<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
A-55, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2869 86-0888952
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
5270 NEIL ROAD, RENO, NEVADA 89502
(702) 826-8300
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT
FOR SERVICE)
RUDOLF W. GUNNERMAN
CHIEF EXECUTIVE OFFICER
A-55, INC.
5270 NEIL ROAD, RENO, NEVADA 89502
(702) 826-8300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
DANIEL J. WINNIKE, ESQ. G. MICHAEL O'LEARY, ESQ.
PAUL R. ROGERS, ESQ. ANDREWS & KURTH L.L.P.
HOWARD, RICE, NEMEROVSKI, CANADY, FALK & RABKIN 4200 CHASE TOWER
A PROFESSIONAL CORPORATION 600 TRAVIS
THREE EMBARCADERO CENTER HOUSTON, TX 77002
SAN FRANCISCO, CA 94111 (713) 220-4200
(415) 434-1600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, $0.001 par value.......................... $115,000,000 $33,925
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457.
------------------------
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION -- OCTOBER 8, 1998
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PROSPECTUS
, 1998
[A-55 LOGO]
A-55, INC.
SHARES OF COMMON STOCK
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THE COMPANY:
- - We have developed a new range of fuel products that are both less expensive to
use and environmentally "cleaner" than most other fossil fuels.
- - A-55, Inc.
5270 Neil Road
Reno, Nevada 89502
(702) 826-8300
PROPOSED SYMBOL & MARKET:
- - AQVV/NASDAQ
THE OFFERING:
- - A-55, Inc. is offering all of the shares.
- - The underwriters have an option to purchase an additional shares
from A-55 to cover over-allotments.
- - This is our initial public offering, and no public market currently exists for
our shares.
- - We plan to use the proceeds from this offering for general corporate purposes
and to repay loans to A-55's Chairman and Chief Executive Officer.
- - Closing: , 1998.
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<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price (Estimated): $ $
Underwriting fees:
Proceeds to Company:
</TABLE>
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This investment involves risk. See "Risk Factors" beginning on Page 7.
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NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS DETERMINED WHETHER THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. NOR HAVE THEY MADE, NOR WILL THEY MAKE, ANY
DETERMINATION AS TO WHETHER ANYONE SHOULD BUY THESE SECURITIES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE> 3
[GRAPHICS TO BE ADDED]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary................. 3
Risk Factors....................... 7
Forward Looking Statements and
Definitions...................... 15
Use of Proceeds.................... 16
Dividend Policy.................... 16
Capitalization..................... 17
Dilution........................... 18
Selected Financial Data............ 19
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 20
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Business........................... 24
Management......................... 47
Certain Transactions............... 51
Principal Stockholders............. 53
Description of Capital Stock....... 54
Shares Eligible for Future Sale.... 56
Underwriting....................... 58
Legal Matters...................... 60
Experts............................ 60
Additional Information............. 61
Index to Financial Statements...... F-l
</TABLE>
-------------------------
The Company owns or has exclusive rights to use the "A-55" registered trademark,
the "Powered With Water" registered service mark as well as the service mark
"Tomorrow's Fuel Working Today." All other brand names and trademarks appearing
in this Prospectus are the properties of their respective holders.
-------------------------
2
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained in this prospectus. This summary
is not complete and does not contain all of the information that you should
consider before investing in the shares of Common Stock of A-55. You should read
the entire prospectus carefully.
A-55
A-55 has developed, tested and begun to market and sell a new range of fuel
products known as A-55(R) Clean Fuels that are both less expensive to use and
environmentally "cleaner" than most other fossil fuels. A-55 Clean Fuels are
made by blending water and almost any petroleum product, even relatively
inexpensive petroleum residues and residue oils. A-55's primary product, A-55(R)
Additive, is the essential ingredient in A-55 Clean Fuels that allows water and
petroleum products to remain in a stable blend.
We believe that A-55 Clean Fuels can be sold at a price that is less (when
measured on the basis of dollars per unit of energy output) than the price
typically paid for natural gas and almost any refined petroleum fuel product
burned in generating electricity and in other large-scale combustion
applications.
A-55 and independent agencies (including the U.S. Environmental Protection
Agency) have performed a variety of tests that demonstrate that A-55 Clean Fuels
are effective fuels in open-flame applications, such as electricity generation
boilers, as well as in combustion turbines and internal combustion engines.
These tests have also shown that A-55 Clean Fuels can reduce emissions of NOx
(oxides of nitrogen) and harmful particulate matter compared with many other
fossil fuels.
We believe that fuel customers in many market segments will find A-55 Clean
Fuels to be attractive substitutes for many other fossil fuels based on both a
comparison of their relative costs and their relative levels of NOx emissions.
A-55 plans to focus its initial marketing efforts on the domestic electricity
generation industry, which consumed 4.8 billion gallons of refined petroleum
products and 2.7 trillion cubic feet of natural gas in 1996. A-55 has not sold
commercial quantities of A-55 Additive or A-55 Clean Fuels in this market
segment. However, as a result of its initial marketing efforts, A-55 has
received a purchase order for the delivery of enough A-55 Additive to allow
Commonwealth Edison of Illinois to burn up to 70,000 barrels (2.9 million
gallons) of A-55 Clean Fuels during the start-up phase at one of its electric
generating plants.
We intend to pursue the sale of A-55 Additive through two principal distribution
channels:
- - sales to electricity generators and other large fuel consumers that elect to
blend A-55 Clean Fuels; and
- - sales to approved distributors such as petroleum refiners.
We believe that petroleum refiners will play an important role in the production
and distribution of A-55 Clean Fuels. We also believe that petroleum refiners
will be an important source of the base residues, residual oils and other
refined petroleum ingredients for fuel consumers that elect to blend their own
A-55 Clean Fuels.
In 1996, the petroleum refining industry supplied approximately 4.2 billion
gallons of No. 6 fuel oil to electricity generators in the United States. No. 6
fuel oil consists of petroleum residues and residual oils that are generally
blended or "cut" with more refined petroleum products (typically called "cutter
stock") to produce a fuel that meets or exceeds a variety
3
<PAGE> 5
of fuel specifications established by the industry. By using A-55 Additive,
refiners will be able to blend these residues with water, instead of more
expensive cutter stock, to produce A-55 Clean Fuels that meet the specifications
for No. 6 fuel oil. We expect that the price of A-55 Clean Fuels made with these
residues will be lower than that of No. 6 fuel oil, based on current and
historical market fuel prices.
Domestic electric utilities and other consumers of large quantities of coal and
other fossil fuels will be required to reduce NOx and other harmful emissions
under the Clean Air Act and other federal and state regulations. Faced with
these requirements and increased competition from deregulation, many U.S.
electric utilities are under pressure to evaluate cost-effective alternatives to
generate electricity. Outside of the United States demand for electricity is
projected to nearly double during the 25-year period ending 2020. Much of this
demand is expected to be supplied by burning fossil fuels. We believe that A-55
Clean Fuels will allow electricity generators and other large fossil fuel
consumers, both in the United States and abroad, to reduce harmful NOx emissions
without investing in costly equipment to control emissions.
Our strategy is to pursue a large-scale branding and marketing campaign with a
focus on the following market segments:
- - Electricity Generators--Electricity generators consume substantial volumes of
fossil fuel. We intend to further segment this market by fuel usage:
- No. 6 Fuel Oil and Natural Gas--A-55 Clean Fuels can serve as
cost-effective and environmentally responsible substitutes for these
fuels.
- Coal--A-55 Clean Fuels can be used to help coal-burning electricity
generators comply with the strict NOx emissions regulations being
phased in through the year 2000 and thereafter.
- - Petroleum Refiners--Refiners are currently well-positioned to profitably
produce, market and distribute A-55 Clean Fuels to the ultimate consumer. We
intend to form strategic alliances with petroleum refiners in order to gain
access to electric utilities and other large fossil fuel consumers.
- - International Markets--We believe that A-55 can capitalize on the increasing
demand for electricity and the growing awareness of environmental concerns in
both industrialized and developing countries abroad.
We intend to produce A-55 Additive at a commercial facility near A-55's
executive offices, which are located at 5270 Neil Road, Reno, Nevada 89502,
where the telephone number is (702) 826-8300. In addition, we plan to build a
number of production facilities at strategic regional locations that will allow
A-55 to meet the demands of our customers.
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<PAGE> 6
THE OFFERING
Common Stock offered............ shares
Common Stock to be outstanding
after the Offering............ shares(1)
Use of Proceeds................. A-55 will use the net proceeds of the
Offering for general corporate purposes
(including working capital to support the
growth of A-55's business related to
production, distribution, sales and
marketing activities, research and
development and application engineering) and
to repay approximately $21.2 million of
indebtedness to A-55's principal
stockholder. See "Use of Proceeds."
Listing......................... NASDAQ National Market
Proposed Trading Symbol......... AQVV
- ------------------------------
(1) Excludes shares of common stock to be reserved for issuance under
A-55's 1998 Stock Option Plan, none of which are currently outstanding.
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<PAGE> 7
SUMMARY FINANCIAL DATA
You should read the following summary historical and pro forma financial data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the financial statements and related notes of A-55
and its predecessor, a Nevada limited partnership, and the Unaudited Pro Forma
Combined Financial Statements and related notes included in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ----- ----- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
General and administrative........ $ 1,769 $ 465 $ 534 $ 989 $ 2,082 $ 943 $ 2,503
Research and development.......... 291 214 20 185 1,927 601 255
Sales and marketing............... 6 94 1 560 624 254 282
Legal............................. 13 -- 244 152 852 44 135
Depreciation and amortization..... 177 110 37 261 1,362 689 667
------- ----- ----- ------- ------- ------- -------
Total operating expenses..... 2,256 883 835 2,147 6,847 2,531 3,842
------- ----- ----- ------- ------- ------- -------
Operating loss...................... (2,256) (883) (835) (2,147) (6,847) (2,531) (3,842)
Other income (expense), net......... (25) 776 (44) (558) (692) (198) (533)
------- ----- ----- ------- ------- ------- -------
Net income (loss)................... $(2,281) $(107) $(879) $(2,705) $(7,539) $(2,730) $(4,375)
======= ===== ===== ======= ======= ======= =======
Pro forma net income (loss), as
adjusted(1)....................... $(6,782) $(3,830)
Pro forma net income (loss) per
share.............................
Pro forma weighted average common
shares outstanding(2).............
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1998
----------------------------------------------- -------------------------------------
PRO FORMA
AS FURTHER
1993 1994 1995 1996 1997 ACTUAL PRO FORMA(3) ADJUSTED(4)
------- ------ ------- ------- -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................... $ 1,085 $ 77 $ 6 $ 796 $ 784 $ 196 $ 196
Working capital
(deficit)............. (1,503) (625) (1,460) (9,655) (13,549) (17,310) (19,746)
Total assets..... 2,455 1,235 1,204 5,651 4,677 3,668 3,668
Advances from R. W.
Gunnerman and related
accrued interest...... 0 80 151 8,523 11,387 14,631 16,776
Total partners' capital
(deficit)/
stockholders'
equity................ (156) 518 (351) (4,806) (12,344) (16,719) (18,864)
</TABLE>
- -------------------------
(1) Pro forma net loss, as adjusted, reflects the combined historical net loss
of A-55 and its predecessor, adjusted for the reduction in interest expense
resulting from the application of $ million of estimated proceeds
of the Offering to repay advances from Rudolf W. Gunnerman, the Chairman and
Chief Executive Officer of A-55. See "Use of Proceeds."
(2) See Unaudited Pro Forma Combined Financial Statements included in this
Prospectus.
(3) Gives effect to the reorganization of the predecessor into a corporation as
A-55 and to the partnership distribution to be completed in connection with
that reorganization which will be financed with additional advances from
Rudolf W. Gunnerman. See "Forward-Looking Statements and Definitions."
(4) Further adjusted to reflect the sale of shares of Common Stock
offered hereby and the application of the estimated net proceeds from the
Offering. See "Use of Proceeds."
6
<PAGE> 8
RISK FACTORS
You should carefully consider the following factors and other information in
this prospectus before deciding to invest in the Common Stock.
LIMITED OPERATING HISTORY; LACK OF REVENUES
A-55 began operations in November 1992 and has a limited operating history. A-55
has primarily focused on research and development and as a result has not had
any revenues, and has had net losses from operations, since it was formed. A-55
has recently added senior officers and management level employees in the sales,
production, finance and other areas. Its success will depend on management being
able to address the risks encountered by development stage companies and to
implement A-55's business plan. A-55 may not be successful in implementing its
business plan, and if it is not its financial results will not improve. Even if
it is successful in implementing its business plan, its financial position may
not improve. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
UNCERTAINTY OF MARKET ACCEPTANCE
Market acceptance of A-55 Clean Fuels has not yet been demonstrated on a large
scale and is uncertain. Moreover, because A-55 Clean Fuels are new, potential
customers may hesitate to rely on them before A-55 has demonstrated their
long-term effectiveness in commercial usage. A-55 Clean Fuels may not achieve
significant market acceptance, and even if they do, they may be rendered
obsolete or inferior as a result of technological change, changing governmental
regulation, changing customer needs or new product introductions. If its
products are not broadly accepted by its target markets, A-55 will not be
successful. See "Business--Target Markets."
TECHNOLOGICAL CHANGE; LACK OF LONG-TERM COMMERCIAL APPLICATION OF TECHNOLOGY
The market for clean fuels is characterized by rapidly changing technology,
evolving industry standards, frequent new products and changing consumer
demands. In this type of market, existing products and services can become
obsolete and unmarketable or require unanticipated investments in research and
development. In order to be successful, A-55 will have to adapt to rapidly
changing technologies and improve its products in response to changing customer
and industry demands.
A-55 products have not been exposed to broad, long-term commercial usage that
may illuminate deficiencies that have not been identified in A-55's testing. In
addition, many of the potential applications for which A-55 Clean Fuels have
been tested have not been evaluated over prolonged periods to demonstrate their
long-term effectiveness. A-55 is continuing to develop information on the
effects of prolonged use of A-55 Clean Fuels in large boilers, combustion
turbines and internal combustion engines. Deficiencies in A-55's technology may
be discovered as a result of further testing and extensive commercial usage, and
A-55 may not be able to cure these deficiencies. See "Business--Testing and
Performance."
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LACK OF COMMERCIALIZATION EXPERIENCE; LACK OF CUSTOMER BASE; MANAGEMENT OF
EXPANSION
A-55 has virtually no experience in marketing, sales and distribution. A key
factor to A-55's success will be its ability to increase demand for its products
by educating target customers on the benefits of A-55 Clean Fuels in comparison
with more traditional fossil fuels and other alternative emissions control
technologies. A-55 has received only one significant purchase order. To be
successful in its commercialization efforts, A-55 believes that it will be
important to enter into agreements with influential fuel users and suppliers
whose acceptance of A-55 Clean Fuels will assist both in validating its
commercial effectiveness and increasing the likelihood of demand for A-55 Clean
Fuels by other customers. A-55 may not be successful in doing so. See
"Business--Sales and Marketing."
Having largely been focused to date primarily on technology development and
product testing, A-55 is not experienced in managing rapid growth into an
integrated marketing, sales, production and distribution business. Rapid growth
or expansion could place a significant strain on A-55's managerial, operating,
financial and other resources. A-55's systems, management, procedures or
controls may not be adequate to support its expanding operations. If A-55 cannot
manage successfully the expansion of its business, its business and results of
operations would be adversely affected. See "Management."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY
The patent rights embodying a portion of A-55's technology are licensed
exclusively to A-55 from the inventor, Rudolf W. Gunnennan, who is the Chairman
and Chief Executive Officer of A-55. These patent rights consist of one issued
U.S. patent, four pending U.S. patent applications, and several granted patents
and pending patent applications in foreign countries. The current U.S. patent
covers the combustion of a water and hydrocarbon blend in internal combustion
engines. A pending U.S. patent application covers the use of such blends as
fuels to be burned in electricity generating plants, which is the primary focus
of A-55's sales and marketing efforts. As is common in the patent application
process, the U.S. Patent and Trademark Office has raised certain challenges with
respect to these pending applications, and A-55 cannot predict the likelihood
that any of the pending applications will be approved.
Others may have filed, or may in the future file, patent applications with
claims that overlap with elements of A-55's intellectual property. Patents may
be issued covering all or part of the claims of other persons that compete with
A-55's technologies. It is also possible that infringement claims will be
asserted against A-55 in the future that could adversely affect A-55.
See "Business--Patents and Intellectual Property Protection."
LIMITED PRODUCTION EXPERIENCE; DEPENDENCE UPON PETROLEUM REFINERS
A-55 has no experience in producing A-55 Additive or A-55 Clean Fuels in
significant commercial quantities. To date, A-55 has produced A-55 Additive and
A-55 Clean Fuels in limited quantities for research and development, testing and
limited commercial sales, primarily for demonstration projects. Companies often
encounter difficulties in scaling-up production of new products, including
problems involving production yields, quality control and assurance, raw
material supply and shortages of qualified personnel. A-55 may not be able to
produce A-55 Additive in commercial quantities at a competitive cost. If A-55
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<PAGE> 10
encounters difficulties in producing sufficient quantities of A-55 Additive to
meet commercial demand, its business and results of operations would be
adversely affected. See "Business--Production and Distribution."
A-55 expects that the primary producers of A-55 Clean Fuels will be petroleum
refiners, due to their experience in producing petroleum fuel products, and
large fuel consumers that elect to blend their own A-55 Clean Fuels. A-55 has
not received any commitment from any refiners or others to produce A-55 Clean
Fuels. A-55 may not be able to convince refiners that they should purchase A-55
Additive, and expend the capital necessary to permit the blending of A-55 Clean
Fuels, until A-55 can demonstrate substantial demand for those fuels. At the
same time, it may be difficult for A-55 to create such demand until it can
demonstrate to electricity generators and other fossil fuel consumers that a
stable source of supply exists for such fuels. See "Business--Target Markets"
and "Business--Production and Distribution."
REQUIREMENT FOR REGULATORY APPROVALS
A-55's primary target market, the U.S. electricity generating industry, is
regulated. It is likely that a substantial number of its customers will require
some form of regulatory approval in order to use A-55 Clean Fuels. To the extent
these companies are delayed in receiving or fail to receive such approvals,
A-55's business and results of operations will be adversely affected.
Prior to any sale of A-55 Clean Fuels or A-55 Additive for domestic
transportation applications, A-55 expects to be required to register these
products, as well as the engine modifications required for the use of these
products, under a number of regulatory regimes with the Environmental Protection
Agency. In order to satisfy the EPA's requirements for introducing a new
transportation fuel, A-55 expects that it would be required to submit extensive
research and test data. A-55 Clean Fuels and Additive may also be subject to
regulation by various states, including California.
A-55 intends to apply for any certificates and/or approvals that are needed to
introduce its products into markets that it believes are promising. The fuel and
vehicle-emissions certification and approval process involves the development
and submission to government entities of a large quantity of information. This
process may take a long time and be very expensive. Delays in obtaining needed
approvals could inhibit marketing of A-55's products and cause the loss of
competitive opportunities. A-55 has limited experience in conducting testing and
in pursuing applications necessary to gain regulatory approvals. Regulatory
approval may not be obtained for A-55 products, or once obtained could be
withdrawn. See "Business--Government Regulation."
UNCERTAINTY OF TEST RESULTS
A-55 test results described in this Prospectus were performed using certain
equipment, fuel, conditions and test protocols. All testing is subject to
potentially significant variability, and A-55's test results may not be
replicated with other equipment, fuel, conditions, test methods, or under
official certification test conditions. Any such significant change or
variability could limit A-55's ability to achieve and retain required approvals
from government agencies and from customers. See "Business--Testing and
Performance."
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PRICING VOLATILITY AND UNCERTAINTY OF SUPPLY OF FOSSIL FUELS
A-55 Clean Fuels typically contain approximately 65% to 70% petroleum products
by volume. A-55 anticipates demand for A-55 Clean Fuels will be affected by
changes in the market prices for various fossil fuels since such changes will
impact the relative cost-effectiveness of A-55 Clean Fuels. In particular, if
the price for the petroleum products on which A-55 Clean Fuels are based
increases relative to the price of natural gas or coal or other fuels not based
on similar petroleum products, the demand for A-55's products would be adversely
affected. Competitive fuel products, such as No. 6 fuel oil and natural gas, are
commodities and, as such, their prices are subject to volatile changes in
response to factors affecting supply and demand for such products. Such factors
include seasonal weather patterns, the national and international economy,
market demand, regulatory changes, the price of crude oil and other petroleum
feedstocks, the capacity of regional refiners to provide adequate supplies of
refined products and unexpected national and international events. Large changes
in the market prices for these products could have an adverse effect on A-55's
business and results of operations. See "Business--Industry Overview--Increasing
Environmental Regulation."
A-55 does not currently have any arrangements with refiners, marketers or others
for supplies of significant volumes of refined or unrefined petroleum products
for blending of A-55 Clean Fuels. Although A-55 believes that for the
foreseeable future adequate supplies of such petroleum products are available
from numerous sources, to the extent that A-55 or its customers are unable to
procure adequate supplies on favorable terms, A-55's business and results of
operations would be adversely affected.
DEPENDENCE ON ADVANCEMENT AND ENFORCEMENT OF REGULATORY PROVISIONS
A-55's success in the United States and other countries will depend in part on
effective enforcement of existing environmental and energy policy regulations.
Many potential consumers of A-55 Clean Fuels are unlikely to switch from the use
of conventional fuels unless compliance with applicable regulatory requirements
provokes, directly or indirectly, the use of A-55 Clean Fuels. Both additional
regulation and enforcement of such regulatory provisions are likely to be
vigorously opposed by the entities affected by such requirements. If existing
emissions-reducing standards are weakened, or if governments are not active and
effective in enforcing such standards, A-55's business and results of operations
could be adversely affected. Even if the current trend toward more stringent
emissions standards continues, A-55 will depend on the ability of A-55 Clean
Fuels to satisfy such emissions standards more efficiently than other
alternative technologies. Certain standards imposed by regulatory programs may
limit or preclude the use of A-55's products to comply with environmental or
energy requirements.
POTENTIAL IMPACT ON EQUIPMENT WARRANTIES AND INSURANCE
A-55 Clean Fuels are used in mechanical applications such as boilers, combustion
turbines and internal combustion engines. These are expensive machines designed
to operate on precise tolerances, including specifications as to the fuel to be
used in their operation. A-55 may face resistance from potential customers if
its products have not been certified for use by the manufacturer. In addition,
potential customers may also hesitate to use A-55's products due to concerns
that the modifications necessary to permit the use of these products, or the use
of the products at all, might negatively impact the manufacturer's warranty
coverage on their machines. Potential customers may also be concerned about the
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<PAGE> 12
impact on existing insurance coverage of using a novel fuel. If A-55 encounters
resistance from potential customers to use A-55 Clean Fuels in their existing
equipment or to modify their equipment to permit the use of these fuels, A-55's
business and results of operations could be adversely affected.
RISK OF PRODUCT LIABILITY
Consumers and others who purchase A-55's products or use A-55 Clean Fuels may
bring liability claims against A-55 allegedly resulting from the use of these
products. A-55 does not currently have product liability insurance and may not
be able to obtain and maintain adequate levels of such insurance in the future
on acceptable terms or in sufficient amounts to protect it.
UNCERTAINTY OF ACCEPTANCE OF REBURN TECHNOLOGY
As part of its sales and marketing efforts, A-55 intends to target owners and
operators of electricity generating facilities that currently burn significant
amounts of coal and are confronting regulatory requirements to reduce NOx
emissions. A-55's success in penetrating this market will largely depend on
these coal-fired generators adopting a reburn strategy to meet emissions
specifications. Reburning is a technique that has not been widely adopted in the
United States to date and may not become a widely accepted method for
controlling NOx emissions. Further, even if coal-fired generators adopt
reburning as an emission control method, A-55 Clean Fuels may not be used as a
reburn fuel. See "Business--Target Markets--Electricity Generation
Industry--Coal."
COMPETITION
The combustible fuels market is intensely competitive. Large natural gas, coal
and oil companies have substantial resources and well established modes of
production, distribution and sales of their products. These companies are also
known to have significant political influence to help in the advancement of
their causes in local, state and national governments. To the extent that these
companies regard A-55 as a competitor, they are likely to use these resources to
compete vigorously with A-55. These competitive activities might include efforts
to develop more effective emissions control technologies, to impede the
recognition of A-55 Clean Fuels as an accepted fuel or to establish competing
products.
A-55 also will face competition from producers of alternative fuels, potentially
including water and petroleum blends similar to those developed by A-55, and
from manufacturers of emissions control technologies. Many of these producers
may have significantly greater financial, political and other resources than
A-55. Considerable governmental and private efforts have been devoted to
promoting commercialization of alternative energy resources, such as natural gas
or other fuels and NOx emissions control technologies. Certain of these products
and technologies have been promoted not only by their direct and indirect
producers but also by legislators and other government officials and
environmental groups. A-55's success may depend in part on its ability to
convince some of these third parties that its products offer a more effective
alternative to the use of traditional fuels than do competing alternative fuels
and technologies. A-55 may not be successful in this regard. Furthermore, A-55's
competitors may devote substantial financial resources to market existing
competitive products, develop new competitive products or otherwise compete with
11
<PAGE> 13
A-55's products, and such efforts could adversely affect A-55's business and
results of operations. See "Business--Competition."
POTENTIAL ENVIRONMENTAL LIABILITY
A-55 must conduct its operations in accordance with a variety of federal, state
and local laws and regulations governing the release or discharge of pollutants
into the air and the water (including ground water), product specifications, and
the generation, handling, treatment, storage, transportation and disposal of
solid and hazardous waste and materials with hazardous or toxic constituents.
Consequently, A-55 faces exposure from claims and lawsuits involving
environmental matters, including soil and water contamination, air pollution and
personal injuries or property damage allegedly caused by substances produced,
handled, transported, used, released or disposed of by it. As its business
grows, A-55 will have to develop and implement more extensive procedures for the
proper handling, storage, and transportation of finished products and materials
used in the production process and for the disposal of waste products. In
addition, state or local requirements may also restrict A-55's production and
distribution operations. A-55 could incur significant costs to comply with the
laws and regulations described above as production and distribution activity
increases. See "Business--Government Regulation."
LITIGATION
A-55 is currently a party to various pending legal proceedings and may be
subject in the future to other legal proceedings which arise in the course of
its business. A-55 may incur significant legal expenses in connection with such
litigation that could have an adverse effect on its financial condition and
results of operations. In addition, pursuing numerous legal proceedings or
highly involved litigation may result in the diversion of management's attention
from day-to-day business operations. The pending legal proceedings may not be
resolved quickly or in A-55's favor. Any prolonged litigation could have an
adverse effect on A-55's business and results of operations. See
"Business--Legal Proceedings."
CONTROL BY PRINCIPAL STOCKHOLDER AND MANAGEMENT
Upon completion of the offering, Rudolf W. Gunnerman will hold approximately
% of the outstanding Common Stock of A-55 ( % if the Underwriters'
over-allotment option is exercised in full). Accordingly, Mr. Gunnerman will
continue to hold sufficient voting power to enable him to elect all of the
directors and to control the outcome of all issues submitted to a vote of the
stockholders. In addition, all of the officers and directors of A-55 as a group
will hold or will be regarded as beneficially owning approximately % of the
outstanding Common Stock ( % if the Underwriters' over-allotment option is
exercised in full). This concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of A-55, including
transactions in which the holders of Common Stock might receive a premium for
their shares over prevailing market prices. See "Principal Stockholders."
NO PRIOR PUBLIC MARKET; STOCK PRICE VOLATILITY
There has not been a public market for the Common Stock. A-55 is applying to
list the Common Stock for trading on the Nasdaq National Market. A-55 does not
know the extent to which investor interest in it will lead to the development of
a trading market or how liquid that market might be. The initial public offering
price for the Common Stock
12
<PAGE> 14
will be determined through negotiations between the Underwriters and A-55.
Investors may not be able to resell their shares at or above the initial public
offering price. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price of the Common Stock. Many factors,
including future announcements concerning A-55 or its competitors, variations in
fossil fuel prices, variations in operating results, announcements of
technological innovations, amendment, adoption or repeal of governmental
regulations, introduction of new products or changes in product pricing policies
by A-55 or its competitors, and changes in earnings estimates by securities
analysts, could cause the market price of the Common Stock to fluctuate
substantially. In addition, the stock market in recent years has experienced
extreme price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of affected companies. These
fluctuations, as well as general economic, political and market conditions, may
have a material adverse effect on the market price of the Common Stock.
RISKS ASSOCIATED WITH INTERNATIONAL LICENSES AND OPERATIONS
A-55 expects to market and distribute A-55 Clean Fuels outside the United States
through licenses or other strategic relationships. The benefit A-55 receives
from these relationships will depend on the abilities of local companies to
raise capital, initiate operations and achieve market acceptance of A-55's
products. This may include the effectiveness of these companies in persuading
the applicable local government to grant necessary regulatory approvals for the
use of A-55 Clean Fuels. A-55's success in a particular foreign market will also
depend on the local company's successful operation of an integrated business
dedicated to the sale of A-55's products. A-55's existing licensees are required
to secure financing to fund their required initial payments to A-55 and to
develop their businesses. Two of the licensees have failed to make,
collectively, $12.0 million in payments due to A-55. Over time, a limited number
of international relationships may account for a substantial portion of A-55's
revenues, and A-55's operating results would be significantly affected by events
that affect such relationships and the results of operations of foreign
licensees. Under such circumstances, the loss, or significant reduction in sales
volume by, one or more of the local companies could have an adverse effect on
A-55's business and results of operations. See "Business--Sales and
Marketing--International Markets."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of A-55's Certificate of Incorporation could make it more
difficult for a third party to acquire control of A-55 without the consent of
the A-55 Board of Directors, even if such change in control were favored by the
stockholders. The Certificate of Incorporation also allows A-55 to issue
preferred stock without stockholder approval. Such issuance could make it more
difficult for a third party to acquire A-55. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could drop as a result of sales of a large
number of shares of Common Stock in the market after the offering, or the
perception that such sales could occur. These factors also could make it more
difficult for A-55 to raise funds through future offerings of Common Stock.
13
<PAGE> 15
There will be shares of Common Stock outstanding immediately after the
Offering. Of these shares, the shares sold in the offering will be freely
transferable without restriction or further registration under the Securities
Act, except for any shares purchased by "affiliates" of A-55, as defined in Rule
144 under the Securities Act. The remaining shares of Common Stock
outstanding will be "restricted securities" as defined in Rule 144. These shares
may be sold in the future without registration under the Securities Act to the
extent permitted by Rule 144 or an exemption under the Securities Act.
In connection with the offering, A-55, its executive officers and directors and
certain of its stockholders have agreed that, with certain exceptions, they will
not sell any shares of Common Stock without the consent of Donaldson, Lufkin &
Jenrette Securities Corporation for 180 days after the date of this prospectus.
See "Description of Capital Stock," "Shares Eligible for Future Sale" and
"Underwriting."
14
<PAGE> 16
FORWARD-LOOKING STATEMENTS AND DEFINITIONS
This Prospectus contains certain statements that are "forward-looking"
statements within the meaning of Section 27A of the Securities Act of Section
21E of the Exchange Act. All statements other than statements of historical
facts included in this Prospectus, including without limitation statements that
use terminology such as "estimate," "expect," "intend," "anticipate," "believe,"
"may," "will," "continue" and similar expressions, are forward-looking
statements. These forward-looking statements include, among other things, the
discussions of A-55's business strategy and expectations concerning A-55's
market position, future sales, profitability, liquidity and capital resources,
attempts to reduce costs, the costs of its products and A-55 Clean Fuels
relative to competing products and technologies, and ability to protect its
patents and trade secrets. Although A-55 believes that the assumptions upon
which the forward-looking statements contained in this Prospectus are based are
reasonable, any of the assumptions could prove to be inaccurate and, as a
result, the forward-looking statements based on those assumptions also could be
incorrect. All phases of the operations of A-55 involve risks and uncertainties,
many of which are outside the control of A-55 and any one of which, or a
combination of which, could materially affect the results of A-55's operations
and whether the forward-looking statements ultimately prove to be correct.
Important factors that could cause actual results to differ materially from
A-55's expectations include, but are not limited to those that are discussed in
this Prospectus, including those set forth in "Risk Factors."
A-55, Inc. (the "Company") is a Delaware corporation. Its predecessor was formed
as a Delaware limited partnership in November 1992 under the name A-55, L.P. In
January 1994, the Delaware limited partnership was reorganized as a Nevada
limited partnership (the "Predecessor"). Prior to the closing of this Offering,
the Predecessor will be merged with and into the Company, which was formed in
July 1997 but has not conducted any operations, with the Company continuing as
the surviving entity of such merger (the "Reorganization"). As a result of the
Reorganization, the partners of the Predecessor will become the sole
stockholders of the Company with the same proportionate ownership interests in
the Company as they owned in the Predecessor immediately prior to the
Reorganization. As used in this Prospectus, unless otherwise indicated,
references to the "Company" refer to A-55, Inc. and include the business and
operations of the Predecessor.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares
of Common Stock offered hereby are estimated to be approximately $
($ if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $ per share (which is the
midpoint of the estimated range of the initial public offering price) and after
deducting estimated underwriting discounts and commissions and offering
expenses.
The Company intends to use the net proceeds of the Offering for general
corporate purposes, including working capital to support the growth of the
Company's business relating to production, distribution, sales and marketing,
research and development, application engineering, and for the promotion and
development of both its initial target markets and longer term market
opportunities in the international and transportation sectors. The Company has
not yet determined the amount of funds that will be required for each such
application, as these requirements will depend upon the extent to which the
Company elects to purchase or lease future facilities and equipment, its ability
to identify and attract personnel in sales and marketing and other designated
areas, the rate of growth, if any, of future sales and the terms of such sales.
The Company will utilize a portion of the net proceeds to continue to
aggressively protect its intellectual property rights relating to the A-55
Technology.
Approximately $21.2 million will be used to repay the indebtedness of the
Company to Rudolf W. Gunnerman, who is the Chairman and Chief Executive Officer
of the Company ("R. W. Gunnerman"). The Company's indebtedness under certain
notes payable to R. W. Gunnerman was approximately $19.1 million as of October
5, 1998 and bears effective interest rates at the prime rate as charged from
time to time, and is currently 8.5% per annum, and would otherwise be payable at
dates ranging from on demand to February, 1999. The Company expects to incur
additional indebtedness to R. W. Gunnerman of $2.1 million to finance
partnership distributions in connection with the Reorganization on similar
terms. See "Certain Transactions."
Pending the foregoing uses, the proceeds will be invested in short-term,
investment-grade, interest-bearing securities.
DIVIDEND POLICY
The Company currently intends to retain future earnings for the development of
its business and does not anticipate paying cash dividends in the foreseeable
future. The Company's future dividend policy will be determined by its Board of
Directors on the basis of various factors, including the Company's results of
operations, financial condition, capital requirements and investment
opportunities.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the capitalization as of June 30, 1998 on (i) the
Predecessor's historical basis, (ii) a pro forma basis to give effect to the
Reorganization and (iii) a pro forma as further adjusted basis to give effect to
the sale by the Company of shares of Common Stock in the Offering and the
application of the estimated net proceeds therefrom. This table should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Use of Proceeds," the Financial Statements and
notes thereto of A-55, Inc. and the Predecessor, and the Unaudited Pro Forma
Combined Financial Statements and related notes included in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
--------------------------------------------
PRO FORMA
AS FURTHER
ACTUAL PRO FORMA ADJUSTED
------------ ------------ ----------
<S> <C> <C> <C>
Cash................................ $ 196,400 $ 196,400 $
============ ============ ========
Advances from R. W. Gunnerman and
related accrued interest due at
dates ranging from on demand to
February, 1999.................... $ 14,631,100 $ 16,776,400(1)
Partners' (deficit)/shareholders'
equity (deficit):
Partners' deficit................. (16,718,900) --
Preferred stock, $0.001 par
value.......................... -- --
Common stock, $0.001 par value.... --
Paid in capital................... -- (18,864,200)(1)
Retained earnings................. --
------------ ------------ --------
Total partners'
(deficit)/shareholders'
equity (deficit)....... (16,718,900) (18,864,200)
------------ ------------ --------
Total capitalization................ $ (2,087,800) $ (2,087,800)
============ ============ ========
</TABLE>
- -------------------------
(1) Gives effect to advances of $2,145,300 from R. W. Gunnerman to pay partner
distributions in connection with the Reorganization.
17
<PAGE> 19
DILUTION
The net tangible book value (deficit) of the Company as of June 30, 1998, after
giving effect to the Reorganization, was approximately $(18,864,200) or $( )
per share. Net tangible book value (deficit) per share represents the amount of
total tangible net assets of the Company reduced by the amount of its total
liabilities and divided by the total number of shares of Common Stock
outstanding. After giving effect to the sale of the shares of
Common Stock offered hereby at an assumed initial public offering price of
$ per share, after deduction estimated underwriting discounts and
commissions and offering expenses, proforma net tangible book value of the
Company at June 30, 1998 would have been approximately $ or $ per
share. This represents an immediate increase in net tangible book value of
$ per share to existing stockholders and an immediate dilution of $ per
share to new investors. The following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...... $
------
Net tangible book value per share before
Offering........................................ $ --
Increase attributable to new investors............. --
------
Pro forma net tangible book value per share after
Offering...........................................
------
Dilution per share of new investors.................. $
======
</TABLE>
The following table summarizes, on a pro forma basis after the Offering as of
June 30, 1998, the differences between the existing stockholders and the new
investors with respect to the number of shares of Common Stock purchased from
the Company, the total consideration paid to the Company and the average price
per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------- -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders............... -- --% $ -- --% $ --
New Investors....................... -- -- -- -- --
----- ----- -------- ----- ------
Total..................... -- --% $ -- --% $ --
===== ===== ======== ===== ======
</TABLE>
18
<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 1995,
1996 and 1997 and as of December 31, 1996 and 1997 have been derived from the
Financial Statements of the Predecessor, which have been audited by
PricewaterhouseCoopers LLP, independent accountants, included in this
Prospectus. The selected financial data for the years ended December 31, 1993
and 1994 and as of December 31, 1993, 1994 and 1995 have been derived from the
financial statements of the Predecessor, which have been audited but are not
contained herein. The financial data set forth below as it relates to the
balance sheet at June 30, 1998 and the related statements of operations for the
six months ended June 30, 1997 and 1998 are derived from the unaudited financial
statements of the Predecessor. Such unaudited financial statements, in the
opinion of management, have been prepared on the same basis as the audited
financial statements and include all significant adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the results
of the interim periods. The results of interim periods are not necessarily
indicative of the results of operations for the entire year. This information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the financial statements and
related notes of the Predecessor, and the Unaudited Pro Forma Combined Financial
Statements and related notes included in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------- -------------------------
1993 1994 1995 1996 1997 1997 1998
----------- --------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Expenses:
General and administrative...... $ 1,769,400 $ 465,000 $ 534,400 $ 989,000 $ 2,081,500 $ 943,200 $ 2,503,400
Research and development........ 291,300 214,300 19,600 184,900 1,927,200 601,300 254,700
Sales and marketing............. 6,000 94,200 500 559,500 623,800 253,600 281,500
Legal........................... 12,600 -- 243,600 152,300 852,400 43,800 135,400
Depreciation and amortization... 176,800 109,700 36,600 261,000 1,361,600 689,400 666,800
----------- --------- --------- ----------- ----------- ----------- -----------
2,256,100 883,200 834,700 2,146,700 6,846,500 2,531,300 3,841,800
Other income (expense):
Joint venture activities........ -- 780,600 (27,400) (383,000) -- -- --
Interest and other income....... 4,300 11,000 2,100 235,000 65,000 155,600 11,700
Interest expense................ (2,100) (9,400) (9,800) (7,300) (1,800) (1,800) --
Interest expense to related
parties....................... (26,700) (6,000) (9,000) (402,800) (755,200) (352,000) (544,400)
----------- --------- --------- ----------- ----------- ----------- -----------
Net income (loss)................. $(2,280,600) $(107,000) $(878,800) $(2,704,800) $(7,538,500) $(2,729,500) $(4,374,500)
=========== ========= ========= =========== =========== =========== ===========
Pro forma net income (loss), as
adjusted (1).................... $(6,781,500) $(3,830,100)
Pro forma net income (loss) per
share...........................
Pro forma weighted average common
shares outstanding(2)...........
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash....................... $ 1,085,300 $ 77,000 $ 5,700 $ 795,500 $ 783,800
Working capital
(deficit)................ (1,503,300) (624,800) (1,459,800) (9,655,100) (13,548,600)
Total assets............... 2,454,700 1,234,500 1,203,800 5,651,300 4,676,600
Advances from R. W.
Gunnerman and related
accrued interest......... 0 79,700 151,400 8,522,500 11,386,600
Total partners' capital
(deficit)/ stockholders'
equity................... (156,000) 517,900 (351,100) (4,805,900) (12,344,400)
<CAPTION>
AS OF JUNE 30, 1998
-----------------------------------------
PRO FORMA
AS FURTHER
ACTUAL PRO FORMA(3) ADJUSTED(4)
------------ ------------ -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash....................... $ 196,400 $ 196,400
Working capital
(deficit)................ (17,309,600) (19,746,400)
Total assets............... 3,668,200 3,668,200
Advances from R. W.
Gunnerman and related
accrued interest......... 14,631,100 16,776,400
Total partners' capital
(deficit)/ stockholders'
equity................... (16,718,900) (18,864,200)
</TABLE>
- -------------------------
(1) Pro forma net loss, as adjusted, reflects the combined historical net loss
of the Company and the Predecessor, adjusted for the reduction in interest
expense resulting from the application of $ million of estimated
proceeds of the Offering to repay advances from R. W. Gunnerman. See "Use of
Proceeds".
(2) See Unaudited Pro Forma Combined Financial Statements included in this
Prospectus.
(3) Gives effect to the Reorganization and partnership distributions to be
completed in connection with the Reorganization which will be financed with
additional advances from R. W. Gunnerman.
(4) Further adjusted to reflect the sale of shares of Common Stock
offered hereby and the application of the estimated net proceeds from the
Offering. See "Use of Proceeds."
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Financial Statements and the related notes
included in this Prospectus. Except for the historical information contained
herein, the discussion in this Prospectus contains certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this Prospectus. The
Company's actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include those
discussed in "Risk Factors," as well as those discussed elsewhere herein.
OVERVIEW
The Company is a development stage company and to date has focused its efforts
primarily on the development of A-55 Clean Fuels and the Company's current
extensive proprietary knowledge base (the "A-55(R) Technology"). A-55 Technology
includes both the formulae and methods for production of A-55 Additive, and the
related technology and know-how necessary to blend and use A-55 Clean Fuels in
specific combustion applications. If the Company is successful in implementing
its business strategy, the Company expects to complete its development stage by
the end of 1998.
In July 1994, the Company formed Advanced Fuels, L.L.C. ("Advanced Fuels"), with
Caterpillar owning a 51% equity interest and the Company owning the remaining
49%. The joint venture was formed to pursue commercial exploitation of the A-55
Technology in internal combustion engines. Under the joint venture agreement,
the Company received consulting fee revenue for services rendered to the joint
venture. These consulting fees have been netted against the Company's share of
joint venture losses. In October 1996, the Predecessor acquired Caterpillar's
51% interest in Advanced Fuels and the joint venture was dissolved.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
General and Administrative. General and administrative expenses increased
$1,560,200 or 165% to $2,503,400 for the six months ended June 30, 1998, from
$943,200 in the comparable time period in 1997, primarily due to the addition of
new members of the Company's senior management. The Company expects that general
and administrative expenses will continue to increase as it begins to
commercialize the A-55 Technology.
Research and Development. Research and development expenses decreased $346,600
or 58% to $254,700 for the six months ended June 30, 1998, from $601,300 in the
comparable time period in 1997. This decrease was primarily due to a greater
range of product testing during the six months ended June 30, 1997 compared to
the commensurate period in 1998. The Company expects that research and
development expenses will increase in future periods.
Sales and Marketing. Sales and marketing expenses increased $27,900 or 11% to
$281,500 for the six months ended June 30, 1998, from $253,600 in the comparable
time period in
20
<PAGE> 22
1997, primarily due to an increase in the Company's sales and marketing staff.
The Company expects that sales and marketing expenses will increase
substantially in future periods as it expands its sales and marketing staff and
associated activities. See "Business--Sales and Marketing."
Legal. Legal expenses incurred during the six month periods ended June 30, 1998
and 1997 consisted of costs related to general matters.
Depreciation and Amortization. Depreciation and amortization expense declined
$22,600 or 3% to $666,800 in the six months ended June 30, 1998 from $689,400 in
the comparable period in 1997. For each of the six-month periods ended on June
30, 1998 and 1997, the Company recorded amortization expense of $593,300
relating to the intellectual property obtained from the October 1996 dissolution
of Advanced Fuels. The decline in depreciation and amortization in the 1998
period relative to the prior year was due to certain equipment having become
fully depreciated in 1997.
Net loss. The net loss for the six months ended June 30, 1998 totaled
$(4,374,500) compared to a net loss of $(2,729,500) for the six months ended
June 30, 1997. The decrease in earnings was due primarily to the ongoing
development and commercialization efforts of the A-55 Technology.
Fiscal Years 1997, 1996 and 1995
General and Administrative. General and administrative expenses increased
$1,092,500 or 110% to $2,081,500 in 1997, from $989,000 in 1996. These expenses
increased $454,600 in 1996, or approximately 85%, from $534,400 in 1995. The
increases in 1997 and 1996 were primarily due to the continued growth of the
Company to support the ongoing development and commercialization of the A-55
Technology. The increases of general and administrative expenses in 1997
compared to 1996, and 1996 compared to 1995 were also due to the Company's
acquisition of Advanced Fuels in October 1996.
