insurer Policy No. Amount Deductible
National Union Fire 008565962 $2,000,000 $100,000/$250,000 SEC
Insurance Co.
Subject only to the provisions of Section 2(b)
hereof, Corporation hereby agrees that, so long as
Director shall continue to serve as a director of
Corporation (or shall continue at the request of
Corporation to serve as a director, officer,
employee or agent of another corporation,
partnership, joint venture, trust or other
enterprise) and thereafter so long as Director
shall be subject to any possible claim or
threatened, pending or completed action, suit or
proceeding, whether civil, criminal or
investigative, by reason of the fact that Director
was a director of Corporation (or served in any of
said other capacities), Corporation will purchase
and maintain in effect for the benefit of Director
one or more valid, binding and enforceable policy
or policies of D&O Insurance providing, in all
respects, coverage at least comparable to that
presently provided pursuant to the Insurance
Policy.
(b) Corporation shall not be required to maintain
said policy or policies of D&O Insurance in effect
if said insurance is not reasonably available or
if, in the reasonable business judgment of the
then directors of Corporation, either (i) the
premium cost for such insurance is substantially
disproportionate to the amount of coverage; or
(ii) the coverage provided by such insurance is so
limited by exclusions that there is insufficient
benefit from such insurance.
(c) In the event Corporation does not purchase
and maintain in effect said policy or policies of
D&O Insurance pursuant to the provisions of
Section 2(b) hereof, Corporation agrees to hold
harmless and indemnify Director to the full extent
of the coverage which would otherwise have been
provided for the benefit of Director pursuant to
the Insurance Policy.
3. Additional Indemnity.
Subject only to the limitations set forth in
Section 4 hereof, and without limitation to Section 1
above, Corporation shall further hold harmless and
indemnify Director:
(a) Against any and all expenses (including
attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably
incurred by Director in connection with any
threatened, pending or completed action, suit or
proceeding, whether civil, criminal,
administrative or investigative (including an
action by or in the right of the Corporation) to
which Director is or was a party or is threatened
to be made a party by reason of the fact that
Director is, was or at any time becomes a director
of the Corporation, or is or was serving or at any
time serves at the request of the Corporation as a
director, officer, employee or agent of another
corporation, partnership, joint venture, trust or
other enterprise; and
(b) Otherwise to the fullest extent that may be
provided to Director by Corporation under the
nonexclusivity provisions of Section 10.5 of the
Bylaws of the Corporation and the State Statutes.
4. Limitations on Additional Indemnity.
No indemnity pursuant to Section 3 hereof shall be paid
by Corporation:
(a) except to the extent the aggregate of losses
to be indemnified thereunder exceeds the amount of
such losses for which the Director is indemnified
either pursuant to Sections 1 or 2 hereof or
pursuant to any D&O Insurance purchased and
maintained by the Corporation; or
(b) in respect to remuneration paid to Director
if it shall be determined by the Reviewing Party
(as defined in Section 5 below), or by a final
judgment or other final adjudication, that such
remuneration was in violation of law; or
(c) if a determination of the Reviewing Party is
made, or if a judgment is rendered against a
Director, that an accounting must be made for
profits made from the purchase or sale by Director
of securities of Corporation in violation of the
provisions of Section 16(b) of the Securities
Exchange Act of 1934 and amendments thereto or
similar provisions of any federal, state or local
statutory law; or
(d) on account of Director's conduct which is
determined by the Reviewing Party, or by a final
judgment or other final adjudication, to have been
knowingly fraudulent, deliberately dishonest or of
willful misconduct; or
(e) if the Reviewing Party or a Court having
jurisdiction in the matter shall determine that
such indemnification is not lawful.
5. Reviewing Party.
"Reviewing Party" means:
(a) the Board of Directors, provided that a
majority of directors are not parties to the
claim, or
(b) special, independent counsel selected and
appointed by the Board of Directors; or
(c) special, independent counsel approved or
chosen pursuant to Section 6 below.
Any determination by the Reviewing Party shall be
conclusive and binding on Corporation and Director. If
the Reviewing Party determines that Director would not
be permitted to be indemnified in whole or in part,
Director shall have the right to commence litigation in
the State of Delaware in any court of proper
jurisdiction seeking an order or judgment by the court
equivalent to the determination of the Reviewing Party
or challenging any such determination by the Reviewing
Party or any aspect thereof.
