U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
___X___ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended __________June 30, 1999____________________
OR
______TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________________ to ______________________
Commission file number ____0-25177______
ADVANCED ENGINE TECHNOLOGIES, INC.
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(Name of Small Business Issuer in Its Charter)
Colorado 84-1358194
------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
9909 Osuna Road, N.E., Albuquerque, New Mexico 87111
- ---------------------------------------------- --------------
(Address of Principal Executive Offices) (Zip Code)
(505) 323-7341
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(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
None None
- ------------------ ------------------------------
<PAGE>
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
___X___Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) , and (2)
has been subject to such filing requirements for past 90 days.
Yes____X_______ No____________
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or any
amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year.___$-0-______
The aggregate market value of the common equity held by non-affiliates
computed by reference to the price at which the common equity was sold, or the
average bid and asked price of such common equity ($6.00 per share) as of
September 7, 1999 was $44,624,256.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.22,325,000 common shares as
of June 30, 1999_
Transitional Small Business Disclosure Format (check one):
Yes________ No_________
<PAGE>
PART I
Item 1. Description of Business
General
Advanced Engine Technologies, Inc. (the "Company") was formed to
commercialize the OX2 internal combustion engine, a state-of-the-art, uniquely
designed which is environmentally more compatible than engines used today. The
primary focus of the Company will be on the commercial introduction of the OX2
engine and subsequent licensing of the OX2 engine technology to approved
manufacturers.
The Company had entered into an exclusive license agreement with OX2 Engine
(Distribution) Ltd. ("OX2") to manufacture, distribute and market the OX2 engine
in the North American Free Trade Agreement countries (presently the United
States, Canada and Mexico). Under the sub-license agreement, the Company had the
exclusive license to manufacture, distribute and market the OX2 engine which is
subject to the patent in NAFTA countries. The Company was to issue 39,000,000 to
OX2 (the licensor): 20,000,000 upon signing the agreement (issued) and an
additional 19,000,000 shares upon presentation of certified emission test
results. In December 1998, both parties agreed to cancel the requirement to
issue the additional 19,000,000 shares upon completion of certain criteria. The
sub-license agreement was for the life of the patent or a minimum of twenty
years, whichever is longer. OX2 was the licensee of the technology from OX2
Intellectual Property, Inc., a foreign corporation which was assigned the
technology from the original patent holders. In May 1999, Advanced Engine
Technologies, Inc. acquired the world wide patent rights for the OX2 engine from
OX2 in exchange for $1.5 million. The Company will take responsibility for
Patent maintenance and future R&D.
At the present time only a prototype of the OX2 engine has been built.
No OX2 engines have been manufactured for production use, and no assurance can
be given that the OX2 will be successfully manufactured.
On July 15, 1998, Carroll Shelby, a director of the Company,
individually and as Trustee of the Carroll Hall Shelby Trust and the Company
entered into a joint venture agreement to develop the OX2 engine for use in a
standard application for motor vehicles and to promote the OX2 engine to the
automotive industry. The agreement is to expire December 31, 2001. Shelby
received 300,000 shares of the Company for the initial joint venture contract
and will receive an additional 250,000 shares of the Company if the OX2 Engine
is developed for use in a standard application for motor vehicles and promotes
the OX2 engine to the automotive industry.
In June 1999, the Company agreed to issue 1,000,000 shares of its common
stock to the University of California Riverside Foundation. The stock is to be
issued in five annual installments of 200,000 shares each. The first installment
was issued in July of 1999. The donated stock is to provide an endowment for
research funds for the College of Engineering-Center for Environmental Research
and Technology.
3
<PAGE>
Product Overview
The OX2 internal combustion engine is fuel efficient, light weight, low
emission, multi fueled, smaller, inexpensive, higher power to weight ratio and
without complex manufacture/production requirements. Preliminary statistics have
shown the OX2 engine either meets or in most cases exceeds requirements in all
area of existing internal combustion engines. The OX2 engine will be applied
from zero to multi thousand horse-power, for lawn mowers, chain saws, brush
cutters, marine inboard/outboards, generators, aircraft, automotive and
industrial engines.
The fact that the OX2 engine has only six major components, of which
only three move, results in low set-up and production costs with a simplicity of
design that promotes a high level of quality assurance.
The major parts are as follows: (1) housing, (2) cylinder block, (3) top
piston plate, (4) lower piston plate, (5) com track, and (6) drive shaft. The
moving parts are: (1) cylinder block, (2) top piston plate, and (3) lower piston
plate.
The data given below is related to the current prototype however it
should be noted that the engine is flexible enough to allow these parameters to
change to best suit a particular application.
Number of Combustion
Chambers 8
System 4 Stroke
Diameter 12.8 inches/325 mm.
Width 10 inches/254 mm.
Weight 140 lb./63.5 kilos
Actual Cubic Capacity 66.25 c.i./ 1086 cc
Fuel Any combustible gas
or liquid.
Brief Synopsis of the OX2 Engine
Set forth is a comparison and description of the operation of the OX2
engine against a normal four stroke conventional engine (hereinafter referred to
as "4sc Engine").
The current prototype of the OX2 engine has two spark plugs, two spark
plugs leads and coils. There is no crank shaft, distributor, sump, or oil pump
and in fact there is no need for oil pressure to support bearings, however a
small amount of oil is used for cooling.
The combustion chambers are only slightly longer than the stroke, (e.g.
a 75mm. stroke requires a 87 mm. combustion chamber) and pistons need only to be
thick enough to house the rings. There are no piston skirts and the rings are
the only contact point with the bore. In other words at no time do the pistons
touch the bore and nor are they reliant on it for support. This system
eliminates loading on the sides of the combustion chambers.
4
<PAGE>
Not counting seals and bearings the OX2 engine has only six major
components, and should be easier to manufacture than a cylinder head of a
conventional four cylinder engine. There are only two wearing parts, which would
wear at a rate similar to ordinary piston rings. Once the engine is set to its
operating setting it needs little or no servicing.
The current OX2 engine fires four times as often as a 4scEngine, i.e.
For every complete cycle of a 4scEngine the OX2 engine has completed four
cycles. Therefore engine capacity of the OX2 engine when compared to 4scEngine
is calculated by multiplying the actual engine capacity by four.
Because the OX2 engine does not use a conventional crankshaft it has
been able to achieve a leverage advantage of 6.6 times over a 4scEngine which
has a similar stroke. The method used to achieve this is the subject of the
engine patent.
Further, the OX2 engine design enables the timing to be adjusted
sufficiently to produce the most effective burn of the combustible fuel being
used irrespective of the engine R.P.M. This is possible due to the extended
dwell at the top of the compression stroke. Compare this to a 4scEngine where
pre ignition occurs if the timing is advanced to far, causing combustion prior
to the top of the stroke. The result of which is resistance against the
crankshaft thus causing a loss of energy.
OX2 piston speed (which is controlled by the fuel burn rate) remains
constant throughout the entire power stroke at the leverage advantage referred
to above. The inlet and exhaust valves do not commence to open until the exhaust
and power strokes respectively have been fully completed. They then remain open
long enough to ensure maximum operating efficiency. This enables more regulated
mixture to be induced prior to firing and for exhaust gases to be expelled
efficiently.
