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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission File Number 0-21926
AER ENERGY RESOURCES, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 34-1621925
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4600 Highlands Parkway, Suite G, Smyrna, Georgia
(Address of principal executive offices)
30082
(Zip Code)
Registrant's telephone number, including area code: (770) 433-2127
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on the OTC
Bulletin Board on February 19, 2001, was approximately $6,375,761.
As of February 19, 2001, the registrant had 24,850,263 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the Proxy Statement for the registrant's 2001 Annual
Meeting of Shareholders are incorporated by reference to the extent indicated in
Part III of this Form 10-K.
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TABLE OF CONTENTS
PAGE
PART I
Item 1. Business.......................................................................................... 3
2. Properties........................................................................................ 7
3. Legal Proceedings................................................................................. 7
4. Submission of Matters to a Vote of Security Holders............................................... 7
Executive Officers of the Registrant.............................................................. 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................. 9
6. Selected Financial Data........................................................................... 9
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 10
7A. Quantitative and Qualitative Disclosures about Market Risk........................................ 13
8. Financial Statements and Supplementary Data .............................................. 13
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 13
PART III
Item 10. Directors and Executive Officers of the Registrant .............................................. 14
11. Executive Compensation............................................................................ 14
12. Security Ownership of Certain Beneficial Owners and Management.................................... 14
13. Certain Relationships and Related Transactions.................................................... 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................... 15
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PART I
Item 1. Business.
General
AER Energy Resources, Inc. (the "Company" or "AER Energy") was incorporated
in 1989 and has been engaged in the development and commercialization of high
energy density zinc-air batteries. AER Energy's current strategy as a research
and development ("R&D") company is focused on primary (disposable), rather than
rechargeable, zinc-air battery technology and licensing our extensive patent
portfolio to large established battery and original equipment manufacturers
with plans to commercialize the technology. Until 1998, the Company's
operations had been focused primarily on developing and improving its
technology, setting up the manufacturing process, testing and selling
rechargeable zinc-air batteries, and similar activities.
Under the current strategy, the Company seeks to generate revenues from
license and royalty fees, and research and development contract fees. Revenues
in the form of license fees and research and development funds commenced in the
fourth quarter of 1998 related to the Technology Licenses and Services ("TLAS")
Agreement with Duracell Inc. The Company continues to be a development stage
company. New alliances, license agreements, and research and development
contracts will be sought which would eventually bring the Company out of the
development stage.
In September 1998, the Company announced its TLAS Agreement with Duracell
Inc., a subsidiary of The Gillette Company, making Duracell the first licensee
of the Company's primary (non-rechargeable) zinc-air technology. Under the
terms of the TLAS Agreement, the Company agreed to license certain of its
primary zinc-air related battery technology and license the rights to its then
existing patents to Duracell. In addition, Duracell agreed to fund certain
joint product development projects with the Company during 1999. Duracell owns
any technology developed under the projects it funded, and the Company has
rights to utilize any such technology. Duracell also has options to obtain
certain other license rights.
In November 1997, the Company was issued a United States patent for its
"Diffusion Air Manager" technology. The Diffusion Air Manager can extend
zinc-air battery storage life by isolating the cells in zinc-air batteries from
exposure to air during periods when the battery is in storage or not in use.
The result is a primary battery that can operate an electronic device 3 to 5
times longer than alkaline batteries or can be stored for up to two years and
deliver most of its energy. Due to the simplicity, small size and enhanced
storage life capability provided by the Diffusion Air Manager, this patented
air manager technology may allow the Company to capitalize on the opportunities
in hand-held electronic products like camcorders, cellular telephones, cordless
telephones, digital cameras, and hand-held computers. This breakthrough air
manager technology will be used to seek to attract more large established
battery and consumer electronic original equipment manufacturers ("OEMs") into
alliances for joint product development, licensing, and commercialization of
the Company's primary zinc-air battery technology.
The Company was formed in 1989 to develop and commercialize high energy
density zinc-air batteries using the technology licensed from Dreisbach
Electromotive, Inc. ("DEMI"). DEMI was formed in 1982 to conduct research and
development on electric vehicles and battery systems utilizing, among others,
zinc-air technology. DEMI's zinc-air development programs included applications
for electric vehicles and portable products. The Company and DEMI entered into
a license agreement (the "DEMI License") in July 1989 whereby DEMI granted to
the Company exclusive worldwide rights to DEMI's zinc-air battery patents and
technology (including trade secrets) for all applications other than motor
vehicles for so long as the Company wishes to use such licensed rights. DEMI
has retained the rights to zinc-air technology for motor vehicle applications
and to its other technologies for motor vehicle applications and batteries
producing over 500 watts of continuous power output.
Technology Overview
The market for batteries is currently being served by a variety of
different battery technologies, some of which were first commercialized
approximately 100 years ago. Each of these battery technologies offers certain
attributes such as energy density, energy storage capacity, cost, configuration
and service life which make it best suited for particular product applications.
Choosing the appropriate battery to serve a given application involves matching
the battery's characteristics to the user's application requirements. The
Company is not aware of any single battery technology that can ideally serve
all applications.
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The battery industry is broadly segmented into two types of batteries:
primary and rechargeable. Primary batteries are used until fully discharged,
then discarded, and are typically priced below rechargeable batteries. In
contrast, rechargeable batteries are discharged and then can be recharged to
almost full capacity to be used again.
The Company believes important battery characteristics include energy
density, energy storage capacity, cell voltage and discharge voltage profile.
Energy density can be calculated based on either the weight or volume of the
battery. For a given amount of energy, higher energy density by weight yields
lighter batteries and higher energy density by volume yields smaller batteries.
Energy storage capacity refers to the limits on a battery's ability to store
energy safely and practically. Batteries with high energy storage capacity may
more easily be configured to deliver increased operating time. Cell voltage
determines the number of individual cells that must be connected in series to
provide the overall voltage required to operate a specific product. Generally,
batteries requiring fewer cells to achieve a given battery voltage are more
reliable and facilitate original equipment product design. The shape of a
battery's discharge voltage profile defines the range of voltage over which a
product must operate to utilize all of the energy stored in the battery. A
battery with a flat discharge profile delivers a more consistent level of
voltage throughout the battery's discharge cycle and may simplify an OEM
product design and contribute to better operating efficiency.
The Company believes its primary zinc-air batteries offer a unique
combination of high energy density by weight and volume, and high energy
storage capacity. In addition, the Company's primary zinc-air battery cell has
a relatively flat discharge voltage profile.
Zinc-air batteries are known to exhibit superior energy density compared to
other types of batteries due to their ability to absorb oxygen directly from
the atmosphere to fuel the chemical reaction that generates electricity. It is
this superior energy density that provides zinc-air batteries with their long
runtime capability. However, if stored in an open-to-air condition, the storage
life of zinc-air batteries can be greatly effected by the humidity in the air.
As a result, the use of primary zinc-air batteries has been relegated to small
applications in which the battery operates continuously once it is placed in
service. For this reason, primary zinc-air batteries have been predominantly
used in hearing aids. In order to develop a broadly marketable zinc-air
battery, AER Energy needed to develop an air management system to isolate the
battery's zinc-air cells from exposure to air during customer storage. The
Company's early air manager designs for rechargeable zinc-air batteries were
bulky and relatively expensive since they involved the use of sliding doors or
electromechanical devices to seal the battery case and isolate the zinc-air
cells from exposure to air. In November 1997, the Company was issued a patent
on its Diffusion Air Manager, an air management system that consists of
openings configured as tubes to admit air into the battery enclosure and a
small fan to draw air through the tubes. The Diffusion Air Manager can be
applied to both primary and rechargeable zinc-air batteries. In addition,
because of its simplicity, small size, and improvement in zinc-air battery
storage life, the Diffusion Air Manager is expected to expand the number of
applications that are appropriate for primary and rechargeable zinc-air battery
technology. The Company believes that the market for primary zinc-air batteries
is larger and more easily penetrated than the market for rechargeable batteries
and, as a consequence, will continue to focus on primary batteries.
Business Strategy
The Company's strategy is to capitalize on the need for long runtime
batteries by mobile workers and other consumers dissatisfied with the runtime
of their portable electronic devices powered by other batteries. The following
are key elements of the Company's current strategy:
1. Generate revenues from license fees, development contracts and
royalties.
2. Focus research and development on primary zinc-air battery
technology.
3. Pursue market opportunities through relationships with major
battery and electronic product manufacturers.
4. Maintain lower operating costs consistent with the current
business direction.
Products
AER Energy's focus is on research and development of primary zinc-air
battery products. The Company chose this focus because its patented Diffusion
Air Manager technology can be applied to primary zinc-air batteries and it
believes that the path to market is normally faster for primary batteries than
it is for rechargeable batteries.
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It is anticipated that the primary zinc-air batteries that would be
produced by Company licensees would most likely be used in hand-held electronic
devices, such as cellular telephones, cordless telephones, camcorders, digital
cameras, and hand-held computers. Due to the long runtime and storage life
achieved with the Diffusion Air Manager, and the anticipated low cost of the
batteries, they could also be used in some applications that are served today
by rechargeable batteries.
Marketing and Licensing
The main objective of AER Energy's marketing and licensing effort is to
find large established battery and consumer electronic equipment manufacturers
which recognize the advantages of the Company's zinc-air technology and which
are able to fulfill the manufacturing, marketing and sales roles needed to
bring the commercial battery products to market.
Research and Development
The Company's significant research and development (R&D) efforts have
produced numerous patents, its primary technological assets. The Company's
Diffusion Air Manager technology, which extends the life of zinc-air cells, is
the foundation of AER Energy's entry into the primary battery market. The
Company plans to continue its R&D efforts and work to reduce the size and cost
of zinc-air batteries. While AER Energy is an R&D company, it still maintains a
small assembly operation to produce prototype batteries for evaluation testing.
A majority of the Company's expenses to date have been for R&D. The
Company's R&D expenses for the last three years averaged $4.00 million per year
and have aggregated $42.73 million from inception to December 31, 2000. In 1998
and 1999, a portion of the Company's R&D expenses were funded under the TLAS
Agreement.
Environmental Matters
The Company is subject to various United States federal, state and local
standards that govern the storage, use and disposal of various chemicals used
in and waste materials produced during the manufacture of its zinc-air
batteries, including zinc, carbon, potassium hydroxide, solvents and adhesives.
These standards include the Environmental Protection Agency's regulations
governing the amount of zinc in the manufacturing waste stream and state and
local regulations governing fire protection, air quality standards and employee
safety, training and preparedness.
During 1996, the Company eliminated the addition of mercury to its zinc-air
cells and batteries without sacrificing size, weight or power. Under federal
regulations, the Company's zinc-air batteries with no added mercury are not
considered hazardous waste and can be disposed of as household garbage.
However, some of the chemicals currently used in its batteries, such as zinc
metal and potassium hydroxide, may subject its batteries to environmental
regulation in the future.
Competition
The development and marketing of battery products is highly competitive.
The industry consists primarily of major domestic and international companies,
the vast majority of which have financial, technical, marketing, sales,
manufacturing, distribution and other resources and name recognition
substantially greater than those of the Company, as well as established
positions in the market and established ties with OEMs. This competitive
situation is one reason AER Energy changed its strategy to one which
anticipates licensing its technology to large established battery and consumer
electronic equipment manufacturers.
