UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (_x_) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended April 30, 1997 or (___) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From __________ To __________. Commission File No. 0-25184 U.S. ELECTRICAR, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 95-3056150 (State of other jurisdiction of (IRS employer identification number) incorporation or organization) 5 Thomas Mellon Circle, Suite 254 San Francisco, CA 94134 (Address of Principal Executive Offices and Zip Code) Indicate by check mark whether he registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods 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 (___) As of June 10, 1997, there were 152,060,668 shares of Common Stock, no par value, outstanding. INDEX U.S. ELECTRICAR, INC. Page No. -------- PART 1. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) ............................... 3 Consolidated Balance Sheets: April 30, 1997 and July 31, 1996 .............................. 3 Consolidated Statements of Operations: Three and Nine months ended April 30, 1997 and 1996 ............ 4 Consolidated Statements of Cash Flows: Nine months ended April 30, 1997 and 1996 ...................... 5 Notes to Consolidated Financial Statements: for the Three and Nine months ended April 30, 1997 and 1996 .... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................ 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings .............................................. 15 Item 2. Changes in Securities .......................................... 15 Item 3. Defaults upon Senior Securities ................................ 15 Item 4. Submission of Matters to a Vote of Security Holders ............ 16 Item 5. Other Information .............................................. 17 Item 6. Exhibits and Reports on Form 8-K ............................... 17 SIGNATURE .................................................................. 18 EXHIBIT INDEX............................................................... 19 2 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS U.S. ELECTRICAR, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except for share and per share data) - ---------------------------------------------------------------------------------------------------- As of As of April 30, 1997 July 31, 1996 -------------- ------------- ASSETS (Unaudited) CURRENT ASSETS: Cash $ 1,177 $ 13 Accounts receivable, net of allowances of $434 and $596 2,407 856 Inventory 1,782 2,387 Prepaids and other current assets 279 184 -------- -------- Total Current Assets 5,645 3,440 PROPERTY, PLANT AND EQUIPMENT - NET 1,152 835 OTHER ASSETS 172 88 -------- -------- TOTAL ASSETS $ 6,969 $ 4,363 ======== ======== LIABILITIES AND SHAREHOLDERS' (DEFICIT) CURRENT LIABILITES: Accounts payable $ 2,883 $ 2,868 Accrued payroll and related expense 679 441 Accrued warranty expense 970 1,156 Reserve for lease obligations 49 112 Accrued Interest 458 208 Other accrued expenses 893 721 Customer deposits and deferred revenue 104 323 Capital leases payable 273 0 Bonds and notes payable 5,497 7,283 -------- -------- Total Current Liabilities 11,806 13,112 LONG TERM DEBT 3,987 3,987 SHAREHOLDERS' (DEFICIT): Series A preferred stock - No par value; 30,000,000 shares authorized; 3,693,000 and 4,010,000 shares issued and outstanding at 4/30/97 and 7/31/96 2,641 2,983 Series B preferred stock - No par value; 5,000,000 shares authorized; 1,587,000 shares issued and outstanding 3,175 3,175 Stock notes receivable (1,127) (1,061) Common Stock - No par value; 300,000,000 shares authorized; 149,068,000 and 120,220,000 shares issued and outstanding at 4/30/97 and 7/31/96 67,678 59,157 Accumulated deficit (81,191) (76,990) -------- -------- Total Shareholders' (Deficit) (8,824) (12,736) -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) $ 6,969 $ 4,363 ======== ======== <FN> Note: The balance sheet at July 31, 1996 has been derived from the audited financial statements at that date. See notes to consolidated financial statements. </FN> 3 U.S. ELECTRICAR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except for per share and share data) - ------------------------------------------------------------------------------------------------------------------- Three Months Ended April 30, Nine Months Ended April 30, ---------------------------- --------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- NET SALES $ 2,856 $ 478 $ 3,754 $ 3,489 COST OF SALES 1,007 1,571 2,419 5,060 ------------- ------------- ------------- ------------- GROSS MARGIN 1,849 (1,093) 1,335 (1,571) ------------- ------------- ------------- ------------- OTHER COSTS AND EXPENSES: Research & development 394 413 1,027 1,129 Selling, general & administrative 835 2,503 2,322 5,186 Interest and financing fees 145 453 557 1,366 Impairment of long-lived assets 894 894 Acquisition of a research company 1,630 ------------- ------------- ------------- ------------- Total other costs and expenses 1,374 4,263 5,536 8,575 ------------- ------------- ------------- ------------- INCOME (LOSS) BEFORE GAIN ON DEBT RESTRUCTURING 475 (5,356) (4,201) (10,146) GAIN ON DEBT RESTRUCTURING 1,858 2,248 ------------- ------------- ------------- ------------- NET INCOME (LOSS) $ 475 $ (3,498) $ (4,201) $ (7,898) ============= ============= ============= ============= PER COMMON SHARE: Income (loss) before gain on debt restructring $ 0.003 $ (0.090) $ (0.033) $ (0.170) Gain on debt restructuring 0.030 0.040 ------------- ------------- ------------- ------------- Net income (loss) per common share $ 0.003 $ (0.060) $ (0.033) $ (0.130) ============= ============= ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING 137,631,515 62,665,378 128,360,813 56,873,171 4 U.S. ELECTRICAR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands) - -------------------------------------------------------------------------------- Nine Months Ended April 30 -------------------------- 1997 1996 ---- ---- OPERATIONS Net loss $(4,201) $(7,898) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and Amortization 394 1,014 Change in allowance for doubtful accounts 170 Provision to reduce inventory values 245 (1,100) Provision for impairment of long-lived assets 894 Loss on disposal of assets 11 246 Purchase of research and development 1,630 Loss on divestiture of business unit 55 Interest income on stock notes receivable (66) (60) Accretion on royalties payable (773) Interest converted to notes payable 8 Interest converted to common stock 194 Change in operating assets and liabilities: Accounts Receivable (1,916) 219 Inventory 698 3,610 Prepaids and other assets (1) (15) Accounts payable and accrued expenses 287 426 Customer deposits and deferred revenue (354) (319) ------- ------- Net cash used by operating activities (3,016) (3,586) ------- ------- INVESTING: Repayments on advances to Systronix Corporation 209 Purchases of property, plant and equipment, net of disposals (35) ------- ------- Net cash provided by investing activities 174 0 ------- ------- FINANCING: Payments on notes payable (2,372) (40) Payments on capital leases (94) Borrowings on notes payable 3,122 2,388 Proceeds from issuance of common stock 3,350 2,701 Excercise of options and warrants 28 ------- ------- Net cash provided by financing activities 4,006 5,077 ------- ------- NET INCREASE IN CASH AND EQUIVALENTS 1,164 1,491 CASH AND EQUIVALENTS: Beginning of period 13 319 ------- ------- End of period $ 1,177 $ 1,810 ======= ======= 5 U.S. ELECTRICAR, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (UNAUDITED) (In thousands) - ------------------------------------------------------------------------------- Nine Months Ended April 30, --------------------------- 1997 1996 ---- ---- NONCASH INVESTING AND FINANCING ACTIVITIES: Conversion of Series A preferred stock to common stock $ 342 $ 1,583 Conversion of Series S bonds to common stock 3,000 701 Preferred stock issued in connection with debt restructuring 3,015 Notes payable issued in connection with debt restructuring 4,017 Conversion of convertible notes to common stock 600 Assumption of notes payable in connection with acquisition 800 Note issued in connection with acquisition 830 Note assumed by buyer in connection with diverstiture (1,013) Conversion of accrued interest to notes payable 139 Acquisition of capital assets through capital leases 361 Decrease in accounts receivable from divestiture of IEV 365 Decrease in inventory from divestiture of IEV 470 Decrease in accounts payable and accrued expenses from divestiture of IEV (172) Increase in inventory from acquisition of Systronix Corporation (499) Increase in prepaids from acquisition of Systronix (94) Increase in accounts payable and accrued expenses from acquisition of Systronix (361) Increase in customer deposits from acquisition of Systronix 135 6 U. S. ELECTRICAR, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS For the Three and Nine Months Ended April 30, 1997 and 1996 NOTE 1 - Basis of Presentation The accompanying unaudited financial statements have been prepared from the records of the Company without audit, and in the opinion of management, include all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at April 30, 1997 and the interim results of operations and cash flows for the three and nine month periods ended April 30, 1997 and 1996. The balance sheet at July 31, 1996, presented herein, has been prepared from the audited financial statements of the Company for the fiscal year then ended. The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The July 31, 1996 and April 30, 1997 inventories are reported at market value. The inventory valuation adjustments are estimates based on sales of inventory subsequent to July 31, 1996, and the projected impact of certain economic, marketing and business factors. Warranty reserves and certain accrual expenses are based upon an analysis of future costs expected to be incurred in meeting contracted obligations. The amounts estimated for the above, in addition to other estimates not specifically addressed, could differ from actual results; and the difference could have a significant impact on the financial statements. Accounting policies followed by the Company are described in Note 1 to the audited financial statements for the fiscal year ended July 31, 1996. