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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
January 30, 1997
AMERIGON INCORPORATED
(Exact Name of Issuer as Specified
in its Charter)
California 0-21810 95-431855-4
(State or Other (Commission File (IRS
Jurisdiction Number) Employer
of Incorporation Identification
Identification or Number)
Organization)
404 East Huntington Drive, Monrovia, California 91016
(Address of Principal Executive Offices) (Zip Code)
(818) 932-1200
(Registrant's telephone number,
including area code)
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Item 5. Other Events
To date, Amerigon Incorporated (the "Company") has focused on and
invested substantial capital in four product technologies: heated and cooled
seats, radar products, electric vehicles, and IVS-TM- audio navigation
products. The Company has recently determined to focus its resources
primarily on developing its heated and cooled seat and radar technologies.
The Company is presently seeking to sell the IVS-TM- product line or find a
strategic or financial partner to help further develop and market the IVS-TM-
product. The Company is also presently seeking strategic and financial
partners to help support continued development and marketing of the Company's
electric vehicle systems. No assurance can be given that the Company's
change in business strategy will prove successful or even beneficial to the
Company. Further, no assurance can be given that the Company will be able to
complete a sale of the IVS-TM- product line, obtain additional funding or
attract strategic or financial partners or that, if such funding or partners
were to be obtained, the electric vehicle or IVS-TM- products could be
successfully developed. If the Company is unable to arrange such a
relationship in the near term, the Company will attempt to sell its
proprietary interests and other assets in and related to these technologies
or abandon their development. No assurance can be given that the Company
would be able to effect such a sale on terms favorable to the Company or at
all.
In addition to the risks associated with the Company's decision to
focus its resources primarily on developing its heated and cooled seat and radar
technologies, potential investors in the Company's securities should be aware of
the following cautionary risk factors and consider them carefully in evaluating
the Company and its business before purchasing the stock of the Company:
DEVELOPMENT STAGE COMPANY
The Company's proposed future operations are subject to numerous risks
associated with establishing new businesses, including, but not limited to,
unforeseeable expenses, delays and complications, as well as specific risks
of the industry in which the Company competes. There can be no assurance that
the Company will be able to market any product on a commercial scale, achieve
profitable operations or remain in business. To date, the Company's first
developed product, the IVS-TM-, has not been commercially successful. The
Company was formed in April 1991 and most of its products are still in the
development stage. In addition, several of the Company's products are aimed at
the electric vehicle market, which is still in its infancy and may never achieve
commercial prominence. The likelihood of the success
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of the Company must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection
with establishing a new business, including, without limitation, uncertainty
as to market acceptance of the Company's products, marketing problems and
expenses, competition and changes in business strategy. There can be no
assurance that the Company will be successful in its proposed business
activities.
Moreover, except for the IVS-TM-, the Company's other products are in
various stages of prototype development and will require the expenditure of
significant funds for further development and testing in order to commence
commercial sales. No assurance can be given that the Company will obtain such
additional funds or that it will be successful in resolving all technical
problems relating to its products or in developing the technology used in its
prototypes into commercially viable products. The Company does not expect to
generate any significant revenues from the sale of seat or radar products for at
least 12 to 24 months, and no assurance can be given that such sales will ever
materialize. Further, there can be no assurance that any of the Company's
products, if successfully developed, will be capable of being produced in
commercial quantities at reasonable costs or will be successfully marketed and
distributed. See "Limited Marketing Capabilities; Uncertainty of Market
Acceptance."
SUBSTANTIAL OPERATING LOSSES SINCE INCEPTION
The Company has incurred substantial operating losses since its
inception. At December 31, 1995 and at September 30, 1996, the Company had
accumulated deficits since inception of $13,187,000 and $19,432,000,
respectively. During the years ended December 31, 1994 and 1995, the Company
had net losses of $4,235,000 and $3,237,000, respectively. For the nine
months ended September 30, 1995 and 1996, the Company had net losses of
$2,960,000 and $6,245,000, respectively. The Company has incurred additional
losses and its accumulated deficit has increased since September 30, 1996.
The Company's accumulated deficits are attributable to the costs of
developmental and other start-up activities, including the industrial design,
development and marketing of the Company's products and a significant loss
incurred on a major electric vehicle development contract. See "Electric
Vehicle Cost Overruns and Significant Contract Losses". The Company has
continued to incur losses due to continuing expenses without significant
revenues or profit margins on the sale of products, and expects to incur
significant losses for the foreseeable future.
