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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21810
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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.)
5462 IRWINDALE AVENUE, IRWINDALE, CALIFORNIA 91706-2058
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (626) 815-7400
Securities registered pursuant to Section 12(b) of the Act: None
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 February 26, 1999, was $2,711,469. (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 February 26, 1999, the registrant had issued and outstanding 2,510,089
shares of Class A Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the registrant's definitive proxy statement for its 1999 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.
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 is focused on technologies that it
believes can be readily adapted to automotive needs for advanced vehicle
electronics. 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 is principally
focused on developing proprietary positions in the following technologies:
(i) thermoelectric heated and cooled seats; and (ii) radar for maneuvering
and safety.
The Company is presently working with a number of the world's largest
automotive original equipment manufacturers ("OEMs") and seat manufacturers
on pre-production and production development programs for heated and cooled
seats. In addition, the Company has sold many prototypes of its heated and
cooled seats to potential customers for evaluation and demonstration. In
December 1997, the Company received its first production order for its heated
and cooled seat product but shipments of production units in 1998 were very
small. During 1998, the Company was selected by Johnson Controls, a major
seat supplier to automotive OEMs to supply its Climate Control Seat ("CCS")
system to be installed in seat systems on one platform for a major North
American auto manufacturer starting in the 2000 model year. The Company's
radar for maneuvering and safety is in an earlier stage of development than
the heated and cooled seats. The Company has developed prototypes of the
radar product and sold them to various automotive and other companies.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's business segment information is incorporated herein by
reference from Note 16 of the Company's financial statements and related
financial information indexed on page F-1 of this report and incorporated by
reference into this report.
PRODUCTS
CLIMATE CONTROL SEAT SYSTEM
The Company's CCS system utilizes an exclusive, licensed, patented
technology, as well as two patents held by the Company, on a variable
temperature seat climate control system to improve the temperature comfort of
automobile passengers. The CCS uses one or more small 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 product has reached the stage where it can be mass-produced for a
particular customer. However, since each customer's seats are not the same,
and therefore have different configuration requirements, the Company must
tailor its product to meet those design criteria. A customer will provide the
Company with one of its car seats to be modified so that a CCS unit may be
installed as a prototype. The seat is then returned to the customer for
evaluation and testing. The Company has delivered prototype units to most
major automobile companies and/or seat manufacturers who sell seats to those
companies. Once the prototype is approved, further development will take
place to make the CCS product production-ready. The lengthy evaluation and
design cycles required by the major OEMs will result in a lack of high-volume
sales to these customers for approximately the next one to two years although
the Company expects to begin production at relatively low volumes in the next
twelve months. However, the Company has targeted non-OEM customers who can
quickly "design in" the CCS products and has received its first production
order from one of those customers and has delivered a very small
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number of units in 1998. The Company continues to do additional research and
development to modify the existing product with the goal of making the unit
less complex, more energy efficient and less expensive to manufacture and
install. There can be no assurance that these development programs will
result in viable products 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 passenger vehicle applications:
intelligent cruise control, airbag crash systems, and occupant sensors (the
"LLNL Radar"). 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 Lawrence Livermore National Laboratory
("LLNL") license required 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 or the license would become
non-exclusive. The Company did not achieve this and the license is now
non-exclusive and is available to other companies.
Nevertheless, the Company intends to continue to pursue radar products with
its own radar technology which is different than the LLNL Radar. This system,
called Swept-range Wideband Radar, provides improved range information and
noise immunity compared to the LLNL Radar with a slightly higher system cost.
Swept-range Radar is intended for applications requiring more accurate range
data such as in Precision Parking, Lane Change, Safety Restraint and Active
Suspension Systems. See "Proprietary Rights and Patents - Radar for
Maneuvering and Safety."
The Company has applied its 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 has
received contracts from a number of automotive manufacturers to design
evaluation prototypes 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
1999. 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," "Exclusive License on Heated and Cooled Seats;
Nonexclusive License on Radar Technology," and "Dependence on Acceptance by
Automobile Manufacturers and Consumers; Market Competition."
On April 2, 1998 the Company entered into a joint research project with New
Mexico State Highway and Transportation Department (NMSHTD) Research Bureau
to test the Company's radar for New Mexico's Highway Maintenance and
Construction Departments. In the project, the Company's radar was installed
in heavy construction equipment used by the department and lights and a
buzzer warn vehicle operators if an object is behind the vehicle when it is
in reverse. Detected objects include people, posts, vehicles, walls and other
structures. During a 16 week field testing, four dump trucks and a passenger
van were equipped with the Company's radar product. Two phases of the three
phase project were successfully completed in 1998 and the NMSHTD Research
Bureau approved the final phase of the project in December of 1998. The
NMSHTD operates a fleet of approximately 5,000 vehicles and successful
completion of Phase III may entail the installation of the Company's radar
product in some of those vehicles.
The Company believes it has generated interest in its radar product from
other State's Departments of Transportation. Management believes there may be
a market opportunity to equip trucks and heavy construction equipment with
its radar product as an after-market item. Because of the long design cycles
required before the Company's radar can become a feature in consumer vehicles
by sales to automobile and truck OEMs, the Company's probability of sales of
radar products in the vehicle after-market in the near term are superior than
its commercial prospects for radar product sales to OEMs.
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Several automotive OEMs 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 July 24, 1997 the Company entered into a joint venture agreement with
Yazaki Corporation to develop and market the Company's voice activated
navigation system. Under the terms of the agreement, IVS, Inc. was created
and Yazaki Corporation owns a majority interest in IVS-TM- and the Company
owns a minority interest (16% on a fully diluted basis). The Company received
$1,800,000 in cash and a note receivable for $1,000,000 in consideration for
net assets related to Amerigon's voice interactive technology totaling
approximately $89,000. In addition, the Company incurred costs of $348,000
associated with the sale. At the end of 1998, due to delays in product
development, Yazaki Corporation decided to discontinue funding for the joint
venture. IVS-TM- is exploring other financing alternatives and possible
bankruptcy proceedings. Amerigon will not provide any funds to continue IVS'
operation.
PROPOSED DISPOSITION OF ELECTRIC VEHICLE OPERATIONS
The Company was originally founded to focus on advanced automotive
technologies, including electric vehicles. The Company spent many years
developing and conducting research on electric vehicles. The Company was the
recipient of a number of federal and state government grants relating to the
development of electric vehicles. It also had research and development
contracts with commercial companies relating to electric vehicles. During
1995 and 1996, the majority of the Company's revenues were from electric
vehicle operations. However, the Company incurred substantial losses from
electric vehicle activities, including significant cost overruns on an
electric vehicle development contract. By December 31, 1997, substantially
all work had been completed on the Company's electric vehicle contracts.
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. In addition, the Company has been developing an "Energy Management
System" which is a proprietary computer-based system for electric vehicles
with two functions. The first is to optimize 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. 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 may be more important in determining the cost of
operating an electric vehicle than the cost of the electricity necessary to
recharge the battery. The Company has completed initial research and
development of prototype Energy Management Systems and has installed them in
prototype vehicles.
During 1997, the Board of Directors determined to focus the Company's
activities primarily on the CCS and radar products. The Company began
actively looking for a strategic partner for the electric vehicle business to
engage in a joint venture or to provide funding for electric vehicle
operations. The Company also sought to form a joint venture to manufacture,
sell and service a small electric car in India (this effort had been ongoing
since at least 1996). During this time, the Company substantially reduced its
expenditures for electric vehicle activities but maintained key personnel in
an attempt to find a joint
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venture partner or some other means of deriving value from its electric
vehicle technologies. The Company attempted to obtain either a strategic
partner who would, among other things, provide financing for an electric
vehicle joint venture, or a purchaser for the Company's electric vehicle
assets, in each case without success. As a result, in 1998 the Board of
Directors decided to suspend funding the electric vehicle program (effective
August 1998) because it was generating continuing losses and utilizing
resources that the Board felt would be better utilized in development of the
CCS and radar products. Dr. Bell, the Company's founder and Chairman of the
Board, believed that there were still commercial opportunities worth pursuing
and agreed to temporarily fund the program personally, in return for a 15%
interest in the subsidiary in which the electric vehicle assets were to be
placed (the "EV Sub"). The 15% interest was transferred to Dr. Bell in March
of 1999. The Board approved this proposal and the Company continued to seek a
strategic partner.
In December 1998, the Company entered into a letter agreement with a group of
companies controlled by Sudarshan K. Maini (the "Maini Group") in relation to
a joint venture to produce electric vehicles in India (the "Indian JV").
Under the terms of that letter agreement, the Company will receive (i) a
minority equity position in a yet to be formed Indian company and (ii)
royalties on sales of electric vehicles by the Indian JV, both in exchange
for contribution of certain assets and technology to the Indian JV. However,
to fully launch the Indian JV, external financing for the Indian JV must be
obtained as neither the Company nor the Maini Group has committed the
necessary funding for the Indian JV.
In connection with a proposed financing for the Company which is described
more fully in "Item 7 Management's Discussion and Analysis -- Liquidity and
Capital Resources" (the "Proposed Financing"), the investors require that the
Company redeem from Dr. Bell the Class B Shares of the Company that he and/or
his affiliates will hold upon the termination of the escrow that was created
in connection with the Company's initial public offering of securities in
1993. Dr. Bell has entered into an agreement to sell to the Company those
Class B Shares in exchange for the remaining 85% equity interest in the EV
Sub, subject to the closing of the Proposed Financing and shareholder
approval of the exchange transaction (the "Exchange"). If the Exchange is
effected, the Company will have no further ownership interest in the EV Sub
but will retain the right to receive from the EV Sub payment of 85% of the
royalties which the EV Sub receives from the Indian JV, if any. The EV Sub
will have all other rights to the Company's electric vehicle technology. If
the proposed financing is completed but the shareholders do not approve of
the Exchange of the EV Sub to Dr. Bell for the Class B Shares, then the Class
B Shares will be redeemed for cash and Dr. Bell will be granted rights to
control the board of directors of the EV Sub and co-sale rights and rights of
first refusal with respect to any disposition by the Company of its interests
in the EV Sub. The investors have indicated that they do not intend to
continue funding electric vehicle operations whether or not the Company
maintains any ownership interest in the EV Sub.
