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As filed with the Securities and Exchange Commission on September __, 2005
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2/A
AMENDMENT NO. 2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------
ALTERNATE ENERGY CORP.
(Name of Registrant in Our Charter)
NEVADA 86-0884116
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation Identification No.)
or Organization)
2813
(Primary Standard Industrial
Classification Code Number)
ALTERNATE ENERGY CORP. BLAINE FROATS
3325 NORTH SERVICE ROAD, UNIT 105 ALTERNATE ENERGY CORP.
BURLINGTON, ONTARIO, 3325 NORTH SERVICE ROAD, UNIT 105
CANADA L7N3G2 BURLINGTON, ONTARIO,
(905) 332-3110 CANADA L7N3G2
(Address and telephone number of (905) 332-3110
Principal Executive Offices and (Name, address and telephone
Principal Place of Business) number of agent for service)
COPIES TO:
Jonathan Leinwand
Jonathan D, Leinwand, P.A.
12955 Biscayne Blvd., Suite 402
North Miami, FL 33181
Phone: (305) 981-4524
Fax: (954) 252-4265
Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
=========================================================================================================================
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (4) PER SHARE PRICE FEE
- -------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.001 per share 20,000,000(2)shares $0.32(1) $ 6,400,000.00 $ 753.28
- -------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.001 per share(3) 17,660,474 shares $0.40 $ 7,064,189.60 $ 831.45
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Common Stock, par value $0.001 per share 10,844,424 shares $0.276 $ 2,993,061.02 $ 352.28
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Common Stock, par value $0.001 per share 1,200,000 shares $1.00 $ 1,200,000.00 $ 141.21
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TOTAL 49,704,898 shares $ $17,657,250.62 $ 2,078.22
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For purposes of
this table, we have used the average of the closing bid and asking prices
as of April 14, 2005.
(2) Pursuant to Rule 416 of the Securities Act of 1933, as amended (the
"Securities Act"), the shares of common stock offered hereby also include
such presently indeterminate number of shares of common stock as shall be
issued by us to the selling stockholders upon adjustment under
anti-dilution provisions covering the additional issuance of sharesRamp
resulting from stock splits, stock dividends or similar transactions.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(g) of the Securities Act, based on the higher of (a)
the exercise price of the warrants or (b) the offering price of securities
of the same class included in this Registration Statement.
(4) The amount to be registered was calculated based upon double the maximum
number of shares that could be issued pursuant to the notes and warrants.
We are obligated under the Subscription agreement with the Selling
Shareholders to register double the maximum number of shares that could be
issued.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
PROSPECTUS
Subject to completion, dated April 18, 2005
ALTERNATE ENERGY CORP.
26,434,783
SHARES OF COMMON STOCK
This prospectus relates to the sale of up to 26,434,783 shares of
Alternate Energy Corp.'s ("AEC" or the "Company") common stock by certain
persons who are, or are beneficially deemed to be, stockholders of AEC. Please
refer to "Selling Stockholders" beginning on page 8. AEC is not selling any
shares of common stock in this offering and therefore will not receive any
proceeds from this offering. AEC may receive proceeds from the exercise of
warrants to purchase 11,237,640 shares of common stock. All costs associated
with this registration will be borne by AEC.
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over-the-Counter Bulletin Board during
the term of this offering. On April 14, 2005, the last reported sale price of
our common stock was $0.35 per share. Our common stock is quoted on the
Over-the-Counter Bulletin Board under the symbol "ARGY." These prices will
fluctuate based on the demand for the shares of common stock.
The terms of the subscription agreement with the Investors calls for the
registration of the shares underlying the convertible notes and warrants PLUS AN
ADDITIONAL NUMBER OF SHARES EQUAL TO 100% OF THE UNDERLYING SHARES TO ENSURE
THAT A SUFFICIENT NUMBER OF SHARES ARE AVAILABLE FOR CONVERSION UNDER ALL
CONTINGENCIES.
The selling stockholders consist of five accredited investors.
Brokers or dealers effecting transactions in these shares should confirm
that the shares are registered under the applicable state law or that an
exemption from registration is available.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 4.
No underwriter or person has been engaged to facilitate the sale of shares
of common stock in this offering. None of the proceeds from the sale of stock by
the selling stockholders will be placed in escrow, trust or any similar account.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
The date of this prospectus is __________ __, 2005.
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................1
THE OFFERING...................................................................2
SUMMARY CONSOLIDATED FINANCIAL INFORMATION.....................................3
RISK FACTORS...................................................................4
FORWARD-LOOKING STATEMENTS.....................................................7
SELLING STOCKHOLDERS...........................................................8
USE OF PROCEEDS...............................................................11
PLAN OF DISTRIBUTION..........................................................11
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.....................12
DESCRIPTION OF BUSINESS.......................................................16
MANAGEMENT....................................................................27
DESCRIPTION OF PROPERTY.......................................................32
LEGAL PROCEEDINGS.............................................................32
PRINCIPAL STOCKHOLDERS........................................................32
CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.................................34
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS.................................35
DESCRIPTION OF SECURITIES.....................................................36
EXPERTS.......................................................................39
LEGAL MATTERS.................................................................39
HOW TO GET MORE INFORMATION...................................................39
AUDITORS' REPORT.............................................................F-1
FINANCIAL STATEMENTS.........................................................F-2
PROSPECTUS SUMMARY
OVERVIEW
AEC is an energy company committed to delivering innovative, practical and
environmentally responsible fuel and power solutions to consumer, commercial and
government markets. The Company's main technology is focused on production of
on-demand hydrogen. We believe AEC's hydrogen production process is designed to
overcome two major industry obstacles - affordability and safety. The hydrogen
production system leverages a proprietary chemical process that yields
fuel-cell-quality hydrogen from fresh or salt water, with no known harmful
by-products. Since AEC's hydrogen-maker requires little space, we believe it can
be designed to directly supply almost any application on an as-needed basis,
eliminating the need to store hydrogen in a compressed state.
AEC is focused upon the commercialization of its patent pending hydrogen
technology. The Company believes its hydrogen technology will have application
in the areas of stationary and portable fuel cell applications, back-up power
applications, electric-powered and gas combusting vehicles, and residential and
commercial/industrial applications for users wishing to gain independence from
the existing electricity grid. AEC is moving to complete the necessary
engineering refinements and industry certifications.
Management believes that AEC's long-term growth prospects are positively
affected by several market and industry trends including continued uncertainty
about the price and availability of fossil fuels, growing consumer demand for a
reliable alternative to the public electric power grid, continued concerns about
the impact of fossil fuels and greenhouse gases on the global environment and
serious concerns with the increasing reliance on imported fossil fuels for
Western nations.
Unlike most of its competitors, AEC's process does not generate its
hydrogen from fossil fuels. It also does not require any of electric power. Nor
does it require a large scale manufacturing process. The Company believes that
its technology will have both substantial environmental and cost-competitive
advantages in the marketplace.
ABOUT US
Our principal office is located at 3325 North Service Road, Suite 105,
Burlington, Ontario, Canada L7N3G2. Our telephone number is (905) 332-3110.
1
THE OFFERING
This offering relates to the sale of common stock by certain persons who
are, or are beneficially deemed to be, stockholders of AEC. The selling
stockholders consist of a limited number of accredited investors.
COMMON STOCK OFFERED Up to 26,434,783 shares by selling
stockholders (representing 200% of the total
shares issuable pursuant to the Convertible
Notes and Warrants described herein
OFFERING PRICE Market price
COMMON STOCK OUTSTANDING
BEFORE THE OFFERING 105,644,941 shares as of April 13, 2005(1)
USE OF PROCEEDS We will not receive any proceeds
of the shares offered by the selling
stockholders. Any proceeds received from the
exercise of warrants will be used for
general working capital. See "Use of
Proceeds."
RISK FACTORS The securities offered hereby involve a high
degree of risk and immediate substantial
dilution. See "Risk Factors" and "Dilution."
OVER-THE-COUNTER BULLETIN
BOARD SYMBOL "ARGY"
- ----------
(1) Excludes option to purchase 8,580,000 shares of common stock, and notes and
warrants convertible into 24,852,449 shares of common stock as of April 13,
2005.
2
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
2004 2003
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STATEMENT OF OPERATION DATA:
Revenues $ -- $ --
Administrative expenses 428,674 76,973
Consulting fees 4,467,672 2,857,703
Management fees -- 240,000
Professional fees 379,367 29,443
Research and Development 30,567 --
Stock option benefit -- 697,000
Amortization 41,840 --
Recovery of loan -- (202,000)
Loss on investments -- --
Net Profit (loss) (5,348,120) (3,699,119)
Net Profit (loss) per share (0.04) (0.08)
Weighted average number of
Common shares outstanding 128,185,299 45,798,538
DECEMBER 31, DECEMBER 31,
2004 2003
------------ ------------
BALANCE SHEET DATA:
Cash $ 418,253 $ 411,727
Deferred consulting costs 373,333 3,122,456
Prepared expenses and sundry assets 232,979 38,801
Technology, licenses and patents 2,124,373 1,969,236
Total assets 3,822,255 5,542,220
Accounts payable and accrued liabilities 36,384 263,954
Note due to related party 350,381 180,362
Total liabilities 386,765 444,316
Capital stock 104,815 125,747
Additional paid-in capital 23,168,880 19,543,328
Deficit (19,919,291) (14,571,171)
Total liabilities and stockholders' deficit 3,822,255 5,542,220
3
RISK FACTORS
WE ARE SUBJECT TO VARIOUS RISKS THAT MAY MATERIALLY HARM OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. YOU SHOULD CAREFULLY CONSIDER THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS FILING
BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
AEC HAS LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE
We have not been profitable and have lost money on both a cash and
non-cash basis. For the year ended December 31, 2004 and December 31, 2003, we
lost $5,348,120 and $3,699,119 respectively. Our accumulated deficit was
$19,919,291 at December 31, 2004. Future losses are likely to occur, as we are
dependent on spending money to pay for our operations. No assurances can be
given that we will be successful in reaching or maintaining profitable
operations.
AEC MAY NEED TO RAISE ADDITIONAL CAPITAL OR DEBT FUNDING TO SUSTAIN OPERATIONS
Unless AEC can become profitable with the existing sources of funds we
have available, we will require additional capital to sustain operations and we
may need access to additional capital or additional debt financing to develop
our products. In addition, to the extent that we have a working capital deficit
and cannot offset the deficit from profitable sales we may have to raise capital
to repay the deficit and provide more working capital attain revenues. We cannot
assure you that financing whether from external sources or related parties will
be available if needed or on favorable terms. Our inability to obtain adequate
financing will result in the need to reduce the pace of business operations. Any
of these events could be materially harmful to our business and may result in a
lower stock price.
OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE
SIGNIFICANTLY
There has been a limited public market for our common stock and there can
be no assurance that a public trading market for our common stock will develop.
An absence of an active trading market could adversely affect our shareholders'
ability to sell our common stock in short time periods, or possibly at all. Our
common stock has experienced, and is likely to experience in the future,
significant price and volume fluctuations, which could adversely affect the
market price of our common stock without regard to our operating performance. In
addition, we believe that factors such as quarterly fluctuations in our
financial results and changes in the overall economy or the condition of the
financial markets could cause the price of our common stock to fluctuate
substantially. These fluctuations may also cause short sellers to enter the
market from time to time in the belief that AEC will have poor results in the
future. We cannot predict the actions of market participants and, therefore, can
offer no assurances that the market for our stock will be stable or appreciate
over time.
4
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT
FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS
Our common stock is deemed to be "penny stock" as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline. Penny stocks are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the NASDAQ automated quotation system
(NASDAQ listed stock must still have a price of not less than $5.00
per share); or
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$10.0 million (if in continuous operation for less than three
years), or with average revenues of less than $6.0 million for the
last three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor.
WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL
Our success largely depends on the efforts and abilities of key
executives, including Blaine Froats, our Chairman of the Board and Chief
Executive Officer. The Company does not have an employment agreement with Mr.
Froats and does not maintain key man life insurance on Mr. Froats. The loss of
the services of Mr. Froats could materially harm our business because of the
cost and time necessary to replace and train a replacement. Such a loss would
also divert management attention away from operational issues. To the extent
that we are smaller than our competitors and have fewer resources we may not be
able to attract the sufficient number and quality of staff.
WE MAY NOT BE ABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, THE
FOUNDATION OF OUR BUSINESS, WHICH COULD HARM OUR BUSINESS BY MAKING IT EASIER
FOR OUR COMPETITORS TO DUPLICATE OUR SERVICES
We regard certain aspects of our products, processes, services and
technology as proprietary. We have taken steps to protect them with patent
applications, restrictions on disclosure and other methods. Despite these
precautions, we cannot be certain that third parties will not infringe or
misappropriate our proprietary rights or that third parties will not
independently develop similar products, services and technology. Any
infringement, misappropriation or independent development could severely
detriment our operations.
We may have to resort to litigation to enforce our intellectual property
rights, protect our trade secrets, determine the validity and scope of the
proprietary rights of others, or defend ourselves from claims of infringement,
invalidity or unenforceability. Litigation may be expensive and divert resources
even if we win. This could adversely affect our business, financial condition
and operating results such that it could cause us to reduce our operations.
OTHER PARTIES MAY ASSERT THAT OUR TECHNOLOGY INFRINGES ON THEIR INTELLECTUAL
PROPERTY RIGHTS, WHICH COULD DIVERT MANAGEMENT TIME AND RESOURCES AND POSSIBLY
FORCE AEC TO REDESIGN OUR TECHNOLOGY
5
Technology-based industries, such as ours, are characterized by an
increasing number of patents and frequent litigation based on allegations of
patent infringement. From time to time, third parties may assert patent,
copyright and other intellectual property rights to technologies that are
important to us. While there currently are no outstanding infringement claims
pending by or against us, we cannot assure you that third parties will not
assert infringement claims against us in the future, that assertions by such
parties will not result in costly litigation, or that they will not prevail in
any such litigation. In addition, we cannot assure you that we will be able to
license any valid and infringed patents from third parties on commercially
reasonable terms or, alternatively, be able to redesign products on a
cost-effective basis to avoid infringement. Any infringement claim or other
litigation against or by us could have a material adverse effect on us and could
cause us to reduce our operations.
OUR PRODUCTS USE INHERENTLY DANGEROUS, FLAMMABLE FUELS, WHICH COULD SUBJECT US
TO PRODUCT LIABILITY CLAIMS
Our business exposes us to potential product liability claims that are
inherent in hydrogen and products that use hydrogen. Hydrogen is a flammable gas
and therefore a potentially dangerous product. Our products produce hydrogen
from water utilizing a new metallurgy and chemical process and to the extent
that hydrogen is in our product or the surrounding power systems, it is
flammable. Any accidents involving our products or other hydrogen-based products
could materially impede widespread market acceptance and demand for our hydrogen
generator or other products. We have not negotiated a products liability policy
at this time and also cannot predict whether we would be able to maintain
insurance coverage on acceptable terms. In addition, we may be held responsible
for damages beyond the scope of insurance coverage.
RISKS RELATED TO THIS OFFERING
THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE
MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE
The selling stockholders intend to sell in the public market 26,434,783
shares of common stock being registered in this offering as a resale and not as
the issuance of shares by the company. That means that up
approximately 26,434,783 shares may be sold pursuant to this offering. Such
sales may cause our stock price to decline.
THE PRICE YOU PAY IN THIS OFFERING WILL FLUCTUATE AND MAY BE HIGHER OR LOWER
THAN THE PRICES PAID BY OTHER PEOPLE PARTICIPATING IN THIS OFFERING
The price in this offering will fluctuate based on the prevailing market
price of the common stock on the Over-the-Counter Bulletin Board. Accordingly,
the price you pay in this offering may be higher or lower than the prices paid
by other people participating in this offering.
6
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus may
contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans and (e) our anticipated needs for working capital. These
statements may be found under "Management's Discussion and Analysis or Plan of
Operations" and "Description of Business," as well as in this prospectus
generally. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under "Risk Factors" and matters described in
this prospectus generally. In light of these risks and uncertainties, there can
be no assurance that the forward-looking statements contained in this prospectus
will in fact occur.
7
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. A description of each selling stockholder's relationship to AEC
and how each selling shareholder acquired the shares to be sold in this offering
is detailed in the information immediately following this table.
Beneficial ownership is determined in accordance with SEC rules and
includes voting of investment power with respect to the securities. However,
certain of the selling stockholders is subject to certain limitations on the
exercise of their warrants or conversion of their convertible debentures, if
any. The most significant of these limitations is that such selling stockholder
may not exercise its warrants or convert its convertible debentures, if such
exercise or conversion would cause such holder's beneficial ownership of our
common stock (excluding shares underlying any of their unexercised warrants or
unconverted convertible debentures) to exceed 4.99% of the outstanding shares of
common stock.
PERCENTAGE OF PERCENTAGE OF SHARES
SHARES BENEFICIALLY OUTSTANDING SHARES BENEFICIALLY
OWNED BEFORE BENEFICIALLY OWNED SHARES TO BE SOLD OWNED AFTER
OFFERING BEFORE OFFERING(1) IN THE OFFERING (2) OFFERING(1)
- --------------------------------------------------------------------------------------------------------------------------
Design Investments Ltd.(3)
9 Tambark Circuit
Werrington Downs, NSW 2747
Austrailia 4,810,511 4.55% 4,810,511 0
Professional Traders Fund LLC (3)
1400 Old Country Road, Suite 206
Westbury, NY 11590 1,771,921 1.67% 1,771,921 0
Harborview Master Fund LP (3)
Harbour House Waterfront Dr.