NEED FOR ADDITIONAL FINANCING
The Company has experienced negative cash flow since its
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inception and has expended, and expects to continue to expend, substantial
funds to continue its development efforts. The Company has not generated and
does not expect to generate in the foreseeable future sufficient revenues
from the sales of its principal products to cover its operating expenses.
In October, 1996, the Company completed a private placement of $3,000,000 of
its debt securities (the "Bridge Financing"), the net proceeds of which have
since been spent, in part to help fund the Company's operating expenses. On
January 29, 1997, the Company borrowed an additional $100,000 from Lon E.
Bell, Ph.D., Chief Executive Officer, President, Chairman of the Board of
Directors, founder and a principal shareholder of the Company, for working
capital purposes, which loan is due and payable on the earlier of March 1,
1997 or, if the Offering (as defined below) is completed, the day after the
completion of such Offering. The Company previously borrowed $200,000 from
Dr. Bell for working capital purposes, which loan remains outstanding and is
due and payable on demand. See "Potential Conflicts of Interest" herein. The
Company anticipates that it will need to borrow additional amounts to help
fund its operating expenses prior to the earliest date that the Offering
could be completed, if completed at all. No assurance can be given that the
Company will be able to obtain such additional amounts on terms affordable to
the Company or at all.
On December 6, 1996, the Company filed with the Securities and
Exchange Commission (the "Commission") a registration statement (the
"Registration Statement") relating to a contemplated public offering (the
"Offering") of the Company's equity securities, the net proceeds of which
Offering are intended to be used to repay the Company's obligations under the
Bridge Financing, to repay the working capital loans from Dr. Bell, to help
fund the Company's operating expenses and for certain other purposes. The
Offering will be made only by means of a prospectus and will not be made
until and unless the Registration Statement has been declared effective by
the Commission. No assurance can be given that the Registration Statement
will be declared effective by the Commission or that, even if the
Registration Statement is declared effective, the Offering will ultimately be
undertaken or completed.
Even after the completion of the Offering, the Company will require
additional financing through bank borrowings, debt or equity financing or
otherwise to finance its planned operations. If additional funds are not
obtained when needed, the Company will be required to significantly curtail
its activities, dispose of one or more of its technologies and/or cease
operations and liquidate. If and when the Company is able to commence
commercial production of its heated and cooled seat or radar products, the
Company will incur significant expenses for tooling product parts and to set
up manufacturing and/or assembly processes. In part as a result of the
Company's anticipated capital requirements, management is currently seeking
to sell the IVS-TM-product line or enter into collaborative or other
arrangements with financial or strategic corporate partners to develop the
IVS-TM- product and its electric vehicle technologies. No assurance can be
given that such alternate funding sources can be obtained or will provide
sufficient, or any, financing for the Company. Moreover, the licensing
agreements for the Company's current and potential future rights to licensed
technology generally require the payment of minimum royalties. For the
fiscal year ended December 31, 1996, the Company paid a total of
approximately $140,000 in royalties. In the event the Company is unable to
pay such royalties or otherwise breaches such licensing agreements, the
Company would lose its rights to the technology, which would have a material
adverse effect on the Company's business.
In light of the foregoing, and the significant losses experienced on
the Company's major electric vehicle contract (see
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"Electric Vehicle Cost Overruns and Significant Contract Losses"), it is
likely that the report of the Company's independent accountants with respect
to the Company's financial statements as of and for the period ended December
31, 1996 will contain an explanatory paragraph concerning the Company's
ability to continue as a going concern without obtaining additional financing.
ELECTRIC VEHICLE COST OVERRUNS AND SIGNIFICANT CONTRACT LOSSES
In its results for the nine months ended September 30, 1996, the
Company reported cost overruns on the approximately $9.6 million electric
vehicle contract now in process that resulted in the Company recording
charges to operations for the ultimate estimated loss at completion of the
contract of approximately $1,625,000. The Company may continue to experience
cost overruns on this contract due to unanticipated design and development
problems and continuing delays in the completion of this contract, as well as
other factors. Furthermore, the customer under the contract is entitled to
withhold 10% of the contract price payable to the Company for a period of
time following the final shipment and to offset such amount against any
claims the customer may have against the Company, including any warranty
claims. Any such withholding and/or offset would further exacerbate the
Company's liquidity problems. The Company will also be obliged to fulfill
warranty obligations on electric vehicles delivered under the contract for a
period of one year, which may result in additional expense to the Company.
