UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended
December 31, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-10446
LITHIUM TECHNOLOGY CORPORATION
(Name of Small Business Issuer in Its Charter)
DELAWARE 13-3411148
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5115 CAMPUS DRIVE, PLYMOUTH MEETING, PENNSYLVANIA
(Address of Principal Executive Offices)
19462
(Zip Code)
(610) 940-6090
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: NONE.
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK
PAR VALUE, $0.01
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendments to this Form 10-KSB.[ ]
State issuer's revenues for its most recent fiscal year. $22,000
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days.
Approximately $9,622,351 as of March 1, 2002. The aggregate market value was
based upon the mean between the closing bid and asked price for the common stock
as quoted by the NASD OTC Electronic Bulletin Board.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of March 22, 2002, 64,303,305
shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security-holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). None.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
2
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Description of Business................................................................................ 4
Item 2. Description of Property................................................................................ 14
Item 3. Legal Proceedings...................................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.................................................... 14
PART II
Item 5. Market for LTC's Common Equity and Related Stockholder Matters......................................... 15
Item 6. Management's Discussion and Analysis or Plan of Operation.............................................. 16
Item 7. Financial Statements................................................................................... 17
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................................... 17
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...................................................... 18
Item 10. Executive Compensation................................................................................. 20
Item 11. Security Ownership of Certain Beneficial Owners and Management......................................... 24
Item 12. Certain Relationships and Related Transactions......................................................... 25
Item 13. Exhibits and Reports on Form 8K........................................................................ 26
FINANCIAL STATEMENTS............................................................................................... F-1
3
PART I
SAFE HARBOR STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This report contains certain forward-looking
statements and information that are based on the beliefs of management as well
as assumptions made by and information currently available to management. The
statements contained in this report relating to matters that are not historical
facts are forward-looking statements that involve risks and uncertainties,
including, but not limited to, the successful commercialization of our
batteries, future demand for our products, general economic conditions,
government and environmental regulation, competition and customer strategies,
technological innovations in the battery industries, changes in our business
strategy or development plans, capital deployment, business disruptions, our
ability to consummate the share exchange and financing described herein and
other risks and uncertainties, certain of which are beyond our control. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may differ materially from those
described herein as anticipated, believed, estimated or expected.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW AND RECENT DEVELOPMENTS
GENERAL
We are a pre-production stage company in the process of commercializing unique,
solid-state, lithium-ion and lithium polymer rechargeable batteries. We are
engaged in technology development activities and pilot line manufacturing
operations to further advance this battery technology and we hold various
patents relating to such batteries.
We have worked closely with selected portable electronics Original Equipment
Manufacturers ("OEMs") in the past, exploring various notebook, computer, PDA
and wireless handset applications. Over the past few years we have refocused our
unique large footprint cell technology and market activities to concentrate on
large, high rate battery applications including advanced automotive batteries
for 42-volt systems, Hybrid Electric Vehicles (HEVs) and energy storage devices
for the distributed power/renewable energy market. In September 2000, we
completed our first working prototype lithium-ion HEV battery, complete with
battery management and control electronics. A second generation prototype HEV
battery, designed to meet the specifications of an existing HEV, was completed
in January 2001. We are currently working on a prototype 42-volt automotive
battery which we expect to deliver to a European auto manufacturer in the second
quarter of 2002. We have not yet delivered a prototype HEV, 42-volt or
stationary power battery for testing by a third party.
We are a Delaware corporation that was incorporated on December 28, 1995 under
the laws of the State of Delaware. Our predecessor - Lithium Technology
Corporation (a Nevada corporation previously named Hope Technologies, Inc.) -
merged with and into us in a reincorporation merger that became effective on
February 8, 1996. We have one wholly-owned subsidiary, Lithion Corporation.
Our executive office is located at 5115 Campus Drive, Plymouth Meeting,
Pennsylvania 19462 and our telephone number is (610) 940-6090. Information
contained on our web site (www.lithiumtech.com) does not constitute part of this
Report.
PENDING TRANSACTION WITH GAIA
In December 2001 we entered into a non-binding letter of intent (the "LOI") with
the German lithium polymer battery company GAIA Akkumulatorenwerke GmbH,
headquartered in Nordhausen/Thuringia, Germany ("GAIA") and Arch Hill Capital
N.V. of the Netherlands ("Arch Hill"), the sole stockholder of GAIA. The LOI
contemplates a potential share exchange between us and GAIA (the "GAIA Share
Exchange") whereby we would acquire an equity interest in GAIA in exchange for
the issuance to Arch Hill of an equity interest in us. If we consummate the GAIA
Share Exchange we anticipate that we would enter into a strategic alliance
agreement with GAIA and operate the two companies as a single entity with two
operating locations - at Plymouth Meeting, Pennsylvania and at Nordhausen,
Germany.
We have agreed in the LOI to use our best efforts to consummate the GAIA Share
Exchange by May 31, 2002. We have not entered into any definitive agreements
relating to the GAIA Share Exchange as of the date of this Report and no
assurance can be given that the GAIA Share Exchange will be consummated as
described herein or at all.
In order to have sufficient capital resources for our development, production,
operating and administrative needs and in order to implement the new strategy of
combining our operations with GAIA we will need to raise at least $6,000,000 in
a new equity financing (the "New Financing"). We expect that the New Financing
will be a condition precedent to the GAIA Share Exchange. If we raise $6,000,000
in the New Financing we believe that we would have sufficient funds to meet our
needs until approximately June 2003. We believe that a second financing
transaction will be necessary during the twelve months after the completion of
the GAIA Share Exchange, if such transaction is consummated, in order to fully
implement our new business plan.
We have not entered into any definitive agreements relating to the New Financing
as of the date of this Report and no assurance can be given that the New
Financing will be consummated.
4
BRIDGE FINANCING BY ARCH HILL
Pursuant to the terms of a bridge loan entered into as of January 8, 2002, as
amended on March 22, 2002, Arch Hill has agreed to advance working capital to us
until the earlier of the closing of the New Financing and May 31, 2002. Notes
issued to Arch Hill under the bridge financing agreement are convertible, at any
time prior to repayment of the Notes, into our common stock at $.08 per share.
Arch Hill has advanced a total of $1,042,025 through March 22, 2002 convertible
into 13,025,312 shares of our common stock. With respect to the shares issuable
upon conversion of the bridge notes, we granted certain demand and piggy back
registration rights commencing May 1, 2002.
TERMINATION OF MERGER WITH ILION
On December 31, 2001, we entered into a Termination Agreement with Ilion
Technology Corporation ("Ilion") which was closed on January 8, 2002 when all
closing conditions were met (the "Termination Agreement"). Pursuant to the
Termination
5
Agreement, the existing Merger Agreement between us and Ilion, dated January 19,
2000, as amended from time to time, and all other agreements between us and
Ilion, were terminated.
Pursuant to our Merger Agreement with Ilion, which had a termination date of
February 28, 2002, we had proposed to merge our lithium battery business with
Ilion's. That merger was contingent on an initial public offering by Ilion,
which did not occur.
Under the provisions of the Termination Agreement, all rights and obligations of
Ilion and us under the Merger Agreement, the related bridge financing agreement
in effect since October 1999, and all other agreements between us and Ilion,
were terminated. In connection with the Termination Agreement, Ilion sold to
Arch Hill $3,949,000 of our notes originally held by Ilion and the remaining
$1,300,000 of our notes held by Ilion were converted into 13,000,000 restricted
shares of our common stock (the "Ilion Conversion Shares").
The Termination Agreement provides that after the termination closing and from
time to time as requested by Ilion, we will take all appropriate actions to
nominate one person designated by Ilion to our Board of Directors provided that
Ilion (i) is the beneficial owner of at least 1% of our common stock then
outstanding during the two year period after the termination closing or (ii) is
the beneficial owner of at least 5% of our common stock then outstanding at any
time after the termination closing.
As a condition to the Termination Agreement, the existing Warrant Agreement
between us and Ilion, dated as of January 19, 2000 (the "Warrant Agreement"),
relating to 7,500,000 shares of our common stock was amended (the "Warrant
Amendment") to increase the number of shares of our common stock subject to the
Warrant Agreement to 12,500,000 all exercisable at $.15 per share (the "Warrant
Shares") and to extend the termination date of the Warrants to January 10,
2004. The Warrants are exercisable from the date of issuance.
The Termination Agreement also provides that if after the closing of the New
Financing and the GAIA Share Exchange the Ilion Conversion Shares and the
Warrant Shares do not equal at least 9% of our capital stock on a fully diluted
basis, then we will issue to Ilion warrants to purchase our common stock (the
"New Warrant Shares") having the same terms as the Warrant and Warrant Amendment
so that the Ilion Conversion Shares, the Warrant Shares and the new Warrant
Shares equal 9% of our capital stock on a fully diluted basis immediately after
the GAIA Share Exchange.
As a condition to the Termination Agreement, we entered into cross licensing
agreements with Ilion whereby worldwide, non-exclusive, royalty free, perpetual
licenses were granted by each to the other with respect to certain specified
technology. The license from us to Ilion covers all product designs, processing
techniques and knowledge known to "those skilled in the art" whether or not
patented or patentable which we owned or possessed on December 31, 2001 and have
communicated to Ilion or was developed by us pursuant to the LTC-Ilion Merger
Agreement, solely as the foregoing relates to the materials, design and
architecture of lithium-ion/lithium-ion polymer batteries and excluding any of
the foregoing as it relates to lithium metal polymer batteries and excluding any
improvements to the technology after December 31, 2001. The license from Ilion
to us covers all product designs, processing techniques and knowledge known to
"those skilled in the art" whether or not patented or patentable which Ilion
owned or possessed on December 31, 2001 and has communicated to us or was
developed by us pursuant to the LTC-Ilion Merger Agreement, solely as the
foregoing relates to the materials, design and architecture of lithium-ion
/lithium-ion polymer batteries and excluding any improvements to the technology
after December 31, 2001.
6
As part of the licensing arrangement we agreed not to duplicate Ilion's High
Power Device product or design or any other aspect of the high power device
system that can be protected by patent or may not be determined by outside
analysis and agreed to not enter the power conditioning reliability market for a
period of two years after Proteus Power LLC (or its successor) ("Proteus")
enters commercial production or December 31, 2004, whichever is earlier. Subject
to the foregoing, we have the right to use known conventional construction
designs which exist in the commercial marketplace outside of Ilion-Proteus.
With respect to the Ilion Conversion Shares, the Warrant Shares and the shares
issuable upon conversion of the Ilion Notes and the Arch Bridge Notes, we
granted certain demand and piggy back registration rights commencing May 1,
2002.
As a further condition to the Termination Agreement on December 31, 2001, we
entered into a Note Purchase and Sale Agreement with Ilion and Arch Hill (the
"Note Purchase and Sale Agreement") which was closed on January 8, 2002 when all
closing conditions were met. Under the terms of the Note Purchase and Sale
Agreement, Arch Hill acquired from Ilion $3,949,000 principal amount of our
promissory notes held by Ilion (the "Ilion Notes"), convertible at $0.10 per
share into 39,490,000 shares of our Common Stock. The Ilion Notes were
previously issued by us to Ilion in connection with the LTC-Ilion Merger
Agreement and related bridge financing agreement.
DEVELOPMENT AND COMMERCIALIZATION PLAN
During our development phase, we have adapted proven industrial manufacturing
processes to produce rechargeable flat lithium cells. In parallel, by using our
coating and laminating capabilities and operations we have developed processes
for manufacturing large footprint lithium-ion and lithium polymer cells. In
recent years, we combined these techniques with proprietary design, packaging
and assembly techniques to produce large battery assemblies in response to a
growing interest by automobile manufacturers for 42-volt automotive and HEV
batteries.
HEVs are vehicles that combine a small internal combustion engine with an
electric motor powered by an on-board battery. HEVs have or are expected to have
battery systems ranging from 144-288 volts (compared to today's standard 12-volt
car battery), which power the car part of the time in tandem with a smaller gas
engine. The result is a "half electric" vehicle which increases the gas mileage
of comparable conventional vehicles thereby reducing emissions. Innovative
transmission systems assure a smooth blending of the two power sources. The gas
engine powers the vehicle while cruising on level roads and charges the on-board
battery which provides the extra power needed for acceleration and climbing
hills.
There are incentives for automakers to develop -- and for consumers to buy --
HEVs. The 2003 Department of Energy budget includes a tax credit of up to $4,000
towards the purchase of an HEV. With the success of HEVs introduced to date and
increasing demands for more "on board" power, there is growing interest on the
part of automakers to apply advanced battery technology to a variety of
automotive applications.
In addition to the development of HEVs, there has been movement towards a
42-volt battery system. The 12-volt electrical system, which has been around for
45 years, cannot accommodate all the new electronics available for today's cars.
In the mid 1990's carmakers in the U.S., Japan and Europe began looking at
tripling the on-board battery power to 36 volts, which increases to 42 volts
when the car is operating. The 42-volt systems is expected to provide multiple
advantages -- better fuel efficiency, reduced emissions and more consumer
benefits by enabling an expanded array of on-board electronics and comforts,
some of which operate when the vehicle is not in use.
The 42-volt systems involve some redesign and modification of the electrical
system and its components (particularly lights) although some manufacturers are
initially planning to use a 12-volt battery along with the 42-volt battery until
the older system can be phased out. Japanese 42-volt systems are anticipated in
the marketplace in 2003, while European manufacturers are aiming at 2004-2005
for the introduction. The intention of U.S. auto manufacturers regarding 42-volt
systems is less clear.
We believe that we have the capability to design batteries for a wide array of
applications - such as those requiring high rates or high capacity as well as
high or low temperatures. Since 1983, we have evaluated a wide array of
lithium-ion cell designs covering a broad spectrum of applications. These
evaluations have involved coating a wide variety of electrode materials -
including those for lithium-ion liquid, lithium metal and lithium polymer
chemistries - onto a variety of substrates, including solid foils, expanded
metal grids and fiber webs. In addition, certain manufacturing steps were
adapted to our pilot line over the last six years to accommodate these new
techniques. These factors have allowed us the flexibility to match the battery
design to the application. In recent years, we have extended our experience to
the assembly of full batteries complete with battery management and control
systems.
We believe that we are now in a position to begin to use our technology to
provide large prototype batteries for the 42-volt automotive and HEV battery
markets and for other large battery applications such as renewable power,
including solar electric systems and uninterruptible power systems.
7
TECHNOLOGY OVERVIEW
Our rechargeable lithium battery technology base dates back to 1983 when our
company was known as Hope Technologies. After a restructuring in 1994, our
company was re-started and we took our present name. We have engaged in
high-yield pilot line operations since 1996. In 1997 we began focusing on unique
large footprint flat cells and large battery assemblies comprised of stacked
cells and control circuitry. We have built an HEV prototype battery which was
designed to meet the specifications of an existing HEV.
Our lithium-ion and lithium polymer batteries are comprised of thin, laminated
cells or bicells. Our proprietary technology includes critical composition,
process, and packaging aspects of the battery.