Compare this to the combustion signature of a 4scEngine where piston
speed increases and decreases twice during the power stroke. To begin with, the
majority of the power from the firing occurs at the top of the stroke where
there is little or no leverage. By the middle of the stroke (where there is
maximum leverage) the piston is out accelerating the maximum burn rate,
resulting in a loss of torque. Towards the end of the stroke the piston is
decelerating again, the outlet port is starting to open and energy is being lost
through the exhaust. Added to this at high revs there is considerable back
pressure form exhaust gasses trying to escape out of the valves, again causing
resistance and a loss of efficiency. A significant advantage of the OX2 engine
design is that it has a capability to lengthen or shorten the piston stroke and
dwell at top dead center during engine operation thus ensuring optimum
efficiency at all times irrespective of engine revs or load.
A further feature of the OX2 engine is that it achieves considerable
torque at all stages through its operating range. Consequently in most
applications there would be no need for the engine to operate at revs higher
than 2500 rpm. In some instances this would eliminate the need for a gear box
and would certainly reduce engine wear. However, if high engine revs is a
prerequisite for a particular application, then the OX2 engine can be easily
adapted accordingly.
5
<PAGE>
Combustion Chamber & Porting
Conventional Engine
Air & fuel is taken in to the combustion chamber through the intake port
and past the intake valve which is located off to one side of the cylinder. The
valve being fully open for only a percentage of the stroke and the port size
being restricted by the combustion chambers ability to house any larger valve
while still leaving room for the exhaust valve. The valves themselves restrict
the efficient flow of gasses into and out of the combustion chamber as well as
creating turbulence as gasses attempt to flow around them again causing further
restrictions to the smooth and efficient flow of gasses.
OX2 Engine
In the OX2 engine air and fuel is taken in to the combustion chamber
through one port located in the center of the combustion chamber. This port
could be the size of the chamber if so desired. It is fully opened for the
entire duration of the stroke plus some additional time to allow a full chamber
of air & fuel. There is no valve restricting the flow and the chamber is convex
in shape so as to fully change the cylinder with maximum efficiency. Due to the
fact that this port is also the exhaust port a heat transfer takes place on
intake thus cooling the port and seal while maximizing fuel vaporization in the
one simple process. Added to this is the recirculation of exhaust gasses into
the combustion chamber on intake which also assists in the vaporization of the
fuel.
Conventional Engine Vacuum
To control engine power and speed the flow of air and fuel is restricted
to the combustion chamber via a carburetor or throttle body and fuel injectors.
(Less fuel and air results in less potential energy for heat expansion and
therefore less power and lower engine revs). The negative affect of this in a
conventional engine is high engine vacuum, which produces two energy wasting
affects: (1) it takes a great deal of energy for the piston to travel down the
bore under such vacuum; and (ii) on completion of the intake stroke the
combustion chamber still does not have full volume of air fuel mixture and as
you can only compress what is in the cylinder in the first place compression
will not be optimum, as a result maximum efficiency from the potential energy
will not be obtained.
OX2 Engine
The OX2 engine is designed to have exhaust gasses fed back in to the
combustion chamber, so as the throttle is backed off more exhaust gasses enter
the combustion chamber ensuring that engine pressure is only slightly below
atmospheric pressure thus eliminating the majority of the vacuum created. This
ensures that there is no waste of energy fighting vacuum and also allows for
optimum compression regardless of the air fuel delivery. This means that more
fuel is used driving the piston and less wasted pressuring the combustion
chamber. As there was little pressure differential the air fuel induced in to
the cylinder does not drop in temperature and when the heat of recalculated
exhaust gasses is added to this the fuel remains in a gaseous form thus ensuring
an efficient burn.
6
<PAGE>
Marketing
The total size of the internal combustion engine industry makes the
introduction of any significant change to industry standards a complex
promotional and marketing exercise. The multi-purpose nature of the OX2 engine
should make it compatible to all market applications, providing an opportunity
from a market that is demanding change.
The initial introduction of the OX2 engine will be to specialist engine
manufacturers who produce purpose built engines. Sub-licenses by the Company to
manufacture OX2 engines will be issued to only a limited number of engine
manufacturers, achieving a manageable and controlled market introduction. This
will ensure that all efforts are focused to the success of consolidating a
targeted market share and the development of cash flow.
It is expected that income will be generated in two ways: (1) approved
manufacturers will pay a licensing fee for the right to produce and sell the OX2
engine, license fees will be determined by territory size and market potential,
and (ii) for each engine produced and sold a royalty payment will be received,
with royalty payments will be determined by engine capacity and application.
Patents
International Patent Application. No PCT/AU95/00815 -- in the name of
Advanced Engine Technologies, Inc. -- Axial Piston Rotary Engine -- filed in
Australia. A patent filed in Australia is usually in effect for a minimum of
twenty years. U.S. Patent No. 5,813,372 - Axial Piston Rotary Engine - has been
granted.
Item 2. Description of Property
The Company does not own or lease any property. The company office space
in New Mexico is provided by a shareholder and is reimbursed on a cost basis.
The office space in Gardena, California is provided without charge pursuant to
the joint venture with Carroll Shelby.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
7
<PAGE>
Part II
Item 5. Market for common equity and related stockholder matters
Since the first quarter of 1999, the Company's Common Stock has traded
in the over-the-counter market and has been quoted on the Bulletin Board of the
NASDAQ under the symbol: AENG.
Set forth below are the range of prices by quarter since trading
commenced.
High Low
---- ---
First Quarter 1998 7 1/2 1 3/4
Second Quarter 1998 29 1/4 6 1/2
Third Quarter 1998 21 7 1/2
Fourth Quarter 1998 26 7/8 6 3/4
First Quarter 1999 17 1/2 7 3/4
Second Quarter 1999 9 5/8 4 7/8
Third Quarter 1999 9 3/4 5 1/8
Fourth Quarter 1999 8 5 1/8
As of June 30, 1999, the Company had 274 shareholders of record.
The Company has not paid any dividends since inception. The Company does
not anticipate paying any dividends in the future even if it were to have
earnings.
Item 6. Management's Discussion and Analysis or Plan of Operation
The Company plans to continue the development of prototypes and
marketing during the 2000 fiscal year. Activities will include demonstrations to
prospective original equipment manufacturers of products using internal
combustion engines, work with its joint venture partner to develop an engine for
automobile use and developing additional joint venture partners in order to
market the engine. While prototypes of the OX2 engine exist, there can be no
assurance the Company will be successful with its marketing efforts, the
development of its joint ventures or in the ultimate development of the engine
for commercial applications.
The Company's cash flow requirements to fund these activities and the
general operations of the Company total approximately $800,000 and include
approximately $200,000 for consulting and $100,000 for equipment among other
costs. The Company expects to fund these costs with its current cash reserves of
approximately $2,200,000 which came from private placements. The Company's cost
estimates do not include provisions for any contingencies or unexpected expenses
that may arise or any unanticipated increases in costs. As a result, the
Company's cash reserves may not be adequate to cover the actual costs of
operations in the 2000 fiscal year.
8
<PAGE>
The Companies' net loss since inception (September 23, 1996) is
$1,376,249. The Companies' net loss for 1999 Fiscal Year is $902,381.
The Company expects to sign its first contracts for the production of
small engines in fiscal year 2000 and expects as a result to begin generating
revenue. There are currently no signed contracts that will produce revenue and
there can be no assurance management will be successful in negotiating these
contracts.
