UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
|
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For the
fiscal year ended December 31, 2008
o
|
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 001-14015
Applied
Energetics, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
|
|
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
|
(IRS
Employer Identification
Number)
|
3590
East Columbia Street
|
|
|
Tucson,
Arizona
|
|
85714
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
Registrant’s
telephone number, including area
code (520) 628-7415
Securities
registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class
|
|
Name of Each Exchange on Which
Registered
|
Common
Stock, $.001 par value
|
|
The NASDAQ Stock Market LLC (Nasdaq Global Market)
|
Securities
registered pursuant to Section 12(g) of the Exchange Act:
Series
A Preferred Stock, $.001 par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 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. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
Accelerated Filer ¨
|
Accelerated
Filer x
|
Non-Accelerated
Filer ¨
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act. Yes o No x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, computed by reference to the last reported
sales price at which the stock was sold on June 30, 2008 (the last day of the
registrant’s most recently completed second quarter) was approximately
$84,485,000.
The
number of outstanding shares of the registrant’s Common Stock, $.001 par value,
as of March 9, 2009 was 86,578,680.
APPLIED
ENERGETICS, INC.
ANNUAL
REPORT ON FORM 10-K
FOR
THE YEAR ENDED DECEMBER 31, 2008
INDEX
|
|
|
Page No.
|
PART
I.
|
|
|
|
|
|
|
Item
1.
|
Business
|
1
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
3
|
|
|
|
|
|
Item
1B.
|
Unresolved
Staff Comments
|
11
|
|
|
|
|
|
Item
2.
|
Properties
|
11
|
|
|
|
|
|
Item
3.
|
Legal
Proceedings
|
11
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
11
|
|
|
|
|
PART
II.
|
|
|
|
|
|
|
|
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
|
12
|
|
|
|
|
|
Item
6.
|
Selected
Financial Data
|
13
|
|
|
|
|
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
14
|
|
|
|
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
21
|
|
|
|
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
21
|
|
|
|
|
|
Item
9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
|
21
|
|
|
|
|
|
Item
9A.
|
Controls
and Procedures
|
21
|
|
|
|
|
|
Item
9B.
|
Other
Information
|
22
|
|
|
|
|
PART
III.
|
|
|
|
|
|
|
|
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
23
|
|
|
|
|
|
Item
11.
|
Executive
Compensation
|
26
|
|
|
|
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
37
|
|
|
|
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director Independence
|
39
|
|
|
|
|
|
Item
14.
|
Principal
Accountant Fees and Services
|
39
|
|
|
|
|
PART
IV:
|
|
|
|
|
|
|
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
41
|
|
|
|
|
|
Schedule
II
|
Valuation
and Qualifying Accounts
|
41
|
|
|
|
|
|
Signatures:
|
|
45
|
PART
I
ITEM
1. BUSINESS:
CAUTIONARY
NOTE CONCERNING FORWARD-LOOKING STATEMENTS:
Certain
statements in this Form 10-K constitute forward-looking statements within the
meaning of the Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements include
all statements that do not relate solely to the historical or current facts, and
can be identified by the use of forward looking words such as "may", "believe",
"will", "expect", "expected", "project", "anticipate", "anticipated”,
“estimates", "plans", "strategy", "target", "prospects" or
"continue". These forward looking statements are based on the current
plans and expectations of our management and are subject to a number of
uncertainties and risks that could significantly affect our current plans and
expectations, as well as future results of operations and financial condition
and may cause our actual results, performances or achievements to be materially
different from any future results, performances or achievements expressed or
implied by such forward-looking statements. This Form 10-K contains important
information as to risk factors under Item 1A. In making these
forward-looking statements, we claim the protection of the safe-harbor for
forward-looking statements contained in the Private Securities Reform Act of
1995. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, there can be no assurance that such
expectations will prove to have been correct. We do not assume any
obligation to update these forward-looking statements to reflect actual results,
changes in assumptions, or changes in other factors affecting such
forward-looking statements.
AVAILABLE
INFORMATION:
Applied
Energetics, Inc. makes available free of charge on its website at www.appliedenergetics.com
its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practical
after electronically filing or furnishing such material to the Securities and
Exchange Commission (SEC).
This
report may be read or copied at the SEC’s Public Reference Room at 100 F Street,
NE, Room 1580, Washington, DC 20549 or at www.sec.gov. Information on the
operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.
GENERAL:
Applied
Energetics, Inc. (“company”, “Applied Energetics”, “we”, “our” or “us”) is a
developer and manufacturer of guided energy systems for military, commercial and
environmental applications, utilizing proprietary knowledge of high performance
lasers, high-voltage electronics, advanced optics and atmospheric and plasma
energy interactions. We apply these technologies to deliver
innovative solutions to urgent military missions, including neutralizing
improvised explosive devices (“IEDs”), directing or delivering varying amounts
of energy via “Laser Induced Plasma Channel” (“LIPCTM”)
technologies, and other high priority missions of U.S. and allied military
forces. Additionally, we develop and manufacture specialized
high-voltage and laser products for government and commercial customers for a
range of applications. As a technology driven, research oriented business, we
work with all types of customers to advance operating performance and to improve
the understanding of and market opportunities for our emerging
technologies. Our executive office is located at 3590 East Columbia
Street, Tucson, Arizona, 85714 and our telephone number is (520)
628-7415.
LGE
and LIPC Technologies:
Applied
Energetics is the developer of laser guided energy (“LGETM”) and
LIPC technologies. These revolutionary technologies can precisely
transmit high voltage electrical charges by using a laser to create a conductive
path in the atmosphere. We are developing applications that can deliver tailored
weapon and countermeasure effects to targets with laser accuracy, and with
manageable effects to reduce the potential for inadvertent injury and minimize
collateral damage. This technology has been in development since our inception
in 2002, and we have protected what we believe to be the enabling intellectual
property through U.S. Patent filings. LGE development has been funded
through multiple Department of Defense (“DoD”) contracts in support of U.S.
Navy, Army, Air Force, and the Office of Secretary of Defense programs as well
as through internally funded research initiatives.
Counter-IED
Technologies:
At the
request of our U.S. Government customers, we developed major components,
complete solutions, and integrated systems that demonstrate significant
capability in countering IEDs, a major threat to military and security
operations throughout the world. We completed numerous Government-sponsored
tests of several prototype counter-IED (“CIED”) systems. Technical and field
results of such CIED testing are highly sensitive or classified, but we are
satisfied that the full range of these tests accurately reflect the capability
of our technology in addressing this critical mission. We have integrated our
CIED technologies into various military and non-military vehicles, including
remotely operated vehicles. Because of continued company-initiated innovations,
we anticipate additional product variations may be utilized on other military
platforms in the future as military customers identify new candidate areas for
implementation of our technologies. We continue to work actively with our
customers to field these innovative CIED technologies.
High-Voltage
Technologies:
Since the
company’s inception, we have acquired and developed unique high-voltage
capabilities (“HV”). Operating within the company is a group focused on
providing high-voltage solutions for semiconductor, aerospace, environmental,
and other commercial ventures and activities. Opportunities currently in process
or under development include advanced electron-beam technologies, stack-gas
irradiation, nested high-voltage generators and other unique power solutions for
use in a wide range of commercial applications.
Laser
Technologies:
The
company designs and builds rugged solid state lasers, laser pump heads,
thin-disk laser assemblies, fiber lasers, laser drive and control electronics,
optic and fiber-optic interfaces and unique laser components for military and
commercial applications. The company has the expertise to build very
unique, rugged ultra-short pulse lasers for key applications for a variety of
mission-critical environments.
PATENTS/PROPRIETARY
INFORMATION:
Since our
inception, we have pursued the development of a range of core intellectual
property objectives using internal investment, and have aggressively pursued
patents on such technology. The objective of this approach has been to establish
a sole source role for us in customer-funded technology and product development
contracts, as well as to protect the value of the intellectual property that we
create. Our patent applications, in tandem with our significant
proprietary knowledge, may be used as justification for sole source contracts in
accordance with Federal Acquisition Regulations, and thereby may improve our
competitive position. Presently, eight patents have been issued and twenty-three
U. S. patent applications are pending. We have received U. S. Government
initiated “national security related” secrecy orders for fourteen of the twenty
three pending patent applications. The U.S. Patent and Trademark Office imposes
secrecy orders when disclosure of an invention by publication of a patent would
be detrimental to the United States’ national security. These patents are
treated as under review unless and until they are declassified, at which time
patents may be issued, with enforcement based on the original filing date. We
have thus far received notice that two of these patent applications under
secrecy order have been found patentable by the U.S. Patent Office. These
patents and patent applications relate to our core LIPC technology, CIED
offerings, and other technologies related to LGE, laser and high voltage
applications.
CUSTOMER
DEPENDENCY:
Revenue
is derived from contracts with Government agencies or contractors to the
Government representing approximately 87%, 98%, and 96%, of total revenue for
2008, 2007, and 2006, respectively. The loss of any of these customers would
have a material adverse effect on Applied Energetics. All contracts are subject
to renegotiation of profits or termination at the election of the Government.
When we refer to “Government” we mean the U.S. Government and its
agencies. The company has recently expanded its marketing to focus a
portion of its proposed future business on commercial and environmental
opportunities outside of pure Governmental contracting.
COMPETITION:
Currently,
substantially all of our activity and revenue is generated through contracts
with agencies of the Government focused on military and national security
applications. We have developed, demonstrated, and advanced innovative
directed-energy technologies. We believe that we are the only company in the
United States that is providing the Government access to these currently unique
technologies. However, we face competition from other domestic companies within
the defense industry and other companies with differing technologies that seek
to provide similar benefits or address similar missions as our technologies.
Additionally, foreign countries and companies may also be developing
technologies that may compete with our technologies.
RESEARCH
AND DEVELOPMENT:
We fund
our research and development primarily through internal investment and we
diligently attempt to retain the sole ownership of all of the original key
intellectual property. We believe control of the core intellectual
property we have developed is necessarily critical to the use of the LIPC, CIED
and HV technologies. We occasionally outsource research tasks to experienced
individuals or companies for activities that require equipment or modeling
capabilities that we do not have internally available, preserving our
intellectual property.
Our
short-term research and development goals are to develop efficient and compact
laser sources, novel high-voltage electrical sources, efficient optical systems
to extend the range of our LGE system and to engineer laser hardware to smaller
and more rugged technologies as an essential element of moving our LGE
technology to practical fielding. Longer-term research objectives
include development of tunable and eye safe laser sources to improve safety and
utility of LGE, adjunct military applications for lasers to expand accessible
military markets for our technology, and integrated weapon and counter-weapon
system technologies to facilitate our role as an integrated system
provider. We are also investigating the application of guided energy
systems as a mechanism for efficient reduction of power plant emissions to
address what we believe to be significant emerging environmental equipment
markets.
Our
research and development expense for 2008, 2007, and 2006 was $1,372,396,
$1,197,792, and $3,571,262, respectively.
BACKLOG
OF ORDERS:
At
December 31, 2007 and 2008 and February 28, 2009 we had a backlog (i.e. work
load remaining on signed contracts) of approximately $6.7 million, $4.6
million and $2.9 million, respectively, to be completed within the twelve
months following those dates.
EMPLOYEES:
As of
December 31, 2008, we had 70 employees, compared to 76 on December 31, 2007 and
83 on December 31, 2006. At December 31, 2008, 23 of our employees are in
management and general administrative, 33 are in technical and engineering and
14 are in manufacturing. We believe that our relationship with our
employees is good. None of our employees are members of a labor
union. During the fourth quarter, the company initiated a process
whereby each product line was evaluated for appropriate levels of staffing given
current and anticipated contract activities, timing of deliverables and general
expected economic conditions. Following this evaluation, on December
16, 2008, the company reduced its staffing by 15 individuals.
ITEM
1A. RISK FACTORS:
Future
results of operations of Applied Energetics involve a number of known and
unknown risks and uncertainties. Factors that could affect future operating
results and cash flows and cause actual results to vary materially from
historical results include, but are not limited to those risks set forth
below:
Risk
Related to Our Business
Our
growth is subject to a number of economic risks.
As widely
reported, financial markets in the United States, Europe and Asia have been
experiencing extreme disruption in recent months, including, among other things,
extreme volatility in securities prices, severely diminished liquidity and
credit availability, ratings downgrades of certain investments and declining
valuations of others. Governments have taken unprecedented actions
intended to address extreme market conditions that have included severely
restricted credit and declines in real estate values. While currently
these conditions have not impaired our ability to access credit markets and
finance our operations, there can be no assurance that there will not be a
further deterioration in financial markets and confidence in major economies
such that our ability to access credit markets and finance our operations might
be impaired. Although our total revenues improved in 2008, the
current tightening of credit in financial markets could adversely affect the
ability of customers and suppliers to obtain financing for significant purchases
and operations and could result in a decrease in or cancellation of orders for
our products and services. Our business can also be adversely
affected by decreases in the general level of economic activity, such as
decreases in defense spending, financial strength of customers and government
procurement. We are unable to predict the duration and severity of
the current disruption in financial markets and the adverse economic conditions
that might occur and the effect such events might have on our
business.
Our
historical lack of earnings and continued future losses could adversely affect
our financial health and prevent us from continuing to develop and market our
products.
We have
incurred net losses applicable to our common stockholders since our formation in
June 2002. Our ability to achieve profitable operations is dependent
upon, among other things, our ability to obtain sufficient government and
commercial contracts and to complete the development of products based on our
technologies. We cannot assure you that we will be able to significantly
increase our revenue or achieve and maintain profitability.
Our lack
of earnings history and continued future losses could have important
consequences, such as:
|
·
|
increasing
our vulnerability to general adverse economic and industry
conditions;
|
|
·
|
limiting
our flexibility in planning for, or reacting to, changes in our business
and our industry;
|
|
·
|
restricting
us from introducing new products or exploiting business
opportunities;
|
|
·
|
requiring
us to sell debt or equity securities or to sell some of our core assets,
possibly on unfavorable
terms;
|
|
·
|
limiting
our ability to obtain additional financing;
and
|
|
·
|
placing
us at a possible competitive disadvantage compared to our competitors, who
may have greater financial
resources.
|
If
we are unable to generate funds or obtain new funds on acceptable terms, we may
not be able to continue to develop and/or market our present and potential
products.
Our
liquidity needs have typically arisen from the funding of our operating losses,
our research and development program and the launch of our new products, working
capital requirements, and strategic initiatives. In the past, we have met these
cash requirements through proceeds from certain placements of our
securities.
The
development of products requires the commitment of substantial resources to
conduct the time consuming research and development and regulatory activities
necessary to bring any potential product to market and to establish production,
marketing and sales capabilities. Our ability to fund our products, research and
development, working capital and capital expenditures will depend on our future
operating performance, which will be affected by factors discussed elsewhere in
this filing and in the other reports we file with the SEC, including, without
limitation, economic conditions and financial, business, regulatory, political,
market and other factors, many of which are beyond our
control.
Additionally,
current economic conditions may inhibit our ability to obtain future funding
from Government sources or from public capital sources consistent with our prior
history.
We
are limited in our ability to disclose significant details of our operations
that may have a significant impact on our results and future operations due to
restrictions imposed by our Government customers.
We
produce military products and conduct research that is protected and deemed
sensitive to the nation’s security. Therefore, we are limited, under specific
classification guides issued to the company by our government customers, in
publicly discussing or disclosing certain details of our technologies,
applications, contract terms and the product’s future, if any. Such absence of
explanation, detail and discussion may prohibit us from providing details that
an investor may find meaningful, cause many individuals and investors to
question our level of disclosure and discourage potential investors from
investing in our securities.
The
timing and magnitude of Government funding and orders for our CIED systems or
products cannot be predicted.
We expect
that we will be dependent upon sales of our CIED system products for a
substantial portion of our revenue over the near future. We are hopeful that we
will continue to receive funding to advance our technologies, however, the
Government’s course of action will not be fully known until orders for product
are actually issued to us. Because Government agencies have been the dominant
revenue source historically and many of these agencies continue to be identified
as the intended customers for our various future products, it is uncertain
whether we will enter into new or continue with existing development or
production contracts and, if we do, what the timing or magnitude of such orders
will be.
We
may not be able to meet the volume or production demands for our CIED system
products, if we receive production orders.
We intend
to outsource certain manufacturing processes if our customers order a
significant number of our CIED products. We are uncertain that we will be able
to find sufficient outsource facilities to meet the customer’s demands for our
CIED products on a timely basis or at all. Failure to meet volume and
production demands for any order we receive could result in the loss of the
contract and irreparable harm to our reputation with our customers.
The
receipt of future Government funding is uncertain and may be reduced or
eliminated at any time, particularly if our LIPC technology does not meet
certain milestones.
We rely
on Government funding for certain aspects of LIPC development through funding
provided in the federal Government budget and contracts with various Government
agencies. Due to federal budgetary constraints and an anticipated overall
reduction in the defense budget, we cannot provide assurance that any continued
Government funding will be made available, or that we will be able to enter into
any agreements with Government customers for the further development of LIPC. We
expect that additional funding for LIPC will be subject to our technology
meeting certain Government established milestones. We have, including recently,
missed some Government established milestones and schedule deadlines, and may do
so again in the future. If our LIPC technology does not meet Government
established milestones, due to our performance or outside environmental or
physics constraints, additional Government funding may be reduced or
eliminated. If additional Government funding for LIPC is reduced or
is not forthcoming, in the absence of additional funding, our future LIPC
technology development efforts could be terminated and our revenues would be
adversely affected.
