SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For The Quarterly Period Ended September 30, 2002
[ ] 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
(Exact Name of Small Business Issuer as Specified 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, PA 19462
(Address of Principal Executive Offices)
(610) 940-6090
(Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant 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 ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 13, 2002: 88,235,392
shares of Common Stock.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
LITHIUM TECHNOLOGY CORPORATION AND SUBSIDIARY
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
INDEX
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Condensed Consolidated Balance Sheets - September 30, 2002
and December 31, 2001 (Unaudited) 3
Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended September 30, 2002
and 2001, and Period From July 21, 1989 (Date of
Inception) to September 30, 2002 (Unaudited) 4
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) - Nine Months Ended September 30, 2002 (Unaudited) 6
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2002 and 2001, and
Period from July 21, 1989 (Date of Inception) to
September 30, 2002 (Unaudited) 7
Notes to Condensed Consolidated Financial Statements - September 30,
2002 (Unaudited) 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 19
ITEM 3. CONTROLS AND PROCEDURES 25
PART II - OTHER INFORMATION 25
ITEM 1. LEGAL PROCEEDINGS 25
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 5. OTHER INFORMATION 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
2
PART I - FINANCIAL INFORMATION
LITHIUM TECHNOLOGY CORPORATION AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 20,000 $ 60,000
Prepaid insurance and deferred charges 137,000 10,000
------------ ------------
Total Current Assets 157,000 70,000
------------ ------------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION OF $1,335,000 AND $1,301,000 258,000 235,000
SECURITY DEPOSIT 21,000 21,000
------------ ------------
Total assets $ 436,000 $ 326,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 475,000 $ 293,000
Accrued salaries 201,000 201,000
Note payable 65,000 82,000
Convertible promissory notes 1,915,000 80,000
Non-convertible promissory notes 500,000 --
------------ ------------
Total current liabilities 3,156,000 656,000
------------ ------------
LONG-TERM LIABILITIES:
Convertible promissory notes 3,949,000 5,249,000
------------ ------------
Total liabilities 7,105,000 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 - 64,303,305 and 51,303,305 shares 643,000 513,000
Additional paid-in capital 70,358,000 47,719,000
Accumulated deficit (6,865,000) (6,865,000)
Deficit accumulated during development stage (70,805,000) (46,946,000)
------------ ------------
Total stockholders' equity (deficiency) (6,669,000) (5,579,000)
------------ ------------
$ 436,000 $ 326,000
============ ============
See accompanying notes to condensed consolidated financial statements.
3
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
2002 2001
---- ----
REVENUES:
Development contracts and research grants $ 82,000 $ 5,000
------------ ------------
COSTS AND EXPENSES:
Engineering, research and development 488,000 223,000
General and administrative 402,000 164,000
------------ ------------
890,000 387,000
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net of interest income (2,000) (1,000)
Gain on insurance recovery 30,000 --
------------ ------------
28,000 (1,000)
------------ ------------
NET LOSS $ (780,000) $ (383,000)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING: 64,303,305 51,294,305
============ ============
BASIC AND DILUTED NET LOSS PER SHARE: $ (.01) $ (.01)
============ ============
See accompanying notes to condensed consolidated financial statements.
4
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED PERIOD FROM
------------------------------- JULY 21, 1989
SEPTEMBER 30, (DATE OF
------------------------------- INCEPTION) TO
2002 2001 SEPTEMBER 30, 2002
---- ---- ------------------
REVENUES:
Development contracts and research grants $ 83,000 $ 12,000 $ 273,000
------------ ------------ ------------
COSTS AND EXPENSES:
Engineering, research and development 1,314,000 850,000 12,285,000
General and administrative 1,183,000 646,000 15,978,000
Stock based compensation expense 2,755,000 -- 5,018,000
------------ ------------ ------------
5,252,000 1,496,000 33,281,000
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense, net of interest income (6,000) (3,000) (1,842,000)
Interest expense related to beneficial
conversion feature (18,714,000) -- (36,635,000)
Gain on insurance recovery 30,000 -- 30,000
Other non-operating income -- -- 650,000
------------ ------------ ------------
(18,690,000) (3,000) (37,797,000)
------------ ------------ ------------
NET LOSS $(23,859,000) $ (1,487,000) $(70,805,000)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING: 63,922,355 51,294,305
============ ============
BASIC AND DILUTED NET LOSS PER SHARE:
$ (.37) $ (.03)
============ ============
See accompanying notes to condensed consolidated financial statements.
5
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIENCY) (UNAUDITED)
DEFICIT
ACCUMULATED
DURING
COMMON STOCK ADDITIONAL ACCUMULATED DEVELOPMENT
SHARES AMOUNT PAID-IN CAPITAL DEFICIT STAGE
------ ------ --------------- ------- -----
BALANCES AT DECEMBER 31, 2001 51,303,305 $ 513,000 $ 47,719,000 $ (6,865,000) $(46,946,000)
Nine months ended September 30, 2002:
Issuance of Warrants 2,755,000
Beneficial conversion feature related
to convertible notes 18,714,000
Stock issued upon conversion of
convertible notes 13,000,000 130,000 1,170,000
Net loss (23,859,000)
------------ ------------ ------------ ------------ ------------
BALANCES AT SEPTEMBER 30, 2002 64,303,305 $ 643,000 $ 70,358,000 $ (6,865,000) $(70,805,000)
============ ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
6
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PERIOD FROM
JULY 21, 1989
NINE MONTHS ENDED (DATE OF
SEPTEMBER 30 INCEPTION) TO
2002 2001 SEPTEMBER 30, 2002
---- ---- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(23,859,000) $ (1,487,000) $(70,805,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Interest expense relating to the beneficial conversion feature of the
Convertible Notes 18,714,000 -- 36,635,000
Gain on insurance recovery (30,000) -- (30,000)
Depreciation 97,000 107,000 1,400,000
Amortization of debt issue costs -- -- 1,070,000
Common stock and warrants issued at prices below fair market value 2,755,000 -- 3,922,000
Repricing of outstanding options -- -- 25,000
Repricing of outstanding warrants -- -- 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:
Other current assets (127,000) -- (137,000)
Security and equipment deposits -- -- (21,000)
Accounts payable, accrued expenses and customer deposits 182,000 (21,000) 2,291,000
Due to related parties -- -- (118,000)
------------ ------------ ------------
Net cash used in operating activities (2,268,000) (1,401,000) (22,366,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (129,000) (29,000) (1,417,000)
Insurance recovery on property and equipment 39,000 -- 39,000
Other -- -- 94,000
------------ ------------ ------------
Net cash provided by (used in) investing activities $ (90,000) $ (29,000) $ (1,284,000)
------------ ------------ ------------
See accompanying notes to condensed consolidated financial statements.
7
PERIOD FROM
JULY 21, 1989
(DATE OF
NINE MONTHS ENDED INCEPTION)
SEPTEMBER 30 TO SEPTEMBER 30,
2002 2001 2002
---- ---- ----
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds received from Convertible Promissory Notes 1,835,000 1,443,000 7,164,000
Proceeds received from Non-convertible Promissory Notes 500,000 -- 500,000
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 -- -- 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 note payable (17,000) -- (17,000)
Repayment of convertible debt -- -- (100,000)
------------ ------------ ------------
Net cash provided by financing activities 2,318,000 1,443,000 23,670,000
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (40,000) 13,000 20,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 60,000 52,000 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,000 $ 65,000 $ 20,000
============ ============ ============
See accompanying notes to condensed consolidated financial statements.
8
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED
PERIOD FROM
JULY 21, 1989
NINE MONTHS ENDED (DATE OF)
SEPTEMBER 30, INCEPTION TO
2002 2001 SEPTEMBER 30, 2002
---- ---- ------------------
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 -- -- $ 3,300,000
preferred stock
Exchange of convertible debt for convertible preferred stock -- -- $ 356,000
Conversion of convertible debt and accrued interest into common stock, net of
unamortized debt discount $ 1,300,000 -- $11,247,000
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
Issuance of warrants $ 2,755,000 $ 2,755,000
See accompanying notes to condensed consolidated financial statements.