UNCERTAIN MARKET DEMAND FOR IVS-TM-; FURTHER REFINEMENT NEEDED; POSSIBLE
DISPOSITION
Development of the first generation IVS-TM- audio navigation
product was completed and commercial sales commenced in December 1995. To
date, sales of the product have been weak due to lower than anticipated
consumer acceptance of the product and overall market demand. In 1995, the
Company had pre-production orders for approximately 2,000 units. As of
December 31, 1996, only approximately 2,700 units had been produced and sold.
Of such units, approximately 270 are subject to one customer's right to
return units for a refund of approximately $77,000. No assurance can be
given that such units will not be returned. Moreover, the Company believes
that the current IVS-TM- product is not commercially viable and will require
further development, at significant cost, in order to have a reasonable
prospect for commercial viability, particularly with respect to sales to
automobile manufacturers. Based upon the results to date, the strategy of
attempting to sell the IVS-TM-product in the aftermarket is questionable. As
a result of weak demand for the product in its current form and the capital
resources necessary to refine and market it, the Company is presently seeking
to sell the IVS-TM- product line and the Company's interests in related
technology or to find a strategic or financial
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partner to help further develop and market the IVS-TM- product. If no such
sale or relationship is consummated in the near future, the Company intends
to discontinue sales and further development of the IVS-TM- and related
technology.
POSSIBLE TERMINATION OF LICENSE OF VOICE-RECOGNITION SOFTWARE TECHNOLOGY USED IN
IVS-TM-
The Company has failed to make advance royalty payments required by
the terms of the governing license agreement for certain voice-recognition
software technology used in the IVS-TM-. This license may be terminated by
either party upon a material breach of the agreement by the other party that
remains uncured after a certain grace period. If the licensor were to
terminate such license, in order to continue to manufacture and sell the
IVS-TM-, the Company would either need to reach an accommodation with such
licensor or identify and secure a license to use a substitute software
technology, neither of which can be assured. The adaptation of substitute
software technology under such circumstances might result in additional
development costs to the Company. If the Company were unable to reach an
accommodation with the licensor or identify and secure a substitute license,
the Company's ability to sell the IVS-TM- product line and the Company's
interests in related technology might be impaired.
LACK OF EXCLUSIVE LICENSES ON IVS-TM- AND HEATED AND COOLED SEATS; POTENTIAL
LOSS OF EXCLUSIVITY OF LICENSE ON RADAR FOR MANEUVERING AND SAFETY
The Company has entered into an agreement with the IVS-TM-
licensor, Audio Navigation Systems, LLC ("ANS"), formerly Audio Navigation
Systems, Inc., which resolved prior differences of interpretation of the
license agreement covering the IVS-TM- technology. The new agreement
provides, among other things, that ANS can produce, market and/or license
others to make and sell products incorporating certain improvements made by
the Company to the IVS-TM- technology that could compete directly with the
Company's IVS-TM- product. The Company believes that ANS may introduce a
competitive product in 1997. Such competition could have an adverse effect
on the value of the Company's IVS-TM- product and on any future versions of
such product. The Company also lacks an exclusive license for its heated and
cooled seat technology. Consequently, such technology may be licensed to
other entities, which may introduce seat products competitive with those of
the Company. Such competitive products may be superior to the Company's seat
products, and such competition may have a material adverse effect on sales of
the Company's seat products and on the business and financial condition of
the Company.
The Company's exclusive license from the Regents of the University of
California for the Company's radar technology
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requires the Company to achieve commercial sales of products by the end of
1998. Commercial sales are defined as sales of non-prototype products to at
least one original equipment manufacturer. Failure to achieve commercial
sales for a particular application will result in the loss of exclusivity of
the license for that application, in which event the licensor will have the
right to grant other entities a non-exclusive license for that application on
terms no more favorable than those enjoyed by the Company.