Our
future success will depend on our ability to develop new technologies and
applications that address the needs of our markets.
Both our
defense and commercial markets are characterized by rapidly changing
technologies and evolving industry standards. Accordingly, our future
performance depends on a number of factors, including our ability
to:
|
·
|
identify
emerging technological trends in our target
markets;
|
|
·
|
develop
and maintain competitive products;
|
|
·
|
enhance
our products by improving performance and adding innovative features that
differentiate our products from those of our
competitors;
|
|
·
|
develop
and manufacture and bring products to market quickly at cost-effective
prices; and
|
|
·
|
meet
scheduled timetables for the development, certification and delivery of
new products.
|
We
believe that, in order to remain competitive in the future, we will need to
continue to develop new products, which will require the investment of
significant financial and engineering resources. The need to make these
expenditures could divert our attention and resources from other projects, and
we cannot be sure that these expenditures will ultimately lead to the timely
development of new technology, products, and systems using the Company’s
technology or products. Due to the design complexity of our products, we may in
the future experience delays in completing development and introduction of new
products. Any delays could result in increased costs of development, deflect
resources from other projects or incur loss of contracts.
In
addition, there can be no assurance that the market for our products will
develop or continue to expand as we currently anticipate. The failure of our
technology to gain market acceptance could significantly reduce our revenue and
harm our business. Furthermore, we cannot be sure that our competitors will not
develop competing or differing technologies which gain market acceptance in
advance of our products. The possibility that our competitors might develop new
technology or products might cause our existing technology and products to
become obsolete or create significant price competition. If we fail in our new
product development efforts or our products fail to achieve market acceptance
more rapidly than our competitors, our revenue will decline and our business,
financial condition and results of operations will be negatively
affected.
Changes
in government spending could significantly impact our sales and
profitability.
In each
of the past three years, 87%, 98%, and 96% of our net revenue for the years
ended December 31, 2008, 2007, and 2006, respectively, were from the U.S.
Government and Government contractors. U.S. defense spending
historically has been cyclical. Though it is not clear that future
defense spending will be equally cyclical, defense budgets rise when perceived
threats to national security increase the level of concern over the country’s
safety. At other times, spending on the military can
decrease. While Department of Defense funding has grown rapidly over
the past few years, there is no assurance this trend will
continue. Competing demands for federal funds can put pressure on all
areas of spending, which could impact the defense budget.
A
decrease in U.S. government defense spending or changes in spending allocation
could result in one or more of our programs being reduced, delayed or
terminated. Reductions in our existing programs, unless offset by
other programs and opportunities, could adversely affect our ability to sustain
and grow future sales and become profitable.
We
depend on the Government for substantially all of our revenue, and a reduction
in the quality of this relationship and/or a shift in Government funding could
have severe consequences on our prospects and financial condition.
Any
significant disruption or deterioration of our relationship with the Government
or important agencies thereof could significantly reduce our revenue. Our
Government programs must compete with programs managed by other defense
contractors for a limited number of programs and for uncertain levels of
funding. The development of our business will depend upon the continued
willingness of the U.S. Government agencies to fund existing and new defense
programs and, in particular, to continue to purchase our products and services.
Although defense spending in the United States has increased in recent years,
further increases may not continue and any proposed budget or supplemental
budget request may not be approved. In addition, the U.S. Department of Defense
may not continue to focus its spending on technologies or missions relevant to
our technologies and products.
Our
competitors continuously engage in efforts to expand their business
relationships with the Government which may be to our disadvantage and are
likely to continue these efforts in the future. The Government may choose to use
other defense contractors for its limited number of defense programs. In
addition, the funding of defense programs also competes with non-defense
spending of the Government. Budget decisions made by the Government are outside
of our control and have long-term consequences for the size and structure of
Applied Energetics. A shift in Government defense spending to other programs in
which we are not involved or a reduction in Government defense spending
generally could have severe consequences for our results of
operations.
Our
Government customers may terminate or modify our existing contracts, which would
adversely affect our revenue.
There are
inherent risks in contracting with the Government, including risks peculiar to
the defense industry, which could have a material adverse effect on our
business, financial condition or results of operations. Laws and regulations
permit the Government to:
|
·
|
terminate
contracts for its convenience;
|
|
·
|
reduce
or modify contracts if its requirements or budgetary constraints
change;
|
|
·
|
cancel
multi-year contracts and related orders if funds for contract performance
for any subsequent year become
unavailable;
|
|
·
|
shift
its spending practices; and
|
|
·
|
adjust
contract costs and fees on the basis of audits done by its
agencies.
|
If the
Government terminates our contracts for convenience, we may only recover our
costs incurred or committed for settlement expenses and profit on work completed
before the termination. Additionally, most of our backlog could be adversely
affected by any modification or termination of contracts with the Government or
contracts the prime contractors have with the Government. The Government
regularly reviews our costs and performance on its contracts, as well as our
accounting and general business practices. The Government may reduce the
reimbursement for our fees and contract-related costs as a result of an audit.
We can give no assurance that one or more of our Government contracts will not
be terminated under these circumstances. Also, we can give no assurance that we
would be able to procure new Government contracts to offset the revenue lost as
a result of any termination of our contracts. As our revenue is dependent on our
procurement, performance and payment under our contracts, the loss of one or
more critical contracts could have a negative impact on our financial
condition.
Our
business is subject to various restrictive laws and regulations because we are a
contractor and subcontractor to the Government.
As a
contractor and subcontractor to the Government, we are subject to various laws
and regulations that are more restrictive than those applicable to
non-Government contractors. We are required to obtain and maintain material
Governmental authorizations and approvals to run our business as it is currently
conducted. New or more stringent laws or Government regulations concerning
Government contracts, if adopted and enacted, could have a material adverse
effect on our business.
Generally,
Government contracts are subject to oversight audits by Government
representatives. Responding to Governmental audits, inquiries or investigations
may involve significant expense and divert management attention from regular
operations. Our Government business is also subject to specific procurement
regulations and a variety of socio-economic and other requirements. These
requirements, although customary in Government contracts, increase our
performance and compliance costs. These costs might increase in the future,
reducing our margins, which could have a negative effect on our financial
condition. Failure to comply with these regulations and requirements could lead
to suspension or debarment, for cause, from Government contracting or
subcontracting for a period of time. Among the causes for debarment are
violations of various statutes, including those related to:
|
·
|
Government
security regulations;
|
|
·
|
protection
of the environment;
|
|
·
|
accuracy
of records and the recording of costs;
and
|
Any of
these factors, which are largely beyond our control, could also negatively
impact our financial condition. We also may experience problems associated with
advanced designs required by the Government, which may result in unforeseen
technological difficulties and cost overruns. Failure to overcome these
technological difficulties and the occurrence of cost overruns would have a
negative impact on our results.
These
Government contracts may be subject to protest or challenge by unsuccessful
bidders or to termination, reduction or modification in the event of changes in
Government requirements, reductions in federal spending or other
factors.
Competition
within our markets may reduce our procurement of future contracts and our
revenue.
The
defense and commercial industries in which we operate are highly competitive.
Our future competitors may range from highly resourceful small concerns, which
engineer and produce specialized items, to large, diversified firms and defense
contractors. Many of our potential competitors have more extensive or more
specialized engineering, manufacturing and marketing capabilities and greater
financial resources than us. Consequently, these competitors may be better
suited to take advantage of economies of scale and devote greater resources to
develop new technologies. There can be no assurance that we can continue to
compete effectively with these firms. In addition, some of our
suppliers and customers could develop the capability to manufacture products
similar to products that we are developing. This would result in
competing directly which could significantly reduce our revenue and seriously
harm our business.
There can
be no assurance that we will be able to compete successfully against our current
or future competitors or that the competitive pressures we face will not result
in reduced revenue and market share or seriously harm our business.
We
derive a substantial portion of our revenue from a limited number of contracts.
Therefore, our revenue will be adversely affected if we fail to receive new
contracts and renewals or follow-on contracts.
Our
Government contracts are important because our contracts are typically for fixed
terms which vary from shorter than one year to multi-year, particularly for
contracts with options. The typical term of our contracts with the U.S.
Government is between one and two years. The loss of revenue from our possible
failure to obtain new contracts and renewals or follow-on contracts may be
significant because our Government contracts account for a substantial portion
of our revenue.
Our
products may fail to perform satisfactorily in tests at various stages of
development and even if our products perform satisfactorily, there may be
unanticipated delays in obtaining contracts.
Our
Government customers typically test our products at various stages of
development. Although we believe our technologies will perform their ultimately
intended applications, many of our products have not been completed to date. Our
success will ultimately depend upon our products meeting performance criteria
established by our customers. Failure of a product to perform satisfactorily in
a field test could result in delay of product development, cost overruns or even
termination of the contract, any of which could materially affect the
development of such product and our prospects, revenue and financial
condition.
In the
past, we have experienced delays in obtaining Government contracts despite what
we have been advised by prospective Government customers after our products have
been satisfactorily field tested. These delays are inherent in doing business
with Government contracting agencies. Nevertheless, these delays make it
difficult for us to predict and prepare for production and can adversely affect
anticipated operating results.
We depend on component availability,
subcontractor performance and our key suppliers to manufacture and deliver our
products and services.
Our
manufacturing operations are highly dependent upon the delivery of materials by
outside suppliers in a timely manner. In addition, we depend in part upon
subcontractors to assemble major components and subsystems used in our products
in a timely and satisfactory manner. If these contract manufacturers are not
willing to contract with us on competitive terms or devote adequate resources to
fulfill their obligations to us, or we do not properly manage these
relationships, our existing customer relationships may suffer. In addition, by
undertaking these activities, we run the risks that:
|
·
|
the
reputation and competitiveness of our products and services may
deteriorate as a result of the reduction of our control over quality and
delivery schedules and the consequent risk that we will experience supply
interruptions and be subject to escalating costs;
and
|
|
·
|
our
competitiveness may be harmed by the failure of our contract manufacturers
to develop, implement or maintain manufacturing methods appropriate for
our products and customers.
|
Moreover,
because most of our contracts are with Governmental agencies, we may be limited
in the third parties we can engage as component manufacturers.
We are
dependent for some purposes or product on sole-source suppliers. If any of these
sole-source suppliers fails to meet our needs, we may not have readily available
alternatives. Our inability to fill our supply needs could jeopardize our
ability to satisfactorily and timely complete our obligations under Government
and other contracts. This might result in reduced revenue, termination of one or
more of these contracts and damage to our reputation and relationships with our
customers. We cannot be sure that materials, components, and subsystems will be
available in the quantities we require, if at all.
Because
the manufacturing process of our products is highly complex, errors, changes or
uncertainties could disrupt production.
The
manufacture of our products involves highly complex and precise processes,
requiring production in a highly controlled and clean
environment. Inadvertent or slight changes or uncertainties in our
manufacturing processes, errors or use of defective or contaminated materials
could impact our ability to achieve and affect product reliability, or disrupt
and/or delay production.
Our
business could be adversely affected by a negative audit by the U.S.
Government.
Government
agencies such as the Defense Contract Audit Agency ("DCAA") routinely audit and
investigate Government contractors. These agencies review a contractor's
performance under its contracts, cost structure and compliance with applicable
laws, regulations and standards. The DCAA also reviews the adequacy of, and a
contractor's compliance with, its internal control systems and policies,
including the contractor's purchasing, property, estimating, compensation and
management information systems. Any costs found to be improperly allocated to a
specific contract will not be reimbursed, while such costs already reimbursed
must be refunded. If an audit uncovers improper or illegal activities, we may be
subject to civil and criminal penalties and administrative sanctions, including
termination of contracts, forfeiture of profits, suspension of payments, fines
and suspension or prohibition from doing business with the Government. In
addition, our reputation would suffer serious harm if allegations of impropriety
were made against us.
Our
backlog is subject to reduction and cancellation.
Backlog
represents products or services that our customers have committed by contract to
purchase from us. Our total funded backlog as of December 31, 2008
and February 28, 2009 was approximately $4.6 million and $2.9 million,
respectively. Backlog is subject to fluctuations and is not necessarily
indicative of future revenue. Moreover, cancellations of purchase orders or
reductions of product quantities in existing contracts could substantially and
materially reduce backlog and, consequently, future revenue. Our failure to
replace cancelled or reduced backlog could result in lower future
revenue.
We
depend on the recruitment and retention of qualified personnel, and our failure
to attract and retain such personnel could seriously harm our
business.
Due to
the specialized nature of our businesses, our future performance is highly
dependent upon the continued services of our key engineering personnel and
executive officers. Our prospects depend upon our ability to attract and retain
qualified engineering, manufacturing, marketing, sales and management personnel
for our operations. Competition for personnel is intense, and we may not be
successful in attracting or retaining qualified personnel. Our failure to
compete for these personnel could seriously harm our business, results of
operations and financial condition. Additionally, since the majority of our
business involves technologies that are classified due to national security
reasons, we must hire U.S. Citizens who have the ability to obtain a security
clearance. This further reduces our potential labor pool.
Because
many of our contracts and projects are classified for national security reasons,
we may not be able to provide important information to the public.
To date,
substantially all of our revenue has been derived from contracts which are
classified by the Government for national security
reasons. Therefore, we are prohibited from filing these contracts as
exhibits to our SEC reports, registration statements and filings or provide more
than the summary information that we provide in our reports, registration
statements and other filings with the SEC and in our press releases. The
targets, effects, ranges, voltages and currents delivered, along with many other
aspects of our technologies are highly sensitive to ongoing military operations
and are largely classified under specific Department of Defense guidelines and,
consequently, cannot be disclosed publicly. Accordingly, investors may not have
important information concerning our businesses and operations with which to
make an informed investment decision.
The
U.S. Government's royalty-free right to use technology developed by us limits
our intellectual property rights.
We seek
to protect the competitive benefits we derive from our patents, proprietary
information and other intellectual property. However, we do not have the right
to prohibit the U.S. Government from using certain technologies developed or
acquired by us or to prohibit third party companies, including our competitors,
from using those technologies in providing products and services to the U.S.
Government. The U.S. Government has the right to royalty-free use of
technologies that we have developed under Government contracts. We are free to
commercially exploit those Government-funded technologies and may assert our
intellectual property rights to seek to block other non-Government users
thereof, but we cannot assure you we could successfully do so.
We are
subject to Government regulation which may require us to obtain additional
licenses and could limit our ability to sell our products outside the United
States.
We
may be unable to adequately protect our intellectual property rights, which
could affect our ability to compete.
Protecting
our intellectual property rights is critical to our ability to compete and
succeed as a company. We hold a number of United States patents and patent
applications, as well as trademark, and registrations which are necessary and
contribute significantly to the preservation of our competitive position in the
market. There can be no assurance that any of these patents or future patent
applications and other intellectual property will not be challenged, invalidated
or circumvented by third parties. In some instances, we have augmented our
technology base by licensing the proprietary intellectual property of others. In
the future, we may not be able to obtain necessary licenses on commercially
reasonable terms. We enter into confidentiality and invention assignment
agreements with our employees, and enter into nondisclosure agreements with our
suppliers and appropriate customers so as to limit access to and disclosure of
our proprietary information. These measures may not suffice to deter
misappropriation or independent third party development of similar technologies.
Moreover, the protection provided to our intellectual property by the laws and
courts of foreign nations may not be as advantageous to us as the remedies
available under United States law.
We
may face claims of infringement of proprietary rights.
There is
a risk that a third party may claim our products infringe on their proprietary
rights. Whether or not our products infringe on proprietary rights of third
parties, infringement or invalidity claims may be asserted or prosecuted against
us and we could incur significant expense in defending them. If any
claims or actions are asserted against us, we may be required to modify our
products or obtain licenses on commercially reasonable terms, which we may be
unable to do in a timely manner or at all. Our failure to do so could adversely
affect our business.
Our
operations expose us to the risk of material environmental
liabilities.
We are
also subject to increasingly stringent laws and regulations that impose strict
requirements for the proper management, treatment, storage and disposal of
hazardous substances and wastes, restrict air and water emissions from our
testing and manufacturing operations, and require maintenance of a safe
workplace. These laws and regulations can impose substantial fines and criminal
sanctions for violations, and require the installation of costly pollution
control equipment or operational changes to limit pollution emissions and/or
decrease the likelihood of accidental hazardous substance releases. We incur,
and expect to continue to incur, substantial capital and operating costs to
comply with these laws and regulations. In addition, new laws and regulations,
stricter enforcement of existing laws and regulations, the discovery of
previously unknown contamination or the imposition of new clean-up requirements
could require us to incur costs in the future that would have a negative effect
on our financial condition or results of operations.
The
unpredictability of our results may harm the trading price of our securities, or
contribute to volatility.
