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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
ý |
Annual
report under Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended
December
31, 2004; or |
|
¨ |
Transition
report under Section 13 or 15(d) of the Securities Exchange Act of
1934 |
COMMISSION
FILE NO. 1-11602
NANO-PROPRIETARY,
INC.
(Exact
name of registrant as specified in its charter)
|
TEXAS
(State
of Incorporation) |
76-0273345
(IRS
Employer Identification Number) |
3006
Longhorn Boulevard, Suite 107, Austin, Texas 78758
(Address
of principal executive office, including Zip Code)
Registrant's
telephone number, including area code: (512)
339-5020
Securities
registered pursuant to Section 12(b) of the Exchange Act:
|
Title
of each class |
Name
of Each Exchange on Which Registered |
|
Common
Stock, $0.001 par value |
OTC
Bulletin Board |
Securities
registered pursuant to Section 12(g) of the Exchange Act: None
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
past 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 þ
No ¨
Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form 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 an accelerated filer (as defined in Rule
12b-2 of the Act).
Yes þ
No ¨
The
aggregate market value of the Common Stock held by non-affiliates of the
Registrant, based upon the average of the closing bid and asked price of the
Common Stock on the OTC Bulletin Board system on June 30, 2004 of $2.03, was
approximately $195 million.
As of
March 1, 2005, the registrant had 98,606,547 shares of Common Stock issued and
outstanding.
Documents
Incorporated by Reference
No
documents are incorporated by reference into this annual report on Form
10-K
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PART
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PART
III |
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10. |
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PART
IV |
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Item
15. |
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49 |
Important
Information Concerning Forward-Looking Statements
Our
disclosure and analysis in this report contains some forward-looking statements.
Forward-looking statements give our current expectations or forecasts of future
events. They use words such as “anticipate”, “believe”, “expect”, “estimate”,
“project”, “intend”, “plan”, and other words and terms of similar meaning in
connection with any discussion of future operating or financial performance. In
particular, these include statements relating to future actions, prospective
products or product approvals, future performance or results of current and
anticipated products, sales efforts, expenses, the outcome of contingencies such
as legal proceedings, and financial results. From time to time, we also may
provide oral or written forward-looking statements in other materials we release
to the public.
Any or
all of our forward-looking statements in this report and in any other public
statements we make may turn out to be wrong. They can be affected by inaccurate
assumptions we might make, or by known or unknown risks or uncertainties. Many
factors mentioned in the risk factors are important in determining future
results. Consequently, no forward-looking statement can be guaranteed. Actual
future results may vary materially.
We
undertake no obligation to publicly update any forward-looking statements,
whether as the result of new information, future events, or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our 10-Q, 8-K, and 10-K reports to the SEC. Also note that we include a
cautionary discussion of risks, uncertainties, and possibly inaccurate
assumptions relevant to our business. These are factors that we think could
cause our actual results to differ materially from expected and historical
results. Other factors besides those listed here could also adversely affect
us.
RISK
FACTORS
Our
success is dependent on our principal technologies
Our field
emission technology, sensors, and nanomaterials which include composites, are
emerging technologies. Our financial condition and prospects are dependent upon
our licensing these technologies to others. Additional R&D needs to be
conducted on the carbon nanotube technology before others can produce products
using this technology. Market acceptance of products using our technology will
be dependent upon the acceptance within the industries of those products of the
quality, reliability, performance, efficiency, and breadth of application and
cost-effectiveness of the products. There can be no assurances that these
products will be able to gain commercial market acceptance.
Our
technology development is in its early stages and the outcome is
uncertain
Our many
applications of nanotechnologies, and certain products that use these
technologies, will require significant additional development, engineering,
testing and investment prior to commercialization. We are exploring the use of
our technology in several different types of products, in addition to the
cathodes that we have developed that currently use this technology. We have
developed proof of concepts of potential products based on carbon nanotube
technologies. We are developing products jointly with others based on our
technology. Upon successful completion of the development process, our
development partners will be required to license our technology to produce and
sell the products. Our development partners retain all rights to any
intellectual property that they develop in the process.
If any of
the products that are being developed using our technologies are developed, it
may not be possible for potential licensees to produce these products in
significant quantities at a price that is competitive with other similar
products. At the present time, the only revenue that we receive related to our
technology is related to reimbursed research expenditures, development fees, and
the license agreement with Oxford Instruments. These revenues are identified in
our quarterly filings on Form 10-Q and Form 10-QSB, and our annual filings on
Form 10-K as revenues of our Applied Nanotech, Inc. subsidiary in the related
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” sections. We also anticipate receiving up-front license fees in
2005.
Products
using our technology may not be accepted by the market
Since our
inception, we have focused our product development and R&D efforts on
technologies that we believe will be a significant advancement over currently
available technologies. With any new technology, there is a risk that the market
may not appreciate the benefits or recognize the potential applications of the
technology. Market acceptance of products using our technology will depend, in
part, on our ability to convince potential customers of the advantages of such
products as compared to competitive products. It will also depend upon our
ability to train manufacturers and others to use our products.
Our
development partners have certain rights to jointly developed property and to
license our technology
We have
committed to license our technology to our development partners upon completion
of certain development projects that are in process. The terms of any such
license have not yet been determined. One of our development partners, a large
Japanese display company, has paid us $2.0 million for research services and has
the right to offset this payment against any future license fee payments due as
a result of an existing license agreement that we have with this company. Our
development partners in the HYFED™ project also have rights to any jointly
developed property; however, any such jointly developed property would be based,
at least in part, on our underlying technology and would require our partners to
enter into an agreement with us. See also “Our technology development is in
its early stages and the outcome is uncertain” above for further
discussion.
We
may not be able to provide system integration
In order
to prove that our technologies work and will produce a complete product, we must
ordinarily integrate a number of highly technical and complicated subsystems
into a fully integrated prototype. There is no assurance that we will be able to
successfully complete the development work on some of our proposed products or
ultimately develop any market for those products.
Many
products that may be developed using our technology will have to be integrated
into end-user products by manufacturers of those products. Although we intend to
develop products to be integrated into existing manufacturing capabilities,
manufacturers may be required to make modifications to, or expand their
manufacturing capabilities. Manufactures may not elect to integrate products
using our technology into their end-user products, or they may not devote
adequate resources to modifying their manufacturing capabilities so that our
technologies can be successfully incorporated into their end-user products. The
complexity of integration may delay the introduction of products using our
technology.
Rapid
technological changes could render our technology obsolete and we may not remain
competitive
The
display industry and other industries in which we compete are highly competitive
and are characterized by rapid technological change. Our existing and proposed
products will compete with other existing products and may compete against other
developing technologies. Development by others of new or improved products,
processes or technologies may reduce the size of potential markets for our
products. There is no assurance that other products, processes or technologies
will not render our proposed products obsolete or less competitive. Many of our
competitors have greater financial, managerial, distribution, and technical
resources than we do. We will be required to devote substantial financial
resources and effort to further R&D. There can be no assurances that we will
successfully differentiate our technology from our competitors' technology, or
that we will adapt to evolving markets and technologies, develop new
technologies, or achieve and maintain technological advantages.
We
have limited resources and our focus on particular products may result in our
failure to capitalize on other opportunities
We have
limited resources available to successfully develop and commercialize our
technology. As of March 1, 2005, we had 23 full-time employees, 1 part-time
employee, and 2 substantially full time consultants. There is a wide array of
potential applications for our technology and our limited resources require us
to focus on specific product areas, while ignoring others.
We
have limited manufacturing capacity and experience
We have
no established commercial manufacturing facilities in the area of the
carbon nanotube field emission technology in which we are conducting our
principal research. At the present time, we have no intention of establishing a
manufacturing facility related to our field emission technology, sensors,
nanomaterials which include using composites, or any other aspects of our
technology. We are focusing our efforts on licensing our technology to others
for use in their manufacturing processes. To the extent that any of our other
products require manufacturing facilities, we intend to contract with a
qualified manufacturer.
We
are dependent on the availability of materials and
suppliers
The
materials used in producing current and future products using our technology are
purchased from other vendors. We anticipate that the majority of raw materials
used in products to be developed by us will be readily available to
manufacturers. However, there is no assurance that the current availability of
these materials will continue in the future, or if available, will be procurable
at favorable prices.
We
have a history of net losses
We have a
history of net losses. From our inception through December 31, 2004, we incurred
net losses of approximately $80 million. Our only profitable year was 1999,
based on the strength of a license agreement of approximately $5.6 million
signed in March 1999. We have incurred net income and losses as
shown below:
|
Year
Ended December 31 |
|
|
Net
Income
(Loss) |
|
|
|
|
|
|
|
|
1995 |
|
|
($14,389,856 |
) |
|
1996 |
|
|
($13,709,006 |
) |
|
1997 |
|
|
($6,320,901 |
) |
|
1998 |
|
|
($3,557,548 |
) |
|
1999 |
|
|
($1,118,134 |
|
|
2000 |
|
|
($7,671,014 |
) |
|
2001 |
|
|
($5,081,559 |
) |
|
2002 |
|
|
($4,908,856 |
) |
|
2003 |
|
|
($4,214,202 |
) |
|
2004 |
|
|
($4,612,026 |
) |
Although
we expect to be profitable in the future, we may not be. Our profitability
in 2005 is dependent on the signing of additional license agreements or
obtaining additional research funding. We may, however, continue to incur
additional operating losses for an extended period of time as we continue to
develop proof of concepts. We do, however, expect the magnitude of those losses,
if they continue, to decrease. We have funded our operations to date primarily
through the proceeds from the sale of our equity securities and debt offerings.
We are primarily a contract research and development organization and are
dependent on license agreements and research funding to achieve profitability.
In order to continue development of our technology, we anticipate that
substantial research and development expenditures will continue to be
incurred.
We
have no current royalty agreements producing significant
revenue
Our
future strategy is dependent on licensing our technology to other companies and
obtaining royalties based on products that these licensees develop and sell. We
have no plans to manufacture and sell any carbon nanotube field emission
products ourselves, and as such, we have no carbon nanotube field emission
product revenues. We signed a license agreement in 1999, for a one-time, up
front, payment of approximately $5.6 million. This was a non-exclusive license
to Canon, Inc. that covered substantially all of our field emission patents, but
excluding the basic carbon nanotube patent and specific applications for other
field emission display patents including, but not limited to, large area color
displays. This license will produce no future revenue unless Canon decides to
license the additional patents or the excluded field emission display
applications. In 2002, we signed another license agreement with a large Japanese
display manufacturer. This license agreement calls for us to be paid royalties
equal to 2% of the licensee’s sales of products using our technology. The
licensee also will receive credit against royalties due under the agreement for
$2 million of research funding and up-front payments that the licensee has
provided to us from 2001 to 2003. Accordingly, no royalties will be due under
the agreement until sales of the licensee’s products exceed $100
million.
We expect
to license our technology to be used in other applications. See additional
discussion in the risk factor “Our technology development is in its early stages
and the outcome is uncertain”. It is our intention that all future license
agreements will include a provision that requires the payment of ongoing
royalties, although there can be no assurance that will
occur.
Our
revenues have been dependent on government contracts in the
past
In many
years, a significant part of our revenues is derived from contracts with
agencies of the United States government. Following is a summary of those
revenues for the past ten years:
|
Year
Ended December 31 |
|
|
Revenues
from
Government
Contracts |
|
|
Percentage
of
Total
Revenue |
|
1995 |
|
$ |
1,009,000 |
|
|
33%
|
|
1996 |
|
$ |
2,869,000 |
|
|
50%
|
|
1997 |
|
$ |
854,000 |
|
|
24%
|
|
1998 |
|
$ |
0 |
|
|
0%
|
|
1999 |
|
$ |
0 |
|
|
0%
|
|
2000 |
|
$ |
352,341 |
|
|
13%
|
|
2001 |
|
$ |
466,680 |
|
|
15%
|
|
2002 |
|
$ |
254,152 |
|
|
18%
|
|
2003 |
|
$ |
339,790 |
|
|
44%
|
|
2004 |
|
$ |
305,721 |
|
|
80%
|
We
currently have binding commitments for future government funding of
approximately $130,000. We do not intend to seek any government funding unless
it directly relates to achievement of our strategic objectives.
Contracts
involving the United States government are, or may be, subject to various risks
including, but not limited to, the following:
| |
· |
Unilateral
termination for the convenience of the
government |
| |
· |
Reduction
or modification in the event of changes in the government's requirements
or budgetary constraints |
| |
· |
Increased
or unexpected costs causing losses or reduced profits under fixed-price
contracts or unallowable costs under cost reimbursement
contracts |
| |
· |
Increased
or unexpected costs causing losses or reduced profits under fixed-price
contracts or unallowable costs under cost reimbursement
contracts |
| |
· |
Potential
disclosure of our confidential information to third
parties |
| |
· |
The
failure or inability of the prime contractor to perform its prime contract
in circumstances where we are a
subcontractor |
| |
· |
The
failure of the government to exercise options provided for in the
contracts |
| |
· |
The right of the government to obtain a non-exclusive,
royalty free, irrevocable world-wide license to technology developed under
contracts funded by the government if we fail to continue to develop
the technology |
The
health effects of nanotechnology are unknown
There is
no scientific agreement, but some scientists believe that in some cases,
nanomaterials may be hazardous to an individual’s health or the environment. The
science of nanotechnology is based on arranging atoms in such a way as to modify
or build materials in such a way as never made in nature; and therefore the
effects are unknown. The Company takes appropriate precautions for its employees
working with carbon nanotubes and believes that any health risks related to
carbon nanotubes used in potential products can be minimized. Future research
into the effects of nanomaterials in general, and carbon nanotubes in
particular, on health and environmental issues may have an adverse effect on
products using our technology.
We
may have future capital needs and the source of that funding is
uncertain
We expect
to continue to incur substantial expenses for R&D, product testing, and
administrative overhead. The majority of R&D expenditures are for the
development of our technologies. Some of the proposed products using our
technology may not be available for commercial sale or routine use for a period
of up to two years. Commercialization of existing and proposed products that
would use our technology may require additional capital in excess of our current
capital. A shortage of capital could prevent us from achieving profitability for
an extended period of time. Because the timing and receipt of revenues from the
sale of products using our technology will be tied to the achievement of certain
product development, testing, manufacturing and marketing objectives, which
cannot be predicted with certainty, there may be substantial fluctuations in our
results of operations. If revenues do not increase as rapidly as anticipated, or
if product development and testing require more funding than anticipated, we may
be required to curtail our expansion and/or seek additional financing from other
sources. We may seek additional financing through the offer of debt or equity or
any combination of the two at any time, although we do not expect to seek
additional financing for the remainder of the year.
We have
developed a plan to allow us to maintain operations until we are able to sustain
ourselves and we believe our current cash levels are sufficient to fund
operations until we reach that point. We have the existing resources to continue
operations for a period through at least the end of 2005. Our plan is primarily
dependent on raising funds through the licensing of our technology and revenue
generated from performing contract research services. We intend to raise capital
through debt or equity offerings, only if necessary. We expect to sign
significant license and development contracts within the next year, although
there can be no assurances that this will occur.
Our plan
is based on current development plans, current operating plans, the current
regulatory environment, historical experience in the development of electronic
products and general economic conditions. Changes could occur which would cause
certain assumptions on which this plan is based to be no longer valid. Our plan
is primarily dependent on increasing revenues, licensing our technology, and
raising additional funds through additional debt and equity offerings, only if
necessary. If adequate funds were not available from operations or additional
sources of financing, we may have to eliminate, or reduce substantially,
expenditures for research and development, and testing of our products. We may
have to obtain funds through arrangements with other entities that may require
us to relinquish rights to certain of our technologies or products. These
actions could materially and adversely affect us.
We
have technologies subject to licenses
As a
licensee of certain research technologies through license and assignment
agreements with Microelectronics and Computer Technology Corporation (“MCC”), we
have acquired rights to develop and commercialize certain research technologies.
In certain cases, we are required to pay royalties on the sale of products
developed from the licensed technologies and fees on revenues from sublicensees.
We also have to pay for the costs of filing and prosecuting patent applications.
The agreement is subject to termination by either party, upon notice, in the
event of certain defaults by the other party. We expect any royalty payments to
be made to MCC to be insignificant based on the substantial amounts of revenues
that would have to be generated to offset the costs of maintaining the patents
over the years.
We have
also licensed certain patents related to carbon nanotube technology from Till
Keesman (“the Keesman patents”). We licensed 6 patents in 2000 in exchange for a
payment of $250,000 payable in shares of our common stock. Under the terms of
the agreement, we are obligated to pay license fees equal to 50% of any
royalties received by the Company related to these patents. We are allowed to
offset certain expenses, up to a maximum of $50,000 per year, against payments
due under this agreement. The agreement also contains provisions related to
minimum license fee payments. A total of $1,000,000 of minimum payments has been
made, with the last payment made in May 2004. No future minimum payments are due
and the minimum payments made to date can be offset against future royalties due
under the license agreement. Certain of the products that we are developing may,
in part, be based on some of the patents that we have licensed.
We
may be unable to enforce or defend our ownership and use of proprietary
technology
Our
ability to compete effectively with other companies will depend on our ability
to maintain the proprietary nature of our technology. Although we have been
awarded patents, have filed applications for patents, or have licensed
technology under patents that we do not own, the degree of protection offered by
these patents or the likelihood that pending patents will be issued is
uncertain. Competitors in both the United States and foreign countries, many of
which have substantially greater resources and have made substantial investment
in competing technologies, may already have, or may apply for and obtain patents
that will prevent, limit or interfere with our licensees ability to make and
sell our products using our technology. Competitors may also intentionally
infringe on our patents. The defense and prosecution of patent suits is both
costly and time-consuming, even if the outcome is favorable to us. In foreign
countries, the expenses associated with such proceedings can be prohibitive. In
addition, there is an inherent unpredictability in obtaining and enforcing
patents in foreign countries. An adverse outcome in the defense of a patent suit
could subject us to significant liabilities to third parties. Although third
parties have not asserted infringement claims against us, there is no assurance
that third parties will not assert such claims in the future. A major law firm
has reviewed our patent portfolio and agreed to handle litigation related to
certain of our patents on a contingency basis.
We also
rely on unpatented proprietary technology, and there is no assurance that others
will not independently develop the same or similar technology, or otherwise
obtain access to our proprietary technology. To protect our rights in these
areas, we require employees, consultants, advisors and collaborators to enter
into confidentiality agreements. These agreements may not provide meaningful
protection for our trade secrets, know-how, or other proprietary information in
the event of any unauthorized use, misappropriation or disclosure of such trade
secrets, know-how, or other proprietary information. While we have attempted to
protect proprietary technology that we develop or acquire and will continue to
attempt to protect future proprietary technology through patents, copyrights and
trade secrets, we believe that our success will depend upon further innovation
and technological expertise.
The
loss of key personnel could adversely affect our business
Our
future success will depend on our ability to attract and retain highly qualified
scientific, technical and managerial personnel. Competition for such personnel
is intense. We may not be able to attract and retain all personnel necessary for
the development of our business. In addition, much of the know-how and processes
developed by us reside in our key scientific and technical personnel. The loss
of the services of key scientific, technical and managerial personnel could have
a material adverse effect on us until we are able to replace those
personnel.
We
are exposed to litigation liability
We have
lawsuits that arise in the normal course of business. We have been subject to
litigation in the past and have settled litigation in the past that has resulted
in material payments. We expect all current lawsuits to be resolved with no
material impact on our financial statements, and we are unaware of any other
potential significant litigation. If we were to become subject to a judgment
that exceeds our ability to pay, that judgment would have a material impact on
our financial condition and could affect our ability to continue in
existence.
PART
I.
When used
in this document, the words “anticipate”, “believe”, “expect”, “estimate”,
“project”, “intend”, “plan”, and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties, and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, believed, expected,
estimated, projected, intended, or planned. For additional discussion of such
risks, uncertainties, and assumptions, see “Important Information Concerning
Forward-Looking Statements” and “Risk Factors” included at the beginning of this
report.
DESCRIPTION
OF BUSINESS
General
Nano-Proprietary,
Inc. is engaged in the development of proof of concepts of products and
materials, and the performance of services based principally on novel
applications of carbon nanotube technology and other nanotechnology areas based
on intellectual property and expertise that we have developed over the years. We
were incorporated in Texas in 1987 and completed our initial public offering in
1993. Our initial focus was on a next generation display technology called field
emission display (“FED”). The majority of our research over the years has
related to FED technology, and we have accumulated significant intellectual
property in this area. FED technology has evolved significantly over the life of
the company, and we have been at the forefront of that evolution, accumulating
intellectual property each step of the way. We believe our FED intellectual
property will be required by any entity that develops a display using this
technology. As discussed in greater detail under the heading “Display
activities”, our FED technology includes both carbon nanotube based field
emission displays and thin-film based field emission technology, such as the
technology recently introduced by Canon and Toshiba referred to as
SED.