The Company has at least one competitor, Electric Fuel Corporation, which
is currently manufacturing and marketing primary zinc-air batteries for
cellular telephones. Electric Fuel Corporation's zinc-air batteries do not
incorporate air management control. The Company believes that its major
competitors will also include makers of nickel-cadmium, nickel-metal hydride
and lithium-based batteries, some, if not all, of whom are candidates to be AER
Energy licensees. Such competitors and potential licensees include Moltech
Power Systems, Sanyo Electric Co., Ltd., Toshiba Corporation, Matsushita
Electric Industrial Co., Ltd., SAFT and Varta Batterie AG, which, among others,
currently manufacture nickel-cadmium or nickel-metal hydride batteries or both.
Sony Corporation, Sanyo Electric Co., Ltd. and Matsushita Electric, among
others, are marketing lithium-ion batteries that are designed for use with
portable computers, video cameras and cellular telephones. Sony Corporation,
Sanyo Electric Co., and Matsushita Electric announced the availability of
lithium polymer batteries in 1999. Valence Technology, Inc., Ultralife
Batteries, Inc., and Electro Fuel Inc. are also engaged in the research and
development of lithium-polymer batteries, most of which are not yet
commercially available. In addition, companies such as Sony, Matsushita
Electric, Sanyo, SAFT, Rayovac, Tadiran Electronic Industries, Eveready,
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Duracell and Toshiba, and possibly other companies, may have active R&D programs
to develop new high energy density batteries. No assurance can be given that
such companies will not develop batteries similar or superior to the Company's
zinc-air batteries.
Patents and Licenses
The Company relies on certain technology for which either the Company or
DEMI has sought patent protection, including certain patents licensed to the
Company by DEMI. The Company has sought to protect any technology it believes
to be proprietary by obtaining patents for such technology both in the United
States and in certain countries abroad. Where appropriate, the Company will
prosecute infringements to its patent rights. However, there can be no
assurance that any particular infringement will be prosecuted, or if
prosecuted, that it will be successful. The Company also relies upon its trade
secrets, know-how, continuing technological innovations and its ability to
exploit new opportunities to develop and maintain its competitive position.
The Company has been granted 42 United States patents, 7 European patents,
4 Canadian patents, and 10 Japanese patents. In addition, the Company has filed
25 United States and 57 foreign patent applications as of December 31, 2000. It
is the Company's intention to continue filing new patent applications in the
United States, Japan, Europe, Canada, and other countries, as appropriate, for
the technology, products and product improvements developed through its
research and product development activities.
The Company believes that its most significant intellectual property
benefits are derived from its air manager patents and pending applications. The
air manager system regulates the flow of air within the battery during use and
isolates the zinc-air cells from air during storage, both critical variables
affecting zinc-air battery performance and storage life. The Company has been
issued 10 United States patents on its air manager system. The Company also has
14 United States patent applications pending on its designs relating to its air
manager system. The Company believes its most significant air manager patents
are No. 5,691,074 and No. 5,919,582, which cover the Company's Diffusion Air
Manager and expire in 2015. The Company's early air manager designs were bulky
and relatively expensive since they involved the use of sliding doors or
electromechanical devices. The Company's current Diffusion Air Manager consists
of openings that are configured as tubes to admit air into the battery
enclosure and a small fan to draw air through the tubes. The Company believes
the Diffusion Air Manager is a simple, low cost solution to the storage life
problems encountered by both rechargeable and primary zinc-air battery designs.
Through the DEMI License, the Company has exclusive rights to ten DEMI
patents (except for motor vehicle applications) which have been issued in the
United States and two that have been issued in Japan. The DEMI patents relate
to air manager systems, an electrolyte recirculating system, a flexible cell
case which allows for zinc anode volume change during charge and discharge, a
continuous consumable anode, a coated air electrode and a method for attaching
zinc-air batteries to electronic products. The Company is not currently
utilizing any of the technology embodied in the DEMI patents.
The Company and DEMI entered into the DEMI License in July 1989 whereby
DEMI granted to the Company the exclusive worldwide rights to DEMI's zinc-air
battery patents and technology (including trade secrets) for all applications
other than motor vehicles for so long as the Company wishes to use such
licensed rights. The DEMI License includes the right to sublicense and it
covers any new zinc-air technology developed or acquired by DEMI, or by Mr.
Cheiky, DEMI's former principal scientist, prior to expiration of his
employment agreement with DEMI. For these rights, the Company agreed to pay
DEMI royalties of 4% of net sales through July 19, 2004, subject to certain
minimum amounts and possible increases or decreases to a maximum of 4% and a
minimum of 2%, as specified in the DEMI License (except for sales by Duracell
which are set at 4%). The applicable percentage of royalties is currently 4% of
net sales. After July 19, 2004, the Company may continue to use such licensed
technology without payment of further royalties. In order to maintain exclusive
rights to the technology covered by the DEMI License, the Company paid minimum
royalties to DEMI for the first ten years of the DEMI License (through 1999).
Effective in 1993, the DEMI License was amended so that, under certain
circumstances, some or all of the royalties due under the DEMI License are
payable to the shareholders of DEMI rather than to DEMI. DEMI has also agreed
to the terms of a proposed OEM air manager license agreement to be entered into
by the Company and any OEMs licensing the air manager system, which provides
that 4% of the royalties the Company receives from sublicensing the air manager
system will be payable to DEMI, subject to reduction as provided in the
proposed agreement.
In order to manufacture air electrodes for its zinc-air batteries, the
Company purchased production equipment and licensed the accompanying air
electrode and process technology pursuant to a 1993 agreement (the
"Westinghouse License") with Westinghouse Electric Corporation
("Westinghouse"). Under the Westinghouse License, the Company is obligated to
pay royalties of 1% of its revenues from sales of zinc-air battery products up
to $300,000, followed by royalties of 0.5% of such revenues up to an additional
$350,000, at which time no further royalties for product sales will be due. In
addition, for ten years, from 1993 to 2003, the Company will pay Westinghouse
the greater of (i) 50% of any sublicense fees it receives if it sublicenses the
technology licensed from Westinghouse, or (ii) 0.5% of sublicensee product
sales. The Company is not currently using the Westinghouse technology.
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In September 1998, the Company executed the TLAS Agreement with Duracell
Inc. pursuant to which the Company's zinc-air battery technology has been
licensed to Duracell on primarily a non-exclusive basis. Under the agreement,
Duracell funded certain product development projects with the Company during
1999. In return, Duracell owns any technology developed under the product
development projects it funded. The Company has certain royalty-bearing and
royalty-free rights to utilize any developed technology funded by Duracell.
Duracell also has certain non-exclusive rights to the Company's technology and
certain option rights to obtain an exclusive license of the Company's
technology to manufacture and sell certain battery cells.
In addition to potential patent protection, the Company attempts to protect
its trade secrets and other proprietary information through secrecy agreements
with customers, suppliers, employees and consultants, and other security
measures. Although the Company intends to protect its rights vigorously, there
can be no assurance that these measures will be successful.
Employees
At December 31, 2000, the Company had 35 employees. Of the total number of
personnel, 10 were engaged in R&D, 15 were engaged in product development,
assembly and prototype operations, and 10 were in marketing and general and
administrative functions. The Company's success will depend in large part on
its ability to retain skilled and experienced employees. None of the Company's
employees are covered by a collective bargaining agreement, and the Company
considers its relations with its employees to be good.
Forward Looking Statements
This report contains statements which, to the extent that they are not
recitations of historical fact, may constitute "forward looking statements"
within the meaning of applicable federal securities laws and are based on the
Company's current expectations and assumptions. These expectations and
assumptions are subject to a number of risks and uncertainties which could
cause actual results to differ materially from those anticipated, which include
but are not limited to the following: ability of the Company to achieve
development goals, ability of the Company to commercialize its battery
technology, ability of the Company to license its technology, development of
competing battery technologies, ability of the Company to protect its
proprietary rights to its technology, improvements in conventional battery
technologies, demand for and acceptance of the Company's products in the
marketplace, ability to obtain commitments from battery manufacturers and OEMs,
impact of any future governmental regulations, impact of pricing or material
costs, ability of the Company to raise additional funds and other factors
affecting the Company's business that are beyond the Company's control. All
forward looking statements contained in this report are intended to be subject
to the safe harbor protection provided by applicable federal securities laws.
Item 2. Properties.
The Company currently leases 24,840 square feet of administrative,
engineering, testing and product development office space in Smyrna, Georgia.
The Company believes that its existing facilities and equipment, together with
any equipment to be purchased with existing cash, will be adequate to conduct
its operations. Management does not anticipate needing additional space in the
near future, but believes that if needed, the Company would be able to secure
additional space at reasonable rates.
Item 3. Legal Proceedings.
The Company is not currently a party to, and no property of the Company is
presently the subject of, any pending legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2000.
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Executive Officers of the Registrant.
The executive officers of the Company as of February 19, 2001 were as
follows:
NAME AGE POSITION
---- --- --------
David W. Dorheim 51 President, Chief Executive Officer and Director
R. Dennis Bentz 50 Vice President - Product and Process Development
Frank M. Harris 48 Vice President - Marketing and Licensing
J.T. Moore 61 Vice President - Chief Financial Officer, Treasurer and Secretary
Lawrence A. Tinker, Ph.D 48 Vice President - Advanced Technology
David W. Dorheim joined the Company in 1989 as President, Chief Executive
Officer and a director. From 1985 to 1989, Mr. Dorheim was Vice President,
Battery Assembly Division, Gates Energy Products, Inc., with responsibility for
assembly operations in Juarez, Mexico, Newcastle, England and Hong Kong as well
as a design center in El Paso, Texas. Prior to 1985, Mr. Dorheim held various
marketing and sales positions with the General Electric Battery Division in
Gainesville, Florida, including Regional Sales Manager and Manager of Marketing
Programs. Mr. Dorheim is a director of DEMI.
R. Dennis Bentz joined the Company in 1990 as Vice President -
Manufacturing. His title was changed in 1998 to Vice President - Product and
Process Development to reflect his role in the Company's current strategy.
Duracell International, Inc., a battery manufacturer, employed Mr. Bentz from
1978 to 1990. Mr. Bentz's last four years at Duracell were spent as Product
Engineering Manager, with responsibility for product and process design of
alkaline, lithium and primary zinc-air batteries. Prior to 1987, Mr. Bentz
managed the Duracell development and testing facility in Tarrytown, New York
and served as Engineering Manager and Product Engineer.
Frank M. Harris joined the Company in 1990 as Vice President - Marketing
and Sales. His title was changed in 1998 to Vice President - Marketing and
Licensing to reflect his role in the Company's current strategy. From 1987
through 1989, Mr. Harris was employed by International Components Corporation,
a Chicago-based manufacturer of battery chargers, as Vice President of
Engineering and Director of Sales. From 1986 to 1987, Mr. Harris served as
Manager of Marketing Programs for a lighting product line of the General
Electric Lighting Business Group. From 1981 to 1986, Mr. Harris worked with the
battery business of General Electric where he held positions in market research
and served as manager of private label battery marketing.
J. T. Moore joined the Company in September 1998 as Vice President - Chief
Financial Officer, Treasurer and Secretary. He previously served as Chief
Financial Officer of Dyad Corporation, a computer software developer, from 1997
to 1998, Executive Vice President of Eastern European Capital, an international
investment company, from 1995 to 1997, and International Chief Financial
Officer/Director of Finance for Turner Broadcasting Company, an international
broadcasting company, from 1993 to 1995. His experience also includes Arthur
Andersen, LLP and Marriott Corporation. Mr. Moore is a certified public
accountant.