GRANT FUNDED PROGRAMS
The Company has historically received grants from various sources to provide
partial support for its product development efforts. Most grants received by
the Company related to electric vehicle operations. 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. The Company's
grants have historically been subject to periodic audit by the granting
government authorities for the purpose of confirming, among other things,
progress in development and that grant moneys were 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.
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 and USAID. 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
two other electric vehicle programs for CALSTART, for which the Company
recognized revenues from CALSTART of approximately $0, $389,000 and $840,000
in 1998, 1997 and 1996, respectively.
For the years ended December 31, 1998, 1997 and 1996, the Company recorded a
total of $0, $504,000 and $1,172,000, 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 obtain any additional grants and intends to focus its efforts
on working toward production contracts for CCS and radar sensor systems.
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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. 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 1998, 1997 and 1996 were $3,202,000, $2,072,000 and $2,128,000,
respectively. Included in these amounts for each of such years were $43,000,
$260,000 and $298,000, 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 would seek 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 1998, 1997 and 1996 were $1,364,000, $2,611,000 and $11,743,000,
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.
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 could also be factory installed and would
have a greater impact on other vehicle systems. The radar system could also
be sold as an after-market item for trucks.
The Company's ability to successfully market its CCS 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). See "Item 1
Risk Factors Dependence on Acceptance by Automobile Manufacturers and
Consumers; Market Competition," "Competition; Possible Obsolescence of
Technology"; "Nonexclusive License on Radar Technology" and "Limited
Marketing Capabilities; Uncertainty of Market Acceptance"
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MANUFACTURING, CONTRACTORS AND SUPPLIERS
The Company currently has limited manufacturing capacity for CCS systems. The
Company intends to develop further its 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 experience in establishing and managing volume production of
automobile components. There can be no assurance that the Company's efforts
to establish its manufacturing operations for any of its products 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. See "Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations Year Ended December 31, 1998 Compared to Year Ended December 31,
1997."
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, including thermoelectric devices, are only
available from a limited number of suppliers. 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 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.
CCS
Pursuant to an Option and License Agreement between the Company and Feher
Design, Inc. ("Feher"), Feher has granted to the Company an 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 three 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
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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 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 required the
Company to achieve commercial sales of products by the end of 1998.
Commercial sales were defined as sales of non-prototype products to at least
one original equipment manufacturer. Since commercial sales volumes were not
achieved, the exclusivity on the license has lapsed. Although the Company
retains its license, other companies may also acquire the license and develop
products based on the technology.
The Company holds one patent on radar technology. 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." At December 31, 1998, the Company also had
pending one additional patent application on its radar technology.
ELECTRIC VEHICLE SYSTEMS
The Company was 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. The Company's Energy
Management System technology is now part of the EV Sub, a subsidiary created
as a result of the Board of Director's decision in August of 1998 to suspend
funding of the electric vehicle program and Dr. Bell's resulting offer to
continue funding the electric vehicle program in return for a 15% stake in a
subsidiary to be formed which contains the electric vehicle assets. Pursuant
to the Proposed Financing, the EV Sub may be sold to Dr. Bell in exchange for
the redemption of his Class B Shares held by him or his affiliates. See
"Proposed Disposition of Electric Vehicle Operations."
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 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
7
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, such as heated seats, ventilated seats
and ultrasonic radar 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 active cooling of automotive car seats, although substantial
competition exists for the supply of heated-only seats and several companies
are offering a product which circulates ambient air through a seat without
active cooling. In addition Mercedes Benz has announced an option on certain
new models which combines heated seats with circulation of ambient air. 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. 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 and sport utility vehicles. 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 OEMs 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.
EMPLOYEES
As of December 31, 1998, the Company had 44 employees and 5 outside
contractors. None of the Company's employees are subject to collective
bargaining agreements. The Company considers its employee relations to be
satisfactory.
RISK FACTORS
8
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 interactive voice navigation
system was not commercially successful. See "Item 1 Business" herein. The
Company was formed in April 1991 and its principal products are still in the
development or pre-production stage. 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 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, the Company's radar systems are in various stages of
prototype/pre-production development and will require the expenditure of
significant funds for further development and testing in order to commence
commercial sales. No assurance can be given that the Company will obtain the
funds necessary to pay for such further development of its products 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 significant revenues from the sale of seat or radar
products for at least 12 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, 1998 and 1997, the Company had accumulated deficits since
inception of $36,305,000 and $28,601,000, 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. 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
PROPOSED FINANCING; CHANGE OF CONTROL
On March 29, 1999, the Company entered into a Securities Purchase Agreement
with Westar Capital II LLC and Big Beaver Investments LLC (the "Investors")
pursuant to which the Investors will invest $9 million in the Company in
return for 9,000 shares of a Series A Preferred Stock (which are convertible
into Class A Common Stock at an initial conversion price of $1.675 per common
share) and Contingent Warrants. The Contingent Warrants are exercisable only
to the extent certain other warrants to purchase Class A Common Stock are
exercised, and then only in an amount that will enable the Investors to
maintain the same percentage interest in the Company that they have in the
Company after the initial investment (on an as converted basis). In
connection with this transaction, the Investors would obtain the right to
elect a majority of the
9
Company's directors as well as rights of first refusal to provide additional
financing for the Company and registration rights. In addition, based upon
the Company's existing capitalization and the proposed terms of the Series A
Preferred Stock, immediately following the proposed investment, the Investors
would have approximately 74% of the Company's common equity (on an as
converted basis, excluding options and warrants). Completion of the proposed
financing is subject to a number of conditions, including shareholder
approval, which the Company intends to seek at the 1999 Annual Shareholders
Meeting. There can be no assurance that the proposed equity financing will be
completed.
Concurrent with the execution of the Securities Purchase Agreement, an
affiliate of the Investors provided a secured credit facility (the "Bridge
Loan") to the Company for up to $1.2 million which bears interest at 10% per
annum and matures on the earlier of September 30, 1999 or the completion of
the equity financing. As additional consideration for the Bridge Loan, the
Company issued detachable five year warrants to purchase 300,000 shares of
Class A Common Stock at $1.03 per share, subject to adjustment. The bridge
warrants will be cancelled upon the completion of the equity investment with
the Investors. The Bridge Loan is secured by a lien on virtually all of the
Company's assets. The Bridge Loan is necessary to allow the Company to
continue operations pending the closing of the equity financing, although the
amount of the Bridge Loan may not be adequate even if fully drawn. Further,
there are numerous conditions to making each borrowing under the Bridge Loan.
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.
Notwithstanding the proposed financing described above, the Company will
require additional financing through bank borrowings, debt or equity
financing or otherwise to finance its planned operations. If additional funds
are not obtained when needed, the Company will be required to significantly
curtail its activities, dispose of one or more of its technologies and/or
cease operations and liquidate. If and when the Company is able to commence
commercial volume 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. No assurance can be given
that such alternate funding sources can be obtained or will provide
sufficient, or any, financing for the Company.
PROPOSED DISPOSITION OF ELECTRIC VEHICLE OPERATIONS
In 1998, the Board of Directors decided to suspend funding the electric
vehicle program (effective August 1998) because it was generating continuing
losses and utilizing resources that the Board felt would be better utilized
in development of the CCS and radar products. Dr. Bell, the Company's founder
and Chairman of the Board, believed that there were still commercial
opportunities worth pursuing and agreed to fund the program personally, in
return for a 15% interest in the EV Sub. The Board approved this proposal and
the Company continued to seek a strategic partner.
In December 1998, the Company entered into a letter agreement with the Maini
Group in relation to the Indian JV. Under the terms of that letter agreement,
the Company will receive (i) a minority equity position in a yet to be formed
Indian company and (ii) royalties on sales of electric vehicles by the Indian
JV, both in exchange for contribution of certain assets and technology to the
Indian JV. However, to fully launch the Indian JV, external financing for the
Indian JV must be obtained as neither the Company nor the Maini Group has
committed the necessary funding for the Indian JV.
In connection with the proposed financing for the Company which is described
above and in "Item 7 Management's Discussion and Analysis -- Liquidity and
Capital Resources", the Investors require that the Company redeem from Dr.
Bell the Class B Shares of the Company that he and/or his affiliates will
hold upon the termination of the escrow that was created in connection with
the Company's initial public offering of securities in 1993. Dr. Bell has
entered into a Share Exchange Agreement to sell to the Company those Class B
Shares in exchange for the remaining 85% equity interest in the EV Sub,
subject to the closing of the proposed financing and shareholder approval of
the exchange transaction. If the exchange is effected, the Company will have
no further ownership interest in the EV Sub but will retain the right to
receive from the EV Sub payment of 85% of the royalties which the EV Sub
receives from the Indian JV, if any. The EV Sub will have all other rights to
the Company's electric vehicle technology. If the proposed financing is
completed but the shareholders do not approve of the sale of the EV Sub to
Dr. Bell for the Class B Shares, then the Class B Shares will be redeemed for
cash and Dr. Bell will be granted rights to control the board of directors of
the EV Sub and co-sale rights and rights of first refusal with respect to any
disposition by the Company of its interests in the EV Sub. The investors have
indicated that they do no intend to continue funding electric vehicle
operations whether or not the Company maintains any ownership interest in the
EV Sub. See "Business--Proposed Disposition of Electric Vehicle Operations."
10
DEPENDENCE ON ACCEPTANCE BY AUTOMOBILE MANUFACTURERS AND CONSUMERS; MARKET
COMPETITION
The Company's ability to successfully market its CCS 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 "Exclusive Licenses on
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).
