UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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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
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AER ENERGY RESOURCES, INC.
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(Exact name of registrant as specified in its charter)
Georgia 34-1621925
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4600 Highlands Parkway, Suite G, Smyrna, Georgia 30082
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(Address of principal executive offices) (Zip Code)
(770) 433-2127
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(Registrant's telephone number, including area code)
Not Applicable
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Former name, former address and former fiscal year,
if changed since last report)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
There were 25,537,121 shares of Common Stock outstanding as of August 13, 2002.
AER ENERGY RESOURCES, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
Page
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Balance Sheets - June 30, 2002 and December 31, 2001. 3
Condensed Statements of Operations - Three Months Ended June 30, 4
2002 and 2001, Six Months Ended June 30, 2002 and 2001, and Period From July
17, 1989 (Date of Inception) to June 30, 2002.
Condensed Statements of Cash Flows - Six Months Ended June 30, 5
2002 and 2001, and Period From July 17, 1989 (Date of Inception)
to June 30, 2002.
Notes to Condensed Financial Statements. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 8
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 13
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
AER Energy Resources, Inc.
(a Development Stage Company)
CONDENSED BALANCE SHEETS
June 30, December 31,
2002 2001
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 501,817 $ 57,487
Accounts receivable 104,583 101,445
Raw materials and supplies 40,757 78,354
Prepaid general insurance 17,986 93,839
Prepaid financing expenses -- 115,958
Prepaid expenses and other current assets 1,876 31,506
------------- -------------
Total current assets 667,019 478,589
Equipment and improvements 3,458,299 3,455,578
Less accumulated depreciation (3,290,697) (3,252,193)
------------- -------------
167,602 203,385
Other assets 10,591 10,589
------------- -------------
TOTAL ASSETS $ 845,212 $ 692,563
============= =============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK,
AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 44,212 $ 82,905
Accrued separation expenses 52,336 --
Other accrued expenses 79,898 147,889
Revolving credit note from related party -- 1,500,000
Convertible note payable 250,000 239,987
------------- -------------
Total current liabilities 426,446 1,970,781
Redeemable convertible preferred stock, no par value, in series:
Series A: authorized - 425,000 shares; 404,500 shares issued and
outstanding at June 30, 2002 and December 31, 2001; liquidation
preference and redemption price of $4,525,847 as of June 30, 2002
(including $480,847 undeclared dividends) 1,119,130 2,237,561
Series B: authorized - 250,000 shares; 102,250 shares issued and
outstanding at June 30, 2002; liquidation preference and
redemption price of $1,114,943 as of June 30, 2002 (including
$92,443 undeclared dividends) 339,129 726,200
Series C: authorized - 250,000 shares; 102,250 shares issued and
outstanding at June 30, 2002; liquidation preference and
redemption price of $1,097,276 as of June 30, 2002 (including
$74,776 undeclared dividends) -- 148,189
Series D: authorized - 400,000 shares; 300,000 shares issued and
outstanding at June 30, 2002; liquidation preference and
redemption price of $3,084,375 as of June 30, 2002 (including
$84,375 undeclared dividends) 10,103 --
Series E: authorized - 200,000 shares; 100,000 shares issued and
outstanding at June 30, 2002; liquidation preference and
redemption price of $1,012,938 as of June 30, 2002 (including
$12,938 undeclared dividends) 781,425 --
------------- -------------
Total liabilities and redeemable convertible preferred stock 2,676,233 5,082,731
Stockholders' deficit:
Preferred stock, no par value:
Authorized - 20,000,000 shares; no shares issued and outstanding -- --
Common stock, no par value:
Authorized - 150,000,000 shares; 25,537,121 shares issued and
outstanding at June 30, 2002 and 25,522,121 shares issued and
outstanding at December 31, 2001 74,552,647 69,841,974
Unearned stock compensation (6,109) (15,065)
Deficit accumulated during the development stage (76,377,559) (74,217,077)
------------- -------------
Total stockholders' deficit (1,831,021) (4,390,168)
------------- -------------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK, AND STOCKHOLDERS' DEFICIT $ 845,212 $ 692,563
============= =============
See notes to condensed financial statements.
