-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U1oQbA1wTgmgCNbeg5P7m/CyMntQXTBQpm1+AW5NcpDxEQzePB1FaVklU7UTdn2l UuYttBRkF9gWL4bQUpnTgA== 0000823927-00-000017.txt : 20000329 0000823927-00-000017.hdr.sgml : 20000329 ACCESSION NUMBER: 0000823927-00-000017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTROSOURCE INC CENTRAL INDEX KEY: 0000823927 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 742466304 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16323 FILM NUMBER: 581229 BUSINESS ADDRESS: STREET 1: 2809 INTERSTATE 35 SOUTH CITY: SAN MARCOS STATE: TX ZIP: 78666 BUSINESS PHONE: 5127536500 MAIL ADDRESS: STREET 1: 2809 INTERSTATE 35 SOUTH CITY: SAN MARCOS STATE: TX ZIP: 78666 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1999. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________________to______________ Commission file number 0-16323 ELECTROSOURCE, INC. (Exact name of Registrant as specified in its charter) Delaware 742466304 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2809 Interstate 35 South, San Marcos, Texas 78666 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (512) 753-6500 Securities registered pursuant None to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reported required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 24, 2000, 13,154,300 common shares were outstanding and the aggregate market value of the common shares held by non-affiliates (based on the closing price of these shares of $16.00, as reported by NASDAQ at the close of business on March 24, 2000) was approximately $210,468,800. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference into the indicated part or parts of this report: Portions of the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on June 14, 2000, are incorporated by reference into Part III hereof. PART I Item 1. Business. General Electrosource, Inc. ("ELSI" or the "Company"), is an energy storage solutions company engaged in the manufacture of advanced lead-acid, rechargeable storage batteries and the development of related processes and technologies. The Horizon battery utilizes plate grids made from a patented coextruded wire and a special paste mixture. The Company is focusing its efforts on development of Horizon battery technology for use in many applications including hybrid power vehicles, electric vehicles, neighborhood electric vehicles, electric scooters, lawn and garden tools, power management and starting power. The principal executive offices of the Company are located at 2809 Interstate 35 South, San Marcos, Texas 78666, and its telephone number is (512) 753-6500. Significant Events During 1999, the Company continued to receive equity financing under an Agreement, which was entered into on June 2, 1998, with Kamkorp Limited, a private limited company incorporated in England ("Kamkorp"), for up to $6,000,000 of equity financing. Kamkorp is a management holding company, holding shares in a number of companies including Frazer-Nash Research Ltd. (FNR), Frazer-Nash Research, Inc. (FNRI), and Electrosource International Ltd. (EIL). Kamkorp also has options to purchase an additional 3,000,000 shares at $1.00 under this original agreement. In addition, in October 1999 Kamkorp was granted the option to purchase an additional 3,000,000 shares of the Company's Common Stock at $1.00. At December 31, 1999, Kamkorp is the record holder of 7,480,000 shares or 61.6% of the Company's 12,137,699 outstanding shares of Common Stock and is the beneficial owner of 12,000,000 shares or 70% of the Company's Common Stock. Kamkorp appointed three members to the Company's nine-member Board of Directors in 1998 under the original Agreement (See Note G - Liquidity). The Horizon Battery The Company has concentrated its efforts on the design of a new concept of lead-acid battery employing coextruded wire in plates oriented in the horizontal plane, as opposed to the vertical plane orientation of conventional batteries. This battery concept, named "Horizon," enables design of a lead-acid battery with significantly higher energy density than is possible with conventional battery design. We believe the Horizon design may ultimately prove to be more economical to manufacture than conventional batteries due to the elimination of several steps in the manufacturing process. Several hundred prototypes and production versions of the Horizon battery have been built and tested in a variety of configurations. Testing by the Company and by third parties indicates that various configurations of the battery meet or exceed some of the performance goals established by major governmental and industry groups for electric vehicle batteries. The Company also believes the Horizon battery has a number of applications other than electric vehicles, such as hybrid powered vehicles, portable power tools such as lawn and garden tools, electric power management, uninterruptible power and for starting, lighting and ignition ("SLI") batteries for automobiles and aircraft. The Company has designed various prototype batteries for such applications which are currently under evaluation by customers. Coextrusion Technology The Company holds an exclusive license for the development and commercial exploitation of patented coextruded wire. Coextrusion is a process by which one material is extruded, or forced through a die, with uniform thickness, onto a core material passing simultaneously through the same die. The process is capable of extruding lead (or lead alloy) onto any material having adequate tensile strength to pass at high speed through the pressurized dies. The Company refers to this process as C2M technology. Successfully coextruded core materials include fiberglass, Kevlar and cross-linked carbon fiber yarns, aluminum, copper and titanium wire and polypropylene, polyester, nylon and polyethylene monofilament. Coextruded lead wire facilitates the use in lead-acid batteries of pure lead or extremely low concentration lead alloys, which are difficult to cast repeatedly at the high rates required in production. The management of the Company believes that grids made from such wire and used in lead-acid storage batteries have improved corrosion resistance and, therefore, longer life, or equivalent life with reduced total material content. Energy-Active Material Formulation The Company has also developed a new type of energy-active material, or paste, for use in lead-acid battery electrodes. The Company also invented two additional paste formulations, each of which may contribute to the reduction of battery manufacturing cost. The Company has protected this proprietary technology as trade secrets, and does not plan to apply for patents related to these formulations. The Company is continuing the development of these formulations in connection with the Horizon battery project, but has no current plans for separate commercialization of the energy active material. Battery Grid The Company has patented the use of its coextruded wire in electrodes for lead-acid batteries. The claims in this patent encompass not only the present method employed by the Company of weaving the wire into a woven mesh to form the "bigrids" but also any non-woven methods of using the coextruded wire in lead-acid battery electrodes. Compression Cage During the development stage of the Company, we learned through battery life testing that the plates and separators in a sealed lead-acid battery must be kept under a constant compression in order to achieve high cycle life. The Company developed and patented an idea to encase the plates and separators in a "compression cage" to comply with this requirement. Marketing The worldwide market for lead-acid batteries can be classified into the following major segments: Starting, Lighting and Ignition. For engine starting applications as used in aircraft, passenger cars, light and heavy trucks, garden tractors and motorcycles. Motive Power. For use in electric vehicles, hybrid vehicles, industrial fork lifts, underground mining equipment, golf carts and neighborhood electric vehicles. Such batteries undergo daily discharging and overnight recharging. Power Management. For use in utility emergency power, telecommunications, uninterrupted computer and other power supplies and cellular radio. Such batteries are typically used as a secondary source of power. Portable Power. Typically small, lead-acid batteries for use in such items as portable power tools and outdoor power tool products, as well as electrically driven medical equipment. The Company has initiated strategic business relationships and cooperative development agreements with companies and government agencies in all of the above markets. Management believes that in 2000 some of these customers could move from test phases to integration of Horizon technology into their commercial products. Competition The lead-acid battery industry is mature, well-established and highly competitive. The industry is characterized by a few major domestic and foreign producers including Exide, Delphi, Johnson Controls, Inc., GNB, Hawker and Yuasa, all of which have substantially greater financial resources than the Company. Accordingly, the Company's ability to succeed in this market depends upon its ability to demonstrate superior performance and cost attributes of its technology. The Company has historically concentrated its activities in the electric vehicle segment of the market with a view to demonstrating improved energy to weight and longer battery life in comparison to traditional lead-acid batteries. The principal competitors of the Company in the electric vehicle market (Ovonics and Saft) have directed their efforts to other battery types, such as nickel-cadmium and nickel- metal hydride, rather than lead-acid formulations. At least one major automobile manufacturer and one major battery company are known to have research and development projects underway to develop lead-acid batteries for electric vehicles. Patents and Protection of Technology Prior to May 1990, the Company held an exclusive sublicense from Tracor, Inc. ("Tracor") under several US patents covering the coextruded wire and the coextrusion apparatus for producing composite wire for use only in lead-acid battery applications. In May 1990, Tracor assigned to the Company all rights under the original license agreement between Tracor and Blanyer-Mathews, the inventors of the coextrusion technology. This assignment terminated the sublicense between Tracor and the Company and allowed the Company to apply the technology outside of the area of lead-acid storage batteries, if any such applications are available. The license assigned to the Company expires concurrently with the patents, the earliest of which expires in 2004, and requires payment of annual minimum royalties to Blanyer- Mathews the greater of $100,000 or sales-based royalties equal to 1/2 percent of sales for battery applications. The license becomes non-exclusive in the event the Company defaults in its obligation to pay the minimum royalty. The license may be terminated by the licensor in the event that the Company defaults in its obligation to pay sales-based royalties or enters bankruptcy. The Company is responsible for the maintenance and administration of the licensed patent. Under the terms of the assignment, the Company is to pay Tracor a royalty of four percent on all technology sales unrelated to lead-acid storage batteries for the term of the license. In March 1990, a patent was issued to the Company covering an energy-active material formulation, including the processes for manufacturing this material. In October 1990, a US patent was issued to the Company for the Horizon battery design. In September 1989, a patent was issued to the Company covering the battery grid and its producing method. In April 1995, a patent was issued to the Company covering the battery plate compression assembly. In 1999, the Company was granted a "composition-of- matter" patent covering the lead-glass composite material produced by the Company. This provides an additional seventeen years of protection of this critically important advanced material on which the Horizon technology is based. The know-how relating to the Company's energy-active material formulation, the application of coextruded wire to battery electrodes and certain manufacturing processes are confidential and proprietary to the Company. Research and Development Initial research and development programs were directed toward understanding the behavior of the wire in lead-acid battery electrodes in various corrosive environments. With the development of the Horizon C2M battery concept, the focus of research work has been redirected toward improving the performance of the battery in the following areas; longer cycle life, longer shelf life, and increased specific energy. In addition, programs are underway to reconfigure the Horizon battery concept into a variety of applications. A limited number of prototype Horizon batteries for specialized markets (see "Marketing") continue to be built in attempts to optimize battery electrical performance and life and to meet customer requests for different battery configurations or performance. The Company incurred approximately $1,300,000, $1,800,000, and $2,500,000 in research and development costs in the years ended December 31, 1999, 1998, and 1997, respectively, of which approximately $448,000, $415,000, and $1,400,000 related to customer sponsored research activities in the years ended December 31, 1999, 1998, and 1997, respectively. Backlog The Company's backlog was approximately $1,892,000, $410,000, and $210,000, respectively, in battery orders at December 31, 1999, 1998, and 1997. As of December 31, 1999, the Company has a backlog of approximately $510,000 in project revenue. Export Sales During 1999, 1998, and 1997, the Company earned revenue of approximately $1,286,000, $360,000, and $1,100,000, respectively, from sales of Horizon batteries and project services to foreign customers. Customer Concentration A significant portion of the Company's total revenue from battery sales, project revenue and all other sources (approximately 6%, 39%, and 37% in 1999, 1998, and 1997, respectively) was generated from Chrysler Corporation ("Chrysler"). In December 1997, Chrysler announced its decision to use nickel-metal hydride batteries made by a competitor in its electric vehicles. Chrysler's purchase of a significant number of batteries from the Company in the future is uncertain. Approximately 19% of the Company's 1999 battery sales were to Electrosource International Limited ("EIL"), an affiliate. Management of the Company believes that sales to EIL will increase as a percentage of total sales. The Company is economically dependent on this affiliate and its parent company, Kamkorp Limited ("Kamkorp") (See Management's Discussion and Analysis of Financial Condition and Results of Operations). Kamkorp is a significant shareholder with representation on the Company's Board of Directors. The Company is dependent on cash payments from Kamkorp to continue operations on a day-to-day basis. EIL's customer for the batteries is Perusahaan Otomobil Elektrik (Malaysia) ("POEM"), a Malaysian joint venture company in which Kamkorp affiliates hold a minority interest, engaged in the production of the electric vehicles developed by Kamkorp. Raw Materials The basic raw materials of lead-acid batteries are lead, sulfuric acid and plastic, each of which is readily available. The Company has experienced no material delays in obtaining timely delivery of these materials. Environmental Concerns The Company's laboratory facility and manufacturing plant includes an enclosed area specifically for the mixing of lead- oxide paste and the application of such paste to battery electrodes. The air in these areas is continuously filtered to remove lead particles. Employees operating in these areas are instructed in the use of safety equipment such as gloves, protective aprons, and respirators and are required under Occupational Safety and Health Administration ("OSHA") guidelines to submit to blood monitoring tests on a periodic basis. The analysis of these tests are undertaken by an outside, independent and OSHA approved laboratory and the results thereof are communicated to the Company's employees. The management of the Company believes that the energy-active material developed by the Company may be safer to manufacture than energy-active materials currently in general use due to reductions in potential environmental hazards. The active material paste used in conventional batteries has a consistency similar to wet cement and must be allowed to dry for two or three days after being impressed into the grid of a battery plate. When dried the plates produce fine lead dust as they are transported in a plant through the battery assembly process. This airborne dust poses a potential health risk to workers, and there are OSHA regulations regarding allowable levels of airborne lead in a battery plant for which manufacturers must devote significant resources in prevention, treatment, and compliance. The Company's energy-active material, on the other hand, has a consistency similar to toothpaste and contains certain binders which minimize the generation of lead dust, thus minimizing worker exposure to airborne lead. As a part of the battery manufacturing process, the Company handles and disposes of various hazardous materials such as lead and sulfuric acid. The Company is subject to strict environmental regulations and has previously incurred significant costs in installing equipment to manage and control hazardous substances and pollution. As part of its on-going operations, the Company incurred $75,000, $68,000, and $37,000 in non-capital expenditures in 1999, 1998, and 1997, respectively, to properly dispose of hazardous materials and waste. As a result of such preventive measures, the Company has not incurred significant remediation costs to date. The management of the Company believes that the Company is currently in compliance with all applicable local, state, and federal environmental rules and regulations in all material respects. Management is not currently aware of any material infrequent or non-recurring clean-up expenditures to be incurred in the future based on present circumstances and conditions. Employees As of March 24, 2000, the Company employed 50 full-time employees. Item 2. Properties. All of the Company's operations are located in an 88,000 square foot facility located in San Marcos, Texas at 2809 Interstate 35 South. The monthly rental rate is currently $30,000 per month and escalates over the life of the lease to $35,000 per month until expiration in 2003. The Company believes this site is adequate for low-rate production requirements and possesses enough expansion capacity if the Company elects to expand capacity at this site. Management believes that all