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted for purposes of the interim financial statements. The financial statements should be read in conjunction with the audited financial statements, including the notes thereto, for the year ended July 31, 1996, which are included in the Company's Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 as filed with the Securities and Exchange Commission. The income or loss per common share is based on the weighted average of common shares outstanding. Potential dilution exists in earnings per share for the three months ended April 30, 1997 if common stock equivalents, consisting of unexercised stock options and warrants, were included in the calculation. The resulting dilution in earnings per share, when compared to the $.003 currently reflected in the financial statements, would be insignificant and, therefore, has not been calculated. The results of operations for the three and nine month periods presented herein are not necessarily indicative of the results to be expected for the full year. NOTE 2 - Going Concern The Company has experienced recurring losses from operations and use of cash from operations and had an accumulated deficit of $76,990,000 at July 31, 1996 and $81,191,000 at April 30, 1997. A substantial portion of the losses are attributable to research, development and other start-up costs associated with the Company's focus on the development and manufacture of electric vehicles, including electric powered buses, the conversion of gas powered cars and light trucks to electric power and off-road electric powered industrial vehicles. During the three years ended July 31, 1996, the Company obtained approximately $45 million (net of debt repayments) in cash from financial activities through private placements of common stock and Series A preferred stock, the exercise of options and warrants, and the issuance of convertible subordinated notes payable and secured convertible bonds and notes. During the nine months ended April 30, 1997, the Company raised an additional $750,000, net of repayments, through the issuance of secured convertible debt. 7 It is management's intention to complete its debt restructuring and to seek additional financing through private placements as well as other means. In March, 1997, the Company completed an agreement with Hyundai Motor Company ("HMC") and Hyundai Electronics Industries Co., Ltd. ("HEI") whereby HMC and HEI collectively invested $3.6 million in the Company and reached agreement to secure a technology license for an additional payment of $2.0 million. The Company received $555,000 of the funds for the license agreement in April, 1997. Subsequent to April 30, 1997, in May, 1997, the Company received the remaining $1,295,000 then due for the license agreement. The remaining $150,000 is to be received over 6 years. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Cash flows from operations for the foreseeable future may not be sufficient to enable the Company to meet its obligations. Market conditions and the Company's financial position may inhibit its ability to achieve profitable operations. These factors as well as the future availability or inadequacy of financing to meet future needs, could force the Company to delay, modify, suspend or cease some or all aspects of its planned operations, and/or seek protection under applicable state and federal bankruptcy and insolvency laws. NOTE 3 - Inventories Inventories are comprised of the following (in thousands): April 30, 1997 July 31, 1996 -------------- ------------- (unaudited) ----------- Finished Goods $648 $1,000 Work-in-process 398 710 Raw materials 1,012 1,450 Valuation adjustment (276) (773) -------- ------- $1,782 $2,387 ======== ======= 8 U.S. ELECTRICAR, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 4 - Notes and Bonds Payable, Long-Term Debt and Other Financing Notes and bonds payable and long-term debt are comprised of the following (in thousands): April 30, 1997 July 31, 1996 -------------- ------------- Series S secured convertible bonds, interest at 10%; principal and interest due March 1997, secured by the personal property of the parent company. $3,000 Convertible secured notes under a Supplemental Loan Agreement with ITOCHU Corporation; interest at 10%, principal and interest due April 1998, secured by the personal property of the parent company. $3,000 3,000 Convertible secured note (acquisition of