EXCLUSIVE LICENSE ON HEATED AND COOLED SEATS; NON-EXCLUSIVE LICENSE ON RADAR
TECHNOLOGY
In 1997, the Company negotiated with the licensor of the CCS technology an
exclusive license for the manufacture and sale of licensed products for
installation or use in automobiles, trucks, buses, vans and recreational
vehicles. As part of the agreement, all intellectual property developed by
Amerigon related to variable temperature seats is owned by Amerigon but such
licensor will have the right to license Amerigon's technology on a
non-exclusive basis for use other than in automobiles, trucks, buses, vans
and recreational vehicles.
The Company's license from LLNL for one type of the Company's radar
technology became non-exclusive as of December 31, 1998. The lack of
exclusivity means that the Company has reduced intellectual property
protection for technology developed from this license and faces possible
competition from other companies which can acquire this license from LLNL.
See "Item 1 Business Proprietary Rights and Patents."
LIMITED PROTECTION OF PATENTS AND PROPRIETARY RIGHTS
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.
The Company holds current and future rights to licensed technology through
licensing agreements requiring the payment of minimum royalties. The Company
has prepaid all royalties for the fiscal year ending December 31, 1999, but
if the Company were unable to pay such royalties or otherwise breached these
license agreements, the Company would lose its rights to the licensed
technology. This would materially and adversely affect the Company's business.
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
11
challenges to the rights of such licensor to its patents.
LIMITED MANUFACTURING EXPERIENCE
To date, the Company has been engaged in only limited manufacturing in small
quantities, and there can be no assurance that the Company's efforts to
establish its manufacturing operations for any of its products 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. 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.
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, however, 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. The Company has delivered
prototype units of CCS systems to most of the major automotive and seat
companies and been selected by a major seat supplier to automotive OEMs to
supply CCS to be installed on one platform for a major North American auto
manufacturer. However, no assurance can be given that the achievement of any
of these milestones will result in production orders or that such orders, if
obtained, will be received in the near future.
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 costs associated with acquiring general
purpose assets such as facilities and capital equipment, and may be subject
to negotiation and substantial delays in receipts by the Company. Any
unilateral cancellation of, or price reduction with respect to, any contract
that the Company may obtain could reduce or eliminate any financial benefits
anticipated from such contract and could have a material adverse effect on
the Company's financial condition and results of operations.
COMPETITION; POSSIBLE OBSOLESCENCE OF TECHNOLOGY
The automotive component industry is subject to intense competition.
Virtually all 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
12
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, Chairman of the
Board of Directors and the founder of the Company, and Richard A. Weisbart,
President and Chief Operating Officer and a Director. The Company has
obtained key-person life insurance coverage in the amount of $2,000,000 on
the life of Dr. Bell. Neither Dr. Bell nor Mr. Weisbart is bound by an
employment agreement with the Company. The loss of the services of Dr. Bell,
Mr. Weisbart 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
disruptions, the imposition of tariffs and import and export controls,
changes in governmental policies and other factors which could have an
adverse effect on the Company's business. See also "Risk of Foreign Sales."
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 $2,000,000 of product liability coverage, 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 when and if high volume production begins, the Company
expects to purchase additional insurance coverage. 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.
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 significant additional financing
will be necessary to fund the Company's long-term operations.
FLUCTUATIONS IN QUARTERLY RESULTS; POSSIBLE VOLATILITY OF STOCK PRICE
13
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 declined significantly
because the activity on the Company's major electric vehicle development
contract substantially concluded at the end of 1996 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
The Company leases its current facilities from Dillingham Partners, an entity
that is 60% controlled by Dr. Bell. The Company determined that the lease is
on terms no less favorable to the Company than those which could be obtained
from unaffiliated parties.
John W. Clark, a director of the Company, is a partner of Westar Capital.
Westar Capital is one of the two primary investors in the Proposed Financing.
See "Item 7 Management Discussion and Analysis - Liquidity and Capital
Resources." This transaction, combined with Mr. Clark's membership on the
Board of Directors, could give rise to conflicts of interest.
In August 1998 the Board of Directors decided to suspend funding the electric
vehicle program because it was generating continuing losses and utilizing
resources that the Board felt would be better utilized by pursuit of the CCS
and radar products. Dr. Bell agreed to fund the program personally, in return
for a 15% interest in the EV Sub, which was transferred to Dr. Bell in March
of 1999. In connection with the Proposed Financing, Dr. Bell may acquire the
remaining equity interest in the EV Sub in exchange for the Class B Shares of
the Company. This means that the Company may have no further ownership
interest in electric vehicle technology and will only have the rights to EV
Sub payment of 85% of the royalties which the EV Sub receives from the Indian
JV. This transaction is subject to conditions, including shareholder
approval. This transaction, combined with Dr. Bell's ownership of a
significant percentage of the Company's Class A Common Stock, his position as
an officer and his membership on the Board of Directors, could give rise to
conflicts of interest.
ANTI-TAKEOVER EFFECTS OF PREFERRED STOCK
The Series A Preferred Stock proposed to be issued to the Investors in
connection with the proposed financing will have the right to elect five of
seven members of the Board of Directors. In addition, the Series A Preferred
Stock will vote together with the shares of Class A Common Stock on any other
matter submitted to shareholders. Immediately following the closing of the
proposed financing, holders of the Series A Preferred Stock will have
approximately 74% of the voting shares of the Company and will have the
ability to approve or prevent any subsequent change in control of the Company.
In addition, 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.
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.
14
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters, manufacturing and research
and development facilities in leased space of approximately 40,000 square
feet in Irwindale, California. The Company's lease expires December 31, 2002.
The current monthly rent under the lease is approximately $20,000. The
Company believes that its facilities are adequate for its present
requirements. See "Item 1 -- Risk Factors - Potential Conflict of Interest."
ITEM 3. LEGAL PROCEEDINGS
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. The Company
settled the case out of court during 1998.
The Company is subject to litigation from time to time in the ordinary course
of its business, but there is no current pending litigation to which the
Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 18, 1998 the Company filed a proxy statement with the Securities
and Exchange Commission and began to solicit shareholder approval of an
amendment to the Company's Articles of Incorporation which would effect a
1-for-5 reverse stock split of the Company's Class A Common Stock and
increase the effective amount of authorized but unissued Class A Common
Stock. On January 25, 1999 the Company held a special shareholders meeting
where the 1-for-5 reverse stock split was approved. 11,380,104 shares were
voted in favor of the reverse stock split, 391,845 shares were voted against
the reverse stock split, and 30,857 shares were not voted due to abstention
or broker non-vote. The reverse stock split became effective on January 26,
1999, upon the filing of an amendment to the Articles of Incorporation of the
Company, and the Company's Class A Common Stock began trading on the adjusted
basis on the Nasdaq SmallCap Market on January 28, 1999. Share information
for all periods has been retroactively adjusted to reflect the split.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Class A Common Stock trades on the Nasdaq SmallCap Market under
the symbol ARGNA. The Company's Class A Warrants trade on the Nasdaq SmallCap
Market under the symbol ARGNW. 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 1997 through December 31, 1998. Such prices
reflect inter-dealer prices, without retail mark-up, markdown or commission
and may not necessarily represent actual transactions.
1997 HIGH(1) LOW(1)
------- ------
1st Quarter......................... $33.75 $17.50
2nd Quarter......................... 25.65 12.50
3rd Quarter......................... 35.00 18.75
4th Quarter......................... 35.30 10.30
1998
1st Quarter......................... 14.05 5.00
2nd Quarter......................... 6.90 3.15
3rd Quarter......................... 3.60 1.25
4th Quarter......................... 5.00 .65
As of March 3, 1999, there were approximately 1,775 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 1996 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.
15
- -------------------
(1) Numbers adjusted to give effect to the 1-for-5 reverse stock split that
became effective on January 26, 1999, upon the filing of an amendment to
the Articles of Incorporation of the Company. The Company's Class A
Common Stock began trading on the adjusted basis on the Nasdaq SmallCap
Market on January 28, 1999. See "Item 4 Submission of Matters to a Vote
of Security Holders."
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-----------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Total revenues.......................................... $ 2,640 $ 7,809 $ 7,447 $ 1,308 $ 770
Net loss................................................ (4,235) (3,237) (9,997) (5,417) (7,704)
Net loss per diluted share (1) (2)...................... (6.40) (4.90) (12.30) (3.10) (4.03)
Deficit accumulated during development stage............ (9,950) (13,187) (23,184) (28,601) (36,305)
AS OF DECEMBER 31,
-----------------
(IN THOUSANDS)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Working capital......................................... $ 4,149 $ 6,481 $ (3,315) $ 8,826 $ 1,190
Total assets............................................ 7,162 8,995 3,922 10,568 2,644
Capitalized lease obligations........................... 78 68 43 41 65
- -----------
(1) Excluded from the average number of common shares used to calculate net
loss per share are the 600,000 Escrowed Contingent Shares (See Note 7 to
the Financial Statements). Adoption of SFAS No. 128 "Earnings Per Share"
by the Company. No effect on previously reported per share information
occurred due to antidilution provisions of the accounting principles.
(2) Numbers adjusted to give effect to the 1-for-5 reverse stock split that
became effective on January 26, 1999, upon the filing of an amendment to
the Articles of Incorporation of the Company. The Company's Class A
Common Stock began trading on the adjusted basis on the Nasdaq SmallCap
Market on January 28, 1999. See "Item 4 Submission of Matters to a Vote
of Security Holders."
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
Historically, 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. Although the Company licensed the
rights to these technologies from the holders of the related patents, it has
now developed its own patented or patentable technology to complement those
licenses. The Company recently lost the exclusivity on its license to certain
radar technology from LLNL, but intends to continue to pursue radar products
with its own technology In the automotive components industry, products
typically proceed through five stages of research and development and
commercialization. Initial research on the product
16
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. The
Company received its first production order in December 1997 and during 1998
the Company was selected to supply its CCS system to be installed in seat
systems for one platform of a major North American auto manufacturer starting
in the 2000 model year. The Company is continuing its efforts to obtain
commitments and orders from large equipment manufacturers. Development
contracts are from customers interested in developing a particular use or
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 have been
obtained in the past 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.