The research and development required to bring the product to commercial
production is provided by the Company's parent. In addition, development is
undertaken by its joint venture partner as well. As a result, the Company expect
to carry out or fund any research and development.
The Company does not currently have any employees other than the its
officers nor does it expect to add any in the next year.
Item 7. Financial Statements
Independent Auditors' Report
Financial Statement:
Balance Sheet
Statements of Operation
Statements of Stockholders Equity
Statements of Cash Flows
Notes to Financial Statements
Item 8. Changes in and Disagreements with Accountants
None
9
<PAGE>
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons
Set forth below are the names and ages of all directors and executive
officers of the Company.
Name Age Position
- ---- --- --------
Murray J. Bailey 49 President and Director
George Hunt 69 Director
Carroll Shelby 75 Director
Murray Bailey - President
Murray J. Bailey is a New Zealand citizen with a background in
marketing. From 1991 until 1994 he was chief executive of the Economic
Development office, Western Bay of Plenty, New Zealand. Mr. Bailey moved to
Australia in 1994 to establish a marketing and consulting business. Mr. Bailey
assumed the Presidency of the Company in May 1997. Murray Bailey has been
appointed a director as a representative of OX2 Engine (Distribution) Ltd.
Pursuant to the License Agreement with the Company, OX2 Engine has the right to
appoint two directors to the board of directors. No other nominee has been
proposed at this time.
George Hunt - Director
George Hunt has 36 years experience in the marine industry as an agent
and supplier of all related equipment, products and service. In 1972, he
established Sterling Marine, a Colorado company, gradually building the business
to four marine sales and service locations in the United States, having been
recognized by Bayliner for multimillion dollar sales achievements. His
relationships with major marine engine manufacturers and suppliers provide
valuable inroads to the industry for Advanced Engine Technologies, Inc.
Carroll Shelby - Director
Carroll Shelby has over 50 years of successful experience in the engine
industries. Inducted into a number of automotive related Halls of Fame.
Founder/Director of:
Shelby American, Inc
Shelby American Licensing, Inc.
Shelby Technologies
Carroll Shelby Enterprises
Carroll Shelby Children's Foundation
International Chili Society
Director of Automotive Hall of Fame
10
<PAGE>
Item 10. Executive Compensation
The Company paid consulting fees to its President, who is also a
shareholder, in the amount of $211,203 from September 23, 1996 (inception) to
June 30, 1999 including $69,790 for the year ended June 30, 1998, and $82,505
for the year ended June 30, 1999. He continues to receive consulting fees of
$6,650 a month.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of June 30, 1999, with
respect to all shareholders known by the Company to be beneficial owners of more
than 5% of the outstanding Common Stock, all directors, and all directors and
executive officers as a group. Except as noted below, each shareholder has sole
voting and investment power with respect to shares owned.
Number Of
Name & Address Common Shares
of Beneficial Owner Beneficially Owned Percent*
- -----------------------------------------------------------------------------
Robert/Margaret Petersen 2,045,534 9.1%
6420 Wilshire Blvd./20th Floor
Los Angeles, CA. 90048
Carmel International Corp. 1,428,000*** 6.3%
P.O. Box N/8188 Saffery Square/Suite 205
Nassau, Bahamas
Coach Financial Inc. 5,517,300*** 24.7%
35 Barrack Rd.
Belize City, Belize
Maverick Associates Inc. 4,089,300*** 18.3%
Henville Building/Prince Charles St.
Charlestown
Nevis, West Indies
Macro Management Group, Ltd. 1,161,820 5.2%
Windsor House 2nd Floor
Kummel Highway
Port Vila, Vanuatu
11
<PAGE>
Murray J. Bailey 198,670 0.9%
9909 Osuna Rd. NE
Albuquerque, NM 87111
Carroll Shelby 360,000 1.6%
10862 Vicenza Way
Los Angeles, California 90077
George Hunt 87,000** 0.4%
906 Holly
Sterling, Colorado 80751
- ----------------------
* Based upon 22,325,000 shares outstanding. Does not include 250,000 shares
that may be issued to Carroll Shelby on completion of the joint venture.
** These shares are owned by Cecil L. Hunt, wife of George Hunt who disclaims
beneficial ownership.
***These share are beneficially owned by OX2 Engine (Distribution) Pty. Ltd.
Item 12. Certain Relationships and Related Transactions
In October 1996, the Company entered into a contract with OX2
(Distributions) Ltd. (OX2) whereby the Company acquired the rights to
manufacture, distribute and market the OX2 combustion engine in the United
States, Canada and Mexico for the life of the world wide patent. As part of this
contract the Company issued 20,000,000 shares of its common stock and will issue
an additional 19,000,000 upon the successful completion of emission tests. In
December 1998, both parties agreed to cancel the requirement to issue the
additional 19,000,000 shares. The Company is also to pay a royalty of 15 percent
of the gross proceeds of its revenue in its territory and 75 percent for sales
outside the territory. In May 1999, the Company acquired the world wide patent
rights for the OX2 engine from OX2 in exchange for $1.5 million. The Company
will take responsibility for Patent maintenance and future R&D. In addition, OX2
has the right to appoint two of the Company's directors. As of June 30, 1999 OX2
owned approximately 49.3 percent of the Company's outstanding shares and OX2 had
appointed one director who is also the Company's President.
The Company paid administrative fees and reimbursed expenses to a
company that is owned by one of its shareholders, Greg Howland in the amount of
$50,010 from September 23, 1996 (inception) to June 30, 1999 including $15,700
for the year ended June 30, 1998, and $31,293 for the year ended June 30, 1999.
On July 15, 1998, Carroll Shelby, a director of the Company,
individually and as Trustee of the Carroll Hall Shelby Trust and the Company
entered into a joint venture agreement to develop the OX2 engine for use in a
standard application for motor vehicles and to promote the OX2 engine to the
automotive industry. The agreement is to expire December 31, 2001. Shelby
received 300,000 shares of the Company for the initial joint venture contract
and will receive an additional 250,000 shares of the Company if the OX2 Engine
is developed for use in a standard application for motor vehicles and promotes
the OX2 engine to the automotive industry.
12
<PAGE>
Item 13. Exhibits, List and Reports on Reports on 8-K
(a) Exhibits
2(a) Certificate of Incorporation*
10 By-Laws*
6(a) License Agreement with OX2 Engine*
10 Joint Venture with Carroll Shelby*
10.1 Cancellation of 19,000,000 Share Issuance
10.2 Contract for World Rights and Patents
* Filed with 10-SB and incorporated here by reference
(b) Reports on Form 8K
None
13
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this registration to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADVANCE ENGINE TECHNOLOGIES, INC.
------------------------------------------------------------------------
(Registrant)
By:_______________________/s/ Murray J. Bailey_____________________
Murray J. Bailey, President
Date:______________________________________________________________
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By:_____________________________/s/ George Hunt____________________
George Hunt, Director
Date:______________________________________________________________
By:____________________________/s/ Carroll Shelby__________________
Carroll Shelby, Director
Date:______________________________________________________________
14
<PAGE>
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL REPORT
JUNE 30, 1999
<PAGE>
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statements of Operations 3
Statements of Stockholders' Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6
<PAGE>
NEFF & RICCI LLP
- ----------------------------
CERTIFIED PUBLIC ACCOUNTANTS
7001 PROSPECT PLACE NE
ALBUQUERQUE, NM 87110
Independent Auditors' Report
Advanced Engine Technologies, Inc.