personal property used by the Company is in good condition. Item 3. Legal Proceedings. In December 1996, the Company filed a petition in State Court in Travis County, Texas, seeking, among other things, a declaratory judgment that Horizon Battery Technologies, LTD. ("HBTL") had no right to arbitration or monetary relief under a "Know-How License Agreement". HBTL contested jurisdiction and removed the proceedings to the U.S. Federal Court. The Federal District Court ruled that it did not have personal jurisdiction over HBTL. The Company successfully appealed in the U.S. Fifth Circuit Court of Appeals. In September 1999, the District Court granted summary judgement in favor of the Company. No further proceedings are anticipated since no appeal was filed by HBTL. The Company has approximately $1,000,000 of outstanding accounts payable, most of which is payable to raw materials suppliers and service providers, some of which is considerably past due. One vendor sued the Company in May 1999 for approximately $12,000 and the suit was settled in the third quarter. In the first quarter of 2000, six vendors have filed suits against the Company. Five of these vendors have accepted pay out agreements for the amounts owed and the remaining one is in negotiation for a pay out agreement. Item 4. Submission of Matters to a Vote of Security Holders. None. PART II Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters. Trading Market for ELSI Common Stock The Company's Common Stock has been traded in the over-the- counter market and reported on NASDAQ under the symbol "ELSI" since January 1988. The following table sets forth, for the periods indicated, the high and low bid price per share of Common Stock as reported by NASDAQ. Prices represent inter-dealer quotations, without adjustment for retail markup, markdown or commission, and may not represent actual transactions. High Low 1998 First Quarter 2 5/8 3/8 Second Quarter 3 19/32 Third Quarter 2 9/16 7/8 Fourth Quarter 1 5/8 5/8 1999 First Quarter 3 1/4 5/8 Second Quarter 1 7/8 1 Third Quarter 1 5/8 13/16 Fourth Quarter 5 3/4 13/16 The transfer agent and registrar for the Common Stock of the Company is Harris Trust and Savings Bank, Shareholder Services 311-11, 311 West Monroe, Chicago, IL 60606 (phone 312-360-5475). The approximate number of record holders of Common Stock at March 20, 2000, was 3,365. Dividends and Dividend Policy The Company has paid no dividends on its Common Stock to date and does not anticipate paying dividends on the Common Stock currently or in the foreseeable future. Further, the Company currently has a deficit in its "surplus" account (defined as the excess of net assets over par value of shares outstanding) which, under Delaware corporate law, precludes any distributions to shareholders in a given year unless the Company reports net income in that year or the preceding year, in which case dividends could be paid to the extent of net income for the year in which the dividend is declared and net income for the fiscal year immediately preceding the year of declaration. In the event that the earnings of the Company permit payment of dividends under Delaware law, the timing and amount of such dividends will be determined by the Board of Directors in light of the Company's earnings, financial condition and capital requirements. Item 6. Selected Financial Data. (In thousands, except per share data) Year Ended December 31, 1999 1998 1997 1996 1995 Revenues $2,203 $2,380 $3,244 $3,563 $3,278 Loss before Extraordinary Gain $(3,466) $(5,862) $(7,833) $(7,825) $(20,508) Extraordinary Gain - $2,331 - - - Net Loss $(3,466) $(3,530) $(7,833) $(7,825) $(20,508) Basic (and diluted) Loss per Share-continuing operations $(0.34) $(0.95) $(1.91) $(2.13) $(9.76) Basic (and diluted) Loss per Share $(0.34) $(0.57) $(1.91) $(2.13) $(9.76) Dividends per Share None None None None None As of Year Ended December 31 1999 1998 1997 1996 1995 Working Capital (Deficit) $(1,115) $(2,287) $(1,675) $(2,845) $1,556 Total Assets $5,407 $5,217 $8,006 $9,488 $15,277 Shareholders' Equity $2,505 $2,162 $1,492 $3,847 $1,240 Long-Term Obligations - $72 $2,949 $1,768 $11,324 See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations for discussion of material uncertainties which may cause the data above not to be indicative of the Company's future financial condition or results of operations. The foregoing should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Disclosure Regarding Forward-Looking Statements From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological development, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward- looking statements. When used in this report, the words "expects," "believes," "anticipates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business primarily include completion of existing battery orders, uncertainty as to receipt of additional orders, inability to obtain additional debt or equity financing, continued willingness and ability of Kamkorp and its affiliates to provide financing, currency controls and other uncertainties arising from Malaysia and Far East economies upon which the Company is dependent for equity financing and battery sales, the dependence of the Company upon a few key customers, the invention of technology which might limit the value of the Company's products, the invention or discovery of new/alternative energy sources which might limit the value of the Company's products, the lack of capacity of the Company to manufacture products to fulfill new orders, delisting of the Company's Common Stock on NASDAQ, delays in shipment or cancellation of orders, customer reorganization, fluctuations in demand primarily associated with governmental mandates for the production of zero emission vehicles and the ability to successfully commercialize the Horizon battery. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the factors which affect the Company's business in this report and in the Company's periodic reports on Forms 10-Q and 8-K as filed with the Securities and Exchange Commission. Results of Operations During 1999, the Company continued to receive equity financing under an Agreement, which was entered into on June 2, 1998, with Kamkorp Limited, a private company organized in England ("Kamkorp"), for up to $6,000,000 of equity financing. Kamkorp also has options to purchase an additional 3,000,000 shares at $1.00 under this original agreement. In addition, in October 1999 Kamkorp was granted the option to purchase an additional 3,000,000 shares of the Company's Common Stock at $1.00. At December 31, 1999, Kamkorp is the record holder of 7,480,000 shares or 61.6% of the Company's 12,137,699 outstanding shares of Common Stock and is the beneficial owner of 12,000,000 shares or 70% of the Company's Common Stock. Kamkorp appointed three members to the Company's nine-member Board of Directors in 1998 under the original Agreement. The Company continued to maintain operations with a reduced workforce throughout the year as a result of limited funding and the inability to generate battery orders sufficient to warrant an increase in staffing. While Kamkorp has provided substantial amounts of financing to the Company to date ($7,480,000), Kamkorp is not legally required to make future advances. However, Kamkorp has acknowledged to the Company that it intends to continue providing equity funding to the Company in 2000 to fund day-to-day operations. The Company received a purchase order in June 1999 for 8,000 12H85 batteries from Electrosource International Limited ("EIL") for delivery beginning in the third quarter of 1999 with completion of the order in the first quarter of 2000. The Company delivered 444 batteries against this order during the year ended December 31, 1999 and is scheduled to deliver the remainder of the order in 2000. EIL is the international marketing company and is affiliated with Kamkorp. The delivered battery sales represent 19% of the battery sales for 1999. The Company received a purchase order in December 1999 for 6,000 12C25 batteries from Frazer-Nash Research Limited (FNR) for delivery beginning in the first quarter of 2000 with completion of the order in April. FNR is a private limited company incorporated in England, and is a wholly owned subsidiary of Kamkorp. Its principle activity is the design and development of advanced electric vehicles and a range of electronic products for the consumer, telecommunications and automotive industries. The 12C25 battery has been specified by Frazer-Nash Research Limited as the battery for all of the electric vehicles to be supplied to the Sydney 2000 Olympic Games. Frazer-Nash is the exclusive supplier of electric vehicles to the Olympic Games. In late 1998 management made the decision to concentrate all research and development activity on developing new batteries suitable for mass markets such as vehicles, UPS systems, hybrid electric vehicles and electric vehicles. The external development programs which remain active are those with the Defense Advanced Project Agency ("DARPA"), the Department of Energy ("DOE") and Horizon Aircraft. All others programs have been terminated by the customer or the Company. Such terminations did not have a material adverse effect on the financial position of the Company. Sales of existing battery types did not increase as expected in 1999 due to delays in orders from Lockheed Martin and others testing the battery for use in new products in emerging markets. Generally, testing of products by customers has taken longer than expected because of difficulties in integration of battery packs in new products. Battery packs are being tested simultaneously with other newly designed components in customer products. Revenue The Company generated project revenue of approximately $1,603,000, $736,000, and $2,234,000 for the years ended December 31, 1999, 1998, and 1997, respectively. Essentially all of the remaining project revenue generated in 1999 was from cooperative development and research agreements with DARPA and DOE for Hybrid Electric Vehicle ("HEV") and Electric Vehicle ("EV") applications. All projects are for lead-acid batteries with the exception of the DOE program in which the Company is working on a lithium polymer which may eventually be used in batteries for a wide variety of applications. During 1998, approximately $215,000 of revenue generated was from the final resolution and settlement of a program with a customer which remains confidential. Battery orders from this customer are not expected in the near future, if at all. During 1997, approximately $1,500,000 of revenue was generated from SMH Automobile S. A. ("SMH"), DARPA and Fiat for the development and/or evaluation of batteries and battery packs for HEV and EV applications and $645,000 was generated from Chrysler for various engineering, environmental and other tests performed on the 12H85 battery. The SMH program was terminated by the customer in 1998 and in late 1997 Chrysler announced its decision to use nickel-metal-hydride batteries made by a competitor. Project revenue is expected to continue to decline in 2000 as the Company focuses its efforts on sales of its standard production batteries. The Company had battery sales of approximately $490,000, $955,000, and $915,000 for the years ending December 31, 1999, 1998, and 1997, respectively. Approximately 19% and 38% of 1999 and 1998 battery sales, respectively, were to EIL. The Company is economically dependent on Kamkorp and its affiliates (See Liquidity and Capital Resources section below.) Management expects sales to Kamkorp and its affiliates to increase as a percentage of total battery sales and for the group to remain the largest collective customer for Horizon batteries in 2000. Approximately 26%, 28%, and 56% of 1999, 1998, and 1997, battery sales, respectively, were to Chrysler. Chrysler announced its decision to use Nickel-Metal-Hydride batteries in its electric minivan for the 1999 model year, however, it has continued to order a small number of batteries from the Company for further testing and evaluation. However, Chrysler's purchase of a significant number of batteries from the Company in the future is uncertain. Approximately 32%, 12% and 28% of 1999, 1998 and 1997 battery sales, respectively, were to Lockheed Martin for use in HEVs and EVs they are producing for fleet consumers for testing and evaluation. Sales of batteries to Lockheed Martin are expected to increase in 2000. Lockheed Martin produces a drive train used in hybrid buses manufactured by the Orion Bus Company and others. The New York Transit Authority has been testing a hybrid diesel bus on the streets of New York City manufactured by Orion, which is powered by a Lockheed Martin drive train and Electrosource batteries. The tests have been completed and were successful. Following the favorable results, the New York Transit Authority placed an order with Orion, in December 1999, for the hybrid buses powered by Horizonr batteries. However, the amount and timing of any order for batteries for the Company remains uncertain. The remainder of battery sales in all years were from numerous customers requesting batteries for testing and evaluation. Management expects the level of battery sales to increase beginning in the second quarter of 2000, at which time battery orders from EIL are expected to increase. Additionally, the Company has received Federal Aviation Administration ("FAA") certification of its battery designs used in the helicopter starting applications, and expects that interest in this battery design will be increasing. However, the amount and timing of any sales of this battery design remains uncertain. The majority of these applications are in emerging markets and the entry of final products into such markets is difficult to predict. During 1998, the Company received a $1,104,275 purchase order from Chrysler, which replaced an earlier purchase order for $1,400,000. The $1,104,275 purchase order was paid in full in 1998. Chrysler designated $656,100 for the purchase order as a cancellation fee from the previous order and $448,175 for batteries to be delivered in 1998 and 1999. During 1998, the Company recorded $656,100 as income as all tasks necessary to earn the income were performed and there were no further obligations related to such revenue. Approximately $171,000 of the battery revenue remains deferred at December 31, 1999 and will be recognized upon shipment of the batteries in 2000. Costs and Expenses Manufacturing costs decreased by approximately $1,095,000 or 31% during 1999 as the Company continued to maintain operations with a reduced workforce throughout the year. Manufacturing costs have remained high as a percentage of battery sales primarily due to the fact that the Company has not had the capital required to further automate the production processes or purchase materials at higher volumes to receive better pricing. Fixed facility costs of leasing and maintaining its 88,000 square foot facility are also a significant expense. Management expects that manufacturing costs can decrease as a percentage of battery sales if, and when, volume production begins; however, additional capital will be required for manufacturing tooling required for higher production volumes in order to achieve manufacturing efficiencies and to lower raw material costs. Selling, general and administrative costs decreased by approximately $998,000 or 52% during 1999 primarily based on the actions taken in February 1998 to reduce the workforce and to control costs. Costs were also reduced significantly for travel, legal, accounting and consulting fees. Management expects selling, general and administrative costs to remain relatively constant in 2000 until battery orders and production levels warrant additional support sales and administrative staff and associated costs. Research and development costs decreased by approximately $543,000 or 30% in 1999 due to the decrease in work on programs, primarily SMH and Chrysler. The amount of development work and related costs have not decreased proportionately with revenue as a larger proportion of development work and related costs were incurred in 1999 on programs which did not generate revenue and on cost-share programs which generate less revenue than commercial programs. Research and development costs had increased by approximately $1,040,000 or 72% in 1997 due to the significant increase in development work in 1997 associated with the custom design of numerous batteries and battery packs for customers (SMH, Fiat, SMUD, Black & Decker, Chrysler and another which remains confidential), testing and evaluation of batteries (aircraft and helicopter starting applications) and costs associated with joint research and development efforts with Corning to improve the Company's products, production processes and automation. It is anticipated that the current level of research and development expenditures will remain relatively constant in 2000. Depreciation and amortization costs decreased by approximately $792,000 or 47% during 1999. The majority of the decrease is due to the full amortization of purchased technology in October 1998, which resulted in a monthly decrease of approximately $67,000 in amortization. The remainder of the decrease in 1999 is due to the full depreciation of various production pieces of equipment in 1999 which remain in use. Interest costs decreased by approximately $345,000 or 95% during 1999. Interest costs relate primarily to the Company's previous debt obligations to Corning and have decreased due to the Company's retirement of its obligations to Corning in June 1998. During 1997 and early 1998, the Company issued Convertible Notes Payable to Corning with a principal balance of $6,202,500 at face interest rates of 5%. The Company was also amortizing discounts on the Convertible Notes Payable. In June 1998, the Company paid Corning $1,500,000 in cash in full settlement of its outstanding obligations to Corning. An extraordinary gain on the early extinguishment of debt of approximately $3,500,000 was realized from this transaction. Interest costs are expected to remain relatively constant in 2000, unless significant debt is incurred. As a part of the battery manufacturing process, the Company handles and disposes of various hazardous materials such as lead and sulfuric acid. The Company is subject to strict environmental regulations and has incurred significant costs in installing equipment to manage and control hazardous substances and pollution. As part of its on-going operations, the Company incurred $75,000, $68,000 and $37,000, in non-capital expenditures in 1999, 1998 and 1997, respectively, to properly dispose of hazardous materials and waste. As a result of such preventive measures, the Company has not incurred significant remediation costs. Management is not currently aware of any material infrequent or non-recurring