Lawrence A. Tinker, Ph.D joined the Company in 1993 as Vice President -
Engineering. His title was changed in 1998 to Vice President - Advanced
Technology to reflect his role in the Company's current strategy. During the
prior five years, Dr. Tinker was employed by Gates Energy Products, Inc., where
his most recent position was Manager, Technology for aerospace batteries. In
this position, Dr. Tinker managed a group of scientists responsible for
developing nickel-cadmium, nickel-metal hydride and nickel-hydrogen aerospace
battery systems. Prior to 1988, Dr. Tinker was employed by Ballard Research
Inc. for six years, where he managed the research and development effort for
rechargeable lithium battery systems.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
From its initial public offering date in July 1993 to March 14, 1999, the
Company's common stock traded on the NASDAQ National Market under the symbol
"AERN". From March 15, 1999 to March 29, 1999, the Company's common stock
traded on the Nasdaq SmallCap Market under the symbol "AERNC". From March 30,
1999 to the present, the Company's common stock has traded under the symbol
"AERN" on the OTC Bulletin Board ("OTCBB").
The following table sets forth, for the quarters indicated, the high and
low sales prices for the Company's common stock on the OTCBB.
PRICE
--------------------
QUARTER ENDED: HIGH LOW
------------------ --------- ---------
March 31, 1999.............................. $0.9375 $0.2813
June 30, 1999............................... 0.6563 0.2188
September 30, 1999.......................... 0.3750 0.1875
December 31, 1999........................... 0.7969 0.2031
March 31, 2000.............................. $6.2500 $0.2500
June 30, 2000............................... 2.0000 0.7500
September 30, 2000.......................... 1.3125 0.5625
December 31, 2000........................... 0.8125 0.2344
On December 29, 2000, the closing price of the common stock as reported on
the OTCBB was $0.2344 per share. On February 19, 2001, there were 265 holders
of record of the Company's common stock. This number excludes shareholders
holding stock under nominee or street name accounts with brokers.
The Company has not declared a cash dividend on its common stock since
inception. The Company has incurred operating losses since inception and
anticipates that for the foreseeable future, earnings, if any, will be retained
for the operation and growth of its business. Accordingly, the Company does not
anticipate paying any dividends in the foreseeable future.
Item 6. Selected Financial Data.
PERIOD FROM
JULY 17, 1989
(DATE OF
YEAR ENDED DECEMBER 31, INCEPTION TO
----------------------------------------------------- DECEMBER 31,
STATEMENT OF OPERATIONS DATA: 2000 1999 1998 1997 1996 2000
----------------------------------------------------- -------- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
License fee and research and development
revenues ....................................... $ 431 $ 1,947 $ 350 $ -- $ -- $ 2,728
Product sales ....................................... -- -- -- 108 23 338
Cost of product sales ............................... -- -- -- (2,675) (1,311) (6,759)
------- ------- ------- ------- ------- --------
431 1,947 350 (2,567) (1,288) (3,693)
Total cost and expenses ............................. 5,184 5,592 7,360 7,022 7,330 69,420
------- ------- ------- ------- ------- --------
Operating loss ...................................... (4,753) (3,645) (7,010) (9,589) (8,618) (73,113)
Net loss ............................................ (4,909) (3,487) (6,632) (8,766) (7,559) (69,486)
Accretion of redeemable convertible preferred stock.. 34 -- -- -- -- 34
Redeemable convertible preferred stock
dividend requirements .......................... 71 -- -- -- -- 71
------- ------- ------- ------- ------- --------
Net loss attributable to common stock ............... (5,014) (3,487) (6,632) (8,766) (7,559) (69,591)
------- ------- ------- ------- ------- --------
Net loss per common share (basic and diluted) ....... $ (0.20) $ (0.14) $ (0.27) $ (0.36) $ (0.33) $ (4.11)
------- ------- ------- ------- ------- --------
9
10
AS OF DECEMBER 31,
-------------------------------------------------------
BALANCE SHEET DATA: 2000 1999 1998 1997 1996
------------------------------------------------------------- ------ ------ -------- --------- --------
(IN THOUSANDS)
Total assets................................................. $1,252 $2,581 $ 5,335 $ 12,057 $ 20,688
Total long-term liabilities.................................. $ -- $ 288 $ -- $ 2 $ 3
Redeemable convertible preferred stock....................... $3,386 $ -- $ -- $ -- $ --
Total long-term liabilities and redeemable convertible
preferred stock......................................... $3,386 $ 288 $ -- $ 2 $ 3
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
AER Energy was incorporated in 1989 and has been engaged in the development
and commercialization of high energy density zinc-air batteries. AER Energy's
current strategy as an R&D company is focused on primary (disposable), rather
than rechargeable, zinc-air battery technology and licensing our extensive
patent portfolio to large established battery and OEMs with plans to
commercialize the technology. Until 1998, the Company's operations had been
focused primarily on developing and improving its technology, setting up the
manufacturing process, testing and selling rechargeable zinc-air batteries, and
similar activities. The Company's current focus allows it to capitalize on the
capability of its patented Diffusion Air Manager technology and opportunities
in hand-held electronic products like camcorders, cellular telephones, cordless
telephones, digital cameras, and hand-held computers. The Diffusion Air Manager
is a simplified method of isolating the cells in zinc-air batteries from
exposure to air during periods when the battery is in storage or not in use.
The result is a primary battery that can operate an electronic device 3 to 5
times longer than alkaline batteries or can be stored for up to two years and
deliver most of its energy.
In September 1998, the Company announced its Technology Licenses and
Services ("TLAS") Agreement with Duracell Inc., a subsidiary of The Gillette
Company, making Duracell the first licensee of the Company's zinc-air
technology. Under the TLAS Agreement, Duracell agreed to license the rights to
the Company's then existing patents. In addition, Duracell funded certain joint
product development projects with the Company in 1999. Duracell owns any
technology developed under the projects it funds, and the Company has rights to
utilize any of the technology. Duracell also has options to obtain certain
other license rights.
During 1998 and 1999, Duracell paid the Company a total of $3.00 million
under the TLAS Agreement, which was recognized as revenue when it was earned.
For the years ended December 31, 2000, 1999, and 1998, $0.43 million, $1.93
million, and $0.35 million, respectively, were recognized as license fee
revenue and research and development revenue in the Company's Statements of
Operations.
Throughout 2001, the Company plans to seek additional license agreements
for its patented zinc-air technology with other companies, and develop
prototype primary zinc-air batteries that utilize Diffusion Air Manager
technology.
Results of Operations
Revenues for 2000, 1999, and 1998 were $0.43 million, $1.95 million, and
$0.35 million, respectively. Revenues for 2000 relate to the license fees
earned under the TLAS Agreement. Virtually all of the 1999 and 1998 license
fees and research and development revenues arose from the TLAS Agreement.
Research and development expenses decreased 6% to $3.53 million in 2000
from $3.74 million in 1999. This decrease resulted primarily from reduced
personnel related expenses, lower legal fees, and reduced direct materials
expense. The 21% decrease to $3.74 million in 1999 from $4.75 million in 1998
was primarily from reduced personnel related expenses, due to fewer employees
in 1999 than in 1998, and a decrease in patent attorney legal fees. These
employee reductions are associated with the Company's change in strategy to an
R&D company during 1998.
10
11
Marketing, general and administrative expenses decreased 11% to $1.66
million in 2000 from $1.86 million in 1999. This decrease resulted primarily
from reduced personnel related expenses, decreased royalty expenses, and lower
administrative expenses. The 29% decrease to $1.86 million in 1999 from $2.61
million in 1998 resulted primarily from a decrease in the provision for
obsolete inventory, lower personnel-related expenses, lower corporate legal
fees, and decreases in travel expenses and trade show activities.
For 2000, 1999, and 1998, interest income decreased as a result of lower
cash and cash equivalents balances throughout each year in comparison with the
previous year.
Liquidity, Capital Resources and Financial Condition
The Company financed its operations from inception through July 1993 with
debt and private placements of common stock. In July 1993, the Company
received, net of underwriting discounts and commissions but before deducting
expenses, proceeds of $16.3 million from its initial public offering of
2,500,000 shares of common stock. In August 1993, the Company issued 311,700
additional shares pursuant to the exercise of the underwriters' over-allotment
option, and received additional proceeds of $2.0 million, net of underwriting
discounts and commissions. In November 1994, the Company closed a second public
offering of 2,500,000 shares of its common stock, generating proceeds of $12.3
million, net of underwriting discounts and commissions but before deducting
expenses. In December 1994, 150,000 additional shares were issued pursuant to
the underwriters' over-allotment option, generating additional proceeds of
$0.74 million, net of underwriting discounts and commissions.
In November 1995, the Company issued $10.68 million principal amount of 8%
convertible subordinated debentures due November 17, 1997. Through November 17,
1997, a holder of a debenture could have elected to convert the debenture into
common stock of the Company at a conversion price equal to the lesser of $3.60
per share or a percentage ranging from 85% to 100% of the average closing bid
price for the five trading days immediately prior to the conversion. In
connection with the transaction, the Company paid to a placement agent $0.84
million in fees and delivered warrants to purchase 225,590 shares of the
Company's common stock at an exercise price of $4.32 per share. The warrants
expired in 1998. During 1996, $9.78 million in principal plus accrued interest
was converted into 5,394,992 shares of common stock at an average conversion
price of $1.86 per share. During 1997, the remaining $0.90 million in principal
plus accrued interest was converted into 518,683 shares of common stock at an
average conversion price of $1.93 per share.
In May 1996, the Company issued 1,584,158 shares of its common stock, and
warrants to purchase 835,000 additional shares, in a private placement at an
aggregate purchase price of $10.00 million. The transaction generated proceeds
of $9.37 million, net of expenses. The warrants have an exercise price of
$6.3125 per share and expire in 2001. The value of the warrants is included in
common stock on the balance sheet.
In April 2000, the Company received $2.00 million in cash pursuant to two
$1.00 million convertible promissory notes payable from two major shareholders
of the Company. The Company was required to make quarterly interest payments at
prime plus four percent. If the Company consummated an equity issuance during
the term of the loans, the lenders could convert the loans in whole or in part
into equity at the same price at which the equity was being issued by the
Company. If the notes were not converted, the principal was due in March 2002.
Each lender was issued warrants to purchase 112,994 shares of the Company's
common stock at an exercise price of $1.77 per share. The warrants expire in
March 2005.
In September 2000, the Company received $1.93 million in cash, net of
issuance costs, pursuant to the issuance of 404,500 shares of redeemable
convertible preferred stock to two major shareholders of the Company. The
balance of the total preferred stock purchase price of $4.00 million was paid
by the conversion of the $2.00 million convertible promissory notes issued in
April 2000. The Company incurred total interest expense on the convertible
promissory notes, prior to the conversion to preferred stock, of $0.22 million.
The preferred stock may be converted to common stock of the Company at any time
at the option of the holders at a conversion price of $0.851 per share, subject
to various possible adjustments. The Company may redeem the preferred stock at
any time at a price equal to $10.00 per share plus all accrued and unpaid
dividends, and it must be redeemed in September 2005, unless previously
converted. Dividends accrue at the rate of 6.75% per annum, are cumulative, and
compound annually. Each of the two shareholders were issued warrants to
purchase 470,035 shares of the Company's common stock at an exercise price of
$0.886 per share, subject to various possible adjustments. The warrants expire
in September 2005.
As of December 31, 2000, the Company had cash and cash equivalents of $0.78
million. The Company anticipates using these funds as needed to fund capital
equipment purchases, research and product development efforts, marketing and
licensing activities, production of prototype zinc-air battery products,
development of alliances with battery manufacturers and OEMs, working capital
and general corporate purposes as determined by management.
11
12
Net cash used in operating activities increased to $4.89 million in 2000
from $2.49 million in 1999. This change in net cash used in operating
activities is primarily due to the decrease in revenues, both current and
deferred.