PO Box 972
Road Town, Tortola
British Virgin Islands 4,810,511 4.55% 4,810,511 0
Double U Master Fund LP (3)
c/o Navigator Management Ltd.
Harbor House, Waterfront Dr.
PO Bix 972
Road Town, Tortola
British Virgin Islands 4,810,511 4.55% 4,810,511 0
Platinum Partners Value (3)
Arbitrage Fund LP
152 W 57th St.
New York, NY 10019 7,215,664 6.83% 7,215,664 0
Westor Capital (f/k/a Westor Online)
Mr. Richard Bach
258 Genesee Street, Suite 601
Utica, New York 13502. 800,000 * 800,000 0
InvestorSource Group LLC
PO Box 50593
Sarasota, FL 34232
Manager: Steven King 1,200,000 1.00% 1,200,000 0%
* indicates ownership of less than 1%.
8
(1) Applicable percentage of ownership is based on 105,644,941 shares of
common stock outstanding as of April 13, 2005, together with securities
exercisable or convertible into shares of common stock within 60 days of
April 13, 2005, for each stockholder. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of common stock subject to securities exercisable or convertible
into shares of common stock that are currently exercisable or exercisable
within 60 days of April 13, 2005, are deemed to be beneficially owned by
the person holding such securities for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding
for the purpose of computing the percentage ownership of any other person.
Note that affiliates are subject to Rule 144 and Insider trading
regulations - percentage computation is for form purposes only.
(2) The number of shares to be sold is less than the number being registered
as we are registering an extra number of shares to cover contingent
obligations contained in the Subscription Agreement and Note with the
Investors.
(3) Below depicts a table which discloses the natural person having sole or
shared voting and investment control held by the beneficial owner.
- -------------------------------------------------------------------------------
Beneficial Owner Natural Person having sole/shared
voting/investment control
- -------------------------------------------------------------------------------
Platinum Partners Mark Nordllicht
- -------------------------------------------------------------------------------
Design Investment LTD Haim Rolinitsky
- -------------------------------------------------------------------------------
Harborview Master Fund Richard Rosenblum
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Double U Master Fund Carl Jacobson
- -------------------------------------------------------------------------------
Professional Traders Howard Berger & Marc Swickle
- -------------------------------------------------------------------------------
InvestorsSource Group LLC. Steven King
9
The following information contains a description of each selling
shareholder's relationship to AEC and how each selling shareholder acquired the
shares to be sold in this offering is detailed below. None of the selling
stockholders have held a position or office, or had any other material
relationship, with AEC:
On March 2, 2005, the company entered into a private placement with certain
accredited investors whereby these investors have purchased $1,500,000 in
convertible notes, with Class A Warrants to purchase a number of shares equal to
the number of shares to which the Notes are convertible, at a price of $.40 per
share expiring in 3 years and with Class B Warrants to purchase up to an
additional $1.5 million in the Company's common shares at $.276 of the average
closing bid price for the 5 days preceding the notice to exercise and expiring
90 days after the registration statement registering the shares has been
declared effective. The note carries an interest rate of 6%. Interest is payable
quarterly in arrears in either cash or stock of the Company, at the Company's
discretion.
The Class B Warrants have a price of $.276 per share.
The Notes are convertible into shares of the Company at $.276 for the 5 days
preceding the notice to convert with a floor of $.15 and a ceiling of $.35 per
share, which represent the minimum and maximum conversion rates.
Class C Warrants have been issued. The warrant allows for the purchase of
400,000 shares at $.40 per share and 600,000 shares at $1.00 per share,
exercisable for 3 years from the date of the closing.
Professional Traders Fund LLC and Platinum Partners Value Arbitrage Fund LP have
previously invested in the Company in a private placement in January 2004. None
of the other investors have any relationship with the Company, its officers or
directors.
10
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by certain selling stockholders. There will be no
proceeds to us from the sale of shares of common stock in this offering, except
to the extent that the selling shareholders exercise their respective warrants.
The table below depicts the warrants, exercise price, number of shares and
proceeds to the company.
- ----------------------- ------------------ --------------------- ---------------------
Warrants Exercise Price Number of Shares Proceeds
- ----------------------- ------------------ --------------------- ---------------------
Class A $.40 4,285,714 to $1,714,285.60 to
10,000,000 $4,000,000.00
- ----------------------- ------------------ --------------------- ---------------------
Class B $.276 5,434,783 $1,500,000
- ----------------------- ------------------ --------------------- ---------------------
Class C $.40 400,000 $160,000
$1.00 600,000 $600,000
- ----------------------- ------------------ --------------------- ---------------------
Total 10,720,497 to $3,974,285.60 to
16,434,783 $6,260,000
- ----------------------- ------------------ --------------------- ---------------------
PLAN OF DISTRIBUTION
The selling stockholders of the common stock of AEC and any of their
pledgees, assignees and successors-in-interest may, from time to time, sell any
or all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales, to the extent permitted by law;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise; or
o any other method permitted pursuant to applicable law.
11
The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), if available, rather
than under this prospectus.
Westor Online, Inc. is the placement agent and any broker/dealers who act
in connection with the sale of the shares by means of this prospectus will be
deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act of 1933, and any commissions received by them and profit on any
resale of the shares as principal might be deemed to be underwriting discounts
and commissions under the Securities Act.
We engaged Westor Online, Inc, a registered broker-dealer, as our
placement agent with respect to the $1.5 million securities to be issued as best
efforts with a 20% over allotment. The Company shall pay the Placement Agent's
legal cost and due diligence expenses ("Legal Fees") incurred by the Placement
Agent in connection with this investment and the transactions contemplated,
which shall equal $5,000 to be paid directly from escrow on the Closing Date.
The Placement Agent will be paid at the closing of the Offering a cash
commission of ten percent (10%) of the aggregate subscription price of the
Securities to be closed thereupon.
Additionally, at the closing, the Placement Agent shall receive 1,000,000
warrants to purchase common stock at an exercise price equal 110 per cent of the
closing inside bid price on the Closing Date. These fees shall also be payable
upon the exercise of any warrants which constitute a portion of any units sold
hereunder. The Placement Agent's non-accountable expense allowance will be equal
to 3% of the offering payable is cash upon each closing. The Company will pay
all remaining accountable expenses at closing
Whether or not the offering is successfully completed, it shall be the
Company's obligation to bear all of its expenses in connection with the
Offering, including, but not limited to, the following: filing fees, printing
and duplicating costs, the Company's and Placement Agent's postage, delivery,
and advertising expenses, registrar and transfer agent fees, reasonable counsel
and accounting fees of the Company and issue and transfer taxes.
On or prior to the effectiveness of the registration statement to which
this prospectus is a part, we will advise the selling security holder that it
and any securities broker-dealers or others who may be deemed to be statutory
underwriters will be governed by the prospectus delivery requirements under the
Securities Act. Under applicable rules and regulations under the Securities
Exchange Act of 1934, any person engaged in a distribution of any of the shares
may not simultaneously engage in market activities with respect to the common
stock for the applicable period under Regulation M prior to the commencement of
this distribution. In addition and without limiting the foregoing, the selling
security holder will be governed by the applicable provisions of the Securities
and Exchange Act of 1934, and the rules and regulations thereunder, including
without limitation Rules 10b-5 and Regulation M, which provisions may limit the
timing of purchases and sales of any of the shares by the selling security
holder.
We will advise the selling security holder that the anti-manipulation
rules under the Securities Exchange Act may apply to sales of shares in the
market and to the activities of the selling security holder and any of its
affiliates. We have informed the selling security holder that it may not:
o engage in any stabilization activity in connection with any of the
shares;
o bid for or purchase any of the shares or any rights to acquire the
shares;
12
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
We are also registering 1,200,000 shares of our common stock issued to
InvestorSource Group LLC in consideration of services provided to us. This
represents a fixed fee payable to InvestorSource that was not contingent upon
the outcome of this or any other financing.
InvestorSource Group LLC will offer, but not limited to, the following
services:
(i) Advice regarding the capital structure;
(ii) Advice regarding corporate architecture, to include formation and
strategy;
(iii) Advice regarding long term value planning;
(iv) Advice regarding the maximization of shareholder value and
extraction of shareholder partnership and capital participation;
(v) Advice regarding Media relations and public awareness campaigns;
(vi) Advice regarding European capital market introductions and investor
plans;
(vii) Advice regarding Merger and Acquisition opportunities;
(viii) Advice regarding ESOP/ISOP planning and implementation;
(ix) Advice regarding financing opportunities;
(x) Advice regarding capital raising and public relations and investor
relations functions which may include road shows, press interviews,
and other functions;
(xi) Advice regarding listing on a National Stock Exchange.
13
In connection with the sale of our common stock or interests therein, the
selling stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The selling stockholders have
informed the Company that it does not have any agreement or understanding,
directly or indirectly, with any person to distribute the common stock.
The Company is required to pay certain fees and expenses incurred by the
Company incident to the registration of the shares. The Company has agreed to
indemnify the selling stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
MANAGEMENT DISCUSSION AND ANALYSIS
GENERAL
The following discussion and analysis should be read in conjunction with the
financial statements, and the notes thereto included herein. The information
contained below includes statements of AEC's or management's beliefs,
expectations, hopes, goals and plans that, if not historical, are
forward-looking statements subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in the
forward-looking statements. For a discussion on forward-looking statements, see
the information set forth in the Introductory Note to this registration
statement under the caption "Forward Looking Statements", which information is
incorporated herein by reference.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND NEW ACCOUNTING PRONOUNCEMENTS
Management's discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires that we make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. At each balance sheet date, management evaluates its estimates. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions. The
estimates and critical accounting policies that are most important in fully
understanding and evaluating our financial condition and results of operations
include those listed below:
14
DESCRIPTION OF BUSINESS
Alternate Energy Corporation (AEC) has been developing a hydrogen production
system that has mass-deployment economics and will provide on-demand power
solutions to a widespread, global base of commercial, industrial, consumer and
government markets.
The Company's main technology is focused on production of on demand hydrogen.
AEC believes its hydrogen production process is designed to overcome three major
industry obstacles affordability, storage and safety. The hydrogen production
system leverages a proprietary chemical process that yields fuel cell quality
hydrogen with no known harmful by-products. Since AEC's hydrogen maker requires
little space, it can be designed to directly supply mobile and stationary
applications on an as needed basis, eliminating the need to store hydrogen in a
compressed state. AEC is focused upon the rapid commercialization and launch to
multiple markets of its hydrogen production technology. The initial patents were
filed in 2004. The Company believes its hydrogen technology will have
application in the areas of back-up and primary power for commercial, industrial
and military purposes; stationary and portable fuel cell power applications, in
fuel cell-driven and internal combustion engine vehicles, and residential and
commercial applications for users wishing to gain independence from the existing
electricity grid. AEC is moving to complete the necessary engineering
refinements required to develop and then market these commercial products.
DEFERRED CONSULTING COSTS
Shares have been issued to service providers and consultants over the term of
contracts ranging from 1 to 3 years. Shares have been issued at the fair market
value price at date of contract signing and the expense will be amortized over
the term of the contract.
IMPAIRMENT OF INTANGIBLE ASSETS WITH INDEFINITE LIVES
On May 22, 2003, the Company adopted SFAS No 142, "Goodwill and Other Intangible
Assets." Under the new statement, the Company no longer amortizes intangible
assets with indefinite lives, but instead tests for impairment on at least an
annual basis. In accordance with SFAS No. 142, the Company evaluates the
carrying value of other intangible assets annually as of December 31 and between
annual evaluations if events occur or circumstances change that would more
likely than not reduce the fair value of the reporting unit below its carrying
amount. Such circumstances could include, but are not limited to, (1) a
significant adverse change in legal factors or in business climate, (2)
unanticipated competition, or (3) an adverse action or assessment by a
regulator. When evaluating whether the other intangible asset is impaired, the
Company compares the fair value of the reporting unit to which the other
intangible asset is assigned to its carrying amount. If the carrying amount of a
reporting unit exceeds its fair value, then the amount of the impairment loss
must be measured. The impairment loss would be calculated by comparing the
implied fair value of reporting unit to its carrying amount. In calculating the
implied fair value of the other intangible assets, the fair value of the
reporting unit is allocated to all of the other assets and liabilities of that
unit based on their fair values. The excess of the fair value of a reporting
unit over the amount assigned to its other assets and liabilities is the implied
fair value of its intangibles. The initial evaluation of the intangible assets
completed as of October 1, 2003 in accordance with SFAS No. 142 resulted in no
impairment losses. Additionally, the Company performed its periodic review of
its intangible assets for impairment as of December 31, 2003, and did not
identify any asset impairment as a result of the review.
15
STOCK OPTION PLANS
On MAY 22, 2003, THE COMPANY adopted a stock option plan that is accounted for
based on SFAS No. 123 and related interpretations. The plan allows THE COMPANY
to grant options to persons employed or associated with THE COMPANY, including
without limitation, any employee, director, general partner, officer, attorney,
accountant, consultant or advisor up to an aggregate of 5,000,000 Common shares.
The options have a term of expiration to be set by the Compensation Committee of
the Board of Directors but will not exceed ten (10) years after the grant date
and the options vest immediately. The exercise price for each option is chosen
at the discretion of the Compensation Committee. On February 24, THE COMPANY
increased the number of shares to be issued under the plan to 15,000,000.
On JULY 7, 2003 THE COMPANY granted 4,100,000 options at $0.10 expiring JUNE 1,
2006 and expensed the difference between the fair market value of the shares on
JULY 7, 2003 and the option price. The option expense amount for 2003 totaled
$697,000 and 20,000 of these options were exercised in the year.
On OCTOBER 15, 2004, THE COMPANY granted 5,050,000 options at $0.34 expiring
September 2007. No expense was recorded since the fair market value at the
option grant day equaled the option price of $0.34.
550,000 options were exercised in the year ended December 31, 2005 and 200,135
options expired during the same year.
There were 75,000 options exercised during the first quarter ending March 31,
2005. There were no options exercised during the second quarter ended June 30,
2005
RESULTS OF OPERATIONS FOR FISCAL YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE
FISCAL YEAR ENDED DECEMBER 31, 2003 AND FISCAL QUARTER ENDED JUNE 30, 2005
COMPARED TO THE FISCAL QUARTER ENDED JUNE 30, 2004.
REVENUES
There have been no revenues generated during the period from December 31, 2003
up to fiscal quarter ending June 30, 2005. During this period AEC has been
involved in the development of its hydrogen production system along with its
sales and marketing strategies. The company anticipates revenue as soon as its
hydrogen production system can be implemented into or surpasses its first
alpha-stage unit, the H2 1500-A1, which was recently demonstrated before two
separate multinational engine companies in the U.S. This mobile "road show" was
set up on-site with each organization, to review AEC's Hydrogen Production
technology and discuss business opportunities. The company is on schedule with
an accelerated product development timetable to take advantage of several
opportunities with targeted organizations. These meetings are the beginning of a
series of such meetings over the coming months, whereby Alternate Energy
Corporation will be showcasing its hydrogen production technology to commercial
parties. These groups have been pre-qualified as having a demonstrated need for
clean, alternative power.
16
EXPENSES -FISCAL YEAR ENDED DECEMBER 31, 2004
AEC had total expenses of $5,348,120 and $3,699,119 in the fiscal year ended
December 31, 2004 and December 31, 2003, respectively.
AEC's expenses for the fiscal year ended December 31, 2004 consisted of $428,674
in administrative expenses, $4,467,672 in consulting fees, $379,367 in
professional fees, $30,567 for research/development and $41,840 in amortization.
The increase in administrative expenses of $351,701 during this period reflects
AEC's growth towards a stronger administrative base to support the development
of its technology.
Consulting fees rose by $1,609,969 due to the increase in activity towards the
accelerated focus on research and development pertaining to its hydrogen
production system, its demonstration units and its marketing and operation
strategy.
Professional fees were $379,367 compared to $29,443 in 2003, this increase is
attributed to the increase of corporate activity.
EXPENSES-FISCAL QUARTER ENDED JUNE 30, 2005
Total expenses for the fiscal quarter ended June 30, 2005 was $680,889 compared
to $3,196,329 for the same period in 2004
AEC's expenses for the fiscal quarter ended June 30, 2005 consisted of $121,728
in administrative expenses, $416,716 in consulting fees, $122,121 in
professional fees and $20,324 in amortization. During the fiscal quarter ended
June 30, 2005, AEC's expenses decreased significantly comparative to the fiscal
quarter ended June 30, 2004, mostly due to consulting fees, which were
$2,914,571 in the 2004 period.
There was a decrease of $115,858 in administrative expenses for the period ended
June 30, 2005 compared to the same period in 2004
A decrease in consulting fees of $2,497,855 is attributed to the utilization of
core consultants relative to the focus on research and development pertaining to
its hydrogen production system, its demonstration units and its marketing and
operation strategy.
Professional fees were $122,121 for the fiscal quarter ended June 30, 2005
compared to $19,475 for the same period in 2004. Increases in accounting and
corporate activities were the main attributing factors towards the change.
Over the next 12 months, AEC anticipates that its expenses will not increase
substantially over its expenses in fiscal year 2004. AEC will continue as
planned in the goals set for the continued development, sales and marketing of
its hydrogen production system.
NET LOSS
AEC had a net loss of $5,348,120 for the fiscal year ended December 31, 2004,
compared with a net loss of $3,699,119 for the fiscal year ended December 31,
2003. The increase of $1,649,001 in the net loss for the 2004 fiscal year
compared to the 2003 fiscal year relates mainly to the increase in consulting,
administration and professional fees due to the accelerated activity resulting
in the rise in expenses.
