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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 1996
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 0-21810
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AMERIGON INCORPORATED
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4318554
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
404 E. HUNTINGTON DRIVE, MONROVIA, 91016
CALIFORNIA --------------------------------------
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (818) 932-1200
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
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None.
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Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, no par value
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(Title of Class)
Class A Warrants
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
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. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average bid and asked prices of such
stock as of March 24, 1997, was $36,732,500. (For purposes of this computation,
the registrant has excluded the market value of all shares of its Common Stock
reported as being beneficially owned by executive officers and directors of the
registrant; such exclusion shall not be deemed to constitute an admission that
any such person is an "affiliate" of the registrant.)
At March 24, 1997, the registrant had issued and outstanding 12,542,500
shares of Class A Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the registrant's definitive proxy statement for its 1997 Annual
Meeting of Shareholders to be filed with the Commission within 120 days after
the close of the registrant's fiscal year are incorporated by reference into
Part III.
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AMERIGON
ITEM 1. BUSINESS
GENERAL
Amerigon Incorporated (the "Company") is a development stage company
incorporated in California in 1991 to develop, manufacture and market
proprietary high technology automotive components and systems for sale to
automobile and other original equipment manufacturers. The Company was founded
on the premise that technology proven for use in the defense and aerospace
industries could be successfully adapted to the automotive and transportation
industries. The Company has focused on technologies that it believes can be
readily adapted to automotive needs for advanced vehicle electronics and for
electric vehicle systems. The Company seeks to avoid direct competition with
established automotive suppliers of commodity products by identifying market
opportunities where the need for rapid technological change gives an edge to new
market entrants with proprietary products. The Company has principally focused
on developing proprietary positions in the following technologies: (i)
thermoelectric heated and cooled seats; (ii) radar for maneuvering and safety;
(iii) voice interactive navigation and entertainment; and (iv) electric vehicle
components and production systems.
The Company has recently determined to focus its resources primarily on
developing its heated and cooled seat and radar for maneuvering and safety
technologies. The Company has adopted this strategy primarily because the
Company believes that the markets for these products have greater near-term
potential than the markets for its other products, and because these
technologies presently afford the Company its best opportunities to exploit
competitive advantages over rival companies. The Company also expects continued
necessary development and marketing of the Company's voice interactive
navigation technologies and electric vehicle systems to entail very high costs,
to the point that they are likely to exceed the Company's financial resources.
Even if the Company were able to overcome this financial challenge, management
also believes that the Company might not be able to develop and successfully
market the next generation of IVS-TM-, and might not be able to successfully
develop and profitably manufacture electric vehicles or their components,
without commercial or technical assistance from one or more strategic partners.
Recently, the Company entered into a non-binding letter of intent that
contemplates the possible formation of a joint venture to pursue further
development and marketing of the IVS-TM- product. See "-- Products" herein. If
the proposed joint venture (or a similar transaction) is not consummated or the
Company is unable to sell the IVS-TM- technology and product line in the near
future, the Company plans to discontinue sales and further manufacture and
development of the IVS-TM- and related technology. The Company is also presently
seeking strategic and financial partners to help support continued development
and marketing of the Company's electric vehicle systems. See "--Products"
herein. 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 relating to its electric vehicle technology or abandon their
development.
The Company's heated and cooled seats and radar products are in various
stages of development. The Company is presently working with three of the
world's largest automotive original equipment manufacturers on pre-production
development programs for heated and cooled seats. In addition, the Company has
sold multiple prototypes of its heated and cooled seats and radar for
maneuvering and safety to potential customers for evaluation and demonstration.
The Company has recently experienced significant cash shortfalls because its
expenses have greatly exceeded its revenues. On October 31, 1996, the Company
completed a $3,000,000 private placement (the "Bridge Financing") of Units, each
consisting of $47,500 principal amount of unsecured promissory notes (the
"Bridge Notes") and $2,500 principal amount of subordinated convertible
debentures (the "Debentures"), to enable it to continue operations until the
completion of a public offering (the "Offering") of Units consisting of Class A
Common Stock and Class A Warrants. The sale of 17,000 Units in the Offering was
completed on February 18, 1997, and the sale of an additional 2,550 Units
pursuant to the underwriter's exercise of an over-allotment option was completed
on March 7, 1997. The aggregate proceeds
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from the Offering, net of underwriting fees and discounts and all expenses, were
approximately $17,700,000. Approximately $4,100,000 of the proceeds of the
Offering were applied to repayment of the Bridge Notes and other indebtedness,
with the balance of the net proceeds to be used to fund future operations.
PRODUCTS
CLIMATE CONTROL SEAT SYSTEM
The Company's Climate Control Seat ("CCS") system utilizes non-exclusive,
licensed, patented technology to improve the temperature comfort of automobile
passengers. The CCS uses one or more small (approximately two-inch square and
one-eighth inch thick) thermoelectric modules, which are solid-state devices the
surfaces of which turn hot or cold depending on the polarity of applied direct
current electricity. Heat-transfer parts attached to the modules cool or heat
air that is blown past them. The conditioned air is then circulated through
ducts and pads in the seat so that the surface of the seat grows warm or cool
for the passengers, with small quantities of conditioned air passing through the
seat to flow directly on the passengers. Each seat has individual electronic
controls to adjust the level of heating or cooling. The CCS uses substantially
less energy than conventional air conditioners by focusing the cooling directly
on the passengers through the seat, rather than cooling the entire ambient air
volume and the interior surfaces of the vehicle.
The CCS offers several benefits compared to conventional heated car seats.
First, the thermoelectric technology provides both heating and cooling. The
system also provides environmental benefits because it cools without the use of
fluorine-based refrigerants or other liquids. The CCS could be used as the sole
source of climate control in certain cars, such as low cost European cars or
electric vehicles. Only a portion of the cars sold in Europe come equipped with
factory air conditioning because of cost and effect on gas mileage, and the
range of electric vehicles is greatly reduced by the large amount of energy
required to operate traditional air conditioners. For some consumers, seat-based
cooling is expected to be sufficient, while others will prefer it to be
augmented with moderate cooling of the ambient air. In either case, there is the
potential for significant reductions in energy usage, which would result in
greater gas mileage in conventional vehicles and greater range in electric
vehicles.
Additional research and development are needed before the CCS can be
commercialized. In particular, a production-engineered design is being modified
with the goal of making the units less complex, more energy efficient and less
expensive to manufacture and install. The Company is also working to reduce fan
noise and condensation resulting from operation of the seat in the cooling mode.
No assurance can be given that the Company will be successful in effecting such
improvements to the CCS. The Company's initial marketing of the CCS has been to
automobile and vehicle seat manufacturers directly. The Company is presently
working with three of the world's largest automotive original equipment
manufacturers on pre-production development programs for the CCS. However, there
can be no assurance that these development programs will result in a
commercially viable product or lead to commercial production orders.
Since Amerigon's CCS system provides both heating and cooling, the Company
believes that the potential market for CCS is larger than the market for heated
seats alone. The Company also believes that the CCS concept could be applied to
seats other than those used in motor vehicles (e.g. to aircraft, theater, and
stadium seating) although the Company has not devoted any resources to the
development of such applications.
RADAR FOR MANEUVERING AND SAFETY
In January 1994, the Company obtained a non-transferable limited exclusive
license from the Regents of the University of California (Lawrence Livermore
National Laboratory) to certain "pulse-echo," "ultra-wideband" radar technology
for use in the following three passenger vehicle applications: intelligent
cruise
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control, airbag crash systems, and position sensors. The license requires the
Company to achieve commercial sales (defined as sales of non-prototype products
to at least one original equipment manufacturer) of products by the end of 1998.
Failure to achieve commercial sales will result in the loss of exclusivity of
the license with respect to any particular application. The Company anticipates
possible sales of non-prototype radar products to several potential customers in
1998, although no such sales can be assured. See "--Proprietary Rights and
Patents--Radar for Maneuvering and Safety."
This technology was originally developed as part of a laser fusion program
to measure the short bursts of energy emitted during fusion experiments. This
type of radar sends out from one to two million short radio impulses every
second to a distance of 5 to 10 meters, each lasting a billionth of a second.
These short impulses enable the radar to operate across a wider and lower band
of radio frequency, making it less likely to suffer from interference from other
radar signals, and allowing it to penetrate dirt, snow and ice.
The Company has applied this technology to develop demonstration prototypes
of a parking aid and a lane change aid. The parking aid detects a vehicle or
other object that reflects radar signals behind the automobile and provides an
audible or visual signal as the driver approaches it. The lane change aid
detects vehicles to the side of the automobile when the driver attempts to turn
or change lanes and emits an audible warning signal. The Company began marketing
these radar products in 1994 and has received contracts to design evaluation
prototypes from eight automotive manufacturers for both the parking and lane
change aids. These products are now under evaluation by prospective customers.
The Company's near-term objective is to obtain further development agreements
from some of these and other prospective customers to customize the system
design during 1997. No assurance can be given that the Company will obtain any
such further development agreements. See "Item 1--Risk Factors--Limited
Marketing Capabilities; Uncertainty of Market Acceptance," "--Competition;
Possible Obsolescence of Technology," "--Lack of Exclusive Licenses on IVS-TM-
and Heated and Cooled Seats; Potential Loss of Exclusivity of License on Radar
for Maneuvering and Safety," and "--Dependence on Acceptance by Automobile
Manufacturers and Consumers; Market Competition."
Several automotive original equipment manufacturers are now offering
ultrasonic or infrared laser distance sensors for parking aids. The Company
believes that the advantage of its radar technology is superior performance.
Competing products in the automotive industry have utilized ultrasonic and
infrared sensors which require line of sight from the sensor to the target and
installation with outside lenses. Dirt, ice, rain, fog or snow can obstruct the
function of such systems. Although they offer reasonable accuracy at short
distances, they are comparatively range-limited and are subject to false trigger
problems due to interference with the required line of sight. The Company's
radar technology, on the other hand, is less susceptible to these environmental
conditions, and can even penetrate plastic, allowing it to be mounted inside
plastic bumpers or tail light assemblies. Although there is currently
considerable interest among automobile manufacturers for various radar products,
there is substantial competition from large and well-established companies for
these potential product opportunities, as well as for possible industrial
applications. Many of these companies have substantially greater financial and
other resources than those of the Company. In addition, considerable research
and development will be required to develop the Company's radar technology into
finished products, including design and development of application software and
antenna systems and production engineering to reduce costs and increase
reliability. No assurance can be given that the Company will be successful in
reducing costs or increasing reliability or that the Company will be able to
develop its radar technology into finished products.
INTERACTIVE VOICE SYSTEMS (IVS-TM-)
On March 3, 1997, the Company entered into a non-binding letter of intent
with Yazaki Corporation, a Japanese company ("Yazaki"), and Technology
Strategies and Alliances, a California corporation ("TSA"), pursuant to which
the parties propose, subject to satisfactory completion of due diligence,
completion of definitive documents and other conditions specified in the letter
of intent, to form a joint venture to develop and market the IVS-TM- product in
the automotive aftermarket. The basic terms of the
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joint venture call for the Company to provide to the joint venture company
substantially all assets relating to the IVS-TM- product, with the Company
retaining an equity interest in such company. The Company would also be paid
$2,000,000 in cash within one year of the parties' execution of the definitive
joint venture agreement. The Company may be obligated to pay a portion of the
consideration received in the joint venture transaction to third parties
pursuant to existing license agreements. The transaction would also involve
payments to the Company of up to $1,000,000 to support the Company's cost
structure in the IVS-TM- area. The letter of intent further contemplates that
Yazaki would contribute capital agreed by the parties to be necessary to fund
the joint venture company's business strategy in exchange for, among other
things, a majority equity interest in such company and the exclusive rights to
manufacture, market and sell to automotive and other industries' OEMs all
products developed by the joint venture company. Shares in the joint venture
company would also be reserved for key officers, working directors and employees
of the joint venture company through a stock option plan. No assurance can be
given that Yazaki will provide any support funding, that the parties will agree
on a definitive joint venture agreement or enter into such agreement, or that
the proposed joint venture transaction will ultimately be consummated.
The IVS-TM- was initially designed to apply voice recognition technology
incorporating proprietary features and computer systems to provide an
inexpensive and easy-to-use tool for people to receive directions to their
destination while driving their vehicle. The IVS-TM- provides navigation
directions through the car's audio compact disc ("CD") system using actual
spoken words stored on the CD through digital compression technology. The car CD
system or radio functions normally when the IVS-TM- is not giving or receiving
instructions, but can be temporarily interrupted to use the IVS-TM- functions.
The IVS-TM- has three components: a small microphone mounted near the sun visor,
similar to a cellular phone microphone; an electronic module (approximately
two-thirds the size of a standard video cassette tape) that is mounted inside
the dashboard, under the seat or in the trunk; and a standard automobile CD
player and radio. In most instances, the CD player is modified by its
manufacturer to provide additional ports in the back of the unit for connecting
to the IVS-TM- electronic module.
To date, the IVS-TM- product has not been commercially successful and likely
would require substantial further development before it could be expected to
achieve significant sales. Such further development includes, among other
things, the need to streamline data-entry, lower costs, improve the
compatibility of the product with CD units and explore other applications of the
technology. 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. Although the Company received an order for additional units,
the Company did not accept such order since the costs associated with filling
the order were greater than the revenues to be received as a result of the low
volume of units ordered.
The IVS-TM- system operates by requesting a starting point and a destination
point, each of which must be spelled out, one letter at a time, by the driver or
a passenger, and confirmed by the unit. Way-points may include specific street
names and addresses, cross-streets or "points of interest" (such as airports,
hotels, gas stations, major restaurants, ATMs and tourist attractions). The
IVS-TM- provides step-by-step verbal instructions on how to reach the
destination. The IVS-TM- uses a proprietary routing algorithm that selects the
most favorable route to a given destination taking into account average highway
and street speeds, one way streets and distances.
The operating software and digital map data for the IVS-TM- are stored on a
CD that is inserted in the car stereo when the system is in use. The CDs, which
contain encrypted maps for various metropolitan areas, are packaged inside the
same box with the IVS-TM- hardware. Customers call a toll-free number to access
the maps they wish from the selection available on the CDs. Upon payment by
credit card for requested metropolitan areas, the customer is provided a code
number that unlocks the encrypted maps once the number is spoken into the
IVS-TM- unit.
To date the Company has completed encrypted maps for twenty metropolitan
areas including Atlanta, Boston, Chicago, Dallas/Ft. Worth, Denver, Detroit,
Houston, Indianapolis, Las Vegas, the five counties in Los Angeles, Miami, New
York and Northern New Jersey, Orlando, Philadelphia, Phoenix, Sacramento,
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San Diego, San Francisco, Seattle and Washington D.C./Baltimore. Using map
technology licensed from an unrelated third party, the Company does map checking
and limited upgrading to make the maps suitable for use with the IVS-TM-.
The Company believes that the IVS-TM- has several advantages over other
navigation systems which generally utilize manual keyboards or touch screens to
input data, visual map displays for showing locations, and global positioning
satellite systems or other expensive sensors for identifying the vehicle's
location. The IVS-TM- is not only less costly but simpler and safer to use
because it relies solely on verbal instructions, and drivers are not distracted
by the need to look at a visual display or manipulate a keyboard or other
complicated controls. In addition, competitive navigation systems with visual
displays require extensive modification to the interior of a vehicle if the
display is to fit in the dashboard, thereby reducing the feasibility of offering
the product as a dealer-installed option or aftermarket product.
In December 1995 and January 1996, the Company shipped the first IVS-TM-
product to be sold initially to the consumer electronics market. Four
manufacturers of automotive CD players (Kenwood, Alpine, Clarion and Fujitsu-Ten
Eclipse) have modified certain of their CD player models for compatibility with
the IVS-TM-. To date, the IVS-TM- has only been sold to the retail aftermarket.
ELECTRIC VEHICLE SYSTEMS
By developing its own products and managing programs related to electric
vehicles (such as the Showcase Electric Vehicle Program and the Running Chassis
Program), the Company has developed a base of knowledge and expertise concerning
electric vehicles. The Company's experience has included the ground-up design of
electric vehicles and testing and integration of state of the art components
being made available for electric vehicles by other companies. The Company's
electric vehicle systems program is presently focused on two main fronts. The
first comprises the development and production of electric vehicles, principally
for markets in developing countries. The Company hopes to implement this
initiative in the near-term through a possible joint venture project in India.
The Company's other main electric vehicle undertaking would center on the
marketing and distribution of its Energy Management System.
The Company is seeking financial partners to help fund further research and
development of its electric vehicle technology and strategic partners to assist
the Company in manufacturing and distribution. No assurance can be given that
the Company will be able to identify or obtain any such partners. If the Company
is not able to obtain such financial or strategic partners, the Company will
abandon further development of its electric vehicle technology or attempt to
sell its proprietary interests and other assets in and relating thereto. The
Company is the recipient of certain federal and state government grants relating
to the development of the Company's electric vehicle products. Any failure to
complete the development work contemplated by such grants that may be occasioned
by the Company's abandonment of its electric vehicle business may have an
adverse effect on the Company, including the loss of revenues from such grants
or the inability to collect related receivables.
Electric Vehicles. The Company has nearly completed a contract (the
"Samsung Contract")for approximately $9,600,000 to develop approximately 50
aluminum-chassis passenger electric vehicle systems for Samsung Heavy Industries
Co., Ltd., Kihung R&D Center, and affiliated companies. The electric vehicles
produced under this contract include two of the Company's other proprietary
products, the CCS and the Energy Management System.