9
LITHIUM TECHNOLOGY CORPORATION
AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2002
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America applicable to interim periods. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. These financial
statements should be read in conjunction with the audited financial statements
of Lithium Technology Corporation and its wholly-owned subsidiary Lithion
Corporation, collectively referred to as LTC or the "Company", included in LTC's
Annual Report on Form 10-KSB filed with the Securities and Exchange Commission
for the year ended December 31, 2001. Operating results for the three and nine
months ended September 30, 2002 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2002 or any interim
period.
2. CRITICAL ACCOUNTING POLICIES AND RECENT PRONOUNCEMENTS
CONSOLIDATION -- The condensed 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.
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 Consensus 98-5, "Accounting for convertible
securities with beneficial conversion features or contingently adjustable
conversion ratios."
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 LTC financial
position or results of operations for the current year, but does require that
certain of LTC's options 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 adoption of SFAS No. 141 did not have any impact on LTC's
financial position or its results of operations. LTC adopted SFAS No. 142 on
January 1, 2002 and the adoption did not have any impact on LTC's financial
position or its results of operations.
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
10
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. The adoption of SFAS No. 144
did not have any impact on LTC's financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred rather than at the date of a commitment to an exit or disposal plan and
nullifies EITF 94-3. SFAS 146 applies to exit or disposal activities initiated
after December 31, 2002. SFAS 146 is not expected to have a material impact on
LTC's financial position or operations.
3. HISTORY OF THE BUSINESS
GENERAL - LTC is a pre-production stage company 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.
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.
LTC has worked closely with selected portable electronics Original Equipment
Manufacturers ("OEMs") in the past, exploring various notebook, computer,
personal data assistant ("PDA") and wireless handset applications. Over the past
two 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. In August
2002, LTC, together with GAIA Akkumulatorenwerke GmbH ("GAIA") of Nordhausen,
Thuringia, Germany, completed and shipped a prototype 42-volt automotive battery
to BMW under the European Union-sponsored "Astor" program (Assessments and
testing of advanced storage systems for propulsion and other electrical systems
in passenger cars). The Astor consortium consists of seven European auto
companies: Volkswagen, BMW, Daimler Chrysler, Opel, Fiat, Volvo, and Peugeot.
The prototype lithium battery is undergoing testing in Europe.
On January 8, 2002, LTC completed the first step in a strategic repositioning of
the Company. In the first phase, LTC and Ilion Technology Corporation ("Ilion")
terminated their previously existing Merger Agreement dated January 19, 2000, as
amended from time to time, to pave the way for LTC's proposed share exchange
pursuant to which LTC would acquire a 60% beneficial ownership interest in GAIA.
(See Note 10).
SHARE EXCHANGE AGREEMENT - On June 7, 2002, LTC signed a Share Exchange
Agreement ("Share Exchange Agreement") pursuant to which LTC would acquire a 60%
beneficial ownership interest in GAIA (the "Share Exchange"). The Share Exchange
Agreement provided, among other things, that LTC and GAIA would enter into a
strategic alliance agreement upon the closing of the Share Exchange. The closing
of the Share Exchange was subject to a $5 million minimum financing condition.
LTC and Arch Hill Ventures waived the requirement of receipt by LTC of at least
$5 million in equity financing as a condition to the closing of the Share
Exchange. The closing under the Share Exchange Agreement occurred on October 4,
2002. (See Note 10).
BRIDGE FINANCING BY ARCH HILL CAPITAL - Under the terms of a bridge financing
agreement the ("Arch Hill Capital Financing Agreement") entered into as of
January 8, 2002, as amended on March 22, 2002, May 30, 2002 and July 29, 2002,
Arch Hill Capital N.V. ("Arch Hill Capital") advanced (i) a total of $1,914,567
prior to July 29, 2002 convertible into 23,932,087 shares of LTC common stock
and (ii) a total of $500,000 from July 29, 2002 through September 30, 2002 in
exchange for non-convertible promissory notes.
Notes issued to Arch Hill Capital under the Arch Hill Capital Financing
Agreement prior to July 29, 2002 were convertible, at any time prior to
repayment of the promissory notes, into LTC common stock at $.08 per share and
were repayable upon the issuance of the following amounts of new convertible
notes by LTC ("New Notes"): upon the issuance of $6,000,000 principal amount of
New Notes - one-third of the outstanding promissory notes were repayable; upon
the issuance of $7,000,000 principal amount of New Notes - two-thirds of the
outstanding promissory notes were repayable; upon the issuance of $8,000,000
principal amount of New Notes - all of the promissory notes were repayable.
Notwithstanding the foregoing, in the event there was no closing of a financing
by October 31, 2002, all outstanding amounts under the promissory notes were due
and owing on October 31, 2002.
11
On October 4, 2002, in connection with waiving the $5 million financing
condition of closing of the Share Exchange, LTC entered into Amendment No. 4 to
the Arch Hill Capital Financing Agreement pursuant to which Arch Hill Capital
agreed to amend the foregoing repayment terms of the notes. (See Note 10).
TERMINATION OF MERGER WITH ILION - On December 31, 2001, LTC entered into a
Termination Agreement with 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 Agreement ("Merger 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.
Under the provisions of the Termination Agreement, all rights and obligations of
Ilion and LTC under the Merger Agreement, the related bridge financing agreement
("Ilion 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 Capital $3,949,000 of LTC notes
originally held by Ilion (the "Ilion Notes") and the remaining $1,300,000 of LTC
notes held by Ilion (the "Ilion Notes") were converted into 13,000,000
restricted shares of LTC common stock (the "Ilion Conversion Shares"). LTC
recognized $16,483,000 of interest expense related to the beneficial conversion
feature during the nine months ended September 30, 2002. (See Note 7).
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 LTC common stock was amended (the "Warrant
Amendment") to increase the number of shares of LTC 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. In connection therewith, LTC recognized
$2,755,000 of stock based compensation expense during the nine months ended
September 30, 2002.
In connection with the Ilion Financing Agreement, 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 licenses 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 has
communicated to Ilion 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 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.
12
With respect to the Ilion Conversion Shares, the Warrant Shares and the shares
issuable upon conversion of the Ilion 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 Capital
(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 Capital acquired from Ilion $3,949,000 principal
amount of Ilion Notes, convertible into 39,490,000 shares of LTC Common Stock.
The Ilion Notes were previously issued by LTC to Ilion in connection with the
LTC-Ilion Merger Agreement and related Ilion Financing Agreement.
4. OPERATING AND LIQUIDITY DIFFICULTIES AND MANAGEMENT'S PLANS TO OVERCOME
The accompanying condensed 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 stock. Continuation of LTC's operations in 2002 and thereafter is
dependent upon the bridge financing from Arch Hill Capital described in Note 10
and completion of a new financing. These conditions raise substantial doubt
about LTC's ability to continue as a going concern. The accompanying condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
MANAGEMENT'S PLANS - As described in Note 3, LTC has worked closely with
selected portable electronics OEMs in the past, exploring various notebook
computer, PDA and wireless handset applications. Over the past two 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, HEVs and energy storage devices for
the distributed power/renewable energy market.
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 abilities of
the combined operations of LTC and GAIA.
LTC does not currently have sufficient cash to achieve all its development and
production objectives.
In order to have sufficient capital resources for LTC's development, production,
operating and administrative needs and in order to implement the strategy of
combining LTC's operations with GAIA, LTC will need to close on one or more
equity financing transactions in the near term. LTC believes that if it raises
approximately $5,000,000 in an equity financing it would have sufficient funds
to meet the needs of LTC and GAIA for approximately six months. LTC also
believes that a second financing transaction will be necessary during 2003
in order to fully implement its new business plan. LTC expects that Arch Hill
Capital will continue to provide bridge financing as needed until a new
financing transaction is completed although Arch Hill Capital has not entered
into a formal agreement to provide such bridge financing.
There can be no assurance that funding will continue to be provided by Arch Hill
Capital in the amounts necessary to meet all of LTC's obligations until the
closing of a new financing or that LTC will be able to consummate a new
financing. If a 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.
5. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2002 are summarized as follows:
Laboratory equipment $ 1,428,000
Furniture and office equipment 117,000
Leasehold improvements 48,000
-----------
$ 1,593,000
13
Less: Accumulated depreciation and amortization (1,335,000)
-----------
$ 258,000
===========
6. 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. On
February 28, 2002, LTC remedied the condition of default. As of September 30,
2002, the principal balance remaining under the note is $65,000. The note is
secured by the intellectual property rights and equipment developed from the
funds provided by this agreement.
7. PROMISSORY NOTES
As of December 31, 2001, in connection with the Ilion Financing Agreement, Ilion
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 was not consummated for
any reason. (See Note 3). Since the Convertible Promissory Notes became
convertible on January 8, 2002, the entire $16,483,000 of interest expense
related to the beneficial conversion feature was recognized as expense during
January 2002. During January 2002, in connection with the Termination Agreement,
Ilion sold to Arch Hill Capital $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.
Under the terms of the Arch Hill Capital Financing Agreement entered into as of
January 8, 2002, as amended on March 22, 2002, May 30, 2002 and July 29, 2002,
Arch Hill Capital advanced to LTC (i) a total of $1,914,567 prior to July 29,
2002 convertible into 23,932,087 shares of LTC common stock and (ii) a total of
$500,000 from July 29, 2002 through September 30, 2002 in exchange for
non-convertible notes.
Notes issued to Arch Hill Capital under the Arch Hill Capital Financing
Agreement prior to July 29, 2002 were convertible, at any time prior to
repayment of the promissory notes, into LTC common stock at $.08 per share and
were repayable upon the issuance of the following amounts of new convertible
notes by LTC ("New Notes"): upon the issuance of $6,000,000 principal amount of
New Notes - one-third of the outstanding promissory notes were repayable; upon
the issuance of $7,000,000 principal amount of New Notes - two-thirds of the
outstanding promissory notes were repayable; upon the issuance of $8,000,000
principal amount of New Notes - all of the promissory notes were repayable.
Notwithstanding the foregoing, in the event there was no closing of a financing
by October 31, 2002, all outstanding amounts under the promissory notes were due
and owing on October 31, 2002.
On October 4, 2002, in connection with waiving the $5 million financing
condition of closing under the Share Exchange Agreement LTC entered into
Amendment No. 4 to the Arch Hill Capital Financing Agreement pursuant to which
Arch Hill Capital agreed to amend the foregoing repayment terms of the notes.
(See Note 10).
Subsequent to September 30, 2002, Arch Hill Capital advanced funds to LTC and
LTC issued non-convertible notes. (See Note 10).
8. COMMITMENTS AND CONTINGENCIES
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
at 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 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.
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 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 at the discretion of the Board of Directors or the applicable
committee of the Board of Directors in accordance performance thresholds for
14
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.
9. STOCKHOLDERS' EQUITY
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. In June 2002, 20,000 options were issued under the 2002 Plan to an
employee, having an exercise price of $.14, a term of ten years, with 25% of
such options vesting at the time of issuance and the remainder vesting 25% upon
each anniversary of the grant date. In July and August 2002, 55,000 options were
issued under the 2002 Plan to certain employees with exercise prices ranging
from $.11 to $.115. The options have a term of ten years, with 25% of such
options vesting at the time of issuance and the remainder vesting 25% upon each
anniversary of the grant date.
Options under the 1994 Stock Plan, The Directors Plan, the 1998 Plan and the
2002 Plan as of September 30, 2002 are summarized as follows:
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
Outstanding, January 1, 2002 2,350,000 $ 0.25
Granted 825,000 $ 0.19
Exercised 0 0
Cancelled 0 0
--------- --------
Outstanding, September 30, 2002 3,175,000 $ 0.25
--------- --------
Options exercisable, September 30, 2002 2,744,000 $ 0.26
--------- --------
Warrants as of September 30, 2002 are summarized as follows:
WEIGHTED
AVERAGE
WARRANTS EXERCISE PRICE
-------- --------------
Outstanding, January 1, 2002 4,186,000 $0.15
Granted 12,500,000(1) $0.15
Cancelled 0 0
---------- -----
Outstanding, September 30, 2002 16,686,000 $0.15
---------- -----
Exercisable, September 30, 2002 16,686,000 $0.15
---------- -----
(1) In connection therewith in January 2002, LTC recognized $2,755,000 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. (See Note 3).
15
10. SUBSEQUENT EVENTS
SHARE EXCHANGE - On October 4, 2002, LTC closed the Share Exchange pursuant to
which LTC acquired an interest in GAIA through LTC's acquisition of 60% of the
outstanding shares of GAIA Holding B.V. ("GAIA Holding"). GAIA Holding, a
private limited liability company incorporated under the laws of the
Netherlands, is the 100% beneficial owner of GAIA. GAIA is a private limited
liability company incorporated under the laws of Germany. GAIA Holding's
ownership interest in GAIA is held through certain trust arrangements. (See
"GAIA Holding Beneficial Ownership Interest in GAIA" below).
The Share Exchange was consummated pursuant to the terms of the Share Exchange
Agreement that LTC entered into on June 7, 2002 with Hill Gate Capital N.V.
("Hill Gate"), which subsequently changed its name to Arch Hill Real Estate N.V.
("Arch Hill Real Estate"). On September 6, 2002, all of the outstanding shares
of GAIA Holding and all of the rights and obligations of Arch Hill Real Estate
under the Share Exchange Agreement were transferred to Arch Hill Ventures, N.V.,
a private company limited by shares, incorporated under the laws of the
Netherlands ("Arch Hill Ventures"). Arch Hill Capital, a private company limited
by shares, incorporated under the laws of the Netherlands, controls Arch Hill
Ventures.
In the Share Exchange, Arch Hill Ventures transferred to LTC shares of GAIA
Holding that constitute 60% of the outstanding shares of GAIA Holding, and LTC
issued to Arch Hill Ventures 60,000 shares of LTC Series A Preferred Stock. Arch
Hill Ventures currently owns the remaining 40% of the outstanding shares of GAIA
Holding.
LTC and Arch Hill Ventures waived the requirement of receipt by LTC of at least
$5 million in equity financing as a condition to the closing of the Share
Exchange. In connection with such waiver, Arch Hill Capital agreed to convert
$1,914,567 principal of LTC promissory notes held by Arch Hill Capital into
shares of LTC common stock as described below.
Each outstanding share of the Series A Preferred Stock is convertible at the
option of the holder thereof into 1,113.40524 shares of LTC common stock at any
time following the authorization and reservation of a sufficient number of
shares of LTC common stock by all requisite action, including action by LTC's
Board of Directors and by LTC's shareholders, to provide for the conversion of
all outstanding shares of Series A Preferred Stock into shares of LTC common
stock.
Each share of the Series A Preferred Stock will automatically be converted into
1,113.40524 shares of LTC common stock one year following the authorization and
reservation of a sufficient number of shares of LTC common stock to provide for
the conversion of all outstanding shares of Series A Preferred Stock into shares
of LTC common stock. The shares of Series A Preferred Stock held by Arch Hill
Ventures are convertible, in the aggregate, into 66,804,314 shares of LTC common
stock.
The shares of Series A Preferred Stock are entitled to vote together with the
common stock on all matters submitted to a vote of the holders of the common
stock. On all matters as to which shares of common stock or shares of Series A
Preferred Stock are entitled to vote or consent, each share of Series A
Preferred Stock is entitled to the number of votes (rounded up to the nearest
whole number) that the common stock into which it is convertible would have if
such Series A Preferred Stock had been so converted into common stock as of the
record date established for determining holders entitled to vote, or if no such
record date is established, as of the time of any vote on such matters. Each
share of Series A Preferred Stock is initially entitled to the number of votes
that 1,114 shares of common stock would have.