We have experience with a wide variety of lithium battery systems and
constructions, which we believe will enable us to develop creative product
solutions to meet customer requirements. Our technology experience includes the
following:
- Cell Type
- Lithium metal
- Lithium-ion polymer
- Lithium-ion liquid
- Chemistries
- Anodes:
Lithium metal alloy, carbon/graphite, lithium titanate
- Cathodes:
Cobalt, manganese spinel and layered oxides, nickel cobalt, vanadium
oxide
- Separators:
Various polymers (including mixtures), Celgard
- Electrolytes: Common commercial and some proprietary systems
based on many different solvents and salts
- Cell Constructions
- Electrode pairs
- Bicells
- Bipolars
- Substrates
- Carbon web
- Metal non-wovens
- Polymer non-wovens
- Metal foil collectors
- Metal grid collectors
- Release carriers
8
- Assemblies
- Flat prismatic multi-cell stacks
- Folded prismatic multi-cell stacks
- Full assemblies of cells into batteries
- Battery management and control systems
- Applications (50 mWhr - 100 kWhr)
- Small metal primaries (1/2"x -3/4")
- Cell phone (1"x3")
- Laptop (side-by-side 4"x8" cells)
- HEV (stacked 7"x10" cells)
- Stationary Power (12"x12" stacks)
- Performance
- High capacity: 200+ Whr/kg, 250+Whr/1
- High power: 30C
- Capacity retention: 90% @1000 cycles
- Broad temperature range
We also have experience in cell and battery manufacturing processes. Our coating
and lamination know-how enables us to achieve uniformity and consistency via a
range of application techniques. We have the ability to handle large footprint
cells and assemble cells into large battery stacks. In addition, we are familiar
with many coating, lamination, assembly, packaging, and formation equipment
suites which can be scaled up for large volume operations.
We had no revenues from commercial operations for the year ended December 31,
2001. Revenues from development contracts were $22,000 for the year ended
December 31, 2001.
INTELLECTUAL PROPERTY
We hold twenty-six issued U.S. patents and have three pending patent
applications on our technology. We also have other proprietary knowledge that is
in the patent disclosure stage or that we protect as trade secrets. Our early
patents relate to materials and construction for lightweight solid-state
rechargeable batteries. The later patents and applications relate to
improvements to the technology contained in the first patent or to other key
aspects of rechargeable lithium battery technology.
The earliest of our patents expires 2005. There is no current or, to our
knowledge, threatened litigation on our patents. The following table sets forth
the U.S. patents that we currently hold:
9
Patent Number Title
------------- -----
4,794,059 Lightweight Solid State Rechargeable Batteries
4,861,690 Lightweight Battery Construction
4,960,655 Lightweight Batteries
5,006,431 Solid State Polymer Electrolyte for Batteries
5,057,385 Battery Packaging Construction
5,102,752 Solid State Composite Electrolyte for
Batteries
5,350,647 Electrodes for Electrochemical Devices
5,378,558 Composite Electrolytes for Electrochemical
Devices
5,422,200 Battery Packaging Construction for Alkali
Metal Multicell Batteries
5,443,602 Apparatus and Method for Automatic Mass
Production and Packaging of Electrochemical
Cells
5,521,023 Composite Electrolytes
5,529,707 Lightweight Composite Polymeric Electrolytes
for Electrochemical Devices
5,597,658 Rolled Single Cell and Bi-Cell Electrochemical
Devices and Method of Manufacturing the Same
5,650,243 Battery Packaging Construction using Flexible
Plastic Barrier Structures
5,655,313 Apparatus for Fluidized, Vacuum Drying and Gas
Treatment for Powdered, Granular, or Flaked
Material
5,705,084 Polymer Alloy Electrolytes For Electrochemical
Devices
5,747,195 Current Collectors For High Energy Density
Cells
5,750,289 Lightweight Current Collectors and Carriers
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5,925,483 Multi-Layer Polymer Electrolytes For
Electrochemical Devices
6,025,096 Solid State Polymeric Electrolytes for
Electrochemical Devices
6,080,267 Method for Electroconductive Fastening of
Carbon Fiber Current Collectors and Terminals
for Electrochemical Devices
6,080,511 Composite Polymer Electrolytes for Alkali
Metal Electrochemical Devices which Contain a
Glass Fiber Net
6,134,773 Method for Automatic Mass Production of
Electrochemical Cells
6,143,445 Composite Electrodes Containing Chopped
Conductive Fibers
6,232,019B1 Gel Electrolyte for Electrochromic and
Electrochemical Devices
6,251,540B Composite Electrodes Containing Metalized
Glass or Ceramic Collectors.
With respect to licensing relationships, we have: (i) entered into a
cross-license with Valence Technology Corporation with respect to rights
relating to U.S. Patent No. 4,997,732 held by Valence (Battery in a Vacuum
Sealed Enveloping Material and Process for Making the Same) and rights relating
to U.S. Patent No. 5,057,385 held by us (Battery Packaging Construction); (ii)
granted certain license/distributorship option rights pursuant to a Japanese
consortium technology development agreement entered into in 1996, and (iii)
entered into a cross licensing agreement with Ilion (See "Overview and Recent
Developments--Termination of Merger with Ilion").
COMPETITION
Competition in the rechargeable battery industry is intense. In our target
market of automotive and stationary battery applications, the principal
competitive technologies currently fielded are lead acid and nickel metal
hydride. We believe that lithium-ion and lithium polymer batteries will enter
this segment of the rechargeable battery market in the near future. The
rechargeable battery industry consists of major domestic and international
companies, many of which have financial, technical, marketing, sales,
manufacturing, distribution and other resources substantially greater than ours.
Our primary competitors who have announced availability of either lithium-ion or
lithium polymer based rechargeable battery products for this market include
Shin-Kobe Electric Machinery, GS Battery of Japan, SAFT of France and Delphi of
the U.S., among others.
We believe that we have technological advantages that will enable us to compete
in this market.
11
We are able to construct large flat cells which have form factor and performance
benefits over a broad set of operating conditions. We believe this technology is
advantageous in constructing large automotive and stationary power batteries.
The construction of large batteries for automotive and stationary power
applications requires customized, tailored solutions for each application by
each OEM. By working with selected OEMs on specific product requirements, we
believe that we will be able to utilize our battery know-how and expertise and
successfully compete with other players in penetrating the automotive and
stationary power market segments.
RAW MATERIALS
Certain materials used in our products are available only from a limited number
of sources. The industry currently has sufficient capacity to meet our needs.
However, there can be no assurances that sources and the currently adequate
supply of raw materials will continue.
EQUIPMENT AND FACILITIES
We have outfitted a modern research and development facility in Plymouth
Meeting, Pennsylvania, with appropriate equipment and instrumentation. At 12,400
square feet, this facility has sufficient space to meet our near-term needs. In
January 2000 we received a semiautomatic cell packaging and filling machine.
Together with the coating equipment and lamination equipment previously
installed, these pieces of equipment are critical to our ability to produce
pilot quantities of batteries and to specify expansion and upgrading of
continuous flow manufacture.
RESEARCH AND DEVELOPMENT
We devote substantial resources to technology development activities related to
the development of our battery products. During the fiscal years ended December
31, 2001 and 2000, we spent approximately $1,060,000 and $1,515,000
respectively, on research and development activities. We expect that product
development expenses will increase significantly as we continue to advance our
battery technology and develop products for commercial applications.
EMPLOYEES
Our management team and technical staff has expertise in technology,
commercialization, process development, battery engineering, electrochemistry
international marketing, fund-raising and strategic alliance development. As of
March 15, 2002, we had a total of ten full-time and four part-time employees.
12
GOVERNMENT REGULATION, SAFETY, ENVIRONMENTAL COMPLIANCE
As with any battery, our lithium-ion batteries can short when not handled
properly. Due to the high energy and power density of lithium-ion batteries, a
short can cause rapid heat buildup. Under extreme circumstances, this could
conceivably cause a fire. This is most likely to occur during the formation
and/or testing phase of our process. We incorporate safety procedures in our
battery testing lab to minimize safety risks, although there can be no assurance
that an accident in any part of our facilities where charged batteries are
handled will not occur. Any such accident could require an internal
investigation by our technical staff, causing delays in further development and
manufacturing of our products, which could adversely affect our operations and
financial condition.
Our manufacturing process incorporates the use of solvents, some of which
are flammable and/or toxic in high concentrations. Our manufacturing process
also incorporates pulverized solids, which can be toxic to employees when
allowed to become airborne one year in high concentrations. We have incorporated
safety controls and procedures into our pilot line manufacturing processes
designed to maximize the safety of our employees and neighbors. Any related
incident, including fire or personnel exposure to toxic substances, could result
in significant production delays or claims from damages resulting from injuries,
which could adversely affect our operations and financial condition.
Prior to commercial production of our batteries, we will seek to obtain approval
of our products by one or more of the organizations engaged in product safety,
such as Underwriters' Laboratories. Such approvals could require significant
time and resources from our technical staff and, if redesign were necessary,
result in a delay in the commercialization of our products.
Current manufacturers of small lithium-ion batteries are not subject to the
requirements of the U.S. Department of Transportation (USDOT) regulations. In
addition, current lithium-ion batteries are considered to be non-dangerous by
the International Civil Aviation Organization (ICOA), the International Air
Transport Association (IATA), and the International Maritime Dangerous Goods
(IMDG) regulations. However, due to the size of our prototype HEV batteries and
the lack of regulatory information currently published for such large batteries,
a permit may be required to transport our lithium batteries from our
manufacturing facility. Although similar batteries with other chemistries are
routinely shipped from manufacturing facilities to all parts of the world, and
although we believe that our batteries will be exempted from transport
regulations based upon current transport regulations, no assurance can be given
at this time that we will not encounter any difficulties in complying with
ever-changing USDOT, ICOA, IATA, and IMDG regulations.
All materials used by us must be registered in accordance with the U.S. Toxic
Substance Control Act (TSCA) before they can be imported for use in full-scale
manufacturing operations. Although the raw material manufacturer is responsible
for obtaining TSCA registration for any products that it ships to the U.S., the
time required for suppliers to obtain TSCA registration could result in a delay
in the commercialization of our products.
As with all employers in the U.S., we must comply with U.S. Occupational and
Safety Administration (OSHA) regulations designed for the protection of every
U.S. employee while at the workplace. Similarly, as an
13
employer in the State of Pennsylvania, we must comply with U.S. Environmental
Protection Agency (USEPA) and Pennsylvania Department of Environmental
Protection Agency (PADEP) regulations designed to protect the environment from
contaminants that can be discharged from manufacturing facilities. No assurance
can be given that we will not encounter any difficulties in complying with OSHA,
USEPA, and PADEP regulations.
ITEM 2. DESCRIPTION OF PROPERTY
We lease a 12,400 square foot research facility and corporate headquarters in a
free-standing building at 5115 Campus Drive in Plymouth Meeting, Pennsylvania
pursuant to a Lease Agreement with PMP Whitemarsh Associates dated July 22, 1994
and amended on March 7, 2001.
We are currently leasing the facility under a two year lease extension that
commenced on April 1, 2001 and ends on March 31, 2003. The annual rent under the
lease during the two year extension is approximately $134,000 and $136,000 in
years one and two, respectively.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth
quarter of the fiscal year ended December 31, 2001.
14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded in the over-the-counter market, and "bid" and "asked"
prices in the common stock are quoted on the NASD OTC Electronic Bulletin Board
under the symbol "LITH". The following table sets forth certain information with
respect to the high and low bid prices for our common stock as of the close of
each of the four calendar quarters of 2001 and 2000. Such quotations reflect
inter-dealer prices, without retail mark-ups, mark-downs or commissions, and may
not represent actual transactions.
Bid Prices for Common Stock
---------------------------
2001 High Low
---- ---- ---
Fourth Quarter 0.2550 0.0460
Third Quarter 0.1250 0.0500
Second Quarter 0.2200 0.1150
First Quarter 0.3200 0.1250
2000
----
Fourth Quarter 0.5700 0.1750
Third Quarter 0.7500 0.3800
Second Quarter 1.3100 0.4950
First Quarter 2.6250 0.2500
On March 15, 2002, the last sale price quoted on the LTC Bulletin Board was
$0.185. As of March 15, 2002, there were approximately 845 holders of record of
our common stock.
We have never paid cash dividends on our common stock and do not presently
anticipate paying cash dividends in the foreseeable future. It is anticipated
that earnings, if any, will be retained for use in our business for an
indefinite period. Payments of dividends in the future, if any, will depend on,
among other things, our ability to generate earnings, our need for capital, and
our financial condition. Additionally, our ability to pay dividends is limited
by applicable state law. Declaration of dividends in the future will remain
within the discretion of our Board of Directors which will review the dividend
policy from time to time.
15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this report.
GENERAL AND PLAN OF OPERATION
We are a pre-production stage company in the process of commercializing unique,
solid-state, lithium-ion and lithium polymer rechargeable batteries. We are
engaged in technology development activities and pilot line manufacturing
operations to further advance this battery technology and we hold various
patents relating to such batteries.
We have worked closely with selected portable electronics OEMs in the past,
exploring various notebook computer, PDA and wireless handset applications. Over
the past few years we have refocused our large footprint cell technology and
market activities to concentrate on large, high rate battery applications
including advanced automotive batteries for 42-volt systems, HEVs and energy
storage devices for the distributed power/renewable energy market. In September
2000, we completed our first working prototype lithium-ion HEV battery, complete
with battery management and control electronics. A second generation prototype
HEV battery, designed to meet the specifications of an existing HEV, was
completed in January 2001. We are currently working on a prototype 42-volt
automotive battery which we expect to deliver to a European auto manufacturer in
the second quarter of 2002. We have not yet delivered a prototype HEV, 42-volt
or stationary power battery for testing by a third party.
In December 2001 we entered into a non-binding LOI with GAIA and Arch Hill, the
sole stockholder of GAIA. The LOI contemplates a potential share exchange
between us and GAIA whereby we would acquire an equity interest in GAIA in
exchange for the issuance to Arch Hill of an equity interest in us. If we
consummate the GAIA Share Exchange we anticipate that we would enter into as
strategic alliance agreement with GAIA and operate the two companies as a single
entity with two operating locations - at Plymouth Meeting, Pennsylvania and at
Nordhausen, Germany.
We have agreed in the LOI to use our best efforts to consummate the GAIA Share
Exchange by May 31, 2002. We have not entered into any definitive agreements
relating to the GAIA Share Exchange as of the date of this Report and no
assurance can be given that the GAIA Share Exchange will be consummated as
described herein or at all.
In January 2002 as amended on March 22, 2002, we entered into a bridge loan with
Arch Hill pursuant to which Arch Hill has agreed to advance working capital to
us until the earlier of the closing of the New Financing and May 31, 2002.
For a further description of the GAIA Share Exchange, the bridge financing with
Arch Hill and the termination of the Merger Agreement with Ilion see "Business
Overview and Recent Developments" above in Item 1.
We have been unprofitable since inception, expect to incur substantial
additional operating losses over the next few years and need significant
additional financing to continue the development and commercialization of our
technology. We do not expect to generate revenues from commercial operations
during the year ended December 31, 2002.
LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
We have financed our operations since inception with convertible debt and
private placements of common stock and have raised approximately $19.8 million,
including $5,249,000 from Ilion as of December 31, 2001.
At December 31, 2001, we had cash and cash equivalents of $60,000, fixed assets
of $235,000 and other assets of $31,000. Our total liabilities were $5,905,000
consisting of accounts payable, accrued salaries, accrued expenses and a
convertible promissory note to Arch Hill in the amount of $656,000 and
convertible promissory notes held by Ilion in the amounts of $5,249,000. We had
a working capital deficit of $586,000 on December 31, 2001 as
16
compared to a working capital deficit of $485,000 on December 31, 2000. The
increase in the working capital deficit is primarily attributable to the $80,000
convertible note payable to Arch Hill.
Our cash and cash equivalents increased by approximately $8,000 from December
31, 2000 to December 31, 2001. The cash increase is attributable primarily to a
decrease in financing from Ilion offset by reduced engineering, research and
development and general and administrative expenses.
Our stockholders' deficiency was $5,579,000 at December 31, 2001, after giving
effect to an accumulated deficit of $53,811,000 which consisted of $46,946,000
accumulated deficit during the development stage from July 21, 1989 through
December 31, 2001 and $6,865,000 accumulated deficit from prior periods. We
expect to incur substantial operating losses as we continue our
commercialization efforts.
