<PAGE> 1
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 September 30, 2000
--------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission File Number 0-21926
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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 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
--------------------------------------------------------------------------------
(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 24,850,263 shares of Common Stock outstanding as of November 9, 2000.
<PAGE> 2
AER ENERGY RESOURCES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Balance Sheets - September 30, 2000 and December 31, 1999. 3
Condensed Statements of Operations - Three Months Ended September 30, 4
2000 and 1999, Nine Months Ended September 30, 2000 and 1999, and
Period From July 17, 1989 (Date of Inception) to September 30, 2000.
Condensed Statements of Cash Flows - Nine Months Ended September 30, 5
2000 and 1999 and Period From July 17, 1989 (Date of Inception) to
September 30, 2000.
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 11
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
AER ENERGY RESOURCES, INC.
(a Development Stage Company)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,920,921 $ 1,761,268
Trade accounts receivable -- 31,070
Inventories 80,337 82,198
Prepaid expenses and other current assets 81,176 83,355
------------ ------------
Total current assets 2,082,434 1,957,891
Equipment and improvements 3,644,056 3,624,558
Less accumulated depreciation (3,250,743) (3,012,647)
------------ ------------
393,313 611,911
Other assets 11,191 11,191
------------ ------------
TOTAL ASSETS $ 2,486,938 $ 2,580,993
============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK, AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 103,840 $ 70,583
Deferred revenue 395,313 431,250
Other accrued expenses 167,504 191,873
------------ ------------
Total current liabilities 666,657 693,706
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 September 30, 2000; liquidation preference and
redemption price of $4,048,034 as of September 30, 2000 (including
$3,034 undeclared dividends in 2000) 3,020,635 --
------------ ------------
Total liabilities and redeemable convertible preferred stock 3,687,292 981,206
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; 24,850,263 shares issued and
outstanding at September 30, 2000 and December 31, 1999 67,586,138 66,580,384
Unearned stock compensation (40,598) (66,808)
Deficit accumulated during the development stage (68,745,894) (64,913,789)
------------ ------------
Total stockholders' (deficit) equity (1,200,354) 1,599,787
------------ ------------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK, AND STOCKHOLDERS' (DEFICIT) EQUITY $ 2,486,938 $ 2,580,993
============ ============
</TABLE>
See notes to condensed financial statements.
3
<PAGE> 4
AER ENERGY RESOURCES, INC.
(a Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 17,1989
(DATE OF
THREE MONTHS ENDED NINE MONTHS ENDED INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999 2000
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
License fees and research and development revenues $ 107,813 $ 484,783 $ 323,438 $ 1,464,158 $ 2,620,408
Product sales -- -- -- -- 338,174
Cost of product sales -- -- -- -- (6,758,985)
----------- ----------- ----------- ----------- ------------
Gross margin on product sales -- -- -- -- (6,420,811)
----------- ----------- ----------- ----------- ------------
107,813 484,783 323,438 1,464,158 (3,800,403)
----------- ----------- ----------- ----------- ------------
Costs and expenses:
Research and development
- related party -- -- -- -- 1,145,913
- other 923,916 871,168 2,704,022 2,860,423 40,757,763
Marketing, general and administrative
- related party -- -- -- 50,000 1,388,695
- other 393,126 359,050 1,275,889 1,452,668 24,923,179
----------- ----------- ----------- ----------- ------------
Total costs and expenses 1,317,042 1,230,218 3,979,911 4,363,091 68,215,550
----------- ----------- ----------- ----------- ------------
Operating loss (1,209,229) (745,435) (3,656,473) (2,898,933) (72,015,953)
Interest income 7,659 34,741 45,534 133,527 4,092,228
Interest expense - related parties (110,441) -- (221,166) -- (485,611)
----------- ----------- ----------- ----------- ------------
Net loss (1,312,011) (710,694) (3,832,105) (2,765,406) (68,409,336)
Accretion of redeemable convertible preferred stock (1,441) -- (1,441) -- (1,441)
Redeemable convertible preferred stock dividend requirements (3,034) -- (3,034) -- (3,034)
----------- ----------- ----------- ----------- ------------
Net loss attributable to common stock $(1,316,486) $ (710,694) $(3,836,580) $(2,765,406) $(68,413,811)
=========== =========== =========== =========== ============
Net loss per common share (basic and diluted) $ (0.05) $ (0.03) $ (0.15) $ (0.11) $ (4.09)
=========== =========== =========== =========== ============
Weighted average shares outstanding (basic and diluted) 24,850,263 24,850,263 24,850,263 24,853,695 16,736,896
</TABLE>
See notes to condensed financial statements.
4
<PAGE> 5
AER ENERGY RESOURCES, INC.