In addition to the voting rights provided above, as long as any shares of Series
A Preferred Stock are outstanding, the affirmative vote or consent of the
holders of two-thirds of the then-outstanding shares of Series A Preferred
Stock, voting as a separate class, will be required in order for LTC to:
(i) amend, alter or repeal, whether by merger, consolidation or
otherwise, the terms of the Series A Preferred Stock or any other
provision of LTC's Charter or Bylaws, in any way that adversely
affects any of the powers, designations, preferences and
relative,participating, optional and other special rights of the
Series A Preferred Stock;
(ii) issue any shares of capital stock ranking prior or superior to, or
on parity with, the Series A Preferred Stock; or
(iii) subdivide or otherwise change shares of Series A Preferred Stock
into a different number of shares whether in a merger,
consolidation, combination, recapitalization, reorganization or
otherwise.
The Series A Preferred Stock ranks on a parity with the common stock as to any
dividends, distributions or upon liquidation, dissolution or winding up, in an
amount per share equal to the amount per share that the shares of common stock
into which such
16
Series A Preferred Stock are convertible would have been entitled to receive if
such Series A Preferred Stock had been so converted into common stock prior to
such distribution.
AMENDMENT TO BRIDGE FINANCING AGREEMENT WITH ARCH HILL CAPITAL - Effective
October 4, 2002, LTC and Arch Hill Capital amended the terms of the Arch Hill
Capital Financing Agreement. (See Note 3). Amendment No. 4 to the Arch Hill
Capital Financing Agreement provides that the entire principal balance and all
other sums due and payable under (i) any promissory note issued prior to July
29, 2002 shall be converted as of the closing of the Share Exchange into LTC
common stock on the conversion terms set forth in such notes and (ii) any
promissory note issued on or after July 29, 2002 shall be applied against the
purchase price of equity securities being sold by LTC in any equity financing
after the closing of the Share Exchange. Pursuant to the terms of such Amendment
No. 4 to the Arch Hill Capital Financing Agreement, on October 4, 2002,
$1,914,567 in principal of outstanding promissory notes issued prior to July 29,
2002 were converted, at $.08 per share, into 23,932,087 shares of LTC common
stock, and the $500,000 in principal of outstanding non-convertible promissory
notes issued from July 29, 2002 through October 4, 2002 remained outstanding. On
October 18, 2002, November 1, 2002 and November 8, 2002 Arch Hill Capital
advanced $287,375, $150,000 and $150,000 to LTC in exchange for non-convertible
notes.
OWNERSHIP OF SHARES BY ARCH HILL CAPITAL AND ARCH HILL VENTURES (WHICH IS
CONTROLLED BY ARCH HILL CAPITAL) -
Arch Hill Capital beneficially owns:
(i) 23,932,087 outstanding shares of LTC common stock;
(ii) 39,490,000 shares of LTC common stock issuable upon conversion of
$3,949,000 of LTC convertible notes at $.10 per share; and
(iii) 66,804,314 shares of LTC common stock issuable upon conversion of
60,000 shares of LTC Series A Preferred Stock held by Arch Hill
Ventures (which is controlled by Arch Hill Capital)
The 130,226,401 shares of LTC common stock beneficially owned by Arch Hill
Capital constitutes approximately 67% of LTC common stock on an as-converted
basis. Accordingly, Arch Hill Capital is a controlling stockholder and is able
to control the outcome of most matters submitted to LTC stockholders for
approval, including the election of LTC directors, any amendments to the
Certificate of Incorporation of LTC or a merger, sale of assets or other
significant transaction without the approval of other LTC stockholders. In
addition, Arch Hill Capital controls a majority of the voting power of GAIA
Holding and GAIA by virtue of its ownership of a controlling interest in LTC. As
a result, Arch Hill Capital has an effective veto power over corporate
transactions by LTC, GAIA Holding or GAIA which management or non-control
stockholders of such entities might desire.
The calculation of percentage of LTC common stock beneficially owned by Arch
Hill Capital is based on the number of shares of LTC common stock outstanding as
of November 13, 2002 (88,235,392 shares) plus the number of shares of LTC common
stock issuable to Arch Hill Capital upon conversion of convertible securities
held by such entity.
STRATEGIC ALLIANCE AGREEMENT WITH GAIA - On October 4, 2002, LTC entered into a
Strategic Alliance Agreement with GAIA (the "Strategic Alliance Agreement")
covering technology sharing and licensing, joint production, marketing, sales
and distribution activities and similar matters. The Strategic Alliance
Agreement provides for the following, among other matters:
Ownership of Technology. - As determined in accordance with the rules of
inventorship, LTC will have sole ownership of all inventions, patents, know-how,
trade secrets, technical information, data, manufacturing processes, designs,
ideas, and the like ("Technology") invented, discovered or developed solely by
LTC, by LTC employees, or by LTC agents prior to and during the term of the
Strategic Alliance Agreement ("LTC Technology") and GAIA will have sole
ownership of all Technology invented, discovered or developed solely by GAIA, by
GAIA's employees, or by GAIA's agents prior to and during the term of the
Strategic Alliance Agreement ("GAIA Technology"). LTC and GAIA will each own
jointly and equally with the other party all Technology invented, discovered or
developed jointly by the parties, their employees or agents during the term of
the Strategic Alliance Agreement ("Strategic Alliance Technology").
Cross-License of Technology - LTC granted to GAIA a worldwide,
non-sublicensable, royalty-free license of all LTC Technology and GAIA granted
to LTC a worldwide, non-sublicensable, royalty-free license of all GAIA
Technology. Neither party may sell, transfer, divest or license to any third
party, any Strategic Alliance Technology or any interest in the Technology that
is the subject of the foregoing licenses without the written consent of the
other party.
Patents - Each party will have full responsibility for the application,
prosecution, and maintenance of patents and/or patent applications worldwide for
those inventions which are solely owned by such party. Unless the parties
determine otherwise, all patent applications relating to LTC Technology, GAIA
Technology and Strategic Alliance Technology will be filed in the United States
and Germany. LTC will be the owner of any resulting patents, approvals or
licenses issued by any governmental entity relating to any LTC Technology. GAIA
will be the owner of any resulting patents, approvals or licenses issued by any
governmental entity relating to any
17
GAIA Technology. LTC and GAIA will be co-owners on an equal basis, of any
resulting patents, approvals or licenses issued by any governmental entity
relating to any Strategic Alliance Technology. LTC and GAIA have the right to
bring and maintain any appropriate suit or action for infringement of any patent
or other right with respect to Technology owned by such party.
Supplier and Manufacturing Agreements - The parties will enter into mutually
acceptable manufacturing, supply, and other agreements.
Accounting Controls and Financial Information - Each party must adhere to
specified accounting and internal financial controls and furnish to the other
party specified financial information.
Termination of Agreement - The Strategic Alliance Agreement (including the
licenses and rights granted thereunder) will remain in full force and effect
until the earlier of (i) the mutual consent of both parties; (ii) the
liquidation or dissolution of either party; or (iii) termination in the event of
a default. Default is defined to occur when either party (the "Defaulting
Party") (a) becomes bankrupt or insolvent, or files a petition in bankruptcy or
makes a general assignment for the benefit of creditors or otherwise
acknowledges insolvency, or is adjudged bankrupt; (b) goes or is placed in a
process of complete liquidation other than for an amalgamation or
reconstructions; (c) suffers the appointment of a receiver for any substantial
portion of its business who shall not be discharged within sixty days after his
appointment or (d) breaches any material provision of the Strategic Alliance
Agreement and fails to cure such breach within thirty (30) days written notice
thereof by the other party. In the event of default, the non-Defaulting party,
at its option may terminate its obligation to and the rights of the Defaulting
Party under the Strategic Alliance Agreement upon ten days' written notice to
the Defaulting Party and such termination will take effect as of the occurrence
on the event giving rise to the option to terminate.
OPERATIONAL PLAN - LTC and GAIA are in the process of combining their operations
and staffs into a single, cohesive entity. The consolidated organizational
structure provides for LTC corporate headquarters at Plymouth Meeting,
Pennsylvania and two operating units - GAIA USA in Plymouth Meeting and GAIA
Europe in Nordhausen, Germany. The two companies have formulated and approved a
new combined strategic Business Plan which provides for a unified approach to:
overall business strategy; technology research and development; product
development; procurement; production; market and competitive analysis; customer
contact plans; marketing; Public Relations/Investor Relations; sales;
distribution; securing future Joint Venture relationships for manufacturing and
distribution; securing future resource needs; and financial forecasts. Mr. David
J. Cade will remain as Chairman and Chief Executive Officer of LTC, and Dr.
Franz J. Kruger, CEO of GAIA GmbH, will become President and Chief Operating
Officer of LTC.