While
focusing primarily on FED technology, over the years we have performed research
in many other areas. Much of this research was an outgrowth of our work in the
FED area. This research was in other display technologies, used processes
learned while we were working with FED technology, used raw materials used in
our FED research, or capitalized on other unique capabilities within our
organization. We have also accumulated significant additional intellectual
property in areas beyond the FED technology. At present, we have over 240 total
patents, including 96 issued, 78 pending, and 46 provisional.
Research
and Development
As a
result of our focus on developing and protecting our intellectual property, we
spend significant amounts on research and development. We spent $2,611,583,
$1,861,660, and $2,541,962 on research and development in the years ended
December 31, 2004, 2003, and 2002, respectively. This represents approximately
52%, 38%, and 44% of our total operating costs and expenses in 2004, 2003, and
2002, respectively. We expect to continue to invest heavily in research and
development and expect our research and development costs for 2005 to be between
40% and 50% of our operating costs.
Business
Segments
Our
operations currently consist of three reportable business segments.
Applied
Nanotech, Inc. ANI is
the main focus of our current efforts. It was incorporated in January 1997 and
is developing our proprietary carbon nanotube and related technology.
Accordingly, our research is focused in the broad area of carbon nanotube
technology and its application to the display, electronics, biosensor, medical,
x-ray, and other industries. Our development plans for this technology are
discussed
later in this report.
Electronic
Billboard Technology, Inc. EBT was
incorporated in January 1997 to focus on developing sun-readable display
products for outdoor use. Its initial primary product focus was an
electronic billboard that would enable the outdoor advertising industry to
exploit the Internet and information revolution by placing ads at different
locations at different times. The focus of EBT was shifted to displays for
indoor use that could be used as part of an overall point of purchase
advertising program. We also developed a patented product called the E-Window™.
In 2002, we restructured EBT and stopped selling products directly and instead
limited ourselves to licensing our technology. We did this to focus on our
higher potential business at ANI. At the present time, we are not actively
pursuing technology licenses at EBT, but rather are monitoring industry
developments to insure that there are no infringements on our intellectual
property that would require users to obtain a license.
Other. We also
incur general overhead to operate Nano-Proprietary that is not associated with
any specific
subsidiary or
other segment. This overhead is the approximate cost of being a public company,
which is the amount in excess of that which might be incurred by a private
company. To the extent that EBT is basically inactive, information relative to
this segment is not that meaningful.
Following
is a summary of revenues, net loss, and total assets for each segment for each
of the last three years.
| |
|
2004 |
|
2003 |
|
2002 |
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
ANI |
|
$ |
382,522 |
|
$ |
773,959 |
|
$ |
1,284,462 |
|
EBT |
|
$ |
— |
|
$ |
— |
|
$ |
130,386 |
|
Other |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
Total
Revenues |
|
$ |
382,522 |
|
$ |
773,959 |
|
$ |
1,414,848 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations |
|
|
|
|
|
|
|
|
|
|
ANI |
|
$ |
(4,030,353 |
) |
$ |
(2,890,175 |
) |
$ |
(1,502,126 |
) |
EBT |
|
$ |
106,251 |
|
$ |
(361,784 |
) |
$ |
(1,369,318 |
) |
Other |
|
$ |
(687,924 |
) |
$ |
(962,243 |
) |
$ |
(1,811,975 |
) |
Total |
|
$ |
(4,612,026 |
) |
$ |
(4,214,202 |
) |
$ |
(4,683,419 |
) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
ANI |
|
$ |
310,005 |
|
$ |
1,424,724 |
|
$ |
146,299 |
|
EBT |
|
$ |
— |
|
$ |
527 |
|
$ |
25,371 |
|
Other |
|
$ |
834,363 |
|
$ |
2,358,766 |
|
$ |
150,285 |
|
Total |
|
$ |
1,144,368 |
|
$ |
3,784,017 |
|
$ |
321,955 |
|
Applied
Nanotech, Inc.
Overall
We are
primarily a nanotechnology company. We are focusing our efforts on
research, proof of concept development for products, and licensing our
technology to others. ANI is developing world-class technologies that generally
fall into one of four markets or categories. These categories are display,
sensors, functional nanomaterials, and other specific electronic applications.
We intend to license our technology to others to allow them to manufacture
products using our technology. We have no plans to establish any manufacturing
facilities in the foreseeable future and manufacturing is not a part of our
core strategy. To the extent that we would need to develop manufacturing
capabilities, we intend to use manufacturing partnerships, joint ventures, or
arrange to have products manufactured through contract
manufacturers.
Display
activities
Our main
focus for virtually the entire life of the Nano-Proprietary has been on Field
Emission Display (“FED”) technology. We have performed significant research and
accumulated significant intellectual property in this area. Field emission
display is a next generation display technology that is ideally suited for use
in large flat screen televisions, with large being defined as 50-inch diagonal
or greater. TVs using FED technology are intended to compete with and improve on
the plasma, projection, and CRT displays currently available in the large screen
TV market. FED technology can also be used for large outdoor electronic displays
in products such as roadside billboards, stadium displays, and other outdoor
electronic signs. We have developed an extensive patent portfolio covering
numerous aspects of FED technology.
Carbon-nanotube
based large area flat screen color field emission
displays. Because
of cost advantages carbon nanotubes are currently the preferred method in the
display industry for construction of large area flat screen color TVs using FED
technology. As
discussed in more detail in the Technology Agreements section below, we licensed
6 patents from Till Keesman in 2000. These patents are basic patents covering
the use of emissions from carbon nanotubes. The U.S. Patent (No.
RE38,223 E) was
reissued in August 2003. This reissuance strengthened and reinforced the basic
nature of this patent. It is our belief that any company using a carbon
nanotubes in an emission mode, regardless of application, will be required to
license this, and possibly other patents from us. No companies have yet obtained
the right to use this patent from us.
Other
companies are developing large area color TVs that may be, in part, based on our
carbon nanotube based field emission technology. Companies including Samsung,
Dupont, Noritake, and Motorola all have made public announcements related to the
development of large area carbon nanotube based field emission displays, or
manufacturing processes for such displays. To the extent that these companies,
or any other companies, bring a TV to market using carbon nanotube based field
emission display technology, they would be required to license one or more of
our patents.
We are
also developing our own proofs of concepts of carbon nanotube based field
emission display TVs. We currently have both a 14-inch monochrome and a 14-inch
color proof of concept. We are developing a 25-inch color prototype in
conjunction with a consortium of Japanese component manufacturers. Each member
of the consortium is contributing its own particular expertise to the prototype
at its own expense. The purpose of the 25-inch color prototype is to demonstrate
scalability is not an issue with the carbon nanotube-based field emission
display. It is being built to specifications enabling it to be expanded to a
60-inch display; however, it is being built at 25 inches due to cost
considerations. Upon completion of the 25-inch color prototype, it is our goal
to start a pilot line with a major manufacturer and license the technology. This
manufacturer could be one that has done extensive work on its own related to
carbon nanotube based field emission displays, or one that perceives itself as
behind the curve in this area and would use this as an opportunity to catch up
to others in the area. Other members of the consortium would have the
opportunity to become equipment suppliers, component manufacturers, or
manufacturers of carbon nanotube based TVs.
Other
large area flat screen color field emission displays. Canon,
Inc. and Toshiba have jointly developed a large area flat screen color TV based
on FED technology. This product is based on a previous generation of FED
technology using surface conduction technology, referred to by Canon and Toshiba
as SED, and is not based on carbon nanotube technology. We also have patents
covering this form of FED technology. Canon and Toshiba have announced that they
have formed a joint venture to manufacture components for this TV, are
constructing a manufacturing line, demonstrated this product at the 2005
consumer electronics show in Las Vegas in January 2005, and announced that they
would have product available in August 2005. In 1999,
we signed a non-exclusive license with Canon that covered substantially all of
our field emission patents, but excluded the basic carbon nanotube patent and
specific applications for other field emission display patents including, but
not limited to, large area color displays. Toshiba and the joint venture formed
by Canon and Toshiba have no licenses from us. It is our belief that all
entities involved will require licenses from us in order to manufacture and sell
large area flat screen color TVs using this FED technology.
HyFED™ - We
have developed a new display technology that we call the HyFED™. We expect the
HyFED™ to be phased in as an improvement to the way our FED technology will be
used in the large area color displays previously described. HyFED™ combines what
we believe to be the best properties of CRTs and our field emission technology.
We expect the HyFED™ to significantly cut the cost of the drivers used in a
field emission display. In January 1999, we formed an International Development
Team to develop the first HyFED™ based on our FED technology. The International
Development Team was composed of six organizations - four from Japan, one from
Europe, and ourselves. The International Development Team completed a working
four-inch monochrome prototype of the HyFED™ in January 2000. The team was
expanded and developed a prototype with an active gray scale. Each member of the
team was focused on the development of a specific portion of the prototype and
members have funded their own portion of the work. Work on the HyFED™ has been
frozen until our basic FED technology is being used in the production of large
area color TVs. Upon completion of the final prototype, these team members will
be given the first opportunity to license the HyFED™ technology. We expect to
license our HyFED™ technology, although no assurances can be given that this
will occur.
PETS
for medium resolution large area electronic billboards- The PET
is a basic display device that could be used in many display applications in
addition to electronic billboards. The carbon nanotube field emission technology
provides several advantages over the existing technologies used in these areas.
It generally has a higher image quality, better sunlight readability, lower
cost, lower energy usage, improved viewing angle and excellent video
capabilities. We do not intend to manufacture these PETs ourselves, but rather
license other manufacturers to produce them. We have currently licensed a
previous version of field emission display technology that is not based on
carbon nanotubes to a large Japanese display manufacturer that is now working
internally to complete development of the product.
Licensing
agreements. We have
an extensive patent portfolio that we have developed and acquired over the
years. Licensing of this technology to major companies is a critical part of our
overall strategic plan and critical to achieving profitability in the short run.
We currently have two license agreements related to our FED technology. In March
1999, we signed our first significant license agreement with Canon, Inc. In
exchange for a one-time, up-front payment of approximately $5.6 million, Canon
was granted a non-exclusive right to use a portion of our FED
technology, but
excluding the basic carbon nanotube patent and specific applications for other
field emission display patents including, but not limited to, large area color
displays. In 2002,
we signed another license agreement with a large Japanese display manufacturer.
This license calls for royalties of 2% of the licensee’s sales of products using
our technology. The licensee will receive credit against royalties due under the
agreement for $2 million of research funding that the licensee provided to us
from 2001 to 2003. Accordingly, no royalties will be due under the agreement
until sales of the licensee’s products exceed $100 million. We expect to sign
multiple additional license agreements over the next few years, and we expect
that such license agreements will include both an up-front payment and a
continuing royalty stream based on the products sold by the
licensee.
Competition.
Because
of the strength of our intellectual property in the FED area, our competition
comes from other technologies, rather than other companies. Any company
developing a carbon nanotube based FED large area flat screen color TV will be
required to license our patents. There are other companies attempting to develop
non-carbon nanotube based field emission display technologies. It is our opinion
that these technologies will not be as cost efficient or demonstrate as high a
level of brightness as the field emission technology, whether carbon nanotube
based or the SED. However, even companies developing these non-carbon nanotube
based field emission displays will likely be required to license other portions
of our patent portfolio in order to bring a product to market.
In the
large area flat screen color TV industry, the primary competition comes from
plasma panel displays, LCD displays, organic LED displays, and color picture
tubes. We believe our technology, when fully developed, will primarily compete
with plasma displays and LCD displays, and generally compares favorably with
both types of displays in several key technical measures. Plasma displays
generally have quality issues related to burn-in, lifetime, and brightness that
are not expected to exist in field emission displays. In addition, carbon
nanotube based field emission displays are expected to be less costly than
plasma displays. LCD displays have quality issues related to the viewing angle
and are generally not economical once the size exceeds 40 inches, and therefore
are not considered strong competition because our technology is targeted at
displays greater than 40 inches. However, several companies are currently
developing backlights for LCDs using carbon nanotubes. Successful development of
a carbon nanotube backlight would require a license to our intellectual
property.
Sensors
Biosensors. Our
carbon nanotube technology is ideally suited for use in biosensors. Sensors
based on carbon nanotubes can be used to detect chemical, organic, or biological
warfare agents, as well as explosives, hydrogen, ammonia and numerous other
chemicals., We have developed several proof of concepts demonstrating the
viability of our sensor technology and are currently seeking development
partners to license the technology and integrate it into specific
products.
Hydrogen
sensors. These
sensors are targeted for use in fuel cells for automobiles and for remote
monitoring of large power transformers. We currently have two agreements related
to our hydrogen sensors. The first is a license, purchase, and development
agreement with an international company that specializes in the design,
measurement, analysis, and development of electrical measuring equipment. The
agreement, signed in July 2004, gave the licensee the exclusive right for the
use of the technology for the measurement of hydrogen in power transformers, tap
changers, and breakers, if certain minimum royalty payments were
made. ANI
provided pre-production design, development, and engineering work. The licensee
will pay a royalty of 10% of the sales of the products containing the hydrogen
sensors. The agreement called for minimum royalty payments of $55,100 during the
year beginning November 1, 2004, for the licensee to maintain exclusivity. In
February 2005, Applied Nanotech agreed to produce the hydrogen sensors for the
licensee for an agreed upon price and both parties mutually agreed to exercise
the option of non-exclusivity. This gives us the opportunity to license our
technology to other companies in the same industry.
We also
have a research and development agreement with, KRI, Inc, the research and
development subsidiary of Osaka Gas Co. Ltd., the second largest gas utility
company in Japan, to develop a hydrogen sensor for automotive fuel cell
applications. This contract is the result of a joint proposal submitted by KRI
and ANI to NEDO, the New Energy Industrial Technology Development Organization
established by the Japanese Government in 1980. This project is expected to be
completed by the end of 2005, and upon successful completion, we expect to seek
additional funding in this area.
Other
sensors. We have
also demonstrated that carbon nanotubes can be used to develop sensors for
chemical, organic, and biological warfare agents. We have also demonstrated that
carbon nanotubes and other nanodetectors can be used for the remote detection of
explosives, and sensors used in environmental monitoring, health care, the food
industry, biotech-biopharma applications, genetic biosensors, and immunosensors.
We are currently seeking funding to take our research in this area to the next
level of development, which would include proofs of concept, and product
development. Ideally we would do this with a development partner that would fund
the development and license the technology for manufacturing upon completion, or
in conjunction with a development partner under a government funding program. We
most likely would have different development partners for different sensors that
may be used in different industries.
Competition.
Our
competition in the sensor area will come from a variety of technologies and
companies depending on the purpose and use of the sensor. There are other
technologies used as sensors; however, we believe carbon nanotube based sensors
and other nanodetectors are more versatile, can sense a broader range of
materials, and are more selective (sensitive) in their sensor results. We
believe that selecting the right strategic partners for development of proof of
concepts for our sensor technology is an important step in the market acceptance
of sensors using our technology.
Functional
Nanomaterials
We are in
the advanced stages of research into nanomaterials using carbon nanotube
composites. We believe that some of the first widespread use of nanotechnology
by established companies will be in this area as they work to improve existing
products, materials, and processes. A significant opportunity exists in this
area for us to develop and license our technology. We are currently exploring
opportunities with several companies in this area. In addition to the two
companies mentioned below, our exploratory relationships with Mitsubishi Heavy
Industries, Ltd. and Mitsui & Co. Ltd., both of which were announced in
2003, may result in development contracts in this area.
Shimane
Institute of Technology. We
recently entered
into a research and development agreement with Shimane Institute for Industrial
Technology (SIIT) to develop a new aluminum alloy using carbon nanotubes that
has thermal conductivity 4-5 times greater than aluminum metal. SIIT is a
technology organization fully supported by the government of Shimane Prefecture,
Japan. Under the terms of the agreement ANI will develop and engineer a process
to manufacture thin foils of aluminum alloys having superior
thermo-conductivity. This project is expected to be completed in the third
quarter of 2005. Applications include any microelectronic device that generates
heat, including circuit boards for computers and high powered radar. These
alloys can also improve the strength of the aluminum without adding
weight.
SouthWest
NanoTechnologies, Inc. In 2004,
we entered into a strategic partnership with SouthWest NanoTechnologies, Inc.
(“SWeNT”), a technology spin-off from the University of Oklahoma and
Conoco-Phillips based in Norman, Oklahoma. The Companies are working together to
tailor SWeNT’s proprietary single wall carbon nanotubes for specific uses. We
are also authorized to represent SWeNT in Asia.
Competition.
Since
this is a developing area of nanotechnology, there are not established
competitors. Our competition would come from companies working with other
materials. Since each project is unique, there are not necessarily established
competitors in the market.
Other
Electronic Applications
We are
working in several other areas that have grown out of basic work in the FED
area. These technologies are related to previously discussed applications in
that they use common materials, such as carbon nanotubes, use similar processes,
capitalize on knowledge that we have gained in our research in other areas, or
take advantage of unique capabilities of our technical staff. Following is a
summary of some of these technology areas.
Cathodes. We have
developed a carbon nanotube cold cathode electron source, which can be utilized
for many non-display related applications such as x-ray tubes, medical devices,
microelectronics, low-power thrusters, CRT electron guns, wireless
communications, and polluted air scrubbing. We licensed this technology to
Oxford Instruments for use in cathodes in their portable Horizon 600 hand-held
XRF Spectrometer, an X-ray device used for alloy sorting, materials
identification, and inorganic analysis. These cathodes use our proprietary
carbon nanotube technology, but have only generated nominal license fees to
date.
Memory
Chips. We have
a license option agreement with the University of Texas at Austin to further the
development of a next generation memory chip using the university’s information
storage technology based on thin photo-conductive films. The ultimate goal is to
make a low cost non-volatile memory device with increased capacity. We will be
designing, fabricating, and optimizing a 10,000 bit proof of concept using this
technology. This project is expected to take no more than eighteen months and
for that eighteen month period, we have the right to sign an exclusive license,
with the right to sublicense, for this technology within certain pre-defined
parameters.
Shimane
Masuda Electronics. We
signed a letter of intent to jointly develop new products using our technology
with Shimane Masuda Electronics (“SME”). This development phase is expected to
take up to twelve months. Upon completion of the development phase, if products
are successfully developed, we will either form a joint venture with SME, or
license our technology to SME, under terms already negotiated.
Competition.
Numerous
other companies are working with other technologies with the goal of achieving
results similar to the goals of our technology. The ultimate success of products
using our technology will be dependent up on the results of our research
compared with results achieved by others.
EBT
Electronic
Display Products.
EBT was formed to develop sun-readable display products for outdoor use.
We expanded our focus to large area displays for indoor use that would compete
with Plasma and could be used as part of an overall point of purchase
advertising program and developed a patented product called the E-Window™. We
restructured EBT and stopped selling products directly and instead limited
ourselves to licensing our technology. At the present time, we are not actively
pursuing technology licenses at EBT, but rather are monitoring industry
developments to insure that there are no infringements on our intellectual
property that would require users to obtain a license.
We expect
that any license agreements would include both an upfront payment and ongoing
royalties based on product sales by the licensee. We expect that potential
licensees for the E-Window™ would market it, primarily to major retailers and to
either manufacture the product, or contract with others to manufacture the
product.
EBT also
has acquired the right to certain patented Liquid Crystal Display (“LCD”)
technology that is ideal for use in outdoor electronic billboards. All research
and development related to this technology has been suspended until we procure
funding specifically to further develop this technology.
We have
also applied for other patents at EBT, that if ultimately granted, would
increase the value of EBT’s intellectual property.
Competition Our
E- Window™
product is a unique patented product. It does, however, face competition from a
variety of other indoor display products from a variety of sources. Our success
in this area will be dependent on the ability of licensees to successfully
market our products.
We are
unaware of any other organizations that have developed an electronic billboard
using an LCD technology. However, we are not currently continuing development of
this technology, and LCD technology is an existing technology used in many
applications. Competition from other manufacturers could develop at any time.
There are several other companies either producing or developing electronic
billboards using other technologies.
Technology
Agreements
Till
Keesman. We have
licensed certain patents related to carbon nanotube technology from Till Keesman
(“the Keesman patents”). We licensed 6 patents in 2000 in exchange for a payment
of $250,000 payable in shares of our common stock. Under the terms of the
agreement, we are obligated to pay license fees equal to 50% of any royalties
received by the Company related to these patents. We are allowed to offset
certain expenses, up to a maximum of $50,000 per year, against payments due
under this agreement. The agreement also contains provisions related to minimum
license fee payments. A total of $1,000,000 of minimum payments has been made,
with the last payment made in May 2004. No future minimum payments are due and
the minimum payments made to date can be offset against future royalties due
under the license agreement. Certain of the products that we are developing may,
in part, be based on some of the patents that we have licensed. These
patents cover areas using the emission from a carbon nanotube, such as displays.
There are other areas of carbon nanotube technology, such as biosensors, that
are not based on an emission from the carbon nanotube, and therefore would not
require payment of a royalty under this license agreement.