Nordskog); due January 1997, with interest at 9% payable quarterly; secured by certain machinery and equipment of the subsidiary; in September 1996, the assets associated with the previous acquisition of Nordskog were sold in exchange for the assumption of this note - 1,013 Secured promissory note - Credit Managers Association of California ("CMAC") as exclusive agent for Non-Qualified Creditors; interest at 3%, with principal and interest due April 1999; secured with an interest in a sinking fund escrow consisting of 10% of any financing received subsequent to April 1996; the Board of Directors may waive the sinking fund set aside on a case-by-case basis 95 95 Secured subordinated promissory note - CMAC as exclusive agent for Qualified Creditors; interest at 3%, with principal and interest due April 1999; secured with an interest in a sinking fund escrow as noted above 560 560 Secured subordinated promissory note - CMAC as exclusive agent for Non-Qualified Creditors; interest at 3% for the first 5 years, 6% for years 6 and 7, and then at prime plus 3% through date of maturity; interest payments are made upon payment of principal, with principal and interest due no later than April 2016; secured with an interest in a sinking fund escrow as noted above; payments on this note are subordinated to payment in full on all principal and accrued interest owed on the above 3-year non-qualified and qualified notes 3,332 3,332 Promissory note - accrued interest on Nordskog convertible secured note converted to a new note; due upon receipt of additional financing by the Company, with interest at 9%. 147 - 9 April 30, 1997 July 31, 1996 ---------------- ------------- NOTE 4 - Long-Term Debt (Continued) Promissory note payable to principals of Systronix Corporation in connection with the acquisition of Systronix; interest at 10%, due May 1997. 130 - Convertible secured promissory note payable to Itochu Corporation; interest at 10%, due December 1997; convertible into common stock at $0.30 per share. 1,300 - Convertible secured promissory note payable to Fontal International, Ltd.; interest at 10%, due July, 1997; convertible into common stock at $0.30 per share. 800 - Other 120 270 ________ ________ 9,484 11,270 Less current maturities 5,497 7,283 _________ ________ $3,987 $ 3,987 ========= ======== 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The matters addressed in this report, with the exception of the historical information presented, incorporate certain forward-looking statements involving risks and uncertainties, including the risks discussed in the report under the heading "Certain Factors That May Affect Future Results", as reported by the Company in the Form 10-K filed with the Commission on November 12, 1996. GENERAL U.S. Electricar, Inc. and Subsidiaries (the "Company") develops, converts, assembles, manufactures and distributes battery-powered electric vehicles, including on-road pick-up trucks, passenger cars, buses and delivery vehicles, and a variety of off-road industrial vehicles. The Company's product lines included converted vehicles (originally built to be powered by internal combustion engines) and vehicles that are built specifically to be battery powered. The Company's fiscal year ends July 31. All year references refer to fiscal years. During 1994 and the first half of 1995, the Company's approach to its business was to establish manufacturing, marketing and support functions of a large scale company so that the transition from development and prototype activities to volume production of on-road electric vehicles could be made as quickly as possible once component parts design, systems integration and assembly processes were developed. The Company raised approximately $38 million to fund its activities during this period. However, the Company was not able to achieve volume production primarily because the development of such designs and processes were not completed prior to the company's capital becoming severely depleted which occurred in the second half of 1995. The Company incurred losses totaling $62,586,000 during 1994 and 1995. The Company was forced to severely curtail its activities in the second half of 1995 due to a lack of funds. Certain facilities were closed and operations were consolidated, and the Company initiated programs to restructure its debt and raise interim funding. During 1996, the Company restructured a significant portion of its debt and raised approximately $5 million in interim funding. However, its operations continued to be impacted by an insufficient amount of funds to adequately support its planned sales volumes and product development programs. The Company curtailed the manufacture and sale of off-road industrial vehicles in the third and fourth quarters of 1996 and reduced the carrying values of the assets associated with this product line. In 1996, the Company incurred a loss of $9,354,000. In September 1996, a