During the years ended December 31, 2000 and 1999, cash used in investing
activities was $21,974 and $964, respectively, which primarily reflected the
purchase of office, manufacturing and battery testing equipment, as well as
purchases and sales of short-term investments in 1999.
Net cash provided by financing activities of $3.93 million for the year
ended December 31, 2000 arose from the issuance of convertible notes and
redeemable convertible preferred stock. No cash was provided by financing
activities during the year ended December 31, 1999.
As discussed in Note 6 to the Financial Statements, the Company has agreed
to pay DEMI royalties pursuant to the DEMI License. During 1999, the last
required payment to DEMI was made for minimum royalty fees. The Company
recorded royalty expense related to the DEMI License for the years ended
December 31, 2000, 1999, and 1998 and for the period from inception to December
31, 2000 of $0, $0.05 million, $0.10 million, and $1.39 million, respectively.
As discussed in Note 7 to the Financial Statements, under the Westinghouse
License, for use of the Westinghouse technology, the Company is required to pay
royalties of 1% of revenues up to $300,000 followed by 0.5% of revenues up to
$350,000, after which no further product sales royalties would be due. The
Company is not using the Westinghouse technology in its primary zinc-air
batteries, therefore, no payments are being made to Westinghouse.
At December 31, 2000, the Company had available net operating loss
carryforwards for income tax purposes of approximately $64.95 million and
research and development credit carryforwards of approximately $1.46 million.
These carryforward items will both begin to expire in 2004 and are both subject
to certain limitations on annual utilization related to changes in ownership of
the Company. These limitations could significantly reduce the amount of the net
operating loss carryforwards and the research and development credit
carryforwards available to the Company in the future.
On February 27, 2001, AER's major shareholder, Elmwood Partners II
(affiliated with Jon Lindseth), invested an additional $0.99 million in Company
redeemable convertible preferred stock, net of issuance costs. The preferred
stock is convertible to common stock at a conversion price of $0.515 per share,
subject to various possible adjustments. A warrant to purchase a total of
776,699 shares of AER Energy common stock at $0.538 per share, subject to
various possible adjustments, was also issued to the investor. The Company
currently anticipates that its existing cash and cash equivalents balance will
fund operations and continue technology development at the current level of
activity into the second quarter of 2001. The Company will need to raise
additional funds through additional license agreements, R&D contracts, debt or
equity, which it is currently pursuing. There is no assurance that the needed
funds will be raised. If sufficient funds are not raised, the Company will be
required to severely curtail or terminate operations.
The market price of the Company's common stock has fluctuated significantly
since it began to be publicly traded in July 1993 and may continue to be highly
volatile. Factors such as the ability of the Company to achieve development
goals, ability of the Company to commercialize its battery technology, ability
of the Company to license its technology, development of competing battery
technologies, ability of the Company to protect its proprietary rights to its
technology, improvements in conventional battery technologies, demand for and
acceptance of the Company's products in the marketplace, ability to obtain
commitments from battery companies and OEMs, impact of any future governmental
regulations, impact of pricing or material costs, ability of the Company to
raise additional funds, general market conditions and other factors affecting
the Company's business that are beyond the Company's control may cause
significant fluctuations in the market price of the Company's common stock. The
market prices of the stock of many high technology companies have fluctuated
substantially, often unrelated to the operating or research and development
performance of the specific companies. Such market fluctuations could adversely
affect the market price for the Company's common stock.
On March 30, 1999, the common stock of the Company ceased trading on the
Nasdaq SmallCap Market, moving to over-the-counter stock trading on the OTC
Bulletin Board.
12
13
Impact of Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements
("SAB 101") which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 was required to be
adopted in the fourth quarter of 2000 with retroactive application to the
beginning of the year. SAB 101 allows companies to report any changes in
revenue recognition related to adopting its provisions as an accounting change
at the time of implementation in accordance with APB Opinion No. 20, Accounting
Changes. The adoption of SAB 101 had no material impact on the Company's
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. FASB Statement No. 133 was originally effective for fiscal years
beginning June 15, 1999. However, in May 1999, the FASB voted to delay the
effective date for one year, to fiscal years beginning after June 15, 2000 by
issuing FASB Statement No. 137. The Statement will require the Company to
disclose certain information regarding derivative financial instruments. The
Company believes there will be no material impact on its results of operations
and financial position upon adoption of this Statement.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company has invested a portion of its cash and cash equivalents in
high-rated corporate debt financial instruments that mature in 90 days or less.
The Company has historically held, and plans in the future to hold, all such
instruments until maturity. If the instruments were, for some reason not
anticipated, redeemed earlier than their maturity, there might be a gain or
loss on the transaction. The Company has no transactions that qualify for
treatment under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities.
Item 8. Financial Statements and Supplementary Data.
Reference is made to the Index to Financial Statements on Page F-1 of the
Financial Statements of the Company filed as part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
13
14
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information concerning the nominees for Directors of the Company set
forth under "Election of Directors" in the Company's Proxy Statement for its
2001 Annual Meeting of Shareholders is incorporated herein by reference in
response to the information required by this Item 10.
Information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 set forth under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement for its 2001
Annual Meeting of Shareholders is incorporated herein by reference in response
to the information required by this Item 10.
Information concerning the Executive Officers of the Company is contained
in a separate section captioned "Executive Officers of the Registrant" in Part
I of this report and is incorporated herein by reference in response to the
information required by this Item 10.
Item 11. Executive Compensation.
The information set forth under "Executive Compensation" in the Company's
Proxy Statement for its 2001 Annual Meeting of Shareholders is incorporated
herein by reference in response to the information required by this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information set forth under "Voting Securities" in the Company's Proxy
Statement for its 2001 Annual Meeting of Shareholders is incorporated herein by
reference in response to the information required by this Item 12.
Item 13. Certain Relationships and Related Transactions.
The information set forth under "Certain Transactions" and "Compensation
Committee Interlocks and Insider Participation" in the Company's Proxy
Statement for its 2001 Annual Meeting of Shareholders is incorporated herein by
reference in response to the information required by this Item 13.
14
15
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents:
(1) The following financial statements of the Company and Report of
Independent Auditors are filed as part of this Report.
Balance Sheets as of December 31, 2000 and 1999
Statements of Operations for the years ended December 31, 2000, 1999,
and 1998, and for the period from July 17, 1989 (date of inception) to
December 31, 2000
Statements of Stockholders' (Deficit) Equity for the years ended
December 31, 2000, 1999, and 1998, and for the period from July 17,
1989 (date of inception) to December 31, 2000
Statements of Cash Flows for the years ended December 31, 2000, 1999,
and 1998, and for the period from July 17, 1989 (date of inception) to
December 31, 2000
Notes to Financial Statements
Report of Independent Auditors
(2) Financial Statement Schedules:
Financial statement schedules have been omitted either because they
are not applicable or because the information that would be included
in such schedules is included elsewhere in the financial statements or
the notes thereto.
(3) Exhibits:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- ----------------------------------------------------------------------------------------------------------------
3.1 Articles of Incorporation of the Company, as amended.
3.2 Bylaws of the Company, as amended. (1)
4.1 See Articles II and VII of the Company's Articles of Incorporation located within
Exhibit 3.1
4.2 See Articles 2, 3 and 4 of the Company's Bylaws located within Exhibit 3.2
4.3 Warrant to Purchase Common Stock of AER Energy Resources, Inc. dated as of March 31, 2000 between
The Kindt-Collins Company and AER Energy Resources, Inc. (15)
4.4 Warrant to Purchase Common Stock of AER Energy Resources, Inc. dated as of April 3, 2000 between
FW AER II, L. P. and AER Energy Resources, Inc. (15)
4.5 Warrant to Purchase Common Stock of AER Energy Resources, Inc. dated as of September 27, 2000 between
Elmwood Partners II and AER Energy Resources, Inc. (17)
4.6 Warrant to Purchase Common Stock of AER Energy Resources, Inc. dated as of September 27, 2000 between
FW AER II, L. P. and AER Energy Resources, Inc. (17)
10.1 License Agreement dated July 19, 1989 among the Company, Dreisbach Electromotive, Inc. and Mike Cheiky.(2)
10.2* AER Energy Resources, Inc. 1992 Stock Option Plan, as amended.(2)
10.3* Form of Non-Qualified Stock Option Agreement.(3)
10.4* Form of Incentive Stock Option Agreement.(3)
10.5 Agreement dated May 12, 1993 between the Company and Westinghouse Electric Corporation.(2)
10.6* Form of Indemnity Agreement with Directors.(2)
10.7 Consent to Partial Assignment of Royalties and Amendment No. 2 to License Agreement dated as of October 15, 1993
among the Company, Dreisbach Electromotive, Inc. and Mike Cheiky.(4)
10.8 Amended and Restated DEMI/AER Air Manager Agreement dated October 15, 1993 among the Company,
Dreisbach Electromotive, Inc. and Mike Cheiky.(4)
10.9* AER Energy Resources, Inc. 1993 Non-Employee Directors' Restricted Stock Award Plan.(4)
15
16
10.10* Form of Director's Restricted Stock Award Agreement.(5)
10.11* Stock Option Agreement dated November 2, 1989 by and between David W. Dorheim and Aerobic Power Systems, Inc.
(now AER Energy Resources, Inc.).(6)
10.12* Stock Option Agreement dated February 8, 1991 by and between R. Dennis Bentz and AER Energy Resources, Inc. (6)
10.13* Stock Option Agreement dated July 1, 1990 by and between Frank M. Harris and Aerobic Power Systems, Inc.
(now AER Energy Resources, Inc.).(6)
10.14 Lease Agreement dated November 15, 1993 between AER Energy Resources, Inc. and Highlands Park Associates.(7)
10.15 Lease Agreement dated March 25, 1994 between AER Energy Resources, Inc. and Highlands Park Associates.(7)
10.16* Stock Option Agreement dated December 20, 1994 between H. Douglas Johns and AER Energy Resources, Inc.(8)
10.17* Consulting Agreement dated December 20, 1994 between H. Douglas Johns and AER Energy Resources, Inc.(9)
10.18 Form of Convertible Debenture Subscription Agreement.(10)
10.19 Form of 8% Convertible Debenture due November 17, 1997.(10)
10.20 Registration Rights Agreement.(10)
10.21 Warrant to Purchase Common Stock.(10)
10.22 Amendment No. 3 to License Agreement and Termination of Technology Assignment Agreement dated
December 26, 1995.(11)
10.23 Securities Purchase Agreement, dated as of May 20, 1996, by and between FW AER Partners, L.P. and
AER Energy Resources, Inc.(12)
10.24 Warrant to Purchase Common Stock.(12)
10.25* Agreement between H. Douglas Johns and AER Energy Resources, Inc. dated November 7, 1996, amending Mr. Johns'
Consulting Agreement and Stock Option Agreement.(13)
10.26 Technology Licenses and Services Agreement, dated as of September 24, 1998, by and between Duracell Inc. and
AER Energy Resources, Inc.(14)
10.27 Convertible Promissory Note dated as of March 31, 2000 between The Kindt-Collins Company and AER Energy
Resources, Inc.(15)
10.28 Convertible Promissory Note dated as of April 3, 2000 between FW AER II, L.P. and AER Energy Resources, Inc.(15)
10.29 Securities Purchase Agreement dated as of September 27, 2000 between Elmwood Partners II and FW AER II, L. P.,
purchasers, and AER Energy Resources, Inc.(17)
21 Subsidiaries of the Company.(2)
23 Consent of Ernst & Young LLP, Independent Auditors.
* Indicates management contract or compensatory plan or arrangement.