Our
operating results may vary significantly over time for a variety of reasons,
many of which are outside of our control, and any of which may harm our
business. The value of our securities may fluctuate as a result of
considerations that are difficult to forecast, such as:
|
·
|
the
size and timing of contract receipt and funding; changes in Government
policies and Government budgetary
policies;
|
|
·
|
termination
or expiration of a key Government
contract;
|
|
·
|
our
ability and the ability of our key suppliers to respond to changes in
customer orders;
|
|
·
|
timing
of our new product introductions and the new product introductions of our
competitors;
|
|
·
|
adoption
of new technologies and industry
standards;
|
|
·
|
competitive
factors, including pricing, availability and demand for competing
products, and fluctuations in foreign currency exchange
rates;
|
|
·
|
conditions
in the capital markets and the availability of project
financing;
|
|
·
|
the
ability to hire and retain key scientists and executives and/or
appropriately trained and experienced
staff;
|
|
·
|
regulatory
developments;
|
|
·
|
general
economic conditions;
|
|
·
|
changes
in the mix of our products;
|
|
·
|
cost
and availability of components and subsystems;
and
|
Our
stock is subject to the risk of being de-listed from the NASDAQ Stock
Market.
During
the fourth quarter of 2008, due to extraordinary market conditions, NASDAQ
temporarily suspended certain minimum listing requirements. Such temporary rule
suspensions included the temporary non-enforcement of the rule requiring a
minimum $1.00 closing bid price for common stock. The company’s
common stock closing bid has dropped below, and remained below this required
threshold and it is not known if the closing bid price in the future will
increase sufficient to be acceptable NASDAQ or for how long NASDAQ will suspend
enforcement of this rule. Therefore there is a risk that the company
may be de-listed from the NASDAQ stock market in the future. Any such delisting
could adversely affect the liquidity or market pricing of our
stock.
A
limited number of stockholders, including two of our officers, hold a
significant portion of our outstanding voting stock and have control over
stockholder matters.
As of
March 9, 2009, our seven largest stockholders owned approximately 62.9% of our
outstanding common stock. Accordingly, they can exert, if they acted
together, significant influence over matters, which require stockholder vote,
including the election of directors, amendments to our certificate of
incorporation or approval of the dissolution, merger, or sale of our Company,
our subsidiaries or substantially all of our assets. This concentration of
ownership and control by a limited number of stockholders could delay or prevent
a change in our control or other action, even when a change in control or other
action might be in the best interests of other stockholders.
A
large number of shares of our common stock could be sold in the market in the
near future, which could depress our stock price.
As of
March 9, 2009, we had outstanding approximately 87 million shares of common
stock. A substantial portion of our shares are currently freely trading without
restriction under the Securities Act of 1933, having been held by their holders
for over two years and are eligible for sale under Rule 144(k) of the Securities
Act. Our outstanding Series A Preferred Stock is convertible into an
aggregate of approximately 0.3 million shares of common stock. There are also
currently outstanding restricted stock, restricted stock units, options and
warrants to purchase approximately 4.7 million shares of our common stock.
To the extent any of our options or warrants are exercised or the Series A
Preferred Stock are converted, your percentage ownership will be diluted and our
stock price could be further adversely affected. The shares of common stock
underlying the Series A Preferred Stock and outstanding restricted stock,
restricted stock units, options and warrants have been registered for resale by
the holders thereof or are eligible for sale under Rule 144. As the
underlying shares are sold, the market price could drop significantly if the
holders of these restricted shares sell them or if the market perceives that the
holders intend to sell these shares.
In 2008,
the Board determined that offering employees the right to exchange their
existing options for new options was, at that time, a preferable means of
providing long-term incentive compensation. In connection with the
exchange offer, which was completed on March 9, 2009, employees were offered the
right to exchange two existing options for one new option. In the
exchange offer, the company issued 1,751,268 new options in exchange for
3,502,536 old options. The new options, which are fully vested, are
exercisable at any time over a three year period. The exercise price
of the new options is $0.50 per share.
There
are many factors outside of our control which could adversely affect the price
of our stock or your ability to sell your shares.
There are
many financial, political, regulatory and market factors and other third-party
actions that influence the trading and pricing of our securities. Many of these
are outside our control. Such factors, actions or activities could negatively
impact your ability to trade your shares, the price of your shares, or could
further negatively impact our ability to utilize public equity markets according
to the needs and optimal timing of offerings, acquisitions, infusions or
liquidity.
Provisions
of our corporate charter documents could delay or prevent change of
control.
Our
Certificate of Incorporation authorizes our board of directors to issue up to
1,000,000 shares of "blank check" preferred stock without stockholder approval,
in one or more series and to fix the dividend rights, terms, conversion rights,
voting rights, redemption rights and terms, liquidation preferences, and any
other rights, preferences, privileges, and restrictions applicable to each new
series of preferred stock. In addition, our Certificate of Incorporation divides
our Board of Directors into three
classes, serving staggered three-year terms. At least two annual meetings,
instead of one, will be required to effect a change in a majority of our Board
of Directors. The designation of preferred stock in the future, the
classification of our Board of Directors, its three classes and the rights
agreement could make it difficult for third parties to gain control of our
company, prevent or substantially delay a change in control, discourage bids for
our common stock at a premium, or otherwise adversely affect the market price of
our common stock.
We
use estimates in accounting for many of our programs and changes in our
estimates could adversely affect our future financial results.
Contract
accounting requires judgments relating to assessing risks, including risks
associated with customer directed delays and reductions in scheduled deliveries,
unfavorable resolutions of claims and contractual matters, judgments associated
with estimating contract revenues and costs, and assumptions for schedule and
technical issues. The estimation of total revenues and cost at completion is
complicated and subject to many variables. Because of the significance of the
judgments and estimation processes, it is likely that materially different
amounts could be recorded if we used different assumptions or if the underlying
circumstances were to change. Changes in underlying assumptions, circumstances
or estimates may adversely affect our future results of operations and financial
condition, including requiring us to take write downs or charges in certain
periods, and could result in fluctuations in our operating results.
Our
investment in cash and cash equivalents are subject to risks, including risks
relating to the banks in which these assets are held.
At
December 31, 2008, we had $1.1 million of cash held primarily in two large banks
which are FDIC insured to FDIC limits. In addition, we had $14.4 million
invested in money market funds that primarily invest in government and treasury
based securities.
ITEM 1B. UNRESOLVED STAFF
COMMENTS:
None.
ITEM
2. PROPERTIES:
Our
principal office, manufacturing, storage, and primary research and development
facility is located in Tucson, Arizona. We purchased this approximately 25,000
square foot facility in February 2008.
On
September 16, 2005 we took possession of approximately 7,000 square feet of
additional manufacturing space in Tucson. The monthly rent for this property is
approximately $5,311 per month under a lease that expires June 30,
2009.
In
December 2006, we entered into a lease agreement for an additional 12,000 square
foot facility in Tucson, Arizona, and we exercised our option to extend this
lease to January 2010 with monthly rent of approximately $7,000, accelerating to
approximately $7,400 in the final year of the lease.
In June
2006, we commenced a 3-year non-cancelable, renewable operating lease for
approximately 11,000 square feet, in Tucson, at a monthly rent of approximately
$5,300 with annually-set monthly rent escalations which will increase the
monthly rent over time to $5,600. We are also responsible for certain property
related costs, including insurance, utilities and property taxes.
In June
2007, we commenced a 3-year non-cancelable, renewable operating lease for
approximately 11,000 square feet, in Earth City, MO, at a monthly rent of
approximately $6,000. We are also responsible for certain property related
costs, including insurance, utilities and property taxes.
Rent
expense, including common area maintenance costs, was approximately $457,000,
$910,000, and $906,000 for 2008, 2007, and 2006, respectively.
We
believe our facilities are adequate for our current planned
operations.
See
Note 11 to the
Consolidated Financial Statements of our 2008 Financial Statements, which is
incorporated herein by reference for information with respect to our lease
commitments at December 31, 2008.
ITEM
3. LEGAL PROCEEDINGS:
Except as
described in Note 11 to the Consolidated Financial Statements, which is
incorporated herein by reference, as of December 31, 2008, we were not a
party to any pending legal proceedings other than claims that arise in the
conduct of our business.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Not
Applicable.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASE OF EQUITY SECURITIES:
Market
price per share
Our
common stock is currently listed on the NASDAQ Global Market, trading under the
symbol “AERG.” The following table sets forth information as to the price range
of our common stock for the period January 1, 2007 through December 31, 2008. No
dividends on common stock were declared for these periods.
Quarterly Periods
|
|
High
|
|
|
Low
|
|
2007
|
|
|
|
|
|
|
First
|
|
|
6.25 |
|
|
|
4.10 |
|
Second
|
|
|
6.57 |
|
|
|
3.78 |
|
Third
|
|
|
4.36 |
|
|
|
2.65 |
|
Fourth
|
|
|
4.19 |
|
|
|
2.85 |
|
2008
|
|
|
|
|
|
|
|
|
First
|
|
|
3.25 |
|
|
|
1.58 |
|
Second
|
|
|
2.94 |
|
|
|
1.59 |
|
Third
|
|
|
2.00 |
|
|
|
0.52 |
|
Fourth
|
|
|
1.00 |
|
|
|
0.18 |
|
Holders
of Record
As of
March 9, 2009, there were approximately 258 holders of record of Applied
Energetics’ common stock.
Unregistered
Sale of Securities and Use of Proceeds
There
were no unregistered sales of securities in 2008.
Dividends
We have
never paid cash dividends on our common stock and do not expect to do so in the
foreseeable future. Instead, we intend to retain any earnings to
support our operations and the growth of our business.
Dividends
on our Preferred Stock are payable quarterly on the first day of February, May,
August and November, in cash or shares of Common Stock, at our discretion. We
declared and paid dividends on our 6.5% Series A Convertible Preferred Stock in
May, August and November, 2008 and February, 2009. Portions of these dividends
were paid in the form of common stock with the remaining paid in cash. Dividends
on Preferred Stock are accrued when the amount of the dividend is
declared. In order to reduce the amount of dividends payable,
5,151,000 shares of common stock were exchanged for 515,100 shares of preferred
stock. Such exchange was determined to be an induced conversion and,
as such, required $3.3 million dollars to be reported as a special
dividend.
Equity
Compensation Plan Information
See Item
11.
In 2008
the company purchased 85,490 shares of common stock from employees to satisfy
the company’s withholding tax requirements. Such purchases in the form of a net
issuance occurred as follows:
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
|
(a)
|
|
|
(b)
|
|
|
Shares (or Units)
|
|
|
|
Total number
|
|
|
Average
|
|
|
Purchased as Part
|
|
|
|
of Shares (or
|
|
|
Price Paid
|
|
|
of Publicly
|
|
|
|
Units)
|
|
|
per Share
|
|
|
Announced Plans
|
|
Period
|
|
Surrendered
|
|
|
(or Unit)
|
|
|
or Programs
|
|
Jan,
2008
|
|
|
41,782 |
|
|
$ |
2.86 |
|
|
|
41,782 |
|
Jun,
2008
|
|
|
12,576 |
|
|
$ |
2.22 |
|
|
|
12,576 |
|
Dec,
2008
|
|
|
31,132 |
|
|
$ |
0.29 |
|
|
|
31,132 |
|
ITEM
6. SELECTED FINANCIAL DATA:
The
following selected financial data should be read in conjunction with the
consolidated financial statements and the notes thereto contained herein in Item
8. “Financial Statements and Supplementary Data,” and the information contained
herein in Item 7 “Management’s Discussion and Analysis of Financial Condition
and Results of Operations.” Historical results are not necessarily
indicative of future results.
Following
is a summary of Applied Energetics’ selected financial data for the years ended
and as of December 31, 2008, 2007, 2006, 2005, and 2004.
Consolidated Statements of
Operations Data:
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
16,614,211 |
|
|
$ |
12,403,628 |
|
|
$ |
10,029,755 |
|
|
$ |
18,875,928 |
|
|
$ |
10,930,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(8,719,622 |
) |
|
$ |
(13,663,772 |
) |
|
$ |
(17,513,878 |
) |
|
$ |
(3,624,603 |
) |
|
$ |
(3,261,005 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to
common stockholders
|
|
$ |
(12,927,341 |
) |
|
$ |
(14,844,191 |
) |
|
$ |
(18,714,354 |
) |
|
$ |
(3,840,539 |
) |
|
$ |
(3,261,005 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per
share attributable
to common stockholders
|
|
$ |
(0.16 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.25 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.05 |
) |
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
22,708,089 |
|
|
$ |
29,466,870 |
|
|
$ |
37,152,626 |
|
|
$ |
23,652,831 |
|
|
$ |
12,537,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital lease obligations
|
|
$ |
2,028 |
|
|
$ |
15,965 |
|
|
$ |
77,510 |
|
|
$ |
99,907 |
|
|
$ |
2,805,917 |
|
Please
refer to the Notes to the Financial Statements beginning on page F -
8 of this report for a more complete description of the numbers contained
in the table above.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You
should read the following discussion and analysis (“MD&A”) together with the
financial data in the section labeled “Selected Financial Data,” with the risk
factors set forth in Item 1A., and with our audited Consolidated Financial
Statements and Notes thereto included elsewhere herein.
OVERVIEW
Applied
Energetics, Inc. (“Applied Energetics”, “we”, “us”, or the “company”), is a
developer and manufacturer of guided energy systems for military, commercial and
environmental applications, utilizing proprietary knowledge of high performance
lasers, high-voltage electronics, advanced optics and atmospheric and plasma
energy interactions. We apply these technologies to deliver
innovative solutions to urgent military missions, including neutralizing
improvised explosive devices (“IEDs”), directing or delivering varying amounts
of energy via LIPC technologies, and other high priority missions of U.S. and
allied military forces. Additionally, we develop and manufacture
specialized high-voltage and laser products for government and commercial
customers for a range of applications. In February 2008, we changed our name to
Applied Energetics, Inc. from Ionatron, Inc.
LGE
and LIPC Technologies:
Applied
Energetics is the developer of laser guided energy (“LGETM”) and
laser induced plasma channel (“LIPCTM”)
technologies. These revolutionary technologies can precisely transmit high
voltage electrical charges by using a laser to create a conductive path in the
atmosphere. We are developing applications that can deliver tailored weapon and
countermeasure effects to targets with laser accuracy, and with manageable
effects to reduce the potential for inadvertent injury and minimize collateral
damage. This technology has been in development since our inception in 2002, and
we have protected what we believe to be the enabling intellectual property
through U.S. Patent filings. LGE development has been funded through
multiple Department of Defense contracts in support of U.S. Navy, Army, Air
Force, and the Office of Secretary of Defense programs as well as through
internally funded research initiatives.
In April
2008, we received a $4.5 million sole source contract from the Advanced
Munitions Technology Development office at the U.S. Army’s Research, Development
and Engineering Command (ARDEC) for the development and advancement of the
company’s Laser Guided Energy technology. This funding is directly
from ARDEC’s discretionary funds.
Counter-IED
Technologies:
At the
request of our U.S. Government customers, we developed major components,
complete solutions, and integrated systems that demonstrate significant
capability in countering IEDs, a major threat to military and security
operations throughout the world. We completed numerous Government-sponsored
tests of several prototype counter-IED (“CIED”) systems. Technical and field
results of such CIED testing are highly sensitive or classified, but we are
satisfied that the full range of these tests accurately reflect the capability
of our technology in addressing this critical mission. We have integrated our
CIED technologies into various military and non-military vehicles, including
armored vehicles and remotely operated vehicles. Because of continued company
initiated innovations, we anticipate additional product variations may be
utilized on other military platforms in the future as military customers
identify new candidate areas for implementation of our technologies. We continue
to work actively with our customers to field these innovative CIED
technologies.
In June
2008, we received a $9.0 million modified cost-plus fixed fee contract for a
system for the U.S. Marine Corps. Due to the sensitivity of the
effort, the customer has asked that program details not be publicly
disclosed. The twelve-month contract is administered by the U.S. Army
(Aberdeen Proving Ground, MD).
High-Voltage
Technologies:
Since the
company’s inception, it has acquired and developed unique high-voltage
capabilities. Operating within the company is a group focused on providing
customized high-voltage solutions for semiconductor, aerospace, environmental,
and other commercial ventures and activities. Opportunities currently in process
or under development include advanced electron-beam technologies, stack-gas
irradiation, nested high-voltage generators and other unique power solutions for
a wide range of applications.
In
December 2008, we completed the initial phase of a long-term development program
with a major aerospace / defense contractor under an exclusive supplier
agreement. This agreement provided for concept development, prototype
fabrication and testing, and fabrication and delivery of operational hardware
systems. We continue to work with this important customer to advance
our collaborative technologies.
Laser
Technologies:
The
company has the capability to design and build rugged solid state lasers, laser
pump heads, thin-disk laser assemblies, fiber lasers, laser drive and control
electronics, optic and fiber-optic interfaces and unique laser components for
military and commercial applications. The company has the expertise
to build very unique, rugged ultra-short pulse lasers for key applications for a
variety of mission-critical environments.