Research and Development. The Company's research and development expenses in
1997 increased $1,742,300 from $184,900 in 1996, which primarily represented
incremental costs incurred subsequent to the dissolution of the Advanced Fuels
joint venture in 1996. During 1995 and through October 1996, the level of
research and development activities performed directly by the Company was
insignificant. Research and development, specifically product testing, was the
primary operating activity of Advanced Fuels from its inception in July 1994
through its acquisition and dissolution in October 1996.
Sales and Marketing. Sales and marketing expenses in 1997 increased
approximately $64,300 or 11% to $623,800, from $559,500 in 1996, due to the
hiring of additional sales and marketing personnel in 1997 and increased
marketing activities. The Company first commenced sales and marketing activities
in 1996, and consequently these expenses were insignificant in 1995.
Legal. Legal expenses in 1997 were approximately $700,100 higher than the
$152,300 incurred during 1996 primarily as a result of the Company increasing
its legal reserve by $800,000. See "Legal Proceedings." Legal expenses in 1996
decreased $91,300 or 37% to $152,300 primarily due to the Company establishing a
$200,000 legal reserve relating to a lawsuit filed against in 1995. See "Legal
Proceedings."
Depreciation and Amortization. Depreciation and amortization expense in 1997 of
$1,361,600 represented amortization expense totaling $1,186,600 related to
intellectual
21
<PAGE> 23
property obtained in the acquisition of Advanced Fuels in October 1996 and
depreciation expense totaling $175,000. Depreciation and amortization in 1996 of
$261,000 represented amortization expense totaling $197,800 related to
intellectual property obtained in the acquisition of Advanced Fuels in October
1996 and depreciation expense totaling $63,200. There was no amortization
expense during 1995. The increase in depreciation expense in 1996 and subsequent
increase in 1997 was due to the acquisition of equipment necessary to the
development of the Company and its technology.
Joint Venture Activities. Joint venture activities for 1996 consisted of the
Company's equity share of net losses in Advanced Fuels totaling $1,133,000,
partially offset by consulting fees the Company received from Advanced Fuels
totaling $750,000. In 1995, the Company's equity share of joint venture net
losses of $1,027,400 was offset by consulting fees totaling $1,000,000. There
were no joint venture activities for 1997.
Net loss. The net loss in 1997 increased $4,833,700 from $2,704,800 in 1996
primarily due to higher general and administrative, legal and sales and
marketing expenses. The net loss in 1996 increased $1,826,000 from $878,800 in
1995 primarily due to the Company's portion of the loss generated by Advanced
Fuels prior to dissolution, the operating expenses incurred by the Company
subsequent to the acquisition and dissolution of Advanced Fuels as well as
increased activities to support the growth of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred losses in each fiscal year since its inception in
November 1992, and at June 30, 1998 had an accumulated deficit of approximately
$18,128,000. During the period from November 1992 through July 1994, the Company
financed its operations and product and market development primarily from equity
contributions and debt. From July 1994 through June 30, 1998, the Company
financed its operations and product and market development primarily through
cash received from international technology license agreements, participation in
the Advanced Fuels joint venture and cash advances from R. W. Gunnerman.
The Company used approximately $3,234,000 of cash to fund operations for the six
months ended June 30, 1998, which primarily relates to the net loss recognized
by the Company for such period offset by depreciation and amortization. Cash
used to fund operations for 1997 was $1,965,000 while cash generated by
operations for 1996 and 1995 was $457,400 and $322,100, respectively. Cash used
from operations for fiscal 1997 represents primarily the Company's net loss
offset by the deferred revenue associated with international technology license
agreements and depreciation and amortization. Cash generated from operations for
1996 and 1995 represents primarily Advanced Fuels joint venture activity,
partially offset by the Company's net losses each fiscal year.
The Company's cash used from investing activities of approximately $53,000 for
the six months ended June 30, 1998 consists of expenditures for fixed assets.
The investing activities for 1997, 1996 and 1995 were approximately $156,000,
$5,756,000, and $493,000, respectively. The investing activity for 1997
represents primarily fixed asset expenditures. The investing activity for 1996
represents the purchase of the outstanding interest of Advanced Fuels for
approximately $5,668,000 as well as approximately $88,000 of fixed asset
expenditures. The investing activity for 1995 represents cash contributions of
$490,000 to Advanced Fuels and approximately $3,000 of fixed asset expenditures.
The Company's financing activities for the six months ended June 30, 1998
primarily consist of approximately $2,700,000 of borrowings from R. W.
Gunnerman. The net cash
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<PAGE> 24
provided by financing activities for 1997, 1996, and 1995 consisted of proceeds
received of approximately $2,109,000, $6,089,000 and $99,000, respectively. The
net cash provided by financing activities for 1997 represents advances from R.
W. Gunnerman. The net cash provided by financing activities for 1996 represents
net advances of approximately $7,839,000 from R. W. Gunnerman and approximately
$1,750,000 of partner distributions. The net cash provided by financing
activities for 1995 represents insignificant advances from R. W. Gunnerman.
The net proceeds from the Offering are estimated to be $ , assuming the
Underwriters' over-allotment option is not exercised. The Company's future
capital requirements will depend upon numerous factors, including the rate of
market acceptance of the Company's products, and the terms of future sales. The
Company's cash needs will also be affected by whether it elects to purchase or
lease the facilities and equipment that are expected to be required to support
its growth. The Company anticipates that the net proceeds of the Offering
together with existing capital resources and cash generated from operations, if
any, would be sufficient to meet the Company's cash requirements for the next 12
months at its anticipated level of operations. However, the Company may seek
additional financing during the next 12 months. There can be no assurance that
any additional financing will be available to the Company on acceptable terms,
or at all, when required by the Company.
YEAR 2000 COMPLIANCE
Currently, many hardware and software systems represent year data with two
instead of four digits (e.g. "01" instead of "2001"). This may cause such
hardware and software systems to produce erroneous results and/or to malfunction
when processing dates after December 31, 1999. As a result, many companies'
software and hardware systems may need to be upgraded or replaced in order to
correctly process dates after December 31, 1999 (that is, so as to be "Year 2000
compliant"). The Company is evaluating the Year 2000 compliance issue as it
relates to the Company's internal computer system and equipment with embedded
technology such as microcontrollers, which are not extensive given the limited
nature of the Company's operations to date. The Company believes that its
existing information technology system is Year 2000 compliant. With regard to
third parties, the Company has not yet developed material supplier or customer
relationships, other than with lessors of leased telephone lines, suppliers of
telephone service and electric power, and therefore the Company has not yet
attempted to evaluate whether such third party systems are Year 2000 compliant.
As the Company's operations grow, its exposure to Year 2000 compliance issues
relating to its internal systems and those of third parties will become
increasingly important. As the Company acquires additional information
technology and embedded technology systems in the future, it intends to only
purchase systems that are Year 2000 compliant. As the Company increases its
reliance on suppliers and customers, it plans to evaluate their Year 2000
compliance on a case by case basis. The lack of Year 2000 compliance on the part
of its key suppliers and customers could interrupt the operations of these
suppliers and customers and their ability to provide materials to, or purchase
products from, the Company. To date, the Company's costs in connection with its
Year 2000 evaluation have been limited to internal staff costs, which have been
expensed as incurred and have not been material. The Company does not presently
anticipate utilizing outside consultants in connection with its Year 2000
compliance. The Company does not expect that Year 2000 compliance will be a
significant cost of information and embedded technologies that it may acquire in
the future.
23
<PAGE> 25
BUSINESS
In addition to the historical information contained herein, this Prospectus
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results may differ significantly from those discussed herein.
Factors that might cause such differences include, but are not limited to, those
discussed in "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," as well as those discussed
elsewhere in this Prospectus.
OVERVIEW
The Company has developed, tested and begun to commercialize proprietary
petroleum-based fuel products known as "A-55 Clean Fuels" that are both less
expensive to use and environmentally "cleaner" than many fossil fuels used
today. A-55 Clean Fuels are produced using the Company's principal product, A-55
Additive, a proprietary formulation allowing for the stable blend of water and
almost any petroleum product, including relatively inexpensive "bottom of the
barrel" tar-like residues and residual oils that result from the process of
refining crude oil ("Residues"). The Company believes that A-55 Clean Fuels can
be produced at a cost that is less, when compared on an energy equivalent basis,
than that of natural gas or almost any refined petroleum fuel product that is
consumed in large volumes to generate electricity as well as in many other
combustion applications.
Combustion tests of A-55 Clean Fuels by the Company, as well as by independent
agencies such as the EPA, demonstrate that A-55 Clean Fuels significantly reduce
emissions of NOx and harmful particulate matter, while maintaining a high energy
output by efficiently burning the carbon content of the fuel's petroleum base.
The tests also demonstrate that A-55 Clean Fuels are effective substitutes for
fossil fuels in a wide variety of applications including open-flame combustion,
such as electricity generation boilers, combustion turbines and internal
combustion engines. In addition, A-55 Clean Fuels have superior handling and
safety characteristics compared to those of other fossil fuels, including
natural gas.
The Company believes that, due to their relative cost and emissions benefits,
A-55 Clean Fuels will have broad application in a number of market segments. For
its initial commercialization of A-55 Clean Fuels, the Company has targeted the
domestic electricity generation market, one of the largest users of fossil
fuels, which consumed 4.8 billion gallons of refined petroleum products and 2.7
trillion cubic feet of natural gas in 1996. With deregulation of the electric
utility industry occurring at a rapid pace, utilities and independent power
producers are searching for ways to become more cost competitive. Because fuel
represents the largest variable operating expense of fossil fuel fired
electricity generating units, the Company expects A-55 Clean Fuels to be well
received by this market. The Company has received an initial purchase order that
will require the delivery of sufficient A-55 Additive to produce up to 70,000
barrels (2.9 million gallons) of A-55 Clean Fuels for Commonwealth Edison, an
electric utility with 1997 annual revenues of $7.1 billion. Such fuel is to be
consumed during the start-up phase of Commonwealth Edison's usage of A-55 Clean
Fuels at one of the five boilers located at its 2,600 megawatts ("MW") Collins
Plant located near Chicago.
The Company intends to pursue the sale of A-55 Additive through two principal
distribution channels: direct sales to electricity generators and other large
fuel consumers
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<PAGE> 26
that elect to blend A-55 Clean Fuels, and to Company approved distributors, such
as petroleum refiners. The Company believes that petroleum refiners will play an
important role in the production and distribution of A-55 Clean Fuels. In
addition, the Company believes that petroleum refiners will also be an important
source of the base Residue and other refined petroleum products for fuel
consumers that elect to blend their own A-55 Clean Fuels.
In 1996, the petroleum refining industry supplied approximately 4.2 billion
gallons of No. 6 fuel oil to electricity generators in the United States. No. 6
fuel oil consists of Residues that are generally blended or "cut" with more
refined petroleum products (typically called "cutter stock") to produce a fuel
that satisfies handling and usage specifications. By using A-55 Additive,
refiners will be able to blend Residues with water, instead of more expensive
cutter stock, to produce A-55 Clean Fuels that meet the specifications for No. 6
fuel oil. The Company expects the cost of A-55 Clean Fuels based on Residues
("Residue-Based A-55 Clean Fuels") to consumers will be lower on an energy
equivalent basis than No. 6 fuel oil, based on current and historical market
prices of No. 6 fuel oil.
The Company expects that the demand for A-55 Clean Fuels will be further
enhanced by the increasingly stringent restrictions on NOx and other harmful
emissions, such as those mandated by the federal Clean Air Act. Faced with these
restrictions and the prospect of increased competition from deregulation, U.S.
electric utilities that burn large quantities of coal and other "dirty" fossil
fuels are under considerable pressure to evaluate cost-effective alternatives to
generate electricity. The Company believes that electricity generators will
likely respond to such pressure by, among other things, burning "cleaner" fuels
or investing in expensive new emissions control technology. Internationally,
demand for electricity is expected to nearly double during the 25-year period
ending 2020, much of which is expected to be met by the combustion of fossil
fuels. Because air pollution already represents a major health hazard in a large
number of urban areas, many foreign governments are imposing or are expected to
impose regulatory programs to promote the development of more environmentally
responsible means of generating electricity. The Company believes that A-55
Clean Fuels will allow electricity generators and other large fossil fuel
consumers, both in the U.S. and abroad, to reduce harmful NOx emissions without
investing in costly emissions control technologies.
The Company's strategy is to aggressively pursue an extensive branding and
marketing campaign aimed at penetrating the following target markets:
- - Electricity Generators--Electric utilities, independent power producers and
large industrial and commercial electricity generators consume substantial
volumes of fossil fuel. The Company intends to further segment this market by
fuel usage:
- No. 6 Fuel Oil and Natural Gas--A-55 Clean Fuels can serve as a
cost-effective and environmentally responsible substitute for these
fuels.
- Coal--A-55 Clean Fuels can be used in combination with coal in
coal-fired electricity generating plants to help them comply with
the strict NOx emissions regulations being phased in through the
year 2000 and thereafter.
- - Petroleum Refiners--Refiners are currently well-positioned to profitably
produce, market and distribute A-55 Clean Fuels to the ultimate consumer. The
Company intends to form strategic alliances with petroleum refiners in order
to access electric utilities and
25
<PAGE> 27
other large fossil fuel consumers by taking advantage of the existing supply
relationships that refiners maintain with such fuel consumers.
- - International Markets--The Company believes that through strategic alliances
with well-positioned local companies, including energy suppliers, it can
capitalize on the increasing demand for electricity and the growing awareness
of environmental concerns in both industrialized and developing countries
abroad.
The Company intends to produce A-55 Additive at a commercial facility being
completed near its headquarters in Reno, Nevada. Additionally, the Company plans
to build a number of production facilities at strategic regional locations that
will allow it to meet the demands of its customers.
A-55 TECHNOLOGY & PRODUCTS
Development. In 1988, the Company's founder, R. W. Gunnerman, began a
decade-long research and development effort with the goal of creating stable
blends of water and petroleum products for use in combustion applications. This
effort led to the creation of the A-55 Technology that includes both the
formulation and method for production of A-55 Additive, and the related
technology and know-how necessary to blend and use A-55 Clean Fuels in specific
combustion applications.
The research and development effort, initially conducted by R. W. Gunnerman, and
commencing in 1992 by A-55, L.P. (the Delaware limited partnership which
preceded the Predecessor) was first focused on smaller applications such as
internal combustion engines. In 1993, the Company began customer field tests in
a transit bus and has since conducted further customer field tests of A-55 Clean
Fuels in a variety of applications. Concurrent with its work on internal
combustion engines, the Company expanded its focus by exploring the use of A-55
Clean Fuels in large stationary applications such as electricity generating
boilers and combustion turbines. The Company's testing and research led to the
development of A-55 Clean Fuels designed specifically for use in large
electricity generating and industrial applications as a cost-competitive fuel
that reduces NOx.
A-55 Additive. The Company's primary product is A-55 Additive, a proprietary
liquid formulation that allows the stable blending of petroleum products and
water. A-55 Additive includes a number of components that enhance the stability
of the blend and facilitate combustion of A-55 Clean Fuels in a variety of
commercial applications. While the Company maintains tight controls on the
formulation of A-55 Additive, all of its constituent ingredients are
commercially available from one or more national or international suppliers.
A-55 Clean Fuels. A-55 Clean Fuels are water and petroleum blends, with A-55
Additive used as the blending agent. In most commercial applications, A-55 Clean
Fuels typically contain by volume approximately 30% water and 70% petroleum
products, with A-55 Additive representing approximately 0.5%. The water content
in A-55 Clean Fuels allows less refined and typically less expensive refined
petroleum products such as Residues and naphtha to be utilized in combustion
applications where such products could not normally be burned without special
treatment, such as advance heating of Residues because of their difficult
handling characteristics. By utilizing A-55 Additive, almost any petroleum
product, even crude oil, can be blended with water. Even when produced with
"bottom of the barrel" petroleum Residues, A-55 Clean Fuels have significantly
reduced emissions of NOx upon combustion as compared with No. 6 fuel oil based
on similar Residues.
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<PAGE> 28
Residue-Based A-55 Clean Fuels are liquids at temperatures down to 21 degreesF,
which allows them to be stored, pumped and transported in a manner similar to
more refined petroleum fuel products, such as gasoline and diesel. This
represents an important advantage over conventional No. 6 fuel oils, which are
generally so thick that they must be heated to temperatures as high as 160
degreesF to maintain their usable viscosity. A-55 Clean Fuels can also be burned
in most combustion applications with relatively minor modifications to existing
equipment. In addition, by varying their petroleum base product, A-55 Clean
Fuels can be produced to meet the particular specifications of a given customer
for criteria such as desired viscosity and levels of sulphur or heavy metal
content. Safety is another significant advantage of A-55 Clean Fuels. Due to
their water content, they have a higher "flash point," making them less likely
to explode when they come into contact with a spark or an open flame at room
temperature than many conventional petroleum products or natural gas.
INDUSTRY OVERVIEW
The Company believes that three important trends will lead to significant market
demand for A-55 Clean Fuels:
- - Continued Growth in Energy Consumption--demand for energy--especially
electricity--continues to grow throughout both industrialized and developing
nations;
- - Deregulation of Electric Utility Industry--cost pressures on domestic
electricity generators are increasing as many states move to deregulate
electric utilities and open the industry to greater competition; and
- - Increasing Environmental Regulation--concern about the environmental harm
caused by the burning of fossil fuels has increased, leading to more stringent
air quality regulations in both the United States and the rest of the world.
Continued Growth in Energy Consumption
The Company believes that it is well-positioned to capitalize on the expected
steady increase in the demand for energy throughout the world, which is
projected to continue for the foreseeable future. The table below sets forth the
increases in energy consumption projected by the Energy Information
Administration of the U.S. Department of Energy ("EIA") for the 25-year period
ending in the year 2020.
WORLD ENERGY CONSUMPTION BY REGION, 1995-2020
(IN QUADRILLION BTU)
<TABLE>
<CAPTION>
COMPOUND ANNUAL
REGION HISTORICAL PROJECTED GROWTH RATE
------ ---------- -------------- ---------------
1995 2010 2020 (1995-2020)
---------- ----- ----- ---------------
<S> <C> <C> <C> <C>
United States........................ 90.4 112.2 118.6 1.1%
Other Industrialized Nations......... 108.7 135.3 152.9 1.4%
Rest of World........................ 166.3 272.0 367.9 3.2%
----- ----- -----
Total...................... 365.4 519.5 639.4 2.3%
===== ===== =====
</TABLE>
Sources: EIA, Office of Energy Markets and End Use; International Statistics
Database and International Energy Annual 1996, DOE/EIA-2019(96) (Washington, DC,
February 1998); World Energy Projection System (1998).
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<PAGE> 29
As reflected in the table above, energy consumption in the U.S. and other
industrialized nations during the 25-year period from 1995 to 2020 is projected
to increase by over 30%. During the same period, energy consumption in the
developing nations is projected to increase by over 150%.
As reflected in the table below, fossil fuels are expected to continue to
provide the vast majority of the world's energy supply.
WORLD ENERGY CONSUMPTION BY ENERGY SOURCE, 1995-2020
(IN QUADRILLION BTU)
<TABLE>
<CAPTION>
COMPOUND ANNUAL
ENERGY SOURCE HISTORICAL PROJECTED GROWTH RATE
------------- ---------- -------------- ---------------
1995 2010 2020 (1995-2020)
---------- ----- ----- ---------------
<S> <C> <C> <C> <C>
Oil.................................. 142.5 195.5 237.3 2.1%
Natural Gas.......................... 78.1 133.3 174.2 3.3%
Coal................................. 91.6 123.6 156.4 2.2%
Nuclear.............................. 23.3 24.9 21.3 (0.4%)
Renewables........................... 30.1 42.4 50.2 2.1%
----- ----- -----
Total...................... 365.4 519.5 639.4 2.3%
===== ===== =====
</TABLE>
Sources: EIA, Office of Energy Markets and End Use, International Statistics
Database and International Energy Annual 1996, DOE/EIA-2019(96) (Washington, DC,
February 1998); World Energy Projection System (1998).
The Company believes that in order to satisfy the increasing demand for
electricity generated with fossil fuels, electricity generators will continue to
seek new technologies that allow for cost-effective means of burning fossil
fuels in an environmentally responsible manner.
Deregulation of Electric Utility Industry
In recent years, a number of states, including California, Illinois,
Massachusetts, New York, Pennsylvania and Rhode Island, have adopted legislative
or regulatory initiatives aimed at promoting competition in the electricity
generation industry and reducing the price of electricity to customers. These
initiatives have placed significant pressure on electric utilities and other
electricity generators to reduce costs in order to compete in a less regulated
environment. Because the price of fuel represents the largest variable operating
expense of fossil fuel fired electricity generators, the Company believes that
this trend toward deregulation will cause the industry to continue to seek the
lowest cost energy sources and to comply with increasingly stringent
environmental regulations in the most cost-effective manner.
Increasing Environmental Regulation
Over the last few decades, governments in both industrialized and developing
nations throughout the world have struggled to mitigate the harmful effects of
emissions from the increased consumption of fossil fuels while relying on those
fuels to provide a majority of the global energy supply necessary for economic
growth. As environmental concerns have grown, many governments have enacted
increasingly stringent regulatory programs in response to the negative impact
that the burning of fossil fuels has on the environment.
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<PAGE> 30
These regulatory programs are likely to increase the demand for viable,
affordable and environmentally "clean" fuels, such as A-55 Clean Fuels.
Under the Clean Air Act, the EPA has exercised its authority to set national
ambient air quality standards for six "criteria pollutants," including NOx, that
cause adverse public health and environmental effects. Areas that are in
violation of the national ambient air quality standards are designated
"non-attainment areas" and may face federal sanctions. In 1996, electric
utilities and other stationary sources were responsible for approximately 45% of
the total NOx emissions in the United States, and the EPA estimates that
coal-fired electricity generating plants account for over 90% of the total NOx
emissions from all electric utilities. In an effort to address NOx emissions,
the EPA has adopted a variety of regulations under the Clean Air Act that are
being phased in through the year 2000 and thereafter.
While the regulatory climate worldwide is at varying stages of development
compared to the United States, many foreign countries have also established some
form of environmental policy framework that regulates pollution caused by fossil
fuel consumption. The Company believes that worldwide regulation of
environmental pollutants will stimulate demand in international markets for NOx
control technologies and cleaner fuels, such as A-55 Clean Fuels.
TARGET MARKETS
The Company has identified the target markets discussed below that it believes
will constitute significant sources of demand for its products.
Electricity Generation Industry
In 1996, electricity generation in the United States exceeded 3 trillion
kilowatt hours. Electricity is generated using a variety of methods, determined
by, among other things, the availability and cost of fuels and overall energy
demand. The most common methods are steam-turbine generating units ("boilers")
and natural gas-fired or petroleum-fired combustion turbines ("turbines"). The
EIA estimates that in 1996 approximately 63% of electricity generating capacity
in the United States was supplied by boilers, which consumed 4.8 billion gallons
of petroleum, 874 million short tons of coal and 2.7 trillion cubic feet of
natural gas.
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<PAGE> 31
The following graph shows the primary energy sources for the net generation of
electricity by electric utilities in the United States in 1996.
U.S. ELECTRIC UTILITY NET GENERATION BY ENERGY SOURCE, 1996
[U.S. ELECTRIC UTILITY NET GENERATION GRAPH]
Source: EIA Electric Power
Annual 1996
Fuel represents the largest variable operating expense of fossil fuel fired
electricity generating units. Because market prices for Residues tend to be
lower than those of almost all other petroleum products, the Company believes
that Residue-Based A-55 Clean Fuels will represent a cost-effective fuel
substitute to the electricity generation market. To gain market acceptance of
its product in this market, the Company initially plans to price A-55 Additive
at a level that will allow electricity generators to burn Residue-Based A-55
Clean Fuels at a cost that does not exceed $2.00 per million Btu ("MmBtu"),
which compares favorably with the market price of No. 6 fuel oil and natural gas
in recent years. The table below sets forth the average annual delivered cost of
No. 6 fuel oil and natural gas for electric utilities for each of the years
1992-1997.
AVERAGE DELIVERED COST OF FUEL TO U.S. ELECTRIC UTILITIES
(NO. 6 FUEL OIL VS. NATURAL GAS)
<TABLE>
<CAPTION>
NO. 6 FUEL OIL NATURAL GAS
($/MMBTU) ($/MMBTU)
-------------- -----------
<S> <C> <C>
1992................. $2.47 $2.33
1993................. 2.36 2.56
1994................. 2.41 2.23
1995................. 2.58 1.98
1996................. 3.03 2.64
1997................. 2.79 2.76
</TABLE>
Source: EIA, Cost and Quality of Fuels for Electric Utility Plants, 1992-97
Tables
Note: The indicated delivered cost represents annual averages; the actual
delivered cost varied significantly throughout each year.
No. 6 Fuel Oil. In certain regions of the United States, No. 6 fuel oil is a
significant fuel source for generating electricity. This is the case even though
combustion of No. 6 fuel oil tends to emit significant quantities of NOx and
other harmful air pollutants and despite the additional costs and inconvenience
of heating the fuel to facilitate its handling. In
30
<PAGE> 32
1996, a total of five states (New York, Connecticut, Massachusetts, Florida and
Hawaii) together received over 80% of the 4.1 billion gallons of the No. 6 fuel
oil delivered to U.S. electric utilities.
The Company has identified four electric utilities in Florida and Hawaii that
own or operate oil-fired boilers with a combined generating capacity of 10,778
MW. The Company plans to focus significant marketing resources on these four
companies as potential purchasers of A-55 Clean Fuels. However, no assurances
can be made that the Company's efforts with these companies will be successful.
By way of example, the Company estimates that a single 250 MW oil-fired boiler
would consume approximately 22 million gallons of Residue-Based A-55 Clean Fuels
per year. The production of this quantity of A-55 Clean Fuels would require
approximately 110,000 gallons of A-55 Additive. Because oil-fired boilers
generally serve as peak generating facilities, the foregoing example assumes the
boiler would operate at 10% of capacity.
The major determinants of the cost of producing No. 6 fuel oil are the price of
its base Residue and the price and the quantity of cutter stock, if any,
required to be blended with the Residue to meet required specifications for No.
6 fuel oil. Residues vary considerably in terms of their viscosity, sulfur
content and other physical characteristics, based largely on the type of crude
oils from which the Residues are derived and the extent to which such Residues
have been refined. In general, the "heavier" or thicker the Residue, the lower
its price because a greater quantity of the more expensive cutter stock must be
blended with it for the final fuel oil product to meet required specifications.
While the cutter stock improves certain handling and other characteristics of
the fuel, it generally has a somewhat lower Btu content than most Residues.
Thus, the Btu content and cost of a given No. 6 fuel oil generally reflect the
combined Btu content and cost of both its Residue and cutter stock, if any.
Residue-Based A-55 Clean Fuels are cost competitive relative to No. 6 fuel oil
primarily because they derive all of their Btu content from the low-cost Residue
while No. 6 fuel oil derives its Btu content from both its base Residue and from
any cutter stock with which the Residue is blended.
Based upon historical and current pricing trends of No. 6 fuel oil and current
price information about Residues, the Company believes that it will have
significant flexibility in pricing A-55 Additive so that A-55 Clean Fuels are
cost competitive with No. 6 fuel oil. In addition, Residue-Based A-55 Clean
Fuels are able to utilize the same infrastructure as No. 6 fuel oil, minimizing
the cost to utilities of switching to A-55 Clean Fuels.
Natural Gas. Natural gas represents an important fuel source for the generation
of electricity in the United States. In 1996, the U.S. electricity generation
industry consumed 2.3 trillion cubic feet of natural gas in electricity
generation boilers either as a primary fuel source or as a secondary fuel in
many of the gas-fired boilers that can also burn No. 6 fuel oil. The Company
believes that most gas-fired boilers are capable of burning A-55 Clean Fuels
with minimal modification.
The Company has received an initial purchase order that will require sufficient
A-55 Additive to produce 70,000 barrels (2.9 million gallons) of A-55 Clean
Fuels to use during the start-up phase of Commonwealth Edison's usage in one of
the five boilers located at its 2,600 MW Collins Plant located near Chicago. The
five boilers at the Collins Plant, which is currently used as a peak generating
facility, are capable of burning both No. 6 fuel oil and natural gas and each
have a 525-550 MW capacity. The Company estimates that a 525 MW dual-fired
boiler using A-55 Clean Fuels as a primary fuel would consume
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<PAGE> 33
approximately 44 million gallons of Residue-Based A-55 Clean Fuels per year. The
production of this amount of A-55 Clean Fuels would require approximately
220,000 gallons of A-55 Additive. Because dual-fired boilers generally serve as
peak generating facilities, the foregoing example assumes the boiler would
operate at 10% of capacity. There can be no assurance that the start-up phase
will be successful or that Commonwealth Edison will purchase additional A-55
Clean Fuels for use in this or any other facility.
Based upon historical and current pricing trends of natural gas and current
price information about Residues, the Company believes that A-55 Clean Fuels
could be used in many boilers at a lower cost on an energy equivalent basis than
natural gas and that it will have significant flexibility in pricing A-55
Additive for sale to this market.
Coal. Coal is a low-cost but relatively "dirty" fuel that is the primary fuel
burned to generate electricity in certain regions of the United States.
Coal-fired electricity generating plants tend to have high NOx emissions. The
Company believes that the operators of most coal-fired electricity generating
plants are in the process of evaluating alternative technical strategies for
controlling NOx emissions to comply with various regulations adopted by the EPA
under the Clean Air Act being phased in by the year 2000 and thereafter. In
performing this evaluation, and in light of ongoing deregulation of the electric
utility industry, the Company believes that coal-fired plant operators are
searching for cost-effective solutions, particularly alternatives to the
substantial capital costs associated with either replacing or retrofitting
existing plants with emissions control technology. See "--Competition--Emissions
Control Technologies" and "--Industry Overview--Increasing Environmental
Regulation."
The Company believes that an effective alternative available to these plant
operators is to implement reburning as a strategy to control NOx emissions to
comply with the Clean Air Act. Reburning is a NOx control technology for boilers
in which a portion of the fuel (typically up to 20% of the total Btu content of
the plant's fuel) is injected downstream of the main burners to establish a fuel
rich zone where NOx gases resulting from the primary burn are reduced to
harmless nitrogen gas. Compared with other NOx emissions control technologies,
the capital costs of reburning are, depending on the boiler size and type,
relatively low. At current market prices, coal is generally less expensive than
most reburn fuels, so the Company believes that coal-fired electricity
generators will only use A-55 Clean Fuels as a reburn fuel, not as a substitute
for coal as the primary fuel, within coal-fired plants that endeavor to reduce
NOx emissions.
While most reburn installations to date (a majority of which have been in
European countries) have employed natural gas as the reburn fuel, utilizing
other less expensive reburn fuels could have significant economic benefits.
Tests have demonstrated that Residue-Based A-55 Clean Fuels yield comparable NOx
emissions reductions at competitive costs, or at a lower cost at current market
fuel prices, than natural gas and other fuels in most reburn applications. Many
coal-fired plants do not have direct access to a natural gas pipeline, thereby
significantly increasing the total cost of utilizing natural gas as a reburn
fuel in these facilities.
The Company estimates that a single 300 MW coal-fired baseload boiler operating
at 100% of capacity, employing a reburn strategy with Residue-Based A-55 Clean
Fuels providing it with 20% of its Btu fuel content, would consume approximately
53 million gallons of
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Residue-Based A-55 Clean Fuels per year, which represents usage of approximately
264,000 gallons of A-55 Additive.
Tennessee Valley Authority ("TVA") is evaluating the use of A-55 Clean Fuels to
maintain maximum flexibility in its NOx compliance strategy. There can be no
assurance that future testing will be successful or that TVA will purchase A-55
Clean Fuels for use in any of its facilities.
The Company has also identified 10 companies that own or operate more than half
of the coal-fired boiler units in 17 eastern states with combined generating
capacity of 132,577 MW. The Company intends to focus its A-55 Clean Fuels reburn
marketing efforts on those electric utilities with coal-fired boilers that are
subject to the NOx control regulations under the Clean Air Act because the
Company believes that these utilities are among the most likely to consider
adopting a reburn strategy to comply with NOx emissions standards. See "Risk
Factors--Uncertainty of Acceptance of Reburn Technology."
Petroleum Refining Industry
Virtually all of the refined petroleum products that are consumed in electricity
generating boilers and turbines are supplied, directly or indirectly, by the
petroleum refining industry. The Company believes that many electricity
generators and other large fuel customers that elect to use A-55 Clean Fuels
will seek to purchase that fuel product from petroleum refiners, representing a
significant distribution channel and market opportunity for the Company to sell
A-55 Additive.
The process of refining crude oil yields significant quantities of Residues,
such as atmospheric residue and vacuum residue. Depending on the type of crude
oil refined, these Residues can account for 15% to 45% by volume of the refined
petroleum. One manner in which refiners dispose of Residues is by blending or
"cutting" them with lighter and more expensive cutter stock to create No. 6 fuel
oil, in which the cutter stock may constitute up to 40% of its volume.
With A-55 Additive, refiners will be able to blend Residues with water
(including a refinery plant's hydrocarbon contaminated wastewater that would
otherwise require costly treatment to meet environmental standards for disposal)
to create A-55 Clean Fuels instead of blending Residues with more expensive
cutter stock to produce No. 6 fuel oil. For these reasons, the Company believes
that Residue-Based A-55 Clean Fuels represent an opportunity for refiners to
continue to sell Residue-based fuels at acceptable prices while freeing up the
more valuable cutter stock for other uses. The Company believes that, based on
historical prices of No. 6 fuel oil and its current price information about
Residues, refiners will be able to supply Residue-Based A-55 Clean Fuels at a
lower price, when measured on an energy equivalent basis, than No. 6 fuel oil.
Due to the cost advantages of producing Residue-Based A-55 Clean Fuels, the
Company believes that refiners may be encouraged to produce A-55 Clean Fuels
from Residues rather than producing more refined petroleum products such as No.
6 fuel oil.
International Markets
In 1996, approximately 75% of the petroleum products consumed worldwide were
consumed outside the United States. Similarly, in 1995 (the most recent year
such data is available), over 80% of the residual fuel oils consumed worldwide
were consumed outside
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the United States. The Company believes that there are significant opportunities
to market its products outside the United States, particularly in countries that
are large consumers of petroleum products.
Coal is expected to fuel a significant portion of the energy needed to meet the
increased global demand for electricity. The EIA expects global coal consumption
to increase 52% over the next 20 years. Governments of both industrialized and
developing nations around the world have enacted, and the Company believes will
continue to enact, increasingly stringent regulations that will require both
electricity generators and other industries that consume large quantities of
coal and other fossil fuels to reduce their NOx emissions.
While the Company intends to continue to explore, and to the extent
opportunities are developed, pursue the international market for its products,
it believes that the more immediate opportunity exists in the domestic markets.
Transportation Sector
The transportation sector is one of the largest users of fossil fuels. This
sector includes on-road vehicles such as automobiles, buses and trucks, as well
as off-road vehicles such as mine excavation, farm and construction equipment,
and consumed approximately 180 billion gallons of refined petroleum products in
the United States in 1996. The sale of fuel for, and modification of, internal
combustion engines and vehicles are highly regulated in the United States. For
example, engines and vehicles may not be sold in the United States unless they
have been certified by the EPA as meeting certain prescribed emission standards.
The process of certification is both time consuming and costly.
Because the transportation sector produces approximately 50% of all NOx
emissions in the United States, the Company believes that the sector is a
significant potential market for A-55 Clean Fuels due to their significant NOx
reducing characteristics. Before the Company can successfully market to this
sector, however, it must complete testing and obtain certification of a variety
of internal combustion engines as modified to use A-55 Clean Fuels and obtain
requisite federal, state and local approvals of A-55 Clean Fuels. Completion of
sufficient engine testing to penetrate a significant portion of this market
segment is not expected to be completed in the short term. As a result, the
Company does not expect that the U.S. sales of its products to this sector will
make a significant contribution to its revenues in the short to medium term.
STRATEGY
The Company's strategy is to aggressively pursue an extensive branding and
marketing campaign aimed at penetrating the following target markets:
- - Electricity Generators--Electric utilities, independent power producers and
large industrial and commercial electricity generators consume substantial
volumes of fossil fuel. The Company intends to further segment this market by
fuel usage:
- No. 6 Fuel Oil and Natural Gas--A-55 Clean Fuels can serve as a
cost-effective and environmentally responsible substitute for these
fuels.
- Coal--A-55 Clean Fuels can be used in combination with coal in
coal-fired electricity generating plants to help them comply with the
strict NOx emissions regulations being phased in through the year 2000
and thereafter.
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- - Petroleum Refiners--Refiners are currently well-positioned to profitably
produce, market and distribute A-55 Clean Fuels to the ultimate consumer. The
Company intends to form strategic alliances with petroleum refiners in order
to reach electric utilities and other large fossil fuel consumers by taking
advantage of the existing supply relationships that refiners maintain with
such fuel consumers.
- - International Markets--The Company believes that through strategic alliances
with local companies, including energy suppliers, it can capitalize on the
increasing demand for electricity and the growing awareness of environmental
concerns in both industrialized and developing countries abroad.
The Company intends to develop the "A-55" brand in order to differentiate itself
and its products from those of potential competitors through an aggressive
advertising campaign that promotes the Company's technology and products.
SALES AND MARKETING
The Company intends to market A-55 Clean Fuels both domestically and
internationally through its sales and marketing staff and senior management.
Each member of the sales and marketing staff is assigned a responsibility for
developing specific high-level relationships with existing customers and future
prospective accounts. In addition, the Company intends to pursue a variety of
business relationships, such as strategic alliances and business ventures with
petroleum refiners, fuel traders, energy brokers and their respective customers
so that they become integrated with the Company's marketing efforts.
Direct Sales. The Company anticipates that direct sales will be its most
productive marketing and sales channel, and therefore expects to rely heavily on
its sales and field service representatives. Typically, electricity generators
will be contacted at the corporate level and introduced to A-55 Clean Fuels. An
initial meeting with the potential customer's fuel buyers and representatives
from the asset allocation and planning department will be held to discuss the
cost and emissions benefits of A-55 Clean Fuels. In follow-up visits, the
Company's field service representatives will work directly with the customer to
verify fuel specification requirements and to discuss the logistics for
manufacturing and supplying the fuel. Once a purchase order is received from a
customer, the field service representatives will assist the customer in
implementing its use of A-55 Clean Fuels.
The Company currently has eleven employees in its sales and marketing divisions
and intends to expand this staff in the near future. Such expansion will include
the addition of sales and field service representatives. There can be no
assurances that the Company will be successful in building a sufficiently large
sales and marketing team and sales force with requisite technical expertise to
address the target markets.
Petroleum Refiners, Fuel Traders and Energy Brokers. The Company expects to
supplement its direct sales efforts by forming relationships with petroleum
refiners, fuel traders and energy brokers and plans to utilize this network to
market to potential electricity generator customers. The Company may authorize
the petroleum refiners, traders and brokers to solicit customers and initiate
preliminary negotiations with customers on behalf of the Company.
Strategic Alliances with Key Customers. The Company believes that certain of its
customers will serve as another channel through which it will market and
distribute its products. Many large electricity generators have the capability
to store a substantial
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inventory of fuel product, and they may serve as distribution centers of A-55
Clean Fuels for their own and others' requirements.
International Markets. The Company believes that the most effective way to
penetrate foreign markets is through strategic alliances with entities having
familiarity with the local political and regulatory environment. The Company's
approach to date has been to structure licensing arrangements such that the
Company will sell A-55 Additive to the licensee at an established price and the
licensee will resell the A-55 Additive or use it to produce and sell A-55 Clean
Fuels.
The Company has entered into four international licenses: one covering
Australia, New Zealand and Papau New Guinea (the "Australian License"); one
covering the Republic of Korea and the Democratic People's Republic of Korea
(the "Korean License"); and two covering the Russian Federation (the "Russian
Licenses"). The licenses provide for equity participation by the Company in the
licensees. Each license also provides for certain initial territorial license
fees plus an on-going royalty which ranges from 0.5% to 1.0% of the sales in the
applicable territory. The initial territorial license fees under the Australian,
Korean and Russian Licenses amount to $35.0 million in the aggregate. Of this
amount, the Australian and the Korean Licenses together account for $15.0
million, all of which has become due, but only $2.4 million of which has been
paid to date. The Company has suspended the payment obligations of the licensee
under the Australian License pending completion of certain field tests being
performed by the licensee in Australia and has had discussions with the licensee
under the Korean License regarding a revised payment schedule. No royalties have
been paid under any of the licenses.
The Company has also entered into a letter of intent to grant a license to a
party that would cover the Mexican market on terms generally similar to those of
the Australian, Korean, and Russian Licenses. The Company expects that over time
it will enter into other licenses with third parties in other international
territories.
In the long term, royalties and other revenues derived from international
licensees and other strategic relationships may represent a material portion of
the Company's total revenues. To reduce its exposure to foreign exchange risks,
the Company intends to denominate its royalties and other payments in U.S.
dollars. If any revenues from international sources were to become payable in
foreign currencies, they could be subject to fluctuations in currency exchange
rates. If as a result of such currency fluctuations the effective price of the
Company's products were to increase in the local markets, demand for those
products could decline, and could have an adverse affect on the Company's
revenues. The Company currently does not use derivative instruments to hedge
foreign exchange rate risk.
In addition, international operations are subject to a variety of risks,
including tariffs, import restrictions and other trade barriers, changes in
regulatory requirements, longer accounts receivable payment cycles, adverse tax
consequences, export license requirements, differing standards regarding the
enforcement of contracts, foreign government regulation, political and economic
instability and changes in diplomatic and trade relationships. Certain countries
in which the Company currently licenses or may in the future license its A-55
Technology may impose substantial withholding taxes on payments for intellectual
property, which the Company may not be able to offset fully against its U.S. tax
obligations.
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The Company's licensees are subject to many of these risks. The risks associated
with international licenses of the Company's technology may have a direct or
indirect adverse effect on the Company's business, financial condition and
results of operations.
The Company will continue to selectively pursue opportunities in the
international arena, but believes that its more immediate revenue generating
opportunities exist in the domestic markets.
TESTING AND PERFORMANCE
In the course of developing its products, the Company has completed a variety of
tests (conducted independently or by the Company) to measure emissions from and
determine the efficacy of A-55 Clean Fuels in an assortment of combustion
applications. The tests described in this section were performed using certain
equipment, fuel, conditions and test protocols. The Company believes these
results are indicative of general performance characteristics. However, there
can be no assurance that these results will be replicated with other equipment,
fuel, conditions or test methods.
Boiler Testing. Pursuant to a Cooperative Research and Development Agreement
under EPA's Environmental Technology Verification program, in 1997 the EPA
tested A-55 Clean Fuels in a 2.5 million Btu/hour North American Package Boiler.
The emissions of a No. 2 diesel, No. 2 diesel-based A-55 Clean Fuels, and
naphtha-based A-55 Clean Fuels were measured as the boiler was operated at low,
mid, and high loads. Each of the A-55 Clean Fuels tested contained 30% water by
volume and no significant modifications to the boiler were needed to burn A-55
Clean Fuels. Relative to the No. 2 diesel, NOx emissions were 15% to 34% lower
for the No. 2 diesel-based A-55 Clean Fuels, and 33% to 51% lower for the
naphtha-based A-55 Clean Fuels, when measured on an energy equivalent basis. The
hydrocarbon (HC), carbon monoxide (CO), and particulate emissions were too low
for each fuel to draw statistically valid conclusions about differences in their
emissions from the burning of No. 2 diesel or A-55 Clean Fuels. The graph below
illustrates the average NOx emissions produced in these tests by No. 2 diesel
compared to A-55 Clean Fuels based on both No. 2 diesel and naphtha.
EPA BOILER TEST: NOX EMISSIONS ANALYSIS
(A-55 CLEAN FUELS VS. NO. 2 DIESEL)
[EPA BOILER TEST: NOX EMISSIONS ANALYSIS GRAPH]
Source: EPA Environmental Technology Verification Test
Research Triangle Park, NC; April 1997
Note: Emissions were measured on an energy equivalent
basis.
The Company has also conducted its own preliminary testing comparing NOx
emissions from No. 6 fuel oil with Residue-Based A-55 Clean Fuels with 30% water
content by
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volume. The preliminary testing showed NOx emissions were an average of 40%
lower with Residue-Based A-55 Clean Fuels, when measured on an energy equivalent
basis. The graph below illustrates the average NOx emissions produced in these
tests by No. 6 fuel oil compared to Residue-Based A-55 Clean Fuels as combusted
in a test burner.
A-55 TECHNICAL CENTER TEST: NOX EMISSIONS ANALYSIS
(A-55 CLEAN FUELS VS. NO. 6 FUEL OIL)
A-55 CLEAN FUELS VS. NO. 6 FUEL OIL GRAPH
Source: A-55 Technical Center Test - Reno, NV; May 26-27,
1998
Note: Emissions were measured on an energy equivalent basis.
Combustion Turbine Testing. Pursuant to a test agreement with the TVA, No. 2
diesel-based A-55 Clean Fuels were tested in August 1997 in a General Electric
MS7OOOB, 54 MW combustion turbine. The TVA test compared No. 2 diesel alone with
No. 2 diesel-based A-55 Clean Fuels with 30% and 35% water by volume. The tests
were conducted at loads of 44 MW, 30 MW and 10 MW. Minor modifications were made
to the unit to allow it to operate with A-55 Clean Fuels. The test results
demonstrated that NOx emissions compared to No. 2 diesel were 53% and 55% lower
with No. 2 diesel-based A-55 Clean Fuels with 30% water by volume and 35% water
by volume, respectively, when measured on an energy equivalent basis. In
addition, the test indicated a net power output gain of two MW when burning A-55
Clean Fuels at base load. The graph below illustrates
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the average reduction in NOx emissions produced in these test by No. 2 diesel
compared with A-55 Clean Fuels based on No. 2 diesel.