MCC. We
acquired 62 patents and patent applications related to the carbon film based
field emission technology from MCC in 1998. We are obligated to pay MCC a
royalty of 2% of future commercial revenues related to these patents. We can,
however, offset certain pre-defined expenses against these royalty payments.
Based on the expenses incurred and cost of maintaining the patents, it is
considered remote that we will be required to pay MCC any royalties at any time
in the near future.
Intellectual
Property Rights
An
important part of our product development strategy is to seek, when appropriate,
protection for our products and proprietary technology through the use of
various United States and foreign patents. Our patent portfolio consists of 96
issued patents, 6 allowed patents, 78 patent applications pending before the
United States Patent and Trademark Office, 46 provisional patent applications,
and 16 published patents. We also have several unsubmitted patent applications
in process. The patents, allowances and applications relate to the carbon
nanotube field emission technology and other technologies. In addition, there
are foreign counterparts to certain United States patents and applications. We
consider our patent portfolio to be our most valuable asset.
The
patenting of technology-related products and processes involves uncertain and
complex legal and factual questions. To date, no consistent policy has emerged
regarding the breadth of claims of such technology patents. Therefore, there is
no assurance that our pending United States and foreign applications will issue,
or what scope of protection any issued patents will provide, or whether any such
patents ultimately will be upheld as valid by a court of competent jurisdiction
in the event of a legal challenge. Interference proceedings, to determine
priority of invention, also could arise in any of our pending patent
applications. The costs of such proceedings would be significant and an
unfavorable outcome could result in the loss of rights to the invention at issue
in the proceedings. If we fail to obtain patents for our technology, and are
required to rely on unpatented proprietary technology, there is no assurance
that we can protect our rights in such unpatented proprietary technology, or
that others will not independently develop substantially equivalent proprietary
products and techniques, or otherwise gain access to our proprietary
technology.
Competitors
have filed applications for, or have been issued patents, and may obtain
additional patents and proprietary rights relating to products or processes used
in, necessary to, competitive with, or otherwise related to, our patents. The
scope and validity of these patents, the extent to which we may be required to
obtain licenses under these patents, or under other proprietary rights and the
cost and availability of licenses are unknown. This may limit our ability to
license our technology. Litigation concerning these or other patents could be
protracted and expensive. If suit were brought against us for patent
infringement, a challenge in the suit by us as to the validity of the other
patent would have to overcome a legal presumption of validity. There can be no
assurance that the validity of the patent would not be upheld by the court or
that, in such event, a license of the patent to us would be available. Moreover,
even if a license were available, the payments that would be required are
unknown and could materially reduce the value of our interest in the
affected products. We do, however, consider our patents to be very strong and
defendable in any action that may be brought against us. A major law firm has
reviewed our patent portfolio and agreed to handle litigation related to certain
of our patents on a contingency basis.
We also
rely upon unpatented trade secrets. No assurances can be given that others will
not independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets or disclose such
technology or that we can meaningfully protect our rights to our unpatented
trade secrets.
We require
our employees, directors, consultants, outside scientific collaborators,
sponsored researchers, and other advisors to execute confidentiality agreements
upon the commencement of employment or consulting relationships with us. These
agreements provide that all confidential information developed or made known to
the individual during the course of the relationship is to be kept confidential
and not disclosed to third parties except in specific circumstances. In the case
of employees, the agreements provide that all inventions conceived by the
individual shall be our exclusive property. There is no assurance, however, that
these agreements will provide meaningful protection for our trade secrets in the
event of unauthorized use or disclosure of such information.
Government
Regulation
Products
using our technology will be subject to extensive government regulation in the
United States and in other countries. In order to produce and market existing
and proposed products using our technology, our licensees must satisfy mandatory
safety standards established by the U.S. Occupational Safety and Health
Administration ("OSHA"), pollution control standards established by the U.S.
Environmental Protection Agency ("EPA") and comparable state and foreign
regulatory agencies. We may also be subject to regulation under the Radiation
Control for Health and Safety Act administered by the Center for Devices and
Radiological Health ("CDRH") of the U.S. Food and Drug Administration. We do not
believe that carbon nanotube field emission products will present any
significant occupational risks to the operators of such equipment. In
addition, the carbon nanotube field emission products are not expected to
produce significant hazardous or toxic waste that would require extraordinary
disposal procedures. Nevertheless, OSHA, the EPA, the CDRH and other
governmental agencies, both in the United States and in foreign countries, may
adopt additional rules and regulations that may affect us and products using our
technology. Additionally, our arrangements with our licensees and their
affiliates may subject products using our technology to export and import
control regulations of the U.S. and other countries. The cost of compliance with
these regulations has not been significant in the past and is not expected to be
material in the future.
A portion
of our revenue has consisted of reimbursement of expenditures under U.S.
government contracts. We recognized $305,721 of revenue in 2004, $339,790 in
2003, and $254,152 in 2002 related to government contracts. These reimbursements
represent all or a portion of the costs associated with such contracts. As of
December 31, 2004, we have one significant grant in process. Government
contracts are subject to delays and risk of cancellation. Also, government
contractors generally are subject to various kinds of audits and investigations
by government agencies. These audits and investigations involve review of a
contractor's performance on its contracts, as well as its pricing practices, the
costs it incurs and its compliance with all applicable laws, regulations and
standards. We are, and in the future expect to be, audited by the
government.
Employees
As of
March 1, 2005 we had 23 full-time employees, including 3 executive officers. We
also had 1 part-time employee and 2 substantially full time consultants. Within
the next twelve months, if business conditions support it, we may hire
additional employees. We are not subject to any collective bargaining agreements
and we consider our relations with our employees to be good.
Available
Information
Our
website is Http://www.nano-proprietary.com. Our
periodic reports and all amendments to those reports required to be filed or
furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange
Act of 1934 are available free of charge through its website. During the period
covered by this report, the Company made its periodic reports on Form 10-K, Form
10-KSB, and Form 10-QSB and its current reports on Form 8-K and amendments to
those documents available on its website as soon as reasonably practicable after
those reports were filed with or furnished electronically to the Securities and
Exchange Commission. The Company will continue to make such reports and
amendments to those reports available on its website as soon as reasonably
practicable after those reports are filed with or furnished to the Securities
and Exchange Commission. Material contained on our website is not incorporated
by reference in this Annual Report on Form 10-K.
We lease
a facility in Austin that is used for our corporate headquarters and research
and development activities under a lease expiring in February 2007. We also
lease office space in Dallas on a month to month basis.
We
believe that these facilities are suitable and will be adequate for our
anticipated research, development, and administrative activities for the
foreseeable future. If we embark on significant new research that requires
significant additional employees, we may have to establish additional
facilities.
We do not
currently invest in real estate or interests in real estate, real estate
mortgages, or securities of or interests in persons primarily engaged in real
estate activities. However, the Company has no policy, either for or against,
making such investments.
From time
to time the Company and its subsidiaries are also defendants in various lawsuits
that may arise related to minor matters. It is expected that any such lawsuits
would be settled for an amount no greater than the liability recorded in the
financial statements for such matters. If resolution of any of these suits
results in a liability greater than that recorded, it could have a material
impact on us.
Item 4.
Submission
of Matters to a Vote of Security Holders
There
were no matters submitted to a vote of security holders during the fourth
quarter of 2004.
Item 5. Market
for Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Our
common stock, $0.001 par value trades on the OTC Bulletin Board system under the
symbol “NNPP”. The following table sets forth, on a per share basis for the
periods indicated, the high and low sale prices for the common stock as reported
by the OTC Bulletin Board system. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
| |
|
High |
Low |
| |
|
|
|
|
2003 |
First
Quarter |
$0.59 |
$0.16 |
|
|
Second
Quarter |
$1.42 |
$0.50 |
|
|
Third
Quarter |
$2.31 |
$0.79 |
|
|
Fourth
Quarter |
$3.84 |
$1.98 |
|
|
|
|
|
|
2004 |
First
Quarter |
$3.23 |
$1.98 |
|
|
Second
Quarter |
$2.70 |
$1.38 |
|
|
Third
Quarter |
$2.14 |
$1.29 |
|
|
Fourth
Quarter |
$2.52 |
$1.80 |
|
|
|
|
|
|
2005 |
First
Quarter (through March 1, 2005) |
$3.53 |
$2.01 |
On March
1, 2005, the closing sale price for our common stock as reported on the OTC
Bulletin Board system was $3.25. As of March 1, 2005, there were
approximately 360 shareholders of record for our common stock. This does not
include shareholders holding stock in street name in brokerage
accounts.
We have
never paid cash dividends on our common stock, nor do we have any plans to pay
dividends. Our board of directors currently intends to invest future earnings,
if any, to finance expansion of our business. Any payment of cash dividends in
the future will be dependent upon our earnings, financial condition, capital
requirements, and other factors deemed relevant by our board of directors. It is
unlikely that any dividends on our common stock will be paid in the foreseeable
future.
Recent
Sales of Unregistered Securities
There
were no sales of unregistered securities in the fourth quarter of
2004.
| |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
2000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from continuing operations |
|
$ |
382,522 |
|
$ |
773,959 |
|
$ |
1,414,848 |
|
$ |
1,101,951 |
|
$ |
467,817 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations |
|
$ |
(4,612,026 |
) |
$ |
(4,214,202 |
) |
$ |
(4,683,419 |
) |
$ |
(4,850,770 |
) |
$ |
(6,612,354 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations per share |
|
$ |
(0.05 |
) |
$ |
(0.05 |
) |
$ |
(0.07 |
) |
$ |
(0.07 |
) |
$ |
(0.12 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets |
|
$ |
1,144,368 |
|
$ |
3,784,017 |
|
$ |
321,955 |
|
$ |
1,839,055 |
|
$ |
1,641,565 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
obligations |
|
$ |
5,944 |
|
$ |
27,353 |
|
$ |
46,283 |
|
$ |
121,651 |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
shareholders’ equity (deficit) |
|
$ |
846,456 |
|
$ |
3,552,829 |
|
$ |
(2,460,595 |
) |
$ |
(945,614 |
) |
$ |
65,775 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per common share |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
In 2002,
we sold our Sign Builders of America, Inc. subsidiary. All information related
to Sign Builders has been removed from this summary as a result of its
presentation as a discontinued operation. Also in 2002, we restructured our
Electronic Billboard Technology, Inc. subsidiary. EBT no longer sells products
or services, but seeks to license its intellectual property to others. Revenue
from continuing operations includes $130,386 and $10,000 in 2003 and 2002,
respectively. There was no revenue from EBT in all other years presented.
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should assist in understanding our financial condition,
liquidity, and capital resources as of December 31, 2004 and the results of
operations for the years ended December 31, 2004, 2003 and 2002. The Notes to
our Consolidated Financial Statements included later in this report contain
detailed information that should also be read in conjunction with this
discussion.
OVERVIEW
Nano-Proprietary,
Inc. is engaged in research and development related to nanotechnology products,
primarily those involving carbon nanotubes, to be used in the display,
electronics, sensor, and other industries. Our technology and many of its
potential applications are still new and in the early stages of development. Our
revenue has primarily consisted of development projects involving either the
U.S. government or large multinational corporations.
OUTLOOK
We expect
our cash needs for 2005 to be approximately $4.8 million. We intend to fund
those needs through a combination of sales, reimbursements for research, and
license agreements. We anticipate receiving significantly more revenue in 2005
than was received in 2004. We have developed a plan to enable us to achieve
positive cash flow from operations with approximately $4.8 million of revenue.
As of March 1, 2005, we have approximately $3.3 million in cash to cover any
potential revenue shortfall that may occur for the year. Our cash balance
includes $3.0 million in equity that we raised in February 2005. We do not
expect to need to raise any additional equity in 2005.
Our plan
is to generate sufficient revenues in 2005 to achieve breakeven or better;
however, losses may continue as we continue to fund the development of field
emission technology, sensors, and nanomaterials which include composites. There
can be no assurances that we will be profitable in the future. Full
commercial development of our technology may require additional funds in the
future. We expect to continue our concentrated research and development
of ANI’s technology in 2005.
We have
developed a plan to allow ourselves to maintain operations until we are able to
sustain ourselves on our own revenue. Our plan is primarily dependent on raising
funds through the licensing of our technology and through reimbursed research
arrangements. Our current cash balances are adequate to insure that we can
maintain our operations at the present level. We believe that we have the
ability to continue to secure short term funding, if needed, to enable us to
continue operations until our plan can be completed if this plan takes longer
than anticipated.
This plan
is based on current development plans, current operating plans, the current
regulatory environment, historical experience in the development of electronic
products, and general economic conditions. Changes could occur which would cause
certain assumptions on which this plan is based to be no longer valid. Our plan
is primarily dependent on increasing revenues. Although we do not expect funding
our operations to be a problem, if adequate funds are not available from
operations, or additional sources of financing, we may have to eliminate, or
reduce substantially, expenditures for research and development, testing of our
products, or obtain funds through arrangements with other entities that may
require us to relinquish rights to certain technologies or products. Such
results could materially and adversely affect us.
Critical
Accounting Policies
Our
significant accounting policies are summarized in the footnotes to our financial
statements. Some of the most critical policies are also discussed
below.
Stock
based compensation - We
have granted stock options to employees and others. In addition, all employees
have the opportunity to earn additional goal-based options awards each year. In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
123R (Revised 2004), Share-Based Payment ("SFAS No. 123R"), which requires that
the compensation cost relating to share-based payment transactions be recognized
in financial statements based on the provisions of SFAS 123 issued in 1995. Up
until this time, we have accounted for stock based compensation under the
provisions of APB 25 and disclosed pro-forma compensation expense calculated
using the Black-Scholes model in the footnotes to the financial statements.
We will
be required to adopt the provisions of SFAS No. 123R in the financial statements
for the quarter ended September 30, 2005. Under the provisions of SFAS No. 123R,
pro-forma presentation is no longer allowed, and we will be required to record
compensation expense for option grants in the financial statements. It is likely
that implementation of SFAS No. 123R will have a material impact on our
financial statements. The exact impact cannot be predicted because it is
dependent on future factors that can not be determined at the present time, such
as the volatility of our common stock. As disclosed in Note 2 to the Financial
Statements, had we accounted for stock based compensation under the provisions
of SFAS No. 123 in the past, we would have recorded additional expense of
approximately $2.2 million, $600,000, and $500,000 in the years ended December
31, 2004, 2003, and 2002, respectively.
Other
- As a
matter of policy, we review our major assets for impairment. Our major operating
assets are accounts receivable, and property and equipment. We depreciate our
property and equipment over their estimated useful lives. We recorded impairment
charges in 2002, but did not identify any impaired items in 2003 or 2004. We
have not experienced significant bad debts expense, and we do not believe that
we need an allowance for doubtful accounts for any exposure to loss in our
December 31, 2004 accounts
receivable.
LIQUIDITY
AND CAPITAL RESOURCES
Our cash
balance was $901,585 at December 31, 2004, which was a decrease from the cash
balance of $3,564,570 at December 31, 2003. Our working capital decreased from
approximately $3.5 million at December 31, 2003 to approximately $700,000 at
December 31, 2004. During the same period, our current ratio decreased from 18
to 1 to a ratio of approximately 3.4 to 1. This decreased level of liquidity is
the result of reduced fundraising activity in 2004 due to positive expectations
for future revenues.
The
principal source of our liquidity has been funds received from exempt offerings
of common stock. Cash provided by financing activities was $2,037,390,
$7,267,465, and $2,586,663 in 2004, 2003, and 2002, respectively. Of this, the
majority came from private placements of our common stock in the amounts of
$1,065,000, $4,812,943, and $1,983,902 in 2004, 2003, and 2002, respectively.
Additional amounts came from the exercise of warrants. The increase in
fundraising activity in 2003 was the result of a conscious decision to raise
money to solidify our financial condition and to insure that we had sufficient
funds to last through the end of 2005. The majority of the balance of the cash
provided by financing activities in 2004 and 2003 came from the proceeds from
the exercise of stock options, primarily by former employees. The majority of
the balance of the cash provided by financing activities in 2002 came from
convertible notes payable, which in reality were just another form of private
placement of our common stock in that they were converted into common
stock.
We
completed another private placement of our common stock in February 2005. We
raised a total of $3.0 million by issuing 1.2 million shares of our common stock
to once again insure that we had sufficient funds to last through the end of
2005. As of March 1, 2005, our cash balance is approximately $3.3 million. This
combined with expected revenue is enough for us to operate into 2006, even if
there were no significant new positive developments. We may receive additional
funds from the exercise of warrants, although there is no assurance that
warrants will be exercised. We may receive additional funds from the exercise of
employee stock options, although a significant portion of the funds received
from stock option exercises in 2004 and 2003 was from former employees that had
options expiring in 2003 and 2004. There are no remaining options held by former
employees and no options expiring in 2005.
In the
unlikely event that we need additional funds in 2005 beyond the amount that we
have as of the date of this filing, we may seek to sell additional debt or
equity securities. We have no plans to do this, however. While we expect to be
able to obtain any funds needed for operations, there can be no assurances that
any financing alternatives can be arranged on commercially acceptable terms. We
believe that our success in reaching profitability will be dependent upon the
viability of products using our technology and their acceptance in the
marketplace.
Net cash
used in operating activities was $4,581,513 in 2004, $3,716,964 in 2003, and
$2,915,612 in 2002. The cash used in operations was primarily the result of the
net losses incurred in each year. We expect a reduction in cash used in
operating activities in 2005 as the result of an expected increase in revenues.
We have a plan to generate positive cash from operations, however, since that
will require significantly increased revenues, there is no assurance that will
be achieved. Such significantly increased revenues would most likely result from
license agreements with significant up-front payments, or substantial research
contracts. The increase in the cash used in operating activities from 2003 to
2004 was primarily the result of three factors. A decrease in revenue of roughly
$400,000, an increase in royalty payments of approximately $100,000, and
generally increased spending on research and development, particularly related
to prototype displays. The increase in cash used in operations from 2002 to 2003
was primarily the result of working capital changes, particularly in accounts
payable and accrued expenses. Increases in accounts payable and accrued expenses
decreased cash used in operating activities by over $700,000 in 2002, while it
increased cash used in operating activities by over $400,000 in
2003.
Cash
provided by investing activities was $82,956 in 2002. The cash provided by
investing activities in 2002 was the result of the sale of our SBOA subsidiary
and the proceeds from the sale of excess EBT assets, offset by capital
expenditures during the year. Only $1,799 of cash was used in investing
activities in 2003 and $118,987 was used in investing activities in 2004. We
would expect minimal cash to be used in investing activities in 2005. No
material commitments exist as of December 31, 2004, for future purchases of
capital assets.
A summary
of our contractual cash obligations at December 31, 2004 is as
follows:
|
Contractual
Obligations |
|
|
Total |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
Notes
payable including interest |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
Long-term
debt including interest |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Operating
leases |
|
|
243,294
|
|
|
114,491
|
|
|
114,491 |
|
|
14,312 |
|
|
—
|
|
|
Capital
leases including interest |
|
|
29,228
|
|
|
23,184
|
|
|
6,044
|
|
|
— |
|
|
—
|
|
|
Total
contractual cash obligations |
|
$ |
272,522 |
|
$ |
137,675 |
|
$ |
120,535 |
|
$ |
14,312 |
|
$ |
— |
|
During
2003, all convertible notes payable were converted into common stock in 2003,
and all long-term debt was paid in 2003 as well. We currently have no notes
payable or long-term debt. We believe that we have currently have the cash
available to meet our cash requirements for fiscal 2005.
RESULTS
OF OPERATIONS
Business
Segments. We have
three reportable business segments, our Applied Nanotech, Inc. subsidiary, our
Electronic Billboard Technology, Inc. subsidiary and our remaining activities,
primarily corporate overhead. Because our Electronic Billboard Technology, Inc.
subsidiary has only minimal activity, our management discussion and analysis
related to results of operations is much more meaningful if done on a
consolidated basis. To the extent that EBT activity had a significant impact on
consolidated activity, it will be discussed in the context of the consolidated
results. The only significant financial activity at EBT in 2004 was the variable
option pricing effect of options held by former EBT employees.
Revenues.
Following is a summary of revenues for the three years covered by this
report.
| |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
Government
Revenues |
|
|
305,721 |
|
|
339,790 |
|
|
254,142 |
|
Futaba
Contract Research |
|
|
— |
|
|
400,000 |
|
|
1,000,000 |
|
Total
ANI Revenues |
|
|
382,522 |
|
|
773,959 |
|
|
1,284,452 |
|
Total
EBT Revenues |
|
|
— |
|
|
— |
|
|
130,386 |
|
Total
Revenues |
|
|
382,522 |
|
|
773,959 |
|
|
1,414,848 |
|
| |
|
|
|
|
|
|
|
|
|
|
Revenue
backlog at December 31 |
|
|
130,000 |
|
|
425,000 |
|
|
400,000 |
|
Substantially
all of the revenues during the 3-year period came from ANI. The Government
revenues in 2002 came from the completion of a multi-year NASA project and the
2003 and 2004 government revenues resulted from a project for the Department of
Defense being done in conjunction with Northrop Grumman. The Futaba revenues in
2002 and 2003 resulted from the completion of a project for Futaba started in
2001. The EBT Revenues in 2002 were result of the sale of miscellaneous display
products and payments by customers for test products. EBT changed its business
model in 2002 and no longer sells products. EBT is willing to license its
technology, but is not currently actively pursuing its technology.