17
AEC had a net loss of $680,889 for the fiscal quarter ended June 30, 2005,
compared with a net loss of $3,196,329 for the fiscal quarter ended June 30,
2004. The decrease of $2,515,440 in the net loss for the 2005 fiscal quarter
compared to the 2004 fiscal quarter relates mainly to consulting fees in the
2005 period.
LIQUIDITY AND CAPITAL RESOURCES
AEC's financial statements have been prepared on a going concern basis that
contemplates the realization of assets and the settlement of liabilities and
commitments in the normal course of business. AEC incurred a net loss of
$5,348,120 and $3,699,119 for the years ended December 31, 2004 and December 31,
2003, respectively, and has an accumulated deficit of $19,919,291 at December
31, 2004. AEC had $418,253 in cash on hand as of December 31, 2004.
Net cash used in operating activities was $2,210,336 for the twelve month period
ended December 31, 2004, compared with $194,262 for the twelve month period
ended December 31, 2003. The Net Cash used for the 2004 period resulted mainly
from consulting and professional fees due to accelerated operational activities.
Net cash obtained from financing activities was $2,920,019 for the twelve month
period ended December 31, 2004, compared with $712,362 for the twelve month
period ended December 31, 2003. In the 2004 period, the Company issued shares of
common stock for $2,750,000 and received advances from directors totaling
$170,019.
Net cash used in investing activities for the fiscal year ended December 31,
2004 was $703,157 for the purchase of property, equipment, securities and
intangible assets. The investing activities during the fiscal year ended
December 31, 2003 was $106,373 for the purchase of intangible assets.
AEC incurred a net loss of $680,889 and $3,196,329 for the quarters ended June
30, 2005 and June 30, 2004, respectively, and has an accumulated deficit of
$21,271,413 at June 30, 2005. AEC had $77,528 in cash on hand as of June 30,
2005. Management may obtain additional capital principally through the sale of
equity securities. The realization of assets and satisfaction of liabilities in
the normal course of business is dependent upon AEC ultimately obtaining
profitable operations. However, no assurances can be given that AEC will be
successful in these activities. Should any of these events not occur, the
accompanying financial statements will be materially affected.
AEC is at present meeting its current obligations from financing activities.
However, due to no cash generated from operations, AEC currently does not
internally generated cash sufficient to pay all of its incurred expenses and
other liabilities. As a result, AEC is dependent on investor capital and loans
to meet its expenses and obligations. Although investor funds have allowed AEC
to meet its obligations in the recent past, there can be no assurances that
AEC's present methods of generating cash flow will be sufficient to meet future
obligations. Historically, AEC has, from time to time, been able to raise
additional capital, but there can be no assurances that AEC will be able to
raise additional capital in this manner.
18
Net cash used in operating activities was $765,240 for the three month period
ended June 30, 2005.
Net cash obtained from financing activities was $0 for the three month period
ended June 30, 2005, compared with $0 for the three month period ended June 30,
2004. In the 2005 period, the Company issued 1,024,857shares of common stock
On March 2, 2005, the company entered into a private placement with certain
accredited investors whereby these investors have purchased $1,500,000 in
convertible notes, with Class A Warrants to purchase a number of shares equal to
the number of shares to which the Notes are convertible at a price of $.40 per
share expiring in 3 years and with Class B Warrants to purchase up to an
additional $1.5 million in the Company's common shares at $.276 for the 5 days
preceding the notice to exercise and expiring 90 days after the registration
statement registering the shares has been declared effective. The note carries
an interest rate of 6%. Interest is payable quarterly in arrears in either cash
or stock of the Company, at the Company's discretion.
The Company has received $500,000 in cash from the investors and will receive an
additional $1,000,000 upon its registration statement filed with the SEC being
declared effective.
The Notes are convertible into shares of the Company at $.276 for the 5 days
preceding the notice to convert with a floor of $.15 and a ceiling of $.35 per
share.
Class C Warrants are being issued to Westor Online, Inc., the placement agent
for the transaction. The warrant allows for the purchase of 400,000 shares at
$.40 per share and 400,000 shares at $1.00 per share, exercisable for 3 years
from the date of the closing. The investors are additionally getting 200,000
Class C Warrants.
In January 2004, AEC entered into a Securities Purchase Agreement with Palisades
Master Fund LP, Crescent International Ltd., Alpha Capital AG, Bristol
Investment Fund, Ltd., Ellis International Limited, Inc., Vertical Ventures,
LLC, Platinum Partners, Abraham Schwartz, Colbart Birnet, Chana Braun, Ronald
Nash, Marketwise Trading, West End Convertible Fund, and a trust account
pursuant to which AEC sold a total of 5,500,000 shares of common stock at a
price of $0.50 per share and warrants to purchase a total of 2,750,000 shares of
common stock at an exercise price of $0.85 per share. The warrants have a three
year term. AEC received gross proceeds of $2,750,000 from this transaction.
In December 2003, AEC entered into a Securities Purchase Agreement with LRG
Holdings Inc., Professional Traders Fund LLC, Generation Capital Associates,
First Mirage Inc., Truk Opportunity Fund LLC, pursuant to which AEC sold a total
of 1,060,000 shares of common stock at a price of $0.50 per share and warrants
to purchase a total of 471,112 shares of common stock and an exercise price of
$1.20 per share. The warrants have a three year term. AEC received gross
proceeds of $530,000 from this transaction.
May 22, 2003, AEC issued 104,870,715 shares of common stock to AEC1, Inc. in
exchange for technology, products and licenses. In November 2004, the Company
cancelled 30,000,000 shares that were returned to the Company by AEC 1 as part
of an agreement to divest the Company of certain non-core technology.
19
AEC expects to have sufficient cash to meet its short-term capital requirements.
However, there are no assurances that AEC will be able to raise sufficient funds
to meet long-term capital needs. AEC may also seek alternative sources of
financing, including from more conventional sources such as bank loans and
credit lines. Again, no assurances can be given that AEC will be able to meet
its needs through the sale of securities or otherwise. Further, the availability
of any future financing may not be on terms that are satisfactory to AEC.
From time to time, AEC may evaluate potential acquisitions involving
complementary businesses, content, products or technologies. AEC has no present
agreements or understanding with respect to any such acquisition. AEC's future
capital requirements will depend on many factors, including growth of AEC's
business, the success of its operations, economic conditions and other factors
including the results of future operations.
PLAN OF OPERATION
Over the next twelve months, AEC will continue to focus on the building of ICE
and fuel cell generator sets to demonstrate to investors and potential customers
AEC's hydrogen fuel production capability. The ICE generator will use our
hydrogen as fuel throughout the demonstration, produced on the spot by AEC's
hydrogen production unit.
AEC anticipates the unveiling of a final demonstration unit in the second
quarter of 2005 and at such a time will commence demonstrations in strategic
locations in both the United States and Canada. We are in the process of
scheduling demonstrations with existing prominent players in the ICE generator
business. This is one of the last steps in bringing AEC closer to revenue
generation.
These developments parallel AEC's recent work on its hydrogen production unit
for use with the Astris E8 alkaline fuel cell. The fuel cell and ICE platforms
are expected to provide AEC with multiple market opportunities and greater
revenue potential.
We have and will also continue to refine our hydrogen production process. Due to
the strict purity and volume requirements of a fuel cell, our technical team has
worked and continues to work in conjunction with a number of recognized
independent laboratories to ensure that outputs meet acceptable levels.
In order to accomplish and continue with these steps management estimates that
the Company we will require several million dollars towards the end of Fiscal
year ended 2005. As the Company does not have any current revenue, such funds
will come from loans from officers and private placements of the Company's
common stock.
DESCRIPTION OF BUSINESS
Alternate Energy Corporation (AEC) is developing a hydrogen production system
that has mass-deployment economics and will provide on-demand power solutions to
a widespread, global base of commercial, industrial, consumer and government
markets. The Company is scheduling demonstrations with key strategic partners,
potential customers and licensees in 2005, then planning to ship initial
hydrogen production and electricity generation systems later in 2005. AEC's
proprietary discovery in metallurgy permits a small-scale unit to generate
hydrogen from an aqueous solution at price competitive, if not better than, the
current fossil fuel kWh cost of energy.
The Company's main technology is focused on production of on demand hydrogen.
AEC believes its hydrogen production process is designed to overcome three major
industry obstacles affordability, storage and safety. The hydrogen production
20
system leverages a proprietary chemical process that yields fuel cell quality
hydrogen from fresh or salt water, with no known harmful by-products. Since
AEC's hydrogen maker requires little space, it can be designed to directly
supply mobile and stationary applications on an as needed basis, eliminating the
need to store hydrogen in a compressed state.
AEC is focused upon the rapid commercialization and launch to multiple markets
of its hydrogen production technology. The initial patents were filed in Fall
2004. The Company believes its hydrogen technology will have application in the
areas of back-up and primary power for commercial, industrial and military
purposes; stationary and portable fuel cell power applications, in fuel
cell-driven and internal combustion engine vehicles, and residential and
commercial applications for users wishing to gain independence from the existing
electricity grid. AEC is moving to complete the necessary final engineering
refinements required to develop and then market these commercial products.
Management believes that AEC's long-term growth prospects are positively
affected by several market and industry trends including:
o continued uncertainty about the price and availability of fossil fuels
(with crude oil recently priced over and still near $50.00 U.S./barrel
versus under $30.00 U.S./barrel in October 2003)
o growing commercial and consumer demand for a reliable alternative to the
public electric power grid
o continued concerns about the impact of fossil fuels and greenhouse gases
on the global environment
o serious concerns with the increasing reliance on imported fossil fuels for
Western nations
Unlike most of its competitors, AEC's process does not generate its hydrogen
from fossil fuels. It also does not require any electrical input.
TECHNOLOGY
AEC owns a metallurgy formulation that causes the separation of hydrogen from
water at low cost, in small scale, with no external or electrical energy input
required. This hydrogen production unit combines with a hydrogen reciprocating
engine, alternator, battery and inverter in an integrated package that can be
located on-site for a residential or commercial electricity customer. At a very
low competitive kWh cost for hydrogen, the unit will supply power to the
building/home/application (5-7 kWh requirements) utilizing water as a fuel
source and may produce excess power (5 kW) for use in the electrical grid to
reduce peak demand requirements. A smaller version of this generator package can
be used to recharge/run various mobile devices and machinery, along with the
battery pack to power an electric car.
At the Company's facilities in Burlington Ontario (Canada), and along with
contracted, independent laboratories, the Company is refining its technology and
preparing demonstrations of the hydrogen production unit. These Demonstration
units will power an Internal Combustion Engine and Astris Energi's model E8 2.4
kW Alkaline Fuel Cell for a number of potential commercial customers. These
demonstrations will substantiate the ability to generate hydrogen and
electricity to power a variety of devices at very competitive prices. AEC's
consulting engineers have already confirmed the economic model and functionality
of this process.
21
The AEC hydrogen production technology refines the production of hydrogen and
resultant gaseous formation without the need for external energy input at time
of production. AEC's process involves a chemical reaction between a proprietary
metal mix and the liquid solution. These metals are plentiful, stable in cost
and produce effective, highly purified hydrogen utilizing a catalytic process.
As well, AEC believes this technology has major implications for the economics
of supplying Internal Combustion Engine-based portable generators (back-up and
primary for commercial and consumer applications) and Fuel Cell or Internal
Combustion engine-based hybrid electric vehicles with a clean, cost-efficient
hydrogen power source.
Suitable water sources for the aqueous media include, but are not limited to:
distilled water, natural sea water, mineral waters or other natural fresh
waters.
Upon immersion of AEC's fabricated metals into the aqueous media, there is an
immediate production of aqueous ions and gaseous components, including but not
limited to, 99.99% pure hydrogen and oxygen. Removal apparatus for the oxygen
are not required for the purity levels required in use by alkaline fuel cells
and internal combustion engines. No source of external energy is introduced or
required for such production.
The process does not involve electrolysis, nor the use of an external source of
electrical power of any manner in the actual hydrogen generation process
The output from the AEC process was certified by Maxxam Analytics, to be 99.9%
pure hydrogen on October 7, 2003.
STRATEGY
AEC's go-to-market strategy is to achieve a leading position in the major market
segments that we believe can be penetrated rapidly, with relatively little
difficulty and at modest cost. The factors evaluated in selecting the initial
markets include: market size, established competitors, distribution channels,
ease of penetration (i.e. sales and marketing costs), certifications and
licenses required, warranty costs and service infrastructure needs, to name a
few.
Based upon AEC's evaluation of the various factors, we have targeted for initial
penetration the Commercial Back-up Power and Internal Combustion Engine and
generator set markets due to initial speed to large, open markets, distribution
channels, and ease of penetration. Phase II markets include: Technology Backup,
Emergency Power, Marine Power due to its being a smaller market with high
margins which can be readily accessed and Electric Vehicle/Hybrid Propulsion due
to the large attention on this segment, amount of grant and other subsidized
financing available.
In entering the initial markets, AEC will also introduce the technology to
various resources that would add the proper third party validation to the
technology, including independent laboratories, major engineering firms and U.S.
federal government contracting entities. Some of this resources will provide an
evaluation of the technology including engineering and test reports,
determination of their market strengths and available support in distributing
the technology, the purchase of units for testing purposes, and introduction to
appropriate federal government agencies through their existing relationships.
Applications for grants to conduct these tests and purchases may be applied for
as part of the development and certification process. Each agency will be
approached on a strategic alliance level to assist in not only testing, but
deployment throughout their network of agencies and customers within government,
and access to their Fortune 100 alliances. We additionally intend to create a
targeted advisory panel and develop relationships with these key individuals as
required.
22
Upon establishing a secure position in its initial markets, AEC will consider
additional markets as appropriate. AEC has divided its prospective markets into
four phases as follows:
PHASE I - IMMEDIATE IMPLEMENTATION: Markets that have immediate power
requirements and resources such as:
o Existing Internal Combustion Engine OEMs (required to convert existing
engines and generator sets from gasoline and diesel-powered to
Hydrogen-powered)
o On-site Commercial Back-Up Power
o On-site Primary Power
o Micro-technology (for both mobile and fixed power applications)
o Military micro and mobile applications
These markets segments are characteristically large, have well-established
distribution channels and are readily accessible. All have immediate and
substantial power requirements as a foundation of their businesses. We believe
these targets can be quickly entered representing the fastest time to revenue
for AEC. Licensing a portion of the product manufacturing process may be an
option with some of these organizations, especially certain large global
Internal Combustion Engine OEMs, where AEC would retain the business of
supplying Hydrogen, materials and/or full systems.
PHASE II - SECONDARY IMPLEMENTATION: Upon establishing a solid marketing
position in Phase I markets, Phase II markets may be selectively considered
while not distracting from the market penetration of Phase I markets. Phase II
market operations may be prepared during implementation of Phase I. These may
include:
o Technology Back-up
o Emergency Power
o Marine Power
o Bulk Hydrogen Gas sales to Distributors and end Customers
o Electric Vehicle/Hybrid power
o Offshore Emergency Back-up
PHASE III - MID RANGE MARKETS: Upon establishing solid control of Phase I
markets and strong market position in Phase II markets, Phase III markets may be
selectively developed. These may include:
o Residential Back-up Power (retrofit)
o Off the Electrical Utility Grid (Residential and Commercial)
o First Responder (Emergency Services)
o Green Energy (Residential and Commercial)
PHASE IV - LONG RANGE MARKETS: These markets may be postponed for an extended
period until prior phases are well established:
o Government Back up
o New Residential Construction
o Offshore Brown out
o Offshore Ecological
PRODUCT
AEC's hydrogen production system leverages a proprietary chemical process that
yields fuel-cell-quality, on-demand hydrogen from fresh or salt water, with no
known harmful by-products - at low comparative cost.
23
Through intensive research and development, the company has developed a
proprietary hydrogen production process, which is now patent pending.
We have continued to refine our hydrogen production process. Due to the strict
purity and volume requirements of a fuel cell, our technical team has worked and
continues to work in conjunction with a number of recognized independent
laboratories to ensure that outputs meet acceptable levels for this application.
AEC has also been working with Astris Energi Inc, the leading alkaline fuel cell
developer. Astris has used AEC's affordable hydrogen to power their 1kw alkaline
fuel cell. AEC further validated our proprietary process when its hydrogen
successfully powered the Astris' 1kw golf cart on September 16th, 2003 using
hydrogen derived from water with no other energy input. AEC took delivery and
completed training on the first Powerstack 250 E8 2.4 kw alkaline Fuel Cell from
Astris from their pre-commercial production facility in Vlasim, Czech Republic.
This will form the basis of one of the company's demonstration units for various
prospective commercial clients.
In May 2004, AEC and Astris entered into a VAR agreement, whereby AEC is now a
Value Added Reseller (VAR) for Astris' AFC Power Generator products. The
companies believe that this Agreement is the optimal route for their
relationship to follow, in that a VAR relationship allows AEC to utilize Astris'
alkaline Fuel cell for demonstration and business development purposes while
permitting Astris access to AEC's substantial distribution and sales prospects.
This VAR arrangement allows AEC to demonstrate and make available a combined
fuel cell power-pack for sale to major corporate, industrial and energy utility
customers, as well as demonstration with various commercial, government and
Military authorities.
RESEARCH AND DEVELOPMENT
The hydrogen production system will be ready for demonstration in the second
calendar quarter of 2005. Our in-house research team has bench tested the
results of the technology configuration. This configuration and its associated
mechanical designs are now being refined and a limited number of units built for
demonstration purposes to prospective customers/licensees, prior to
commercialization (targeted for late 2005-2006).
Since May 2003, we have spent in excess of $460,000 on research and development
of our hydrogen production process.