(1) Filed on June 17, 1993 as an Exhibit to Amendment No. 2 to the Registrant's Registration Statement on Form S-1 (File No.
33-62668) and incorporated herein by reference.
(2) Filed on May 14, 1993 as an Exhibit to the Registrant's Registration Statement on Form S-1 (File No. 33-62668) and
incorporated herein by reference.
(3) Filed on October 5, 1993 as an Exhibit to the Registrant's Registration Statement on Form S-8 (File No. 33-69982) and
incorporated herein by reference.
(4) Filed on October 29, 1993 as an Exhibit to the Registrant's Quarterly Report on Form 10-Q (File No. 0-21926) for the
quarter ended September 30, 1993 and incorporated herein by reference.
(5) Filed on September 24, 1993 as an Exhibit to the Registrant's Registration Statement on Form S-8 (File No. 33-69462) and
incorporated herein by reference.
(6) Filed on March 25, 1994 as an Exhibit to the Registrant's Annual Report on Form 10-K (File No. 0-21926) for the year ended
December 31, 1993 and incorporated herein by reference.
(7) Filed on September 23, 1994 as an Exhibit to the Registrant's Registration Statement on Form S-1 (File No. 33-84300) and
incorporated herein by reference.
(8) Filed on February 2, 1995 as an Exhibit to the Registrant's Registration Statement on Form S-8 (File No. 33-89068) and
incorporated herein by reference.
(9) Filed on March 23, 1995 as an Exhibit to the Registrant's Annual Report on Form 10-K (File No. 0-21926) for the year ended
December 31, 1994 and incorporated herein by reference.
(10) Filed on December 13, 1995 as an Exhibit to the Registrant's Form 8-K (File No. 0-21926) and incorporated herein by
reference.
16
17
(11) Filed on March 28, 1996 as an Exhibit to the Registrant's Annual Report on Form 10-K (File No. 0-21926) for the year ended
December 31, 1995 and incorporated herein by reference.
(12) Filed on May 20, 1996 as an Exhibit to the Registrant's Form 8-K (File No. 0-21926) and incorporated herein by reference.
(13) Filed on March 27, 1997 as an Exhibit to the Registrant's Annual Report on Form 10-K (File No. 0-21926) for the year ended
December 31, 1996 and incorporated herein by reference.
(14) Filed on September 24, 1998 as an Exhibit to the Registrant's Form 8-K (File No. 0-21926) and incorporated herein by
reference.
(15) Filed on May 10, 2000 as an Exhibit to the Registrant's Quarterly Report on Form 10-Q (File No. 0-21926) for the quarter
ended March 31, 2000 and incorporated herein by reference.
(16) Filed on August 12, 2000 as an Exhibit to the Registrant's Quarterly Report on Form 10-Q (File No. 0-21926) for the quarter
ended June 30, 2000 and incorporated herein by reference.
(17) Filed on November 13, 2000 as an Exhibit to the Registrant's Quarterly Report on Form 10-Q (File No. 0-21926) for the
quarter ended September 30, 2000 and incorporated herein by reference.
(b) Reports on Form 8-K filed in the fourth quarter of 2000:
The registrant did not file any reports on Form 8-K during the quarter
ended December 31, 2000.
17
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 15, 2001.
AER ENERGY RESOURCES, INC.
By: /s/ DAVID W. DORHEIM
----------------------------------
David W. Dorheim,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------------------- ---------------------------------- --------------
/s/ JON A. LINDSETH Chairman March 15, 2001
--------------------------------
Jon A. Lindseth
/s/ DAVID W. DORHEIM Director, President and Chief March 15, 2001
-------------------------------- Executive Officer
David W. Dorheim
/s/ J. T. MOORE Vice President -- Chief Financial March 15, 2001
-------------------------------- Officer, Treasurer and Secretary
J. T. Moore (Principal Accounting Officer
and Principal Financial Officer)
/s/ DAVID G. BROWN Director March 15, 2001
--------------------------------
David G. Brown
/s/ JAMES W. DIXON Director March 15, 2001
--------------------------------
James W. Dixon
/s/ WILLIAM L. JACKSON Director March 15, 2001
--------------------------------
William L. Jackson
/s/ JOHN L. WILKES Director March 15, 2001
--------------------------------
John L. Wilkes
18
19
AER ENERGY RESOURCES, INC.
(a Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors....................... F-2
Financial Statements
Balance Sheets.................................... F-3
Statements of Operations.......................... F-4
Statements of Stockholders' (Deficit) Equity...... F-5
Statements of Cash Flows.......................... F-6
Notes to Financial Statements..................... F-7
F-1
20
REPORT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
AER Energy Resources, Inc.
We have audited the accompanying balance sheets of AER Energy Resources,
Inc. (a development stage company) as of December 31, 2000 and 1999, and the
related statements of operations, stockholders' (deficit) equity, and cash
flows for each of the three years in the period ended December 31, 2000 and for
the period from July 17, 1989 (date of inception) to December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AER Energy Resources, Inc.
(a development stage company) as of December 31, 2000 and 1999, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2000 and for the period from July 17, 1989 (date of
inception) to December 31, 2000, in conformity with accounting principles
generally accepted in the United States.
The accompanying financial statements have been prepared assuming AER
Energy Resources, Inc. will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring operating losses and
negative cash flows from operations. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. These financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability of assets or the amounts and classifications of
liabilities that may result from the outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
------------------------------------
Ernst & Young LLP
Atlanta, Georgia
January 12, 2001
F-2
21
AER ENERGY RESOURCES, INC.
(a Development Stage Company)
BALANCE SHEETS
DECEMBER 31,
---------------------------------
2000 1999
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 781,314 $ 1,761,268
Trade accounts receivable -- 31,070
Inventories 76,752 82,198
Prepaid expenses and other current assets 59,402 83,355
----------- -----------
Total current assets 917,468 1,957,891
Equipment and improvements:
Machinery and equipment 2,956,329 3,104,958
Office equipment 242,466 300,810
Leasehold improvements 220,668 218,790
----------- -----------
3,419,463 3,624,558
Less accumulated depreciation (3,096,045) (3,012,647)
----------- -----------
323,418 611,911
Other assets 10,791 11,191
----------- -----------
TOTAL ASSETS $ 1,251,677 $ 2,580,993
=========== ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK, AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 60,910 $ 70,583
Deferred revenue 287,500 431,250
Other accrued expenses 158,940 191,873
----------- -----------
Total current liabilities 507,350 693,706
Long-term liabilities - deferred revenue -- 287,500
Series A redeemable convertible preferred stock, no par value:
Authorized - 425,000 shares in 2000; 404,500 shares issued and
outstanding at December 31, 2000; liquidation preference and
redemption price of $4,116,293 as of December 31, 2000 (including
$71,293 undeclared dividends in 2000) 3,386,419 --
----------- -----------
Total liabilities and redeemable convertible preferred stock 3,893,769 981,206
Stockholders' (deficit) equity:
Preferred stock, no par value:
Authorized - 10,000,000 shares; no shares issued and outstanding -- --
Common stock, no par value:
Authorized - 100,000,000 shares; issued and outstanding - 24,850,263 shares
at December 31, 2000 and 1999 67,212,754 66,580,384
Unearned stock compensation (31,861) (66,808)
Deficit accumulated during the development stage (69,822,985) (64,913,789)
----------- -----------
Total stockholders' (deficit) equity (2,642,092) 1,599,787
----------- -----------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK, AND STOCKHOLDERS' (DEFICIT) EQUITY $ 1,251,677 $ 2,580,993
=========== ===========
See notes to financial statements.
F-3
22
AER ENERGY RESOURCES, INC.
(a Development Stage Company)
STATEMENTS OF OPERATIONS
PERIOD FROM
Year Ended December 31, JULY 17, 1989
---------------------------------------------- (date of inception)
2000 1999 1998 to December 31, 2000
----------- ------------ ------------ --------------------
License fees and research and development revenues $ 431,250 $ 1,946,970 $ 350,000 $ 2,728,220
Product sales -- -- -- 338,174
Cost of product sales -- -- -- (6,758,985)
----------- ------------ ------------ ------------
Gross margin on product sales -- -- -- (6,420,811)
----------- ------------ ------------ ------------
431,250 1,946,970 350,000 (3,692,591)
Costs and expenses:
Research and development
- related party -- -- -- 1,145,913
- other 3,525,572 3,736,317 4,746,681 41,579,313
Marketing, general and administrative
- related party -- 50,000 99,931 1,388,695
- other 1,658,372 1,806,038 2,513,215 25,305,662
----------- ------------ ------------ ------------
Total costs and expenses 5,183,944 5,592,355 7,359,827 69,419,583
----------- ------------ ------------ ------------
Operating loss (4,752,694) (3,645,385) (7,009,827) (73,112,174)
Interest income 64,664 158,556 378,318 4,111,358
Interest expense - related parties (221,166) -- -- (485,611)
----------- ------------ ------------ ------------
Net loss (4,909,196) (3,486,829) (6,631,509) (69,486,427)
Accretion of redeemable convertible preferred stock (33,874) -- -- (33,874)
Redeemable convertible preferred stock dividend requirements (71,293) -- -- (71,293)
----------- ------------ ------------ ------------
Net loss attributable to common stock $(5,014,363) $ (3,486,829) $ (6,631,509) $(69,591,594)
=========== ============ ============ ============
Net loss per common share (basic and diluted) $ (0.20) $ (0.14) $ (0.27) $ (4.11)
=========== ============ ============ ============
Weighted average shares outstanding (basic and diluted) 24,850,263 24,853,452 24,839,403 16,915,297
See notes to financial statements.
F-4
23
AER ENERGY RESOURCES, INC.