CRITICAL
ACCOUNTING POLICIES:
USE
OF ESTIMATES:
The
preparation of consolidated financial statements in conformity with United
States generally accepted accounting principles requires management to make
estimates, judgments and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Management bases its assumptions on
historical experiences and on various other inputs and estimates that it
believes to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. In addition, management
considers the basis and methodology used in developing and selecting these
estimates, the trends in and amounts of these estimates, specific matters
affecting the amount of and changes in these estimates, and any other relevant
matters related to these estimates, including significant issues concerning
accounting principles and financial statement presentation. Such estimates and
assumptions could change in the future as more information becomes known which
could impact the amounts reported and disclosed herein. Significant estimates
include revenue recognition under the percentage of completion method of
contract accounting, estimate to forecast loss on contracts under the completed
contract method of accounting, the valuation of inventory, estimates of
long-lived asset value, and estimate to forecast expected forfeiture rate on
stock-based compensation and stock-based compensation expense.
REVENUE
RECOGNITION:
Revenue
has been derived from ongoing contract work for systems development, effects
testing and the design and development of demonstration systems and sub-systems
for our Government and commercial customers. This work is expected to
be generally performed under cost-plus contracts with Government
customers.
Revenue
under long-term Government contracts is generally recorded under the percentage
of completion method. Revenue, billable monthly, under cost plus fixed fee
contracts is recorded as costs are incurred and includes estimated earned fees
in the proportion that costs incurred to date bear to total estimated costs.
Costs include direct labor, direct materials, subcontractor costs and overhead.
General and administrative expenses allowable under the terms of the contracts
are allocated per contract depending on its direct labor and material proportion
to total direct labor and material of all contracts. As contracts can extend
over one or more accounting periods, revisions in earnings estimated during the
course of work are reflected during the accounting period in which the facts
become known. When the current contract estimate indicates a loss, a provision
is made for the total anticipated loss in the period in which the facts become
known. Management evaluates many variables and makes various assumptions related
to the estimation of total cost of completion of long-term
contracts. Management reviews the progress and performance of all
contracts monthly.
The asset
caption “accounts receivable” includes costs and estimated earnings in excess of
billings on uncompleted contracts, which represents revenue recognized in excess
of amounts billed. Such revenue is billable under the terms of the
contracts at the end of the year, yet was not invoiced until the following year
and is generally expected to be collected within one year. The liability
“billings in excess of costs and estimated earnings on uncompleted contracts”
represents billings in excess of revenue recognized.
Revenue
for other products and services is recognized when such products and services
are delivered or performed and, in connection with certain sales to certain
customers, when the products and services are accepted, which is normally
negotiated as part of the initial contract. Revenue from commercial,
non-Governmental, customers has historically been based on fixed price contracts
where the sale is recognized upon acceptance of the product or performance of
the service and when payment is probable under the completed contract method of
accounting. Contract costs are accumulated in the same manner as inventory costs
and are charged to operations as the related revenue from contract is
recognized. When the current contract estimate indicates a loss, a provision is
made for the total anticipated loss in the period in which the facts become
known.
INVENTORIES:
Inventories
include material, direct labor and related manufacturing overhead and are stated
at the lower-of-cost (determined on a weighted average basis) or market. Due to
the nature of our inventory, we analyze inventory on an item-by-item basis
compared to future usage and sales for obsolescence quarterly.
STOCK-BASED
COMPENSATION:
SFAS No.
123(R), “Share-Based Payment”, establishes accounting for stock-based awards
exchanged for employee, director and non-employee services. Accordingly,
stock-based compensation cost is measured at grant date, based on the fair value
of the award, and is recognized as an expense over the requisite service
period.
We
adopted the modified prospective application method as provided by SFAS 123(R).
Under this method, SFAS 123(R) is applied to stock-based compensation made after
the effective date. Additionally, compensation cost for the portion of awards
for which the requisite service has not been rendered, such as unvested stock
options, that were outstanding as of the date of adoption will be recognized as
the remaining requisite services are rendered. The compensation cost relating to
unvested awards at the date of adoption will be based on the grant-date fair
value for those awards.
The fair
value of each option is estimated at the date of grant using the Black-Scholes
option valuation model. We estimate expected stock price volatility based on the
mean of the historical volatility of Applied Energetics, an industry index and a
representative peer group. We use historical data to estimate forfeiture rates.
SFAS 123(R) requires the estimation of forfeitures when recognizing compensation
expense and that this estimate of forfeitures be adjusted over the requisite
service period should actual forfeitures differ from such estimates. Changes in
estimated forfeitures are recognized through a cumulative adjustment, which is
recognized in the period of change and which impacts the amount of unamortized
compensation expense to be recognized in future periods. We estimate expected
life by analyzing the historical option exercise behavior of employees
considering the effect of strike and market price on employee decision making
and pertinent vesting schedules. The risk-free interest rate for periods within
the contractual life of the option is based on the U.S. Treasury yield for
comparable periods.
RESULTS
OF OPERATIONS:
Our
consolidated financial information for the years ending December 31, 2008, 2007,
and 2006 is as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenue
|
|
$ |
16,614,211 |
|
|
$ |
12,403,628 |
|
|
$ |
10,029,755 |
|
Cost
of revenue
|
|
|
15,874,818 |
|
|
|
14,473,935 |
|
|
|
11,305,966 |
|
General
and administrative
|
|
|
8,470,656 |
|
|
|
11,442,279 |
|
|
|
10,778,479 |
|
Selling
and marketing
|
|
|
251,349 |
|
|
|
368,706 |
|
|
|
643,384 |
|
Research
and development
|
|
|
1,372,396 |
|
|
|
1,197,792 |
|
|
|
3,571,262 |
|
Impairment
of assets
|
|
|
- |
|
|
|
- |
|
|
|
2,090,884 |
|
Other
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(2,099
|
) |
|
|
(2,838
|
) |
|
|
(13,001
|
) |
Interest
income
|
|
|
637,475 |
|
|
|
1,410,303 |
|
|
|
812,311 |
|
Other
income
|
|
|
10 |
|
|
|
7,847 |
|
|
|
544 |
|
Loss
before provision for income taxes
|
|
|
(8,719,622
|
) |
|
|
(13,663,772
|
) |
|
|
(17,560,366
|
) |
Provision
(benefit) for income taxes
|
|
|
- |
|
|
|
- |
|
|
|
(46,488
|
) |
Net
loss
|
|
$ |
(8,719,622 |
) |
|
$ |
(13,663,772 |
) |
|
$ |
(17,513,878 |
) |
REVENUE
Revenue
increased approximately $4.2 million to $16.6 million for the year ended
December 31, 2008 compared to 2007, which was primarily attributable to
increased revenues from our new U.S. Marine Corps contract received in June 2008
for the CIED product line, and completed projects within our commercial (HV)
product line. The increased revenue in the CIED product line was
approximately $5.6 million and the increase in the HV product line was $1.96
million, offset by a reduction in LGE revenue of approximately $3.4
million. The $2.4 million increase in revenue from 2006 to 2007 was
primarily due to an increase in revenue from our LGE project of $5.5 million,
which was partially offset by a decrease of $2.7 million from our CIED projects
and a decrease in our non-governmental projects of $347,000.
COST
OF REVENUE
Cost of
revenue for 2008 increased approximately $1.4 million compared to 2007. The
increase in cost of revenue is consistent with the 34% increase in revenues
offset by loss accruals of $1.4 million and a lower-of-cost-or-market reserve of
$1.5 million taken in 2007. By product line, there was an increase of $4.3
million for CIED, an increase of $0.3 million for High Voltage and a decrease of
$3.2 million for LGE. Cost of revenue includes manufacturing labor, benefits and
overhead, and an allocation of allowable general and administration and research
and development costs in accordance with the terms of our government contracts.
Cost of revenue also increased from 2006 to 2007, consistent with our increased
revenue, by $3.2 million. The negative gross margin in 2007 was primarily due to
$1.4 million estimated loss accruals attributed to the contracted development of
high-voltage technologies and the increase in lower-cost-or-market reserve of
$1.5 million.
GENERAL
AND ADMINISTRATIVE
G&A
expenses decreased approximately $3.0 million between 2008 and
2007. The decrease primarily consisted of a $1.4 million increase in
applied labor, overhead and material handling costs allocated to cost of revenue
and decreases of $887,000 in non-cash share-based expenses, $597,000 in
professional fees, $541,000 in building related expenses largely due to the
purchase of our principal Tucson facility in February 2008 and to $183,000 in
depreciation and amortization expenses. In addition, there were
decreases on disposal of assets of $77,000 primarily from the exit from our
leased facilities at the Stennis Space Center, Mississippi in September 2007.
The decrease was partially offset by increases of $449,000 in salaries and
accrued compensation, and $267,000 in travel and recruiting expenses for the
same period. General and administrative expense increased from 2006
to 2007 by approximately $664,000. This increase consists of an increase in
stock-based compensation for stock based awards granted to directors and
employees in the amount of $1.2 million, an increase in salaries and accrued
compensation in the amount of $591,000 and a decrease of $1.9 million of applied
overhead. Offsetting these increases were reductions in temporary help and
consultants of $895,000, travel related expenses of $697,000, professional fees
of $565,000, supplies of $475,000 and fringe and benefits costs of
$119,000.
At
December 31, 2008, there was approximately $2.1 million of unrecognized
compensation costs related to unvested restricted stock awards, net of estimated
forfeitures and approximately $1.0 million of unrecognized compensation costs
related to unvested stock options, net of estimated
forfeitures. These costs are expected to be recognized on a
weighted-average basis over periods of approximately four years for restricted
stock awards and two years for unvested stock options.
At
December 31, 2007, there was approximately $3.3 million of unrecognized
compensation costs related to unvested restricted stock awards, net of estimated
forfeitures and approximately $2.8 million of unrecognized compensation costs
related to unvested stock options, net of estimated forfeitures. These costs are
expected to be recognized on a weighted-average basis over periods of
approximately two years for restricted stock awards and one year for unvested
stock options.
SELLING
AND MARKETING
Selling
and marketing expenses decreased approximately $117,000 between 2008 and 2007,
reflecting reduced payroll costs and professional fees. Selling and
marketing expenses were approximately $369,000 for 2007; a decrease of
approximately $275,000 from $643,000 in 2006, reflecting reduced salaries and
travel costs.
RESEARCH
AND DEVELOPMENT
Research
and development expenses increased approximately $175,000 from 2008 to 2007,
with increases in research and development expenses related to Laser
Technologies of $460,000, to LGE of $279,000 and to HV of
$93,000. These increases were offset by the decrease in research and
development expenses related to CIED products of $554,000 and to patents expense
of $104,000. Research and development expenses decreased
approximately $2.4 million during 2007 as compared to 2006 primarily due the
redeployment of our technical staff to our funded projects in-progress. During
2006, we started new research and development initiative and we continued work
on our on-going research projects to expedite the advancement of our LGE, LIPC
and CIED technologies. These strategic decisions are designed to advance and
strengthen our intellectual property rights and advance technology development
at a rate that is less dependent on contract funding. As revenues declined in
2006, the burden of increased R&D was increasingly borne by company internal
funds. Also impacting the rise was the approximately $1.5 million increase in
the amount of general and administrative expenses allocated to research and
development. The costs to complete and the estimated dates upon which our
efforts will result in commercially viable products are uncertain. Many aspects
of our technologies are highly sensitive to ongoing military operations and are
largely classified under specific DoD guidelines and, consequently, cannot be
disclosed publicly.
Our
short-term research and development goals are to develop efficient and compact
laser sources, novel high voltage electrical sources, efficient optical systems
to extend the range of our LGE system and engineer the LGE hardware to smaller
and more rugged technologies.
IMPAIRMENT
OF INTANGIBLE ASSETS:
We
performed our annual test for goodwill impairment in the fourth quarter. In
2006, due to a significant reduction in sales volume and negative cash flows, we
revised the five-year earnings forecast and projected cash flows for North Star.
The projected cash flows were considered in determining the fair value of
goodwill and unamortized intangible assets recorded at the acquisition and also
in subsequent periods to assess for potential impairment. Due to the decline in
projected cash flows in 2006, the company performed assessments of the carrying
value of North Star’s goodwill and tradename indefinite lived intangible assets.
This assessment consisted of estimating the asset’s fair value and comparing the
estimated fair value to the carrying value of the asset. We estimated the
goodwill asset’s fair value through the use of an average of the Capitalization
of Gross Revenues and Goodwill/Revenue methods to value the revenue generated
because the analyses are made independent of direct reference to the reporting
unit’s actual performance. The North Star tradename intangible asset’s fair
value was estimated through an analysis of the projected cash flow. Based on
these analyses, we determined that the fair values of our goodwill and tradename
intangible assets were below their carrying value and in the fourth quarter of
2006 recorded impairment charges of approximately $1.5 million for goodwill and
$603,000 for the North Star tradename.
INTEREST
INCOME AND INTEREST EXPENSE
Net
interest income for the 2008 was lower by approximately $773,000 from 2007
primarily due to the lower balance of invested funds and lower interest rates on
our investments in 2008. Net interest income for 2007 was higher by
approximately $608,000 versus 2006 primarily because the funds provided from the
August 2006 financing were invested in income producing investments for all of
2007 as compared to less than two months of 2006.
NET
LOSS
As a
result of the foregoing, our operations in 2008 resulted in a net loss of
approximately $8.7 million, a reduction of approximately $4.9 million compared
to the $13.7 million loss for 2007. This decrease in loss
incorporates an increase in revenues of $4.2 million, decreases in G&A of
$3.0 million and sales and marketing of $117,000, offset by an increase in costs
of revenue of $1.2 million, a decrease in net interest income of $773,000, and
an increase in R&D of $175,000.
Our
operations for the year ended December 31, 2007 resulted in a net loss of
approximately $13.7 million, an improvement of approximately $3.9 million when
compared to 2006. This improvement reflects reduction in research and
development expenses of approximately $2.4 million, a reduction of $2.1 million
from the goodwill and intangible asset impairment charges recognized in 2006 and
an increase of our net interest income of $608,000, offset by a decrease in our
gross margin of $794,000 and an increase of general and administrative expenses
of $664,000.
INFLATION
AND SEASONALITY:
We do not
believe that inflation has a material effect on the operations or financial
condition of our business, nor do we believe that we are subject to significant
seasonal swings in our business.
LIQUIDITY
AND CAPITAL RESOURCES:
At
December 31, 2008, we had approximately $15.5 million of cash and cash
equivalents. In 2008, we used approximately $4 million of cash in operating
activities. This amount is comprised primarily of our net loss of approximately
$8.7 million and decreases in inventories of $1.2 million. Offsetting these
amounts were non-cash stock option compensation expense of approximately $3.7
million, a decrease in accrued expenses, deposits and deferred rent of $1.3
million. Also in 2008, investment activities provided approximately $4.8 million
consisting of the sale of available-for-sale securities of $7.5 million and
partially offset by purchases of approximately $2.7 million of equipment. During
2008, financing activities used approximately $289,000, primarily representing
preferred stock dividends. We do not anticipate significant capital
expenditures for 2009.
We
anticipate that short-term and long-term funding needs will be provided from the
cash flow from servicing our Government contracts. We believe that we
have sufficient working capital to fulfill existing contracts and expected
contracts in 2009 and into 2010. The Government contracts, that presently
represent a major portion of our current activity, are on a cost plus fixed fee
basis. This means all work performed is done at our Government-approved rates,
which include general and administrative costs, overhead, labor and materials,
fees and profit. These costs are accrued as incurred and billed
monthly.
We
previously held investments in auction rate securities (“ARS”) in the form of
asset backed securities. In accordance with FAS 157, we recorded
temporary impairment charges within other comprehensive loss during the first
quarter of 2008 due to temporary market failures and illiquidity first
experienced during the first quarter of 2008 (due to auction
failures). During the fourth quarter of 2008 all of the ARS
securities previously held by the company were sold at par and all accumulated
interest was paid in connection with the final settlement. The company does not
own any ARS securities as of December 31, 2008. The company invested
100% of the proceeds in Government Backed Money Market securities and
equivalents.
The
following reflects 2008 quarterly activity for ARS securities:
|
|
Asset Backed
|
|
|
|
Securities
|
|
Fair
value December 31, 2007
|
|
$ |
7,500,000 |
|
|
|
|
|
|
Unrealized
losses - 1st quarter 2008
|
|
|
(375,000 |
) |
Sales
- 3rd quarter 2008
|
|
|
(100,000 |
) |
Unrealized
loss adjustment - 3rd quarter 2008
|
|
|
5,000 |
|
Sales
- 4th quarter 2008
|
|
|
(7,400,000 |
) |
Unrealized
loss adjustment - 4th quarter 2008
|
|
|
370,000 |
|
|
|
|
|
|
Fair
value December 31, 2008
|
|
$ |
- |
|
BACKLOG
OF ORDERS:
At
December 31, 2007 and 2008 and February 28, 2009, respectively, we had a backlog
(that is, work load remaining on signed contracts) of approximately $6.7
million, $4.6 million and $2.9 million, respectively, to be completed
within the next twelve months following those dates.
CONTRACTUAL
OBLIGATIONS:
The
following table summarizes our contractual obligations and other commercial
commitments as of December 31, 2008:
|
|
Payment by Period
|
|
|
|
|
|
|
Less than 1
|
|
|
|
|
|
|
|
|
More than 5
|
|
|
|
Total
|
|
|
Year
|
|
|
1 to 3 Years
|
|
|
3 to 5 Years
|
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
leases
|
|
$ |
2,047 |
|
|
$ |
2,047 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Operating
leases
|
|
|
257,319 |
|
|
|
220,072 |
|
|
|
37,247 |
|
|
|
- |
|
|
|
- |
|
Purchase
Obligations
|
|
|
412,112 |
|
|
|
412,112 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
671,478 |
|
|
$ |
634,231 |
|
|
$ |
37,247 |
|
|
$ |
- |
|
|
$ |
- |
|
Not
included in the above table are the dividends on our Series A Preferred Stock
that are approximately $220,000 each year (approximately $55,000 each quarter),
assuming no conversion to common stock.