We do not currently have sufficient cash to achieve all of our development and
production objectives. In order to have sufficient capital resources for our
development, production, operating and administrative needs and in order to
implement the new strategy of combining our operations with GAIA we will need to
raise at least $6,000,000 in a new equity financing. We expect that the New
Financing will be a condition precedent to the GAIA Share Exchange. If we raise
$6,000,000 in the New Financing we believe that we would have sufficient funds
to meet our needs until approximately June 2003. We believe that a second
financing transaction will be necessary during the twelve months after the
completion of the GAIA Share Exchange, if such transaction is consummated, in
order to fully implement our new business plan.
We have not entered into any definitive agreements relating to the New Financing
as of the date of this Report.
Pursuant to the terms of a bridge loan entered into as of January 8, 2002 as
amended on March 20, 2002, Arch Hill has agreed to advance working capital to us
until the earlier of the closing of the New Financing and May 31, 2002. Arch
Hill has advanced a total of $1,042,025 through March 22, 2002 convertible at
$.08 per share into 13,025,312 shares of our common stock. We believe that
provided Arch Hill advances the needed working capital to us until we will have
sufficient capital resources to meet our needs and satisfy our obligations
through May 31, 2002.
There can be no assurance that funding will continue to be provided by Arch Hill
in the amounts necessary to meet all of our obligations until the closing of the
New Financing or that we will be able to consummate the New Financing. If the
New Financing is not consummated, we will assess all available alternatives
including a sale of our assets or merger, the suspension of operations and
possibly liquidation, auction, bankruptcy, or other measures.
RESULTS OF OPERATIONS
We had no revenues from commercial operations for the years ended December 31,
2001 and 2000. Revenues from development contracts were $22,000 for the year
ended December 31, 2001.
Engineering, research and development expenses were $1,060,000 for the year
ended December 31, 2001 compared to $1,515,000 in 2000. The decrease of $455,000
was due primarily to decreased lab supplies and salaries.
General and administrative expenses were $954,000 for the year ended December
31, 2001 compared to $1,957,000 in 2000. The decrease of $1,003,000 was due to
decreased legal, accounting and other expenses and reduced salaries and related
payroll expenses.
Stock based compensation expenses were $469,000 for the year ended December 31,
2001 compared to $25,000 in 2000. The $469,000 of expense for 2001 was caused by
the extension in December 2001 of the expiration date of all outstanding
warrants to January 2004. The $25,000 of expense for 2000 was caused by a
reduction of the exercise price of stock options under the Directors Plan.
Interest expense increased to $7,000 (net of interest income of $5,000) for the
year ended December 31, 2001
17
compared to $6,000 (net of interest income of $15,000) in 2000.
In connection with the $80,000 convertible promissory note payable to Arch Hill,
$80,000 of interest expense related to the beneficial conversion feature was
recognized as expense for the year ended December 31, 2001. Since the
Convertible Promissory Note payable to Arch Hill is convertible at inception,
the entire $80,000 of interest expense related to the beneficial conversion
feature was recognized as expense for the year ended December 31, 2001.
ITEM 7. FINANCIAL STATEMENTS
Our Financial Statements beginning on page F-1 are filed as part of this
Annual Report on Form 10-KSB and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning our directors and
executive officers as of the date of this report:
NAME AGE POSITION
---- --- --------
David J. Cade 64 Chairman of the Board and Chief Executive Officer
Andrew J. Manning 56 Executive Vice President, Chief Operating Officer and
Chief Technical Officer
William D. Walker 60 Vice President, Treasurer and Chief Financial Officer
Stephen F. Hope 59 Director
Ralph D. Ketchum 75 Director
Arif Maskatia 52 Director
John D. McKey, Jr. 58 Director
David J. Cade was elected our Chairman and Chief Executive Officer on November
1, 1999. Mr. Cade previously served as our President and Chief Operating Officer
from May 1996 to November 1999. Mr. Cade served as our Vice President of
Marketing from August 1994 to May 1996 and was elected an officer in October
1994. Mr. Cade has served as our director since August 1997. Mr. Cade has over
thirty years of experience in senior business development, marketing, sales and
international strategic alliances in global telecommunications systems,
electronics and information technologies. From February 1988 to October 1992,
Mr. Cade was Senior Vice President of Marketing and Business Development for
COMSAT Systems Division in Washington D.C. and from October 1992 to April 1994,
Mr. Cade was Vice President of Sales and Marketing at Interdigital
Communications Corporation, a Philadelphia company that manufactures wireless
telephone systems for customers worldwide. Previously, Mr. Cade held managerial
positions in Washington D.C. with Martin Marietta (now Lockheed Martin), AT&T
and the Department of Defense. Mr. Cade holds an MBA from Syracuse University
and an undergraduate degree from the University of Illinois.
18
Andrew J. Manning was elected our Executive Vice President, Chief Operating
Officer and Chief Technical Officer on January 22, 2002. Previously Dr. Manning
served as our Executive Vice President of Operations, a position he had held
since January 2001. Dr. Manning joined us in 1994 as Director of Process
Development, and was Vice President of Manufacturing from October 1999 - January
2001. Dr. Manning has over 25 years of experience in process development,
process engineering, and new plan design and start-up. He has held various
technology management positions in thin-film industries, including Director of
Manufacturing Technologies at Congoleum, and Director of Research and
Engineering for Tarkett, where he was responsible for process and equipment
involving coating, saturation, lamination, and substrate handling. Dr. Manning
has a broad technical background, including polymers, non-woven, thermal
processing and synthetic minerals. He has related experience at Celanese and
Pfizer. Dr. Manning received both his Ph.D. and B.S. degrees in Chemical
Engineering from Cornell University.
William D. Walker, our Treasurer and Chief Financial Officer, was elected to his
present position on January 22, 2002. Previously he had served as our Chief
Financial Officer from August 1994 to August 1999 and then acted in a consultant
capacity to us until his reappointment as Chief Financial Officer in January
2002. Mr. Walker, a CPA, has extensive experience in public accounting and
capital raising. He was a partner with Main LaFrentz & Co. and later served as
Chief Financial Officer for Ecolaire, Inc., a privately held manufacturer of
equipment for the electric utility industry. Mr. Walker also has owned and
operated several successful small businesses that design and manufacture
machinery for the paper industry. He holds a B.S. from Drexel University and an
M.B.A. from Cornell University.
Stephen F. Hope has served as our director since October 1990 and was our
President, Chairman of the Board and Treasurer from October 1990 through April
1994. He is a director of Lithion Corporation, our wholly-owned subsidiary. Mr.
Hope was Director and the President of Hope Industries, Inc., our previously
wholly-owned subsidiary, from 1985 through December 1993. He received a B.A.
from Dartmouth University in 1965 and is a member of the Society of
Manufacturing Engineers and the Society of Photo-Finished Engineers.
Ralph D. Ketchum has served as our director since July 1, 1994. He has been
President of RDK Capital, Inc. ("RDK Capital") since January 1987. RDK Capital
is a general partner of RDK Capital Limited Partnership, an investment limited
partnership. Mr. Ketchum served as Chief Executive Officer and Chairman of the
Board of Heintz Corporation ("Heintz"), a majority owned subsidiary of RDK
Capital Limited Partnership. Mr. Ketchum was Senior Vice President and Group
Executive of the Lighting Group, General Electric Company from 1980 to 1987. He
also serves as a director of Metropolitan Savings Bank, Oglebay-Norton
Corporation, Thomas Industries and Pacific Scientific, Inc.
Arif Maskatia has served as our director since February 23, 1999. Mr. Maskatia
has over 27 years of experience in the computer industry. He presently is Vice
President of the Advanced Technology & Portable Development Group for Acer
Advanced Labs in San Jose, California, responsible for development of new
notebook computer platforms. Prior to joining Acer, he held senior technology
development positions with Zenith Data Systems and Alcatel/ITT Information
Systems. Mr. Maskatia holds Bachelors and Masters degrees in electrical
engineering from Cornell University.
19
John D. McKey, Jr. has served as our director since September 8, 1995. He has,
since January 2001, been of counsel to the law firm of McCarthy, Summers, Bobko
Wood, Sawyer & Terry, and, from September 1993 to January 2001, was a partner at
McCarthy, Summers, Bobko & McKey, P.A. and from June 1986 to September 1993,
was a partner at Kohn, Bobko, McKey & Higgins, P.A. Mr. McKey formerly served as
a director of Publishing Company of North America and currently serves as a
director of Pipeline Technologies, Inc.
Our directors hold office until the next annual meeting of our stockholders and
until their successors have been duly elected and qualified.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and
directors, and persons who beneficially own, directly or indirectly, more than
ten percent (10%) of the registered class of our equity securities to file
reports of ownership and changes in ownership on Forms 3, 4 and 5 with the
Securities and Exchange Commission ("SEC"). Officers, directors and greater than
ten percent (10%) beneficial owners are required by SEC regulation to furnish
us with copies of all Forms 3, 4 and 5 they file. No Forms 3, 4 and 5 relating
to our common stock were filed during 2001.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation paid by
us during the three years ended on December 31, 2001 to our Chief Executive
Officer. There were no other executive officers of our company, or any of our
subsidiaries, who were serving as an executive officer on December 31, 2001 and
received total salary and bonus in excess of $100,000 during fiscal year 2001.
Accordingly, Mr. Cade is the only "Named Executive Officer".
Long-Term Compensation
Awards
Securities
Name and Principal Underlying
Position Year Salary Options/Sars(#)
-------- ---- ------ ---------------
David J. Cade, 2001 $165,000 -0-
Chairman and Chief 2000 $165,000 -0-
Executive Officer 1999 $156,667 165,000 (1)
(1) Mr. Cade was granted 165,000 stock options on September 27, 1999 at an
exercise price of $0.26 per share.
20
OPTIONS
The following table sets forth information with respect to the number and value
of in-the-money unexercised options held by the Named Executive Officer at the
end of fiscal year 2001. The value of in-the-money unexercised options held at
December 31, 2001 is based on the closing "bid" price of $0.16 per share of
Common Stock on December 31, 2001. All of the options held by Named Executive
Officers had exercise prices in excess of $.16 as of December 31, 2001,
accordingly there were no in-the-money unexercised options as of that date. No
options were exercised by the Named Executive Officer in fiscal year 2001.
AGGREGATED DECEMBER 31, 2001 OPTION/SAR VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised in the Money
Options/Sars Options/Sars
at Fy-end (#) at Fy-end (#)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
---- ------------- -------------
David J. Cade 701,482/ 0 $0/0
In February 2000, our Board approved the acceleration of the vesting of all
outstanding stock options. This action was taken in connection with the Merger
Agreement between us and Ilion which contained a covenant that we will use our
best efforts to cause all outstanding LTC options to be exercised by the holders
thereof prior to the Merger.
In June 2000, our Board of Directors approved the reduction of the exercise
price of each outstanding option having an exercise price in excess of $.28 to
$.28. This action was taken in connection with the Merger Agreement between us
and Ilion which contained a covenant that we will use our best efforts to cause
all outstanding LTC options to be exercised by the holders thereof prior to the
Merger. In connection with the 2000 repricing of the stock options under the
1994 Stock Plan, our Board concluded repricing was advisable and in the best
interests of LTC in order to, among other things, provide incentive to
management and employees and in order to provide LTC with necessary working
capital. No change other than the change in exercise price was approved at that
time.
21
EMPLOYMENT AGREEMENTS AND CERTAIN EMPLOYEE MATTERS
Mr. Cade, our Chairman and Chief Executive Officer, received a yearly salary of
$165,000 in 2001 pursuant to an employment agreement which had a termination
date of the later of February 8, 2002 and one year after the closing date of the
LTC-Ilion merger.
We have entered into an Employment Agreement with Mr. Cade, for a period of
three years commencing as of January 1, 2002 (the "Term"), pursuant to which Mr.
Cade serves as our Chairman and Chief Executive Officer at a salary of $207,500
per year until the closing of the LTC-GAIA Transaction, and thereafter at
$250,000 per year, subject to increase at the discretion of the Board of
Directors. The Agreement provides that during each fiscal year, Mr. Cade will be
eligible to receive a target bonus of up to 40% of his annual salary for such
fiscal year with the exact amount of such bonus to be determined in the
discretion of the Board of Directors or the applicable committee of the Board of
Directors in accordance with performance thresholds for such fiscal year to be
agreed upon prior to March 1 of the fiscal year to which the bonus and the
performance thresholds relate.
In the event that Mr. Cade's employment is terminated by us other than for
cause, death or disability then under the Agreement: (i) we will continue to pay
to Mr. Cade his then annual salary for the remainder of the Term or for six
months (whichever is longer) in one lump sum within thirty days after the
termination date, (ii) Mr. Cade will be entitled, during the period for which
such severance payment is being paid, to receive all benefits under our medical
insurance, disability insurance, life insurance and other benefit plans as are
then in effect for our executives and (iii) all then exercisable and
unexercisable options will immediately become exercisable on the date of
termination, and will remain exercisable in accordance with the terms of the
applicable plan and agreement. Cause is defined as the breach or continued gross
neglect by Mr. Cade, or gross negligence or willful misconduct by Mr. Cade in
the performance, of any of his duties or obligations under the Agreement.
In the event that Mr. Cade's employment is terminated for cause, disability,
death or by the resignation of Mr. Cade, (i) Mr. Cade's employment under the
Agreement will cease (upon 30 days notice in the event of disability), (ii) we
will pay Mr. Cade his accrued and unpaid salary, accrued vacation time and
expense reimbursement through the date of termination and (iii) all options will
be treated in accordance with the terms of the applicable stock incentive plan
and stock option agreement pursuant to which such options were granted provided
that in the event of the death of Mr. Cade all options (whether vested or
unvested) will be transferred in accordance with Mr. Cade's will and become
exercisable for a period of thirty-six (36) months from the date of death,
subject to the terms of the applicable stock incentive plan.
The Agreement includes certain confidentially, non-solicitation and
non-competition provisions. In January 2002, Mr. Cade was granted 150,000 stock
options at an exercise price of $.20 which vest one-half on July 1, 2002 and
one-half on January 22, 2003.
We have entered into an Employment Agreement with Andrew J. Manning, for a
period of three years commencing as of January 1, 2002 (the "Term"), pursuant to
which Dr. Manning serves as our Executive Vice President, Chief Operating
Officer and Chief Technical Officer at a salary of $150,000 per year until the
closing of the LTC-GAIA Transaction and thereafter at $175,000 per year, subject
to increase at the discretion of the Board of Directors. The Agreement provides
that during each fiscal year, Dr. Manning will be eligible to receive a target
bonus of up to 20% of his annual salary for such fiscal year with the exact
amount of such bonus to be determined in the discretion of the Board of
Directors or the applicable committee of the Board of
22
Directors in accordance with performance thresholds for such fiscal year to be
agreed upon prior to March 1 of the fiscal year to which the bonus and the
performance thresholds relate.
In the event that Dr. Manning's employment is terminated by us other than for
cause, death or disability then under the Agreement: (i) we will continue to pay
to Dr. Manning his then annual salary for the remainder of the Term or for six
months (whichever is longer) in one lump sum within thirty days after the
termination date, (ii) Dr. Manning will be entitled, during the period for which
such severance payment is being paid, to receive all benefits under our medical
insurance, disability insurance, life insurance and other benefit plans as are
then in effect for our executives and (iii) all then exercisable and
unexercisable options will immediately become exercisable on the date of
termination, will remain exercisable in accordance with the terms of the
applicable plan and agreement. Cause is defined as the breach or continued gross
neglect by Dr. Manning, or gross negligence or willful misconduct by Dr. Manning
in the performance, of any of his duties or obligations under the Agreement.