(A Development Stage Company)
We have audited the accompanying balance sheet of Advanced Engine Technologies,
Inc. (a development stage company) as of June 30, 1999, and the related
statements of operations, stockholders' equity, and cash flows for the year then
ended and for the period from September 23, 1996, (inception) through June 30,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements as of June 30, 1998,
were audited by Neff & Company LLP, who merged with Ricci & Ricci LLC as of
January 1, 1999, and whose report dated August 28, 1999, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Advanced Engine Technologies,
Inc. as of June 30, 1999 and the results of its operations and its cash flows
for the year then ended and from September 23, 1996 (inception) to June 30,
1999, in conformity with generally accepted accounting principles.
/s/ Neff & Ricci LLP
Albuquerque, New Mexico
August 19, 1999
1
<PAGE>
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
June 30, 1999
ASSETS
CURRENT ASSETS
Cash $ 561,796
Prepaid insurance 8,216
-------------
Total current assets 570,012
FIXED ASSETS
Furniture 7,523
Computer equipment 43,913
Manufacturing equipment and tooling 66,102
-------------
Less accumulated depreciation (19,351)
-------------
Total fixed assets 98,187
OTHER ASSETS
Patent rights, net of accumulated
amortization of $25,181 1,496,537
Patent, copyrights and designs net of
accumulated amortization of $5,104 38,646
-------------
Total other assets 1,535,183
-------------
Total assets $ 2,203,382
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,881
-------------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY
Common stock-50,000,000 shares authorized,
22,325,000 issued and outstanding; $.001 value 22,325
Additional paid-in capital 3,554,425
Deficit accumulated during the development stage (1,376,249)
Total stockholders' equity 2,200,501
Total liabilities and stockholders' equity $ 2,203,382
=============
The Notes to the Financial Statements are an integral part of this statement.
2
<PAGE>
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
Years Ended June 30, 1999 and 1998
Period From September 23, 1996 (Inception)
Through June 30, 1999
September 23,
1996
(Inception)
Through
June 30,
1999 1998 1999
Operating expenses $ 400,161 333,601 898,445
Research and development expenses 525,000 - 525,000
--------------------------------------
Income loss from operations (925,161) (333,601) (1,423,445)
Interest income 22,780 23,966 47,196
--------------------------------------
Net loss $ (902,381) (309,635) (1,376,249)
======================================
Basic net loss per share $ (.041) (.014) (.066)
======================================
Weighted average number of common
shares outstanding 21,947,500 21,487,200 20,821,685
======================================
The Notes to the Financial Statements are an integral part of these statements.
3
<PAGE>
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1999 and 1998
Period From September 23, 1996 (Inception)
Through June 30, 1999
<TABLE>
<CAPTION>
Equity
(Deficit)
Accumulated
Common Stock Additional During the
------------------ Paid-in Development
Shares Amount Capital Stage Total
<S> <C> <C> <C> <C> <C>
Issuance of common stock
to parent corporation for
license rights (Note 3) 20,000,000 $ 20,000 (18,000) - 2,000
Issuance of common stock
for services (Note 3) 600,000 600 5,400 - 6,000
Issuance of common stock
for cash (Note 5) 499,200 499 498,701 - 499,200
Net loss - - - (164,233) (164,233)
---------------------------------------------------------------
Balance, June 30, 1997 21,099,200 21,099 486,101 (164,233) 342,967
Issuance of common stock
for cash (Note 5) 500,800 501 500,299 - 500,800
Net loss - - - (309,635) (309,635)
---------------------------------------------------------------
Balance, June 30, 1998 21,600,000 21,600 986,400 (473,868) 534,132
Issuance of stock for assets
and services (Note 5) 325,000 325 568,425 - 568,750
Issuance of common stock
for cash (Note 5) 400,000 400 1,999,600 - 2,000,000
Net loss - - - (902,381) (902,381)
---------------------------------------------------------------
Balance, June 30, 1999 22,325,000 $ 22,325 3,554,425 (1,376,249) 2,200,501
===============================================================
</TABLE>
The Notes to the Financial Statements are an integral part of these statements.
4
<PAGE>
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
Years Ended June 30, 1999 and 1998
Period From September 23, 1996 (Inception)
Through June 30, 1999
<TABLE>
<CAPTION>
September 23,
1996
(Inception)
Through
June 30,
1999 1998 1999
<S> <C> <C> <C>
Reconciliation of net losses to net
cash provided by operations:
Net loss $ (902,381) (309,635) (1,376,249)
Depreciation and amortization 47,834 1,802 49,636
Issuance of common stock for
assets and services 568,750 - 576,750
Changes in current assets and liabilities:
Stock subscriptions receivable - 74,000 -
Prepaid insurance (8,216) - (8,216)
Accounts payable (28,402) 27,228 2,881
---------------------------------------------
Net cash flows applied to
operating activities (322,415) (206,605) (755,198)
---------------------------------------------
Cash flows from investing activities:
Equipment purchases (95,757) (21,782) (117,539)
Intangible purchases (1,565,468) - (1,565,468)
---------------------------------------------
Net cash flows applied to
investing activities (1,661,225) (21,782) (1,683,007)
Cash flows from financing activities:
Issuance of common stock 2,000,000 500,800 3,000,000
Loan proceeds - - 50,000
Loan payments - (50,000) (50,000)
---------------------------------------------
Net cash flows provided by
financing activities 2,000,000 450,800 3,000,000
---------------------------------------------
Net increase in cash 16,360 222,413 561,795
Cash at beginning of period 545,435 323,022 -
---------------------------------------------
Cash at end of period $ 561,795 545,435 561,795
=============================================
</TABLE>
The Notes to the Financial Statements are an integral part of these statements.
5
<PAGE>
ADVANCED ENGINE TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 1. NATURE OF BUSINESS
Advanced Engine Technologies, Inc. (the Company), originally a subsidiary of OX2
Engine (Distribution) Ltd. (OX2), was incorporated under the laws of Colorado
and began operations on September 23, 1996. The Company was formed to acquire
the rights to manufacture, distribute and market an OX2 Engine combustion engine
throughout the United States, Canada and Mexico. On October 18, 1996 the Company
entered into a contract with OX2, which was incorporated in the Republic of
Vanuatu, whereby the Company acquired the rights to manufacture, distribute and
market the OX2 combustion engine. As part of this contract the Company issued
20,000,000 shares of its common stock and was to issue an additional 19,000,000
upon the completion of certain tests (see Note 3). In December 1998, both
parties agreed to cancel the requirement to issue the additional 19,000,000
shares. In addition, OX2 has the right to appoint two of the Company's
directors. As of June 30, 1998, OX2 owned approximately 62 percent of the
Company's outstanding shares.
During the year ended June 30, 1999, OX2 transferred its ownership interest to
various successor entities, none of which individually has a controlling
interest. These successor entities have common ownership and as a group may have
a controlling interest in the Company.
In May of 1999, the Company acquired the world wide patent rights for the OX2
engine from OX2 in exchange for $1.5 million. The Company will take
responsibility for Patent maintenance and future R&D.