clean-up expenditures to be incurred in the future based on present circumstances and conditions. The Company did not experience any information technology complications arising from the problems associated with the Year 2000. The Company had previously completed an assessment of its information technology systems' readiness for the Year 2000 and believed that the modifications necessary for the Year 2000 would not be significant. During the years ended December 31, 1999, 1998 and 1997, the Company issued approximately 3,700,000, 3,900,000 and 677,000 shares of Common Stock, respectively, as a result of a change in control of the Company, financing transactions, purchases of technology and equipment, payment of the Technology License Payable and consulting services and the exercise of stock options. As a result of the increase in shares for these years, the loss per share in each year was less than it would have been based on the shares outstanding at the end of the preceding year. Management of the Company believes that the issuance of shares in these years was necessary to fund the increased working capital and capital expenditure requirements. Liquidity and Capital Resources During 1999, the Company did not generate sufficient cash flow from operations to fund its working capital needs. The Company continued to receive equity financing ($3,580,000 in 1999) under an Agreement, which was entered into on June 2, 1998, with Kamkorp Limited, a private company organized in the United Kingdom ("Kamkorp"), for up to $6,000,000 in equity financing. Kamkorp also has options to purchase an additional 3,000,000 shares at $1.00 under this Agreement. In addition, in October 1999, Kamkorp was granted the option to purchase an additional 3,000,000 shares of the Company's Common Stock at $1.00. At December 31, 1999, Kamkorp is the record holder of 7,480,000 shares or 61.6% of the Company's 12,137,699 outstanding shares of Common Stock and is the beneficial owner of 12,000,000 shares or 70% of the Company's Common Stock. In accordance with the terms of the Agreement, Kamkorp has nominated three members to the Company's nine- member Board of Directors. Additionally, the Company must obtain express approval from Kamkorp for all important management policies and decisions (See Note G - Liquidity). While Kamkorp has provided substantial amounts of financing to the Company to date, Kamkorp is not legally required to make future advances. However, Kamkorp has acknowledged to the Company that it intends to continue equity funding to the Company in 2000. Funds generated in 1999 from the fund raising activities above were used to maintain minimum production capabilities and to sustain operations, to design and develop new battery products including the 12C25 battery, and to pay for the lease and maintenance of its 88,000 square foot manufacturing facility. Capital expenditures of approximately $10,000 were incurred in 1999. The Company received a purchase order in June 1999 for 8,000 12H85 batteries from Electrosource International Limited ("EIL") for delivery beginning in the third quarter of 1999 with completion of the order in the first quarter of 2000. The Company delivered 444 batteries against this order during the year ended December 31, 1999 and is scheduled to deliver the remainder of the order in 2000. EIL is the international marketing company and is affiliated with Kamkorp. EIL's customer for the batteries is Perusahaan Otomobil Elektrik (Malaysia) ("POEM"), a Malaysian joint venture company in which Kamkorp affiliates hold a minority interest, engaged in the production of the electric vehicles developed by Kamkorp. The Company received a purchase order in December 1999 for 6,000 12C25 batteries from Frazer-Nash Research Limited for delivery beginning in the first quarter of 2000 with completion of the order in April. The 12C25 battery has been specified by Frazer- Nash Research Limited as the battery for all of the electric vehicles to be supplied to the Sydney 2000 Olympic Games. Frazer- Nash is the exclusive supplier of electric vehicles to the Olympic Games. Cash balances have been depleted and the Company is currently dependent on cash payments from Kamkorp and its affiliates to continue operations on a day-to-day basis. The Company has approximately $1,000,000 of outstanding accounts payable, most of which is payable to raw material suppliers and service providers, some of which is considerably past due. Cash generated from battery sales and contracts with other customers is not sufficient to fund operations. Cash payments from Kamkorp and its affiliates to date have been sufficient to fund ongoing operations, but not to pay the outstanding accounts payable or raw material purchases. If a significant battery order is received, significant funding will be required to pay the outstanding accounts payable and to order raw materials. The Company is discussing the possibility of accelerated or additional financing from Kamkorp including Kamkorp's exercise of its option to purchase the remaining options to purchase 4,520,000 shares (the original agreement to purchase 6,000,000 shares, plus options to purchase an additional 6,000,000 shares, less shares purchased as of December 31, 1999 of 7,480,000 shares) of the Company's Common Stock at $1.00 per share. Absent additional funding from Kamkorp or other sources, the Company will not have the funds necessary to complete battery orders from Kamkorp affiliates or other customers, or to pay all outstanding obligations and will not be able to continue as a going concern. The Company's Common Stock is traded in the Over-the-Counter Market and is reported on the Nasdaq Stock Markets ("Nasdaq"). In order to maintain listing by Nasdaq under rules which went into effect in February 1998, the Company must maintain a minimum $2,000,000 of net tangible assets (total assets, excluding goodwill, minus total liabilities) and the Company's closing price cannot fall below $1.00 per share for 30 consecutive trade dates. On February 1, 1999, the Company received written notice from Nasdaq that the closing bid price of its shares fell below $1.00 for 30 consecutive business days and therefore did not meet the Nasdaq minimum listing requirements. The written notification stated that within 90 days of the notification, the Company's closing bid price must be $1.00 or higher for ten consecutive calendar days to satisfy the requirement. This requirement was met by mid-February 1999. As of March 31, 1999, the Company's net tangible assets were less than $2,000,000. As a result, the Company was not in compliance with the minimum listing requirements of Nasdaq and advised Nasdaq of that fact. On April 15, 1999, the Company received notice from Nasdaq that it was concerned that the Company may not be able to sustain compliance with the continued listing requirements of Nasdaq in light of the "going concern" opinion from its independent auditor. To address this concern Nasdaq requested a detailed letter from the Company, discussing the timeline for resolution of these items and a discussion explaining why the Company believes it will be able to sustain compliance with the continued listing standards of Nasdaq. The Company complied with this request on April 30, 1999. Additionally, on May 20, 1999, the Company received notice that since the Company failed to meet the requirement for net tangible assets of $2 million on the March 31, 1999 Form 10-Q, the Company would be required to submit before June 4, 1999, a proposal for achieving compliance. This proposal was submitted June 3, 1999. The Nasdaq Staff responded to both of these issues in a letter dated July 14, 1999. The Staff reviewed the Company's plan for regaining and maintaining compliance and stated while the Staff has determined that the Company will not be delisted due to its previously cited failures to comply, they have determined to apply more stringent reporting requirements. The Company was required to submit an internal balance sheet and statement of operations for the period ended July 31, 1999 by August 20, 1999. Thereafter, until further notice, the Company will be required to submit by the 20th of each month, an internal balance sheet and statement of operations for the preceding month's end. The Company has complied with this requirement to date. The Company is required to keep Nasdaq apprised of all material events and any changes in its financial statements. Should the Company fail to maintain $2 million net tangible assets, the Staff will issue a formal delisting letter to the Company. If the Company does not continue to maintain the required listing criteria, it is likely that the Company's shares would be delisted from the Nasdaq Small cap Market at a time specified by Nasdaq, in which event the shares would be quoted on the Over-the-Counter ("OTC") Bulletin Board and/or the Pink Sheets of the National Quotation Board ("NQB"). In such trading markets, brokers and dealers effecting trades in the Common Stock would become subject to the Securities and Exchange Commission rules covering trading in "penny stocks." Becoming subject to the "penny stock" rules would likely have a material adverse effect on both the price and trading liquidity of the Company's Common Stock. If the Company were delisted from Nasdaq, it would likely be more difficult to obtain additional funding. There can be no assurance that additional funding which will generate sufficient cash to sustain operations can be obtained on terms acceptable to the Company, if at all. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. Other In December 1996, the Company filed a petition in State Court in Travis County, Texas, seeking, among other things, a declaratory judgment that Horizon Battery Technologies, LTD. ("HBTL") had no right to arbitration or monetary relief under a "Know-How License Agreement". HBTL contested jurisdiction and removed the proceedings to the U.S. Federal Court. The Federal District Court ruled that it did not have personal jurisdiction over HBTL. The Company successfully appealed in the U.S. Fifth Circuit Court of Appeals. In September 1999, the District Court granted summary judgement in favor of the Company. No further proceedings are anticipated since no appeal was filed by HBTL. Management of the Company believes that inflation does not have a material effect on the Company's results of operations. Item 8. Financial Statements and Supplementary Data. See Item 14(a) for an index of the financial statements and schedules included as a part of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. As disclosed on Form 8-K on August 11, 1999, (amended on October 7, 1999) Ernst & Young LLP resigned as the Company's independent auditors. As disclosed on Form 8-K on November 23, 1999, Weaver and Tidwell were appointed as the Company's independent auditors. PART III Item 10. Directors and Executive Officers of Registrant. Information with regard to directors and executive officers and their business experience is set forth under "ELECTION OF DIRECTORS" in the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 14, 2000, and is incorporated herein by reference. Information with regard to the filing of reports of ownership and changes of ownership by the Company's directors, officers, and persons who beneficially own more than ten percent of a registered class of the Company equity securities is set forth under "ELECTION OF DIRECTORS - Section 16(a) Disclosure" in the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 14, 2000, and is incorporated herein by reference. Item 11. Executive Compensation. Information with regard to executive compensation and pension or similar plans is set forth under "ELECTION OF DIRECTORS - Compensation of Executive Officers and Directors" in the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 14, 2000, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information with regard to security ownership of certain beneficial owners and management is set forth under "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 14, 2000, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. Information with regard to certain transactions is set forth under "ELECTION OF DIRECTORS - Compensation Committee Interlocks and Insider Participation" and "ELECTION OF DIRECTORS - Certain Relationships and Related Transaction" in the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on June 14, 2000, and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a)(1) The following financial statements of the Company are included in Item 8: Page No. Balance Sheets -- December 31, 1999 and 1998 F-4 Statements of Operations -- For the years ended December 31, 1999, 1998 and 1997 F-5 Statements of Shareholders' Equity -- For the years ended December 31, 1999, 1998 and 1997 F-6 Statements of Cash flows -- For the years ended December 31, 1999, 1998 and 1997 F-7 Notes to Financial Statements -- December 31, 1999 F-8 (a)(2) Financial Statement Schedules All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are included in the notes to financial statements, not required under the related instructions or are inapplicable, and therefore have been omitted. (a)(3) Exhibits 3.1 Restated Certificate of Incorporation of Electrosource, Inc. (filed as Exhibit 3.1 to Electrosource, Inc., Registration Statement on Form 10 filed October 19, 1987, as amended by Form 8 Amendments filed January 8, 1988 and January 13, 1988 (hereinafter referred to as "Form 10") and incorporated herein by reference). 3.2 Certificate of Designation, Preferences, Rights and Limitations of 1992 Series A Preferred Stock and Series A-1 Preferred Stock of Electrosource, Inc. as filed of record with the Delaware Secretary of State on January 15, 1992 (filed as Exhibit 4.1 to Electrosource, Inc. Form 8-K Current Report for Issuers Subject to the 1934 Act Reporting Requirements filed December 24, 1991 and incorporated herein by reference). 3.3 Amendment to Restated Certificate of Incorporation of Electrosource, Inc., increase in authorized shares to 50,000,000 shares (filed as Exhibit 3.1 to Electrosource, Inc., Quarterly Report on Form 10-Q for quarter ended June 30, 1995 and incorporated herein by reference). 3.4 Amendment to Restated Certificate of Incorporation of Electrosource, Inc., elimination of Certificate of Designation for Series A and Series A-1 Preferred Stock (filed as Exhibit 3.2 to Electrosource, Inc., Quarterly Report on Form 10-Q for quarter ended June 30, 1995 and incorporated hereby by reference). 3.5 Amendment to the Restated Certificate of Incorporation of Electrosource filed as of July 22, 1996 (filed as Exhibit 3.1 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference). 3.6 Bylaws of Electrosource, Inc. (filed as Exhibit 3.2 to Form 10 and incorporated herein by reference). 3.7 Amendment to Bylaws of Electrosource, Inc., pursuant to a Certificate of Secretary dated May 25, 1990 (filed as Exhibit 3.3 to Electrosource, Inc., Annual Report on Form 10-K for the period ended December 31, 1991 and incorporated herein by reference). 3.8 Amendment to Bylaws of Electrosource, Inc. dated November 3, 1993 (filed as Exhibit 3.5 to Electrosource, Inc., Annual Report on Form 10-K for the period ended December 31, 1993 and incorporated herein by reference). 3.9 Amendment to Bylaws of Electrosource, Inc. dated June 23, 1994 (filed as Exhibit 3.6 to Electrosource, Inc. Annual Report filed on Form 10-K for the period ended December 31, 1994 and incorporated herein by reference). 3.10 Amendment to Bylaws of Electrosource, Inc. dated November 13, 1996 (filed as Exhibit 3.10 to Electrosource, Inc. Annual Report filed on Form 10-K for the period ended December 31, 1996 and incorporated herein by reference). 4.1 Warrant to purchase up to 5,424 shares of Electrosource, Inc. Common Stock issued to Rosehouse Ltd., a Bermuda-based institutional buyer, dated April 5, 1995 (filed as an Exhibit to Electrosource, Inc. Current Report on Form 8-K filed April 12, 1995 and incorporated herein by reference). 4.2 Warrant to purchase up to 5,000 shares of Electrosource, Inc. Common Stock issued to Ally Capital Management, Inc. on April 17, 1995 (filed as Exhibit 4.1 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and incorporated herein by reference). 4.3 Warrant to purchase up to 25,000 shares of Electrosource, Inc., Common Stock, issued to Rosehouse Ltd., a Bermuda-based institutional buyer, dated July 27, 1995 (filed as Exhibit 4.4 to Electrosource, Inc. Quarterly Report on Form 10-Q for quarter ended June 30, 1995 and incorporated herein by reference). 4.4 Warrant (Stock Option Agreement No. W12-101) to purchase up to 20,000 shares of Electrosource, Inc., Common Stock, issued to Corning Incorporated dated December 31, 1997 for payment of that certain Project Annex dated October 20, 1997 (filed as Exhibit 4.16 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 4.5 Warrant (Stock Option Agreement No. W12-102A) to purchase up to 70,000 shares of Electrosource, Inc., Common Stock, issued to Corning Incorporated dated December 31, 1997 for payment on that certain Project Annex dated October 20, 1997 (filed as Exhibit 4.17 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 4.6 Warrant (Stock Option Agreement No. W12-103A) to purchase up to 70,000 shares of Electrosource, Inc., Common Stock, issued to Corning Incorporated dated December 31, 1997 for payment on that certain Project Annex dated October 20, 1997 (filed as Exhibit 4.18 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 4.7 Warrant (Stock Option Agreement No. W12-102B) to purchase up to 60,000 shares of Electrosource, Inc. Common Stock, issued to Corning Incorporated dated June 30, 1998 for payment of that certain Project Annex dated October 20, 1997 (filed as Exhibit 4.7 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1998 and incorporated herein by reference). 4.8 Warrant (Stock Option Agreement No. W12-103B) to purchase up to 60,000 shares of Electrosource, Inc. Common Stock, issued to Corning Incorporated dated June 30, 1998 for payment of that certain Project Annex dated October 20, 1997 (filed as Exhibit 4.8 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1998 and incorporated herein by reference). 10.1 Sublicense Agreement dated as of October 5, 1987 between Electrosource, Inc. and Tracor, Inc. (filed as Exhibit 10.4 to Form 10 and incorporated herein by reference). 10.2 Patent and Technology Exclusive License Agreement dated August 14, 1984 between Tracor, Inc. and Blanyer-Mathews Associates, Inc. ("BMA") (filed as Exhibit 10.9 to Registration Statement [No 33-30486] on Form S-1 filed August 14, 1989 hereinafter referred to as "Form S-1" and incorporated herein by reference). 10.3 Amendment to Patent and Technology Exclusive License Agreement dated May 29, 1987 between Tracor, Inc. and BMA (filed as Exhibit 10.10 to Form S-1 and incorporated herein by reference). 