The
revenue backlog at both December 31, 2004 and 2003 consists of revenue related
to our project being done in conjunction with Northrop Grumman for the
Department of Defense. The backlog at December 31, 2002 related to the Futaba
Project.
We expect
revenue to be significantly higher in 2005 than in 2004 and we plan to generate
minimum revenues in 2005 of $4.8 million at ANI. We have specifically identified
approximately $2.6 million of potential revenue for 2005, although there is no
guarantee that these revenues will be obtained, and expect the remaining $2.2
million to come from some of the many opportunities currently being explored.
Revenues could increase above these levels as a result of royalty agreements or
additional research revenues, but no assurances can be made that this will
occur, or that even $4.8 million in revenue will be achieved. We are actively
pursuing revenue producing contracts from numerous sources in several different
areas. We also intend to seek additional government research grants in the
future that are directly related to projects that we are already working on in
conjunction with our strategic objectives.
Cost
of sales. Because
we do not ship products or provide homogenous services, we do not incur costs of
sales in the traditional sense. We do keep track of our costs on individual
projects, but because there is a wide variation in cost percentages, presenting
cost of sales information is not meaningful. Government sponsored research has
nominal or no gross margins and is primarily just a reimbursement of costs. In
some cases we charge nominal amounts for projects that have much higher costs
because we are proving a concept that will be helpful to us in other areas, or
are seeking a significantly larger follow up contract with the customer. In
other instances we may perform research contracts that have significant positive
margins because we are able to capitalize on work that we have done and
knowledge that we have gained in the past. At the present stage of our
development, it is more meaningful to look at total research and development
costs in conjunction with revenues than to look at solely internally funded
research projects and the cost of research associated with revenue producing
contracts.
Research
and development.
Following is a summary of research and development expenditures for the three
years.
| |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
|
ANI
Research and development |
|
$ |
2,611,583 |
|
$ |
1,861,660 |
|
$ |
1,799,943 |
|
EBT
Research and development |
|
$ |
— |
|
$ |
— |
|
$ |
742,019 |
|
Total
Research and development |
|
$ |
2,611,583 |
|
$ |
1,861,660 |
|
$ |
2,541,962 |
|
Company
sponsored research and development expenses at Applied Nanotech, Inc. remained
relatively constant from 2002 to 2003, but increased substantially in 2004. This
increase was primarily the result of spending on two prototype carbon nanotube
based field emission displays that we are developing. One is a 14-inch prototype
done entirely by us and the other is a 25-inch prototype being done in
conjunction with an international consortium of display component
manufacturers.
We expect
to continue to incur substantial expenses in support of additional research and
development activities related to the commercial development of our field
emission technology, sensors, and nanomaterials which include composites. We
expect to incur less than the $2.6 million in research related expenditures
incurred in 2004 because the 14-inch prototype was completed in 2004 and the
majority of the expenditures related to the 25-inch were incurred in 2004, even
though the 25-inch will not be completed until 2005. We may, however, incur more
research and development expense in 2005 than presently expected. We are
pursuing numerous opportunities for research contracts and depending upon the
nature of the contracts signed, we may require more research materials than
expected, or we may require additional personnel.
Selling,
general, and administrative.
Following are key components of selling, general, and administrative
expense:
| |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
|
Variable
option pricing |
|
$ |
(267,696 |
) |
$ |
749,755 |
|
$ |
— |
|
EBT
related S, G, & A |
|
$ |
— |
|
$ |
— |
|
$ |
1,032,361 |
|
Other
S, G, & A |
|
$ |
2,201,059 |
|
$ |
1,934,357 |
|
$ |
2,087,040 |
|
Total
selling, general, and administrative |
|
$ |
1,903,363 |
|
$ |
2,684,112 |
|
$ |
3,119,401 |
|
| |
|
|
|
|
|
|
|
|
|
|
Pro-forma
SFAS No. 123 Expense |
|
$ |
2,259,387 |
|
$ |
552,927 |
|
$ |
544,034 |
|
Total
selling, general and administrative expense declined significantly from 2002 to
2004, however the most relevant line to look at in the above table is the other
selling, general, and administrative. Variable option pricing is dependent upon
the market price of our common stock, as explained below, and with the
restructuring at EBT in late 2002, there is no longer selling, general, and
administrative expense associated with EBT.
As
explained in greater detail in Note 10 to the financial statements, the Company
repriced a total of 900,500 options in April 2001. These options, all with an
exercise price greater than $1.50 per share, were repriced to $1.50 per share.
At the time of the repricing our common stock was trading at approximately $0.95
per share. No compensation expense related to the employees was recorded at the
time. The repricing of these options resulted in a new measurement date for
accounting purposes and reclassification of these options as variable plan
awards beginning on the date of the repricing. The Company previously accounted
for these option grants as fixed plan awards. From the date of the repricing
through December 31, 2002, the quoted value of the Company’s common stock did
not exceed the exercise price of the options, and as such, no compensation
expense was recognized at any period through that date. In 2003, the Company’s
common stock price exceeded the exercise price and remained above it, closing at
$2.73 per share on December 31, 2003 and $2.17 on December 31, 2004. The Company
recorded $749,755 in non-cash option expense for the cumulative effects of the
repricing in the year ended December 31, 2003. In the year ended December 31,
2004, a total of $267,696 was recorded as a reduction in expense as a result of
the reduction in the Company’s stock price in 2004. As of December 31, 2004, a
total of 217,500 of these options held by employees and 30,000 options held by a
consultant remain outstanding.
The
change in other selling, general, and administrative expense is primarily
related to payroll. Virtually all employees, including all officers, took salary
reductions effective November 1, 2002. These reductions remained in effect until
November 1, 2003, for employees, and December 1, 2003, for officers. As such
these reductions were in effect for the majority of 2003. The reinstated levels
were in effect for all of 2004. Non-payroll related expense remained relatively
constant from year to year.
We expect
selling, general and administrative expense in 2005 to be approximately $2.5
million, before considering the effects of variable option accounting or the
implementation of SFAS No. 123R. Since the impact of variable option accounting
depends on both the price of our common stock and when option holders choose to
exercise options, it is virtually impossible to predict with any certainty.
Based on the options outstanding at December 31, 2004, though, each $1.00
increase in the price of our stock would result in approximately $250,000 of
additional expense. The number of repriced options outstanding at December 31,
2004 is roughly half of the amount outstanding at December 31, 2003, so the
effect of a price change in 2005 will likely have approximately half the effect
that a similar price change would have had in 2004. The expected increase in
selling, general, and administrative expense in 2005 is the result of expected
increased payroll related costs and the estimated cost of an annual
meeting.
As
previously discussed, we will be required to implement SFAS No. 123R in our
financial statements for the quarter ended September 30, 2005. Implementation
will likely have a material impact on our selling, general, and administrative
expense. The table above shows the amount of expense that would have been
recorded in the years ended December 31, 2004, 2003, and 2002, if we had
recorded the amounts calculated under SFAS No. 123 in those years, rather than
disclosing pro-forma information in the footnotes to the financial statements.
It is not possible to predict the effect of SFAS No. 123R on future periods
because the expense to be calculated is dependent up on future events including
the number of options granted, the number of options vested, volatility as
impacted by changes in the price of our common stock, etc.
The
largest single component of cost that we incur is payroll related expense. In
2002, we incurred approximately $3.7 million of payroll related expense spread
throughout research and development, selling, general and administrative
expense, and discontinued operations. As a result of the sale of SBOA,
restructuring at EBT, and other cost reductions, payroll related expense
declined to approximately $1.7 million in 2003, excluding the cost related to
variable option accounting. Excluding the effect of variable option pricing, our
payroll related expense in 2004 was approximately $1.9 million. We expect
payroll related expense in 2005 to be approximately $2.0 million. Our expected
burn rate for 2005 is roughly $380,000 per month, excluding revenues. Based on
this we believe we can breakeven at a revenue level of $4.8 million or less, but
no assurances can be made that this will occur, or that we can achieve that
level of revenue.
Impairment
charges. As
discussed in greater detail in Note 7 to the financial statements, our operating
results for 2002 included $176,286 in impairment charges related to the
restructuring at EBT. We did not have any impairment charges in 2003 and do not
expect to have any impairment charges in the future.
Other
income. Following is a summary of other income for the last three calendar
years.
| |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
|
Interest
expense |
|
$ |
(4,584 |
) |
$ |
(56,065 |
) |
$ |
(711,331 |
) |
Lawsuit
settlement |
|
$ |
— |
|
$ |
— |
|
$ |
435,240 |
|
Miscellaneous
other income |
|
$ |
24,982 |
|
$ |
13,676 |
|
$ |
15,473 |
|
Interest
expense decreased substantially from $711,331 in 2002 to $56,065 in 2003, and
again to $4,584 in 2004. A significant portion of the interest expense in 2002
and 2003 resulted from the amortization of the value of beneficial conversion
features associated with convertible debt and interest payments on that
convertible debt. All of the convertible notes payable outstanding at December
31, 2002 were converted into common stock in 2003. We had no debt outstanding at
December 31, 2003 or 2004, and expect to incur no debt in 2005. We expect our
interest expense to continue to be negligible in 2005. The income from the
lawsuit settlement in 2002 was the result of the settlement of the TDS lawsuit
discussed in greater detail in Note 13 to the financial statements. We expect
miscellaneous other income to continue to be insignificant in 2005.
SEASONALITY
AND INFLATION
Nano-Proprietary's
business is not seasonal in nature. Management believes that Nano-Proprietary's
operations have not been affected by inflation.
ACCOUNTING
PRONOUNCEMENTS
In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
123R (Revised 2004), Share-Based Payment ("SFAS No. 123R"), which requires that
the compensation cost relating to share-based payment transactions be recognized
in financial statements based on the provisions of SFAS 123 issued in 1995. The
Company currently accounts for stock-based compensation using APB 25 and
discloses pro forma compensation expense quarterly and annually by calculating
the stock option grants' fair value using the Black-Scholes model and disclosing
the impact on net income and earnings (loss) per share in a Note to the
Consolidated Financial Statements. Upon adoption, pro forma disclosure will no
longer be an alternative. SFAS 123R is effective for the first annual or interim
report period beginning after June 15, 2005. Accordingly, we will adopt this
provision for its financial statements for the period ended September 30, 2005.
The financial impact of adopting SFAS 123R can not be predicted, however it will
likely have a material impact on the Company’s financial
statements.
Item 7A. Quantitative
and Qualitative Disclosures About Market Risk
We do not
use any derivative financial instruments for hedging, speculative, or trading
purposes. Our exposure to market risk is currently immaterial.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
OF
NANO-PROPRIETARY, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
|
Independent
Auditor’s Report |
19 |
|
Consolidated
Balance Sheets - December 31, 2004 and 2003 |
20 |
|
Consolidated
Statement of Operations - Years Ended December 31, 2004, 2003, and
2002 |
21 |
|
Consolidated
Statements of Shareholders’ Equity - Years Ended December 31, 2004, 2003,
and 2002 |
22 |
|
Consolidated
Statements of Cash Flows - Years Ended December 31, 2004, 2003, and
2002 |
23 |
|
Notes
to Consolidated Financial Statements |
24 |
To the
Board of Directors and Shareholders
Nano-Proprietary,
Inc.
Austin,
Texas
We have
audited the accompanying consolidated balance sheets of Nano-Proprietary, Inc.
and Subsidiaries (collectively, the “Company”) as of December 31, 2004 and 2003
and the related consolidated statements of operations, shareholders’ equity and
cash flows for each of the three years in the period ended December 31,
2004. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Nano-Proprietary, Inc. and
Subsidiaries as of December 31, 2004 and 2003, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2004 in conformity with U.S. generally accepted accounting
principles.
Sprouse
& Anderson, L.L.P.
Austin,
Texas
February
3, 2005
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
ASSETS |
|
|
|
|
|
|
|
| |
|
December
31, |
|
|
|
|
|
2004 |
|
|
2003 |
|
|
Current
assets: |
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
901,585 |
|
$ |
3,564,570 |
|
|
Accounts
receivable, trade - net of allowance for doubtful accounts
|
|
|
6,735
|
|
|
41,132
|
|
|
Prepaid
expenses and other current assets |
|
|
85,135
|
|
|
100,201
|
|
|
Total
current assets |
|
|
993,455
|
|
|
3,705,903
|
|
|
Property
and equipment, net |
|
|
141,373
|
|
|
77,314
|
|
|
Other
assets |
|
|
9,540
|
|
|
800
|
|
|
Total
assets |
|
$ |
1,144,368 |
|
$ |
3,784,017 |
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
140,597 |
|
$ |
126,809 |
|
|
Obligations
under capital lease |
|
|
21,430
|
|
|
19,380
|
|
|
Accrued
liabilities |
|
|
74,956
|
|
|
57,646
|
|
|
Deferred
Revenue |
|
|
54,985
|
|
|
—
|
|
|
Total
current liabilities |
|
|
291,968
|
|
|
203,835
|
|
|
Obligations
under capital lease, long-term |
|
|
5,944
|
|
|
27,353
|
|
|
Commitments
and contingencies |
|
|
—
|
|
|
—
|
|
|
Total
liabilities |
|
|
297,912
|
|
|
231,188
|
|
|
Shareholders'
equity : |
|
|
|
|
|
|
|
|
Preferred
stock, $1.00 par value, 2,000,000 shares authorized;
no
shares issued and outstanding at December 31, 2004 or 2003 |
|
|
—
|
|
|
—
|
|
|
Common
stock, 120,000,000 shares authorized, $.001 par value,
97,246,422
and
95,612,990 shares issued and outstanding, respectively |
|
|
97,246
|
|
|
95,613
|
|
|
Additional
paid-in capital |
|
|
80,822,625
|
|
|
78,918,605
|
|
|
Accumulated
deficit |
|
|
(80,073,415 |
) |
|
(75,461,389 |
) |
|
Total
shareholders' equity |
|
|
846,456
|
|
|
3,552,829
|
|
|
Total
liabilities and shareholders' equity |
|
$ |
1,144,368 |
|
$ |
3,784,017 |
|
See notes
to consolidated financial statements.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
| |
|
Year
ended December 31, |
|
|
|
|
|
2004
|
|
|
2003
|
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
Contract
research |
|
|
— |
|
|
400,000 |
|
|
1,000,000 |
|
|
Government
contracts |
|
|
305,721
|
|
|
339,790
|
|
|
254,152
|
|
|
License
fees and royalties |
|
|
10,852
|
|
|
2,248
|
|
|
—
|
|
|
Other
|
|
|
65,949
|
|
|
31,921
|
|
|
160,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues |
|
|
382,522
|
|
|
773,959
|
|
|
1,414,848
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Operating
costs |
|
|
|
|
|
|
|
|
|
|
|
Research
and development |
|
|
2,611,583
|
|
|
1,861,660
|
|
|
2,541,962
|
|
|
Selling,
general and administrative expenses |
|
|
1,903,363
|
|
|
2,684,112
|
|
|
3,119,401
|
|
|
Royalty
expense |
|
|
500,000
|
|
|
400,000
|
|
|
—
|
|
|
Impairment
charge |
|
|
—
|
|
|
—
|
|
|
176,286
|
|
|
Total
operating costs |
|
|
5,014,946
|
|
|
4,945,772
|
|
|
5,837,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations |
|
|
(4,632,424 |
) |
|
(4,171,813 |
) |
|
(4,422,801 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on disposal of assets |
|
|
125
|
|
|
4,695
|
|
|
18,418
|
|
|
Interest
income |
|
|
24,857
|
|
|
8,981
|
|
|
—
|
|
|
Interest
expense |
|
|
(4,584 |
) |
|
(56,065 |
) |
|
(711,331 |
) |
|
Lawsuit
settlement |
|
|
—
|
|
|
—
|
|
|
435,240
|
|
|
Other
income (loss) |
|
|
—
|
|
|
—
|
|
|
(2,945 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before taxes |
|
|
(4,612,026 |
) |
|
(4,214,202 |
) |
|
(4,683,419 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for taxes |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations |
|
|
(4,612,026 |
) |
|
(4,214,202 |
) |
|
(4,683,419 |
) |
|
Discontinued
operations |
|
|
|
|
|
|
|
|
|
|
|
Loss
from the operation of Sign Builders of America, Inc. |
|
|
—
|
|
|
—
|
|
|
(90,941 |
) |
|
Loss
on disposal of Sign Builders of America, Inc. |
|
|
—
|
|
|
—
|
|
|
(134,496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
(4,612,026 |
) |
|
(4,214,202 |
) |
|
(4,908,856 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion
on convertible preferred stock |
|
|
— |
|
|
—
|
|
|
(37,495 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) applicable to common shareholders |
|
|
(4,612,026 |
) |
|
(4,214,202 |
) |
|
(4,946,351 |
) |
|
Earnings
(loss) per share |
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted |
|
|
(0.05 |
) |
|
(0.05 |
) |
|
(0.07 |
) |
|
Weighted
average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted |
|
|
96,609,237
|
|
|
87,366,507
|
|
|
71,829,575
|
|
See
notes to consolidated financial statements.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS
OF SHAREHOLDERS' EQUITY (DEFICIT)
|
|
Preferred |
|
Common |
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Paid-In
Capital |
|
|
Deficit |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
January 1, 2002 |
|
|
850
|
|
$ |
850 |
|
|
66,899,584
|
|
$ |
66,900 |
|
$ |
65,324,967 |
|
$ |
(66,338,331 |
) |
$ |
(945,614 |
) |
|
Issuance
of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as
compensation |
|
|
-
|
|
|
-
|
|
|
75,000
|
|
|
75
|
|
|
20,925
|
|
|
-
|
|
|
21,000
|
|
|
Issuance
of common stock for patents |
|
|
-
|
|
|
-
|
|
|
523,729
|
|
|
524
|
|
|
85,891
|
|
|
-
|
|
|
86,415
|
|
|
Issuance
of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as a
result of the exercise of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee
stock options |
|
|
-
|
|
|
-
|
|
|
230,000
|
|
|
230
|
|
|
136,020
|
|
|
-
|
|
|
136,250
|
|
|
Issuance
of common stock for cash |
|
|
-
|
|
|
-
|
|
|
5,792,554
|
|
|
5,793
|
|
|
1,978,109
|
|
|
-
|
|
|
1,983,902
|
|
|
Issuance
of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
payment of accounts payable |
|
|
-
|
|
|
-
|
|
|
655,000
|
|
|
655
|
|
|
156,595
|
|
|
-
|
|
|
157,250
|
|
|
Issuance
of common stock as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
result
of convertible notes payable |
|
|
-
|
|
|
-
|
|
|
1,527,308
|
|
|
1,527
|
|
|
697,531
|
|
|
-
|
|
|
699,058
|
|
|
Conversion
of Series G Preferred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common stock |
|
|
(850 |
) |
|
(850 |
) |
|
1,267,617
|
|
|
1,267
|
|
|
(417 |
) |
|
-
|
|
|
-
|
|
|
Covnversion
value of debt issued |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
310,000
|
|
|
-
|
|
|
310,000
|
|
|
Net
(loss) |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,908,856 |
) |
|
(4,908,856 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2002 |
|
|
-
|
|
|
-
|
|
|
76,970,792
|
|
|
76,971
|
|
|
68,709,621
|
|
|
(71,247,187 |
) |
|
(2,460,595 |
) |
|
Issuance
of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
as compensation |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
101,400
|
|
|
-
|
|
|
101,400
|
|
|
Issuance
of common stock for patents |
|
|
-
|
|
|
-
|
|
|
71,021
|
|
|
71
|
|
|
13,565
|
|
|
-
|
|
|
13,636
|
|
|
Issuance
of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as a
result of the exercise of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee
stock options |
|
|
-
|
|
|
-
|
|
|
3,132,060
|
|
|
3,132
|
|
|
2,508,765
|
|
|
-
|
|
|
2,511,897
|
|
|
Issuance
of common stock for cash |
|
|
-
|
|
|
-
|
|
|
7,607,097
|
|
|
7,607
|
|
|
4,805,336
|
|
|
-
|
|
|
4,812,943
|
|
|
Issuance
of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in
payment of accounts payable |
|
|
-
|
|
|
-
|
|
|
125,000
|
|
|
125
|
|
|
276,657
|
|
|
-
|
|
|
276,782
|
|
|
Issuance
of common stock as |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
result
of convertible notes payable |
|
|
-
|
|
|
-
|
|
|
7,707,020
|
|
|
7,707
|
|
|
1,753,506
|
|
|
-
|
|
|
1,761,213
|
|
|
Variable
Option Pricing |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
749,755
|
|
|
-
|
|
|
749,755
|
|
|
Net
(loss) |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,214,202 |
) |
|
(4,214,202 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2003 |
|
|
-
|
|
|
-
|
|
|
95,612,990
|
|
|
95,613
|
|
|
78,918,605
|
|
|
(75,461,389 |
) |
|
3,552,829
|
|
|
Issuance
of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
as compensation |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
116,600
|
|
|
-
|
|
|
116,600
|
|
|
Issuance
of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as a
result of the exercise of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employee
stock options |
|
|
-
|
|
|
-
|
|
|
1,211,545
|
|
|
1,211
|
|
|
972,138
|
|
|
-
|
|
|
973,349
|
|
|
Issuance
of common stock for cash |
|
|
-
|
|
|
-
|
|
|
421,887
|
|
|
422
|
|
|
1,082,978
|
|
|
-
|
|
|
1,083,400
|
|
|
Variable
Option Pricing |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(267,696 |
) |
|
-
|
|
|
(267,696 |
) |
|
Net
(loss) |
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,612,026 |
) |
|
(4,612,026 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2004 |
|
|
-
|
|
$ |
- |
|
|
97,246,422
|
|
$ |
97,246 |
|
$ |
80,822,625 |
|
$ |
(80,073,415 |
) |
$ |
846,456 |
|
See notes
to consolidated financial statements.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
| |
|
Year
Ended
December
31, |
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(4,612,026 |
) |
$ |
(4,214,202 |
) |
$ |
(4,908,856 |
) |
|
Adjustments
to reconcile loss to net
cash
used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense |
|
|
54,928
|
|
|
44,419
|
|
|
278,949
|
|
|
Amortization
of discount on debt |
|
|
—
|
|
|
—
|
|
|
461,698
|
|
|
(Gain)
loss on disposal of assets |
|
|
(125 |
) |
|
(4,695 |
) |
|
(17,952 |
) |
|
Non-cash
loss on disposal of SBOA |
|
|
—
|
|
|
—
|
|
|
106,572
|
|
|
Stock
and options issued for services |
|
|
116,600
|
|
|
101,400
|
|
|
21,000
|
|
|
Stock
issued for patent option |
|
|
—
|
|
|
13,636
|
|
|
86,415
|
|
|
Variable
option accounting charge |
|
|
(267,696 |
) |
|
749,755
|
|
|
—
|
|
|
Impairment
charge |
|
|
—
|
|
|
—
|
|
|
176,286
|
|
|
Net
realized and unrealized losses on marketable securities |
|
|
—
|
|
|
—
|
|
|
3,397
|
|
|
Changes
in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, trade |
|
|
34,397
|
|
|
(8,816 |
) |
|
174,504
|
|
|
Inventories |
|
|
—
|
|
|
—
|
|
|
(46,739 |
) |
|
Prepaid
expenses and other assets |
|
|
6,326
|
|
|
57,531
|
|
|
6,845
|
|
|
Accounts
payable |
|
|
13,788
|
|
|
(181,287 |
) |
|
232,226
|
|
|
Accrued
expenses |
|
|
17,310
|
|
|
(274,705 |
) |
|
495,631
|
|
|
Customer
deposits and other current liabilities |
|
|
54,985
|
|
|
—
|
|
|
14,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
adjustments |
|
|
30,513
|
|
|
497,238 |
|
|
1,993,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities |
|
|
(4,581,513 |
) |
|
(3,716,964 |
) |
|
(2,915,612). |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
Purchase
of marketable securities |
|
|
—
|
|
|
—
|
|
|
(25,860 |
) |
|
Sale
of marketable securities |
|
|
—
|
|
|
—
|
|
|
46,313
|
|
|
Capital
expenditures |
|
|
(118,987 |
) |
|
(6,494 |
) |
|
(231,880 |
) |
|
Proceeds
from the sale of SBOA |
|
|
—
|
|
|
—
|
|
|
250,000
|
|
|
Proceeds
from sale of assets |
|
|
125
|
|
|
4,695
|
|
|
44,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities |
|
|
(118,862 |
) |
|
(1,799 |
) |
|
82,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from short-term notes payable |
|
|
—
|
|
|
—
|
|
|
1,150,000
|
|
|
Repayment
of short-term notes payable |
|
|
—
|
|
|
—
|
|
|
(600,000 |
) |
|
Proceeds
from issuance of common stock |
|
|
2,056,749
|
|
|
7,324,840
|
|
|
2,120,152
|
|
|
Repayment
of long-term notes payable and capital lease
obligations |
|
|
(19,359 |
) |
|
(57,375 |
) |
|
(83,489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities |
|
|
2,037,390
|
|
|
7,267,465 |
|
|
2,586,663 |
|
|
Net
increase (decrease) in cash and cash equivalents |
|
|
(2,662,985 |
) |
|
3,548,702
|
|
|
(245,993 |
) |
|
Cash
and cash equivalents, beginning of year |
|
|
3,564,570
|
|
|
15,868
|
|
|
261,861
|
|
|
Cash
and cash equivalents, end of year |
|
$ |
901,585 |
|
$ |
3,564,570 |
|
$ |
15,868 |
|
See notes
to consolidated financial statements.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization,
Operations, and Liquidity:
Nano-Proprietary,
Inc. and its subsidiaries (“the Company”) are engaged in the development of
products for applications using proprietary field emission technology, sensors,
and nanomaterials which include composites, and the performance of significant
research in that area. The Company has also developed patented electronic sign
technology, has sold products using that technology, and has now limited itself
to licensing that technology to others. It intends to obtain development
revenues for applying its technology to specific applications for customers and
licensing its technology to others.