MANUFACTURING
To assist in developing commercial-grade products and to accelerate
revenue-generating relationships, we intend to partner with segment-specific
OEMs, and leverage their existing relationships, manufacturing resources and
distribution channels. AEC intends to retain full rights to manufacture the core
Hydrogen Production Units and to supply the required hydrogen fuel itself.
MARKETING
We have evaluated the prospective markets for our products by several criteria.
The results have enabled us to prioritize the many global, large-scale market
opportunities, into 4 core clusters, across 2 primary platforms. These platforms
are: a) use with converted Internal Combustion Engines including generator sets
large and small and with micro turbines, and b) with Fuel Cells.
24
The Evaluation Criteria for the markets analyzed were defined as follows:
1. SPEED TO INITIAL PRODUCT
2. GROSS MARGIN
3. MARKET SIZE-
4. AVAILABLE MARKET SHARE-
5. DISTRIBUTION CHANNELS-
6. EASE OF PENETRATION-
7. MAINTENANCE AND COST TO OPERATE
8. SALES AND MARKETING OVERHEAD
9. SERVICE
10. SALES AND FINANCING STRUCTURE
11. MANUFACTURING-
12. WARRANTY AND AFTER MARKET
13. OPERATING EXPECTATIONS
14. GRANT FUNDS AVAILABLE
Based upon the above market analysis, we have categorized our markets as
follows:
PHASE I - IMMEDIATE IMPLEMENTATION:
1. EXISTING INTERNAL COMBUSTION ENGINE OEMs (required to convert existing
engines and generator sets from gasoline and diesel-powered to
Hydrogen-powered). With added market pressure to develop and market "CLEANER"
generator sets, more competition to innovate, large existing and ready markets,
and real demand for a cleaner, cheaper fuel source versus gasoline and diesel,
Management believes this segment represents a very large and ripe market. One or
several of the 5-6 major players could also be licensed to manufacture
Hydrogen-powered Engines, Generators and turbines, with AEC retaining the
business of providing the materials for fuel production. Revenue streams here
could be quite large in volume.
2. COMMERCIAL BACK-UP POWER: Critical power to operate basic functions of a
facility in event of power outages. Sub-categories include Military,
Healthcare/Medical, Food Service (refrigeration, etc.), Security, Banking,
Retail markets. The initial speed to this large, open market, established
distribution channels, and ease of penetration make this a candidate for
immediate implementation despite the difficulties in sales and financing
structure (costs as high as 12% for leasing, vendor financing, etc.) and high
operating expectations of the customer base.
3. ON-SITE PRIMARY POWER: Similar target as above, but likely for more remote
customers and smaller stationary applications.
4. MICRO-TECHNOLOGY (FOR BOTH MOBILE AND FIXED POWER APPLICATIONS): AEC intends
to design, develop and market a small scale power device to help power radios,
cell phones, portable laptop PCs, heaters, generators, lighting and more, a
small limited use or even single use power pack can be designed and marketed to
both commercial and retail customer targets.
5. MILITARY AND MICRO POWER APPLICATIONS: One of AEC's platforms is intended to
be for mobile, limited use "POWER PACKS", replacing heavier and costly batteries
or fuel for power. The U.S. Military has an immediate need to develop micro
power systems for field use in communications, GPS, survival, scanning and
sensing devices.
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PHASE II - SECONDARY IMPLEMENTATION:
1. TECHNOLOGY BACK-UP POWER (EMERGENCY STANDBY POWER): We believe that this is a
very large market with relatively rapid speed-to-market opportunities. However,
it is not in Phase I due to estimated tight gross margins, strong incumbent
competition, issues with penetration, high marketing costs and high user
expectations. Due to its size and our belief that we can get to it reasonably
quickly through excellent distribution channels, this indicates it should
receive a higher priority than later phase markets. Target segments include
specific organizations that provide critical business operations such as:
routers, servers, computer infrastructure that are generally outsourced to
service groups that provides emergency back-up systems on a monthly contract or
long term basis.
2. EMERGENCY POWER: Applications for Ambulances, Fire Truck Generators, portable
power generators for use in hurricanes, floods, vehicle accidents, highway
service emergency trucks. These applications typically have low Kwh
requirements, with similar competitive and market conditions/issues to
penetrate. This segment has well established competition, poor distribution
channels and high user service expectations.
3. MARINE POWER SYSTEMS: Management believes that this is a smaller market but
has exceptional margins that we believe we can access reasonably quickly, as
certification through such organizations as the U.S. Coast Guard is not often a
lengthy process. Replacement of diesel and gas generators that are drop-ins
bought every day. Typically, most 32 foot + boats have a generator. Another
sub-category is electric generation to batteries to power electric engines for
boats, a large trend in the category. We believe that the U.S. military is
building many electric ships to avoid weight of diesel fuel and utilize new
lightweight batteries. Sail boats are also early adopters of new alternative
propulsion systems. The difficulty may be penetration, high marketing and sales
costs, and high user expectations take it out of a Phase I candidate where we do
not want to address these obstacles initially.
4. BULK HYDROGEN GAS SALES: AEC intends to explore opportunities, where
available, to provide bulk Hydrogen gas technology for on-demand and on-site
production, where required. Currently many large food plants (just one example)
require large quantities of Hydrogen gas produced daily for their various
production processes (e.g. hydrogenation plants). Volumes can be large (e.g. 50
million-100 million litres per month), and special product development and on
site testing of beta units would be required. The sales model would be to
license units at a slight premium price to the customer who wishes to produce on
site, and store Hydrogen as required and AEC would collect royalties from volume
production. Currently AEC has one large food production plant in South America
that has expressed interest in a pilot test program
5. ELECTRIC POWER/HYBRID VEHICLE PROPULSION: AEC Management believes that this
market has exceptional obstacles but has the offset of a large amount of federal
grant and other subsidized financing available. For this reason alone,
initiation of work on this market can be begun in Phase II and may be able to be
funded without equity or debt cost. To drive actual vehicle wheels by electric
battery that is charged by the unit is possible now, and meeting with some real
success in the marketplace (e.g. Toyota's Prius hybrid car has sold over 30,000
units in 2 years). Competition is fierce with Honda, Toyota, GM, Ford all
working with PEM-based fuel cells, and AEC-Astris' on-demand alkaline fuel cell
model needs to be presented and gain acceptance. Certain small service vehicles
and low speed neighborhood vehicles (such as Feel Good Cars) present defined
markets and product applications for AEC's hydrogen production units (to power
both Internal Combustion engines) and for Fuel Cell-driven vehicles.
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6. OFFSHORE EMERGENCY BACK-UP: Hurricanes, tornados, typhoons are a regular fact
of life in such markets that have regular power interruptions such as Coastal
USA (Florida, Gulf of Mexico states, California), most Caribbean nations (e.g.
Jamaica, Bahamas, Cuba, Mexico, the Philippines, Taiwan, India, Bangladesh,
Pakistan, Indonesia). The need for back up power is real in all of these
nations. Management believes product distribution via such organizations as the
Red Cross and other aid organizations is a strong opportunity.
PHASE III - MID- & LONG-RANGE MARKETS:
1. RESIDENTIAL BACK-UP POWER & RETROFIT: Almost same market as "OFF THE GRID"
(below), but also includes some new construction and developers who offer it as
a project feature in certain geographic markets. Typically geographically
limited to areas where power is problematical, such as Texas and Kansas and
other high-lightning strike and rural areas. Most competitive products are sold
through Home Depot and Lowe's. This is a smaller market with tighter margins
(high degree of discounting at retail), high maintenance, cost of sale, service,
and financing structures which is the reason we have reserved it for Phase III.
2. OFF THE ELECTRICAL UTILITY GRID (RESIDENTIAL AND COMMERCIAL): This group is
characterized as "ALTERNATIVE LIFESTYLE, ANTI-ESTABLISHMENT" that like new
solutions that are environmentally sound to avoid dealing with large Utility
Companies. We believe that the Internet is a good channel to reach these people.
Generally they have good economic demographics. Off the grid is not mainstream
electricity users as reliability is the most important concern to the mainstream
and they will not switch off their power for a new technology no matter how
proven it is at this point. This is a relatively small market with poor margins
and the same high maintenance, sale and financing costs as Residential Back-up.
3. FIRST RESPONDER (Emergency Services): Defined as emergency transportation
vehicles (EMT, fire and rescue vehicles) that see heavy daily use, where new
equipment is often ordered every three years. New Homeland Security regulations
require firehouse, ambulance, medical, and rescue to have back-up power sources.
We believe that this market will take some time for product launch and is highly
competitive with market shares already established, difficulty of penetration,
and high user expectations, justifying a postponed approach until other markets
are well established.
4. GREEN ENERGY (RESIDENTIAL AND COMMERCIAL): Concerned citizens and businesses
that want to stop pollution already pay 15-20% more per Kwh for their power.
Most major power companies support green energy programs either through the
public utility or private companies, This is a small market that management
believes can be quickly and relatively easily captured due to an open market,
strong distribution channels, and ease of penetration. Additionally, almost all
other considerations with the exception of Service and Warranty are highly
favorable.
PHASE IV - LONG-RANGE MARKETS:
1. GOVERNMENT BACK-UP POWER: We believe that critical areas of need are weapons
systems, radar, communications, satellite, FAA/airports that generally bid on an
RFP basis but also generally serviced by a prime contractor pursuant to long
term contracts. Standard is basic operational functionality such as healthcare,
food services (refrigeration), etc. Penetration issues include: tight market
conditions, high maintenance, cost of sale, service expense and rigorous
manufacturing and user expectations make this a final phase market.
27
2. NEW RESIDENTIAL CONSTRUCTION USE: U.S. Census statistics show there are over
116.5 million residences listed across all 50 states and the potential for the
HVAC and furnace market is large and attractive, but segment issues include
tighter margins, tight market conditions, possibly longer time-to-market,
difficult penetration due to new standards and codes that are still being
written in most jurisdictions, possibly high marketing, maintenance, sales, and
service costs (unless a licensee relationship with a major established
OEM/distributor is negotiated), has resulted in this segment being moved to a
later phase.
3. OFFSHORE BROWN OUT: Most third world countries that have brown outs, such as
India, Taiwan, Korea, Philippines, where most major business operations have
power back-ups. We believe that American interests in foreign countries likely
have back-up for alarm and security systems, which could make this an attractive
niche segment at a later phase. Competitive markets with difficult penetration
and poor distribution channels combined with high sales and financing costs make
this a Phase IV segment.
4. OFFSHORE ECOLOGICAL: Geographic concentrations of fossil fuel burning such as
Hong Kong, Vietnam, which have attendant health problems and are supported in
clean-up by World Bank and other international organizations. A small market
group, with very competitive conditions and weak, inefficient distribution
channels make the sales, marketing and warranty costs too high to focus on in
early Phases.
COMPETITION
Generally there are two main processes in which hydrogen is currently produced
in large quantities for either fuel cell use or industrial bulk gas
applications: by extraction of hydrogen from hydrocarbons and by the
electrolysis of water. Fossil fuels can be reformed to produce pure hydrogen and
within this process natural gas is the most common fuel of choice. This process
also produces carbon dioxide emissions and requires excessive power to operate
the reformer. Hydrogen can be separated from oxygen in water using electrolysis.
This process requires high voltage electricity and is currently uneconomical.
Electrolytically produced hydrogen costs around $30/mBtu, natural gas reformed
hydrogen about $3/mBtu, and gasoline reformed hydrogen about $9/mBtu.
We believe that the U.S. hydrogen industry currently produces 9 million tons of
hydrogen per year (enough to power 20-30 million cars or 5-8 million homes) for
use in chemicals production, petroleum refining, metals treating and electrical
applications. Steam methane reforming accounts for 95% of the hydrogen produced
in the U. S. Other methods of hydrogen production are gasification of fossil
fuels (e.g. coal), splitting water using electricity (electrolysis), heat or
light, and thermal or biological conversion of biomass.
We believe that researchers and companies understand the importance of this
fuel. There are fuel cell and vehicle producers, like Ballard and Ford, teaming
up with fuel producing companies like Exxon and Shell Hydrogen working
cooperatively, trying to make a viable, economically competitive hydrogen fuel.
The two major categories of hydrogen productions systems are fuel cell
manufacturing companies, which invariably integrate a fuel production process,
and manufacturers and distributors industrial gases, including hydrogen.
PROTON EXCHANGE MEMBRANE FUEL CELLS (PEM): Most hydrogen fuel cell companies are
concentrating on PEM (Proton Exchange Membrane) fuel cells platforms and
predominantly involved in the automotive sector. The advantages of the PEM fuel
cell include fast startup and load following, and scalability, while
disadvantages include that they require high purity H2 fuel, are poisoned by
carbon monoxide and sulfur, dependant on platinum (unstable pricing) and
requires large compression and storage. Applications include transportation,
uninterrupted power supply, and auxiliary power. Some of the major companies
involved with PEM fuel cells include Anuvu Fuel Cell Products, Avista Labs,
Ballard Power, Direct Methanol Fuel Cell Corp., Plug Power (including H Power,
acquired), Placan, Fuel Cell Energy, General Motors, Hitachi, Hydrogenics,
Millennium, Mitsubishi, Motorola, MTI MicroFuel Cells, Nuvera Fuel Cells, Proton
Energy Systems, and Stuart Energy.
28
DIRECT METHANOL FUEL CELLS (DMFC): The companies producing DMFCs include those
producing fuel cells that can be fueled directly by any alcohol. The optimal
application for DMFCs is in the field of personal electronics, e.g. primary
power or battery charging for cell phones, laptops, PDs, and MP players. DMFCs
has an advantage over batteries because they have higher energy density, grid
independence, and instant "RECHARGING". DMFCs use liquid fuel but require no
reformer and operate near room temperature. Primary markets for DMFCs are
military (battlefield networking), consumer (grid independence), and industrial
(inventory tracking). The companies producing DMFCs include Direct Methanol Fuel
Cell Corp; Ballard Power (acquired rights from DTI Energy), Hitachi, Independent
Power Technologies, Jadoo Power Systems, Giner, Manhattan Scientifics,
Mechanical Technology, Inc. (parent of MTI Micro Fuel Cells), Medis
Technologies, Motorola, Neah Power Systems, NEC, Samsung, and Toshiba.
ALKALINE FUEL CELLS (AFC): The advantages include inexpensive electrolytes and
catalysts, fast start-up, low temperature operation, while disadvantages include
sensitivity to CO2. Applications include transportation, portable, aerospace
(used in US manned spacecraft). Competitors include Astris Energi Inc., a
Canadian company (Mississauga, Ontario) that since 1983 has been pioneering the
development of alkaline fuel cell electric generators and now has three such
power systems fully tested and ready for commercialization, Apollo Energy
Systems, Eneco, Independent Power Technologies, Medis Technologies, Inc., and
UTC Fuel Cells, a United Technologies Company, maker of AFCs for NASA's Apollo
and Space Shuttle programs.
MOLTON CARBONATE FUEL CELLS (MCFC): The primary advantages of MCFCs are that
they operate with the highest efficiency. MCFCs run on natural gas and the
system's hot exhaust can be used for cogeneration. The major disadvantages of
MCFCs is that they are slow to warm up and load. MCFCs are primarily used for
baseload generation, commercial industrial uses, hotels, hospital, and
co-generation. The major companies in producing MCFCs are Ansaldo Fuel Cells,
CHUBU Electric, Fuel Cell Energy, Inc., and GenCell Hokkaido Electric.
SOLID OXIDE FUEL CELLS (SOFC): SOFCs run on natural gas and have a higher
efficiency than PEMs. They also produce hot exhaust which can be used for
cogeneration. Basically SOFCs have application in the areas of APUs,
residential, commercial, industrial, and cogeneration. The companies producing
SOFCs include Altair Nanotechnologies, CellTech Power, Acumetrrics Adaptive
Materials, Inc., Ceres Power, Chubu Electric Power (with Mitsubishi Heavy
Industries), Ceramic Fuel Cells, Delphi, EBZGmbH, Franklin Fuel Cells, Fuel Cell
Technologies, Fuel Cell energy, General Electric, Global Thermoelectric,
Honeywell, McDermott Technology, NexTech Materials, NAGK Insulators, Rolls
Royce, Siemens, Siemens-Westinghouse, Sulzer Hexis, TechSys Inc., and Ztek Corp.
PHOSPHORIC ACID FUEL CELLS (PAFC): The advantages of PAFC are that they are
readily available commercially. Their disadvantages are that they are less
efficient than MCFCs and SOFCs and require an external reformer. Mainly, PAFCs
are used in stationary operations. The two major companies in this area are UATC
Fuel Cells and Electrochem, Inc.-Toshiba.
REGENERATIVE FUEL CELLS: Regenerative Fuel Cells have a single stack so they can
run as both a fuel cell and an electrolyzer. The disadvantage of this fuel cell
is that there are none yet available in commercially significant power ranges.
Regenerative Fuel Cells are used in systems based on intermittent renewable
energy, arbitrage of peak and off-peak electricity prices, and self fueling UPS
systems.
29
Examples of industrial gas providers include Air Liquide (www.airliquide.com), a
global provider of industrial and medical gases. Their core business is to
supply oxygen, nitrogen, hydrogen and other gases and services to most
industries (for example: steel, oil refining, chemicals, glass, electronics,
healthcare, food processing, metallurgy, paper and aerospace). Air Products'
hydrogen strategy has focused on the supply of hydrogen for demonstration and
pilot projects to such organizations as Honda and Toyota. Air Products built and
operates an on-site hydrogen production facility, a fuel cell power plant and a
fueling station capable of dispensing hydrogen and hydrogen blended fuels to a
fleet of light duty vehicles in Las Vegas, Nevada. Praxair is the largest
industrial gases supplier in North and South America, is rapidly growing in
Asia, and has strong, well-established businesses in Southern Europe. Their
primary products are oxygen, nitrogen, argon, helium, hydrogen, electronics
gases and a wide range of specialty gases. Praxair was selected as the exclusive
hydrogen supplier for Coleman Powermate's new AIRGEN(TM) fuel cell generator.