10.4 Bonus Royalty Agreement dated May 26, 1989 among Electrosource, Inc., Tracor, Inc., and BMA (filed as Exhibit 19 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1989 and incorporated herein by reference). 10.5 Amendment to Bonus Royalty Agreement entered into as of November 30, 1989 by and among BMA, Tracor, Inc. and Electrosource, Inc. (filed as Exhibit 10.17 to Post Effective Amendment No. 1 to Form S-1 Registration Statement [No. 33-34581] filed December 11, 1989 hereinafter referred to as "Post-Effective Amendment" and incorporated herein by reference). 10.6 Assignment of Patent License dated as of May 14, 1990 by and between Electrosource, Inc. and Tracor, Inc. (joined by BMA for limited purposes described therein)(filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the period ended December 31, 1990 hereinafter referred to as the "1990 Form 10-K" and incorporated herein by reference). 10.7 Letter Agreement dated as of January 15, 1991 between Electrosource, Inc. and BMA (filed as Exhibit 10.21 to the Company's 1990 Form 10-K and incorporated herein by reference). 10.8 License Modification Agreement dated January 16, 1992 between Blanyer Mathews & Associates, Inc., Electrosource, Inc. and Battery Horizons, Ltd. (filed as Exhibit 10.23 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1991 and incorporated herein by reference). 10.9 First Amendment to Assignment of Patent License dated April 2, 1992 between Electrosource, Inc. and Tracor, Inc. (filed as Exhibit 10.58 to Company's Registration Statement [No. 33-65248] on Form S-1 filed June 30, 1993 and incorporated herein by reference). 10.10 Lease Agreement between William D. McMorris and Horizon Battery Technologies, Inc. dated August 17, 1993 (filed as Exhibit 10.42 to Electrosource Inc. Annual Report on Form 10-K for the period ended December 31, 1994 and incorporated herein by reference). 10.11 Lease Agreement between William D. McMorris and Electrosource, Inc. dated May 29, 1998 (filed as Exhibit 10.1 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). 10.12 Amendment to Business Alliance and License Agreement dated November 1, 1995 between Electric Power Research Institute and Electrosource, Inc. (filed as Exhibit 10.2 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference). 10.13 Stock Purchase Agreement together with the Asset and Technology License Agreement dated January 31, 1995 between BDM Technologies, Inc. and Electrosource, Inc. (filed as Exhibit 10.46 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1994 and incorporated herein by reference). 10.14 First Amendment to Asset and Technology License Agreement between BDM International, Inc. and Electrosource, Inc. dated December 18, 1997 (filed as Exhibit 10.17 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.15 Equipment Lease Agreement dated September 7, 1995, between Salem Capital Corporation and Electrosource, Inc. (filed as Exhibit 10.65 to Electrosource, Inc. Annual Report on Form 10-K for the period ending December 31, 1995 and incorporated herein by reference). 10.16 Development Agreement and Agreement for Purchase of Machinery and Supplies between Electrosource, Inc., and Charles L. Mathews ("Contractor") dated November 1, 1995 (filed as Exhibit 10.68 to Electrosource, Inc. Annual Report on Form 10-K for the period ending December 31, 1995 and incorporated herein by reference). 10.17 Agreement for Aircraft Starting Battery Distribution between Electrosource, Inc. and Horizon Aviation, Inc. dated February 13, 1996 (filed as Exhibit 10.70 to Electrosource, Inc. Annual Report on Form 10-K for the period ending December 31, 1995 and incorporated herein by reference). 10.18 Memorandum of Understanding between Electrosource, Inc. and Lockheed Martin Corporation dated March 15, 1996 (filed as Exhibit 10.1 to Electrosource, Inc. Quarterly Report on Form 10-Q for quarter ended March 31, 1996 and incorporated herein by reference). 10.19 Subscription Agreements between participants and Electrosource, Inc. dated January 23, 1997 (filed as Exhibit 4.9 to Electrosource, Inc. Registration Statement [No. 333-25659] Form S-3 on April 23, 1997 and incorporated herein by reference). 10.20 Amendment Number One to Stock Purchase Warrant dated August 18, 1998, issued under Subscription Agreements between participants and Electrosource, Inc. dated January 23, 1997 (filed as Exhibit 10.2 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 and incorporated herein by reference). 10.21 Note Purchase and Option Agreement for $4 million dated March 27, 1997 between Electrosource, Inc. and Corning Incorporated (filed as Exhibit 4.1 to Electrosource, Inc. Quarterly Report on Form 10-Q for quarter ended March 31, 1997 and incorporated herein by reference). 10.22 5% Convertible Promissory Note for $100,000 dated September 27, 1997 between Electrosource, Inc. and Corning Incorporated for payment of interest due on the Note Purchase and Option Agreement dated March 27, 1997 (filed as Exhibit 10.31 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.23 5% Convertible Promissory Note for $102,500 dated March 27, 1998 between Electrosource, Inc. and Corning Incorporated for payment of interest due on the Note Purchase and Option Agreement dated March 27, 1997 and Promissory Note dated September 27, 1997 (filed as Exhibit 10.32 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.24 Amendment No. 1 dated December 22, 1997 to Stock Option Agreement dated March 27, 1997 between Corning Incorporated and Electrosource, Inc. (filed as Exhibit 10.33 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.25 Research and Development Umbrella Agreement dated July 1, 1997 between Corning Incorporated and Electrosource, Inc. (filed as Exhibit 10.34 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.26 Project Annex dated October 20, 1997 to the Development Umbrella Agreement dated as of July 1, 1997 by and between Corning Incorporated and Electrosource, Inc., being further defined in Exhibit 1, Project Proposal, Physical and Chemical Description of Battery Electrode "Moss." (filed as Exhibit 10.35 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.27 Project Annex dated October 20, 1997 to the Development Umbrella Agreement dated as of July 1, 1997 by and between Corning Incorporated and Electrosource, Inc., being further defined in Exhibit 1, Project Proposal, Engineering Resources (filed as Exhibit 10.36 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.28 Project Annex dated October 20, 1997 to the Development Umbrella Agreement dated as of July 1, 1997 by and between Corning Incorporated and Electrosource, Inc., being further defined in Exhibit 1, Project Proposal, Characterization of Electrode Materials and Collector Grid Materials (filed as Exhibit 10.37 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.29 Amendment dated June 15, 1998 to May 29, 1998 Agreement terminating Notes between Corning Incorporated and Electrosource, Inc. for a one-day extension for payment (filed as Exhibit 10.3 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). 10.30 Stock Purchase Agreement dated June 2, 1998 between Kamkorp and Electrosource, Inc. (filed as Exhibit 4.1 to Electrosource, Inc. Form 8-K dated June 11, 1998 and incorporated herein by reference). 10.31 Registration Rights Agreement dated June 2, 1998 between Kamkorp and Electrosource, Inc. (filed as Exhibit 4.2 to Electrosource, Inc. Form 8-K dated June 11, 1998 and incorporated herein by reference). 10.32 Form of Severance Agreement between officers/key employees and Electrosource, Inc. dated May 18, 1998 (filed as Exhibit 10.4 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). 10.33 Purchase Order for Horizon Batteries Pack Development Program between Fiat Auto and Electrosource, Inc. dated September 30, 1996 (filed as Exhibit 10.40 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.34 Frame-Development Contract dated March 14, 1997 between SMH Automobile S.A. and Electrosource, Inc. (filed as Exhibit 10.41 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.35 Summary Contract Amendment Terms dated November 12, 1997 for Frame- Development Contract dated March 14, 1997 between SMH Automobile S.A. and Electrosource, Inc. (filed as Exhibit 10.42 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.36 Severance Agreement between James M. Rosel and Electrosource, Inc. effective August 31, 1998 (filed as Exhibit 10.1 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 and incorporated herein by reference). 10.37 Purchase Order Number ES1001 between Electrosource International and Electrosource, Inc. dated June 15, 1998 for 5,800 batteries (filed as Exhibit 10.49 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1998 and incorporated herein by reference). 10.38 Purchase Order Number ES1002 (amendment to Purchase Order Number ES1001) between Electrosource International and Electrosource, Inc. dated March 3, 1999 (filed as Exhibit 10.50 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1998 and incorporated herein by reference). The following exhibits filed under Paragraph 10 of Item 601 are the Company's compensation plans and arrangements: 10.39 Director Indemnification Agreement dated September 1, 1993 between Electrosource, Inc. and Dr. Norman Hackerman (filed as Exhibit 10.57 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1993 and incorporated herein by reference). 10.40 Director Indemnification Agreement dated June 22, 1995 between Electrosource, Inc. and Nathan Morton (filed as Exhibit 10.2 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and incorporated herein by reference). 10.41 Director Indemnification Agreement dated March 3, 1997 between Electrosource, Inc. and Richard E. Balzhiser (filed as Exhibit 10.51 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.42 Director Indemnification Agreement dated June 2, 1998 between Electrosource, Inc. and Kamal Siddiqi (filed as Exhibit 10.5 to Electrosource, Inc. Quarterly Report on Form 10-Q for the period ended June 30, 1998 and incorporated herein by reference). 10.43 Director Indemnification Agreement dated June 2, 1998 between Electrosource, Inc. and Clifford Winckless (filed as Exhibit 10.6 to Electrosource, Inc. Quarterly Report on Form 10-Q for the period ended June 30, 1998 and incorporated herein by reference). 10.44 Director Indemnification Agreement dated June 2, 1998 between Electrosource, Inc. and Roger Musson (filed as Exhibit 10.7 to Electrosource, Inc. Quarterly Report on Form 10-Q for the period ended June 30, 1998). 10.45 Director Indemnification Agreement dated December 23, 1998 between Electrosource, Inc. and William F. Griffin (filed as Exhibit 10.64 to Electrosource, Inc. Annual Report on Form 10K for the period ended December 31, 1998 and incorporated herein by reference). 10.46 Director Indemnification Agreement dated December 23, 1998 between Electrosource, Inc. and James M. Rosel (filed as Exhibit 10.65 to Electrosource, Inc. Annual Report on Form 10K for the period ended December 31, 1998 and incorporated herein by reference). 10.47 Director Indemnification Agreement dated August 16, 1999 between Electrosource, Inc. and Benny E. Jay. 10.48 1996 Stock Option Plan for Electrosource, Inc. (filed as Exhibit 4.2 to Registration Statement [No. 333-31101] on Form S-8 and incorporated herein by reference). 10.49 1999 Stock Option Plan for Electrosource, Inc. (filed as Exhibit 4 to Form 10Q for the quarter ended June 30, 1999 and incorporated herein by reference). 24.1 Consent of Weaver and Tidwell LLP 24.2 Consent of Ernst & Young LLP 27. Financial Data Schedule (b) Reports on Form 8-K. Reports on Form 8-K filed during the quarter ended December 31, 1999 were: November 9, 1999 Grant of 3,000,000 options to Kamkorp, Ltd. November 23, 1999 Appointment of Weaver and Tidwell as independent auditors. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ELECTROSOURCE, INC. By: /s/ Date: Benny E. Jay, President/Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date Director, March 24, 2000 /s/ President and Benny E. Jay Chief Executive Officer /s/ Director March 24, 2000 Richard E. Balzhiser /s/ Director March 22, 2000 William F. Griffin /s/ Director March 22, 2000 Norman Hackerman Director ___________ Nathan P. Morton /s/ Director and March 23, 2000 Roger Musson Chief Financial Officer /s/ Director March 22, 2000 James M. Rosel /s/ Director March 23, 2000 Kamal Siddiqi /s/ Director March 23, 2000 Clifford G. Winckless /s/ Vice President March 24, 2000 Don C. Perriello Treasurer and Chief Accounting Officer ELECTROSOURCE, INC. Audited Financial Statements December 31, 1999 Audited Financial Statements Report of Independent Auditors for 1999 F-2 Report of Independent Auditors for 1998 and 1997 F-3 Balance Sheets F-4 Statements of Operations F-5 Statements of Shareholders' Equity F-6 Statements of Cash Flows F-7 Notes to Financial Statements F-8 REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Electrosource, Inc. We have audited the accompanying balance sheet of Electrosource, Inc., as of December 31, 1999, and the related statements of operations, shareholders' equity, and cash flows for the year ended December 31, 1999. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Electrosource, Inc. at December 31, 1999, and the results of its operations and its cash flows for year ended December 31, 1999, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note O, the Company has incurred recurring operating losses, has a working capital deficit and revenues have not resulted in sufficient cash flow to sustain operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Weaver and Tidwell LLP Fort Worth, Texas March 14, 2000 REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Electrosource, Inc. We have audited the accompanying balance sheet of Electrosource, Inc. as of December 31, 1998, and the related statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Electrosource, Inc. at December 31, 1998 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note O, the Company has incurred recurring operating losses, has a working capital deficit and revenues have not resulted in sufficient cash flow to sustain operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP Austin, Texas March 5, 1999, except for Note O, As to which the date is April 12, 1999 ELECTROSOURCE, INC. Balance Sheets December 31 1999 1998 ASSETS CURRENT ASSETS Cash and cash equivalents $ 157,008 $ 207,246 Trade receivables 1,417,736 109,520 Inventories 167,569 350,464 Prepaid expenses and other assets 45,247 29,938 TOTAL CURRENT ASSETS 1,787,560 697,168 PROPERTY AND EQUIPMENT, Net 2,753,849 3,462,157 INTANGIBLE ASSETS Technology license agreement 3,048,674 3,048,674 Less: accumulated amortization (2,235,217) (2,046,397) NET INTANGIBLE ASSETS 813,457 1,002,277 OTHER ASSETS 52,500 55,500 TOTAL ASSETS $ 5,407,366 $ 5,217,102 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,044,086 $ 948,528 Accrued liabilities 1,399,285 1,308,346 Deferred revenue and advance payment on batteries 387,421 649,893 Current portion of capital lease obligations 71,513 77,006 TOTAL CURRENT LIABILITIES 2,902,305 2,983,773 CAPITAL LEASE OBLIGATIONS (less current portion) - 71,512 COMMITMENTS AND CONTINGENCIES (Notes H, I and O) SHAREHOLDERS' EQUITY Common Stock, par value $1.00 per share, authorized 50,000,000 shares; issued and outstanding 12,137,699 in 1999 and 8,434,531 in 1998 12,137,699 8,434,531 Preferred Stock, par value $1.00 per share; authorized 10,000,000 shares, no shares issued or outstanding - - Common Stock subscription receivable (467,663) (467,663) Warrants (Note J) - - Paid in capital 51,552,599 51,446,508 Accumulated deficit (60,717,574) (57,251,559) 2,505,061 2,161,817 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,407,366 $ 5,217,102 See notes to financial statements. ELECTROSOURCE, INC. Statements of Operations For the years ended December 31, 1999 1998 1997 REVENUES Battery sales $ 381,434 $ 593,864 $ 914,901 Battery sales - Frazer-Nash/EIL 108,990 360,850 - Project revenue 1,602,797 735,719 2,233,923 Cancellation fee - 656,100 - Miscellaneous Income 109,499 - - Interest income 87 33,218 94,849 2,202,807 2,379,751 3,243,673 COSTS AND EXPENSES Manufacturing 2,469,023 3,564,176 3,448,677 Selling, general and administrative 915,107 1,913,128 2,468,778 Research and development 1,260,918 1,803,632 2,490,677 Technology license and royalties 100,000 100,000 110,000 Depreciation and amortization 907,203 1,699,305 1,915,942 Interest expense 16,571 362,040 453,506 Loss on payment of capital lease - - 189,316 5,668,822 9,442,281 11,076,896 LOSS BEFORE INCOME TAXES (3,466,015) (7,062,530) (7,833,223) INCOME TAX BENEFIT - 1,200,895 - LOSS BEFORE EXTRAORDINARY GAIN (3,466,015) (5,861,635) (7,823,223) EXTRAORDINARY GAIN FROM EARLY EXTINGUISHMENT OF DEBT, NET OF TAX OF $1,200,895 (NOTE F) - 2,331,150 - NET LOSS $(3,466,015) $(3,530,485) $(7,833,223) BASIC (AND DILUTED) LOSS PER SHARE BEFORE EXTRAORDINARY GAIN $ (0.34) $ (0.95) $ (1.91) BASIC (AND DILUTED) LOSS PER SHARE $ (0.34) $ (0.57) $ (1.91) WEIGHTED AVERAGE SHARES OUTSTANDING 10,071,303 6,180,010 4,106,695 See notes to financial statements. ELECTROSOURCE, INC. Statements of Shareholders' Equity [CAPTION] Common Stock Total Common Paid In Subscriptions Accumulated Shareholders' Stock Capital Receivable Deficit Equity Balance at January 1, 1997 $3,857,912 $45,876,668 - $(45,887,851) $ 3,846,729 Shares issued in Regulation D offering 109,397 545,453 - - 654,850 Shares issued Technology License 76,668 1,172,016 - - 1,248,684 Shares issued for capital lease obligations and equipment purchases 127,500 708,945 - - 836,445 Shares issued for operating lease and other obligations 299,304 467,663 (467,663) - 299,304 Shares issued for consulting services 6,000 58,800 - - 64,800 Exercises of options and warrants 57,750 246,383 - - 304,133 Stock options issued for technical and consulting services - 480,000 - - 480,000 Stock options issued in conjunction Convertible Notes Payable - 1,590,580 - - 1,590,580 Net loss for year ended December 31, 1997 - - - (7,833,223) (7,833,223) Balance at December 31, 1997 4,534,531 51,146,508 (467,663) (53,721,074) 1,492,302 Shares issued to Kamkorp 3,900,000 - - - 3,900,000 Stock options issued for technical and consulting services - 300,000 - - 300,000 Net loss and comprehensive income for year ended December 31, 1998 - - - (3,530,485) (3,530,485) Balance at December 31, 1998 8,434,531 51,446,508 (467,663) (57,251,559) 2,161,817 Shares issued to Kamkorp (Note G) 3,580,000 - - - 3,580,000 Stock options exercised under 1996 Stock Option Plan 86,918 49,432 - - 136,350 Shares issued for exercise of Warrants 36,250 56,659 - - 92,909 Net loss for year ended December 31, 1999 - - - (3,466,015) (3,466,015) Balance at December 31, 1999 $12,137,699 $51,552,599 $(467,663) $(60,717,574) $2,505,061 See notes to financial statements.