In the event that Dr. Manning's employment is terminated for cause, disability,
death or by the resignation of Dr. Manning, (i) Dr. Manning's employment under
the Agreement will cease (upon 30 days notice in the event of disability), (ii)
we will pay Dr. Manning his accrued and unpaid salary, accrued vacation time and
expense reimbursement through the date of termination and (iii) all options will
be treated in accordance with the terms of the applicable stock incentive plan
and stock option agreement pursuant to which such options were granted provided
that in the event of the death of Dr. Manning all options (whether vested or
unvested) will be transferred in accordance with Dr. Manning's will and become
exercisable for a period of thirty-six (36) months from the date of death,
subject to the terms of the applicable stock incentive plan.
The Agreement includes certain confidentially, non-solicitation and
non-competition provisions. In January 2002, Dr. Manning was granted 100,000
stock options at an exercise price of $.20 which vest one-half on July 1, 2002
and one-half on January 22, 2003.
In 2001, 2000 and 1999, we paid $4,938, $38,937 and $53,218, respectively to
William D. Walker for services rendered to us. Mr. Walker served as our
Treasurer and Chief Financial Officer until August 1999. Mr. Walker has provided
services to us as a consultant since August 1999. On January 22, 2002 Mr. Walker
was reappointed as our Treasurer and Chief Financial Officer. In January 2002,
Mr. Walker was granted 50,000 stock options at an exercise price of $.20 which
vest one-half on July 1, 2002 and one-half on January 22, 2003.
COMPENSATION OF DIRECTORS
Directors receive no cash compensation for serving on our Board of Directors.
Each non-employee director receives an option to purchase 13,334 shares of
Common Stock under our Directors Stock Option Plan (the "Directors Plan") upon
election to the Board and is eligible to receive additional options approved by
the Board or option committee.
In January 2002, each non-employee director was granted options to purchase
50,000 shares of our common stock, having an exercise price of $.20, having a
term of ten years, with one-half of such options vesting July 1, 2002 and
one-half vesting January 22, 2003.
23
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
SECURITY OWNERSHIP
The following table sets forth as of March 22, 2002, the number and percentage
of outstanding shares of our common stock beneficially owned by executive
officers, directors and stockholders owning at least 5% of our common stock:
Name of Owner Shares Beneficially Owned Percentage of Class (1)
------------- ------------------------- -----------------------
Arch Hill Capital N.V. 52,515,312 (3) 44.95%
Parkweg 2
2585 JJ's
Gravenhage
Ilion Technology Corporation 25,500,000 (4) 33.20%
99 South Bedford St., Suite 2
Burlington, MA
David Cade(2) 701,482 (5) 1.08%
William Walker(2) -0- 0
Andrew J. Manning(2) 469,042 (5) *
Stephen Hope(2) 1,289,607 (6) 2.00%
Ralph Ketchum(2) 672,438 (7) 1.05%
Arif Maskatia(2) 13,334 (5) *
John D. McKey(2) 127,535 (8) *
All Executive Officers and Directors as a Group 3,273,438(9) 4.99%
(7 persons)
(1) 64,303,305 shares outstanding as of March 22, 2002.
(2) Address c/o Lithium Technology Corporation, 5115 Campus Drive, Plymouth
Meeting, PA 19462.
(3) Consists of $3,949,000 notes convertible into 39,490,000 shares of our
common stock and $1,042,025 notes convertible into 13,025,312 shares of our
common stock.
(4) Includes warrants to purchase 12,500,000 shares of our common stock.
24
(5) Consists of options exercisable within 60 days of March 22, 2002.
(6) Includes options to purchase 35,000 shares exercisable within 60 days of
March 22, 2002; 1,164,279 shares held directly by Mr. Hope; and 90,328
shares held by Hazel Hope, the Executrix of the Estate of Henry Hope.
(7) Includes options to purchase 38,0334 shares exercisable within 60 days of
March 22, 2002; 384,275 shares held directly by Mr. Ketchum; and 249,829
shares held by Mr. Ketchum's spouse.
(8) Includes options to purchase 58,334 shares exercisable within 60 days of
March 22, 2002.
(9) Includes options to purchase 1,315,526 shares exercisable within 60 days of
March 22, 2002.
* Less than 1%.
CHANGES IN CONTROL
We have entered into a bridge financing agreement with Arch Hill and have issued
a total of $1,042,025 of convertible notes to Arch Hill from January 2002 to
March 22, 2002, convertible into 13,025,312 shares of our common stock and Arch
Hill has purchased from Ilion $3,949,000 of Notes convertible into 39,490,000
shares of our common stock as described above in Item 1 in "Description of
Business -- Overview and Recent Developments." As of March 22, 2002, Arch Hill
was the beneficial owner of 52,515,312 shares of our common stock representing
approximately 45% of our outstanding shares. Arch Hill, as a stockholder of
GAIA, will receive additional shares of our common stock upon the consummation
of the GAIA Share Exchange. The letter of intent between us, Arch Hill and GAIA
relating to the GAIA Share Exchange, has been extended until May 31, 2002. We
expect the GAIA Share Exchange and New Financing to be completed during our
second fiscal quarter of 2002.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We issued a total of $5,249,000 of convertible notes to Ilion from September
1999 to December 2001 convertible into our common stock at $.10 per share. In
connection with the termination of our proposed merger with Ilion, we entered
into a Termination Agreement, Warrant Amendment, cross-licensing arrangements
and Note Purchase Agreement as described above in Item 1 in "Description of
Business -- Overview and Recent Developments."
We have entered into a bridge financing agreement with Arch Hill and have issued
a total of $1,042,025 of convertible notes to Arch Hill from January 2002 to
March 22, 2002 convertible into 13,025,312 shares of our common stock and Arch
Hill has purchased $3,949,000 of Ilion Notes convertible into 39,490,000 shares
of our Common Stock as described above in Item 1 in "Description of Business --
Overview and Recent Developments."
We have entered into agreements with our executive officers as described above
in Item 10 "Executive Compensation".
25
We believe that the transactions described above were fair to us and were as
favorable to us as those which it might have obtained from non-affiliated third
parties, given the circumstances under which such transactions were proposed and
effectuated.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following Exhibits are filed as part of this Report or
incorporated herein by reference:
3.1 Certificate of Incorporation.(1)
3.2 Certificate of Amendment to Certificate of Incorporation
effective June 19, 2000.(2)
3.3 Certificate of Designation of Series A Preferred Stock of
LTC.(3)
3.4 By-Laws, as amended.(1)
4.1 Specimen Common Stock Certificate.(1)
10.1 1994 Stock Incentive Plan, as amended.(4)
10.2 Directors Stock Option Plan.(4)
10.3 1998 Stock Incentive Plan. (5)
10.4 2002 Stock Incentive Plan +
10.5 Form of Stock Option Agreement relating to LTC's 1994 Stock
Incentive Plan, as amended.(6)
10.6 Form of Restricted Stock Agreement relating to LTC's 1994
Stock Incentive Plan.(7)
10.7 Form of Stock Option Agreement relating to LTC's Directors
Stock Option Plan.(6)
10.8 Form of Stock Option Agreement relating to LTC's 1998 Stock
Incentive Plan.(5)
10.9 Form of Incentive Stock Option Agreement relating to LTC's
2002 Stock Incentive Plan. +
10.10 Form of Non-Qualified Incentive Stock Option Agreement
relating to LTC's 2002 Stock Incentive Plan [For Employees].+
10.11 Form of Non-Qualified Incentive Stock Option Agreement
relating to LTC's 2002 Stock Incentive Plan [For Consultants
and Non-Employee Directors].+
10.12 Lease Agreement, dated July 22, 1994, between PMP Whitemarsh
Associates and LTC and Addendum dated July 22, 1994. (6)
26
10.13 Lease Extension, dated February 3, 2000 between PMP Whitemarsh
Associates and LTC (8).
10.14 First Amendment to Lease, dated March 19, 2001 between PMP
Whitemarsh Associates and LTC. (9)
10.15 [omitted]
10.16 Warrant to Purchase Common Stock issued to Group III Capital,
Inc. dated May 9, 1996.(7)
10.17 Warrant to Purchase Common Stock issued to Nanele Services,
Inc., dated May 9, 1996.(7)
10.18 Form of Warrant Agreement dated October 23, 1996 between LTC
and the Placement Agent.(10)
10.19 Form of Registration Rights Agreement dated October 23, 1996
between LTC and the Placement Agent.(10)
10.20 Letter Agreement dated February 5, 1997 between LTC and Chase
Manhattan Bank.(10)
10.21 Form of Common Stock Warrant to Purchase Common Stock issued
to Interlink Management Corporation.(11)
10.22 Form of Warrant Amendment Agreement. (2)
10.23 Form of Second Warrant Amendment Agreement. (12)
10.24 Form of Third Warrant Amendment Agreement. +
10.25 Employment Agreement Extension, dated June 1, 1998, between
David Cade and LTC.(5)
10.26 Employment Agreement Extension dated January 4, 2000 between
LTC and David Cade.(8)
10.27 Employment Agreement dated January 1, 2002 between David Cade
and LTC. +
10.28 Agreement dated May 5, 2000 between LTC and Thomas Thomsen (3)
10.29 Agreement dated May 5, 2000 between LTC and George Ferment (3)
10.30 Employment Agreement dated January 1, 2002 between Andrew J.
Manning and LTC. +
10.31 Termination Agreement, dated as of December 31, 2001, between
LTC and Ilion. [Schedules and Exhibits omitted] (13)
10.32 Warrant Amendment Agreement, dated as of December 31, 2001,
between LTC and Ilion. (13)
10.33 License Agreement, dated as of December 31, 2001, from LTC to
Ilion [Schedules omitted]. (13)
27
10.34 License Agreement, dated as of December 31, 2001 from Ilion to
LTC [Schedules omitted]. (13)
10.35 Note Purchase and Sale Agreement, dated as of December 31,
2001, among Ilion, Arch Hill and LTC. [Schedules omitted] (13)
10.36 Interim Financing Letter Agreement, dated as of December 31,
2001, between LTC and Arch Hill [Schedules and Exhibits
omitted]. (13)
10.37 Form of Convertible Promissory Note to be issued under the
Interim Financing Letter Agreement between LTC and Arch. (13)
10.38 Bridge Financing Amendment Agreement, dated as of March 20,
2002, between LTC and Arch Hill.
21.1 List of Subsidiaries.(7)
23.1 Consent of Deloitte & Touche, LLP+
23.2 Consent of Wiss & Co., LLP+
(1) Incorporated herein by reference to LTC's Annual Report on
Form 10-K for the fiscal year ended October 31, 1989.
(2) Incorporated herein by reference to LTC's Quarterly Report on
Form 10- QSB for the quarter ended September 30, 2000.
(3) Incorporated herein by reference to LTC's Form S-4 filed on
May 12, 2000.
(4) Incorporated herein by reference to the exhibits contained in
LTC's Information Statement Pursuant to Section 14(c) of the
Securities Exchange Act of 1934, dated January 19, 1996.
(5) Incorporated herein by reference to LTC's Form 10-KSB for the
fiscal year ended December 31, 1998.
(6) Incorporated herein by reference to LTC's Form 10-KSB for the
fiscal year ended December 31, 1995.
(7) Incorporated herein by reference to LTC's Registration
Statement on Form SB-2, File No. 333-08143, filed on July 15,
1996.
(8) Incorporated herein by reference to LTC's Report on Form 8-K,
dated January 19, 2000.
28
(9) Incorporated herein by reference to LTC's Form 10-KSB for the
fiscal year ended December 31, 2000.
(10) Incorporated herein by reference to LTC's Report on Form 8-K,
dated October 25, 1996.
(11) Incorporated herein by reference to LTC's Report on Form 8-K,
dated September 22, 1997.
(12) Incorporated herein by reference to LTC's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 2000.
(13) Incorporated herein by reference to LTC's Report on Form 8-K
dated January 23, 2002.
+ Exhibit filed herewith in this Report.
29
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
DECEMBER 31, 2001
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Reports............................................................. F-2
Consolidated Balance Sheet at December 31, 2001........................................... F-4
Consolidated Statements of Operations for the Years Ended December 31, 2001 and
2000 and the Period from July 21, 1989 (Date of Inception) to December 31, 2001....... F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) for the
Period from July 21, 1989 (Date of Inception) to December 31, 2001.................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001 and
2000 and the period from July 21, 1989 (Date of Inception) to December 31, 2001....... F-14
Notes to Consolidated Financial Statements................................................ F-17
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Lithium Technology Corporation:
We have audited the accompanying consolidated balance sheet of Lithium
Technology Corporation and subsidiary (development stage companies) as of
December 31, 2001, and the related consolidated statements of operations,
changes in stockholders' deficiency and cash flows for each of the two years in
the period ended December 31, 2001, and for the period from July 21, 1989 (date
of inception) to December 31, 2001. 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. The Company's
financial statements for the period July 21, 1989 (date of inception) through
December 31, 1996, were audited by other auditors whose report, dated January
22, 1997, expressed an unqualified opinion on those statements and included
explanatory paragraphs that described the uncertainty concerning the Company's
ability to continue as a going concern. The financial statements for the period
July 21, 1989 (date of inception) through December 31, 1996 reflect a cumulative
net loss of $18,877,000, of the total net loss of $46,946,000 for the period
July 21, 1989 (date of inception) through December 31, 2001. The other auditors'
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for such prior periods, is based solely on the report of such
other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors,
such consolidated financial statements present fairly in all material respects,
the financial position of Lithium Technology Corporation and subsidiary
(development stage companies) as of December 31, 2001, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2001, and for the period from July 21, 1989 (date of inception)
through December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company is a development stage
enterprise engaged in developing and marketing lithium-ion and lithium polymer
rechargeable batteries. As discussed in Note 3 to the financial statements, the
Company's operating losses since inception and lack of adequate financing to
fund its operations raise substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
/s/ DELOITTE & TOUCHE, LLP
Philadelphia, PA
March 26, 2002
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Lithium Technology Corporation and
Subsidiary (Development Stage Companies)
We have audited the consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows of Lithium Technology Corporation
and subsidiary (Development Stage Companies) for the period July 21, 1989 (date
of inception) to December 31, 1996. 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 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 results of operations and cash flows of
Lithium Technology Corporation and subsidiary (Development Stage Companies) for
the period July 21, 1989 (date of inception) to December 31, 1996, 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 discussed in Notes 1 and 3 of
the financial statements, the Company is a development stage company, has
suffered recurring losses from operations and needs significant additional
financing to repay existing indebtedness and to continue the development of its
technology. These factors raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 3. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ WISS & COMPANY, LLP
Woodbridge, New Jersey
January 22, 1997
F-3
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
CURRENT ASSETS:
Cash and cash equivalents $ 60,000
Prepaid insurance 10,000
------------
Total Current Assets 70,000
------------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION OF $1,301,000 235,000
Security deposit 21,000
------------
Total assets $ 326,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 293,000
Accrued salaries 201,000
Note payable 82,000
Convertible promissory note 80,000
------------
Total current liabilities 656,000
------------
LONG-TERM LIABILITIES
Convertible promissory notes 5,249,000
------------
Total liabilities 5,905,000
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, par value $.01 per share
Authorized - 100,000 shares
Issued and outstanding - None
Common stock, par value $.01 per share
Authorized - 125,000,000 shares
Issued and outstanding 51,303,305 shares 513,000
Additional paid-in capital 47,719,000
Accumulated deficit (6,865,000)
Deficit accumulated during development stage (46,946,000)
------------
Total stockholders' equity (deficiency) (5,579,000)
------------
Total liabilities and stockholders' equity (deficiency) $ 326,000
============
See accompanying notes to consolidated financial statements.