substantial portion of the assets of Industrial Electric Vehicles, Inc., (formerly Nordskog Electric Vehicles, Inc. (Nordskog), prior to its acquisition by the Company) were sold. Consideration for this sale included the assumption of, and release of liability for, the note payable that totaled $1,013,000 at July 31, 1996 to Nordskog. On October 25, 1996, the Company acquired substantially all the tangible and intangible assets, and assumed certain liabilities, of Systronix Corporation (Systronix), for stock, a note and cash. LIQUIDITY AND CAPITAL RESOURCES The Company has experienced significant recurring cash flow shortages due to operating losses primarily attributable to research, development ,administrative and other expenses associated with the Company's efforts to become an international manufacturer and distributor of electric vehicles. Cash flows from operations have been extremely negative and have not been sufficient to meet the Company's obligations as they came due. The Company has therefore had to raise 11 funds through numerous financial transactions and from various resources. At least until the Company reaches break-even volume in sales and develops and/or acquires the capability and technology necessary to manufacture and sell its electric vehicles profitably, it will need to continue to rely extensively on cash from debt and equity financing. The Company anticipates that it will require substantial additional outside financing for at least two more years. During the nine months ended April 30, 1997, the Company spent $3,016,000 in cash on operating activities to fund the net loss of $4,201,000 resulting from factors explained in the following section of this discussion and analysis. Accounts receivable, exclusive of the divestiture of the industrial electric vehicles business, increased by $1,916,000. The reduction of accounts receivable attributable to this divestiture was $365,000, net of allowances. Included in the April 30, 1997 balance of accounts receivable is $1,320,000 due from HMC for the license agreement. Inventory, net of the divestiture of the industrial electric vehicles business, which reduced inventory by $470,000, and the acquisition of Systronix Corporation, which increased inventory by $499,000, decreased by $698,000. The operations of the Company during the nine months ended April 30, 1997 were financed primarily by the issuance of promissory notes, the issuance of convertible secured promissory notes, the sale of common stock and the sale of a technology license. The Company received $472,000 from the issuance of promissory notes. In addition, $1,350,000 was received from Fontal International, Ltd. and $1,300,000 was received from Itochu Corporation, for the issuance of convertible secured promissory notes. Sales of common stock totaling $3,600,000 were made to Hyundai Motor Company ("HMC") and Hyundai Electronics Industries Co., Ltd. ("HEI"). A technology license was sold to HMC and HEI for $2,000,000. During the period, the promissory notes were repaid in full, and repayments were made on the convertible secured promissory notes in the amount of $1,150,000. In addition, payments of $700,000 were made during the period against the $829,978 promissory note issued to the principals of Systronix Corporation, the payment schedule was amended, and the maturity date of the note was extended to May, 1997. Subsequently, in June 1997, the remainder of the principal balance and accrued interest was paid in full. IF THE COMPANY IS UNABLE TO RESTRUCTURE ITS DEBT OR OTHERWISE REFINANCE OR CONVERT SUCH DEBT, AND ADDITIONAL FUNDING IS NOT AVAILABLE, THE COMPANY WOULD BE FORCED TO SEEK PROTECTION UNDER APPLICABLE STATE AND FEDERAL BANKRUPTCY AND INSOLVENCY LAWS. SIGNIFICANT ADDITIONAL FUNDING WILL BE NEEDED IN 1998. AS OF JUNE 10, 1997, THE COMPANY HAD NO COMMITMENTS FROM ANY PERSON OR ENTITY TO PROVIDE CAPITAL, AND THERE CAN BE NO ASSURANCE THAT ADDITIONAL FUNDS WILL BE AVAILABLE FROM ANY SOURCE AT THE TIME THE COMPANY WILL NEED SUCH FUNDS. THE INABILITY OF THE COMPANY TO OBTAIN ADDITIONAL FUNDING ON TERMS ACCEPTABLE TO THE COMPANY WILL HAVE A MATERIAL ADVERSE EFFECT ON ITS BUSINESS. THE FUTURE AVAILABILITY OR INADEQUACY OF FINANCING TO MEET FUTURE NEEDS COULD FORCE THE COMPANY TO DELAY, MODIFY, SUSPEND OR CEASE SOME OR ALL ASPECTS OF ITS PLANNED OPERATIONS, AND/OR SEEK PROTECTION UNDER APPLICABLE STATE AND FEDERAL BANKRUPTCY AND INSOLVENCY LAWS. RESULTS OF OPERATIONS Net sales increased $2,378,000, or 497%, in the third quarter of 1997 from the third quarter of 1996, and increased $265,000, or 8%, in the first nine months of 1997 from the same period of 1996. The increase in sales in the third quarter was primarily due to the sale of a technology license to Hyundai Motor Company and Hyundai Electronics Industries Co., Ltd. For first nine 12 months of 1997, the increase due to the license sale was offset by decreases in sales due to the Company's