TVA COMBUSTION TURBINE TEST: NOX EMISSIONS ANALYSIS
(A-55 CLEAN FUELS VS. NO. 2 DIESEL)
A-55 CLEAN FUELS VS. DIESEL GRAPH
Source: Tennessee Valley Authority Test - Colbert Steam Plant, AL;
August 19-21, 1997
*Note: The TVA Combustion Turbine Test was conducted as a real-time
test over a 35-minute period. Diesel fuel was burned for the
first 15 minutes of the test period at which time the Diesel
was replaced with A-55 Clean Fuels for the remainder of the
test. Average NOx emissions for Diesel and A-55 Clean Fuels
were calculated using steady-state operating levels during
minutes 5-15 and 20-30, respectively.
Reburn Testing. In February 1998, the Company conducted bench scale tests at the
Energy and Environmental Research Corporation's ("EER") facility in California
in order to determine the potential of A-55 Clean Fuels as a reburn fuel in an
electric utility scale application. The tests compared the effectiveness of
natural gas to A-55 Clean Fuels based on naphtha and No. 6 fuel oil, when used
as a reburn fuel to reduce NOx. Each test demonstrated NOx emissions reductions
for A-55 Clean Fuels that were similar to those of natural gas, when compared on
an energy equivalent basis. The graph below illustrates the percentage of the
NOx reduction experienced in these tests when reburning with natural gas and
A-55 Clean Fuels based on No. 6 fuel oil.
EER REBURN TEST: NOX REDUCTION ANALYSIS
(A-55 CLEAN FUELS VS. NATURAL GAS)
A-55 CLEAN FUELS VS. NATURAL GAS GRAPH
Source: Energy and Environmental Research Reburn Test - Irvine CA;
February 18-19, 1998
Note: Initial NOx levels were 800 ppm prior to the addition of
Natural Gas
and A-55 Clean Fuels as reburn fuels.
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In May 1998, the Company contracted with EER to conduct a larger pilot scale
test using A-55 Clean Fuels as a reburn fuel and both natural gas and coal as
base fuels. The test results generally confirmed the previous bench scale test
results described above, demonstrating that NOx reductions in excess of 70%
could be achieved using A-55 Clean Fuels to provide approximately 20% of the
total combustion's Btu content.
Internal Combustion Engine Testing. The Company has conducted numerous tests to
measure emissions, power, performance and fuel consumption in a variety of
internal combustion diesel and gasoline engines through a combination of
in-house, independent laboratories and in-field customer testing. Independent
tests, including those conducted by the California Truck Testing Services and
the Southwest Research Institute on diesel engines operating on A-55 Clean
Fuels, have shown significant reductions in NOx and particulates, as well as
soot and smoke, without compromising engine horsepower or torque. Tests on the
use of A-55 Clean Fuels in spark-ignited (gasoline) engines conducted mostly at
the Company's testing facility in Reno with its own dynamometers and emission
measuring test equipment, and to a more limited extent by independent
laboratories, have shown similar NOx emissions reducing trends as with diesel
engines. While these tests have shown an increase in emissions of HC and CO in
certain applications, these emissions levels were generally either within EPA
standards or were at levels that the Company believes can be brought within
compliance by the use of standard emission control equipment.
COMPETITION
Fossil Fuel Suppliers
The Company believes that its primary competition in most of its target markets
will be the suppliers of No. 6 fuel oil and natural gas. The combustible fuels
market is intensely competitive, supplied by many major international and
national oil, gas and coal companies. To the extent that these companies regard
the Company as a competitor, they can be expected to compete vigorously with the
Company. The Company cannot predict the reaction of these energy companies to
the advancement of A-55 products, although natural gas suppliers can be expected
to regard the Company as a direct competitor to the extent A-55 Clean Fuels are
successful in displacing significant quantities of natural gas as a fuel source.
The Company believes that the reaction of coal suppliers may be at least
somewhat favorable in that they may view A-55 Clean Fuels as a means by which
coal-fired plant operators can adopt a cost-effective reburn strategy to
endeavor to comply with ever stricter environmental and energy regulations while
allowing them to continue burning coal as the primary fuel source. In addition,
petroleum refiners may be motivated to use the Residues that they would
otherwise have used to produce and sell No. 6 fuel oil to instead produce and
sell Residue-Based A-55 Clean Fuels.
Alternative Fuels Suppliers; Emissions Control Technologies
The Company expects to face competition from producers of alternative fuels,
including water and petroleum blends similar to those of the Company, as well as
from the manufacturers of emissions control technologies. Many of these
producers and manufacturers may have significantly greater financial, political
and other resources than the Company. Considerable governmental and private
efforts have been devoted to alternative resources, such as natural gas and
alcohol-based fuels, and to emissions control
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technologies such as catalytic converters. The Company's success in new markets
may depend in part on its ability to effectively demonstrate to its target
consumers that A-55 Clean Fuels offer a more effective or less expensive
alternative to traditional fuels than other alternative fuels or emissions
control technologies.
While a variety of NOx emission control technologies have been developed over
the years for use by coal-fired electricity generating plants, they may be
broadly classified into two primary categories: flue-gas treatment and
combustion modifications. The Company believes that of the various technologies
available, only a few are currently considered to be reasonably cost effective
to coal-fired electricity generators to achieve compliance with NOx emissions
restrictions.
Flue-Gas Treatment. Among the available flue-gas treatment technologies, the
Company believes that operators of coal-fired electricity generating plants
generally consider either Selective Catalytic Reduction ("SCR") or Selective
Non-Catalytic Reduction ("SNCR") to be the two leading options. SCR is an
effective post-combustion NOx control technology used with coal-fired
electricity generating boilers, employing a catalyst to enhance the reaction
between ammonia or urea and NOx, SNCR is a newer technology that relies upon
higher flue gas temperatures to effect the reaction between ammonia or urea and
NOx, eliminating the need for a catalyst.
Combustion Modifications. Among the available combustion modifications to reduce
NOx emissions, the Company believes that operators of coal-fired electricity
generating plants will generally consider reburning and co-firing to be the
leading contenders. The co-firing of coal with other fuels such as natural gas,
wood chips or other waste products has been employed in several electricity
generating boilers. This technique can reduce the overall generation of NOx
relative to the amount of coal that is replaced. Whether this NOx control
strategy is available to an electricity generator on a cost-effective basis
depends on the type of boiler, its ability to handle multiple fuels and the
availability of the alternative fuel. For a discussion of reburning as a NOx
control strategy, see "--Target Markets--Electricity Generation Industry--Coal."
PATENTS AND INTELLECTUAL PROPERTY PROTECTION
The patent rights embodying a portion of the A-55 Technology are licensed
exclusively to the Company from the inventor, R. W. Gunnerman. These patent
rights consist of one issued U.S. patent, four pending U.S. patent applications,
36 granted patents in foreign countries and 42 pending patent applications in
foreign countries. The foreign patents and applications cover 52 different
foreign countries, including countries in North and South America, Europe, the
Far East, the Middle East, the African continent and the former Soviet
republics. The current U.S. patent was reissued on May 14, 1996 to include
broader claims than in the original patent issued in October 1992, which broader
claims reflected the continuing development and expansion of the Company's
technology. The existing patent covers the combustion of water and hydrocarbon
blends in internal combustion engines and a pending patent application covers
the use of such blends as fuels to be burned in electricity generating plants.
Each of the four pending U.S. patent applications covers the production of a
water-phased blended fuel.
The granted patents and pending patent applications in foreign countries
generally cover both the combustion of a water and hydrocarbon blend in internal
combustion engines and the production of a water-phased blended fuel. None of
the patents or pending applications
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have ever been challenged or opposed in any jurisdiction, either U.S. or
foreign. However, as is common in the patent application process, the Patent
Office has raised certain challenges with respect to the four patent
applications pending in the U.S. and the Company is unable to predict the
likelihood that any of the applications will be approved. Research efforts are
continually under way to further develop the A-55 Technology, and new patents
will be applied for as further discoveries and improvements are made.
The Company attempts to protect its trade secrets and other proprietary
information through agreements with licensees, proprietary information
agreements with employees and consultants and other security measures. The
Company also relies on trademarks and trade secret laws to protect its
intellectual property. Despite these efforts, there can be no assurance that
others will not gain access to the Company's trade secrets, or that the Company
can meaningfully protect its intellectual property. In connection with the
dissolution in October of 1996 of its joint venture with Caterpillar, Inc.
("Caterpillar"), the Company granted Caterpillar certain rights to use certain
of the A-55 Technology in connection with internal combustion engines and the
Company is currently involved in certain litigation with Caterpillar regarding
technology-related issues. In addition, effective trade secret protection may be
unavailable or limited in certain foreign countries. Although the Company
intends to protect its rights vigorously, there can be no assurance that such
measures will be successful.
There can be no assurance that the pending U.S. or foreign patent applications
or any future U.S. or foreign patent applications will be approved, that any
issued patents will protect the Company's intellectual property or will not be
challenged by third parties, or that the patents of others will not have a
material adverse effect on the Company's business, financial condition and
results of operations. Litigation may be necessary in the future to enforce the
Company's patent rights or other intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement or invalidity, and
there can be no assurance that the Company would prevail in any future
litigation. Any such litigation, whether or not determined in the Company's
favor or settled by the Company, could be costly and would divert the efforts
and attention of the Company's personnel from normal business operations, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
See "Risk Factors--Limited Protection of Intellectual Property."
License Agreement with Caterpillar. Pursuant to the October 1996 agreement
dissolving a joint venture that the Company had formed in July 1994 with
Caterpillar to commercialize advanced fuels for use in internal combustion
engines, including spark-ignited (gasoline), compression-ignited (diesel) and
turbine engines, Caterpillar was granted (i) exclusive rights to engine-related
technology with respect to the production and conversion of Caterpillar engines,
(ii) non-exclusive rights to engine-related technology with respect to the
conversion of non-Caterpillar engines to consume aqueous fuel produced by
Caterpillar (until October 24, 1999, these non-exclusive rights become operative
only under certain circumstances), (iii) non-exclusive rights to fuel-related
technology to make, have made, use or sell (but not license) gasoline- or
naphtha-based aqueous fuels, but only for Caterpillar diesel and natural gas
engines, (iv) non-exclusive rights to the fuel-related technology to sell
diesel-based aqueous fuel in all applications for products of the kind sold by
Caterpillar, and (v) beginning on October 24, 2001, non-exclusive rights to the
fuel-
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related technology to license diesel-based aqueous fuel in all applications for
products of the kind sold by Caterpillar. The Company and Caterpillar also
agreed to pay each other a royalty in the amount of $0.005 per gallon of aqueous
fuel (or the equivalent in surfactant) sold by it directly, through license, by
sale of technology or by other action. The first royalty payment is not payable
until a party and its licensees have cumulatively sold 2.0 billion gallons of
aqueous fuel (or the equivalent in surfactant). The royalty obligation is
effective for ten years from the date the first royalty payment is due. The
parties also agreed that, should the Company or Caterpillar enter into an
arrangement with an oil company for the manufacture or distribution of
diesel-based aqueous fuel and receive a lump sum payment in connection
therewith, the other party would be entitled to 20% of the lump sum payment. See
"--Legal Proceedings."
GOVERNMENT REGULATION
The Company's operations are subject to a variety of federal, state and local
laws and regulations governing the release or discharge of pollutants into the
air, soil and the water (including ground water), product specifications, and
the generation, treatment, storage, transportation and disposal of solid and
hazardous waste and materials with hazardous and toxic constituents. Such laws
generally have become and are becoming increasingly stringent. As is the case
with all companies involved in similar activities, the Company faces exposure
from actual or potential claims and lawsuits involving environmental matters,
including soil and water contamination, air pollution and personal injuries or
property damage allegedly caused by substances produced, handled, transported,
used, released or disposed of by the Company.
Over time, the Company's business will involve the production and distribution
of substantially greater quantities of A-55 Additive, and therefore it will be
required to develop and implement more extensive and formal procedures for (i)
the proper handling, storage, and transportation of its finished additive and
the chemical ingredients used in its manufacture; (ii) emission of contaminants
to the ambient air during production, transportation, and storage activities and
discharge of contaminants to a water body or a wastewater treatment facility
during production or storage activities; and (iii) disposal of waste products.
In addition, there may be state or local requirements applicable to the location
of production or storage facilities which may apply to the Company's production
and distribution operations.
See "Risk Factors--Potential Environmental Liability."
Fuel used in electric generating boilers, turbines and other stationary
applications is not subject to fuel specification requirements as stringent as
those that apply to fuel sold for use in on-road vehicles. State and local
pollution control agencies regulate fuels used in stationary applications such
as electricity generating units indirectly, by limiting the amount of various
emissions released by them as well as regulating the quantity of sulphur and
other chemicals within the fuel itself prior to its combustion. Fuels used by
electricity generators are regulated through operating permits issued by state
or local agencies or the EPA. Operating permits include limitations on
emissions, visibility (opacity), control technology limits and operating limits
which involve fuel type, hours of operation, maximum fuel feed rate and maximum
heat value. Some electricity generators that plan to burn A-55 Clean Fuels may
require a modification of their relevant operating permits before they can do
so.
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<PAGE> 45
The use of fuels in automobile and other internal combustion engine vehicles is
highly regulated in the United States, primarily by the federal government
although certain states also have adopted regulations applicable to such
vehicles. Before A-55 Clean Fuels are marketed broadly for this purpose, the
Company may need to demonstrate in official testing situations that these fuels
satisfy certain requirements. It may also be required to show that adjusting
engines to operate on A-55 Clean Fuels will not compromise anti-tampering
regulations that are designed to maintain the efficacy of emissions reducing
equipment required of on-road vehicles, or obtain either certification or
appropriate waivers of such requirements.
Unanticipated changes in existing regulatory requirements, or the failure of the
Company to comply with such requirements or adoption of new requirements, could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company is also subject to numerous federal,
state and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
hazardous substance disposal. There can be no assurance that such laws or
regulations will not have a material adverse effect on the Company's business,
financial condition or results of operations.
See "Risk Factors--Requirement for Regulatory Approvals."
PRODUCTION AND DISTRIBUTION
The Company currently produces all of its A-55 Additive and small quantities of
A-55 Clean Fuels at its technical center in Reno, Nevada. As market demand for
A-55 Clean Fuels and A-55 Additive increases, the Company expects to enlarge its
existing facilities and build or acquire new A-55 Additive blending facilities
at strategic locations where market demand is greatest. The Company generally
does not intend to produce A-55 Clean Fuels in order to directly supply the
demands of customers for the finished fuel product, but it does intend to
produce A-55 Additive. The Company expects that both petroleum refiners and some
of the larger consumers of A-55 Clean Fuels will purchase A-55 Additive directly
from the Company and its distributors to produce A-55 Clean Fuels.
The Company does not refine crude oil in order to produce Residues or any other
petroleum product that may be used as a base for A-55 Clean Fuels; nor does it
produce any component of A-55 Additive. Its production of A-55 Additive consists
of blending its ingredients in the proper formulation required for specific
applications. While there are multiple suppliers for Residues, naphtha, diesel,
gasoline, and each of the A-55 Additive ingredients, the Company is evaluating
several alternatives to secure sources of supply of its raw materials, including
building or acquiring a production facility or entering into strategic alliances
with chemical production facilities or petroleum refiners.
Commercial products similar to A-55 Additive and A-55 Clean Fuels, and their raw
materials, are routinely transported and distributed by tank truck, rail tank
car, barge and ocean-going vessels. Distribution centers and final destination
storage facilities are typically large capacity storage tanks equipped to
properly and safely store petrochemical type products. The Company plans to
transport, distribute and store A-55 Additive and its raw materials in a manner
consistent with industry best practices and regulatory requirements. The
handling and storage characteristics of A-55 Clean Fuels closely resemble those
of conventional petroleum fuels. See "--Government Regulation."
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<PAGE> 46
FACILITIES
The Company's administrative offices are located in a leased building in Reno,
Nevada, containing approximately 45,000 square feet of space. The building is
leased to the Company by R. W. Gunnerman, for a term expiring on June 30, 2000.
See "Certain Transactions."
The Company's technical center is located in a facility in Reno, Nevada that is
owned by the Company. The facility covers three acres and includes buildings
containing an aggregate of approximately 25,000 square feet of space.
The Company is completing a commercial scale A-55 Additive mixing plant located
in a building in Sparks, Nevada that is leased by the Company for a term of
three years. The Company has designed the 33,000 square foot, 80,000 gallon per
day capacity mixing facility, scheduled for completion and operation by the
fourth quarter of 1998, to serve as a template for the construction of other
mixing facilities in the U.S. and abroad.
EMPLOYEES
The Company currently employs approximately 50 full-time employees. The Company
has not experienced any work stoppages and believes its relations with its
employees are good. None of the Company's employees is covered by a collective
bargaining agreement.
LEGAL PROCEEDINGS
The Company and R. W. Gunnerman are named defendants in a lawsuit instituted by
Richard J. Schneider in Fayette County, Ohio, Court of Common Pleas on March 29,
1995. In the suit, Mr. Schneider alleges that the Company and R. W. Gunnerman
granted him an exclusive license to develop, market and sublicense the A-55
Technology in aviation-related applications pursuant to a letter agreement dated
September 20, 1993. In the suit, Mr. Schneider seeks, among other things,
specific performance by the Company and R. W. Gunnerman of their obligations
under the letter agreement, including providing him with the formulation of A-55
Additive. After a court trial, judgment was entered on June 19, 1997, ordering
that (i) the Company and R. W. Gunnerman perform their obligations under the
letter agreement and (ii) the Company and R. W. Gunnerman pay the court costs of
the suit. On July 1, 1997, the Company and R. W. Gunnerman filed a Notice of
Appeal with the Court of Appeals of Fayette County, Ohio, Twelfth Appellate
District. Mr. Schneider then filed a Motion of Enforcement of the June 19
judgment with the trial court. After a hearing on November 25, 1997, the trial
court entered judgment, granting Mr. Schneider's motion and required the Company
and R. W. Gunnerman to disclose the formulation of A-55 Additive to Mr.
Schneider. The Court also required the posting of a $1,000,000 bond for damages
suffered by Mr. Schneider as a result of the Company's failure to produce the
formulation of A-55 Additive, and specified that Mr. Schneider would be entitled
to collect such bond if the June 19 judgment was affirmed on appeal. The Company
and R. W. Gunnerman also appealed the November 25 judgment to the appellate
court. The November 25 and June 19 appeals were subsequently consolidated. On
August 24, 1998, the appellate court affirmed the trial court's judgments, again
ordering that the formulation of A-55 Additive be disclosed to Mr. Schneider.
The Court held, however, that the calculation of $1,000,000 for damages was
without specific basis and remanded the issue of the calculation of damages to
the trial court. The Company has not yet disclosed the formulation of A-55
Additive to Mr. Schneider or
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<PAGE> 47
provided him with a license to the A-55 Technology. Mr. Schneider has filed
motions to enforce the June 19 judgment in state district court in Washoe
County, Nevada. The Company and Mr. Gunnerman intend to appeal the August 24
decision of the appellate court. There can be no assurance that the Company and
R. W. Gunnerman will be successful in their appeal, or that, if the Company and
R. W. Gunnerman are successful in their appeal, that the Company and R. W.
Gunnerman would be successful in any subsequent trial.
In a separate action, on July 14, 1997, the Company sued Mr. Schneider in state
district court in Washoe County, Nevada, alleging that Mr. Schneider breached a
Secrecy/ Confidential Disclosure Agreement entered into by the Company and Mr.
Schneider on September 17, 1993. In the suit, the Company seeks injunctive
relief and unspecified monetary damages. Mr. Schneider has filed an answer to
the claim and the parties are currently in discovery.
In a third action, on January 22, 1998, the Company sued Mr. Schneider in
federal district court in Reno, Nevada, alleging that he infringed the Company's
trademarks. In its complaint, the Company seeks unspecified damages and has
requested injunctive relief. The Court issued a preliminary injunction against
Mr. Schneider's use of the Company's trademarks, subject to the posting of a
$100,000 bond by the Company, which it has posted.
In early 1998, the Company learned that Caterpillar had recently received title
by assignment to four U.S. patents related to the use of aqueous fuel in
internal combustion engines. The Company believes that these patents cover
inventions developed all or in part by R. W. Gunnerman and should have been
assigned to the Company as a result of the dissolution of the joint venture
between the Company and Caterpillar. In April 1998, the Company initiated steps
towards arbitration, pursuant to the terms of the parties' joint venture
agreement. In May 1998, Caterpillar filed suit in federal court in Peoria,
Illinois against the Company, seeking a declaration that Caterpillar owns all
right, title, and interest in and to the disputed patents. Shortly thereafter,
the Company filed a demand for arbitration in Denver, Colorado under the terms
of the joint venture agreement. At the same time, the Company filed a motion in
the federal district court in Illinois to dismiss or stay the action and to
compel Caterpillar to participate in the arbitration in Denver. Recently, the
Court in Illinois granted the Company's motion and has ordered Caterpillar to
participate in the arbitration and has stayed the Illinois action. Caterpillar
has appealed the Court's ruling.
The Company is not presently a party to any other pending material legal
proceedings. The Company may be subject from time to time to various other legal
proceedings which arise in the ordinary course of its business. Specifically,
the Company anticipates that it may be necessary, from time to time, to protect
the proprietary intellectual property rights underlying the A-55 Technology
against third-party infringement. The Company intends to aggressively pursue
legal remedies against any such infringers. The Company anticipates that it may
incur significant legal and other expenses related to the protection of its
proprietary intellectual property.
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<PAGE> 48
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and senior employees of the Company and their
ages as of the date of this Prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Rudolf W. Gunnerman.................. 70 Chief Executive Officer and Chairman of the
Board
Thomas N. Harvey..................... 49 President
Daniel J. Klaich..................... 48 Executive Vice President, Policy and
Planning, Secretary and Director
Peter W. Gunnerman................... 32 Executive Vice President, Business
Development and Director
Patrick M. Grimes.................... 31 Controller and Acting Chief Financial
Officer
Dr. William C. Tao................... 40 President, Power Markets Division
Dr. Thomas M. Houlihan............... 59 Senior Vice President, Power Markets
Division
Kristina Gunnerman................... 36 Vice President, Personnel
Alexander J. Paior................... 51 Director of International Development
</TABLE>
- -------------------------
Rudolf W. Gunnerman is the founder and the principal stockholder of the Company
and the Predecessor and has been Chief Executive Officer of those entities since
the inception of the Predecessor in November 1992. He was elected the Company's
Chairman of the Board in September 1997. Mr. Gunnerman has over 40 years of
experience in the research and development of various commercial technologies
and products, primarily within the energy industry, and most recently in the
field of clean fuels and combustion technology.
Thomas N. Harvey has been President of the Company and the Predecessor since May
1998. From January 1992 to May 1998 he served as Chairman of the Board of the
Global Environment & Technology Foundation (a not-for-profit organization which
has provided public service in environmental and technology commercialization
for ten years) and continues to serve as a director of that organization. From
October 1996 to May 1998, Mr. Harvey was Senior Vice President of Business
Development for The Columbus Group, which represents U.S. and foreign interests
in securing business development opportunities and arranging investment
financing in the U.S. and abroad. From May 1997 to May 1998, Mr. Harvey was the
Chairman of the Board of Roy Weston, Inc., a publicly held environmental
engineering company, and continues to serve as a director of such company. Mr.
Harvey is currently the President and a director of Globequest International,
Ltd., a family owned consulting business. Mr. Harvey received an engineering
degree from West Point in 1971, a masters degree in international relations from
Boston University in 1973, and an M.B.A. degree from the University of Puget
Sound in 1979.
Daniel J. Klaich has been an officer of the Company and the Predecessor since
January 1994, currently as Executive Vice President, Policy and Planning and
Secretary. He has been a director of the Company since its inception. From
January 1980 to December 1993, he was a partner in the Reno, Nevada law firm of
Walter, Key, Maupin, Oats, Cox, Klaich & LeGoy, which served as the Company's
primary outside counsel. Mr. Klaich received a B.S. in Accounting from the
University of Nevada in 1972, a law degree from the
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<PAGE> 49
University of Washington in 1975, and an L.L.M. degree in taxation from the New
York University School of Law in 1978.
Peter W. Gunnerman has been an officer of the Company and the Predecessor since
inception in November 1992 (currently as Executive Vice President of Business
Development) and a director of the Company since its inception. Mr. Gunnerman
has worked on the development of the A-55 Technology with his father, Rudolf W.
Gunnerman, since 1988. Mr. Gunnerman received a B.A. in History and German from
the University of Oregon in 1988.
Patrick M. Grimes has been Controller of the Company and the Predecessor since
August 1997 and is currently the Acting Chief Financial Officer. From November
1991 to August 1997, Mr. Grimes was employed by Ernst & Young LLP. Mr. Grimes
received a B.S. in Business Administration from California State University of
Sacramento in 1990. Mr. Grimes is a certified public accountant.
Dr. William C. Tao joined the Company as the President of the Power Markets
Division in July of 1998. Between October 1985 and December 1997, Dr. Tao worked
at the Lawrence Livermore National Laboratory, most recently as the Director of
International Program Development. In that capacity, Dr. Tao worked with the
World Bank and the Asian Development Bank on infrastructure building. Dr. Tao
has served on the President's Council on Sustainable Energy since January 1996.
Dr. Tao received a degree in Chemical Engineering and Nuclear Engineering from
the University of California in 1980. He received his masters degree from
Stanford University in 1981 and his Ph.D. also from Stanford University in 1986.
Dr. Thomas M. Houlihan joined the Company in July of 1998 as Senior Vice
President of the Power Markets Division. Between January 1994 and September
1997, Dr. Houlihan was an American Society of Mechanical Engineers Executive
Fellow in the White House Science Office and The Interagency Environmental
Technology Office. At the White House Science Office, Dr. Houlihan worked with
personnel from 20 federal agencies to produce the position paper on sustainable
development. Dr. Houlihan received his B.S. degree in Mechanical Engineering
from Manhattan College in 1957 and his Ph.D., also in Mechanical Engineering,
from Syracuse University in 1961.
Kristina Gunnerman joined the Company in July 1997 as its Director of Human
Resources. Prior to joining the Company she was engaged in the practice of law
in Sacramento, California, as Staff Attorney to a law and motion judge of the
California Superior Court. Ms. Gunnerman received her B.A. degree in German and
Political Science from the University of Oregon in 1983 and her law degree from
the University of California, Hastings College of the Law, in 1988.
Alexander J. Paior has served as Director of International Development of the
Company and the Predecessor since May 1998. Between September 1996 and May 1998,
he was a full-time consultant to the Company on international business
development. Prior to September 1996, Mr. Paior practiced law and investment
banking in Australia for over 20 years, including international commercial
transactions in both Australia and Southeast Asia. Between October 1995 and June
1996, Mr. Paior was retained by the South Australian government to assist in the
disposal of government assets in excess of US $1 billion. Mr. Paior received a
Bachelor of Laws from University of Adelaide in 1974.
48
<PAGE> 50
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board. The Board of Directors of the Company has three
members, each of whom are employees of the Company. All of the current directors
serve until the next annual stockholders' meeting or until their successors have
been duly elected and qualified. The Board expects to appoint at least two
non-employee directors to the Board of Directors within ninety days of
consummation of the Offering. There are no family relations between the
directors and executive officers except that R. W. Gunnerman is the father of
Peter Gunnerman and Kristina Gunnerman.
The Company is dependent on the active participation of the Company's principal
executive officers and the Company's ability to continue to attract and retain
highly capable management personnel. The loss of the services of key personnel
could have a material adverse affect on the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors intends to establish an Audit Committee and a
Compensation Committee after consummation of the Offering. The Board anticipates
that the Audit Committee will consist of non-employee directors and Mr. Klaich
and will serve to: (i) make recommendations to the Board of Directors of the
independent auditors who conduct the annual examination of the Company's
accounts; (ii) review the scope of the annual audit and periodically meet with
the Company's independent auditors to review their findings and recommendations;
(iii) approve major accounting policies or changes to those policies; and (iv)
periodically review the Company's principal internal financial controls. The
Board expects that the Compensation Committee will consist of two or more
non-employee directors and will serve to review the compensation of executive
officers of the Company and make recommendations regarding such compensation to
the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth compensation paid or accrued by the Company for
the year ended December 31, 1997 to its Chief Executive Officer and each of its
two other executive officers with annual compensation in excess of $100,000 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION SALARY
--------------------------- --------
<S> <C> <C>
Rudolf W. Gunnerman................................ 1997 $375,000
Chief Executive Officer
Daniel J. Klaich................................... 1997 125,000
Executive Vice President, Policy and Planning
Peter W. Gunnerman................................. 1997 125,000
Executive Vice President, Business Development
</TABLE>
COMPENSATION OF DIRECTORS
Directors of the Company have not received cash for services provided as Board
or committee members; however, the Company anticipates that compensation for
non-employee directors will commence following the Offering at levels to be
determined by the
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<PAGE> 51
Board. Directors are also reimbursed for expenses incurred in attending meetings
of the Board or committees thereof.
EMPLOYMENT AGREEMENTS
The Company has entered into an at-will employment agreement with Mr. Thomas N.
Harvey. Pursuant to this agreement, Mr. Harvey is entitled to an annual base
salary of $250,000 for his first year of employment and $300,000 each additional
year. Mr. Harvey is also entitled to: (i) a one-time grant of options to
purchase 150,000 shares of the Common Stock at a per share exercise price equal
to the Offering price, such options to vest over five years; and (ii) annual
grants of non-qualified stock options in amounts and under terms consistent with
options granted to other senior officers of the Company, subject to approval of
the Board of Directors. The agreement may be terminated at will or for cause (as
defined in the agreement) and provides that if he is terminated without cause,
or resigns for good reason (as defined in his agreement), he will be entitled to
be paid severance equal to three years of his base salary if such termination
occurs on or before March 1, 2003, and one year of his base salary if such
termination occurs after such date. The agreement contains a covenant not to
solicit employees or customers of the Company for a period of two years
following the termination of employment.
The Company has entered into an employment agreement with Dr. William Charles
Tao. Pursuant to this agreement, Dr. Tao is entitled to an annual base salary of
$240,000 per year. The agreement may be terminated upon Dr. Tao's death, his
failure to satisfactorily perform his duties, or for economic circumstances
beyond the control of the Company. Mr. Tao has agreed not to become directly or
indirectly engaged in or involved with any business competitive or similar to
that of the Company during the term of the agreement. The agreement also
provides that Dr. Tao may purchase from R.W. Gunnerman 2% of the total shares of
the Company at a price equal to 90% of the Offering price. Such options vest in
June 2001 subject to acceleration upon the satisfactory completion of certain
performance criteria.
The Company has entered into an at-will employment agreement with Dr. Thomas
Houlihan. Pursuant to this agreement, Dr. Houlihan is entitled to an annual base
salary of $180,000 per year.
1998 STOCK OPTION PLAN
At or promptly after the effectiveness of the Reorganization, the Company
intends to adopt a stock option plan (the "1998 Stock Option Plan") intended to
provide directors, officers, employees and consultants of the Company with an
opportunity to invest in the Company and to advance the interests of the Company
and its stockholders by enabling the Company to attract and retain qualified
personnel. The 1998 Stock Option Plan will provide for the granting of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, and nonqualified stock options. The maximum number of shares
of Common Stock that may be subject to options granted under the 1998 Stock
Option Plan will not exceed, in the aggregate, the number of shares equal to
% of the shares of Common Stock outstanding immediately following
consummation of the Offering. Shares of Common Stock that are attributable to
grants that have expired, terminated or been cancelled or forfeited will be
available for issuance or use in connection with future grants. The Compensation
Committee will administer the
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<PAGE> 52
1998 Stock Option Plan and select the individuals who will receive awards and
establish the terms and conditions of such awards.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Pursuant to the provisions of the Delaware General Corporation Law, the Company
has adopted provisions in the Certificate which provide that directors of the
Company shall not be personally liable for monetary damages to the Company or
its stockholders for a breach of fiduciary duty as a director, except for
liability as a result of (i) a breach of the director's duty of loyalty to the
Company or its stockholders; (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) an act
related to the unlawful stock repurchase or payment of a dividend under Section
174 of Delaware General Corporation Law; and (iv) transactions from which the
director derived an improper personal benefit. Such limitation of liability does
not affect the availability of equitable remedies such as injunctive relief or
rescission.
The Bylaws require the Company to indemnify its officers and directors, and
permits the Company to indemnify its other agents, by bylaws, agreements or
otherwise, to the full extent permitted under Delaware law. The Company intends
to enter into separate indemnification agreements with its directors and
officers which may, in some cases, be broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. The
indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them in which they
could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.
At present, other than the legal proceedings described in "Business-Legal
Proceedings," there is no pending litigation or proceeding involving a director,
officer, employee or agent of the Company where indemnification will be required
or permitted. The Company is not aware of any other threatened litigation or
proceeding which may result in a claim for such indemnification.
CERTAIN TRANSACTIONS
The partners of the Predecessor have approved the Reorganization. Pursuant to
the Reorganization, the partnership interests in the Predecessor are to be
converted into all of the shares of Common Stock of the Company prior to
consummation of the Offering. All such partnership interests outstanding will be
converted on the same conversion ratio, and Messrs. R. W. Gunnerman, Daniel J.
Klaich and Peter W. Gunnerman will receive, respectively, shares representing
78.7%, 3.0% and 3.0% of the total shares of the Company outstanding immediately
prior to the completion of the Offering. See "Principal Stockholders."
The A-55 Technology is owned by R. W. Gunnerman, who licensed the technology to
the Company pursuant to an Exclusive License Agreement dated January 3, 1994, by
and among R. W. Gunnerman and the Predecessor (as subsequently amended, the
"Technology License"). Pursuant to the Technology License, R. W. Gunnerman
granted the Company an exclusive license to exploit the A-55 Technology in
return for a 93.8%
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<PAGE> 53
interest in the Predecessor. The Technology License provides for no royalty or
other payments to R. W. Gunnerman. The Technology License will be amended and
restated in connection with consummation of the Reorganization.
At October 5, 1998, the Company had notes payable and related accrued interest
of approximately $19.1 million to R. W. Gunnerman pursuant to several promissory
notes of the Company payable to R. W. Gunnerman. The notes are payable on demand
and bear interest at 8.5% per annum. In addition, in connection with the
Reorganization, the Predecessor will distribute $2,145,300 in cash to a
specified class of limited partners and expects to obtain the funds required for
those distributions under additional notes payable to R.W. Gunnerman. The
Company intends to repay all of such amount with a portion of the net proceeds
from the Offering. See "Use of Proceeds."
In connection with the settlement in October 1998 of certain litigation brought
by a third party against R. W. Gunnerman, the Predecessor and the Company, R. W.
Gunnerman agreed to repay $11.5 million to the third party, $2.0 million of
which has been paid. The remaining $9.5 million is payable on or before April
30, 1999 and is secured by real property owned by R. W. Gunnerman as well as a
security interest in 51% of the limited partners' interest in the Predecessor
and 51% of the outstanding voting stock in the Company. Of R. W. Gunnerman's
settlement payment, $1.5 million relates to the repayment to the third party of
amounts previously advanced by the third party to the Predecessor. The $1.5
million is included in the notes payable to R. W. Gunnerman.
From time to time the Company utilizes for corporate travel purposes a plane
owned by Starbright Charter, Ltd., a corporation wholly owned by R. W.
Gunnerman. Through August 15, 1998, the Company has paid Starbright Charter,
Inc. approximately $217,000. The Company believes that the amounts paid for such
services do not exceed the fair market value thereof.
The Company leases office facilities at 5270 Neil Road, Reno, Nevada, from R. W.
Gunnerman pursuant to a lease dated April 16, 1997. The lease requires monthly
rental payments of approximately $63,000 through April 2000. The Company
believes that the amounts paid for such facilities do not exceed the fair market
rental thereof.
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<PAGE> 54
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information about the beneficial
ownership of the Company's Common Stock as of October 1, 1998, and as adjusted
to reflect the sale by the Company of the shares offered upon the completion of
the Offering (i) by each person who is known by the Company to own beneficially
more than five percent (5%) of the outstanding shares of Common Stock, (ii) by
each of the Company's directors, (iii) by each of the Named Executive Officers,
(iv) by all directors and executive officers as a group. The table gives effect
to the Reorganization. Except as otherwise indicated, the Company believes that
the beneficial owners of the securities listed below, based on information
provided by such owners, had sole investment and voting power with respect to
the Common Stock shown below as being beneficially owned by them, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED AFTER
PRIOR TO THE OFFERING THE OFFERING(1)
NAME OF STOCKHOLDER --------------------- -------------------
------------------- NUMBER PERCENT NUMBER PERCENT
<S> <C> <C> <C> <C>
Rudolf W. Gunnerman(2)................. 78.7
Daniel J. Klaich....................... 3.0
Peter W. Gunnerman..................... 3.0
All directors and executive officers as
a group (9 persons).................. 85.7
</TABLE>
- -------------------------
(1) Assumes the Underwriters' over-allotment option is not exercised.
(2) Includes shares held by RWG, Inc., a Nevada corporation and
general partner of the Predecessor, of which R. W. Gunnerman is the sole
stockholder.
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<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon consummation of the Offering, the Company will have authorized capital
stock of shares consisting of shares of Common Stock, $0.001
par value, and shares of preferred stock, $0.001 par value. As of June
30, 1998, giving effect to the Reorganization, shares of Common Stock
were outstanding, held by 89 holders of record, and no shares of Preferred Stock
were outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding shares of Preferred Stock
that may be issued, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available for the payment of dividends. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and liquidation preferences of any
outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive rights or rights to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are fully paid and
non-assessable, and the shares of Common Stock to be issued upon completion of
the Offering will be fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority, without action by the stockholders, to
designate and issue up to shares of Preferred Stock in one or more
series and to designate the dividend rate, voting rights and other rights,
preferences and restrictions of each series, any or all of which may be greater
than the rights of the Common Stock. The Company has no present plans to issue
any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock may be to enable the Board to
discourage an attempt to obtain control of the Company by means of a tender
offer, proxy contest, merger or otherwise and to protect the continuity of the
Company's management. The issuance of shares of Preferred Stock may adversely
affect the rights of holders of Common Stock. For example, Preferred Stock
issued by the Company may rank prior to the Common Stock as to dividend rights,
liquidation preference or both, may have full or limited voting rights and may
be convertible into shares of Common Stock. Accordingly, the issuance of shares
of Preferred Stock may discourage bids for the Common Stock or may otherwise
adversely affect the market price of the Common Stock.
CLASSIFIED BOARD OF DIRECTORS; FILLING VACANCIES
The Certificate provides that the Board is divided into three classes and that
the number of directors in each class shall be as nearly equal as is possible
based upon the number of directors constituting the entire Board. The
Certificate effectively provides that the term of office of the first class will
expire at the annual meeting of stockholders following the date of this
Prospectus, the term of office of the second class will expire at the second
annual
54
<PAGE> 56
meeting of stockholders following the date of the Prospectus, and the term of
office of the third class will expire at the third annual meeting of
stockholders following the date of this Prospectus. At each annual meeting of
stockholders, successors to directors of the class whose term expires at such
meeting will be elected to serve for three-year terms and until their successors
are elected and qualified.
The classification of directors has the effect of making it more difficult for
stockholders to change the composition of the Board. At least two annual
meetings of stockholders, instead of one, will generally be required to effect a
change in a majority of the Board. Such a delay may help to provide the Board
with sufficient time to analyze an unsolicited proxy contest, a tender or
exchange offer or any other extraordinary corporate transaction. However, such
classification provisions could also have the effect of discouraging a third
party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and its stockholders. The classification of the
Board could thus increase the likelihood that incumbent directors will retain
their positions.
Under Delaware law, unless otherwise provided in the certificate of
incorporation, directors serving on a classified board may only be removed by
the stockholders for cause. The Certificate does not override this provision.
The Certificate does provide that, subject to the rights of any holders of
Preferred Stock, newly created directorships resulting from an increase in the
authorized number of directors or vacancies on the Board resulting from death,
resignation, retirement, disqualification or removal of directors or any other
cause may be filled only by the Board (and not by the stockholders unless there
are no directors in office), provided that a quorum is then in office and
present, or by a majority of the directors then in office, if less than a quorum
is then in office, or by the sole remaining director. Accordingly, the Board
could prevent any stockholder from enlarging the Board and filling the new
directorships with such stockholder's own nominees.
The provisions of the Certificate governing the removal of directors and the
filling of vacancies may have the effect of discouraging a third party from
initiating a proxy contest, making a tender offer or otherwise attempting to
gain control of the Company, or of attempting to change the composition or
policies of the Board, even though such attempts might be beneficial to the
Company or its stockholders. These provisions of the Certificate could thus
increase the likelihood that incumbent directors will retain their positions.
STOCKHOLDER MEETING PROVISIONS
The Bylaws provide that (subject to the rights of any holders of Preferred
Stock) (i) only a majority of the Board, the Chief Executive Officer or a duly
appointed committee of the Board will be able to call a special meeting of
stockholders; and (ii) following the Offering, stockholder action may be taken
only at a duly called and convened annual or special meeting of stockholders and
may not be taken by written consent. These provisions, taken together, prevent
stockholders from forcing consideration by the stockholders of stockholder
proposals over the opposition of the Board, except at an annual meeting.
The Bylaws establish an advance notice procedure for stockholders to make
nominations of candidates for election as director, or to bring other business
before an annual meeting of stockholders of the Company (the "Notice
Procedure"). The Notice Procedure provides that, subject to the rights of any
holders of Preferred Stock, only persons who are nominated by or at the
direction of the Board, any committee appointed by the Board, or
55
<PAGE> 57
by a stockholder who has given timely written notice to the Secretary of the
Company prior to the meeting at which directors are to be elected will be
eligible for election as directors of the Company. The Notice Procedure provides
that at an annual meeting only such business may be conducted as has been
brought before the meeting by, or at the direction of, the Board, any committee
appointed by the Board, or by a stockholder who has given timely written notice
to the Secretary of the Company of such stockholder's intention to bring such
business before such meeting. Under the Notice Procedure, to be timely, notice
of stockholder nominations or proposals to be made at an annual or special
meeting must be received by the Company not less than 60 days nor more than 90
days prior to the scheduled date of the meeting (or, if less than 70 days'
notice or prior public disclosure of the date of the meeting is given, than not
later than the 15th day following the earlier of (i) the day such notice was
mailed or (ii) the day such public disclosure was made). These notices must
contain certain prescribed information.
The Notice Procedure affords the Board an opportunity to consider the
qualifications of proposed director nominees or the merit of stockholder
proposals, and, to the extent deemed appropriate by the Board, to inform
stockholders about such matters, and also provides a more orderly procedure for
conducting annual meetings of stockholders.
Although the Bylaws do not give the Board any power to approve or disapprove
stockholder nominations for the election of directors or proposals for action,
the foregoing provisions may have the effect of precluding a contest for the
election of directors or the consideration of stockholder proposals and of
discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposal, if
the proper advance notice procedures are not followed, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
the Company and its stockholders.
DELAWARE LAW
The Company is a Delaware corporation and subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203 prevents
an "interested stockholder" (defined generally as a person owning 15% or more of
a corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years following
the date such person became an interested stockholder, subject to certain
exceptions such as the approval of the board of directors and of the holders of
at least two-thirds of the outstanding shares of voting stock not owned by the
interested stockholder. The existence of this provision would be expected to
have an anti-takeover effect, possibly inhibiting attempts that might result in
a premium over the market price for the shares of Common Stock held by
stockholders.
TRANSFER AGENT
The Company's transfer agent and registrar for its Common Stock is
.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock.
Future sales of substantial amounts of Common Stock in the public market could
adversely affect the market price of the Common Stock.
56
<PAGE> 58
Upon consummation of the Offering, the Company will have outstanding an
aggregate of shares of Common Stock, assuming (i) the issuance of
shares of Common Stock offered by the Company hereby and (ii) no
exercise of the Underwriters' over-allotment option. Of these shares, the
shares sold in the Offering will be freely tradable without
restriction or further registration under the Securities Act, except for any
shares purchased by "affiliates" of the Company as that term is defined in Rule
144 under the Securities Act (whose sales would be subject to certain
limitations and restrictions described below).
The remaining shares of Common Stock held by existing stockholders
were issued and sold by the Company in reliance on exemptions from the
registration requirements of the Securities Act. All these shares will be
subject to "lock-up" agreements described below on the effective date of the
Offering. Beginning 180 days after the effective date of the Offering, these
shares will become eligible for sale upon expiration of lock-up agreements
described below, subject to the limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least one year
(including the holding period of any prior owner except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately
shares immediately after the Offering) or (ii) generally, the average weekly
trading volume in the Common Stock during the four calendar weeks preceding the
required filing of a Form 144 with respect to such sale. Sales under Rule 144
are generally subject to the availability of current public information about
the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, is entitled to sell such shares without having to comply with the manner
of sale, public information, volume limitation or notice filing provisions of
Rule 144.
All of the Company's stockholders (including the Company's executive officers
and directors), who in the aggregate beneficially own shares of Common
Stock of the Company, have agreed that they will not, subject to certain limited
exceptions, directly or indirectly, offer, sell or otherwise dispose of any
shares of Common Stock or any securities exercisable for any such shares for a
period of 180 days after the effective date of the Offering without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation.
57
<PAGE> 59
UNDERWRITING
Under the terms of, and subject to the conditions contained in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, each of the underwriters named
below (the "Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities
Corporation is acting as the representative (the "Representative"), has
severally agreed to purchase, and the Company has agreed to sell to each
Underwriter, the number of shares of Common Stock set forth opposite the name of
such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation........
--------
Total............................................
========
</TABLE>
The costs and expenses payable by the Company in connection with the offering,
other than underwriting commissions and discounts are estimated to be
approximately $ .