F-4
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
AND PERIOD FROM JULY 21, 1989 (DATE OF INCEPTION)
TO DECEMBER 31, 2001
YEAR ENDED PERIOD FROM
DECEMBER 31, JULY 21, 1989
--------------------------------------- (DATE OF INCEPTION) TO
2001 2000 DECEMBER 31, 2001
------------ ------------ ------------
REVENUES:
Development contracts $ 22,000 -- 190,000
------------ ------------ ------------
COSTS AND EXPENSES:
Engineering, research and development 1,060,000 1,515,000 10,971,000
General and administrative 954,000 1,957,000 14,795,000
Stock based compensation expense,
primarily general and administrative 469,000 25,000 2,263,000
------------ ------------ ------------
2,483,000 3,497,000 28,029,000
OTHER INCOME (EXPENSES):
Interest expense, net of interest income (7,000) (6,000) (1,836,000)
Interest expense related to beneficial
conversion feature (80,000) -- (17,921,000)
Other non-operating income -- -- 650,000
------------ ------------ ------------
(87,000) (6,000) (19,107,000)
------------ ------------ ------------
NET LOSS $(2,548,000) $(3,503,000) ($46,946,000)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING: 51,303,305 50,541,000
------------ ------------
BASIC AND DILUTED NET LOSS PER SHARE: $ (.05) $ (.07)
============ ============
See accompanying notes to consolidated financial statements.
F-5
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY)
PERIOD FROM JULY 21, 1989 (DATE OF INCEPTION)
TO DECEMBER 31, 2001
SERIES A SERIES B SERIES C
PREFERRED CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED
STOCK STOCK STOCK
------------------------ -------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- ----------- ----------- ----------- -----------
BALANCES AT JULY 21, 1989
PERIOD ENDED OCTOBER 31, 1989:
Net assets received in reverse
acquisition ........................ -- --
Change in par value .................. -- --
Exchange for debt owed to officer .... 23,000 $2,300,000 -- -- -- --
Shares sold to financial consultant
in conjunction with financing ...... -- -- -- -- -- --
Expenses paid by principal shareholder
on behalf of Lithium Corporation ... -- -- -- -- -- --
Net income (loss) for the year
---------- ---------- ----------- ----------- ----------- -----------
BALANCES AT OCTOBER 31, 1989 ............ 23,000 $2,300,000 -- -- -- --
YEAR ENDED OCTOBER 31, 1990:
Issuance of Class B common stock for
cash to Investors .................. -- -- -- -- -- --
Exercise of Class B common stock
warrants, net of offering costs .... -- -- -- -- -- --
Net loss ............................. -- -- -- -- -- --
---------- ---------- ----------- ----------- ----------- -----------
BALANCES AT OCTOBER 31, 1990 ............ 23,000 $2,300,000 -- -- -- --
YEAR ENDED OCTOBER 31, 1991:
Conversion of debt due stockholder ... 10,000 1,000,000 -- -- -- --
Exercise of Class B common stock
warrants, net of offering costs
of $520,000 ........................ -- -- -- -- -- --
Fair value of warrants issued in
connection with financial
consulting services ................ -- -- -- -- -- --
Net loss ............................. -- -- -- -- -- --
---------- ---------- ----------- ----------- ----------- -----------
BALANCES AT OCTOBER 31, 1991 ............ 33,000 $3,300,000 -- -- -- --
YEAR ENDED OCTOBER 31, 1992:
Issuance of common stock to certain
employees for services rendered .... -- -- -- -- -- --
Net loss ............................. -- -- -- -- -- --
---------- ---------- ----------- ----------- ----------- -----------
BALANCES AT OCTOBER 31, 1992 ............ 33,000 3,300,000 -- -- -- --
YEAR ENDED OCTOBER 31, 1993:
Net loss ............................. -- -- -- -- -- --
---------- ---------- ----------- ----------- ----------- -----------
BALANCES AT OCTOBER 31, 1993 ............ 33,000 $3,300,000 -- -- -- --
See accompanying notes to consolidated financial statements.
F-6
CLASS A CLASS B
COMMON STOCK COMMON STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
BALANCES AT JULY 21, 1989 ............ 2,333,000 $ 1,000 -- --
PERIOD YEAR ENDED
OCTOBER 31, 1989:
Net assets received in reverse
acquisition (Note 1) ............... -- -- 210,000 $ 1,000
Change in par value................... 6,000
Exchange for debt owed to officer .... -- --
Shares sold to financial consultant
in conjunction with financing ...... -- -- 697,000 1,000
Expenses paid by principal
shareholder on behalf of
Lithium Corporation ................ -- -- -- --
Net income (loss) for the year ....... -- -- -- --
----------- ----------- ----------- -----------
BALANCES AT OCTOBER 31,
1989 ............................... 2,333,000 $ 7,000 907,000 $ 2,000
YEAR ENDED OCTOBER 31, 1990:
Issuance of Class B common stock
for cash to Investors .............. -- -- 57,000 --
Exercise of Class B common stock
warrants, net of offering costs .... -- -- 15,000 --
Net Income (loss) for
the year ........................... -- -- -- --
----------- ----------- ----------- -----------
BALANCES AT OCTOBER 31, 1990 ......... 2,333,000 $ 7,000 979,000 $ 2,000
YEAR ENDED OCTOBER 31, 1991:
Conversion of debt due stockholder ... -- -- -- --
Exercise of Class B common stock
warrants, net of offering costs
of $520,000 ........................ -- -- 145,000 --
Fair value of warrants issued in
connection with financial
consulting services ................ -- -- -- --
Net loss ............................. -- -- -- --
----------- ----------- ----------- -----------
BALANCES AT OCTOBER 31,
1991 ............................... 2,333,000 $ 7,000 1,124,000 $ 2,000
YEAR ENDED OCTOBER 31, 1992:
Issuance of common stock to
certain employees for services
rendered ...................... -- -- 96,000 --
Net loss ........................... -- -- -- --
----------- ----------- ----------- -----------
BALANCES AT OCTOBER 31,
1992 ............................... 2,333,000 7,000 1,220,000 $ 2,000
YEAR ENDED OCTOBER 31, 1993:
Net loss ........................... -- -- -- --
----------- ----------- ----------- -----------
BALANCES AT OCTOBER 31,
1993 ............................... 2,333,000 $ 7,000 1,220,000 $ 2,000
----------- ----------- ----------- -----------
DEFICIT
ACCUMULATED
ADDITIONAL DURING
PAID-IN ACCUMULATED DEVELOPMENT
CAPITAL DEFICIT STAGE
----------- ----------- -----------
BALANCES AT JULY 21, 1989 ............ -- $(6,465,000) --
PERIOD YEAR ENDED
OCTOBER 31, 1989:
Net assets received in reverses
acquisition (Note 1) ............... $ 36,000 --
Change in par value .................. (6,000)
Exchange for debt owed to officer ....
Shares sold to financial consultant
in conjunction with financing ...... 7,000 --
Expenses paid by principal
shareholder on behalf of
Lithium Corporation ................ 79,000 --
Net income (loss) for the year ....... -- 844,000 $ (502,000)
----------- ----------- -----------
BALANCES AT OCTOBER 31,
1989 ............................... 116,000 $(5,621,000) $ (502,000)
YEAR ENDED OCTOBER 31, 1990:
Issuance of Class B common stock
for cash to Investors .............. 50,000 -- --
Exercise of Class B common stock
warrants, net of offering costs .... -- -- --
NET INCOME (LOSS) FOR
THE YEAR ........................... -- 569,000 (498,000)
----------- ----------- -----------
BALANCE AT OCTOBER 31, 1990 .......... $ 166,000 $(5,052,000) $(1,000,000)
YEAR ENDED OCTOBER 31, 1991:
Conversion of debt due stockholder ... -- -- --
Exercise of Class B common stock
warrants, net of offering costs
of $520,000 ........................ 121,000 -- --
Fair value of warrants issued in
connection with financial
consulting services ................ 30,000 -- --
Net loss ............................. -- (84,000) (560,000)
----------- ----------- -----------
BALANCES AT OCTOBER 31,
1991 ............................... $ 317,000 $(5,136,000) $(1,560,000)
YEAR ENDED OCTOBER 31, 1992:
Issuance of common stock to
certain employees for services
rendered ...................... 106,000
Net loss ........................... -- (23,000) (175,000)
----------- ----------- -----------
BALANCES AT OCTOBER 31,
1992 ............................... $ 423,000 $(5,159,000) $(1,735,000)
YEAR ENDED OCTOBER 31, 1993:
Net loss ........................... -- (1,706,000) (66,000)
----------- ----------- -----------
BALANCES AT OCTOBER 31,
1993 ............................... $ 423,000 $(6,865,000) $(1,801,000)
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-7
SERIES A SERIES B SERIES C
PREFERRED CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED
STOCK STOCK STOCK
-------------------------- -------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
BALANCES AT OCTOBER 31, 1993 ................ 33,000 $ 3,300,000 -- -- -- --
TWO MONTHS ENDED
DECEMBER 31, 1993:
Contribution to capital accumulated
losses in excess of Company's
investment ............................. -- -- -- -- -- --
Conversion of preferred stock to
common stock ........................... (33,000) (3,300,000) -- -- -- --
Fair value of option issued in exchange
for certain legal services ............. -- -- -- -- -- --
Net loss ................................. -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1993 ................ -- -- -- -- -- --
YEAR ENDED DECEMBER 31, 1994:
Change in par value of Class B
common stock to $.0001 ................. -- -- -- -- -- --
Issuance of common stock:
For services relating to warrants
exercised in 1995 ................... -- -- -- -- -- --
Upon cancellation of indebtedness ...... -- -- -- -- -- --
In exchange for advances repayable
only out of proceeds of public
offering ............................ -- -- -- -- -- --
Upon exercise of option ................ -- -- -- -- -- --
For cash, less related costs of $152,000 -- -- -- -- -- --
Upon conversion of $162,000 of 7%
convertible promissory notes and
accrued interest thereon ............ -- -- -- -- -- --
Upon exercise of option to acquire
laboratory equipment and
forgiveness of related accrued rent . -- -- -- -- -- --
Upon conversion of preferred stock ..... -- -- (1,000) -- -- --
Issuance of convertible preferred stock in
exchange for convertible promissory
notes .................................. -- -- 14,000 -- -- --
For cash ................................. -- -- -- -- 10,000 --
Issuance of 7% convertible promissory
notes .................................. -- -- -- -- -- --
Net loss ................................. -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1994 ............... -- -- 13,000 -- 10,000 --
----------- ----------- ----------- ----------- ----------- -----------
YEAR ENDED DECEMBER 31, 1995
Issuance of common stock
Upon conversion of convertible
preferred stock ..................... (6,000) -- -- --
Upon conversion of 7% convertible
promissory notes and accrued
interest thereon .................... -- -- -- --
Upon exercise of warrants .............. -- -- -- --
Recapitalization of common stock ....... -- -- -- --
Issuance of 12% convertible
promissory notes .................... -- -- -- --
Net loss ............................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31, 1995 ............... 7,000 $ -- 10,000 $ --
YEAR ENDED DECEMBER 31, 1996
Conversion of preferred stock
to common stock......................... (7,000) (10,000)
BALANCES AT DECEMBER 31, 1996 ............... -- $ -- -- $ -- -- $ --
----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-8
CLASS A CLASS B
COMMON STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
----------- ----------- --------- -----------
BALANCES AT OCTOBER 31,
1993 ................................ 2,333,000 $ 7,000 1,220,000 $ 2,000
TWO MONTHS ENDED
DECEMBER 31, 1993:
Contribution to capital of
accumulated losses in excess of
Company's investment ........... -- -- -- --
Conversion of preferred stock to
common stock ...................... 1,000,000 3,000 667,000 1,000
Fair value of option issued in
exchange for certain legal
services .......................... -- -- -- --
Net loss ............................ -- -- -- --
----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31,
1993: ............................... 3,333,000 $ 10,000 1,887,000 $ 3,000
YEAR ENDED DECEMBER 31,
1994:
Change in par value of Class B
common stock to $.0001 ............ -- -- -- 3,000
Issuance of common stock:
For services relating to
warrants exercised in 1995 ..... -- -- 22,000 --
Upon cancellation of
Indebtedness ................... -- -- 78,000 --
In exchange for advances
repayable only out of
proceeds of public offering .... -- -- 133,000 --
Upon exercise of option .......... -- -- 17,000 --
For cash, less related costs of
$152,000 ....................... -- -- 907,000 3,000
Upon conversion of $162,000 of
7% convertible promissory
notes and accrued interest
thereon ........................ -- -- 79,000 --
Upon exercise of option to
acquire laboratory equipment
and forgiveness of related
accrued rent ................... -- -- 83,000 1,000
Upon conversion of preferred
stock .......................... -- -- 43,000 --
Issuance of convertible preferred
stock in exchange for
convertible promissory notes ..... -- -- -- --
For cash ......................... -- -- -- --
Issuance of 7% convertible
promissory notes ................. -- -- -- --
Net loss ........................... -- -- -- --
----------- ----------- ----------- -----------
BALANCES AT DECEMBER 31,
1994: ............................... 3,333,000 $ 10,000 3,249,000 $ 10,000
DEFICIT
ACCUMULATED
ADDITIONAL DURING
COMMON STOCK PAID-IN ACCUMULATED DEVELOPMENT
SHARES AMOUNT CAPITAL DEFICIT STAGE
----------- ----------- ----------- ----------- -----------
BALANCES AT OCTOBER 31,
1993 ............................ 423,000 $(6,865,000) $(1,801,000)
TWO MONTHS ENDED
DECEMBER 31, 1993:
Contribution to capital of
accumulated losses in excess of
Company's investment ....... 3,659,000 -- --
Conversion of preferred stock to
common stock .................. 3,296,000 -- --
Fair value of option issued in
exchange for certain legal
services ...................... 8,000 -- --
Net loss ........................ -- -- (67,000)
----------- ----------- -----------
BALANCES AT DECEMBER 31,
1993: ........................... 7,386,000 $(6,865,000) $(1,868,000)
YEAR ENDED DECEMBER 31,
1994:
Change in par value of Class B
common stock to $.0001 ........ (3,000) -- --
Issuance of common stock:
For services relating to
warrants exercised in 1995 .. 88,000 -- --
Upon cancellation of
Indebtedness ................ 445,000 -- --
In exchange for advances
repayable only out of
proceeds of public offering . 471,000 -- --
Upon exercise of option ....... 8,000 -- --
For cash, less related costs of
$152,000 .................... 933,000 -- --
Upon conversion of $162,000 of
7% convertible promissory
notes and accrued interest
thereon ..................... 165,000 -- --
Upon exercise of option to
acquire laboratory equipment
and forgiveness of related
accrued rent ................ 271,000 -- --
Upon conversion of preferred
stock ....................... -- -- --
Issuance of convertible preferred
stock in exchange for
convertible promissory notes .. 356,000 -- --
For cash ........................ 100,000 -- --
Issuance of 7% convertible
promissory notes .............. 1,643,000 -- --
Net loss ........................ -- -- (3,776,000)
----------- ----------- -----------
BALANCES AT DECEMBER 31,
1994: ............................... $ 11,863,000 $(6,865,000) (5,644,000)
See accompanying notes to consolidated financial statements.