In its results for the year ended December 31, 1996, the Company reported
cost overruns on this contract that caused costs for such contract to exceed
revenues from the contract by approximately $2,150,000 for 1996 and resulted in
the Company recording charges to operations for the ultimate estimated loss at
completion of the contract of approximately $1,900,000. See "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations." During 1996, the Company experienced a number of unanticipated
design and development problems in the course of its performance under this
contract. It became necessary to significantly modify the design of the interior
of the electric
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vehicles to correct design deficiencies. The delay caused by this redesign had a
number of deleterious side-effects. A number of employees had to be re-assigned
to new jobs, which resulted in additional work hours. Orders already given to
vendors for tooling and parts had to be canceled or delayed. As a result of
these delays, some of the vendors that had been selected for critical parts took
on large projects for other companies and were thereafter no longer available to
supply the Company on a timely basis. Additional costs and delays were incurred
in re-negotiating several large, complex supply contracts. Finally, due to the
delays and the short time left to complete tooling and parts, orders had to be
rushed, causing significantly higher costs for tooling, parts and freight. The
Company also experienced problems with certain products supplied by vendors.
These problems required additional attention by engineers, re-work of tooling
and parts, and in some cases required the engagement of alternate suppliers. The
Company may continue to experience cost overruns on this contract due to delays
in completion of the contract and other factors.
In February 1996, the Company entered into a memorandum of understanding
(which has since expired) 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 $2,200,000 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 proposed joint venture called for the Company to
produce approximately 60 electric mini-cars in ready-to-assemble kits for
assembly in India. The proposed Indian co-venturer would have been expected to
build the manufacturing capability for full-scale production. In anticipation of
the formation of the Indian joint venture, the Company began prototype
development work on a mini-car called the "REVA," designed principally for the
Indian market. The Company has produced five fully-functional REVA prototypes.
The Company has decided not to make any financial contribution to the joint
venture entity and to seek a different joint venture arrangement involving the
same and/or possibly one or more other strategic partners. The five completed
REVA prototypes, together with additional prototypes that the Company may
complete pursuant to existing grants, may be contributed to an alternative joint
venture. However, no assurance can be given that the Company will identify any
such strategic partners or ultimately consummate any joint venture transaction.
The Company intends to focus any electric vehicle development activity on
vehicles intended for use in developing Asian countries. The Company believes
that there may be considerable demand for low cost electric vehicles in these
markets. For example, in India, auto capacity is currently estimated at 300,000,
which is comparatively small when measured against India's 20,000,000 household
middle class population. Less than 20% of these households own cars; more than
50% own motorcycles. As a result, in India there is a growing demand for
vehicles and a large unfilled backlog of orders. Because of this backlog, Indian
consumers typically must put down a 10% cash deposit for a car and often have to
wait for up to a year or more for delivery. In India, most cars sell for $7,500
or more and are expensive to operate due to the limited availability of gas and
high costs of maintenance. The REVA is designed to be priced at less than $6,000
and to be relatively inexpensive to operate due to the availability of
electricity for re-charging batteries in most households and the minimal number
of parts compared to gas-powered cars. If the Company is successful in
consummating a joint venture in India for the development, marketing and/or
manufacture of electric vehicles, the Company might seek to identify similar
opportunities in other developing countries. The Company has no present plans to
try to sell its electric vehicles in the United States.
Energy Management System. The Company's "Energy Management System" is a
proprietary computer-based system under development by the Company for electric
vehicles. The Energy Management System has two functions. First, it optimizes
battery charging and use based on the age and condition of the battery to
maximize vehicle range and extend battery life. The second function is to
automatically adjust the operation of the systems of an electric vehicle to
improve performance. For example, if the vehicle air conditioner is running, the
system can momentarily turn it down during acceleration so that additional
energy is available for propelling the vehicle. The system can also predict
available range for typical
6
freeway, city or mountain driving, and whether specific trips are possible (such
as a commute to work or a trip to the grocery store). These features of the
Energy Management System are important in electric vehicle applications because
the range of electric vehicles initially will be limited to approximately 60 to
120 miles between charges, and because the frequency of battery replacement will
be more important in determining the cost of operating an electric vehicle than
the cost of the electricity necessary to recharge the battery.
The Energy Management System consists of two components: first, a
custom-developed printed circuit board with a micro-processor computer chip and
other standard, commercially available computer components, that serves as the
"brain" of the system; and second, custom-developed sensors installed on each of
the vehicle's batteries to provide information concerning the batteries' status.
Optimal decisions are either implemented automatically by the system or
communicated to the driver through a text display in the instrument panel. The
Company has completed initial research and development of prototype Energy
Management Systems and is installing units in the electric vehicles it assembles
under development orders and in the REVA prototypes developed in connection with
the proposed Indian joint venture.
The Company intends to try to market the Energy Management System by
licensing its technology to other companies making electric vehicles. However,
the system requires customization for the particular electric vehicle it is to
control, including modification of the software, and requires extensive
integration into the vehicle since it must connect with various other systems,
receive sensor inputs from throughout the vehicle, and communicate with a visual
display in the instrument panel. Because of these integration requirements, the
Company or its licensees would need to undertake significant application
engineering to adapt this product for each electric vehicle model. Furthermore,
because development of the electric vehicle industry is subject to numerous
uncertainties, the Company cannot predict whether there would ever be commercial
sales of its system. Any significant additional investments in development of
this product would be based upon customer interest as the electric vehicle
market develops.
GRANT FUNDED PROGRAMS
The Company seeks grants from various sources to provide partial support for
its product development efforts. A grant is essentially a cost-sharing
arrangement whereby the Company obtains reimbursement from the grant agency for
a portion of direct costs and reimbursable administrative costs incurred in
managing specific development programs. Revenue from government agency grants
and other sources pursuant to such cost-sharing arrangements is recognized when
reimbursable costs have been incurred. Billings on the Company's grant programs
are generally subject to the Company achieving certain milestones or complying
with billing schedules designated in the grant agreements. Accordingly, delays
between the time reimbursable grant costs are incurred and ultimately billed may
occur. Grant revenues earned are recorded on the balance sheet as Unbilled
Revenue until billed.
Since 1992, the Company has received grants from the Advanced Research
Projects Agency of the Department of Defense, the California Energy Commission,
the Federal Transit Administration, and the Southern California Air Quality
Management District. Several of the Company's grant-funded programs have been
obtained through CALSTART, a non-profit consortium of primarily California
companies engaged in the development and manufacture of products that benefit
the environment. The Company managed the Showcase Program, co-managed the
Neighborhood Electric Vehicle Program, and currently manages two other electric
vehicle programs for CALSTART, for which the Company recognized revenues from
CALSTART of approximately $840,000 and $2,198,000 in 1996 and 1995,
respectively. Such amounts represent reimbursement of expenses incurred by the
Company in managing four programs for CALSTART in 1995 and two programs in 1996.
For the years ended December 31, 1996 and 1995, the Company recorded a total
of $1,172,000 and $2,391,000, respectively, in federal and state government
grants to fund the Company's development of various of its products, including
electric vehicles. The Company has significantly reduced its efforts to
7
obtain any additional grants and intends to focus its efforts on working toward
production contracts for CCS and radar sensor systems.
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.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are an essential component
of the Company's efforts to develop products for introduction in the
marketplace. At March 24, 1997, approximately 35 of the Company's 59 employees
(including all technicians and engineers involved in the Company's four product
areas) were involved in technology research and product development. The
Company's research and development activities are expensed as incurred. These
expenses include direct expenses for wages, materials and services associated
with development contracts, grant program activities, and the development of the
Company's products, excluding expenses associated with projects that are
specifically funded by development contracts or grant agreements from customers
(which are classified under Direct Development Contract and Related Grant Costs
or Direct Grant Costs in the Company's Statement of Operations). Research and
development expenses do not include any portion of general and administrative
expenses.
The total amounts spent by the Company for research and development
activities in 1996, 1995, and 1994 were $2,128,000, $2,367,000, and $2,137,000,
respectively. Included in these amounts for each of such years were $298,000,
$345,000, and $248,000, respectively, in payments for license rights to
technology and minimum royalties. The Company's research and development
expenses fluctuate significantly from period to period, due both to changing
levels of research and development activity and changes in the amount of such
activities that are covered by customer contracts or grants. Where possible, the
Company seeks funding from third parties for its research and development
activities. Customer-sponsored research and development expenses (i.e., expenses
classified as Direct Development Contract and Related Grant Costs or Direct
Grant Costs on the Company's Statement of Operations) for each of 1996, 1995,
and 1994 were $11,743,000, $5,671,000, and $1,731,000, respectively.
MARKETING AND SALES
In the automotive components industry, products typically proceed through
five stages of research and development and commercialization. Initial research
on the product concept comes first, in order to assess its technical feasibility
and economic costs and benefits, and often includes the development of an
internal prototype for the supplier's own evaluation of the product. If the
product appears feasible, a functioning prototype or demonstration prototype is
manufactured by the component supplier to demonstrate and test the features of
the product. This prototype is then marketed to automotive companies to generate
sales of evaluation prototypes for internal evaluation by the automobile
manufacturer. If the automobile manufacturer remains interested in the product
after testing initial evaluation prototypes, it typically works with the
component supplier to refine the product and then purchase second and subsequent
generation engineering prototypes for further evaluation. Finally, the
automobile manufacturer determines to either purchase the component for a
production vehicle or terminate interest in the component.
8
The time required to progress through these five stages of commercialization
varies widely. Automotive companies will take longer to evaluate components that
are critical to the safe operation of a vehicle where a product failure can
result in a passenger death. Conversely, if the product is not safety critical,
the evaluation can proceed more quickly since the risk of product liability is
smaller. Another factor influencing the time required to complete the product
sales cycle relates to the required level of integration of the component into
other vehicle systems. Products that are installed by the factory generally
require a medium amount of time to evaluate since other vehicle systems are
affected and because a decision to introduce the product into the vehicle is not
easily reversed, as it is with dealer-installed options. Products that are
installed by an auto dealer take the least amount of time to evaluate since they
have little impact on other vehicle systems. The Company's products vary in how
they fit within these two factors affecting the time required for completing the
sales cycle. The CCS has a moderate effect on other vehicle systems and would be
a factory installed item. The Company's radar system and energy management
system would also be factory installed and would have a greater impact on other
vehicle systems.
The Company's CCS, radar products and IVS-TM-, all of which are derived from
technologies used in the aerospace or defense industries, are designed primarily
to be applied to new gasoline-powered vehicles, with possible aftermarket
application to existing gasoline-powered vehicles. The energy management system
and the electric vehicle systems are uniquely designed for application to
electric vehicles.
The Company's ability to successfully market its seats and radar products
will in large part be dependent upon, among other things, the willingness of
automobile manufacturers to incur the substantial expense involved in the
purchase and installation of the Company's products and systems, and,
ultimately, upon the acceptance of the Company's products by consumers. In
addition, automobile manufacturers may be reluctant to purchase key components
from a small, development-stage company with limited financial and other
resources. Even if the Company is successful in obtaining favorable responses
from automobile manufacturers, the Company may need to license its technology to
potential competitors to ensure adequate additional sources of supply in light
of automobile manufacturers' reluctance to purchase products from a sole source
supplier (particularly where the continued viability of such supplier is in
doubt, as may be the case with the Company). Acceptance of the Company's
components and systems for electric vehicles is dependent upon market acceptance
of electric vehicles, as to which there can be no assurance. See "Item 1--Risk
Factors--Dependence on Acceptance by Automobile Manufacturers and Consumers;
Market Competition," "--Competition; Possible Obsolescence of Technology" and
"--Lack of Exclusive Licenses on IVS-TM- and Heated and Cooled Seats; Potential
Loss of Exclusivity of License on Radar for Maneuvering and Safety" and "Limited
Marketing Capabilities; Uncertainty of Market Acceptance."
9
MANUFACTURING, CONTRACTORS AND SUPPLIERS
The Company intends to develop manufacturing capability in order to
implement its business plan, control product quality and delivery, to shorten
product development cycle times, and protect and further develop proprietary
technologies and processes. This capability could be developed internally
through the purchase or development of new equipment and the hiring of
additional personnel, or through the acquisition of companies with established
manufacturing capability. Certain members of management of the Company have
significant experience in establishing and managing volume production of
automobile components. However, to date, the Company has been engaged in only
limited manufacturing, principally of the IVS-TM- product in small quantities,
and there can be no assurance that the Company's efforts to establish its
manufacturing operations for any of its products (including electric vehicles)
will not exceed estimated costs or take longer than expected or that other
anticipated problems will not arise that will materially adversely affect the
Company's operations, financial condition and/or business prospects. The Company
has already experienced significant delays and cost overruns in connection with
its electric vehicle contracts. See "Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year Ended December
31, 1996 Compared to Year Ended December 31, 1995." The Company currently is
seeking to identify and hire a vice president of operations with manufacturing
experience. However, no assurance can be given that the Company will be
successful in identifying, hiring or retaining such an individual on terms
affordable to the Company (or on any terms).
The Company has in the past engaged certain outside contractors to perform
product assembly and other production functions for the Company, and the Company
anticipates that it may desire to engage contractors for such purposes in the
future. These outside contractors include suppliers of raw materials and
components and may include sublicensees that have rights to manufacture
components for the Company's products. The Company believes that there are a
number of outside contractors that provide services of the kind that have been
used by the Company in the past and that the Company may desire to use in the
future. However, no assurance can be given that any such contractors would agree
to work for the Company on terms acceptable to the Company or at all. The
Company's inability to engage outside contractors on acceptable terms or at all
would impair the Company's ability to complete any development and/or
manufacturing contracts for which outside contractors' services may be needed.
Moreover, the Company's reliance upon third party contractors for certain
production functions will reduce the Company's control over the manufacture of
its products and will make the Company dependent in part upon such third parties
to deliver its products in a timely manner, with satisfactory quality controls
and on a competitive basis.
The Company relies on various vendors and suppliers for the components of
its products. The Company expects that it will procure these components through
purchase orders, with no guaranteed supply arrangements. While 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 was unable
to pay, and did not pay, most of its vendors and suppliers on a timely basis.
Even though the Company has since paid such vendors and suppliers using a
portion of the proceeds from the Offering, the Company believes that its
relations with many of such vendors and suppliers are strained. There can be no
assurance that any of such vendors and suppliers will not limit or cease doing
business with the Company or impose more onerous or restrictive payment and
credit terms. 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.
PROPRIETARY RIGHTS AND PATENTS
The Company acquires developed technologies through licenses and joint
development contracts in order to optimize the Company's expenditure of capital
and time, and to adapt and commercialize such
10
technologies in automotive products which are suitable for mass production. The
Company also develops technologies or furthers the development of acquired
technologies through internal research and development efforts by Company
engineers.
The Company has adopted a policy of seeking to obtain, where practical, the
exclusive rights to use technology related to its products through patents or
licenses for proprietary technologies or processes. The Company currently has
several license arrangements, three patents and several pending patent
applications relating to the technologies used in the Company's business, as
described below.
CCS
Pursuant to an Option and License Agreement between the Company and Feher
Design, Inc. ("Feher"), Feher has granted to the Company a non-exclusive
worldwide license to use three specific CCS technologies covered by patents held
by Feher. The license with respect to technology subject to a Feher patent
expires upon the expiration of the Feher patent covering the relevant
technology. The first of these three patents expires on November 17, 2008.
In addition to the aforementioned license rights to the CCS technology, the
Company holds two patents on a variable temperature seat climate control system.
The Company also has pending two additional patent applications with respect to
certain improvements to the CCS technology developed by the Company. The Company
is aware that an unrelated party filed a patent application in Japan on March
30, 1992 with respect to technology similar to the CCS technology. 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.
RADAR FOR MANEUVERING AND SAFETY
Pursuant to a License Agreement between the Company and the Regents (the
"Regents") of the University of California (Lawrence Livermore National
Laboratory), the Regents have granted to the Company a limited, exclusive
license to use certain technology covered by patents held by the Regents in the
following three passenger vehicle applications: intelligent cruise control, air
bag crash systems, and position sensors. This license 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. The Company is currently working with several potential
customers for its radar products and anticipates possible sales of non-prototype
radar products to such potential customers in 1998. However, any potential sales
of non-prototype radar products to such customers remain subject to such
customers' evaluation of related prototypes, analysis of the market potential,
if any, for such products, and other factors. No assurance can be given that the
Company will be able to achieve sales to any such customers (or any other
customers) in 1998 or at any time. See "Item 1--Risk Factors Dependence on
Acceptance by Automobile Manufacturers and Consumers; Market Competition,"
"--Time Lag From Prototype to Commercial Sales," "--Special Factors Applicable
to the Automotive Industry In General," and "--Competition; Possible
Obsolescence of Technology." The license expires on January 14, 2014 (the date
of expiration of the last-to-expire patent for the technology covered by the
license). As the patents covering the licensed technology expire, products made
by the Company using such technology (and only such technology) will cease to be
subject to any further royalty obligations under the license.
11
IVS-TM-
The Company has licensed rights to intellectual property comprising the
IVS-TM- technology pursuant to three different license agreements. The Company
has a worldwide non-exclusive license from Lernout & Hauspie Speech Products
N.V. to use certain interactive software and related documentation used in the
voice recognition technology incorporated in the IVS-TM- product. The Company
also has a non-exclusive license to produce, distribute and/or sell copies of a
navigation database, the rights to which are owned by Navigation Technologies
Corporation ("NavTech"). This license expires on December 31, 2001 but may be
renewed at the Company's option for subsequent five-year periods (which renewal
option is subject to termination by NavTech).