(a Development Stage Company)
STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
Common Stock
Convertible -----------------------------
Debentures Shares Amount
-----------------------------------------------------
Issuance of common stock:
For cash ranging from $0.02 to $6.31 per share,
inception to May 1996 $ -- 10,005,908 $ 20,622,292
For cash in public offerings for $5.25 and $7.00 per share,
June 1993 to December 1994 -- 5,461,700 30,257,263
For promissory notes ranging from $0.89 to $1.89 per share,
February 1990 to January 1993 -- 135,450 169,675
For exchange of debt ranging from $1.22 to $1.89 per share,
May 1991 to July 1992 -- 3,079,305 4,438,934
Exercise of stock options ranging from $0.89 to $5.00 per share,
May 1994 to June 1996 -- 108,600 133,546
Payments received on promissory notes -- -- --
Shares granted under Restricted Stock Award Plan (Note 4) -- 143,750 1,209,455
Shares canceled under Restricted Stock Award Plan (Note 4) -- (36,000) (260,813)
Compensation under Restricted Stock Award Plan -- -- (195,750)
Cancellation of promissory note -- (21,375) (40,375)
Sale of convertible debentures for cash, November 1995 9,834,500 -- --
Interest payable on convertible debentures 336,558 -- --
Conversion of debentures into common stock (10,171,058) 5,913,675 10,171,058
Grant of compensatory stock options -- -- 14,063
Forgiveness of promissory notes -- -- --
Net loss and comprehensive loss, inception to December 31, 1997 -- -- --
-----------------------------------------------------
Balance at December 31, 1997 -- 24,791,013 66,519,348
Exercise of stock options at $0.89 per share, January 1998 -- 11,250 10,012
Shares granted under Restricted Stock Award Plan -- 60,000 63,780
Compensation under Restricted Stock Award Plan -- -- --
Payments received on promissory notes -- -- --
Forgiveness of promissory notes -- -- --
Net loss and comprehensive loss -- -- --
-----------------------------------------------------
Balance at December 31, 1998 -- 24,862,263 66,593,140
Shares canceled under Restricted Stock Award Plan -- (12,000) (12,756)
Compensation under Restricted Stock Award Plan -- -- --
Net loss and comprehensive loss -- -- --
-----------------------------------------------------
Balance at December 31, 1999 -- 24,850,263 66,580,384
Issuance of 225,988 warrants in conjunction with the
issuance of convertible promissory notes -- -- 361,581
Conversion of convertible promissory notes to redeemable
convertible preferred stock -- -- (272,692)
Issuance of 940,070 warrants in conjunction with the
issuance of redeemable convertible preferred stock -- -- 648,648
Accretion of redeemable preferred stock and preferred stock dividends -- -- (105,167)
Compensation under Restricted Stock Award Plan -- -- --
Net loss and comprehensive loss -- -- --
-----------------------------------------------------
Balance at December 31, 2000 $ -- 24,850,263 $ 67,212,754
=====================================================
Deficit
Notes Accumulated
Receivable During the Total
from Common Unearned Development Stockholders'
Stock Sales Compensation Stage (Deficit) Equity
--------------------------------------------------------------
Issuance of common stock:
For cash ranging from $0.02 to $6.31 per share,
inception to May 1996 $ -- $ -- $ -- $ 20,622,292
For cash in public offerings for $5.25 and $7.00 per share,
June 1993 to December 1994 -- -- -- 30,257,263
For promissory notes ranging from $0.89 to $1.89 per share,
February 1990 to January 1993 (169,675) -- -- --
For exchange of debt ranging from $1.22 to $1.89 per share,
May 1991 to July 1992 -- -- -- 4,438,934
Exercise of stock options ranging from $0.89 to $5.00 per share,
May 1994 to June 1996 -- -- -- 133,546
Payments received on promissory notes 57,425 -- -- 57,425
Shares granted under Restricted Stock Award Plan (Note 4) -- (1,209,455) -- --
Shares canceled under Restricted Stock Award Plan (Note 4) -- 260,813 -- --
Compensation under Restricted Stock Award Plan -- 823,760 -- 628,010
Cancellation of promissory note 40,375 -- -- --
Sale of convertible debentures for cash, November 1995 -- -- -- 9,834,500
Interest payable on convertible debentures -- -- (336,558) --
Conversion of debentures into common stock -- -- -- --
Grant of compensatory stock options -- -- -- 14,063
Forgiveness of promissory notes 35,937 -- -- 35,937
Net loss and comprehensive loss, inception to
December 31, 1997 -- -- (54,458,893) (54,458,893)
-------------------------------------------------------------
Balance at December 31, 1997 (35,938) (124,882) (54,795,451) 11,563,077
Exercise of stock options at $0.89 per share, January 1998 -- -- -- 10,012
Shares granted under Restricted Stock Award Plan -- (63,780) -- --
Compensation under Restricted Stock Award Plan -- 72,822 -- 72,822
Payments received on promissory notes 2,000 -- -- 2,000
Forgiveness of promissory notes 33,938 -- -- 33,938
Net loss and comprehensive loss -- -- (6,631,509) (6,631,509)
-------------------------------------------------------------
Balance at December 31, 1998 -- (115,840) (61,426,960) 5,050,340
Shares canceled under Restricted Stock Award Plan -- 12,756 -- --
Compensation under Restricted Stock Award Plan -- 36,276 -- 36,276
Net loss and comprehensive loss -- -- (3,486,829) (3,486,829)
-------------------------------------------------------------
Balance at December 31, 1999 -- (66,808) (64,913,789) 1,599,787
Issuance of 225,988 warrants in conjunction with the
issuance of convertible promissory notes -- -- -- 361,581
Conversion of convertible promissory notes to redeemable
convertible preferred stock -- -- -- (272,692)
Issuance of 940,070 warrants in conjunction with the
issuance of redeemable convertible preferred stock -- -- -- 648,648
Accretion of redeemable preferred stock and preferred
stock dividends -- -- -- (105,167)
Compensation under Restricted Stock Award Plan -- 34,947 -- 34,947
Net loss and comprehensive loss -- -- (4,909,196) (4,909,196)
-------------------------------------------------------------
Balance at December 31, 2000 $ -- $ (31,861) $(69,822,985) $ (2,642,092)
=============================================================
See notes to financial statements.
F-5
24
AER ENERGY RESOURCES, INC.
(a Development Stage Company)
STATEMENTS OF CASH FLOWS
PERIOD FROM
JULY 17, 1989
(date of
Years Ended December 31, inception) to
------------------------------------------- December 31,
2000 1999 1998 2000
----------- ----------- ------------ -------------
Operating activities:
Net loss $(4,909,196) $(3,486,829) $ (6,631,509) $(69,486,427)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 299,316 428,364 467,191 4,143,482
Amortization of unearned stock compensation 34,947 36,276 72,822 772,055
Amortization of discount on promissory notes 88,889 -- -- 88,889
Grant of compensatory stock options 14,063
Forgiveness of promissory notes -- -- 33,938 69,875
Loss on disposal of equipment 11,151 1,019 -- 79,440
Deferred rental expense -- -- (2,112) --
Accretion of discount on short-term investments
and marketable securities -- (75,852) -- (263,259)
Changes in operating assets and liabilities:
Trade accounts receivable 31,070 (31,070) 116 --
Inventories, net 5,446 (29,469) 238,549 (76,752)
Prepaid expenses and other assets 24,353 (26,291) 98,060 (53,662)
Accounts payable (9,673) (8,506) (140,141) 60,910
Accrued royalties - related party -- (30,000) -- --
Deferred revenue (431,250) 668,750 50,000 287,500
Other accrued expenses (32,933) 65,972 (117,145) 317,874
----------- ----------- ------------ ------------
Net cash used in operating activities (4,887,880) (2,487,636) (5,930,231) (64,046,012)
Investing activities:
Purchases of equipment and improvements (21,974) (76,816) (38,783) (4,172,667)
Purchases of short-term investments and marketable securities -- (3,224,148) -- (14,736,444)
Purchase of license agreement -- -- -- (250,000)
Proceeds from sales/maturities of short-term investments and
marketable securities -- 3,300,000 -- 15,000,000
Changes in other assets -- -- -- (140,501)
----------- ----------- ------------ ------------
Net cash used in investing activities (21,974) (964) (38,783) (4,299,612)
Financing activities:
Proceeds from revolving credit note to related parties -- -- -- 5,430,000
Issuance of convertible debentures, net of issuance costs -- -- -- 9,834,500
Proceeds from convertible notes payable to related parties 2,000,000 -- -- 2,000,000
Payments on notes payable to related parties -- -- -- (1,150,000)
Payments received on promissory notes -- -- 2,000 59,425
Issuance of common stock upon exercise of stock options -- -- 10,012 143,558
Issuance of common stock, net of issuance costs -- -- -- 50,879,555
Issuance of redeemable convertible preferred stock, net of
issuance costs 1,929,900 -- -- 1,929,900
----------- ----------- ------------ ------------
Net cash provided by financing activities 3,929,900 -- 12,012 69,126,938
----------- ----------- ------------ ------------
(Decrease) increase in cash and cash equivalents (979,954) (2,488,600) (5,957,002) 781,314
Cash and cash equivalents at beginning of period 1,761,268 4,249,868 10,206,870 --
----------- ----------- ------------ ------------
Cash and cash equivalents at end of period $ 781,314 $ 1,761,268 $ 4,249,868 $ 781,314
=========== =========== ============ ============
Supplement disclosure of non-cash financing activities:
Upon resignation of one member of the Company's Board
of Directors, 12,000 non-vested shares of common stock,
issued under the 1993 Non-Employee Directors' Restricted
Stock Award Plan, were forfeited and returned to
authorized and unissued shares $ -- $ 12,756 $ -- $ 12,756
=========== =========== ============ ============
Conversion of the $2.0 million promissory notes payable
to related parties to redeemable convertible preferred
stock, net of unamortized discount of $272,692 $ 1,727,308 $ -- $ -- $ 1,727,308
=========== =========== ============ ============
See notes to financial statements.
F-6
25
AER ENERGY RESOURCES, INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 2000
1. Significant Accounting Policies
Description of Business
AER Energy Resources, Inc. (the "Company" or "AER Energy") was incorporated
in 1989 and has been engaged in the development and commercialization of high
energy density zinc-air batteries. AER Energy's current strategy as a research
and development ("R&D") company is focused on primary (disposable), rather than
rechargeable, zinc-air battery technology and licensing its extensive patent
portfolio to large established battery and original equipment manufacturers
("OEMs") with plans to commercialize the technology. Until 1998, the Company's
operations had been focused primarily on developing and improving its
technology, setting up the manufacturing process, testing and selling
rechargeable zinc-air batteries, and similar activities. The current strategy
allows the Company to capitalize on the capability of its patented Diffusion
Air Manager technology and opportunities in hand-held electronic products like
camcorders, cellular telephones, cordless telephones, digital cameras, and
hand-held computers.
The Company continues to be a development stage company. Under the current
strategy, the Company seeks to generate revenues from license and royalty fees,
and R&D contract fees. Revenues in the form of license fees and R&D funds
commenced in the fourth quarter of 1998 related to the Technology Licenses and
Services Agreement with Duracell Inc., as discussed in Note 7. New alliances,
license agreements, and R&D contracts continue to be sought which would
eventually bring the Company out of the development stage.
Going Concern
Since inception, the Company's operations have been principally engaged in
the development of its technology and products. As a result, the Company has
incurred significant operating losses and negative cash flows from operations.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that may result from the outcome of this uncertainty.
The Company currently anticipates that its existing cash and cash
equivalents balance in addition to the funding received on February 27, 2001
(see Note 14) will fund operations and continue technology development at the
current level of activity into the second quarter of 2001. The Company will
need to raise additional funds through additional license agreements, R&D
contracts, debt or equity. There is no assurance that the needed funds will be
raised. If sufficient funds are not raised, the Company will be required to
severely curtail or terminate operations.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. Based on the Company's estimate of future
undiscounted cash flows, the Company expects to recover the net book value of
its remaining fixed assets. The Company's estimates of future undiscounted cash
flows have taken into consideration its current R&D operations and contemplate
the Company entering into license agreements and research and development
agreements, similar, or somewhat similar, to the 1998 agreement with Duracell
Inc., throughout the remaining life of the Company's fixed assets. The Company
will likely need working capital infusions from yet unidentified sources to
bridge shortfalls in cash flow before such license or research and development
agreements are executed and generating cash. If the Company is unable to enter
into such agreements or obtain debt or equity financing, a writedown of
long-lived assets to fair value may be required. During the years ended December
31, 2000, 1999 and 1998, the Company recorded write-offs of obsolete equipment
with a net book value of $11,151, $1,019, and $0, respectively, as part of
marketing, general and administrative expenses.
F-7
26
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents.
As of December 31, 2000 and 1999, the Company maintained approximately 38% and
87%, respectively, of its cash and cash equivalents, consisting of short
duration, high-rated corporate debt securities, under the management of a high
credit quality, third party financial institution custodian.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, bank deposits and highly liquid
investments with maturities of three months or less when purchased and are
stated at cost, which approximates market.
Inventories
Inventories are valued at lower of cost or market, using the first-in,
first-out (FIFO) method. The inventory balances at December 31, 2000 and 1999
of $76,752 and $82,198, respectively, consist entirely of raw materials.