F-9
CLASS A CLASS B
COMMON STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1994 $ 3,333,000 $ 10,000 3,249,000 $ 10,000
YEARS ENDED
DECEMBER 31, 1995:
Issuance of common stock
Upon conversion of
convertible pre-
ferred stock .......... -- -- 341,000 1,000
Upon conversion of 7%
convertible promissory
notes and accrued in-
terest thereon ........ -- -- 500,000 1,000
Upon exercise of
warrants .............. -- -- 120,000 1,000
Recapitalization of
common stock ............ (3,333,000) (10,000) (4,210,000) (13,000)
Issuance of 12% convertible --
promissory notes ........ -- -- -- --
Net loss .................. -- -- -- --
------------ ------------ ------------ ------------
BALANCES AT
DECEMBER 31, 1995 ......... -- $ -- -- $ --
============ ============ ============ ============
DEFICIT
ACCUMULATED
ADDITIONAL DURING
COMMON STOCK PAID-IN ACCUMULATED DEVELOPMENT
SHARES AMOUNT CAPITAL DEFICIT STAGE
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1994 $ 11,863,000 (6,865,000) (5,644,000)
YEARS ENDED
DECEMBER 31, 1995:
Issuance of common stock
Upon conversion of
convertible pre-
ferred stock ............ (1,000) -- --
Upon conversion of 7%
convertible promissory
notes and accrued in-
terest thereon .......... 1,050,000 -- --
Upon exercise of warrants . 254,000 -- --
Recapitalization of
common stock .............. 7,543,000 $ 75,000 (52,000) --
Issuance of 12% convertible
promissory notes .......... 6,377,000 -- --
Net loss .................... -- -- (8,849,000)
------------ ------------ ------------ ------------ ------------
BALANCES AT
DECEMBER 31, 1995 ........... 7,543,000 $ 75,000 $ 19,491,000 $ (6,865,000) $(14,493,000)
See accompanying notes to consolidated financial statements.
F-10
DEFICIT
ACCUMULATED
ADDITIONAL DURING
COMMON STOCK PAID-IN ACCUMULATED DEVELOPMENT
SHARES AMOUNT CAPITAL DEFICIT STAGES
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1995 ................... 7,543,000 $ 75,000 $ 19,491,000 $ (6,865,000) $(14,493,000)
YEAR ENDED DECEMBER 31, 1996
Issuance of common stock:
Upon conversion of convertible
preferred stock .......................... 454,000 4,000 (4,000) -- --
Upon conversion of 7% convertible
promissory notes and accrued interest
($20,000) and related costs of $41,000 ... 152,000 2,000 277,000 -- --
Upon conversion of 12% convertible
promissory notes and accrued interest
thereon of $100,000 net of related
costs of $218,000 ........................ 7,004,000 70,000 1,612,000 -- --
For cash:
From consortium, net of placement
costs of $212,000 ........................ 632,000 7,000 2,181,000 -- --
Upon exercise of stock options ............. 193,000 2,000 95,000 -- --
Other ...................................... 38,000 -- 19,000 -- --
In payment of accrued salaries and
accounts Payable ......................... 434,000 4,000 260,000 -- --
Upon exercise of warrants .................. 196,000 2,000 98,000 -- --
In connection with costs relating to
the Issuance of 10% convertible notes .... 462,000 5,000 520,000 -- --
Issuance of warrants for services rendered ... -- -- 175,000 -- --
Issuance of warrants in settlement of
litigation ................................. -- -- 68,000 -- --
Net loss ................................. -- -- -- -- (4,384,000)
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1996 ................... 17,108,000 $ 171,000 $ 24,792,000 $ (6,865,000) $(18,877,000)
YEAR ENDED DECEMBER 31, 1997:
Issuance of common stock
In connection with costs relating to the
issuance of 10% convertible notes .......... 493,000 $ 5,000 $ 575,000
In connection with the sale of Escrowed
Shares by the Convertible Note Purchasers..... 2,669,000 27,000 2,219,000
Upon exercise of warrants .................... 100,000 1,000 13,000
In payment of accrued salaries and
accounts payable ........................... 646,000 6,000 369,000
Issuance of warrants for services rendered ... 88,000
See accompanying notes to consolidated financial statements.
F-11
DEFICIT
ACCUMULATED
ADDITIONAL DURING
COMMON STOCK PAID-IN ACCUMULATED DEVELOPMENT
SHARES AMOUNT CAPITAL DEFICIT STAGES
------------ ------------ ------------ ------------ ------------
In connection with the sale of the 8.5%
Senior secured convertible notes ....... $ 400,000
Issuance of the 8.5% senior secured
convertible notes ......................
Net loss: ................................. 9,821,000 (14,164,000)
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1997 ............. 21,016,000 $ 210,000 $ 38,277,000 $ (6,865,000) $(33,041,000)
YEAR ENDED DECEMBER 31, 1998
Issuance of common stock:
In connection with settlement of
litigation ........................... 125,000 1,000 124,000
Upon exercise of stock options ......... 98,000 1,000 53,000
For cash ............................... 143,000 2,000 98,000
In lieu of interest: ................... 1,670,000 17,000 451,000
Net loss: .............................. (3,261,000)
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1998 ............. 23,052,000 $ 231,000 $ 39,003,000 $ (6,865,000) $(36,302,000)
YEAR ENDED DECEMBER 31, 1999:
Issuance of common stock:
In connection with conversion of
senior secured convertible notes ..... 20,206,000 202,000 4,968,000
In connection with services rendered ... 523,000 5,000 211,000
In connection with repricing of warrants -- -- 602,000 == ==
In connection with private placement ... 4,500,000 45,000 1,573,000
Net loss: ................................. (4,593,000)
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1999 ............. 48,281,000 $ 483,000 $ 46,357,000 $ (6,865,000) $(40,895,000)
See accompanying notes to consolidated financial statements.
F-12
DEFICIT
ACCUMULATED
ADDITIONAL DURING
COMMON STOCK PAID-IN ACCUMULATED DEVELOPMENT
SHARES AMOUNT CAPITAL DEFICIT STAGES
---------- ------------ ------------ ------------ ------------
YEAR ENDED DECEMBER 31, 2000:
Issuance of common stock:
Upon exercise of stock options ..... 3,022,000 $ 30,000 $ 788,000
In connection with repricing of
common stock ..................... --
Net loss: ............................. 25,000 $ (3,503,000)
---------- ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 2000 ......... 51,303,000 513,000 47,170,000 $ (6,865,000) $(44,398,000)
YEAR ENDED DECEMBER 31, 2001:
In connection with warrant
modification ....................... -- -- 469,000
Beneficial conversion feature
related to convertible notes ....... 80,000
Net loss: ............................. (2,548,000)
------------ ------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 2001 ......... 51,303,000 $ 513,000 $ 47,719,000 $ (6,865,000) $(46,946,000)
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-13
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
AND PERIOD FROM JULY 21, 1998 (DATE OF INCEPTION)
TO DECEMBER 31, 2001
PERIOD FROM
YEAR ENDED JULY 21, 1989
DECEMBER 31, (DATE OF INCEPTION) TO
2001 2000 DECEMBER 31, 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ..................................... $ (2,548,000) $ (3,503,000) $(46,946,000)
Adjustments to reconcile net loss to
net cash flows from operating activities:
Interest expense relating to the
beneficial conversion feature of
the Convertible Notes ............... 80,000 -- 17,921,000
Depreciation .............................. 142,000 135,000 1,303,000
Amortization of debt issue costs .......... -- -- 1,070,000
Common stock issued at prices
below fair market value ............... -- -- 1,167,000
Repricing of outstanding options .......... -- 25,000 25,000
Repricing of outstanding warrants ......... 469,000 -- 1,071,000
Reduction of accrued expenses ............. -- -- (270,000)
Common stock issued in lieu of
interest .............................. -- -- 1,915,000
Fair value of warrants and option
granted for services rendered ......... -- -- 209,000
Common stock issued for services
provided .............................. -- -- 273,000
Common stock issued upon
settlement of litigation .............. -- -- 125,000
Expenses paid by shareholder on
behalf of Company ..................... -- -- 79,000
Changes in operating assets and liabilities:
Accounts receivable ....................... -- 21,000 0
Other current assets ...................... (10,000) 18,000 (10,000)
Security and equipment deposits ........... -- -- (21,000)
Accounts payable, accrued expenses
and customer deposits ................. 39,000 (93,000) 2,109,000
Due to related parties .................... -- -- (118,000)
------------ ------------ ------------
Net cash used in operating activities (1,828,000) (3,397,000) (20,098,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ........ (30,000) (52,000) (1,288,000)
Other ..................................... -- 94,000
------------ ------------ ------------
Net cash used in investing activities . (30,000) (52,000) (1,194,000)
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
F-14
PERIOD FROM
YEAR ENDED JULY 21, 1989
DECEMBER 31, (DATE OF INCEPTION) TO
2001 2000 DECEMBER 31, 2001
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds received from Convertible
Promissory Notes .................................... 1,866,000 2,645,000 5,329,000
Net advance repayable only out of
proceeds of public offering ..................... -- -- 471,000
Proceeds received upon issuance of
common stock .................................... -- -- 3,789,000
Proceeds received from issuance of
preferred stock, net of related Costs ........... -- -- 100,000
Proceeds received upon exercise of
options and warrants, net of Costs .............. -- 818,000 1,455,000
Net advances by former principal Stockholder ........ -- -- 321,000
Proceeds from sale of convertible debt .............. -- -- 10,874,000
Debt issue costs .................................... -- -- (887,000)
Repayment of convertible debt ....................... (100,000)
------------ ------------ ------------
Net cash provided by financing
activities .................................... 1,866,000 3,463,000 $ 21,352,000
------------ ------------ ------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS ......................................... 8,000 14,000 60,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD ................................. 52,000 38,000 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD ....................................... $ 60,000 $ 52,000 $ 60,000
============ ============ ============
SUPPLEMENTAL CASH FLOW
INFORMATION
Contribution to capital by former principal stockholder -- -- $ 3,659,000
Related party debt exchanged for convertible debt ...... -- -- $ 321,000
Exchange of indebtedness to former principal
stockholder for common stock ........................ -- -- $ 445,000
Issuance of common stock for
services and accrued salaries ....................... -- $ 501,000
Exchange of equipment and accrued
rent for common stock ............................... -- -- $ 271,000
Subordinated notes and related accrued interest
exchanged for Series A preferred stock .............. -- -- $ 3,300,000
Exchange of convertible debt for
convertible preferred stock ......................... -- -- $ 356,000
See accompanying notes to consolidated financial statements.
F-15
PERIOD FROM
YEAR ENDED JULY 21, 1989
DECEMBER 31, (DATE OF INCEPTION) TO
2001 2000 DECEMBER 31, 2001
----------- ----------- ----------
Conversion of convertible debt and
accrued interest into common stock,
net of unamortized debt discount ..................... -- -- $9,947,000
Exchange of advances repayable only out of proceeds of
public offering for common stock ..................... -- -- 471,000
Deferred offering costs on warrants exercised ........... -- -- 88,000
Issuance of warrants in settlement of litigation for debt
issue costs and for services rendered ................ -- -- 364,000
Common stock issued for costs
related to 10% promissory notes ...................... -- -- 525,000
See accompanying notes to consolidated financial statements.
F-16
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
NOTE 1 - HISTORY OF THE BUSINESS AND RECENT DEVELOPMENTS
Lithium Technology Corporation and its wholly-owned subsidiary, Lithion
Corporation, collectively referred to as "LTC", are pre-production stage
companies in the process of commercializing unique, solid-state, lithium-ion and
lithium polymer rechargeable batteries. LTC is engaged in technology development
activities and pilot line manufacturing operations to further advance this
battery technology and holds various patents relating to such batteries. LTC has
developed innovative flat lithium ion batteries for large, high rate
applications including Hybrid Electric Vehicles (HEVs), other automotive
applications and energy storage devices for the distributed power/renewable
energy market.
The date of inception of LTC's development stage is July 21, 1989. At
that time, LTC exchanged its capital stock for all of the capital stock of
Lithion and an operating company in a reverse acquisition. The operating company
was divested in November 1993. The accumulated deficit associated with the
operating company of $6,865,000 has been segregated from LTC's deficit
accumulated during the development stage in the accompanying consolidated
financial statements.
PENDING TRANSACTION WITH GAIA - In December 2001, LTC entered into a non-binding
letter of intent (the "LOI") with the German lithium polymer battery company
GAIA Akkumulatorenwerke GmbH, headquartered in Nordhausen/Thuringia, Germany
("GAIA") and Arch Hill Capital N.V. of the Netherlands ("Arch Hill"), the sole
stockholder of GAIA. The LOI contemplates a potential share exchange between LTC
and GAIA (the "GAIA Share Exchange") whereby LTC would acquire an equity
interest in GAIA in exchange for the issuance to Arch Hill of an equity interest
in LTC. If LTC consummates the GAIA Share Exchange management anticipates that
LTC would enter into a strategic alliance agreement with GAIA and operate the
two companies as a single entity with two operating locations -- at Plymouth
Meeting, Pennsylvania and at Nordhausen, Germany.
LTC has agreed in the LOI to use its best efforts to consummate the GAIA Share
Exchange by May 31, 2002. LTC has not yet entered into any definitive
agreements relating to the GAIA Share Exchange and no assurance can be given
that the GAIA Share Exchange will be consummated as described herein or at all.
In order to have sufficient capital resources for its development, production,
operating and administrative needs and in order to implement the new strategy
of combining its operations with GAIA, LTC will need to raise at least
$6,000,000 in a new equity financing (the "New Financing"). LTC expects that
the New Financing will be a condition precedent to the GAIA Share Exchange. If
LTC raises $6,000,000 in the New Financing, management believes that LTC would
have sufficient funds to meet its needs until approximately June 2003.
Management believes that a second financing transaction will be necessary
during the twelve months after the completion of the GAIA Share Exchange, if
such transaction is consummated, in order to fully implement the Company's new
business plan.
LTC has not entered into any definitive agreements relating to the New
Financing and no assurance can be given that the New Financing will be
consummated.
BRIDGE FINANCING BY ARCH HILL - Pursuant to the terms of a bridge loan entered
into as of January 8, 2002, as amended on March 22, 2002 Arch Hill has agreed to
advance working capital to LTC until the earlier of the closing of the New
Financing and May 31, 2002. Notes issued to Arch Hill under the bridge financing
agreement are convertible, at any time prior to repayment of the Notes, into LTC
common stock at $.08 per share. Arch Hill has advanced a total of $1,042,025
through March 22, 2002 convertible into 13,025,312 shares of LTC common stock.
LTC believes that provided Arch Hill advances the needed working capital to it
under the bridge loan, LTC will have sufficient capital resources to meet its
needs and satisfy its obligations through May 31, 2002.
TERMINATION OF MERGER WITH ILION - On December 31, 2001, LTC entered into a
Termination Agreement with Ilion Technology Corporation ("Ilion") which was
closed on January 8, 2002 when all closing conditions were met (the "Termination
Agreement"). Pursuant to the Termination Agreement, the then existing Merger
F-17
Agreement between LTC and Ilion, dated January 19, 2000, as amended from time to
time, and all other agreements between LTC and Ilion, were terminated. Pursuant
to the Merger Agreement between LTC and Ilion, which had a termination
date of February 28, 2002, LTC had proposed to merge its lithium battery
business with Ilion's. That merger was contingent on an initial public offering
by Ilion, which did not occur. (See Note 10 - Subsequent Events.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the
accounts of Lithium Technology Corporation and Lithion Corporation. All
significant intercompany accounts and transactions have been eliminated.
ESTIMATES AND UNCERTAINTIES - The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America ("generally accepted accounting principles") requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results, as determined at a later date,
could differ from those estimates.
FINANCIAL INSTRUMENTS - Financial instruments include cash and cash
equivalents, other assets, accounts payable and convertible promissory notes
payable. With the exception of convertible promissory notes payable, management
believes that the amounts reported for financial instruments are reasonable
approximations of their fair values due to their short-term nature.