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, $5,328,000, and $533,000 were recorded in 1995, 1996
and 1997, 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. No replacement revenue was
scheduled for 1997 or 1998. In addition, in 1996, the Company substantially
completed work relating to the two electric vehicle grants, with no
replacement grants scheduled to follow. As of December 31, 1998, the Company
had no development contracts in place except for contracts to build prototype
systems. The Company has no efforts to obtain any additional grants and has
focused its efforts on working toward production contracts for Climate
Control Seat ("CCS") systems and radar sensor systems. See "Item 1 Risk
Factors Dependence on Grants; Government Audits of Grants."
RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED
DECEMBER 31, 1997
Total revenues for the year ended December 31, 1998 ("1998") decreased by
$538,000, or approximately 41%, to $770,000, from $1,308,000 for the year
ended December 31, 1997 ("1997"). The decline was primarily due to the
completion of certain development contracts in 1997 and a reduced level of
development contract activity in 1998.
During 1998, development continued on CCS and the Company's radar system,
some of which was funded by development contracts. Development contract
revenue relating to the Company's CCS and radar products decreased to
$752,000 in 1998, a decline of $529,000, or approximately 41% from the
$1,281,000 in such revenue recorded for 1997. The decrease in 1998
principally reflects the Company's completion in 1997 of work on several
development contracts. The Company is not seeking to obtain new grants and
continues to focus its efforts on working toward production contracts for CCS
and radar sensor systems.
Direct development contract and related grant costs decreased to $1,364,000
in 1998 from $2,586,000 in 1997, primarily due to decreased activity in the
Company's electric vehicle program in 1997 and the end of allocating
administrative expenses to this category.
Research and development expenses increased by $1,130,000 or approximately
55%, in 1998 to $3,202,000 from $2,072,000 in 1997. These expenses represent
research and development expenses for which no development contract or grant
funding has been obtained. The increase was due to an increase in headcount,
tooling expenditures, prototype materials and consulting.
17
Selling, general and administrative ("SG&A") expenses decreased by $373,000,
or approximately 8%, in 1998 to $4,098,000 from $4,471,000 in 1997. The
decrease in 1998 was primarily due to the reduction in salaries and wages
related to reduced headcount and the nonrecurrence of costs related to IUS
joint venture activities in 1997.
Net interest income totaled $238,000 and $406,000 in 1998 and 1997,
respectively. Interest income decreased due to a decline in cash balances as
a result of those funds being used in operations.
RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED
DECEMBER 31, 1996
Total revenues for the year ended December 31, 1997 ("1997") decreased by
$6,139,000, or approximately 82% to $1,308,000, from $7,447,000 for the year
ended December 31, 1996 ("1996"). Approximately $533,000, or nearly 41% of
1997 total revenues were derived from the Samsung contract and related
grants, which is a decrease of approximately $5,635,000 when compared to
1996, when $6,168,000, or nearly 83% of total revenues were related to the
Samsung contract and other grants. The Company completed work on the Samsung
contract and the related grants in 1997. No replacement contract or
replacement grants are scheduled to follow or expected to be obtained.
During 1997, development continued on CCS and the Company's radar system,
some of which was funded by development contracts. Development contract
revenue relating to the Company's CCS, radar and IVS-TM- products decreased
to $748,000 in 1997, a decline of $199,000, or approximately 21% from the
$947,000 in such revenue recorded for 1996. The decrease in 1997 principally
reflects the lack of commercial sales of IVS-TM- products as well as the
Company's completion in 1996 of work on several development contracts
relating to the IVS-TM- products not replaced in 1997 with new contracts. The
Company began selling IVS-TM- products in 1995. The total revenue recognized
for the IVS-TM- products in 1997 was $10,000, compared with $363,000 in 1996.
On July 24, 1997, the Company entered into a joint venture agreement with
Yazaki Corporation to form a new entity to develop and market the IVS-TM-
products. Under the terms of the agreement, Yazaki Corporation owns a
majority interest and the Company owns a minority interest of IVS, Inc. -TM-.
As part of the transaction, the Company received $1,800,000 in cash and a
note receivable for $1,000,000 in consideration for net assets related to
Amerigon's voice interactive technology totaling approximately $89,000. In
addition, the Company incurred costs of $348,000 associated with the sale.
$1,800,000 was paid through July 1997 and $971,000 was paid in July 1998.
Revenues from, grants other than electric vehicle-related grants decreased by
$305,000, or approximately 92% to $27,000 in 1997 from $332,000 in 1996.
Revenue from electric vehicle development contracts decreased $5,183,000 or
approximately 97% in 1997 to $145,000 from $5,328,000 in 1996. The Company
completed the Samsung contract in 1997. Related electric vehicle grant
revenues totaled $389,000 in 1997, a decrease of $451,000, or approximately
54%, from the $840,000 in such revenues recorded for 1996. The reduction in
these grant revenues reflects the completion of the Samsung contract as
discussed above.
Direct development contract and related grant costs decreased to $2,586,000
in 1997 from $11,533,000 in 1996, primarily due to decreased activity in the
Company's electric vehicle program in 1997, particularly in connection with
the Samsung contract and related grants. The Company also recorded changes to
operations in 1996, included in the total direct development contract and
related grant costs, for the ultimate estimated loss at completion of the
contract of approximately $1,900,000. Direct development costs related to
commercial sales of IVS-TM- decreased in 1997 to $55,000 from $490,000 in
1996 primarily due to weak demand on IVS-TM- products and the sale of the
Company's IVS-TM- technology to Yazaki Corporation.
Direct grant costs in 1997 declined by $185,000, or approximately 88%, to
$25,000 from $210,000 in 1996. These costs are related to the projects for
which grant revenues are reported. The decrease in 1997 reflects the decline
in grant project activities in which the Company was engaged during 1997.
Grant costs as a percentage of grant revenues of $27,000 and $332,000 were
93% and 63% in 1997 and 1996, respectively.
Research and development expenses declined by $56,000, or approximately 3%,
in 1997 to $2,072,000 from $2,128,000 in 1996. 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.
Selling, general and administrative ("SG&A") expenses increases by
$1,061,000, or approximately 31%, in 1997 to $4,471,000 and development
expenses from $3,410,000 in 1996. The increase in 1997 was primarily due to
the fact that fewer SG&A expenses were allocated to development contracts.
The Company also incurred costs related to the IVS-TM- joint venture and
costs associated with locating strategic partners for the electric vehicle
program. Direct and indirect overhead
18
expenses included in SG&A that are associated with development contracts are
allocated to such contracts.
Interest expense incurred totaled $71,000 and $211,000 in 1997 and 1996,
respectively. For 1997, interest expense represents charges incurred in
conjunction with a bank line of credit obtained to finance work on the
Samsung electric vehicle contract, the Bridge Financing, and the loan from
the Company's Chief Executive Officer and principal shareholder. These loans
were repaid upon the completion of the Company's Follow-on Public Offering in
February 1997. Interest income increased to $477,000 in 1997 from $48,000 in
1996 as a result of higher cash balances maintained in investments purchased
during 1997 with proceeds from the Company's secondary offering. Net interest
income (expense) was $406,000 in 1997 compared with ($163,000) in 1996. Also,
the net loss of the Company was partially offset by the gain on disposal of
assets due to the joint venture with Yazaki Corporation. See "Note 15."
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had working capital of $1,190,000. On March
29, 1999 the Company entered into a Securities Purchase Agreement with Westar
Capital LLC and Big Beaver Investments LLC (the "Investors") pursuant to
which the Investors will invest $9 million in the Company in return for 9,000
shares of Series A Preferred Stock which are convertible into Class A Common
Stock and warrants that are exercisable only to the extent certain other
warrants to purchase Class A Common Stock are exercised and then only in an
amount that will enable the Investors to maintain the same percentage
interest in the Company that they have in the Company after the initial
investment on a fully converted basis. This transaction is subject to a
number of conditions, including shareholder approval, which the Company
intends to seek at the 1999 Annual Shareholders Meeting. Concurrent with the
execution of the Securities Purchase Agreement, an affiliate of the Investors
provided a secured bridge loan to the Company for up to $1.2 million which
bears interest at 10% per annum and matures upon the earlier of September 30,
1999 or the completion of the equity financing and contains detachable
warrants for 300,000 shares of Class A Common Stock which will be cancelled
upon the completion of the equity investment. The bridge loan is necessary to
allow the Company to continue operations pending the closing of the equity
financing, although the amount of the bridge loan may not be adequate even if
fully drawn. Further, there are numerous conditions to making each borrowing
under the bridge loan. No assurance can be given that the proposed financing
will be completed. 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 sale of prototypes to
customers.
Cash and cash equivalents decreased by $4,370,000 in 1998 primarily due to a
net loss of $7,704,000. Operating activities used $7,227,000, which was
primarily a result of the net loss of $7,704,000 and repayment of $287,000 of
outstanding balances to vendors, and reductions of deferred revenues of
$53,000, reductions of accounts receivable of $60,000 and an increase in
accrued liabilities of $164,000. Investing activities provided $2,922,000, of
which $2,400,000 was from the selling of short-term investments along with
$971,000 from a receivable from sale of assets, offset by $449,000 related to
the purchase of property and equipment. Financing activities used $65,000
for repayment of capital leases.
The Company requires immediate financing and 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 need immediate
financing from sources outside the Company before it can achieve
profitability from its operations. While the Company has just secured a loan
for up to $1.2 million and entered into an agreement for a $9 million equity
investment as described above there can be no assurance that the proposed
equity financing will be consummated or even if it is, that additional
financing will not need to be obtained. The Company does not anticipate that
the proceeds from the proposed financing will be sufficient to meet the
Company's operating needs beyond a year. At or before that time, the Company
will need additional financing or will be unable to continue operations.