3
AER Energy Resources, Inc.
(a Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Period from
July 17, 1989
(date of
Three Months Ended Six Months Ended inception) to
June 30, June 30, June 30,
2002 2001 2002 2001 2002
------------ ------------ ------------ ------------ ------------
License fees and research and
development revenues $ 97,741 $ 107,812 $ 167,530 $ 215,625 $ 3,298,159
Product sales -- -- -- -- 338,174
Cost of product sales -- -- -- -- (6,758,985)
------------ ------------ ------------ ------------ ------------
Gross margin on product sales -- -- -- -- (6,420,811)
------------ ------------ ------------ ------------ ------------
97,741 107,812 167,530 215,625 (3,122,652)
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Research and development
- related party -- -- -- -- 1,145,913
- other 546,019 745,742 1,529,256 1,523,289 46,162,716
Marketing, general and
administrative
- related party -- -- -- -- 1,388,695
- other 352,496 386,852 783,340 800,838 27,631,010
------------ ------------ ------------ ------------ ------------
Total costs and expenses 898,515 1,132,594 2,312,596 2,324,127 76,328,334
------------ ------------ ------------ ------------ ------------
Operating loss (800,774) (1,024,782) (2,145,066) (2,108,502) (79,450,986)
Interest income 2,498 5,370 3,701 8,629 4,126,551
Interest expense -- (45,562) (19,117) (45,562) (1,053,124)
------------ ------------ ------------ ------------ ------------
Net loss (798,276) (1,064,974) (2,160,482) (2,145,435) (76,377,559)
------------ ------------ ------------ ------------ ------------
Accretion of redeemable
preferred stock (618,750) (67,931) (923,750) (105,352) (1,432,496)
Redeemable preferred
stock dividends (166,334) (91,267) (302,855) (165,689) (745,379)
------------ ------------ ------------ ------------ ------------
Net loss attributable to
common stock $ (1,583,360) $ (1,224,172) $ (3,387,087) $ (2,416,476) $(78,555,434)
============ ============ ============ ============ ============
Net loss per share (basic
and diluted) $ (0.06) $ (0.05) (0.13) $ (0.10) $ (4.39)
============ ============ ============ ============ ============
Weighted average shares outstanding
(basic and diluted) 25,530,033 25,312,229 25,526,099 25,082,522 17,892,076
See notes to condensed financial statements.
4
AER Energy Resources, Inc.
(a Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
July 17, 1989
(date of
Six Months Ended inception) to
June 30, June 30,
2002 2001 2002
----------- ----------- ------------
OPERATING ACTIVITIES:
Net loss $(2,160,482) $(2,145,435) $(76,377,559)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 38,504 86,000 4,338,134
Amortization of unearned stock compensation 8,956 17,473 805,757
Amortization of discount on promissory notes -- -- 200,563
Non-cash interest on convertible debentures -- -- 336,558
Grant of compensatory stock options -- -- 14,063
Forgiveness of promissory notes -- -- 69,875
Loss on disposal of equipment -- -- 79,440
Accretion of discount on short-term investments
and marketable securities -- -- (263,259)
Net changes in operating assets and liabilities 220,391 (284,619) 194,958
----------- ----------- ------------
Net cash used in operating activities (1,892,631) (2,326,581) (70,601,470)
INVESTING ACTIVITIES:
Purchases of equipment and improvements (2,722) (16,354) (4,211,504)
Purchases of short-term investments and marketable securities -- -- (14,736,444)
Purchase of license agreement -- -- (250,000)
Proceeds from sales/maturities of short-term investments and
marketable securities -- -- 15,000,000
Changes in other assets -- -- (140,501)
----------- ----------- ------------
Net cash used in investing activities (2,722) (16,354) (4,338,449)
FINANCING ACTIVITIES:
Proceeds from revolving credit note to related parties -- -- 6,930,000
Issuance of convertible debentures, net of issuance costs -- -- 9,834,500
Proceeds from convertible notes payable to related parties -- -- 2,000,000
Proceeds from convertible notes payable -- 261,113 261,113
Payment on revolving credit note to related parties (1,508,827) -- (1,508,827)
Payments on notes payable to related parties -- -- (1,150,000)
Payments received on promissory notes -- -- 59,425
Issuance of common stock upon exercise of stock options -- -- 143,558
Issuance of common stock, net of issuance costs -- 254,211 51,133,766
Issuance of redeemable convertible preferred stock, net of
issuance costs 3,848,510 1,959,792 7,738,201
----------- ----------- ------------
Net cash provided by financing activities 2,339,683 2,475,116 75,441,736
----------- ----------- ------------
Increase in cash and cash equivalents 444,330 132,181 501,817
Cash and cash equivalents at beginning of period 57,487 781,314 --
----------- ----------- ------------
Cash and cash equivalents at end of period $ 501,817 $ 913,495 $ 501,817
=========== =========== ============
See notes to condensed financial statements.