The Underwriting Agreement provides that the obligations of the Underwriters to
purchase shares of Common Stock are subject to certain conditions, and that, if
any of the foregoing shares are purchased by the Underwriters pursuant to the
Underwriting Agreement, all the shares offered hereby must be purchased.
The Company has been advised that the Underwriters propose to offer the shares
of Common Stock directly to the public initially at the price to public set
forth on the cover page of this Prospectus, and to certain selected dealers (who
may include the Underwriters) at such public offering price less a selling
concession not in excess of $ per share. The selected dealers may
reallow a concession not in excess of $ per share to certain brokers
and dealers. After the initial public offering, the public offering price, the
concession to selected dealers and the reallowance may be changed by the
Representative.
The Company has granted to the Underwriters an option to purchase up to an
additional shares of Common Stock, at the initial price to
the public less the aggregate underwriting discount, solely to cover
over-allotments. This option may be exercised at any time up to 30 days after
the date of this Prospectus. To the extent that the Underwriters exercise such
option, each Underwriter will be committed, subject to certain conditions, to
purchase a number of shares proportionate to such Underwriter's initial
commitment as indicated in the preceding table. If all such shares
are purchased by the Underwriters, the total underwriting discount will be
$ .
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments that the Underwriters may be required to make in
respect thereof. Such indemnification provisions would require the Company to
hold the Underwriters harmless from and against any and all losses, claims,
damages, liabilities and judgments caused by any untrue statement contained in
this Prospectus or by any omission to state a material fact herein, except for
untrue statements or omissions based upon information relating to
58
<PAGE> 60
any Underwriter furnished in writing to the Company by such Underwriter
expressly for use in this Prospectus, and subject to certain other limitations.
The Company, and all of the Company's stockholders, including its executive
officers and directors, have agreed with the Underwriters not to offer, sell,
pledge, contract to sell, grant any option, right of warrant to purchase, or
otherwise transfer or dispose of directly or indirectly any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or in any manner transfer all or a portion of the economic
consequences associated with the ownership of any Common Stock for a period of
180 days after the date of the Prospectus without the prior written consent of
the Representative and subject to certain limited exceptions. See "Shares
Eligible for Future Sale."
No action has been taken in any jurisdiction by the Company or the Underwriters
that would permit a public offering of the Common Stock offered pursuant to the
Offering in any jurisdiction where action for that purpose is required, other
than the United States. The distribution of this Prospectus and the offering or
sale of the shares of Common Stock offered hereby in certain jurisdictions may
be restricted by law. Accordingly, the shares of Common Stock offered hereby may
not be offered or sold, directly or indirectly, and neither this Prospectus nor
any other offering material or advertisements in connection with the Common
Stock may be distributed or published, in or from any jurisdiction, except under
circumstances that will result in compliance with applicable rules and
regulations of any such jurisdiction. Such restrictions may be set out in
applicable Prospectus supplements. Persons into whose possession this Prospectus
comes are required by the Company and the Underwriters to inform themselves
about and to observe any applicable restrictions. This Prospectus does not
constitute an offer of, or an invitation to subscribe for purchase of, any
shares of Common Stock and may not be used for the purpose of an offer to, or
solicitation by, anyone in any jurisdiction or in any circumstances in which
such offer or solicitation is not authorized or is unlawful.
The Representative has informed the Company that the Underwriters do not intend
to confirm sales of Common Stock offered hereby to any accounts over which they
exercise discretionary authority.
The Company has applied to list the Common Stock on the Nasdaq National Market
under the trading symbol "AQVV."
Prior to the Offering, there has been no public market for the Common Stock. The
initial public offering price for the shares of Common Stock will be negotiated
between the Company and the Representative. The factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to the prevailing market conditions, will be the Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of the
above factors in relation to market valuation of companies in related
businesses.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Specifically, the Underwriters may bid for and purchase shares of Common Stock
in the open market to cover syndicate short positions. In addition, the
Underwriters may bid for and purchase shares of Common Stock in the open market
to stabilize the price of the Common Stock. These activities may stabilize or
maintain the market price of the Common Stock above
59
<PAGE> 61
independent market levels. The Underwriters are not required to engage in these
activities and may end these activities at any time.
In the ordinary course of its business, Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") has entered into an agreement to serve as financial advisor
to the Company. As compensation therefor, DLJ may receive, at its option, either
cash payable by the Company or options to purchase Common Stock from R.W.
Gunnerman.
LEGAL MATTERS
The validity of the shares of Common Stock offered by the Company hereby will be
passed upon for the Company by Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
a Professional Corporation, San Francisco, California, which has acted as
counsel to the Company in connection with the Offering. Certain legal matters in
connection with the Offering will be passed upon for the Underwriters by Andrews
& Kurth L.L.P., Houston, Texas.
EXPERTS
The balance sheets of A-55, L.P. as of December 31, 1996 and 1997, and the
related statements of operations, partners' capital (deficit) and cash flows for
each of the three years in the period ended December 31, 1997, and the period
from November 1, 1992 (inception) through December 31, 1997, and the results of
operations and cash flows of Advanced Fuels L.L.C. for the periods ended
December 31, 1995 and October 24, 1996 and for the period from July 6, 1994
(inception) through October 24, 1996, and the balance sheets of A-55, Inc. as of
December 31, 1997 and June 30, 1998, included in this Prospectus, have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
60
<PAGE> 62
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form S-1
(together with all amendments, exhibits, schedules and supplements thereto, the
"Registration Statement") under the Securities Act of 1933, as amended, with
respect to the Common Stock offered hereby. This Prospectus, which forms a part
of the Registration Statement, does not contain all of the information set forth
in the Registration Statement. For further information with respect to the
Company and the Common Stock, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference to such exhibit. Copies of the Registration Statement may be
examined without charge at the Public Reference Section of the Commission, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and the Commission's
Regional Offices located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of the Registration Statement can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed by
the Commission. Information on the operation of the Public Reference Section of
the Commission may be obtained by calling the Commission at 1-800-SEC-0330. The
Commission maintains a World Wide Web site that contains registration
statements, reports, proxy and information statements and other information
regarding registrants (including the Company) that file electronically with the
Commission. The address of such World Wide Web site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports containing
financial statements for each fiscal year audited by independent auditors.
61
<PAGE> 63
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
A-55, INC.
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-2
Balance Sheet as of December 31, 1997 and June 30, 1998..... F-3
Notes to Financial Statement................................ F-4
A-55, L.P.
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-6
Balance Sheets as of December 31, 1996 and 1997, and June
30, 1998.................................................. F-7
Statements of Operations for the period from November 1,
1992 (inception) to December 31, 1997, and for the years
ended December 31, 1995, 1996 and 1997, and for the six
months ended June 30, 1997 and 1998....................... F-8
Statements of Partners' Capital (Deficit) for the period
from November 1, 1992 (inception) to December 31, 1997,
and for the years ended December 31, 1995, 1996 and 1997,
and for the six months ended June 30, 1997 and 1998....... F-9
Statements of Cash Flows for the period from November 1,
1992 (inception) to December 31, 1997, and for the years
ended December 31, 1995, 1996 and 1997, and for the six
months ended June 30, 1997 and 1998....................... F-10
Notes to Financial Statements............................... F-11
ADVANCED FUELS L.L.C.
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-21
Statements of Operations for the period from July 6, 1994
(inception) to October 24, 1996, and for the year ended
December 31, 1995, and for the period ended October 24,
1996...................................................... F-22
Statements of Cash Flows for the period from July 6, 1994
(inception) to October 24, 1996, and for the year ended
December 31, 1995, and for the period ended October 24,
1996...................................................... F-23
Notes to Financial Statements............................... F-24
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Pro Forma Combined Balance Sheet as of June 30, 1998........ F-26
Pro Forma Combined Statement of Operations for the six
months ended June 30, 1998................................ F-27
Pro Forma Combined Statement of Operations for the year
ended December 31, 1997................................... F-28
Notes to Pro Forma Combined Financial Statements............ F-29
</TABLE>
F-1
<PAGE> 64
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
A-55, Inc.
In our opinion, the accompanying balance sheets present fairly, in all material
respects, the financial position of A-55, Inc. at December 31, 1997 and June 30,
1998 in conformity with generally accepted accounting principles. This financial
statement is the responsibility of the Company's management; our responsibility
is to express an opinion on this financial statement based on our audits. We
conducted our audits of this statement in accordance with generally accepted
auditing standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Sacramento, CA
August 7, 1998
F-2
<PAGE> 65
A-55, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
<S> <C> <C>
ASSETS
Deferred offering costs................................. $157,800 $291,500
-------- --------
Total assets.................................. $157,800 $291,500
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to affiliate........................................ $157,800 $291,500
-------- --------
Total liabilities............................. 157,800 291,500
-------- --------
Commitment
Stockholders' equity:
Preferred stock, $0.001 par value; 1,000 shares
authorized, no shares issued or outstanding........ -- --
Common stock, $0.001 par value; 9,000 shares
authorized, no shares issued or outstanding........ -- --
Paid-in capital
Retained earnings..................................... -- --
-------- --------
Total stockholders' equity.................... -- --
-------- --------
$157,800 $291,500
======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-3
<PAGE> 66
A-55, INC.
NOTES TO FINANCIAL STATEMENT
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
A-55, Inc. (the "Company"), a Delaware corporation, has been established to
develop, produce and market environmental technology related to cost-competitive
clean fuels.
The Company was formed in July 1997 in anticipation of a merger of certain
entities under common control (the "Reorganization"). The Reorganization will be
undertaken in connection with the planned offering of common stock (the
"Offering").
The balance sheet should be read in conjunction with the historical Financial
Statements of A-55, L.P. (the "Predecessor"), included elsewhere in this
Prospectus.
FINANCIAL STATEMENT PRESENTATION
The preparation of the balance sheet in conformity with generally accepted
accounting principals 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 balance sheet. Actual
results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company will account for stock-based employee compensation arrangements in
accordance with the provisions of APB No. 25 "Accounting for Stock Issued to
Employees", and comply with the disclosure provisions of SFAS No. 123
"Accounting for Stock-Based Compensation". Under APB No. 25, compensation cost
is recognized based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to acquire
the stock.
INCOME TAXES
Income taxes are computed using the asset and liability method under which
deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between tax bases and financial reporting
bases of assets and liabilities.
2. DEFERRED OFFERING COSTS AND DUE TO AFFILIATE
Through December 31, 1997 and June 30, 1998, the Predecessor has incurred costs
totaling $157,800 and $291,500, respectively, in conjunction with the Offering.
These costs have been transferred to the Company by the Predecessor and are
reflected as deferred offering costs, with the corresponding liability recorded
as due to affiliate, in the accompanying balance sheets. If the Offering is
consummated, the costs will be deducted from the proceeds from the Offering. If
the Offering is not consummated, the costs will be charged to expense in the
period in which a decision has been made to terminate the Offering. In such
event, the costs would be borne by the Predecessor.
3. STOCK OPTIONS
Pursuant to an employment agreement, the Company will, upon the completion of
the Offering, grant an option to purchase 150,000 shares of the Company's common
stock to an employee. The shares will vest ratably over a five year period. The
exercise price of the option will equal the Offering price of the Company's
common stock.
F-4
<PAGE> 67
A-55, INC.
NOTES TO FINANCIAL STATEMENT (CONTINUED)
In July 1998, R. W. Gunnerman granted a key employee of the Predecessor the
option to purchase from R. W. Gunnerman up to a two percent interest in the
Company, based upon the total issued shares immediately following the Offering,
at a purchase price equal to ten percent below the Offering price of the
Company's common stock. The option will vest in June 2001 and allows for
accelerated vesting based upon completion of certain performance criteria by the
employee.
4. COMMITMENT
The Company has entered into an agreement with an entity that will provide
financial advisory services to the Company for a period of up to 24 months,
commencing October 1, 1998. The entity will receive up to $2,000,000 for such
services rendered contingent upon the occurrence of one or more transactions as
defined in the agreement. In lieu of any cash payment, the entity may elect to
receive options to purchase up to 1.6 percent of the Common Stock of the Company
from R. W. Gunnerman.
F-5
<PAGE> 68
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
A-55, L.P.
In our opinion, the accompanying balance sheets and the related statements of
operations, of partners' capital (deficit) and of cash flows present fairly, in
all material respects, the financial position of A-55, L.P. (a development stage
enterprise) at December 31, 1996 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1997
and the period from November 1, 1992 (inception) through December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the management of A-55, L.P.; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Sacramento, CA
October 5, 1998
F-6
<PAGE> 69
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1996 1997 1998
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.............................. $ 795,500 $ 783,800 $ 196,400
Inventories....................... -- 97,700 148,600
Other current assets.............. 6,600 18,400 26,300
Receivable from affiliate......... -- 157,800 291,500
----------- ------------ ------------
Total current assets...... 802,100 1,057,700 662,800
Property and equipment, net......... 1,487,200 1,443,500 1,423,300
Intellectual property, net.......... 3,362,000 2,175,400 1,582,100
----------- ------------ ------------
$ 5,651,300 $ 4,676,600 $ 3,668,200
=========== ============ ============
LIABILITIES AND PARTNERS' DEFICIT
Current liabilities:
Trade accounts payable............ $ 139,900 $ 482,500 $ 445,100
Accrued expenses.................. 1,794,800 2,737,200 2,896,200
Advances from R.W. Gunnerman and
related accrued interest....... 8,522,500 11,386,600 14,631,100
----------- ------------ ------------
Total current
liabilities............ 10,457,200 14,606,300 17,972,400
Deferred revenue.................... -- 2,414,700 2,414,700
----------- ------------ ------------
Total liabilities......... 10,457,200 17,021,000 20,387,100
----------- ------------ ------------
Commitments and contingencies (Note
8)
Partners' deficit:
General partner's contributions,
net of distributions........... 1,180,200 1,180,200 1,180,200
Limited partners' contributions,
net of distributions........... 228,500 228,500 228,500
Deficit accumulated during
development stage.............. (6,214,600) (13,753,100) (18,127,600)
----------- ------------ ------------
Total partners' deficit... (4,805,900) (12,344,400) (16,718,900)
----------- ------------ ------------
$ 5,651,300 $ 4,676,600 $ 3,668,200
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 70
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED,
NOVEMBER 1, 1992 YEARS ENDED DECEMBER 31, JUNE 30,
(INCEPTION) TO ------------------------------------- -------------------------
DECEMBER 31, 1997 1995 1996 1997 1997 1998
----------------- --------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Expenses:
General and
administrative......... $ 5,911,400 $ 534,400 $ 989,000 $ 2,081,500 $ 943,200 $ 2,503,400
Research and
development............ 2,637,300 19,600 184,900 1,927,200 601,300 254,700
Sales and marketing...... 1,284,000 500 559,500 623,800 253,600 281,500
Legal.................... 1,425,000 243,600 152,300 852,400 43,800 135,400
Depreciation and
amortization........... 1,954,100 36,600 261,000 1,361,600 689,400 666,800
------------ --------- ----------- ----------- ----------- -----------
13,211,800 834,700 2,146,700 6,846,500 2,531,300 3,841,800
Other income (expense):
Joint venture
activities............. 370,200 (27,400) (383,000) -- -- --
Interest and other
income................. 318,600 2,100 235,000 65,000 155,600 11,700
Interest expense......... (30,400) (9,800) (7,300) (1,800) (1,800) --
Interest expense to
related parties........ (1,199,700) (9,000) (402,800) (755,200) (352,000) (544,400)
------------ --------- ----------- ----------- ----------- -----------
Net loss................... $(13,753,100) $(878,800) $(2,704,800) $(7,538,500) $(2,729,500) $(4,374,500)
============ ========= =========== =========== =========== ===========
Allocation of net loss:
General partner.......... $ (2,636,300) $ (8,800) $ (27,000) $ (75,400) (26,300) (43,700)
Limited partners......... (11,116,800) (870,000) (2,677,800) (7,463,100) (2,703,200) (4,330,800)
------------ --------- ----------- ----------- ----------- -----------
$(13,753,100) $(878,800) $(2,704,800) $(7,538,500) $(2,729,500) $(4,374,500)
============ ========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 71
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
----------- ------------ ------------
<S> <C> <C> <C>
Partners' capital, November 1, 1992
(inception)....................... $ -- $ -- $ --
Contributions..................... 2,214,000 2,697,600 4,911,600
Distributions..................... (1,170,000) (1,916,700) (3,086,700)
Partnership interests issued to
employees...................... -- 1,324,000 1,324,000
Reclassification of partnership
status......................... 144,900 (144,900) --
Net loss.......................... (2,525,100) (105,900) (2,631,000)
----------- ------------ ------------
Partners' capital (deficit),
December 31, 1994................. (1,336,200) 1,854,100 517,900
Contributions..................... -- 9,800 9,800
Net loss.......................... (8,800) (870,000) (878,800)
----------- ------------ ------------
Partners' capital (deficit),
December 31, 1995................. (1,345,000) 993,900 (351,100)
Distributions..................... (8,700) (1,741,300) (1,750,000)
Net loss.......................... (27,000) (2,677,800) (2,704,800)
----------- ------------ ------------
Partners' deficit, December 31,
1996.............................. (1,380,700) (3,425,200) (4,805,900)
Net loss.......................... (75,400) (7,463,100) (7,538,500)
----------- ------------ ------------
Partners' deficit, December 31,
1997.............................. (1,456,100) (10,888,300) (12,344,400)
Net loss (Unaudited).............. (43,700) (4,330,800) (4,374,500)
----------- ------------ ------------
Partners' deficit, June 30, 1998
(Unaudited)....................... $(1,499,800) $(15,219,100) $(16,718,900)
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 72
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1,
1992 SIX MONTHS ENDED
(INCEPTION) TO YEARS ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, -------------------------------------- -------------------------
1997 1995 1996 1997 1997 1998
------------------ ---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss....................... $(13,753,100) $ (878,800) $(2,704,800) $(7,538,500) $(2,729,500) $(4,374,500)
Adjustments to reconcile net
loss to net cash (used in)
provided by operating
activities:
Depreciation and
amortization............... 1,954,100 36,600 261,000 1,361,600 689,400 666,800
Receivables from Advanced
Fuels offset against
purchase price of joint
venture.................... (331,900) -- (331,900) -- -- --
Equity in loss of joint
venture.................... 3,430,200 1,027,400 1,133,000 -- -- --
Loss on disposal of property
and equipment.............. 28,000 -- -- 24,400 -- --
Compensation expense for
partnership interests
issued to employees........ 1,324,000 -- -- -- -- --
Changes in operating assets
and liabilities:
Inventory.................. (97,700) -- -- (97,700) (44,800) (50,900)
Other current assets....... (18,400) 2,400 5,800 (11,800) (27,600) (7,900)
Receivable from
affiliate................ (157,800) -- -- (157,800) -- (133,700)
Trade accounts payable..... 482,500 12,700 126,300 342,600 8,400 (37,400)
Accrued expenses........... 2,737,200 120,200 1,632,000 942,400 1,524,400 159,000
Accrued interest........... 1,092,800 1,600 336,000 755,200 352,000 544,400
Deferred revenue........... 2,414,700 -- -- 2,414,700 -- --
------------ ---------- ----------- ----------- ----------- -----------
Net cash (used in) provided
by operating
activities............... (895,400) 322,100 457,400 (1,964,900) (227,700) (3,234,200)
------------ ---------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment.................... (2,041,200) (2,600) (88,100) (155,700) (23,300) (53,300)
Contributions to joint
venture...................... (990,000) (490,000) -- -- -- --
Purchase of joint venture...... (5,668,100) -- (5,668,100) -- -- --
------------ ---------- ----------- ----------- ----------- -----------
Net cash used for investing
activities............... (8,699,300) (492,600) (5,756,200) (155,700) (23,300) (53,300)
------------ ---------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Partners' contributions........ 4,921,400 9,800 -- -- -- --
Distributions to partners...... (4,836,700) -- (1,750,000) -- -- --
Advances from R. W. Gunnerman,
net.......................... 10,293,800 89,400 7,838,600 2,108,900 1,059,000 2,700,100
------------ ---------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities..... 10,378,500 99,200 6,088,600 2,108,900 1,059,000 2,700,100
------------ ---------- ----------- ----------- ----------- -----------
Net change in cash............. 783,800 (71,300) 789,800 (11,700) 808,000 (587,400)
Cash, beginning of period...... -- 77,000 5,700 795,500 795,500 783,800
------------ ---------- ----------- ----------- ----------- -----------
Cash, end of period............ $ 783,800 $ 5,700 $ 795,500 $ 783,800 $ 1,603,500 $ 196,400
============ ========== =========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Interest paid.................. $ 137,300 $ 17,200 $ 74,100 $ 1,800 $ 1,800 $ --
============ ========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 73
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
A-55, L.P. (the Partnership or the Predecessor) was formed as a Delaware limited
partnership in November 1992 for the purpose of developing, producing and
marketing environmental technology related to cost-competitive clean fuels (the
"A-55 Technology"). In January 1994, the Partnership was reorganized as a Nevada
limited partnership.
The Predecessor is a development stage enterprise and, to date, has focused its
efforts primarily on the development of the A-55 Technology. The A-55 Technology
includes the Predecessor's proprietary additive which allows for the stable
blend of almost any petroleum product with water to create clean fuels that are
both less expensive to use and environmentally cleaner than many fossil fuels
used today. The Predecessor's development activities have included internal
research and development as well as research and development conducted through a
since-dissolved joint venture with Caterpillar, Inc. (Note 4).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PLANNED OFFERING AND RELATED COSTS
In connection with the initial public offering, the Predecessor intends to
complete a merger (the "Reorganization") with A-55, Inc. (the "Company"), a
Delaware corporation, with the Company continuing as the surviving entity of
such merger. As a result of the Reorganization, the partners of the Predecessor
will become the sole stockholders of the Company with the same proportionate
ownership interests in the Company as they owned in the Predecessor immediately
prior to the Reorganization. In conjunction with the Reorganization, the
Predecessor intends to make certain Partner distributions totaling $2,145,300.
The Predecessor has incurred costs totaling $157,800 and $291,500 on behalf of
the Company at December 31, 1997 and June 30, 1998 in connection with capital
raising efforts. These costs have been charged to the Company and the
corresponding receivable has been recorded by the Predecessor.
FINANCIAL STATEMENT PRESENTATION
The preparation of the 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.
REVENUE RECOGNITION
Revenue from territorial license agreements will be recognized when the licensee
has completed all contractual requirements to be granted a license and
collection of license fees is reasonably assured.
F-11
<PAGE> 74
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and consist primarily of
costs incurred in the development of the Predecessor's aqueous fuel technology.
INCOME TAXES
No provisions have been made for federal or state income taxes because such
taxes, if any, are the responsibility of the individual partners.
Differences between the tax and book bases of the Predecessor's assets and
liabilities exist due primarily to the amortization period of intellectual
property, the timing of revenue recognition and the deductibility of certain
accrued expenses. This difference results in net assets for tax purposes being
$2,195,800 and $7,389,000 greater than the net assets for book purposes at
December 31, 1996 and 1997.
As noted in "Planned Offering and Related Costs" above, the Predecessor intends
to transfer all of its assets and liabilities to the Company in exchange for all
the outstanding shares of common stock of the Company. Following the transfer,
the Company will be subject to income taxes as a C Corporation.
A pro forma provision for income taxes, showing the tax effects as if the
Predecessor had always been subject to income taxes as a C corporation, has not
been included in the accompanying statement of operations. No income tax benefit
would be recognized for the years ended December 31, 1995, 1996 and 1997 due to
the Predecessor recognizing pre-tax losses and there is substantial doubt as to
the Predecessor's ability to utilize these losses in the future.
ADVERTISING
The Predecessor expenses the costs of advertising the first time advertising
takes place. Advertising expenses, for the years ended December 31, 1995, 1996,
and 1997 as well as the six months ended June 30, 1997 and 1998 were not
significant.
ALLOCATION OF INCOME, LOSSES AND DISTRIBUTIONS
The Predecessor has three classes of limited partnership interests: A, B and C.
Losses are allocated to all partners, except Class C limited partners, based on
participation percentages. No additional losses are allocated to Class B limited
partners whose capital balances fall to zero. Any remaining losses are allocated
to the general partner.
After offsetting prior losses, 50% of all profits, and 50% of distributions of
cash from operations as determined by the general partner, are allocated to
Class B limited partners until they are allocated an amount equal to their
original capital contributions. The remaining 50% is allocated to the other
partners, including the general partner, based on their relative participation
percentages. Thereafter, profits and distributions are allocated to all
partners, including the general partner, based on participation percentages.
F-12
<PAGE> 75
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Class C limited partners have no initial capital contribution requirements.
INVENTORIES
Inventories consist primarily of fuel-blending units held for sale. Inventories
are stated at the lower of cost (determined using the first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. The cost of maintenance and repairs
is expensed as incurred; significant renewals and betterments are capitalized.
Depreciation expense is recognized on the straight-line method over estimated
useful lives as follows:
<TABLE>
<S> <C>
Buildings.................................. 31 years
Machinery and equipment.................... 5 years
Office furniture and equipment............. 5 - 7 years
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1996, 1997 and the
six months ended June 30, 1997 and 1998 was $36,600, $63,200, $175,000, $96,100
and $73,500 respectively.
INTELLECTUAL PROPERTY
Intellectual property represents the fair value of the rights to Advanced Fuels'
aqueous fuel technology re-acquired by the Predecessor in October 1996 (Note 4).
Intellectual property is amortized on a straight-line basis over three years.
Amortization expense for the years ended December 31, 1996 and 1997 was $197,800
and $1,186,600, respectively, and was $593,300 for the six months ended June 30,
1997 and 1998, respectively.
PARTNERSHIP CAPITAL-BASED COMPENSATION
The Predecessor accounts for Partnership capital-based employee compensation
arrangements in accordance with the provisions of APB No. 25, "Accounting for
Stock Issued to Employees," and complies with the disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." Under APB 25, compensation
cost is recognized based on the difference, if any, on the date of grant between
the fair value of the Predecessor's capital interests and the amount an employee
must pay to acquire the partnership interest.
INTERIM FINANCIAL DATA (UNAUDITED)
The unaudited financial statements as of June 30, 1998 and for the six months
ended June 30, 1997 and 1998 have been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of management, include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations, in
accordance with generally accepted accounting principles.
F-13
<PAGE> 76
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. BALANCE SHEET COMPONENTS
The components of certain balance sheet captions are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------ -----------
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Property and equipment, net:
Land and improvements.......... $ 377,900 $ 513,800 $ 513,800
Buildings and improvements..... 763,300 628,800 628,800
Machinery and equipment........ 390,700 435,300 470,800
Office furniture and
equipment................... 115,800 194,200 212,000
---------- ---------- ----------
1,647,700 1,772,100 1,825,400
Less--accumulated
depreciation................ (160,500) (328,600) (402,100)
---------- ---------- ----------
$1,487,200 $1,443,500 $1,423,300
========== ========== ==========
Accrued expenses:
Refundable marketing fees...... $1,500,000 $1,500,000 $1,500,000
Legal.......................... 200,000 1,000,000 1,000,000
Other.......................... 94,800 237,200 396,200
---------- ---------- ----------
$1,794,800 $2,737,200 $2,896,200
========== ========== ==========
</TABLE>
In 1996, the Predecessor received $1,500,000 from an individual who signed a one
year agreement to represent the Predecessor in marketing its aqueous fuel
technology. Under the agreement, the Predecessor would have been obligated to
pay the individual an agreed-upon royalty from any sales resulting from the
individual's efforts during the one year period. No such sales agreements were
consummated during this period. In September 1998, R. W. Gunnerman assumed the
liability to refund these marketing fees, and the Advances from R. W. Gunnerman
were increased accordingly. See Note 5.
4. ADVANCED FUELS JOINT VENTURE
In July 1994, the Predecessor formed a joint venture, Advanced Fuels, L.L.C.,
(Advanced Fuels), with Caterpillar, Inc. (Caterpillar), to commercialize the
A-55 aqueous fuel technology for use in internal combustion engines, including
spark-ignited (gasoline), compression-ignited (diesel) and turbine engines.
Pursuant to the formation agreement, the Predecessor contributed, in exchange
for a 49% interest in Advanced Fuels, $500,000 cash, $303,200 of equipment at
its net book value, and an exclusive license to the A-55 aqueous fuel technology
for the specified purposes of Advanced Fuels. In 1995, the Predecessor
contributed an additional $490,000 cash to Advanced Fuels.
F-14
<PAGE> 77
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Under the joint venture agreement, the Predecessor agreed to provide Advanced
Fuels with consulting services regarding business and technology matters,
potential sales licenses, patent issues and the supervision of fuel testing. For
these consulting services, Advanced Fuels remitted cash to the Predecessor of
$1,000,000 and $750,000 for the years ended December 31, 1995 and 1996,
respectively.
The Predecessor accounted for its investment in the Advanced Fuels joint venture
under the equity method of accounting. A-55's share of the net losses of
Advanced Fuels was $1,027,400 and $1,133,000 for the years ended December 31,
1995 and 1996, respectively. A significant portion of the expenses incurred by
Advanced Fuels were paid by the Predecessor with subsequent reimbursement
received from Advanced Fuels. These transactions are not included in the
Predecessor's statements of operations except to the extent losses were
allocated by the joint venture. Total Advanced Fuels expenses funded by the
Predecessor were $506,600 and $1,170,000 for the years ended December 31, 1995
and 1996, respectively.
In October 1996, the Predecessor, using funds borrowed from R. W. Gunnerman,
acquired Caterpillar's 51% interest in Advanced Fuels for $6,000,000 and the
joint venture was dissolved. Under the terms of the dissolution agreement, the
Predecessor acquired all tangible assets of Advanced Fuels. Advanced Fuels'
liabilities to the Predecessor and Caterpillar were forgiven. No third party
liabilities of Advanced Fuels existed at the date of dissolution. Pursuant to
the dissolution agreement, Caterpillar was granted (i) exclusive rights to the
engine-related technology with respect to the conversion of Caterpillar engines,
(ii) nonexclusive rights to the engine-related technology with respect to the
conversion of non-Caterpillar engines to consume aqueous fuel produced by
Caterpillar (until October 24, 1999, these nonexclusive rights become operative
only under certain circumstances), (iii) nonexclusive rights to the fuel-related
technology to make, have made, use or sell (but not license) gasoline- or
naphtha-based aqueous fuels, but only for Caterpillar diesel and natural gas
engines, (iv) nonexclusive rights to the fuel-related technology to sell
diesel-based aqueous fuel in all applications for products of the kind sold by
Caterpillar, and (v) beginning on October 24, 2001, nonexclusive rights to the
fuel-related technology to license diesel-based aqueous fuel in all applications
for products of the kind sold by Caterpillar. The Predecessor and Caterpillar
also agreed to pay each other a royalty in the amount of $0.005 per gallon of
aqueous fuel (or the equivalent in surfactant) sold by it directly, through
license, by sale of technology or by other action. The first royalty payment is
not payable until a party and its licensees have cumulatively sold 2.0 billion
gallons of aqueous fuel (or the equivalent in surfactant). The royalty
obligation is effective for ten years from the date the first royalty payment is
due. The parties also agreed that, should the Predecessor or Caterpillar enter
into an arrangement with an oil company for the manufacture or distribution or
diesel-based aqueous fuel and receive a lump sum payment in connection
therewith, the other party would be entitled to 20% of the lump sum payment. At
December 31, 1996 and 1997, no amounts were payable or receivable under the
royalty agreement or lump sum payment agreement.
F-15
<PAGE> 78
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Predecessor accounted for the acquisition using the purchase method of
accounting. The purchase price consisted of $5,668,100 in cash and the
forgiveness by the Predecessor of $331,900 of receivables from Advanced Fuels,
reduced by the reversal of the Predecessor's liability to fund Advanced Fuels'
deficit totaling $2,086,600. The net purchase price of $3,913,400 was allocated
as follows:
<TABLE>
<S> <C>
Equipment.......................................... $ 353,600
Intellectual property.............................. 3,559,800
----------
$3,913,400
==========
</TABLE>
The acquired equipment was capitalized to property and equipment, as it will be
utilized by A-55 in its ongoing research efforts. The liability for accumulated
deficit consists of A-55's underfunded investment in Advanced Fuels at the date
of the acquisition. Intellectual property was capitalized as an intangible asset
as it represents the fair value of the rights to Advanced Fuels' aqueous fuel
technology acquired by the Predecessor.
The above joint venture activity has been reflected as "joint venture
activities" in the statements of operations as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Equity in net loss of joint venture... $1,027,400 $1,133,000
Consulting revenues earned from joint
venture............................. (1,000,000) (750,000)
---------- ----------
$ 27,400 $ 383,000
========== ==========
</TABLE>
In the opinion of management, the consulting revenues earned from the joint
venture approximate those that would be earned in an arm's-length transaction
with other third parties.
F-16
<PAGE> 79
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. ADVANCES FROM R. W. GUNNERMAN AND RELATED ACCRUED INTEREST
The Predecessor has borrowing arrangements with the developer of A-55's
proprietary technology, who is a limited partner and the majority shareholder in
a corporation, which is the general partner of the Partnership (R. W.
Gunnerman), to provide funding for the general operations of the Predecessor.
Advances from R. W. Gunnerman and the related accrued interest consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------- -----------
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Unsecured advances, bearing
interest at prime (8.5% at
December 31, 1997) and due at
dates ranging from on demand
to February 1999............. $8,184,900 $10,293,800 $12,993,800
Accrued interest on advances... 337,600 1,092,800 1,637,300
---------- ----------- -----------
$8,522,500 $11,386,600 $14,631,100
========== =========== ===========
</TABLE>
Subsequent to June 30, 1998, the Predecessor has received $2,560,000 of
additional advances from R. W. Gunnerman. Additionally, in September 1998, R. W.
Gunnerman assumed the Predecessor's $1,500,000 liability for refundable
marketing fees. See Note 3. These advances are due on demand and bear interest
at prime.
Estimation of the fair value of advances from R. W. Gunnerman is not considered
practicable due to the relationships involved.
6. TERRITORIAL LICENSE AGREEMENTS
During the year ended December 31, 1997, the Predecessor entered into four
territorial license agreements: (i) one covering Australia, New Zealand and
Papau New Guinea (the "Australia License"), (ii) one covering the Republic of
Korea and the Democratic People's Republic of Korea (the "Korean License"), and
(iii) two covering the Russian Federation (the "Russian Licenses"). Each of
these licenses provides for payment to the Predecessor of certain initial
territorial license fees and an on-going royalty which ranges from 0.5% to 1.0%
of the sales in the applicable territory. Additionally, the Predecessor is
granted a 30% ownership interest in the licensee corporation. The initial
territorial license fees under the Australian, Korean, and Russian Licenses
amount to $35.0 million in the aggregate. Of this amount, the Australian and
Korean Licenses together account for $15.0 million, all of which has become due,
but only $2,414,700 of which has been paid to date. The Predecessor has
suspended the payment obligations of the licensee under the Australian License
pending completion of certain field tests being performed by the licensee in
Australia and is currently negotiating a revised payment schedule with the
licensee under the Korean License. All cash collected from the Australian and
Korean licenses has been recorded as deferred revenue pending the completion of
the field tests and negotiation of the revised payment schedule. Under the
Russian License, territorial license payments are not due until the licensee
completes certain field tests and other
F-17
<PAGE> 80
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
detail requirements, which have not been completed to date. No royalties have
been paid under any of the licenses.
7. PARTNERSHIP OPTIONS
In January 1996, R. W. Gunnerman granted a key employee the option to purchase a
three-quarter percent limited partnership interest, owned by R. W. Gunnerman,
for $750,000. The option vested 33.3 percent immediately as of the date of grant
and the remaining portion vested 33.3 percent in January 1997 and 1998. At each
vesting date, the employee exercised the option in exchange for a note payable
to R. W. Gunnerman and acquired the vested partnership interest. In September
1997, R. W. Gunnerman granted another key employee the option to purchase a one
percent limited partnership interest, owned by R. W. Gunnerman, for $5,000,000.
In management's judgment, the fair market value of this partnership interest on
the date of grant was $3,000,000. The option vested immediately as of the date
of grant and was exercised in September 1998 in exchange for $225,000 in cash
and a note payable to R. W. Gunnerman for the balance. In January 1998, R. W.
Gunnerman granted an individual the option to purchase a one percent partnership
interest, owned by R. W. Gunnerman, for $3,000,000. In management's judgment,
the fair market value of this partnership interest on the date of grant was
$3,000,000. The option vested immediately and expires ten years from the date of
grant.
In conjunction with the Offering described in Note 2, all unexercised options to
purchase limited partnership interests convert, without change to the original
exercise price and vesting period, into options to purchase common stock of the
Company from R. W. Gunnerman. Additionally, the percentage ownership interest
the optionee is entitled to purchase does not change upon the conversion of the
options. This ownership percentage is determined based upon the total number of
common shares outstanding immediately following the completion of the Offering.
The Predecessor has applied APB Opinion 25 and related Interpretations in
accounting for the issuance of these options. No compensation cost was charged
against operations for these options as the fair market value of the interest
approximated the exercise price on the date of grant. Had compensation costs for
the years ended December 31, 1996 and 1997 related to the options been
determined based on the minimum value of the options at the grant date
consistent with FASB Statement 123, the Predecessor's net loss would have been
increased to the pro forma amount indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Net loss:
As reported........................... $2,704,800 $7,538,500
Pro forma............................. $2,738,000 $7,655,100
</TABLE>
The fair value of the options are estimated on the date of the grant using a
minimum value option-pricing model with the following weighted-average
assumptions used for the grant: risk-free weighted average interest rate of 7%,
distribution rate of 0% and weighted average expected option life of 1.5 years.
Minimum value option-pricing models require the input of highly subjective
assumptions, which are subject to change from time to time.
F-18
<PAGE> 81
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
During April 1997, the Predecessor entered into a three year operating lease to
lease a facility from R. W. Gunnerman. Future minimum rental payments under the
operating lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
<S> <C>
1998.................................... $ 756,000
1999.................................... 756,000
2000.................................... 252,000
----------
$1,764,000
==========
</TABLE>
Rent expense under the operating lease totaled $0, $0 and $441,000 for the years
ended December 31, 1995, 1996 and 1997, respectively, and totaled $63,000 and
$378,000 for the six month periods ended June 30, 1997.
PROFESSIONAL SERVICES
The Predecessor has entered into an agreement with an entity that will provide
financial advisory services to the Predecessor for a period of up to 24 months,
commencing October 1, 1998. The entity will receive up to $2,000,000 for such
services, contingent upon the occurrence of one or more transactions as
described in the agreement. In lieu of any cash payment, the entity may elect to
receive options to purchase common stock of the Company from R. W. Gunnerman.
EMPLOYMENT AGREEMENTS
The Predecessor has entered into employment agreements with certain key
employees which entitle the employees to severance benefits ranging from one to
three years of base salary if termination of the employee occurs without cause.
No amounts have been accrued for severance benefit expense at December 31, 1996,
1997 or June 30, 1998.
LEGAL PROCEEDINGS
The Predecessor and R. W. Gunnerman are named defendants in a lawsuit instituted
by a former limited partner of the Predecessor (the "Plaintiff") on March 29,
1995 in which the Plaintiff alleges that the Predecessor and R. W. Gunnerman
granted him an exclusive license to develop, market and sublicense the A-55
Technology in aviation-related applications pursuant to a letter agreement dated
September 20, 1993. In the suit, the Plaintiff seeks, among other things,
specific performance by the Predecessor and R. W. Gunnerman of their obligations
under the letter agreement, including providing him with information concerning
the formulation of A-55 Additive. After a court trial, judgment was entered on
June 19, 1997, ordering that (i) the Predecessor and R. W. Gunnerman perform
their obligations under the letter agreement and (ii) the Predecessor and R. W.
Gunnerman pay the court costs of the suit. On July 1, 1997, the Predecessor and
R. W. Gunnerman filed a Notice of Appeal. The Plaintiff then filed a
F-19
<PAGE> 82
A-55, L.P.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Motion of Enforcement of the June 19, 1997 judgment with the trial court. After
a hearing, on November 25, 1997, the Court granted the Plaintiff's motion,
requiring the posting of a $1,000,000 bond for damages suffered by the Plaintiff
pending the results of the Predecessor's appeal and requiring the Predecessor
and R. W. Gunnerman to disclose the formulation of the A-55 Additive to the
Plaintiff. The bond has not yet been posted, and the Plaintiff has filed various
motions to enforce the June 19, 1997 judgment in Nevada. The Predecessor's legal
expenses for the years ended December 31, 1995 and 1997 include accruals of
$200,000 and $800,000, respectively, for payment commitments related to this
lawsuit. The Predecessor and R. W. Gunnerman appealed the November 25, 1997
judgment to the appellate court. On August 24, 1998, the appellate court
affirmed the trial court's judgment, ordering that the formulation of A-55
Additive be disclosed to the Plaintiff; however, the Court has reversed the
damages award and the matter was remanded to the trial court for an evidentiary
hearing to determine the issue of damages. The Predecessor and R. W. Gunnerman
intend to appeal the decision of the appellate court. There can be no assurance
that the Predecessor and R. W. Gunnerman will be successful in the appeal, or
that, if the Predecessor and R. W. Gunnerman are successful in the appeal, that
the Predecessor and R. W. Gunnerman would be successful in any subsequent trial.
In early 1998, the Predecessor learned that Caterpillar had recently received
title by assignment to four United States patents related to the use of aqueous
fuel in internal combustion engines. The Predecessor believes that these patents
cover inventions developed by R. W. Gunnerman and should have been assigned to
the Predecessor under the terms of the Advanced Fuels dissolution agreement
between the Predecessor and Caterpillar. In April 1998, Caterpillar filed suit
in federal district court in Peoria, Illinois against the Predecessor,
requesting a declaration that Caterpillar owns all right, title, and interest in
and to the disputed patents. Caterpillar is not seeking monetary damages against
the Predecessor with respect to its suit. In July 1998, the district court ruled
in favor of the Predecessor's motion to compel arbitration of the dispute in
Denver, Colorado, as provided in the joint venture agreement, and stayed the
litigation pending the outcome of such arbitration. No amounts have been
recorded in the Financial Statements related to the future outcome of this
matter.
9. RELATED PARTY TRANSACTIONS
In addition to the related party transactions addressed in Notes 4, 5 and 8, the
Predecessor, during the six month period ended June 30, 1998, has paid
approximately $200,000 in travel expenses to a corporation wholly owned by R.W.
Gunnerman. No travel expenses to this entity were incurred prior to 1998.
10. SUBSEQUENT EVENTS
In September 1998, the Predecessor borrowed $1,500,000 from a third party under
a note payable, partially secured by real property. The note requires monthly
interest payments at prime plus 2.5%, and all unpaid principal and interest is
due in March 1999. The Predecessor transferred $1,000,000 of the loan proceeds
to R. W. Gunnerman as a reduction to the Advances from R. W. Gunnerman.
F-20
<PAGE> 83
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of
Advanced Fuels L.L.C.
In our opinion, the accompanying statements of operations and of cash flows
present fairly, in all material respects, the results of operations and cash
flows of Advanced Fuels L.L.C. (a development stage enterprise) for the periods
ended December 31, 1995 and October 24, 1996 and for the period from July 6,
1994 (inception) through October 24, 1996, in conformity with generally accepted
accounting principles. 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 audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As further described in Note 3 to the financial statements, on October 24, 1996,
one of the members acquired the interest of the other member and the Company was
dissolved.
PricewaterhouseCoopers LLP
Sacramento, CA
September 15, 1997
F-21
<PAGE> 84
ADVANCED FUELS L.L.C.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 6, 1994 PERIOD ENDED
(INCEPTION) TO YEAR ENDED OCTOBER 24,
OCTOBER 24, 1996 DECEMBER 31, 1996
(DISSOLUTION) 1995 (DISSOLUTION)
---------------- ------------ -------------
<S> <C> <C> <C>
Revenue:
Product sales...................... $ 31,800 $ 5,300 $ 26,500
Cost of revenue:
Product sales...................... 54,700 24,500 30,200
----------- ----------- -----------
Gross profit......................... (22,900) (19,200) (3,700)
----------- ----------- -----------
Expenses:
General and administrative......... 337,400 121,700 178,200
Research and development........... 2,448,700 848,200 1,190,300
Consulting fees to A-55............ 3,750,000 1,000,000 750,000
----------- ----------- -----------
6,536,100 1,969,900 2,118,500
----------- ----------- -----------
Operating loss....................... (6,559,000) (1,989,100) (2,122,200)
Other income (expense):
Interest income and other.......... 12,300 12,200 100
Interest expense to Caterpillar.... (350,800) (119,800) (190,200)
----------- ----------- -----------
Net loss............................. $(6,897,500) $(2,096,700) $(2,312,300)
=========== =========== ===========
Allocation of net loss:
Caterpillar........................ $(3,517,700) $(1,069,300) $(1,179,300)
A-55............................... (3,379,800) (1,027,400) (1,133,000)
----------- ----------- -----------
$(6,897,500) $(2,096,700) $(2,312,300)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 85
ADVANCED FUELS L.L.C.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 6, 1994 PERIOD ENDED
(INCEPTION) TO YEAR ENDED OCTOBER 24,
OCTOBER 24, 1996 DECEMBER 31, 1996
(DISSOLUTION) 1995 (DISSOLUTION)
---------------- ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................... $(6,897,500) $(2,096,700) $(2,312,300)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Depreciation and amortization... 151,700 63,200 57,900
Changes in operating assets and
liabilities:
Receivables from A-55......... (25,000) (25,000) --
Prepaid expenses and other
assets..................... -- (13,000) 13,000
Accounts payable to members... 428,900 (252,300) 222,900
Accrued interest payable to
Caterpillar................ 190,200 (1,200) 150,600
----------- ----------- -----------
Net cash used for operating
activities.............. (6,151,700) (2,325,000) (1,867,900)
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and
equipment....................... (139,400) -- (98,200)
Cash received on disposal of
property and equipment.......... 15,100 15,100 --
----------- ----------- -----------
Net cash (used for)
provided by investing
activities.............. (124,300) 15,100 (98,200)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' contributions............. 2,336,000 1,000,000 --
Proceeds from notes payable to
Caterpillar..................... 3,940,000 990,000 1,700,000
----------- ----------- -----------
Net cash provided by
financing activities.... 6,276,000 1,990,000 1,700,000
----------- ----------- -----------
Net change in cash................... -- (319,900) (266,100)
Cash, beginning of period............ -- 586,000 266,100
----------- ----------- -----------
Cash, end of period.................. $ -- $ 266,100 $ --
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during period for
interest........................ $ 160,600 $ 121,000 $ 39,600
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Member contributions of property
and equipment................... $ 303,200
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 86
ADVANCED FUELS L.L.C.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Advanced Fuels L.L.C. (the Company) was formed on July 6, 1994 as a limited
liability company pursuant to State of Delaware laws. The Company was 51% owned
by Caterpillar Inc. (Caterpillar), a Delaware corporation, and 49% owned by A-55
L.P. (A-55), a Nevada limited partnership, (collectively, the members). Advanced
Fuels was a development stage company formed to commercialize the A-55 aqueous
fuel technology for use in internal combustion engines, including spark ignited
(gasoline), compression ignited (diesel) and turbine engines. Caterpillar's
initial contribution to the Company consisted primarily of $836,000 cash. A-55's
initial contribution to the Company consisted of $500,000 cash, $303,200 of
equipment at its net book value and an exclusive license to the A-55 aqueous
fuel technology for the specified purposes of the Company. Additionally,
Caterpillar agreed to make periodic loans to the Company to fund its working
capital requirements. Caterpillar and A-55 were also required to contribute an
additional $510,000 and $490,000, respectively, to fund the 1995 operations of
Advanced Fuels. These contributions were paid by the members in 1995.