In May, 1996, the Company entered into an agreement (the "Settlement
Agreement") with ANS and certain other parties pursuant to which the Company
settled certain disputes it had with such parties relating to certain technology
used or useful in the Company's IVS-TM- product. Under the Settlement Agreement,
ANS granted the Company a worldwide non-exclusive, royalty-bearing license to
make and sell products incorporating certain voice-interface vehicle navigation
technology and technology for recognizing spoken words in which ANS has
proprietary rights. The Settlement Agreement also provides that the Company has
exclusive rights to the IVS-TM- trademark. The Company granted ANS a worldwide
non-exclusive, royalty-bearing license to make and sell products incorporating
certain improvements made by the Company to the voice-interface system and the
word recognition technology. These products could compete directly with the
Company's IVS-TM- product and could be introduced by ANS as early as 1997.
The Company has copyrights on several materials used in connection with its
IVS-TM- product, including map discs for various geographical regions to be used
with the navigator software (which copyrights are jointly owned with NavTech and
ANS), as well as navigator installation and user guides for use with certain
in-dash compact disc components manufactured by Kenwood, Eclipse, Clarion and
Alpine (which copyrights are jointly owned with ANS).
ELECTRIC VEHICLE SYSTEMS
The Company was recently issued a patent on a key function of the Energy
Management System and has applied for additional patents relating to such
system. The Company believes that those elements of the Energy Management System
not covered by the patent are protected as trade secrets.
GENERAL
Because of rapid technological developments in the automotive industry and
the competitive nature of the market, the patent position of any component
manufacturer is subject to uncertainties and may involve complex legal and
factual issues. Consequently, although the Company either owns or has licenses
to certain patents, and is currently processing several additional patent
applications, it is possible that no patents will issue from any pending
applications or that claims allowed in any existing or future patents issued or
licensed to the Company will be challenged, invalidated, or circumvented, or
that any rights granted thereunder will not provide adequate protection to the
Company. There is an additional risk that the Company may be required to
participate in interference proceedings to determine the priority of inventions
or may be required to commence litigation to protect its rights, which could
result in substantial costs to the Company.
The Company's potential products may conflict with patents that have been or
may be granted to competitors or others. Such other persons could bring legal
actions against the Company claiming damages and seeking to enjoin manufacturing
and marketing of the affected products. Any such litigation could result in
substantial cost to the Company and diversion of effort by the Company's
management and technical personnel. If any such actions are successful, in
addition to any potential liability for damages, the Company could be required
to obtain a license in order to continue to manufacture or market the affected
products. There can be no assurance that the Company would prevail in any such
action or that any license
12
required under any such patent would be made available on acceptable terms, if
at all. Failure to obtain needed patents, licenses or proprietary information
held by others may have a material adverse effect on the Company's business. In
addition, if the Company becomes involved in litigation, it could consume a
substantial portion of the Company's time and resources. However, the Company
has not received any notice that its products infringe on the proprietary rights
of third parties.
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
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 that 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.
The enactment of the legislation implementing the General Agreement on Trade
and Tariffs has resulted in certain changes to United States patent laws that
became effective on June 8, 1995. Most notably, the term of patent protection
for patent applications filed on or after June 8, 1995 is no longer a period of
17 years from the date of grant. The new term of a United States patent will
commence on the date of issuance and terminate 20 years from the earliest
effective filing date of the application. Because the time from filing to
issuance of an automotive technology patent application is often more than three
years, a 20-year term from the effective date of filing may result in a
substantially shortened term of patent protection, which may adversely impact
the Company's patent position. If this change results in a shorter period of
patent coverage, the Company's business could be adversely affected to the
extent that the duration and/or level of the royalties it may be entitled to
receive from a collaborative partner, if any, is based on the existence of a
valid patent.
COMPETITION
The automotive components and systems business is highly competitive. The
Company may experience competition directly from automobile manufacturers, most
of which have the capability to manufacture competing products. Many of the
existing and potential competitors of the Company have considerably greater
financial and other resources than the Company, including, but not limited to,
an established customer base, greater research and development capability,
established manufacturing capability and greater marketing and sales resources.
The Company also competes indirectly with related products that do not offer
equivalent features to the Company's products, but can substitute for the
Company's products. The Company believes that its products will compete on the
basis of price, performance and quality.
CCS
The Company is not aware of any competitors that are offering systems for
both heating and cooling automotive car seats, although substantial competition
exists for the supply of heated-only seats. It is possible that competitors will
be able to expand or modify their current products by adding a cooling function
to their seats based upon a technology not covered by patented technology
licensed to the Company, or by licensing rights to these patents from the
inventor. The CCS competes indirectly with alternative methods of providing
passenger climate control in a vehicle such as heating and air conditioning
systems, which are currently available for almost all vehicles. The Company
hopes to develop a market niche for this product initially as a luxury in
conventional gasoline-powered cars in Europe, where gasoline
13
prices are relatively high, as well as in electric vehicles which, due to their
reliance on batteries, could benefit from a less energy intensive source of
climate control. The Company is aware that a Japanese patent has been applied
for by another entity on technology similar to the CCS technology.
RADAR FOR MANEUVERING AND SAFETY
The potential market for automotive radar has attracted many aerospace
companies who have developed a variety of radar technologies. A few automotive
original equipment manufacturers are now offering ultrasonic or infrared laser
distance sensors for parking aids. These companies have far greater technical,
financial and other resources than the Company does. While the Company believes
that its licensed radar technology has competitive advantages which are
protected by intellectual property rights in the applications the Company is
developing, it is possible that the market will not accept the Company's radar
products or that competitors will find ways to offer similar products without
infringing on the Company's intellectual property rights.
IVS-TM-
The Company is aware that there are 20 or more competitors developing
car-based navigation systems, and is aware of at least 13 companies that have
systems that are very advanced in the development cycle, including systems from
Blaupunkt-werk GmbH, Bosch Electronics, Clarion Corporation of America, Motorola
Incorporated, Sanyo Fisher USA Corp., Siemens Automotive LP, Sony Electronics,
Phillips Electronics, Pioneer Electronic Corp. and General Motors Corporation.
Several of these competitors have achieved significant sales of their systems in
Japan and Europe, and recently have introduced their product in the United
States or are planning to introduce their product in the United States. Many of
these competitors have established relationships with automobile manufacturers.
The Company expects that new competitors will enter the market once United
States sales are established. All the competitive systems of which the Company
is currently aware utilize visual displays and, unlike the Company's IVS-TM-,
most of them rely on global positioning satellite systems to identify the
location of the vehicle. While these features of competitive navigation systems
may enhance consumer acceptance of the systems, they are more costly than the
Company's system.
Under the Settlement Agreement with ANS, ANS will have rights which will
allow it to make and sell products incorporating certain improvements made by
the Company to the IVS-TM- technology. These products could compete directly
with the Company's IVS-TM- product and could be introduced by ANS as early as
1997. To the Company's knowledge, ANS does not at this time have a product for
commercial sale. The Company is not aware of any other competitor that has
offered a voice recognition system for identifying the vehicle location or
desired destination, although at least two competitors use a voice recognition
system to allow drivers to control some of the functions of the system, such as
the movement of the map or the visual display, and several competitors use
speech output, but not input, systems to provide verbal directions to the
destination.
ELECTRIC VEHICLE SYSTEMS
ELECTRIC VEHICLES. The potential market for electric vehicles and electric
vehicle systems, when and if it develops into a significant commercial market,
is expected to attract many of the domestic and international automobile
manufacturers. Currently, many automobile manufacturers are doing development
work on electric vehicles, and some have announced plans to enter the commercial
market. General Motors Corporation has recently introduced a production electric
vehicle that is now available for lease in the United States.
The Company has experience in the design and prototyping of Electric Vehicle
Systems which it believes provides certain niche market opportunities. The
Company believes such a niche now exists in developing Asian countries.
Accordingly, the Company initially intends to sell its Electric Vehicle Systems
14
in selected Asian markets where competition at this time is from a limited
number of higher priced gasoline-powered cars. The emergence of a significant
market, if such emergence occurs, will cause other competitors to enter the
market, all of which may have far greater depth of technical, manufacturing, and
marketing resources than does the Company. The Company does not intend to enter
the U.S. market at this time.
ENERGY MANAGEMENT SYSTEM
The Company is aware of one competitor, Hughes Power Control Systems, which
is developing and offering a product which competes directly with the Energy
Management System. The Company is also aware of several automobile manufacturers
that plan to incorporate the function of the Energy Management System into
electronic modules currently manufactured or which may be manufactured in the
future.
EMPLOYEES
As of March 24, 1997, the Company had 59 employees, two of whom were
part-time employees. Approximately four of the Company's employees, or about 5%
of the Company's personnel, are covered under a collective bargaining agreement.
The Company considers its employee relations to be satisfactory.
RISK FACTORS
THE COMPANY'S SECURITIES ARE HIGHLY SPECULATIVE IN NATURE AND INVOLVE A HIGH
DEGREE OF RISK. PRIOR TO MAKING AN INVESTMENT DECISION, CURRENT AND PROSPECTIVE
INVESTORS IN THE COMPANY'S SECURITIES SHOULD GIVE CAREFUL CONSIDERATION TO,
AMONG OTHER THINGS, THE RISK FACTORS SET FORTH BELOW. THIS REPORT CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. REFERENCE IS MADE IN
PARTICULAR TO THE DESCRIPTION OF THE COMPANY'S PLANS AND OBJECTIVES FOR FUTURE
OPERATIONS, ASSUMPTIONS UNDERLYING SUCH PLANS AND OBJECTIVES AND OTHER
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS SECTION, "ITEM 1--BUSINESS," "ITEM
7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," AND IN OTHER PLACES IN THIS REPORT. SUCH STATEMENTS MAY BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL,"
"EXPECT," "BELIEVE," "ESTIMATE," "ANTICIPATE," "INTEND," "CONTINUE," OR SIMILAR
TERMS, VARIATIONS OF SUCH TERMS OR THE NEGATIVE OF SUCH TERMS. SUCH STATEMENTS
ARE BASED ON MANAGEMENT'S CURRENT EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF
FACTORS AND UNCERTAINTIES WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. THE COMPANY EXPRESSLY
DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR
REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT ANY
CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN
EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED.
FACTORS WHICH COULD CAUSE SUCH RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED
IN THE FORWARD-LOOKING STATEMENTS INCLUDE THOSE SET FORTH BELOW.
DEVELOPMENT STAGE COMPANY
The Company's proposed future operations are subject to numerous risks
associated with establishing new businesses, including, but not limited to,
availability of capital, 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. See "Item 1--Business" herein. 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 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
15
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. The IVS-TM- likely will require further development, at
significant cost, in order to have a reasonable prospect for commercial
viability. The Company recently entered into a non-binding letter of intent that
contemplates the possible formation of a joint venture to pursue further
development of the IVS-TM- product. See "Item 1--Business--Products" and
"--Uncertain Market Demand for IVS-TM-; Further Refinement Needed; Possible
Disposition." No assurance can be given that the Company will obtain the funds
necessary to pay for such further development of its products (through
arrangements with strategic partners or otherwise) or that, if such funds are
obtained, the Company 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 9 to
18 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, 1996 and 1995, the Company had accumulated deficits since
inception of $23,184,000 and $13,187,000, respectively. See "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations." 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 from operations since its
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 near future sufficient revenues from the sales of its
principal products to cover its operating expenses. The Company will require
additional financing through bank borrowings, debt or equity financing or
otherwise to finance its planned operations. Unless the Company were to obtain
one or more additional significant development contracts or grants (which cannot
be assured), the Company will not be able to obtain bank financing to fund its
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 enter into collaborative or other arrangements with financial or strategic
corporate partners to develop the IVS-TM- product and its electric vehicle
technologies or, failing that, to sell the Company's proprietary interests in
and any other assets relating to such technologies. See "--Possible Disposition
or Abandonment of Electric Vehicle and IVS Product Businesses." 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
16
licensed technology generally require the payment of minimum royalties. For the
fiscal year ended December 31, 1996, the Company paid a total of approximately
$201,000 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.
POSSIBLE DISPOSITION OR ABANDONMENT OF ELECTRIC VEHICLE AND IVS-TM- PRODUCT
BUSINESSES
To date, the Company has focused on and invested substantial capital in four
product technologies: (i) thermoelectric heated and cooled seats; (ii) radar for
maneuvering and safety; (iii) voice interactive navigation and entertainment;
and (iv) electric vehicle components and production systems. The Company has
recently determined to focus its resources primarily on developing its heated
and cooled seat and radar technologies. The Company recently entered into a
non-binding letter of intent that contemplates the possible formation of a joint
venture to pursue further development of the IVS-TM- product. However, no
assurance can be given that such joint venture will ever be consummated. 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 will be able to attract any
such strategic or financial partners or that, if such partners were to be
obtained, the Company's electric vehicle products could be successfully
developed. If the Company is unable to consummate a relationship with one or
more strategic or financial partners for the development, marketing and/or
manufacture of the IVS-TM- and electric vehicle products in the near term, the
Company will attempt to sell its proprietary interests and other assets in and
related to these products 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. Moreover, there can be no assurance that the Company's
change in business strategy will prove successful or even beneficial to the
Company. See "Item 1--Business--Products."
ELECTRIC VEHICLE COST OVERRUNS AND SIGNIFICANT CONTRACT LOSSES
For fiscal 1996, the Company reported cost overruns on the approximately
$9,600,000 Samsung contract that caused the costs of such contract to exceed
revenues from the contract by approximately $2,150,000 for 1996 and resulted in
the Company recording charges to operations for the ultimate estimated loss at
completion of the contract of approximately $1,900,000. See "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company may continue to experience cost overruns on this
contract due to 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 it may
have against the Company, including any warranty claims. Any such withholding
and/or offset could result in additional losses under this contract. 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.
17
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. The Company recently entered into a non-binding
letter of intent that contemplates the possible formation of a joint venture to
pursue further development of the IVS-TM- product. However, no assurance can be
given that such joint venture will ever be consummated. See "Item
1--Business--Products."
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 licensor of the IVS-TM-
product, which resolved prior differences of interpretation of the license
agreement covering the IVS-TM- technology. The new agreement provides, among
other things, that such licensor 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 licensor may introduce a competitive product as early as 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. See "Item 1--Business--Proprietary Rights and
Patents."
The Company's exclusive license from the Regents of the University of
California for the Company's radar technology requires the Company to achieve
sales of products to at least one original equipment manufacturer by the end of
1998. Failure to achieve such 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.
See "Item 1--Business--Proprietary Rights and Patents."
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.
18
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. See "Item 1--Business--Proprietary Rights and
Patents."
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
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.
DEPENDENCE ON ACCEPTANCE BY AUTOMOBILE MANUFACTURERS AND CONSUMERS; MARKET
COMPETITION
The Company's ability to successfully market its seats and radar products
will in large part be dependent upon the willingness of automobile manufacturers
to incur the substantial expense involved in the purchase and installation of
the Company's products and systems, and, ultimately, upon the acceptance of the
Company's products by consumers. The Company's potential customers may be
reluctant to modify their existing automobile models, where necessary, to
incorporate the Company's products. In addition, automobile manufacturers may be
reluctant to purchase key components from a small, development-stage company
with limited financial and other resources. The Company's ability to
successfully market its seats and radar products will also be dependent in part
upon its ability to persuade automobile manufacturers that the Company's
products are sufficiently unique that they cannot be obtained elsewhere. See
"--Competition; Possible Obsolescence of Technology" and "--Lack of Exclusive
Licenses on IVS-TM- and Heated and Cooled Seats; Potential Loss of Exclusivity
of License on Radar for Maneuvering and Safety." There can be no assurance that
the Company will be successful in this effort. Furthermore, in the event the
Company is successful in obtaining favorable responses from automobile
manufacturers, the Company may need to license its technology to potential
competitors to ensure adequate additional sources of supply in light of
automobile manufacturers' reluctance to purchase products from a sole source
supplier (particularly where the continued viability of such supplier is in
doubt, as may be the case with the Company). Acceptance of the Company's
components and systems for electric vehicles is dependent upon market acceptance
of electric vehicles, as to which there can be no assurance.
LACK OF CAPITAL TO FUND PROPOSED ELECTRIC VEHICLE JOINT VENTURE; STRATEGY
UNTESTED; INCREASED LOSSES RESULTING FROM WRITE-OFF OF CAPITALIZED EXPENSES
IN 1996 FOURTH QUARTER
In February 1996, the Company entered into a memorandum of understanding
(which has since expired) 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 $2,200,000 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 proposed joint venture
19
called for the Company to produce approximately 60 electric mini-cars in
ready-to-assemble kits for assembly in India. The proposed Indian co-venturer
would have been expected to build the manufacturing capability for full-scale
production. In anticipation of the formation of the Indian joint venture, the
Company has begun prototype development work on a mini-car called the "REVA,"
designed principally for the Indian market. The Company has produced five
fully-functional REVA prototypes. The Company has decided not to make any
financial contribution to the joint venture entity and to seek a different joint
venture arrangement involving the same and/or possibly one or more other
strategic partners. The five completed REVA prototypes, together with additional
prototypes that the Company may complete pursuant to existing grants, may be
contributed to an alternative joint venture. However, no assurance can be given
that the Company will identify any strategic partners or ultimately consummate
any joint venture transaction.
Even if the Company were to identify willing and able joint venture partners
and desire to consummate a joint venture transaction in India or in other
countries, there can be no assurance that the government 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 favorable to make such ventures financially
feasible, or that competition would 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 those of the Company. See "--Dependence on Acceptance
by Automobile Manufacturers and Consumers; Market Competition" and
"--Competition; Possible Obsolescence of Technology."