LIMITED PROTECTION OF PATENTS AND PROPRIETARY RIGHTS; POTENTIAL DISPUTE WITH
LICENSOR OF SEAT TECHNOLOGY
The Company believes that patents and proprietary rights have been
and will continue to be important in enabling the Company to compete. There
can be no assurance that any patents will be granted or that the Company's or
its licensors' patents and proprietary rights will not be challenged or
circumvented or will provide the Company with any meaningful competitive
advantages or that any pending patent applications will issue. Furthermore,
there can be no assurance that others will not independently develop similar
products or will not design around any patents that have been or may be
issued to the Company or its licensors. Failure to obtain patents in certain
foreign countries may materially adversely affect the Company's ability to
compete effectively in certain international markets. The Company is aware
that an unrelated party filed a patent application in Japan on March 30, 1992
with respect to certain improvements to the CCS technology developed by the
Company. However, to date, this application remains subject to examination
and therefore no patent has been issued to the party filing such application.
If such patent were to issue and be upheld, it could have a material adverse
effect upon the Company's ability to sell CCS products in Japan.
The Company has a different understanding regarding technology
improvements made by the Company than that of the licensor of certain technology
used in the Company's heated and cooled seats. Such licensor has informed the
Company that he believes that he is entitled to a license to use any
improvements to such technology that the Company might develop. If such
licensor were deemed to have such rights to use such improvements, such licensor
may develop and sell seat products competitive with those of the Company, which
competition may have a material adverse effect on sales of the Company's seats
and its business and financial condition generally.
The Company also relies on trade secrets that it seeks to protect,
in part, through confidentiality and non-disclosure agreements with
employees, customers and other parties. There can be no assurance that these
agreements will not be breached, that the Company would have adequate
remedies for any such breach or
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that the Company's trade secrets will not otherwise become known to or
independently developed by competitors. To the extent that consultants, key
employees or other third parties apply technological information
independently developed by them or by others to the Company's proposed
projects, disputes may arise as to the proprietary rights to such information
which may not be resolved in favor of the Company. The Company may be
involved from time to time in litigation to determine the enforceability,
scope and validity of proprietary rights. Any such litigation could result
in substantial cost to the Company and diversion of effort by the Company's
management and technical personnel. Additionally, with respect to licensed
technology, there can be no assurance that the licensor of the technology
will have the resources, financial or otherwise, or desire to defend against
any challenges to the rights of such licensor to its patents.
LACK OF CAPITAL TO FUND PROPOSED ELECTRIC VEHICLE JOINT VENTURE; STRATEGY
UNTESTED; WRITE-OFF OF CAPITALIZED EXPENSES IN 1996 FOURTH QUARTER
In February 1996, the Company entered into a memorandum of
understanding (which by its terms expired on August 29, 1996) with a
strategic partner to enter into a proposed joint venture in India to develop,
market and/or manufacture electric vehicles. The terms of the joint venture
called for the Company to contribute cash in the approximate amount of $2.2
million as well as the design and certain tooling for production of the
electric vehicles to the joint venture in exchange for a minority equity
stake. The Company presently lacks the capital to make such a financial
contribution to a joint venture entity, and currently does not propose to
apply any of the net proceeds of the Offering for such purpose. Accordingly,
unless the terms of the joint venture were to be revised so as to eliminate
or substantially reduce the Company's required capital contribution, or
unless the Company can find a new or additional joint venture partner, the
Company would be unable to participate in the proposed joint venture on its
original terms. No assurance can be given that the Company will be able to
reduce its required capital contribution to the proposed joint venture or
obtain additional financing for the proposed joint venture. Furthermore,
there can be no assurance that the Company and its proposed partner will ever
consummate the proposed joint venture.
Even if the Company were able to obtain sufficient funding to
participate in the proposed joint venture in India or similar joint ventures
in other countries, there can be no assurance that the governments of such
countries would grant the necessary permits, authority and approvals for any
such joint venture or similar enterprise or for the development, manufacture
and sale of electric vehicles, that consumer interest would be sufficient or
economic factors affecting consumer demand would be
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favorable to make such ventures financially feasible, or that competition
will not exist or develop that would materially adversely affect the
financial feasibility of such ventures. In addition, many of the Company's
competitors in the electric vehicle market have greater financial resources
than the Company.
Prior to December of 1996, the Company treated certain costs
totaling approximately $700,000 incurred in connection with prototype
development in anticipation of the formation of the Indian joint venture as
capitalized expenses. Because the joint venture may not be viable, the
Company will treat such costs as current period expenses in December of 1996.
Such expenses will increase losses during the fourth quarter of 1996 by
approximately $700,000. See "Potential Charges to Income."