The generator can be used by industrial customers as a back-up power source to
keep mission-critical computer and phone systems operating during power outages.
LICENSES
AEC owns all its technology without any royalty obligations and relies on no
licensing agreements for its operations. We anticipate that we may enter into
cross licensing agreements with major distribution partners in the future as
part of the distribution of its products.
PATENT
A provisional patent has been filed for our core technology and we have
substantially documented the invention date. We have conducted a comprehensive
prior art search and are currently preparing the main patent application. We
intend to obtain patent protection in the countries that represent approximately
80% of global gross domestic product.
GOVERNMENT REGULATION
It is common for the government to set the standards of alternative energy
processes. Hydrogen has not come under those standards as yet. The only
regulations that currently apply are for the storage of Hydrogen gas, which our
process does not require. However, we believe that the flow, pressure build up,
and the fittings used in our applications, whether they are direct ignition or
fuel cell application, will eventually come under regulation.
TRADEMARKS
The Company currently owns no trademarks with respect to its products.
EMPLOYEES
We currently have 8 full time employees. We have outsourced certain functions to
consultants who do not work exclusively for us. We have three main consultants:
business development, sales and marketing, and technical.
30
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
As of MARCH 28, 2005, the directors and executive officers which are actually
employed by AEC, their age, positions, the dates of their initial election or
appointment as directors or executive officers, and the expiration of the terms
are as follows:
NAME AGE POSITION
- ---- --- --------
BLAINE FROATS 66 Chairman of the Board of Directors, CEO
SEAN FROATS 33 Director, Vice President of Operations, and
Secretary
JACK WASSERMAN 55 Director and Treasurer
None of AEC's directors or executive officers is currently a director of any
company that files reports with the SEC, except as described below. None of our
directors have been involved in any bankruptcy or criminal proceeding (excluding
traffic an other minor offenses), nor has been enjoined from engaging in any
business.
AEC's directors are elected at the annual meeting of stockholders and hold
office until their successors are elected. AEC's officers are appointed by the
Board of Directors and serve at the pleasure of the Board and are subject to
employment agreements, if any, approved and ratified by the Board.
BLAINE FROATS has been the chairman of the board of directors and chief
executive officer of AEC, since May 2003. Mr. Froats was raised in London,
Ontario where he attended South Collegiate Institute. In 1958, he joined A. E.
Ames where he completed the Investment Dealers Association Securities Course in
two years, earning the fourth highest mark in Canada. After leaving A. E. Ames
in 1958, Mr. Froats joined the Royal Trust Company as a Personal Investment and
Pension Fund Officer. During his tenure with the Royal Trust Company, he
completed the Harvard University Certified Analyst Course and thereafter
obtained a Certified Financial Analyst degree. From 1964 to 1969, he worked for
Cochran Murray & Company (now known as Midland Walwyn) as an Institutional
Salesperson and then a Special Situation Analyst. He eventually joined the
Corporate Finance Department and worked closely with one of the firm's senior
partners. While with Cochran Murray & Company, he underwrote Magna Electronics
(now known as Magna International). In 1970, Mr. Froats formed his own
consulting firm. Mr. Froats became involved in plastic reclaiming and invented a
plastic/paper separator that was, subsequently, patented internationally. Since
1975 he has been the Chief Executive Officer of several publicly reporting
companies in both Canada and the United States, including Formulated Mouldings
(Canada) Inc., an Ontario company, Mainframe Fund Inc., an Ontario company, and
Nyderdown (Canada) Inc., an Ontario company. He is currently the Chief Executive
Officer and Chairman of Environmental Shelter, Inc., an Ontario company,
Environmental Fuel Technology, Inc., an Ontario company, and Environmental
Plastics Corporation, a Delaware corporation. In 1991, Mr. Froats founded
Environmental Products Group, Inc. ("EPG"), an affiliated Delaware corporation,
for which he co-invented a new plastic used in home moldings. Mr. Froats is
currently the Chairman of the Board of Directors of EPG, which in 1991-92 was
listed on the OTC Bulletin Board but is no longer a reporting company. Mr.
BLAINE FROATS is the father of Mr. SEAN FROATS, the Vice President of Operations
and a director of AEC.
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SEAN FROATS has been a director, secretary and the vice president of operations
of AEC since May 2003. Since 1997, Mr. Froats has been a director and the vice
president of operations of EPG where he is responsible for all computer related
operations, film presentations, technical drawings, and the design of EPG's
logo, stationary, reports, graphics, and WEBSITE. He invented EPG's plastic
shelter and co-invented EPG's home molding plastic. In 1991-92 EPG was listed on
the OTC Bulletin Board but is no longer a reporting company. Mr. SEAN FROATS is
the son of Mr. BLAINE FROATS, the chairman of the board of directors of AEC.
JACK WASSERMAN has been a director and the treasurer of AEC since May 2003. Mr.
Wasserman has been an auditor for over 25 years. He began his career in 1974 as
an auditor with Arthur Andersen and Company. Mr. Wasserman left Arthur Andersen
and Company in 1976 and for the next year was a senior external auditor for
Revenue Canada. From 1977 to 1979, he worked for Abrams, Caplan and Zwieg as an
Audit Manager. From 1977 to 1990, Mr. Wasserman was the Vice President of
Finance for Yorkville Limited, a manufacturer of musical instruments and
equipment. After leaving Yorkville Limited, he was hired as an independent
consultant by Curwood Packaging Inc. to restructure THE COMPANY's accounting
department. From 1991 to 2000, Mr. Wasserman worked on the development of
several businesses into franchising opportunities, including GamePower Inc., a
video game operations company (1992-1994), Visual Adventures Inc., a video
arcade company (1994), World Tel Internet Inc., an Internet Service Provider
(1994-1995), and Yesic Communications Inc., an Internet Service Provider
(1995-2000). In addition to being a director of AEC, Mr. Wasserman is a
director, the president and chief executive officer of Consolidated Gulfside
Resources Limited, a Canadian public company listed on the Toronto Stock
Exchange. From 2000 until joining AEC, Mr. Wasserman was retired. Mr. Wasserman
received his Bachelor of Commerce degree from the University of Toronto,
Toronto, Ontario in 1972.
Board Of Directors And Committees
Our Board of Directors presently consists of three members: BLAINE FROATS, SEAN
FROATS, and JACK WASSERMAN. Our BYLAWS generally provide for majority approval
of directors in order to adopt resolutions. The Board of Directors may be
expanded in the future. All executive officer compensation, including payroll
expenditures, salaries, stock options, stock incentives, and bonuses, must be
approved by the unanimous consent of the Board of Directors. The entire Board of
Directors acts as the Audit Committee and the Compensation Committee.
On compensation matters, the Board considers and recommends payroll
expenditures, salaries, stock options, stock incentive and bonus proposals for
our employees. Acting in its audit committee function, the Board reviews, with
our independent accountants, our annual financial statements prior to
publication, and reviews the work of, and approves non-audit services performed
by, such independent accountants. The Board appoints the independent public
accountants for the ensuing year. The Board also reviews the effectiveness of
the financial and accounting functions and the organization, operation and
management of AEC.
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal year ended December 31, 2004 and
December 31, 2003 and 2002 certain information regarding the compensation earned
by AEC's Chief Executive Officer and each of AEC's most highly compensated
executive officers whose aggregate annual salary and bonus for fiscal 2004
exceeds $100,000, with respect to services rendered by such persons to AEC and
its subsidiaries.
32
SUMMARY COMPENSATION TABLE
(a) (b) (c) (d) (e) (f) (g) (h) (i)
SECURITIES ALL
NAME AND OTHER RESTRICTED UNDERLYING
PRINCIPAL ANNUAL STOCK OPTIONS/ LTIP
POSITION YEAR (1) SALARY BONUS COMPENSATION- AWARD(S) SARS PAYOUTS
- -------- -------- ------ ----- ------------- -------- ---- -------
Blaine Froats 2004 137,000 - - - 2,000,000 - -
2003 - - - - 2,000,000 - -
2002 - - - - - - -
Sean Froats 2004 119,000 - - - 2,000,000 - -
2003 45,000 - - - 1,000,000 - -
2002 - - - - - - -
Jack Wasserman 2004 - - - - 100,000 - -
2003 - - - - 100,000 - -
2002 - - - - - - -
Corbee Dutchburn (2) 2004 - - - - - -
2003 - - - 325,000 - - -
2002 - - - - - - -
Lyle Goodis (2) 2004 - - - - - -
2003 - - - 325,000 - - -
2002 - - - - - - -
Geeta 2004 - - - - - - -
Naipaul- 2003 - - - - -
Denton 2002 120,000 - - 150,000 - - -
President
Robert G. 2004 - - - - - - -
Jones 2003 - - - - - -
2002 - - - 835,886 - -
2001 100,000 - - 550,000 62,500 - -
2000 120,000 - - 1,200,000 - - -
Gary W. 2004 - - - - - - -
Evans 2003 - - - - - -
Secretary 2002 60,000 - - 400,000 - -
2001 120,000 - - 512,500 62,500 - -
2000 120,000 - - 1,200,000 - - -
Robert W. 2004 - - - - - - -
Wilder 2003 - - - - - - -
2002 - - - 328,598 - - -
2001 50,000 - - 550,000 - - -
2000 120,000 - - 800,000 - - -
(1) As of March 28 2004, Blaine Froats, Sean Froats, Jack Wasserman,
Corbee Dutchburn and Lyle Goodis are only individuals identified in this
table that are still associated with AEC. Denton, Jones and Evans resigned
in May 2003 and Wilder resigned in 2002. Mr. Goodis and Mr. Dutchburn have
resigned their executive positions with the Company but continue to act as
consultants to the Company.
(2) Pursuant to agreements with the Company, each of Corbee Dutchburn and
Lyle Goodis were issued 225,000 shares of common stock. An additional
200,000 shares of common stock was issued to Velocity Product Solutions,
Inc. for services provided by Mr. Dutchburn and Mr. Goodis. 100,000 shares
has been attributed to each of Mr. Dutchburn and Mr. Goodis.
33
OPTION/SAR GRANTS
On May 22, 2003, AEC adopted a stock option plan, authorizing AEC to grant
options to purchase up to an aggregate of 7,500,000 shares of common stock. This
plan was recently amended to authorize the issuance of 15,000,000 shares of
common stock.
On July 7, 2003 the Company granted 4,100,000 options at $0.10 expiring June 1,
2006 to Blaine Froats (2,000,000), Sean Froats (1,000,000), Jack Wasserman
(100,000), Jeffrey Hayward (500,000), Suzanne Brydon (250,000), Jason Froats
(150,000) and Marilyn Froats (100,000). The Company has expensed the difference
between the fair market value of the shares on July 7, 2003 and the option
price. The option expense amount for 2003 totals $697,000 and 20,000 options
were exercised in the year. $693,600 has been recorded to the stock option
liability account.
On October 15, 2004, the Company granted 5,050,000 options at $0.34 expiring
September 2007. No expense was recorded since the fair market value at the
option grant day equaled the option price of $0.34.
550,000 options were exercised in the year and 200,135 options expired during
the year.
The following table summarizes information about options outstanding at December
31, 2004:
RANGE OF REMAINING
EXERCISE NUMBER CONTRACTUAL
PRICES OUTSTANDING LIFE
------ ----------- ----
$0.10 3,530,000 1.5 YEARS
$0.34 5,050,000 2.875 YEARS
---------
8,580,000
=========
For options issued in 2001, the new accounting policy of the Company was to
expense the stock options once granted at the fair market value price. The
policy has been retroactively restated to coincide with SFAS No. 123. The change
of the stock option policy in 2001 has increased both the consulting fee expense
by $153,180 and the stock option liability by $153,180. In 2002, no options were
issued by the Company, and in 2004 no expense was recorded for the issuance of
options as they were granted at fair market value.
The options included in stock option liability were issued as follows:
2001 $153,180
2003 693,600
--------
$846,780
========
The following grants of stock options, whether or not in tandem with stock
appreciation rights ("SARs") and freestanding SARs have been made to officers
and/or directors:
34
NUMBER OF
SECURITIES
NUMBER OF UNDERLYING
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED EXERCISE NUMBER OF
OPTIONS DURING LAST OR BASE OPTIONS EXPIRATION
NAME SARS GRANTED 12 MONTHS[1] PRICE ($/SH) EXERCISED DATE
- ---- ------------ ------------ ------------ --------- ----
Blaine Froats 2,000,000 $0.34 NIL 10/15/07
Jack Wasserman 100,000 $0.34 NIL 10/15/07
Sean Froats 2,000,000 $0.34 NIL 10/15/07
Other than as set forth above, we have no stock options or stock appreciation
rights to its officers or directors.
There are no compensation arrangements for employment, termination of employment
or change-in-control between the Company and the executive officers.
COMPENSATION OF DIRECTORS
AEC has not compensated any director for his services as a director during 2004
except as set forth above.
EMPLOYMENT AGREEMENTS
There are no outstanding fees or expenses due directors or officers effective
December 31, 2004.
The Company previously entered into agreements with Velocity Product Solutions,
Inc. relating to the services of Corbee Dutchburn and Lyle Goodis on September
25, 2003, October 30, 2003 and December 5, 2003. As a result of the October 30,
2003 agreement, Mr. Dutchburn served as the Company's president and chief
operating officer and Mr. Goodis served as the Company's executive vice
president. Pursuant to the September 25, 2003 agreement, Velocity received
200,000 shares of the Company's common stock. Pursuant to the October 30, 2003
agreement, Mr. Dutchburn and Mr. Goodis were each issued 225,000 shares of the
Company's common stock valued at $1.48/share. Pursuant to the December 5, 2003
agreement, the services were to be provided for a three (3) month period for a
monthly fee of $22,225 per month beginning January 1, 2004. This agreement is
renewable on three (3) month intervals. Mr. Goodis and Mr. Dutchburn resigned
their positions as officers of the Company in June 2004, but remain as
consultants to the Company on a project basis.
The Company entered into an employment agreement with Geeta Naipaul-Denton, a
former president of the Company, wherein the Company would pay Ms.
Naipaul-Denton $120,000 per year. The employment agreement had a three year
term. This agreement was terminated effective December 31, 2002.
The Company had entered into an employment agreement with Robert Jones, a former
president of the Company, wherein the Company was to pay Mr. Jones $120,000. The
employment agreement had a three year term. Mr. Jones resigned as president
effective October 11, 2001. This agreement was terminated effective October 31,
2001.
The Company had entered into an employment agreement with Gary Evans wherein the
Company would pay Mr. Evans $120,000 per year as secretary of the Company. The
employment agreement has a three year term. This agreement was terminated
effective December 31, 2002.
35
DESCRIPTION OF PROPERTY
AEC's administrative offices are located at 3325 North Service Road, unit 105,
Burlington, Ontario, Canada L7N 3G2 Phone: (905) 332-3110 Fax: (905) 332-2068
www.cleanwatts.com. AEC occupies 3,000 square feet at a rental rate of $1,992,88
CAD per month ($1,517.11 USD per month). Our lease is renewed on a bi-annual
basis with the current period ending April 30, 2005.
In 2004 we opened a facility near Oak Ridge, Tennessee. Our hydrogen production
process was further refined at this facility. We have determined that further
study of the process need not take place at the facility and we have closed it.
We intend to sublet the facility but remain obligated on the lease for an
additional 12 months at a rental rate of $3,189.75 per month.
LEGAL PROCEEDINGS
On October 22, 2004 we sued Russell Rothman in the Ontario Superior Court of
Justice (Case No. 04-CV-277760CM2). We are seeking the rescission of agreements
between us and Rothman, return of shares paid to him, and return of money paid.
We had entered into an agreement with Rothman for the purchase of certain
technology related to the production of hydrogen gas. Rothman represented to us
that he had all right title and interest in the technology and had the ability
to sell the technology. We alleged in our lawsuit that Rothman had in fact sold
the technology to other companies, and on more than one occasion, prior to
entering into the agreement with us. We additionally allege that the technology
he purported to sell did not work. We do not rely on the Rothman technology for
the production of hydrogen. We have developed our own proprietary processes for
producing hydrogen.
Rothman has counterclaimed against us for breach of contract in the amount of $2
billion and is asking for punitive damages in the amount of $10 million. We
believe that the counterclaim is completely without merit. Accordingly, on July
12, 2005 we are scheduled to return to Court, at which time our Canadian
solicitors will move for an order to determine that the counterclaim is
groundless and for it to be dismissed. This court date was originally set for
April 1, 2005, but was adjourned by the Court at Rothman's request.
In 2002, the SEC brought suit against COI Solutions Inc. and one of its former
officers. Subsequent to the company's acquisition of the assets of Alternate
Energy Corporation in 2003 and complete management change, the SEC agreed to
settle the litigation. AEC neither admitted nor denied the allegations of the
SEC's complaint as part of the settlement. The settlement was entered by the
District Court for the Southern District of Florida and included an injunction
enjoining the company, its officers or directors from violating securities laws
in the future.
On February 17, 2005 entered jundgements of permanent injunction and other
relief against defendants COI Solutions, Inc. and Mel Levine from violating
Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.