OPTION AGREEMENT WITH GAIA HOLDING STOCKHOLDER - On October 4, 2002, in
connection with the closing of the Share Exchange, LTC entered into an Option
Agreement with Arch Hill Ventures pursuant to which LTC has the right to acquire
additional shares of GAIA Holding owned by such stockholder in order to maintain
LTC's ownership position in GAIA Holding and GAIA at not less than 60% of the
outstanding shares. The Option Agreement shall remain in full force and effect
until the earlier of (a) the consent of the parties to the Option Agreement; (b)
the termination of the Strategic Alliance Agreement; or (c) the liquidation or
dissolution of GAIA Holding.
GAIA HOLDING BENEFICIAL OWNERSHIP INTEREST IN GAIA - GAIA Holding is the 100%
beneficial owner of GAIA. The outstanding shares of GAIA are held pursuant to
certain Dutch and German trust agreements by two Netherlands entities affiliated
with Arch Hill Capital (the "Nominal Stockholders") for the risk and account of
GAIA Holding. Based on the Dutch and the German trust agreements, the Nominal
Stockholders are obliged to transfer the legal ownership of the shares in GAIA
without any further payments to GAIA Holding or to a third party designated by
GAIA Holding on the demand of GAIA Holding. Pursuant to the trust agreements,
GAIA Holding has the right to vote the shares of GAIA held by the Nominal
Stockholders.
SHARE TRANSFER AGREEMENT - In connection with the Share Exchange closing, LTC
entered into an Agreement with GAIA Holding, Arch Hill Ventures and the Nominal
Stockholders (the "Share Transfer Agreement") which provides that without LTC's
prior written consent, GAIA Holding may not directly or indirectly transfer or
instruct any party to transfer the legal ownership of the shares of GAIA held by
the Nominal Stockholders to any party other than to GAIA Holding and upon LTC's
written direction, GAIA Holding will instruct the Nominal Stockholders to
transfer the legal ownership of the shares of GAIA held by the Nominal
Stockholders to GAIA Holding for no payment. The Share Transfer Agreement
provides that notwithstanding the foregoing, in the event that the transfer of
the GAIA shares to GAIA Holding results in a negative tax implication to GAIA
(the "Tax Effect") that would otherwise be avoided by not transferring the GAIA
shares, then LTC will compensate the shareholders of GAIA Holding other than LTC
in the amount of such Tax Effect multiplied by the percentage of shares of GAIA
Holding that are beneficially owned by shareholders of GAIA Holding other than
LTC. The Share Transfer Agreement further provides that at such time as the
parties determine that there would no longer be any
18
possible Tax Effect as a result of the transfer of the GAIA shares to GAIA
Holding, then the legal ownership of the GAIA shares held by the Nominal
Stockholders shall be transferred to GAIA Holding without any payment.
REVERSE ACQUISITION ACCOUNTING - Because Arch Hill Capital beneficially owns a
majority of the shares of LTC, the Share Exchange transaction and related
transactions might be accounted for as a reverse acquisition. In that case, the
purchase price would be allocated to LTC's assets and liabilities and future
consolidated financial statements for LTC would be the financial statements of
GAIA Holding as the acquiror and LTC's assets and liabilities would likely be
changed to reflect the purchase price allocation.
WARRANTS ISSUED - As compensation for services in connection with the Share
Exchange, on October 4, 2002, LTC issued in a private transaction warrants to
purchase 1,800,000 shares of LTC common stock at an exercise price of $0.185 per
share. The warrants are immediately exercisable and have a five year term.
ITEM 2. 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
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, personal
data assistant ("PDA") and wireless handset applications. Over the past two
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, Hybrid Electronic 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. In August 2002, together with GAIA
Akkumulatorenwerke GmbH ("GAIA"), we completed and shipped a prototype 42-volt
automotive battery to BMW under the European Union-sponsored "Astor" program
(Assessments and testing of advanced storage systems for propulsion and other
electrical systems in passenger cars). The Astor consortium consists of seven
European auto companies: Volkswagen, BMW, Daimler Chrysler, Opel, Fiat, Volvo,
and Peugeot. The prototype lithium battery is now undergoing testing in Europe.
Our operating plan seeks to minimize our capital requirements, but
commercialization of our battery technology will require substantial amounts of
additional capital. We expect that technology development and operating and
production expenses will increase significantly as we continue to advance our
battery technology and develop products for commercial applications. Our working
capital and capital requirements will depend upon numerous factors, including,
without limitation, the progress of our technology development program,
technological advances, the status of competitors and the abilities of the
LTC-GAIA combined operations.
We do not currently have sufficient cash to achieve all our development and
production objectives.
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.
GAIA SHARE EXCHANGE
General - On October 4, 2002, we closed a share exchange (the "Share Exchange")
pursuant to which we acquired an interest in GAIA, a lithium polymer battery
company, headquartered in Nordhausen/Thuringia, Germany, through our acquisition
of 60% of the outstanding shares of GAIA Holding B.V. ("GAIA Holding"). GAIA
Holding, a private limited liability company incorporated under the laws of the
Netherlands, is the 100% beneficial owner of GAIA. GAIA is a private limited
liability company incorporated under the laws of Germany. GAIA Holding's
ownership interest in GAIA is held through certain trust arrangements. (See
"GAIA Holding Beneficial Ownership Interest in GAIA" below).
The Share Exchange was consummated pursuant to the terms of a Share Exchange
Agreement (the "Share Exchange Agreement") that
19
we entered into on June 7, 2002 with Hill Gate Capital N.V. ("Hill Gate"), which
subsequently changed its name to Arch Hill Real Estate N.V. ("Arch Hill Real
Estate"). On September 6, 2002, all of the outstanding shares of GAIA Holding
and all of the rights and obligations of Arch Hill Real Estate under the Share
Exchange Agreement were transferred to Arch Hill Ventures, N.V., a private
company limited by shares, incorporated under the laws of the Netherlands ("Arch
Hill Ventures"). Arch Hill Capital N.V., a private company limited by shares,
incorporated under the laws of the Netherlands ("Arch Hill Capital"), controls
Arch Hill Ventures.
In the Share Exchange, Arch Hill Ventures transferred to us shares of GAIA
Holding that constitute 60% of the outstanding shares of GAIA Holding, and we
issued to Arch Hill Ventures 60,000 shares of our Series A Preferred Stock. Arch
Hill Ventures currently owns the remaining 40% of the outstanding shares of GAIA
Holding.
We and Arch Hill Ventures waived the requirement of receipt by us of at least $5
million in equity financing as a condition to the closing of the Share Exchange.
In connection with such waiver, Arch Hill Capital agreed to convert $1,914,567
principal of our promissory notes held by Arch Hill Capital into shares of our
common stock as described below.
Preferred Stock Issued in the Share Exchange - In the Share Exchange, we issued
to Arch Hill Ventures 60,000 shares of our Series A Preferred Stock. Each share
of the Series A Preferred Stock is convertible at the option of the holder
thereof into 1,113.40524 shares of our common stock at any time following the
authorization and reservation of a sufficient number of shares of our common
stock by all requisite action, including action by our Board of Directors and by
our shareholders, to provide for the conversion of all outstanding shares of
Series A Preferred Stock into shares of our common stock.
Each share of the Series A Preferred Stock will automatically be converted into
1,113.40524 shares of our common stock one year following the authorization and
reservation of a sufficient number of shares of our common stock to provide for
the conversion of all outstanding shares of Series A Preferred Stock into shares
of our common stock. The shares of Series A Preferred Stock held by Arch Hill
Ventures are convertible, in the aggregate, into 66,804,314 shares of our common
stock.