ELECTROSOURCE, INC. Statements of Cash Flows 1999 1998 1997 OPERATING ACTIVITIES Net loss $(3,466,015) $(3,530,485) $(7,833,223) Adjustments to reconcile net loss to net cash used in operating activities: Equity instruments issued for consulting services - 300,000 544,800 Depreciation of property, plant and equipment 718,383 788,945 922,822 Amortization of intangible assets 188,820 859,070 993,120 Amortization of prepaid lease expense - 299,304 - Extraordinary gain from early extinguishment of debt, Net of tax - (2,331,150) - Amortization of discounts on convertible notes payable and deferred financing costs - 169,569 188,728 Interest expense paid in convertible notes payable or common stock - 193,002 100,000 Loss on payment of capital lease - - 189,316 Deferred tax benefit - (1,200,895) - Changes in operating assets and liabilities: (Increase) decrease in trade receivables (1,308,216) 298,710 (160,599) (Increase) decrease in inventories 182,895 (28,175) (73,054) (Increase) decrease in prepaid expenses and other assets (12,309) (2,485) 86,865 Increase in accounts payable and accrued liabilities 186,497 69,348 378,934 Increase (decrease) in deferred revenue and advance payments on batteries (262,472) 217,294 (724,429) CASH USED IN OPERATING ACTIVITIES (3,772,417) (3,897,948) (5,386,720) INVESTING ACTIVITIES Purchases of property and equipment, net (10,075) (86,643) (134,458) CASH USED IN INVESTING ACTIVITIES (10,075) (86,643) (134,458) FINANCING ACTIVITIES Proceeds from issuances of convertible notes payable and related warrants to purchase Common Stock - 1,000,000 5,000,000 Payment of notes payable and capital lease obligations (77,005) (1,572,685) (685,968) Proceeds from issuances of common stock, net 3,809,259 3,900,000 958,983 Decrease in restricted cash - 81,604 663,220 CASH PROVIDED BY FINANCING ACTIVITIES 3,732,254 3,408,919 5,936,235 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (50,238) (575,672) 415,057 Cash and cash equivalents at beginning of period 207,246 782,918 367,861 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 157,008 $ 207,246 $ 782,918 See notes to financial statements. NOTES TO FINANCIAL STATEMENTS ELECTROSOURCE, INC. December 31, 1999 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization: Electrosource, Inc. (the "Company") was incorporated as a Delaware corporation on June 3, 1987. The Company designs and manufactures advanced lead-acid batteries for use in motive power and starting applications. The majority of revenue recognized through December 31, 1999 has been derived from the development and sales of batteries for electric vehicles and hybrid electric vehicles to automotive manufacturers in the United States, England and Malaysia. Cash and Cash Equivalents: The Company's cash and cash equivalents consist of cash and short-term investments with a maturity of three months or less when purchased. Inventories: Inventories are stated at the lower of cost (on a standard, direct materials and direct labor cost basis) or market value. Property and Equipment: Property and equipment are recorded at cost. The Company has also capitalized equipment in accordance with the terms of related leases. Depreciation of property and equipment (including amounts recorded under capitalized leases) is computed using the straight-line method over the estimated useful lives of the assets or the respective lease term, ranging from 3 to 10 years. Technology License Agreement and Purchased Technology: The Company has been assigned all license rights relating to coextruded wire by the original licensee (See Note D.) The cost of this license is being amortized over the legal life of the patents on the technology (17 years). The patents expire beginning in 2004. On November 1, 1995, the Company obtained intellectual property rights (purchased technology) developed under a Research and Development Agreement (See Note D.) The cost of this purchased technology was fully amortized in 1998. On an ongoing basis, the Company reviews the valuation and amortization of its intangibles, taking into consideration any events or circumstances which might have diminished their value. Project Revenue: Projects are accounted for under the percentage of completion method, wherein revenue is recognized based on cumulative costs incurred and the estimated cost to complete as such relates to total contract price. All costs are expensed as incurred and losses on contracts are estimated and recognized when it becomes apparent a loss is to be incurred. Certain projects are billed quarterly or upon the completion of contract milestones. Stock Compensation: The Company accounts for its stock compensation arrangements under the provisions of APB 25, "Accounting for Stock Issued to Employees." Basic and Diluted Loss Per Share: Basic and diluted loss per share is based on the weighted average number of shares of common stock outstanding during each period. Since the Company has experienced net operating losses, outstanding options and warrants to purchase common stock have an antidilutive effect. Therefore, such options and warrants were not included in the diluted loss per share calculation. Business Segments: The Company is engaged in the manufacture of advanced lead-acid, rechargeable storage batteries and the development of related processes and technologies. Accordingly, the Company considers itself to be in one operating segment. Comprehensive Income: In 1997 the Financial Accounting Standards Board issued Statement 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components. The Company adopted SFAS 130 effective January 1, 1998, but did not have any comprehensive income as defined in SFAS 130 during 1999, 1998 or 1997. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes: The Company reports income taxes in accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires that deferred tax assets and liabilities be determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Advertising Costs: The Company expenses costs of producing advertising and sales related materials as incurred. These expenses for the years ended December 31, 1999, 1998 and 1997 were $4,000, $4,400, and $0, respectively. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. NOTE B - INVENTORIES 1999 1998 Raw materials $121,027 $147,235 Work in progress 46,222 61,499 Finished goods 320 141,730 Total Inventories $167,569 $350,464 NOTE C - PROPERTY AND EQUIPMENT 1999 1998 Office equipment $ 801,610 $ 801,610 Production and lab equipment 5,398,365 5,388,291 Leasehold im provements 875,919 1,301,018 7,075,894 7,490,919 Less - accumulated depreciation and amortization (4,322,045) (4,028,762) Total Property and Equipment $2,753,849 $3,462,157 NOTE D - INTANGIBLE ASSETS Technology License Agreement At its inception, the Company obtained an exclusive sublicense for the development, manufacture and commercial exploitation of coextruded wire for lead-acid battery applications. The Company is responsible for the maintenance and administration of the licensed patent and has an obligation to pay the original licensee a royalty of four percent on all technology sales unrelated to lead-acid, storage batteries for the term of the License Agreement. The Company is obligated to pay the licensor a royalty of one-half of one percent of net sales of coextruded wire and wire-related products, with a minimum annual royalty of $100,000. Purchased Technology In November 1995, the Company completed a research and development agreement with the Electric Power Research Institute ("EPRI"). In accordance with the terms of a November 1995 amendment to the agreement, the Company issued 215,800 shares of Common Stock in exchange for the transfer of intellectual property rights (purchased technology) and the transfer of title to certain equipment which had been purchased by EPRI in connection with research activity undertaken by the Company. In addition, pursuant to the terms of such agreement, certain member utilities of EPRI have elected to receive royalties at the rate of one-tenth of one percent on the Company's sales of products containing licensed technology and on other revenues derived by the Company from license fees, joint ventures and other arrangements involving the licensed technology. NOTE E - ACCRUED LIABILITIES 1999 1998 Payroll and related items $249,253 $111,174 Due to BDM (Note H) 767,950 722,774 Other 382,082 474,398 Total Accrued Liabilities $1,399,285 $1,308,346 NOTE F - CONVERTIBLE NOTES PAYABLE In June 1998, in conjunction with the terms of a Stock Purchase Agreement ("Agreement") with Kamkorp Limited ("Kamkorp"), a company organized in England, the Company executed a separate agreement with Corning Incorporated ("Corning") to retire the full $6,293,002 in outstanding Convertible Notes Payable and accrued interest owed to Corning, in exchange for $1,500,000 in cash. The transaction was completed on June 16, 1998. The Convertible Notes Payable and accrued interest had a carrying amount of $5,032,045 (after unamortized discount of $1,260,957), resulting in an extraordinary gain from the early extinguishment of debt of $2,331,150, net of tax of $1,200,895. Basic and diluted earnings per share for the extraordinary gain from the early extinguishment of debt were $0.38 for the year ended December 31, 1998. The $1,500,000 was provided to the Company by Kamkorp from the sale of 1,500,000 shares of Common Stock under the terms of the Agreement (See Note G). Cash interest paid by the Company was approximately $17,000, $22,000 and $128,000 in 1999, 1998 and 1997, respectively. NOTE G - LIQUIDITY Under the terms of an Agreement entered into with the Company in June 1998, Kamkorp Limited ("Kamkorp") agreed to provide up to $6,000,000 of equity funding for 6,000,000 Common Shares ("shares") at $1.00 per share. In addition, Kamkorp was granted an option to purchase up to 3,000,000 shares at $1.00 per share under the initial agreement. On October 27, 1999, the Company granted Kamkorp an option to purchase an additional 3,000,000 shares of its Common Stock at a price of $1.00 per share. These latest options expire as to 2,000,000 shares in six months, 500,000 shares in nine months, and 500,000 shares in twelve months. Kamkorp is the beneficial owner of 12,000,000 shares representing 70.0% of the Company's Common Stock if all options to Kamkorp are exercised. As of March 14, 2000, Kamkorp has paid for and been issued 8,130,000 shares at $1.00 per share, representing 62% of the Company's outstanding Common Stock at that date. In accordance with the terms of the Agreement Kamkorp nominated three members of the Company's Board of Directors, who were unanimously approved by the Board of Directors, and has the ability to ultimately have control of the Board of Directors. Additionally, pursuant to the terms of the Agreement, the Company must obtain approval from Kamkorp for all important management policies and decisions, which include the following: a. the issuance of Common Stock or any security which provides for the right to acquire Common Stock, or any other capital stock of the Company; b. overall policy decisions relating to business direction and manufacturing capacity; c. any agreement or commitment that materially affects or modifies the intellectual property owned by the Company; d. approval of the annual operating budget, capital budget, overhead budgets and business plans of the Company; e. approval of any merger, consolidation, partnership or joint venture; f. approval of transfer of any assets of the Company with a fair market value greater than $100,000; g. incurring indebtedness for borrowed money, granting any material pledge or security interest in the assets of the Company; h. increasing the size of the Company's Board of Directors; i. amending the Company's Certificate of Incorporation or Bylaws; j. entering into any transaction involving an amount greater than, or having a value in excess of $100,000 or involving a term or commitment for more than 12 months; and k. other various management policies and decisions. As of December 31, 1999, Kamkorp is the record owner of 7,480,000 shares or 61.6% of the Company's 12,137,699 outstanding shares of Common Stock and, including options to purchase Common Stock, the beneficial owner of 12,000,000 shares or 70% of the Company's Common Stock (assuming purchase of the full 6,000,000 shares available under the Agreement and full exercise of the option to purchase 6,000,000 shares). The Company granted Kamkorp demand and piggyback registration rights with respect to all such shares. During the year ended December 31, 1999, existing battery orders and contract work have not been adequate to sustain the Company on an ongoing basis and the Company continues to be dependent on cash payments from Kamkorp and its affiliates to continue operations on a day-to-day basis. The Company anticipates that funds will be available from Kamkorp in an amount sufficient to sustain operations; however, Kamkorp is not obligated to provide this funding. Kamkorp has acknowledged to the Company that it intends to continue equity funding to the Company in 2000. The Company has approximately $1,000,000 of outstanding accounts payable, most of which is payable to raw materials suppliers and service providers, some of which is considerably past due. One vendor sued the Company in May 1999 for approximately $12,000 and the suit was settled in the third quarter. In the first quarter of 2000, six vendors have filed suits against the Company. Five of these vendors have accepted pay out agreements for the amounts owed and the remaining one is in negotiation for a pay out agreement. Funding from Kamkorp, additional battery orders, or other financing will be required in the year 2000 to continue operations and to maintain compliance with the minimum listing standards of the Nasdaq Stock Markets ("Nasdaq"). The Company is discussing the possibility of accelerated financing from Kamkorp, which could be provided under the terms of the Agreement through Kamkorp's exercise of all or a portion of its options to purchase the balance of 4,520,000 shares of the Company's Common Stock at $1.00 per share. NOTE H - LEASE AND OTHER COMMITMENTS The Company leases various plant and office facilities, and production, office and warehouse equipment under operating and capital leases expiring between 2000 and 2003. Future minimum annual rentals under lease arrangements at December 31, 1999 are as follows: Fiscal Year Capital Operating Leases Leases 2000 $ 75,473 $ 408,636 2001 - 370,135 2002 - 420,000 2003 - 385,000 Thereafter - - $ 75,473 $1,583,771 Less imputed interest (3,961) Present value of capital lease obligations $ 71,512 The Company's monthly rental rate on its 88,000 square foot facility is approximately $30,000 per month, escalating to $35,000 per month in 2001. The lease expires in November 2003. Rental expense for operating leases for the years ended December 31, 1999, 1998 and 1997 was approximately $484,000, $905,000, and $898,000, respectively. Sublease rental income of approximately $29,000, $189,000 and $119,000 was received in 1999, 1998 and 1997, respectively. In December 1997, the Company issued 299,304 shares of Common Stock to BDM Technologies, Inc. ("BDM") (now part of TRW) as partial payment for past obligations owed to BDM for occupancy related costs ($314,875, which the Company had accrued) and as prepayment under operating leases for manufacturing equipment which are guaranteed by BDM ($452,092). The number of shares issued was determined based on the fair market value of the shares at the date of the agreement ($2.56 per share). When the shares are sold by BDM, the proceeds will be used to satisfy these past obligations. If the proceeds from the sale of such shares are not sufficient to satisfy the obligations, the Company will issue additional shares of Common Stock or pay cash to BDM to make up the deficiency. BDM has agreed to accept a minimum of $1.00 per share or $299,304 for the shares issued. BDM will retain any overage from the sale of such shares in excess of the obligations. The Company recorded the shares issued to BDM at fair market value on the date of the agreement ($766,967) and recorded a subscription receivable ($467,663) for the difference between the fair market value of the shares and the minimum value for such shares accepted by BDM which will be recorded as permanent equity upon final determination of the number of shares to be issued. The Company's market price was below $2.56 per share for most of 1999; however, it has recently been above the $2.56 price, and as reported by the NASDAQ Stock Market at the close of business on March 14, 2000, the closing price was $12.75. BDM has not notified the Company of an intent to sell such shares in the near term; however, unless the value of the Company's Common Stock remains above the $2.56 per share level, additional shares of Common Stock or cash will be required to settle these obligations under the terms of this agreement. NOTE I - CONTINGENCIES In December 1996, the Company filed a petition in State Court in Travis County, Texas, seeking, among other things, a declaratory judgment that Horizon Battery Technologies, LTD. ("HBTL") had no right to arbitration or monetary relief under a "Know-How License Agreement". HBTL contested jurisdiction and removed the proceedings to the U.S. Federal Court. The Federal District Court ruled that it did not have personal jurisdiction over HBTL. The Company successfully appealed in the U.S. Fifth Circuit Court of Appeals. In September 1999, the District Court granted summary judgement in favor of the Company. No further proceedings are anticipated since no appeal was filed by HBTL. The Company is also involved in certain other contingencies incidental to its business. While the ultimate results of these matters cannot be predicted with certainty, management does not expect them to have a material adverse effect on the financial position of the Company. Trade receivables are composed of balances due from a limited customer base. Although the Company has a concentration of credit risk related to the industries in which its customers participate and to the limited number of customers comprising the trade receivable balance, the Company has not experienced significant collection losses from these respective customers. Activity in the Company's allowance for doubtful accounts was as follows: Additions
Balance at Charged to Charged to Write-Off of Balance at Beginning Costs and Other Uncollectible End of Description of Period Expense Accounts Accounts Period Year ended December 31, 1999 - 0 - - 0 - - 0 - - 0 - - 0 - Year ended December 31, 1998 - 0 - - 0 - - 0 - - 0 - - 0 - Year ended December 31, 1997 $15,599 ($15,599) - 0 - - 0 - - 0 -