RESTATEMENT OF 1996 1ST QUARTER AND 2ND QUARTER FINANCIAL RESULTS
On October 24, 1996, the Company filed two Forms 10Q/A amending the
Company's quarterly reports on Form 10-Q for the periods ended March 31, 1996
and June 30, 1996, respectively, to adjust revenues and expenses associated
with development contracts. In the six months ended June 30, 1996, these
adjustments resulted in a decrease in revenues from development contracts of
$1,500,000 and a decrease in expenses related to direct development contract
costs of $570,000, which caused an increased operating loss and net loss of
$930,000. Net loss per share for such period increased by $.23. The
decrease in revenues from development contracts for the six months ended June
30, 1996 consisted of approximately $800,000 related to errors in the
calculation of the revenue recognized under the Company's major electrical
vehicle development contract. The correction of these errors also resulted
in an increase in direct development contract costs of approximately $130,000
for the six months ended June 30, 1996. The remaining decrease in
development contract revenue of approximately $700,000 related to the
reversal of $700,000 in revenue and an equal amount of associated contract
costs recognized prior to the finalization of the Company's proposed joint
venture in India and related contracts therefrom. The $700,000 in costs were
recorded as deferred contract costs. See "Lack of Capital to Fund Proposed
Electric Vehicle Joint Venture; Strategy Untested; Write-off of Capitalized
Expenses in 1996 Fourth Quarter."
DEPENDENCE ON AND STRAINED RELATIONS WITH VENDORS AND SUPPLIERS
The Company is dependent on various vendors and suppliers for the
components of its products. Although the Company believes that there are a
number of alternative sources for most of these components, certain components
are only available from a limited number of suppliers. Due to the Company's
recent cash shortfalls, the Company has been unable to pay most of its
vendors and suppliers on a timely basis.
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As a result, the Company believes that its relations with many of its vendors
and suppliers may be strained. Many of such vendors and suppliers will no
longer extend trade credit to the Company. There can be no assurance that
any of such vendors and suppliers will not limit or cease doing business with
the Company in the future or further alter the terms on which they do
business with the Company. The loss of any significant supplier, in the
absence of a timely and satisfactory alternative arrangement, or an inability
to obtain essential components on reasonable terms or at all, could
materially adversely affect the Company's business and operations. The
Company's business and operations could also be materially adversely affected
by delays in deliveries from suppliers.
DEFAULT UNDER BANK CREDIT LINE
The Company has a secured line of credit from a commercial bank to
borrow funds based on costs incurred and billings made under a major electric
vehicle development contract. The Company has experienced significant delays
and cost overruns under such electric vehicle contract, which may delay or
impair the Company's ability to collect the remaining payments due under this
contract. See "Electric Vehicle Cost Overruns and Significant Contract
Losses." The line of credit is secured by a security interest in all of the
Company's personal property, including, but not limited to, all accounts
receivable, equipment, inventory and general intangibles. As of January 30,
1997, the Company had approximately $1,200,000 outstanding (including accrued
interest) under the secured line of credit. The Company intends to use part
of the proceeds of the Offering to repay all amounts due under the line of
credit. The line of credit expired by its terms but has been extended orally
until February 28, 1997. The Company has sought, and the Bank has advised the
Company that it will soon deliver, a written extension to such date. However,
the delivery of such a written extension cannot be assured.
The Company has breached certain financial covenants under the line
of credit, which default entitles the bank to declare all sums outstanding
under the line of credit immediately due and payable. Any exercise by the
bank of its rights and remedies under the line of credit prior to the
repayment of all amounts due thereunder would have a material adverse effect
on the Company. However, the bank has agreed orally to forbear until February
28, 1997 from exercising its rights and remedies with respect to the Company's
breaches of the financial covenants. The Company has sought, and the bank
has advised the Company that it will soon deliver, a written forebearance to
such date. However, the delivery of a written forbearance to such date cannot
be assured. The Company has agreed that it will not be entitled to make any
further borrowings under the line of credit.
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LEGAL PROCEEDINGS
HBI Financial Inc. ("HBI"), and DDJ Capital Management LLC ("DDJ"),
each major shareholders of the Company, have threatened various claims
against the Company and its directors and officers arising out of the
December 1995 private placement by the Company of 750,000 shares of Class A
Common Stock. In general, they allege that the Company provided misleading
projections and failed to disclose certain information in connection with
such private placement. The Company believes these allegations to be without
merit. While, to the Company's knowledge, HBI and DDJ have commenced no
legal action against the Company in connection with such claims, no assurance
can be given that they will not do so in the future. If they were to
commence such legal action, the Company would be forced to defend such action
and/or settle with them, the costs of which defense and/or any resulting
liability or settlement could have a material adverse effect on the Company's
financial condition. John W. Clark, a director of the Company, is a general
partner of an affiliate of HBI.