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 Company will not go forward with the joint venture, the
Company treated such costs as current period expenses in December of 1996. Such
expenses increased losses during the fourth quarter of 1996 by approximately
$700,000. See "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operation."
LIMITED MANUFACTURING EXPERIENCE
To date, the Company has been engaged in only limited manufacturing,
principally of the IVS-TM- in small quantities, and there can be no assurance
that the Company's efforts to establish its manufacturing operations for any of
its products (including electric vehicles) will not exceed estimated costs or
take longer than expected or that other unanticipated problems will not arise
which will materially adversely affect the Company's operations, financial
condition and/or business prospects. The Company has already experienced
significant delays and cost overruns in connection with its electric vehicle
contracts. See "--Electric Vehicle Cost Overruns and Significant Contract
Losses." Automobile manufacturers demand on-time delivery of quality products,
and some have required the payment of substantial financial penalties for
failure to deliver components to their plants on a timely basis. Such penalties,
as well as costs to avoid them, such as working overtime and overnight air
freighting parts that normally are shipped by other less expensive means of
transportation, could have a material adverse effect on the Company's business
and financial condition. Moreover, the inability to meet demand for the
Company's products on a timely basis would materially adversely affect the
Company's reputation and prospects. The Company currently is seeking to identify
and hire a vice president of operations with manufacturing experience. However,
no assurance can be given that the Company will be successful in identifying,
hiring or retaining such an individual on terms affordable to the Company (or on
any terms).
RESTATEMENT OF 1996 1ST QUARTER AND 2ND QUARTER FINANCIAL RESULTS
On October 24, 1996, the Company filed two Forms 10-Q/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
20
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; Increased Losses Resulting from 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 was unable to pay, and did not pay, most of its vendors
and suppliers on a timely basis. Even though the Company has since paid such
vendors and suppliers using a portion of the proceeds from the Offering, the
Company believes that its relations with many of such vendors and suppliers are
strained. There can be no assurance that any of such vendors and suppliers will
not limit or cease doing business with the Company or impose more onerous or
restrictive payment and credit terms. 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. See "Item 1--Business Manufacturing, Contractors and
Suppliers."
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.
On November 14, 1996, Gibbins Pattern & Plastic, Inc. ("Gibbins"), a
supplier to the Company, filed suit against the Company in Michigan state court
in the circuit court for the County of Wayne, Michigan for breach of contract,
open account/account stated, and unjust enrichment/quantum meruit. Gibbins
alleges that the Company has failed to pay for delivered products. The Company
has withheld certain payments because Gibbins has failed to provide the Company
with assurance of future performance. Gibbins has claimed a total of $231,548 in
damages. The Company has removed the lawsuit to the federal district court for
the Eastern District of Michigan and asserted certain counterclaims against
Gibbins,
21
which Gibbins has denied. The Company intends to defend the matter vigorously
and believes that the lawsuit will not have a material adverse effect on the
Company.
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.
TIME LAG FROM PROTOTYPE TO COMMERCIAL SALES
The sales cycle in the automotive components industry is lengthy and can be
as long as six years or more for products that must be designed into a vehicle,
since some companies take that long to design and develop a car. Even when
selling parts that are neither safety-critical nor highly integrated into the
vehicle, there are still many stages that an automotive supply company must go
through before achieving commercial sales. The sales cycle is lengthy because an
automobile manufacturer must develop a high degree of assurance that the
products it buys will meet customer needs, interface as easily as possible with
the other parts of a vehicle and with the automobile manufacturer's production
and assembly process, and have minimal warranty, safety and service problems. In
the case of electric vehicles, another factor affecting the pace of
commercialization is the pace of development of the electric vehicle industry
itself. Since that industry has been and probably will continue to be slow to
develop, electric vehicle products can generally be expected to require even
longer times for commercialization than products intended for use in
conventional gasoline-powered vehicles.
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
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 casts 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.
22
COMPETITION; POSSIBLE OBSOLESCENCE OF TECHNOLOGY
The automotive component and electric vehicle industries are subject to
intense competition. Most of the Company's competitors are substantially larger
in size, have substantially greater financial, marketing and other resources
than the Company, and have more extensive experience and records of successful
operations than the Company. Competition extends to attracting and retaining
qualified technical and marketing personnel. There can be no assurance that the
Company will successfully differentiate its products from those of its
competitors, that the marketplace will consider the Company's current or
proposed products to be superior or even comparable to those of its competitors,
or that the Company can succeed in establishing relationships with automobile
manufacturers. Furthermore, no assurance can be given that competitive pressures
faced by the Company will not adversely affect its financial performance. Due to
the rapid pace of technological change, the Company's products may even be
rendered obsolete by future developments in the industry. The Company's
competitive position would be adversely affected if it were unable to anticipate
such future developments and obtain access to the new technology.
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.
Effective on March 14, 1997, R. John Hamman, Jr., the Company's Vice President
of Finance and Chief Financial Officer, resigned from the Company for personal
reasons unrelated to his former responsibilities with the Company. The Company
has commenced a search for a qualified individual to succeed Mr. Hamman as the
Company's Chief Financial Officer. There can be no assurance, however, that the
Company will be successful in identifying, hiring or retaining such a successor
on terms acceptable to the Company or on any terms. 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 $2,000,000 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.
RELIANCE ON MAJOR CONTRACTORS; RISKS OF INTERNATIONAL OPERATIONS
The Company has in the past engaged certain outside contractors to perform
product assembly and other production functions for the Company, and the Company
anticipates that it may desire to engage contractors for such purposes in the
future. The Company believes that there are a number of outside contractors that
provide services of the kind that have been used by the Company in the past and
that the Company may desire to use in the future. However, no assurance can be
given that any such contractors would agree to work for the Company on terms
acceptable to the Company or at all. The Company's inability to engage outside
contractors on acceptable terms or at all would impair the Company's ability to
complete any development and/or manufacturing contracts for which outside
contractors' services may be needed. Moreover, the Company's reliance upon third
party contractors for certain production functions will reduce the Company's
control over the manufacture of its products and will make the Company dependent
in part upon such third parties to deliver its products in a timely manner, with
satisfactory quality controls and on a competitive basis.
Furthermore, the Company may engage contractors located in foreign
countries. Accordingly, the Company will be subject to all of the risks inherent
in international operations, including work stoppages, transportation delays and
interruptions, political instability, foreign currency fluctuations, economic
dis-ruptions, the imposition of tariffs and import and export controls, changes
in governmental policies and
23
other factors which could have an adverse effect on the Company's business. See
also "--Risk of Foreign Sales."
POTENTIAL CHARGES TO INCOME
In connection with the Company's initial public offering completed in 1993,
3,000,000 shares of the Company's Class A Common Stock (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 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
will incur a non-recurring charge to operations in the first quarter of 1997
relating to the repayment of the Bridge Notes and associated costs of their
issuance in the aggregate amount of approximately $416,000.
POTENTIAL PRODUCT LIABILITY
The Company's business will expose it to potential product liability risks
which are inherent in the manufacturing, marketing and sale of automotive
components. In particular, there may be substantial warranty and liability risks
associated with critical safety components of the Company's products. If
available, product liability insurance generally is expensive. While the Company
presently has $5,000,000 of product liability coverage with respect to the
IVS-TM- product and its electric vehicle prototypes, there can be no assurance
that it will be able to obtain or maintain such insurance on acceptable terms
with respect to other products the Company may develop, or that any insurance
obtained will provide adequate protection against any potential liabilities. In
the event of a successful claim against the Company, a lack or insufficiency of
insurance coverage could have a material adverse effect on the Company's
business and operations.
GOVERNMENT AUDITS OF GRANTS
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.
NO DIVIDENDS
The Company has not paid any cash dividends on its Common Stock since its
inception and, by reason of its present financial status and its contemplated
financial requirements, does not anticipate paying any cash dividends in the
foreseeable future. It is anticipated that earnings, if any, which may be
generated from operations will be used to finance the operations of the Company.
24
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 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 fiscal
quarter because the activity on the Company's major electric vehicle development
contract diminished during the fourth quarter of 1996 and substantially
concluded at the end of the year with no replacement contract presently
scheduled to follow. See "Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations." 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, and/or Michael R. Peevey, a director 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 and for which Dr. Bell serves as a
director and member of the executive committee and for which Mr. Peevey serves
as Chairman of the Board of Directors, 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. 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 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.
SIGNIFICANT INFLUENCE OF PRINCIPAL SHAREHOLDER
The Company's principal shareholder, Dr. Bell, beneficially owns
approximately 28% of the outstanding shares of Class A Common Stock of the
Company and, therefore, will have the power to influence significantly the
management and policies of the Company.
25
ANTI-TAKEOVER EFFECTS OF UNISSUED PREFERRED STOCK
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
shareholders. The rights of the holders of Class A Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any shares of
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. However, the Company has no present plans to issue shares
of Preferred Stock.
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.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters and research and
development facilities in sub-leased space in a Monrovia, California industrial
park. The Company's sub-lease expires July 31, 1997, after which the sublessor's
master lease expires and the Company will have to relocate its facilities to an
as-yet undetermined location. The current monthly rent under the sub-lease is
approximately $24,000. The Company believes that adequate alternative space is
available in the immediate area at comparable rates. The Company also leases
manufacturing and office space in Alameda, California on a month-to-month basis.
The monthly rent for this space is approximately $3,300. The Company believes
that its facilities are adequate for its present needs and that satisfactory
alternative facilities will be obtained.
ITEM 3. LEGAL PROCEEDINGS
HBI Financial Inc. ("HBI") and DDJ Capital Management LLC ("DDJ") 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.
On November 14, 1996, Gibbins Pattern & Plastic, Inc. ("Gibbins"), a
supplier to the Company, filed suit against the Company in Michigan state court
in the circuit court for the County of Wayne, Michigan for breach of contract,
open account/account stated, and unjust enrichment/quantum meruit. Gibbins
alleges that the Company has failed to pay for delivered products. The Company
has withheld certain payments because Gibbins has failed to provide the Company
with assurance of future performance. Gibbins has claimed a total of $231,548 in
damages. The Company has removed the lawsuit to the federal district court for
the Eastern District of Michigan and asserted certain counterclaims against
Gibbins,
26
which Gibbins has denied. The Company intends to defend the matter vigorously
and believes that the lawsuit will not have a material adverse effect on the
Company.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of shareholders held November 27, 1996, the
shareholders approved an amendment to the Company's Restated Articles of
Incorporation increasing the authorized number of shares of Class A Common Stock
from 17,000,000 to 40,000,000. The results of the voting at such special meeting
were as follows:
FOR: AGAINST: ABSTAIN: BROKER NON-VOTES:
- ---------- ----------- ----------- -----------------------
4,140,000 197,880 2,199 None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Class A Common Stock has traded on the Nasdaq SmallCap Market
under the symbol ARGNA since June 10, 1993. The Class A Warrants have been
approved for listing on the Nasdaq SmallCap Market and began public trading
February 12, 1997. The following table sets forth the high and low bid prices
for the Class A Common Stock as reported on the Nasdaq SmallCap Market for each
quarterly period (or part thereof) from the beginning of the first quarter of
1995 through December 31, 1996. Such prices reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
HIGH LOW
--------- ---------
1995
1st Quarter................................................................ 13.50 9.50
2nd Quarter................................................................ 10.50 9.50
3rd Quarter................................................................ 12.50 9.00
4th Quarter................................................................ 11.25 10.25
1996
1st Quarter................................................................ 10.75 10.00
2nd Quarter................................................................ 12.00 9.00
3rd Quarter................................................................ 11.00 7.25
4th Quarter................................................................ 7.00 4.75
As of March 24, 1997, there were approximately 51 holders of record of the
Class A Common Stock (not including beneficial owners holding shares in nominee
accounts).
The Company has not paid any cash dividends since its formation and, given
its present financial status and its anticipated financial requirements, does
not expect to pay any cash dividends in the foreseeable future. The Company was
prohibited during the past fiscal year from paying cash dividends by the terms
of its secured bank line of credit, which was paid off using a portion of the
net proceeds of the Offering and terminated effective February 18, 1997. It is
anticipated that earnings, if any, which may be generated from operations will
be used to finance the operations of the Company.
On October 31, 1996, the Company completed the Bridge Financing, which
consisted of the private placement of $3 million of Units, each Unit consisting
of the Bridge Notes and the Debentures. Upon
27
completion of the Offering, each of the Debentures automatically converted into
27,000 of the Company's Class A Warrants, which Class A Warrants entitle the
holder thereof to purchase at any time until February 12, 2002 a like number of
shares of the Company's Class A Common Stock at an exercise price of $5.00 per
share, subject to adjustment. The Bridge Purchasers (as defined below) have
agreed (i) not to exercise the Class A Warrants into which their Debentures were
converted until after February 12, 1998, and (ii) not to sell, transfer, or
otherwise dispose publicly of such Class A Warrants except in the following
amounts after the indicated dates:
LOCK-UP PERIOD PERCENTAGE ELIGIBLE FOR RESALE
- ----------------------------------------------------------------- -------------------------------
Within 90 days after February 18, 1997........................... 0%
Between 91 and 150 days after February 18, 1997.................. 25%
Between 151 and 210 days after February 18, 1997................. 50%
Between 211 and 270 days after February 18, 1997................. 75%
More than 270 days after February 18, 1997....................... 100%
The Company has agreed to register for public resale by the purchasers in
the Bridge Financing the Class A Warrants into which the Debentures were
converted, as well as the Class A Common Stock issuable upon exercise of such
Class A Warrants. The Bridge Notes and the Debentures were sold to a total of 46
"accredited investors" (the "Bridge Purchasers"), as that term is defined in
Rule 501 under the 1933 Act. D.H. Blair Investment Banking Corp. served as
placement agent for the Bridge Financing and, in such capacity, received a
placement fee of $300,000 and a non-accountable expense allowance of $90,000.
The Bridge Notes and the Debentures were sold in reliance on Rule 506 of
Regulation D under the Securities Act of 1933, as amended, which provides a safe
harbor exemption from registration for sales of securities where, among other
things, (i) such sales are made to not more than 35 purchasers (excluding
accredited investors, which are not counted as purchasers for purposes of Rule
506), (ii) specified information is provided to the purchasers of such
securities, and (iii) no form of general solicitation or general advertising is
employed. The Company believes that the Bridge Financing satisfied each of the
foregoing requirements, in that sales were made only to accredited investors,
such investors were provided with the information required to be furnished under
Rule 506, and no general solicitation or advertising was employed in connection
with such sales.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Net revenues................................................ $ 1,900 $ 2,289 $ 2,640 $ 7,809 $ 7,447
Net loss.................................................... (1,459) (3,640) (4,235) (3,237) (9,997)
Net loss per share(1)....................................... (1.46) (1.64) (1.28) (.98) (2.46)
Deficit accumulated during development stage................ (2,075) (5,715) (9,950) (13,187) (23,184)
AS OF DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Working capital deficit(2).................................. $ (1,644) $ 8,833 $ 4,149 $ 6,481 $ (3,315)
Total assets................................................ 969 9,721 7,162 8,995 3,922
Capitalized lease obligations............................... -- -- 78 68 43
- ------------------------
(1) Excluded from the average number of common shares used to calculate net loss
per share are the 3,000,000 Escrowed Contingent Shares (See Note 9 to the
Financial Statements). Per share information for 1992 excludes Escrowed
Contingent Shares on a pro forma basis.
28
(2) During 1993, $2,102 of notes payable to shareholders were contributed to
capital. In addition, in June 1993, the Company completed its initial public
offering resulting in net proceeds to the Company of $11,534.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements of the Company and related notes thereto appearing
elsewhere in this report, and is qualified in its entirety by the same and by
other more detailed financial information appearing elsewhere in this report.
OVERVIEW OF DEVELOPMENT STAGE ACTIVITIES
The Company's operations during the development stage have focused on the
research and development of technologies to adapt them for a variety of uses in
the automotive industry. Generally, the Company licenses the rights to these
technologies from the holders of the related patents. In the automotive
components industry, products typically proceed through five stages of research
and development and commercialization. Initial research on the product concept
comes first, in order to assess its technical feasibility and economic costs and
benefits, and often includes the development of an internal prototype for the
supplier's own evaluation of the product. If the product appears feasible, a
functioning prototype or demonstration prototype is manufactured by the
component supplier to demonstrate and test the features of the product. This
prototype is then marketed to automotive companies to generate sales of
evaluation prototypes for internal evaluation by the automobile manufacturer. If
the automobile manufacturer remains interested in the product after testing
initial evaluation prototypes, it typically works with the component supplier to
refine the product and then purchase second and subsequent generation
engineering prototypes for further evaluation. Finally, the automobile
manufacturer determines to either purchase the component for a production
vehicle or terminate interest in the component. See "Item 1--Business--
Marketing and Sales."
As development of the Company's products proceeds, the Company seeks to
generate revenues from the sale of prototypes, then from specific development
contracts, pre-production orders and, ultimately, production orders. Development
contracts are from customers interested in developing a particular use or
29
project using the Company's technologies and are generally longer term
activities (from six months to one year) involving, in some cases,
pre-production orders of larger quantities of the product for final testing by
the customer before submitting a production order. Revenues obtained as grant
funding from government agencies interested in promoting the technologies for
specific tasks or projects, as well as development funds from prototype sales to
customers, help offset the development expenses overall. Throughout the
development stage, development costs and administrative expenses have exceeded
and are expected to continue to exceed the revenues from customers and from
grant agencies. The Company has entered into a non-binding letter of intent that
contemplates the possible formation of a joint venture to pursue further
development of the IVS-TM- product. See "Item 1--Business--Products."