In addition to injunctive relief, the judgment against Levin, provides for the
imposition of a civil penalty
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect of the beneficial
ownership as of March 11, 2004, for any person who is known to AEC to be the
beneficial owner of more than 5% of AEC's common stock.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
NAME AND AMOUNT AND NATURE OF PERCENTAGE OF
TITLE OF CLASS ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP POSITION CLASS(1)
- -------------- --------------------------- -------------------- -------- --------
Common AEC 1, Inc. 74,870,715(2) 71.4%
3325 North Service Road Unit 105 (Direct)
Burlington, Ontario
Canada L7M 3G2
Common Blaine Froats 74,870,715(2) CEO 73.3%
3325 North Service Road, Unit 105 (Indirect) Director, President,
Burlington, Ontario 2,000,000(3)
Canada L7N 3G2 (Direct)
Total 76,870,715 73.3%
- ----------
(1) Applicable percentage of ownership is based on 104,814,941 shares of
common stock outstanding as of March 28, 2005, for each stockholder.
Beneficial ownership is determined in accordance within the rules of the
Commission and generally includes voting of investment power with respect
to securities. Shares of common stock subject to securities exercisable or
convertible into shares of common stock that are currently exercisable or
exercisable within 60 days of March 28, 2005, are deemed to be
beneficially owned by the person holding such options for the purpose of
computing the percentage of ownership of such persons, but are not treated
as outstanding for the purpose of computing the percentage ownership of
any other person.
36
(2) These shares are held by AEC1, Inc. Blaine Froats together with his
wife, Marilyn, and son, Sean, own a majority of the outstanding shares of
AEC1, Inc. and have the voting power over AEC1, Inc.'s shares of AEC.
50,000,000 shares of AEC1, Inc. are titled in the name of First Flotilla
(BWI) Inc., which is owned by Blaine Froats and Sean Froats. Blaine Froats
also owns 705,000 shares of AEC1, Inc. in his own name.
(3) Mr. Froats owns options to purchase 2,000,000 shares of the Company's
common stock at $0.10 per share.
The following table sets forth information with respect of the beneficial
ownership as of March 28, 2005, for the officers and directors of AEC.
SECURITY OWNERSHIP OF MANAGEMENT
NAME AND AMOUNT AND NATURE OF PERCENTAGE OF
TITLE OF CLASS ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP POSITION CLASS(1)
- -------------- --------------------------- -------------------- -------- --------
Common Blaine Froats 74,870,715(2) Director, President, 72.4%
3325 North Service Road Unit 105 (Indirect) CEO
Burlington, Ontario 3,750,000(3)
Canada L7M 3G2 (Direct)
Common Sean Froats 5,000,000(2)(4) Director, VP 7.2%
3325 North Service Road, Unit 105 (Indirect)
Burlington, Ontario, Canada L7N 3G2 2,750,000
(Direct)
Common Marilyn Froats 2,406,561(5) 2.39%
3325 North Service Road, Unit 105 (Direct)
Burlington, Ontario, Canada L7N 3G2 100,000(5)
(Direct)
Common Jack Wasserman 200,000(6) Director *
3325 North Service Road, Unit 105
Burlington, Ontario, Canada L7N 3G2
All officers and directors 89,077,276 78.12%
as a group (5 persons)
- ----------
(1) Applicable percentage of ownership is based on 104,814,941shares of
common stock outstanding as of March 28, 2005, for each stockholder.
Beneficial ownership is determined in accordance within the rules of the
Commission and generally includes voting of investment power with respect
to securities. Shares of common stock subject to securities exercisable or
convertible into shares of common stock that are currently exercisable or
exercisable within 60 days of March 28, 2005, are deemed to be
beneficially owned by the person holding such options for the purpose of
computing the percentage of ownership of such persons, but are not treated
as outstanding for the purpose of computing the percentage ownership of
any other person.
(2) These shares are held by AEC1, Inc. Blaine Froats together with his
wife, Marilyn, and son, Sean, own a majority of the outstanding shares of
AEC1, Inc. and have the voting power over AEC1, Inc.'s shares of AEC.
5,000,000 shares of AEC1, Inc. are titled in the name of First Flotilla
(BWI) Inc., which is owned by Blaine Froats and Sean Froats. Blaine Froats
also owns 705,000 shares of AEC1, Inc. in his own name.
(3) Mr. Froats owns options to purchase 1,750,000 shares of the Company's
common stock at $0.10 per share and options to purchase 2,000,000 shares
at $.34 per share.
37
(4) Sean Froats is the son of Blaine Froats and Marilyn Froats. Sean is
the beneficial owner of 5,000,000 shares of the Company's common stock
through his ownership of 5,000,000 shares of AEC1, Inc. common stock. Sean
Froats is a director of AEC1, Inc. Sean Froats also owns options to
purchase 750,000 shares of the Company's common stock at $0.10 per share
and 2,000,000 options at $.34 per share.
(5) Marilyn Froats is married to Blaine Froats the Chairman of the Board
of Directors, and the mother of Sean Froats. Ms. Froats beneficially owns
2,406,561 shares of the Company's common stock which are tilted in the
name of AEC1, Inc. Ms. Froats owns options to purchase 100,000 shares of
the Company's common stock at $0.10 per share.
(6) Jack Wasserman owns options to purchase 100,000 shares of the
Company's common stock at $0.10 per share and 100,000 shares at $.34 per
share.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year the Company had the following related party transactions:
2004 2003
---- ----
a) Management fees and expenses paid to directors of the
company and their related company $ - $240,000
---- --------
b) Under the terms of an agreement to return certain patents and technology to
its' original owner, the Company transferred these patents and technology to its
parent company. In consideration for this transfer of the patents and
technology, the Company received 30 million of its own shares from the parent
company which were subsequently cancelled.
During 2002 and 2003, we paid directors of the Company and their related entity,
management fees and expenses of $240,000 in 2003 and $336,326 in 2002.
As of December 31, 2004, we owed $350,381 to a director of AEC, Blaine Froats,
pursuant to a non-interest bearing demand note. No written agreement was
executed.
The Company previously entered into agreements with Velocity Product Solutions,
Inc. relating to the services of Corbee Dutchburn and Lyle Goodis on September
25, 2003, October 30, 2003 and December 5, 2003. As a result of the October 30,
2003 agreement, Mr. Dutchburn served as the Company's president and chief
operating officer and Mr. Goodis served as the Company's executive vice
president. Pursuant to the September 25, 2003 agreement, Velocity received
200,000 shares of the Company's common stock. Pursuant to the October 30, 2003
agreement, Mr. Dutchburn and Mr. Goodis were each issued 225,000 shares of the
Company's common stock valued at $1.48/share. Pursuant to the December 5, 2003
agreement, the services were to be provided for a three (3) month period for a
monthly fee of $22,225 per month beginning January 1, 2004. This agreement is
renewable on three (3) month intervals and terminated on March 31, 2004. Mr.
Goodis and Mr. Dutchburn resigned their officer positions with the Company in
June 2004, but continue to act as consultants to the Company , on a project
basis only.
In December 2002, we entered into an agreement with AEC I Inc., formerly known
as, Alternate Energy Corp. to acquire their assets. AEC1, Inc. is a company that
is not in the industry that the Company was in. However, the board of directors
decided that the Company would not be able to execute its e-health business
plan. The agreement with AEC1, Inc. required the Company to initiate a 2.2 for 1
reverse split. The Company then issued 104,870,715 new shares to AEC1, Inc. and
received the forgiveness of a loan to the Company in the amount of $202,000 for
the assets. The acquisition of the assets was completed on May 23, 2003 and a
new board of directors was elected. The Company changed its name to Alternate
Energy Corp.
On January 3, 1999, we entered into an employment agreement with Robert Jones
wherein we will pay Mr. Jones $120,000 per year as our Treasurer. He was
appointed President in February 2000 and resigned in October 2001. This
agreement was terminated effective October 31, 2001.
38
On January 3, 1999, we entered into an employment agreement with Gary Evans
wherein we will pay Mr. Evans $120,000 per year as our Secretary and Treasurer.
The employment agreement had a three year term. This agreement was terminated
effective June 30, 2002.
On October 11, 2001, we entered into an employment agreement with Geeta
Naipaul-Denton wherein the Company will pay Ms Naipaul-Denton $120,000 per year
as President of the Company. The employment agreement has a three-year term.
MARKET FOR AEC'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our shares currently trade on the Over-the-Counter Bulletin Board under the
symbol "ARGY." From January 1, 2002 to May 23, 2003 the Company's shares traded
on the Bulletin Board operated by the National Association of Securities
Dealers, Inc. under the trading symbol "COII." The highest and lowest bid prices
for AEC's common stock for each calendar quarter for 2004, 2003 and 2002 as
reported by the National Quotation Bureau, and represents inter-dealer
quotations, without retail markup, markdown or commission and may not be
reflective of actual transactions.
Fiscal Quarter High Low
- -------------- ---- ---
2005 Third Quarter $ 0.34 $ 0.20
Second Quarter $ 0.37 $ 0.23
First Quarter $ 0.43 $0.295
2004 Fourth Quarter $ 0.60 $ 0.31
Third Quarter $0.505 $ 0.31
Second Quarter $ 0.69 $ 0.43
First Quarter $ 1.07 $0.565
2003 Fourth Quarter $ 1.72 $ 0.64
Third Quarter $ 2.60 $ 0.20
Second Quarter (1) $ 0.55 $ 0.05
First Quarter $ 0.76 $ 0.30
2002 Fourth Quarter $ 0.90 $ 0.07
Third Quarter $ 1.00 $ 0.04
Second Quarter $ 2.10 $ 0.60
First Quarter $ 0.65 $ 0.21
(1) During the Second quarter of 2003 the Company executed a 2.2 for 1
reverse stock split. The figures for the Second and subsequent quarters
reflect this split and have not been adjusted..
At December 31, 2004, there were 104,814,941 common shares of the Company issued
and outstanding.
As of December 31, 2004, there were approximately 160 holders of record,
including common shares held by brokerage clearing houses, depositories or
otherwise in unregistered form. The beneficial owners of such shares are not
known by the Company.
DIVIDENDS
We have not declared or paid cash dividends on its common stock since its
inception and does not anticipate paying such dividends in the foreseeable
future. The payment of dividends may be made at the discretion of the Board of
Directors and will depend upon, among other factors, on our operations, its
capital requirements, and its overall financial condition.
CHANGES IN SECURITIES
With respect to the sale of unregistered securities, all transactions were
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933,
and Regulation D promulgated under the 1933 Act. In each instance, the purchaser
had access to sufficient information regarding AEC so as to make an informed
investment decision. More specifically, AEC had a reasonable basis to believe
that each purchaser was an "accredited investor" as defined in Regulation D of
the 1933 Act and otherwise had the requisite sophistication to make an
investment in AEC's securities.
39
DESCRIPTION OF SECURITIES
GENERAL
Our authorized capital consists of 250 million shares of common stock, par value
$0.001 per share and 0 shares of preferred stock. At March 28, 2005, there were
104,814,941 outstanding shares of common stock and no outstanding shares of
preferred stock. Set forth below is a summary description of certain provisions
relating to our capital stock contained in its Articles of Incorporation and
By-Laws and under Nevada Statutes. The summary is qualified in its entirety by
reference to our Articles of Incorporation and By-Laws and Nevada law.
COMMON STOCK
Each outstanding share of common stock has one vote on all matters requiring a
vote of the stockholders. There is no right to cumulative voting; thus, the
holder of fifty percent or more of the shares outstanding can, if they choose to
do so, elect all of the directors. In the event of a voluntary of involuntary
liquidation, all stockholders are entitled to a pro rata distribution after
payment of liabilities and after provision has been made for each class of
stock, if any, having preference over the common stock. The holders of the
common stock have no preemptive rights with respect to future offerings of
shares of common stock. Holders of common stock are entitled to dividends if, as
and when declared by the Board out of the funds legally available therefore. It
is our present intention to retain earnings, if any, for use in its business.
The payment of dividends on the common stock is, therefore, unlikely in the
foreseeable future.
PREFERRED STOCK
None.
WARRANTS
In January 2004 as part of a financing transaction, we issued warrants to
purchase a total of 2,750,000 shares of common stock at an exercise price of
$0.85 per share. The warrants have a three year term. In December 2003 as part
of a financing transaction, we issued warrants to purchase a total of 471,112
shares of common stock and an exercise price of $1.20 per share. The warrants
have a three year term.
We have issued warrants to consultants of the Company. HPC Capital Management
was issued warrants to purchase 165,000 shares of common stock at $0.85 per
share as part of the January 2004 financing transaction. Alpine Capital was
issued warrants to purchase a total of 286,000 shares of common stock. Of this
total, warrants to purchase 106,000 shares of common stock at $1.20 per share
were issued as part of the December 2003 financing transaction and warrants to
purchase 180,000 shares of common stock at $0.85 per share as part of the
January 2004 financing transaction. Taurus Global, LLC has been issued warrants
to purchase a total of 2,189,030 shares of common stock. Of this total, warrants
to purchase 1,973,030 shares of common stock have an exercise price of $1.67 per
share, warrants to purchase 144,000 have an exercise price of $0.50 per share,
and warrants to purchase 72,000 shares of common stock have an exercise price of
$0.85 per share.
On March 2, 2005, the company entered into a private placement with certain
accredited investors whereby these investors have purchased $1,500,000 in
convertible notes, with Class A Warrants to purchase a number of shares equal to
the number of shares to which the Notes are convertible at a price of $.40 per
share expiring in 3 years and with Class B Warrants to purchase up to an
additional $1.5 million in the Company's common shares at $.276 the 5 days
preceding the notice to exercise and expiring 90 days after the registration
statement registering the shares has been declared effective.
40
OPTIONS
On May 22, 2003, we adopted a stock option plan, which allows us to grant
options to persons employed or associated with the Company, including without
limitation, any employee, director, general partner, officer, attorney,
accountant, consultant or advisor up to an aggregate of 7,500,000 Common shares.
The options have a term of expiration to be set by the Compensation Committee of
the Board of Directors but will not exceed ten (10) years after the grant date.
The exercise price for each option will be at the discretion of the Compensation
Committee. This plan was recently amended to authorize the issuance of
15,000,000 shares of common stock.
On July 7, 2003 we granted 4,100,000 options at $0.10 expiring June 1, 2006 to
Blaine Froats (2,000,000), Sean Froats (1,000,000), Jack Wasserman (100,000),
Jeffrey Hayward (500,000), Suzanne Brydon (250,000), Jason Froats (150,000) and
Marilyn Froats (100,000). The Company has expensed the difference between the
fair market value of the shares on July 7, 2003 and the option price. The option
expense amount for 2004 totals $697,000 and 20,000 options were exercised in the
year. $693,600 has been recorded to the stock option liability account.
On October 15, 2004, the Company granted 5,050,000 options at $0.34 expiring
September 2007. No expense was recorded since the fair market value at the
option grant day equalled the option price of $0.34.
550,000 options were exercised in the year and 200,135 options expired during
the year.
The following table summarizes information about options outstanding at December
31, 2004:
RANGE OF REMAINING
EXERCISE NUMBER CONTRACTUAL
PRICES OUTSTANDING LIFE
------ ----------- ----
$0.10 3,530,000 1.5 years
$0.34 5,050,000 2.875 years
---------
8,580,000
---------
For options issued in 2001, the new accounting policy of the Company was to
expense the stock options once granted at the fair market value price. The
policy has been retroactively restated to coincide with SFAS No. 123. The change
of the stock option policy in 2001 has increased both the consulting fee expense
by $153,180 and the stock option liability by $153,180. In 2002, no options were
issued by the Company. Options issued in 2004 were issued at fair market value
and therefore the Company incurred no expense.
The options included in stock option liability were issued as follows:
2001 $153,180
2003 693,600
--------
$846,780
TRANSFER AGENT
AEC's transfer agent is Computershare Trust Company, Inc., 350 Indiana
Street, Suite 800, Golden, Colorado 80401. The telephone Number for
Computershare Trust Company is (303) 262-0600.
LIMITATION OF LIABILITY: INDEMNIFICATION
Our Articles of Incorporation include an indemnification provision under
which we have agreed to indemnify directors and officers of AEC from and against
certain claims arising from or related to future acts or omissions as a director
or officer of AEC. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of AEC pursuant to the foregoing, or otherwise, AEC has been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
41
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES OF INCORPORATION
AUTHORIZED AND UNISSUED STOCK
The authorized but unissued shares of our common are available for future
issuance without our stockholders' approval. These additional shares may be
utilized for a variety of corporate purposes including but not limited to future
public or direct offerings to raise additional capital, corporate acquisitions
and employee incentive plans. The issuance of such shares may also be used to
deter a potential takeover of AEC that may otherwise be beneficial to
stockholders by diluting the shares held by a potential suitor or issuing shares
to a stockholder that will vote in accordance with AEC's Board of Directors'
desires. A takeover may be beneficial to stockholders because, among other
reasons, a potential suitor may offer stockholders a premium for their shares of
stock compared to the then-existing market price.
The existence of authorized but unissued and unreserved shares of
preferred stock may enable the Board of Directors to issue shares to persons
friendly to current management which would render more difficult or discourage
an attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise, and thereby protect the continuity of our management.
42
EXPERTS
The consolidated financial statements for the years ended December 31,
2004 and December 31, 2003 included in this prospectus, and incorporated by
reference in the Registration Statement, have been audited by Danziger &
Hochman, independent auditors, as stated in their report appearing with the
financial statements herein and incorporated by reference in the Registration
Statement, and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing. Danziger & Hochman does
not have a direct or indirect interest in the Company, and was not on a
contingency basis.
LEGAL MATTERS
Jonathan D. Leinwand, P.A., Miami, Florida, will pass upon the validity of
the shares of common stock offered hereby for us. Jonathan D. Leinwand, P.A.
does not have a direct or incorrect interest in the Company and was not hired a
contingency basis.