CASH AND CASH EQUIVALENTS - LTC considers all highly liquid investment
instruments purchased with a maturity of three months or less to be cash
equivalents.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Furniture and fixtures, computer equipment and software and laboratory equipment
are depreciated primarily using the straight-line method over their estimated
useful lives of 3 to 7 years. Leasehold improvements are amortized over the
period of the respective lease using the straight-line method.
INCOME TAXES - Deferred tax assets and liabilities are computed for
temporary differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
temporary differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
STOCK OPTIONS - In accordance with Statement of Financial Accounting
Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123), LTC has elected to account for stock option grants to employees using the
intrinsic value based method prescribed by APB Opinion No. 25.
CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES - LTC
accounts for convertible securities with beneficial conversion features in
accordance with Emerging Issues Task Force 98-5, "Accounting for convertible
securities with beneficial conversion features or contingently adjustable
conversion ratios."
NET LOSS PER COMMON SHARE - LTC has presented net loss per common share
pursuant to SFAS No. 128, "Earnings Per Share". Net loss per common share is
based upon the weighted average number of outstanding common shares. For the
years ended December 31, 2001 and 2000, LTC's potential common shares have an
anti-dilutive effect on earnings per share and, therefore, have not been used in
determining the total weighted average number of common shares outstanding.
Potential common shares resulting from convertible notes payable, stock options
and warrants that would be used to determine diluted earnings per share for the
years ended December 31, 2001 and 2000 were as follows:
F-18
POTENTIAL COMMON SHARES
2001 2000
---------------- ----------------
Convertible promissory notes......... 1,000,000(1) --
Stock options........................ 2,350,000 2,516,000
Warrants............................. 4,186,000 4,186,000
--
---------------- ----------------
Total................................ 7,536,000 6,702,000
================ ================
(1) The above table does not include the 13,000,000 restricted shares of LTC
common stock issued to Ilion on January 8, 2002 nor does it include the
39,490,000 shares of LTC common stock that would be issued upon the
conversion of the Ilion notes sold to Arch Hill on January 8, 2002 (See Note
10- Subsequent Events.)
COMPREHENSIVE INCOME - A statement of comprehensive income has not been
provided as comprehensive loss equals net loss for all periods presented.
BUSINESS SEGMENTS - As a development stage enterprise, LTC considers
itself to have one operating segment.
DERIVATIVES - In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for all financial years beginning after June 15, 2000. SFAS 133, as
amended by SFAS No. 137 and SFAS No. 138, establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. Under SFAS No. 133,
certain contracts that were not formerly considered derivatives may now meet the
definition of a derivative. LTC adopted SFAS No. 133 effective January 1, 2000.
The adoption of SFAS No. 133 did not have a significant impact on the financial
position or results of operations of LTC because LTC does not have significant
derivative activity.
STOCK-BASED COMPENSATION - In March 2000, the FASB issued Financial
Accounting Series Interpretation No. 44 ("FIN 44") entitled "Accounting for
Certain Transactions involving Stock Compensation," which provides clarification
to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The adoption of this Interpretation had no effect on the Company's
financial position or results of operations for the current year, but does
require that the Company's option plans be accounted for under variable plan
accounting (See Note 9).
RECENT ACCOUNTING PRONOUNCEMENTS - The FASB issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets"
in June 2001. These statements address how intangible assets that are acquired
individually, with a group of other assets or in connection with a business
combination should be accounted for in financial statements upon and subsequent
to their acquisition. The new statements require that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method and
establish specific criteria for the recognition of intangible assets separately
from goodwill. LTC adopted SFAS No. 141 on July 1, 2001, as required by the new
statement. The Company does not expect the adoption of SFAS No. 141 to have a
material impact on its financial position or its results of operation. LTC will
adopt SFAS No. 142 on January 1, 2002 and does not expect the adoption to have
an impact on its financial position or its results of operations.
F-19
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," in June 2001. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. While LTC is currently evaluating
the impact the adoption of SFAS No. 143 will have on its financial position and
results of operations, it does not expect such impact to be material.
The FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," in August 2001. SFAS No. 144, which addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of, supercedes SFAS No. 121 and is
effective for fiscal years beginning after December 15, 2001. While LTC is
currently evaluating the impact the adoption of SFAS no. 144 will have on its
financial position and results of operations, it does not expect such impact to
be material.
NOTE 3 - OPERATING AND LIQUIDITY DIFFICULTIES AND MANAGEMENT'S PLANS TO OVERCOME
The accompanying consolidated financial statements of LTC have been
prepared on a going concern basis, which contemplates the continuation of
operations, realization of assets and liquidation of liabilities in the ordinary
course of business. Since its inception, LTC has incurred substantial operating
losses and expects to incur additional operating losses over the next several
years. Since December 1993, operations have been financed primarily through the
use of proceeds from the sale of convertible debt and private placements of
common and preferred stock. Continuation of LTC's operations in 2002 is
dependent upon the bridge financing from Arch Hill and completion of the New
Financing described in Note 1. These conditions raise substantial doubt about
LTC's ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
MANAGEMENT'S PLANS - LTC has worked closely with selected portable
electronics Original Equipment Manufacturers ("OEMs") in the past, exploring
various notebook computer, PDA and wireless handset applications. Over the past
few years LTC has refocused its unique large footprint cell technology and
market activities to concentrate on large, high rate battery applications
including advanced automotive batteries for 42-volt systems, Hybrid Electric
Vehicles (HEVs) and energy storage devices for the distributed power/renewable
energy market. In September 2000, LTC completed its first working prototype
lithium-ion HEV battery, complete with battery management and control
electronics. A second generation prototype HEV battery, designed to meet the
specifications of an existing HEV, was completed in January 2001. LTC is
currently working on a prototype 42-volt automotive battery which LTC expects to
deliver to a European auto manufacturer in the second quarter of 2002. LTC has
not yet delivered a prototype HEV, 42-volt or stationary power battery for
testing by a third party.
As described in Note 1, LTC and GAIA have entered into a LOI relating
to a share exchange between LTC and GAIA and a New Financing.
F-20
Management's operating plan seeks to minimize LTC's capital
requirements, but commercialization of LTC's battery technology will require
substantial amounts of additional capital. LTC expects that technology
development and operating and production expenses will increase significantly as
it continues to advance its battery technology and develop products for
commercial applications. LTC's working capital and capital requirements will
depend upon numerous factors, including, without limitation, the progress of
LTC's technology development program, technological advances, the status of
competitors and the ability of LTC and GAIA to collaborate subsequent to the
GAIA Share Exchange.
LTC does not currently have sufficient cash to achieve all its
development and production objectives. LTC needs to raise approximately
$6,000,000 in the New Financing in order to have sufficient capital resources
for its development, production, operating and administrative needs until
approximately June 2003. LTC contemplates that a second financing transaction
will be necessary during the twelve months after the completion of the GAIA
Share Exchange in order to fully implement the new business plan.
LTC has not yet entered into any definitive agreements relating to the
GAIA Share Exchange or the New Financing.
Pursuant to the terms of a bridge loan entered into as of January 8,
2002, Arch Hill has agreed to advance working capital to LTC until the earlier
of the closing of the New Financing or May 31, 2002. Arch Hill has advanced a
total of $1,042,025 through March 22, 2002 convertible at $.08 per share into
13,025,312 shares of LTC common stock. LTC believes that provided Arch Hill
advances the needed working capital to it under the bridge loan, LTC will have
sufficient capital resources to meet its needs and satisfy its obligations
through May 31, 2002.
There can be no assurance that funding will continue to be provided by
Arch Hill in the amounts necessary to meet all of LTC's obligations until the
closing of the New Financing or that LTC will be able to consummate the New
Financing. If the New Financing is not consummated, LTC will assess all
available alternatives including a sale of its assets or merger, the suspension
of operations and possibly liquidation, auction, bankruptcy, or other measures.
The Arch Hill Bridge Loan Agreement does not contain a maximum of the
amount of funding that may be advanced under such agreement. Accordingly, there
is no maximum amount of notes that may be issued to Arch Hill. The amount of the
notes will be related to the working capital advances made by Arch Hill to LTC
and the length of time until the New Financing is completed.
NOTE 4 - PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 2001 is summarized as follows:
2001
---------------
Laboratory equipment........................................ $ 1,382,000
Furniture and office equipment.............................. 106,000
Leasehold improvements...................................... 48,000
---------------
1,536,000
---------------
Less: Accumulated depreciation and amortization............. 1,301,000
---------------
$ 235,000
===============
F-21
NOTE 5 - NOTE PAYABLE:
As of December 31, 2001, LTC was in default on a note for a research
and development funding agreement. Under the agreement, starting in 1999 LTC was
obligated to pay a total of $100,000 for principal and $50,000 for interest
through January 2004. LTC did not make payments on the note until 2000. The
principal balance remaining under the note is $82,000. On February 28, 2002, LTC
remedied the condition of default. The note is secured by the intellectual
property rights and equipment developed from the funds provided by this
agreement.
NOTE 6 - CONVERTIBLE PROMISSORY NOTES
As of December 31, 2001, in connection with the Bridge Loan Financing
Agreement, Ilion has advanced to LTC working capital of $5,249,000 in the form
of Convertible Promissory Notes which have no stated interest rate and are
convertible at $.10 per share into LTC common stock if the LTC Ilion merger is
not consummated for any reason (See Note 1). Subsequent to December 31, 2001, in
connection with the Termination Agreement, Ilion sold to Arch Hill $3,949,000 of
LTC notes originally held by Ilion and the remaining $1,300,000 of LTC notes
held by Ilion were converted into 13,000,000 restricted shares of LTC common
stock (the "Ilion Conversion Shares"). (See Note 1 and Note 10).
As of December 31, 2001, Arch Hill advanced to LTC working capital of
$80,000 in the form of Convertible Promissory Notes which have no stated
interest rate (See Note 1). This note is convertible at any time commencing on
the date of issuance into 1,000,000 shares of LTC common stock at $0.08 per
share. Since the Convertible Promissory Note payable to Arch Hill is
convertible at inception, the entire $80,000 of interest expense related to
the beneficial conversion feature was recognized as expense for the year ended
December 31, 2001.
NOTE 7 - INCOME TAXES:
Deferred income taxes reflect the net effects of temporary differences
between the amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The principal temporary difference
arises from the net operating loss carryforwards and results in a deferred tax
asset of approximately $9,700,000 at December 31, 2001.
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. LTC has determined,
based on its recurring net losses, lack of a commercially viable product and
limitations under current tax law, that a full valuation allowance is
appropriate at December 31, 2001.
At December 31, 2001, LTC had net operating loss carryforwards for
federal income tax purposes of approximately $25,000,000 expiring in the years
2006 through 2016 and net operating loss carryforwards of approximately
$19,600,000 for state income tax purposes, expiring in the years 2005 through
2011.
Current tax law limits the use of net operating loss carryforwards
after there has been a substantial change in ownership (as defined in Internal
Revenue Code Section 382) during a three year period. Due to changes in
ownership between 1993 and 1997, and the conversion of the Senior Secured
Convertible Notes in January 1999, there exists substantial risk that LTC's use
of net operating losses may be severely limited under the Internal Revenue Code.
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
LEASE - LTC leases a 12,400 square foot research facility and corporate
headquarters in a free-standing building at 5115 Campus Drive in Plymouth
Meeting, Pennsylvania pursuant to a Lease
F-22
Agreement between PMP Whitemarsh Associates and LTC dated July 22, 1994. The
lease had an initial five year term which expired on October 31, 1999. By letter
agreements, LTC and the landlord have extended the term of the lease to March
31, 2003. Rental expense under the agreement was $150,000 and $141,000 in 2001
and 2000, respectively.
LTC is currently leasing the facility under a two year lease extension
that commenced on April 1, 2001 and ends on March 31, 2003. The annual rent
under the lease extension is approximately $134,000 and $136,000 in years one
and two, respectively.
EMPLOYMENT AGREEMENTS - LTC had an employment agreement with its
Director of Research/Senior Scientist providing for annual compensation of
$125,000 through February, 2001. The employment agreement was not renewed in
2001.
In May 1996, LTC entered into a one year employment agreement with its
then Chief Executive Officer at an annual salary of $185,000 and other
incentives, including performance bonuses and stock options. The agreement was
extended through October 1999. Effective November 1, 1999, the Chief Executive
Officer resigned. The officer had voluntarily elected to defer his compensation
in 1997 and 1998. At December 31, 2001 and 2000, $201,000 of deferrals from 1997
and 1998 have been included in accrued salaries in the accompanying financial
statements. In 2000, the Board of Directors approved payment of the officer's
$366,000 deferred salary fifty percent in cash and fifty percent in common stock
at fair value on the date of issuance. The former officer received $165,000 in
cash during 2000.
Effective November 1, 1999, LTC extended the employment agreement with
its Chairman/Chief Executive Officer, Mr. Cade, at an annual salary of $165,000
plus other incentives, including performance bonuses and stock options until the
later of February 28, 2002 or one year after the merger with Ilion. (See Note
10).
Dr. George Ferment, the President, Chief Operating Officer and Chief
Technology Officer and a director of LTC, resigned from LTC effective May 31,
2000. Pursuant to a agreement entered into between LTC and Dr. Ferment, LTC
paid Dr. Ferment his salary until June 30, 2000 and paid $77,500 to Dr. Ferment
on June 30, 2000.
NOTE 9 - STOCKHOLDERS' EQUITY
PREFERRED STOCK - LTC is authorized to issue up to 100,000 shares of
preferred stock, all of which is currently undesignated and may be divided and
issued from time to time in one or more series as may be designated by the Board
of Directors. In the event of liquidation, dissolution or winding up of LTC, the
holders of the preferred stock will be entitled to a liquidation preference over
the Common Stock.
The preferred stock may be entitled to such dividends, redemption
rights, liquidation rights, conversion rights and voting rights as the Board of
Directors, in its discretion, may determine, in a resolution or resolutions
providing for the issuance of any such stock. Rights granted by the Board of
Directors may be superior to those of existing shareholders, (including the
right to elect a controlling number of directors as a class). Preferred stock
can be issued without the vote of the holders of Common Stock. No shares of
preferred stock are outstanding at December 31, 2001.
1994 STOCK INCENTIVE PLAN - LTC's Board of Directors adopted the 1994
Stock Incentive Plan (the "1994 Stock Plan") in February 1994. The 1994 Stock
Plan terminates in February 2004, unless terminated earlier by the Board of
Directors. A total of 5,333,334 shares of common stock were reserved and
available for grants. Stock options permitting the holder to purchase a
specified number of shares of common stock are to be granted at an exercise
price not less than 100% of the fair value of such stock on the date of grant;
however, for any non-qualified Stock Option the option price per share of Common
Stock, may alternatively, be fixed at any price deemed to be fair and
reasonable, as of the date of grant. The stock
F-23
options may be in the form of an incentive stock option or a non-qualified stock
option. All options outstanding under the 1994 Stock Plan were 100% vested in
February 2000. Vested options are exercisable for up to sixty months upon
termination of the Grantees employment or association with LTC.
DIRECTORS STOCK OPTION PLAN - In August 1995, the Board of Directors
adopted the Directors Stock Option Plan (the "Directors Plan"). The Directors
Plan terminates in August 2005, unless terminated earlier by the Board of
Directors. A total of 333,333 shares of LTC's common stock are reserved and
available for grant. Stock options permitting the holder to purchase a specified
number of shares of common stock are to be granted at an exercise price equaling
the then fair market value of the common stock on the date of grant. All options
outstanding under the Directors Plan were 100% vested in February 2000. Upon the
termination of a participant's association with LTC, options granted will remain
exercisable for a period of three months or until the stated expiration of the
stock option, if earlier.