The Company is subject to other litigation in the ordinary course of
its business, none of which is expected to have a material adverse effect on the
Company.
LIMITED MARKETING CAPABILITIES; UNCERTAINTY OF MARKET ACCEPTANCE
Because of the sophisticated nature and early stage of development of
its products, the Company will be required to educate potential customers and
successfully demonstrate that the merits of the Company's products justify the
costs associated with such products. In certain cases, the Company will likely
encounter resistance from customers reluctant to make the modifications
necessary to incorporate the Company's products into their products or
production processes. In some instances, the Company may be required to rely on
its distributors or other strategic partners to market its products. The
success of any such relationship will depend in part on the other party's own
competitive, marketing and strategic considerations, including the relative
advantages of alternative products being developed and/or marketed by any such
party. There can be no assurance that the Company will be able to market its
products properly so as to generate meaningful product sales.
SPECIAL FACTORS APPLICABLE TO THE AUTOMOTIVE INDUSTRY IN GENERAL
The automobile industry is cyclical and dependent on consumer
spending. The Company's future sales may be subject to the same cyclical
variations as the automotive industry in general. There have been recent
reports of declines in sales of automobiles on a worldwide basis, and there
can be no assurance that continued or increased declines in automobile
production would not have a
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material adverse effect on the Company's business or prospects. Additionally,
automotive customers typically reserve the right to unilaterally cancel
contracts completely or to require unilateral price reductions. Although
they generally reimburse companies for actual out-of-pocket costs incurred
with respect to the particular contract up to the point of cancellation,
these reimbursements typically do not cover costs associated with acquiring
general purpose assets such as facilities and capital equipment, and may be
subject to negotiation and substantial delays in receipts by the Company.
Any unilateral cancellation of, or price reduction with respect to, any
contract that the Company may obtain could reduce or eliminate any financial
benefits anticipated from such contract and could have a material adverse
effect on the Company's financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL; NEED TO RETAIN TECHNICAL PERSONNEL
The Company's success will depend to a large extent upon the
continued contributions of Lon E. Bell, Ph.D., Chief Executive Officer,
President and Chairman of the Board of Directors and the founder of the
Company, and Joshua M. Newman, Vice President of Corporate Development and
Planning and a Director. The Company has obtained key-person life insurance
coverage in the amount of $2,000,000 on the life of Dr. Bell and in the
amount of $1,000,000 on the life of Mr. Newman. Neither Dr. Bell nor Mr.
Newman is bound by an employment agreement with the Company. The loss of the
services of Dr. Bell, Mr. Newman or any of the Company's executive personnel
could materially adversely affect the Company. The success of the Company
will also depend, in part, upon its ability to retain qualified engineering
and other technical and marketing personnel. There is significant
competition for technologically qualified personnel in the geographical area
of the Company's business and the Company may not be successful in recruiting
or retaining sufficient qualified personnel.
POTENTIAL CHARGES TO INCOME
In connection with the Company's initial public offering completed
in 1993, the Escrow Shares were placed (and currently remain) in an escrow
account, and are subject to release to the beneficial owners of such shares
in the event the Company attains certain pre-tax income goals. In the event
any Escrow Shares are released to persons who are current or former officers
or other employees of the Company, compensation expense will be recorded for
financial reporting purposes. Accordingly, in the event of the release of
the Escrow Shares from escrow, the Company will recognize during the periods
in which the earnings thresholds are met or are probable of being met one or
more substantial non-cash charges which would have the effect of
substantially increasing the Company's loss or reducing or eliminating
earnings, if any, at such time. Although the amount of compensation expense
recognized by
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the Company will not affect the Company's total shareholders' equity or
reduce its working capital, it may have a depressive effect on the market
price of the Company's securities. The Company also expects to incur a
non-recurring charge to operations in each fiscal quarter up to and including
the fiscal quarter in which the closing of the Offering occurs relating to
the repayment of the promissory notes (the "Bridge Notes") issued in
connection with the Bridge Financing and associated costs of their issuance
the aggregate amount of which, together with the charge the Company will
incur upon repayment of the Bridge Notes, will be approximately $500,000. In
addition, during the fourth quarter of 1996, the Company will incur a charge
of approximately $700,000 related to costs incurred in connection with the
Company's proposed Indian joint venture. See "Lack of Capital to Fund
Proposed Electric Vehicle Joint Venture; Strategy Untested; Write-off of
Capitalized Expenses in 1996 Fourth Quarter."