Income and loss for the operations of the Company were allocated to the members
in accordance with their respective ownership percentages.
Under the joint venture agreement, A-55 agreed to provide the Company with
consulting services regarding business and technology matters, potential sales
licenses, patent issues and the supervision of fuel testing. For these
consulting services, the Company remitted to A-55 $1,000,000 and $750,000 for
the periods ended December 31, 1995 and October 24, 1996.
Operations of the Company were conducted primarily at the headquarters of A-55,
utilizing employees of the members. The majority of expenses incurred by the
Company were paid by the members with subsequent reimbursement by the Company.
These transactions are recorded as expenses of the Company when incurred by the
members. Total Company expenses incurred by the members were $969,900 and
$1,368,500 for the periods ended December 31, 1995 and October 24, 1996,
respectively. As discussed in Note 3, on October 24, 1996, the Company was
dissolved.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION
The preparation of the 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.
REVENUE RECOGNITION
Revenue from product sales is recognized when the product is shipped.
F-24
<PAGE> 87
ADVANCED FUELS L.L.C.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs were expensed as incurred and consist primarily
of costs incurred in the development of the aqueous fuel technology.
MACHINERY AND EQUIPMENT
Machinery and equipment is carried at cost. Depreciation expense is recognized
on the declining balance method over a five-year useful life. The cost of
maintenance and repairs is expensed to operations are incurred; significant
renewals and betterments are capitalized.
INCOME TAXES
No provisions have been made for federal or state income taxes because such
taxes, if any, are the responsibility of the members.
3. DISSOLUTION OF JOINT VENTURE
In October 1996, A-55 acquired Caterpillar's 51% interest in Advanced Fuels for
$6,000,000 and the Company was dissolved. Under the terms of the dissolution
agreement, A-55 acquired all tangible assets of the Company. Accounts payable to
the members and notes payable and related accrued interest to Caterpillar were
forgiven. Pursuant to the dissolution agreement, Caterpillar was granted (i)
exclusive rights to the engine-related technology with respect to the conversion
of Caterpillar engines, (ii) nonexclusive rights to the engine-related
technology with respect to the conversion of non-Caterpillar engines to consume
aqueous fuel produced by Caterpillar (until October 24, 1999, these nonexclusive
rights become operative only under certain circumstances), (iii) nonexclusive
rights to the fuel-related technology to make, have made, use or sell (but not
license) gasoline- or naphtha-based aqueous fuels, but only for Caterpillar
diesel and natural gas engines, (iv) nonexclusive rights to the fuel-related
technology to sell diesel-based aqueous fuel in all applications for products of
the kind sold by Caterpillar, and (v) beginning on October 24, 2001,
nonexclusive rights to the fuel-related technology to license diesel-based
aqueous fuel in all applications for products of the kind sold by Caterpillar.
A-55 and Caterpillar also agreed to pay each other a royalty in the amount of
$0.005 per gallon of aqueous fuel (or the equivalent in surfactant) sold by it
directly, through license, by sale of technology or by other action. The first
royalty payment is not payable until a party and its licensees have cumulatively
sold 2.0 billion gallons of aqueous fuel (or the equivalent in surfactant). The
royalty obligation is effective for ten years from the date the first royalty
payment is due. The parties also agreed that, should the Predecessor or
Caterpillar enter into an arrangement with an oil company for the manufacture or
distribution or diesel-based aqueous fuel and receive a lump sum payment in
connection therewith, the other party would be entitled to 20% of the lump sum
payment.
F-25
<PAGE> 88
A-55, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
THE THE HISTORICAL FOR THE FOR THE
COMPANY PREDECESSOR ELIMINATIONS COMBINED REORGANIZATION REORGANIZATION
-------- ------------ ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash.......................... $ -- $ 196,400 $ -- $ 196,400 $ -- $ 196,400
Inventories................... -- 148,600 -- 148,600 -- 148,600
Other current assets.......... -- 26,300 -- 26,300 -- 26,300
Receivable from affiliate..... -- 291,500 (291,500) -- -- --
-------- ------------ --------- ------------ ------------ ------------
Total current assets...... -- 662,800 (291,500) 371,300 -- 371,300
Property and equipment, net... -- 1,423,300 -- 1,423,300 -- 1,423,300
Intellectual property, net.... -- 1,582,100 -- 1,582,100 -- 1,582,100
Deferred offering costs....... 291,500 -- -- 291,500 -- 291,500
-------- ------------ --------- ------------ ------------ ------------
$291,500 $ 3,668,200 $(291,500) $ 3,668,200 $ -- $ 3,668,200
======== ============ ========= ============ ============ ============
LIABILITIES AND EQUITY (DEFICIT)
Trade accounts payable........ $ -- $ 445,100 $ -- $ 445,100 $ -- $ 445,100
Accrued expenses.............. 2,896,200 -- 2,896,200 -- 2,896,200
Advances from R.W. Gunnerman
and related accrued
interest.................... -- 14,631,100 -- 14,631,100 2,145,300(b) 16,776,400
Due to affiliate.............. 291,500 -- (291,500) -- -- --
-------- ------------ --------- ------------ ------------ ------------
Total current
liabilities............. 291,500 17,972,400 (291,500) 17,972,400 2,145,300 20,117,700
Deferred revenue.............. -- 2,414,700 -- 2,414,700 2,414,700
-------- ------------ --------- ------------ ------------ ------------
Total liabilities......... 291,500 20,387,100 (291,500) 20,387,100 2,145,300 22,532,400
-------- ------------ --------- ------------ ------------ ------------
Partners'
(deficit)/stockholders'
equity (deficit):
Partners' deficit........... -- (16,718,900) -- (16,718,900) 18,864,200(a) 2,145,300
(2,145,300)(b) (2,145,300)
Preferred stock, $0.001 par
value, 1,000 shares
authorized, no shares
issued or outstanding..... -- -- -- -- -- --
Common stock, $0.001 par
value, 9,000 shares
authorized, and
shares issued and
outstanding, pro forma and
pro forma as adjusted..... -- -- -- -- [ ](a) [ ]
Paid-in capital............. -- -- -- -- (18,864,200)(a) (18,864,200)
Retained earnings........... -- -- -- -- --
-------- ------------ --------- ------------ ------------ ------------
Total partners' deficit/
stockholders' equity
(deficit)............... -- (16,718,900) -- (16,718,900) (2,145,300) (18,864,200)
-------- ------------ --------- ------------ ------------ ------------
$291,500 $ 3,668,200 $(291,500) $ 3,668,200 $ -- $ 3,668,200
======== ============ ========= ============ ============ ============
<CAPTION>
PRO FORMA
FOR THE
PRO FORMA OFFERING AND
ADJUSTMENTS REORGANIZATION
FOR THE RELATED
OFFERING TRANSACTIONS
----------- --------------
<S> <C> <C>
ASSETS
Cash.......................... (c)
Inventories...................
Other current assets..........
Receivable from affiliate.....
-------- --------
Total current assets......
Property and equipment, net...
Intellectual property, net....
Deferred offering costs....... (c)
-------- --------
======== ========
LIABILITIES AND EQUITY (DEFICI
Trade accounts payable........
Accrued expenses.............. (c)
Advances from R.W. Gunnerman
and related accrued
interest.................... (d)
Due to affiliate..............
-------- --------
Total current
liabilities.............
Deferred revenue..............
-------- --------
Total liabilities.........
-------- --------
Partners'
(deficit)/stockholders'
equity (deficit):
Partners' deficit...........
Preferred stock, $0.001 par
value, 1,000 shares
authorized, no shares
issued or outstanding.....
Common stock, $0.001 par
value, 9,000 shares
authorized, and
shares issued and
outstanding, pro forma and
pro forma as adjusted..... (c)
Paid-in capital............. (c)
Retained earnings...........
-------- --------
Total partners' deficit/
stockholders' equity
(deficit)...............
-------- --------
======== ========
</TABLE>
See accompanying notes.
F-26
<PAGE> 89
A-55, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS FOR FOR THE
THE OFFERING AND OFFERING AND
THE THE OFFERING RELATED OFFERING RELATED
COMPANY PREDECESSOR TRANSACTIONS TRANSACTIONS
-------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Expenses:
General and
administrative......... $ -- $ 2,503,400 $ -- $ 2,503,400
Research and
development............ -- 254,700 -- 254,700
Sales and marketing....... -- 281,500 -- 281,500
Legal..................... -- 135,400 -- 35,400
Depreciation and
amortization........... -- 666,800 -- 666,800
-------- ----------- -------- -----------
-- 3,841,800 -- 3,841,800
Other income (expense):
Interest and other
income................. -- 11,700 -- 11,700
Interest expense.......... -- -- -- --
Interest expense to
related parties........ -- (544,400) 544,400(e) --
-------- ----------- -------- -----------
Net loss.................... $ -- $(4,374,500) $544,400 $(3,830,100)
-------- ----------- -------- -----------
Weighted average common
shares outstanding........ $ --
===========
Net loss per share.......... $ --
===========
</TABLE>
See accompanying notes.
F-27
<PAGE> 90
A-55, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS FOR FOR THE
THE OFFERING AND OFFERING AND
THE THE OFFERING RELATED OFFERING RELATED
COMPANY PREDECESSOR TRANSACTIONS TRANSACTIONS
------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
Expenses:
General and
administrative.......... $ -- $ 2,081,500 $ -- $ 2,081,500
Research and development... -- 1,927,200 -- 1,927,200
Sales and marketing........ -- 623,800 -- 623,800
Legal...................... -- 852,400 -- 852,400
Depreciation and
amortization............ -- 1,361,600 -- 1,361,600
------- ----------- -------- -----------
-- 6,846,500 -- 6,846,500
Other income (expense):
Interest and other
income.................. -- 65,000 -- 65,000
Interest expense........... -- (1,800) -- --
Interest expense to related
parties................. -- (755,200) 755,200(e) --
------- ----------- -------- -----------
Net loss..................... $ -- $(7,538,500) $755,200 $(6,781,500)
======= =========== ======== ===========
Weighted average common
shares outstanding......... $ --
===========
Net loss per share........... $ --
===========
</TABLE>
See accompanying notes.
F-28
<PAGE> 91
A-55, INC.
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET AND STATEMENTS OF OPERATIONS
1. BASIS OF PRESENTATION
In connection with the initial public offering (the "Offering"), A-55, L.P. (the
"Predecessor") intends to complete a merger (the "Reorganization") with A-55,
Inc. (the "Company"), a Delaware corporation, with the Company continuing as the
surviving entity of such Reorganization. As a result of the Reorganization, the
partners of the Predecessor will become the sole stockholders of the Company
with the same proportionate ownership interests in the Company as they owned in
the Predecessor immediately prior to the merger. In addition, the Predecessor
intends to make certain Partner distributions totaling $2,145,300.
The unaudited pro forma financial data reflects the Reorganization related
transactions described below and the Offering as if such transactions had been
completed as of June 30, 1998 for pro forma balance sheet data purposes and as
of January 1, 1997 for pro forma statements of operations data purposes. This
data does not necessarily reflect the results of operations or financial
position of the Company that would have resulted had such transactions actually
been consummated as of such dates. Also, this data is not necessarily indicative
of the future results of operations or future financial position of the Company.
2. PRO FORMA ADJUSTMENTS
REORGANIZATION RELATED TRANSACTIONS
a) Reflects the planned transfer of all assets and liabilities of the
Predecessor in exchange for all of the outstanding common stock of the Company,
and the reclassification of the partners' deficit to common stock and
paid-in-capital.
b) Represents additional advances from R. W. Gunnerman to fund partner
distributions prior to the Offering.
OFFERING
c) Represents the net proceeds to the Company from the Offering [to be
determined], after the repayment of advances from R. W. Gunnerman and related
accrued interest and direct expenses related to the Offering.
d) Reflects the repayment of advances to R. W. Gunnerman and related accrued
interest with a portion of the proceeds from the Offering.
e) Reflects the pro forma effect on interest expense as a result of retiring
advances from R. W. Gunnerman with proceeds from the Offering.
3. DEFERRED OFFERING COSTS
The Company has incurred costs totaling $291,500 in connection with the
Offering. These costs have been reflected as deferred costs in the accompanying
balance sheet. If the Offering is consummated, the cost will be deducted from
the proceeds received from the Offering. If the Offering is not consummated, the
costs will be charged to expense in the
F-29
<PAGE> 92
A-55, INC.
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET AND STATEMENTS OF OPERATIONS
(CONTINUED)
period in which a decision is made to terminate the Offering. In such event, the
costs would be borne by the Predecessor.
4. PRO FORMA NET LOSS PER SHARE
Pro forma per share data is computed based on the net loss and shares of
common stock outstanding after giving respect to the Offering Related
Transactions and the Offering.
F-30
<PAGE> 93
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1998
A-55, INC.
SHARES OF COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
DONALDSON, LUFKIN & JENRETTE
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other
than this prospectus or to make representations as to matters not stated in this
prospectus. You must
not rely on unauthorized information. This prospectus is not an offer to sell
these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or
legal. Neither the delivery of this prospectus nor any sales made hereunder
after the date of this
prospectus shall create an implication that the information contained herein or
the affairs of the
company have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1998 (25 days after the date of this prospectus), all dealers
that affect transactions in these
securities may be required to deliver a prospectus. This is in addition to the
dealer's obligation to
deliver a prospectus when acting as an underwriter in this offering and when
selling previously
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE> 94
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by the Registrant
in connection with the sale of the Common Stock being registered hereby, other
than underwriting commissions and discounts.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- --------
<S> <C>
SEC registration fee........................................ $ 33,925
NASD filing fee............................................. 12,000
Nasdaq National Market Listing Fee..........................
Blue Sky fees and expenses..................................
Printing and engraving expenses.............................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Transfer Agent and Registrar fees...........................
Miscellaneous expenses......................................
--------
Total............................................. $
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has included in the Certificate and the Bylaws provisions to (i)
eliminate the personal liability of its directors for monetary damages resulting
from breaches of their fiduciary duty to the extent permitted by the General
Corporation Law of the State of Delaware (the "DGCL") and (ii) indemnify its
directors and officers to the fullest extent permitted by the DGCL, including
circumstances in which indemnification is otherwise discretionary.
Section 145 of the DGCL permits a corporation, under specified circumstances, to
indemnify its directors, officers, employees or agents against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlements
actually and reasonably incurred by each in connection with any action, suit or
proceeding brought by third parties by reason of the fact that they were or are
directors, officers, employees or agents of the corporation, if such directors,
officers, employees or agents acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses (including attorneys' fees) actually and reasonably incurred by
directors, officers, employees or agents in connection with the defense or
settlement of an action or suit, and only with respect to a matter as to which
they shall have acted in good faith and in a manner they reasonably believed to
be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made if such person shall have been adjudged liable to
the corporation, unless and only to the extent that the court in which the
action or suit was brought shall determine upon application that the defendant
directors, officers, employees or agents are fairly and reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
II-1
<PAGE> 95
The Company's directors and officers are covered by insurance policies
indemnifying them against certain civil liabilities, including liabilities under
the federal securities laws, which might be incurred by them in such capacity.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Company, its directors and officers, and by the Company of
the Underwriters, for certain liabilities, including liabilities arising under
the Securities Act of 1933, as amended (the "Securities Act"), and affords
certain rights of contribution with respect thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since May 1, 1996, the Registrant (including its predecessor) has issued and
sold the following unregistered securities:
In the Reorganization, the partnership interests in A-55, L.P. will be
converted into all of the shares of Common Stock of the Company that are
outstanding prior to the Offering (the "Merger Shares"). The Merger Shares
have not been, and will not be, registered under the Securities Act in
reliance on the exemption provided by Section 4(2) thereof as an offer and
sale of securities which does not involve any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1 Agreement of Merger between the Company and A-55, L.P.
3.1 Amended and Restated Certificate of Incorporation of the
Company.
3.2 Amended and Restated Bylaws of the Company.
4.1 Form of the Company's Common Stock Certificate.
5.1* Opinion of Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation, as to the validity of the
issuance of the securities registered hereby.
10.1 Exclusive License Agreement by and between the Company and
Rudolf W. Gunnerman, dated as of January 3, 1994.
10.2 First Amendment to Exclusive License Agreement by and
between the Company and Rudolf W. Gunnerman, dated as of
January 1, 1995.
10.3 Second Amendment Exclusive License Agreement by and between
the Company and Rudolf W. Gunnerman, dated as of August 18,
1998.
10.4 License Agreement by and between Advanced Fuels, L.L.C. and
Caterpillar Inc., dated as of July 7, 1994.
</TABLE>
II-2
<PAGE> 96
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<C> <S>
10.5 Agreement of Dissolution of Advanced Fuels, L.L.C. by and
between A-55, L.P. and Caterpillar Inc., dated as of October
24, 1996.
10.6 Employment Agreement by and between the Company and Thomas
N. Harvey dated January 7, 1998.
10.7 Employment Agreement by and between the Company and Dr.
William Charles Tao dated June 30, 1998.
10.8 Employment Agreement by and between the Company and Dr.
Thomas M. Houlihan dated July 1, 1998.
10.9* Form of Indemnification Agreement entered into by and
between the Registrant and each of its directors and
executive officers.
10.10 License (Republic of Korean & Democratic People's Republic
of Korea) by and between the Company and Stanton Energy Fund
Pty. Limited dated June 9, 1997.
10.11 License (Exclusive--Australia, New Zealand & New Guinea) by
and between the Company and A-55 Australia Ltd. dated March
4, 1997.
10.12 License Agreement by and between the Company and Vanetik and
Associates, Inc. dated December 2, 1997.
10.13 License Agreement by and between the Company and Vanetik and
Associates, Inc. dated June 27, 1998.
10.14 Promissory Note dated September 30, 1997 issued by A-55,
L.P. for the benefit of R. W. Gunnerman.
10.15 Form of Promissory Note in the aggregate amount of
$4,350,000 issued by A-55, L.P. for the benefit of R. W.
Gunnerman.
10.16 Lease Agreement by and between the Company and Rudolf W.
Gunnerman dated April 16, 1997.
10.17 Amendment Number One to Lease Agreement by and between the
Company and Rudolf W. Gunnerman dated June 2, 1997.
10.18* 1998 Stock Option Plan.
10.19 Consent of Bill Tao to be named as a Director dated August
17, 1998.
23.1 Consent of Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation (included in Exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP.
24.1 Powers of Attorney (included on page II-5).
</TABLE>
- ------------------------------
* To be filed by amendment
All other schedules are omitted because they are inapplicable or the requested
information is shown in the financial statements of the registrant or related
notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described in Item 14, or otherwise, the registrant
has been advised that in the opinion of
II-3
<PAGE> 97
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant 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 registrant 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
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933; (ii) to 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; (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities 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
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(5) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therewith, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 98
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Reno, State of Nevada, on
the 8th day of October, 1998.
A-55, Inc.
By: /s/ RUDOLF W. GUNNERMAN
--------------------------------------
Rudolf W. Gunnerman
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Rudolf W. Gunnerman and Daniel J. Klaich and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution for him in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
/s/ RUDOLF W. GUNNERMAN Chief Executive October 8, 1998
- ----------------------------------------------------- Officer and
Rudolf W. Gunnerman Chairman of the
Board (principal
executive officer)
/s/ PATRICK M. GRIMES Acting Chief October 8, 1998
- ----------------------------------------------------- Financial Officer
Patrick M. Grimes and Treasurer
(principal
financial and
accounting officer)
/s/ DANIEL J. KLAICH Director October 8, 1998
- -----------------------------------------------------
Daniel J. Klaich
/s/ PETER W. GUNNERMAN Director October 8, 1998
- -----------------------------------------------------
Peter W. Gunnerman
</TABLE>
II-5
<PAGE> 1
EXHIBIT 2.1
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER (this "Agreement") is entered into as of July
31, 1998 between A-55, L.P., a Nevada limited partnership (the "Partnership"),
and A-55, Inc., a Delaware corporation (the "Corporation").
BACKGROUND
A. The Partnership is a Nevada limited partnership governed by a
Restated Agreement of Limited Partnership dated as of January 3, 1994, as
amended by First, Second, Third, Fourth, Fifth and Sixth Amendments effective as
of January 26, 1994, January 1, 1995, February 23, 1995, April 1, 1996,
September 16, 1997, and January 1, 1998 respectively (collectively, the
"Partnership Agreement").
B. RWG, Inc., a Nevada corporation, is the sole general partner of the
Partnership (the "General Partner"), and the Partnership's limited partners
consist of Class A, Class B and Class C limited partners (collectively, the
"Limited Partners"). (The General Partner and the Limited Partners are referred
to, collectively, as the "Partners" and, individually, as a "Partner." The
partnership interest of each Partner, whether a general partnership interest or
a Class A, Class B or Class C limited partnership interest, is referred to as a
"Partnership Interest.")
C. The Corporation is a newly-organized Delaware corporation. Its only
outstanding shares of stock are 50 shares of common stock, all of which are
owned by the Partnership.
D. The parties intend that the Partnership merge with and into the
Corporation (the "Merger") pursuant to the terms and conditions set forth herein
and the applicable provisions of Delaware and Nevada law, and that upon the
Merger's Effective Date (as defined below), all of the Partners of the
Partnership will become stockholders of the Corporation. The shares of the
Corporation's common stock to be received by such persons pursuant to the Merger
will not be registered under federal or state securities laws and will therefore
be restricted shares subject to a stock legend restricting the transfer of such
shares.
NOW, THEREFORE, the parties hereby agree as follows:
-1-
<PAGE> 2
1. The Merger.
(a) Effective Date. The Partnership will be merged with and into
the Corporation effective as of the date (the "Effective Date") that this
Agreement or a certificate of merger is filed with the Delaware Secretary of
State. Upon the Effective Date, the separate existence of the Partnership will
cease, and the Corporation will be the surviving entity of the Merger.
(b) Consummation. This Agreement or a certificate of merger will
be filed with the Delaware Secretary of State by the officers of the Corporation
at such date as will be determined by the Corporation's Board of Directors on or
prior to the date of consummation of the Corporation's initial public offering
of its common stock.
2. Representations and Warranties.
(a) Partnership. The Partnership represents and warrants to the
Corporation as follows:
(i) The Partnership has been duly formed and is validly
existing in good standing as a limited partnership under the laws of the State
of Nevada.
(ii) The execution and delivery of this Agreement, and
the consummation of the transactions contemplated hereby, have been duly
authorized by all necessary partnership action.
(b) Corporation. The Corporation represents and warrants to the
Partnership as follows:
(i) The Corporation has been duly organized and is
validly existing in good standing as a corporation under the laws of the State
of Delaware.
(ii) The execution and delivery of this Agreement, and
the consummation of the transactions contemplated hereby, have been duly
authorized by all necessary corporate action.
(iii) The shares of common stock to be issued to the
Partners in connection with the Merger will be validly issued, fully paid and
nonassessable.
3. Conversion of Partnership Interests Into Shares.
(a) General. On the Effective Date, by virtue of the Merger, and
without any further action by any Partner, (i) each Partner's Partnership
Interest in the Partnership
-2-
<PAGE> 3
outstanding immediately prior to the Effective Date will be converted into
shares of common stock of the Corporation pursuant to the terms set forth in
this Section 3, and (ii) the 50 shares of common stock currently issued and
outstanding in the name of the Partnership will be cancelled, and no additional
shares or securities will be issued, and no payments will be made, in respect
thereof.
(b) Number of Shares. The total number of shares into which all
the Partnership Interests will be converted will be determined by the
Corporation prior to the Effective Date. Immediately after the Effective Date,
the Corporation's only issued and outstanding shares of stock will be the shares
of common stock issued in the Merger (the "Shares").
(c) Apportionment of Shares Among Partners. The number of Shares
to be received by each Partner will be determined in accordance with the terms
of the Partnership Agreement, including the distribution provisions of Section
10.03 of the Partnership Agreement. The Partnership contemplates that prior to
the Effective Date, it will have made cash distributions to the Partners of a
sufficient amount to satisfy the "Priority Return" (as defined in the
Partnership Agreement), such that any further distributions would be distributed
to the Partners in proportion to their respective "Participation Percentages"
(as defined in the Partnership Agreement). In such case, immediately after the
Effective Date, each Partner would own that number of Shares determined by
multiplying the total number of Shares outstanding immediately after the
Effective Date by such Partner's Participation Percentage in the Partnership.
(d) Example. This example is based on the assumptions that (i)
before the Effective Date, the Partnership will have made sufficient cash
distributions to the Partners to satisfy the Priority Return, and (ii) the
Corporation determines that it wishes to have 100,000,000 Shares issued and
outstanding immediately after the Effective Date. In such case, a Partner with a
Participation Percentage of 1.543648% in the Partnership immediately before the
Effective Date would, by virtue of the Merger, have his Partnership Interest
converted into 1,543,648 Shares, which would represent 1.543648% of the issued
and outstanding stock of the Corporation immediately after the Effective Date.
4. Corporate Matters.
(a) Certificate of Incorporation. The Corporation's Certificate
of Incorporation as it exists on the Effective Date will be the Certificate of
Incorporation of the Corporation immediately after the Effective Date,
-3-
<PAGE> 4
unless and until it is amended or repealed in accordance with the provisions
thereof and of Delaware law.
(b) Bylaws. The Bylaws of the Corporation as they exist on the
Effective Date will be the Bylaws of the Corporation immediately after the
Effective Date, unless and until they are amended or repealed in accordance with
the provisions thereof.
(c) Directors and Officers. The directors and officers of the
Corporation immediately after the Effective Date will be the same as they are
immediately before the Effective Date.
5. Transfer, Conveyance and Assumption. As of the Effective Date, the
Corporation will continue in existence as the surviving entity, and all of the
assets and property of whatever kind and character of the Partnership will vest
in the Corporation; thereafter, the Corporation, as the surviving entity, will
be liable for all of the liabilities and obligations of the Partnership, and any
claim or judgment against the Partnership may be enforced against the
Corporation, as the surviving entity.
6. Termination. If the Effective Date does not occur on or before
December 31, 1998, this Agreement will terminate and be of no further force and
effect.
7. Miscellaneous.
(a) Further Action. Each party agrees to use reasonable efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement. In particular, the parties will
file whatever documents are required by Delaware and Nevada law to effectuate
the Merger.
(b) Amendments. This Agreement may be amended before the
Effective Date if, and only if, such amendment is in writing and signed by the
parties to this Agreement.
(c) Integration. All prior agreements, contracts, promises,
representations and statements, if any, between the parties are merged into this
Agreement, and this Agreement will constitute the entire understanding between
the parties with respect to the subject matter hereof.
(d) Successors and Assigns. This Agreement will be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns.
-4-
<PAGE> 5
(e) Governing Law. This Agreement will be construed in
accordance with and governed by the laws of the State of Delaware, without
giving effect to principles of conflicts of law.
(f) Counterparts. This Agreement may be signed in any number of
counterparts, each of which will be an original, with the same effect as if the
signatures were upon the same document.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed by their respective authorized representatives as of the date set
forth above.
A-55, L.P., a Nevada limited partnership
By: RWG, Inc., a Nevada corporation,
its sole general partner
By: /s/ Rudolf W. Gunnerman
-----------------------------
Rudolf W. Gunnerman
President
By: /s/ Daniel J. Klaich
-----------------------------
Daniel J. Klaich
Secretary
A-55, INC., a Delaware corporation
By: /s/ Rudolf W. Gunnerman
-----------------------------
Rudolf W. Gunnerman
Chief Executive Officer
By: /s/ Daniel J. Klaich
-----------------------------
Daniel J. Klaich
Secretary
-5-
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
A-55, INC.
A-55, Inc., a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), hereby certifies as follows:
1. The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on July 14, 1997,
under the name, A-55, Incorporated. A certificate of Amendment of Certificate of
Incorporation was filed with the Secretary of State of Delaware on July 24,
1998, to change the Corporation's name to A-55, Inc.
2. Pursuant to Sections 242 and 245 of the Delaware General Corporation
Law, this Amended and Restated Certificate of Incorporation restates and
integrates and further amends the provisions of the Corporation's Certificate of
Incorporation.
3. The terms and provisions of this Amended and Restated Certificate of
Incorporation have been duly adopted pursuant to the provisions of Sections 242
and 245 of the Delaware General Corporation Law.
4. The text of the Certificate of Incorporation of the Corporation, as
amended, is hereby restated and further amended to read in its entirety as
follows:
FIRST. The name of the Corporation is A-55, Inc.
SECOND. The address of the Corporation's registered office in the State
of Delaware is 15 East North Street, Dover, County of Kent. The name of its
registered agent at that address is Incorporating Services, Ltd.
THIRD. The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH. The Corporation is authorized to issue two classes of stock to
be designated, respectively, "Common Stock" and "Preferred Stock". The total
-1-
<PAGE> 2
number of shares which the corporation shall have the authority to issue is
10,000 shares of capital stock divided into (a) 9,000 shares of Common Stock
having a par value of $0.001 per share, and (b) 1,000 shares of Preferred Stock
having a par value of $0.001 per share.
FIFTH. The Preferred Stock of the Corporation may be issued from time to
time in one or more series. Subject to the restrictions prescribed by law, the
Board of Directors is authorized to fix by resolution or resolutions the number
of shares of any series of Preferred Stock and to determine or alter the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of Preferred Stock and, within the limits and restrictions
stated in any resolution or resolutions of the Board of Directors originally
fixing the number of shares constituting any series of Preferred Stock, to
increase (but not above the total number of authorized shares of Preferred
Stock) or decrease (but not below the number of shares of any such series then
outstanding) the number of shares of any such series subsequent to the issue of
shares of that series.
The authority of the Board of Directors with respect to each
series of Preferred Stock shall include, but not be limited to, determination of
the following: (a) the number of shares constituting that series and the
distinctive designation of that series; (b) the dividend rate on the shares of
that series and the relative rights of priority, if any, of payment of dividends
on shares of that series; (c) whether that series shall have voting rights in
addition to the voting rights provided by law, and if so, the terms of such
voting rights; (d) whether that series shall have conversion privileges, and if
so, the terms and conditions of such privilege, including provision for
adjustment of the conversion rate in such events as the Board of Directors shall
determine; (e) whether that series shall be subject to redemption, the terms and
conditions of any such redemption, including the date or dates upon or after
which such series shall be redeemable, and the amount per share payable in case
of redemption, which amount may vary under different conditions and at different
redemption dates; (f) whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and if so, the terms and the
amount of such sinking funds; (g) the rights of the shares of that series in the
event of voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of shares
of that series; and (h) any other relative rights, preferences and limitations
of that series.
SIXTH. The Board of Directors of the Corporation is expressly
authorized to make, alter or repeal bylaws of the corporation, but the
-2-
<PAGE> 3
stockholders may make additional bylaws and may alter or repeal any bylaw
whether adopted by them or otherwise.
SEVENTH. Elections of directors need not be by written ballot except
and to the extent provided in the bylaws of the Corporation.
The directors shall be divided into three classes (I, II, III).
The number of directors comprising each class (assuming no vacancy in any class)
shall be as nearly equal in number as possible based upon the number of
directors comprising the entire Board of Directors. The Board shall, at or
before the first meeting of the Board of Directors following the time of filing
of this Amended and Restated Certificate of Incorporation with the Secretary of
State of the State of Delaware (the "Effective Time"), designate the class to
which each director then serving shall be a member. The initial terms of the
directors in Class I shall extend until the first annual meeting of stockholders
following the Effective Time; the initial term of directors in Class II shall
extend until the second annual meeting of the stockholders following the
Effective Time; and the initial terms of the directors in Class III shall extend
until the third annual meeting of stockholders following the Effective Time. At
each annual meeting of stockholders, successors to directors of the class whose
term expires at such meeting will be elected to serve for three-year terms and
until their successors are elected and qualified.
Subject to the rights of the holders of any class or series of
Preferred Stock then outstanding, newly created directorships resulting from any
increase in the number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or any other cause may be filled by the Board of Directors (and not by
the stockholders unless there are no directors then in office), provided that a
quorum is then in office and present, or by a majority of the directors then in
office, if less than a quorum is then in office, or by the sole remaining
director. A director elected to fill a newly created directorship or other
vacancy shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy occurred and
until such director's successor has been elected and qualified.
EIGHTH. A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation
-3-
<PAGE> 4
Law of Delaware, or (iv) for any transaction from which the director derived an
improper personal benefit. Neither the amendment nor repeal of this Article
EIGHTH, nor the adoption of any provision of the Certificate of Incorporation or
bylaws or of any statute inconsistent with this Article EIGHTH, shall eliminate
or reduce the effect of this Article EIGHTH in respect of any acts or omissions
occurring, or any causes of action, suits or claims that, but for this Article
EIGHTH, would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
NINTH. The Corporation reserves the right at any time and from time to
time to amend, alter, change or repeal any provision contained herein, and other
provisions authorized by the laws of the State of Delaware at the time in force
may be added or inserted, in the manner now or hereafter prescribed by law, and
all rights, preferences and privileges of whatsoever nature conferred upon
stockholders, directors or any other person whomsoever by or pursuant to the
Certificate of Incorporation in its present form or as hereafter amended are
granted, subject to the rights reserved in this Article NINTH.
TENTH. Subject to the rights, if any, of holders of any class or series
of Preferred Stock then outstanding, (i) stockholders are not permitted to call
a special meeting of stockholders or to require the Board of Directors or
officers of the Corporation to call such a special meeting, (ii) a special
meeting of stockholders may only be called by a majority of the Board of
Directors, by the Chief Executive Officer or by a committee duly empowered by
the Board of Directors to call a special meeting, (iii) the business permitted
to be conducted at a special meeting of stockholders shall be limited to matters
properly brought before the meeting by or at the direction of the Board of
Directors, and (iv) any action required or permitted to be taken by the
stockholders must be taken at a duly called and convened annual meeting or
special meeting of stockholders and cannot be taken by consent in writing;
provided, however, that the provisions of the foregoing clause (iv) shall not
apply prior to the consummation of an initial underwritten public offering of
the Corporation's Common Stock that is registered with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, (an "IPO").
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IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be duly executed by Thomas N. Harvey its
President and Daniel J. Klaich its Secretary this 31st day of July, 1998.
A-55, INC.
/s/ Thomas N. Harvey
------------------------------------
Thomas N. Harvey, President
/s/ Daniel J. Klaich
------------------------------------
Daniel J. Klaich, Secretary
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<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS OF
A-55, INC.
ARTICLE I
OFFICES
Section 1.01. Registered Office. The registered office of A-55,
Inc. (hereafter called the "Corporation") in the State of Delaware shall be at
15 East North Street, Dover, County of Kent, and the name of the registered
agent at that address shall be Incorporating Services, Ltd.
Section 1.02. Principal Office. The principal office for the
transaction of the business of the Corporation shall be at 15 East North Street,
Dover, County of Kent. The Board of Directors (hereafter called the "Board") is
hereby granted full power and authority to change said principal office from one
location to another.
Section 1.03. Other Offices. The Corporation may also have an
office or offices at such other place or places, either within or without the
State of Delaware, as the Board may from time to time determine or as the
business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.01. Annual Meetings. Annual meetings of the
stockholders of the Corporation for the purpose of electing directors and for
the transaction of such other proper business as may come before such meetings
shall be held on a specific date and at a time designated by the Board.
Section 2.02. Special Meetings. Stockholders are not permitted
to call a special meeting of stockholders or to require the Board of Directors
or officers of the Corporation to call such a special meeting. A special meeting
of the stockholders for any purpose or purposes may only be called by a majority
of the Board of Directors or by the Chief Executive Officer or by a committee
<PAGE> 2
duly empowered by the Board of Directors to call a special meeting. The business
permitted to be conducted at a special meeting of stockholders shall be limited
to matters properly brought before the meeting by or at the direction of the
Board of Directors.
Section 2.03. Place of Meetings. All meetings of the stockholders
shall be held at such places, within or without the State of Delaware, as may
from time to time be designated by the person or persons calling the respective
meeting and specified in the respective notices or waivers of notice thereof.
Section 2.04. Notice of Meetings. Except as otherwise required by
law, notice of each meeting of the stockholders, whether annual or special,
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder of record entitled to vote at such
meeting by delivering a typewritten or printed notice thereof to him personally,
or by depositing such notice in the United States mail, in a postage prepaid
envelope, directed to him at their post office address furnished by him to the
Secretary of the Corporation for such purpose or, if he shall not have furnished
to the Secretary his address for such purpose, then at his post office address
last known to the Secretary, or by transmitting a notice thereof to him at such
address by telegraph, cable, or wireless. Except as otherwise expressly required
by law, no publication of any notice of a meeting of the stockholders shall be
required. Every notice of a meeting of the stockholders shall state the place,
date and hour of the meeting, and, in the case of a special meeting, shall also
state the purpose or purposes for which the meeting is called. Notice of any
meeting of stockholders shall not be required to be given to any stockholder who
shall have waived such notice and such notice shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, except a
stockholder who shall attend such meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Except as otherwise expressly
required by law, notice of any adjourned meeting of the stockholders need not be
given if the time and place thereof are announced at the meeting at which the
adjournment is taken.
Section 2.05. Advance Notification of Director Nomination. Only
persons who are nominated in accordance with the following procedures shall
be eligible for election as directors. Nominations of persons for election to
the Board of Directors of the Corporation at the annual meeting may be made at
such meeting by or at the direction of the Board of Directors, by any committee
appointed by the Board of Directors or by any common stockholder of the
Corporation entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in this Section 2.05. Such
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nominations, other than those made by or at the direction of the Board of
Directors or by any committee appointed by the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not later than the close of
business on the 60th day nor earlier than the close of business on the 90th day
prior to the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is more than 30
days before or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the close of
business on the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting or
the 10th day following the day on which public announcement of the date of such
meeting is first made by the Corporation. Such stockholder's notice to the
Secretary shall set forth (a) as to each person whom the stockholder proposes to
nominate for election or re-election as a director, (i) the name, age, business
address and residence address of the person, (ii) the principal occupation or
employment of the person, (iii) the class, series and number of shares of
capital stock of the Corporation which are beneficially owned by the person and
(iv) any other information relating to the person that is required to be
disclosed in solicitations for proxies for election of directors pursuant to the
Rules and Regulations of the Securities and Exchange Commission under Section 14
of the Securities Exchange Act of 1934, as amended; and (b) as to the
stockholder giving the notice (i) the name and record address of the
stockholder, (ii) the class, series and number of shares of capital stock of the
Corporation which are beneficially owned by the stockholder and (iii) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder. Such notice shall be accompanied by the executed consent of each
nominee to serve as a director if so elected. The Corporation may require any
proposed nominee to furnish such other information as may reasonably be required
by the Corporation to determine the eligibility of such proposed nominee to
serve as a director of the Corporation. No person shall be eligible for election
as a director of the Corporation by the holders of Common Stock of the
Corporation unless nominated in accordance with the procedures set forth herein.
The officer of the Corporation presiding at an annual meeting shall, if the
facts warrant, determine that a nomination was not made in accordance with the
foregoing procedure and, if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
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<PAGE> 4
Section 2.06. Advance Notification of Business to be Transacted
at Stockholder Meetings. To be properly brought before the annual meeting of
stockholders, business must be either (a) specified in the notice of meeting (or
any supplement or amendment thereto) given by or at the direction of the Board
of Directors or any committee appointed by the Board of Directors, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before an annual meeting by a
stockholder. In addition to any other applicable requirements, for business to
be properly brought before any annual meeting of stockholders by a stockholder,
the stockholder must have given timely notice thereof in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not later than the close of business on the 60th day nor earlier
than the close of business on the 90th day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the 90th day prior to such
annual meeting and not later than the close of business on the later of the 60th
day prior to such annual meeting or the 10th day following the day on which
public announcement of the date of such meeting is first made by the
Corporation. Such stockholder's notice to the Secretary shall set forth as to
each matter the stockholder proposes to bring before the meeting (i) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the name and record
address of the stockholder proposing such business, (iii) the class, series and
number of shares of capital stock of the Corporation which are beneficially
owned by the stockholder, and (iv) any material interest of the stockholder in
such business.
No business shall be conducted at the annual meeting of stockholders
unless it is properly brought before the meeting in accordance with the
procedures set forth in this Section 2.06, provided, however, that nothing in
this Section 2.06 shall be deemed to preclude discussion by any stockholder of
any business properly brought before the meeting in accordance with the
procedures set forth in this Section 2.06. The officer of the Corporation
presiding at the meeting shall, if the facts warrant, determine that business
was not properly brought before the meeting in accordance with the provisions of
this Section 2.06 and, if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted.
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Section 2.07. Quorum. Except in the case of any meeting for the
election of directors summarily ordered as provided by law, the holders of
record of a majority in voting interest of the shares of stock of the
Corporation entitled to be voted thereat, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of the
stockholders of the Corporation or any adjournment thereof. Where a separate
vote by a class or classes is required, a majority of the outstanding shares of
such class or classes, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter and the affirmative vote of the majority of the shares of such class or
classes present in person or represented by proxy at the meeting shall be the
act of such class. In the absence of a quorum at any meeting or any adjournment
thereof, a majority in voting interest of the stockholders present in person or
by proxy and entitled to vote thereat or, in the absence therefrom of all the
stockholders, any officer entitled to preside at, or to act as secretary of,
such meeting may adjourn such meeting from time to time. At any such adjourned
meeting at which a quorum is present any business may be transacted which might
have been transacted at the meeting as originally called. No business may be
transacted at a meeting in the absence of a quorum other than the adjournment of
such meeting, except that if a quorum is present at the commencement of a
meeting, business may be transacted until the meeting is adjourned even though
the withdrawal of stockholders results in less than a quorum.
Section 2.08. Voting.
(a) Each stockholder shall, at each meeting of the
stockholders, be entitled to vote in person or by proxy each share or fractional
share of the stock of the Corporation having voting rights on the matter in
question and which shall have been held by him and registered in his name on the
books of the Corporation:
(i) on the date fixed pursuant to Section 6.05 of
these Bylaws as the record date for the determination of
stockholders entitled to notice of and to vote at such meeting,
or
(ii) if no such record date shall have been so
fixed, then (a) at the close of business on the day next
preceding the day on which notice of the meeting shall be given
or (b) if notice of the meeting shall be waived, at the close of
business on the day next preceding the day on which the meeting
shall be held.
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<PAGE> 6
(b) Shares of its own stock belonging to the Corporation
or to another corporation, if a majority of the shares entitled to vote in the
election of directors in such other corporation is held, directly or indirectly,
by the Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Nothing in this section shall be construed as limiting the right of
the Corporation to vote stock, including but not limited to its own stock, held
by it in a fiduciary capacity. Persons holding stock of the Corporation in a
fiduciary capacity shall be entitled to vote such stock. Persons whose stock is
pledged shall be entitled to vote, unless in the transfer by the pledgor on the
books of the Corporation he shall have expressly empowered the pledgee to vote
thereon, in which case only the pledgee, or their proxy, may represent such
stock and vote thereon. Stock having voting power standing of record in the
names of two or more persons, whether fiduciaries, members of a partnership,
joint tenants, tenants in common, tenants by the entirety or otherwise, or with
respect to which two or more persons have the same fiduciary relationship, shall
be voted in accordance with the provisions of the General Corporation Law of the
State of Delaware.
(c) Any such voting rights may be exercised by the
stockholder entitled thereto in person or by their proxy appointed by an
instrument in writing, subscribed by such stockholder or by their attorney
thereunto authorized and delivered to the secretary of the meeting; provided,
however, that no proxy shall be voted or acted upon after three years from its
date unless said proxy shall provide for a longer period. The attendance at any
meeting of a stockholder who may theretofore have given a proxy shall not have
the effect of revoking the same unless he shall in writing so notify the
secretary of the meeting prior to the voting of the proxy. At any meeting of the
stockholders all matters, except as otherwise provided in the Certificate of
Incorporation, in these Bylaws or by law, shall be decided by the vote of a
majority of the shares present in person or by proxy and entitled to vote
thereat and thereon, a quorum being present. The vote at any meeting of the
stockholders on any questions need not be by ballot, unless so directed by the
chairman of the meeting. On a vote by ballot each ballot shall be signed by the
stockholder voting, or by their proxy, if there be such proxy, and it shall
state the number of shares voted.