As of June 30, 1999, the Company's operations consisted of obtaining capital and
marketing the OX2 combustion engine. Management does not expect to generate
significant sales revenue until fiscal year 2000. Accordingly, planned principal
operations have not commenced and the Company is a development stage enterprise.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents. Cash and cash equivalents include all cash balances
and highly liquid debt instruments with an original maturity of three months or
less. The Company's cash is deposited in a Colorado financial institution and is
insured only up to $100,000 by the Federal Deposit Insurance Corporation.
Fixed Assets. Fixed assets are stated at cost. Depreciation expense is
calculated using the straight-line method over the estimated useful lives of the
assets, which range from 5 to 10 years.
6
<PAGE>
ADVANCED ENGINE TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Other Assets. Patent rights are amortized on a straight-line basis over the
remaining estimated useful life of 10 years. The patents, copyrights and designs
are amortized on a straight-line basis over the remaining estimated useful life
of 5 years. The Company continually reviews other assets to assess
recoverability from estimated future net cash flows. To date, these reviews have
not resulted in a reduction of other assets.
Income Taxes. The Company accounts for its income taxes using the liability
method. Under this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement carrying amounts and tax
basis of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse. The Company has provided a
valuation allowance to offset the benefit of any net operating loss
carryforwards or deductible temporary differences.
Research and Development Costs. Research and development costs are expensed as
incurred.
Advertising Costs. The Company expenses advertising costs as incurred.
Advertising costs amounted to $90,251 from September 23, 1996 (inception) to
June 30, 1999 including $41,808 for the year ended June 30, 1998 and $1,895 for
the year ended June 30, 1999.
Loss per share. Loss per share is computed on the basis of the weighted average
number of common shares outstanding during the year and did not include the
effect of potential common stock as their effect would be antidilutive. The
numerator for the computation is the net loss and the denominator is the
weighted average shares of common stock outstanding.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets 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
reporting period. Actual results could differ from those estimates.
NOTE 3. RELATED PARTY TRANSACTIONS
The Company paid consulting fees to its President, who is also a shareholder, in
the amount of $211,203 from September 23, 1996 (inception) to June 30, 1999
including $69,790 for the year ended June 30, 1998, and $82,505 for the year
ended June 30, 1999.
7
<PAGE>
ADVANCED ENGINE TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 3. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company paid administrative fees and reimbursed expenses to a company that
is owned by one of its shareholders in the amount of $50,010 from September 23,
1996 (inception) to June 30, 1999 including $15,700 for the year ended June 30,
1998, and $31,293 for the year ended June 30, 1999.
In October 1996, the Company issued 600,000 shares of its common stock to one of
its founders in exchange for his services in organizing the Company. The
transaction was recorded at the estimated fair market value of the services
provided ($6,000), as this was more readily determinable.
Also in October 1996, the Company entered into a contract with OX2 whereby the
Company acquired the rights to manufacture, distribute and market the OX2
combustion engine in the United States, Canada and Mexico for the life of the
world wide patent. As part of this contract the Company issued 20,000,000 shares
of its common stock and was to issue an additional 19,000,000 upon the
completion of emission tests. In December 1998, both parties agreed to cancel
the requirement to issue the additional 19,000,000 shares. The Company is also
to pay a royalty of 15 percent of the gross proceeds of its revenue. In
addition, OX2 has the right to appoint two of the Company's directors. As of
June 30, 1999, OX2 had appointed one director who is also the Company's
President. In May 1999, the Company acquired the world wide patent rights for
the OX2 engine from OX2 in exchange for $1.5 million. The Company will take
responsibility for Patent maintenance and future R&D.
NOTE 4. INCOME TAXES
At June 30, 1999 the Company had deferred tax assets amounting to approximately
$508,000. The deferred tax assets consist primarily of the tax benefit of net
operating loss carryforwards and are fully offset by a valuation allowance of
the same amount.
The net change in the valuation allowance for deferred tax assets was an
increase of approximately $328,000 and $70,000 for the year ended June 30, 1999
and 1998, respectively. The net change is due primarily to the increase in net
operating loss carryforwards.
At June 30, 1999 the Company had net operating loss carryforwards of
approximately $1,270,000 available to offset future state and federal taxable
income. These carryforwards will expire in 2017 and 2019 for federal tax
purposes and 2002 and 2004 for state tax purposes.
8
<PAGE>
ADVANCED ENGINE TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
NOTE 5. COMMON STOCK
The Company offered one million shares of its common stock at the price of one
dollar per share in an offering memorandum pursuant to Rule 504 of Regulation D
of the Securities Act of 1933. The Company sold 499,200 shares as of June 30,
1997, and 500,800 during fiscal year 1998. As of June 30, 1997, the Company had
stock subscribed in the amount of $74,000 that was recorded as a receivable and
subsequently received in fiscal year 1998.
On August 6, 1998, the Company entered into a joint venture agreement with
Carroll Shelby under which the Company was to issue 300,000 shares of restricted
common stock in exchange for the design and production of a street vehicle that
utilizes the OX2 combustion engine. These shares were issued in November 1998.
They were valued at $525,000 and expensed as research and development costs. In
addition, the Company will issue an additional 250,000 shares upon completion of
the vehicle utilizing the OX2 combustion engine. Subsequent to this transaction,
Carroll Shelby was appointed to the Board of Directors.
In November 1998 the Company issued 25,000 shares of restricted stock to
purchase patents, copyrights, designs and prototypes to be used with the
Company's technology. This transaction was valued at $43,750 and recorded as an
intangible asset.
In April 1999, the Company issued 400,000 shares of common stock for $2,000,000
in a private placement. Subsequent to June 30, 1999, the Company issued an
additional 400,000 shares of common stock for $2,000,000 in a private placement.
In June 1999, the Company agreed to issue 1,000,000 shares of its common stock
to the University of California Riverside Foundation. The stock is to be issued
in five annual installments of 200,000 shares each. The first installment was
issued in July of 1999. The donated stock is to provide an endowment for
research funds for the College of Engineering-Center for Environmental Research
and Technology.
9
<PAGE>
Deed of agreement concerning the patents, licensing and research and
development in relation to the OX2 engine
THIS DEED is made the 12th day of May 1999
BETWEEN: ADVANCED ENGINE TECHNOLOGY PTY LTD AN 063 092 759, Company organised
and existing under the laws of Australia having its registered office at Factory
1, 2 Greg Chappell Drive, Burleigh Gardens Industrial Estate, Burleigh Heads,
Queensland 4220, Australia ("AETP") of the first part
AND: OX2 INTELLECTUAL PROPERTY INC, a company incorporated in Vanuatu under the
International Companies Act 1992 and having its registered office at 2ndFloor,
Windsor House, Kumul Highway, Port Vila, Republic of Vanuatu ("OX21P") of the
second part
AND: OX2 ENGINE (DISTRIBUTION) LIMITED, a company incorporated in Vanuatu under
the International Companies Act 1992 and having its registered office at 2nd
Floor,, Windsor House, Kumul Highway, Port Vita, Republic of Vanuatu ("OX2ED")
of the third part
AND: ADVANCED ENGINE TECHNOLOGIES, INC, a company incorporated in the United
States of America in the State of Colorado and having its registered office at
9909 Osuna Road, NE, Albuquerque, New Mexico, United State of America ("AETI")
of the fourth part
<PAGE>
RECITALS:
A. By an Agreement for the Assignment of Intellectual Property dated the
11th day of January 1994, made between Steven Charles Manthey, the
inventor of the Engine, as assignor and AETP, as assignee, AETP
acquired all right, title and interest in and to the Intellectual
Property ("the Original Assignment Agreement").