DEPENDENCE ON GRANTS; GOVERNMENT AUDITS OF GRANTS
For the year ended December 31, 1995, and for the nine months ended
September 30, 1996, the Company received a total of $1,469,000 and
$1,454,000, respectively, in Federal and state government grants to fund the
Company's development of various of its products, including electric
vehicles. As a result of budgetary pressures, fewer Federal and state grants
of the kind obtained by the Company in the past are available and those that
are available are increasingly difficult to obtain. No assurance can be given
as to whether the Company will be able to obtain any such grants in the
future.
The Company's grants are subject to periodic audit by the granting
government authorities for the purpose of confirming, among other things,
progress in development and that grant moneys are being used and accounted for
as required by the granting authority. If, as a result of any such audit, a
granting authority were to disallow expenses submitted for reimbursement, such
authority could seek recovery of such funds from the Company. The Company is
not aware of any pending or threatened audits with respect to the Company's
grants and does not have any reason to believe that any grant moneys have been
applied in a manner inconsistent with grant requirements or that any grant
audits are otherwise warranted or likely. However, no assurance can be given
that any such audits will not be commenced in the future or that, if commenced,
any such audits would not result in an obligation of the Company to reimburse
funds to the granting authority.
FLUCTUATIONS IN QUARTERLY RESULTS; SIGNIFICANT DECLINE IN REVENUES EXPECTED;
POSSIBLE VOLATILITY OF STOCK PRICE
Factors such as announcements by the Company of quarterly variations
in its financial results, or unexpected losses, could
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cause the market price of the Class A Common Stock of the Company to
fluctuate significantly. The results of operations in previous quarters have
been partially dependent on large grants, orders and development contracts,
which may not recur in the future. In addition, the Company's quarterly
operating results may fluctuate significantly in the future due to a number
of other factors, including timing of product introductions by the Company
and its competitors, availability and pricing of components from third
parties, timing of orders, foreign currency exchange rates, technological
changes and economic conditions generally. Development contract revenues are
expected to decline significantly in the next two fiscal quarters because the
activity on the Company's major electric vehicle development contract is
expected to diminish during the fourth quarter of 1996 and ultimately
conclude at the end of 1996 with no replacement contract presently scheduled
to follow. In recent years, the stock markets in general, and the share
prices of technology companies in particular, have experienced extreme
fluctuations. These broad market and industry fluctuations may adversely
affect the market price of the Class A Common Stock. In addition, failure to
meet or exceed analysts' expectations of financial performance may result in
immediate and significant price and volume fluctuations in the Class A Common
Stock.
POTENTIAL CONFLICTS OF INTEREST
Affiliates of Lon E. Bell, Ph.D., Chief Executive Officer,
President, Chairman of the Board of Directors, founder and a principal
shareholder of the Company, are parties to certain business contracts and
arrangements with the Company. These contracts and arrangements include the
Company's lease of a manufacturing and office facility located in Alameda,
California from CALSTART, a non-profit research and development consortium
co-founded by Dr. Bell, several management contracts pursuant to which the
Company manages certain electric vehicle grant programs obtained by CALSTART
and an engineering design services contract pursuant to which the Company
periodically engages Adaptrans, an entity owned by David Bell, Dr. Bell's
son, to provide assistance with the Company's development of its electric
vehicle Energy Management System. In addition, Dr. Bell has extended a
$200,000 working capital loan to the Company, which loan is payable on
demand, as well as a $100,000 working capital loan that is due and payable
on the earlier of March 1, 1997 or the day after the completion of the
Offering. These relationships and transactions, coupled with Dr. Bell's
ownership of a significant percentage of the Company's Class A Common Stock
and his membership on the Board of Directors, could give rise to conflicts of
interest. The Company believes that such affiliate transactions are on terms
no less favorable to the Company than those that could have been obtained
from unaffiliated third parties.
John W. Clark, a director of the Company, is a general partner of
an affiliate of HBI. HBI and DDJ, each major
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shareholders of the Company, have threatened various claims against the
Company and its directors and officers arising out of the December 1995
private placement by the Company of 750,000 shares of Class A Common Stock.