Until the
Company is able to operate profitably as a result of revenues from either
reimbursed research or license agreements, it may continue to seek additional
funds through the equity markets, or raise funds through debt instruments to
allow it to maintain operations. There is no assurance that license agreements
will be signed, that commercialization of the Company’s technology and products
will result in income from operations, or that funds will be available in the
equity or debt markets. Management believes it will continue to be able to
secure additional short term funding, if necessary, to allow the Company to
continue operations until it achieves profitability.
The
principal source of the Company's liquidity since the time of its initial public
offering in 1993 has been from the funds received from exempt offerings of
common stock, preferred stock, and convertible debt securities, as well as
license and development revenues. The Company will likely receive
additional funds from the exercise of warrants or options. The Company may also
seek to increase its liquidity through bank borrowings or other
financings. There can be no assurance that any of these financing
alternatives can be arranged on commercially acceptable terms. The Company
believes that its success in reaching profitability will depend on the viability
of its technology and products using that technology, their acceptance in the
marketplace, and its ability to obtain additional debt or equity financings in
the future.
A portion
of the Company's research and development has been funded by others. To
the extent that other funding is not available, the research and development
performed is internally funded by the Company.
2. Summary
of Significant Accounting Policies:
Principles
of consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, Applied Nanotech, Inc. (“ANI”), Electronic
Billboard Technology, Inc. (“EBT”), and Sign Builders of America, Inc. (“SBOA”),
after the elimination of all significant intercompany accounts and transactions.
ANI is primarily involved in developing products for applications using the
Company’s proprietary field emission technology, sensors, and nanomaterials
which include composites. EBT was primarily involved in the commercialization of
electronic digitized sign technology and has now limited itself to licensing
that technology. SBOA was a manufacturer of custom signage, but is now
included as a discontinued operation in 2002 only.
Revenue
recognition
The
Company's revenues include reimbursements under agreements to perform research
and development for others. Revenue under these contracts is recognized when it
is earned pursuant to the terms of the contract. The agreements with federal
government agencies generally provide that, upon completion of a technology
development program, the funding agency is granted a royalty-free license to use
the newly developed technology for its own purposes. The Company retains
all other rights to use, develop, and commercialize the technology and
recognizes revenue when it is billed pursuant to the terms of the contract.
Agreements with other entities generally allow the other entity to license the
Company’s technology upon completion of the project.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary
of Significant Accounting Policies (continued):
The
Company recognizes royalty revenue at the time the underlying product upon which
the royalty is based is shipped by the entity paying the royalty. License
revenue from licensing the Company’s product is recognized as revenue when
earned under the terms of the agreement. Revenue from the sale of products is
recognized at the time of shipment.
Cash and
cash equivalents
The
Company considers all highly liquid investments purchased with a maturity of
approximately three months or less to be cash equivalents.
Accounts
receivable
The
Company occasionally sells products to others on credit; however most sales are
to large financially stable companies, or the Federal government. It is the
Company's policy to record reserves for potential credit losses. Since
inception, the Company has experienced minimal losses. The Company considered no
reserves to be necessary at December 31, 2004, 2003, or 2002.
Property
and equipment
Property
and equipment are recorded at cost, net of accumulated depreciation and
amortization. Depreciation is provided on the straight-line method over the
estimated useful lives of the assets, which range from two to seven years, or
the lease term for leasehold improvements, if less. Expenses for major
renewals and betterments that extend the original estimated economic useful
lives of the applicable assets are capitalized. Expenses for normal repairs and
maintenance are charged to operations as incurred. The cost and related
accumulated depreciation of assets sold or otherwise disposed of are removed
from the accounts, and any gain or loss is included in income.
Impairment
At each
balance sheet date, the Company evaluates the carrying amount and the
amortization period for its long-lived assets. If an indicator of impairment
exists, it is recorded at that time. During 2002 property and equipment related
to the EBT operation were considered impaired and written down in September
2002. See Note 7 for details related to the impairment write down.
Income
taxes
The
Company accounts for income taxes using the liability method pursuant to
Statement of Financial Accounting Standards (“SFAS”) No. 109. Under this
method, deferred income taxes are recorded to reflect the tax consequences on
future years of temporary differences between the tax basis of the assets and
liabilities and their financial amounts at year-end. The Company provides
a valuation allowance to reduce deferred tax assets to their net realizable
value.
Research
and development expenses
Costs of
research and development for Company-sponsored projects are expensed as
incurred.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary
of Significant Accounting Policies (continued):
Accretion
on convertible preferred stock
The
Company’s Series G Convertible Preferred stock bore a 10% accretion, payable in
common stock at the date of conversion. Under the terms of the Series G
Preferred stock, all unconverted shares of the Series G Preferred Stock were
converted as of June 10, 2002. All accretions paid in common stock have been
treated as preferred dividends. The entire amount reflected as accretion on
convertible preferred stock on the income statement relates to the Series G
Preferred stock
Income
(loss) per common share
Basic per
share amounts are computed, generally, by dividing net income or loss by the
weighted average number of common shares outstanding. Diluted per-share
amounts assume the conversion, exercise, or issuance of all potential common
stock instruments unless the effect is anti-dilutive, thereby reducing the loss
or increasing the income per common share. As described in Notes 9, 10 and
11, the Company had options, warrants, and convertible notes outstanding as
indicated in the table below. However, because the Company incurred losses in
all years presented, the inclusion of those potential common shares in the
calculation of diluted loss per-share would have an anti-dilutive effect.
Therefore, basic and diluted per-share amounts are the same in all years
presented.
| |
|
2004 |
|
2003 |
|
2002 |
|
| |
|
|
|
|
|
|
|
Options |
|
|
5,398,703 |
|
|
5,253,175 |
|
|
6,965,629 |
|
Warrants |
|
|
95,000 |
|
|
155,000 |
|
|
155,000 |
|
Convertible
notes payable |
|
|
—
|
|
|
—
|
|
|
8,682,972 |
|
Weighted
average exercise price |
|
$ |
1.29 |
|
$ |
1.10 |
|
$ |
0.45 |
|
In
calculating the basic (income) loss per common share, the premium earned by the
preferred shareholders, ($37,495 in 2002) increased the net loss in that
year.
Stock-based
employee compensation
The
Company uses the intrinsic value method to account for stock-based employee
compensation. During 2004, 2003, and 2002, the Company did not incur any
compensation cost under APB No. 25 for options granted under the Plans. Had the
compensation cost for the Company’s compensation plans been determined
consistent with SFAS No. 123 and SFAS No. 148 using the fair value method, the
Company’s net loss and net loss per common share for 2004, 2003, and 2002 would
approximate the pro forma amounts as shown below:
|
|
|
2004 |
|
2003 |
|
2002 |
|
Net
Loss |
|
|
|
|
|
|
|
|
|
|
As
reported |
|
$ |
(4,612,026 |
) |
$ |
(4,214,202 |
) |
$ |
(4,908,856 |
) |
SFAS
No. 123 Charge |
|
|
2,259,387
|
|
|
552,927
|
|
|
544,034
|
|
Pro
Forma |
|
|
(6,871,413 |
) |
|
(4,767,129 |
) |
|
(5,452,890 |
) |
Net
income (loss) per common share - basic and
diluted |
|
|
|
|
|
|
|
|
|
|
As
reported |
|
$ |
(0.05 |
) |
$ |
(0.05 |
) |
$ |
(0.07 |
) |
Pro
Forma |
|
$ |
(0.07 |
) |
$ |
(0.05 |
) |
$ |
(0.08 |
) |
The
effects of applying SFAS No. 123 in this pro forma disclosure are not indicative
of future amounts. SFAS No. 123 does not apply to awards prior to 1995, and the
Company anticipates making awards in the future under its compensation plans.
The Company also granted 50,000 options to a non-employee consultant in 2003,
100,000 options to a non-employee consultant in 2004, and recorded expense of
$101,400 and $116,600 in 2003 and 2004, respectively, related to those options
using approximately the same assumptions used to determine the SFAS No. 123
charge.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Summary
of Significant Accounting Policies (continued):
The fair
value of each stock option granted in 2004, 2003, and 2002 is estimated on the
date of grant using the Black-Scholes option pricing-model with the following
weighted-average assumptions:
| |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
|
|
|
|
|
|
|
|
|
Dividend
Yield |
|
|
0 |
% |
|
0 |
% |
|
0 |
% |
Risk
Free Interest Rate |
|
|
3.5 |
% |
|
3 |
% |
|
3 |
% |
Expected
Option Life |
|
|
5
Years |
|
|
5
Years |
|
|
5
Years |
|
Turnover/Forfeiture
Rate |
|
|
45 |
% |
|
25 |
% |
|
25 |
% |
Volatility |
|
|
72 |
% |
|
108 |
% |
|
111 |
% |
The
Black-Scholes option valuation model and other existing models were developed
for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of and are highly sensitive to subjective assumptions
including the expected stock price volatility. Nano-Proprietary’s stock options
have characteristics significantly different from those of traded options, and
changes in the subjective input assumptions can materially affect the fair value
estimate.
Reclassifications
Certain
reclassifications were made to previously reported amounts in the accompanying
consolidated financial statements and notes to make them consistent with the
current year presentation.
Management’s
estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, and expenses, as
well as the disclosure of contingent assets and liabilities. Actual results
could differ from those estimates. Significant estimates include NOL reserves,
bad debt reserves, and litigation reserves.
Disclosures
about fair value of financial instruments
The
following methods and assumptions were used to estimate the fair value of each
class of certain financial instruments for which it is practicable to estimate
that fair value. For cash equivalents and accounts receivable, the
carrying amount approximates fair value because of the short-term nature of
these instruments. The fair value of the Company’s notes payable and capital
lease obligations is estimated based on the quoted market prices for the same,
or similar issues, or on the current rates offered to the Company for debt of
the same remaining maturities with similar collateral requirements. For all
years presented, the fair value of the Company’s notes payable and capital lease
obligations approximates their carrying values.
Recently
issued accounting pronouncements
In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
123R (Revised 2004), Share-Based Payment ("SFAS No. 123R"), which requires that
the compensation cost relating to share-based payment transactions be recognized
in financial statements based on the provisions of SFAS 123 issued in 1995. The
Company currently accounts for stock-based compensation using APB 25 and
discloses pro forma compensation expense quarterly and annually by calculating
the stock option grants' fair value using the Black-Scholes model and disclosing
the impact on net income and earnings (loss) per share in a Note to the
Consolidated Financial Statements. Upon adoption, pro forma disclosure will no
longer be an alternative. The Statement is effective for the first annual or
interim report period beginning after June 15, 2005. Accordingly, the Company
will adopt this provision for its financial statements for the period ended
September 30, 2005. The financial impact of adopting this statement can not be
predicted, however it will likely have a material impact on the Company’s
financial statements.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Other
Income
The gain
on disposal of assets included in other income (expense) in both 2003 and 2002
was primarily the result of the sale of equipment related to the EBT operation.
Sales proceeds exceeded the amount estimated at the time the impairment of the
equipment was recorded in September 2002. The income from the lawsuit settlement
in 2002 is the result of the settlement of the TDS lawsuit described in greater
detail in Note 13.
4. Operating
Lease Obligations
:
The
Company leases various facilities and equipment under operating lease agreements
having terms expiring at various dates through 2007. Rental expense was
$115,217, $124,425, and $211,686 for the years ended December 31, 2004,
2003 and 2002, respectively.
Future
minimum lease payments under operating leases that have initial or remaining
noncancelable lease terms in excess of one year at December 31, 2004, were as
follows:
2005 |
|
$ |
114,491 |
|
2006 |
|
|
114,491 |
|
|
2007
and thereafter |
|
|
14,312 |
|
|
Total
future minimum lease payments |
|
$ |
243,294 |
|
5. Capital
Lease Obligations
:
Capital
leases payable at December 31, 2004 and 2003 consisted of the
following:
|
|
|
2004 |
|
2003 |
|
Capital
leases for copier equipment due in
monthly
installments totaling $1,932 through 2006.
The
equipment value and lease obligation was determined
using
a discount rate of 10%. The equipment is included in
office
equipment at December 31, 2004 at a cost of $94,383
and
with accumulated amortization of $72,142. |
|
$ |
29,228 |
|
$ |
52,412 |
|
| |
|
|
|
|
|
|
|
Less
interest |
|
|
1,854 |
|
|
5,679 |
|
| |
|
|
|
|
|
|
|
|
Less
current portion |
|
|
21,430 |
|
|
19,380 |
|
| |
|
|
|
|
|
|
|
|
Capital
Lease Obligations, long-term |
|
$ |
5,944 |
|
$ |
27,353 |
|
Scheduled
maturities for capital lease obligations for the years ended December 31, are as
follows:
2005 |
|
$ |
21,430 |
|
|
2006 |
|
|
5,944 |
|
|
|
|
|
|
|
Total |
|
$ |
27,374 |
|
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. Details
of Certain Balance Sheet Accounts:
Additional
information regarding certain balance sheet accounts at December 31, 2004 and
2003 is as follows:
|
|
|
December
31, |
|
|
|
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
Property
and equipment: |
|
|
|
|
|
|
|
Plant
and equipment |
|
$ |
755,436 |
|
|
667,385 |
|
Furniture
and office equipment |
|
|
182,512
|
|
|
165,959
|
|
|
Leasehold
Improvements |
|
|
14,382
|
|
|
—
|
|
Total
carrying cost |
|
|
952,330
|
|
|
833,344
|
|
|
Less
accumulated depreciation |
|
|
(810,957 |
) |
|
(756,030 |
) |
| |
|
$ |
141,373 |
|
|
|
|
| |
|
|
|
|
|
|
|
Accrued
liabilities: |
|
|
|
|
|
|
|
Payroll
and related accruals |
|
$ |
37,927 |
|
$ |
32,646 |
|
|
Other |
|
|
37,029
|
|
|
25,000
|
|
|
Total |
|
$ |
74,956 |
|
|
|
|
Depreciation
for the years ended December 31, 2004, 2003, and 2002 was $54,928, $44,419, and
$278,949, respectively.