CAPITAL
LEASES:
We rent
office equipment under capital lease agreements with approximately $839 in
monthly payments.
OPERATING
LEASES:
We
generally operate in leased premises under operating leases that have options
permitting renewals for additional periods. In addition to minimum fixed
rentals, the leases typically contain scheduled escalation clauses resulting in
a deferred rent accrual at December 31, 2008 of approximately $4,000. We account
for the escalation provision by straight-line inclusion in the rent
expense. Total rent expense on premises amounted to approximately
$457,000, $910,000, and $906,000 for 2008, 2007 and 2006, respectively. In
February 2008, we purchased our principal office, manufacturing, storage, and
primary research and development facility in Tucson, Arizona for approximately
$2.2 million.
PREFERRED
STOCK:
The
Series A Preferred Stock has a liquidation preference of $25.00 per share. The
Series A Preferred Stock bears dividends at the rate of
6.5% of the liquidation preference per share per annum, which accrues from the
date of issuance, and is payable quarterly, when declared. Dividends
are payable in: (i) cash, (ii) shares of our common stock (valued for such
purpose at 95% of the weighted average of the last sales prices of our common
stock for each of the trading days in the ten trading day period ending on the
third trading day prior to the applicable dividend payment date), provided that
the issuance and/or resale of all such shares of our common stock are then
covered by an effective registration statement or (iii) any combination of the
foregoing. During this fiscal year, 554,428 shares of Series A
Preferred Stock were converted to common stock at a range of contractual and
negotiated conversion rates, thus reducing the quarterly dividend. As
of December 31, 2008, there were 135,572 shares of Series A Preferred Stock
outstanding.
During
the fourth quarter of 2008, the company exchanged 515,100 shares of Series A
Preferred Stock for 5,151,000 shares of common stock. The company accounted for
the exchange pursuant to EITF Topic D-42, “The Effect on the Calculation of
Earnings per Share for the Redemption or Induced Conversion of Preferred Stock”,
("EITF Topic D-42"), and SFAS No. 84, “Induced Conversions of Convertible
Debt”, ("SFAS No. 84"). The exchanges were made at terms other
than the original conversion terms, therefore the Company recorded a charge
(stock dividend) to accumulated deficit of approximately $3.3 million, which
equaled the excess of the fair value of the common stock issued over the fair
value of the common stock issuable pursuant to the original conversion
terms. The par value of the Series A Preferred Stock exchanged and
the aforementioned $3.3 million on the induced conversion was reclassified to
paid-in capital at the time of conversion.
RECENT
ACCOUNTING PRONOUNCEMENTS:
Refer to
Note 2 of Notes to Consolidated Financial Statements for a discussion of recent
accounting standards and pronouncements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK:
In the
normal course of business, our financial position is subject to a variety of
risks, such as the ability to collect our accounts receivable and the
recoverability of the carrying values of our long-term assets. We do not
presently enter into any transactions involving derivative financial instruments
for risk management or other purposes.
Our
available cash balances are invested in Money Market funds (invested primarily
in Government Securities) with generally immediate liquidity. These
short-term cash-like investments are subject to general interest rate and
general market risks. However, lack of timely access to these funds
or loss of any portion of principal could be catastrophic to the ongoing funding
and health of our business. Substantially all of our cash flows are derived from
our operations within the United States and today we are not subject to market
risk associated with changes in foreign exchange rates.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
Our
financial statements, the related notes and the Independent Registered Public
Accountant’s Report(s) thereon, are included in Applied Energetics’ 2008
Financial Statements and are filed as a part of this report on page F-1 following
the signatures.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE:
There
were no changes in or disagreements with accountants on accounting and financial
disclosure matters.
ITEM
9A. CONTROLS AND PROCEDURES:
CONCLUSION
REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures as of December 31, 2008. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the “Exchange Act”), means controls and other procedures
of a company that are designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the company's management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on that evaluation our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are
effective.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f) or
15d-15(f) under the Exchange Act. Internal control over financial reporting is a
process designed by, or under the supervision of, our principal executive and
principal financial officers and affected by our Board of Directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Internal
control over financial reporting includes those policies and procedures
that:
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the company's
assets;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of the management
and directors of the company; and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company's assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
has conducted an assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2008, based on the framework established
in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO Framework). This assessment
included an evaluation of the design of our internal control over financial
reporting and testing of the operational effectiveness of those controls. Based
on our assessment under the criteria described above, management has concluded
that our internal control over financial reporting was effective as of December
31, 2008.
The
effectiveness of our internal control over financial reporting as of December
31, 2008 has been audited by BDO Seidman, LLP, an independent registered public
accounting firm, as stated in their attestation report, which is included as a
part of our 2008 Financial Statements filed as a part of this report on page F-2 following
the signatures.
Changes
in Internal Control Over Financial Reporting
There has
been no change in Applied Energetics’ internal control over financial reporting
for the quarter ended December 31, 2008 that materially affected our internal
control over financial reporting.
ITEM
9B. OTHER INFORMATION:
On March
12, 2009, Mr. Marshall’s (the company’s Chairman and CEO) employment agreement
was amended to provide Mr. Marshall with a life insurance policy with a benefit
of up to $3,000,000, provided that the annual premiums and other costs to the
company under the policy do not exceed $14,000. Mr. Marshall will
also be provided with a tax gross up for the life insurance policy, his
temporary housing, travel and car allowance. Additionally, the
company will pay Mr. Marshall’s reasonable costs associated with relocating to
the Tucson, Arizona area.
On March
12, 2009, Mr. Marshall received a grant of 800,000 stock options having an
exercise price of $0.50, exercisable for a period of three-years and vesting as
to 400,000 shares immediately and 200,000 shares on each of March 9, 2010 and
2011.
On March
15, 2009, our board of directors suspended the automatic stock awards and stock
option grants until further action by the board is taken to determine the timing
of the grants and whether any additional changes shall be made to the
grants.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE:
The
following is information with respect to our executive officers and
directors:
Name
|
|
Age
|
|
Principal
Position
|
|
|
|
|
|
Dana
A. Marshall
|
|
50
|
|
Chairman
of the Board, Chief Executive Officer,
|
|
|
|
|
President
and Assistant Secretary
|
Kenneth
M. Wallace
|
|
46
|
|
Chief
Financial Officer, Principal Accounting Officer
|
|
|
|
|
and
Secretary
|
Joseph
C. Hayden
|
|
50
|
|
Executive
Vice President - Programs
|
Stephen
W. McCahon
|
|
49
|
|
Executive
Vice President - Engineering
|
David
C. Hurley
|
|
68
|
|
Director
|
George
P. Farley
|
|
70
|
|
Director
|
James
K. Harlan
|
|
57
|
|
Director
|
James
A. McDivitt
|
|
79
|
|
Lead
Independent Director
|
James
M. Feigley
|
|
59
|
|
Director
|
Dana A.
Marshall: Dana A. Marshall has been our Chairman of the Board
since November 2007, Chief Executive Officer, President and Director since
August 2006 and was appointed Assistant Secretary of the company in February
2008. Mr. Marshall has over 20 years of experience in the laser and optical
technologies in the aerospace and defense industries. Mr. Marshall is a member
of the Board of Directors of Research-Electro Optics, a privately held company.
Mr. Marshall served as Vice President, Optical Systems SBU of Zygo Corporation,
a publicly traded company, from September 2004 through March 2006. From June
2003 through August 2005, Mr. Marshall owned and operated Infusafe LLC, a
partner in a venture to develop and market designs for pharmaceutical packaging,
and from June 2001 to September 2003, Mr. Marshall managed his income properties
through Cricklewood Realty LLC. From 1993 through 2000, Mr. Marshall was Chief
Executive Officer, President and Chairman of the Board of Cutting Edge
Optronics, Inc., a developer and manufacturer of high power solid state and
semiconductor lasers which he founded in 1993, developed and sold to TRW
Incorporated in 2004. Before founding Cutting Edge Optronics, Mr. Marshall’s
career included substantial positions in strategic planning and program
management, at major defense companies, including serving as Program Manager,
Lasers and Electronic Systems Division of McDonnell Douglas Corporation. Prior
to joining McDonnell Douglas, Mr. Marshall began his defense industry career in
1982 at General Dynamics Corporation, and rose to become Manager of Strategic
Planning at Corporate Headquarters.
Kenneth M.
Wallace: Mr. Wallace has been the Chief Financial Officer
since March, 2006 and was appointed our Principal Accounting Officer in November
2007 and Secretary in February 2008. In June 2006, Mr. Wallace was appointed our
Chief Operating Officer and served in this capacity until October 2007. From
October 2005 through March 2006, Mr. Wallace was Chief Financial Officer of
Crosswalk, Inc., an early-stage software development company. From
July 2004 until May 2005, (when the company received an offer to sell), Mr.
Wallace was Senior Vice President and Chief Operating Officer of a building
products manufacturer based in Chandler, Arizona. From 2000 through that
company’s sale in 2004, Mr. Wallace was Chief Financial Officer and a Director
of MOXTEK, a scientific instrumentation company specializing in X-Ray optics and
nano-structured polarization technologies. From 1996 to 2000, Mr. Wallace was
Chief Financial Officer of LAB-Interlink, a high-tech laboratory automation
company specializing in the remote handling of clinical laboratory
specimens.
Joseph C. Hayden: Joseph C.
Hayden has been the Executive Vice President - Programs for Applied Energetics
since December 2004. Prior to that, Mr. Hayden was the Executive Vice President
of Business Operations from November 2002 to 2004. Mr. Hayden has over 25 years
experience in managing large engineering projects and high technology research
and development. Mr. Hayden is responsible for Contract Bid and Proposals and
administration of existing contracts for Applied Energetics. Prior to the
founding of Applied Energetics, Mr. Hayden worked at Raytheon, Inc. and also at
two other start-up companies. A graduate of the U.S. Naval Academy,
Mr. Hayden was a U.S. Navy Surface Warfare Officer and Nuclear Engineer before
leaving the service to work in industry.
Stephen W. McCahon: Stephen W.
McCahon has been the Executive Vice President - Engineering for Applied
Energetics since November 2002. Dr. McCahon has an extensive
background in optical physics, solid-state physics, ultra-short pulse lasers and
non-linear optics, and a broad background in Electrical Engineering (BSEE, MSEE,
PH.D. EE/Physics). Dr. McCahon has more than 40 scientific
publications and holds 10 issued patents with 3 pending. Prior to joining
Applied Energetics, Dr. McCahon had been Chief Engineer of Raytheon’s Directed
Energy Weapon Product Line. Previously, he had been a Member of the
Research Staff at Hughes Research Laboratories in Malibu, CA (Currently known as
HRL Laboratories).
David C.
Hurley: David C. Hurley is our Lead Independent Director and
served as the independent Chairman of our Board from March 2006 until December
2007. Mr. Hurley was appointed Vice Chairman of PrivatAir of Geneva, Switzerland
on February 1, 2003, relinquishing the role of Chief Executive Officer, a
position he held following the acquisition of Flight Services Group ("FSG") by
PrivatAir in 2000. PrivatAir has major business aviation operations in
over fifteen bases in the U.S. and aircraft service operations at Le Bourget,
Paris, France; Dusseldorf, Munich and Hamburg Germany; and Geneva, Switzerland.
Mr. Hurley founded FSG in 1984. FSG is one of the world's largest
providers of corporate aircraft management, executive charter and aircraft sales
and acquisitions in the U.S. Mr. Hurley has over 30 years experience in
marketing and sales in the aerospace and telecommunications industries. Before
founding FSG, he served as the Senior Vice President of Domestic and
International Sales for Canadair Challenger. He also served as Regional Manager
of the Cessna Aircraft Company and as Director of Marketing, Government and
Military Products Division, for the Harris Intertype Corporation. Mr. Hurley
serves as the Chairman of the Board of the Smithsonian Institution' s National
Air and Space Museum, Washington, D.C.; and serves on the Boards of BE
Aerospace, Inc., a public company, Hexcel Corp., a public company listed on the
New York Stock Exchange, Genesee & Wyoming, Inc., a public company listed on
the New York Stock Exchange, Genesis Lease, Ltd., a public company listed on the
New York Stock Exchange, The Corporate Angel Network, White Plains, N.Y., and
Aerosat, Inc., Manchester, NH. He is an alumnus of Hartwick College and served
three years in the Special Services Branch of the US Army, receiving an
honorable discharge.
George P. Farley: George P.
Farley, a certified public accountant, has been a member of our Board of
Directors since March 2004. Mr. Farley is Chairman of our Audit Committee and
also serves as a member of our Compensation Committee. Mr. Farley has been
providing financial consulting services since 1999. Through 2007, Mr.
Farley served as a Director and a member of the Audit Committee of iCad, Inc. He
has also served as a Director and member of the Audit Committee of Preserver
Insurance Company, Inc. and Acorn Holdings Corp and as a Director for Olympia
Leather Company, Inc. From November 1997 to August 1999, Mr. Farley was a Chief
Financial Officer of Talk.com, Inc., which provides telecommunication services.
Mr. Farley was also a director of Talk.com, Inc. Mr. Farley joined BDO Seidman,
LLP in 1962 and was a partner at BDO Seidman, LLP from 1972 to 1995 with
extensive experience in accounting, auditing and SEC matters.
James K. Harlan: James K.
Harlan has been a member of our Board of Directors since March 2004. Mr. Harlan
is the Chairman of our Compensation Committee and serves as a member of our
Audit Committee. Mr. Harlan is the Executive Vice President and Chief Financial
Officer of HNG Storage, LP, a natural gas storage development and operations
business that he helped found in 1992. From 1991 to 1997, Mr. Harlan served as
Group Development Manager for the Pacific Resources Group which was engaged with
various manufacturing and distribution businesses and joint ventures in Asia,
Australia, and North America. He also served as operations research and planning
analyst for the White House Office of Energy Policy and Planning from 1977 to
1978, the Department of Energy from 1978 to 1981, and U.S. Synthetic Fuels
Corporation from 1981 to 1984. He has a PhD in Public Policy with an operations
research dissertation from Harvard University and a BS in Chemical Engineering
from Washington University in St. Louis. Mr. Harlan was a member of the Board of
Directors of iCAD and was a member of the Audit and Governance Committees until
July 2008.
James A. McDivitt: James A.
McDivitt has served as a member of our Board of Directors since February 2006.
Mr. McDivitt serves as a member of our Compensation Committee and our Audit
Committee and as Chairman of our Nominating and Corporate Governance Committee.
Mr. McDivitt currently serves as a director of Silicon Graphics Inc., a publicly
traded company. From 1981 until his retirement in 1995, Mr. McDivitt was
employed at Rockwell International Corporation, most recently as its Senior Vice
President, Government Operations and International. Mr. McDivitt joined Pullman
Inc. in 1975 as its Executive Vice President and, in October 1975 he became
President of its Pullman Standard Division, The Railcar Division, and later had
additional responsibility for the leasing, engineering and construction areas of
the company. From 1972 through 1975, he was Executive Vice President Corporate
Affairs for Consumers Power Company. Mr. McDivitt joined the United States Air
Force in 1951 and retired with the rank of Brigadier General in 1972. During his
service with the U.S. Air Force, Mr. McDivitt was selected as an astronaut in
1962 and was Command Pilot for Gemini IV and Commander of Apollo 9 and Apollo
Spacecraft Program Manager from 1969 to 1972, including Apollo 12 through 16
missions. Mr. McDivitt holds a B.S. degree in Aeronautical Engineering from the
University of Michigan.
James M. Feigley: James M.
Feigley has served as a member of our Board of Directors since June 2008. Mr.
Feigley serves as a member of our Compensation Committee. Mr. Feigley has served
as President of Rock River Consulting, Inc. a defense consulting firm he founded
in May 2003 after retiring from the U.S. Marine Corps. General
Feigley served as Commander of the Marine Corps Systems Command from 1998
through 2002, where he was the executive authority on research, development,
procurement, fielding and life cycle support for all Marine Corps ground combat,
combat support and combat service support equipment, ordinance and systems.
General Feigley served as Direct Reporting Program Manager to the Assistant
Secretary of the Navy, Research, Development and Acquisition Program from 1993
through 1998, during which time he was in charge of business planning, cost
estimating, technical risk analyses and management, systems engineering and
numerous other responsibilities. He served as Project Manager for the
Headquarters, U.S. Marine Corps and Naval Sea Systems Command from 1986 through
1993, where he managed all technology base projects for ‘Advanced Amphibious
Assault Vehicle’ and wrote all technical, financial, cost, management, risk,
planning and performance documentation. General Feigley also served as a member
of the United States Marine Corps from 1972 through 1986. He received a BS from
the University of Wisconsin- Oshkosh in 1972 and graduated from the Army
Logistics Management Center in 1982, the Marine Corps Command and Staff College
in 1986 and the Defense Systems Management College in 1986. He currently serves
as Distinguished Guest Lecturer at the Defense Acquisition University and an
Associate Member of the Naval Research Advisory Committee. Mr. Feigley retired
from the Marine Corps as a Brigadier General in 2002 and received many
decorations and honors during his military career.
SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE:
Section
16(a) of the Securities Exchange Act of 1934 requires certain officers and
directors of Applied Energetics, and any persons who own more than ten percent
of the common stock outstanding to file forms reporting their initial beneficial
ownership of shares and subsequent changes in that ownership with the SEC and
the NASDAQ Global Market. Officers and directors of Applied Energetics, and
greater than ten percent beneficial owners are also required to furnish us with
copies of all such Section 16(a) forms they file. None of our
officers or directors failed to file any Section 16(a) forms, nor were any such
persons late in making any such filings.
CODE
OF ETHICS:
Applied
Energetics has adopted a Code of Business Conduct and Ethics that applies to all
of Applied Energetics’ employees and directors, including its principal
executive officer, principal financial officer and principal accounting officer.
Applied Energetics’ Code of Business Conduct and Ethics covers all areas of
professional conduct including, but not limited to, conflicts of interest,
disclosure obligations, insider trading, confidential information, as well as
compliance with all laws, rules and regulations applicable to Applied
Energetics’ business.
Upon
request made to us in writing at the following address, our Code of Ethics and
Business Conduct will be provided without charge:
Applied Energetics, Inc.
Attn: Compliance Officer
3590 E Columbia St.
Tucson, AZ 85714
COMMITTEES
OF THE BOARD OF DIRECTORS:
AUDIT COMMITTEE:
The Audit
Committee of the Board of Directors is comprised of Messrs. Farley, Harlan and
McDivitt. The Audit Committee makes recommendations concerning the engagement of
independent public accountants, reviews with the independent public accountants
the scope and results of the audit engagement, approves professional services
provided by the independent public accountants, reviews the independence of the
independent public accountants, considers the range of audit and non-audit fees
and reviews the adequacy of our internal accounting controls. Our Board of
Directors has determined that each committee member meets the independence and
financial literacy requirements under current NASD Marketplace rules applicable
to companies whose securities are quoted on NASDAQ. In addition, our Board of
Directors has determined that Mr. Farley is an “audit committee financial
expert” as defined under Item 401(h) of Regulation S-K of the SEC. Refer to Item
10 above for Mr. Farley's qualifications.
COMPENSATION
COMMITTEE:
The
Compensation Committee of the Board of Directors is comprised of Messrs. Harlan,
Farley and Feigley. The committee is responsible for establishing and
maintaining executive compensation practices designed to encourage company
profitability and enhance long-term shareholder value.
NOMINATING
AND CORPORATE GOVERNANCE COMMITTEE:
The
Nominating and Corporate Governance Committee is comprised of Messrs. McDivitt
and Hurley. The Committee is responsible for establishing and maintaining
corporate governance practices designed to aid the long-term success of Applied
Energetics and effectively enhance and protect shareholder value.
ITEM
11. COMPENSATION DISCUSSION AND ANALYSIS:
Executive
Compensation Philosophy
Our board
of directors is committed to establishing and maintaining executive compensation
practices designed to support the development of the company’s capabilities and
business objectives, enhance our profitability and enhance long-term shareholder
value. Toward these aims, in March 2006, our board of directors
established a compensation committee. This committee reports to the
board on executive compensation matters.
Compensation
Committee
Membership
The
committee is currently comprised of three independent members of the
Board. Director independence is, at a minimum, consistent with
applicable rules for NASDAQ-traded issuers, Rule 16b-3 of the Exchange Act, and
Section 162(m) of the Internal Revenue Code. Currently, the members
of the committee are James K. Harlan (chairman), George P. Farley and James M.
Feigley. David Hurley was appointed to and served as chairman of the
Compensation Committee from June, 2008 through November, 2008, a period of time
when Mr. Harlan had recused himself from all compensation matters while he was
an active candidate for representative to the United States
Congress.
Process and procedures for
considering and determining executive and director compensation.
Among
other things, the committee has the authority and responsibility under its
charter to:
|
·
|
Approve
our compensation philosophy.
|
|
·
|
Formulate,
evaluate, and approve compensation for our officers, as defined in Section
16 of the Securities and Exchange Act of 1934 and rules and regulations
promulgated therein.
|
|
·
|
Formulate,
approve, and administer cash incentives and deferred compensation plans
for executives. Cash incentive plans are based on specific
performance objectives defined in advance of approving and administering
the plan.
|
|
·
|
Oversee
and approve all compensation programs involving the issuance of our stock
and other equity securities.
|
|
·
|
Review
executive supplementary benefits, as well as our retirement, benefit, and
special compensation programs involving significant cost to us, as
necessary and appropriate.
|
|
·
|
Review
compensation for terminated
executives.
|
|
·
|
Oversee
funding for all executive compensation
programs.
|
|
·
|
Review
compensation practices and trends of other companies to assess the
adequacy of our executive compensation programs and
policies.
|
|
·
|
Secure
the services of external compensation consultants or other experts, as
necessary and appropriate. These services, as required, will be
paid from funds provided by the company. This system is
designed to ensure the independence of such external
advisors.
|
|
·
|
Approve
employment contracts, severance agreements, change in control provisions,
and other compensatory arrangements with our
executives.
|
Role
of Chief Executive Officer in Recommending Executive Compensation.
The
committee makes all compensation decisions related to our named executive
officers. However, our Chief Executive Officer regularly provides information
and recommendations to the committee on the performance of the executive
officers, appropriate levels and components of compensation, including equity
grants as well as other information as the committee may request.
Compensation
Goals
Our
compensation policies are intended to achieve the following
objectives:
|
·
|
reward
executives and employees for their contributions to our growth and
profitability, recognize individual initiative, leadership, achievement,
and other valuable contributions to our
company.
|
|
·
|
to
link a portion of the compensation of officers and employees with the
achievement of our overall performance goals, to ensure alignment with the
our strategic direction and values, and to ensure that individual
performance is directed towards the achievement of our collective
goals;
|
|
·
|
to
enhance alignment of individual performance and contribution with
long-term stockholder value and business objectives by providing equity
awards;
|
|
·
|
to
motivate and provide incentives to our named executive officers and
employees to continually contribute superior job performance throughout
the year; and
|
|
·
|
to
obtain and retain the services of skilled employees and executives so that
they will continue to contribute to and be a part of our long-term
success.
|
Compensation
programs and policies are reviewed and approved annually but could be adjusted
more frequently if determined by the committee. Included in this
process is establishing the goals and objectives by which employee and executive
compensation is determined. Executive officers’ performance is
evaluated in light of these performance goals and objectives. The
committee consults the Chief Executive Officer on the performance of other
company executives.
Compensation
Surveys and Compensation Consultants
In
determining compensation levels, we review compensation levels of companies that
we deem to be similar to our company regardless of their location, competitive
factors to enable us to attract executives from other companies, and
compensation levels that we deem appropriate to retain and motivate our
executives. From time to time, we retain the services of independent
compensation consultants to review a wide variety of factors relevant to
executive compensation, trends in executive compensation, and the identification
of relevant peer companies. The committee makes all determinations regarding the
engagement, fees, and services of our compensation consultants, and our
compensation consultants report directly to our committee.
Elements
of Compensation
Compensation
for our executives is generally comprised of:
|
·
|
base
salary which is targeted at a competitive level and used to reward
superior individual job performance of each named executive officer and to
encourage continued superior job
performance;
|
|
·
|
cash
bonuses which are tied to specific, quantifiable and objective performance
measures based on a combination of corporate and individual goals, and
discretionary bonuses;
|
|
·
|
equity
compensation which is based on corporate and individual performance, and
discretionary equity awards.
|
|
·
|
severance
and change of control agreements;
|
|
·
|
other
benefits plan and programs.
|
The
principles which serve as the basis for executive compensation practices apply
to the compensation structures for all employees. Namely, corporate and
individual performance are the key factors which determine incentive
compensation.
The
committee considers each component of executive compensation in light of total
compensation. In considering adjustments to the total compensation of each named
executive officer, the committee also considers the value of previous
compensation, including outstanding equity grants and equity
ownership.
Compensation
paid to executive officers must be approved by our board of directors or by the
committee. The committee conducts several meetings in person or
telephonically to review and consider our compensation program and policies, as
well as specific elements of executive compensation.
Compensation
Considerations
In
setting compensation levels for a particular executive, the committee takes into
consideration
|
·
|
the
proposed compensation package as a
whole
|
|
·
|
each
element of compensation
individually
|
|
·
|
the
executive's past and expected future contributions to our
business
|
|
·
|
our
overall company performance,
|
|
·
|
our
financial condition and prospects,
|
|
·
|
the
need to retain key employees, and
|
|
·
|
general
economic conditions.
|
In order
to enable the company to hire and retain talented executives, the committee may
determine that it is in the best interests of the company to negotiate packages
that may deviate from the company's standard practices in setting the
compensation for certain of its executive officers when such deviation is
required by competitive or other market forces.
Base
Salary
Base
salaries for the named executive officers and other executives are determined
based on market data analysis of comparable positions in the identified
compensation peer group. A competitive base salary is provided to each executive
officer to recognize the skills and experience each individual brings to the
company and the performance contributions they make. When determining the base
salary for an executive, we reference a target of the base salaries of similar
positions in the identified compensation peer group. Other factors are also
taken into account such as internal comparisons, individual skills and
experience, length of time with the company, performance contributions and
competitiveness of the marketplace. Salaries are reviewed on an annual basis,
taking into account the factors described above, and are made in connection with
annual performance reviews. The amounts of such adjustments are calculated using
merit increase guidelines based on the employee's position within the relevant
compensation range and the results of his or her performance review. The
recommended percentage increases are established annually and reflect the
committee's assessment of appropriate salary adjustments based on competitive
surveys and general economic conditions.
Pursuant
to his employment agreement in August 2006, Mr. Marshall, our Chairman, Chief
Executive Officer and President received an annual base salary of established
initially at $250,000 with a provision for annual review of compensation. After
a review of Mr. Marshall’s performance and consideration of prevailing
compensation levels for executive talent such as is required for the company,
the committee increased Mr. Marshall’s annual base salary to $350,000, effective
October 1, 2007. After considering the factors described above, the
committee determined not to make any adjustments to Mr. Marshall’s base salary
during 2008.
In
connection with his hiring and the negotiation of his compensation package in
March 2006, Mr. Wallace, our Chief Financial Officer and Principal Accounting
Officer, received an annual base salary of $190,000. In February 2007, after the
initial year of service and a review of compensation levels for the CFO of
similarly sized public companies, the committee increased Mr. Wallace’s annual
base salary to $210,000 effective February 1, 2007. On October 24, 2007, the
board approved Mr. Wallace’s employment agreement which increased Mr. Wallace’s
annual base salary to $225,000. After considering the factors described above,
the committee determined not to make any adjustments to Mr. Wallace’s base
salary during 2008.
During
the fourth quarter of 2007, the committee reviewed prevailing practices for
compensation of professionals in similar functions as Messrs. Hayden and
McCahon, who as co-founders of our company have significant stock
holdings. During 2006, Mr. Hayden, our Executive Vice-President of
Programs and Mr. McCahon, our Executive Vice-President of Engineering, each
received an annual base salary of $183,750. Effective December 3,
2007, the committee increased the annual base salaries of Messrs. McCahon and
Hayden to $235,000 and $225,000, respectively. After considering the
factors described above, the committee determined not to make any adjustments to
either Mr. McCahon’s or Mr. Hayden’s base salaries during 2008.
Other
than the annual base salary for Mr. Marshall, the levels of annual base salary
were determined based on the recommendation made by the Chief Executive Officer
and approved by the committee. Each individual’s educational qualifications,
leadership skills, demonstrated knowledge and business accomplishments were also
evaluated in determining base salary levels.
Cash
Bonus
Our
practice is to periodically consider awarding cash bonuses based upon, among
other things, accomplishment of key objectives and overall performance. In
addition, from time-to-time the committee may approve payment of bonuses to
executives or key contributors for special accomplishment or other reasons.
These goals may include progress made in technical programs and technology and
product development, improved utilization of company resources and progress in
relationships with key customers and strategic alliances and financing
activities and the financial results of the company. Generally, the company does
not disclose specific targets relating to these goals, because doing so may
disclose confidential business information.
Although
significant advances were made in LGE technology research and development, and
customer relations and certain battle field products were delivered to our
customer, due to current economic conditions and the performance of our stock,
the committee determined not to award cash bonuses for 2008.
Long-Term
Incentives for Non-Executive Employees
The
long-term program defined by the committee in 2007 remained unchanged in 2008,
and includes three major elements: (1) an annual equity grant based on a
percentage of base compensation for all employees other than officers, (2)
performance incentive grants to selected managerial, technical, and
administrative employees at all levels with vesting of a portion of these grants
keyed to achievement of objectives defined in the annual budgeting and planning
process and approved by the Board Committee, and (3) special grants for specific
accomplishments or contributions as determined by the Board Committee. The first
and second elements of this program lead to expected grants made during the
fourth quarter as part of the budgeting and planning process, while the third
element may lead to grants only from time to time, if at
all. Generally, the restricted stock grants under the first two
elements of this program vest over three years to provide for retention and long
run commitment to the success of the company and the grants under the third
element vest upon the earlier of the achievement of the performance objective or
five years from grant.
In 2008,
the committee determined that offering employees the right to exchange their
existing options for new options was, at that time, a preferable means of
providing long-term incentive compensation. In connection with the
exchange offer, which was completed on March 9, 2009, employees were offered the
right to exchange two existing options for one new option. In the
exchange offer, the company issued 1,751,268 new options in exchange for
3,502,536 old options. The new options, which are fully vested, are
exercisable at any time over a three year period. The exercise price
of the new options is $0.50 per share. There were no new equity
grants made to non-executive employees in 2008, except for new hire grants made
in the normal course of business.
The long
term program, which remains in place for 2009, seeks to provide all employees
with an equity interest in the company and its success. The opportunity to
realize significant increments over base annual compensation if the company
succeeds in building value for customers and stockholders is intended to support
recruitment and retention of talented professionals who are sought by larger
businesses. The use of restricted stock grants reflects a trend in equity
compensation practices following the adoption of new accounting standards for
equity based compensation and the desire to provide greater equity incentives
with reduced stockholder dilution while utilizing fewer shares from stockholder
approved equity compensation plans that are subject to overall and annual
limits. Our restricted stock grants typically vest over several years and the
performance based grants subject to accelerated vesting when targets are met and
revocation if performance targets are not reached within defined periods.
Specific performance targets are defined in the planning and budgeting process
and may include items that are company confidential and, in some cases, subject
to classification or confidentiality restrictions imposed by our
customers. The portion of equity compensation grants linked to
performance has initially been set at a modest percentage (about 10%), but this
is intended to increase over time as the scope and predictability of the
company’s activities in various areas increase. The initial performance targets
for this newly defined long term compensation program have a high probability of
being achieved. In future years, the portion and achievement likelihood for
performance compensation may be adjusted with the growth, predictability, and
maturity of the company’s planning and budgeting process.
Long-Term
Incentives for Executives
In 2008,
the committee determined that offering employees the right to exchange their
existing options for new options was, at that time, a preferable means of
providing long-term incentive compensation to executives. In
connection with the exchange offer, which was completed on March 9, 2009,
employees were offered the right to exchange two existing options for one new
option. In the exchange offer, the company issued 1,751,268 new
options in exchange for 3,502,536 old options. The new options, which
are fully vested, are exercisable at any time over a three year
period. The exercise price of the new options is $0.50 per
share.
During
2008, the committee determined to grant stock options to Mr. Marshall to
purchase 800,000 shares of common stock, but determined that such grant would be
made in connection with the completion of the exchange offer. In
connection with the exchange offer, Mr. Marshall and Mr. Wallace respectively
exchanged the 200,000 and 420,000 options granted to them in exchange for
100,000 and 210,000 new options on the same terms and conditions as the other
employees and directors participating in the exchange offer. Mr. Marshall holds
800,000 options, which were not eligible to participate in the exchange
offer. On March 12, 2009, Mr. Marshall received a grant of 800,000
stock options having an exercise price of $0.50 which vested as
follows: 400,000 on March 9, 2009, (the date the new options were
issued in the exchange offer), 200,000 on each of the first and second
anniversaries of the grant date, and expiring on March 9, 2012. The
purpose of the March 12, 2009 grant was to provide Mr. Marshall with a long-term
incentive which more closely approximated the current market price of our common
stock.
Mr.
McCahon and Mr. Hayden did not participate in the exchange offer as they did not
have outstanding eligible options subject to the exchange offer. The
committee determined not to make equity awards to these officers in 2008 since
they have a substantial amount of equity.
No other
long-term equity incentives were granted to Named Executive officers during
2008.