6. Change in Control of Corporation.
If there is a change in control of Corporation (as
defined below), then with respect to all matters
thereafter arising concerning the rights of Director to
indemnity payments and expense advances under this
Agreement, or any other agreements or Bylaws now or
hereafter in effect relating to director
indemnification, Corporation shall seek legal advice
and shall retain a Reviewing Party only from special,
independent counsel selected by Director and approved
by Corporation (which approval shall not be
unreasonably withheld), and who has not otherwise
performed services for Corporation or Director. In the
event that Director and Corporation are unable to
agree on the selection of the special, independent
counsel, such special, independent counsel shall be
selected by lot from among at least five law firms
designated by Director, each of such law firms having
more than 35 attorneys and having a rating of "av" or
better in the then current Martindale-Hubbell Law
Directory. Such selection shall be made in the
presence of Director (and Director's legal counsel or
either of them, as Director may elect). Such special,
independent counsel, among other relevant appropriate
matters, shall determine whether and to what extent
Director would be permitted to be indemnified under
applicable law and shall render its written opinion to
Corporation and Director to such effect. Corporation
shall pay the reasonable fees of the special,
independent counsel and shall fully indemnify such
counsel against any and all costs and expenses arising
out of or relating to this Agreement or its engagement
pursuant hereto.
"Change in control" of Corporation shall be deemed
to have occurred if (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the "Act")), other
than a trustee or other fiduciary holding securities
under an employee benefit plan of Corporation, is or
becomes the "beneficial owner" (as defined in rule
13d-3 under the Act), directly or indirectly, of
securities of Corporation representing 20% or more of
the total voting power represented by Corporation's
then outstanding voting securities; (ii) during any
period of two consecutive years, individuals who at the
beginning of such period constitute the Board of
Directors of Corporation and any new director whose
election by the Board of Directors or nomination for
election by Corporation's shareholders was approved by
a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the
beginning of the period or whose election or nomination
for election was previously so approved, cease, for any
reason, to constitute a majority of the Board of
Directors; or (iii) the shareholders of Corporation
approve a merger or consolidation of Corporation with
any other corporation, other than a merger or
consolidation that would result in the voting
securities of Corporation outstanding immediately
prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting
securities of the surviving entity) at least 80% of the
total voting power represented by the voting securities
of Corporation or the surviving entity, as the case may
be, or an agreement for sale or disposition by
Corporation of all or substantially all Corporation's
assets.
7. Continuation of Indemnity.
All agreements and obligations of Corporation
contained herein shall continue during the period
Director is a director of Corporation (or is or was
serving at the request of Corporation as a director,
officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise),
and shall continue thereafter so long as Director shall
be subject to any possible claim or threatened, pending
or completed action, suit or proceeding, whether,
civil, criminal or investigative, by reason of the fact
that Director was a director of Corporation or serving
in any other capacity referred to herein.
8. Notification and Defense of Claim.
Promptly after receipt by Director of notice of
the commencement of any action, claim, suit or
proceeding, Director will, if a claim in respect
thereof is to be made against Corporation under this
Agreement, notify Corporation of the commencement
thereof; but the omission so to notify Corporation will
not relieve it from any liability which it may have to
Director otherwise than under this Agreement. With
respect to any such action, suit or proceeding as to
which Director notifies Corporation of the commencement
thereof;
(a) Corporation will be entitled to participate
therein at its own expense, and;
(b) Except as otherwise provided below, to the
extent that it may wish, Corporation jointly with
any other indemnifying party similarly notified
will be entitled to assume the defense thereof,
with counsel satisfactory to Director. After
notice from Corporation to Director of its
election so to assume the defense thereof,
Corporation will not be liable to Director under
this Agreement for any legal or other expenses
subsequently incurred by Director in connection
with the defense thereof other than reasonable
costs of investigation or as otherwise provided
below. Director shall have the right to employ
counsel in such action, suite or proceeding, but
the fees and expenses of such counsel incurred
after notice from Corporation of its assumption of
the defense thereof shall be at the expense of
Director unless (i) the employment of counsel by
Director has been authorized by Corporation; (ii)
Director shall have reasonably concluded that
there may be a conflict of interest between
Corporation and Director in the conduct of the
defense of such action; or (iii) Corporation
shall not in fact have employed counsel to assume
the defense of such action, in each of which cases
the fees and expenses of counsel shall be at the
expense of Corporation. Corporation shall not be
entitled to assume the defense of any action, suit
or proceeding brought by or on behalf of
Corporation or as to which Director shall have
made the conclusion provided for in (i) above.