Section 2.09. List of Stockholders. The Secretary of the
Corporation shall prepare and make, at least ten (10) days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a
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period of at least ten (10) days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the duration thereof, and may be inspected by any stockholder
who is present.
Section 2.10. Judges. If at any meeting of the stockholders a
vote by written ballot shall be taken on any question, the chairman of such
meeting may appoint a judge or judges to act with respect to such vote. Each
judge so appointed shall first subscribe an oath faithfully to execute the
duties of a judge at such meeting with strict impartiality and according to the
best of their ability. Such judges shall decide upon the qualification of the
voters and shall report the number of shares represented at the meeting and
entitled to vote on such questions, shall conduct and accept the votes, and,
when the voting is completed, shall ascertain and report the number of shares
voted respectively for and against the question. Reports of judges shall be in
writing and subscribed and delivered by them to the Secretary of the
Corporation. The judges need not be stockholders of the Corporation, and any
officer of the Corporation may be a judge on any question other than a vote for
or against a proposal in which he shall have a material interest.
Section 2.11. Prohibition of Action by Written Consent. Following
the completion by the Corporation of an IPO (as defined in the Certificate of
Incorporation), any action required or permitted to be taken by the stockholders
must be taken at a duly called and convened annual meeting or special meeting of
stockholders and cannot be taken by consent in writing.
ARTICLE III
BOARD OF DIRECTORS
Section 3.01. General Powers. The property, business and affairs
of the Corporation shall be managed by or under the direction of the Board.
Section 3.02. Number; Qualifications. The Board of Directors
shall consist of one or more members. The number of the directors of the Board
of the Corporation shall be fixed from time to time exclusively pursuant to a
resolution adopted by a majority of the total number of directors which the
Corporation would have if there were no vacancies. Directors need not be
stockholders of the Corporation.
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Section 3.03. Election of Directors. The directors shall be
elected by the stockholders of the Corporation at each annual meeting of
stockholders or, prior to completion by the Corporation of an IPO, by written
consent pursuant to Section 2.11 hereof, and at each election the persons
receiving the greatest number of votes, up to the number of directors then to be
elected, shall be the persons then elected. The election of directors is subject
to any provisions contained in the Certificate of Incorporation relating
thereto, including any provisions for a classified board or cumulative voting.
Subject to the rights of the holders of any class or
series of Preferred Stock then outstanding, newly created directorships
resulting from any increase in the number of directors or any vacancies in the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or any other cause may be filled by the
Board of Directors (and not by the stockholders unless there are no directors
then in office), provided that a quorum is then in office and present, or by a
majority of the directors then in office, if less than a quorum is then in
office, or by the sole remaining director. A director elected to fill a newly
created directorship or other vacancy shall hold office for the remainder of the
full term of the class of directors in which the new directorship was created or
the vacancy occurred and until such director's successor has been elected and
qualified. No decrease in the number of authorized directors constituting the
Board of Directors of the Corporation shall shorten the term of any incumbent
director.
Section 3.04. Resignations. Any director of the Corporation may
resign at any time by giving written notice to the Board or to the Secretary of
the Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time be not specified, it shall take effect immediately upon
its receipt; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 3.05. Place of Meeting, Etc. The Board may hold any of
its meetings at such place or places within or without the State of Delaware as
the Board may from time to time by resolution designate or as shall be
designated by the person or persons calling the meeting or in the notice or a
waiver of notice of any such meeting. Directors may participate in any regular
or special meeting of the Board by means of conference telephone or similar
communications equipment pursuant to which all persons participating in the
meeting of the Board can hear each other, and such participation shall
constitute presence in person at such meeting.
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Section 3.06. First Meeting. The Board shall meet as soon as
practicable after each annual election of directors and notice of such first
meeting shall not be required.
Section 3.07. Regular Meetings. Regular meetings of the Board
shall be held at such time and place as the Board shall from time to time by
resolution determine. If any day fixed for a regular meeting shall be a legal
holiday at the place where the meeting is to be held, then the meeting shall be
held at the same hour and place on the next succeeding business day not a legal
holiday. Except as provided by law, notice of regular meetings need not be
given.
Section 3.08. Special Meetings. Special meetings of the Board may
be called by the Chairman of the Board of Directors, the Chief Executive
Officer, or the President and shall be called by the President or Secretary on
the written request of two directors. Notice of all special meetings of the
Board shall be given to each director at their address as it appears on the
records of the Corporation, as follows:
(a) by first-class mail, postage prepaid, deposited in
the United States mail in the city where the principal office of the Corporation
is located at least five (5) days before the date of such meeting; or
(b) by telegram, charges prepaid, such notice to be
delivered to the telegraph company in the city of the principal office of the
Corporation at least forty-eight (48) hours before the time of holding such
meeting; or
(c) by personal delivery, or by telex, telecopy or
other facsimile transmission, at least twenty-four (24) hours prior to the time
of holding such meeting.
Such notice may be waived by any director and any meeting shall be a legal
meeting without notice having been given if all the directors shall be present
thereat or if those not present shall, either before or after the meeting, sign
a written waiver of notice of, or a consent to, such meeting or shall after the
meeting sign the approval of the minutes thereof. All such waivers, consents or
approvals shall be filed with the corporate records or be made a part of the
minutes of the meeting.
Section 3.09. Quorum and Manner of Acting. Except as
otherwise provided in the Certificate of Incorporation or these Bylaws or by
law, the presence of a majority of the total number of directors then in office
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shall be required to constitute a quorum for the transaction of business at any
meeting of the Board. Except as otherwise provided in the Certificate of
Incorporation or these Bylaws or by law, all matters shall be decided at any
such meeting, a quorum being present, by the affirmative votes of a majority of
the directors present. In the absence of a quorum, a majority of directors
present at any meeting may adjourn the same from time to time until a quorum
shall be present. Notice of any adjourned meeting need not be given. The
directors shall act only as a Board, and the individual directors shall have no
power as such.
Section 3.10. Action by Consent. Any action required or permitted
to be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if a written consent thereto is signed by all members of the
Board or of such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board or committee.
Section 3.11. Compensation. The directors shall receive only such
compensation for their services as directors as may be allowed by resolution of
the Board. The Board may also provide that the Corporation shall reimburse each
such director for any expense incurred by him on account of their attendance at
any meetings of the Board or Committees of the Board. Neither the payment of
such compensation nor the reimbursement of such expenses shall be construed to
preclude any director from serving the Corporation or its subsidiaries in any
other capacity and receiving compensation therefor.
Section 3.12. Executive Committee. There may be an Executive
Committee of two or more directors appointed by the Board, who may meet at
stated times, or pursuant to a notice to all by any of their own number, during
the intervals between the meetings of the Board; they shall advise and aid the
officers of the Corporation in all matters concerning its interest and the
management of its business, and generally perform such duties and exercise such
powers as may be directed or delegated by the Board from time to time. The Board
of Directors may also designate, if it desires, other directors as alternate
members who may replace any absent or disqualified member of the Executive
Committee at any meeting thereof. To the full extent permitted by law, the Board
may delegate to such committee authority to exercise all the powers of the Board
while the Board is not in session. Vacancies in the membership of the committee
shall be filled by the Board at a regular meeting or at a special meeting for
that purpose. In the absence or disqualification of any member of the Executive
Committee and any alternate member in such member's place, the member or members
of the Executive Committee present
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at the meeting and not disqualified from voting, whether or not he or she or
they constitute a quorum, may, by unanimous vote, appoint another member of the
Board of Directors to act at the meeting in the place of the absent or
disqualified member. The Executive Committee shall keep written minutes of its
meeting and report the same to the Board when required. The provisions of
Sections 3.07, 3.08, 3.09 and 3.10 of these Bylaws shall apply, mutatis
mutandis, to any Executive Committee of the Board.
Section 3.13. Other Committees. The Board may, by resolution
passed by a majority of the whole Board, designate one or more other committees,
each such committee to consist of one or more of the directors of the
Corporation. The Board of Directors may also designate, if it desires, other
directors as alternate members who may replace any absent or disqualified member
of any such committee at any meeting thereof. To the full extent permitted by
law, any such committee shall have and may exercise such powers and authority as
the Board may designate in such resolution. Vacancies in the membership of a
committee shall be filled by the Board at a regular meeting or a special meeting
for that purpose. Any such committee shall keep written minutes of its meetings
and report the same to the Board when required. In the absence or
disqualification of any member of any such committee and any alternate member in
such member's place, the member or members of any such committee present at the
meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may, by unanimous vote, appoint another member of the Board
of Directors to act at the meeting in the place of the absent or disqualified
member. The provisions of Sections 3.07, 3.08, 3.09 and 3.10 of these Bylaws
shall apply, mutatis mutandis, to any such committee of the Board.
ARTICLE IV
OFFICERS
Section 4.01. Number. The officers of the corporation shall be a
Chairman of the Board, a Chief Executive Officer, a President, a Chief Financial
Officer, and a Secretary. The Board may also elect one or more Vice Presidents
and Assistant Secretaries. A person may hold more than one office providing the
duties thereof can be consistently performed by the same person.
Section 4.02. Other Officers. The Board may appoint such other
officers as it shall deem necessary who shall hold their offices for such terms
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and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.
Section 4.03. Election. Each of the officers of the Corporation,
except such officers as may be appointed in accordance with the provisions of
Section 4.02 or Section 4.05 of this Article, shall be chosen annually by the
Board and shall hold their office until he or she shall resign or shall be
removed or otherwise disqualified to serve, or their successor shall be elected
and qualified.
Section 4.04. Salaries. The salaries of all executive officers
of the Corporation shall be fixed by the Board or by such committee of the Board
as may be designated from time to time by a resolution adopted by a majority of
the Board.
Section 4.05. Removal; Vacancies. Subject to the express
provisions of a contract authorized by the Board, any officer may be removed,
either with or without cause, at any time by the Board or by any officer upon
whom such power of removal may be conferred by the Board. Any vacancy occurring
in any office of the Corporation shall be filled by the Board.
Section 4.06. The Chairman of the Board. The Chairman of the
Board shall preside at all meetings of the stockholders and directors and shall
have such other powers and duties as may be prescribed by the Board or by
applicable law. The Chairman shall be an ex-officio member of standing
committees, if so provided in the resolutions of the Board appointing the
members of such committees.
Section 4.07. Powers and Duties of Officers. The chief executive
officer of the Corporation shall have such powers in the management of the
Corporation as may be prescribed in a resolution by the Board of Directors and,
to the extent not so provided, as generally pertain to such office. The chief
executive officer shall see that all orders and resolutions of the Board of
Directors are carried into effect.
The other officers of the Corporation shall have such powers and duties
in the management of the Corporation as may be prescribed in a resolution by the
Board of Directors or delegated to them by the chief executive officer and, to
the extent not so provided or delegated, as generally pertain to their
respective offices, subject to the control of the Board of Directors and the
chief executive officer. Without limiting the foregoing, the Secretary shall
have the duty to record the proceedings of the meetings of the stockholders and
directors in a book to be kept for that purpose.
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ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
Section 5.01. Checks, Drafts, Etc. All checks, drafts or other
orders for payment of money, notes or other evidence of indebtedness payable by
the Corporation and all contracts or agreements shall be signed by such person
or persons and in such manner as, from time to time, shall be determined by
resolution of the Board. Each such person or persons shall give such bond, if
any, as the Board may require.
Section 5.02. Deposits. All funds of the Corporation not
otherwise employed shall be deposited from time to time to the credit of the
Corporation in such banks, trust companies or other depositories as the Board
may select, or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to whom
such power shall have been delegated by the Board. For the purpose of deposit
and for the purpose of collection for the account of the Corporation, the
President, any Vice President or the Treasurer (or any other officer or
officers, assistant or assistants, agent or agents, or attorney or attorneys of
the Corporation who shall from time to time be determined by the Board) may
endorse, assign and deliver checks, drafts and other orders for the payment of
money which are payable to the order of the Corporation.
Section 5.03. General and Special Bank Accounts. The Board may
from time to time authorize the opening and keeping of general and special bank
accounts with such banks, trust companies or other depositories as the Board may
select or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to whom
such power shall have been delegated by the Board. The Board may make such
special rules and regulations with respect to such bank accounts, not
inconsistent with the provisions of these Bylaws, as it may deem expedient.
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ARTICLE VI
SHARES AND THEIR TRANSFER
Section 6.01. Certificates for Stock. Every owner of stock of the
Corporation shall be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number and class of
shares of the stock of the Corporation owned by such person. The certificates
representing shares of such stock shall be numbered in the order in which they
shall be issued and shall be signed in the name of the Corporation by the
Chairman, or President or a Vice President, and by the Secretary or the
Treasurer, or any Assistant Secretary or Treasurer. Any or all of the signatures
on the certificates may be a facsimile. In case any officer, transfer agent or
registrar who has signed, or whose facsimile signature has been placed upon, any
such certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, such certificate may nevertheless
be issued by the Corporation with the same effect as though the person who
signed such certificate, or whose facsimile signature shall have been placed
thereupon, were such officer, transfer agent or registrar at the date of issue.
A record shall be kept of the respective names of the persons, firms or
corporations owning the stock represented by such certificates, the number and
class of shares represented by such certificates, respectively, and the
respective dates thereof, and in case of cancellation, the respective dates of
cancellation. Every certificate surrendered to the Corporation for exchange or
transfer shall be cancelled, and no new certificate or certificates shall be
issued in exchange for any existing certificate until such existing certificate
shall have been so cancelled, except in cases provided for in Section 6.04.
Section 6.02. Transfers of Stock. Transfers of shares of stock of
the Corporation shall be made only on the books of the Corporation by the
registered holder thereof, or by their attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary, or with a transfer clerk or
a transfer agent appointed as provided in Section 6.03, and upon surrender of
the certificate or certificates for such shares properly endorsed and the
payment of all taxes thereon. The person in whose name shares of stock stand on
the books of the Corporation shall be deemed the owner thereof for all purposes
as regards the Corporation. Whenever any transfer of shares shall be made for
collateral security, and not absolutely, such fact shall be so expressed in the
entry of transfer if, when the certificate or certificates shall be presented to
the Corporation for transfer, both the transferor and the transferee request the
Corporation to do so.
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<PAGE> 15
Section 6.03. Regulations. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer and registration of certificates for shares of
the stock of the Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer clerks or one or more transfer agents
and one or more registrars, and may require all certificates for stock to bear
the signature or signatures of any of them.
Section 6.04. Lost, Stolen, Destroyed, and Mutilated
Certificates. In any case of loss, theft, destruction or mutilation of any
certificate of stock, another may be issued in its place upon proof of such
loss, theft, destruction or mutilation and upon the giving of a bond of
indemnity to the Corporation in such form and in such sum as the Board may
direct; provided, however, that a new certificate may be issued without
requiring any bond when, in the judgment of the Board, it is proper so to do.
Section 6.05. Fixing Date for Determination of Stockholders of
Record. In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action except, prior to completion by the
Corporation of an IPO, for consenting to corporate action in writing without a
meeting, the Board of Directors may fix a record date, which shall not precede
the date the resolution fixing the record date is adopted and which record date
shall not be more than 60 nor less than 10 days before the date of any meeting
of stockholders, nor more than 60 days prior to the time for such other action
as herein before described; provided, however, that if no record date is fixed
by the Board of Directors, the record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at the close of
business on the day preceding the day on which notice is given or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held and, for determining stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or any other
lawful action except, prior to completion by the Corporation of an IPO, for
consenting to corporate action in writing without a meeting, the record date
shall be the close of business on the day on which the Board of Directors adopts
a resolution relating thereto.
For purposes of determining the stockholders entitled, prior to
completion by the Corporation of an IPO, to consent to corporate action in
writing without a meeting, the Board of Directors may fix a record date, which
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<PAGE> 16
shall not precede the date upon which the resolution fixing the record date is
adopted by the Board of Directors, and which record date shall not be more than
10 days after the date upon which the resolution fixing the record date is
adopted, as of which shall be determined the stockholders of record entitled to
consent to corporate action in writing without a meeting. If no record date has
been fixed by the Board of Directors and no prior action by the Board of
Directors is required by the Delaware General Corporation Law, the record date
shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the Corporation. If no
record date has been fixed by the Board of Directors and prior action by the
Board of Directors is required by the Delaware General Corporation Law with
respect to the proposed action, the record date for determining stockholders
entitled to consent to corporate action in writing shall be the close of
business on the day in which the Board of Directors adopts the resolutions
taking such prior action.
ARTICLE VII
INDEMNIFICATION
Section 7.01. Indemnification of Officers, Directors, Employees
and Agents; Insurance.
(a) Right to Indemnification. The Corporation shall have
the right to indemnify any person (the "Indemnitee") to the fullest extent
permitted by law if Indemnitee was or is or becomes a party to or witness or
other participant in, or is threatened to be made a party to or witness or other
participant in, any threatened, pending or completed action, suit, proceeding or
alternative dispute resolution mechanism, or any hearing, inquiry or
investigation that Indemnitee in good faith believes might lead to the
institution of any such action, suit, proceeding or alternative dispute
resolution mechanism, whether civil, criminal, administrative, investigative or
other (hereinafter a "Claim") by reason of (or arising in part out of) any event
or occurrence related to the fact that Indemnitee is or was a director, officer,
employee, agent or fiduciary of the Corporation, or any subsidiary of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee, agent or fiduciary of another corporation,
partnership, limited liability company, joint venture, trust or other
enterprise, or by reason of any action or inaction on the part of Indemnitee
while serving in such capacity against any and all expenses (including
attorneys' fees and all other costs, expenses, and obligations incurred in
connection with investigating, defending, being a witness in or participating in
(including on
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<PAGE> 17
appeal), or preparing to defend, be a witness in or participate in, any such
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by the Corporation, which
approval shall not be unreasonably withheld) of such Claim and any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement (collectively,
hereinafter "Expenses"), including all interest assessments and other charges
paid or payable in connection with or in respect of such Expenses.
(b) Insurance. The Corporation may maintain insurance, at
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law, provided that such
insurance is available on acceptable terms, which determination shall be made by
the Board of Directors or by a committee thereof.
ARTICLE VIII
MISCELLANEOUS
Section 8.01. Seal. The Board shall provide a corporate seal,
which shall be in the form of a circle and shall bear the name of the
Corporation and words and figures showing that the Corporation was incorporated
in the State of Delaware and the year of incorporation.
Section 8.02. Waiver of Notices. Whenever notice is required to
be given by these Bylaws or the Certificate of Incorporation or by law, the
person entitled to said notice may waive such notice in writing, either before
or after the time stated therein, and such waiver shall be deemed equivalent to
notice.
Section 8.03. Fiscal Year. The fiscal year of the Corporation
shall be fixed by resolution of the Board.
Section 8.04. Voting Stock. Any person so authorized by the
Board, and in the absence of such authorization, the Chairman of the Board,
the President or any Vice President, shall have full power and authority on
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<PAGE> 18
behalf of the Corporation to attend and to act and vote at any meeting of the
stockholders of any corporation in which the Corporation may hold stock and at
any such meeting shall possess and may exercise any and all rights and powers
which are incident to the ownership of such stock and which as the owner thereof
the Corporation might have possessed and exercised if present. The Board by
resolution from time to time may confer like powers upon any other person or
persons.
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<PAGE> 19
CERTIFICATE OF SECRETARY
I, the undersigned, the duly elected Secretary of A-55, Inc., a
Delaware corporation, do hereby certify:
That the within and foregoing Amended and Restated Bylaws were
adopted as the Bylaws of the corporation by the Board of Directors on July 31st,
1998 and the same do now constitute the Bylaws of said corporation.
IN WITNESS WHEREOF, I have hereunto subscribed my name this 31st
day of July, 1998.
/s/ Daniel J. Klaich
-------------------------------
Daniel J. Klaich, Secretary
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<PAGE> 1
Exhibit 4.1
INCORPORATED UNDER THE LAWS OF
No. #### THE STATE OF DELAWARE SHARES ##########
JULY 15, 1997
A-55, Inc.
Authorized Capital: 10,000 shares Common Stock
This certifies that -- is the owner of ___________________
Shares of the Common Stock of
A-55, Inc.
[SEAL] transferable only on the Books of the Corporation by the holder
hereof in person or by duly authorized Attorney, on surrender of
this Certificate properly endorsed.
IN WITNESS WHEREOF the duly authorized officers of this Corporation
have hereunto subscribed their names and caused the corporate Seal
to be hereto affixed at Reno, Nevada this _____ day of ____________
A.D. _____
________________________ ________________________
President Secretary
SHARES __________ EACH.
<PAGE> 2
CERTIFICATE
FOR
SHARES
OF THE
CAPITAL STOCK
ISSUED TO
DATED
For Value Received, ____________ hereby sell, assign and transfer unto
_________________________________________________________________________
_____________________________________________________________________ Shares
of the Capital Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_____________________________________________________________________________
to transfer the said Stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ____________________________
In presence of
__________________________ ___________________________
NOTICE THE SIGNATURE OF THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER
<PAGE> 1
EXHIBIT 10.1
EXCLUSIVE LICENSE AGREEMENT
This Agreement is entered into this 3rd day of January, 1994, and replaces
that certain Exclusive License Agreement between the parties dated the 2nd day
of November, 1992, between Rudolf W. Gunnerman (herein called "Licensor"), and
A-55, L.P., a Nevada limited partnership (herein called "Licensee"), based on
the following facts:
A. Incident to the formation of Licensee and in consideration of the
issuance of partnership interests therein, Licensor is obligated to grant this
Exclusive License.
B. Licensor is and may in the future become the owner of certain Technology
as hereinafter defined, which Licensee wishes to acquire the right to use in the
Licensed Territory. Based on the foregoing the parties agree as follows:
1. Definitions
As used herein, the following terms shall have the meanings set forth
below.
1.1 "Field" means:
(a) methods, processes, compositions and apparatuses for carrying out
combustion for the generation of heat in internal combustion engines, either
compression or spark-ignited;
(b) aqueous fuels, including fuels described in the Patents, as well
as (i) methods, processes, apparatuses
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<PAGE> 2
and compositions for their production and (ii) methods, processes, compositions
and apparatuses for their combustion; and
(c) methods, processes, compositions and apparatuses used for
production of chemicals, petrochemicals, plastics or pharmaceuticals utilized in
connection with any of the above;
1.2 "Patent" or "Patents" means all existing and future patents, patent
applications, and like grants in the Licensed Territory that (i) concern or
relate to the Field (including but not limited to the patents and patent
applications listed in Exhibit A hereto) and that (ii) as of the date of this
Agreement or during its term as defined below are or become owned or controlled
by Licensor or in which Licensor otherwise has or acquires the power to grant
rights thereunder, and all continuations, divisionals, continuations-in-part,
substitutes, extensions, reissues, confirmations, registrations, revalidations,
or additions of any of the foregoing.
1.3 "Service Marks" or "Trademarks" means all existing and future Service
Marks, Trademarks, applications for the same, and like grants in the Licensed
Territory that (i) concern or relate to the Field (including but not limited to
the Service Marks and Trademarks and applications therefor listed in Exhibit A
hereto) and that (ii) as of the date of this Agreement or during its term as
defined below are or
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<PAGE> 3
become owned or controlled by Licensor or in which Licensor otherwise has or
acquires the power to grant rights thereunder.
1.4 "Technology" means all existing and future inventions, discoveries,
information, data, know-how, trade secrets, methods, processes, expertise,
confidential information, apparatuses, compositions and works of authorship,
whether or not protected by patent, copyrights, service marks or trademarks that
(i) are within the Field, and (ii) are owned or controlled by Licensor or as to
which Licensor has the power to grant rights thereunder, including but not
limited to Patents. Unless the context of this Agreement requires otherwise, the
term "Technology" shall include the Technology and know-how as defined in this
section, the Patents, the Service Marks, and the Trademarks.
1.5 "Licensed Territory" means the United States, Canada and Mexico.
1.6 "Licensed Products" means:
(a) products, compositions, services, and apparatuses, the
manufacture, use, importation or sale of which in the absence of the licenses
granted hereunder would infringe at least one claim of a Patent; and
(b) products, compositions and apparatuses which, in whole or in
part, employ or are within the definition of Technology.
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<PAGE> 4
1.7 "Licensed Processes" means:
(a) processes and methods, the use of which in the absence of the
licenses granted hereunder would infringe at least one claim of a Patent; and
(b) processes and methods which, in whole or in part, employ or are
within the definition of Technology.
2. Patent License
2.1 Licensor hereby grants to Licensee, to the extent of the Licensed
Territory and to the exclusion of Licensor, the sole and exclusive license to
practice the Patents within the Field, including but not limited to the
manufacture, use, importation and sale of Licensed Products and use of Licensed
Processes.
3. Technology License
3.1 Licensor hereby grants to Licensee, to the extent of Licensed Territory
and to the exclusion of Licensor, the sole and exclusive license to practice the
Technology and know-how within the Field, including but not limited to the
manufacture, use, importation and sale of Licensed Products and use of Licensed
Processes.
3.2 Promptly after execution of this Agreement, Licensor shall make
available to Licensee for its use all Technology in Licensor's possession needed
to make Licensed Products and to use Licensed Processes.
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<PAGE> 5
4. Service Mark and Trademark License
4.1 Licensor hereby grants to Licensee, to the extent of the Licensed
Territory and to the exclusion of Licensor, the sole and exclusive license to
utilize the Service Marks and Trademarks within the Field.
5. Retained Ownership
5.1 Subject to the Patent license in Section 2., the Technology license in
Section 3., and the Service Mark and Trademark license in Section 4., Rudolf W.
Gunnerman retains absolute ownership of all Technology.
6. Royalties
6.1 In consideration of this Agreement, the Licensee shall issue and
deliver to Licensor or a limited partnership in which Licensor is a general
partner certain partnership interests in Licensee.
6.2 There shall be no royalty or other monetary consideration payable to
Licensor as a result of or for this Agreement.
7. Sublicensing
7.1 Licensee shall have the right and obligation to grant sublicenses under
this Agreement as more fully set forth in the Limited Partnership Agreement of
Licensee, as
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<PAGE> 6
the same may be amended or extended from time to time and to which this
Agreement is attached.
8. Representations and Warranties
8.1 Licensor represents and warrants to Licensee:
(a) that Licensor is the exclusive owner of all right, title and
interest in and to the Technology, has the right to grant the licenses
hereunder, has the right to enter into this Agreement, and has not granted to
any other party any similar or conflicting right, license, shop right, or
privilege under the Technology or with respect thereto;
(b) that Licensor is not now aware of any prior art, prior offers for
sale, or other events, circumstances or other facts that could in his opinion
result in a finding that any claim in the Patents are either invalid or
unenforceable;
(c) that Licensor is not now aware of any actual, potential or
threatened assertions of invalidity by third parties against the Technology,
including but not limited to pending or threatened litigation;
(d) that Licensor is not now aware of any potential, likely or actual
charges by third parties of infringement concerning or arising out of the
practice or use of the Technology; and
(e) that Licensor is not now aware of any potential, likely or actual
charges of infringement made or
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<PAGE> 7
to be made or that could be made by or on behalf of Licensor against third
parties concerning or relating to the Field.
9. Term
9.1 The term of the Technology license under Section 3.1 and the Service
Mark and Trademark license under Section 4.1 above shall expire only upon the
dissolution of Licensee in accordance with terms and conditions of the Limited
Partnership Agreement of Licensee, as the same may be amended or extended from
time to time and to which this Agreement is attached.
9.2 The term of the Patent license under Section 2.1 above shall expire
only (a) upon the expiration of the last of the Patents to expire or (b) upon
the dissolution of Licensee in accordance with terms and conditions of the
Limited Partnership Agreement of Licensee, as the same may be amended or
extended from time to time and to which this Agreement is attached, whichever is
earlier.
10. Patents
10.1 Rudolf W. Gunnerman shall from and after the date hereof, on behalf of
Licensee and at Licensee's sole expense, file, prosecute, and maintain all
Patents.
10.2 The parties acknowledge that the Licensee is being formed to exploit
the Technology in the Licensed Territory. Rudolf W. Gunnerman, on behalf of
Licensee and at Licensee's
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<PAGE> 8
sole expense, shall proceed promptly and diligently to obtain patent, copyright,
or equivalent protection available under the laws of appropriate jurisdictions
with respect to the subject matter of the Technology. All consultants,
accountants, attorneys and other professionals utilized by Rudolf W. Gunnerman
on behalf of Licensee in discharging his obligations pursuant to Sections 10.1
and 10.2 shall be acceptable to and approved by Licensee.
10.3 Licensee shall have the right and obligation to institute or defend in
its name and on behalf of Licensor, prosecute, maintain, and settle or otherwise
compromise any actions by or against third parties for infringement. Licensor
shall cooperate fully in such actions when so requested by Licensee. Any such
defense shall be undertaken on behalf of Licensor and Licensee with counsel
acceptable to and approved by Licensor. In the event Licensee determines not to
institute or defend, prosecute, maintain, settle or otherwise compromise any
actions as contemplated in the first sentence of this section, then Licensor at
its option may undertake such actions at its expense, and Licensee shall
have no further interest in the Patent which is the subject of such action, the
proceeds therefrom, or any subsequent royalty or revenue from such Patent.
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<PAGE> 9
11. Nonassignability
11.1 Licensee may not assign its rights or obligations hereunder, except
for sublicensing contemplated by Section 7. above.
12. Severability
12.1 If any part, term, or provision of this Agreement shall be found
illegal or in conflict with any valid controlling law, the validity of the
remaining provisions shall not be affected thereby.
13. Marketing
13.1 Licensee shall place in a conspicuous location on any products made or
sold under any Patent, a patent notice in accordance with 35 U.S.C. Section 287.
Licensee agrees to mark any products made using a process covered by any Patent
with the number of each such patent and, with respect to Patents, to respond to
any request for disclosure under 35 U.S.C. Section 287(b)(4)(B) by only
notifying Licensor of the request for disclosure.
14. Confidentiality
14.1 Each party hereto for itself and on behalf of affiliates agrees not to
disclose to any third party any information, materials or documentation relating
to the Technology except to the extent such disclosure is required
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<PAGE> 10
by law, or by the ordinary business operations of Licensor or Licensee (with any
sublicenses to contain similar confidentiality obligations), and agrees that
such information is proprietary and confidential. At any time that the
disclosure of proprietary and confidential information is required, Licensor or
Licensee shall obtain from the party to whom such disclosure is made an
appropriate written agreement protecting against the further disclosure or
dissemination of such information.
15. General Provisions
15.1 Notices. Any and all notices or other communication required or
permitted by this Agreement to be served on or given to any party hereto shall
be in writing and shall be deemed duly served and given when personally
delivered, given by facsimile, or deposited in the United States mail, by
certified mail, return receipt requested, or Express Mail, Federal Express, DHL,
or UPS Next Day Air addressed to the parties as follows:
<TABLE>
<CAPTION>
Licensor: Licensee:
<S> <C>
Rudolf W. Gunnerman A-55 Limited Partnership
100 N. Arlington Ave. c/o Daniel J. Klaich,
Suite 14-H Sr.Vice Pres.
Reno, Nevada 89501 210 Gentry Way
Fax: (702)826-8393 Reno, Nevada 89502
Fax: (702)826-8383
</TABLE>
15.2 Relationship of the Parties. Nothing in this Agreement shall be
construed to create between the parties a partnership, association, joint
venture or agency.
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<PAGE> 11
15.3 Entire Agreement. This Agreement cancels and supersedes all prior oral
or written representations, agreements and understandings between the parties
and embodies all of the understandings and obligations between the parties with
respect to the subject matter hereof. This Agreement may be modified and amended
at any time, including the addition of new or deletion of existing know-how and
technology pertinent to the license granted under this Agreement. However, no
agreement, modification or extension of this Agreement shall be binding upon any
of the parties hereto unless made in writing and signed by both parties.
15.4 Non-Waiver. Failure of either party to require strict performance of
any term of this Agreement shall not affect that party's right to enforce the
same nor shall any waiver of a default be construed to be a waiver of any other
or succeeding default or waiver of this paragraph.
15.5 Legality. If any term or provision, other than royalty provisions of
the Agreement, shall be held or adjudged by any court of competent jurisdiction,
to be illegal, invalid or an unenforceable term, the remaining provisions shall
be deemed to be separable and shall continue in full force and effect.
15.6 Attorneys' Fees. Should any litigation be commenced between the
parties hereto concerning this Agreement, or the rights and duties of either
party in relation thereto, the party prevailing in such litigation
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<PAGE> 12
shall be entitled, in addition to such other relief as may be granted, to a
reasonable sum as and for attorneys' fees in such action.
15.7 Choice of Law. This Agreement is to be governed by and construed in
accordance with the laws of the State of Nevada as they exist from time to time.
15.8 Binding Effect. Subject to the foregoing provisions, this Agreement
shall inure to the benefit of, and be binding upon, the parties hereto, their
successors, trustees, assigns, heirs, administrators and legal representatives,
but shall not inure to the benefit of any other person, firm or corporation.
15.9 Additional Instruments. The parties agree to make, execute and deliver
such additional instruments as are necessary to carry forth the intent of this
Agreement.
15.10 Authority. Each of the parties covenants that this Agreement is
executed under authority duly granted.
15.11 Duplicate Originals. This Agreement has been signed in two (2)
duplicate originals.
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15.12 Time of the Essence. Time is expressly declared to be of the
essence in this Agreement and each and every provision hereof in which time is
an element.
LICENSEE: LICENSOR:
A-55, L.P., a Nevada /s/ Rudolf W. Gunnerman
Limited Partnership ----------------------------------------
Rudolf W. Gunnerman,
by RWG, Inc., a an individual
Nevada Corporation,
General Partner
By /s/ Daniel J. Klaich
-------------------------------
Daniel J. Klaich,
Senior Vice President
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<PAGE> 1
EXHIBIT 2.1
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER (this "Agreement") is entered into as of July
31, 1998 between A-55, L.P., a Nevada limited partnership (the "Partnership"),
and A-55, Inc., a Delaware corporation (the "Corporation").
BACKGROUND
A. The Partnership is a Nevada limited partnership governed by a
Restated Agreement of Limited Partnership dated as of January 3, 1994, as
amended by First, Second, Third, Fourth, Fifth and Sixth Amendments effective as
of January 26, 1994, January 1, 1995, February 23, 1995, April 1, 1996,
September 16, 1997, and January 1, 1998 respectively (collectively, the
"Partnership Agreement").
B. RWG, Inc., a Nevada corporation, is the sole general partner of the
Partnership (the "General Partner"), and the Partnership's limited partners
consist of Class A, Class B and Class C limited partners (collectively, the
"Limited Partners"). (The General Partner and the Limited Partners are referred
to, collectively, as the "Partners" and, individually, as a "Partner." The
partnership interest of each Partner, whether a general partnership interest or
a Class A, Class B or Class C limited partnership interest, is referred to as a
"Partnership Interest.")
C. The Corporation is a newly-organized Delaware corporation. Its only
outstanding shares of stock are 50 shares of common stock, all of which are
owned by the Partnership.
D. The parties intend that the Partnership merge with and into the
Corporation (the "Merger") pursuant to the terms and conditions set forth herein
and the applicable provisions of Delaware and Nevada law, and that upon the
Merger's Effective Date (as defined below), all of the Partners of the
Partnership will become stockholders of the Corporation. The shares of the
Corporation's common stock to be received by such persons pursuant to the Merger
will not be registered under federal or state securities laws and will therefore
be restricted shares subject to a stock legend restricting the transfer of such
shares.
NOW, THEREFORE, the parties hereby agree as follows:
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<PAGE> 1
EXHIBIT 10.3
SECOND AMENDMENT TO EXCLUSIVE LICENSE AGREEMENT
This Second Amendment is entered into this 18th day of August,
1998, based on the following facts:
A. Incident to its formation, A-55, L.P. was granted a
license under that certain Exclusive License dated
November 2, 1992; restated January 3, 1994; and amended by
that certain First Amendment effective January 1, 1995.
B. Licensor and Licensee desire to further amend the
Exclusive License Agreement.
Based on the foregoing, the parties agree as follows:
1. Section 1.1(a) of the Exclusive License Agreement is
amended in its entirety to read as follows:
(a) methods, processes, compositions and apparatuses for
carrying out combustion for the generation of heat in (i)
internal combustion engines, either compression or spark
ignited and (ii) open flame applications such as boilers
and combustion turbines;"
2. The effective date of this First Amendment is July 31,
1998.
LICENSEE: LICENSOR:
A-55 , L.P., a Nevada
Limited Partnership
/s/ Rudolf W. Gunnerman
__________________________________
By RWG Inc., a Nevada Rudolf W. Gunnerman,
Corporation, an individual
General Partner
By /s/ Daniel J. Klaich
_________________________________
Daniel J. Klaich,
Executive Vice
President
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<PAGE> 1
EXHIBIT 10.4
LICENSE AGREEMENT
This is an Agreement by and between Advanced Fuels, LLC, a limited
liability company under the laws of Delaware, having a mailing address of P.O.
Box 610, Mossville, IL 61552-0610, (hereinafter "LICENSOR"), and Caterpillar
Inc., a Delaware corporation, having a mailing address of 100 N.E. Adams Street,
Peoria, IL 61629, (hereinafter "LICENSEE").
RECITALS
Whereas LICENSOR has the right to license LICENSOR Technology and
LICENSOR Patent Rights which relate to and/or use aqueous fuel defined as
comprising a mixture of water and carbonaceous material for combustion in an
internal combustion engine and the use thereof; and
Whereas LICENSEE desires to obtain and LICENSOR is willing to
grant a worldwide license under LICENSOR Patent Rights and LICENSOR Technology
upon the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the mutual covenants set forth
herein, the sufficiency of which is hereby acknowledged, the parties agree to
the terms and conditions set forth below.
ARTICLE I - DEFINITIONS
For the purposes of this Agreement, the following
terms shall have the meanings set forth hereinbelow.
-1-
<PAGE> 2
1.1 FIELD OF THE AGREEMENT means: methods, processes,
compositions and apparatuses for carrying out combustion for the generation of
heat in internal combustion engines, including compression, spark-ignited and
turbine engines, capable of using aqueous fuels and the use of aqueous fuels in
such engines.
1.2 TECHNOLOGY means all information, know-how, and trade secrets
in and to the Field of the Agreement.
1.3 LICENSOR TECHNOLOGY means all proprietary and confidential
Technology, owned or licensable by LICENSOR, now and during the continuance of
this Agreement.
1.4 LICENSOR PATENT RIGHTS means (a) patents and pending patent
applications in the Field of this Agreement, including, without limitation,
patents, applications and patents issuing on patent applications listed in
Appendix A to this Agreement; (b) future patents and patent applications owned
or licensable by LICENSOR to the extent the claims thereof cover subject matter
in the Field of the Agreement and (c) any national and foreign filings,
continuations, continuations-in-part, divisions, reexamination certificates,
reissues or extensions thereof.
1.5 PRODUCTS shall mean articles, including engines and converted
engines, in the Field of the Agreement which are produced using and/or utilize
LICENSOR Technology and/or are covered by LICENSOR Patent Rights.
-2-
<PAGE> 3
1.6 NET SALES PRICE means the total gross sales billed, less the
following to the extent they are paid or allowed and included in gross sales
billed in accordance with GAAP: (a) sales taxes, use taxes or turnover taxes on
sales invoices; (b) excise taxes, custom duties, or counselor fees; (c)
transportation and insurance on shipments to customers; (d) trade or quantity
discounts (but not cash discounts); and (e) credits allowed for returned goods.
An engine shall be deemed sold, (i) if sold "intercompany" to an affiliated
company for installation as a component in another product, when it is first
accounted for as sold "intercompany" and, (ii) if otherwise sold, when it is
billed to an unaffiliated party. If an engine is sold "intercompany", "gross
sales billed" shall mean the established corporate transfer price for the
engine; provided that, said corporate transfer price shall be a market based
price. If there is no market based corporate transfer price, then the "gross
sales billed" shall be deemed to be the price of the same model similarly
equipped which LICENSEE sells to third parties, or, failing that, which has a
market based corporate transfer price. Where LICENSEE's sale is in a currency
other than United States dollars, the amount received in United States dollars
for purposes of calculating "Net Sales Price" upon which royalty is paid
hereunder shall be calculated by using LICENSEE's standard practices for
currency exchange in this respect; provided that such practices are consistent
with
-3-
<PAGE> 4
GAAP and do not significantly differ from results which will be achieved based
upon the average rate of exchange at Citibank in New York City, New York, on the
last date of the calendar month in which the amount was received by LICENSEE
from the sale of Products.
1.7 LICENSED TERRITORY means the world.
1.8 EFFECTIVE DATE shall mean the last of the
signature dates hereof, as provided for hereinbelow.
1.9 SUBSIDIARY means a corporation or other legal
entity in which LICENSEE owns or controls, directly or indirectly, at least 35%
of the voting stock or interest normally entitled to vote for directors or their
equivalent.
1.10 IMPROVEMENTS means any Technology, patentable or not, within
the scope of LICENSOR Technology and/or LICENSOR Patent Rights.
ARTICLE 2 -- GRANT
2.1 LICENSOR hereby grants to LICENSEE a non-
exclusive right and license (but with certain sole and exclusive rights reserved
to LICENSEE under Paragraph 2.2), without the right to sublicense others except
as provided herein, throughout the Licensed Territory under LICENSOR Technology
and under LICENSOR Patent Rights, to make, use and sell Products in respect to
LICENSEE's engines and engines sold under LICENSEE's trademarks and to practice
processes in connection therewith.
-4-
<PAGE> 5
2.2 The license granted under Article 2.1 shall include the sole
and exclusive right to convert LICENSEE's engines and engines sold under
LICENSEE's trademarks previously sold by LICENSEE to utilize aqueous fuel and
the sole and exclusive right to manufacture, use and sell parts which can be
used in the conversion of such engines and for the repair and replacement of
parts thereof. The right in LICENSEE to convert shall include the right to sell
parts or kits to accomplish such conversion and to allow LICENSEE's authorized
dealerships to convert engines previously sold by LICENSEE, as aforesaid.
2.3 LICENSOR agrees that within thirty days after the Effective
Date of this Agreement, it will make LICENSOR Technology available to LICENSEE
for LICENSEE's licensed use hereunder. Any reasonable out-of-pocket expenses in
making LICENSOR Technology available to LICENSEE during the continuance of this
Agreement shall be reimbursed by LICENSEE. LICENSOR shall be under no obligation
to obtain or develop any additional Technology than available at the Effective
Date of this Agreement, but may do so as it sole option, and alleged
deficiencies in the quality or quantity of any Technology delivered shall not be
considered a material breach of this Agreement, it being recognized by all
parties that the licenses granted hereunder are for substantial rights in
addition to use of Technology.
-5-
<PAGE> 6
2.4 LICENSEE shall have the right to grant sublicenses to its
Subsidiaries. Where reference is made in this Article 2 to LICENSEE's engines
and engines sold under LICENSEE's trademarks, such reference shall also include
its Subsidiaries' engines and engines sold under its Subsidiaries' trademarks.
2.5 It is understood that the license granted to LICENSEE set
forth in Article 2 does not include the right to make and use aqueous fuel which
is the subject of proprietary, confidential and trade secret technology and
patent rights of LICENSOR outside the Field of this Agreement; provided however
that. in the event that aqueous fuel is not available to LICENSEE in a
particular geographic area or market segment in sufficient quantity and quality
at competitive prices necessary to serve said geographical area or market
segment, then LICENSEE shall further have a non-exclusive license under the
Technology, in the Field, to make, use and sell fuel for LICENSEE's engines and
engines sold under LICENSEE's trademarks for said geographic area or market
segment; provided that, if LICENSOR has not been dissolved, LICENSEE has first
requested LICENSOR to supply the fuel and LICENSOR refuses, fails or is unable
to make such supplies available in the particular area or market segment. If
subsequent to LICENSE's exercise of its rights under this section 2.4, fuel
becomes commercially available in an area or market segment in sufficient
quantity and
-6-
<PAGE> 7
quality at competitive prices for a continuous period of at least six months,
then the license under this section 2.4 for the particular circumstance shall
terminate unless the fuel again becomes unavailable.
2.6 If LICENSOR has granted or grants in the future a license to
a third party under the LICENSOR Patent Rights on terms more favorable than
those afforded LICENSEE herein, LICENSEE shall have the right for thirty (30)
days after such terms are brought to its attention to elect such terms in lieu
of those granted herein, effective as of the date they were granted to said
third party.
ARTICLE 3 -- PAYMENTS AND ACCOUNTING
3.1 In consideration for the licenses and rights
granted under Article 2 hereof and the disclosure of LICENSOR Technology,
LICENSEE shall pay LICENSOR as follows:
(a) For each engine sold pursuant to the
license granted in Article 2, (i) two and one-half percent (2 1/2%) of the Net
Sales Price of each such engine covered by a claim of a patent included in
LICENSOR Patent Rights or (ii) one and one-fourth percent (1 1/4%) for each
engine covered by a Pending Claim of a U.S. patent application included in
LICENSOR Patent Rights. Once a patent issues containing a Pending Claim, the
royalty payable shall increase to the rate for a claim of an issued patent. Only
one royalty shall be payable per engine (said royalty to be paid at highest
applicable rate) regardless of the number of times it is sold
-7-
<PAGE> 8
or where it is sold or the number of claims of a patent(s) and patent
application(s) included in LICENSOR Patent Rights which cover it. "Pending
Claim" means any claim of a pending U.S. Patent Application included in LICENSOR
Patent Rights excluding (i) claims which have been twice rejected or are under
final rejection and (ii) claims equivalent to those in (i). Whether claims are
equivalent for purposes of the preceding sentence shall, if not agreed upon by
the parties, be the subject of an arbitration using an experienced patent
attorney agreed to by the parties.
(b) For the conversion of each engine
accomplished pursuant to the license granted in Article 2, no
royalty shall be payable.
(c) On the sale of any parts pursuant to the
license granted in Article 2, no royalty shall be payable.