There is no assurance that additional financing can be secured. The Company's
focus is to bring products to market and achieve revenues based upon its
available resources. The Company continues to pursue the market introduction
of its CCS and radar based sensor device, both for the automotive
marketplace. If and when the Company is able to commence commercial volume
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. The Company does not intend to pursue any more significant grants
or development contracts to fund operations and therefore is highly dependent
on its current working capital sources. Should the Company not obtain
additional equity and/or debt financing immediately, the Company will be
required to significantly curtail its development activities, dispose of one
or more of its technologies and/or cease operations and liquidate. There can
be no assurance that either of these sources is available.
YEAR 2000 IMPACT
19
An issue affecting Amerigon and others is the ability of many computer
systems and applications to process the Year 2000 and beyond ("Y2K"). To
address this problem, in 1998, Amerigon initiated a Y2K program to manage the
Company's overall Y2K compliance effort. A team of internal staff is managing
the program with assistance of some outside consultants. The team's
activities are designed to ensure that there are no material adverse effects
on the Company.
The Company is in the assessment phase of its internal information services
computer systems associated with the Year 2000. The Company is currently
assessing Year 2000 issues related to its non-information technology systems
used in product development, engineering, manufacturing and facilities.
The Company is also working with its significant suppliers and financial
institutions to ensure that those parties have appropriate plans to address
Y2K issues where their systems interface with the Company's systems or
otherwise impact its operations. The Company has communicated in writing with
all of its principal suppliers to confirm their status in regards to Y2K
issues. The Company is assessing the extent to which its operations are
vulnerable should those organizations fail to properly remedy their computer
systems. The Company does not anticipate that potential Year 2000 issues at
the customer level will have a material adverse effect on its ability to
conduct normal business.
The Company's Y2K program is well under way and, based on the results of its
assessment to date is expected to be complete by mid-1999. While the Company
believes its planning efforts are adequate to address its Year 2000 concerns,
there can be no assurance that the systems of other companies on which the
Company's systems and operations rely will be converted on a timely basis and
will not have a material adverse effect on the Company. The Company has not
identified a need to develop an extensive contingency plan for
non-remediation issues at this time. The need for such a plan is evaluated on
an ongoing basis as part of the Company's overall Year 2000 initiative.
Based on the Company's assessment to date, the costs of the Year 2000
initiative (which are expensed as incurred) are estimate to be approximately
$20,000.
The cost of the project and the date on which the Company believes it will
complete its Year 2000 initiative are forward-looking statements and are
based on management's best estimate, according to information available
through the Company's assessments to date. However, there can be no assurance
that these estimates will be achieved, and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the retention of these professions,
the ability to locate and correct all relevant computer codes, and similar
uncertainties. At present, the Company has not experienced any significant
problems in these areas.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's investment portfolio consists of cash equivalents with no
significant market risk. The Company places its investments in debt
instruments of the U. S. government and in high-quality corporate issuers. As
stated in its policy, the Company seeks to ensure the safety and preservation
of its invested funds by limiting default risk and market risk. The Company
has no investments denominated in foreign country currencies and therefore is
not subject to foreign exchange risk.
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.
20
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 "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 1999 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,"
"Executive Compensation Table," "Report of the Compensation Committee on
Executive Compensation," "Compensation Committee Interlocks and Insider
Participation," "Option Grant Table," "Aggregate Options Exercised and
Year-End Values," and "Performance Graph" in the Company's definitive proxy
statement to be filed with the Commission in connection with the Company's
1999 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 "Security Ownership of
Certain Beneficial Owners and Management" and "Escrow Shares" in the
Company's definitive proxy statement to be filed with the Commission in
connection with the Company's 1999 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 1999 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:
Page
----
Report of Independent Accountants F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Shareholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements. F-7
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.
21
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 (3)
3.1.3 Certificate of Amendment of Articles filed with the California
Secretary of State on January 26, 1999
3.2 Amended and Restated Bylaws of the Company (3)
4.1.1 Form of Warrant Agreement among the Company, the Underwriter and
U.S. Stock Transfer Corporation as Warrant Agent (3)
4.2 Form of Warrant Certificate for Class A Warrant (3)
4.3 Form of Specimen Certificate of Company's Class A Common Stock (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)
10.4 Form of Underwriter's Unit Purchase Option (3)
10.5.1 Stock Option Agreement ("Bell Stock Option Agreement"),
effective May 13, 1993, between Lon E. Bell and Roy A. Anderson (3)
10.5.2 List of omitted Bell Stock Option Agreements with Company directors (3)
10.6 Form of Indemnity Agreement between the Company and each of its
officers and directors (1)
10.7 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 (3)**
10.7.1 Termination of Limited Exclusive License Agreement dated as of
June 1998 between the Company and the Regents of the University
of California
10.7.2 Limited Nonexclusive License Agreement dated as of June 1998
between the Company and the Regents of the University of
California
10.8 Option and License Agreement dated as of November 2, 1992
between the Company and Feher Design, Inc. (1)
10.9 Shareholders Agreement, dated May 13, 1993, by and among the
Company and the shareholders named therein (1)
10.10 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 (2)
10.11 Stock Purchase Agreement and Registration Rights Agreement
between the Company and HBI Financial Inc., dated December 29, 1995 (2)
10.13 Joint Venture Agreement between Yazaki Corporation and Amerigon
Incorporated, dated July 22, 1997 (5)
10.14 Amendment to Option and License Agreement between Amerigon and
Feher Design dated September 1, 1997 (6)
10.15 Standard Lease dated January 1, 1998 between Amerigon and
Dillingham Partners (6)
10.16 Letter Agreement dated December 16, 1998 between the Company and
Sudarshan K. Maini
10.17 Securities Purchase Agreement dated March 29, 1999 by and among
the Company, Westar Capital II LLC and Big Beaver Investments LLC
10.18 Credit Agreement dated March 29, 1999 between the Company and
Big Star Investments LLC
10.19 Security Agreement dated March 29, 1999 between the Company and
Big Star Investments LLC
10.20 Patent and Trademark Security Agreement dated March 29, 1999
between the Company and Big Star Investments LLC
10.21 Bridge Warrant dated March 29, 1999
10.22 Share Exchange Agreement dated March 29, 1999 between the
Company and Lon E. Bell
21 List of Subsidiaries
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Price Waterhouse LLP
27 Financial Data Schedule
(b) Reports on Form 8-K.
During the quarter ended December 31, 1998, 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.
22
(2) Previously filed as an exhibit to the Company's Current Report on Form
8-K filed January 5, 1996 and incorporated by reference.
(3) Previously filed as an exhibit to the Company Registration Statement on
Form S-2, as amended, File No. 333-17401, and incorporated by
reference.
(4) Previously filed as an exhibit to the Company's Current Report on Form
8-K, event date June 16, 1997, and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Current Report on Form
8-K, event date July 22, 1997, and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Current Report on Form
10-K for the period ended December 31, 1997, and incorporated herein by
reference.
23
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants................................... F-2
Balance Sheets...................................................... F-3
Statements of Operations............................................ F-4
Statements of Shareholders' Equity.................................. F-5
Statements of Cash Flows............................................ F-6
Notes to Financial Statements....................................... F-7
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(a)(1) and (2) present fairly, in all material respects, the financial
position of Amerigon Incorporated (a Development Stage Enterprise) at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, and
for the period from April 23, 1991 (inception) to December 31, 1998, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses and negative
cash flows from operations and has a significant accumulated deficit. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 2. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PRICEWATERHOUSECOOPERS LLP
Costa Mesa, California
March 23, 1999
F-2
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
(IN THOUSANDS)
ASSETS
DECEMBER 31,
-------------------------
1997 1998
----------- ---------
Current assets:
Cash and cash equivalents....................................................................... $ 6,037 $ 1,667
Short-term investments......................................................................... 2,400 -
Accounts receivable less allowance of $80 in 1997 and $101 in 1998.............................. 255 174
Receivable due from joint venture partner (Note 15) ........................................... 1,000 -
Inventory, primarily raw materials.............................................................. 35 105
Prepaid expenses and other current assets....................................................... 196 136
----------- ---------
Total current assets......................................................................... 9,923 2,082
Property and equipment, net (Note 4)............................................................... 645 562
----------- ---------
Total assets................................................................................. $ 10,568 $ 2,644
----------- ---------
----------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................................. $ 650 $ 363
Deferred revenue................................................................................. 97 44
Accrued liabilities (Note 4)..................................................................... 350 485
----------- ---------
Total current liabilities..................................................................... 1,097 892
Long-term portion of capital lease (Note 13)........................................................ 41 26
Commitments and contingencies (Notes 10 and 13)
Shareholders' equity: (Notes 7, 8 and 9)
Preferred stock, no par value; 1,000 shares authorized, none issued and
outstanding Common stock:
Class A - no par value; 8,000 shares authorized, 1,910 issued and outstanding
in 1997 and 1998 (additional 600 shares held in escrow)....................................... 28,149 28,149
Class B - no par value, 600 shares authorized, none issued and outstanding.......................