HOW TO GET MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act with respect to the securities
offered by this prospectus. This prospectus, which forms a part of the
registration statement, does not contain all the information set forth in the
registration statement, as permitted by the rules and regulations of the
Commission. For further information with respect to us and the securities
offered by this prospectus, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document that we have filed as an exhibit to the registration statement
are qualified in their entirety by reference to the exhibits for a complete
statement of their terms and conditions. The registration statement and other
information may be read and copied at the Commission's Public Reference Room at
450 Fifth Street N.W., Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. The Commission maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the Commission.
43
ALTERNATE ENERGY CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
(STATED IN U.S. DOLLARS)
ALTERNATE ENERGY CORP.
INDEX
DECEMBER 31, 2004
I. PAGE
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet - Statement I F-2
Consolidated Statement of Operations - Statement II F-3
Consolidated Statement of Shareholders' Equity Statement III F-4
Consolidated Statement of Cash Flows - Statement IV F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6 - F-13
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of:
ALTERNATE ENERGY CORP.
(A Development Stage Company)
We have audited the accompanying consolidated balance sheet of ALTERNATE ENERGY
CORP. as at December 31, 2004 and 2003 and the consolidated statements of
operations, shareholders' equity and cash flows for each of the years then ended
and the period May 22, 2003 (date of inception of development stage company)
through December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Oversight Board (United States). Those standards require that we plan and
perform an audit to obtain reasonable assurance whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2004
and 2003 and the results of its operations and their cash flows for each of the
years then ended and the period May 22, 2003 (date of inception of development
stage company) through December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
Per Note 12, the prior year financial statements have been restated with no
effect to net income.
Toronto, Ontario s\ Danziger & Hochman
January 24, 2005 Chartered Accountants
F-1
ALTERNATE ENERGY CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
As at December 31, 2004 STATEMENT I
RESTATED(SEE NOTE 12)
2004 2003
ASSETS
CURRENT
Cash $ 418,253 $ 411,727
Deferred consulting costs 373,333 3,122,456
Prepaid expenses and sundry assets 232,979 38,801
Marketable securities 360,000 --
1,384,565 3,572,984
OTHER
Property and equipment (note 3) 313,317 --
Patents and technology 2,124,373 1,969,236
$ 3,822,255 $ 5,542,220
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 36,384 $ 263,954
Due to director (note 4) 350,381 180,362
386,765 444,316
SHAREHOLDERS' EQUITY
CAPITAL STOCK (note 5) 104,815 125,747
ADDITIONAL PAID IN CAPITAL 23,168,880 19,543,328
ACCUMULATED OTHER COMPREHENSIVE INCOME 81,086 --
(DEFICIT) ACCUMULATED DURING
DEVELOPMENT STAGE Statement III (19,919,291) (14,571,171)
3,435,490 5,097,904
$ 3,822,255 $ 5,542,220
Commitments and contingent liability - note 13
F-2
_____________________________DIRECTOR
ALTERNATE ENERGY CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2004 STATEMENT II
INCEPTION
2004 2003 TO DATE
REVENUE $ -- $ -- $ --
EXPENSES
Administrative 428,674 76,973 505,647
Consulting fees 4,467,672 2,857,703 7,325,375
Management fees (note 10) -- 240,000 240,000
Professional fees 379,367 29,443 408,810
Research and development 30,567 -- 30,567
Stock option benefit -- 697,000 697,000
Amortization 41,840 -- 41,840
(LOSS) BEFORE THE UNDERNOTED (5,348,120) (3,901,119) (9,249,239)
Recovery of loan -- (202,000) --
(Loss) on investments -- -- (202,000)
NET (LOSS) FOR THE YEAR $ (5,348,120) $ (3,699,119) $ (9,047,239)
NET (LOSS) PER SHARE $ (.04) $ (.08)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 128,185,299 45,798,538
F-3
ALTERNATE ENERGY CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Year Ended December 31, 2004 STATEMENT III
ACCUMULTED DEFICIT
COMMON ADDITIONAL OTHER ACCUMULATED
COMMON STOCK PAID-IN COMPREHENSIVE DURING TOTAL
STOCK AMOUNT CAPITAL INCOME DEVELOPMENT EQUITY
SHARES (NOTE 9) (NOTE 9) (LOSS) STAGE DEFICIENCY
DECEMBER 31, 2001 3,380,510 $ 3,381 $ 9,046,043 $ 0 $ (8,762,486) $ 286,938
Issue of shares for services 556,500 557 227,613 0 0 228,170
Issue of shares for cash 3,855,000 3,855 381,645 0 0 385,500
Issue of shares for services
to directors 3,892,174 3,892 717,934 0 0 721,826
Issue of shares to creditors 1,496,112 1,496 283,636 0 0 285,132
Net (loss) 2002 0 0 0 0 (2,109,566) (2,109,566)
DECEMBER 31, 2002 13,180,296 13,181 10,656,871 0 (10,872,052) (202,000)
Reverse stock split (7,189,116) (7,189) 7,189 0 0 0
Issue of shares for licence
and patents 104,870,715 104,870 (42,007) 0 0 62,863
Issue of shares for service 9,005,000 9,005 5,689,555 0 0 5,698,560
Issue of shares to creditors 300,000 300 209,700 0 0 210,000
Stock options issued 0 0 693,600 0 0 693,600
Issue of shares for stock
options 20,000 20 1,980 0 0 2,000
Issue of shares for cash 1,060,000 1,060 530,940 0 0 532,000
Issue of shares for patents 4,500,000 4,500 1,795,500 0 0 1,800,000
Net (loss) 2003 0 0 0 0 (3,699,119) (3,699,119)
DECEMBER 31, 2003 125,746,895 125,747 19,543,328 0 (14,571,171) 5,097,904
Issue of shares for cash 5,500,000 5,500 2,744,500 0 0 2,750,000
Issue of shares for patents 500,000 500 169,500 0 0 170,000
Issue of shares for services 2,418,046 2,418 820,282 0 0 822,700
Issue of shares for warrants 200,000 200 0 0 0 200
Issue of shares for stock
options (net) 450,000 450 137,950 0 0 138,400
Cancellation of shares on
return of patents
(note 10) (30,000,000) (30,000) 0 0 0 (30,000)
Stock options expired 0 0 (246,680) 0 0 (246,680)
Unrealized gains on
marketable securities 0 0 0 60,000 0 60,000
Foreign currency
translation/adjustment 0 0 0 21,086 0 21,086
Net (loss) 2004 0 0 0 0 (5,348,120) (5,348,120)
DECEMBER 31, 2004 104,814,941 $ 104,815 $ 23,168,880 $ 81,086 $(19,919,291) $ 3,435,490
F-4
ALTERNATE ENERGY CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2004 STATEMENT IV
2003
RESTATED INCEPTION
2004 (NOTE 13) TO DATE
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) for the year Statement II $(5,348,120) $(3,699,119) $(9,047,239)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Services for stock 961,750 5,910,560 6,872,310
Write-off of patents 41,085 0 41,085
Stock option liability expense (153,180) 693,600 540,420
Amortization 41,840 0 41,840
CHANGES IN OPERATING ASSETS AND LIABILITIES
Comprehensive income (81,086) 0 (81,086)
Prepaid expenses and deferred development costs (194,178) (38,801) (232,979)
Deferred consulting costs 2,749,123 (3,122,456) (373,333)
Accounts payable and accrued liabilities (227,570) 61,954 (165,616)
Net cash (used in) operating activities (2,210,336) (194,262) (2,404,598)
CASH FLOWS FROM FINANCING ACTIVITIES
Issue of common shares for cash 2,750,000 532,000 3,282,000
Advances from director 170,019 180,362 350,381
Net cash used in financing activities 2,920,019 712,362 3,632,381
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (355,157) 0 (355,157)
Purchase of patents and technology (48,000) (106,373) (154,373)
Investment in marketable securities (300,000) 0 (300,000)
Net cash (used) in investing activities (703,157) (106,373) (809,530)
NET INCREASE IN CASH DURING YEAR 6,526 411,727 418,253
CASH, BEGINNING OF YEAR 411,727 0 0
CASH, END OF YEAR $ 418,253 $ 411,727 $ 418,253
NON-CASH ACTIVITIES
Common shares issued for services 961,750 5,910,560 6,872,310
Common shares issued for patents and technology (net) 107,137 1,862,863 1,970,000
F-5
ALTERNATE ENERGY CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
1. BACKGROUND INFORMATION
----------------------
1. Nature of Operations
Alternate Energy Corp., formerly known as COI, was incorporated in the
State of Nevada on August 1, 1997. The Company commenced active business
operations on June 1, 2003 and is considered to be a development stage
company under SFAS 7. The Company has been working on a strategy to raise
capital in order to continue its efforts to complete certification of its
Hydrogen Production System as well as to develop its Alpha products.
On February 4, 2004, the Company incorporated a wholly-owned
subsidiary, 2040412 Ontario Inc. in the Province of Ontario, Canada. The
subsidiary holds title to certain property and equipment reflected in the
accounts of the Company.
BASIS OF PRESENTATION
These consolidated financial statements present the accounts of Alternate
Energy Corp. and its wholly-owned subsidiary, 2040412 Ontario Inc. The
consolidated entities will hereinafter be referred to as the Company. All
significant intercompany accounts and transactions have been eliminated.
2. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
ACCOUNTING PRINCIPLES
The Company's accounting and reporting policies conform to generally
accepted accounting principles and industry practice in the United States.
The financial statements are prepared in United States dollars.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's estimate of the fair value of cash, prepaid expenses,
marketable securities, accounts payable and accruals and due to director
approximates the carrying value.
DEFERRED CONSULTING COSTS
Shares have been issued to service providers and consultants over the
terms of their contracts which range from six months to one year. Shares
have been issued at the fair market value price at date of contract
signing and the expense is amortized monthly over the term of the
contract.
F-6
ALTERNATE ENERGY CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------
FOREIGN CURRENCY TRANSLATION
The Company considers the functional currency of its operations to be the
local currency and, accordingly, their financial information is translated
into U.S. dollars using exchange rates in effect at year end for assets
and liabilities and average exchange rates during each reporting year for
the results of operations. Adjustments resulting from translation of
foreign accounts are included as a component of other comprehensive income
(loss) within stockholders' equity. Transaction gains and losses in 2004
have been reflected as comprehensive income. In 2003 these amounts were
not material.
MARKETABLE SECURITIES
Marketable securities are classified as current, are available for sale
and are stated at fair market value. The net excess of fair market value
over cost is included in Accumulated Other Comprehensive Income (Loss) on
the Balance Sheet.
PATENTS AND TECHNOLOGY
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
which was adopted in its entirety on May 22, 2003, the Company evaluates
the carrying value of other intangible assets annually as of December 31
and between annual evaluations if events occur or circumstances change
that would more likely than not reduce the fair value of the reporting
unit below its carrying amount. When evaluating whether or not the asset
is impaired, the Company compares the fair value of the reporting unit to
which the asset is assigned to its carrying amount. If the carrying amount
of a reporting unit exceeds its fair value, then the amount of the
impairment loss must be measured. The impairment loss would be calculated
by comparing the implied fair value of the reporting unit to its carrying
amount. The initial evaluation of the Company's patents and technology,
completed as of October 1, 2003 in accordance with SFAS No. 142 resulted
in no impairment losses. To date, there has been no impairment of patents
and technology.
The changes in the carrying amount of patents and technology for the two
years ended December 31, 2004 are as follows:
Balance, May 22, 2003 $ 0
Patents and technology acquired during the year 1,969,236
------------
Balance, December 31, 2003 1,969,236
Patents and technology acquired during the year 218,000
Patents and technology disposed of during the year (note 10) (62,863)
------------
Balance, December 31, 2004 $ 2,124,373
------------
F-7
ALTERNATE ENERGY CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------
INCOME TAXES
The Company accounts for its income taxes under the liability method
specified by Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities as measured by the enacted tax rates which
will be in effect when these differences reverse. Deferred tax expense is
the result of changes in deferred tax assets and liabilities.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation of property and equipment is provided annually on a declining
basis over the estimated useful life of the asset, except for current year
additions on which 1/2 of the rates are applicable. The declining balance
rates are as follows:
Automobile 30% declining balance
Computer hardware 30% declining balance
Computer software 100% declining balance
Equipment 20% declining balance
Telephone 30% declining balance
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No.
130 ("SFAS 130"), "Reporting Comprehensive Income", which establishes
standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by
owners or distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under the
current accounting standards as a component of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income is
displayed in the statement of shareholder's equity and in the balance
sheet as a component of shareholder's equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the year. Actual results could differ from those
estimates.
F-8
ALTERNATE ENERGY CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
-------------------------------
STOCK OPTION PLANS
The Company applies the fair value based method of accounting prescribed
by SFAS No. 123, (Accounting for Stock-Based Compensation) in accounting
for its stock options granted to both employees and non-employees. As
such, compensation expense is recorded on the date of the grant, which
vests immediately based on the fair market value of the stock and is
expensed in the period in which the option was granted.
The Company uses the Black Scholes option model as prescribed by SFAS 123.
The following table illustrates the assumptions used for the model.
2004 2003
---- ----
Risk free interest rates .02 .02
Expected dividend yield 0 0
Expected life 3 years 3 years
Expected volatility 64% 56%
Weighted average grant date fair value of options granted during the period $ 0.34 $ 0.27
Weighted average remaining contractual life of options outstanding 2.31 2.5
See note 6 for further stock option details.
3. PROPERTY AND EQUIPMENT
----------------------
ACCUMULATED
COST AMORTIZATION 2004
-------- ------------ --------
Automobile $ 34,521 5,178 29,343
Computer hardware 24,668 3,700 20,968
Computer software 8,077 4,038 4,039
Equipment 285,244 28,524 256,720
Telephone 2,647 400 2,247
-------- ------------ --------
$355,157 $ 41,840 $313,317
-------- ------------ --------
F-9
ALTERNATE ENERGY CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
4. DUE TO DIRECTOR
---------------
The amount due to one of the directors is non-interest bearing, due
on demand and has no fixed repayment terms.
5. CAPITAL STOCK
-------------
AUTHORIZED
250,000,000 Common shares with a par
value of $0.001
ISSUED 2004 2003
-------- --------
104,814,941 Common shares (2003 125,746,895) $104,815 $125,747
-------- --------
On August 16, 2004, the Company amended its' Articles of
Incorporation and increased the number of authorized common shares to
250,000,000 from 150,000,000.
6. STOCK OPTIONS
-------------
On May 22, 2003, the Company adopted a stock option plan that is accounted
for based on SFAS No. 123 and related interpretations. The plan allows the
Company to grant options to persons employed or associated with the
Company, including without limitation, any employee, director, general
partner, officer, attorney, accountant, consultant or advisor up to an
aggregate of 5,000,000 Common shares. The options have a term of
expiration to be set by the Compensation Committee of the Board of
Directors but will not exceed ten (10) years after the grant date and the
options vest immediately. The exercise price for each option is chosen at
the discretion of the Compensation Committee. On February 24, the Company
increased the number of shares to be issued under the plan to 15,000,000.
On July 7, 2003 the Company granted 4,100,000 options at $0.10 expiring
June 1, 2006 and expensed the difference between the fair market value of
the shares on July 7, 2003 and the option price. The option expense amount
for 2003 totalled $697,000 and 20,000 of these options were exercised in
the year.
On October 15, 2004, the Company granted 5,050,000 options at $0.34
expiring September 2007. No expense was recorded since the fair market
value at the option grant day equalled the option price of $0.34.
550,000 options were exercised in the year and 200,135 options
expired during the year.
F-10
ALTERNATE ENERGY CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
6. STOCK OPTIONS (continued)
-------------
The following table summarizes information regarding options
outstanding at December 31, 2004.
RANGE OF EXERCISE PRICES NUMBER OUTSTANDING REMAINING CONTRACTUAL
LIFE
$0.10 3,530,000 1.5 years
$0.34 5,050,000 2.875 years
---------
8,580,000
---------
7. BASIC LOSS PER SHARE
--------------------
Basic net loss per share figures are calculated using the weighted
average number of common shares outstanding computed on a daily basis.
8. INCOME TAXES
------------
The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. Under the
liability method, a deferred tax asset or liability is determined based on
the difference between the financial statement and tax basis of assets and
liabilities, as measured by the enacted tax rates assumed to be in effect
when these differences are expected to reverse.
The approximate income tax effect of the temporary differences
comprising the net deferred tax asset is approximately as follows:
2004 2003
------------ ------------
Non-capital losses carried forward $ 10,013,288 $ 4,665,186
------------ ------------
Enacted tax rate 30%
Deferred tax assets 3,003,986 1,399,550
Less: Valuation allowance (3,003,986) (1,399,550)
------------ ------------
Net future tax assets $ 0 $ 0
------------ ------------
F-11
ALTERNATE ENERGY CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
8. INCOME TAXES (continued)
------------
In assessing the realizability of future tax assets, management considers
whether it is more likely than not that some portion or all of the future
tax assets will not be realized. The ultimate realization of future tax
assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of future tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. Management has provided for a valuation allowance on all of
its' losses as there is no assurance that future tax benefits will be
realized.
9. PRIOR YEAR AMOUNTS INCLUDED IN THE DEVELOPMENT STAGE COMPANY
------------------------------------------------------------
On May 22, 2003, the Company was redefined as a development stage
company in accordance with SFAS 7 and its requirements. The equity
accounts at May 22, 2003 were as follows:
Capital stock $ 13,181
Additional paid-in capital 10,503,691
Deficit 10,872,052
These amounts are included in the equity accounts during the t 6 18
12 entire development stage of the Company. All amounts recorded in the
"inception to date" category as comparative amounts have been accumulated
since May 22, 2003.