(c) Corporation shall not be liable to indemnify
Director under this Agreement for any amounts paid
in settlement of any action or claim effected
without its written consent. Corporation shall
not settle any action or claim in any manner which
would impose any penalty or limitation on Director
without Director's written consent. Neither
Corporation nor Director will unreasonably
withhold its consent to any proposed settlement.
9. Advancement of Expenses.
Upon the request of Director, and except as
limited by paragraph 8(b) above, Corporation shall
reimburse Director for all reasonable expenses paid by
Director in defending any claim, civil or criminal
action, suit or proceeding for which Director is
entitled to be indemnified by Corporation for such
expenses under the provisions of the State Statutes,
the Bylaws, this Agreement or otherwise.
10. Repayment of Expenses.
Director shall reimburse Corporation for all
reasonable expenses paid or advanced to Director by
Corporation in defending any claim, civil or criminal
action, suit or proceeding against Director in the
event and only to the extent that it shall be
determined by the Reviewing Party that Director is not
entitled to be indemnified by Corporation for such
expenses under the provisions of the State Statutes,
the Bylaws, this Agreement or otherwise.
11. Enforcement.
(a) Corporation expressly confirms and agrees
that it has entered into this Agreement and
assumed the obligations imposed on Corporation
hereby in order to induce Director to continue as
a director of Corporation, and acknowledges that
Director is relying upon this Agreement in
continuing in such capacity.
(b) In the event Director is required to bring
any action to enforce rights or to collect moneys
due under this Agreement and is successful in
such action, Corporation shall reimburse Director
for all of Director's reasonable fees and expenses
in bringing and pursuing such action.
12. Severability.
Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the
others, so that if any provision hereof shall be held
to be valid or unenforceable for any reason, such
invalidity or unenforceability shall not affect the
validity or enforceability of the other provisions
hereof.
13. Governing Law; Binding Effect; Amendment and Termination.
(a) This Agreement shall be interpreted and
enforced in accordance with the laws of the State
of Delaware.
(b) This Agreement shall be binding upon Director
and upon Corporation, its successors and assigns,
and shall inure to the benefit of Director, his
heirs, personal representatives and assigns and
to the benefit of Corporation, its successors and
assigns.
(c) No amendment, modification, termination or
cancellation of this Agreement shall be effective
unless in writing, signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the day and year first above written.
ELECTROSOURCE, INC. DIRECTOR
By: /s/ /s/
Printed Name: William F. Griffin Printed Name: James M. Rosel
Title: President, CEO
Exhibit 24.1
Consent of Independent Auditors
We consent to the incorporation by reference in: (i) the
Registration Statement Number 33-21598 on Form S-8, (ii) the
Registration Statement Number 33-49040 on Form S-8 and (iii) the
Registration Statement Number 33-64110 on Form S-8 pertaining to
the 1987 Stock Option Plan of Electrosource, Inc.; (i) the
Registration Statement Number 33-22223 on Form S-8, (ii) the
Registration Statement Number 33-35856 on Form S-8, (iii) the
Registration Statement Number 33-49042 on Form S-8 and (iv) the
Registration Statement Number 33-64108 on Form S-8 pertaining to
the 1988 Non-Employee Director Stock Option Plan of
Electrosource, Inc.; the Registration Statement Number 33-65386
on Form S-8 pertaining to the 1993 Non-Employee Consultant Stock
Option Plan of Electrosource, Inc.; the Registration Statement
Number 33-63363 on Form S-8 pertaining to the 1994 Stock Option
Plan of Electrosource, Inc.; the Registration Statement Number 33-
31101 on Form S-8 pertaining to the 1996 Stock Option Plan of
Electrosource, Inc.; the Registration Statement (Amendment Number
2 to Form S-3 Number 33-63361) and related Prospectus for the
registration of 185,934 shares of Electrosource, Inc., common
stock; the Registration Statement (Form S-3 Number 333-04637) and
related Prospectus for the registration of 80,610 shares of
Electrosource, Inc. common stock; the Registration Statement
(Form S-3 Number 333-10715) and related Prospectus for the
registration of 1,231 shares of Electrosource, Inc. common stock;
and the Registration Statement (Form S-3 Number 333-25659) and
related Prospectus for the registration of 437,674 shares of
Electrosource, Inc. common stock of our report dated March 5,
1999, except for Note O, as to which the date is April 12, 1999,
with respect to the financial statements of Electrosource, Inc.,
included in this Annual Report on Form 10-K for the year ended
December 31, 1998.
/s/ Ernst & Young LLP
Austin, Texas
April 12, 1999
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