The Company received no funds to offset its development expenses from any
funding source in 1991 and, in 1992, secured its first outside grant totaling
$1,900,000. In 1993, the Company sold $188,000 in prototypes of its developing
technology adaptations and, in addition, recorded $2,101,000 in grant revenue.
In 1994, the sale of prototypes increased and the Company recorded its first
development contract revenues, increasing revenues from these sources to
$1,336,000. Grant revenues became less important as a source of total revenues,
decreasing in 1994 to 49% of total revenues from 92% in 1993. In late 1994, the
Company entered into the Samsung contract, from which revenues of $4,040,000 and
$5,328,000 were recorded in 1995 and 1996, respectively. In addition, the
Company recorded revenues from two grants related to the development of the
electric vehicle technology in 1995 and 1996 of $1,872,000 and $840,000,
respectively. The Company's activity on the Samsung contract diminished during
the fourth quarter of 1996 and substantially concluded at the end of the year,
with no replacement contract presently scheduled to follow. In addition, the
Company has substantially completed work relating to the two electric vehicle
grants, with no replacement grants presently scheduled to follow. As of March
24, 1997, the Company had only minor development contracts in place under which
a total of not more than approximately $317,000 potentially remains to be earned
by the Company (although no assurance can be given that all or any portion of
such amount will ultimately be earned or received). In addition, as of March 24,
1997, no more than a total of approximately $615,000 remained to be earned under
existing grants (although no assurance can be given that all or any portion of
such amount will ultimately be earned or received). The Company has
significantly reduced its efforts to obtain any additional grants and intends to
focus its efforts on working toward production contracts for CCS and radar
sensor systems. See "Item 1--Risk Factors-- Dependence on Grants; Government
Audits of Grants."
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenues for the year ended December 31, 1996 ("1996") decreased by
$362,000, or approximately 4.6%, to $7,447,000, from $7,809,000 for the year
ended December 31, 1995 ("1995"). Approximately $6,168,000, or nearly 83%, of
1996 total revenues were derived from the Samsung contract and related grants,
which is an increase of approximately $256,000 compared to 1995, when
$5,912,000, or nearly 76% of total revenues, related to the Samsung contract and
related grants. The Company substantially completed work on the Samsung contract
and the related grants in 1996, and no replacement contract or replacement
grants are currently scheduled to follow or expected to be obtained.
All other development contract revenue (relating to the Company's CCS, radar
and IVS-TM- products) decreased to $947,000 in 1996, a decline of $431,000, or
approximately 31.3%, from the $1,378,000 in such revenue recorded for 1995. The
decrease in 1996 principally reflects the Company's completion in 1995 of work
on several development contracts relating to the IVS-TM- and radar products,
which contracts were not replaced in 1996. As of March 24, 1997, the Company had
only minor development contracts in place, under which a total of not more than
approximately $317,000 potentially remains to be earned by the Company (although
no assurance can be given that all or any portion of such amount will ultimately
be earned or received). The Company does not anticipate obtaining any
development contracts on the order of the Samsung contract in 1997. Revenues
from grants other than electric-vehicle-related grants decreased
30
by $187,000, or approximately 36%, to $332,000 in 1996 from $519,000 in 1995.
The Company does not obtain grants on a regular basis, and those grants that are
obtained vary as to amount and as to the nature and duration of the work (and
type of product) covered. As of March 24, 1997, no more than approximately
$615,000 remained to be earned under existing grants (although no assurance can
be given that all or any portion of such amount will ultimately be earned or
received). The Company has determined to reduce its efforts to obtain new grants
and intends to focus its efforts on working toward production contracts for CCS
radar sensor systems. See "Item 1--Risk Factors--Dependence on Grants;
Government Audit of Grants."
Revenue from electric vehicle development contracts increased in 1996 to
$5,328,000 from $4,040,000 in 1995. Nearly all electric vehicle development
contract revenue was attributable to the Samsung contract in each of 1995 and
1996. As noted above, this contract was substantially completed in 1996, and no
replacement contract has been obtained or is expected. In contrast to 1995, when
engineering design was the Company's principal activity under the Samsung
contract, in 1996 the Company constructed two prototypes of the electric vehicle
to be built under the Samsung contract and effected certain design modifications
to such prototypes. In addition, the Company completed kits for all vehicle
frames with motor controllers required under the contract, as well as final
tooling for body panels and interior portions of the vehicles. The Company has
shipped the vehicle kits, together with substantially all remaining parts, to
Samsung. The percentage of completion accounting method is used for this
contract, pursuant to which the Company recognizes revenues and gross profit as
work is performed, based on the relationship between actual costs incurred and
total estimated costs at completion. Revenues and gross profit are recognized
prospectively after taking into account revisions in estimated total contract
costs and contract values. Estimated losses are recorded when identified. As
discussed below, the Company's costs related to the Samsung contract exceeded
revenues from such contract by approximately $2,150,000 in 1996.
Related electric vehicle grant revenues totalled $840,000 in 1996, a
decrease of $1,032,000, or approximately 55%, from the $1,872,000 in such
revenues recorded for 1995. The reduction in these grant revenues reflects
significantly greater reimbursements for electric vehicle design costs received
by the Company in 1995, when engineering design work (for which the grants were
primarily given) represented the Company's principal activity under the Samsung
contract. Grant revenue is recorded when reimbursable costs are incurred. The
Company expects that related electric vehicle grant revenues will significantly
decline in 1997, since the Company expects to complete the small amount of
remaining work covered by the two existing grants relating to the Samsung
contract by approximately the end of the second quarter of 1997, and since the
Company has determined to focus its efforts on working toward production
contracts for CCS and radar sensor systems. See "Item 1--Risk--Factors Possible
Disposition or Abandonment of Electric Vehicle and IVS-TM- Businesses" and
"--Dependence on Grants; Government Audit of Grants."
During 1996, development continued on CCS and on the Company's radar system,
some of which was funded by development contracts. The total revenues recognized
for the development of the CCS, radar and IVS-TM- products in 1996 was $947,000,
compared with $1,378,000 in 1995. The decrease in 1996 principally reflects the
Company's completion in 1995 of work on several development contracts relating
to the IVS-TM- and radar products, which contracts were not replaced in 1996.
The Company began selling IVS-TM- products in 1995. Demand for the IVS-TM-
product in 1996 was weak. The Company has not had any significant revenue from
the sale of IVS-TM- products since September 30, 1996. The Company has entered
into a non-binding letter of intent that contemplates the possible formation of
a joint venture to pursue further development of the IVS-TM- product. See "Item
1--Business--Products."
Direct development contract and related grant costs increased to $11,533,000
in 1996 from $5,332,000 in 1995, due principally to increased activity in the
Company's electric vehicle program in 1996 (particularly in connection with the
Samsung contract and related grants). Included in these costs are costs related
to commercial sales of IVS-TM- products totalling $490,000 in 1996 and $412,000
in 1995. In 1996 the Company constructed two prototypes of the electric vehicle
to be built under the Samsung contract and effected certain design modifications
to such prototypes. In addition, the Company completed kits for all
31
vehicle frames with motor controllers required under the contract, as well as
final tooling for body panels and interior portions of the vehicles. The Company
has shipped the vehicle kits, together with substantially all remaining parts,
to Samsung. The Company experienced significant cost overruns on the Samsung
contract due to unanticipated design and development problems and continued
delays in the completion of the contract as well as other factors, all of which
resulted in higher than expected costs for labor, tooling and materials. In
contrast to 1995, when revenues from this contract exceeded costs by
approximately $230,000, in 1996, costs for the Samsung contract exceeded
revenues from such contract by approximately $2,150,000. The Company recorded
charges to operations for the ultimate estimated loss at completion of the
contract of approximately $1,900,000, which amount is included in the total
direct development contract and related grant costs for 1996.
Prior to December of 1996, the Company treated costs totaling approximately
$700,000 incurred in connection with prototype development in anticipation of
the formation of the proposed Indian joint venture (see "Item
1--Business--Products") as capitalized expenses. Because the Company will not go
forward with the proposed joint venture, the Company treated such costs as
current period expenses in December of 1996. Such expenses increased losses
during the fourth quarter of 1996 by approximately $700,000.
Direct grant costs in 1996 declined by $129,000, or approximately 38%, to
$210,000 from $339,000 in 1995. These costs are related to the projects for
which grant revenues are reported. The decrease in 1996 reflects the decline in
grant project activities in which the Company was engaged during 1996. The
Company anticipates that direct grant costs will decrease in 1997 as the Company
completes work on the remaining active grants and focuses its efforts on working
toward production contracts for CCS and radar sensor systems. Grant costs as a
percentage of grant revenues were 63% in 1996 and 65% in 1995.
Research and development expenses declined by $239,000, or approximately
10%, in 1996 to $2,128,000 from $2,367,000 in 1995. These expenses represent
research and development expenses for which no development contract or grant
funding has been obtained. Expenses of research and development projects that
are specifically funded by development contracts from customers are classified
under direct development contract and related grant costs or direct grant costs.
Due to the Company's significant cash shortfalls in 1996, the Company was
constrained in its ability to undertake research and development activities
during the year. Research and development activities are expected to increase in
1997 as the Company's ability to finance such activities has improved since the
completion of the Offering in March, 1997. The Company's research and
development expenses fluctuate significantly from period to period, due to both
changing levels of research and development activity and changes in the amount
of such activities that are covered by customer contracts or grants. Where
possible, the Company seeks funding from third parties for its research and
development activities.
Selling, general and administrative ("SG&A") expenses increased by $275,000,
or approximately 8.8%, in 1996 to $3,410,000 from $3,135,000 in 1995. The
increase in 1996 was due principally to non-recurring costs incurred by the
Company during the year for legal and other services in connection with the
Board of Director's consideration of various corporate financing alternatives,
as well as for outside consulting services in connection with the Company's
efforts to identify strategic or financial partners for its electric vehicle and
IVS-TM- products. Direct and indirect overhead expenses included in SG&A that
are associated with development contracts are allocated to such contracts. The
Company anticipates that fewer SG&A expenses will be allocated to development
contracts in 1997. As a result, absent offsetting decreases in SG&A expenses
generally (which are not currently expected), the Company anticipates that SG&A
expenses may increase in 1997.
Interest expense in 1996 is related to the bank line of credit obtained to
finance work on the Samsung electric vehicle contract, the Bridge Financing, and
the loan from the Company's shareholder. There were no such loans in 1995.
Interest income decreased to $48,000 in 1996 from $127,000 in 1995, reflecting
the
32
Company's overall lower cash balance during 1996. Net interest income (expense)
was ($163,000) in 1996 compared with $127,000 in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues increased by $5,169,000 to $7,809,000 in the year ended
December 31, 1995 from the year ended December 31, 1994 ("1994") due to the
increase in development contract work for customers. Development contract
revenues including revenues from the sales of prototypes increased to
$7,290,000, which includes $1,872,000 of grant funding related to these
development activities, compared to $1,336,000 in 1994. The substantial increase
in development revenues is primarily attributable to revenues in 1995 from the
Company's electric vehicle development contract which were $4,040,000 compared
to $48,000 in 1994. These contracts are related to orders for prototype models
and kits to make approximately 50 electric vehicles. Grant revenue from
activities not related to development contracts decreased from $1,304,000 in
1994 to $519,000 in 1995 due to the completion in 1994 of three grants
accounting for $577,000 of the decrease and due to the decrease in billings for
two other grants.
Direct costs for development contracts and related grants increased from
$928,000 in 1994 to $5,332,000 in 1995 primarily as a result of the Company's
electric vehicle development contract together with development contract costs
in the climate control seat and radar programs. In the electric vehicle program
the costs primarily consisted of tooling costs for prototype materials, internal
and external engineering services and consulting. In 1995, the amount for direct
development contract and related grant costs includes $412,000 with respect to
the commercial sales of IVS products that commenced in December of 1995. Direct
costs for grants decreased from $803,000 in 1994 to $339,000 in 1995, due to the
decrease in the number of and activity under grants as described above.
Research and development expenses include the unfunded portion of direct
wages of Company engineers and technicians, outside consultants, prototype
tooling and prototype materials. Such expenses increased from $2,137,000 in 1994
to $2,367,000 in 1995 primarily due to costs associated with completing the
development of the Company's IVS-TM- product. Included in the research and
development expenses are fees for licenses and royalties of $248,000 in 1994 and
$345,000 in 1995. Research and development is expected to continue at high
levels as work continues toward the commercialization of the Company's electric
vehicle, radar and seat products as well as on improvements to the IVS product.
SG&A decreased from $3,235,000 in 1994 to $3,135,000 in 1995. Increases in
rent, legal expenses, sales commissions and depreciation were offset by
decreases in the provision for doubtful accounts and recruiting expenses.
Interest income decreased from $228,000 in 1994 to $127,000 in 1995 due to the
lower amount of invested cash in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had negative working capital of
$3,315,000. At that time, the Company had a line of credit with no available
borrowing capacity. Subsequently, the Company completed the Offering in the
first quarter of 1997 and raised $17,700,000 of net proceeds. Approximately
$4,110,000 of such proceeds were used in part to pay off most of the Company's
indebtedness, including the bank line of credit, which was terminated effective
February 18, 1997. The Company's principal sources of operating capital have
been the proceeds of its various financing transactions and, to a lesser extent,
revenues from grants, development contracts and the sale of prototypes to
customers. As of the March 24, 1997, the Company had approximately $11,247,000
in remaining proceeds from the Offering. Other than such remaining Offering
proceeds, the Company has virtually no sources of liquidity.
Cash and cash equivalents decreased by $4,283,000 during the year ended
December 31, 1996. Operating activities used $8,514,000, which primarily
resulted from the operating loss of $9,997,000. Reductions in unbilled revenues
of $311,000 (related to billings under the electric vehicle program), in
inventory of $223,000, in prepaid expenses and other assets of $217,000 (related
to the electric vehicle
33
program reductions which was partially offset by new debt issue costs and new
deferred stock offering expenses) and in increases in accounts payable of
$444,000 partially offset the other uses of cash for operating activities.
Investing activities used $182,000 related to the purchase of property and
equipment.
Financing activities provided a total of $4,413,000, of which $1,187,000,
net of repayments, was from borrowing under a bank line of credit established to
finance the cash flows of the major electric vehicle contract, and $3,000,000
was from the Bridge Financing completed in October, 1996. The bank line of
credit expired by its terms on January 31, 1997 and was extended orally by the
bank until February 28, 1997. As of December 31, 1996, the Company was in
violation of certain financial and other covenants contained in the loan
agreement. However, the bank agreed to waive its rights and remedies with
respect to some of such violations and agreed to forbear until January 31, 1997
from exercising its rights and remedies with respect to all others. The bank
orally agreed to extend the waiver and forbearance until February 28, 1997. In
February 1997, the Company repaid its obligations under the credit line using a
portion of the proceeds of the Offering completed on February 18, 1997 and such
credit line was terminated on such date.
In October 1996, the Company completed the Bridge Financing, which consisted
of the private placement of 60 Units, each Unit consisting of $47,500 principal
amount of the Bridge Notes and $2,500 principal amount of the Bridge Debentures.
The Bridge Notes were repaid using a portion of the proceeds of the Offering.
The Bridge Debentures automatically converted into an aggregate of 1,620,000
Class A Warrants on February 18, 1997, the date of the closing of such Offering.
The net proceeds to the Company from the Bridge Financing were approximately
$2,500,000, net of costs of issuance of approximately $500,000. A substantial
portion of the costs of issuance of the Bridge Financing will be charged to
operations in the first fiscal quarter of 1997 in connection with the repayment
of the Bridge Notes.
On February 18, 1997, the Company completed the Offering, consisting of the
sale of 17,000 Units, each consisting of 280 shares of Class A Common Stock and
280 Class A Warrants to purchase, at $5.00 per share, an equal number of shares
of Class A Common Stock. Proceeds to the Company, net of the underwriter's fees
and commissions and expenses of the Offering, were approximately $15,300,000. In
addition, on March 7, 1997, the underwriter exercised an option to purchase an
additional 2,550 Units to cover over-allotments. Additional proceeds from the
sale of the Units pursuant to the underwriter's exercise of the over-allotment
option, net of the underwriter's fees and commissions and all expenses, were
approximately $2,400,000. See Note 9 of Notes to Financial Statements.
The Company expects to incur losses for the foreseeable future due to the
continuing cost of its product development and marketing activities. To fund its
operations, the Company will continue to need cash from financing sources unless
and until such time as sufficient profitable production contracts are obtained.
Unless the Company were to obtain one or more additional significant development
contracts or grants (as to which there can be no assurance), the Company would
not be able to obtain bank financing to fund its operations. Moreover, even if
such additional development contracts are obtained, there still cannot be any
assurance that the Company would be able to obtain bank financing on terms
affordable to the Company or on any terms. Cash inflows during the development
and early stage production period are dependent upon achieving certain billing
milestones under existing development contracts and grants, and on obtaining new
production and/or development contracts. Cash outflows are dependent upon the
level and timing of production and/or development work and the amount of
research and development and overhead expenses. Cash inflows must be
supplemented by cash from debt and/or equity financing, the availability of
which is doubtful and cannot be assured.