(d) For each gallon of aqueous fuel sold
pursuant to the license of section 2.4, a royalty equal to (i), if LICENSOR has
licensed any others, the most favorable generally prevailing per gallon royalty
payable by any such LICENSEE (it being the intent to exclude for this purpose
isolated licenses wherein royalties may not be reflective of generally
prevailing market conditions) or (ii), if LICENSOR has not licensed any others,
U.S.$0.05.
(e) LICENSEE shall be responsible for all
payments to be made to LICENSOR under this agreement whether for activities by
LICENSEE or on behalf of LICENSEE.
-8-
<PAGE> 9
3.2 LICENSEE agrees to make royalty payments to LICENSOR for all
royalty amounts owned by LICENSEE on a calendar quarterly basis. Each quarterly
royalty payment from LICENSEE to LICENSOR will be made within sixty days after
the end of the quarter in connection with which the payment became due in U.S.
dollars by good funds (including wire transfer) free of transfer or other
charges in such place and manner as LICENSOR shall designate. LICENSEE further
agrees to provide LICENSOR with a written report with each quarterly royalty
payment, including an accounting of activities under Article 3.1, and of
receipts during the quarterly period in connection with which the corresponding
royalty payment is being made. LICENSEE may make its reports under this section
3.2 in such a fashion that the Net Sales Price for an individual engine is not
disclosed. Submission of a deliberately false report shall be considered a
material breach of this Agreement.
3.3 LICENSEE agrees to keep accurate records at its regular place
of business in sufficient detail to enable LICENSOR to determine the royalties
payable hereunder and to maintain such records for a period of at least two
years, including two years after the expiration or termination of this Agreement
for any cause. LICENSEE further agrees that it will allow, during the
continuance of this Agreement and for a period of two years thereafter, upon
request of LICENSOR an independent certified public accountant to review
-9-
<PAGE> 10
the aforementioned records of LICENSEE and any sublicensee for up to the
preceding two years to the extent necessary for LICENSOR to verify the accuracy
of the royalty payments made or payable to LICENSOR. Any such audit shall be at
the reasonable expense of LICENSOR unless the audit discloses that the royalty
payments actually made are more than five percent less than the royalty payments
due for the period examined, in which case the reasonable expense of the audit
shall be borne by LICENSEE. LICENSOR shall not be entitled to conduct more than
two (2) audits in any twelve (12) month period. LICENSEE acknowledges that
LICENSOR's rights to license hereunder have been granted pursuant to an
Exclusive License Agreement of even date herewith under which agreement the
licensor thereunder has the authority to review and audit royalty reports of
sublicensees. LICENSEE agrees that the right to audit pursuant to this Paragraph
3.3 shall extend to the licensor under such Exclusive License Agreement, subject
to the limitation of a total of two (2) audits per twelve (12) month period.
3.4 In the event any payment under this Agreement is not made
when due, including any deficiency found in an audit, LICENSEE will pay to
LICENSOR interest on such late payment at the prime rate plus two percent from
the date such payment is due to the date such payment is made. As used in this
Paragraph 3.4, prime rate shall be the prime rate charged by Citibank in New
York, New York, from time to time
-10-
<PAGE> 11
between the date payment was due and the date of actual
payment.
ARTICLE 4 - MARKING
4.1 LICENSEE will apply proper notice of patent
protection on or in connection with Products or their packages, including the
numbers of appropriate U.S. Patents, and to give notice of the pendency of
patent applications on Products or their packages, such as, for example, stating
"Patent Pending', in the form reasonably required by LICENSOR.
ARTICLE 5 -- CONFIDENTIAL STATUS OF TECHNOLOGY
5.1 LICENSEE acknowledges and agrees that, subject
to the provisions of Paragraph 5.3 below, all Technology disclosed to it by
LICENSOR pursuant to this Agreement may constitute and comprise valuable
confidential information and therefore agrees to hold any such Technology it
receives in confidence and otherwise protect it as provided in this Article 5
using the same degree of care it uses with respect to its own information of
like kind.
5.2 LICENSEE agrees that, subject to the provisions of Paragraph
5.3 below, it shall not, without LICENSOR's prior written consent, disclose,
distribute or use any portion of Technology disclosed to it by the other party
pursuant to this Agreement, except to the extent necessary for it to exercise
its rights hereunder (including by way of sale of Products utilizing
Technology), or authorize or allow
-11-
<PAGE> 12
others to do so. LICENSEE further agrees to limit access to such Technology to
those of its employees, or others, who have a "need to know' of the same in
order for it to exercise said rights.
5.3 The obligations under this Article 5 shall not extend to any
portion of Technology disclosed to LICENSEE which (a) is within the public
domain, or enters into the public domain through no fault of LICENSEE, (b) is
within the possession of LICENSEE prior to receipt from LICENSOR as shown by
appropriate records, or (c) is independently made available to LICENSEE as a
matter of right by a third party without restriction on the use or disclosure
thereof. Information which is confidential shall not be deemed to be
nonconfidential merely because it is embraced within information which is
nonconfidential.
5.4 LICENSEE agrees that its obligations under this Article 5
shall extend to those deriving rights through LICENSEE and shall survive any
termination of the other provisions of this Agreement, and shall continue until
such time as one of the exceptions set forth in Paragraph 5.3 above becomes
applicable to the subject matter in question, or until the expiration of a five
year period commencing on the date of termination of the other provisions of
this Agreement, whichever occurs first.
ARTICLE 6 - REPRESENTATIONS AND WARRANTIES
-12-
<PAGE> 13
6.1 LICENSOR expressly warrants that LICENSOR has the right to
license LICENSOR Patent Rights and LICENSOR Technology, that no third party has
any right, title or interest in LICENSOR Patent Rights and LICENSOR Technology,
that according to LICENSOR's information and belief, LICENSOR has taken no
actions which adversely affect these rights, and that LICENSOR has the right to
execute and enter into this Agreement, to perform its obligations hereunder and
to grant the licenses herein.
6.2 LICENSOR warrants that, to the best of its knowledge, there
are no circumstances that would: (a) adversely affect the commercial utility of
the Technology; (b) render the fuel which is the subject of Gunnerman U.S.
patent application serial number CP&H 25169 unpatentable (including by way
satisfying the description, best mode and enablement requirements of 35 USC 112,
first paragraph); (c) render U.S. patent 5,156,114 invalid or unenforceable; (d)
render LICENSEE liable to a third party for patent infringement or trade secret
infringement as a consequence of LICENSEE's practice of the Technology as
provided to LICENSEE.
6.3 LICENSEE represents that it is a corporation duly organized
and existing and in good standing, and that it has the corporate power to enter
into this Agreement and perform the obligations assumed hereunder. LICENSEE
represents that the person executing this Agreement on behalf
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<PAGE> 14
of the corporation is authorized to execute this Agreement and legally bind the
corporation.
6.4 LICENSEE shall indemnify, defend, and hold LICENSOR harmless
from and against any action, claim or liability based on loss or damage to
persons or property resulting from any acts or omissions of LICENSEE or its
employees, agents or permitted sublicensees in connection with its manufacture,
conversion, use and sale of engines, parts, supplies, and/or products utilizing
the Technology; provided that, LICENSOR gives LICENSEE prompt notice of any such
action, claim or liability and permits LICENSEE to conduct the defense.
6.5 LICENSOR shall not be liable for any consequential or special
damages of any kind, including but not by way of limitation, damages for any
loss of use or of profit by LICENSEE, or others, or for any other similar or
similar collateral or consequential damages, which may result from or in
connection with the manufacture, conversion, use or sale by LICENSEE of Products
or processes utilizing the Technology.
6.6 The express warranties contained in this Agreement are in
lieu of all warranties, express or implied, which would be deemed applicable to
this license and to the products manufactured, used and sold thereunder. No
express warranties and no implied warranties as to the merchantability, fitness
for any particular use, infringement
-14-
<PAGE> 15
(except as to title or right to license), or otherwise of the Technology, other
than those expressly set forth in this Agreement shall apply. LICENSEE hereby
waives all other warranties, guarantees, conditions or liabilities, express or
implied, arising by law or otherwise. Without limiting this paragraph LICENSEE
acknowledges and agrees that it shall have sole and the absolute responsibility
for the warranty of its engines and/or parts which utilize the Technology.
ARTICLE 7 - IMPROVEMENTS
7.1 LICENSOR agrees that all Improvements developed by
LICENSOR during the term of this Agreement, shall be made available as part of
LICENSOR Technology and/or LICENSOR Patent Rights at no additional cost to
LICENSEE. LICENSEE shall have the right at its option to elect to take any
patent otherwise includable in LICENSOR Patent Rights. LICENSOR shall promptly
notify LICENSEE of all such Improvements as they become available in
communicable form.
7.2 LICENSEE shall have the right to use Improvements during
the term of this Agreement.
ARTICLE 8 -- TERM AND TERMINATION
8.1 This Agreement shall become effective on the Effective
Date hereof and unless terminated pursuant to Paragraph 8.2 below, shall
continue in full force and effect until the earlier of twenty five (25) years
from the
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<PAGE> 16
effective date of this Agreement or the expiration date of the last patent to
expire under LICENSOR Patent Rights. Upon expiration of this Agreement under
this Paragraph LICENSEE shall acquire a fully paid-up right and license to
LICENSOR Technology and LICENSOR Patent Rights.
8.2 The parties hereto agree that this Agreement, except for the
obligations under Article 5 hereof, may be terminated early (a) by LICENSEE at
any time by providing LICENSOR six (6) months prior written notice of such
termination; or (b) by either party if the other party breaches or defaults on
any material obligation under this Agreement and fails to cure such breach
within sixty days after receipt of written notice from the terminating party
which sets forth the basis of such breach and the terminating party's intent to
terminate the Agreement due to such breach.
8.3 In the event LICENSEE institutes a challenge to the validity
or enforceability of any of LICENSOR Patent Rights, such as by refusal to pay a
royalty hereunder, LICENSOR may, at its sole option, terminate this Agreement
and licenses granted hereunder.
8.4 LICENSOR may at its sole option terminate this Agreement in
the event of any of the following conditions (a) if a petition in bankruptcy
shall be filed by or against LICENSEE and is not dismissed within ninety days
thereafter, (b) if LICENSEE's business or any substantial portion of LICENSEE's
assets are attached by order of court, and such
-16-
<PAGE> 17
attachment is not dissolved within ninety days, (c) if LICENSEE enters into any
agreement or composition of creditors, or (d) if all or substantially all of
LICENSEE's assets are transferred to a successor without prior written consent
of LICENSOR.
8.5 The parties agree that LICENSOR's rights and LICENSEE's
obligations under Article III and Article V of this Agreement shall survive its
termination in order to carry out their terms.
8.6 Upon termination of this Agreement under Paragraph 8.2, 8.3,
or 8.4 all rights and licenses granted to LICENSEE under this Agreement shall
cease and terminate forthwith and LICENSEE agrees that it shall not use or allow
its subLICENSEEs to use LICENSOR Technology and LICENSOR Patent Rights.
ARTICLE 9 -- MISCELLANEOUS
9.1 Assignability. LICENSEE shall have no right
to assign or otherwise transfer this Agreement without the express written
approval of LICENSOR. LICENSOR may assign this Agreement without approval of
LICENSEE except as to the obligation to provide Improvements, which obligation
is personal to LICENSOR or, in the case of automatic assignment to LICENSOR's
licensor if LICENSOR dissolves, an obligation of that licensor. This Agreement
shall inure to the benefit of LICENSOR and its respective successors, heirs and
assigns.
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<PAGE> 18
9.2 Relationship of the Parties. The parties agree that the sole
relationship between LICENSOR and LICENSEE hereunder will be that of licensor
and licensee. Nothing herein shall constitute or be interpreted to make either
party the agent of the other party, and neither party shall in any way be
authorized to obligate the other party in any transaction with a third party.
9.3 Notices. All reports, notices, requests, demands, directions
and other communications provided for hereunder shall be in writing and mailed
to the applicable party as the address of such party set forth at the head of
this Agreement or at such other address as the receiving party may hereafter
designate in a written notice to the other party. If to LICENSEE such reports,
etc. shall be sent Attn: Director of Division Services, Engine Division; copy to
Legal Counsel, Engine Division. Each such report, notice, request, demand,
direction or other communication shaH be effective on the third working day
after it has a been deposited in the U.S. mails (unless earlier received with
confirmation of receipt by the receiving party) addressed as aforesaid, and
shall be sent by first class certified mail, return receipt requested, enclosed
in a postage-prepaid envelope.
9.4 Entire Agreement. The parties acknowledge and
agree that this Agreement constitutes the entire agreement
and understanding relating to the subject matter of this
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<PAGE> 19
Agreement and supersedes all previous communications, proposals, representations
and agreements whether oral or written relating to the subject matter of this
Agreement.
9.5 Modification. The parties acknowledge and agree that this
Agreement may only be modified by the mutual written agreement of the parties
signed by both parties .
9.6 Force Majeure. Neither of the parties shall be liable nor
deemed to be in default, for failure to perform its obligations due to force
majeure.
9.7 Governing Law. The parties agree that this Agreement will be
governed and construed in accordance with the laws of the State of Delaware,
excluding any choice of law rules which may direct application of the laws of
any other jurisdiction.
9.8 Waiver. Each party agrees that any delay or omission on the
part of the other party to exercise any right under this Agreement will not
automatically operate as a waiver of such right or any other right, and a waiver
of any right by the other party hereunder on one occasion will not be construed
as a bar to or a waiver or exercising the right on any other occasion.
9.9 Severability. Each party agrees that, should any provision of
this Agreement be determined by a court of competent jurisdiction to violate or
contravene any applicable law or policy, such provision may be severed and
modified by the court to the extent necessary to comply with
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<PAGE> 20
the applicable law or policy, and such modified provision and the remainder of
the provisions hereof will continue in full force and effect.
9.10 Captions. The title, caption, or heading for any provision
in this Agreement is used as a matter of convenience and is not to be used to
interpret or construe the meaning of any provision.
9.11 Time and the Essence. Time is expressly declared to be of
the essence in this Agreement and each and every provision hereof in which time
is an element.
IN WITNESS WHEREOF, the parties have cause this
Agreement to be executed personally or by their duly
authorized representatives.
Advanced Fuels, LLC, a Delaware Caterpillar Inc., a
Delaware
Limited Liability Company Corporation
By /s/ By /s/
------------------------ -----------------------
(its authorized representative) (its authorized
representative)
LICENSOR LICENSEE
Date: July 7, 1994 Dated: July 7, 1994
--------------------- ---------------
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<PAGE> 21
EXHIBIT A
Patent Report - Rudolf Gunnerman
<TABLE>
Trademarks (U.
======================================================================================================================
<S> <C> <C> <C>
"A-55" SN 74/346338 Filed 1/7/93 Allowed
ITU
- ----------------------------------------------------------------------------------------------------------------------
"Powered with Water 4/5/94 Pending
- ----------------------------------------------------------------------------------------------------------------------
Patents and Patent Applications - U.S.
- ----------------------------------------------------------------------------------------------------------------------
No. 5156114 issued 10/20/92
- ----------------------------------------------------------------------------------------------------------------------
Application (CP&H 25169) Filed 4-94
- ----------------------------------------------------------------------------------------------------------------------
Patents and Applications - Foreign
- ----------------------------------------------------------------------------------------------------------------------
A CP&H docket 21022
- ----------------------------------------------------------------------------------------------------------------------
Australia (PCT) 67302-90 Pending
- ----------------------------------------------------------------------------------------------------------------------
Canada 2029654-2 Pending
- ----------------------------------------------------------------------------------------------------------------------
Czechoslovakia PV5490-90 Pending
- ----------------------------------------------------------------------------------------------------------------------
EPO 90,121,745.5 Published
6/21/91
- ----------------------------------------------------------------------------------------------------------------------
Finland (PCT) 922,307 Pending
- ----------------------------------------------------------------------------------------------------------------------
India 1109/DEL/90 Pending
- ----------------------------------------------------------------------------------------------------------------------
Japan (PCT) 1990-515711 Pending
- ----------------------------------------------------------------------------------------------------------------------
Korea (South) (PCT) 92-702313 Pending
- ----------------------------------------------------------------------------------------------------------------------
Mexico 172,598 Issued
- ----------------------------------------------------------------------------------------------------------------------
Norway (PCT) 92-2007 Pending
- ----------------------------------------------------------------------------------------------------------------------
Poland P287705 Published
10/21/91
- ----------------------------------------------------------------------------------------------------------------------
China-PRC 90,109,356.4 Published
6/5/91
- ----------------------------------------------------------------------------------------------------------------------
China-PRC (Div) Mailed
- ----------------------------------------------------------------------------------------------------------------------
Russia (PCT) 5,052,362.04 Pending
- ----------------------------------------------------------------------------------------------------------------------
S. Africa 90 8921 Issued
- ----------------------------------------------------------------------------------------------------------------------
B. CP&H Docket 23304
- ----------------------------------------------------------------------------------------------------------------------
Argentina 31,980 Pending
- ----------------------------------------------------------------------------------------------------------------------
Chili 459-91 Pending
- ----------------------------------------------------------------------------------------------------------------------
Egypt 312-91 Pending
- ----------------------------------------------------------------------------------------------------------------------
(Continuation)
- ----------------------------------------------------------------------------------------------------------------------
B. CP&H Docket 23304
- ----------------------------------------------------------------------------------------------------------------------
India 459/DEL/91 Pending
</TABLE>
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<PAGE> 22
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Indonesia P000263 Pending
- ----------------------------------------------------------------------------------------------------------------------
Iran 24,557 Issued
- ----------------------------------------------------------------------------------------------------------------------
Ireland 1726/91 Pending
- ----------------------------------------------------------------------------------------------------------------------
Libya 238/91 Pending
- ----------------------------------------------------------------------------------------------------------------------
Malaysia P1900862 Pending
- ----------------------------------------------------------------------------------------------------------------------
Mexico 25,864 Pending
- ----------------------------------------------------------------------------------------------------------------------
Morocco 22,158 Issued
- ----------------------------------------------------------------------------------------------------------------------
N. Zealand (DIV) 250,641 Pending
- ----------------------------------------------------------------------------------------------------------------------
Philippines 42,528 Pending
- ----------------------------------------------------------------------------------------------------------------------
Portugal 97,742 Pending
- ----------------------------------------------------------------------------------------------------------------------
China-PRC 91,103,560.5 Pending
- ----------------------------------------------------------------------------------------------------------------------
South Africa 91/3901 Issued
- ----------------------------------------------------------------------------------------------------------------------
Venezuela 655.91 Pending
- ----------------------------------------------------------------------------------------------------------------------
Yugoslavia 8.1196.91 Pending
======================================================================================================================
</TABLE>
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<PAGE> 1
EXHIBIT 10.5
AGREEMENT OF
DISSOLUTION OF ADVANCED FUELS, L.L.C.,
BETWEEN
A-55, L.P. AND CATERPILLAR INC.
1. A-55 SHALL PAY CATERPILLAR FIVE MILLION SIX HUNDRED SIXTY-EIGHT THOUSAND, ONE
HUNDRED FORTY ONE DOLLARS AND SIXTY CENTS ($5,668,141.60 ON OCTOBER 28, 1996) BY
ELECTRONIC WIRE TRANSFER TO CATERPILLAR'S BANK ACCOUNT NO. 50-24390 AT FIRST
NATIONAL BANK OF CHICAGO, ABA 071000013. SUCH PAYMENT REPRESENTS AN EQUITABLE
ADJUSTMENT TO CATERPILLAR BASED ON THE VALUE OF THE ADVANCED FUEL'S ASSETS
DISTRIBUTED TO A-55 AND CATERPILLAR UPON DISSOLUTION AND REFLECTS SATISFACTION
OF EACH PARTIES' RESPONSIBILITY FOR ADVANCED FUELS' INDEBTEDNESS.
2. CATERPILLAR SHALL HAVE NONEXCLUSIVE RIGHTS TO ALL ADVANCED FUELS' TECHNOLOGY
(E.G., ENGINE AND FUEL TECHNOLOGY TO WHICH ADVANCED FUELS OWNS OR HAS RIGHTS) AS
OF DATE OF DISSOLUTION (INCLUDING TECHNOLOGY IN PROCESS AS OF DATE OF
DISSOLUTION) IN ALL APPLICATIONS FOR PRODUCTS OF THE KIND SOLD BY CATERPILLAR,
NOW AND IN THE FUTURE, SUBJECT TO THE FOLLOWING:
A. A-55 SHALL HAVE EXCLUSIVE RIGHTS TO PROVIDE ADVANCED
FUELS' ENGINE TECHNOLOGY TO CONVERT NON-CATERPILLAR
ENGINES TO BURN AQUEOUS FUEL AND TO PROVIDE SUCH ENGINE
TECHNOLOGY TO NONCATERPILLAR ENGINE MANUFACTURERS TO
PRODUCE ENGINES TO BURN AQUEOUS FUEL, EXCEPT:
1. DURING THE FIRST THREE (3) YEARS AFTER
DISSOLUTION, IF A-55, WITHOUT ANY
PROPRIETARY INFORMATION FROM CATERPILLAR,
CANNOT CONVERT NON-CATERPILLAR ENGINES TO
BURN A CATERPILLAR AQUEOUS FUEL WITHIN
THE TIME PERIOD REQUESTED BY CATERPILLAR,
AND MEET ACCEPTABLE COST AND PERFORMANCE
CRITERIA DETERMINED BY CATERPILLAR, THEN
CATERPILLAR HAS THE RIGHT TO PROVIDE
RETROFIT KITS FOR, OR TECHNOLOGY FOR
CONVERTING, NON-CATERPILLAR ENGINES IN
THE FIELD. AFTER SUCH THREE (3) YEAR
PERIOD, CATERPILLAR HAS A NONEXCLUSIVE
RIGHT TO SERVE CUSTOMERS BY PROVIDING
KITS TO BURN CATERPILLAR AQUEOUS FUEL IN
THEIR CATERPILLAR OR NON-CATERPILLAR
ENGINES. CATERPILLAR IS NOT GIVEN THE
RIGHT TO LICENSE OEMS.
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<PAGE> 2
B. CATERPILLAR SHALL HAVE EXCLUSIVE RIGHTS TO
PROVIDE ADVANCED FUELS' ENGINE TECHNOLOGY TO
CONVERT CATERPILLAR ENGINES;
C. CATERPILLAR SHALL NOT MAKE, HAVE MADE, USE, OR
SELL GASOLINE OR NAPHTHA BASED AQUEOUS FUEL
OTHER THAN FOR CATERPILLAR DIESEL AND NATURAL
GAS ENGINES; AND
D. CATERPILLAR WILL SELL BUT NOT LICENSE DIESEL BASED AQUEOUS
FUEL TECHNOLOGY FOR A PERIOD OF FIVE (5) YEARS.
CATERPILLAR SHALL HAVE NO RIGHT TO LICENSE GASOLINE OR
NAPHTHA BASED AQUEOUS FUEL TECHNOLOGY.
3. RECIPROCAL ROYALTY WHEREBY EACH COMPANY WILL PAY TO THE OTHER COMPANY A
ROYALTY OF $0.005 PER GALLON OF AQUEOUS FUEL SOLD DIRECTLY, THROUGH LICENSE, BY
SALE OF TECHNOLOGY OR BY OTHER ACTION OF THAT COMPANY (OR THE EQUIVALENT IN
SURFACTANT), BUT THE FIRST PAYMENT SHALL NOT BE DUE UNTIL A COMPANY AND ITS
LICENSEES HAVE CUMULATIVELY SOLD 2,000,000,000 GALLONS OF AQUEOUS FUEL (OR THE
EQUIVALENT IN SURFACTANT). ROYALTY PAYMENTS WILL BE PAID ANNUALLY. A COMPANY'S
ROYALTY OBLIGATIONS WILL TERMINATE TEN (10) YEARS FROM THE DATE THE FIRST
ROYALTY PAYMENT IS DUE, I.E., INCLUDING THE FIRST PAYMENT, A MAXIMUM OF ELEVEN
(11) ROYALTY PAYMENTS WILL BE MADE BY A COMPANY.
4. JOINT PRESS RELEASE TO BE ISSUED ON DAY DISSOLUTION AGREEMENT IS SIGNED, AS
FOLLOWS--"A-55, L.P. AND CATERPILLAR INC. HAVE DECIDED TO DISSOLVE THEIR JOINT
VENTURE, ADVANCED FUELS, L.L.C. THE PURPOSE OF THE DISSOLUTION IS TO ENABLE THE
COMPANIES TO PURSUE DIFFERENT PROGRAMS WITH THE LOW EMISSION AQUEOUS FUEL
TECHNOLOGY TO CAPITALIZE ON BUSINESS OPPORTUNITIES. CATERPILLAR WILL FOCUS ITS
AQUEOUS FUEL ACTIVITIES IN THE KINDS OF PRODUCTS IT PRODUCES OR WILL PRODUCE,
AND A-55 WILL PURSUE ALL OTHER POTENTIAL AQUEOUS FUEL APPLICATIONS FOR THE
TECHNOLOGY."
5. NEITHER CATERPILLAR NOR A-55 SHALL USE THE NAME "ADVANCED FUELS" OR ANY NAME
SIMILAR TO OR CONFUSINGLY SIMILAR TO IN THE MARKET PLACE, FOR ANY BUSINESS IN
WHICH CATERPILLAR OR A- 55 HAS AN INTEREST. A-55 WILL KEEP THE NAME A-21 AND THE
TRADEMARK SYMBOL OF ADVANCED FUELS.
6. ADVANCED FUEL'S INVENTIONS UPON DISSOLUTION WILL BE ASSIGNED TO A-55, SUBJECT
TO CATERPILLAR'S RIGHTS HEREUNDER.
7. A-55 AND RUDOLF W. GUNNERMAN HEREBY WITHDRAWS AND RELEASES ANY AND ALL
NOTICES OR CLAIMS THAT ADVANCED FUELS, L.L.C. OR CATERPILLAR IS IN DEFAULT UNDER
THE LIMITED
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<PAGE> 3
LIABILITY COMPANY AGREEMENT OF ADVANCED FUELS, L.L.C. OR RELATED AGREEMENTS.
8. SUBSEQUENT TO THE EFFECTIVE DATE AND FOR A PERIOD OF ONE YEAR CATERPILLAR AND
A-55 AGREE TO REFER ALL INQUIRIES ABOUT THE JOINT VENTURE AND ITS TECHNOLOGY TO
THEIR RESPECTIVE PUBLIC RELATIONS GROUPS FOR RESPONSE ALONG THE LINES OF THE
ABOVE PUBLISHED PRESS RELEASE.
9. PRIOR TO THE DATE OF DISSOLUTION, ADVANCED FUELS SHALL GIVE ACCESS TO A-55
AND CATERPILLAR ALL ADVANCED FUELS' INFORMATION IT OWNS OR TO WHICH IT HAS
RIGHTS. A-55 AND CATERPILLAR AGREE TO PROTECT AS CONFIDENTIAL INFORMATION ALL
PROPRIETARY INFORMATION OF THE OTHER PARTY (A-55 OR CATERPILLAR) RECEIVED BY OR
IN THE POSSESSION OF ADVANCED FUELS.
10. IF A-55 AND/OR RUDOLF GUNNERMAN OR CATERPILLAR INC. ENTER INTO AN
ARRANGEMENT WITH AN OIL COMPANY FOR THE MANUFACTURE OR DISTRIBUTION OF DIESEL
BASED AQUEOUS FUEL AND RECEIVES A LUMP SUM, THE PARTY ENTERING THE ARRANGEMENT
WILL PROVIDE THE OTHER PARTY TWENTY PERCENT (20%) OF ANY LUMP SUM PAYMENT.
11. IF CATERPILLAR INC. DOES NOT RECEIVE FIVE MILLION SIX HUNDRED SIXTY-EIGHT
THOUSAND, ONE HUNDRED FORTY-ONE DOLLARS AND SIXTH-EIGHT CENTS ($5,668,141.68) BY
WIRE TRANSFER IN ACCOUNT #50-24390 AT THE FIRST NATIONAL BANK OF CHICAGO--ABA
071000013-BY THE CLOSE OF THE BUSINESS DAY MONDAY, OCTOBER 28, 1996, A-55 AND
RUDOLF GUNNERMAN BY THIS AGREEMENT HEREBY TRANSFERS AND ASSIGNS ALL RIGHT, TITLE
AND INTEREST OF RUDOLF GUNNERMAN AND A-55 IN ADVANCED FUELS TO CATERPILLAR INC.
INCLUDING ALL INTELLECTUAL PROPERTY OF ADVANCED FUELS INCLUDING LICENSES, TRADE
SECRETS, PATENTS, AND PATENT APPLICATIONS (INCLUDING THE FIVE PATENT
APPLICATIONS PREPARED BY FISH & RICHARDSON FOR ADVANCED FUELS AND THE
APPLICATION FILED BY RUDOLF GUNNERMAN FOR SIMILAR SUBJECT MATTER IN 1996).
12. CATERPILLAR INC. ASSUMES RESPONSIBILITY FOR ANY OUTSTANDING THIRD PARTY
INDEBTEDNESS OF ADVANCED FUELS.
-3-
<PAGE> 4
Agree to this Agreement, on this 24th day of October 1996.
A-55, L.P. CATERPILLAR INC.
BY: RWG, Inc., General Partner
BY:/s/ Rudolf W. Gunnerman
----------------------------- BY:/s/ Gerald L. Shaheen
RUDOLF W. GUNNERMAN, PRESIDENT -------------------------
GERALD L. SHAHEEN, VICE
PRESIDENT
BY:/s/ Rudolf W. Gunnerman
-----------------------------
RUDOLF W. GUNNERMAN, AS AN
INDIVIDUAL
-4-
<PAGE> 1
EXHIBIT 10.1
EXCLUSIVE LICENSE AGREEMENT
This Agreement is entered into this 3rd day of January, 1994, and replaces
that certain Exclusive License Agreement between the parties dated the 2nd day
of November, 1992, between Rudolf W. Gunnerman (herein called "Licensor"), and
A-55, L.P., a Nevada limited partnership (herein called "Licensee"), based on
the following facts:
A. Incident to the formation of Licensee and in consideration of the
issuance of partnership interests therein, Licensor is obligated to grant this
Exclusive License.
B. Licensor is and may in the future become the owner of certain Technology
as hereinafter defined, which Licensee wishes to acquire the right to use in the
Licensed Territory. Based on the foregoing the parties agree as follows:
1. Definitions
As used herein, the following terms shall have the meanings set forth
below.
1.1 "Field" means:
(a) methods, processes, compositions and apparatuses for carrying out
combustion for the generation of heat in internal combustion engines, either
compression or spark-ignited;
(b) aqueous fuels, including fuels described in the Patents, as well
as (i) methods, processes, apparatuses
-1-
<PAGE> 2
and compositions for their production and (ii) methods, processes, compositions
and apparatuses for their combustion; and
(c) methods, processes, compositions and apparatuses used for
production of chemicals, petrochemicals, plastics or pharmaceuticals utilized in
connection with any of the above;
1.2 "Patent" or "Patents" means all existing and future patents, patent
applications, and like grants in the Licensed Territory that (i) concern or
relate to the Field (including but not limited to the patents and patent
applications listed in Exhibit A hereto) and that (ii) as of the date of this
Agreement or during its term as defined below are or become owned or controlled
by Licensor or in which Licensor otherwise has or acquires the power to grant
rights thereunder, and all continuations, divisionals, continuations-in-part,
substitutes, extensions, reissues, confirmations, registrations, revalidations,
or additions of any of the foregoing.
1.3 "Service Marks" or "Trademarks" means all existing and future Service
Marks, Trademarks, applications for the same, and like grants in the Licensed
Territory that (i) concern or relate to the Field (including but not limited to
the Service Marks and Trademarks and applications therefor listed in Exhibit A
hereto) and that (ii) as of the date of this Agreement or during its term as
defined below are or
-2-
<PAGE> 3
become owned or controlled by Licensor or in which Licensor otherwise has or
acquires the power to grant rights thereunder.
1.4 "Technology" means all existing and future inventions, discoveries,
information, data, know-how, trade secrets, methods, processes, expertise,
confidential information, apparatuses, compositions and works of authorship,
whether or not protected by patent, copyrights, service marks or trademarks that
(i) are within the Field, and (ii) are owned or controlled by Licensor or as to
which Licensor has the power to grant rights thereunder, including but not
limited to Patents. Unless the context of this Agreement requires otherwise, the
term "Technology" shall include the Technology and know-how as defined in this
section, the Patents, the Service Marks, and the Trademarks.
1.5 "Licensed Territory" means the United States, Canada and Mexico.
1.6 "Licensed Products" means:
(a) products, compositions, services, and apparatuses, the
manufacture, use, importation or sale of which in the absence of the licenses
granted hereunder would infringe at least one claim of a Patent; and
(b) products, compositions and apparatuses which, in whole or in
part, employ or are within the definition of Technology.
-3-
<PAGE> 4
1.7 "Licensed Processes" means:
(a) processes and methods, the use of which in the absence of the
licenses granted hereunder would infringe at least one claim of a Patent; and
(b) processes and methods which, in whole or in part, employ or are
within the definition of Technology.
2. Patent License
2.1 Licensor hereby grants to Licensee, to the extent of the Licensed
Territory and to the exclusion of Licensor, the sole and exclusive license to
practice the Patents within the Field, including but not limited to the
manufacture, use, importation and sale of Licensed Products and use of Licensed
Processes.
3. Technology License
3.1 Licensor hereby grants to Licensee, to the extent of Licensed Territory
and to the exclusion of Licensor, the sole and exclusive license to practice the
Technology and know-how within the Field, including but not limited to the
manufacture, use, importation and sale of Licensed Products and use of Licensed
Processes.
3.2 Promptly after execution of this Agreement, Licensor shall make
available to Licensee for its use all Technology in Licensor's possession needed
to make Licensed Products and to use Licensed Processes.
-4-
<PAGE> 5
4. Service Mark and Trademark License
4.1 Licensor hereby grants to Licensee, to the extent of the Licensed
Territory and to the exclusion of Licensor, the sole and exclusive license to
utilize the Service Marks and Trademarks within the Field.
5. Retained Ownership
5.1 Subject to the Patent license in Section 2., the Technology license in
Section 3., and the Service Mark and Trademark license in Section 4., Rudolf W.
Gunnerman retains absolute ownership of all Technology.
6. Royalties
6.1 In consideration of this Agreement, the Licensee shall issue and
deliver to Licensor or a limited partnership in which Licensor is a general
partner certain partnership interests in Licensee.
6.2 There shall be no royalty or other monetary consideration payable to
Licensor as a result of or for this Agreement.
7. Sublicensing
7.1 Licensee shall have the right and obligation to grant sublicenses under
this Agreement as more fully set forth in the Limited Partnership Agreement of
Licensee, as
-5-
<PAGE> 6
the same may be amended or extended from time to time and to which this
Agreement is attached.
8. Representations and Warranties
8.1 Licensor represents and warrants to Licensee:
(a) that Licensor is the exclusive owner of all right, title and
interest in and to the Technology, has the right to grant the licenses
hereunder, has the right to enter into this Agreement, and has not granted to
any other party any similar or conflicting right, license, shop right, or
privilege under the Technology or with respect thereto;
(b) that Licensor is not now aware of any prior art, prior offers for
sale, or other events, circumstances or other facts that could in his opinion
result in a finding that any claim in the Patents are either invalid or
unenforceable;
(c) that Licensor is not now aware of any actual, potential or
threatened assertions of invalidity by third parties against the Technology,
including but not limited to pending or threatened litigation;
(d) that Licensor is not now aware of any potential, likely or actual
charges by third parties of infringement concerning or arising out of the
practice or use of the Technology; and
(e) that Licensor is not now aware of any potential, likely or actual
charges of infringement made or
-6-
<PAGE> 7
to be made or that could be made by or on behalf of Licensor against third
parties concerning or relating to the Field.
9. Term
9.1 The term of the Technology license under Section 3.1 and the Service
Mark and Trademark license under Section 4.1 above shall expire only upon the
dissolution of Licensee in accordance with terms and conditions of the Limited
Partnership Agreement of Licensee, as the same may be amended or extended from
time to time and to which this Agreement is attached.
9.2 The term of the Patent license under Section 2.1 above shall expire
only (a) upon the expiration of the last of the Patents to expire or (b) upon
the dissolution of Licensee in accordance with terms and conditions of the
Limited Partnership Agreement of Licensee, as the same may be amended or
extended from time to time and to which this Agreement is attached, whichever is
earlier.
10. Patents
10.1 Rudolf W. Gunnerman shall from and after the date hereof, on behalf of
Licensee and at Licensee's sole expense, file, prosecute, and maintain all
Patents.
10.2 The parties acknowledge that the Licensee is being formed to exploit
the Technology in the Licensed Territory. Rudolf W. Gunnerman, on behalf of
Licensee and at Licensee's
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<PAGE> 8
sole expense, shall proceed promptly and diligently to obtain patent, copyright,
or equivalent protection available under the laws of appropriate jurisdictions
with respect to the subject matter of the Technology. All consultants,
accountants, attorneys and other professionals utilized by Rudolf W. Gunnerman
on behalf of Licensee in discharging his obligations pursuant to Sections 10.1
and 10.2 shall be acceptable to and approved by Licensee.
10.3 Licensee shall have the right and obligation to institute or defend in
its name and on behalf of Licensor, prosecute, maintain, and settle or otherwise
compromise any actions by or against third parties for infringement. Licensor
shall cooperate fully in such actions when so requested by Licensee. Any such
defense shall be undertaken on behalf of Licensor and Licensee with counsel
acceptable to and approved by Licensor. In the event Licensee determines not to
institute or defend, prosecute, maintain, settle or otherwise compromise any
actions as contemplated in the first sentence of this section, then Licensor at
its option may undertake such actions at its expense, and Licensee shall
have no further interest in the Patent which is the subject of such action, the
proceeds therefrom, or any subsequent royalty or revenue from such Patent.
-8-
<PAGE> 9
11. Nonassignability
11.1 Licensee may not assign its rights or obligations hereunder, except
for sublicensing contemplated by Section 7. above.
12. Severability
12.1 If any part, term, or provision of this Agreement shall be found
illegal or in conflict with any valid controlling law, the validity of the
remaining provisions shall not be affected thereby.
13. Marketing
13.1 Licensee shall place in a conspicuous location on any products made or
sold under any Patent, a patent notice in accordance with 35 U.S.C. Section 287.
Licensee agrees to mark any products made using a process covered by any Patent
with the number of each such patent and, with respect to Patents, to respond to
any request for disclosure under 35 U.S.C. Section 287(b)(4)(B) by only
notifying Licensor of the request for disclosure.
14. Confidentiality
14.1 Each party hereto for itself and on behalf of affiliates agrees not to
disclose to any third party any information, materials or documentation relating
to the Technology except to the extent such disclosure is required
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<PAGE> 10
by law, or by the ordinary business operations of Licensor or Licensee (with any
sublicenses to contain similar confidentiality obligations), and agrees that
such information is proprietary and confidential. At any time that the
disclosure of proprietary and confidential information is required, Licensor or
Licensee shall obtain from the party to whom such disclosure is made an
appropriate written agreement protecting against the further disclosure or
dissemination of such information.
15. General Provisions
15.1 Notices. Any and all notices or other communication required or
permitted by this Agreement to be served on or given to any party hereto shall
be in writing and shall be deemed duly served and given when personally
delivered, given by facsimile, or deposited in the United States mail, by
certified mail, return receipt requested, or Express Mail, Federal Express, DHL,
or UPS Next Day Air addressed to the parties as follows:
<TABLE>
<CAPTION>
Licensor: Licensee:
<S> <C>
Rudolf W. Gunnerman A-55 Limited Partnership
100 N. Arlington Ave. c/o Daniel J. Klaich,
Suite 14-H Sr.Vice Pres.
Reno, Nevada 89501 210 Gentry Way
Fax: (702)826-8393 Reno, Nevada 89502
Fax: (702)826-8383
</TABLE>
15.2 Relationship of the Parties. Nothing in this Agreement shall be
construed to create between the parties a partnership, association, joint
venture or agency.
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<PAGE> 1
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
This Agreement for Employment is made on this 30th day of June, 1998, by and
between A-55 LIMITED PARTNERSHIP (A-55 L.P.), AND ITS SUCCESSOR A-55, INC., 5270
Neil Road, Reno Nevada, 89502 (hereinafter referred to as "Employer") and DR.
WILLIAM CHARLES TAO, 6480 Boone Drive, Castro Valley, California 94552
(hereinafter referred to as "Employee").
I. EMPLOYER OFFER OF EMPLOYMENT
The Employer shall employ Employee subject to the following terms and
conditions.
1) The Employee is offered the position, hired, and employed as President,
Power Markets Division for A-55 L.P.
2) Employment for the above Employee shall commence on July 1st, 1998.
3) As President of the Power Markets Division, the Employee will report
directly to the Chairman of A-55 L.P., assuming and performing the
following duties and responsibilities:
- Establish, develop, and implement the corporate charter,
function, staffing requirements, and performance parameters of
the Power Markets Division.
- Establish, develop, and implement the planning, architectural
design, technical engineering, construction, and operation
logistics of A-55 Additive Mixing Plants and Finished Products
Blending Plants within the Division.
- Establish, develop, and implement the near-term and long-term
strategy for domestic and international marketing and direct
sales of the A-55 Clean Fuels finished products, including a plan
to develop and implement a customer services and relations
function within the Division.
- Establish, develop, and implement the necessary logistics to
supply the manufacturing activities, management of facilities,
product Quality Assurance (QA) and Quality Control (QC), and
distribution of the products.
-1-
<PAGE> 2
- Establish and develop, in conjunction with the Chairman, a
strategic plan for the Division and for A-55 L.P., and define the
necessary financial and personnel resources for the successful
implementation of the strategic plan.
4) The Employee shall work Monday through Friday from 8 A.M. to 5 P.M. and
such additional hours as are required to competently perform the duties
of his position. The Employee shall use his best efforts on behalf of
the Employer.
5) The Employee shall comply with all stated standards of performance,
policies, rules, and regulations of A-55 L.P. A Company manual
containing a more complete explanation of these rules and standards has
been provided to the Employee. At this time, Employee acknowledges
receipt of this Company manual. The Employee shall also comply with such
future Employer policies, rules, regulations, performance standards and
manuals as may be published or amended from time to time.
6) The Employer shall make payment to the Employee a set amount as
compensation for services rendered. The Employee agrees to accept the
sum of $240,000.00 USD per year, payable biweekly in accordance with
standard A-55 payroll procedures. In addition to the above compensation,
the Employee will be paid for holidays and accrued vacation, will
receive medical, vision, and term life insurance, and will be eligible
to participate in A-55 L.P.'s 401(k) and Cafeteria Plans.
7) This contract of employment may terminate upon the occurrence of any of
the following events: (a) The death of the Employee; (b) The failure of
the Employee to perform his duties satisfactorily after notice or
warning thereof; (c) For just cause based upon non-performance of duties
by Employee; (d) Economic reasons of the Employer which may arise during
the term of this Agreement and which may be beyond the control of the
Employer.
8) The Employee shall not, at any times during the period hereof of this
Agreement, directly or indirectly, engage in, or become involved in, any
business competitive or similar to that of the within Employer.
9) The term of the employment at A-55 L.P. is offered for an indefinite
period of time unless terminated due to events described above in
section I-7.
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<PAGE> 3
10) The Employer shall establish the Employee as a member of the Board of
Directors for A-55 L.P. along with appropriate compensation (as an
"inside" director) for serving in that capacity.
II. EMPLOYEE ACCEPTANCE OF OFFER FOR EMPLOYMENT
The Employee accepts the terms and conditions for employment as offered by the
Employer along with the following stipulations:
1) The Employer shall hold office at the A-55 L.P. headquarters a minimum
of three (3) days per week, and at the Employee's residence a maximum of
two (2) days per week. The Employee will use his best judgment to
balance the split schedule so that his duties and responsibilities are
competently performed.
2) The Employee will take no vacation during the term of this Agreement,
and the accrued vacation time during the term of this Agreement will be
paid to the Employee as a lump sum at the conclusion of this contract.
3) During the term of this Agreement, the Employee may periodically take
leave without pay from the Company. The Employee will notify the Company
a minimum of two weeks in advance prior to taking leave without pay, and
will take actions to assure that the Division's function will not be
impaired. After such notification, the Employer agrees not to schedule
functions and meetings that will require the attendance and presence of
the Employee.
4) The Employee will reimburse A-55 L.P. for all phone usage not related to
the business of A-55 L.P. The Employee will not conduct any non-A-55
business related phone calls during normal business hours while he is
located either A-55 L.P. or at his residence during the work week.
5) In connection with his employment as President of the A-55 Power
Markets Division, Rudolf W. Gunnerman does hereby grant to Employee the
option to purchase from his holdings in A-55 up to 2% of the total
shares of A-55, L.P. and/or its successor, A-55, Inc. The purchase
price for the shares shall be equal to ten percent (10%) below the first
initial public offering price of the stock, to be paid in cash in full
upon exercise of this option. The option hereby granted shall vest
thirty-six (36) months from the date of this agreement; provided
however, that the option vesting period shall accelerate to the time
when Employee has completed the duties
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<PAGE> 4
stated in Section I.3) above. Employee may exercise the options at any
time within thirty-six months from the date of vesting by giving written
notice thereof to Mr. Gunnerman and transmitting the purchase price in
full to him.
6) Upon the completion of his duties, as stated above in section I-3, and
as the President of A-55 L.P. Power Markets Division, the Employee
reserves the option to terminate this Agreement and conclude his
involvement with A-55 L.P. The Employer can renegotiate with the
Employee a new employment contract for specific assignments,
responsibilities, and position within A-55 L.P. and/or its successor
A-55, Inc.
This Agreement may not be assigned without prior notice by either party. Such
assignment is subject to the mutual consent and approval of any such assignment.