Contributed capital.............................................................................. 9,882 9,882
Deficit accumulated during development stage..................................................... (28,601) (36,305)
----------- ---------
Total shareholders' equity ................................................................... 9,430 1,726
----------- ---------
Total liabilities and shareholders' equity.................................................... $ 10,568 $ 2,644
----------- ---------
----------- ---------
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
(INCEPTION)
TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
---------------------------------- -----------
1996 1997 1998 1998
-------- -------- -------- -----------
Revenues:
Product ............................................. $ - $ - $ 18 $ 18
Development contracts and related grants............. 7,115 1,281 752 17,962
Grants............................................... 332 27 - 6,183
-------- -------- -------- ---------
Total revenues.................................... 7,447 1,308 770 24,163
-------- -------- -------- ---------
Costs and expenses:
Product ............................................. $ - - 48 $ 48
Direct development contract and related grant costs.. 11,533 2,586 1,364 22,268
Direct grant costs................................... 210 25 - 4,757
Research and development............................. 2,128 2,072 3,202 14,061
Selling, general and administrative, including
reimbursable administrative costs................. 3,410 4,471 4,098 22,356
-------- -------- -------- ---------
Total costs and expenses.......................... 17,281 9,154 8,712 63,490
-------- -------- -------- ---------
Operating loss.......................................... (9,834) (7,846) (7,942) (39,327)
Interest income......................................... 48 477 255 1,298
Interest expense........................................ (211) (71) (17) (299)
Gain on disposal of assets ............................. - 2,363 - 2,363
-------- -------- -------- ---------
Operating loss before extraordinary item................ (9,997) (5,077) (7,704) (35,965)
Extraordinary loss from extinguishment of indebtedness.. - (340) - (340)
-------- -------- -------- ---------
Net loss................................................ $ (9,997) $ (5,417) $ (7,704) $ (36,305)
-------- -------- -------- ---------
-------- -------- -------- ---------
Based and diluted net loss per share before
extraordinary item................................... $ (12.31) $ (2.88) $ (4.03)
Base and diluted net loss per share..................... $ (12.31) $ (3.08) $ (4.03)
-------- -------- --------
-------- -------- --------
Weighted average number of shares outstanding........... 812 1,758 1,910
-------- -------- --------
-------- -------- --------
See accompanying notes to the financial statements.
F-4
AMERIGON INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
Deficit
Preferred Common Stock Accum.
Stock Class A Class B During
--------------- --------------- --------------- Contrib. Devel.
Shares Amount Shares Amount Shares Amount Capital Stage Total
------ ------ ------ ------ ------ ------ ------- -------- -------
Balance at April 23, 1991 (Inception)....... - $ - 200 $ 100 - $ - $ - $ - $ 100
Contributed capital-founders' services
provided without compensation.... - - - - - - 111 - 111
Net loss............................... - - - - - - - (616) (616)
---- ---- ----- ------- --- ---- ------ ------- -------
Balance at December 31, 1991................ - - 200 100 - - 111 (616) (405)
Transfer of common stock to employee by
principal shareholder for services...... - - - - - - 150 - 150
Contributed capital-founders' services
provided without compensation........... - - - - - - 189 - 189
Net loss.................................. - - - - - - - (1,459) (1,459)
---- ---- ----- ------- --- ---- ------ ------- -------
Balance at December 31, 1992................ - - 200 100 - - 450 (2,075) (1,525)
Issuance of common stock (public
offering)............................... - - 460 11,534 - - - - 11,534
Options granted by principal shareholder
for services............................ - - - - - - 549 - 549
Contribution of notes payable to
contributed capital..................... - - - - - - 2,102 - 2,102
Net loss.................................. - - - - - - - (3,640) (3,640)
---- ---- ----- ------- --- ---- ------ ------- -------
Balance at December 31, 1993................ - - 660 11,634 - - 3,101 (5,715) 9,020
Compensation recorded for variable
plan stock option....................... - - - - - - 1 - 1
Net loss.................................. - - - - - - - (4,235) (4,235)
---- ---- ----- ------- --- ---- ------ ------- -------
Balance at December 31, 1994................ - - 660 11,634 - - 3,102 (9,950) 4,786
Private placement of common stock......... - - 150 5,636 - - 1 - 5,637
Compensation recorded for variable
plan stock option ...................... - - - - - - 12 - 12
Net loss.................................. - - - - - - - (3,237) (3,237)
---- ---- ----- ------- --- ---- ------ ------- -------
Balance at December 31, 1995................ - - 810 17,270 - - 3,115 (13,187) 7,198
Exercise of stock options................. - - 4 160 - - - - 160
Repurchase of common stock................ - - - (15) - - - - (15)
Expenses of sale of stock................. - - - (94) - - - - (94)
Net loss.................................. - - - - - - - (9,997) (9,997)
---- ---- ----- ------- --- ---- ------ ------- -------
Balance at December 31, 1996................ - - 814 17,321 - - 3,115 (23,184) (2,748)
Issuance of common stock (public
offering)............................... - - 1,096 10,828 - - 6,617 - 17,445
Conversion of Bridge Debentures into
Class A Warrants........................ - - - - - - 150 - 150
Net loss.................................. - - - - - - - (5,417) (5,417)
---- ---- ----- ------- --- ---- ------ ------- -------
Balance at December 31, 1997................ - - 1,910 28,149 - - 9,882 (28,601) 9,430
Net loss ................................. - - - - - - - (7,704) (7,704)
---- ---- ----- ------- --- ---- ------ ------- -------
Balance at December 31, 1998................ - $ - 1,910 $28,149 - $ - $9,882 $(36,305) $ 1,726
---- ---- ----- ------- --- ---- ------ ------- -------
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
(INCEPTION) TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------------- --------------
1996 1997 1998 1998
--------- --------- --------- --------------
Operating activities:
Net loss................................................. $ (9,997) $ (5,417) $ (7,704) $ (36,305)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization......................... 357 162 582 1,656
Provision for doubtful accounts....................... 80 - 21 211
Stock option compensation............................. - - - 712
Gain from sale of assets.............................. - (2,363) - (2,363)
Contributed capital-founders' services provided
without cash compensation........................... - - - 300
Change in operating assets and liabilities:
Accounts receivable................................. (216) 933 60 (385)
Unbilled revenue.................................... 311 1,157 - -
Inventory........................................... 223 (35) (70) (125)
Prepaid expenses and other current assets........... 217 548 60 (136)
Accounts payable.................................... 444 (1,265) (287) 15
Deferred revenue.................................... 60 (57) (53) 44
Accrued liabilities................................. 7 (133) 164 550
-------- -------- -------- ---------
Net cash used in operating activities................. (8,514) (6,470) (7,227) (35,826)
-------- -------- -------- ---------
Investing activities:
Purchase of property and equipment................... (182) (302) (449) (2,195)
Proceeds from sale of assets......................... - 2,800 - 2,800
Receivable from sales of assets...................... - (1,000) - (1,000)
Proceeds from receivable from sale of assets......... - - 971 971
Short term investments............................... - (2,400) 2,400 -
-------- -------- -------- ---------
Net cash provided by (used in) investing activities.. (182) (902) 2,922 576
-------- -------- -------- ---------
Financing activities:
Proceeds from sale of common stock, net.............. (94) 17,595 - 34,772
Proceeds from exercise of stock options.............. 160 - - 160
Repurchase of common stock........................... (15) - - (15)
Borrowing under line of credit....................... 5,180 - - 6,280
Repayment of line of credit.......................... (3,993) (1,187) - (6,280)
Repayment of capital lease........................... (25) (2) (65) (102)
Proceeds from Bridge Financing ...................... 3,000 - - 3,000
Repayment of Bridge Financing........................ - (3,000) - (3,000)
Proceeds from note payable to shareholder............ 200 250 - 450
Repayment of note payable to shareholder............. - (450) - (450)
Contributed to capital............................... - - - 2,102
-------- -------- -------- ---------
Net cash provided by (used in) financing activities.. 4,413 13,206 (65) 36,917
-------- -------- -------- ---------
Net increase (decrease) in cash and cash equivalents. (4,283) 5,834 (4,370) 1,667
Cash and cash equivalents at beginning of period..... 4,486 203 6,037 -
-------- -------- -------- ---------
Cash and cash equivalents at end of period........... $ 203 $ 6,037 $ 1,667 $ 1,667
-------- -------- -------- ---------
-------- -------- -------- ---------
See accompanying notes to the financial statements.
F-6
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, 1998, 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; (4) completing the development, in December 1995, of the audio
navigation system; and (5) completing the development in April 1998, of the
climate control seats and selling of the first commercial units. Amerigon
completed a joint venture for its interactive navigation system (Note 15),
and plans to focus continuing development activities on its Climate Control
Seat and radar systems. The Company is in the process of formalizing a joint
venture for its electric vehicle systems.
The Company augmented 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.
NOTE 2 -- BASIS OF PRESENTATION
BASIS OF PRESENTATION
The Company has suffered recurring losses and negative cash flows from
operations since inception and has a significant accumulated deficit.
Consequently, in order to fund continuing operations and complete product
development, the Company will need to raise additional financing. In this
regard, on March 23, 1999, the Board of Directors approved a proposed
financing transaction with an investor group to raise additional equity
financing and obtain a bridge loan (Note 17). The equity financing, as
currently contemplated, will require shareholder approval. Management
believes that the proceeds from the equity financing and bridge loan will be
sufficient to meet the Company's projected working capital needs through at
least the end of 1999. The outcome of such efforts to raise working capital
cannot be assured. As such, there is substantial doubt about the Company's
ability to continue as a going concern.
The Company's financial statements have been prepared on the basis of
accounting principles applicable to a going concern. Accordingly, they do not
include any adjustments relating to the recoverability of the carrying amount
of recorded assets or the amount of liabilities that might result from the
outcome of these uncertainties.
NOTE 3 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of all financial instruments, comprising cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses 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.
STATEMENT OF CASH FLOWS
All investments with original maturities of less than 90 days are considered
cash equivalents. Cash paid for interest totaled $211,000, $71,000 and
$17,000 in 1996, 1997 and 1998, respectively. Capital lease obligations
incurred totaled $0, $23,000 and $50,000 in 1996, 1997 and 1998, respectively.
F-7
CONCENTRATION OF CREDIT RISK
Financial instruments which subject the Company to concentration of credit
risk consist primarily of cash equivalents and accounts receivable. Cash
equivalents are invested in the U. S. Treasury securities and money market
account of a major U.S. financial services company and the risk is considered
limited. The risk associated with accounts receivable is limited by the large
size and creditworthiness of the Company's commercial customers and the
federal and California government agencies providing grant funding.
INVESTMENTS
As of December 31, 1997, short-term investments to be held to maturity
included U. S. Treasury securities of $1,414,000 and commercial paper of
$986,000 with scheduled maturities of less than one year. The amortized cost,
which includes accrued interest, approximates fair value.