34
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. The Company also expects to require significant capital to fund other
near-term production engineering and manufacturing, as well as research and
development and marketing, of these products. While the Company believes that
the remaining proceeds from the Offering will be sufficient to meet its expected
capital needs through approximately the end of 1997, no assurance can be given
that unanticipated needs for capital will not develop that would exceed the
Company's capital resources or that, even in the absence of any such
unanticipated needs, the Company's current working capital will prove sufficient
to fund its capital needs through the end of 1997 as currently anticipated. See
"Item 1--Risk Factors--Need For Additional Financing."
Over the long-term, the Company expects to continue to expend substantial
funds to continue its development efforts. The Company has experienced negative
cash flow from operating activities since its inception and 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 or to
finance such further development efforts. Accordingly, the Company expects that
significant additional financing will be necessary to fund the Company's
long-term operations.
CHARGE TO INCOME
In the event any Escrow Shares are released from escrow to persons who are
officers and other employees of the Company, compensation expense will be
recorded for financial reporting purposes. Therefore, in the event the Company
attains any of the earnings thresholds required for the release of Escrow Shares
from escrow, such release will be deemed additional compensation expense of the
Company and the Company will recognize during the periods in which the earnings
thresholds are met or are probable of being met or such minimum bid prices
attained what will likely be one or more substantial 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 the Company will not affect the Company's total
shareholders' equity or its working capital, it may have a depressive effect on
the market price of the Company's common stock.
The Company will record a non-recurring charge to operations in the first
quarter of fiscal year 1997 relating to the costs of issuance of the Bridge
Notes. These costs are expensed as amortization to the date of the repayment of
the related Bridge Notes which occurred on February 18, 1997, at which time
approximately $340,000, representing the remaining unamortized costs, will be
charged to operations (See Note 8 of Notes to Financial Statements).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related financial information required to be
filed hereunder are indexed on page F-1 of this report and are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
information contained under the captions entitled "Election of Directors,"
"Executive Officers and Significant Employees" and
35
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement to be filed with the Commission in connection with
the Company's 1997 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information contained under the captions entitled "Executive Compensation,"
"Stock Option Plan," "Report of the Compensation Committee on Executive
Compensation," "Compensation Committee Interlocks and Insider Participation,"
"Option Grants During the Year Ended December 31, 1995," "Aggregate Option
Exercises In the Year Ended December 31, 1995 and Year-End Values," and
"Comparative Stock Performance" in the Company's definitive proxy statement to
be filed with the Commission in connection with the Company's 1997 Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information contained
under the caption entitled "Principal Stockholders" and "Escrow Shares" in the
Company's definitive proxy statement to be filed with the Commission in
connection with the Company's 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information contained under the caption entitled "Certain Transactions" in the
Company's definitive proxy statement to be filed with the Commission in
connection with the Company's 1997 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements.
The following financial statements of the Company and report of independent
accountants are included in Item 8 of this Annual Report:
Report of Independent Accountants
Balance Sheet
Statement of Operations
Statement of Shareholders' Equity
Statement of Cash Flows
Notes to Financial Statements.
2. Financial Statement Schedule.
The following Schedule to Financial Statements is included herein:
Schedule II--Valuation and Qualifying Accounts, together with the report
of independent accountants thereon.
3. Exhibits.
36
The following exhibits are filed as a part of this report:
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
3.1.1 Amended and Restated Articles of Incorporation (the "Articles") of the Company(1)
3.1.2 Certificate of Amendment of Articles filed with the California Secretary of State on December 5, 1996(7)
3.2 Bylaws of the Company as amended to date(1)
4.4 Escrow Agreement among the Company, U.S. Stock Transfer Corporation and the shareholders named
therein(1)
10.1 1993 Stock Option Plan, together with Form of Incentive Stock Option Agreement and Nonqualified Stock
Option Agreement(1)
10.2 Promissory Note Payable from the Company to Lon E. Bell dated September 9, 1996(7)
10.3 Promissory Note from the Company to Lon E. Bell dated January 29, 1997(7)
10.4 Form of Underwriter's Unit Purchase Option(7)
10.5 Stock Option Agreement, effective March 31, 1993, between Lon E. Bell and Joshua Newman(1)
10.6 Stock Option Agreement, effective August 9, 1995, between Lon E. Bell and R. John Hamman, Jr.(7)
10.7.1 Stock Option Agreement ("Bell Stock Option Agreement"), effective May 13, 1993, between Lon E. Bell and
Roy A. Anderson(7)
10.7.2 List of omitted Bell Stock Option Agreements with Company directors(7)
10.8.1 Standard Sublease (the "Monrovia Lease"), dated February 14, 1994, between the Company and Environmental
Systems Group of Joy Technologies, Inc. ("Joy") (formerly Joy Manufacturing Company) for facilities
located in Monrovia, California(2)
10.8.2 Letter dated February 7, 1996 from the Company to Joy extending the term of the Monrovia Lease to
February 14, 1997(7)
10.8.3 Letter dated December 3, 1996 from the Company to McDermott, Inc., successor to Joy, extending the term
of the Monrovia Lease to July 31, 1997(7)
10.9 Form of Indemnity Agreement between the Company and each of its officers and directors(1)
10.10 Product Adaptation and Supply Contract, dated as of November 25, 1994, by and between the Company and
Samsung Heavy Industries Co., Ltd., Kihung R&D Center(7)
10.11 Settlement and License Agreement, dated as of May 10, 1996, by and between the Company, Audio Navigation
Systems, LLC, Alcom Engineering Corporation and Audio Navigation Systems, Inc., together with Addendum
thereto dated June 12, 1996(7)
10.12 License Agreement, dated as of January 20, 1994, by and between the Company and the Regents of the
University of California, together with a letter from the Regents to the Company dated September 19,
1996 relating thereto(7)**
10.13 Option and License Agreement dated as of November 2, 1992 between the Company and Feher Design, Inc.(1)
10.14 License Agreement, dated as of October 19, 1993, by and between the Company and Lernout & Hauspie Speech
Products, N.V., as amended(7)
10.15 License Agreement, dated as of March 15, 1995, by and between the Company and Navigation Technologies
Corporation(7)
37
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
10.16 Shareholders Agreement, dated May 13, 1993, by and among the Company and the shareholders named
therein(1)
10.17 Running Chassis Program Management Agreement between the Company and CALSTART dated September 8, 1993(2)
10.18 Thermoelectric Air Conditioning System Program Contract between the Company and the South Coast Air
Quality Management District dated May 4, 1995(3)
10.19 Thermoelectric Heating and Cooling for Electric Vehicles Program Contract between the Company and the
State of California (Energy Resources and Development Commission) dated May 12, 1994(3)
10.20 Agreement for the Multi-Year Electric Vehicle Running Chassis Program between the Company and CALSTART
dated May 31, 1994(3)
10.21 Modification No. 001 of Participation Agreement between the Company and CALSTART, dated October 9,
1995(4)
10.22 Agreement for the Development of an Agile Assembly Line For the Production of Electric Vehicles and
Components between the Company and CALSTART, Inc., dated November 9, 1995(4)
10.23.1 Security and Loan Agreement, dated November 20, 1995, between the Company and Imperial Bank (the
"Imperial Bank Agreement")(5)
10.23.2 First Amendment to Security and Loan Agreement and Addendum, Exhibit "A" Thereto, effective as of
November 30, 1996(7)
10.23.3 Credit Terms and Conditions, dated November 20, 1995, relating to the Imperial Bank Agreement(5)
10.23.4 Modification to Security and Loan Agreement, effective as of June 26, 1996, entered into between the
Company and Imperial Bank(7)
10.23.5 Letter from Imperial Bank to the Company dated December 4, 1996 extending the term of the Company's
credit line under the Imperial Bank Agreement until December 31, 1996(7)
10.23.6 Letter from Imperial Bank to the Company dated February 3, 1997 extending the term of the Company's
credit line under the Imperial Bank Agreement until January 31, 1997(7)
10.24 Stock Purchase Agreement and Registration Rights Agreement between the Company and Fidelity Copernicus
Fund, L.P. and Fidelity Galileo Fund, L.P., dated December 29, 1995(6)
10.25 Stock Purchase Agreement and Registration Rights Agreement between the Company and HBI Financial Inc.,
dated December 29, 1995(6)
10.26 Amerigon Client Contract, dated April 1, 1996, between the Company and Technology Strategies &
Alliances(7)
10.27 Agreement, dated as of June 1, 1996, by and between the Company and the International Association of
Machinists and Aerospace Workers, District Lodge 725(7)
21 List of Subsidiaries(7)
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Price Waterhouse LLP
27 Financial Data Schedule
38
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
(b) Reports on Form 8-K.
During the quarter ended December 31, 1996, the Company filed no Current
Reports on Form 8-K.
- ------------------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2, as amended, File No. 33-61702-LA, and incorporated by reference.
(2) Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ending December 31, 1993 and incorporated by reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ending December 31, 1994 and incorporated by reference.
(4) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ending December 31, 1995 and incorporated by reference.
(5) Previously filed as an exhibit to the Company's Current Report on Form 8-K
filed December 21, 1995 and incorporated by reference.
(6) Previously filed as an exhibit to the Company's Current Report on Form 8-K
filed January 5, 1996 and incorporated by reference.
(7) Previously filed as an exhibit to the Company Registration Statement on Form
S-2, as amended, File No. 333-17401, and incorporated by reference.
39
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Accountants.......................................................................... F-2
Balance Sheet.............................................................................................. F-3
Statement of Operations.................................................................................... F-4
Statement of Shareholders' Equity.......................................................................... F-5
Statement of Cash Flows.................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Amerigon Incorporated (a Development Stage Enterprise)
In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) and (2) present fairly, in all material respects, the financial
position of Amerigon Incorporated (a Development Stage Enterprise) at December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, and for the period
from April 23, 1991 (inception) to December 31, 1996, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
March 14, 1997
F-2
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
(IN THOUSANDS)
ASSETS
DECEMBER 31,
----------------------
1995 1996
---------- ----------
Current assets:
Cash and cash equivalents............................................................... $ 4,486 $ 203
Accounts receivable less allowance of $100 in 1995 and $80 in 1996 (Note 16)............ 1,052 1,188
Unbilled revenue (Notes 13 and 14)...................................................... 1,468 1,157
Inventory, primarily raw materials...................................................... 243 20
Prepaid expenses and other assets (Note 4).............................................. 961 744
---------- ----------
Total current assets.................................................................. 8,210 3,312
Property and equipment, net (Note 4)...................................................... 785 610
---------- ----------
Total assets.......................................................................... $ 8,995 $ 3,922
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................................................ $ 1,123 $ 1,567
Deferred revenue........................................................................ 94 154
Accrued liabilities (Note 4)............................................................ 512 519
Note payable to shareholder (Note 7).................................................... -- 200
Bridge notes and debentures payable (Note 8)............................................ -- 3,000
Bank loan payable (Note 6).............................................................. -- 1,187
---------- ----------
Total current liabilities............................................................. 1,729 6,627
---------- ----------
Long-term portion of capital lease (Note 15).............................................. 68 43
---------- ----------
Commitments and contingencies (Notes 12 and 15)
Shareholders' equity (deficit): (Notes 9, 10, and 11)
Preferred stock, no par value; 5,000 shares authorized, none issued and outstanding
Common stock:
Class A-no par value; 40,000 shares authorized, 4,050 and 4,069 issued and outstanding
in 1995 and 1996, respectively. (An additional 3,000 shares held in escrow)........... 17,270 17,321
Class B-no par value; 3,000 shares authorized, none issued and outstanding
Contributed capital..................................................................... 3,115 3,115
Deficit accumulated during development stage............................................ (13,187) (23,184)
---------- ----------
Total shareholders' equity (deficit).................................................. 7,198 (2,748)
---------- ----------
Total liabilities and shareholders' equity (deficit).................................. $ 8,995 $ 3,922
---------- ----------
---------- ----------
See accompanying notes to the financial statements.
F-3
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
FROM APRIL
23, 1991
YEAR ENDED DECEMBER 31, (INCEPTION)
------------------------------- TO DECEMBER
1994 1995 1996 31, 1996
--------- --------- --------- ------------
Revenues:
Development contracts and related grants......................... $ 1,336 $ 7,290 $ 7,115 $ 15,929
Grants........................................................... 1,304 519 332 6,156
--------- --------- --------- ------------
Total revenues................................................. 2,640 7,809 7,447 22,085
--------- --------- --------- ------------
Costs and expenses:
Direct development contract and related grant costs.............. 928 5,332 11,533 18,318
Direct grant costs............................................... 803 339 210 4,732
Research and development......................................... 2,137 2,367 2,128 8,787
Selling, general and administrative, including reimbursable
administrative costs........................................... 3,235 3,135 3,410 13,787
--------- --------- --------- ------------
Total costs and expenses....................................... 7,103 11,173 17,281 45,624
--------- --------- --------- ------------
Operating loss..................................................... (4,463) (3,364) (9,834) (23,539)
Interest income.................................................... 228 127 48 566
Interest expense................................................... -- -- (211) (211)
--------- --------- --------- ------------
Net loss........................................................... $ (4,235) $ (3,237) $ (9,997) $ (23,184)
--------- --------- --------- ------------
--------- --------- --------- ------------
Net loss per share................................................. $ (1.28) $ (0.98) $ (2.46)
--------- --------- ---------
--------- --------- ---------
Weighted average number of shares outstanding...................... 3,300 3,306 4,062
--------- --------- ---------
--------- --------- ---------
See accompanying notes to the financial statements.
F-4
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
COMMON STOCK
----------------------------------------------
PREFERRED STOCK CLASS A CLASS B
---------------------- ---------------------- ---------------------- CONTRIBUTED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- --------- ----------- --------- ----------- --------- -----------
Balance at April 23, 1991 (Inception)... -- -- 1,000 $ 100 -- -- --
Contributed capital-founders' services
provided without compensation....... $ 111
Net loss..............................
----- --------- ----- --------- ----- --------- -----------
Balance at December 31, 1991............ 1,000 100 -- -- 111
Transfer of common stock to employee
by principal shareholder for
services............................ 150
Contributed capital-founders' services
provided without compensation....... 189
Net loss..............................
----- --------- ----- --------- ----- --------- -----------
Balance at December 31, 1992............ -- -- 1,000 100 -- -- 450
Issuance of common stock (public
offering)........................... 2,300 11,534
Options granted by principal
shareholder for services............ 549
Contribution of notes payable to
contributed capital................. 2,102
Net loss..............................
----- --------- ----- --------- ----- --------- -----------
Balance at December 31, 1993............ -- -- 3,300 11,634 -- -- 3,101
Compensation recorded for variable
plan stock option (Note 11)......... 1
Net Loss..............................
----- --------- ----- --------- ----- --------- -----------
Balance at December 31, 1994............ -- -- 3,300 11,634 -- -- 3,102
Private placement of common stock..... 750 5,636 1
Compensation recorded for variable
plan stock option (Note 11)......... 12
Net loss..............................
----- --------- ----- --------- ----- --------- -----------
Balance at December 31, 1995............ -- -- 4,050 17,270 -- -- 3,115
Exercise of stock options............. 20 160
Repurchase of common stock............ (1) (15)
Expenses of sale of stock............. (94)
Net loss..............................
----- --------- ----- --------- ----- --------- -----------
Balance at December 31, 1996............ -- -- 4,069 $ 17,321 -- -- $ 3,115
----- --------- ----- --------- ----- --------- -----------
----- --------- ----- --------- ----- --------- -----------
DEFICIT
ACCUMULATED
DURING THE
DEVELOPMENT
STAGE TOTAL
------------ ---------
Balance at April 23, 1991 (Inception)... -- $ 100
Contributed capital-founders' services
provided without compensation....... 111
Net loss.............................. $ (616) (616)
------------ ---------
Balance at December 31, 1991............ (616) (405)
Transfer of common stock to employee
by principal shareholder for
services............................ 150
Contributed capital-founders' services
provided without compensation....... 189
Net loss.............................. (1,459) (1,459)
------------ ---------
Balance at December 31, 1992............ (2,075) (1,525)
Issuance of common stock (public
offering)........................... 11,534
Options granted by principal
shareholder for services............ 549
Contribution of notes payable to
contributed capital................. 2,102
Net loss.............................. (3,640) (3,640)
------------ ---------
Balance at December 31, 1993............ (5,715) 9,020
Compensation recorded for variable
plan stock option (Note 11)......... 1
Net Loss.............................. (4,235) (4,235)
------------ ---------
Balance at December 31, 1994............ (9,950) 4,786
Private placement of common stock..... 5,637
Compensation recorded for variable
plan stock option (Note 11)......... 12
Net loss.............................. (3,237) (3,237)
------------ ---------
Balance at December 31, 1995............ (13,187) 7,198
Exercise of stock options............. 160
Repurchase of common stock............ (15)
Expenses of sale of stock............. (94)
Net loss.............................. (9,997) (9,997)
------------ ---------
Balance at December 31, 1996............ $ (23,184) $ (2,748)
------------ ---------
------------ ---------
See accompanying notes to the financial statements
F-5
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FROM APRIL
23,1991
YEAR ENDED DECEMBER 31, (INCEPTION)
------------------------------- TO DECEMBER
1994 1995 1996 31, 1996
--------- --------- --------- ------------
Operating activities:
Net loss......................................................... $ (4,235) $ (3,237) $ (9,997) $ (23,184)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 176 283 357 912
Provision for doubtful accounts................................ 100 10 80 190
Stock option compensation...................................... 1 12 -- 712
Contributed capital-founders' services provided without cash
compensation................................................. -- -- -- 300
Change in operating assets and liabilities:
Accounts receivable.......................................... (286) (294) (216) (1,378)
Unbilled revenue............................................. (32) (1,193) 311 (1,157)
Inventory.................................................... -- (243) 223 (20)
Prepaid expenses and other assets............................ (23) (872) 217 (744)
Accounts payable............................................. (203) 861 444 1,567
Deferred revenue............................................. 1,708 (1,660) 60 154
Accrued liabilities.......................................... 92 230 7 519
--------- --------- --------- ------------
Net cash used in operating activities.......................... (2,702) (6,103) (8,514) (22,129)
--------- --------- --------- ------------
Investing activities:
Purchase of property and equipment............................... (626) (353) (182) (1,444)
Short term investments........................................... (2,910) 2,910 -- --
--------- --------- --------- ------------
Net cash used in investing activities............................ (3,536) 2,557 (182) (1,444)
--------- --------- --------- ------------
Financing activities:
Proceeds from sale of common stock, net.......................... -- 5,636 (94) 17,176
Proceeds from sale of warrants................................... -- 1 -- 1
Proceeds from exercise of stock options.......................... -- -- 160 160
Repurchase of common stock....................................... -- -- (15) (15)
Borrowing under line of credit................................... -- 1,100 5,180 6,280
Repayment of line of credit...................................... -- (1,100) (3,993) (5,093)
Repayment of capital lease....................................... -- (10) (25) (35)
Proceeds from Bridge Financing (Note 8).......................... -- -- 3,000 3,000
Proceeds from note payable to shareholder........................ -- -- 200 200
Notes payable contributed to capital............................. -- -- -- 2,102
--------- --------- --------- ------------
Net cash provided by financing activities...................... -- 5,627 4,413 23,776
--------- --------- --------- ------------
Net (decrease) increase in cash and cash equivalents........... (6,238) 2,081 (4,283) 203
Cash and cash equivalents at beginning of period............... 8,643 2,405 4,486 --
--------- --------- --------- ------------
Cash and cash equivalents at end of period..................... $ 2,405 $ 4,486 $ 203 $ 203
--------- --------- --------- ------------
--------- --------- --------- ------------
See accompanying notes to the financial statements
F-6
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY:
Amerigon Incorporated (the "Company" or "Amerigon") is a development stage
enterprise, which was incorporated in California on April 23, 1991, primarily to
develop, manufacture and market proprietary, high technology automotive
components and systems for gasoline-powered and electric vehicles.