The shares of Series A Preferred Stock are entitled to vote together with the
common stock on all matters submitted to a vote of the holders of the common
stock. On all matters as to which shares of common stock or shares of Series A
Preferred Stock are entitled to vote or consent, each share of Series A
Preferred Stock is entitled to the number of votes (rounded up to the nearest
whole number) that the common stock into which it is convertible would have if
such Series A Preferred Stock had been so converted into common stock as of the
record date established for determining holders entitled to vote, or if no such
record date is established, as of the time of any vote on such matters. Each
share of Series A Preferred Stock is initially entitled to the number of votes
that 1,114 shares of common stock would have.
In addition to the voting rights provided above, as long as any shares of Series
A Preferred Stock are outstanding, the affirmative vote or consent of the
holders of two-thirds of the then-outstanding shares of Series A Preferred
Stock, voting as a separate class, will be required in order for us to:
(i) amend, alter or repeal, whether by merger, consolidation or
otherwise, the terms of the Series A Preferred Stock or any other
provision of our Charter or Bylaws, in any way that adversely
affects any of the powers, designations, preferences and relative,
participating, optional and other special rights of the Series A
Preferred Stock;
(ii) issue any shares of capital stock ranking prior or superior to, or
on parity with, the Series A Preferred Stock; or
(iii) subdivide or otherwise change shares of Series A Preferred Stock
into a different number of shares whether in a merger,
consolidation, combination, recapitalization, reorganization or
otherwise.
The Series A Preferred Stock ranks on a parity with the common stock as to any
dividends, distributions or upon liquidation, dissolution or winding up, in an
amount per share equal to the amount per share that the shares of common stock
into which such Series A Preferred Stock are convertible would have been
entitled to receive if such Series A Preferred Stock had been so converted into
common stock prior to such distribution.
20
Proxy or Information Statement - We do not currently have enough shares of
common stock authorized to issue shares upon the conversion of all our
outstanding convertible securities. We plan to prepare and file with the
Securities and Exchange Commission a proxy or information statement to be mailed
to our stockholders in order to obtain consent to increase the authorized number
of shares of our common stock or effect a reverse stock split thereof sufficient
to make available that number of shares of our common stock as will be required
for the conversion of the convertible notes to be issued as part of a new
financing, all outstanding convertible securities, including the Series A
Preferred Stock, and for future issuance.
LTC Board of Directors - The Share Exchange Agreement provides that as soon as
practicable after consummation the Share Exchange and filing by us of a Form
14-F for such purpose, our Board of Directors will be increased to twelve
members and Arch Hill Ventures will be entitled to designate six nominees to our
Board of Directors. Ilion Technology Corporation ("Ilion") is also entitled to
designate one nominee to our Board of Directors.
GAIA Board of Directors - Dr. Franz Josef Kruger and Mr. Ralf Tolksdorf are the
managing directors of GAIA. As a condition of closing the Share Exchange, GAIA's
Supervisory Board of Directors has been increased to three members consisting
of:
Mr. Hendrikus Harold van Andel
Prof. Dr. Marnix Snijder
Mr. David J. Cade
GAIA Holding Board of Directors - Mr. Hendrikus Harold van Andel is the sole
executive director of GAIA Holding. In connection with the closing of the Share
Exchange, GAIA Holding's Supervisory Board of Directors has been increased to
four members consisting of:
Mr. David J. Cade
Mr. William D. Walker
Dr. Franz Josef Kruger
Prof. Dr. Marnix Snijder
Registration Rights - Arch Hill Ventures has the following registration rights,
at our expense, with respect to our common stock issuable upon conversion of the
Series A Preferred Stock issued in the Share Exchange: (i) upon the request of
the holders of at least 50% of the Series A Preferred Stock, one demand
registration, (ii) unlimited piggyback rights, and (iii) rights to register
shares in up to three shelf offerings pursuant to Form S-3. All registration
rights will terminate when the underlying common stock may be sold under Rule
144(k).
OWNERSHIP OF SHARES BY ARCH HILL CAPITAL AND ARCH HILL VENTURES (WHICH IS
CONTROLLED BY ARCH HILL CAPITAL)
Arch Hill Capital beneficially owns:
(i) 23,932,087 outstanding shares of our common stock;
(ii) 39,490,000 shares of our common stock issuable upon conversion of
$3,949,000 of our convertible notes at $.10 per share; and
(iii) 66,804,314 shares of our common stock issuable upon conversion of
60,000 shares of our Series A Preferred Stock held by Arch Hill
Ventures (which is controlled by Arch Hill Capital)
The 130,226,401 shares of our common stock beneficially owned by Arch Hill
Capital constitutes approximately 67% of our common stock on an as-converted
basis. Accordingly, Arch Hill Capital is a controlling stockholder and is able
to control the outcome of most matters submitted to our stockholders for
approval, including the election of our directors, any amendments to our
Certificate of Incorporation or a merger, sale of assets or other significant
transaction without the approval of our other stockholders. In addition, Arch
Hill Capital controls a majority of the voting power of GAIA Holding and GAIA by
virtue of its ownership of a controlling interest in LTC. As a result, Arch Hill
Capital has an effective veto power over corporate transactions by LTC, GAIA
Holding or GAIA which management or non-control stockholders of such entities
might desire.
The calculation of percentage of our common stock beneficially owned by Arch
Hill Capital is based on the number of shares of our common stock currently
outstanding as of November 13, 2002 (88,235,392 shares) plus the number of
shares of our common stock issuable to Arch Hill Capital upon conversion of
convertible securities held by such entity.
STRATEGIC ALLIANCE AGREEMENT WITH GAIA
On October 4, 2002, we entered into a Strategic Alliance Agreement with GAIA
(the "Strategic Alliance Agreement") covering technology sharing and licensing,
joint production, marketing, sales and distribution activities and similar
matters.
The Strategic Alliance Agreement provides for the following, among other
matters:
Ownership of Technology - As determined in accordance with the rules of
inventorship, we will have sole ownership of all inventions, patents, know-how,
trade secrets, technical information, data, manufacturing processes, designs,
ideas, and the like ("Technology") invented, discovered or developed solely by
us, by our employees, or by our agents prior to and during the term of the
Strategic Alliance Agreement ("LTC Technology") and GAIA will have sole
ownership of all Technology invented, discovered or developed solely by GAIA, by
GAIA's employees, or by GAIA's agents prior to and during the term of the
Strategic Alliance Agreement ("GAIA Technology"). We and GAIA will each own
jointly and equally with the other party all Technology invented, discovered or
developed jointly by the parties, their employees or agents during the term of
the Strategic Alliance Agreement ("Strategic Alliance Technology").
Cross-License of Technology - We granted to GAIA a worldwide, non-sublicensable,
royalty-free license of all LTC Technology and GAIA granted to us a worldwide,
non-sublicensable, royalty-free license of all GAIA Technology. Neither party
may sell, transfer, divest or license to any third party, any Strategic Alliance
Technology or any interest in the Technology that is the subject of the
foregoing licenses without the written consent of the other party.
Patents - Each party will have full responsibility for the application,
prosecution, and maintenance of patents and/or patent
21
applications worldwide for those inventions which are solely owned by such
party. Unless the parties determine otherwise, all patent applications relating
to LTC Technology, GAIA Technology and Strategic Alliance Technology will be
filed in the United States and Germany. We will be the owner of any resulting
patents, approvals or licenses issued by any governmental entity relating to any
LTC Technology. GAIA will be the owner of any resulting patents, approvals or
licenses issued by any governmental entity relating to any GAIA Technology. We
and GAIA will be co-owners on an equal basis, of any resulting patents,
approvals or licenses issued by any governmental entity relating to any
Strategic Alliance Technology. We and GAIA have the right to bring and maintain
any appropriate suit or action for infringement of any patent or other right
with respect to Technology owned by such party.
Supplier and Manufacturing Agreements - The parties will enter into mutually
acceptable manufacturing, supply, and other agreements.
Accounting Controls and Financial Information - Each party must adhere to
specified accounting and internal financial controls and furnish to the other
party specified financial information.