INVENTORY
Inventory, other than inventoried purchases relating to development
contracts, is valued at the lower of cost, based 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. Long-lived assets to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the related
carrying amount may not be recoverable. Management does not believe that
there are any material impairments at December 31, 1997 and 1998.
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.
DEVELOPMENT CONTRACT REVENUES
The Company has had a series of fixed-price development contracts, which
included (1) specific engineering and tooling services to prepare the
Company's products and the related manufacturing processes for commercial
sales to certain original equipment manufacturers ("OEMs"); (2) the
development of complete electric vehicle systems (Note 11); 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 12) 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
F-8
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 not specifically funded by development
contracts or grants from customers are classified under Research and
Development. Research and development excludes 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 9.
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).
NET LOSS PER SHARE
Under the provisions of SFAS 128, "Earnings per Share," basic earnings per
share ("Basic EPS") is computed by dividing net loss available to common
shareholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share ("Diluted EPS") gives effect to
all dilutive potential common shares outstanding during a period. In
computing Diluted EPS, the treasury stock method is used in determining the
number of shares assumed to be purchased from the conversion of common stock
equivalents.
Because their effects are anti-dilutive, net loss per share for the years
ended December 31, 1996, 1997 and 1998 does not include the effect of 1)
52,230, 73,731 and 168,426, respectively, of stock options outstanding
related to the 1993 and 1997 Stock Option Plans with a weighted average
exercise price of $47.34, $18.87 and $11.95, respectively; 2) 137,139,
118,768 and 118,442, respectively, of stock options outstanding related to
the Bell Options with a weighted average exercise price of $15.51, $13.22 and
$13.25, respectively; and 3) 52,951, 1,471,751 and 1,471,751, respectively,
of warrants to purchase outstanding shares of Class A Common Stock with
exercise prices ranging from $ 25.00 to $48.35 per share.
NOTE 4 -- DETAILS OF CERTAIN FINANCIAL STATEMENT COMPONENTS (IN THOUSANDS)
DECEMBER 31,
--------------------
1997 1998
------- -------
PREPAID EXPENSES AND OTHER ASSETS:
Advances to vendors.......................................... $ 133 $ 104
Prepaid insurance ........................................... 63 32
------- -------
$ 196 $ 136
------- -------
------- -------
PROPERTY AND EQUIPMENT:
Equipment.................................................... $ 767 $ 1,000
Computer equipment........................................... 596 663
Leasehold improvements....................................... 214 225
Production tooling........................................... 142 330
------- -------
1,719 2,218
Less: accumulated depreciation and amortization................. (1,074) (1,656)
------- -------
$ 645 $ 562
------- -------
------- -------
ACCRUED LIABILITIES:
Accrued salaries............................................. $ 171 $ 201
Accrued vacation............................................. 124 171
Other accrued liabilities.................................... 55 113
------- -------
$ 350 $ 485
------- -------
------- -------
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, 1998, the
Company has net operating loss carry forwards for federal and state purposes
of $31,791,000 and $14,737,000 respectively, and has generated
F-9
tax credits from certain research and development activities of $522,000 and
$356,000 for federal and state purposes, respectively. Federal net operating
loss carry forwards and tax credits expire from 2008 through 2012 and state
net operating loss carry forwards expire from 1999 through 2002. The use of
such net operating loss carry forwards 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, deferred revenue and accrued compensated
absences. A valuation allowance of $12,610,000 has been provided for the
entire amount of the deferred tax .
NOTE 6 -- EXTRAORDINARY LOSS
In connection with the repayment of debt financing obtained in 1996, the
Company recorded a non-cash charge in 1997 of $340,000 resulting from the
elimination of the remaining unamortized portion of the deferred debt
issuance costs.
NOTE 7 -- 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.
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 56 shares of Class A Common Stock and 56
Class A Warrants to purchase, at $25.00 per share, an equal number of Class A
Common Stock, resulting in the issuance of 952,000 shares of Class A Common
Stock and 952,000 Class A Warrants. In addition, on March 7, 1997, the
underwriter exercised an option to purchase an additional 2,550 Units or
142,800 shares of Class A Common Stock and 142,800 Class A Warrants to cover
over allotments. Proceeds to the Company, net of expenses, were approximately
$17,445,000. Fees to the underwriter included an option until February 12,
2002, to purchase 340 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.
ESCROW AGREEMENT
Prior to the effective date of the June 1993 initial public offering of the
Company's common stock, 600,000 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 goals including prescribed
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 Company did not achieve the goals and, as such, on April 30, 1999, all
shares held in Escrow will automatically be exchanged for shares of Class B
Common Stock, which will then be released from Escrow.
NOTE 8 -- STOCK WARRANTS
In connection with the Company's June 1993 initial public offering of its
common stock, the Company issued to the underwriters warrants to purchase
through June 9, 1998, 40,951 shares of Class A Common Stock at $48.35 per,
share as adjusted for anti-dilution provisions in the warrant agreements as a
result of the December 29, 1995 private placement of Common Stock and the
February 7, 1997 Follow-on Public Offering. The Company issued to third
parties warrants to purchase 12,000 shares of Class A Common Stock at $51.25
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. None of the warrants have been exercised as of December 31, 1998.
In connection with debt financing obtained in 1996 and the follow-on public
offering completed in 1997 (Note 7), the
F-10
Company has warrants outstanding to issue 324,000 and 1,094,800 shares of
Class A Common Stock, respectively. 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
$25.00, subject to adjustment. Commencing February 12, 1998, the Company may,
upon 30 days' written notice, redeem each Class A Warrant in exchange for
$.25 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 $43.75 (subject to adjustment in the event
of any stock splits or other similar events). As of December 31, 1998, the
Company has not exercised this option and none of these warrants have been
exercised.
NOTE 9 -- STOCK OPTIONS
1993 AND 1997 STOCK OPTION PLANS
Under the Company's 1997 and 1993 Stock Option Plans (the "Plans"), as
amended in June 1995, 150,000 and 110,000 shares, respectively 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 Plans, which expire in April 2007 and 2003, respectively, are
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 both Plans 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 Plans 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 chairman and principal shareholder of the Company, has
granted options to purchase shares of his Class A Common Stock, 75% of which
were Escrowed Contingent Shares. The holder of these options could 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 had no right to purchase Class B Common Stock should such shares have
been released. Accordingly, no such shares are available for purchase by the
holder of the option (Note 7).
The following table summarizes stock option activity:
1993 AND 1997 STOCK OPTION PLANS BELL OPTIONS
-------------------------------- ------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
-------- -------------- -------- --------------
Outstanding at December 31, 1995................ 62,998 $ 46.60 163,571 $ 14.70
Granted......................................... 6,980 51.80 2,500 51.90
Canceled........................................ (12,813) 52.90 (13,932) 27.00
Exercised....................................... (4,000) 40.00 (16,753) 5.75
------- ------- ------- -------
Outstanding at December 31, 1996................ 53,165 47.20 135,386 12.00
Granted......................................... 115,880 17.50 - -
Canceled........................................ (53,408) 46.10 (13,305) 33.45
Exercised....................................... - - (2,313) 5.75
------- ------- ------- -------
Outstanding at December 31, 1997................ 115,637 18.45 119,768 13.55
Granted......................................... 120,995 6.15 - -
Canceled........................................ (33,462) 13.15 (1,346) 5.75
Exercised....................................... - - -
------- ------- ------- -------
Outstanding at December 31, 1998................ 203,170 $ 11.95 118,422 $ 13.25
------- ------- ------- -------
------- ------- ------- -------
The following table summarizes information concerning currently outstanding
and exercisable stock options for the 1993 and 1997 Stock Option Plans as of
December 31, 1998:
F-11
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT DECEMBER 31, 1998 DECEMBER 31, 1998
---------------------------------------------- -------------------------
WEIGHTED- WEIGHTED-
WEIGHTED-AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ----------------- ----------- ---------------- -------- ------------ --------
$3.05 - 6.50 74,220 9.4 $ 3.60 - $ -
11.40 - 18.15 114,000 8.7 15.95 65,998 17.10
20.15 - 21.90 14,123 8.5 21.10 8,255 20.95
48.75 - 56.25 827 6.5 54.76 720 54.58
------- ------
203,170 74,973
------- ------
------- ------
The following table summarizes information concerning currently outstanding and
exercisable stock options for the Bell Option Plan as of December 31, 1998:
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT DECEMBER 31, 1998 DECEMBER 31, 1998
---------------------------------------------- -------------------------
WEIGHTED- WEIGHTED-
WEIGHTED-AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ----------------- ----------- ---------------- -------- ------------ --------
$5.75 81,822 4.2 $ 5.75 9,017 $ 5.75
30.00 36,600 4.4 30.00 2,337 30.00
------- ------
118,422 11,354
------- ------
------- ------
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. The pro forma compensation
costs may not be representative of that to be expected in future years.
YEARS ENDED DECEMBER 31,
----------------------------
1997 1998
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net Loss
As reported......................... $ (5,417) $ (7,704)
Pro Forma........................... (6,136) (7,929)
Basic and diluted loss per share
As reported......................... $ (3.08) $ (4.03)
Pro Forma........................... (3.49) (4.15)
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 AND 1997 STOCK OPTION PLANS BELL OPTION PLAN
--------------------------------- ---------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
Risk free interest rates............... 6% 6% 6% 6%
Expected dividend yield................ none none none none
Expected lives......................... 4.3 yrs. 4.3 yrs. 4.3 yrs. 4.3 yrs.
Expected volatility.................... 55% 60% 55% 60%
The weighted average grant date fair values of options granted under the 1993
Stock Option Plan during 1997 and 1998 were $17.90 and $6.26, respectively.
No options were granted under the Bell Option Plan during 1997 and 1998.
NOTE 10 -- LICENSES
CLIMATE CONTROL 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
F-12
payable based on cumulative net sales and do not require minimum payments.
The Company has recorded royalty expense under this license agreement of
$8,500, $18,000 and $43,000 in 1996, 1997 and 1998, respectively.