(a Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 17,1989
(DATE OF
NINE MONTHS ENDED INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,832,105) $ (2,765,406) $(68,409,336)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 238,096 335,582 4,082,262
Amortization of unearned stock compensation 26,210 27,539 763,318
Amortization of warrants' value 88,889 -- 88,889
Grant of compensatory stock options -- -- 14,063
Forgiveness of promissory notes -- -- 69,875
Loss on disposal of equipment -- -- 68,289
Accretion of discount on short-term investments
and marketable securities -- (75,852) (263,259)
Net changes in operating assets and liabilities (279,439) 733,979 669,418
------------ ------------ ------------
Net cash used in operating activities (3,758,349) (1,744,158) (62,916,481)
INVESTING ACTIVITIES:
Purchases of equipment and improvements (19,498) (73,831) (4,170,191)
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) provided by investing activities (19,498) 2,021 (4,297,136)
FINANCING ACTIVITIES:
Proceeds from convertible notes payable to related parties 2,000,000 -- 2,000,000
Proceeds from revolving credit note to related parties -- -- 5,430,000
Issuance of convertible debentures, net of issuance costs -- -- 9,834,500
Issuance of common stock, net of issuance costs -- -- 50,879,555
Issuance of redeemable convertible preferred stock, net of
issuance costs 1,937,500 -- 1,937,500
Net changes in other financing activities -- -- (947,017)
------------ ------------ ------------
Net cash provided by financing activities 3,937,500 -- 69,134,538
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 159,653 (1,742,137) 1,920,921
Cash and cash equivalents at beginning of period 1,761,268 4,249,868 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,920,921 $ 2,507,731 $ 1,920,921
============ ============ ============
Supplemental disclosure of non-cash financing activities:
Conversion of the $2.0 million promissory notes payable to
related parties, net of unamortized discount, to redeemable
convertible preferred stock $ 1,727,308 $ -- $ 1,727,308
Upon the 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
------------ ------------ ------------
$ 1,727,308 $ 12,756 $ 1,740,064
============ ============ ============
</TABLE>
See notes to condensed financial statements.
5
<PAGE> 6
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 generally accepted accounting principles 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, 1999. Operating results for the three and nine month periods
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2000 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 inventory balances at September
30, 2000 and December 31, 1999 of $80,337 and $82,198, respectively, consist
entirely of raw materials.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles 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 research and development
operations and contemplate the Company
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<PAGE> 7
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. 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. Write-offs of
obsolete equipment recorded in the nine-month periods ended September 30, 2000
and 1999 were $0 and $2,963, respectively.
3. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS TRANSACTION
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 $3.94 million to Elmwood Partners II and FW AER II, L.P., two major
shareholders of the Company. The Company received cash of $1.94 million, net of
issuance costs, with the balance of the purchase price paid via the conversion
of the $2.0 million of outstanding principal on the convertible promissory notes
payable to the two major shareholders. The Series A Preferred may be converted
to common stock of the Company at a conversion price of $0.851 per share,
subject to various possible adjustments, at any time at the option of the
holders. The Company may redeem the Series A Preferred at a price equal to
$10.00 per share plus all accrued and unpaid dividends at any time and it must
be redeemed in September 2005. Dividends accrue at the rate of 6.75% per annum,
are cumulative and compound annually.
Each warrant is exercisable for five years and entitles the holders to
purchase one share of 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 date of grant using a
Black-Scholes valuation model. The warrant value has been allocated to common
stock 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.
4. 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 is not expected to have a 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 presently
7
<PAGE> 8
has no instruments that qualify for treatment under FASB Statement No. 133 and
therefore believes there will be no impact on its results of operations and
financial position upon adoption of this Statement.
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
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 agrees to license the rights to the Company's then existing patents. In
addition, Duracell funded certain joint product development projects with the
Company during 1999. Duracell owns the 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.
The Company continues to seek additional license agreements for its
patented zinc-air technology with other companies, and to focus on the
development of prototype primary zinc-air batteries that utilize Diffusion Air
Manager technology.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 and 1999
The Company earned $0.11 million of license fees and $0.48 million of
license fees and research and development revenues primarily related to the TLAS
Agreement with Duracell during the three months ended September 30, 2000 and
1999, respectively.
Research and development expenses increased 6% to $0.92 million for the
three months ended September 30, 2000 from $0.87 million for the same period in
1999. This increase resulted primarily from an increase in patent filing fees
and associated patent attorney legal fees.
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Marketing, general and administrative expenses increased 8% to $0.39
million for the three months ended September 30, 2000 from $0.36 million for the
same period in 1999. This increase resulted primarily from higher general
insurance premiums in 2000 and a non-recurring decrease of expenses in 1999 due
to the reduction of a warranty reserve.