5
AER ENERGY RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of AER Energy
Resources, Inc. (the "Company") have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. These financial statements should be read in
conjunction with the Company's audited financial statements included in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 2001. Operating results for the three
and six month periods ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2002 or any interim
period.
2. SIGNIFICANT ACCOUNTING POLICIES
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
The Company's inventories are valued at the lower of cost or market,
using the first in, first out (FIFO) method. The inventories balances at June
30, 2002 and December 31, 2001 of $40,757 and $78,354, respectively, consist
entirely of raw materials.
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. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," the Company records impairment
losses on long-lived assets used in operations when events and circumstances
indicate that the
6
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.
The amount of impairment loss recognized is measured as the difference between
the carrying amount and fair value of the asset. Based on the Company's estimate
of future undiscounted cash flows, the Company expects to recover the carrying
amounts of its remaining fixed assets. The Company's estimates of future
undiscounted cash flows have taken into consideration its current research and
development operations and contemplate the Company entering into license
agreements and research and development agreements, similar, or somewhat
similar, to the 1998 and 2001 agreements with Duracell Inc. and Rayovac
Corporation, throughout the remaining useful lives of the Company's fixed
assets. If the Company is unable to enter into such agreements, a write down of
long-lived assets to fair value may be required. No write-offs of obsolete
equipment were recorded in either of the six-month periods ended June 30, 2002
or 2001.
3. PREFERRED STOCK AND WARRANT TRANSACTIONS
In accordance with the terms of the Series A Convertible Preferred
Stock (the "Series A Preferred Stock") issued September 27, 2000, the initial
conversion price of $0.851 is subject to adjustment upon the issuance of common
stock (or equivalents) at less than the current conversion price (as defined by
the agreement). As a result of the issuance of Series B Convertible Preferred
Stock (the "Series B Preferred Stock") on February 27, 2001, the issuance of
stock to Rayovac in April 2001, the issuance of Series C Convertible Preferred
Stock (the "Series C Preferred Stock") on June 1, 2001, the adjustment upon the
first anniversary of the original issue date based on the underlying common
stock price, the issuance of Series D Convertible Preferred Stock (the "Series D
Preferred Stock") on January 31, 2002, and the issuance of Series E Convertible
Preferred Stock (the "Series E Preferred Stock") on April 22, 2002 discussed
below, the conversion price was adjusted from $0.851 to $0.415. In accordance
with EITF 00-27, the number of shares that would be received upon conversion
based on the adjusted conversion price is compared to the number that would have
been received prior to the adjustment. The excess number of shares multiplied by
the fair market value on the commitment date (September 27, 2000) equals the
intrinsic value that results from the adjustment, or the beneficial conversion
option. This value is allocated from the original proceeds to common stock
resulting in a discount on the preferred stock. The discount is then accreted
over the remaining period until the mandatory redemption date (September 27,
2005). As a result of the adjustments above, a total discount on the Series A
Preferred Stock of approximately $3.39 million was recorded on the various dates
of adjustment. The discount will be accreted from the dates of adjustment to the
redemption date of the preferred stock and will result in a reduction of
earnings available to the common shareholders.