7. Impairment
of Assets
:
The
impairment charge for 2002 consists of the following:
Personal
property and
equipment |
|
$ |
92,886 |
|
|
Leasehold
improvements |
|
|
83,400 |
|
|
Total
impairment of assets |
|
$ |
176,286 |
|
In August
2002, the Company made the decision to restructure its Electronic Billboard
Technology, Inc. subsidiary and focus on licensing its technology to others
instead of directly marketing and installing products using the technology. As a
result of this decision, the Company recorded an impairment charge of $176,286
in the quarter ended September 30, 2002 to reduce the value of fixed assets,
including leasehold improvements and personal property owned by EBT. These
assets were all disposed of by December 31, 2002. There were no impairment
charges in 2004 or 2003.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. Income
Taxes
:
The
components of deferred tax assets (liabilities) at December 31, 2004 and 2003,
were as follows:
| |
|
December
31, |
|
| |
|
2004 |
|
2003 |
|
Deferred
tax assets: |
|
|
|
|
|
|
|
Net
operating loss carry forwards |
|
$ |
28,759,000 |
|
$ |
26,227,000 |
|
Research
and experimentation credits |
|
|
469,000 |
|
|
469,000
|
|
Foreign
tax credit credits |
|
|
—
|
|
|
556,000
|
|
Capitalized
intangible assets |
|
|
223,000 |
|
|
261,000
|
|
Depreciation
assets |
|
|
12,000 |
|
|
13,000
|
|
|
Accrued
expenses not deductible until paid |
|
|
15,000 |
|
|
243,000
|
|
|
Total
deferred tax assets |
|
|
29,478,000 |
|
|
27,769,000
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities: |
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
Net
deferred tax assets before valuation allowance |
|
|
29,478,000 |
|
|
27,769,000
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance |
|
|
(29,478,000 |
) |
|
(27,769,000 |
) |
|
|
|
|
|
|
|
|
Net
deferred tax asset |
|
|
|
|
|
|
|
| |
|
$ |
— |
|
|
— |
|
The
following is a reconciliation of the amount of the income tax expense (benefit)
that would result from applying the statutory federal income tax rates to pretax
income (loss) and the reported amount of income tax expense (benefit) for the
periods ended December 31, 2004, 2003, and 2002.
|
|
|
December
31, |
|
|
|
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Expected
income tax expense (benefit) |
|
$ |
(1,568,000 |
) |
$ |
(1,433,000 |
) |
$ |
(1,652,000 |
) |
Deductible
expenses not charged against book income |
|
|
(614,000 |
) |
|
(1,158,000 |
) |
|
(3,000 |
) |
Non-taxable
income |
|
|
(91,000 |
) |
|
—
|
|
|
—
|
|
Non-deductible
expenses |
|
|
7,000
|
|
|
260,000
|
|
|
7,000
|
|
Expiration
of Foreign Tax Credits |
|
|
556,000
|
|
|
—
|
|
|
—
|
|
Other |
|
|
1,000
|
|
|
11,000
|
|
|
(26,000 |
) |
|
Increase
in Valuation Allowance |
|
|
1,709,000
|
|
|
2,320,000
|
|
|
1,674,000
|
|
|
Total
Tax |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
As of
December 31, 2004, the Company had net operating loss carry forwards of
approximately $85 million that expire from 2006 through 2024, and are available
to offset future taxable income. The majority of these carry forwards expire
after 2009. Additionally, the Company has tax credit carry forwards related to
research and development expenditures of approximately $469,000 that expire
through 2011.
The
Company’s IPO, completed in 1993, and subsequent issuances of stock have
effected ownership changes under Internal Revenue Code Section 382. The
ownership changes resulting from these stock issuances will likely limit the
Company's ability to utilize any net operating loss carry forwards or credits
generated before the changes in ownership.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. Capital
Stock:
Beneficial
conversion feature
The
Company issued notes payable with beneficial conversion features during 2002.
The value of these beneficial conversion features was determined to be $310,000
in 2002. These amounts were recorded as an increase in additional paid in
capital and were amortized to interest expense over the term of the
notes.
Preferred
stock
The
Company has authorization for the issuance of 2,000,000 shares of $1.00 par
value preferred stock. As of December 31, 2004, 2003 and 2002, no preferred
shares were outstanding.
Series G
convertible preferred stock
From June
1997 through August 1997, through an exempt offering under Regulation D of the
Securities Act of 1933, the Company issued 1,700 shares of its Series G
preferred stock. The offering provided gross proceeds of $1,700,000 to the
Company. There were no material expenses associated with this offering. Each
share had a liquidation preference of $1,000 plus 10% per annum from the date of
issuance. The Series G preferred stock bore no dividends and holders of the
Series G preferred stock were entitled to vote on all matters submitted to a
vote of the stockholders on an "as if converted" basis.
Each
share of Series G preferred stock was convertible into that number of shares of
common stock determined by dividing the original issue price of the Series G
preferred stock, plus an accretion amount equal to 10 % of the issue price per
annum, by the conversion price. The conversion price was fixed at a rate of
$1.00 per share. All shares of Series G preferred stock that remained
outstanding on June 10, 2002, were automatically converted as of that date. This
conversion resulted in the issuance of an additional 1,267,617 common shares at
that date.
Common
stock
During
2002, 2003, and 2004, the Company issued shares of its common stock in a series
of private placements in exempt offerings under Regulation D of the Securities
Act of 1933. These shares were issued at prices that represented a slight
discount to the market price of the stock at the time of the offerings. All of
these shares were registered to enable the shareholder to be able to sell the
shares, with the latest registration statement declared effective May 10,
2004.
| |
|
Shares |
|
Proceeds |
|
|
2004 |
|
|
401,887 |
|
$ |
1,065,000 |
|
|
2003 |
|
|
7,607,097 |
|
$ |
4,812,943 |
|
|
2002 |
|
|
5,792,554 |
|
$ |
1,983,902 |
|
In a
series of private placements of the Company’s common stock in exempt offerings
under Regulation D of the Securities Act of 1933, the Company also issued
523,729 shares in 2002 and 71,021 shares in 2003, valued at $86,415 and $13,636,
respectively, in payment for the Keesman patent described in more detail in Note
13. The Company also issued 655,000 shares in 2002 and 125,000 shares in 2003 in
payment of accounts payable. The 2002 shares were valued at $157,250 and the
2003 shares were valued at $276,782. The Company also issued 1,527,308 shares in
2002 and 7,707,020 shares in 2003 as the result of the conversion of convertible
notes payable and related accrued interest totaling $699,058 in 2002 and
$1,761,213. The Company had a marketing agreement with Western National
Marketing, LLC. As a result of customer tests performed under this agreement and
in connection with the termination of this agreement, the Company issued 75,000
shares of its common stock in 2002 to Western. The shares were valued at $21,000
based upon the market price of the common stock at the time of issuance. These
shares were registered in November 2002.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. Capital
Stock (continued):
At
December 31, 2004, common stock was reserved for the following
reasons:
Exercise
of stock warrants |
|
|
95,000
|
|
|
Exercise
and future grants of stock options |
|
|
9,530,885
|
|
|
|
|
|
|
|
Total
shares reserved |
|
|
9,625,885 |
|
10. Stock
Options:
The
Company sponsors four stock-based incentive compensation plans (the “Plans”).
The Company applies Accounting Principles Board (“APB”) Opinion No. 25 and
related interpretations in accounting for the Plans. In 1995, the FASB issued
SFAS No. 123 “Accounting for Stock-Based Compensation” which, if fully adopted
by the Company, would change the methods the Company applies in recognizing the
cost of the Plans. Adoption of the cost recognition provisions of SFAS No. 123
is optional and the Company has decided not to elect these provisions of SFAS
No. 123. However, pro forma disclosures as if the Company adopted the cost
recognition provisions of SFAS No. 123 are required by SFAS No. 123 and are
presented in Note 2.
The plans
allow the Company to grant either incentive stock options or non-qualified stock
options. The incentive stock options are exercisable for up to ten years, at an
option price per share not less than the fair market value on the date the
option is granted. The incentive stock options are limited to persons who have
been regular full-time employees of the Company or its present and future
subsidiaries for more than one (1) year and at the date of the grant of any
option are in the employ of the Company or its present and future subsidiaries.
Non-qualified options may be granted to any person, including, but not limited
to, employees, independent agents, consultants and attorneys, who the Company's
Compensation Committee believes have contributed, or will contribute, to the
success of the Company. Non-qualified options may be issued at option
prices of less than fair market value on the date of grant and are exercisable
for up to ten years from date of grant. The option-vesting schedule for options
granted is determined by the Compensation Committee of the Board of Directors at
the time of the grant.
In April
2001, the Company repriced a total of 900,500 options. All options with an
exercise price greater than $1.50 per share, which was approximately 160% of the
market price of the stock at the time of the repricing, held by individuals
employed by the Company as of the repricing date, including one consultant under
contract at the time, were repriced to $1.50 per share. No compensation expense
related to the employees was recorded at the time. The repricing of these
options resulted in a new measurement date for accounting purposes and
reclassification of these options as variable plan awards beginning on the date
of the repricing. The Company previously accounted for these option grants as
fixed plan awards. From the date of the repricing through December 31, 2002, the
quoted value of the Company’s common stock did not exceed the exercise price of
the options, and as such, no compensation expense was recognized at any period
through that date. In 2003, the Company’s common stock price exceeded the
exercise price and remained above it, closing at $2.73 per share on December 31,
2003 and $2.17 on December 31, 2004. The Company recorded $749,755 in non-cash
option expense for the cumulative effects of the repricing and increased
additional paid in capital by the same amount in the year ended December 31,
2003. In the year ended December 31, 2004, a total of $267,696 was recorded as a
reduction in expense and a reduction to paid in capital as a result of the
reduction in the Company’s stock price in 2004. As of December 31, 2004, a total
of 217,500 of these options held by employees and 30,000 options held by a
consultant remain outstanding.
In March
1992, the shareholders of the Company approved the 1992 Employees Stock Option
Plan (the "1992 Employees Plan") for purposes of granting incentive or
non-qualified stock options. The plan was amended several times by the Company’s
Board of Directors to increase the number of shares authorized under the plan.
The latest amendment, in December 1999, increased the authorized shares under
the plan to 6,500,000. This plan expired in March 2002; however, options granted
under this plan prior to expiration remain outstanding until they are exercised,
forfeited, or the exercise period expires. At December 31, 2004, no shares
remained available for grant under the 1992 Employees Plan.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10.
Stock
Options (continued):
In March
1992, the Board of Directors adopted the 1992 Outside Directors’ Stock Option
Plan (the "1992 Directors Plan"), for purposes of granting non-qualified options
to non-employee directors of the Company. The plan was amended several times,
the latest being in December 1999. A total of 1,000,000 shares were reserved for
issuance under the plan and were issued each year based on a formula defined by
the plan. The stock options granted under the 1992 Directors Plan are
exercisable for up to 10 years at an option price equal to the fair market value
on the date the option is granted. This plan expired in March 2002;
however, options granted under the plan prior to expiration remain outstanding
until they are exercised, forfeited, or the exercise period expires. At December
31, 2004, no shares remained available for grant under the 1992 Directors
Plan.
In May
1998, the Board of Directors of the Company established the 1998 Officers and
Directors Stock Option Plan (the “1998 Officers and Directors Plan”) and
reserved a total of 1,200,000 shares for issuance under the Plan. The plan was
amended in January 1999 by the Board of Directors of the Company to increase the
shares reserved for issuance under the plan to 2,500,000. Options under this
plan are granted at the discretion of the Board of Directors. No additional
shares are currently available under this plan and no shares will be come
available under this plan in the future.
In
September 2002, the Board of Directors of the Company established the 2002
Equity Compensation Plan and reserved a total of 5,000,000 shares for issuance
under the Plan, effective March 2002. The purpose of this plan was to replace
the 1992 Employees Plan and the 1992 Directors Plan, both of which expired in
March 2002. A total of 4,132,182 shares remain available for grant under this at
December 31, 2004.
The
following is a summary of stock option activity under all four
plans:
|
|
|
Number
of
Shares |
|
Wgtd.
Ave.
Exercise
Price |
|
|
|
|
|
|
|
Options
outstanding at January 1, 2002 |
|
|
5,813,212
|
|
$ |
0.82 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
2,441,417
|
|
$ |
0.66 |
|
Exercised |
|
|
(230,000 |
) |
$ |
0.60 |
|
|
Canceled |
|
|
(1,059,000 |
) |
$ |
0.69 |
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2002 |
|
|
6,965,629
|
|
$ |
0.79 |
|
| |
|
|
|
|
|
|
|
Granted |
|
|
1,496,995
|
|
$ |
1.88 |
|
Exercised |
|
|
(3,132,060 |
) |
$ |
0.80 |
|
|
Cancelled |
|
|
(77,389 |
) |
$ |
0.82 |
|
| |
|
|
|
|
|
|
|
Options
outstanding at December 31, 2003 |
|
|
5,253,175
|
|
$ |
1.09 |
|
| |
|
|
|
|
|
|
|
Granted |
|
|
2,457,073
|
|
$ |
2.73 |
|
Exercised |
|
|
(1,211,545 |
) |
$ |
0.80 |
|
|
Cancelled |
|
|
(1,100,000 |
) |
$ |
2.94 |
|
| |
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2004 |
|
|
5,398,703
|
|
$ |
1.52 |
|
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. Stock
Options (continued)
:
The
following table summarizes information about stock options outstanding and
exercisable under all four stock option plans at December 31, 2004:
|
|
Options
Outstanding |
|
|
|
Options
Exercisable |
|
|
|
|
|
|
|
|
|
|
Range
of
Exercise
Prices |
|
Number
Outstanding
at
12/31/04 |
|
Wgtd. Avg.
Remaining
Contractual
Life
|
|
Wgtd.
Avg.
Exercise
Price |
|
Number
Exercisable
at
12/31/04 |
|
Wgtd.
Avg.
Exercise
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.00
- $0.50 |
|
|
1,327,214 |
|
|
4.8
Years |
|
$ |
0.43 |
|
|
1,327,214 |
|
$ |
0.43 |
|
$0.51
- $1.00 |
|
|
1,322,583 |
|
|
6.7
Years |
|
$ |
0.84 |
|
|
1,322,583 |
|
$ |
0.84 |
|
$1.01
- $2.00 |
|
|
841,833 |
|
|
6.6
Years |
|
$ |
1.54 |
|
|
841,833 |
|
$ |
1.54 |
|
$2.01
- $2.99 |
|
|
1,907,073 |
|
|
8.9
Years |
|
$ |
2.75 |
|
|
1,157,073 |
|
$ |
2.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,398,703 |
|
|
7.0
Years |
|
$ |
1.52 |
|
|
4,648,703 |
|
$ |
1.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted-average fair values of options under the plans granted during 2004,
2003, and 2002 were as follows:
|
|
|
2004 |
|
2003
|
|
2002 |
|
Discounted
options |
|
$ |
0.00 |
|
$ |
0.00 |
|
$ |
0.00 |
|
At-the-money
options |
|
$ |
1.71 |
|
$ |
1.58 |
|
$ |
0.50 |
|
Premium
options |
|
$ |
1.28 |
|
$ |
0.38 |
|
$ |
0.29 |
|
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. Stock
Warrants
:
Common
stock warrants
In 1996,
the Company issued 35,000 warrants to an advisor in connection with the
Company’s fundraising activities. These warrants enable the holder to purchase
shares of the Company’s common stock at a price of $2.00 per share through 2006.
In 1997, the Company issued 75,000 additional warrants to this advisor in
connection with services related to a joint venture agreement. A total of 15,000
of these warrants were exercised in 1999. These warrants enable the holder to
purchase shares of the Company’s Common Stock at a price of $1.00 per share
through 2007.
In
connection with the issuance of the Company’s Series G preferred stock in 1997,
the Company issued 850,000 warrants to holders of the Series G Preferred. These
warrants enable the holders to purchase shares of the Company’s common stock at
a price of $1.00 through August 2002. A total of 675,000 of these warrants were
exercised and the balance expired unexercised in 2002.
In 1999,
the Company issued a total of 60,000 warrants to three separate individuals in
connection with services rendered to the Company. The exercise price of these
warrants was based on the fair market value of the Company’s common stock at the
time of issuance and ranged from $0.88 to $2.15 per share. These warrants were
exercisable for a period of 5 years from the date of issuance and were either
exercised or expired in 2004.
The
following is a summary of outstanding warrants:
|
|
|
Number
of
Shares |
|
Exercise
Price |
|
|
|
|
|
|
|
Warrants
outstanding at January 1, 2002 |
|
|
330,000
|
|
$ |
0.88-2.15 |
|
|
Expired
or canceled |
|
|
(175,000 |
) |
$ |
1.00 |
|
|
|
|
|
|
|
|
|
Warrants
outstanding at December 31, 2002 |
|
|
155,000
|
|
$ |
0.88-2.15 |
|
|
Expired
or canceled |
|
|
—
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Warrants
outstanding at December 31, 2003 |
|
|
155,000
|
|
$ |
0.88-2.15 |
|
Exercised |
|
|
(20,000 |
) |
$ |
0.88 |
|
|
Expired
|
|
|
(40,000 |
) |
$ |
2.15 |
|
|
|
|
|
|
|
|
|
|
Warrants
outstanding at December 31, 2004 |
|
|
95,000
|
|
$ |
1.00-2.00 |
|
12. Supplemental
Cash Flow Information:
Cash paid
for interest was $4,584, $10,503, and $30,960 for 2004, 2003, and 2002,
respectively. The following non-cash transactions have been excluded from
the accompanying consolidated statement of cash flows:
| |
|
2004 |
|
2003 |
|
2002 |
|
|
|
|
|
|
|
|
|
Non-cash
financing activities: |
|
|
|
|
|
|
|
|
|
|
Conversion
of notes payable and interest into common shares |
|
|
— |
|
$ |
1,761,213 |
|
$ |
699,058 |
|
Issuance
of common shares in payment of accounts payable |
|
|
— |
|
$ |
276,782 |
|
$ |
157,250 |
|
Non-cash
investing activities: |
|
|
|
|
|
|
|
|
|
|
Common
shares issued for patent |
|
|
— |
|
$ |
13,636 |
|
$ |
86,415 |
|
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. Commitments
and Contingencies:
Government
contracts
Governmental
contractors are subject to many levels of audit and investigation. Among
United States agencies that oversee contract performance are: the Defense
Contract Audit Agency, the Inspector General, the Defense Criminal Investigative
Service, the General Accounting Office, the Department of Commerce, the
Department of Justice and Congressional Committees. The Company's management
believes that an audit or investigation, if any, as a result of such oversight
would not have any material adverse effect upon the Company's financial
condition or results of operations.
Till
Keesman Agreement
In May
2000, the Company licensed the rights to 6 carbon nanotube patents that, at the
time, had been applied for by Till Keesman in exchange for a payment of
$250,000 payable in shares of the Company’s common stock. Under the terms of the
agreement, the Company is obligated to pay license fees equal to 50% of any
royalties received by the Company related to these patents. The Company is
allowed to offset certain expenses, up to a maximum of $50,000 per year, against
payments due under this agreement. The agreement also contained provisions
related to minimum license fee payments. These minimum payments, totaling
$1,000,000, have been made and no further minimum payments are due. The Company
is allowed to offset these minimum payments against future royalty payments,
however once these minimum payments and the expenses have been offset, the
Company may be liable for additional royalty payments.
Legal
proceedings
On July
20, 1998, TFI Telemark, Inc. filed a complaint in the County Court at Law No. 2
of Travis County, Texas against the Company for debts of its now defunct
subsidiary, Plasmatron. The Company was served with notice of this suit on
August 5, 1998. The Company believes that no amounts are due to TFI; however,
all amounts claimed as owing by TFI are recorded as liabilities in the
consolidated financial statements of the Company. The Company believes the
ultimate resolution of this matter will not have a material impact on the
consolidated financial statements of the Company.
The
Company previously had a royalty agreement with Texas Digital Systems, Inc.
(TDS) which was terminated by TDS pursuant to the terms of the agreement as of
December 31, 1999. Under the terms of the agreement, TDS was prohibited
from using the Company’s technology after the termination of the agreement. The
Company believed that TDS was continuing to ship products using our technology
and contacted TDS. TDS responded, in part, by filing suit against the Company
and EBT for breach of contract in the 272nd Judicial
District Court in Brazos County Texas on July 26, 2000. The Company was
not served with notice of this suit until December 5, 2000. The Company filed a
counterclaim against TDS and sought substantial damages and an injunction
against TDS for continuing to use the Company’s technology in TDS products after
the termination of the agreement. The case was settled in September 2002 and an
8-K was filed as a result of that settlement. All parties agreed to drop all
claims against other parties to the lawsuit with no admission of liability by
any party. The Company has no further potential liability in conjunction with
this case. The amount of income recorded in other income under the caption
“lawsuit settlement” results from the settlement of this lawsuit.
From time
to time the Company and its subsidiaries are also defendants in various lawsuits
that may arise related to minor matters. It is expected that all such lawsuits
will be settled for an amount no greater than the liability recorded in the
financial statements for such matters. If resolution of any of these suits
results in a liability greater than that recorded, it could have a material
impact on us.
Research
and development commitments
As of
December 31, 2004, the Company was in the process of a contract for research
from the US Department of Defense. The total contract amount is $742,212 and
$613,122 of the revenue was recognized as of December 31, 2004. The revenue to
be received from these research contracts in 2004 is expected to exceed
the cost of this research.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
13. Commitments
and Contingencies (continued):
Agreements
with MCC
The
Company entered into an agreement in 1994 with Microelectronics and Computer
Technology Corporation (“MCC”) that was amended on several subsequent occasions
to cross license and pool technologies. As part of this relationship with MCC,
62 Diamond Field Emission patents and patent applications were assigned directly
to the Company and the Company has agreed to pay a royalty fee of 2% of future
commercial revenues related to the patents received. The Company has the right
to offset one half of the costs of maintaining these patents against any
royalties due under the agreement. No payments have been made to, or are due to,
MCC under this agreement and the possibility is remote that any payments will
ever be due under this agreement.