Long-Lived Assets
In accordance with the provision of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of, the Company reviews its long-lived assets
for impairment at each balance sheet date or whenever events or changes in
circumstances indicate that the carrying amount of an asset should be assessed.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation of equipment
and improvements is computed using the straight-line method over their
estimated useful lives, ranging from three to seven years. Certain equipment is
used to advance the development of production processes, refine product designs
for production and produce batteries for laboratory and field testing.
Amortization of leasehold improvements is recorded over the shorter of the
lives of the related assets or the lease terms. During the years ended December
31, 2000 and 1999, the Company recorded a write-off of fully depreciated
obsolete equipment of $210,182 and $418,966, respectively.
Revenue Recognition
License fee revenues are recognized over the period earned and research and
development revenues are recognized over the period the services are performed.
Revenues from product sales are recognized when the products are shipped.
Income Taxes
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that are likely to be in effect
when the differences are expected to reverse. At December 31, 2000 and 1999,
the Company recorded a 100% valuation allowance against any deferred tax
assets.
Research and Development
Research and development costs are charged to expense as incurred.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123") sets forth accounting and reporting
standards for stock based employee compensation plans. As permitted by SFAS
123, the Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations
F-8
27
("APB 25"). Under APB 25, no compensation expense is recognized for stock
options granted to employees at fair market value. To date, all of the Company's
stock option grants have been made with an option exercise price equal to or
greater than the fair market value of the underlying common stock, and
accordingly, no compensation expense has been recorded.
Impact of Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements
("SAB 101") which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is required to be
adopted in the fourth quarter of 2000 with retroactive application to the
beginning of the year. SAB 101 allows companies to report any changes in
revenue recognition related to adopting its provisions as an accounting change
at the time of implementation in accordance with APB Opinion No. 20, Accounting
Changes. The adoption of SAB 101 had no material impact on the Company's
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. FASB Statement No. 133 was originally effective for fiscal years
beginning June 15, 1999. However, in May 1999, the FASB voted to delay the
effective date for one year, to fiscal years beginning after June 15, 2000 by
issuing FASB Statement No. 137. The Statement will require the Company to
disclose certain information regarding derivative financial instruments. The
Company believes there will be no material impact on its results of operations
and financial position upon adoption of this Statement.
Reclassifications
Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation.
2. Leases
The Company leases office and manufacturing space under operating leases
that expire in 2001. Rent expense under the operating leases for the years
ended December 31, 2000, 1999, and 1998 and for the period from July 17, 1989
(date of inception) to December 31, 2000 was $166,389, $188,959, $221,899, and
$1,620,432, respectively. Minimum lease payments due in 2001 in the aggregate
under the operating leases are $124,035.
3. 1993 Non-Employee Directors' Restricted Stock Award Plan
The Company's 1993 Non-Employee Directors' Restricted Stock Award Plan
provides for the grant of up to an aggregate of 240,000 shares of the Company's
common stock to directors of the Company who are not officers or employees of
the Company. In general, the plan provides for awards of 15,000 shares of
common stock to each non-employee director once every five years, with 3,000
shares vesting after each year of his or her service as a director. At December
31, 2000, 155,750 shares of the Company's common stock were outstanding
pursuant to this plan.
No restricted shares were granted during 2000 or 1999. The total number of
restricted shares granted during the year ended December 31, 1998 was 60,000.
The weighted-average fair value of restricted shares granted for the year ended
December 31, 1998 was $1.06.
Total compensation expense incurred under this plan for the years ended
December 31, 2000, 1999 and 1998 was $0.03 million, $0.04 million, and $0.07
million, respectively, and is included in marketing, general and administrative
costs and expenses.
4. Stockholders' (Deficit) Equity
On September 27, 2000, the Company issued 404,500 shares of Series A
Convertible Preferred Stock ("Series A Preferred") and warrants to purchase up
to 940,070 shares of common stock for a total purchase price, net of transaction
fees, of $3.93 million to two major shareholders of the Company. The Company
received cash of $1.93 million, net of issuance costs, and the exchange of the
$2.00 million of outstanding principal on the convertible promissory notes
issued in April 2000 (see Note 11) for the new issuances. The Series A Preferred
may be converted, at the option of the holders, to common stock of the Company
at any time at a conversion price of $0.851 per share, subject to various
possible adjustments. The Company may redeem the Series A Preferred at a price
equal to $10.00 per share plus all accrued and unpaid dividends; and it must be
redeemed in September 2005, unless previously converted. Dividends accrue at the
rate of 6.75% per annum, are cumulative and compound annually. The Company
incurred total interest expense on the convertible promissory notes of $0.22
million in 2000.
F-9
28
The warrants are exercisable for five years and entitle the holders to
purchase common stock at an exercise price of $0.886 per share, subject to
various possible adjustments. The fair value for these warrants of $0.65
million, or $0.69 per share, was estimated at the issuance date using a
Black-Scholes valuation model. The warrant value has been allocated to common
stock from the proceeds of the Series A Preferred and will be accreted to the
Series A Preferred on a straight-line basis through the mandatory redemption
date so that at such redemption date, the carrying amount of the Series A
Preferred will equal the mandatory redemption value.
On May 20, 1996, the Company issued 1,584,158 shares of its common stock,
and warrants to purchase an additional 835,000 shares, in a private placement
at an aggregate purchase price of $10,000,000, as discussed in Note 9.
On November 29, 1995, the Company reserved 225,590 shares of common stock
for issuance in connection with a warrant delivered to the placement agent of
$10,675,000 principal amount of 8% convertible subordinated debentures, as
discussed in Note 10. The warrants expired unexercised in 1998.
During the period from inception to December 31, 1994, the Company issued
shares of stock to officers and employees of the Company in exchange for notes
receivable. These notes were secured by the shares of common stock issued and
bear interest at 10%. The notes required payments of interest only through
1993. In December 1994, the notes were amended to include full recourse against
the borrowers in the event of nonpayment with principal and accrued interest
payable in equal annual installments in 1997 and 1998. The amended notes also
included a forgiveness provision for the entire indebtedness contingent on the
continued employment of the makers of the notes. Pursuant to the forgiveness
provision, $33,938 of outstanding principal were forgiven and recorded as
compensation expense in the Statement of Operations on December 1, 1998.
During 1991, a major stockholder and another stockholder exchanged notes
due from the Company in the amount of $2,400,000 plus accrued interest of
$125,545 for 2,066,355 shares of the Company's common stock. During 1992, a
major stockholder of the Company advanced $1,880,000 to the Company under a
revolving credit note bearing interest at prime plus 2%. During 1992, the
stockholder exchanged the outstanding balance plus accrued interest of $33,389
for 1,012,950 shares of the Company's common stock.
At December 31, 2000, the Company had reserved 3,997,058 shares of common
stock for the future issuance of restricted stock awards and stock options, and
the future exercise of stock options, warrants, and convertible preferred
stock.
5. Stock Options
Under a stock option agreement, dated in 1994 and amended in 1996, with a
member of the Board of Directors, the Company granted the director an option to
acquire 25,000 shares of the Company's common stock at an exercise price of
$2.125 per share. The option is 100% vested and expires in 2004.
During 1992, the Company adopted the 1992 Stock Option Plan whereby options
may be granted to employees to purchase shares of common stock at prices not
less than the fair value of the shares on the date of the grant for incentive
stock options and not less than 50% of the fair value of the shares on the date
of the grant for non-qualified stock options. Options become vested in
accordance with the terms of each option agreement. In general, options become
fully vested in five years. Options granted in 1999 provide for full vesting to
occur on the fifth anniversary of the grant date, with the possibility of
accelerated vesting occurring on December 31, 2001. Acceleration of vesting on
December 31, 2001 will be measured based upon the Company's ability to
internally generate cash flows sufficient to meet its operating needs. No
option shall be exercisable within the first six months following the date of
grant and no incentive stock option shall be exercisable after the expiration
of ten years from the grant date. On May 9, 1996, the Company amended the 1992
Stock Option Plan to increase the number of shares reserved for future issuance
to 1,500,000.
On March 1, 1996, the Compensation Committee of the Company's Board of
Directors approved a plan to reprice certain options to purchase shares of the
Company's common stock granted to employees pursuant to the 1992 Stock Option
Plan. The options were repriced effective March 22, 1996. Options originally
priced from $4.63 to $8.00 per share were repriced at $3.19 per share, the
closing market price of the common stock on March 22, 1996. Each of the
repriced options, whether or not vested, could not be exercised for a period of
one year ending February 28, 1997. Options to purchase a total of 790,000
shares of common stock were repriced, of which 71,000 were fully vested prior
to repricing.
F-10
29
The Company has elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25") and related Interpretations in accounting for
its employee stock options because, as discussed below, the alternative fair
value accounting provided for under FASB Statement No. 123 ("SFAS 123"),
Accounting for Stock-Based Compensation, requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1999
options: risk-free interest rate of 5.9%; a dividend yield of 0%; volatility
factor of the expected market price of the Company's common stock of 171%; and
a weighted-average expected option life of five years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Because SFAS
123 is applicable only to options granted subsequent to December 31, 1994, its
pro forma effect was not fully reflected until 1999. The Company's pro forma
information follows (in thousands except for loss per share information):
Years Ended December 31,
--------------------------------------
2000 1999 1998
------- ------- -------
Pro forma net loss attributable
to common stock.............. $(4,996) $(3,623) $(6,751)
Pro forma net loss per share:
Basic and diluted......... $ (0.20) $ (0.15) $ (0.27)
A summary of option activity related to the 1992 Stock Option Plan follows:
Weighted
Average
Option Exercise
Shares Price Per Share
---------- ---------------
Outstanding at December 31, 1997 ................................. 901,625 $3.26
Canceled ....................................................... (236,000) 3.42
---------
Outstanding at December 31, 1998 ................................. 665,625 3.21
Granted ........................................................ 665,000 0.25
Canceled ....................................................... (100,000) 1.75
Expired ........................................................ (32,625) 1.89
---------
Outstanding at December 31, 1999 ................................. 1,198,000 1.72
Canceled ....................................................... (28,500) 1.29
---------
Outstanding at December 31, 2000 ................................. 1,169,500 $1.73
=========
Outstanding at December 31, 2000:
Exercise price of $0.25 with a weighted-average remaining
contractual life of 8.5 years ................................ 596,500 $0.25
Exercise price ranging from $2.06 to $3.19 with a
weighted-average remaining contractual life of 3.9 years ..... 540,000 3.18
Exercise price ranging from $3.88 to $6.19 with a
weighted-average remaining contractual life of 5.2 years ..... 33,000 4.85
---------
1,169,500 $1.73
---------
Options exercisable at December 31, 2000:
Exercise price of $0.25 ........................................ -- $ --
Exercise price ranging from $2.06 to $3.19 ..................... 538,000 3.18
Exercise price ranging from $3.88 to $6.19 ..................... 28,000 4.86
---------
566,000 $3.27
=========
Options exercisable at December 31, 1999: ........................ 499,000 $3.27
=========
Options exercisable at December 31, 1998: ........................ 450,625 $3.15
=========
The weighted-average fair value of options granted during 1999 was $0.24.
No options were granted in 2000 and 1998.
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30
Prior to adoption of the 1992 Stock Option Plan, the Company entered into
stock option agreements with key employees to purchase common stock of the
Company. All options granted under these stock option agreements expired in
1999. A summary of option activity related to these agreements follows:
Weighted
Average
Option Exercise
Shares Price Per Share
-------- ---------------
Outstanding at December 31, 1997...................................... 212,000 $ .90
Canceled............................................................ (9,500) 1.22
Exercised........................................................... (11,250) .89
--------
Outstanding at December 31, 1998...................................... 191,250 .89
Expired............................................................. (191,250) .89
Outstanding at December 31, 1999 -- $ --
========
6. Related Party Transactions
The Company has a license agreement with Dreisbach Electromotive, Inc.