Similarly, a total discount on the Series B, C, and D Preferred Stock
of approximately $0.62 million, $0.68 million, and $2.25 million, respectively,
was recorded on the various dates of adjustment.
On April 22, 2002 the Company issued an aggregate of 100,000 shares of
Series E Preferred Stock and warrants to purchase in the aggregate up to
1,851,852 shares of common stock for a total purchase price, net of transaction
fees, of $1.00 million. The Series E Preferred Stock may be converted, at the
option of the holders, to common stock of the Company at any
7
time at a conversion price of $0.207 per share, subject to various possible
adjustments. The Company may redeem the Series E Preferred Stock at a price
equal to $10.00 per share plus at least three years worth of dividends (less any
already paid); and it must be redeemed by April 2007, 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 thereof to purchase common stock at an exercise price of $0.216 per
share, subject to various possible adjustments. The fair value for this warrant
of $0.24 million, or $0.13 per share, was estimated at the date of grant using a
Black-Scholes valuation model. The warrant value has been allocated to common
stock and is being accreted to the Series E Preferred Stock on a straight-line
basis through the mandatory redemption date so that at such redemption date, the
carrying amount of the Series E Preferred Stock will equal the mandatory
redemption value.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board "FASB" issued
SFAS No. 145. This Statement rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. SFAS No. 145 is effective
for financial statements issued on or after May 15, 2002. The Company adopted
SFAS No. 145 during the quarter ended June 30, 2002 and there was no material
effect to its financial statements as a result of this adoption.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal. SFAS No. 146 eliminates the definition and
requirements for recognition of exit costs in EITF Issue No. 94-3. SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. The Company does not believe the
adoption of SFAS 146 will have a material effect on its financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company was incorporated in 1989 and has been engaged in the
development and commercialization of high energy density zinc-air batteries.
Until 1998, the Company's operations were focused primarily on developing and
improving its technology, setting up the manufacturing process, testing and
selling rechargeable zinc-air batteries, recruiting personnel, and similar
8
activities. In 1998, the Company changed its strategy to research and product
development of zinc-air technology with its focus in primary (disposable)
batteries, rather than rechargeable batteries, and plans to commercialize the
technology through alliances with battery and original equipment manufacturers
("OEMs"). This change 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 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.
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 primary
(non-rechargeable) zinc-air technology. Under the terms of the TLAS Agreement,
Duracell agreed to license the rights to the Company's then existing patents. In
addition, Duracell agreed to fund certain joint product development projects
with the Company during 1999. Duracell owns technology developed under the
projects it funds, and the Company has rights to utilize the technology.
Duracell also has options to obtain certain other license rights. Revenue from
this agreement ceased in 2001.
In April 2001, the Company signed a License and Development Agreement
with Rayovac Corporation. Under the agreement, the Company is licensing its
zinc-air battery technology to Rayovac and performing design and development
work for Rayovac. Rayovac will own the technology developed under the agreement
and the Company will have rights to utilize that technology. In December 2001,
Rayovac requested and the Company granted to Rayovac additional license rights
for the Company's zinc-air battery technology. With the additional rights,
Rayovac will be able to pursue a broader range of zinc-air battery products and
markets.
In September 2001, Rayovac received a new zinc-air development contract
from the United States Army Communications and Electronics Command ("CECOM") in
Fort Monmouth, New Jersey, and under the terms of the Rayovac License and
Development Agreement with the Company, Rayovac has subcontracted certain work
from the development program to the Company.