B. By an Agreement For Sale By Way of Assignment dated the 6th day of
November 1996, made between AETP as seller and OX2IP as purchaser,
OX2IP acquired all right, title and interest in and to the. Patents and
the Product.
C. By a Patent License Agreement dated the 18th day of October 1996, made
between OX2IP as licensor and OX2ED as licensee, OX2ED acquired an
exclusive worldwide license to manufacture, distribute and market the
Product ("the Head-License Agreement").
D. By a Patent Sub-License Agreement dated 18th October 1996 made between
OX2IP as grantor and AETI as licensee ("the Sub-License Agreement"),
AETI acquired an exclusive sub-license to manufacture, distribute and
market the Engine in the territory of Canada, Mexico and the United
States of America ("the NAFTA region")
E. By an Investment Agreement dated the 25th day of August 1997 and made
between AETP and OX2IP, AETP assumed the obligations, for the benefit
of AETI, of carrying out the research and development of the Engine and
producing and supplying prototype engines and spare and replacement
engine parts ("Engines and Parts") to AETI, for the purpose of enabling
AETI to better exploit the Engine.
F. Since entering into the Sub-License Agreement, AETI has diligently and
aggressively pursued the commercialisation and exploitation of the
Engine in the NAFTA region and has established strong business
relationships with a number of major multi-national corporations,
(including in particular United States based corporations in the
automotive, military and outboard boating industries) and American
Universities, that are interested in pursuing some form of business
relationship with AETI, such as a partnership, joint venture or other
cooperative relationship, in relation to the research and development,
manufacture, distribution or marketing of the Engine, including the
provision of debt or equity funding for any of the foregoing
("Potential Business Partners").
G. In order for AETI to be able to enter into agreements with the
Potential Business Partners AETI must be able to assure them that for
the duration of any agreement that they may enter into with AETI:
(a). the Patents will be valid and will remain in force;
(b). the Potential Business Partners will have the benefit of
advancements and improvements to the Engine;
<PAGE>
(c). AETI will have such rights in relation to the Engine as are
necessary in order for the Potential Business Partners to be
entitled to research and develop, manufacture, distribute,
market, or otherwise exploit the Engine;
(d). the Potential Business Partners, which carry on business and
supply their products to countries throughout the world, will
have the opportunity to manufacture, distribute, market and
otherwise exploit the Engine, not just in the NAFTA region,
but in any country in which they carry on business or supply a
significant amount of the relevant product and not be at risk
of having a competitor control the rights to exploit the
Engine to their exclusion or in competition with them in any
such country;
(e). the research and development of the Engine will continue to
take place, with all due diligence, on an ongoing basis, into
the future.
AETI is unable to provide these rights and assurances because it does not own or
control the Patents or the Intellectual Property, and does not own or control
the licensing of the Engine except in relation to its sub-license for the NAFTA
region and does not control and is not responsible for the research and
development of the Engine. In addition the Potential Business Partners are
reluctant to enter into agreements with AETI because of the complicated and
fragmented nature of the ownership of the Patents and licensing of the Engine.
H. AETI will be able to provide the Potential Business Partners with the
necessary rights and assurances in relation to the Patents,
Intellectual Property and the Engine, that they require in order to
enter into agreements with AETI, if AETI becomes the owner of the
Patents and Intellectual Property and is responsible for the research
and development of the Engine.
I. AETP, OX21P and OX2ED each accept the accuracy of the facts and
circumstances set out in the foregoing Recitals and have agreed that,
in order to better assure the successful commercialisation and
exploitation of the Engine:
(a). AETP shall assign to AETI, all AETP's right, title and
interest in the Intellectual Property (if any) that AETP may
have at the date hereof,
(b). OX2EP shall assign to AETI, all OX21P's right, title and
interest in the Patents and the Product;
(c). the Head-License Agreement and the Sub-License Agreement shall
be terminated;
(d). AIETI shall take over the responsibility for the research and
development of the Engine.
J. AETP, OX2fP and OX2ED have each considered the terms and actual and
potential consequences of this Deed and have determined that it is in
their best commercial interests to enter into this Deed.
<PAGE>
NOW THE PARTIES AGREE as follows
Article I Interpretation
1.1 In this Deed the following definitions shall apply -
"Application" means International Patent Application No.
PCT/AU/95/00815 filed under the PCT and given an international filing
date of 4th December 1995.
"Confidential Information" means the Technical Information together
with any other confidential information relating to the Engine.
"Copyright" means those rights of copyright under the Commonwealth
Copyright Act in respect of the Material and other rights of copyright
throughout the World.
"Deed" means the this agreement concerning the Patents, Licensing and
research and development in relation to the OX2 combustion engine,
which is entered into as a deed between the parties.
"Design Rights" means those rights comprised in a definition of a
registered design in the Design Act (1906) of the Commonwealth of
Australia granted in relation to the Technology together with all
rights of registered design now confirmed by the laws enforced in the
other parts of the World.
"Engine" means the OX2 combustion engine and any improvements,
amendments and advancements relating to the OX2 combustion engine, and
any other engine technology existing at the date hereof, developed or
owned by AETP, OX2IP or OX2ED at the date hereof.
"Future Rights" means, jointly and severally, all those rights
(statutory and otherwise) comprised in Technical information and the
definition of Design Rights, Patent Rights, Trade Mark Rights or
Copyright and which have been granted or acquired in any way whatsoever
in relation to the Technology by AETP, OX2IP or OX2ED.
"Intellectual Property" means, jointly and severally, the Future
Rights, the Patent Rights, the Copyright, the Design Rights and the
Trade Mark Rights and the Technical Information.
"Licenses" means the licenses, whether head-licenses, licenses granted
pursuant to a head-license, sub-licenses or otherwise, which have been
granted in relation to the Engine.
"Material" means, jointly and severally, those client lists, formulae,
notes, correspondence, drawings and other written material or software
associated with the conduct of the Technology.
"Parties" mean the parties to this Deed, being AETP, OX2IP, OX2ED and
AETI.
"Patents" means all present and future patents and applications filed
in any country in the world insofar as they relate to the Product and
all divisions, continuation,, continuation in part, supplemental
disclosure and reissues thereof and thereto,
<PAGE>
"Patent Rights" means, jointly and severally, those patent rights
pursuant to the Commonwealth Patents Act 1990 in relation to the
Technology and the right to register patents in relation to the
Technology throughout other countries of the World.
"PCT" means the Patent Cooperation Treaty signed at Washington on 19th
June 1970.
"Product" means the OX2 combustion engine as defined in International
Patent Application No. PCT/AU95/00815.
"Technical Information" means in relation to the Original Assignment
Agreement, all that information, advice and know-how of a proprietary
nature owned by Steven Manthey in relation to the Technology, and
means, in relation to the technical information to be assigned to AETI
hereunder, all that information, advice and know-how of a proprietary
nature relating to the Technology that is owned by, or is under the
control of, Steven Manthey, AETI, OX2IP or OX2ED.