Severance
and Change in Control Agreements
Pursuant
to Mr. Marshall’s employment agreement, as amended, if Mr. Marshall’s employment
is terminated by us without “cause”, or by Mr. Marshall for “good reason”, he
would receive payment of his base salary and benefits for 12 months, in monthly
installments. Additionally, following a change of control, all unvested stock
options and restricted stock granted to Mr. Marshall will immediately vest and
become exercisable for the full term of the option and all other unvested equity
awards shall immediately vest. In negotiating these terms, the committee
determined that it was in the best interest of the company, in light of the
authority vested in the Board as a whole to determine the acceptability of any
discussions or prospective transactions, to provide Mr. Marshall as CEO with
incentives to support the development and completion of transactions that might
lead to a change of control without concern for the impact of any such
transaction to him relating to vesting of equity awards or cash compensation
related to transition of employment that might occur following a change of
control.
Pursuant
to Mr. Wallace’s employment agreement, if Mr. Wallace’s employment is terminated
by us without “cause”, he would receive payment of his base salary and benefits
for six months, in monthly installments. If Mr. Wallace is terminated within
three months following a change of control, all unvested stock options granted
to Mr. Wallace will immediately vest and become exercisable for the full term of
the option and all other unvested equity awards shall immediately
vest.
Other
Benefit Plans and Programs.
Executives
are eligible to participate in benefit programs designed for all of our
full-time employees. These programs include a 401(K) savings plan and medical,
dental, disability and life insurance programs. We currently cover
the majority of such medical, dental and insurance payments requiring a minor
co-pay from the employee. Additionally, under our 401(K) plan
employees are eligible to contribute to their 401(K) accounts through payroll
deductions. In 2007, we implemented an employer match benefit where we matched
50% of the employees’ 401(K) contribution up to 3% of their eligible
compensation.
Pursuant
to his employment agreement, during 2008 Mr. Marshall received $39,411 related
to payments of temporary living and automobile expenses. On March 12,
2009, Mr. Marshall’s employment agreement was amended to provide Mr. Marshall
with a life insurance policy with a benefit of up to $3,000,000, provided that
the annual premiums and other costs to the company under the policy do not
exceed $14,000. Mr. Marshall will also be provided with a tax gross
up for the life insurance policy, his housing, travel and car
allowance. Additionally, the company will pay Mr. Marshall’s
reasonable costs associated with relocation to the Tucson, Arizona
area.
SUMMARY
COMPENSATION TABLE
The
following table discloses for the periods presented the compensation for the
persons who served as our Chief Executive Officer and our Chief Financial
Officer and our three most highly compensated other executive officers (not
including the Chief Executive Officer and Chief Financial Officer) whose total
individual compensation exceeded $100,000 for the years ended December 31, 2008,
2007 and 2006 (the “Named Executives”).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
Name and Principal
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Compensation
|
|
|
|
|
Position
|
|
Year
|
|
|
Salary (1)
|
|
|
Bonus (2)(3)
|
|
|
Awards (4)
|
|
|
Awards (5)
|
|
|
(6)
|
|
|
Total
|
|
Dana
A. Marshall
|
|
2008
|
|
|
$ |
350,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
71,949 |
|
|
$ |
421,949 |
|
Chairman,
Chief Executive
|
|
2007
|
|
|
$ |
273,077 |
|
|
$ |
125,000 |
|
|
$ |
300,385 |
|
|
$ |
500,666 |
|
|
$ |
89,439 |
|
|
$ |
1,288,567 |
|
Officer,
President and
|
|
2006
|
|
|
$ |
87,500 |
|
|
$ |
75,000 |
|
|
$ |
- |
|
|
$ |
243,108 |
|
|
$ |
16,185 |
|
|
$ |
421,793 |
|
Assistant
Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth
M. Wallace
|
|
2008
|
|
|
$ |
225,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
7,064 |
|
|
$ |
232,064 |
|
Chief
Financial Officer,
|
|
2007
|
|
|
$ |
210,046 |
|
|
$ |
100,000 |
|
|
$ |
126,162 |
|
|
$ |
368,029 |
|
|
$ |
6,858 |
|
|
$ |
811,095 |
|
Principal
Accounting Officer
|
|
2006
|
|
|
$ |
146,154 |
|
|
$ |
20,000 |
|
|
$ |
- |
|
|
$ |
421,851 |
|
|
$ |
27,360 |
|
|
$ |
615,365 |
|
and
Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
C. Hayden
|
|
2008
|
|
|
$ |
225,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
4,813 |
|
|
$ |
229,813 |
|
Executive
Vice President -
|
|
2007
|
|
|
$ |
199,549 |
|
|
$ |
50,000 |
|
|
$ |
9,864 |
|
|
$ |
- |
|
|
$ |
5,109 |
|
|
$ |
264,522 |
|
Programs
|
|
2006
|
|
|
$ |
183,750 |
|
|
$ |
10,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
6,672 |
|
|
$ |
200,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen
W. McCahon
|
|
2008
|
|
|
$ |
235,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
6,206 |
|
|
$ |
241,206 |
|
Executive
Vice President -
|
|
2007
|
|
|
$ |
200,126 |
|
|
$ |
40,000 |
|
|
$ |
13,085 |
|
|
$ |
- |
|
|
$ |
5,459 |
|
|
$ |
258,670 |
|
Engineering
|
|
2006
|
|
|
$ |
183,750 |
|
|
$ |
10,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,962 |
|
|
$ |
196,712 |
|
(1)
|
Mr.
Marshall’s 2007 salary reflects the increase of his base salary to
$350,000 effective October 1, 2007. In August 2006, we entered into an
employment agreement with Mr. Marshall that provided for Mr. Marshall’s
employment as the company’s President and Chief Executive Officer at an
initial annual base salary of $250,000. Mr. Wallace’s 2007 salary reflects
increases of his base salary to $210,000 effective February 1, 2007 and to
$225,000 effective October 26, 2007. In March 2006, we hired Mr. Wallace
as our Chief Financial Officer at an annual base salary of $190,000.
Accordingly, Mr. Wallace’s and Mr. Marshall’s salaries reflect only their
service for the remaining portion of calendar year 2006. Messrs. Hayden
and McCahon’s 2007 salary reflect increases in their annual base salary to
$200,000 effective March 1, 2007, and another increase effective December
3, 2007 to $225,000 for Mr. Hayden and $235,000 for Mr.
McCahon.
|
(2)
|
Mr.
Marshall’s cash bonus of $125,000 in 2007 was determined by the committee
considering performance as specified in Mr. Marshall’s employment
agreement. This cash bonus was paid in January 2008. Mr. Wallace’s 2007
$100,000 cash bonus was comprised of a $60,000 bonus paid on the execution
of his employment agreement and a $40,000 bonus, paid in January 2008,
which was granted by the compensation committee as a part of a performance
based review related to his contribution to meeting corporate goals for
2007. The cash bonuses that Messrs. Hayden and McCahon received of $50,000
and $40,000, respectively, were granted by the compensation committee in
consideration of their contributions to meeting goals during 2007 and
prior years. These bonuses were paid in January
2008.
|
(3)
|
Mr.
Marshall’s bonus of $75,000 in 2006 is comprised of a $15,000 signing
bonus and a $60,000 cash bonus granted by the compensation committee in
December 2006 in recognition of Mr. Marshall’s accomplishments in the
first five months of employment. This cash bonus was paid in January 2007.
The bonuses that Messrs. Wallace, Hayden and McCahon received of $20,000,
$10,000 and $10,000, respectively, were granted by the compensation
committee as a performance based award considering contribution to meeting
goals during 2006.
|
(4)
|
The
amounts included in the “Stock Awards” column represent the compensation
cost recognized by the company in 2007 related to restricted stock awards,
computed in accordance with SFAS No. 123R. For a discussion of valuation
assumptions, see Note 8 to our 2008 Consolidated Financial
Statements.
|
(5)
|
The
amounts included in the “Option Awards” column represent the compensation
cost recognized by the company in 2007 and 2006 related to stock option
awards, computed in accordance with SFAS No. 123R. For a discussion of
valuation assumptions, see Note 8 to our 2008 Consolidated Financial
Statements.
|
(6)
|
The
2008 amounts shown in the “All Other Compensation” column are attributable
to Mr. Marshall receiving $39,411 for temporary living, travel and
automobile expenses, and $25,105 “gross up” for the payment of taxes for
such expenses. Also included in this amount is the company
match expense for 401(k). The 2007 amounts shown in the “All
Other Compensation” column are attributable to Mr. Marshall receiving
$47,260 for temporary living, travel and automobile expenses and $34,799
“gross up” for the payment of taxes such expenses. All named
executives received the employer match benefit where we match 50% of the
employees’ 401(K) contribution up to 3% of their eligible compensation to
their 401(K) plans, a benefit that is available to all employees.
Additionally, “All Other Compensation” includes the
dollar value of life insurance premiums paid by us for all named executive
officers. The amounts shown in the “All Other Compensation” column for
Messrs. Marshall include payments for commuting costs, temporary housing
assistance and relocation assistance, Mr. Marshall also received
reimbursements of automotive
expenses.
|
GRANTS
OF PLAN-BASED AWARDS
The
following table discloses the grants of a plan-based award to each of the Named
Executives in 2007 and 2008:
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts
|
|
|
Stock
|
|
|
|
|
|
|
|
|
Estimated Future Payouts Under Non-Equity
|
|
|
Under Equity Incentive Plan
|
|
|
Awards:
|
|
|
Grant Date
|
|
|
|
|
|
Incentive Plan Awards
|
|
|
Awards
|
|
|
Number of
|
|
|
Fair Value of
|
|
Name
|
|
Grant
Date
|
|
Threshold
|
|
|
Target&
#160
;($)
|
|
|
Maxium&
#160
;($)
|
|
|
Threshold
|
|
|
Target
|
|
|
Maxium
|
|
|
Shares of
Stock&
;amp
;#16
0;(#)
|
|
|
Stock Awards
|
|
Dana
A.
|
|
|
|
$ |
- |
|
|
$ |
175,000 |
(2) |
|
$ |
175,000 |
(2) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Marshall
|
|
10/26/2007
|
(3) |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
275,000 |
|
|
$ |
976,250 |
|
Kenneth
M.
|
|
|
|
|
- |
|
|
|
56,250 |
(4) |
|
|
56,250 |
(4) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Wallace
|
|
10/26/2007
|
(5) |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
80,000 |
|
|
$ |
284,000 |
|
|
|
11/29/2007
|
(6) |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,500 |
|
|
|
4,500 |
|
|
|
40,500 |
|
|
$ |
147,600 |
|
Joseph
C.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hayden
|
|
11/29/2007
|
(6) |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,500 |
|
|
|
4,500 |
|
|
|
40,500 |
|
|
$ |
147,600 |
|
Stephen
W.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
McCahon
|
|
11/29/2007
|
(6) |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,500 |
|
|
|
4,500 |
|
|
|
40,500 |
|
|
$ |
147,600 |
|
(1)
|
The
amounts included in the “Grant Date Fair Value of Stock Awards” column
represent the full grant date fair value of the awards computed in
accordance with Financial Accounting Standards No. 123R. The fair value of
stock awards is recognized in the income statement as compensation expense
over the vesting period of the grants. For a discussion of valuation
assumptions, see Note 8 to the Consolidated Financial Statements of our
2008 Financial Statements.
|
(2)
|
The
Estimated Future Payouts under Non-Equity Incentive Plan Awards represents
Mr. Marshall’s eligibility to receive an annual incentive bonus in each
calendar year of up to 50% of his base salary if we achieve goals and
objectives established by the compensation committee in accordance with
Mr. Marshall’s employment agreement and is based on his current annual
base salary of $350,000.
|
(3)
|
Pursuant
to the amendment of Mr. Marshall’s employment agreement, on October 26,
2007, the Compensation Committee granted to Mr. Marshall 275,000 shares of
restricted common stock of the company. This restricted stock vest as to
68,750 shares annually on each January 10th from 2008 through
2011.
|
(4)
|
The
Estimated Future Payouts under Non-Equity Incentive Plan Awards represents
Mr. Wallace’s eligibility to receive an annual incentive bonus in each
calendar year of up to 25% of his base salary if we achieve goals and
objectives established by the Compensation Committee in accordance with
Mr. Wallace’s employment agreement and is based on his current annual base
salary of $225,000.
|
(5)
|
Pursuant
to his employment agreement, on October 26, 2007, the Compensation
Committee granted to Mr. Wallace 80,000 shares of restricted common stock
of the company. This restricted stock vest as to 26,666 shares on January
10, 2008 and 26,667 shares on each of January 10, 2009 and January 10,
2010.
|
(6)
|
On
November 29, 2007, the Compensation Committee awarded 45,000 shares of
restricted stock each to Messrs. Wallace, McCahon and Hayden. The
restricted stock grants vest as to 13,500 shares on December 1, 2008, 2009
and 2010. Vesting of the remaining 4,500 shares awarded to each individual
vest upon the achievement of certain specified performance
targets.
|
EMPLOYMENT
AGREEMENTS FOR NAMED EXECUTIVE OFFICERS:
We have
employment agreements with Dana A. Marshall, our Chairman, Chief Executive
Officer and President, and with Kenneth M. Wallace, our Chief Financial Officer
and Principal Accounting Officer.
We
entered into the employment agreement with Mr. Marshall on August 18, 2006, upon
the commencement of his employment with our company, and we amended the
agreement on October 24, 2007. Mr. Marshall’s amended employment
agreement provides for an annual base salary of $350,000, subject to such
increases as our board may determine. The agreement provides an annual incentive
bonus each calendar year of up to 50% of the base salary for the calendar year
if we achieve goals and objectives established by the committee. Pursuant to the
employment agreement, we also provided an inducement grant to Mr. Marshall of
options to purchase 800,000 shares of common stock at an exercise price of $6.30
per share. These options become exercisable as to one quarter of the
shares covered thereby on each of the first four year anniversaries of the date
of grant and expire on the five years from the date of grant. Also, in
accordance with the agreement, we filed a registration statement covering the
shares issuable upon exercise of the option. Mr. Marshall is also
eligible to receive such other cash bonuses or other compensation as may be
awarded by the board during his employment including gross-up tax benefits for
travel and relocation related expenses.
Pursuant
to his employment agreement, we agreed to pay Mr. Marshall a temporary housing
allowance in an amount equal to his actual rental expense (plus an amount equal
to any additional tax consequences to him for such payment, if any), up to
$2,500 per month, for a period through August, 2008, while he establishes a
permanent residence in the Tucson, Arizona area. We also agreed to pay Mr.
Marshall an automobile allowance of $1,000 per month. In August,
2008, the Compensation Committee extended existing temporary living, relocation,
automobile and tax gross-up reimbursements and expenses for Mr. Marshall through
the signing date of a new contract or amendment.
Pursuant
to his employment agreement, during 2008 Mr. Marshall received $39,411 related
to payments of temporary living, relocation and automobile
expenses. On March 12, 2009, Mr. Marshall’s employment agreement was
amended to extend his temporary living expense reimbursement through December
31, 2009 and to provide Mr. Marshall with a life insurance policy with a benefit
of up to $3,000,000, provided that the annual premiums and other costs to the
company under the policy do not exceed $14,000. Mr. Marshall will
also be provided with a tax gross up for the life insurance policy, and his
housing, travel and car allowance. The company will pay his
reasonable costs associated with relocating to the Tucson, Arizona area,
including periodic travel to and from his out-of-state residence for him and his
wife.
Mr.
Marshall’s amended employment agreement is terminable by us immediately for
“cause”, or by us without cause upon 30 days prior written notice or by Mr.
Marshall upon 30 days prior written notice, for any reason including “good
reason”. If Mr. Marshall’s employment is terminated by us without
cause, or by Mr. Marshall for good reason, he would receive payment of his base
salary and benefits, in monthly installments, for 12
months. Additionally, following a change of control, all unvested
stock options awarded to Mr. Marshall will immediately vest and become
exercisable for the full term of the option and all other unvested equity awards
shall immediately vest.
We
entered into the employment agreement with Mr. Wallace on October 26, 2007. Mr.
Wallace’s employment agreement provides for an annual base salary of $225,000,
subject to such increases as our board may determine. The agreement provides for
a signing bonus of $60,000 and an annual incentive bonus each calendar year of
up to 25% of the base salary for the employment year if we achieve goals and
objectives established by the committee. Pursuant to the employment
agreement, we also granted to Mr. Wallace 80,000 shares of restricted common
stock. These shares vest as to 26,666 of the shares on January 10,
2008 and an additional 26,667 of the shares on each of January 10, 2009 and 2010
Mr. Wallace is also eligible to receive such other cash bonuses or other
compensation as may be awarded by the board during his employment.
Mr.