lack of available capital, and resultant inability to pursue sales opportunities. While the Company intends to pursue opportunities to license its technology in the future, there can be no assurance that any additional revenues will be realized from this activity. Sales of converted sedans and light trucks increased to 8 units in the third quarter of 1997 from none in the third quarter of 1996, while unit sales for the first nine months of 1997 were down 39% to 23 units from 38 units in the first nine months of 1996. Total revenue from this product line was $286,000 in the third quarter of 1997 and $801,000 in the first nine months. Sales for the first nine months of 1997 were down $460,000, or 37%, from the corresponding period of 1996. There were no sales of industrial vehicles and associated parts and service in the third quarter of 1997, since this business was sold on September 5, 1996. Sales for this product line in 1996 were $370,000 in the third quarter and $1,711,000 in the first nine months. The Company realized revenues of $154,000 in the third quarter and $298,000 for the year to date of 1997 from various engineering contracts of the Components Division, acquired in October, 1996. Exclusive of the sale of the technology license, cost of sales as a percent of sales decreased to 118% in the third quarter of 1997 from 329% in the third quarter of 1996, and cost of sales as a percent of sales decreased to 138% in the first nine months of 1997 from 145% in the first nine months of 1996. In the third quarter of 1996, production activities were severely curtailed for several weeks due to a shortage of funds. This resulted in highly unfavorable costs relative to the low sales levels. Margins in 1997 are still impacted by the low levels of production and high costs from purchasing parts in small quantities. Efforts to reduce manufacturing overhead continue, but the costs are still high relative to the low levels of production. Research and development expense decreased in the third quarter of 1997 by $19,000, or 5%, from the third quarter of 1996. For the first nine months of 1997, research and development expense decreased $102,000, or 11% from the first nine months of 1996. The Company has reduced its technical staff and curtailed purchasing engineering services due to a severe lack of funds. In October, 1996, the Company acquired substantially all the tangible and intangible assets of Systronix Corporation, which is primarily a research company. The acquisition brought technical capability and knowledge into the Company. In the acquisition, $1,630,000 was previously expensed and reported in the first quarter as the acquisition of a research company. Selling, general and administrative expense decreased $1,668,000, or 67% in the third quarter of 1997, and decreased $2,864,000, or 55% in the first nine months of 1997, from the corresponding periods in 1996. This was primarily as a result of a significant reduction in staff and outside services due to the aforementioned lack of funds. Interest and financing fees in the third quarter of 1997 declined $308,000, or 68%, from the third quarter of 1996. For the first nine months of 1997, interest and financing fees decreased $809,000, or 59% from the first nine months of 1996. During 1996, the Company converted $15,548,000 of principal and accrued interest to common stock, resulting in a significant decrease in interest expense. In March, 1997, the Company converted $3,219,000 of principal and accrued interest on a Series S convertible secured bond to common stock. As a result of the sale of the technology license and the foregoing changes in net sales, cost of sales, other costs and expenses, the acquisition of a research company, and the Company realized net income of $475,000 in the third quarter of 1997, compared to a loss of $3,498,000 in the third quarter of 1996. For the first nine months of 1997, the net loss decreased $3,697,000, or 47% to $4,201,000 from $7,898,000 in the first nine months of 1996. 13 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS Future trends for the Company's revenue and profitability remain difficult to predict. The Company operates in a rapidly changing and developing market that involves a number of risks, some of which are beyond the Company's control. In addition, as previously disclosed in this Form 10-K, the Company's financial condition remains extremely precarious. The following discussion highlights certain of these risks. Going Concern / Net Operating Losses. The Company has experienced recurring losses from operations and had an accumulated deficit of $81,191,000 at April 30, 1997. There is no assurance, however, that any net operating losses will be available to the Company in the future as an offset against future profits for income tax purposes. A substantial portion of the losses are attributable to product development and other start-up costs associated with the