See "Legal Proceedings." While to the Company's knowledge neither HBI nor
DDJ has commenced any legal action against the Company, no assurance can be
given that any such legal action will not be commenced in the future. The
relationship of Mr. Clark with HBI, coupled with the fact that he is a member
of the Company's Board of Directors, could give rise to conflicts of interest.
RISK OF FOREIGN SALES
A substantial percentage of the Company's revenues to date have
been from sales to foreign countries. Accordingly, the Company's business is
subject to many of the risks of international operations, including
governmental controls, tariff restrictions, foreign currency fluctuations and
currency control regulations. However, substantially all sales to foreign
countries have been denominated in U.S. dollars. As such, the Company's
historical net exposure to foreign currency fluctuations has not been
material. No assurance can be given that future contracts will be denominated
in U.S. dollars, however.
POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ STOCK MARKET
While the Company's Class A Common Stock is currently listed on the
Nasdaq SmallCap Market and the Class A Warrants meet the current Nasdaq
listing requirements and are expected to be initially listed on Nasdaq, there
can be no assurance that the Company will meet the criteria for continued
listing. Continued inclusion on the Nasdaq generally requires that (i) the
Company maintain at least $2,000,000 in total assets and $1,000,000 in
capital and surplus, (ii) the minimum bid price of the Common Stock be $1.00
per share, (iii) there be at least 100,000 shares in the public float valued
at $200,000 or more, (iv) the Common Stock have at least two active market
makers and (v) the Common Stock be held by at least 300 holders. Nasdaq has
recently proposed certain modifications to the listing requirements that
would make them even more stringent. Pursuant to such proposed modifications,
continued inclusion on the Nasdaq would require that (i) the Company maintain
(A) net tangible assets (defined as total assets less total liabilities and
goodwill) of at least $2,000,000, (B) net income of $500,000 in two of the
last three years, or (C) market capitalization of at least $35,000,000, (ii)
the minimum bid price of the Common Stock be $1.00 per share, (iii) there be
at least 500,000 shares in the public float valued at $1,000,000 or more,
(iv) the Common Stock have at least two active market makers and (v) the
Common Stock be held by at least 300 holders.
If the Company is unable to satisfy Nasdaq's maintenance
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requirements, its securities may be delisted from Nasdaq. In such event,
trading, if any, in the Class A Common Stock and Class A Warrants would
thereafter be conducted in the over-the-counter market in the so-called "pink
sheets" or on the NASD's "Electronic Bulletin Board." Consequently, the
liquidity of the Company's securities could be impaired, not only in the
number of securities which could be bought and sold, but also through delays
in the timing of transactions, reduction in security analysts' and the news
media's coverage of the Company and lower prices for the Company's securities
than might otherwise be attained.
RISKS OF LOW-PRICED STOCK
If the Company's securities were delisted from Nasdaq (See
"Possible Delisting of Securities from the Nasdaq Stock Market"), they could
become subject to Rule 15g-9 under the Securities Exchange Act of 1934, which
imposes additional sales practice requirements on broker-dealers which sell
such securities to persons other than established customers and "accredited
investors" (generally, individuals with net worths in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses).
For transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule
may adversely affect the ability of broker-dealers to sell the Company's
securities and may adversely affect the ability of purchasers in the Offering
to sell in the secondary market any of the securities acquired hereby.
Commission regulations define a "penny stock" to be any non-Nasdaq
equity security that has a market price (as therein defined) of less than $5.00
per share or with an exercise price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock, unless exempt,
the rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to
both the broker-dealer and the registered representative and current quotations
for the securities. Finally, monthly statements are required to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to
the Company's securities if such securities are listed on Nasdaq and have
certain price and volume information provided on a current and continuing
basis or meet certain minimum net tangible assets or average revenue
criteria. There can be no assurance that the Company's securities will
qualify for exemption from these restrictions. In any event, even if the
Company's securities were
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exempt from such restrictions, they would remain subject to Section 15(b)(6)
of the Exchange Act, which gives the Commission the authority to prohibit any
person that is engaged in unlawful conduct while participating in a
distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the Commission finds
that such a restriction would be in the public interest. If the Company's
securities were subject to the rules on penny stocks, the market liquidity
for the Company's securities could be severely adversely affected.
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: January 30, 1997 AMERIGON INCORPORATED
By /s/ R. John Hamman, Jr.
Its Vice President