("DEMI"). Certain of the beneficiaries of this license agreement are also
shareholders of the Company. Under DEMI's agreement, the Company has an
exclusive license to use the patent rights for the purpose of manufacturing and
marketing certain batteries and other products employing similar technology. In
addition, the Company agreed to pay DEMI royalties, beginning in 1991, of 4% of
net sales subject to certain minimum amounts and possible increases or
decreases to a maximum of 4% and a minimum of 2%, as specified in the
agreement. The applicable percentage of royalties is currently 4% of net sales.
The minimum royalty payments under the agreement were completed and paid in
full in 1999. The Company recorded total royalty expense related to the DEMI
license minimum royalty payments for the years ended December 31, 2000, 1999,
and 1998 and for the period from inception to December 31, 2000 of $0, $0.05
million, $0.10 million, and $1.39 million, respectively. These minimum royalty
expenses are included in marketing, general and administrative expenses in the
Statements of Operations. Additional royalties based on a percentage of net
sales, if any, would be included in the cost of sales.
The Company recorded R&D expenses as a part of the agreement for the period
from inception to December 31, 2000 of approximately $1.15 million, all of
which were recorded prior to 1993. No additional amounts of R&D expenses were
required under the agreement after 1992.
7. License and Research and Development Agreements
On September 24, 1998, the Company executed its TLAS Agreement with
Duracell Inc., a subsidiary of The Gillette Company. Under the terms of the
TLAS Agreement, the Company agrees to license certain of its zinc-air battery
technology to Duracell. In addition, Duracell agreed to fund certain joint
product development projects with the Company in 1999. Under the agreement,
Duracell will own technology developed under the projects it funds, which the
Company will have rights to utilize. Duracell also has options to obtain
certain other license rights. Deferred revenue represents the unamortized
portion of the $1.15 million in license fees received from Duracell under the
TLAS Agreement. Revenues related to this agreement are included in license fees
and research and development revenues in the Statements of Operations.
On May 12, 1993, the Company executed an agreement with Westinghouse
Electric Corporation ("Westinghouse") whereby the Company obtained exclusive
license and sublicense rights to use Westinghouse's air electrode technology
for portable computer products and non-exclusive license and sublicense rights
for all other portable products. The agreement entitles the Company to
improvements developed or acquired by Westinghouse prior to May 1, 1995.
Pursuant to the agreement, the Company paid an initial license fee of $250,000
and pays 1% of revenues up to $300,000 followed by 0.5% of revenues up to
$350,000, at which time no further royalties for product sales will be due. In
addition, for ten years, from 1993 to 2003, the Company will pay Westinghouse
the greater of (i) 50% of any sublicense fees it receives if it sublicenses the
technology licensed from Westinghouse, or (ii) 0.5% of sublicensee product
sales. The Company purchased specific production equipment for $325,000 from
Westinghouse. The agreement also includes certain provisions requiring
additional payments to Westinghouse if the Company sublicenses the technology.
Currently, the Company is not using technology obtained from Westinghouse in
its primary batteries.
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31
8. Income Taxes
A reconciliation of the provision for income taxes to the federal and state
statutory rate of 38% is as follows:
Period From
July 17, 1989 (Date
Years Ended December 31, of Inception) to
---------------------------------------------- December 31,
2000 1999 1998 2000
----------- ----------- ----------- -------------------
Tax at statutory rate......... $(1,865,494) $(1,324,995) $(2,519,973) $(26,404,842)
Research and development
credits..................... (80,487) (84,872) (112,687) (1,461,465)
Other......................... 253,587 3,223 9,112 300,727
Valuation reserve............. 1,692,394 1,406,644 2,623,548 27,565,580
----------- ----------- ----------- ------------
$ -- $ -- $ -- $ --
=========== =========== =========== ============
The tax effects of temporary differences, credits, and carryforwards that
give rise to significant portions of deferred tax assets consist of the
following:
December 31,
-----------------------------
2000 1999
------------ ------------
Deferred tax assets:
Net operating loss
carryforwards.............. $ 24,681,638 $ 22,479,889
Depreciation................. 34,406 232,285
Start-up costs............... 1,340,967 1,710,888
Research and development
credits.................... 1,461,465 1,380,978
Warranty reserve............. -- 3,933
License agreement............ 39,211 50,027
Inventory obsolescence....... 1,140 5,928
Other........................ 6,753 9,258
------------ ------------
Gross deferred tax assets.... 27,565,580 25,873,186
Valuation allowance.......... (27,565,580) (25,873,186)
------------ ------------
Net deferred tax assets........ $ -- $ --
============ ============
At December 31, 2000, the Company had available net operating loss
carryforwards for income tax purposes of approximately $64.95 million and
research and development credit carryforwards of approximately $1.46 million.
These carryforward items will both begin to expire in 2004. Both of these
carryforward items are subject to certain limitations on annual utilization
related to changes in ownership of the Company. These limitations could
significantly reduce the amount of the net operating loss and credit
carryforwards available to the Company in the future.
9. Proceeds from the Sale of Common Stock
On May 20, 1996, in a private placement at an aggregate purchase price of
$10.00 million, the Company issued 1,584,158 shares of its common stock and
warrants to purchase 835,000 additional shares. The transaction generated
proceeds of $9.37 million, net of expenses. The warrants have an exercise price
of $6.3125 per share and expire in 2001. The value of the warrants is included
in common stock on the balance sheet.
On November 9, 1994, the Company closed a public offering of 2.50 million
shares of its common stock, generating proceeds of $12.30 million, net of
underwriting discounts and commissions but before deducting expenses. On
December 7, 1994, 150,000 additional shares of common stock were issued
pursuant to the underwriters' over-allotment option, generating additional
proceeds of $0.74 million, net of underwriting discounts and commissions.
On July 9, 1993, the Company closed an initial public offering of 2.50
million shares of its common stock, generating proceeds of $16.30 million, net
of underwriting discounts and commissions but before deducting expenses. On
August 6, 1993, 311,700 additional shares of common stock were issued pursuant
to the underwriters' over-allotment option, generating additional proceeds of
$2.00 million, net of underwriting discounts and commissions.
The net proceeds from the common stock sales have been used to fund capital
equipment purchases, R&D efforts, sales and marketing activities, production of
prototype zinc-air battery products, development of alliances with battery
manufacturers and OEMs, working capital and general corporate purposes at the
Company's discretion.
F-13
32
10. Proceeds from the Sale of Convertible Debentures
On November 29, 1995, the Company issued $10.68 million principal amount of
8% convertible subordinated debentures due November 17, 1997. Through November
17, 1997, a holder of a debenture could have elected to convert the debenture
into common stock of the Company at a conversion price equal to the lesser of
$3.60 per share or a percentage ranging from 85% to 100% of the average closing
bid price for the five trading days immediately prior to the conversion. In
connection with the transaction, the Company paid to a placement agent $0.84
million in fees and delivered warrants to purchase 225,590 shares of the
Company's common stock at an exercise price of $4.32 per share. The warrants
expired in 1998. During 1996, $9.78 million in principal plus accrued interest
converted into 5,394,992 shares of common stock at an average conversion price
of $1.86 per share. During 1997, the remaining $0.90 million in principal plus
accrued interest converted into 518,683 shares of common stock at an average
conversion price of $1.93 per share.
11. Proceeds from the Sale of Convertible Promissory Notes
On April 3, 2000, the Company received $2.00 million in cash pursuant to
two $1.00 million convertible promissory notes from two major shareholders of
the Company. The Company was required to make quarterly interest payments at
prime plus four percent. If the Company consummated an equity issuance during
the term of the loans, the lenders could convert the loans in whole or in part
into equity at the same price at which the equity was being issued by the
Company. If the notes were not converted, the principal was due in March 2002.
As discussed in Note 4, upon the issuance of redeemable convertible preferred
stock in September 2000, the lenders converted the entire $2.00 million
principal of the convertible promissory notes into 200,000 shares of preferred
stock. During the year ended December 31, 2000, $0.22 million of interest
payments were made on the notes. Each lender was issued warrants to purchase
112,994 shares of the Company's common stock at an exercise price of $1.77 per
share. The fair value for these warrants of $0.36 million, or a $1.60 per
share, was estimated at the issuance date using a Black-Scholes valuation model
and has been allocated to common stock from the proceeds. The warrants expire
in March 2005.
12. Defined Contribution Benefit Plan
Effective February 1, 1993, the Company adopted the AER Energy Resources
401(k) Plan, a defined contribution benefit plan which qualifies under Section
401(k) of the Internal Revenue Code. All employees of the Company as of
February 1, 1993 were eligible to participate in the plan. Employees hired
after February 1, 1993 who have completed six months of service with the
Company may participate in the plan. Participants may contribute up to 15% of
their base salary to the plan and any employer matching contribution is
discretionary. There was no employer matching contribution during the years
ended December 31, 2000, 1999 and 1998.
13. Summary Quarterly Financial Information (Unaudited)
The following table summarizes the Company's quarterly financial
information (in thousands, except share data).
Quarters in 2000 Ended
-----------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
License fees and research and development
revenues......................................... $ 108 $ 108 $ 108 $ 107
Total costs and expenses............................. 1,380 1,282 1,317 1,205
------- ------- ------- -------
Operating loss....................................... (1,273) (1,175) (1,209) (1,096)
------- ------- ------- -------
Net loss............................................. $(1,259) $(1,261) $(1,312) $(1,077)
Accretion of redeemable convertible preferred
stock............................................. -- -- (1) (33)
Redeemable convertible preferred stock
dividend requirements............................. -- -- (3) (68)
------- ------- ------- -------
Net loss attributable to common stock................ $(1,259) $(1,261) $(1,316) $(1,178)
Net loss per common share
basic and diluted................................ $ (0.05) $ (0.05) $ (0.05) $ (0.05)
F-14
33
Quarters in 1999 Ended
-----------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
License fees and research and development
revenues......................................... $ 483 $ 497 $ 485 $ 482
Total costs and expenses............................. 1,679 1,454 1,230 1,229
------- ------- ------- -------
Operating loss....................................... (1,196) (957) (745) (747)
------- ------- ------- -------
Net loss............................................. $(1,141) $ (914) $ (711) $ (721)
Accretion of redeemable convertible preferred
stock............................................ -- -- -- --
Redeemable convertible preferred stock
dividend requirements............................ -- -- -- --
------- ------- ------- -------
Net loss attributable to common stock................ $(1,141) $ (914) $ (711) $ (721)
Net loss per common share
basic and diluted................................ $ (0.05) $ (0.04) $ (0.03) $ (0.02)
14. Subsequent Event (Unaudited)
On February 27, 2001, the Company issued 102,250 shares of Series B
Convertible Preferred Stock ("Series B Preferred") and warrants to purchase up
to 776,699 shares of common stock for a total purchase price, net of
transaction fees, of $0.99 million to one major shareholders of the Company,
Elmwood Partners II (affiliated with Jon Lindseth). The Series B Preferred may
be converted, at the option of the holders, to common stock of the Company at
any time at a conversion price of $0.515 per share, subject to various possible
adjustments. The Company may redeem the Series B Preferred at a price equal to
$10.00 per share plus all accrued and unpaid dividends; and it must be redeemed
in February 2006, unless previously converted. Dividends accrue at the rate of
6.75% per annum, are cumulative and compound annually. The warrants are
exercisable for five years and entitle the holders to purchase common stock at
an exercise price of $0.5376 per share, subject to various possible
adjustments.
F-15