Company's business focus on the development, production and sale of battery powered electric vehicles. Cash flows from future operations may not be sufficient to enable the Company to achieve profitable operations. Market conditions and the Company's financial position may inhibit its ability to achieve profitable operations. These factors, as well as others, indicate the Company may be unable to continue as a going concern unless it is able to obtain significant additional financing and generate sufficient cash flows to meet its obligations as they come due and sustain its operations. As of June 10, 1997, the Company had no firm commitments from any person or entity to provide capital, and there can be no assurance that additional funds will be available from any source at the time the Company will need such funds. Continued Losses. For the fiscal years ended July 31, 1994, 1995 and 1996, the Company had substantial net losses of $25,021,000, 37,565,000 and $9,354,000, respectively on sales of $5,787,000, $11,625,000 and $4,209,000, respectively, and a net loss of $4,201,000 for the nine months ended April 30, 1997. Nature of Industry. The electric vehicle ("EV") industry is in its infancy. Although the Company believes that it has manufactured a significant percentage of the electric vehicles sold in the United States based upon its own knowledge of the industry, there are many large and small companies, both domestic and foreign, now in, poised to enter, or entering this industry. This EV industry is subject to rapid technological change. Most of the major domestic and foreign automobile manufacturers (1) have produced design-concept electric vehicles, and/or (2) have developed improved electric storage, propulsion and control systems, and/or (3) are now entering or planning to enter the field. Various non-automotive companies are also developing improved electric storage, propulsion and control systems. Growth of the present limited demand for electric vehicles depends upon (a) future regulation and legislation requiring more use of non-polluting vehicles, (b) the environmental consciousness of customers and (c) the ability of electric vehicles to successfully compete with vehicles powered with internal combustion engines on price and performance. Changed Legislative Climate. Because vehicles powered by internal combustion engines cause pollution, there has been significant public pressure in Europe and Asia, and enacted or pending legislation in the United States at the federal level and in certain states, to promote or mandate the use of vehicles with no tailpipe emissions ("zero emission vehicles") or reduced tailpipe emissions ("low emission vehicles"). Legislation requiring or promoting zero emission vehicles is necessary to create a significant market for electric vehicles. There can be no assurance, however, that further legislation will be enacted or that current legislation or state imposed mandates will not be repealed or amended (as recently occurred in California), or that a different form of zero emission or low emission vehicle will not be invented, developed and produced, and achieve greater market acceptance than electric vehicles. Extensions, modifications or reductions of current federal and state legislation, mandates and potential tax incentives could adversely affect the Company's business prospects if implemented. 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings: On May 20, 1996, a suit was filed by a shareholder against the Company, one of its former officers, and a third party individual in the San Francisco Superior Court. The suit alleges that the individual made fraudulent and negligent misrepresentations to induce the shareholder to purchase shares of Company stock for $100,000; that the former officer concealed material facts from the shareholder; and that defendants (including the Company) all breached fiduciary duties to the shareholder. The complaint seeks compensatory damages, punitive damages, attorneys fees and costs, and other relief. The Company believes the allegations against it are without merit. The Company sought dismissal of such claims, by demurring to the Complaint and the First Amended Complaint. The demurrer to the First Amended Complaint was sustained without leave to amend. Judgment was entered in favor of the Company and its former officer on February 7, 1997. On May 12, 1997 the shareholder filed a Motion for Relief from Order Sustaining Demurrer. The Motion for Relief was denied on May 20, 1997. On January 16, 1997, the Company was served a Complaint for Damages originally filed in San Francisco Superior Court on September 30, 1996 against the Company by Anthony O. Vicari, Plaintiff in Propria Persona. The Complaint alleges that on or about October, 1994, plaintiff and the Company entered into an oral agreement whereby the plaintiff agreed to seek and arrange a joint business venture agreement for the