14. Concentrations
of Credit Risk:
The
Company’s financial instruments that are exposed to concentrations of credit
risk consist of cash and cash equivalents and receivables. The Company places
its cash and cash equivalents with high credit quality financial institutions;
however for periods of time during the year, bank balances on deposit were in
excess of the Federal Deposit Insurance Corporation insurance limit. At December
31, 2004 and 2003, amounts in excess of the FDIC limit of $175,058 and
$1,263,331, respectively, were held at JP Morgan Chase.
The
Company’s receivables are uncollateralized and result primarily from its
research and development projects performed primarily for U.S. Federal
Government Agencies and services performed for large U.S. and multinational
corporations. The Company has not incurred any material losses on these
receivables.
15. Research
and Development Contracts
:
The
Company makes significant expenditures for research and development. On
occasion, the Company may seek funding for a portion of its research and
development costs to reduce the cost of such expenditures to the Company. The
Company only seeks funding for projects that it already intended to do, or for
projects that would apply its technology for other uses in instances where that
application would allow the Company to achieve technical milestones that are
part of its strategic plan. A substantial portion of the Company’s funded
research has been from government contracts. Under government contracts, the
government has the right to utilize the results for its purposes and the Company
has the right to utilize the technology for commercial purposes.
Generally, when the Company contracts with other entities, the entity is also
conducting its own internal research related to application of the Company’s
technology to its products and such expenditures by the entity may exceed the
amount of funding provided to the Company. Usually the entity has the right to
license the technology at the conclusion of the project, if they desire. The
costs of a particular research program may significantly exceed the funding
received, however since the research was part of planned research, these
contracts generally involve only nominal additional costs to the
Company.
The
following schedule summarizes certain information with respect to research and
development contracts:
| |
|
2004 |
|
2003 |
|
2002 |
|
Contract
research revenues |
|
$ |
305,721 |
|
$ |
739,790 |
|
$ |
1,254,152 |
|
Costs
incurred charged to operations included in research and
development |
|
$ |
278,928 |
|
$ |
405,962 |
|
$ |
764,632 |
|
Amount
of additional funding commitments |
|
$ |
129,090 |
|
$ |
424,075 |
|
$ |
- |
|
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
16. Segment
Information
:
The
Company’s operations are classified into three principal reportable segments
that provide slightly different products or services.
|
|
|
|
|
|
|
|
|
|
|
|
|
ANI |
|
EBT |
|
All
Other |
|
Total |
|
|
2004 |
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
382,522 |
|
$ |
- |
|
$ |
- |
|
$ |
382,522 |
|
Interest
Expense |
|
|
3,949
|
|
|
- |
|
|
635
|
|
|
4,584
|
|
Depreciation
and Amortization |
|
|
50,185
|
|
|
- |
|
|
4,743
|
|
|
54,928
|
|
Research
and Development |
|
|
2,611,583
|
|
|
- |
|
|
- |
|
|
2,611,583
|
|
Income
(Loss) from Continuing Operations |
|
|
(4,030,353 |
) |
|
106,251
|
|
|
(687,924 |
) |
|
(4,612,026 |
) |
Assets |
|
|
310,005
|
|
|
- |
|
|
834,363
|
|
|
1,144,368
|
|
Capital
Expenditures |
|
|
116,613
|
|
|
- |
|
|
2,374
|
|
|
118,987
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
773,959
|
|
|
- |
|
|
-
|
|
|
773,959
|
|
Interest
Expense |
|
|
5,999
|
|
|
20
|
|
|
50,046
|
|
|
56,065
|
|
Depreciation
and Amortization |
|
|
37,653
|
|
|
- |
|
|
6,766
|
|
|
44,419
|
|
Research
and Development |
|
|
1,861,660
|
|
|
- |
|
|
- |
|
|
1,861,660
|
|
Loss
from Continuing Operations |
|
|
(2,890,175 |
) |
|
(361,784 |
) |
|
(962,243 |
) |
|
(4,214,202 |
) |
Assets |
|
|
1,424,724
|
|
|
527
|
|
|
2,358,766
|
|
|
3,784,017
|
|
Capital
Expenditures |
|
|
6,494
|
|
|
- |
|
|
- |
|
|
6,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
1,284,462
|
|
|
130,386
|
|
|
-
|
|
|
1,414,848
|
|
Interest
Expense |
|
|
9,237
|
|
|
2,696
|
|
|
699,398
|
|
|
711,331
|
|
Depreciation
and Amortization |
|
|
29,046
|
|
|
109,943
|
|
|
139,960
|
|
|
278,949
|
|
Research
and Development |
|
|
1,799,943
|
|
|
742,019
|
|
|
- |
|
|
2,541,962
|
|
Loss
from Continuing Operations |
|
|
(1,502,126 |
) |
|
(1,369,318 |
) |
|
(1,811,975 |
) |
|
(4,683,419 |
) |
Assets |
|
|
146,299
|
|
|
25,371
|
|
|
150,285
|
|
|
321,955
|
|
Capital
Expenditures |
|
|
52,327
|
|
|
172,444
|
|
|
7,199
|
|
|
231,880
|
|
Financial
information is furnished to the chief operating officer for review regarding
each subsidiary of the Company.
The ANI
segment consists of the activities of ANI and includes license revenues and
contract research revenues related to ANI’s technology. In both years,
virtually all ANI revenues were contract research revenues. The Company’s EBT
subsidiary previously sold electronic display products, but is now limiting
itself to licensing its technologies to others for use in display products. The
majority of EBT’s revenue in 2002 was from the sale of electronic display
products. All other segments include the Company’s general
overhead.
The
accounting policies applied by each of the segments are the same as those used
by the Company.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. Retirement
Plan
:
The
Company sponsors a defined contribution 401(k) profit sharing plan. No company
contributions were made in any of the years presented.
18. Discontinued
Operations:
On
September 27, 2002, the Company signed a letter of intent to sell all of the
assets of Sign Builders of America, Inc. The buyer agreed to pay $250,000,
plus assume substantially all of the liabilities of SBOA. The transaction was
closed October 8, 2002 with an effective date of October 1, 2002. Full payment
was received at closing. The purchaser was an entity formed by the previous
controller of Sign Builders of America, Inc. For comparative purposes, the
Company’s financial statements have been presented to reflect SBOA as a
discontinued operation in the consolidated statement of operations for all
periods presented.
Following
is a summary of the net assets of SBOA as of the date of the sale:
Cash |
|
$ |
6,469 |
|
Accounts
receivable |
|
|
321,327
|
|
Inventory |
|
|
279,128
|
|
Property,
plant, and equipment - net |
|
|
245,679
|
|
Accounts
payable |
|
|
(195,556 |
) |
Accrued
expenses |
|
|
(51,059 |
) |
Customer
deposits |
|
|
(226,202 |
) |
|
Capital
lease obligations |
|
|
(18,472 |
) |
|
|
|
|
|
Net
Assets |
|
|
361,314
|
|
|
ecorded
loss |
|
|
111,314
|
|
|
|
|
|
|
|
Net
carrying value of assets sold |
|
$ |
250,000 |
|
Additional
expenses related to the disposition were incurred to bring the total loss on the
disposition of Sign Builders of America, Inc. to $134,496. Sign Builders of
America, Inc. had revenue of $1,877,385 through September 30, 2002.
19. Significant
Customers
:
Net
revenues for contract research to one major customer of Applied Nanotech, Inc.
totaled $1,000,000 in 2002 and $400,000 in 2003. No revenue was received
from this customer in 2004. In addition, Applied Nanotech, Inc. received
research and development revenues from the U.S. Government in the three years as
disclosed on the income statement.
20. Subsequent
Events
:
During
the period from January 1, 2005 through February 28, 2005,the Company received
$3,000,000 in proceeds and issued 1,200,000 shares of common stock in connection
with a private placement of the Company’s common stock.
NANO-PROPRIETARY,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
21. Quarterly
Financial Information (Unaudited)
:
| |
|
First |
|
Second |
|
Third |
|
Fourth |
|
Total |
|
| |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Year |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
77,658 |
|
$ |
100,718 |
|
$ |
100,473 |
|
$ |
103,673 |
|
$ |
382,522 |
|
Operating
income (loss) |
|
|
(1,117,862 |
) |
|
(1,269,201 |
) |
|
(1,108,338 |
) |
|
(1,137,023 |
) |
|
(4,632,424 |
) |
Net
(loss) |
|
|
(1,111,641 |
) |
|
(1,263,529 |
) |
|
(1,100,534 |
) |
|
(1,136,322 |
) |
|
(4,612,026 |
) |
Earnings
(loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted |
|
|
(0.01 |
) |
|
(0.01 |
) |
|
(0.01 |
) |
|
(0.01 |
) |
|
(0.05 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
444,452
|
|
|
160,380
|
|
|
88,195
|
|
|
80,932
|
|
|
773,959
|
|
Operating
income (loss) |
|
|
(749,524 |
) |
|
(681,333 |
) |
|
(1,200,627 |
) |
|
(1,540,329 |
) |
|
(4,171,813 |
) |
Net
(loss) |
|
|
(770,969 |
) |
|
(696,056 |
) |
|
(1,212,280 |
) |
|
(1,534,897 |
) |
|
(4,214,202 |
) |
Earnings
(loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted |
|
|
(0.01 |
) |
|
(0.01 |
) |
|
(0.01 |
) |
|
(0.02 |
) |
|
(0.05 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
285,437
|
|
|
480,284
|
|
|
218,990
|
|
|
430,137
|
|
|
1,414,848
|
|
Operating
income (loss) |
|
|
(1,153,914 |
) |
|
(1,269,443 |
) |
|
(1,527,982 |
) |
|
(471,462 |
) |
|
(4,422,801 |
) |
(Loss)
from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing
operations |
|
|
(1,371,151 |
) |
|
(1,466,153 |
) |
|
(1,238,700 |
) |
|
(607,415 |
) |
|
(4,683,419 |
) |
Income
(loss) from |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discontinued
operations |
|
|
2,209
|
|
|
(21,810 |
) |
|
(212,654 |
) |
|
6,818
|
|
|
(225,437 |
) |
Net
(loss) |
|
|
(1,368,942 |
) |
|
(1,487,963 |
) |
|
(1,451,354 |
) |
|
(600,597 |
) |
|
(4,908,856 |
) |
Earnings
(loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted |
|
|
(0.02 |
) |
|
(0.02 |
) |
|
(0.02 |
) |
|
(0.01 |
) |
|
(0.07 |
) |
Annual
Earnings (loss) per share may not equal the sum of the four quarterly amounts
due to rounding.
Item 9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, within 90 days of the filing date of this
report (the “Evaluation Date”). Based upon this evaluation, our principal
executive officer and principal financial officer concluded as of the Evaluation
Date that our disclosure controls and procedures were effective such that the
material information required to the included in our Securities and Exchange
Commission (“SEC”) reports is recorded, processed summarized and reported within
the time periods specified in SEC rules and forms relating to the Company,
including, our consolidated subsidiaries, and was made known to them by others
within those entities, particularly during the period when this report was being
prepared.
On or
before May 2, 2005, Nano-Proprietary shall provide an amendment to this annual
report on Form 10-K, which will include management’s annual report on internal
controls over financial reporting and the related auditor’s report on
management’s assessment of internal control over financial reporting as required
by Item 308 of Regulation S-K under the Securities Exchange Act of
1934.
Nano-Proprietary
completed a private placement of $3,000,000 whereby it issued 1,200,000 shares
of common stock to accredited investors at a price of $2.50 per share. The
proceeds will be used for working capital. A total of 1,000,000 shares were
acquired by investment funds run by JLF Asset Management, LLC. JLF Asset
Management was established in 1999 and has approximately $500 million under
management. It is managed by Jeff Feinberg, previously a partner in Soros Fund
Management, and prior to that, second in
command at Fidelity Magellan Fund. The remaining 200,000 shares were acquired by
First London Securities, a participant in previous private placements of the
Company’s Stock. The offering was priced on Thursday, February 10, 2004 when the
stock closed at $2.54, but traded as high as $2.65. Final documents were
completed Monday, February 14, 2005.
|
|
Directors
and Executive Officers of the
Registrant |
The
following sets forth the names, ages and certain information concerning the
Directors and Executive Officers of Nano-Proprietary.
|
Name |
Age |
Class |
Position |
Director/Officer
Since |
Term
Expires |
|
|
|
|
|
|
|
|
Marc
W. Eller |
49 |
III |
Director,
Chairman,
Chief
Executive Officer |
November
1995 |
2006 |
|
Dr. Zvi
Yaniv |
58 |
II |
Director,
President,
Chief
Operating Officer |
July
1996 |
2005 |
|
Douglas
P. Baker |
48 |
N/A |
Chief
Financial Officer |
June
1996 |
N/A |
|
Charles
C. Bailey |
56 |
I |
Director |
November
1999 |
2005 |
|
Ronald
J. Berman |
48 |
III |
Director |
May
1996 |
2006 |
|
Eddie
Lee |
42 |
II |
Director |
October
2001 |
2005 |
|
Dr.
Robert Ronstadt |
63 |
II |
Director
|
January
2003 |
2005 |
|
David
R. Sincox |
66 |
I |
Director |
October
1994 |
2005 |
______________________
Marc W.
Eller has served as the Company’s Chief Executive Officer since July 29, 1996.
Mr. Eller is Chairman of the Board of Directors and has been a Director since
November 1995. Prior to becoming CEO, Mr. Eller was involved in commercial real
estate investment and in investment banking activities for publicly traded
companies. Mr. Eller has a B.A. degree in Economics.
Dr. Zvi
Yaniv has served as the Company’s President and Chief Operating Officer and a
Director since July 29, 1996. Dr. Yaniv has degrees in physics, mathematics, and
electro-optics as well as a Ph.D. in Physics. Prior to joining the Company, in
May 1996, Dr. Yaniv operated a consulting practice and previously was President
and CEO of Optical Imaging Systems Inc., a supplier of flat panel color liquid
crystal displays to the avionics and defense industries.
Douglas
P. Baker has been with the Company since June 17, 1996. Mr. Baker is a C.P.A.
and has both a B.B.A. and a M.B.A. Immediately prior to joining
Nano-Proprietary, Inc., Mr. Baker was a divisional controller for MascoTech,
Inc. from 1991 to 1996. Mr. Baker also has experience in public accounting and
as CFO of a privately held company.
Charles
C. Bailey has been an attorney in private practice since 1995. Prior to that Mr.
Bailey had a 20-year career in government. Positions held include Assistant
Criminal District Attorney and Chief Prosecutor in Lubbock County, Texas;
General Counsel for the Texas Department of Public Safety; Assistant General
Counsel for Governor Bill Clements; and Director of Legal Services and Franchise
Taxes for the Texas State Comptroller’s Office. His last position with the state
of Texas, from 1993 to 1995, was Executive Assistant and General Counsel to Lt.
Governor Bob Bullock.
Ronald J.
Berman has been a Director since May 1996. Mr. Berman co-founded BEG
Enterprises, Inc. with Marc W. Eller and was its President from 1989 until
1998. Mr. Berman currently is President of R.J. Berman Enterprises, Ltd.,
a real estate development company, Inergi Fitness, and Walkers Warehouse. Mr.
Berman earned a Juris Doctor degree in 1980 from the University of Detroit.
Prior to 1989, Mr. Berman was an attorney in private practice.
Eddie Lee
is Chairman and CEO of Pacific Northern, Inc., a Company that he founded in
1987. Pacific Northern, Inc. is the largest visual display company serving
the retail jewelry industry.
Dr.
Robert Ronstadt has been a Director since January 2003. Dr. Ronstadt became
Vice President of Technology Commercialization for Boston University in June
2003. At the same time, he became the Director of Boston University's
Technology Commercialization Institute. He was special advisor to the
Chancellor of Boston University from January to May 2003. Prior to that,
from 1998 to 2002, he was Director of the IC2 Institute at the University
of Texas in Austin and the J. Marion West Chair of Constructive Capitalism. Dr.
Ronstadt was a professor of entrepreneurship at the Pepperdine University School
of Business Management from 1992 to 1998 and Babson College in Wellesley
Massachusetts from 1975 to 1985. From 1986 to 1992, he was the CEO of a
software enterprise.
David R.
Sincox has been a Director of the Company since October 1994. From 1987 through
2000, Mr. Sincox served as the Vice President of Administration of
Ref-Chem Construction Corporation, an engineering and construction firm. Since
January 2001, Mr. Sincox has been President of Clear Lake Business Services,
Inc. a consulting firm. Mr. Sincox is also a member of the Board of Directors of
Maxim Bank.
The Board
of Directors has three committees. The audit committee consists of Mr. Sincox
and Mr. Bailey. The compensation committee consists of Mr. Lee and Mr. Berman.
The executive committee consists of Mr. Eller and Dr. Yaniv.
The Board
of Directors has determined that David R. Sincox, a member of the audit
committee, is an “audit committee financial expert” and “independent” as defined
under applicable SEC rules. The board’s affirmative determination was based
upon, among other things, his experience as Vice President of Administration of
Ref-Chem Construction Company and his consulting practice.
We have
adopted a Code of Ethics within the meaning of Item 406(b) of Regulation S-B of
the Securities Exchange Act of 1934. This Code of Ethics applies to all
directors, officers, and employees of the Company. A copy of this Code of Ethics
is publicly available on our website at www.nano-proprietary.com.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities of Exchange Act of 1934 requires Nano-Proprietary’s
officers, and Directors, and persons who beneficially own more than 10 % of a
registered class of Nano-Proprietary’s common stock, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and NASDAQ. Officers, Directors, and beneficial owners of more than 10% of
Nano-Proprietary’s common stock are required by the Securities and Exchange
Commission regulations to furnish Nano-Proprietary with copies of all Section
16(a) forms that they file.
Based
solely on review of the copies of such reports furnished to us, or written
representations that no reports were required, we believe that for the period
from January 1, 2004 through December 31, 2004, all Officers, Directors, and
greater than 10% beneficial owners complied with all Section 16(a) filing
requirements applicable to them.
The
following table sets forth the total cash compensation paid or to be paid, as
well as certain other compensation paid or accrued, for services rendered during
the fiscal years ended December 31, 2004, 2003 and 2002 by the Chief Executive
Officer and all executive officers whose total annual salary and bonus exceeded
$100,000 for the fiscal year ended December 31, 2004 (the "Named Executive
Officers"):
SUMMARY
COMPENSATION TABLE
|
|
|
|
Annual
Compensation |
|
Long-Term
Compensation |
|
|
Name
and Principal Position |
|
Year |
|
Salary($) |
|
Bonus($) |
|
Other
Annual
Compensation(1) |
|
Securities
Underlying
Options(#) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Marc
W. Eller, |
|
|
2004 |
|
$ |
200,000 |
|
|
-0- |
|
|
-0- |
|
|
750,000 |
|
Chief
Executive Officer (2) |
|
|
2003 |
|
$ |
145,000 |
|
|
-0- |
|
|
-0- |
|
|
280,000 |
|
|
|
|
2002 |
|
$ |
148,333 |
|
$ |
150,000 |
|
|
-0- |
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zvi
Yaniv, President and |
|
|
2004 |
|
$ |
200,000 |
|
|
-0- |
|
|
-0- |
|
|
750,000 |
|
Chief
Operating Officer |
|
|
2003 |
|
$ |
145,000 |
|
$ |
147,917 |
|
|
-0- |
|
|
280,000 |
|
|
|
|
2002 |
|
$ |
181,667 |
|
|
-0- |
|
|
-0- |
|
|
-0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas
P. Baker, |
|
|
2004 |
|
$ |
150,000 |
|
|
-0- |
|
|
-0- |
|
|
400,000
|
|
Chief
Financial Officer |
|
|
2003 |
|
$ |
127,083 |
|
|
-0- |
|
|
-0- |
|
|
213,000
|
|
|
|
|
2002 |
|
$ |
140,833 |
|
$ |
45,000 |
|
|
-0- |
|
|
100,000
|
|
______________________
|
(1) |
No
Named Executive Officers received perquisites that exceeded in value the
lesser of $50,000 or 10% of such officers' salary and bonus.
|
|
(2) |
In
2002, Mr. Eller was awarded a bonus. Only $80,000 of this bonus was paid
in 2002. The remainder was deferred until such time as cash flow permitted
payment. The remaining $70,000 was paid to Mr. Eller in September 2003.
|
EMPLOYMENT
AGREEMENTS
The
Company currently has no employment agreements with executive
officers.
OPTION
GRANTS IN LAST FISCAL YEAR
In 2002,
Nano-Proprietary established its 2002 Equity Compensation Plan, which may be
used to grant employees, including officers of Nano-Proprietary, incentive stock
options designed to qualify under Section 422 of the Internal Code of 1986, or
non-qualified stock options. The following table sets forth information
concerning stock-option grants to the Named Executive Officers in
2004.
| |
|
|
|
|
|
|
Name |
Number
of
Securities
Underlying
Options
Granted(#)(1) |
Percent
of Total
Options
Granted to
Employees
in
Fiscal
Year 2004 |
Exercise
or
Base Price ($/Sh) |
Expiration
Dates |
Grant
Date
Present
Value (4) |
| |
|
|
|
|
|
|
Marc
W. Eller |
700,000 (2)
|
28.49%
|
$2.93 |
1/23/14 |
$496,000
|
|
|
50,000 (3)
|
2.03%
|
$2.17 |
12/31/14 |
$66,000
|
| |
|
|
|
|
|
|
Dr.