"Technology" means, jointly and severally, those rights associated with
the OX2 internal combustion engine the subject of the Application.
"Territory" means
EUROPEAN UNION
Belgium Greece Netherlands
Denmark Ireland, Republic of Italy
France Portugal Spain
Germany Luxembourg United Kingdom
NAFTA
Canada Mexico United States of America
ASIA
All countries of continental Asia (excluding Russia, Thailand and
Indonesia)
REST OF THE WORLD
All countries, territories and jurisdictions not comprised in the above
3 categories.
"Trade Mark Rights" means those rights in the trade nominations
developed or acquired by Manthey, AFETP, OX2IP or OX2ED, which might
describe the Technology or such other names in respect of the
Technology which is capable of protection under the Trade Mark Act 1955
(as amended) and the Trade Mark Regulations of the Commonwealth of
Australia, the Business Names Act or the Corporations Law of the
respective states of the Commonwealth and by similar laws in all other
countries throughout the World.
"World" means, jointly and severally, all territories and countries of
the World including the Commonwealth of Australia.
1.2 A reference to persons shall include corporations; words including the
singular number shall include the plural number and vice versa, words
including a gender shall include all other genders.
<PAGE>
1.3 A reference to a statute or a section of a statute includes all
amendments to that statute or section and includes all statutes or
sections passed in substitution for the statute or section referred to,
or incorporating any of its provisions.
Article 2 Assignment of Product, Patents and Intellectual Property to AETI
2.1 OX2IP hereby assigns to AETI, all OX2IP's right, title and interest in
the Product and the Patents and the Intellectual Property, in
consideration for the sum of US$1,500,000 paid by AETI to OX2IP, the
receipt of which sum is hereby acknowledged by OX2IP and in
consideration for the other obligations assumed by AETI hereunder.
2.2 AETP hereby assigns to AETI, all right, title and interest in the
Intellectual Property that AETP may have at the date hereof, in
consideration for AETI assuming the responsibility for the research and
development of the Engine and AETP being released from such
responsibility and in consideration for AETP being released from its
obligation to supply Engines and Parts to AETI and in consideration for
the other obligations assumed by AETI hereunder.
Article 3 Execution and form of Assignments of Patents and Intellectual
Property and costs
3.1 OX2IP shall execute such forms of assignment and other documents in
respect of the Patents and the Intellectual Property and shall perform
such other acts as AETI may reasonably require, in order to register
such Patents and Intellectual Property in AETI's name pursuant to any
relevant statutory provision in any country and all fees, costs and
expenses incurred by OX2IP in connection therewith shall be borne and
paid by AETI.
3.2 AETP shall execute such forms of assignment and other documents in
respect of the Patents and the Intellectual Property and shall perform
such other acts as AETI may reasonably require, in order to register
such Patents and Intellectual Property in AETI's name pursuant to any
relevant statutory provision in any country and all fees, costs and
expenses incurred by AETP in connection therewith shall be borne and
paid by AETI.
Article 4 No Warranty or Guarantee as to the validity of the Patents or
Intellectual Property
4.1 OX2IP and AETP do not warrant or guarantee the validity of the Patents,
or the Intellectual Property and do not warrant or guarantee that any
manufacture, use, sale, lease or other disposal or exploitation of the
Engine does not infringe any patent or similar intellectual property
right not held by OX2IP or AETP at the date hereof.
Article 5 AETI to assume all obligations in relation to the Patents, the
Intellectual Property and the research and development of the Engine
and AETI to be released from its obligations to AETI
5.1 In consideration of the assignment of the Product, Patents and
Intellectual Property to AETI, AETI agrees to perform all obligations
in respect of the Patents and the Intellectual Property, and without
limiting the generality of the aforesaid, AETI shall:
<PAGE>
(a) Lodge applications for Patents and Intellectual Property
rights in respect of countries where such application has not
been made, where it would be reasonable for AETI so to do;
(b) Pay all renewal fees necessary to keep the Patents and
Intellectual Property rights (if any) in force, each such
payment to be effected not later than seven days before the
last date; thereof,
(c) use its best efforts to procure the grant of all Patents and
Intellectual Property rights for which application is made;
(d) assert from time to time whatever claims and rights which AETI
may have as holder of the Patents or Intellectual Property
arising from actual or apparent use, disclosure or other
infringement of the Patents, or Intellectual Property, or the
Confidential Information and it is a fundamental condition of
this Deed that AETI shall promptly assert and enforce all such
claims and rights and institute and prosecute an action
against any such infringement which comes to its notice.
5.2 In consideration of the assignment of the Product, Patents and
Intellectual Property to AETI, AETI hereby assumes the responsibility
of carrying out the research and development of the Engine and
undertakes to use its best efforts to carry out all such research and
development as shall be necessary to diligently advance and improve the
Engine in order to be able to successfully commercialise and exploit
the Engine throughout the World.
5.3 In consideration of AETP assigning to AETI all right, title and
interest in the Intellectual Property that AETP may have at the date
hereof, AETI hereby releases AETP from all obligations that it owes
AETI in respect of the research and development of the Engine and the
supply of Engines and Parts and AETI shall have no claims or rights
against AETP, whether existing or future, in relation to the
performance of such obligations.
Article 6 Disclosure of Confidential Information by AETI
6.1 AETI agrees only to disclose Confidential Information to parties who
have first signed a confidentiality agreement under which they agree:
(a) not to use or disclose the Confidential Information except in
relation to the research and development, manufacturing,
distribution, marketing, or other exploitation of the Engine
pursuant to an agreement entered into with AETI which is in
force;
(b) not to perform any act, or omit to perform any act, which in
the circumstances carries an unreasonable high risk that the
confidentiality of the Confidential Information or any of it
will be breached;
(c) only to disclose the Confidential Information to other parties
where it is necessary to do so in order to exploit the engine
as set out in sub-clause (a) of this clause and provided that
such parties first sign a confidentiality agreement, for the
benefit of AETI, on the same terms as those set out in
sub-clauses (a), (b) and (c) of this clause.
<PAGE>
Article 7 Assignment of Intellectual Property to OX2IP by AETI in the event of
its default
7.1 AETI will forthwith assign the Patents and Intellectual Property to
AETP upon the happening of any of the following events:
(a) an order is made or a resolution passed for the winding up or
dissolution without winding up of AETI, unless the winding up
is for the purpose of reconstruction or amalgamation and the
scheme for reconstruction or amalgamation receives AETP's
prior written consent (which consent shall not be'
unreasonably withheld);
(b) AETI enters into an arrangement, reconstruction or composition
with its creditors or any of them, without AETP's prior
written consent (which consent shall not be unreasonably
withheld);
(c) AETI suspends payment of its debts or becomes insolvent within
the meaning of any relevant legislation or law;
(d) a receiver is appointed to AETI;
(e) if pursuant to the provisions of any relevant legislation AETI
Is placed under official management or an inspector is
appointed to investigate its affairs;
(f) if AETI is in breach of its obligations under clause 6;
(g) if is persist and substantial default is made by AETI in the
performance of any term of this Deed and where such default is
capable of remedy such default is not remedied within 30 days
after notice, specifying such default and requiring AETI to
remedy the same has been given to AETI by AETP.