manufacture and sale of of the Company's electric vehicles to Grupo Industrial CASA, S.A. de C.V., a Mexican Corporation, and that the Company agreed to compensate the plaintiff for said services in the amount of one million dollars and to issue to plaintiff eighty thousand shares of Company stock. The Complaint further alleges that the Company breached the oral agreement on or about December 20, 1994. The Complaint seeks compensatory damages in an unspecified amount, punitive damages, the issuance of eighty thousand shares of stock, and attorney fees and costs. On February 18, 1997, the Company filed an Answer to the Complaint wherein the Company denies the allegations and seeks dismissal of the Complaint. A date for trial has been set for September, 1997. Item 2. Changes in Securities: None. Item 3. Defaults Upon Senior Securities: None. 15 Item 4. Submission of Matters to a Vote of Securities Holders: The Company's Annual Meeting of Stockholders was held May 9, 1997. The following matters were voted upon at the annual meeting. (a) To provide authorization for the Board of Directors to effect a reverse stock split of the Company's common stock in a ratio of up to one-for-twenty, at any time until the next annual meeting of shareholders. The results of the voting were as follows: Number of Common shares voted FOR 103,053,154 Percentage of Common shares voted FOR 81.0% Number of Common, Series A and Series B Preferred shares voted FOR 110,124,203 Percentage of Common, Series A and Series B Preferred shares voted FOR 81.1% (b) Election of nine (9) directors of the Company, each to serve until the next annual meeting of shareholders or until their respective successors are elected and qualified. The results of the voting were as follows: Each director received an affirmative vote of over 80.4% of the total number of shares voting. The Series B director received an affirmative vote of 52.6% of the Series B shares voting. (c) To ratify the adoption by the Board of Directors of the Company's 1996 Stock Option Plan under which shares have been reserved for issuance. The results of the voting were as follows: Number of Common, Series A and Series B Preferred shares voted FOR 77,345,691 Percentage of Common, Series A and Series B Preferred shares voted FOR 72.7% (d) To ratify the selection of Moss-Adams LLP as independent auditors of the Company for the fiscal year ended July 31, 1997. The results of the voting were as follows: Number of Common, Series A and Series B Preferred shares voted FOR 90,420,354 Percentage of Common, Series A and Series B Preferred shares voted FOR 84.9% 16 Item 5. Other Information: (a) Fontal Convertible Debt On April 30, 1997, the Company and Fontal International, Ltd., Geneva, Switzerland, executed a Loan Agreement whereby Fontal extended a loan to the Company in the amount of $200,000. The Loan was evidenced by a Promissory Note which provides for a due date of July 9, 1997, an interest rate of ten percent (10%) per annum, and the right to convert principal and accrued interest at any time, in one or more installments, into shares of the Company's common stock at the conversion rate described below. The note and any shares issuable upon conversion thereof have not been registered under the Securities Act of 1933 in reliance upon Regulation S promulgated thereunder. The number of shares to be issued pursuant to any election to convert any or all of the Loan amount shall equal the quotient obtained by dividing (x) the amount of the loan to be converted, by (y) the conversion price of $0.30 per share. The total number issuable pursuant to such conversion of principal is therefore 666,667 shares. (c) Certain Debt Maturities ITOCHU: The Company has outstanding secured notes under a Supplemental Loan Agreement with ITOCHU Corporation in the principal amount of $3.0 million. The maturity date on these notes was extended from April 17, 1997 to April 17, 1998. Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits: 10.99 Loan Agreement for $200,000 convertible promissory note with Fontal International, Ltd., dated April 30, 1997. (b) Reports on Form 8-K None. 17 SIGNATURE Pursuant to the requirements of Section 13 or 15 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 on June 10, 1997. U.S. ELECTRICAR, INC. (Registrant) /s/ Roy Y. Kusumoto - -------------------------------------------------------------------------------- By: Roy Y. Kusumoto, Chief Executive Officer and President (Principal executive officer) /s/ Barrett R. Woodruff - -------------------------------------------------------------------------------- By: Barrett R. Woodruff, Acting Chief Financial Officer (Principal financial and accounting officer) 18 EXHIBIT INDEX Exhibit No. Description Page No. - ----------- ----------- -------- 10.99 Loan Agreement for $200,000 convertible promissory note with Fontal International, Ltd., dated April 30, 1997. 20 27 Financial Data Schedule 24 19