Termination of Agreement - The Strategic Alliance Agreement (including the
licenses and rights granted thereunder) will remain in full force and effect
until the earlier of (i) the mutual consent of both parties; (ii) the
liquidation or dissolution of either party; or (iii) termination in the event of
a default. Default is defined to occur when either party (the "Defaulting
Party") (a) becomes bankrupt or insolvent, or file a petition in bankruptcy or
make a general assignment for the benefit of creditors or otherwise acknowledge
insolvency, or be adjudged bankrupt; (b) goes or is placed in a process of
complete liquidation other than for an amalgamation or reconstructions; (c)
suffers the appointment of a receiver for any substantial portion of its
business who shall not be discharged within sixty days after his appointment or
(d) breaches any material provision of the Strategic Alliance Agreement and
fails to cure such breach within thirty (30) days written notice thereof by the
other party. In the event of default, the non-Defaulting party, at its option
may terminate its obligation to and the rights of the Defaulting Party under the
Strategic Alliance Agreement upon ten days' written notice to the Defaulting
Party and such termination will take effect as of the occurrence on the event
giving rise to the option to terminate.
OPERATIONAL PLAN - We and GAIA are in the process of combining operations and
staffs into a single, cohesive entity. The consolidated organizational structure
provides for our corporate headquarters at Plymouth Meeting, Pennsylvania and
two operating units - GAIA USA in Plymouth Meeting and GAIA Europe in
Nordhausen, Germany. We have formulated and approved with GAIA a new combined
strategic Business Plan which provides for a unified approach to: overall
business strategy; technology research and development; product development;
procurement; production; market and competitive analysis; customer contact
plans; marketing; Public Relations/Investor Relations; sales; distribution;
securing future Joint Venture relationships for manufacturing and distribution;
future resource needs; and financial forecasts. Mr. David J. Cade will remain as
our Chairman and Chief Executive Officer, and Dr. Franz J. Kruger, CEO of GAIA
GmbH, will become our President and Chief Operating Officer.
OPTION AGREEMENT WITH GAIA HOLDING STOCKHOLDER - On October 4, 2002, in
connection with the closing of the Share Exchange, we entered into an Option
Agreement with Arch Hill Ventures pursuant to which we have the right to acquire
additional shares of GAIA Holding owned by such stockholder in order to maintain
our ownership position in GAIA Holding and GAIA at not less than 60% of the
outstanding shares. The Option Agreement shall remain in full force and effect
until the earlier of (a) the consent of the parties to the Option Agreement; (b)
the termination of the Strategic Alliance Agreement; or (c) the liquidation or
dissolution of GAIA Holding.
GAIA HOLDING BENEFICIAL OWNERSHIP INTEREST IN GAIA - GAIA Holding is the 100%
beneficial owner of GAIA. The outstanding shares of GAIA are held pursuant to
certain Dutch and German trust agreements by two Netherlands entities (the
"Nominal Stockholders") for the risk and account of GAIA Holding. Based on the
Dutch and the German trust agreements, the Nominal Stockholders are obliged to
transfer the legal ownership of the shares in GAIA without any further payments
to GAIA Holding or to a third party designated by GAIA Holding on the demand of
GAIA Holding. Pursuant to the trust agreements, GAIA Holding has the right to
vote the shares of GAIA held by the Nominal Stockholders.
SHARE TRANSFER AGREEMENT - In connection with the Share Exchange closing, we
entered into an Agreement with GAIA Holding, Arch Hill Ventures and the Nominal
Stockholders (the "Share Transfer Agreement") which provides that without our
prior written consent, GAIA Holding may not directly or indirectly transfer or
instruct any party to transfer the legal ownership of the shares of GAIA held by
the Nominal Stockholders to any party other than to GAIA Holding and upon our
written direction, GAIA Holding will instruct the Nominal Stockholders to
transfer the legal ownership of the shares of GAIA held by the Nominal
Stockholders to GAIA Holding for no payment. The Share Transfer Agreement
provides that notwithstanding the foregoing, in the event that the transfer of
the GAIA shares to GAIA Holding results in a negative tax implication to GAIA
(the "Tax Effect") that would otherwise be avoided by not transferring the GAIA
shares, then we will compensate the shareholders of GAIA Holding other than us
in the amount of such Tax Effect multiplied by the percentage of shares of GAIA
Holding that are beneficially owned by shareholders of GAIA Holding other than
us. The Share Transfer Agreement further provides that at such time as the
parties determine that there would no longer be any possible Tax Effect as a
result of the transfer of the GAIA shares to GAIA Holding, then the legal
ownership of the GAIA shares held by the Nominal Stockholders shall be
transferred to GAIA Holding without any payment.
WARRANTS ISSUED - As compensation for services in connection with the Share
Exchange, on October 4, 2002, we issued in a private transaction warrants to
purchase 1,800,000 shares of our common stock at an exercise price of $0.185 per
share. The warrants are immediately exercisable and have a five year term.
22
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 $22.1 million,
including $5,249,000 from Ilion and $2,414,567 from Arch Hill Capital as of
September 30, 2002 pursuant to the terms of a bridge loan agreement.
Effective October 4, 2002, we and Arch Hill Capital amended the terms of a
bridge financing agreement (the "Arch Hill Capital Financing Agreement") entered
into as of January 8, 2002, as previously amended on March 22, 2002, May 30,
2002 and July 29, 2002. Arch Hill Capital advanced (i) a total of $1,914,567
prior to July 29, 2002 convertible into 23,932,087 shares of our common stock,
(ii) a total of $500,000 from July 29, 2002 through September 30, 2002 in
exchange for non-convertible notes and (iii) a total of $587,375 from September
30, 2002 through November 8, 2002.
Notes issued to Arch Hill Capital under the Arch Hill Capital Financing
Agreement prior to July 29, 2002 were convertible, at any time prior to
repayment of the promissory notes, into our common stock at $.08 per share and
were repayable upon the issuance of the following amounts of new convertible
notes by us ("New Notes"): upon the issuance of $6,000,000 principal amount of
New Notes - one-third of the outstanding promissory notes were repayable; upon
the issuance of $7,000,000 principal amount of New Notes - two-thirds of the
outstanding promissory notes were repayable; upon the issuance of $8,000,000
principal amount of New Notes - all of the promissory notes were repayable.
Notwithstanding the foregoing, in the event there was no closing of a financing
by October 31, 2002, all outstanding amounts under the promissory notes were due
and owing on October 31, 2002.
On October 4, 2002, in connection with waiving the $5 million financing
condition of closing of the Share Exchange, we entered into Amendment No. 4 to
the Arch Hill Capital Financing Agreement pursuant to which Arch Hill Capital
agreed to amend the foregoing repayment terms of the notes. Amendment No. 4 to
the Arch Hill Capital Financing Agreement provides that the entire principal
balance and all other sums due and payable under (i) any promissory note issued
prior to July 29, 2002 shall be converted as of the closing of the Share
Exchange into our common stock on the conversion terms set forth in such notes
and (ii) any promissory notes issued on or after July 29, 2002 shall be applied
against the purchase price of equity securities being sold by us in any equity
financing after the closing of the Share Exchange. Pursuant to the terms of such
Amendment No. 4 to the Arch Hill Capital Financing Agreement, on October 4,
2002, $1,914,567 in principal of outstanding promissory notes issued prior to
July 29, 2002 were converted, at $.08 per share, into 23,932,087 shares of our
common stock, and the $500,000 in principal of outstanding non-convertible
promissory notes issued from July 29, 2002 through October 4, 2002 remained
outstanding. On October 18, 2002, November 1, 2002 and November 8, 2002 Arch
Hill Capital advanced $287,375, $150,000 and $150,000 to us in exchange for
non-convertible notes.
At September 30, 2002, we had cash and cash equivalents of $20,000, prepaid
insurance and deferred charges of $137,000, fixed assets of $258,000 and other
assets of $21,000. Our total liabilities were $7,105,000 consisting of current
liabilities (accounts payable, accrued salaries, accrued expenses and
convertible and non-convertible promissory notes) in the aggregate amount of
$3,156,000 and long-term liabilities (convertible promissory notes held by Arch
Hill, formerly held by Ilion) in the amount of $3,949,000. We had a working
capital deficit of $2,999,000 on September 30, 2002 as compared to a working
capital deficit of $586,000 on December 31, 2001. The increase in the working
capital deficit is primarily attributable to the issuance of convertible notes
to Arch Hill Capital during the first nine months of 2002.