10. RELATED PARTY TRANSACTIONS
--------------------------
During the year the Company had the following related party
transactions:
2004 2003
---- --------
a) Management fees and expenses paid to directors
of the company and their related company $ 0 $240,000
---- --------
b) Under the terms of an agreement to return certain patents
and technology to its' original owner, the Company transferred these
patents and technology to its' parent company. In consideration for
this transfer of the patents and technology, the Company received 30
million of its' own shares from the parent company which were
subsequently cancelled.
F-12
ALTERNATE ENERGY CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
11. WARRANTS
--------
During the year 5,613,586 warrants were issued and the total warrants
outstanding at December 31, 2004 were 6,232,192 (December 31, 2003
818,606). The expiration date of the warrants is between December 2006 and
January 2007 and the strike price ranges from $0.85 to $1.67.
12. RESTATEMENT AND CORRECTION OF AN ERROR IN A PRIOR PERIOD
--------------------------------------------------------
Stock options outstanding that were recorded in 2001 and 2003 in the
amounts of 153,180 and 693,600 were incorrectly recorded as liabilities.
The stock option account has now been recorded as equity. There was no
effect to net income for the 2001 and 2003 years.
The Company has restated the statement of operations and cash flows
following SFAS7 Accounting and Reporting by Development Stage Companies.
There was no effect to net income resulting from this restatement.
The Company has restated the statement of cash flows following
SFAS95 Statement of Cash Flow. There was no effect to net income resulting
from this restatement.
13. COMMITMENTS AND CONTINGENT LIABILITY
------------------------------------
COMMITMENTS
The Company has entered into operating leases for its premises. Minimum
lease payments under the terms of the lease are as follows:
2005 $48,375
2006 14,250
--------
$62,625
--------
CONTINGENT LIABILITY
Alternate Energy Corp. has commenced an action against an individual
for fundamental breach of an agreement. If successful, the agreement will
be terminated and the individual will be required to repay cash and stock
to the Company. The Company has obtained an interim injunction against the
individual freezing the bulk of his assets.
The defendant has filed a counterclaim against Alternate Energy
Corp. for breach of contract in the amount of $2 billion and is asking for
punitive damages in the amount of $10 million. The Company believes that
the counterclaim is without merit. Accordingly, on April 1, 2005 the
Company is scheduled to appear in Court, at which time the Company's
solicitors will move for an order to determine that the counterclaim is
groundless and for it to be dismissed.
F-13
Interim Financial Statements
ALTERNATE ENERGY CORP.
CONDENSED BALANCE SHEET
UNAUDITED
Six months ended June, 30
June, 30 December, 31
2005 2004
------------ ------------
ASSETS
Current
Cash 77,528 418,253
Deferred consulting costs 73,646 373,333
Prepaid expense and sundry assets 226,679 232,979
Marketable security 160,000 360,000
Other
Property & equipment 331,148 313,317
Technology & patent assets 2,124,373 2,124,373
------------ ------------
$ 2,993,375 $ 3,822,255
============ ============
LIABILITIES
Current
Accounts payable & accrued liabilities 90,942 36,384
Loans payable 500,000 0
Due to director 282,582 350,381
------------ ------------
$ 873,524 $ 386,765
============ ============
SHAREHOLDERS' EQUITY
Capital stock 107,247 104,815
Additional paid in capital 23,492,915 23,168,880
Accumulated other comprehensive income (208,898) 81,086
Deficit (21,271,413) (19,919,291)
------------ ------------
2,119,851 3,435,490
------------ ------------
------------ ------------
$ 2,993,375 $ 3,822,255
============ ============
See accompanying notes to the financial statements.
F-14
ALTERNATE ENERGY CORP.
CONDENSED STATEMENT OF OPERATIONS
UNAUDITED
Three Months Three Months Six Months Six Months
Ending June 30 Ending June 30 Ending June 30 Ending June 30
------------- ------------- ------------- -------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
REVENUE $ -- $ -- $ -- $ --
------------- ------------- ------------- -------------
EXPENSES
Stock option benefit 0 0 0 0
Management fees 0 24,697 0 92,197
Professional fees 122,121 19,475 267,170 349,764
Consulting 416,716 2,914,571 878,304 3,008,668
Administration 121,728 237,586 255,121 437,686
Amortization 20,324 0 38,113 0
------------- ------------- ------------- -------------
$ 680,889 $ 3,196,329 $ 1,438,708 $ 3,888,315
------------- ------------- ------------- -------------
NET EARNINGS (loss) ($ 680,889) ($ 3,196,329) ($ 1,438,708) ($ 3,888,315)
------------- ------------- ------------- -------------
WEIGHTED BASIC AVERAGE SHARES 106,803,219 130,847,668 106,388,219 130,847,668
============= ============= ============= =============
See accompanying notes to the financial statements
F-15
ALTERNATE ENERGY CORP.
CONDENSED STATEMENT OF CASH FLOWS
UNAUDITED
Six Months Ended June 30
2005 2004
----------- -----------
Cash flows from (applied to)
OPERATING ACTIVITIES
Net earnings (loss) ($1,432,822) ($3,888,315)
Services for stock $ 629,469 $ 227,000
Amortization $ 38,113 $ --
----------- -----------
($ 765,240) ($3,661,315)
=========== ===========
CHANGES IN
Accounts payable & accrued liabilities $ 54,558 $ 169,465
Prepaid expense ($ 6,300) $ 2,073,744
$ -
----------- -----------
($ 716,982) ($1,418,106)
=========== ===========
FINANCING ACTIVITIES
Share subscription -- 2,753,200
Advances from director ($ 67,799) ($ 15,780)
LOAN PAYABLE $ 500,000 $ --
----------- -----------
$ 432,201 $ 2,737,420
=========== ===========
INVESTING ACTIVITIES
Purchase of intangible assets ($ 55,944) ($ 1,012)
----------- -----------
NET INCREASE (decrease) IN CASH DURING YEAR ($ 340,725) $ 1,318,302
----------- -----------
CASH, BEGINNING OF PERIOD $ 418,253 $ 411,727
----------- -----------
CASH, END OF PERIOD $ 77,528 $ 1,730,029
----------- -----------
See accompanying notes to the financial statements
F-16
ALTERNATE ENERGY CORP.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited) June 30, 2005
1. GENERAL
The unaudited condensed statements have been prepared on the same basis as the
audited financial statements and, in the opinion of management, reflect all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation for each of the periods presented. The results of operations for
interim statements are not necessarily indicative of results to be achieved for
full fiscal years.
As contemplated by the Securities and Exchange Commission (SEC) under Rule 10-01
of Regulation S-X, the accompanying financial statements and related footnotes
have been condensed and do not contain certain information that will be included
in THE COMPANY'S annual financial statements and footnotes thereto. For further
information, refer to the financial statements and related footnotes for the
year ended December 31, 2004 included in THE COMPANY'S Annual Report on Form
10-KSB.
INCOME TAXES
The Company accounts for its income taxes under the liability method specified
by Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect when
these differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities.
In assessing the realizability of future tax assets, management considers
whether it is more likely than not that some portion or all of the future tax
assets will not be realized. The ultimate realization of future tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of future tax liabilities, projected future taxable income
and tax planning strategies in making this assessment.
LOSS PER SHARE
THE COMPANY reports earnings per share in accordance with the provisions of SFAS
No. 128, EARNING PER SHARE. SFAS No 128 requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common shares by the
weighted average common shares outstanding during the period. Diluted earnings
per share takes into account the potential dilution that could occur if the
securities or other CONTRACTS to issue stock were exercised and converted to
common stock.
There were stock options outstanding at June 30, 2005 to purchase 8,480,000 of
common stock, December 31, 2004 - 8,580,000.
F-17
Basic weighted average shares outstanding March 31, 2005 were 106,803,219,
December 31, 2004 - 128,185,299.
2. CAPITAL STOCK
There were 1,024,857 common stock issued during this period.
F-18
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation include an indemnification provision under
which we have agreed to indemnify directors and officers of AEC from and against
certain claims arising from or related to future acts or omissions as a director
or officer of AEC. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of AEC pursuant to the foregoing, or otherwise, AEC has been advised
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be incurred
in connection with the issuance and distribution of the securities being
registered. AEC will pay all expenses in connection with this offering.
Securities and Exchange Commission Registration Fee $ 1,725.95
Printing and Engraving Expenses $ 2,500.00
Accounting Fees and Expenses $ 5,000.00
Legal Fees and Expenses $ 30,000.00
TOTAL $ 39.225.95
RECENT SALES OF UNREGISTERED SECURITIES
On March 2, 2005, the company entered into a private placement with
certain accredited investors whereby these investors have purchased $1,500,000
in convertible notes, with Class A Warrants to purchase a number of shares equal
to the number of shares to which the Notes are convertible, at a price of $.40
per share expiring in 3 years and with Class B Warrants to purchase up to an
additional $1.5 million in the Company's common shares at a price of $0.276 per
share. The note carries an interest rate of 6%. Interest is payable quarterly in
arrears in either cash or stock of the Company, at the Company's discretion.
The Notes are convertible into shares of the Company at 70% of the average
closing bid price for the 5 days preceding the notice to convert with a floor of
$.15 and a ceiling of $.35 per share.
Class C Warrants have been issued. The warrant allows for the purchase of
400,000 shares at $.40 per share and 600,000 shares at $1.00 per share,
exercisable for 3 years from the date of the closing.
The March 2, 2005 offering was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933. There was no general solicitation of
investors; the investors were provided with the financial reports of the Company
as filed with the Commission; and the investors had access to officers,
directors and management of the Company to ask questions.
In January 2004, we entered into a Securities Purchase Agreement with
Palisades Master Fund LP, Crescent International Ltd., Alpha Capital AG, Bristol
Investment Fund, Ltd., Ellis International Limited, Inc., Vertical Ventures,
II-1
LLC, Platinum Partners, Abraham Schwartz, Colbart Birnet, Chana Braun, Ronald
Nash, Marketwise Trading, West End Convertible Fund, and Zeena Kaila pursuant to
which AEC sold a total of 5,500,000 shares of common stock at a price of $0.50
per share and warrants to purchase a total of 2,750,000 shares of common stock
at an exercise price of $0.85 per share. The warrants have a three year term. We
received gross proceeds of $2,750,000 from this transaction.
In December 2003, we entered into a Securities Purchase Agreement with LRG
Holdings Inc., Professional Traders Fund LLC, Generation Capital Associates,
First Mirage Inc., Truk Opportunity Fund LLC, pursuant to which AEC sold a total
of 1,060,000 shares of common stock at a price of $0.50 per share and warrants
to purchase a total of 471,112 shares of common stock and an exercise price of
$1.20 per share. The warrants have a three year term. We received gross proceeds
of $530,000 from this transaction.
In December 2003, we entered into a Securities Purchase Agreement with LRG
Holdings Inc., Professional Traders Fund LLC, Generation Capital Associates,
First Mirage Inc., Truk Opportunity Fund LLC, pursuant to which AEC sold a total
of 1,060,000 shares of common stock at a price of $0.50 per share and warrants
to purchase a total of 471,112 shares of common stock and an exercise price of
$1.20 per share. The warrants have a three year term. We received gross proceeds
of $350,000 from this transaction.
As part of the January 2004 and the December 2003 financings, we issued
warrants to consultants of the Company. HPC Capital Management was issued
warrants to purchase 165,000 shares of common stock at $0.85 per share as part
of the January 2004 financing transaction. Alpine Capital was issued warrants to
purchase a total of 281,000 shares of common stock. Of this total, warrants to
purchase 106,000 shares of common stock at $1.20 per share were issued as part
of the December 2003 financing transaction and warrants to purchase 180,000
shares of common stock at $0.85 per share as part of the January 2004 financing
transaction. Taurus Global, LLC has been issued warrants to purchase a total of
2,189,030 shares of common stock. Of this total, warrants to purchase 1,973,030
shares of common stock have an exercise price of $1.67 per share, warrants to
purchase 144,000 have an exercise price of $0.50 per share, and warrants to
purchase 72,000 shares of common stock have an exercise price of $0.85 per
share.
These offerings were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933. There was no general solicitation of investors; the
investors were provided with the financial reports of the Company as filed with
the Commission; and the investors had access to officers, directors and
management of the Company to ask questions.
II-2
On May 22, 2003, the Registrant acquired all the assets of AEC I Inc.,
formerly known as Alternate Energy Corp., and changed its name to Alternate
Energy Corp. The assets were acquired in exchange for 104 million shares of the
Registrant's common stock and the forgiveness of a loan to the Registrant in the
amount of $202,000.
On December 2, 2002, 1,496,112 common shares were issued at $0.190582 per
share as settlement for $285,132 owed to investors and creditors of the Company,
$1,496 being the par value, was credited to share capital and $283,636 was
credited to additional paid in capital.
On November 14, 2002, 44,000 common shares were issued at $0.13 per share
as settlement for services rendered to the Company, $44 being the par value, was
credited to share capital and $5,676 was credited to additional paid in capital.
On July 7, 2002, 3,855,000 Common shares were issued at $0.10 per share
for a cash consideration of $385,500 pursuant to an exemption from registration.
$3,855 being the par value, was credited to share capital and $381,645 was
credited to additional paid in capital.
II-3
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM SB-2.
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ------------------------------------------------------ --------------------------------------------
3.1 Initial Articles of Incorporation, as filed August 1, Incorporated by reference to Exhibit 3.1 to
1997 Form 10-SB12G filed with the SEC on November
10, 1999
3.2 Bylaws Incorporated by reference to Exhibit 3.2 to
Form 10-SB12G filed with the SEC on November
10, 1999
3.3 Articles of Amendment to the Articles of Incorporated by reference to Exhibit 3.3 to
Incorporation, as filed on August 23, 1997 Form 10-SB12G filed with the SEC on November
10, 1999
3.4 Articles of Amendment to the Articles of Incorporated by reference to Exhibit 3.4 to
Incorporation, as filed on November 20, 1998 Form 10-SB12G filed with the SEC on November
10, 1999
3.5 Articles of Amendment to the Articles of Amendment, as Incorporated by reference to Exhibit 3.5 to
filed on May 16, 2003 Form 10-KSB filed with the SEC on March 16,
2004
5.1 Opinion on Legality Provided herewith.
10.1 Subscription Agreement
with attached schedules Filed herewith
10.2 Form of Convertible Note Incorporated by reference to Exhibit 4 to
Form 8-K filed with the SEC on March 15,
200
10.3 Form of Class A Warrant Incorporated by reference to Exhibit 4 to
Form 8-K filed with the SEC on March 15,
2005
10.4 Form of Class B Warrant Incorporated by reference to Exhibit 4 to
Form 8-K filed with the SEC on March 15,
2005
10.5 Form of Class C Warrant Incorporated by reference to Exhibit 4 to
Form 8-K filed with the SEC on March 15,
2005
10.6 Letter of Engagement between the Company and Velocity Incorporated by reference to Exhibit 10.8 to
Product Solutions, Inc. dated September 25, 2003 Form 10-KSB filed with the SEC on March 16,
2004
10.7 Letter of Engagement between the Company and Velocity Incorporated by reference to Exhibit 10.9 to
Product Solutions, Inc. dated October 30, 2003 Form 10-KSB filed with the SEC on March 16,
2004
II-4
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ------------------------------------------------------ --------------------------------------------
10.8 Letter of Engagement between the Company and Velocity Incorporated by reference to Exhibit 10.10 to
Product Solutions, Inc. dated December 5, 2003 Form 10-KSB filed with the SEC on March 16,
2004
10.9 Asset Purchase Agreement between the Company and AEC1, Incorporated by reference to Exhibit 10.6 to
Inc. formerly known as Alternate Energy Corp. Form 8-K filed with the SEC on June 5, 2003
10.10 Funds Escrow Agreement Fled herewith
14 Code of Ethics Incorporated by reference to Exhibit 14 to
Form 10-KSB filed with the SEC on March 16,
2004
23.2 Consent of Auditor Provided herewith.
99.5 1999 Non-Qualified Stock Option Plan Incorporated by reference to Exhibit 3.1 to
Form 10-SB12G filed with the SEC on November
10, 1999
99.6 1999 Qualified Stock Option Plan Incorporated by reference to Exhibit 3.1 to
Form 10-SB12G filed with the SEC on November
10, 1999
99.7 2003 Stock Benefit Plan Incorporated by reference to Exhibit to Form
S-8 filed with the SEC on July 23, 2003
(b) REPORTS ON FORM 8-K.
On March 15, 2005 the Company filed a Report on From 8-K disclosing the
private placement of securities that are being registered on this Registration
Statement.
II-5
UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of
the Securities Act of 1933 (the "Act");
(ii) Reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective Registration Statement;
(iii) Include any additional or changed material information
on the plan of distribution;
(2) That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities that remain unsold at the end of the
offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, on September 13, 2005
ALTERNATE ENERGY CORP.
By: /S/ BLAINE FROATS
-------------------------------------
Blaine Froats
CFO, Principal Accounting Officer
President and Director
Pursuant to the requirements of the Securities Act of 1933 this
Registration Statement has been duly signed by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
/S/ BLAINE FROATS Date: September 13, 2005
- ------------------------------------------
Blaine Froats
Director
/S/ SEAN FROATS Date: September 13, 2005
- ------------------------------------------
Sean Froats
Director
/S/ JACK WASSERMAN Date: September 13, 2005
- ------------------------------------------
Jack Wasserman
Director
II-7