Zvi Yaniv |
700,000 (2)
|
28.49%
|
$2.93 |
1/23/14 |
$496,000
|
|
|
50,000 (3)
|
2.03%
|
$2.17 |
12/31/14 |
$66,000
|
| |
|
|
|
|
|
|
Douglas
P. Baker |
350,000
(2) |
14.24%
|
$2.93 |
1/23/14 |
$248,000
|
| |
50,000 (3)
|
2.03%
|
$2.17 |
12/31/14 |
$66,000
|
_____________
|
(1) |
The
options were granted for a term of ten (10) years, subject to earlier
termination in certain events related to termination of
employment. |
|
(2) |
For
Mr. Eller and Dr. Yaniv, these options vest as follows: 200,000 if royalty
agreements totaling $3 million are signed in 2004, an additional 200,000
if options the Company achieves profitability in 2004, and 100,000 for
each of the years 2005, 2006, and 2007, if the Company achieves
profitability in those years. The options for Mr. Baker vest according to
the same milestones, but the amounts are 100,000 related to royalties,
100,000 related to 2004 profitability, and 50,000 for profitability in
each of the years 2005, 2006, and 2007. Since the Company did not receive
$3,000,000 in royalties in 2004 and did not achieve profitability in 2004,
all options related to those milestones did not vest and expired December
31, 2004. The present value includes all options granted, including those
which expired. |
|
(3) |
These
options became exercisable in full on the date of the grant in
2004. |
|
(4) |
The
fair value of these options at the date of grant was estimated using a
Black-Scholes option pricing model. The following weighted average
assumptions were used to estimate the value of the options January 23,
2004 and December 31, 2004: a 5 year expected life of the options, a
dividend yield of 0%, expected volatility for the shares of 71.65, a
turnover/forfeiture percentage of 45%, and a risk free rate of return of
3.5%. |
AGGREGATED
OPTION EXERCISES IN LAST FISCAL YEAR
AND
FISCAL YEAR-END OPTION VALUES
The
following table sets forth certain information concerning (i) the exercise of
stock options by each of the Named Executive Officers during the last fiscal
year ended December 31, 2004 and (ii) the number and intrinsic value of the
options held by the Named Executive Officers at December 31, 2004. Year-end
values are based on the closing price of $2.17 per share of the common stock on
December 31, 2004, on the NASDAQ OTC Bulletin Board System. They do not reflect
the actual amounts, if any, which may be realized upon the future exercise of
remaining stock options and should not be considered indicative of future stock
performance.
|
Name |
|
Shares
Acquired
on
Exercise (#) |
|
Value
Realized
($) |
|
Number
of
Unexercised
Securities
Underlying
Options
at
December
31, 2004 (#)
Exercisable/
Unexercisable |
|
Value
of
Unexercised
In-the-Money
Options
at
December
31, 2004 ($)
Exercisable/
Unexercisable |
|
|
|
|
|
|
|
|
|
Marc
W. Eller |
|
0 |
|
0 |
|
230,000 / 300,000 |
|
$0 / $0 |
Dr. Zvi
Yaniv |
|
0 |
|
0 |
|
710,000
/ 300,000 |
|
$440,900 / $0 |
|
Douglas
P. Baker |
|
0 |
|
0 |
|
725,000
/ 150,000 |
|
$576,270 / $0 |
DIRECTOR
COMPENSATION FOR 2004
All
Directors who are not employees of the Company receive $150 per board meeting or
committee meeting attended in person, and $50 per telephonic meeting. Reasonable
expenses incurred by each Director in connection with his duties as a Director
are also reimbursed by Nano-Proprietary.
All of
Nano-Proprietary’s outside Directors participate in the 2002 Equity Compensation
Plan, under which Nano-Proprietary may grant stock options to any Director. On
July 26, 2004, each of the five outside Directors was granted an automatic grant
of 50,000 options under the 2002 Equity Compensation Plan at a price of $1.68.
These grants became exercisable in full on the date of the grant.
All of
the Directors have retained the right to pursue additional business activities
that are not competitive with the business of Nano-Proprietary, and do not
adversely affect their performance as Directors. If, as, and when conflicts of
interest arise, the nature of the conflict must be fully disclosed to the Board
of Directors, and the person who is subject to the conflict must abstain from
participating in any decision that may impact on his conflict of interest.
Except for this disclosure and abstention policy, the Directors will not be in
breach of any fiduciary duties owed to Nano-Proprietary or the shareholders by
virtue of their participation in such additional business
activities.
Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
CERTAIN
BENEFICIAL OWNERS
The only
person or entity known to be the beneficial owner of 5% or more of the
outstanding voting stock of any class of Nano-Proprietary, Inc. stock as of
March 1, 2005, is listed below. For the purposes of this Annual Report on Form
10-K, beneficial ownership of securities is defined in accordance with the rules
of the SEC to mean generally the power to vote or dispose of securities,
regardless of any economic interest therein.
| |
|
Beneficial
Ownership |
|
Percent
of Outstanding Common
Stock |
| |
|
|
|
|
|
Pinnacle
Fund, L.P. |
|
7,100,668 |
|
7.23% |
| |
|
|
|
|
|
Barry
Kitt, General Partner
4965
Preston Park Blvd.,
Suite
240
Plano,
TX 75093 |
|
|
|
|
SECURITY
OWNERSHIP OF MANAGEMENT
Set forth
below is certain information with respect to beneficial ownership of
Nano-Proprietary’s common stock as of March 1, 2005, by each Director, each
Named Executive Officer and by the directors and executive officers as a group.
Unless otherwise indicated, each person or member of the group listed has sole
voting and investment power with respect to the shares of common stock
listed.
| |
|
|
|
|
Name |
Options
Included
in
Beneficial
Ownership
(1) |
Common
Stock
Beneficial
Ownership |
Percentage
of
Class |
|
Dr.
Robert Ronstadt |
75,000 |
75,000 |
* |
|
David
R. Sincox |
395,000 |
520,000 |
* |
|
Charles
C. Bailey |
268,333 |
268,333 |
* |
|
Marc
W. Eller |
230,000 |
451,796 |
* |
|
Eddie
Lee |
166,667 |
166,667 |
* |
|
Ronald
J. Berman |
639,383 |
1,144,925 |
1.15% |
|
Dr.
Zvi Yaniv |
710,000 |
746,000 |
* |
|
Douglas
P. Baker |
564,500 |
564,500 |
* |
|
All
Executive Officers and
Directors
as a group (8 persons) |
3,039,383 |
3,937,221 |
3.87% |
_________________________
|
* |
Less
than 1% |
|
(1) |
This
column lists shares that are subject to options exercisable within sixty
(60)-days of March 1, 2005, and are included in common stock beneficial
ownership pursuant to Rule 13d-3(d)(1) of the Exchange Act.
|
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS
|
Equity
Compensation
Plans
Not Approved by
the
Shareholders of
the
Nano-Proprietary |
Number
of Securities to be issued upon exercise of outstanding
options |
Weighted-average
exercise price of
outstanding
options |
Number
of Securities remaining available for future issuance
under
equity
compensation
plans
(3) |
|
|
(a) |
(b) |
(c) |
|
1992
Employee Plan (1) |
1,091,000 |
$1.01 |
- |
|
1992
Outside Directors
Plan (2) |
497,716 |
$0.95 |
- |
|
1998
Directors and
Officers Plan |
900,000 |
$0.46 |
- |
|
2002
Equity
Compensation Plan |
2,909,987 |
$2.12 |
4,132,182 |
|
Total |
5,398,703 |
$1.52 |
4,132,182 |
|
(1) |
The
1992 Employee Plan was originally approved by shareholders and authorized
3.0 million shares. The plan was subsequently amended twice by the Board
to increase the authorized number of shares and is therefore classified as
a plan not approved by our shareholders. |
|
(2) |
The
1992 Outside Directors Plan was originally approved by shareholders and
authorized 500,000 shares. The plan was subsequently amended by the Board
to increase the authorized number of shares and is therefore classified as
a plan not approved by our shareholders |
|
(3) |
This
column excludes securities reflected in column
(a) |
There are
no equity compensation plans approved by shareholders at the present
time.
The 1992
Employee Plan was created in 1992 for the purpose of granting incentive or
non-qualified stock options to employees of, or contractors for, the Company. A
total of 6.5 million shares were authorized under the plan. All options granted
under this plan were priced at the fair market value of our common stock on the
date of grant, or greater, and have a life of ten (10) years from their date of
grant, subject to earlier termination as set forth in such plan. The plan
expired in 2002; however, options granted prior to such plan’s expiration remain
exercisable, subject to the terms of the respective option grants.
The 1992
Outside Directors’ Plan was established in 1992 for the purpose of granting
non-qualified options to non-employee Directors of the Company. A total of 1.0
million options were authorized under the plan. All options granted under this
plan were priced at the fair market value of our common stock or greater on the
date of grant and have a life of ten (10) years from their date of grant,
subject to earlier termination as set forth in such plan. The plan expired
in 2002; however, options granted prior to such plan’s expiration remain
exercisable, subject to the terms of the respective option grants.
In 1998,
the Company’s Board of Directors established the 1998 Directors’ and Officers
Plan to award non-qualified options to Officers and Directors. All options
granted under this plan were priced at the fair market value of our common
stock, or greater, on the date of grant and have a life of ten (10) years from
their date of grant, subject to earlier termination as set forth in such
plan. A total of 2.5 million options were granted under this plan; however
no options remain available for granting under this plan.
In 2002,
the Company’s Board of Directors established the 2002 Equity Compensation Plan
for the purpose of granting incentive or non-qualified stock options to
employees or directors of the Company. All options granted under this plan were
priced at the fair market value of our common stock, or greater, on the date of
grant and have a life of ten (10) years from their date of grant, subject to
earlier termination as set forth in such plan. A total of 5,000,000
options were initially authorized under this plan. This plan was amended
December 31, 2004 to increased the authorized shares by 3,000,000 to a total of
8,000,000 shares.
For a
further description of each of the stock option plans described above, please
see Note 10 to the Consolidated Financial Statements herein.
Item 13. Certain
Relationships and Related Transactions
None
Item
14. Principal
Accountant Fees and Services
Audit
Fees
The
aggregate fees billed to the Company by Sprouse & Anderson, L.L.P. for the
audit of Nano-Proprietary’s annual financial statements and for the review of
the financial statements included in its quarterly reports on Form 10-QSB for
the Fiscal Years ended December 31, 2004 and 2003 totaled $24,650 and $39,870,
respectively.
Audit-Related
Fees
Nano-Proprietary
did not incur or pay any fees to Sprouse & Anderson, L.L.P., and Sprouse
& Anderson, L.L.P. did not provide any services related to audit-related
fees in the last two fiscal years.
Tax
Fees
There
were no fees billed to Nano-Proprietary by Sprouse & Anderson, L.L.P. for
services rendered to Nano-Proprietary during the last two fiscal years for tax
compliance, tax advice, or tax planning.
All
Other Fees
There
were no fees billed to Nano-Proprietary by Sprouse & Anderson, L.L.P. for
services rendered to Nano-Proprietary during the last two fiscal years, other
than the services described above under “Audit Fees.”
It is the
audit committee’s policy to pre-approve all services provided by Sprouse &
Anderson, L.L.P. All services provided by Sprouse & Anderson, L.L.P. during
the years ended December 31, 2004 and 2003 were pre-approved by the audit
committee.
As of the
date of this filing, Nano-Proprietary current policy is to not engage Sprouse
& Anderson, L.L.P. to provide, among other things, bookkeeping services,
appraisal or valuation services, or internal audit services. The policy provides
that Nano-Proprietary engage Sprouse & Anderson, L.L.P. to provide audit,
tax, and other assurance services, such as review of SEC reports or filings.
The
Audit Committee considered and determined that the provision of the services
other than the services described under “Audit Fees” is compatible with
maintaining the independence of the independent auditors.
PART
IV
Item
15. Exhibits
and Financial Statement Schedules
| |
(a) |
Exhibits:
See Index to Exhibits on page 51 for a descriptive response to this
item. |
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
| |
|
|
| |
NANO-PROPRIETARY,
INC. |
|
|
|
|
By: |
/s/ Marc W.
Eller |
| |
Marc W. Eller ,
Chief Executive Officer |
| |
March 7,
2005 |
In
accordance with the Exchange Act, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature |
Title |
Date |
/s/
Marc
W. Eller
Marc
W. Eller |
Chairman,
Chief Executive
Officer
(Principal Executive Officer and
Director) |
March
7, 2005 |
/s/
Douglas P. Baker
Douglas
P. Baker |
Vice
President and
Chief
Financial Officer
(Principal
Financial Officer and Principal Accounting Officer) |
March
7, 2005 |
|
Dr.
Robert Ronstadt*
David
R. Sincox*
Eddie
Lee*
Ronald
J. Berman*
Charles
G. Bailey*
Dr. Zvi
Yaniv* |
Directors |
March
7, 2005 |
*By:
//s// Douglas P. Baker
(Douglas P. Baker,
Attorney-in-Fact)
INDEX TO
EXHIBITS
The
exhibits indicated by an asterisk (*) have been previously filed with the
Securities
and
Exchange Commission and are incorporated herein by reference.
|
EXHIBIT
NUMBER |
DESCRIPTION
OF EXHIBIT |
|
3(i).1* |
Restated
Articles of Incorporation of Company, as filed December 9, 1999 with the
Secretary of State for the State of Texas. (Exhibit 3(i)1 to the Company’s
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1999) |
|
3(i).2* |
Amendment
to the Restated Articles of Incorporation of the Company, as filed with
the Secretary of State for the State of Texas. (Exhibit 3(i).2 to the
Company’s Current Report on Form 8-K dated as of July 1,
2003). |
|
3(ii).1* |
Amended
and Restated Bylaws of the Company (Exhibit 3(ii) to the Company’s
Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31,
1996). |
|
4.1
* |
Form
of Certificate for shares of the Company’s common stock (Exhibit 4.1 to
the Company’s Registration Statement on Form SB-2[No.33-51446-FW] dated
January 7, 1993). |
|
4.2* |
Amended
and Restated Rights Agreement dated as of November 16, 2000, between the
Company and American Securities Transfer, Incorporated, as Rights Agent,
which includes as Exhibit A the form of Statement of Resolution
establishing and designating series of preferred stock as “Series H
Junior Participating Preferred Stock” and fixing and determining the
relative rights and preferences thereof, as Exhibit B the form of Rights
Certificate, and as Exhibit C the Summary of Rights to Purchase Preferred
Shares. (Exhibit 4.1 to the Company’s Current Report on Form 8-K dated as
of November 16, 2000). |
|
4.3 |
Form
of Regulation D Subscription agreement by and between the Company and the
participants of private placements |
|
4.4 |
Form
of Registration Rights Agreement by and between the Company and the
participants of private placements |
|
10.1* |
Amended
and Restated 1992 Outside Directors’ Stock Option Plan (Exhibit 4.2 to the
Company’s Registration Statement on Form S-8 [No. 333-56547] dated June 9,
1998). |
|
10.2* |
1998
Directors and Officers Stock Option Plan (Exhibit 4.3 to the Company’s
Registration Statement on Form S-8 [No. 333-56547] dated June 9,
1998). |
|
10.3* |
Amended
and Restated 1992 Stock Option Plan (Exhibit 4.1 to the Company’s
Registration Statement on Form S-8 [No. 333-56457] dated June 9,
1998) |
|
10.4 |
Amended
and Restated 2002 Equity Compensation Plan |
|
10.5* |
Patent
Assignment and Royalty Agreement between Electronic Billboard Technology,
Inc. and Advanced Technology, Incubator, Inc. dated as of October 6, 1998.
(Exhibit 10.18 to the Company’s Current Report on Form 10-KSB dated as of
March 31, 1999). |
|
10.6* |
Lease
agreement between the Company and Industrial Properties Corporation dated
as of June 2, 1998. (Exhibit 10.2 to the Company’s Current Report on Form
8-K dated as of December 7, 1998). |
|
10.7* |
Lease
agreement between the Company and Industrial Properties Corporation dated
as of February 15, 2004. (Exhibit 10.11 to the Company’s Annual Report on
Form 10-KSB for the fiscal year ended December 31,
2004). |
|
10.8* |
Patent
License Agreement, dated as of March 26, 1999, by and between the Company
and Canon, Inc. (Exhibit 10.1 to the Company’s amended Current Report on
Form 8-K/A dated as of April 16, 1999). |
|
10.9* |
Agreement
of Research and Development by and between the Applied Nanotech, Inc. and
Futaba Corporation (Exhibit 10.1 to the Company’s Current Report on Form
8-K dated as of January 1, 2001) |
|
10.10* |
Agreement
of Research and Development by and between the Applied Nanotech, Inc. and
Futaba Corporation for Phase II development (Exhibit 10.14 to the
Company’s Annual Report on From 10-KSB for the fiscal year ended December
31, 2001). |
|
EXHIBIT
NUMBER |
DESCRIPTION
OF EXHIBIT |
|
10.11* |
Agreement
for HyFED™ Development Team Phase II by and between Field Emission Picture
Element Technology, Inc. and Electrovac Ges.m.b.H. (Exhibit 10.2 to the
Company’s Current Report on Form S-2 date August 24,
2001) |
|
10.12* |
Agreement
for HyFED™ Development Team Phase II by and between Field Emission Picture
Element Technology, Inc. and Imaging System Technology, Inc. (Exhibit 10.3
to the Company’s Current Report on Form S-2 date August 24,
2001) |
|
10.13* |
Agreement
for HyFED™ Development Team Phase II by and between Field Emission Picture
Element Technology, Inc. and Supertex, Inc. (Exhibit 10.4 to the Company’s
Current Report on Form S-2 date August 24, 2001) |
|
10.14* |
Agreement
for HyFED™ Development Team Phase II by and between Field Emission Picture
Element Technology, Inc. and Schott Fiber Optics. (Exhibit 10.5 to the
Company’s Current Report on Form S-2 date August 24,
2001) |
|
10.15* |
Agreement
for HyFED™ Development Team Phase II by and between Field Emission Picture
Element Technology, Inc. and Lead Sangyo Co., Ltd. (Exhibit 10.6 to the
Company’s Current Report on Form S-2 date August 24,
2001) |
|
10.16* |
Agreement
for HyFED™ Development Team Phase II by and between Field Emission Picture
Element Technology, Inc. and Shanghai Novel Color Picture Tube Co., Ltd.
(Exhibit 10.7 to the Company’s Current Report on Form S-2 date August 24,
2001) |
|
10.17* |
Agreement
for HyFED™ Development Team Phase II by and between Field Emission Picture
Element Technology, Inc. and Shanghai Vacuum Electron Devices Co., Ltd.
(Exhibit 10.8 to the Company’s Current Report on Form S-2 date August 24,
2001) |
|
10.18* |
Nano-Proprietary,
Inc. Audit Committee Charter (Exhibit 10.23 to the Company’s Annual Report
on Form 10-KSB for the fiscal year ended December 31,
2002) |
|
10.19* |
Research/Development
and License Agreement entered into by Applied Nanotech, Inc. dated as of
September 11, 2002 (Exhibit 10.1 to the Company’s Current Report on Form
8-K dated as of September 27, 2002). |
|
10.20* |
Asset
Purchase Agreement by and among Fith, Inc., Electronic Billboard
Technology, Inc. and Sign Builders of America, Inc. (Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated as of October 8,
2002). |
|
10.21* |
Second
Addendum to Patent License Agreement by and among Nano-Proprietary, Inc.
and Till Keesman (Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated as of November 18, 2002). |
|
10.22* |
Strategic
Partnership agreement with SouthWest Nanotechnologies, Inc. (Exhibit 4.1
to the Company’s Quarterly report on Form 10-QSB for the quarter ended
June 30, 2005). |
|
11 |
Computation
of (Loss) per Common Share |
|
14* |
Nano-Proprietary,
Inc. Code of Ethics (Exhibit 14 to the Company’s Annual Report on Form
10-KSB for the fiscal year ended December 31, 2004) |
|
21 |
Subsidiaries
of the Company |
|
24 |
Powers
of Attorney. |
|
31.1 |
Rule
13a-14(a)/15d-14(a) Certificate of Marc W. Eller, Chief Executive
Officer |
|
31.2 |
Rule
13a-14(a)/15d-14(a) Certificate of Douglas P. Baker, Chief Financial
Officer |
|
32.1 |
Section
1350 Certificate of Marc W. Eller, Chief Executive
Officer |
|
32.2 |
Section
1350 Certificate of Douglas P. Baker, Chief Financial
Officer |
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51