In the event that AETI is required to assign the Patents and Intellectual
Property to AETP, AETI shall execute such forms of assignment and other
documents in thereof and shall perform such other acts as AETP may reasonably
require, in order to register such Patents and Intellectual Property in AETP's
name pursuant to any relevant statutory provision in any country and all fees,
costs and expenses incurred by AETI in connection therewith shall be borne and
paid by AETI.
Article 8 Exploitation of the Engine
8.1 shall use its best endeavors to commercialise and exploit the Engine
including the research and development of the Engine and the funding
thereof and the manufacturing, distribution and marketing of the Engine
and to appoint agents, and licensees for the purpose of such
commercialisation and exploitation.
<PAGE>
Article 9 Termination of Head License Agreement and Sub-License Agreement by
mutual abandonment
9.1 OX2fP and OX2ED agree that the Head-License Agreement is terminated at
the date hereof by mutual abandonment and neither party shall have any
existing or future claims or rights against the other arising out of,
or in relation to, the Head-License Agreement, or the performance of
any term thereof.
9.2 OX2ED and AETI agree that the Sub-License Agreement is terminated at
the date hereof by mutual abandonment and neither party shall have any
existing or future claims or rights against the other arising out of,
or in relation to, the Sub-License Agreement, or the performance of any
term thereof.
Article 10 AETP, OX2IP and OX2ED warrant that the execution of this Deed by
them does not breach any agreement
10.1 AETP, OX2IP and OX2ED each hereby represent, warrant and undertake that
neither the execution of this Deed nor the performance of its of
obligations hereunder will cause it to be in breach of any agreement to
which it is party or is subject
Article 11 AETP, OX21P and OX2ED agree that this Deed is in their best
commercial interests
11.1 AETP, OX2IP and OX2ED have each considered the terms and consequences
of this Deed and have determined that it is in their best commercial
interests to enter into this Deed.
Article 12 Stamp duty and charges
12.1 All stamp duty and other government charges (if any) payable in respect
of this deed shall be paid by AETI.
Article 13 Notices
13.1 All notices shall be in writing and shall be given by any one Of the
following means -
(a) by delivering it to the address of the party on a business
day during normal business hours; or
(b) by sending it to the address of the party by pre-paid airmail
post or if airmail post is not available by ordinary post; or
(c) by sending it by facsimile transmission to the facsimile
number of the party and on the next business day by giving it
by either of the means set forth in sub-clause 13.1 (a) or
13.1 (b) above.
13.2 A notice shall be deemed to be given and received -
(a) if given in accordance with sub-clause 13.1 (a), on the next
business day after the day of delivery;
<PAGE>
(b) if given in accordance with sub-clause I3.I (b), seven (7)
clear business days after the day of posting;
(c) if given in accordance with sub-clause 13.1 (c) on the next
business days after transmission.
13.3 The address and facsimile numbers referred to in clause 13.1 shall in
the absence of notice to the contrary be as set out below:
AETP:
Address: Factory 1, 2 Greg Chappell Drive, Burleigh Gardens
Industrial Estate, Burleigh Heads, Queensland 4220, Australia
Facsimile: +61-75-593-5180
OX2IP:
Address: 2nd Floor, Windsor House, Kumul Highway, Port Vila, Republic
of Vanuata
Facsimile: +678-23836
OX2ED:
Address: 2nd Floor, Windsor House, Kumul Highway, Port Vila, Republic
of Vanuata
Facsimile: +678-23836
AETI:
Address: 9909 Osuna Road, NE, Albuquerque, New Mexico, United States of
America
Facsimile: +1-505-323-7342
Article 14 Waiver
14.1 A party's failure or delay to exercise a power or right does not
operate as a waiver of that power or right.
14.2 The exercise of a power or right does not preclude either its exercise
in the future or the exercise of any other power or right.
14.3 A waiver is not effective unless it is in writing.
14.4 Waiver of a power or right is effective only in respect of the specific
instance to which it relates and for the specific purpose for which it
is given.
<PAGE>
Article 15 Severability
15.1 If any provision of this deed be held to be invalid in any way or
unenforceable it shall be severed and the remaining provisions shall
not in any way be affected or impaired and this deed shall be construed
so as to most nearly give effect to the intent of the parties as it was
originally executed.
Article 16 Applicable law and jurisdiction
16.1 This Deed shall be governed by and construed in accordance with the
laws of the State of California and the United States of America.
16.2 Each party irrevocably and unconditionally submits to the non-
exclusive jurisdiction of the courts of the State of California and
waives any immunity or any objection it may have to any action in those
courts and to a claim that any action in those courts and to a claim
that any action has been brought in an inconvenient forum or to those
courts not having jurisdiction.
THIS AGREEMENT WAS EXECUTED AS A DEED on the date first hereinbefore written
THE COMMON SEAL of
ADVANCED ENGINE TECHNOLOGY PTY LTD
was hereunto affixed in accordance with its
Articles of Association and in the presence of-.
/s/ Steven Manthey
- --------------------------------------
Steven Manthey Director
/s/ Paul Bailey
- --------------------------------------
Paul Bailey Director/Secretary
BY STEVEN MANTHEY for and on
Behalf of OX2 INTELLECTUAL
PROPERTY INC.
/s/ Steven Manthey
- --------------------------------------
Steven Manthey
<PAGE>
BY STEVEN MANTHEY for and on
Behalf of OX2 ENGINE
(DISTRIBUTION) INC.
/s/ Steven Manthey
- -------------------------------------
Steven Manthey
THE COMMON SEAL of
ADVANCED ENGINE TECHNOLOGIES, INC.
was hereunto affixed in accordance with its
Articles of Association and in the presence of:
/s/ Murray J. Bailey
- -------------------------------------
Murray J. Bailey Director
In October 1996 AET entered into a Licensing Agreement with OX2 Engine
(Distribution) Ltd, hereinafter referred to as the "Grantor", for the right to
manufacture, distribute and market the OX2 engine.
Page two items 2.1, 2.1.1 and 2.1.2. of the Agreement deals specifically with
the issuance of AET common shares to the Grantor. To date, 20,000,000 shares
have been issued, however, the Agreement calls for an additional 19,000,000
shares to be issued after certain events take place.
It is now the Grantor's opinion that this issuance of additional shares could
have a negative effect on AET's ability to commercialise the OX2 engine. The
Grantor feels that AET and its public shareholders could incur financial harm if
these additional 19,000,000 shares were issued.
In consideration for the excellent performance by AET in it's effort to
commercialise the OX2 engine and for the strong support shareholders of AET have
given the company, the Grantor has made a decision to rescind that portion of
the Licensing Agreement, calling for the future issuance of additional
19,000,000 shares.
AET has received an executed amendment to the 1996 Licensing Agreement,
effectively cancelling AET's commitment to issue the additional 19,000,000
shares as called for in article 2.1.2 of the Licensing Agreement between AET and
the Grantor in consideration for a sum of $100 US.
The amendment to the Licensing Agreement has been accepted by AET and the
consideration of US$100 has been paid.
The Common Seal of
OX2 Engine (Distribution) LTD.
/s/ Laurie Harrison
- --------------------------------------------------------------------------------
Director/Officer
Laurie Harrison
The Common Seal of
Advanced Engine Technologies, Inc.
/s/ Murray J. Bailey
- --------------------------------------------------------------------------------
Director/Officer
Murray J. Bailey
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
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