NOTE J - SHAREHOLDERS' EQUITY In 1997, the Company sold 109,397 shares of Common Stock (combined with warrants to purchase Common Stock at prices ranging from $5.25 to $7.56 per share) for net proceeds of approximately $655,000. During 1998, the warrants were repriced to $2.56 per share. Stock Option Plans The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has two stock option plans, the 1996 Stock Option Plan ("1996 Plan"), which received shareholder approval in 1997, authorizing 960,000 shares and the 1999 Stock Option Plan ("1999 Plan"), which received shareholder approval in 1999, authorizing 1,000,000 shares. Both Plans provide for the grant/award of options to employees, directors and consultants at the discretion of the Compensation/Stock Option Committee to purchase shares of the Company's Common Stock at a price not less than 100% of the market price of such stock on the date the option is granted. These options generally become exercisable in three stages in equal portions at six months, eighteen months and thirty months after the date of grant and expire up to ten years from the date of grant. In August 1998, the Board of Directors approved the repricing of all employee stock options effective on that date. Accordingly, 461,833 employee stock options with exercise prices ranging from $5.28 to $37.50 per share were repriced to an exercise price of $1.56 per share, the fair value of the Company's Common Stock on that date. The repricing had no impact on vesting schedules. Director and consultant stock options were not repriced. Pro forma information regarding net loss and loss per share is required by FASB Statement 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999 1998 and 1997, respectively: risk-free interest rates of 5.0%, 5.0% and 5.3%; dividend yield of 0%; volatility factors of the expected market price of the Company's common stock of 1.91, 1.76 and .80; and a weighted-average expected life of the option of five years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: 1999 1998 1997 Pro forma stock-based compensation expense $428,133 $873,222 $1,320,661 Pro forma net loss $3,894,148 $4,403,707 $9,153,884 Pro forma loss per share $(0.39) $(0.71) $(2.23) The effects of applying Statement No. 123 for pro forma disclosures are not necessarily indicative of future amounts due to the prospective adoption of FASB Statement No. 123's effects on reported net income for future years. A summary of changes in common stock options during 1997, 1998 and 1999 is as follows: Range of Exer. Weighted-Avg. Shares Prices ($) Exer. Price($) Options outstanding January 1, 1997 495,765 5.28 - 37.50 14.13 Granted 298,131 2.94 - 7.75 6.79 Exercised (31,500) 5.28 5.28 Surrendered (28,100) 5.28 - 35.00 9.50 Options outstanding December 31, 1997 734,296 2.94 - 37.50 11.71 Granted 603,418 1.00 - 2.50 1.51 Exercised - - - Surrendered (648,037) 1.56 - 37.50 10.82 Options outstanding December 31, 1998 689,677 1.00 - 37.50 3.62 Granted 280,083 1.00 - 1.75 .73 Exercised (86,918) 1.563 - 1.75 .85 Surrendered (186,366) 1.563 -35.00 1.99 Options outstanding December 31, 1999 696,476 1.00 - 37.50 8.06 Options exercisable, December 31, 1997 525,145 2.94 - 37.50 13.37 1998 210,844 1.00 - 37.50 8.33 1999 463,064 1.00 - 37.50 8.02 The weighted-average fair value of options granted during 1999, 1998 and 1997 was $1.57, $1.42, and $4.60 per share, respectively. A summary of option information by exercise price as of December 31, 1999 follows: Total Options Outstanding Currently Exercisable Weighted- Weighted- Number Average Average Number Weighted- Exercise of Exercise Remaining Of Average Price ($) Options Price Contractual Options Exercise Price 1.00 - 1.44 137,350 1.06 9.15 67,350 1.03 1.56 267,548 1.56 7.35 225,541 1.56 1.62 - 1.75 184,084 1.75 9.07 62,679 1.64 2.16 - 6.94 81,687 5.69 7.04 81,687 5.69 7.00 -17.50 10,407 12.65 7.02 10,407 7.02 27.50 9,900 27.50 6.83 9,900 27.50 37.50 5,500 37.50 6.83 5,500 37.50 1.00 -37.50 696,476 2.81 8.11 463,064 3.46 Warrants The Company has issued numerous warrants associated with various debt and equity financings and other agreements with varying expiration dates through 2005. The Company entered into a technical development agreement with Corning in September 1997 to jointly improve the Company's products, production processes and automation. The Company paid Corning for such services by issuing warrants at agreed upon values and exercise prices. The Company expensed the warrants issued in 1998 and 1997 at their estimated fair value of approximately $300,000 and $400,000, respectively. The technical development agreement was terminated in 1998. The following table represents a summary of warrant activity for the three years ended December 31, 1999: Warrants Price Per Warrant ($) Warrants outstanding January 1, 1997 394,423 15.30 - 55.00 Issued 1,277,383 4.00 - 9.00 Exercised (26,250) 5.25 Expired (56,499) 16.13 - 55.00 Warrants outstanding December 31, 1997 1,589,057 4.00 - 50.00 Issued 120,000 7.12 Exercised - - Expired (300,000) 30.00 - 40.00 Warrants outstanding December 31, 1998 1,409,057 4.00 - 50.00 Issued - - Exercised (36,250) 2.563 Expired (500,000) 4.00 - 6.00 Warrants outstanding December 31, 1999 872,807 4.00 - 6.00 Reserved Shares At December 31, 1999, shares of the Company's Common Stock were reserved as follows for issuance under: Stock option plans 1,841,582 Exercise of warrants 872,807 Stock Purchase Agreement (Note G) 4,520,000 BDM Agreement (Note H) 767,663 8,002,052 NOTE K - REVENUE Project The Company generated approximately $1,155,000 of project revenue for the year ended December 31, 1999, under agreements with Frazer-Nash Research Limited and Frazer-Nash Research, Inc. for the continued research and development of the Company's battery technology. The Company also had $100,000 of other income from Electrosource International, Ltd. ("EIL") for marketing assistance to complete negotiations for an order of 8,000 of the Company's 12H85 batteries. This order from EIL follows receipt of an order from Perusahaan Otomobile Elektrik (Malaysia) Sdn. Bdh. ("POEM"). The remaining revenue generated in 1999 was from cooperative development and research agreements with the Defense Advanced Research Projects Agency ("DARPA") and with the Department of Energy ("DOE"). The DARPA programs are for various HEV and EV applications. The DOE program is for the development of core technology for a lithium polymer material eventually to be used in batteries. Similar programs were in progress in 1998. Project revenues were expected to decrease throughout 1999 as some of the DARPA programs were completed in early 1999. During 1997, the Company generated project revenue of approximately $645,000 from Chrysler Corporation ("Chrysler") for various environmental and other tests performed on the Horizon battery. The majority of remaining project revenue generated in 1997 (approximately 65%) was from SMH, DARPA and Fiat Auto for the development and/or evaluation of batteries for hybrid and electric vehicle applications. SMH is located in Switzerland, DARPA and DOE in the United States and Fiat Auto in Italy. Batteries Approximately 19% of the Company's 1999 battery sales were to EIL. The Company is economically dependent on Kamkorp and its affiliates (See Notes G and O). Approximately 26%, 30% and 56% of the Company's 1999, 1998 and 1997 battery sales, respectively, were to Chrysler. In December 1997, Chrysler announced its decision to use nickel-metal-hydride batteries made by a competitor in its EPIC Minivan. Accordingly, Chrysler's purchase of a significant number of batteries from the Company in the future is uncertain. Capacity Maintenance In July 1996, the Company received a $3,000,000 payment from Chrysler. Chrysler designated $2,366,000 of this payment as compensation for continued capacity maintenance and ramp-up costs incurred by the Company in relation to its role as a supplier to the automaker for its electric vehicle EPIC Minivan Program and $634,000 for various engineering, research and development (ER&D) efforts. During 1996, the Company recorded $2,366,000 as income as all tasks necessary to earn the income were performed and there were no further obligations related to such revenue. The Company recorded $634,000 as deferred revenue which was recognized in income in 1997 as the ER&D tasks were performed. Cancellation Fee During 1998, the Company received a $1,104,275 purchase order from Chrysler, which replaced an earlier purchase order for $1,400,000. The $1,104,275 purchase order was paid in full in 1998. Chrysler designated $656,100 of the purchase order as a cancellation fee from the previous order and $448,175 for batteries to be delivered in the future. During 1998, the Company recorded $656,100 as income as all tasks necessary to earn the income were performed and there were no further obligations related to such revenue. Approximately $171,000 of the battery revenue remains deferred at December 31, 1999 and will be recognized upon shipment of the batteries. During 1999, 1998 and 1997, the Company earned revenue of approximately $1,286,000, $360,000, and $1,100,000 (61%, 15%, and 34% of total revenue), respectively, from sales of batteries and project services to foreign customers. The majority of 1999 and 1998 revenue from foreign customers was from EIL and Frazer-Nash Research Limited (See Note O). The majority of 1997 revenue from foreign customers was from SMH (Switzerland) and Fiat Auto (Italy). NOTE L - INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax asset at December 31, 1999 and 1998 are as follows: 1999 1998 Deferred Tax Assets: Net operating loss and other tax carry-forwards $ 17,556,179 $ 16,165,976 Book depreciation in excess of tax depreciation 1,940,134 2,158,793 Inventory, accruals and other 288,772 444,121 Total deferred tax assets 19,785,085 18,768,890 Less valuation allowance (19,785,085) (18,768,890) Deferred tax assets, net $ - $ - The reconciliation of income tax provision (benefit) on continuing operations computed at the United States federal statutory tax rates to income tax expense for the years ended December 31, 1999, 1998 and 1997 are as follows: 1999 1998 1997 Income tax benefit at statutory U.S. federal income tax rate (34.0%) (34.0%) (34.0%) Operating losses not benefited 34.0% 17.0% 34.0% Effective income tax rate 0.0% (17.0%) 0.0% The Company's valuation allowance increased by $1.0 million in 1999 and $1.1 million in 1998, primarily as a result of net operating losses which were generated but may not be realizable. At December 31, 1999, the Company had net operating loss carry forwards of approximately $50 million, which will expire from 2002 through 2019, research and development credits of approximately $400,000 and foreign tax credits of approximately $120,000 which expire beginning in 2002 and 2000, respectively. Ownership changes as defined in the Internal Revenue Code have resulted in severe limitations on the utilization of a significant portion of the Company's net operating loss and other tax carry forwards. NOTE M - RELATED PARTY TRANSACTIONS During 1995, the Company entered into agreements with a director of the Company for the development of certain machinery and materials as well as general consulting. The Company paid $32,000 and $103,000 under such agreements in 1997 and 1996, respectively. The Company may also purchase machinery developed in accordance with this agreement at its option for an additional fee. During 1997, the Company also began purchasing certain raw materials from the former director. The Company paid $5,900, $44,000, and $65,000 for such materials during 1999, 1998 and 1997, respectively. In addition, the Company has leased approximately 4,000 square feet in the former director's manufacturing facility for a monthly cost of $400 and has paid $3,400 in 1999 and $4,800 annually under such agreement during 1997 and 1998. NOTE N - EMPLOYEE BENEFIT PLAN The Company sponsors a qualified defined contribution plan covering all eligible employees. The Company matches twenty-five percent of a participant's voluntary contributions up to a maximum of four percent of a participant's compensation. The Company's contribution expense was approximately $31,000, $30,000, and $33,000 in 1999, 1998 and 1997, respectively. NOTE O - ABILITY TO CONTINUE AS A GOING CONCERN The Company has continued to incur operating losses. Revenues have not resulted in sufficient cash flows to sustain operations and at December 31, 1999 there is a net working capital deficit. As a result, the Company is dependent on Kamkorp and its affiliates to continue operations on a day to day basis. Under the terms of an Agreement entered into with the Company in June 1998, Kamkorp Limited ("Kamkorp") agreed to provide up to $6,000,000 of equity funding for 6,000,000 Common Shares ("shares") at $1.00 per share. In addition, Kamkorp was granted an option to purchase up to 3,000,000 shares at $1.00 per share under the initial agreement. On October 27, 1999, the Company granted Kamkorp an option to purchase an additional 3,000,000 shares of its Common Stock at a price of $1.00 per share. These latest options expire as to 2,000,000 shares in six months, 500,000 shares in nine months, and 500,000 shares in twelve months. Kamkorp is the beneficial owner of 12,000,000 shares representing 70.0% of the Company's Common Stock if all options to Kamkorp are exercised. As of March 14, 2000, Kamkorp has paid for and been issued 8,130,000 shares at $1.00 per share, representing 62% of the Company's outstanding Common Stock at that date. As of December 31, 1999, Kamkorp has purchased 7,480,000 shares of the Company's Common Stock. Kamkorp's obligation to make these purchases is dependent upon the absence of any material change in the financial position, business or prospects of the Company and upon certain other conditions precedent, such as the absence of litigation, absence of defaults on other contracts and agreements, and compliance with environmental regulations. From January 1 through March 14, 2000, Kamkorp purchased an additional 650,000 shares of Common Stock at $1.00 per share. Although Kamkorp has provided substantial amounts of financing to the Company to date, Kamkorp is not legally required to provide this funding. Kamkorp has acknowledged to the Company that it intends to continue equity funding to the Company in 2000. The Company received a purchase order in June 1999 for 8,000 12H85 batteries from Electrosource International Limited ("EIL") for delivery beginning in the third quarter of 1999 with completion of the order in the first quarter of 2000. The Company delivered 444 batteries against this order during the year ended December 31, 1999 and is scheduled to deliver the remainder of the order in 2000. EIL is the international marketing company and is affiliated with Kamkorp. These battery sales represent 19% of the battery sales in 1999. The Company received a purchase order in February 2000 for 6,000 12C25 batteries from Frazer-Nash Research Limited for delivery beginning in the first quarter of 2000 with completion of the order in April. The 12C25 battery has been specified by Frazer- Nash Research Limited as the battery for all of the electric vehicles to be supplied to the Sydney 2000 Olympic Games. Frazer- Nash is the exclusive supplier of electric vehicles to the Olympic Games. The Company's Common Stock is traded in the Over-the-Counter Market and is reported on the Nasdaq Stock Markets ("Nasdaq"). In order to maintain listing by Nasdaq under rules which went into effect in February 1998, the Company must maintain a minimum $2,000,000 of net tangible assets (total assets, excluding goodwill, minus total liabilities) and the Company's closing price cannot fall below $1.00 per share for 30 consecutive trade dates. On February 1, 1999, the Company received written notice from Nasdaq that the closing bid price of its shares fell below $1.00 for 30 consecutive business days and therefore did not meet the Nasdaq minimum listing requirements. The written notification stated that within 90 days of the notification, the Company's closing bid price must be $1.00 or higher for ten consecutive calendar days to satisfy the requirement. This requirement was met by mid-February 1999. As of March 31, 1999, the Company's net tangible assets were less than $2,000,000. As a result, the Company was not in compliance with the minimum listing requirements of Nasdaq and advised Nasdaq of that fact. On April 15, 1999, the Company received notice from Nasdaq that it was concerned that the Company may not be able to sustain compliance with the continued listing requirements of Nasdaq in light of the "going concern" opinion from its independent auditor. To address this concern Nasdaq requested a detailed letter from the Company on or about April 30, 1999, discussing the timeline for resolution of these items and a discussion explaining why the Company believes it will be able to sustain compliance with the continued listing standards of Nasdaq. The Company complied with this request on April 30, 1999. Additionally, on May 20, 1999, the Company received notice that since the Company failed to meet the requirement for net tangible assets of $2 million on the March 31, 1999 Form 10-Q, the Company would be required to submit before June 4, 1999, a proposal for achieving compliance. This proposal was submitted June 3, 1999. The Nasdaq Staff responded to both of these issues in a letter dated July 14, 1999. The Staff reviewed the Company's plan for regaining and maintaining compliance and stated while the Staff has determined that the Company will not be delisted due to its previously cited failures to comply, they have determined to apply more stringent reporting requirements. The Company was required to submit an internal balance sheet and statement of operations for the period ended July 31, 1999 by August 20, 1999. Thereafter, until further notice, the Company would be required to submit by the 20th of each month, an internal balance sheet and statement of operations for the preceding month's end. The Company has complied with this requirement. The Company is required to keep Nasdaq apprised of all material events and any changes in its financial statements. Should the Company fail to maintain $2 million net tangible assets, the Staff will issue a formal delisting letter to the Company. If the Company does not continue to maintain the required listing criteria, it is likely that the Company's shares would be delisted from the Nasdaq Small cap Market at a time specified by Nasdaq, in which event the shares would be quoted on the Over-the-Counter ("OTC") Bulletin Board and/or the Pink Sheets of the National Quotation Board ("NQB"). In such trading markets, brokers and dealers effecting trades in the Common Stock would become subject to the Securities and Exchange Commission rules covering trading in "penny stocks." Becoming subject to the "penny stock" rules would likely have a material adverse effect on both the price and trading liquidity of the Company's Common Stock. If the Company were delisted from Nasdaq, it would likely be more difficult to obtain additional funding. There can be no assurance that additional funding which will generate sufficient cash to sustain operations can be obtained on terms acceptable to the Company, if at all. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. Washington, D.C. 20549 ________________________________________ EXHIBITS TO FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission File December 31, 1999 Number 0-16323 __________________________________________ ELECTROSOURCE, INC. (Exact name of Registrant as specified in its charter) Delaware 742466304 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2809 Interstate 35 South, San Marcos, Texas 78666 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (512) 753-6500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share (Title of Class) INDEX TO EXHIBITS No. Description Page 3.1 Restated Certificate of Incorporation of -- Electrosource, Inc. (filed as Exhibit 3.1 to Electrosource, Inc., Registration Statement on Form 10 filed October 19, 1987, as amended by Form 8 Amendments filed January 8, 1988 and January 13, 1988 (hereinafter referred to as "Form 10") and incorporated herein by reference). 3.2 Certificate of Designation, Preferences, Rights -- and Limitations of 1992 Series A Preferred Stock and Series A-1 Preferred Stock of Electrosource, Inc. as filed of record with the Delaware Secretary of State on January 15, 1992 (filed as Exhibit 4.1 to Electrosource, Inc. Form 8-K Current Report for Issuers Subject to the 1934 Act Reporting Requirements filed December 24, 1991 and incorporated herein by reference). 3.3 Amendment to Restated Certificate of -- Incorporation of Electrosource, Inc., increase in authorized shares to 50,000,000 shares (filed as Exhibit 3.1 to Electrosource, Inc., Quarterly Report on Form 10-Q for quarter ended June 30, 1995 and incorporated herein by reference). 3.4 Amendment to Restated Certificate of -- Incorporation of Electrosource, Inc., elimination of Certificate of Designation for Series A and Series A-1 Preferred Stock (filed as Exhibit 3.2 to Electrosource, Inc., Quarterly Report on Form 10-Q for quarter ended June 30, 1995 and incorporated hereby by reference). 3.5 Amendment to the Restated Certificate of -- Incorporation of Electrosource filed as of July 22, 1996 (filed as Exhibit 3.1 to Electrosource, Inc. Quarterly Report on Form 10- Q for the quarter ended June 30, 1996 and incorporated herein by reference). 3.6 Bylaws of Electrosource, Inc. (filed as Exhibit -- 3.2 to Form 10 and incorporated herein by reference). 3.7 Amendment to Bylaws of Electrosource, Inc., -- pursuant to a Certificate of Secretary dated May 25, 1990 (filed as Exhibit 3.3 to Electrosource, Inc., Annual Report on Form 10-K for the period ended December 31, 1991 and incorporated herein by reference). 3.8 Amendment to Bylaws of Electrosource, Inc. -- dated November 3, 1993 (filed as Exhibit 3.5 to Electrosource, Inc., Annual Report on Form 10-K for the period ended December 31, 1993 and incorporated herein by reference). 3.9 Amendment to Bylaws of Electrosource, Inc. -- dated June 23, 1994 (filed as Exhibit 3.6 to Electrosource, Inc. Annual Report filed on Form 10-K for the period ended December 31, 1994 and incorporated herein by reference). 3.10 Amendment to Bylaws of Electrosource, Inc. -- dated November 13, 1996 (filed as Exhibit 3.10 to Electrosource, Inc. Annual Report filed on Form 10-K for the period ended December 31, 1996 and incorporated herein by reference). 4.1 Warrant to purchase up to 5,424 shares of -- Electrosource, Inc. Common Stock issued to Rosehouse Ltd., a Bermuda-based institutional buyer, dated April 5, 1995 (filed as an Exhibit to Electrosource, Inc. Current Report on Form 8- K filed April 12, 1995 and incorporated herein by reference). 4.2 Warrant to purchase up to 5,000 shares of -- Electrosource, Inc. Common Stock issued to Ally Capital Management, Inc. on April 17, 1995 (filed as Exhibit 4.1 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and incorporated herein by reference). 4.3 Warrant to purchase up to 25,000 shares of -- Electrosource, Inc., Common Stock, issued to Rosehouse Ltd., a Bermuda-based institutional buyer, dated July 27, 1995 (filed as Exhibit 4.4 to Electrosource, Inc. Quarterly Report on Form 10-Q for quarter ended June 30, 1995 and incorporated herein by reference). 4.4 Warrant (Stock Option Agreement No. W12-101) to -- purchase up to 20,000 shares of Electrosource, Inc., Common Stock, issued to Corning Incorporated dated December 31, 1997 for payment of that certain Project Annex dated October 20, 1997 (filed as Exhibit 4.16 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 4.5 Warrant (Stock Option Agreement No. W12-102A) -- to purchase up to 70,000 shares of Electrosource, Inc., Common Stock, issued to Corning Incorporated dated December 31, 1997 for payment on that certain Project Annex dated October 20, 1997 (filed as Exhibit 4.17 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 4.6 Warrant (Stock Option Agreement No. W12-103A) -- to purchase up to 70,000 shares of Electrosource, Inc., Common Stock, issued to Corning Incorporated dated December 31, 1997 for payment on that certain Project Annex dated October 20, 1997 (filed as Exhibit 4.18 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 4.7 Warrant (Stock Option Agreement No. W12-102B) -- to purchase up to 60,000 shares of Electrosource, Inc. Common Stock, issued to Corning Incorporated dated June 30, 1998 for payment of that certain Project Annex dated October 20, 1997 (filed as Exhibit 4.7 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1998 and incorporated herein by reference). 4.8 Warrant (Stock Option Agreement No. W12-103B) -- to purchase up to 60,000 shares of Electrosource, Inc. Common Stock, issued to Corning Incorporated dated June 30, 1998 for payment of that certain Project Annex dated October 20, 1997 (filed as Exhibit 4.8 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1998 and incorporated herein by reference). 10.1 Sublicense Agreement dated as of October 5, -- 1987 between Electrosource, Inc. and Tracor, Inc. (filed as Exhibit 10.4 to Form 10 and incorporated herein by reference). 10.2 Patent and Technology Exclusive License -- Agreement dated August 14, 1984 between Tracor, Inc. and Blanyer-Mathews Associates, Inc. ("BMA") (filed as Exhibit 10.9 to Registration Statement [No 33-30486] on Form S-1 filed August 14, 1989 hereinafter referred to as "Form S-1" and incorporated herein by reference). 10.3 Amendment to Patent and Technology Exclusive -- License Agreement dated May 29, 1987 between Tracor, Inc. and BMA (filed as Exhibit 10.10 to Form S-1 and incorporated herein by reference). 10.4 Bonus Royalty Agreement dated May 26, 1989 -- among Electrosource, Inc., Tracor, Inc., and BMA (filed as Exhibit 19 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1989 and incorporated herein by reference). 10.5 Amendment to Bonus Royalty Agreement entered -- into as of November 30, 1989 by and among BMA, Tracor, Inc. and Electrosource, Inc. (filed as Exhibit 10.17 to Post Effective Amendment No. 1 to Form S-1 Registration Statement [No. 33- 34581] filed December 11, 1989 hereinafter referred to as "Post-Effective Amendment" and incorporated herein by reference). 10.6 Assignment of Patent License dated as of May -- 14, 1990 by and between Electrosource, Inc. and Tracor, Inc. (joined by BMA for limited purposes described therein) (filed as Exhibit 10.20 to the Company's Annual Report on Form 10- K for the period ended December 31, 1990 hereinafter referred to as the "1990 Form 10-K" and incorporated herein by reference). 10.7 Letter Agreement dated as of January 15, 1991 -- between Electrosource, Inc. and BMA (filed as Exhibit 10.21 to the Company's 1990 Form 10-K and incorporated herein by reference). 10.8 License Modification Agreement dated January -- 16, 1992 between Blanyer Mathews & Associates, Inc., Electrosource, Inc. and Battery Horizons, Ltd. (filed as Exhibit 10.23 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1991 and incorporated herein by reference). 10.9 First Amendment to Assignment of Patent License -- dated April 2, 1992 between Electrosource, Inc. and Tracor, Inc. (filed as Exhibit 10.58 to Company's Registration Statement [No. 33-65248] on Form S-1 filed June 30, 1993 and incorporated herein by reference). 10.10 Lease Agreement between William D. McMorris and -- Horizon Battery Technologies, Inc. dated August 17, 1993 (filed as Exhibit 10.42 to Electrosource Inc. Annual Report on Form 10-K for the period ended December 31, 1994 and incorporated herein by reference). 10.11 Lease Agreement between William D. McMorris and -- Electrosource, Inc. dated May 29, 1998 (filed as Exhibit 10.1 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). 10.12 Amendment to Business Alliance and License -- Agreement dated November 1, 1995 between Electric Power Research Institute and Electrosource, Inc. (filed as Exhibit 10.2 to Electrosource, Inc. Quarterly Report on Form 10- Q for the quarter ended September 30, 1995 and incorporated herein by reference). 10.13 Stock Purchase Agreement together with the -- Asset and Technology License Agreement dated January 31, 1995 between BDM Technologies, Inc. and Electrosource, Inc. (filed as Exhibit 10.46 to Electrosource, Inc. Annual Report on Form 10- K for the period ended December 31, 1994 and incorporated herein by reference). 10.14 First Amendment to Asset and Technology License -- Agreement between BDM International, Inc. and Electrosource, Inc. dated December 18, 1997 (filed as Exhibit 10.17 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.15 Equipment Lease Agreement dated September 7, -- 1995, between Salem Capital Corporation and Electrosource, Inc. (filed as Exhibit 10.65 to Electrosource, Inc. Annual Report on Form 10-K for the period ending December 31, 1995 and incorporated herein by reference). 10.16 Development Agreement and Agreement for -- Purchase of Machinery and Supplies between Electrosource, Inc., and Charles L. Mathews ("Contractor") dated November 1, 1995 (filed as Exhibit 10.68 to Electrosource, Inc. Annual Report on Form 10-K for the period ending December 31, 1995 and incorporated herein by reference). 10.17 Agreement for Aircraft Starting Battery -- Distribution between Electrosource, Inc. and Horizon Aviation, Inc. dated February 13, 1996 (filed as Exhibit 10.70 to Electrosource, Inc. Annual Report on Form 10-K for the period ending December 31, 1995 and incorporated herein by reference). 10.18 Memorandum of Understanding between -- Electrosource, Inc. and Lockheed Martin Corporation dated March 15, 1996 (filed as Exhibit 10.1 to Electrosource, Inc. Quarterly Report on Form 10-Q for quarter ended March 31, 1996 and incorporated herein by reference). 10.19 Subscription Agreements between participants -- and Electrosource, Inc. dated January 23, 1997 (filed as Exhibit 4.9 to Electrosource, Inc. Registration Statement [No. 333-25659] Form S-3 on April 23, 1997 and incorporated herein by reference). 10.20 Amendment Number One to Stock Purchase Warrant -- dated August 18, 1998, issued under Subscription Agreements between participants and Electrosource, Inc. dated January 23, 1997 (filed as Exhibit 10.2 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 and incorporated herein by reference). 10.21 Note Purchase and Option Agreement for $4 -- million dated March 27, 1997 between Electrosource, Inc. and Corning Incorporated (filed as Exhibit 4.1 to Electrosource, Inc. Quarterly Report on Form 10-Q for quarter ended March 31, 1997 and incorporated herein by reference). 10.22 5% Convertible Promissory Note for $100,000 -- dated September 27, 1997 between Electrosource, Inc. and Corning Incorporated for payment of interest due on the Note Purchase and Option Agreement dated March 27, 1997 (filed as Exhibit 10.31 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.23 5% Convertible Promissory Note for $102,500 -- dated March 27, 1998 between Electrosource, Inc. and Corning Incorporated for payment of interest due on the Note Purchase and Option Agreement dated March 27, 1997 and Promissory Note dated September 27, 1997 (filed as Exhibit 10.32 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.24 Amendment No. 1 dated December 22, 1997 to -- Stock Option Agreement dated March 27, 1997 between Corning Incorporated and Electrosource, Inc. (filed as Exhibit 10.33 to Electrosource, Inc. Annual Report on Form 1o-K for the period ended December 31, 1997 and incorporated herein by reference). 10.25 Research and Development Umbrella Agreement -- dated July 1, 1997 between Corning Incorporated and Electrosource, Inc. (filed as Exhibit 10.34 to Electrosource, Inc. Annual Report on Form 10- K for the period ended December 31, 1997 and incorporated herein by reference). 10.26 Project Annex dated October 20, 1997 to the -- Development Umbrella Agreement dated as of July 1, 1997 by and between Corning Incorporated and Electrosource, Inc., being further defined in Exhibit 1, Project Proposal, Physical and Chemical Description of Battery Electrode "Moss." (filed as Exhibit 10.35 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.27 Project Annex dated October 20, 1997 to the -- Development Umbrella Agreement dated as of July 1, 1997 by and between Corning Incorporated and Electrosource, Inc., being further defined in Exhibit 1, Project Proposal, Engineering Resources (filed as Exhibit 10.36 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.28 Project Annex dated October 20, 1997 to the -- Development Umbrella Agreement dated as of July 1, 1997 by and between Corning Incorporated and Electrosource, Inc., being further defined in Exhibit 1, Project Proposal, Characterization of Electrode Materials and Collector Grid Materials (filed as Exhibit 10.37 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.29 Amendment dated June 15, 1998 to May 29, 1998 -- Agreement terminating Notes between Corning Incorporated and Electrosource, Inc. for a one- day extension for payment (filed as Exhibit 10.3 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated herein by reference). 10.30 Stock Purchase Agreement dated June 2, 1998 -- between Kamkorp and Electrosource, Inc. (filed as Exhibit 4.1 to Electrosource, Inc. Form 8-K dated June 11, 1998 and incorporated herein by reference). 10.31 Registration Rights Agreement dated June 2, -- 1998 between Kamkorp and Electrosource, Inc. (filed as Exhibit 4.2 to Electrosource, Inc. Form 8-K dated June 11, 1998 and incorporated herein by reference). 10.32 Form of Severance Agreement between -- officers/key employees and Electrosource, Inc. dated May 18, 1998 (filed as Exhibit 10.4 to Electrosource, Inc. Quarterly Report on Form 10- Q for the quarter ended June 30, 1998 and incorporated herein by reference). 10.33 Purchase Order for Horizon Batteries Pack -- Development Program between Fiat Auto and Electrosource, Inc. dated September 30, 1996 (filed as Exhibit 10.40 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.34 Frame-Development Contract dated March 14, 1997 -- between SMH Automobile S.A. and Electrosource, Inc. (filed as Exhibit 10.41 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.35 Summary Contract Amendment Terms dated November -- 12, 1997 for Frame-Development Contract dated March 14, 1997 between SMH Automobile S.A. and Electrosource, Inc. (filed as Exhibit 10.42 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.36 Severance Agreement between James M. Rosel and -- Electrosource, Inc. effective August 31, 1998 (filed as Exhibit 10.1 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 and incorporated herein by reference). 10.37 Purchase Order Number ES1001 between -- Electrosource International and Electrosource, Inc. dated June 15, 1998 for 5,800 batteries (filed as Exhibit 10.49 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1998 and incorporated herein by reference). 10.38 Purchase Order Number ES1002 (amendment to -- Purchase Order Number ES1001) between Electrosource International and Electrosource, Inc. dated March 3, 1999 (filed as Exhibit 10.50 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1998 and incorporated herein by reference). The following exhibits filed under Paragraph 10 of Item 601 are the Company's compensation plans and arrangements: 10.39 Director Indemnification Agreement dated -- September 1, 1993 between Electrosource, Inc. and Dr. Norman Hackerman (filed as Exhibit 10.57 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1993 and incorporated herein by reference). 10.40 Director Indemnification Agreement dated June -- 22, 1995 between Electrosource, Inc. and Nathan Morton (filed as Exhibit 10.2 to Electrosource, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and incorporated herein by reference). 10.41 Director Indemnification Agreement dated March -- 3, 1997 between Electrosource, Inc. and Richard E. Balzhiser (filed as Exhibit 10.51 to Electrosource, Inc. Annual Report on Form 10-K for the period ended December 31, 1997 and incorporated herein by reference). 10.42 Director Indemnification Agreement dated June -- 2, 1998 between Electrosource, Inc. and Kamal Siddiqi (files as Exhibit 10.5 to Electrosource, Inc. Quarterly Report on Form 10- Q for the period ended June 30, 1998 and incorporated herein by reference). 10.43 Director Indemnification Agreement dated June -- 2, 1998 between Electrosource, Inc. and Clifford Winkless (filed as Exhibit 10.6 to Electrosource, Inc. Quarterly Report on Form 10- Q for the period ended June 30, 1998 and incorporated herein by reference). 10.44 Director Indemnification Agreement dated June -- 2, 1998 between Electrosource, Inc. and Roger Musson (filed as Exhibit 10.7 to Electrosource, Inc. Quarterly Report on Form 10-Q for the period ended June 30, 1998). 10.45 Director Indemnification Agreement dated -- December 23, 1998 between Electrosource, Inc. and William F. Griffin (filed as Exhibit 10.64 to Electrosource, Inc. Annual Report on Form 10K for the period ended December 31, 1998 and incorporated herein by reference). 10.46 Director Indemnification Agreement dated -- December 23, 1998 between Electrosource, Inc. and James M. Rosel (filed as Exhibit 10.65 to Electrosource, Inc. Annual Report on Form 10K for the period ended December 31, 1998 and incorporated herein by reference). 10.47 Director Indemnification Agreement dated August E-10 16, 1999 between Electrosource, Inc. and Benny E. Jay. 10.48 1996 Stock Option Plan for Electrosource, Inc. -- (filed as Exhibit 4.2 to Registration Statement [No. 333-31101] on Form S-8 and incorporated herein by reference). 10.49 1999 Stock Option Plan for Electrosource, Inc. -- (filed as Exhibit 4 to Form 10Q for the quarter ended June 30, 1999 and incorporated herein by reference). 