Amerigon's activities through December 31, 1996, include (1) obtaining the
rights to the basic technology underlying the climate control seat system,
certain radar applications and the interactive voice navigation system; (2)
obtaining financing from grants and other sources and conducting development
programs related to electric vehicles and its other products; (3) marketing of
these development stage products to automotive companies and their suppliers;
and (4) completing the development, in December 1995, of the audio navigator
system and selling the first commercial units. The Company is currently seeking
strategic partners to form joint venture companies or for the out right sale of
its electric vehicle and interactive voice navigation systems, and plans to
focus continuing development activities on its climate control seat and radar
systems.
The Company's strategy has been to augment the expenditure of its own funds
on research and development by seeking and obtaining various grants and
contracts with potential customers which support the development of its products
and related technologies. Through such grant funded activities and development
contracts with customers, the Company has opportunities to gain access to new
technologies and to extend its own product development efforts.
NOTE 2--BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The financial statements include amounts that are based on management's
judgments. Certain reclassifications have been made for consistent presentation.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of all financial instruments, comprising cash and cash
equivalents, accounts receivable and unbilled revenues, accounts payable,
accrued expenses, notes payable and capital leases, approximate fair value
because of the short maturities of these instruments.
USE OF ESTIMATES
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
All investments with original maturities of less than 90 days are considered
cash equivalents.
F-7
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentration of credit
risk consist primarily of cash equivalents, accounts receivable and unbilled
revenue. Cash equivalents are invested in the money market account of a major
U.S. financial services company and the risk is considered limited. The risk
associated with accounts receivable and unbilled revenue is limited by the large
size and credit worthiness of the Company's commercial customers and the federal
and California government agencies providing grant funding. One commercial
customer and one government agency are included in the $2,345,000 of accounts
receivable and unbilled revenues at December 31, 1996, representing 54% and 21%,
respectively, of the total. One commercial customer and two government agencies
represent 10%, 10%, and 28%, respectively, of revenues for the year ended
December 31, 1994; one commercial customer and one government agency represent
52% and 16%, respectively, of revenues for the year ended December 31, 1995; and
one commercial customer represents 72% of revenues for the year ended December
31, 1996. No government agency exceeded 10% of total revenues in 1996. In
addition, revenues from foreign customers represented 54% and 76% of total
revenues for the years ended December 31, 1995 and 1996, respectively, and an
insignificant percentage for the year ended December 31, 1994.
INVENTORY
Inventory, other than inventoried purchases relating to development
contracts, is valued at the lower of cost, on the first-in, first-out basis, or
market. Inventory related to development contracts is stated at cost, and is
removed from inventory when used in the development project.
PROPERTY AND EQUIPMENT
Property and equipment, including additions and improvements, are recorded
at cost. Expenditures for repairs and maintenance are charged to expense as
incurred. When property or equipment is retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the accounts. Gains
or losses from retirements and disposals are recorded as other income or
expense.
Property and equipment are depreciated over their estimated useful lives
ranging from three to five years. Leasehold improvements are amortized over the
shorter of their estimated useful lives or the term of the lease. Depreciation
and amortization are computed using the straight-line method.
LONG-LIVED ASSETS
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," was issued. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used or disposed of by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company adopted
this statement in 1996 and it had no effect on the financial statements.
DEVELOPMENT CONTRACT REVENUES
The Company has a series of fixed-price development contracts, which include
(1) specific engineering and tooling services to prepare the Company's products
and the related manufacturing processes for
F-8
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
commercial sales to certain original equipment manufacturers ("OEMs"); (2) the
development of complete electric vehicle systems (Note 13); and (3) prototype
products developed during the research and development process, some of which
are sold to third parties for evaluation purposes. Revenue is recognized on
development contracts using the percentage of completion method or, in the case
of short duration contracts, when the prototype or service is delivered.
Revenues earned are recorded on the balance sheet as Unbilled Revenue until
billed. All amounts received from customers in advance of the development effort
are reflected on the balance sheet as Deferred Revenue until such time as the
contracted work is performed.
GRANT REVENUES
Revenue from government agency grants and other sources pursuant to cost
reimbursement and cost sharing arrangements (Note 14) is recognized when
reimbursable costs have been incurred. Billings on the Company's grant programs
are generally subject to the Company achieving certain milestones or complying
with billing schedules designated in the grant agreements. Accordingly, delays
between the time reimbursable grant costs are incurred and then ultimately
billed may occur. Grant revenues earned are recorded on the balance sheet as
Unbilled Revenue until billed.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development activities are expensed as incurred. These amounts
represent direct expenses for wages, materials and services associated with
development contracts, grant program activities and the development of the
Company's products. Research and development expenses associated with projects
that are specifically funded by development contracts or grant agreements from
customers are classified under Direct Development Contract and Related Grant
Costs or Direct Grant Costs in the Statement of Operations. All other research
and development expenses that are not associated with projects that are
specifically funded by development contracts or grants from customers are
classified under Research and Development. Research and development does not
include any overhead or administrative costs.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for employee stock based compensation in accordance
with Accounting Principles Board Opinion No. 25 and related interpretations. The
disclosures required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), have been included in
Note 11.
INCOME TAXES
Income taxes are determined under guidelines prescribed by Financial
Accounting Standards Board Statement No. 109 (SFAS 109), "Accounting for Income
Taxes." Under the liability method specified by SFAS 109, deferred tax assets
and liabilities are measured each year based on the difference between the
financial statement and tax bases of assets and liabilities at the applicable
enacted Federal and state tax rates. A valuation allowance is provided for the
portion of net deferred tax assets considered unlikely to be realized (Note 5).
F-9
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
NET LOSS PER SHARE
The Company's net loss per share calculations are based upon the weighted
average number of shares of common stock outstanding. Excluded from this
calculation are the 3,000,000 Escrowed Contingent Shares (Note 9). Common stock
equivalents (stock options and stock warrants) are anti-dilutive in 1994, 1995
and 1996, and are excluded from the net loss per share calculation.
NOTE 3--HISTORICAL LOSSES:
The Company is a development stage enterprise and has incurred losses from
operations of $23,184,000 from its inception in April, 1991 through December 31,
1996. The Company may continue to incur losses for the foreseeable future due to
the costs anticipated to be incurred with the development, manufacture and
marketing of its products.
NOTE 4--DETAILS OF CERTAIN FINANCIAL STATEMENT COMPONENTS (IN THOUSANDS):
DECEMBER 31,
--------------------
1995 1996
--------- ---------
PREPAID EXPENSES AND OTHER ASSETS:
Debt issue costs (Note 8)................................................ $ $ 397
Deferred stock offering expenses (Note 9)................................ -- 269
Advances to vendors...................................................... 916 38
Prepaid insurance........................................................ 45 40
--------- ---------
$ 961 $ 744
--------- ---------
--------- ---------
PROPERTY AND EQUIPMENT:
Equipment................................................................ $ 611 $ 694
Computer equipment....................................................... 578 654
Leasehold improvements................................................... 151 174
--------- ---------
1,340 1,522
Less: accumulated depreciation and amortization............................ (555) (912)
--------- ---------
$ 785 $ 610
--------- ---------
--------- ---------
ACCRUED EXPENSES:
Accrued salaries......................................................... $ 328 $ 291
Accrued vacation......................................................... 165 152
Other accrued liabilities................................................ 19 76
--------- ---------
$ 512 $ 519
--------- ---------
--------- ---------
NOTE 5--INCOME TAXES:
There are no assets or liabilities for income taxes, nor income tax expense
included in the financial statements because the Company has losses since
inception for both book and tax purposes. As of December 31, 1996, the Company
has net operating loss carryforwards for federal and state purposes of
F-10
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES: (CONTINUED)
$19,237,000 and $9,617,000 respectively, and has generated tax credits for
certain research and development activities of $254,000 and $175,000 for federal
and state purposes, respectively. Federal net operating loss carryforwards and
tax credits expire from 2008 through 2011 and state net operating loss
carryforwards expire from 1998 through 2001. The use of such net operating loss
carryforwards would be limited in the event of a change in control of the
Company. In 1993, the Company elected to be taxed as a C corporation for both
federal and state income tax purposes. Prior to that time, the Company was not
subject to federal taxation and was subject to state taxation at a reduced rate
(2.5%).
Temporary differences between the financial statement and tax bases of
assets and liabilities are primarily attributable to net operating loss and tax
credit carry forwards, depreciation, unbilled grant revenue, deferred revenue
and accrued compensated absences. A valuation allowance of $7,161,000 has been
provided for the entire amount of the deferred tax assets arising from these
differences, which represents an increase in the valuation allowance of
$3,242,000 from December 31, 1995.
NOTE 6--LINE OF CREDIT:
On November 27, 1995, the Company entered into a line of credit agreement
with a bank under which the Company was allowed to borrow up to $4 million based
on certain costs incurred and billings made under a major electric vehicle
development contract (Note 13). The borrowing limit was reduced to approximately
$1,187,000 on November 30, 1996. The line of credit, which expired by its
amended terms on January 31, 1997, provided for interest at the prime rate plus
1.3% and payments from the customer were applied as repayments. All assets of
the Company were pledged as collateral and the loan was guaranteed by the
Company's president, a principal shareholder. The loan agreement restricted the
Company's payment of dividends and redemptions or retirement of stock. The
agreeement also contained certain required financial statement ratios and limits
certain loans, investments, acquisitions and dispositions of assets. At December
31, 1996, the Company was in violation of certain financial and other covenants
contained in the loan agreement for which the bank agreed to waive certain of
these violations and to forbear through January 31, 1997 from exercising it
rights and remedies with respect to all others. The outstanding balance of the
line of credit at December 31, 1996 totaled approximately $1,187,000. On
February 7, 1997, the Company repaid approximately $462,000 of the outstanding
balance using funds received under its major electric vehicle development
contract. The remaining balance of $725,000 was repaid from the proceeds of the
Company's follow-on public offering which was completed on February 18, 1997
(Note 9).
NOTE 7--NOTE PAYABLE TO SHAREHOLDER:
On September 9, 1996, Dr. Lon E. Bell, the President and principal
shareholder of the Company, loaned $200,000 to the Company at 8% interest
without collateral and due on demand. Dr. Bell loaned to the Company an
additional $100,000 on January 29, 1997 and $150,000 on February 12, 1997 at 10%
interest without collateral. These loans totaling $450,000 were repaid by the
Company in February 1997 from the proceeds of the Company's follow-on public
offering (Note 9).
NOTE 8--BRIDGE FINANCING:
On October 31, 1996, the Company completed a private placement (the "Bridge
Financing") of 60 bridge units (each a "Bridge Unit"), each consisting of one
$47,500 10% unsecured promissory note made
F-11
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--BRIDGE FINANCING: (CONTINUED)
by the Company (each a "Bridge Note") and one $2,500 10% convertible
subordinated debenture (each a "Bridge Debenture"). At December 31, 1996,
$2,850,000 of Bridge Notes and $150,000 of Bridge Debentures were outstanding.
The proceeds to the Company from the October 1996 Bridge Financing were
approximately $2,500,000, net of issuance costs of $500,000. Upon the completion
on February 18, 1997 of the Company's follow-on public offering of Class A
Common Stock and Class A Warrants (Note 9), the Bridge Notes were repaid and the
Bridge Debentures were converted into a total of 1,620,000 warrants to purchase
Class A Common Stock, each exercisable at $5.00 per share. In the first quarter
of fiscal 1997, the Company will record a non-cash charge resulting from the
elimination of the remaining unamortized portion of the deferred debt issuance
costs totaling approximately $340,000.
NOTE 9--COMMON STOCK:
The Class A and Class B Common Stock are substantially the same on a
share-for-share basis, except that holders of outstanding shares of Class B
Common Stock will be entitled to receive dividends and distributions upon
liquidation at a per share rate equal to five percent of the per share rate
received by holders of outstanding shares of Class A Common Stock. The Class B
Common Stock is neither transferable nor convertible and is subject to
cancellation under certain circumstances.
INITIAL PUBLIC OFFERING
In June 1993, the Company sold 2,300,000 shares of its Class A Common Stock
for net proceeds of $11,534,000. The Company issued Warrants to purchase 204,757
shares of Class A Common Stock, as subsequently adjusted pursuant to
anti-dilution provisions (Note 10). Immediately prior to the public offering,
$2,102,000 of the outstanding balance of notes payable to shareholders were
contributed by the shareholders to the capital of the Company.
PRIVATE PLACEMENT OF CLASS A COMMON STOCK IN 1995
On December 29, 1995, the Company sold 750,000 shares of its Class A Common
Stock for $6,000,000 and received net proceeds of $5,636,000. The investors
received registration rights pursuant to which the Company must register these
shares. In addition, the Company issued Warrants to purchase 60,000 shares of
Class A Common Stock (Note 10).
FOLLOW-ON PUBLIC OFFERING OF CLASS A COMMON STOCK AND CLASS A WARRANTS
On February 18, 1997, the Company completed a public offering of 17,000
units (the "Units"), each consisting of 280 shares of Class A Common Stock and
280 Class A Warrants to purchase, at $5.00 per share, an equal number of Class A
Common Stock, resulting in the issuance of 4,760,000 shares of Class A Common
Stock and 4,760,000 Class A Warrants. The public offering price was $1,030 per
Unit and proceeds to the Company, net of expenses, were approximately
$15,300,000. In addition, on March 7, 1997, the underwriter exercised an option
to purchase an additional 2,550 Units to cover over-allotments. Additional
proceeds, net of expenses, were approximately $2,400,000. Fees to the
underwriter included an option until February 12, 2002, to purchase 1,700 Units
( the "Unit Purchase Option") at 145% of the price to the public. The Unit
Purchase Option is not exercisable by the underwriter until February 12, 2000.
F-12
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--COMMON STOCK: (CONTINUED)
ESCROW AGREEMENT
Prior to the effective date of the June 1993 initial public offering,
3,000,000 shares of the Company's Class A Common Stock ("Escrowed Contingent
Shares") were deposited into escrow by the then existing shareholders in
proportion to their then current holdings. These shares are not transferable
(but may be voted) and will be released from escrow in the event the Company
attains certain earnings levels (which have been adjusted for the December 29,
1995 private placement and for the February 1997 follow-on public offering)
during the period through December 31, 1998.
The release of the Escrowed Contingent Shares will be deemed compensatory
and, accordingly, will result in charges to earnings equal to the fair market
value of the Escrowed Contingent Shares recorded ratably over the period
beginning on the date when management determines that any of the specified
events are probable of being attained and ending on the date when the goal is
attained causing the Escrowed Contingent Shares to be released. At the time a
goal is attained, previously unrecognized compensation expense will be adjusted
by a one-time charge based on the then fair market value of the shares released
from Escrow. Such charges could substantially reduce the Company's net income or
increase the Company's loss for financial reporting purposes in the periods such
charges are recorded. The specified events are not considered probable of
attainment at this time.
On April 30, 1999, all shares that have not been released from Escrow will
automatically be exchanged for shares of Class B Common Stock, which will then
be released from Escrow. Any dividends or other distributions made with respect
to Escrowed Contingent Shares that have not been released from Escrow as Class A
Common Stock will be forfeited and contributed to the capital of the Company on
April 30, 1999.