1998 STOCK INCENTIVE PLAN - LTC's Board of Directors adopted the 1998
Stock Incentive Plan (the "1998 Plan") in December 1998. The 1998 Plan
terminates in December 2008. A total of 3,000,000 shares of common stock are
reserved and available for grant. The exercise price of an option granted under
the 1998 Plan will not be less than the fair market value of LTC's Common Stock
on the date of grant; however, for any non-qualified Stock Option the option
price per share of Common Stock, may alternatively, be fixed at any price deemed
to be fair and reasonable, as of the date of grant. All options outstanding
under the 1998 Plan were 100% vested in February 2000. Vested options are
exercisable for up to sixty months upon termination of the Grantee's employment
or association with LTC.
In September 1999, LTC decreased the exercise price of all outstanding
options issued under the 1994 Stock Plan to an exercise price of $0.26 and in
June 2000, LTC decreased the exercise price of all outstanding options issued
under the Directors Plan and the 1998 Plan having an exercise price in excess of
$.28 to $.28. The repricing resulted in approximately $25,000 of additional
stock compensation expense to LTC. In February 2000, the Board approved the
acceleration of the vesting of all outstanding stock options, on the condition
that the optionee consents to a new termination date of the earlier of the
original option termination date or the date preceding the Ilion merger. As a
result of the repricings, all of LTC's option plans require variable plan
accounting beginning on July 1, 2000, as prescribed by FIN 44. This did not
result in any additional compensation expense for the years ended December 31,
2001 and 2000. Options under the 1994 Stock Plan, the Directors Plan and the
1998 Plan as of December 31 are summarized as follows:
2001 2000
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ---------- ---------- ----------
Outstanding, beginning of year . 2,516,000 0.27 5,474,000 $ 0.27
Granted ........................ 0 0 65,000 $ 0.48
Exercised ...................... 0 (3,023,000) $ 0.27
Cancelled ...................... (166,000) 0.27 0 $ 0.27
---------- ---------- ---------- ----------
Outstanding, end of year ....... 2,350,000 0.27 2,516,000 $ 0.27
---------- ---------- ---------- ----------
Options exercisable, end of year 2,350,000 0.27 2,516,000 $ 0.27
---------- ---------- ---------- ----------
F-24
The following table summarizes information about stock options
outstanding at December 31, 2001:
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
RANGE OF AVERAGE REMAINING AVERAGE
EXERCISE OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE
PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
------ ----------- ----- ---- ----------- -----
0.22 14,590 .22 7 years 14,590 0.22
0.25 13,334 .25 7 years 13,333 0.25
0.26 1,766,435 .26 4 years 1,766,435 0.26
0.28 490,729 .28 7 years 490,729 0.28
0.48 65,600 .48 7 years 65,000 0.48
The per share weighted-average fair value of stock options granted
during 2000 was $.27 on the date of grant. No options were granted in 2001. LTC
applies Accounting Principles Board Opinion No. 25 and related Interpretations
in accounting for its stock option plans. Accordingly, no compensation cost has
been recognized for its stock option plans. Had the compensation cost for LTC's
stock option plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of FASB Statement 123,
LTC's pro forma net loss for the year ended December 31, 2000 would have been
$3,732,000 ($.07 per share). The pro forma loss for the year ended December 31,
2001 is the net loss of $2,548,000 ($.05 per share).
The fair value of options granted under LTC's stock option plans was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used: 2000 - no dividend yield,
expected volatility of 131%, risk-free interest rate of 6.3% and expected life
of 2 years.
WARRANTS -
Warrants as of December 31 are summarized as follows:
2001 2000
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
WARRANTS PRICE WARRANTS PRICE
---------- ---------- ---------- ----------
Outstanding, beginning of year 4,186,000 $ .15 4,590,000 $ .15
Cancelled .................... -- $ .15 (404,000) $ 15
---------- ---------- ---------- ----------
Outstanding, end of year ..... 4,186,000(1) $ .15 4,186,000 $ .15
---------- ---------- ---------- ----------
Exercisable .................. 4,186,000 $ .15 4,186,000 $ .15
========== ========== ========== ==========
(1) The above table does not include the 12,500,000 warrants issued to Ilion on
January 8, 2002. (See Note 10 - Subsequent Events.)
F-25
There were no warrants granted or exercised during 2001 or 2000. In December
2001, LTC's Board of Directors approved the extension of the expiration date of
all of the outstanding warrants to January 2004. In connection therewith, LTC
recognized $469,000 of stock based compensation expenses using the Black-Scholes
option pricing model as prescribed by FASB Statement 123 using the following
assumptions: no dividend yield, expected volatility of 198%, risk-free interest
rate of 4.34% and expected life of 2 years. The following table summarizes
information about warrants outstanding at December 31, 2001:
WEIGHTED WEIGHTED AVERAGE WEIGHTED
RANGE OF WARRANTS AVERAGE REMAINING WARRANTS AVERAGE
EXERCISE PRICE OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
-------------- ----------- -------------- ---------------- ----------- --------------
$0.15 4,186,000 $.15 2.03 years 4,186,000 $.15
NOTE 10 - SUBSEQUENT EVENTS
TERMINATION OF MERGER WITH ILION - As described above in Note 1, effective as of
January 8, 2002 LTC and Ilion entered into a Termination Agreement pursuant to
which the Merger Agreement and all other agreements, between LTC and Ilion, were
terminated.
Under the provisions of the Termination Agreement, all rights and
obligations of Ilion and LTC under the Merger Agreement, the related bridge
financing agreement in effect since October 1999, and all other agreements
between LTC and Ilion, were terminated. In connection with the Termination
Agreement, Ilion sold to Arch Hill $3,949,000 of LTC notes originally held by
Ilion and the remaining $1,300,000 of LTC notes held by Ilion were converted
into 13,000,000 restricted shares of LTC common stock (the "Ilion Conversion
Shares").
The Termination Agreement provides that after the termination closing
and from time to time as requested by Ilion, LTC will take all appropriate
actions to nominate or remove or replace one person designated by Ilion to LTC's
Board of Directors provided that Ilion (i) is the beneficial owner of at
least 1% of LTC common stock then outstanding during the two year period after
the termination closing or (ii) is the beneficial owner of at least 5% of LTC
common stock then outstanding at any time after the termination closing.
As a condition to the Termination Agreement, the existing Warrant
Agreement between LTC and Ilion, dated as of January 19, 2000 (the "Warrant
Agreement"), relating to 7,500,000 shares of our common stock was amended (the
"Warrant Amendment") to increase the number of shares of our common stock
subject to the Warrant Agreement to 12,500,000 (the "Warrant Shares") and to
extend the termination date of the Warrants to January 10, 2004. The Warrants
are currently exercisable at $.15 per share.
The Termination Agreement also provides that if after the closing of
the New Financing and the GAIA Share Exchange the Ilion Conversion Shares and
the Warrant Shares do not equal at least 9% of LTC capital stock on a fully
diluted basis, then LTC will issue to Ilion warrants to purchase our common
stock (the "New Warrant Shares") having the same terms as the warrant and
warrant amendment so that the Ilion Conversion Shares, the Warrant Shares and
the New Warrant Shares equal 9% of LTC's capital stock on a fully diluted basis
immediately after the GAIA Share Exchange.
In connection with the Bridge Loan from Ilion, LTC granted Ilion a
non-exclusive worldwide license to use LTC's thin film technology and
manufacturing methods solely as it relates to lithium-ion polymer batteries (the
"Original Ilion License"). The Original Ilion License provided that all
improvements that were developed by LTC or Ilion during the course of the
licensing arrangement are owned by Ilion (the "Improvements"). Under the
Termination Agreement, the Original Ilion License was terminated and LTC and
Ilion entered into cross licensing agreements whereby worldwide, non-exclusive,
royalty free, perpetual license were granted by each to the other with respect
to certain specified technology. The cross licensing agreement gives LTC, among
other things, the right to use the Improvements owned by Ilion and gives Ilion,
among other things, the right to use certain LTC technology that did not
constitute Improvements. The license from LTC to Ilion covers all product
designs, processing techniques and knowledge known to "those skilled in the art"
whether or not patented or patentable which LTC owned or possessed on December
31, 2001 and have communicated to Ilion or was developed by us pursuant to the
LTC-Ilion Merger Agreement, solely as the foregoing relates to the
F-26
materials, design and architecture of lithium-ion/lithium-ion polymer batteries
and excluding any of the foregoing as it relates to lithium metal polymer
batteries and excluding any improvements to the technology after December 31,
2001. The license from Ilion to LTC covers all product designs, processing
techniques and knowledge known to "those skilled in the art" whether or not
patented or patentable which Ilion owned or possessed on December 31, 2001 and
has communicated to LTC or was developed by LTC pursuant to the LTC-Ilion Merger
Agreement, solely as the foregoing relates to the materials, design and
architecture of lithium-ion /lithium-ion polymer batteries and excluding any
improvements to the technology after December 31, 2001.
As part of the licensing arrangement LTC agreed not to duplicate
Ilion's High Power Device product or design or any other aspect of the high
power device system that could be protected by patent, provided however, LTC
may duplicate aspects of the system that may be determined by third party
analysis. LTC also agreed to not enter the power conditioning reliability
market for a period of two years after Proteus Power LLC (or its successor)
("Proteus") enters commercial production or three years after December 31,
2001, whichever is earlier. Subject to the foregoing, LTC has the right to use
known conventional construction designs which exist in the commercial
marketplace outside of Ilion-Proteus.
With respect to the Ilion Conversion Shares, the Warrant Shares and the
shares issuable upon conversion of the Ilion Notes and the Arch Bridge Notes,
LTC granted certain demand and piggy back registration rights commencing May 1,
2002.
As a further condition to the Termination Agreement on December 31,
2001, LTC entered into a Note Purchase and Sale Agreement with Ilion and Arch
Hill (the "Note Purchase and Sale Agreement") which was closed on January 8,
2002 when all closing conditions were met. Under the terms of the Note Purchase
and Sale Agreement, Arch Hill acquired from Ilion $3,949,000 principal amount of
LTC promissory notes held by Ilion (the "Ilion Notes"), convertible into
39,490,000 shares of our Common Stock. The Ilion Notes were previously issued by
LTC to Ilion in connection with the LTC-Ilion Merger Agreement and related
bridge financing agreement.
BRIDGE FINANCING BY ARCH HILL - As described above in Note 1, effective as of
January 8, 2002 and amended on March 20, 2002, LTC has entered into a bridge
loan agreement with Arch Hill pursuant to which Arch Hill has agreed to advance
working capital to LTC until the earlier of the closing of the New Financing or
May 31, 2002. Notes issued to Arch Hill under the bridge financing agreement are
convertible, at any time prior to repayment of the Notes, into LTC common stock
at $.08 per share. Arch Hill has advanced a total of $1,042,025 through March
22, 2002 convertible into 13,025,312 shares of LTC common stock.
EMPLOYMENT AGREEMENTS - LTC has entered into an Employment Agreement with David
Cade, for a period of three years commencing as of January 1, 2002 (the "Term"),
pursuant to which Mr. Cade serves as LTC's Chairman and Chief Executive Officer
at a salary of $207,500 per year until the closing of the LTC-GAIA Transaction
and thereafter at $250,000 per year, subject to increase at the discretion of
the Board of Directors. The Agreement provides that during each fiscal year, Mr.
Cade will be eligible to receive a target bonus of up to 40% of his annual
salary for such fiscal year with the exact amount of such bonus to be determined
in the discretion of the Board of Directors or the applicable committee of the
Board of Directors in accordance with performance thresholds for such fiscal
year to be agreed upon prior to March 1 of the fiscal year to which the bonus
and the performance thresholds relate.
Mr. Cade's employment agreement provides for certain severance
payments benefits in the event his employment is terminated by LTC other than
for cause and
F-27
includes certain confidentiality, non-solicitation and non-competition
provisions.
LTC has entered into an Employment Agreement with Andrew J. Manning,
for a period of three years commencing as of January 1, 2002 (the "Term"),
pursuant to which Dr. Manning serves as LTC's Executive Vice President, Chief
Operating Officer and Chief Technical Officer at a salary of $150,000 per year
until the closing of the LTC-GAIA Transaction and thereafter at $175,000 per
year, subject to increase at the discretion of the Board of Directors. The
Agreement provides that during each fiscal year, Dr. Manning will be eligible
to receive a target bonus of up to 20% of his annual salary for such fiscal
year with the exact amount of such bonus to be determined in the discretion of
the Board of Directors or the applicable committee of the Board of Directors in
accordance with performance thresholds for such fiscal year to be agreed upon
prior to March 1 of the fiscal year to which the bonus and the performance
thresholds relate. Dr. Manning's employment agreement provides for certain
severance payment benefits in the event his employment is terminated by LTC
other than for cause and includes certain confidentiality, non-solicitation and
non-competition provisions.
F-28
2002 STOCK INCENTIVE PLAN - LTC's Board of Directors adopted the 2002
Stock Incentive Plan (the "2002 Plan") in January 2002. The 2002 Plan terminates
in January 2012. A total of 7,000,000 shares of common stock are reserved and
available for grant. The exercise price of an option granted under the 2002 Plan
will not be less than the fair market value of LTC's Common Stock on the date of
grant; however, for any non-qualified Stock Option the option price per share of
Common Stock, may alternatively, be fixed at any price deemed to be fair and
reasonable, as of the date of grant. Options granted that are not vested will be
cancelled immediately upon termination of the grantee's employment or
association with LTC, except in certain situations such as retirement, death or
disability. Vested options are exercisable for up to sixty months upon
termination of the Grantee's employment or association with LTC.
In January 2002, 750,000 options were issued under the 2002 Plan to
employees and directors of LTC, having an exercise price of $.20, a term of ten
years, with one-half of such options vesting July 1, 2002 and one-half vesting
January 22, 2003.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERS ENDED
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ----------- -----------
2000:
Net revenues ............................. $ 0 $ 0 $ 0 $ 0
Net loss ................................. $ 855,000 $ 1,128,000 $ 700,000 $ 820,000
Basic and diluted loss
per share ............................ $ 0.02 $ 0.02 $ 0.01 $ 0.02
=========== =========== =========== ===========
Weighted average common shares
outstanding .......................... 49,212,000 50,002,000 50,922,000 50,541,000
=========== =========== =========== ===========
2001:
Net revenues ............................. $ 0 $ 7,000 $ 5,000 $ 10,000
Net loss ................................. $ 668,000 $ 436,000 $ 383,000 $ 1,061,000
Basic and diluted loss per share ......... $ 0.01 $ 0.01 $ 0.01 $ 0.02
=========== =========== =========== ===========
Weighted average common shares outstanding 51,303,305 51,303,305 51,303,305 51,303,305
=========== =========== =========== ===========
Basic and diluted net income (loss) per common share for the year ended
December 31, 2001 and 2000, differs from the sum of basic and diluted net income
(loss) per common share for the quarters during the respective year due to the
different periods used to calculate net income (loss) and weighted average
shares outstanding.
F-29
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LITHIUM TECHNOLOGY CORPORATION
Date: March 27, 2002 By: /S/ DAVID J. CADE
-------------------------------------------
David J. Cade, Chairman and
Chief Executive Officer
(Principal Executive Officer)
By: /S/ WILLIAM D. WALKER
------------------------------------------
William D. Walker, Chief Financial Officer
(Principal Financial and Accounting Officer)
In accordance with the Securities Exchange Act of 1934, this report has been
signed by the following persons and in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ David J. Cade Director March 27, 2002
-----------------
David J. Cade
/s/ Stephen F. Hope Director March 27, 2002
-------------------
Stephen F. Hope
/s/ Ralph D. Ketchum Director March 27, 2002
--------------------
Ralph D. Ketchum
/s/ Arif Maskatia Director March 27, 2002
-----------------
Arif Maskatia
/s/ John D. McKey, Jr. Director March 27, 2002
----------------------
John D. McKey, Jr.