Wallace’s employment agreement is terminable by us immediately for “cause”, or
by us without cause upon 30 days prior written notice or by Mr. Wallace upon 30
days prior written notice. If Mr. Wallace’s employment is terminated by us
without cause, he would receive payment of his base salary and benefits, in
monthly installments, for six months. Additionally, if Mr. Wallace is
terminated within 3 months following a change of control, all unvested stock
options awarded to Mr. Wallace will immediately vest and become exercisable for
the full term of the option and all other unvested equity awards shall
immediately vest.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
The
following table discloses unexercised options held by the Named Executives at
December 31, 2008:
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Awards
|
|
Stock
Awards
|
|
Name
|
|
Number
of Securities Underlying Unexercised Options Exercisable
(#)
|
|
|
Number
of Securities Underlying Unexercised Options Unexercisable
(#)
|
|
|
Option
Exercise
Price
|
|
Option
Expiration
Date
|
|
Number
of shares of stock that have not vested
|
|
|
Market
Value of Shares of stock that have not vested
|
|
Dana
A. Marshall
|
|
|
400,000 |
|
|
|
400,000 |
(1) |
|
$ |
6.30 |
|
08/18/2011
|
|
|
|
|
|
|
|
|
|
200,000 |
|
|
|
- |
|
|
$ |
3.84 |
|
12/26/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206,250 |
(3) |
|
$ |
66,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth
M. Wallace
|
|
|
75,000 |
|
|
|
25,000 |
(2) |
|
$ |
9.75 |
|
02/13/2011
|
|
|
|
|
|
|
|
|
|
|
|
200,000 |
|
|
|
- |
|
|
$ |
7.20 |
|
06/02/2011
|
|
|
|
|
|
|
|
|
|
|
|
120,000 |
|
|
|
- |
|
|
$ |
3.84 |
|
12/26/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,500 |
(4) |
|
$ |
10,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,334 |
(5) |
|
$ |
17,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
C. Hayden
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,500 |
(4) |
|
$ |
10,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen
W. McCahon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,500 |
(4) |
|
$ |
10,080 |
|
(1)
|
Vest
in three installments of 200,000 shares of common stock on August 18, 2009
and 2010.
|
(2)
|
Vest
on March 20, 2009.
|
(3)
|
Restricted
stock grant vested 68,750 shares each on January 10, 2008 and
2009. An additional 68,750 shares vest annually on January 10,
2010 and 2011.
|
(4)
|
Restricted
stock grant vested 13,500 shares on December 1,
2008. Additionally, 13,500 shares vest annually on December 1,
2009 and 2010. Vesting of the remaining 4,500 shares awarded to
each individual vest upon the achievement of certain specified performance
targets.
|
(5)
|
Restricted
stock grant vested 26,666 shares on January 10, 2008 and 26,667 shares on
January 10, 2009. An additional 26,667 shares will vest on
January 10, 2010.
|
(6)
|
The
market value of shares or units of stock that have not vested as reported
in the table above is determined by multiplying the closing market price
of our common stock on the last trading day of 2008 of $0.32 by the number
of shares stock that have not
vested.
|
On March
9, 2009, in connection with the exchange offer, Messrs. Marshall and Wallace
exchanged options to purchase 200,000 shares and 420,000 shares, respectively,
as described in this table for 100,000 and 210,000 fully vested options,
respectively, exercisable at $0.50 per share, with a three-year
term. On March 12, 2009, Mr. Marshall was granted options to purchase
800,000 shares, exercisable for a period of three-years and vesting as to
400,000 shares immediately and 200,000 shares on March 9, 2010 and
2011.
POTENTIAL
PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL
Mr.
Marshall’s amended employment agreement provides that if we terminate Mr.
Marshall’s employment without cause, or if Mr. Marshall terminates his
employment for “good reason”, Mr. Marshall will receive an amount equal to his
base salary then in effect for a period of 12 months plus the pro rata portion
of any incentive bonus earned in any employment year through the date of his
termination. If Mr. Marshall’s employment is terminated by us for cause, he
would receive his base salary through the date of termination and all expenses
and accrued benefits rising prior to such termination. Following a change of
control, all unvested stock options awarded to Mr. Marshall will immediately
vest and become exercisable for the full term of the option and all other
unvested equity awards shall immediately vest.
Mr.
Wallace’s employment agreement provides that if Mr. Wallace is terminated by us
without cause, he would receive payment of his base salary and benefits, in
monthly installments, for six months. Additionally, if Mr. Wallace is
terminated within 3 months following a change of control, all unvested stock
options awarded to Mr. Wallace will immediately vest and become exercisable for
the full term of the option and all other unvested equity awards shall
immediately vest.
In the
event of a change-in-control and at the discretion of the Board of Directors,
option awards granted under our 2004 Stock Incentive Plan and our 2007 Stock
Incentive Plan which have been outstanding for at least one year may become
exercisable in full until it expires pursuant to its terms and all restrictions
contained in Restricted Stock awards granted under the Plans may lapse and the
shares of stock subject to such awards shall be distributed to the
Participant.
The
following table sets forth the potential post-employment, or change in control,
payments that would be made to our executive officers by us assuming their
employment was terminated, or the change of control, occurred on December 31,
2008 based on their salaries and annual incentive compensation payments
contained in their employment agreements at December 31, 2008.
Executive Payments Upon Termination or Change in Control
|
|
|
|
|
|
|
|
|
|
For Cause
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination or
|
|
|
|
|
|
Termination
|
|
|
|
Without Cause
|
|
|
For Good Reason
|
|
|
Voluntary
|
|
|
Change in
|
|
|
Following Change
|
|
Name
|
|
Termination
|
|
|
Resignation
|
|
|
Resignation
|
|
|
Control (1)
|
|
|
in Control (1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dana
A. Marshall
|
|
$ |
350,000 |
(3) |
|
$ |
350,000 |
(3) |
|
$ |
- |
|
|
$ |
88,000 |
(4) |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth
M. Wallace
|
|
|
112,500 |
(5) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
178,100 |
(6) |
|
(1)
|
The
value of vested options as of December 31, 2008 is zero as our closing
price was less than the exercise price of such
options.
|
|
(2)
|
Assumes
an effective date of a change in control within three months prior to
December 31, 2008.
|
|
(3)
|
Consists
of one year of base salary or
$350,000.
|
|
(4)
|
Represents
vesting of 275,000 shares of restricted common stock valued at the closing
price of the company's common stock on December 31,
2008.
|
|
(5)
|
Consists
of six months of base salary or
$112,500.
|
|
(6)
|
Consists
of six months of base salary or $112,500, $25,600 for 80,000 shares of
restricted common stock and $40,000 for 125,000 shares of restricted
common stock valued at the closing price of the company's common stock on
December 31, 2008.
|
DIRECTOR
COMPENSATION
The
following table discloses our director compensation for the year ended December
31, 2008:
|
|
Fees Earned or
|
|
|
Stock
|
|
|
Option
|
|
|
|
|
Name
|
|
Paid in Cash
|
|
|
Awards (1)
|
|
|
Awards (1)
|
|
|
Total
|
|
David
C. Hurley
|
|
$ |
64,595 |
|
|
$ |
100,001 |
(2) |
|
$ |
15,250 |
|
|
$ |
179,846 |
|
George
P. Farley
|
|
$ |
75,000 |
|
|
$ |
75,000 |
(3) |
|
$ |
15,250 |
|
|
$ |
165,250 |
|
James
K. Harlan
|
|
$ |
57,986 |
|
|
$ |
62,500 |
(4) |
|
$ |
15,250 |
|
|
$ |
135,736 |
|
James
A. McDivitt
|
|
$ |
90,927 |
|
|
$ |
90,625 |
(5) |
|
$ |
44,975 |
|
|
$ |
226,527 |
|
James
M. Feigley
|
|
$ |
29,167 |
|
|
$ |
50,001 |
(6) |
|
$ |
11,550 |
|
|
$ |
90,718 |
|
(1)
|
The
amounts included in the “Stock Awards” and “Option Awards” columns
represent the compensation cost recognized by the company in 2008 related
to share awards to directors, computed in accordance with SFAS No. 123R.
For a discussion of valuation assumptions, see Note 8 to our 2008
Consolidated Financial Statements. All options granted to directors in
2007 vested immediately and became immediately exercisable upon
grant.
|
(2)
|
Mr.
Hurley was granted options to purchase 10,000 shares of common stock in
January 2008 with a grant date fair value, computed in accordance with
SFAS No. 123R, of $15,250 which was recognized in 2008 for financial
statement reporting purposes in accordance with SFAS
123R.
|
(3)
|
Mr.
Farley was granted options to purchase 10,000 shares of common stock in
January 2008 with a grant date fair value, computed in accordance with
SFAS No. 123R, of $15,250 which was recognized in 2008 for financial
statement reporting purposes in accordance with SFAS
123R.
|
(4)
|
Mr.
Harlan was granted options to purchase 10,000 shares of common stock in
January 2008 with a grant date fair value, computed in accordance with
SFAS No. 123R, of $15,250 which was recognized in 2008 for financial
statement reporting purposes in accordance with SFAS
123R.
|
(5)
|
Mr.
McDivitt was granted options to purchase 10,000 shares of common stock in
January 2008 and 25,000 in March 2008 with an aggregate grant date fair
value, computed in accordance with SFAS No. 123R, of $44,975 which was
recognized in 2008 for financial statement reporting purposes in
accordance with SFAS 123R.
|
(6)
|
Mr.
Feigley was granted options to purchase 10,000 shares of common stock in
June 2008 with a grant date fair value, computed in accordance with SFAS
No. 123R, of $11,550 which was recognized in 2008 for financial statement
reporting purposes in accordance with SFAS
123R.
|
In
January 2008, the Board of Directors amended its Independent Directors
Compensation Program. Pursuant to the program, the Chairman of the Board, and/or
Lead Independent Director, if independent, is eligible to receive $100,000 per
year. The Chairman of the Audit Committee is to receive $75,000 per
year, the Chairman of the Compensation Committee is to receive $62,500 per year,
the Chairman of the Nominating Committee is to receive $55,000 per year and each
other independent director is to receive $50,000 per year.
Also,
under the program, the Chairman of the Board, if he is an independent director,
and if he is not an independent director, the lead independent director is to
receive a number of shares of our common stock equal to $100,000 divided by the
closing sale price of the common stock on the date of the award, the Chairman of
the Audit Committee is to receive a number of shares of our common stock equal
to $75,000 divided by the closing sale price of the common stock on the date of
the award, the Chairman of the Compensation Committee is to receive a number of
shares of our common stock equal to $62,500 divided by the closing sale price of
the common stock on the date of the award, the Chairman of the Nominating
Committee is to receive a number of shares of our common stock equal to $55,000
divided by the closing sale price of the common stock on the date of the award
and each other independent director is to receive a number of shares of our
common stock equal to $50,000 divided by the closing sale price of the common
stock on the date of the award. The stock grants under this program are
automatically granted on every January 15th, or the
next business day, and vest on the grant date. All of the stock granted to the
directors in 2008 vested immediately upon grant.
In
January, 2009, the board amended and delayed the timing of the stock grants and
option awards from January 15th of each
year until the third business day following the company’s release of its audited
financial statements for the prior year.
Additionally,
under the program as amended, on the third day following the filing of its form
10-K each year (or on the first business day thereafter if such date is not a
business day), each independent director is to receive options to purchase
10,000 shares of the Registrant’s common stock. The exercise price of such
options shall be the closing sale price of our common stock on the date of
grant.
Under the
program, if at anytime an independent director serves in more than one position
of Chairman of the Board, lead independent director and Chairman of the Audit
Committee or Compensation Committee, that director shall receive the higher
level compensation paid for any such position the director then
holds.
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION:
During
the fiscal year ended December 31, 2008, none of our executive officers served
on the board of directors or the compensation committee of any other company
whose executive officers also serve on our Board of Directors or our
Compensation Committee.
COMPENSATION
COMMITTEE REPORT:
The
Compensation Committee of the Board of Directors has reviewed and discussed with
management the Compensation Discussion and Analysis and, based on this review
and these discussions, the Compensation Committee recommended to the Board of
Directors that the Compensation Discussion and Analysis be included in Applied
Energetics’ annual report on Form 10-K.
James K.
Harlan
George P.
Farley
James M.
Feigley
David C.
Hurley (partial year member)
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS:
The
following table sets forth information regarding the beneficial ownership of our
Common Stock, based on information provided by the persons named below in
publicly available filings, as of March 9, 2009:
|
·
|
each
of our directors and executive
officers;
|
|
·
|
all
directors and executive officers of ours as a group;
and
|
|
·
|
each
person who is known by us to beneficially own more than five percent of
the outstanding shares of our Common
Stock.
|
Unless
otherwise indicated, the address of each beneficial owner is care of Applied
Energetics, 3590 East Columbia Street, Tucson, Arizona 85714. Unless
otherwise indicated, the company believes that all persons named in the
following table have sole voting and investment power with respect to all shares
of common stock that they beneficially own.
For
purposes of this table, a person is deemed to be the beneficial owner of the
securities if that person has the right to acquire such securities within 60
days of March 9, 2009 upon the exercise of options or warrants. In determining
the percentage ownership of the persons in the table below, we assumed in each
case that the person exercised all options and warrants which are currently held
by that person and which are exercisable within such 60 day period, but that
options and warrants held by all other persons were not exercised, and based the
percentage ownership on 86,368,690 shares outstanding on March 9,
2009.
Name
and Address of Beneficial Owner
|
Number
of Shares Beneficially Owned (1)
|
Percentage
of Shares Beneficially Owned (1)
|
Robert
Howard
|
12,968,712
|
2
|
14.1%
|
Artis
Capital Management, L.P.
|
8,775,185
|
3
|
9.5%
|
State
of Wisconsin Investment Board
|
8,012,070
|
4
|
8.7%
|
Thomas
C. Dearmin
|
6,647,351
|
5
|
7.2%
|
Galleon
Management L.P.
|
6,010,817
|
6
|
6.5%
|
Joseph
C. Hayden
|
5,994,468
|
7
|
6.5%
|
Stephen
W. McCahon
|
5,873,968
|
8
|
6.4%
|
Dana
A. Marshall
|
1,235,086
|
9
|
1.3%
|
Kenneth
M. Wallace
|
325,227
|
10
|
*
|
James
K. Harlan
|
184,365
|
11
|
*
|
James
A. McDivitt
|
178,115
|
12
|
*
|
David
C. Hurley
|
176,284
|
13
|
*
|
James
M. Feigley
|
14,947
|
14
|
*
|
George
P. Farley
|
0
|
15
|
*
|
All
directors and executive officers as a group (8 persons)
|
13,982,460
|
|
15.2%
|
* Less
than 1%
|
(1)
|
Computed
based upon the total number of shares of common stock, restricted shares
of common stock and shares of common stock underlying options held by that
person that are exercisable within 60 days of March 9,
2008.
|
|
(2)
|
Based
on information provided by Mr. Howard on February 24,
2009.
|
|
(3)
|
Based
on information contained in a report on Schedule 13G filed with the SEC on
February 13, 2009: The address of Artis Capital Management, LLC
(“Artis”) is One Market Plaza, Spear Street Tower, Suite 1700, San
Francisco, CA 94105. Artis is a registered investment adviser and is the
investment adviser of investment funds that hold the company’s stock for
the benefit of the investors in those funds, including Artis Technology 2X
Ltd (“2X”). Artis Inc. is the general partner of Artis. Stuart L. Peterson
is the president of Artis Inc. and the controlling owner of Artis and
Artis Inc. Each of Artis, Artis Inc., and Mr. Peterson disclaims
beneficial ownership of the Stock, except to the extent of its or his
pecuniary interest therein. 2X disclaims that it is, the beneficial owner
as defined in Rule 13d-3 under the Securities Act of 1933 of any of such
shares of common stock.
|
|
(4)
|
Based
on information contained in a report on Schedule 13G filed with the SEC on
January 30, 2009.
|
|
(5)
|
Based
on information provided by Mr. Dearmin on February 26,
2009.
|
|
(6)
|
Based
on information contained in a report on Schedule 13G filed with the SEC on
February 14,
2008 which indicates sole voting and investment power as to
the shares
|
|
(7)
|
Represents
5,925,668 shares of common stock.
|
|
(8)
|
Represents
5,828,968 shares of common stock.
|
|
(9)
|
Includes
137,500 unvested shares of restricted common stock and 900,000 options
exercisable within 60 days of March 9, 2009. The above amount
does not include 800,000 shares issuable upon exercise of options not
exercisable within 60 days.
|
|
(10)
|
Represents
115,227 shares of common stock and 210,000 options exercisable within 60
days of March 9, 2009.
|
|
(11)
|
Represents
23,115 shares of common stock and 161,250 options exercisable within 60
days of March 9, 2009.
|
|
(12)
|
Represents
23,115 shares of common stock and 155,000 options exercisable within 60
days of March 9, 2009.
|
|
(13)
|
Represents
33,784 shares of common stock and 142,500 options exercisable within 60
days of March 9, 2009.
|
|
(14)
|
Represents
9,947 shares of common stock and 5,000 options exercisable within 60 days
of March 9, 2009.
|
|
(15)
|
Mr.
Farley denies beneficial ownership of the common shares and common shares
issuable upon exercise of options he transferred to a family
trust.
|
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The
following table details information regarding our existing equity compensation
plans as of December 31, 2008:
Equity Compensation Plan Information
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
securities to be
|
|
|
|
|
|
Number of securities remaining
|
|
|
|
issued upon
|
|
|
Weighted-average
|
|
|
available for future issuance
|
|
|
|
exercise of
|
|
|
exercise price of
|
|
|
under equity compensation
|
|
|
|
outstanding
|
|
|
outstanding
|
|
|
plans (excluding securities
|
|
Plan category
|
|
options
|
|
|
options
|
|
|
reflected in column (a))
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation
|
|
|
|
|
|
|
|
|
|
plans
approved by
|
|
|
|
|
|
|
|
|
|
security
holders
|
|
|
3,818,598 |
|
|
|