24.1 Consent of Weaver and Tidwell LLP E-14 24.2 Consent of Ernst & Young LLP E-15 27. Financial Data Schedule E-16 EX-8 2 EXHIBIT 10.47 DIRECTOR INDEMNIFICATION AGREEMENT THIS AGREEMENT is made this 16th day of August, 1999, between ELECTROSOURCE, INC., a Delaware corporation ("Corporation") and Benny E. Jay ("Director"). WITNESSETH: WHEREAS, Director is a member of the Board of Directors of Corporation and in such capacity is performing a valuable service for Corporation; and WHEREAS, the Bylaws of the Corporation (the "Bylaws") provide for the indemnification of the officers, directors, agents and employees of Corporation; and WHEREAS, such Bylaws and Section 145 of the Delaware General Corporation Laws, as amended to date (the "State Statutes"), specifically provide that they are not exclusive, and thereby allow that contracts may be entered into between Corporation and the members of its Board of Directors with respect to indemnification of such directors; and WHEREAS, in accordance with the authorization provided by the State Statutes, Corporation has purchased and presently maintains a policy or policies of Directors and Officers Liability Insurance ("D&O Insurance") covering certain liabilities which may be incurred by its directors and officers in the performance of their services for Corporation; and WHEREAS, recent developments with respect to the terms and availability of D&O Insurance and with respect to the application, amendment and enforcement of statutory and bylaw indemnification provisions generally have raised questions concerning the adequacy and reliability of the protection afforded to directors thereby; and WHEREAS, in order to resolve such questions and thereby induce the Director to continue to serve as a member of the Board of Directors of Corporation, Corporation has determined and agreed to enter into this Agreement with Director. NOW THEREFORE, in consideration of Director's continued service as a Director after the date hereof, the parties hereto agree as follows: 1. Indemnity of Director. Corporation shall hold harmless and indemnify Director to the full extent authorized or permitted by the provisions of the State Statutes, or by any amendment thereof or other statutory provisions authorizing or permitting such indemnification which is adopted after the date hereof. 2. Maintenance of Insurance and Self Insurance. (a) Corporation represents that it presently has in force and effect a policy of D&O Insurance with the insurance company and in the amount as follows (the "Insurance Policy"): Insurer Policy No. Amount Deductible National Union Fire Insurance Co. 008565962 $2,000,000 $100,000/$250,000 SEC Subject only to the provisions of Section 2(b) hereof, Corporation hereby agrees that, so long as Director shall continue to serve as a director of Corporation (or shall continue at the request of Corporation to serve as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and thereafter so long as Director shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal or investigative, by reason of the fact that Director was a director of Corporation (or served in any of said other capacities), Corporation will purchase and maintain in effect for the benefit of Director one or more valid, binding and enforceable policy or policies of D&O Insurance providing, in all respects, coverage at least comparable to that presently provided pursuant to the Insurance Policy. (b) Corporation shall not be required to maintain said policy or policies of D&O Insurance in effect if said insurance is not reasonably available or if, in the reasonable business judgment of the then directors of Corporation, either (i) the premium cost for such insurance is substantially disproportionate to the amount of coverage; or (ii) the coverage provided by such insurance is so limited by exclusions that there is insufficient benefit from such insurance. (c) In the event Corporation does not purchase and maintain in effect said policy or policies of D&O Insurance pursuant to the provisions of Section 2(b) hereof, Corporation agrees to hold harmless and indemnify Director to the full extent of the coverage which would otherwise have been provided for the benefit of Director pursuant to the Insurance Policy. 3. Additional Indemnity. Subject only to the limitations set forth in Section 4 hereof, and without limitation to Section 1 above, Corporation shall further hold harmless and indemnify Director: (a) Against any and all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by Director in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action by or in the right of the Corporation) to which Director is or was a party or is threatened to be made a party by reason of the fact that Director is, was or at any time becomes a director of the Corporation, or is or was serving or at any time serves at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise; and (b) Otherwise to the fullest extent that may be provided to Director by Corporation under the nonexclusivity provisions of Section 10.5 of the Bylaws of the Corporation and the State Statutes. 4. Limitations on Additional Indemnity. No indemnity pursuant to Section 3 hereof shall be paid by Corporation: (a) except to the extent the aggregate of losses to be indemnified thereunder exceeds the amount of such losses for which the Director is indemnified either pursuant to Sections 1 or 2 hereof or pursuant to any D&O Insurance purchased and maintained by the Corporation; or (b) in respect to remuneration paid to Director if it shall be determined by the Reviewing Party (as defined in Section 5 below), or by a final judgment or other final adjudication, that such remuneration was in violation of law; or (c) if a determination of the Reviewing Party is made, or if a judgment is rendered against a Director, that an accounting must be made for profits made from the purchase or sale by Director of securities of Corporation in violation of the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; or (d) on account of Director's conduct which is determined by the Reviewing Party, or by a final judgment or other final adjudication, to have been knowingly fraudulent, deliberately dishonest or of willful misconduct; or (e) if the Reviewing Party or a Court having jurisdiction in the matter shall determine that such indemnification is not lawful. 5. Reviewing Party. "Reviewing Party" means: (a) the Board of Directors, provided that a majority of directors are not parties to the claim, or (b) special, independent counsel selected and appointed by the Board of Directors; or (c) special, independent counsel approved or chosen pursuant to Section 6 below. Any determination by the Reviewing Party shall be conclusive and binding on Corporation and Director. If the Reviewing Party determines that Director would not be permitted to be indemnified in whole or in part, Director shall have the right to commence litigation in the State of Delaware in any court of proper jurisdiction seeking an order or judgment by the court equivalent to the determination of the Reviewing Party or challenging any such determination by the Reviewing Party or any aspect thereof. 6. Change in Control of Corporation. If there is a change in control of Corporation (as defined below), then with respect to all matters thereafter arising concerning the rights of Director to indemnity payments and expense advances under this Agreement, or any other agreements or Bylaws now or hereafter in effect relating to director indemnification, Corporation shall seek legal advice and shall retain a Reviewing Party only from special, independent counsel selected by Director and approved by Corporation (which approval shall not be unreasonably withheld), and who has not otherwise performed services for Corporation or Director. In the event that Director and Corporation are unable to agree on the selection of the special, independent counsel, such special, independent counsel shall be selected by lot from among at least five law firms designated by Director, each of such law firms having more than 35 attorneys and having a rating of "av" or better in the then current Martindale-Hubbell Law Directory. Such selection shall be made in the presence of Director (and Director's legal counsel or either of them, as Director may elect). Such special, independent counsel, among other relevant appropriate matters, shall determine whether and to what extent Director would be permitted to be indemnified under applicable law and shall render its written opinion to Corporation and Director to such effect. Corporation shall pay the reasonable fees of the special, independent counsel and shall fully indemnify such counsel against any and all costs and expenses arising out of or relating to this Agreement or its engagement pursuant hereto. "Change in control" of Corporation shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of Corporation, is or becomes the "beneficial owner" (as defined in rule 13d-3 under the Act), directly or indirectly, of securities of Corporation representing 20% or more of the total voting power represented by Corporation's then outstanding voting securities; (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of Corporation and any new director whose election by the Board of Directors or nomination for election by Corporation's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease, for any reason, to constitute a majority of the Board of Directors; or (iii) the shareholders of Corporation approve a merger or consolidation of Corporation with any other corporation, other than a merger or consolidation that would result in the voting securities of Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 80% of the total voting power represented by the voting securities of Corporation or the surviving entity, as the case may be, or an agreement for sale or disposition by Corporation of all or substantially all Corporation's assets. 7. Continuation of Indemnity. All agreements and obligations of Corporation contained herein shall continue during the period Director is a director of Corporation (or is or was serving at the request of Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise), and shall continue thereafter so long as Director shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether, civil, criminal or investigative, by reason of the fact that Director was a director of Corporation or serving in any other capacity referred to herein. 8. Notification and Defense of Claim. Promptly after receipt by Director of notice of the commencement of any action, claim, suit or proceeding, Director will, if a claim in respect thereof is to be made against Corporation under this Agreement, notify Corporation of the commencement thereof; but the omission so to notify Corporation will not relieve it from any liability which it may have to Director otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Director notifies Corporation of the commencement thereof; (a) Corporation will be entitled to participate therein at its own expense, and; (b) Except as otherwise provided below, to the extent that it may wish, Corporation jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel satisfactory to Director. After notice from Corporation to Director of its election so to assume the defense thereof, Corporation will not be liable to Director under this Agreement for any legal or other expenses subsequently incurred by Director in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Director shall have the right to employ counsel in such action, suite or proceeding, but the fees and expenses of such counsel incurred after notice from Corporation of its assumption of the defense thereof shall be at the expense of Director unless (i) the employment of counsel by Director has been authorized by Corporation; (ii) Director shall have reasonably concluded that there may be a conflict of interest between Corporation and Director in the conduct of the defense of such action; or (iii) Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel shall be at the expense of Corporation. Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of Corporation or as to which Director shall have made the conclusion provided for in (i) above. (c) Corporation shall not be liable to indemnify Director under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. Corporation shall not settle any action or claim in any manner which would impose any penalty or limitation on Director without Director's written consent. Neither Corporation nor Director will unreasonably withhold its consent to any proposed settlement. 9. Advancement of Expenses. Upon the request of Director, and except as limited by paragraph 8(b) above, Corporation shall reimburse Director for all reasonable expenses paid by Director in defending any claim, civil or criminal action, suit or proceeding for which Director is entitled to be indemnified by Corporation for such expenses under the provisions of the State Statutes, the Bylaws, this Agreement or otherwise. 10. Repayment of Expenses. Director shall reimburse Corporation for all reasonable expenses paid or advanced to Director by Corporation in defending any claim, civil or criminal action, suit or proceeding against Director in the event and only to the extent that it shall be determined by the Reviewing Party that Director is not entitled to be indemnified by Corporation for such expenses under the provisions of the State Statutes, the Bylaws, this Agreement or otherwise. 11. Enforcement. (a) Corporation expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on Corporation hereby in order to induce Director to continue as a director of Corporation, and acknowledges that Director is relying upon this Agreement in continuing in such capacity. (b) In the event Director is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, Corporation shall reimburse Director for all of Director's reasonable fees and expenses in bringing and pursuing such action. 12. Severability. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be valid or unenforceable for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. 13. Governing Law; Binding Effect; Amendment and Termination. (a) This Agreement shall be interpreted and enforced in accordance with the laws of the State of Delaware. (b) This Agreement shall be binding upon Director and upon Corporation, its successors and assigns, and shall inure to the benefit of Director, his heirs, personal representatives and assigns and to the benefit of Corporation, its successors and assigns. (c) No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing, signed by both parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. ELECTROSOURCE, INC. DIRECTOR By: /s/ /s/ Printed Name: Don C. Perriello Printed Name: Benny E. Jay Title: Vice President/Finance EX-9 3 EXHIBIT 24.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in: (i) the Registration Number 33-21598 on Form S-8, (ii) the Registration Statement Number 33-49040 on Form S-8, and (iii) the Registration Statement Number 33-64110 on Form S-8 pertaining to the 1987 Stock Option Plan of Electrosource, Inc.; (i) the Registration Statement Number 33-22223 on Form S-8, (ii) the Registration Statement Number 33-35856 on Form S-8, (iii) the Registration Statement Number 33-49042 on Form S-8 and (iv) the Registration Statement Number 33-64108 on Form S-8 pertaining to the 1988 Non-Employee Director Stock Option Plan of Electrosource, Inc.; the Registration Statement Number 33-65386 on Form S-8 pertaining to the 1993 Non-Employee Consultant Stock Option Plan of Electrosource, Inc.; the Registration Statement Number 33-63363 on Form S-8 pertaining to the 1994 Stock Option Plan of Electrosource, Inc.; the Registration Statement Number 33-31101 on Form S-8 pertaining to the 1996 Stock Option Plan of Electrosource, Inc.; the Registration Statement (Amendment Number 2 to Form S-3 Number 33-63361) and related Prospectus for the registration of 185,934 shares of Electrosource, Inc. common stock; the Registration Statement (Form S-3 Number 333-04637) and related Prospectus for the registration of 80,610 shares of Electrosource, Inc. common stock; the Registration Statement (Form S-3 Number 333-10715) and related Prospectus for the registration of 1,231 shares of Electrosource, Inc. common stock; and the Registration Statement (Form S-3 Number 333-25659) and related Prospectus for the registration of 437,674 shares of Electrosource, Inc. common stock of our report dated March 14, 2000, with respect to the financial statements of Electrosource, Inc. as of the for the year ended December 31, 1999, included in this Annual Report on Form 10-K for the year ended December 31, 1999. WEAVER AND TIDWELL, LLP Fort Worth, Texas March 28, 2000 EX-11 4 EXHIBIT 24.2 Consent of Independent Auditors We consent to the incorporation by reference in: (i) the Registration Statement Number 33-21598 on Form S-8; (ii) the Registration Statement Number 33-49040 on S-8 and (iii) the Registration Statement Number 33- 64110 on Form S-8 pertaining to the 1987 Stock Option Plan of Electrosource, Inc.; (i) the Registration Statement Number 33-22223 on Form S-8, (ii) the Registration Statement Number 33-35856 on Form S-8, (iii) the Registration Statement Number 33-49042 on Form S-8 and (iv) the Registration Statement Number 33- 64108 on Form S-8 pertaining to the 1988 Non-Employee Director Stock Option Plan of Electrosource, Inc.; the Registration Statement Number 33-65386 on Form S-8 pertaining to the 1993 Non-Employee Consultant Stock Option Plan of Electrosource, Inc.; the Registration Statement Number 33-63363 on Form S-8 pertaining to the 1994 Stock Option Plan of Electrosource, Inc.; the Registration Statement Number 33-31101 on Form S-8 pertaining to the 1996 Stock Option Plan of Electrosource, Inc.; the Registration Statement (Amendment Number 2 to Form S-3 Number 33-63361) and related Prospectus for the registration of 185.934 shares of Electrosource, Inc. Common Stock; the Registration Statement (Form S-3 Number 333-04637) and related Prospectus for the registration of 80,610 shares of Electrosource, Inc. common stock; the Registration Statement (Form S-3 Number 333-10715) and related Prospectus for the registration of 1,231 shares of Electrosource, Inc. common stock; and the Registration Statement (Form S-3 Number 333-25659) and related Prospectus for the registration of 437,674 shares of Electrosource, Inc. common stock of our report dated March 5, 1999, with respect to the financial statements of Electrosource, Inc. as of and for the years ended December 31, 1998 and 1997 included in the Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Ernst & Young LLP Austin, Texas March 28, 2000 EX-27 5
5 12-MOS DEC-31-1999 DEC-31-1999 157 0 1418 0 168 1788 7076 (4322) 5407 2902 0 0 0 12138 (9633) 5407 2203 2203 2469 5652 0 0 17 (3466) 0 (3466) 0 0 0 (3466) (0.34) (0.34)
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