NOTE 10--STOCK WARRANTS:
In connection with the Company's June 1993 initial public offering, the
Company issued to the underwriters warrants to purchase through June 9, 1998,
204,757 shares of Class A Common Stock at $9.67 per, as adjusted for
anti-dilution provisions in the warrant agreements as a result of the December
29, 1995 private placement of Common Stock. The Company issued to third parties
warrants to purchase 60,000 shares of Class A Common Stock at $10.25 per share
as a financial advisory fee in connection with the private placement completed
on December 29, 1995. These warrants expire on December 28, 2000.
In connection with the public offering of Units completed on February 18,
1997, the Company issued 4,760,000 Class A Warrants to purchase Class A Common
Stock. Each Class A Warrant entitles the registered holder thereof to purchase,
at any time until February 12, 2002, one share of the Company's Class A Common
Stock at an exercise price of $5.00, subject to adjustment. Commencing February
12, 1998, the Company may, upon 30 days' written notice, redeem each Class A
Warrant in exchange for $.05 per Class A Warrant, provided that before any such
redemption, the closing Bid Price of the Class A Common Stock as reported by the
Nasdaq SmallCap Market or the closing bid price on any national exchange (if the
Company's Class A Common Stock is listed thereon) shall have, for 30 consecutive
days ending within 15 days of the date of the notice of redemption, averaged in
excess of $8.75 (subject to adjustment in the event of any stock splits or other
similar events). In addition, the underwriter had an over-allotment option to
sell an additional 2,550 of the Units sold in the offering which would result in
the issuance of an additional 714,000 shares of Class A Common Stock and 714,000
Class A Warrants. This
F-13
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK WARRANTS: (CONTINUED)
over-allotment option was exercised by the underwriter on March 7, 1997 (Note
9). The underwriter, as part of the underwriting fee, has an option to purchase
an additional 1,700 Units which would, if exercised, result in the issuance of
an additional 476,000 shares of Class A Common Stock and 476,000 Class A
Warrants. Bridge Debentures issued in connection with the Bridge Financing in
October 1996 (Note 8) were converted on February 18, 1996 into 1,620,000 Class A
Warrants upon completion of the Company's follow-on public offering.
NOTE 11--STOCK OPTIONS:
1993 STOCK OPTION PLAN
Under the Company's 1993 Stock Option Plan (the "Plan"), as amended in June
1995, 550,000 shares of the Company's Class A Common Stock are reserved for
issuance, pursuant to which officers and employees of the Company as well as
other persons who render services to or are otherwise associated with the
Company are eligible to receive qualified ("incentive") and/or non-qualified
stock options.
The Plan which expires in April 2003, is administered by the Board of
Directors or a stock option committee designated by the Board of Directors. The
selection of participants, allotment of shares, determination of price and other
conditions are determined by the Board of Directors or stock option committee at
its sole discretion, in order to attract and retain personnel instrumental to
the success of the Company. Incentive stock options granted under the Plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price which is not less than the fair market value of the Common Stock on the
date of the grant, except that the term of an incentive stock option granted
under the Plan to a shareholder owning more than 10% of the voting power of the
Company on the date of grant may not exceed five years and its exercise price
may not be less than 110% of the fair market value of the Common Stock on the
date of the grant.
OPTIONS GRANTED BY PRINCIPAL SHAREHOLDER ("BELL OPTIONS")
Dr. Lon E. Bell, the president and principal shareholder of the Company, has
granted options to purchase shares of his Class A Common Stock, 75% of which are
Escrowed Contingent Shares. The holder of these options can exercise the
portions of his options related to Escrowed Contingent Shares only upon release
of these shares from escrow as Class A Common Stock. The option holder has no
right to purchase Class B Common Stock should such shares be released (Note 9).
Any options granted at prices below fair market value on the date of grant
result in compensation expense with respect to options to purchase the 25% of
such shares not placed in escrow. Compensation expense and a corresponding
adjustment to contributed capital on options to purchase Escrowed Contingent
Shares will be recorded when they are released or it is determined they are
probable of being released as Class A Common Stock.
In 1993, options were granted at prices below fair market value for which
compensation expense was recorded for the non-escrowed shares based on the
amount by which such shares were below the fair market value at the time of
grant. Additional compensation expense will be recorded if the related Escrowed
Contingent Shares are released from escrow. Certain of the Bell options granted
during 1993 to one individual were granted contingent on certain future
performance criteria and are accounted for as a variable plan. The Company
recorded approximately $1,000 and $12,000 of compensation expense in 1994
F-14
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK OPTIONS: (CONTINUED)
and 1995, respectively related to 1,500 and 5,028 of those options,
respectively. There was no compensation expense relating to these options in
1996.
The following table summarizes stock option activity:
1993 STOCK OPTION PLAN BELL OPTIONS
------------------------ -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
--------- ------------- ---------- -------------
Outstanding at December 31, 1993.................. 80,000 $ 6.50 823,235 $ 2.75
Granted........................................... 63,574 9.94 -- --
Canceled.......................................... (2,064) 9.78 -- --
Exercised......................................... -- -- -- --
--------- ------ ---------- ------
Outstanding at December 31, 1994.................. 141,510 8.02 823,235 2.75
Granted........................................... 179,775 10.40 16,614 11.89
Canceled.......................................... (5,339) 10.52 (4,640) 1.15
Exercised......................................... -- -- (1,500) 1.15
--------- ------ ---------- ------
Outstanding at December 31, 1995.................. 315,946 9.32 833,709 2.94
Granted........................................... 35,305 10.36 12,500 10.38
Canceled.......................................... (19,015) 10.58 (212,153) 5.40
Exercised......................................... (20,000) 8.00 (83,762) 1.15
--------- ------ ---------- ------
Outstanding at December 31, 1996.................. 312,236 $ 9.44 550,294 $ 2.40
--------- ------ ---------- ------
--------- ------ ---------- ------
Of the options outstanding at December 31, 1994. 1995 and 1996 under the
1993 Stock Option Plan, options to purchase 80,218, 204,839 and 287,024 shares,
respectively, were exercisable at weighted average prices of $7.46, $9.20 and
$9.35 per share, respectively. Of the options outstanding at December 31, 1994,
1995, and 1996 under the Bell Option Plan, options to purchase 155,432, 413,990
and 337,482 shares, respectively, were exercisable at weighted average prices of
$1.63, $2.53 and $2.98 per share, respectively.
The following table summarizes information concerning currently outstanding
and exercisable stock options for the 1993 Stock Option Plan as of December 31,
1996:
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT DECEMBER 31, 1996
----------------------------------------- DECEMBER 31, 1996
WEIGHTED- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ---------------- ----------- --------------- ----------- ----------- -----------
$6.00 to $8.00 60,000 2.4 years $ 6.00 60,000 $ 6.00
8.25 to 9.94 47,932 2.5 9.73 46,267 9.73
10.25 150,000 3.7 10.25 150,000 10.25
10.50 to 12.75 54,304 2.9 10.76 30,757 10.89
----------- -----------
312,236 287,024
----------- -----------
----------- -----------
F-15
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--STOCK OPTIONS: (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable stock options for the Bell Option Plan as of December 31, 1996:
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT DECEMBER 31, 1996
----------------------------------------- DECEMBER 31, 1996
WEIGHTED- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ---------------- ----------- --------------- ----------- ----------- -----------
$1.15 427,283 5.4 years $ 1.15 214,705 $ 1.15
6.00 106,634 7.6 6.00 118,897 6.00
10.25 to 12.00 16,377 3.8 11.50 3,880 11.98
----------- -----------
550,294 337,482
----------- -----------
----------- -----------
The Company accounts for these plans under APB Opinion No. 25. Had
compensation expense for these plans been determined consistent with SFAS 123,
the Company's net loss and net loss per share would have been increased to the
pro forma amounts in the following table. Because the SFAS 123 method of
accounting has not been applied to options prior to December 31, 1994, the
resulting pro forma compensation costs may not be representative of that to be
expected in future years.
YEARS ENDED DECEMBER
31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
Net (Loss)
As Reported............................................................ $ (3,237) $ (9,997)
Pro Forma.............................................................. (3,798) (10,488)
Net (Loss) per Share
As Reported............................................................ (.98) (2.46)
Pro Forma.............................................................. (1.15) (2.58)
The fair value of each stock option grant has been estimated pursuant to
SFAS 123 on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions:
1993 STOCK
OPTION PLAN BELL OPTION PLAN
------------------------ ------------------------
1995 1996 1995 1996
----------- ----------- ----------- -----------
Risk free interest rates.......................... 6.00% 6.00% 6.00% 6.00%
Expected dividend yield........................... none none none none
Expected lives.................................... 4 yrs. 4 yrs. 4 yrs. 4 yrs.
Expected volatility............................... 56.20% 60.06% 55.13% 59.98%
The weighted average grant date fair values of options granted under the
1993 Stock Option Plan during 1995 and 1996 were $5.13 and $5.35, respectively.
The weighted average grant date fair values of options granted under the Bell
Option Plan during 1995 and 1996 were $5.80 and $5.36, respectively.
F-16
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--LICENSES:
CLIMATE CONTROLLED SEAT SYSTEM. In 1992, the Company obtained the worldwide
license to manufacture and sell technology for a climate control seat system to
individual automotive OEMs. Under the terms of the license agreement, royalties
are payable based on cumulative net sales. The Company has recorded royalty
expenses under this license agreement of $11,500, $20,800 and $8,500 in 1994,
1995 and 1996, respectively.
RADAR SYSTEM. In January 1994, the Company entered into a license agreement
for exclusive rights in certain automotive applications to certain radar
technology. A licensing fee of $100,000 was paid in January 1994. Royalties are
required to be paid based on cumulative net sales and are subject to minimum
annual royalties beginning in 1995. The minimum royalty payments for 1995 and
1996 were $50,000 and $100,000, respectively, and were expensed as Research and
Development.
AUDIO NAVIGATION SYSTEM. The Company has licensed several technologies and
map data sources in connection with its Interactive Voice Navigation System
("IVS") and is subject to royalty payments under each of these agreements. In
May 1996, the Company entered into a revised worldwide, non-exclusive license,
for the duration of the underlying patent, to manufacture and sell products
incorporating certain voice-interface vehicle navigation technology and
technology for recognizing spoken words. In connection with the license, the
Company must pay royalties on net commercial sales of certain hardware (at 2%)
and software (at 15%). The company is entitled to receive from the licensor a
royalty on sales by the licensor of hardware (at 2%) and software (at 15%). The
Company also licenses the right to use certain voice recognition technology
under which a royalty is due based on the cumulative sales of hardware units. In
addition, the Company uses certain geographic data bases for which it pays a fee
based on each map area sold. There are no minimum royalties under these
agreements. The Company has recorded, as Research and Development, royalty
expenses under these license agreements of $50,000, $50,000 and $189,500 in
1994, 1995 and 1996, respectively.
NOTE 13--MAJOR CONTRACTS
In December 1994, the Company entered into contracts with two Asian
manufacturing companies to produce approximately 50 aluminum chassis passenger
electric vehicle systems. These contracts, together with 1995 additions, are
valued at approximately $9,600,000, of which the Company received $1,650,000 in
1994, $2,230,000 in 1995 and $4,193,000 in 1996. During 1996, the Company
experienced cost overruns on this contract caused by unanticipated design and
development problems which resulted in a loss on the contract recorded in 1996
of approximately $1,900,000. For the years ended December 31, 1994, 1995 and
1996, the Company recognized revenue of $48,000, $4,040,000 and $5,328,000,
respectively, from this contract. At December 31, 1995 and 1996, $209,000 and
$872,000, respectively, are included in Unbilled Revenue representing amounts
recognized as revenue for which billings had not been presented to the customer.
In 1995, the Company completed development contracts related to specific
engineering and tooling of the Company's audio navigation system.
NOTE 14--GRANTS:
Grant funding received by the Company are essentially cost sharing
arrangements whereby the Company obtains reimbursement from the funding source
for a portion of direct costs and reimbursable
F-17
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--GRANTS: (CONTINUED)
administrative expenses incurred in managing specific programs related to the
technologies utilized in the Company's products. The Company is obligated to
provide specified services and to undertake specified activities under its
arrangement with the funding sources for these programs.
CALSTART, Inc. ("CALSTART"), a not-for-profit consortium of public and
private entities (Note 15) was organized to support programs designed to promote
the development of advanced transportation including the advancement of electric
vehicles. CALSTART's support is primarily through the direct or indirect
arrangement of grant funding for such programs. Since 1992, the Company has been
selected by CALSTART to manage or co-manage several such programs. Revenues
recognized from CALSTART related programs were $802,000, $2,198,000 and $840,000
during 1994, 1995 and 1996, respectively. The Company has also received grants
from the California Energy Commission, the Federal Transit Administration and
from the Southern California Air Quality Management District related to work on
its electric vehicle and its climate control seat technology.
As of December 31, 1996, the Company has recorded $275,000 relating to
reimbursable costs incurred for which billings had not yet been presented to the
funding agencies. The Company is entitled to obtain future reimbursement from
its funding sources for up to $880,000 of direct costs and reimbursable
administrative costs incurred in managing grant programs now in process, most of
which are expected to be completed during 1997.
NOTE 15--COMMITMENTS AND CONTINGENCIES
As of December 31, 1996, the Company had in effect compensation agreements
with certain key employees, including each of the officers, which provide for
annual compensation amounts, semi-annual increases in salary based upon the
Consumer Price Index and annual increases based on merit. Several of these
agreements also provide for bonuses based upon performance, and several include
a guaranteed minimum bonus provision. These compensation agreements do not
include an obligation of continued employment; however, bonuses based upon
individual performance objectives achieved prior to termination would be payable
to terminated employees.
The Company's subleases its facility in Monrovia, California for $24,000 per
month under an agreement which expires July 31, 1997. The Company also had a
sublease agreement with CALSTART (Note 16) on a facility in Alameda, California,
for approximately $11,000 per month which expired at December 31, 1996. The
facility is now leased on a month to month basis for approximately $3,300 per
month. Rent expense under all of the Company's operating leases was $202,000,
$512,000, and $595,000 for 1994, 1995, and 1996, respectively.
In December 1994, the Company entered into a 60-month capital lease contract
for an IBM computer system with an implicit interest rate of 11.8% and, in July
1995, entered into a 36 month capital lease contract with an implicit interest
rate of 19.7% for additional computer equipment. The future minimum annual
commitments under capital leases for 1997, 1998 and 1999 are $22,000, $23,000
and $20,000, respectively.
The Company is involved in various pending litigation arising out of the
normal conduct of its business, including those relating to commercial
transactions and contracts. In the opinion of management, based in part on the
opinion of legal counsel, the final outcome of these matters will not have a
material adverse effect on the Company's financial position or results of
operations.
F-18
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--RELATED PARTY TRANSACTIONS:
Dr. Bell, the President and principal shareholder of the Company, co-founded
CALSTART (Notes 14 and 15) in 1992, served as its interim President, and for the
last four years has served on CALSTART's Board of Directors and is a member of
its Executive Committee.
The Company leased space from CALSTART from June 1992 until April 1994 at no
charge, at which time the Company moved to its current facility. In December
1995, the Company signed a 13 month lease with CALSTART for a 24,000 square foot
manufacturing and office facility located in Alameda, California for an advance
payment of $450,000 and $11,000 per month (Note 15).
At December 31, 1995 and 1996, the Company owed $150,000 and $73,000,
respectively to CALSTART related to the lease, and CALSTART owed to the Company
$135,000 and $343,000, respectively, relating primarily to amounts withheld from
payments made by CALSTART under several grant programs which will be paid to the
Company upon completion of the respective grant programs.
F-19
AMERIGON
AMERIGON INCORPORATED
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS
BEGINNING COSTS AND OTHER FROM BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD
- ----------------------------------------------- ----------- ------------- ------------- ----------- ---------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year Ended December 31, 1994................... $ -- $ 100 $ -- $ -- $ 100
Year Ended December 31, 1995................... 100 10 -- (10) 100
Year Ended December 31, 1996................... 100 80 -- (100) 80
ALLOWANCE FOR DEFERRED INCOME TAX ASSETS
Year Ended December 31, 1994................... 1,092 1,500 -- -- 2,592
Year Ended December 31, 1995................... 2,592 1,327 -- -- 3,919
Year Ended December 31, 1996................... 3,919 3,242 -- -- 7,161
F-20
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.
AMERIGON INCORPORATED
By: /s/ LON E. BELL
------------------------------------
Lon E. Bell, Ph. D.
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHAIRMAN OF THE BOARD
March 28, 1997
--------------------------------------
(Date)
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 in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ------------------------------------------------------ -------------------------------------------------- -----------------
/s/ LON E. BELL President, Chief Executive Officer and Chairman of
------------------------------------------- the Board (Principal Executive Officer and March 28, 1997
Lon E. Bell, Ph. D. Acting Principal Financial and Accounting
Officer)
/s/ JOSHUA M. NEWMAN Vice President of Corporate Development and
------------------------------------------- Planning, Secretary and Director March 28, 1997
Joshua M. Newman
/s/ ROY A. ANDERSON Director
------------------------------------------- March 28, 1997
Roy A. Anderson
/s/ ROGER E. BATZEL Director
------------------------------------------- March 28, 1997
Roger E. Batzel
/s/ JOHN W. CLARK Director
------------------------------------------- March 28, 1997
John W. Clark
/s/ A. STEPHENS HUTCHCRAFT, JR. Director
------------------------------------------- March 28, 1997
A. Stephens Hutchcraft, Jr.
/s/ MICHAEL R. PEEVEY Director
------------------------------------------- March 28, 1997
Michael R. Peevey
Director
------------------------------------------- March , 1997
Norman R. Prouty, Jr.