In addition, AER Energy has continued to work with a major Japanese
consumer electronics corporation to support the development of prototype
zinc-air batteries that include Diffusion Air Managers. Positive test results
from the evaluation of these batteries were received in October 2001. New
prototypes were developed and the Japanese corporation reported positive test
results on these batteries in early 2002. In all cases, Rayovac, Duracell, and
the Japanese corporation continue to work with AER Energy to identify
appropriate initial product applications for zinc-air batteries.
A significant effort at AER has also produced a cathode design that
exhibits a power capability superior to that of conventional cathodes used in
zinc-air hearing aid batteries. The cathode is designed to deliver superior
operating voltages in both constant power and pulse power discharges and is
currently being protected as a trade secret. The AER Energy cathode
9
can increase the operating time of zinc-air hearing aid batteries when they are
used in new digital hearing aids that require short duration, high power pulses.
AER Energy is just starting to explore opportunities to license its cathode
design to hearing aid battery manufacturers.
In 2001, AER Energy made significant efforts towards decreasing
operating costs. In addition, in early 2002, AER Energy reduced its workforce
from 35 people to 20 people, which included the departure of three executive
officers, David Dorheim, Dennis Bentz, and Frank Harris. David Dorheim will
remain available to assist AER Energy as a consultant and intends to remain on
the Board of Directors at least through 2002. Dr. Lawrence Tinker, formerly Vice
President of Advanced Technology, became President on May 10, 2002, and Jon
Lindseth, Chairman, assumed the role of Chief Executive Officer on that same
date. AER Energy further cut its workforce from 20 people to 10 people in July
2002. This reduction included the departure of one executive officer, J.T.
Moore. We believe the resources we have retained will allow us to continue our
development efforts with current and potential licensees, further reductions are
likely to be implemented.
Throughout 2002, the Company will continue to seek additional license
agreements for its patented zinc-air technology with other companies, and focus
on the development of prototype primary zinc-air batteries that utilize
Diffusion Air Manager technology.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 and 2001
The Company generated $0.10 million of license fees and research and
development revenues under the CECOM Agreement with Rayovac during the three
months ended June 30, 2002.
Research and development expenses decreased 27% to $0.55 million for
the three months ended June 30, 2002 from $0.75 million for the same period in
2001. This decrease resulted primarily from decreased personnel related expenses
due to layoffs, decreased travel, supplies and direct materials, and
depreciation expenses.
Marketing, general and administrative expenses decreased 9% to $0.35
million for the three months ended June 30, 2002 from $0.39 million for the same
period in 2001. This decrease resulted primarily from decreased personnel
related expense due to layoffs and decreased legal expenses offset by increased
investor relations expenses.
Six Months Ended June 30, 2002 and 2001
The Company generated $0.17 million of license fees and research and
development revenues under the CECOM Agreement with Rayovac during the six
months ended June 30, 2002.
Research and development expenses increased 0.39% to $1.53 million for
the six months
10
ended June 30, 2002 from $1.52 million for the same period in 2001. This
increase resulted primarily from increased tooling and supplies and direct
materials, offset by decreased travel and depreciation expenses.
Marketing, general and administrative expenses decreased 2% to $0.78
million for the six months ended June 30, 2002 from $0.80 million for the same
period in 2001. This decrease resulted primarily from decreased personnel travel
and legal expenses offset by increased insurance and accounting expenses.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
As of June 30, 2002, the Company had cash and cash equivalents of $0.50
million. The Company anticipates using these funds as needed to fund licensing
activities, development of alliances with battery manufacturers and OEMs,
working capital and general corporate purposes as determined by management.
In April 2002, the Company received $1 million in cash, pursuant to the
issuance of 100,000 shares of Series E Preferred Stock to AER's major
shareholder, Elmwood Partners II (affiliated with Chairman and Chief Executive
Officer Jon Lindseth).
Net cash and cash equivalents increased $0.44 million for the six
months ended June 30, 2002 versus an increase of $0.13 million for the same
period in 2001, due primarily to the issuance of Series D Preferred Stock and
the Series E Preferred Stock offset by operating losses.