Nine Months Ended September 30, 2000 and 1999
The Company earned $0.32 million of license fees and $1.46 million of
license fees and research and development revenues primarily related to the TLAS
Agreement with Duracell during the nine months ended September 30, 2000 and
1999, respectively.
Research and development expenses decreased 6% to $2.70 million for the
nine months ended September 30, 2000 from $2.86 million for the same period in
1999. This decrease resulted primarily from lower personnel-related expenses due
to fewer employees, lower depreciation expense due to a decrease in capital
expenditures in recent years, and lower production materials and tooling
expenses. Such decreases were offset by increases in patent attorney legal fees
and travel expenses.
Marketing, general and administrative expenses decreased 15% to $1.28
million for the nine months ended September 30, 2000 from $1.50 million for the
same period in 1999. This decrease resulted primarily from lower professional
fees, investor relations expenses, personnel-related expenses, rent, utilities,
property tax expenses, public relations and market research activities, and the
completion in 1999 of minimum royalty payments to the licensor of certain
technology to the Company.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
As of September 30, 2000, the Company had cash and cash equivalents of
$1.92 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.
Net cash used in operating activities increased to $3.76 million for
the nine months ended September 30, 2000 from $1.74 million for the same period
in 1999 due primarily to the increase in the net loss and the net decrease in
operating assets and liabilities for the nine months ended September 30, 2000.
For the nine months ended September 30, 2000, net cash used in
investing activities of $0.02 million related to purchases of capital equipment
and improvements. Net cash provided by investing activities of $2,000 for the
same period in 1999 related to investment activities in high-grade, short-term
commercial paper.
In late September 2000, the Company received $1.94 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 $4.0 million was paid via
the conversion of the $2.0 million of outstanding principal on the convertible
promissory notes payable issued in April 2000 to the two major shareholders. The
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Company incurred total interest expense on the convertible promissory notes
payable, prior to the conversion to preferred stock, of $0.22 million for the
nine months ended September 30, 2000. The preferred stock may be converted to
common stock of the Company at a conversion price of $0.851 per share, subject
to various possible adjustments, at any time at the option of the holders. The
Company may redeem the preferred stock at a price equal to $10.00 per share plus
all accrued and unpaid dividends at any time 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 shareholder was
issued warrants to purchase 470,035 shares of the Company's common stock at an
exercise price of $.886 per share, subject to various possible adjustments. The
warrants expire in September 2005.
Net cash provided by financing activities of $3.94 million for the nine
months ended September 30, 2000 arises from the issuance in late September 2000
of 404,500 shares of redeemable convertible preferred stock and 940,070 warrants
to two major shareholders. No cash was provided by financing activities during
the nine months ended September 30, 1999.
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 first quarter of 2001. 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 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.
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
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<PAGE> 11
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
presently has no instruments that qualify for treatment under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities".
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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 $3.94 million to Elmwood Partners II and FW AER II, L.P., two major
shareholders of the Company. The Company received cash of $1.94 million, net of
issuance costs, with the remainder paid via the conversion of the $2.0 million
of outstanding principal on the convertible promissory notes payable to the two
major shareholders. The Series A Preferred may be converted to common stock of
the Company at a conversion price of $0.851 per share, subject to various
possible adjustments, at any time at the option of the holders. The Company may
redeem the Series A Preferred at a price equal to $10.00 per share plus all
accrued and unpaid dividends at any time 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 warrant is exercisable for
five years and entitles the holders to purchase one share of common stock at an
exercise price of $0.886 per share, subject to various possible adjustments. The
issuance of the Series A Preferred and warrants were exempt from registration
under the Securities Exchange Act of 1933, as amended, pursuant to Section 4(2),
including Rule 506 of Regulation D promulgated thereunder. Both purchasers of
the Series A Preferred and warrants were accredited investors under Regulation
D.
The Series A Preferred ranks ahead of the Company's common stock as to
payment of dividends and amounts upon liquidation, dissolution or winding-up,
and therefore could adversely affect the holders of common stock with respect to
such payments.
AER Energy(R) is a trademark of AER Energy Resources, Inc.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<S> <C>
3.3 Articles of Amendment to Articles of Incorporation of AER Energy
Resources, Inc.
4.7 See Article II and Exhibit A located within Exhibit 3.3.
4.8 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.
4.9 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.
10.27 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.
27 Financial Data Schedule (for SEC use only).
</TABLE>
(B) REPORTS ON FORM 8-K:
The registrant did not file any reports on Form 8-K during the three
months ended September 30, 2000.
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: November 9, 2000 By: /s/ David W. Dorheim
------------------------------------
David W. Dorheim, President and
Chief Executive Officer
Date: November 9, 2000 By: /s/ J.T. Moore
-----------------------------------
J.T. Moore, Vice President,
Chief Financial Officer, Secretary
and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
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