Our cash and cash equivalents decreased by approximately $40,000 from December
31, 2001 to September 30, 2002. The cash decrease is attributable primarily to
payment of trade creditors and others prior to funding under the Arch Hill
Capital Financing Agreement.
Our stockholders' deficiency was $6,669,000 at September 30, 2002, after giving
effect to an accumulated deficit of approximately $77,670,000 which consisted of
$70,805,000 deficit accumulated during the development stage from July 21, 1989
through September 30, 2002 and $6,865,000 accumulated deficit from prior
periods. We expect to incur substantial operating losses as we continue our
commercialization efforts.
23
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 strategy of combining our operations with GAIA we need to close on
one or more equity financing transactions in the near term. We believe that if
we raise approximately $5,000,000 in an equity financing we would have
sufficient funds to meet the needs of LTC and GAIA for approximately six months.
We also believe that a second financing transaction will be necessary during
2003 in order to fully implement our new business plan. We have not entered into
any definitive agreements relating to a new financing as of the date of this
Report and no assurance can be given that any financing will be consummated.
We expect that Arch Hill Capital will continue to provide bridge financing as
needed until a new financing transaction is completed although Arch Hill Capital
has not entered into a formal agreement to provide such bridge financing. There
can be no assurance that funding will continue to be provided by Arch Hill
Capital in the amounts necessary to meet all our obligations until the closing
of a new financing or that we will be able to consummate the new financing. If a
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
NINE MONTHS ENDED SEPTEMBER 30, 2002
We had revenues from development contracts and research grants in the amount of
$83,000 for the nine months ended September 30, 2002 as compared to $12,000 for
the nine months ended September 30, 2001. The development contracts and research
grants revenue includes a $75,650 non-recurring alternative fuel incentive grant
from the Commonwealth of Pennsylvania.
Engineering, research and development expenses were $1,314,000 for the nine
months ended September 30, 2002 compared to $850,000 for the nine months ended
September 30, 2001. The increase of $464,000 was due primarily to increased
materials purchased to produce prototype batteries and increased technical
consulting services and salaries. We expect our engineering, research and
development expenses to continue to increase during fiscal year 2002.
General and administrative expenses were $1,183,000 for the nine months ended
September 30, 2002 compared to $646,000 for the nine months ended September 30,
2001. The increase of $537,000 was due to increased legal, accounting,
consulting and other expenses primarily relating to the Share Exchange, the
bridge financing transactions and the termination of the proposed merger with
Ilion.
Stock based compensation expenses were $2,755,000 for the nine months ended
September 30, 2002 compared to $0 for the nine months ended September 30, 2001.
The $2,755,000 of expense was caused by the issuance of 12,500,000 warrants to
Ilion pursuant to terms of the Termination Agreement.
Interest expense increased to $6,000 (net of interest income of $2,000) for the
nine months ended September 30, 2002 compared to $3,000 (net of interest income
of $4,000) for the nine months ended September 30, 2001.
We had a $30,000 gain on insurance recovery relating to equipment loss during
the nine months ended September 30, 2002.
In connection with the Bridge Loan Financing Agreement, Ilion had advanced to us
working capital of $5,249,000 in the form of Convertible Promissory Notes which
had no stated interest rate and were convertible at $.10 per share into our
common stock if the LTC-Ilion merger was not consummated for any reason (See
Notes 3 and 7). Since the Convertible Promissory Notes became convertible on
January 8, 2002, the entire $16,483,000 of interest expense related to the
beneficial conversion feature was recognized as expense during January 2002.
As of September 30, 2002, Arch Hill Capital advanced to us working capital of
$1,914,567 (including $1,834,567 advanced during the nine months ended September
30, 2002) in the form of Convertible Promissory Notes which have no stated
interest rate (See Note 3). The notes are convertible at any time commencing on
the date of issuance into 23,932,087 shares of our common stock at $0.08 per
share. Since the Convertible Promissory Notes totaling $1,834,567 payable to
Arch Hill Capital are convertible at inception, the entire $2,231,000 of
interest expense related to the beneficial conversion feature of these Notes was
recognized as expense during the nine months ended September 30, 2002.
THREE MONTHS ENDED SEPTEMBER 30, 2002
We had revenues from development contracts and research grants in the amount of
$82,000 for the three months ended September 30, 2002 as compared to $5,000 in
revenues from commercial operations for the three months ended September 30,
2001. The development contracts and research grants revenue includes a $75,650
non-recurring alternative fuel incentive grant from the Commonwealth of
Pennsylvania.
Engineering, research and development expenses were $488,000 for the three
months ended September 30, 2002 compared to
24
$223,000 for the three months ended September 30, 2001. The increase of $265,000
was due primarily to increased materials purchased to produce prototype
batteries, increased technical consulting services and salaries.
General and administrative expenses were $402,000 for the three months ended
September 30, 2002 compared to $164,000 for the three months ended September 30,
2001. The increase of $238,000 was due to increased legal, insurance, consulting
and other expenses.
Interest expense increased to $2,000 (net of interest income of $1,000) for the
three months ended September 30, 2002 compared to $1,000(net of interest income
of $2,000) for the three months ended September 30, 2001.
We had a $30,000 gain on insurance recovery relating to equipment loss during
the nine months ended September 30, 2002.
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 combine our operations and staffs with GAIA 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 form those described herein as
anticipated, believed, estimated or expected.
ITEM 3. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of LTC's management,
including the Chief Executive Officer and Chief Financial Officer, an evaluation
was performed of the effectiveness of the design and operation of LTC's
disclosure controls and procedures within 90 days before the filing date of this
report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the date of evaluation, LTC's disclosure
controls and procedures were effective.
(b) There have been no significant changes in LTC's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
25
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) The following Exhibits are filed as part of this Report or
incorporated herein by reference:
3.5 Amended Certificate of Designation of Lithium
Technology Corporation (1)
10.42 Option Agreement dated as of October 4, 2002 by and
between Arch Hill Ventures N.V., GAIA Holding, B.V.
and Lithium Technology Corporation. (1)
10.43 Agreement dated October 4, 2002 by and between GAIA
Holding B.V., Arch Hill Ventures, N.V., Arch Hill
Real Estate, N.V., Stichting Administratiekantoor
GAIA and Lithium Technology Corporation. (1)
10.44 Bridge Financing Amendment Agreement No. 4 dated as
of October 4, 2002 between Lithium Technology
Corporation and Arch Hill Capital N.V. (1)
10.45 Strategic Alliance Agreement dated as of October 4,
2002 by and between Lithium Technology Corporation
and GAIA Akkumulatorenwerke GmbH.
10.46 Form of Warrant dated October 4, 2002 issued to
principals of Colebrooke Capital, Inc. (1)
b) Form 8-K Reports during the Quarter Ended September 30, 2002:
None.
(1) Incorporated herein by reference to the Company's Report on Form 8-K dated
October 16, 2002
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 14, 2002 LITHIUM TECHNOLOGY CORPORATION
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)
26
CERTIFICATIONS
I, David J. Cade, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Lithium
Technology Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ David J. Cade
-----------------------------------
David J. Cade
Chairman and Chief Executive Officer
27
CERTIFICATIONS (CONTINUED)
I, William D. Walker, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Lithium
Technology Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ William D. Walker
----------------------------
William D. Walker
Chief Financial Officer
28
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies in his capacity as an officer of
Lithium Technology Corporation (the "Company") that the Quarterly Report of the
Company on Form 10-QSB for the period ended September 30, 2002 fully complies
with the requirements of Section 13(a) of the Securities Exchange Act of 1934
and that the information contained in such report fairly presents, in all
material respects, the financial condition of the Company at the end of such
period and the results of operations of the Company for such period.
Dated: November 14, 2002
/s/ David J. Cade
--------------------------------------
David J. Cade
Chairman and Chief Executive Officer
/s/ William D. Walker
--------------------------------------
William D. Walker
Chief Financial Officer
29