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 third quarter of 2002. The Company will
need to raise additional funds through additional license agreements, research
and development contracts, debt or equity. There can be no assurance that
additional license agreements or research and development contracts or equity or
debt financing will be available when needed or on terms acceptable to the
Company.
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 those described under "Forward Looking
Statements" below 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.
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
11
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has invested a portion of its cash and cash equivalents in
highly liquid financial instruments. 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 which qualify for treatment under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities".
AER Energy is a trademark of AER Energy Resources, Inc.
12
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 22, 2002 the Company issued an aggregate of 100,000 shares of
Series E Preferred Stock and warrants to purchase up to 1,851,852 shares of
common stock for a total purchase price, net of transaction fees, of $1.00
million. The Series E Preferred Stock may be converted, at the option of the
holders, to common stock of the Company at any time at a conversion price of
$0.207 per share, subject to various possible adjustments. The Company may
redeem the Series E Preferred Stock at a price equal to $10.00 per share plus at
least three years worth of dividends (less any already paid); and it must be
redeemed by April 2007, 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 $0.216 per share, subject to various possible adjustments.
The issuance of the Series E Preferred Stock and warrants was exempt
from registration under the Securities Act of 1933, as amended, pursuant to
Section 4(2), including Rule 506 of Regulation D promulgated thereunder. The
purchaser of the Series E Preferred Stock and warrants was an accredited
investor under Regulation D, and the Company did not engage in any advertising
or general solicitation in connection with the sale of these securities.
The Series E Preferred Stock ranks ahead of the Company's common stock
and on parity with the Company's Series A through D Preferred Stock as to
payment of dividends and amounts payable upon liquidation, dissolution or
winding-up, and therefore could adversely affect the holders of common stock
with respect to such payments.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 2002 Annual Meeting of Shareholders was held on May 14,
2002. The only matter voted upon at this meeting was the election of six
nominees to the Company's Board of Directors. The following table shows the
number of votes cast for each nominee and the number of votes withheld as to
each nominee. There were no abstentions or broker non-votes as to any nominee,
and there were no nominees other than those named in the Company's proxy
statement (who are set forth below).
Name of Nominee Affirmative Votes Votes Withheld
--------------- ----------------- --------------
David G. Brown 24,210,531 161,160
James W. Dixon 24,243,191 128,500
David W. Dorheim 24,112,465 259,226
William L. Jackson 24,113,791 257,900
Jon A. Lindseth 24,104,265 267,426
John L. Wilkes 24,113,791 257,900
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ITEM 5. OTHER INFORMATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the
Company's Chief Executive Officers and Chief Financial Officer submitted to the
Securities and Exchange Commission as additional correspondence accompanying
this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
3.1 Articles of Incorporation of the Company, as amended. (1)
4.1 Warrant to Purchase Common Stock of AER Energy Resources, Inc.
dated April 22, 2002 between Elmwood Partners II and AER
Energy Resources, Inc. (2)
10.1 Securities Purchase Agreement dated as of April 22, 2002 by
and between Elmwood Partners II and AER Energy Resources, Inc.
(2)
10.2 Consulting and Severance Agreement dated as of March 25, 2002
by and between David W. Dorheim and AER Energy Resources, Inc.
(1)
(1) Filed on May 15, 2002 as an exhibit to the Registrant's
Quarterly Report on Form 10-Q (File No. 0-21926) for the
quarter ended March 31, 2002 and incorporated herein by
reference.
(2) Filed on May 8, 2002 as an exhibit to Amendment No. 9 to
Schedule 13D, filed by Jon A. Lindseth et al., and
incorporated herein by reference.
(B) REPORTS ON FORM 8-K:
The registrant filed a report on Form 8-K on May 8, 2002 discussing a
change in auditors.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AER ENERGY RESOURCES, INC.
Date: August 13, 2002 By: /s/ Lawrence Tinker
------------------------------------
Lawrence Tinker, President
Date: August 13, 2002 By: /s/ Taylor Kennedy
------------------------------------
Taylor Kennedy
Chief Financial Officer, Secretary
and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
15