RADAR SYSTEM. In January 1994, the Company entered into a license agreement
for exclusive rights in certain automotive applications to certain radar
technology. 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 1996 and 1997 were $100,000 and $150,000 respectively,
and were expensed as Research and Development. The exclusivity portion of
this Licensing Agreement was not renewed in 1998 and minimum royalty payments
are no longer required.
NOTE 11 -- 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, were valued at approximately $9,600,000 and were completed in
fiscal year 1997. The Company received $4,193,000 and $1,487,000 in 1996 and
1997, respectively. For the years ended December 31, 1996 and 1997, the
Company recognized revenue of $5,328,000 and $145,000, respectively, from
this contract.
NOTE 12 -- 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 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.
Grant funding received in 1996 and 1997 of $840,000 and $389,000
respectively, related to CALSTART, Inc., a not-for-profit consortium of
public and private entities (Note 14) which was organized to support programs
designed to promote the development of advanced transportation including the
advancement of electric vehicles. The Company did not receive any grant
funding in 1998.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
The Company leases its facility in Irwindale, California for $20,000 per
month under an agreement which expires December 31, 2002. Rent expense under
all of the Company's operating leases was $595,000, $415,000 and $266,000 for
1996, 1997 and 1998, respectively. Future minimum lease payments under this
lease are $240,000 in 1999, 2000, 2001 and 2002.
The Company has entered into certain office and computer equipment leases
under long-term lease arrangements which are reported as capital leases. The
terms of the leases range from three to five years with interest rates
ranging from 11.8% to 19.7%. Future minimum lease payments under these
capital leases are $45,000, $13,000, $6,000 and $6,000, respectively, for
years ending December 31, 1999, 2000, 2001 and 2002 of which $6,000
represents total interest to be paid and $39,000 was included in accounts
payable at December 31, 1998.
NOTE 14 -- RELATED PARTY TRANSACTIONS
Dr. Bell, Chairman of the Board and the principal shareholder of the Company,
co-founded CALSTART (Note 12) in 1992, served as its interim President, and
for the last five years has served on CALSTART's Board of Directors and is a
member of its Executive Committee. Included in accounts receivable at
December 31, 1997 and 1998 was a receivable owed to the Company from CALSTART
of $153,000 and $41,000, respectively, relating primarily to amounts withheld
from payments made by CALSTART under several grant programs. In addition, in
December 1995, the Company signed a thirteen-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. The
lease expired in 1997.
The Company leases its current facilities from a partnership which is
controlled by Dr. Bell. The Company believes that the terms of the lease are
at least as favorable as those that could be obtained from other lessors.
F-13
NOTE 15 -- JOINT VENTURE AGREEMENT
On July 24, 1997, the Company entered into a joint venture agreement with
Yazaki Corporation ("Yazaki") to develop and market the Company's Interactive
Voice System (IVS-TM-), a voice activated navigation system. Under the terms
of the agreement, the Company received $1,800,000 in cash and a note
receivable for $1,000,000 in consideration for the net assets related to
Amerigon's voice interactive technology totaling $89,000. In addition, the
Company incurred costs of $348,000 associated with the sale. In 1998, the
Company received approximately $971,000 in payment of the remaining
$1,000,000 noted above. The $971,000 is net of approximately $29,000 of prior
year navigation system related expenses owed by Amerigon to IVS.
On December 16, 1998, the Company entered into a Letter Agreement with a
group of Companies controlled by Sudaishan K. Maini (the "Maini Group") to
develop and market the Company's electric vehicle systems ("EV"). Under the
terms of the Letter Agreement, the Company would receive a 25% interest in a
company to be formed as well as received royalties in exchange for
contribution of certain assets and technology to the joint venture. The
Company's net book value of such assets was nil at December 31, 1998. This
agreement will be assigned to a subsidiary to be formed by the Company
(Note 17).
NOTE 16 -- SEGMENT REPORTING
In 1998, the Company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" which requires the Company to disclose
certain segment information used by management for making operating decisions
and assessing the performance of the Company. Essentially, management
evaluates the performance of its segments based primarily on operating
results before depreciation and selling, general and administrative costs.
Such accounting policies used are the same as those described in Note 3.
The Company's reportable segments are as follows:
- - CLIMATE CONTROL SEATS (CCS) - variable temperature seat climate control
system designed to improve the temperature comfort of automobile
passengers.
- - RADAR - radar-based sensing system that detects objects that reflects radar
signals near the automobile and provides an audible or visual signal as the
driver approaches the object.
- - ELECTRIC VEHICLE SYSTEMS (EV) - design and development of electric vehicles
and related components. The Company is currently in the process of
formalizing a joint venture for its electric vehicles systems (Note 15).
- - INTERACTIVE VOICE NAVIGATION (IVS-TM-) - voice recognition technology
incorporating proprietary features and computer systems which allows the
driver to receive directions to their destination while driving their
vehicle. In 1997, the Company entered into a joint venture agreement
whereby all related assets were sold (Note 15).
The table below presents information about the reported revenues and
operating loss of Amerigon for the years ended December 31, 1998, 1997 and
1996 (in thousands). Asset information by reportable segment is not reported,
since management does not produce such information.
RECONCILING AS
CCS RADAR EV IVS-TM- ITEMS REPORTED
------- ------- -------- ------- ----------- ---------
1998
Revenue $ 396 $ 329 $ 45 $ - $ - $ 770
Operating loss (2,844) (455) (545) - (1)(4,098) (7,942)
1997
Revenue 451 135 611 111 - 1,308
Operating loss (978) (702) (1,194) (501) (1)(4,471) (7,846)
1996
Revenue 258 311 6,168 710 7,447
Operating loss (17) (378) (4,904) (1,125) (1)(3,410) (9,834)
(1) Represents selling, general and administrative costs of $3,053,000,
$4,309,000 and $3,516,000, respectively, including
F-14
depreciation expense of $357,000, $162,000 and $482,000, respectively,
for years ended December 31, 1998, 1997 and 1996.
Revenue information by geographic area (in thousands):
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1996 1997 1998
----------------- ---------------- -----------------
United States - Commercial $ 598 $ 211 $ 58
United States - Government 1,700 416 103
Asia 5,114 556 461
Europe 35 125 148
----------------- ---------------- -----------------
Total Revenues $ 7,447 $ 1,308 $ 770
----------------- ---------------- -----------------
----------------- ---------------- -----------------
In 1998, three customers, two foreign (CCS) and one government (Radar)
represented 12%, 30% and 13% of the Company's sales. In 1997, three
customers, one foreign and one government (EV) and one foreign (CCS/Radar)
represented 11%, 30% and 19% of the Company's sales. In 1996, two customers,
one foreign and one government (EV) represented 63% and 15% of the Company's
sales.
NOTE 17--SUBSEQUENT EVENTS
On January 28, 1999, the Company effected a 1 for 5 reverse stock split.
Share information for all periods has been retroactively adjusted to reflect
the split.
On March 23, 1999, the Company's Board of Directors agreed to form a
subsidiary to hold the Company's electric vehicle systems ("EV") operations
(Note 15). Pursuant to discussions held among the Company's Board of
Directors and Dr. Bell, Chairman of the Board and a significant shareholder
of the Company, the Company agreed to sell to Dr. Bell a 15% interest in the
EV subsidiary for $88,000. The Board of Directors also approved a proposal to
sell to Dr. Bell its remaining 85% interest in the EV subsidiary in exchange
for all of his Class B Common Stock (to be released from escrow April 30,
1999) in order to satisfy a condition of the proposed financing described
below. The Class B Common Stock will be cancelled. The sale of the remaining
interest in the EV subsidiary is subject to shareholder approval. The net
assets of the EV operation were nil at December 31, 1998.
On March 23, 1999, the Board of Directors approved a proposed financing
transaction (the "Financing") with an investor group. Under the terms of the
Financing the Company will issue 9,000 shares of Series A Preferred Stock and
Warrants to purchase up to 1,651,180 shares of Class A Common Stock in
exchange for $9,000,000. The Series A Preferred Stock will initially be
convertible into 5,373,134 shares of Class A Common Stock. The Financing is
subject to shareholder approval. It is anticipated that an affiliate of the
investor group will extend up to $1,200,000 in loans bearing interest at 10%
per annum which is due and payable upon the earlier of the closing of the
Financing or September 30, 1999. The affiliate will also receive warrants to
purchase 300,000 shares of Class A Common Stock.
F-15
AMERIGON INCORPORATED
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS
BEGINNING OF COSTS AND OTHER FROM BALANCE AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVES OF PERIOD
----------- ------------ ---------- ------------ ------------ ---------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year Ended December 31, 1996............... $ 100 $ 80 $ - $ (100) $ 80
Year Ended December 31, 1997 .............. 80 - - - 80
Year Ended December 31, 1998............... 80 27 - (6) 101
ALLOWANCE FOR DEFERRED INCOME TAX ASSETS
Year Ended December 31,1996................ 3,919 3,242 - - 7,161
Year Ended December 31, 1997 .............. 7,161 2,118 - - 9,279
Year Ended December 31,1998................ 9,279 2,726 - - 12,005
F-16
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.
CHIEF EXECUTIVE OFFICER
AND
CHAIRMAN OF THE BOARD
March 29, 1999
--------------------
(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 Chief Executive Officer and Chairman of the Board March 29, 1999
-----------------------------
Lon E. Bell, Ph. D.
/s/ Richard A. Weisbart President and Chief Operating Officer March 29, 1999
-----------------------------
Richard A. Weisbart
/s/ Roy A. Anderson Director March 29, 1999
-----------------------------
Roy A. Anderson
/s/ John W. Clark Director March 29, 1999
-----------------------------
John W. Clark
/s/ Michael R. Peevey Director March 29, 1999
-----------------------------
Michael R. Peevey
/s/ Scott O. Davis Chief Financial Officer and Secretary March 29, 1999
-----------------------------
Scott O. Davis