This Agreement constitutes the complete understanding between the parties,
unless amended by a subsequent written instrument signed by the Employer and
Employee. Any dispute under this contract shall be required to be resolved by
binding arbitration of the parties hereto. Each party shall select on arbitrator
and both arbitrators shall select a third. The arbitration shall be governed by
the rules of the American Arbitration Association then in force and effect.
Accepted by: Accepted by:
/s/ Rudolf W. Gunnerman /s/ William C. Tao
- ---------------------------------- -----------------------------------
Mr. Rudolf W. Gunnerman Dr. William C. Tao
Chairman, A-55 L.P.
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<PAGE> 1
EXHIBIT 10.8
A-55(R) A-55 L.P.
CLEAN FUELS Corporate Headquarters
July 1, 1998
Dr. Thomas Houlihan
3851 Irongate Lane
Bowie MD 20715
Dear Dr. Houlihan:
I am pleased to offer you a position as Senior Vice- President, Power Markets
Division for A-55(R) Limited Partnership (A-55(R) L.P.), beginning July 1, 1998.
Your time will be compensated at the rate of $ 15,000 per month, (annualized
salary of $ 180,000) as earned, paid bi-weekly. As a salaried staff member with
full benefits, you will be exempt from any overtime payment but, you will be
able to participate in all incentive programs of A-55(R) L.P.
As Senior Vice-President of the Power Markets Division of A-55(R) L.P., you will
report directly to the President of the Division, or in his absence, to the
Chairman of A-55(R) L.P. Your main duties for A-55(R) L.P. shall include, but
will not necessarily be limited to, the following:
- - As a senior marketing and sales executive within the Division,
responsibility for direct sales activities, customer service and
customer relations for power customers assigned to you.
- - Coordinating with the President of the Division all
manufacturing and engineering activities necessary to
support his marketing efforts.
- - Other miscellaneous duties and responsibilities as
assigned.
As an exempt salaried employee, you will be paid for holidays and vacation, and
will receive term life insurance, all as stated in the A-55(R) L.P. Employee
Handbook. Furthermore, you will be eligible to participate in the A-55(R) L.P.'s
401 (k) and Cafeteria Plans. A-55(R) L.P. will pay for your medical and vision
insurance beginning August 1, 1998. The company will pay the expenses of moving
your household goods (including the cost of moving one vehicle). You must submit
two bids to the Company and the Company has the right to pick from the two or
secure a third.
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<PAGE> 2
As Senior Vice-President of the Power Markets Division of A-55(R) L.P., you will
be included in the A-55(R) L.P. Incentive Compensation Plan and Stock Option
Plan. I wish to emphasize that these plans have been discussed in general terms
by management but are subject to final approval and, of course, may be change
from time to time. Finally, you will be included on the "friends and family"
list of the Company, thereby eligible to purchase stock of the Company at its
initial public offering for the initial price and up to 5000 shares.
You should understand that your employment at A-55(R) L.P. is at will and for an
indefinite period of time and that salary payments, benefits, and working
conditions may change at any time. As a condition of employment you will be
required to sign an A-55(R) L.P. Secrecy Agreement. A copy of this Agreement is
attached for your review.
If the above terms and conditions of employment are acceptable to you, please
sign below.
WELCOME TO THE A-55(R) L.P. TEAM.
Sincerely,
/c/ Rudolf W. Gunnerman
- -----------------------------
Mr. Rudolf W. Gunnerman
Chairman
/c/ Thomas Houlihan
- -----------------------------
Dr. Thomas Houlihan
Accepted by:
/c/ Rudolf W. Gunnerman
- -----------------------------
Mr. Rudolf W. Gunnerman
Chairman
RWG:sl
CC: Dir., H.R.
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<PAGE> 1
EXHIBIT 10.10
LICENSE AGREEMENT
(Republic of Korea & Democratic People's Republic of Korea)
PREAMBLE
The parties to this Agreement are A-55, L.P., a Nevada limited partnership
("A-55"), and Stanton Energy Fund Pty. Limited of Level 50, 101 Collins street,
Melbourne, Victoria, Australia on behalf of a corporation to be incorporated in
the Republic of Korea referred to at paragraph 3.5 below ("Grantee").
This Agreement shall become effective on the date it is executed by the last
party to execute same, as set forth on the signature page hereof and payment of
the technical transfer fee pursuant to paragraph 3.2.1 below.
This Agreement is made with reference to the following facts:
A. A-55 owns the rights to transfer to others, the rights to certain worldwide
patent applications, issued patents and trademarks, and valuable
technology, know-how, trade secrets and prototypes which relate to and/or
use an aqueous fuel comprising a mixture of water and carbonaceous material
for combustion in an internal combustion engine and the use thereof,
including technologies as set forth in the patent applications and issued
patents as more fully defined below ("A-55 Technology").
B. Grantee desires to be licensed to use such rights and information from A-55
within a geographical territory.
Now, therefore, in consideration of the mutual promises and covenants, and upon
the conditions herein contained, the parties agree as follows:
1. DEFINITIONS.
As used herein, the following terms shall have the following meanings:
1.1 "A-55 Patent"
means without limitation any product claim of:
1.1.1 A-55 U.S. Patent No. 5,156,114, issued December 10,
1992;
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1.1.2 Pending patent applications related to the A-55
Technology; and Aqueous Fuel for Internal Combustion
Engines and Method of Combustion, No. 92-702313, filed
November 5, 1990 in the Republic of Korea, Aqueous Fuel
and Method of Preparing the Same, No. 705638-96 filed
March 29, 1995 in the Republic of Korea and patents and
patents pending relating to the A-55 Technology.
1.2 "A-55 Clean Fuels"
means fuel covered by any product claim of the A-55 Patent.
1.3 "A-55 Processes"
means any process or procedure to produce and/or utilize the A-55 Clean Fuels or
any other product claim of the A-55 Patent.
1.4 "A-55 Know-how"
means proprietary information of a confidential nature owned by A-55 relating to
the techniques available for commercial exploitation of A-55 Patent and any A-55
Processes; and A-55 Know-how means proprietary information of a confidential
nature owned by A-55 relating to the techniques available for commercial
exploitation of A-55 Patent, including the subject matter of any A-55 Patent if
no patent should issue thereon.
1.5 "A-55 Products"
means any product sold by Grantee associated with the grant of this license or
the A-55 Technology. It is intended by the parties, that this term shall have
the broadest meaning and not in any way be limited to products which are capable
of patent or contractual protection. By way of example but not limitation, the
term would include any product bearing, utilizing or referring to the A-55
Trademark, clothing, pens, souvenirs, and the like.
1.6 "A-55 Technology"
means all know-how, trade secrets, confidential information, and expertise
including, but not limited to, designs, plans, specifications and all other
information and documentation,
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whether patentable or not, relating to A-55 Patent. Unless the context
requires otherwise, the term "A-55 Technology" shall include all rights and
claims under the A-55 Patent, the A-55 Clean Fuels, the A-55 Processes, the
A-55 Know-how, and A-55 Products.
1.7 "A-55 Trademark"
means:
1.7.1 United States registered trademark number 1,848,044;
1.7.2 United States Registered Service Mark No. 74/510,26
("Powered With Water"); and
1.7.3 Any identical or substantially similar trademarks or service
marks which may be obtained by A-55.
1.8 "Net Sales"
means the gross selling price of A-55 Clean Fuels and all other A-55
Products for which an invoice or like sales record has been prepared by
Grantee, or any sublicensee of or party or entity related to or affiliated
with Grantee, less any trade, or quantity (but not cash) discounts actually
allowed, transportation charges, sales or use taxes, if any, included in
the invoice price, and the price of any fuel or other A-55 Product
returned.
1.9 "Territory"
means the Republic of Korea and the Democratic People's Republic of Korea.
1.10 "Effective Date"
shall mean the date stated in the Preamble.
2. GRANT OF PATENT AND KNOW-HOW RIGHTS TO GRANTEE
2.1 Grant:
Subject to the terms and conditions set out herein, A-55 hereby grants to
Grantee:
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2.1.1 The right under the A-55 Patent to manufacture, sell,
distribute and use A-55 Clean Fuels and A-55 Products in the
Territory and the right to practice any A-55 Process
necessary for such manufacture or sale in the Territory.
2.1.2 The right to use A-55 Know-how in the Territory.
2.1.3 The right to practice any and all A-55 Technology in the
Territory, and the right to allow its purchasers to practice
any and all A-55 Technology and patent rights in the
Territory.
2.2 Patent Marking:
Grantee shall, where possible, mark any A-55 Product produced under any
patent licensed hereunder with the number of the applicable patent.
2.3 Excluded Applications:
All aviation applications, including supplying fuel for such applications,
are excluded from this Agreement and specifically reserved to A-55.
However, subject to any contractual obligation A-55 may have existing at
the date hereof and the other limitations and restrictions set out herein,
this license shall extend to all aviation applications within the Territory
when in the opinion of A- 55, such applications are commercially viable.
2.4 Licenses to OEM:
2.4.1 A-55 reserves the sole and exclusive right to negotiate license
agreements with original equipment manufacturers ("OEMs").
Grantee acknowledges that such licenses may be worldwide and may
include the right to utilize and practice the A-55 Technology in
the Territory. The grant of any such license to an OEM shall not
infringe on the grant of this Agreement; provided, however, that
royalties for the use and practice of the A-55 Technology within
the Territory under such a license shall be to the advantage of
Grantee.
2.4.2 Any license granted to an OEM as contemplated in paragraph 2.4.1
must not permit it to manufacture A-55
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Clean Fuels in the Territory, whether for distribution or sale
or for its own consumption.
2.4.3 A-55 shall upon the grant of any license to an OEM, give notice
thereof to Grantee.
2.5 Nature of Grant:
2.5.1 Grantee acknowledges that, incident to the dissolution
of Advanced Fuels, L.L.C., Caterpillar Inc. retained
licensed rights to the A-55 Technology for use in
products of the kind it produces or will produce in the
Territory. Pursuant to retained license rights,
Caterpillar Inc. may sell, but not license until
October 24, 2001, a diesel emulsion based aqueous fuel
emulsion and may make, but not license, a naphtha fuel
emulsion for Caterpillar engines only.
2.5.2 Except as otherwise provided in paragraphs. 2.3, 2.4,
and 2.5. 1, A-55 shall grant no other license to the
A-55 Technology in the Territory while this Agreement
is in force and Grantee is not in default.
2.6 Sublicenses:
Subject to the express written approval of A-55, first had and obtained on
each occasion, Grantee shall have the right to grant sublicenses under this
Agreement provided that no such sublicense shall entitle Grantee or the
sublicensee to assign, transfer or part with any rights thereunder without
the prior written approval of A-55 first had and obtained. Unless waived by
A-55, each such sublicense that relates to the manufacture of A-55 Clean
Fuels by the sublicensee shall, in addition to other pertinent provisions,
contain provisions for the protection and preservation of A-55's equity
interest in Grantee and the payment of royalties of an amount not less than
that specified in paragraph 3.1 to Grantee, who shall hold the same in
trust for payment to A- 55 or make some other stipulation which is
acceptable to A- 55 to compensate fully A-55 for such royalties as if the
sale had been made directly by Grantee.
2.7 Purchase and Sale of Additives
2.7.1 A-55 shall sell and deliver in a timely manner to the
Grantee or the Grantee's order
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such quantities of the surfactant as the Grantee shall
order from time to time.
2.7.2 The initial price of the surfactant (which shall
exclude for these purposes any cetane enhancer or
methanol) to Grantee will be Twenty Dollars (US$20) per
gallon plus all freight and transportation costs. That
price is fixed for 6 months from the date that this
License agreement comes into operation. The price of
the surfactant may be reviewed and adjusted by A-55
from time to time after the initial period of six
months. Any increase in price must be fixed by A-55 in
good faith by reference only to increases in raw
material costs of the surfactant. Any increase in price
will operate on orders placed after notification.
2.7.3 The Grantee shall pay the price for the surfactant sold
ex gate from A-55's premises by immediately available
funds such as an irrevocable Bank letter of credit
2.7.4 The additives must be of a merchantable quality and fit
for their intended purpose.
2.7.5 Property and risk in the additives pass to the Grantee
ex gate from A-55's premises
3. PAYMENTS FOR RIGHTS GRANTED UNDER PARAGRAPH 2.
3.1 Continuing Annual Royalty:
For the rights granted under paragraph 2. above, Grantee shall pay to A-55
a royalty of ONE PERCENT (1%) of the Net Sales in the Territory.
3.2 Technical Transfer Fee:
In consideration for the rights granted herein, Grantee shall pay to A-55 a
technical transfer fee of TEN MILLION DOLLARS ($10,000,000). The technology
transfer fee will be paid by four installments:
3.2.1 The first installment of US$1,000,000, will be paid to
A-55 by Grantee on 9th June 1997 but in any event no
later than 15th June 1997
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3.2.2 Unless extended pursuant to paragraph 3.3 a second
installment of US$2,000,000, will be paid to A-55 on
9th December 1997.
3.2.3 Unless extended pursuant to paragraph 3.3 a third
installment of US$2,000,000, will be paid to A-55 on
9th March 1998
3.2.4 Unless extended pursuant to paragraph 3.3 the second
installment of US$5,000,000, will be paid to A-55 on
9th June 1998.
3.3 Extension of Time:
A-55 proposes in the near future to conduct a test with Tennessee Valley
Association in Alabama involving a combustion turbine and/or coal fired
test (`the Test'). A- 55 anticipates that preliminary results of the Test
will become available by August 30, 1997. If neither of the preliminary
test results are received before that date, the Parties agree that each of
the dates for payment of the installments referred to in paragraphs 3.2.1
to 3.2.4 (inclusive) shall be deferred by a period equal to the period from
August 30 1997 to the date that either of the preliminary results of the
Test are received by A-55. but in any event no longer than six (6) months.
3.4 Outbreak of Hostilities:
If during the period between the payment of the first installment of the
technology transfer fee and the date of payment of the second installment
there occurs an outbreak of hostilities between the Republic of Korea and
the Democratic People's Republic of Korea which can be reasonably be
described as a major regional conflict the operation of this agreement,
including the time for payment of the second installment shall be suspended
during the term of such hostilities.
3.5 Equity Interest in Grantee:
Stanton Energy Fund Pty Ltd shall forthwith incorporate a company in the
Republic of Korea to be called `A-55 Korea' or similar and take whatever
steps may be necessary to procure that the corporation shall immediately
assume the rights and obligations of the Grantee pursuant to this
Agreement. Stanton Energy Fund Pty Ltd shall raise and inject the capital
required to meet the Licensee's obligations under this Agreement and to
ensure the
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Licensee's commercial success. Forthwith upon the incorporation of the
corporation, and in consideration of the grant of this license and incident
to the formation of the corporation, the corporation shall deliver to A-55
a share certificate evidencing the allotment to it of thirty percent (30%)
of the issued shares in the corporation deemed fully paid. The constituent
documents of the corporation shall provide that A-55 shall have no
obligation to make any contribution to the capital of corporation for the
issuance of such interest other than the grant of this license, and shall
further provide that such interest shall not be subject to dilution upon
future contributions of capital.
4. DISCLOSURE AND CONFIDENTIALITY OF KNOW-HOW
4.1 Disclosure:
Within thirty (30) days after the Effective Date of this
Agreement, A-55 shall use its best efforts to disclose to Grantee
all of the technology it possesses relating to the manufacture,
use or sale of A-55 Technology, which is required by Grantee to
exercise and exploit its rights hereunder. Such disclosure shall
include design, engineering and manufacturing information and
specifications, including without limitation; identification of
commercially-available equipment (and the name of the
manufacturers thereof), engineering drawings of special equipment
designed by or for A-55, and process operations and quality
control tests. It is understood by Grantee that the foregoing
obligation of disclosure shall not include any obligation to
disclose composition of the A-55 Clean Fuels surfactant package,
which will be made and distributed solely and exclusively by A-55
but which will be sold, within the Territory only to Grantee for
its use in the manufacture of the A-55 Clean Fuels.
4.2 Confidentiality:
Grantee agrees to use reasonable efforts to maintain as
confidential A-55 Know-how disclosed to it pursuant to paragraph
4.1, provided that:
4.2.1 All information, in whatever form transmitted to
Grantee from A-55, shall be presumed to be confidential
know-how unless expressly identified to the contrary.
4.2.2 Grantee shall not be required to treat as confidential
any A-55 Know-how which is:
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(a) publicly disclosed by A-55, or disclosed to
another party by A-55 without a confidential
restriction, including disclosure by A-55 in any
patent, published patent application, any other
writing or verbally disclosed by A-55; or
(b) publicly available prior to its disclosure by
A-55, or which becomes publicly available after
disclosure by A-55 through no fault of Grantee; or
(c) known to Grantee prior to its disclosure by A-55;
or
(d) disclosed to Grantee by a third party who did not
acquire the information, directly or indirectly,
from A-55; or
(e) independently developed by an employee or
consultant of Grantee subsequent to disclosure by
A-55 but who did not have knowledge of the
disclosure made by A- 55; or
(f) required to be disclosed to any local, state or
federal agency in connection with a proper and
lawful request, law or regulation; provided,
however, that prior to any such disclosure,
Grantee shall give notice of such request to A-
55, which shall have a reasonable opportunity to
apply for such orders as it may deem appropriate
to protect its interests.
4.2.3 Grantee will maintain internal procedures to protect
any A-55 Know-how that is to be treated as confidential
in the same manner in which it protects its own
confidential technical information.
4.2.4 A-55 represents and warrants that the information it
identifies in accordance with paragraph 4.2.1 is
confidential information and that it treats it as such.
5. GRANT OF RIGHTS UNDER TRADEMARKS
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5.1 Trademark Grant
Subject to the due execution and registration of a user agreement in a
form approved by A-55, A-55 hereby grants to Grantee, and its
sublicensees and distributors, the right to use the A-55 Trademark,
together with any other trademark that A-55 may acquire in connection
with its sale of A-55 Clean Fuels to third parties, and to use the
name "A-55" in a corporate name, division name, or other name of any
entity it may establish for the manufacture or distribution of A-55
Clean Fuels. Should "A-55" not be trademarked in any jurisdiction of
the Territory, Grantee shall have the obligation to do all things
necessary to obtain such trademark and register any related designs or
logos at its cost and to hold the same for the sole and exclusive
benefit of A-55. As used herein, the term "A-55 Trademark" shall refer
to any trademark or related design obtained by Grantee hereunder.
5.2 Marking:
Grantee shall mark any A-55 Product which it produces or sells
pursuant to this Agreement with the A-55 Trademark, which, when used,
shall bear an "(r)" to denote its federal registration.
5.3 Use of Trademark:
Grantee acknowledges that any use by it of the A-55 Trademark shall be
to the advantage of the exclusive benefit of A-55. Grantee shall use
the A-55 Trademark only in a manner approved and directed from time to
time by A-55. In connection with such use, Grantee shall comply with
all trademark notice, registered user, and other requirements to
maintain the validity of the A-55 Trademark registration in the
Territory. Grantee shall not make any use of the A-55 Trademark that
would misrepresent to the public that Grantee rather than A-55 is the
owner of such mark or the registration thereof.
5.4 Quality Standards:
A-55 shall establish product specifications or quality standards of
any A-55 Product, including A-55 Clean Fuels, to be sold under the
A-55 Trademarks, and Grantee agrees that its products using the
Trademark
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shall comply therewith to ensure that the A-55 Trademark is being
properly protected. In order to ensure high and consistent quality of
the A-55 Clean Fuels, Grantee shall manufacture and blend all A-55
Clean Fuels which it distributes pursuant to this Agreement with
standard blending equipment sold to it by A-55 unless the use of other
equipment is approved in advance by A-55 (such approval not to be
unreasonably withheld). A-55 may from time to time require Grantee to
ship actual production samples of A-55 Clean Fuel to A-55 for
inspection and testing to ascertain compliance with such product
specifications or quality standards.
5.5 Price:
There shall be no additional royalty for the license under the A-55
Trademarks.
6. TIME AND MANNER OF PAYMENTS.
6.1 Time for Payments:
Payments required under paragraph 3.1 shall be made within fifteen
(15) days following the last day of each calendar quarter in which
there are Net Sales of A-55 Clean Fuels or A-55 Products by Grantee
during the preceding calendar quarter.
6.2 Manner of Payments:
Payments shall be made by certified or registered mail to A-55's
address as specified herein accompanied by a written report signed by
an authorized representative of Grantee setting forth the dollar
amount of the Net Sales of A-55 Clean Fuels or A-55 Products as to
which a royalty is payable for each quarter.
6.3 Overdue Payments:
Payments shall, when overdue, bear interest at an annual rate of one
percent (1%) above the prime rate of Citibank in effect in New York
City on the last day payment was due. In no event shall the interest
so charged exceed the legal limit that may be charged for interest.
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7. RECORDS, INSPECTION, AUDITS AND REPORTS
7.1 Records:
Grantee shall keep true and accurate records and books of account
showing the use and/or practice of the A-55 Technology by Grantee, the
manufacture, marketing and sale of A-55 Clean Fuels and A-55 Products
by Grantee, and all other information necessary for the accurate
determination of the payments to be made to A-55 hereunder.
7.2 Inspection:
It is a condition of this Agreement, and Grantee represents and
guarantees, that it will permit a mutually acceptable firm of
certified public accountants as representatives of A-55 to inspect and
audit, at reasonable times during Grantee's usual business hours, any
and all parts of the records kept by Grantee pursuant to this
paragraph which are required to be rendered by Grantee herein, and to
make excerpts from such records. In the event that Grantee and A-55
are unable to agree on a mutually acceptable firm of certified public
accountants it is hereby agreed that such inspection and audit may be
performed by the certified public accounting firm of Price Waterhouse,
whose principal offices are now at New York City, New York. All fees
of any such firm for such inspection and audit shall be paid by A-55
except in the event of a discrepancy described in paragraph 7.3 below,
in which case Grantee shall pay such fees.
7.3 Discrepancy Expenses:
In the event any audit performed by A-55 results in a finding that
there is a discrepancy in excess of five percent (5%) between the
amounts paid to A-55 and the amounts which should have been paid to
A-55, the cost of such audit shall be borne entirely by Grantee.
7.4 Retention of Records:
Grantee's obligation to retain records and A-55's right to inspect and
audit and make excerpts with respect to the records for each year in
which royalty payments are due, in the absence of a charge of fraud or
intentional misrepresentations, shall terminate three (3) years after
the end of each such year to which such records pertain.
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7.5 Audit:
The Grantee shall at its cost cause an audit of its financial affairs
to be conducted each year during the term of this Agreement to
coincide with the financial year of A-55. Such audit will be conducted
by an auditor selected by A-55 and the Grantee shall deliver such
audited accounts prepared in accordance with generally accepted
accounting principles and practices for public companies in the united
states of America to A-55 within 3 months of the end of the financial
year to which they relate.
8. REPRESENTATIONS AND WARRANTIES
8.1 Grantee Represents And Warrants That:
8.1.1 Organization, Standing, etc: Grantee is a limited
company duly organized, validly existing, and in good
standing under the laws of Australia and has all
requisite corporate power and authority to own and
operate its properties, to carry on its business as now
conducted, and as proposed to be conducted, to enter
into this Agreement, and to carry out the provisions
hereof.
8.1.2 Qualification: Grantee is duly qualified to do business
in the Territory.
8.1.3 Challenged Validity: If Grantee should challenge the
validity or enforceability of the A-55 Patent licensed
under this Agreement, in whole or in part, A-55 shall
have the option, by notice in writing, to immediately
terminate this Agreement.
8.1.4 Business Plan: Grantee shall within thirty (30) days of
the date of this Agreement prepare and submit for
approval to A-55 a business and financing plan for the
use and exploitation of the A-55 Technology in the
Territory. The approval of this plan by A-55 shall not
be unreasonably withheld. Grantee shall expend its best
efforts to implement or exceed the business plan and,
during the term of this Agreement to exploit and
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commercialize the A-55 Technology within the Territory
to the fullest extent commercially possible.
8.2 A-55 Represents And Warrants That:
8.2.1 Organization, Standing, etc: A-55 is a limited
partnership duly organized, validly existing, and in
good standing under the laws of the State of Nevada and
has all requisite power and authority to own and
operate its properties, to carry on its business as now
conducted and as proposed to be conducted, to enter
into this Agreement, and to carry out the provisions
hereof.
8.2.2 Qualification: There is no jurisdiction wherein the
character of the properties owned by A-55 or the nature
of the activities conducted by A- 55 makes necessary
the licensing or qualification of A-55 as a foreign
partnership therein, in which it is not so licensed.
8.2.3 Disclosure: Neither this Agreement nor any document,
certificate, or statement referred to herein or
furnished to Grantee pursuant hereto contains any
untrue statement known to A-55 of a material fact or
omits to state a material fact necessary to make the
statements contained herein and therein not misleading.
8.2.4 Ownership of Patent, etc: A-55 warrants and represents
that Rudolf W. Gunnerman is the sole and exclusive
owner of the entire right, title and interest in and to
the A-55 Patent, and any reissues or extensions of such
Patent, and will be the sole and exclusive owner of all
patent improvements thereto which it makes, in each
case free and clear of all liens, claims, charges,
pledges, mortgages, security interests and other
encumbrances, and that, pursuant to exclusive license
from Mr. Gunnerman, it has the full and sole right,
power and authority to enter into,
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consummate and perform the transactions and obligations
contemplated by this Agreement.
8.2.5 No Conflicting Agreements: A-55 has not entered into
any agreement or understanding, written or oral,
regarding the A-55 Technology, any patent improvement
thereof, or any know-how licensed hereunder, which is
in conflict or inconsistent with any of the terms and
conditions of this Agreement.
8.2.6 Validity: A-55 warrants and represents that it is not
aware of any law or facts which would permit any person
or entity to challenge the validity or enforceability
of the patent rights granted herein.
8.2.7 Infringement: The A-55 Patent, all patent improvements,
and know-how as now practiced by A-55 and all of its
current licensees do not, to A- 55's knowledge,
violate, infringe or conflict with the rights of any
person, firm or government.
9. EXCHANGE OF TECHNICAL INFORMATION, MUTUAL TRANSFER OF MODIFICATIONS,
VARIATIONS, IMPROVEMENTS AND PATENT PROTECTION.
9.1 Exchange of Technical Information:
Each party hereto shall exchange with the other all technical
information acquired during the term of this Agreement relating to the
A-55 Technology and developments with respect to same and will
communicate to the other all information and data obtained therefrom.
Each party further agrees that designated representatives of the other
may, at reasonable times, visit the laboratory, plants, and other
installations of the other in which research and operations relating
to the A-55 Technology are being conducted.
9.2 Disclosure of Modifications:
The parties shall promptly inform each other in writing of any
modifications, variations, or improvements relating to the A-55
Technology, and the know-how licensed hereunder, which are developed
by them or otherwise come to their attention. It is
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expressly agreed that modifications, variations or improvements
disclosed to A-55 by any other licensee, Grantee, joint venturer, or
any other party having the right to practice any rights licensed
hereunder, shall, subject to any contractual obligations imposed upon
A-55, be disclosed to Grantee under the scope of this paragraph.
9.3 Rights to Modifications:
Notwithstanding which party hereunder shall have discovered any
modification, variation or improvement to the A-55 Technology, all
such modifications, variations or improvements shall be owned solely
by A- 55; provided, however, that Grantee shall have the right to use
all modifications, variations and improvements, whether patented or
unpatented, made or acquired by A-55 during the term of this Agreement
without further compensation to A-55. The parties shall cooperate with
each other in connection with the filing of any patent applications
relating to any such modifications, variations or improvements.
9.4 Intellectual Property Protection:
A-55 shall at its own cost, use its best endeavors to seek patent
protection in the Democratic People's Republic of Korea. A-55 and
Grantee agree to diligently seek patent protection for all inventions,
modifications and improvements to the A-55 Technology in the Territory
at Grantee's expense. A-55 may, at its own option, apply for patent
protection which is not pursued by Grantee, in which case the cost
thereof shall be borne solely by A-55 and all benefits therefrom shall
be solely owned by A-55 and not subject to the terms of this
Agreement; provided, however, that Grantee may, within three (3)
months of the issuance of a patent to A-55, give A-55 notice of its
election to take rights under such patent by paying all costs and
expenses of A-55, together with interest thereon at one percent (1%)
over the prime rate charged by Citibank New York from time to time.
Any annual fees with respect to maintenance of patents or trademarks
within the Territory shall be paid by Grantee or, at the option of
A-55, paid by A-55 and reimbursed upon invoice.
10. INFRINGEMENT
10.1 Notification of Infringement:
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Grantee and A-55 shall each notify the other promptly in writing of
any known infringement of the A-55 Patent, unauthorized use of any
confidential know-how licensed hereunder, or any infringement or
unfair competition relating to a trademark licensed hereunder, which
either party learns of during the term of this Agreement.
10.2 Litigation by A-55:
A-55 shall have no obligation to sue any such infringers or
competitors, but shall have the right to do so at its own expense and
the right to join Grantee and obtain Grantee's full cooperation, if
necessary, at no legal expense to Grantee. If A-55 brings suit against
an infringer or competitor, A-55 shall have the sole right to control
such lawsuit and to settle the same on terms and conditions approved
by A-55. All monetary and other recoveries resulting from such a
lawsuit or any settlement thereof shall belong to A-55. A-55 shall not
be required to have pending more than one (1) suit for infringement of
any patent licensed under this Agreement.
10.3 Litigation by Grantee:
If, after notice of any infringement of the A-55 Patent or any other
patent licensed hereunder, unauthorized use of any confidential
know-how licensed hereunder, or infringement or unfair competition
relating to a trademark licensed hereunder, A-55:
10.3.1 is unable to bring any such infringement or unfair
competition to a halt, or
10.3.2 fails to file and commence diligent prosecution of a
suit against such third party for patent infringement
or unfair competition, within six (6) months after A-55
learns thereof,
then Grantee may take any action it deems necessary to stop the
infringement or unfair competition, joining A-55 therein if necessary
but at no expense to A-55. Any recoveries made upon any such suit
shall belong solely to Grantee
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except for any award made by the court in favor of A-55.
10.4 Actions by Third Parties:
If, during the term of this Agreement one (1) or more third
parties file suit in the Territory against Grantee or any of its
purchasers for patent infringement due to Grantee's or any
purchaser's manufacture, marketing, use, export or sale of A-55
Products in the best modes contemplated by A-55 or in modes
approved by A- 55, Grantee shall notify A-55 of such suit and
tender defense thereof to A-55. If A-55 refuses the defense of
same, Grantee may at its option elect to defend said suit. A-55
shall indemnify and hold Grantee harmless from damages assessed
against Grantee in any third party infringement suit, but said
indemnification shall be limited to an amount equal to the
payments made to A-55 by Grantee under the terms of this
Agreement.
10.5 Conduct of Defense:
In the event that an action described in paragraph 10.4 is
commenced against Grantee in any jurisdiction, A-55 hereby
authorizes Grantee to join A-55 in said action as either an
additional original defendant or third party defendant.
10.6 Declaratory Judgment:
Grantee may elect to file a declaratory judgment action against
any third party referred to in paragraph 10.4, in which event it
will notify A- 55 of its intention and tender the filing of any
such suit to A-55. If A-55 refuses to institute such declaratory
judgment action against a third party, Grantee shall have the
option to institute such action. Further, A-55 hereby authorizes
Grantee to join A-55 as a plaintiff in any such declaratory
action.
11. CONSULTATION SERVICES
11.1 Consultation Services:
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<PAGE> 19
A-55 shall provide to Grantee such qualified technical personnel
to assist Grantee in the exercise of the rights granted pursuant
to this Agreement. Grantee shall pay for the reasonable cost of
such assistance, including all necessary travel, food, lodging
and other expenses, and the pro rata pay (plus 20%) of the
persons rendering such technical assistance. If travel is
required, technical personnel shall fly coach, management
personnel shall fly business class, and the President or Chairman
shall fly first class.
11.2 Manner of Payment:
Upon any request from Grantee of technical assistance from A-55
pursuant to this, A-55 shall prepare and render to Grantee an
estimate of the cost thereof, together with an approximate time
frame within which such assistance may be rendered. Grantee
shall, upon receipt and review of the same, forward the amount to
A-55 whereupon such assistance shall be rendered within the
agreed upon time. Any differences in the estimated and actual
expenses shall be accounted for and paid or refunded upon
termination of such services.
12. TERMINATION AND CONSEQUENCES OF DEFAULT
12.1 Termination for Invalidity:
12.1.1 This Agreement shall terminate in twenty-five (25)
years, or upon the expiration of the last A-55 Patent
to expire, whichever is later, in which event Grantee
shall be entitled to continue to exploit the rights
granted under this Agreement without the payment of any
additional royalties to A-55.
12.1.2 Upon a judgment of invalidity or unenforceability of
the A-55 Patent, Grantee shall be entitled to continue
to exploit the rights granted under this Agreement by
payment of the royalties specified in paragraph 3 if
Grantee continues to practice A-55 Know-how; provided
such payments shall be payable by Grantee until
twenty-five
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<PAGE> 20
(25) years after the Effective Date of this Agreement
and Grantee shall then be entitled to exploit the
rights granted under this Agreement without payment of
any royalties to A-55.
12.2 Consequences of Default by Grantee:
In the event of a default by Grantee which is not cured in a
timely manner as provided herein:
12.2.1 A-55 may, by written notice, terminate this Agreement.
12.2.2 At its option, A-55 may, in its unfettered discretion,
elect to continue this Agreement but convert it to a
non-exclusive license, as to any third party or entity,
within the Territory.
12.2.3 All unpaid sums due A-55 under paragraph. 3.1 herein to
and including the Effective Date of any such default
shall be due and payable within thirty (30) days
thereafter.
12.3 Consequences of Default by A-55:
In the event of a default by A-55 Grantee shall be entitled to
exploit the rights granted under the terms of this Agreement and
shall pay all royalties which accrue hereunder to the independent
auditors named in paragraph 7.2 until such default is resolved or
cured, whereupon the funds so held shall be dispersed in
accordance with such resolution.
12.4 General Consequences:
12.4.1 Termination pursuant to paragraph 12.1 or the
consequences of default as specified in paragraphs 12.2
or 12.3 shall not relieve either party of any
obligations due to the other under the terms of this
Agreement to and including the date of termination or
the Effective Date of any such default.
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12.4.2 In no event will default operate to release Grantee or
A-55 from any damages, costs and expenses that may be
due as a result of such default.
12.4.3 Either of the parties hereto shall have the right to
give public notice of any termination or default in
such manner and at such times and places as it may deem
advisable.
12.5 Delivery of A-55 Technology:
In the event of termination of this Agreement for whatever
reason, Grantee shall at the request of A-55, deliver to A-55 all
papers, drawings and other documents samples and models relating
to any matters that are the subject of this Agreement, shall
execute such documents as are reasonably requested by A-55 and
shall cease to exploit the rights granted under the terms of this
Agreement. Without limiting the activities that shall cease upon
such termination, Grantee shall remove all trademark designation
from A-55 Products; transfer any trademarks to A-55 which it has
acquired, change its name to delete reference to A-55; and
transfer to A-55 any related business names which it has used in
the practice of the A-55 Technology.
13. EVENTS OF DEFAULT, NOTICE OF DEFAULT, AND CURING THEREOF
13.1 Events of Default:
A default shall occur hereunder if any one of the following
events shall occur:
13.1.1 Grantee fails to pay any sum due hereunder and such
failure continues for thirty (30) days; or
13.1.2 Without reasonable cause, Grantee fails to materially
implement the business plan or the financial plan
approved by A-55; or
13.1.3 A party fails to perform or comply with any term hereof
which materially affects this Agreement; or
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<PAGE> 22
13.1.4 Without the prior written approval of A-55 first had
and obtained, there is a change in control of the
Grantee; or
13.1.5 Without the prior written approval of A-55 first had
and obtained, by virtue of any issue of shares, capital
reduction or any means whatsoever, A- 55's shareholding
(representing voting shares or entitlement to equity)
in Grantee falls below 30%; or
13.1.6 A party files a voluntary petition for bankruptcy or
any similar relief under laws for the benefit of
creditors; a party is adjudged bankrupt or a receiver
is appointed by a court of competent jurisdiction, and
such adjudication is not vacated within thirty (30)
days; or an involuntary petition is filed for
reorganization or similar relief and is not dismissed
or stayed within sixty (60) days; or
13.1.7 Any representation or warranty made in this Agreement
proves to have been incorrect in any material respect
which significantly affects this Agreement.
13.2 Notice of Default:
Before any default is effective herein, the party declaring the
default shall provide the defaulting party with a written notice
specifying the claimed default. Such notice shall provide a
period of thirty (30) days from the date of the notice within
which the defaulting party may cure such default.
13.3 Failure to Cure:
In the event the defaulting party fails to cure any default to
the reasonable satisfaction of the other party within the thirty
(30) day period described in paragraph 13.2, the default will,
unless the other party specifies otherwise, become effective on
the last day of the thirty (30) day period, provided that if
either party in good faith denies there is a breach or default
(other than a breach or default for the
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<PAGE> 23
nonpayment of money), such party may within such thirty (30) day
period submit the matter to binding arbitration and in the event
it is finally determined that a breach or default has occurred,
such party shall have thirty (30) days from the date of
determination to cure the same.
14. INDEMNITY AND DISCLAIMER
14.1 Indemnification by Grantee:
Grantee shall defend, indemnify and hold A-55 harmless from and
against any action, claim, liability, expense (including
reasonable attorneys' fees and costs) or damage (including
consequential damages) to persons or property resulting from any
acts or omissions of Grantee and its employees and agents in
connection with the performance of this Agreement or the
manufacture, use and sale of A-55 Products hereunder.
14.2 Indemnification by A-55:
A-55 shall defend, indemnify and hold Grantee harmless from and
against any action, claim, liability, expense (including
reasonable attorneys' fees and costs) or damage (including
consequential damages) to persons or property resulting from any
breach or untruth of any representation or warranty hereunder or
failure to perform any covenant hereunder).
15. GENERAL PROVISIONS
15.1 Notices:
Any notice required to be given under this Agreement shall be in
writing and shall be sent by certified or registered mail, or its
equivalent, postage prepaid, to each party at the address below
or at such other address of which one party shall notify the
other in the same manner:
To A-55: A-55, LP
5270 Neil Road
Reno, NV 89502
USA
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<PAGE> 24
To Grantee: Stanton Energy Fund Pty. Limited
Level 50, 101 Collins street,
Melbourne, Victoria, 3000
Australia
15.2 Governing Law:
This Agreement shall be governed by the law of Nevada. for performance
in the Territory.
15.3 Arbitration:
All disputes, differences, or questions between the parties concerning
the construction, interpretation, and effect of this Agreement or of
any paragraph herein contained or the rights and liabilities of the
parties, shall be settled by arbitration in accordance with the Rules
of Arbitration of the American Arbitration Association by arbitrators
appointed in accordance with such rules; provided that either party
shall have the right to appeal the result of any such arbitration; and
provided further that arbitration under this paragraph shall not apply
to disputes, differences or questions between the parties concerning
violations of United States Anti-Trust laws or regarding the validity
of the A-55 Patent or regarding the confidentiality of any know-how
licensed hereunder. Unless the parties otherwise agree, the site for
arbitration shall be Reno, Nevada.
15.4 No Affiliations:
Nothing in this Agreement shall be construed to create between the
parties a partnership, association, joint venture, or agency.
15.5 Prior Agreements, Amendments:
This Agreement cancels and supersedes all prior oral or written
representations, agreements and understandings between the parties
with respect to the subject matter hereof, and embodies all of the
understandings and obligations between the parties with respect to the
subject matter hereof. This Agreement may be modified and amended at
any time, including the addition of new or deletion of existing
know-how and technology pertinent to the rights transferred under this
Agreement, provided that no agreement or modification or extension of
this Agreement shall be binding upon any of the parties hereto unless
made in writing and signed by both parties.
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<PAGE> 25
15.6 Waivers:
Failure of either party to require strict performance of any term of
this Agreement shall not affect that party's right to fully enforce
the same, nor shall any waiver of a default be construed to be a
waiver of any succeeding default.
15.7 Provisions Severable:
If any term or provision of this Agreement shall be held or adjudged
illegal, invalid, or unenforceable by any court having jurisdiction,
such shall not affect the validity of any other term or provision
hereof, and any such illegal, invalid, or unenforceable term or
provision shall be deemed to be severable and shall be deleted from
this Agreement. A-55 agrees to send Grantee notice within thirty (30)
days after the date any term or provision of this Agreement is
adjudged illegal, invalid or unenforceable. The parties agree that
the grant of this Agreement insofar as it relates to that part of the
Territory known as the Democratic People's Republic of Korea is
subject to any applicable law of the United States of America. If the
grant of such license by A-55 is prohibited by, or would contravene
any such law, the operation of this Agreement in that part of the
Territory as relates to the Democratic People's Republic of Korea
shall, without in any way affecting any other provisions of this
Agreement (including but without limiting the generality of the
foregoing paragraph 3), be suspended until such license may lawfully
be granted.
15.8 Binding Agreement:
This Agreement shall be binding upon and be to the advantage of the
parties, their successors and signs to the extent this Agreement is
assignable by its terms.
15.9 Authority to Contract, Counterparts:
Each of the parties covenants that this Agreement is executed under
authority duly granted by its board of directors. The Agreement has
been signed in two (2) counterparts, one for each party, each of
which shall be deemed to be an original.
15.10 Costs of Litigation:
In the event of any dispute arising as the result of the breach or
alleged breach of any term of this
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<PAGE> 26
Agreement, if such dispute is taken by either party to arbitration or
to any court, the successful party in any such arbitration or court
action shall be entitled, in addition to any damages suffered, to
receive its actual costs of arbitration or suit including, without
limiting the generality of the foregoing, attorneys' fees, experts'
fees, the cost of exhibits and the preparation thereof, and all other
costs reasonably incident to such arbitration or court action.
15.11 Financial Statements:
During the term hereof, Grantee shall furnish A-55 annually with the
annual report and a copy of the 10-K (or such other substantially
similar statement required by the laws of the Territory) statement of
it and its parent and Subsidiaries, if any.
15.12 Injunction:
The parties hereto acknowledge that the damages for any breach of
this Agreement by either party relating to any matter other than the
payment of money would be incapable of precise determination and
would cause the nondefaulting party irreparable harm. Accordingly,
each party accepts the other party's right to obtain an injunction to
prevent any further breach of the Agreement should the nondefaulting
party deem it necessary to do so.
15.13 No Assignment:
Grantee shall have no right to assign or otherwise transfer this
Agreement or any of the rights granted to or obligations imposed upon
Grantee without the express prior written consent of A-55. A-55 may
transfer this Agreement or any of the rights granted hereunder to it
without the prior consent of Grantee; provided, however that A-55
shall not be relieved of any obligations hereunder unless such
transfer is consented to in writing by Grantee.
15.14 Headings:
Caption headings are for convenience of reference only.
SIGNING PROVISION
In witness whereof, the parties have signed this Agreement as of the date
appearing below their respective signatures..
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<PAGE> 27
A-55, L.P., a Nevada limited partnership
By RWG, Inc., a Nevada corporation
By /s/ Rudolf W. Gunnerman
-------------------------------
Rudolf W. Gunnerman,
President
"A-55"
DATED: June 9, ,1997
-----------------------
Stanton Energy Fund Pty Ltd for
and on behalf of a corporation yet to
be incorporated
By /s/ Michael J. Roux
-----------------------------
Michael J. Roux
Chairman
"Grantee"
DATED: June 9 , , 1997.
-----------------------
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<PAGE> 1
EXHIBIT 10.11
LICENSE AGREEMENT
(EXCLUSIVE - AUSTRALIA, NEW ZEALAND & NEW GUINEA)
PREAMBLE
The parties to this Agreement are RUDOLF W. GUNNERMAN of 210 Gentry Way Reno NV
89502 ("Mr Gunnerman") and A-55, L.P., a Nevada limited partnership ("A-55"),
and A-55 Australia Ltd. (ACN 076 598 475), a corporation formed pursuant to the
laws of Australia ("Grantee").
This Agreement shall become effective on the date payment is made by Grantee of
the initial installment of the technical transfer fee pursuant to paragraph
3.2.1 below.
This Agreement is made with reference to the following facts:
A. Mr Gunnerman and/or A-55 owns the rights to transfer to others the
rights to certain worldwide patent applications, issued patents and
trademarks, and valuable technology, know-how, trade secrets and
prototypes which relate to and/or use an aqueous fuel comprising a
mixture of water and carbonaceous material for combustion in an internal
combustion engine and the use thereof, including technologies as set
forth in the patent applications and issued patents as more fully defined
below ("A-55 Clean Fuels").
B. Grantee desires to be licensed to use such rights and information from
A-55 within a geographical territory.
C. A-55 manufactures, distributes and sells the Additives.
D. A-55 has agreed to sell the additives to the Grantee so that the Grantee
can distribute and sell (either itself or under license to others) A-55
Clean fuels throughout the Territory on the terms and conditions set out
in this Agreement.
Now, therefore, in consideration of the mutual promises and covenants, and upon
the conditions herein contained, the parties agree as follows:
1. DEFINITIONS.
In this Agreement, the following terms shall have the following meanings:
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<PAGE> 2
1.1 "Additives" means the package of additives required in order to
manufacture A-55 clean fuels.
1.2 "Fuel" means any fuel for which a royalty is payable under the terms
of this Agreement.
1.3 "Net Sales" means the gross Selling Price of Fuel and all other A-55
Products for which an invoice or like sales record has been prepared
by Grantee, or any sublicensee of or party or entity related to or
affiliated with Grantee, less any trade, cash or quantity discounts
actually allowed, transportation charges and sales or use taxes, if
any, included in the invoice price, and the price of any Fuel or
other A-55 Product returned.
1.4 "Selling Price" means the amount regularly charged for Fuel from
time to time by Grantee to third parties. Grantee shall
independently and exclusively determine its Selling Price.
1.5 "Territory" means The Commonwealth of Australia, The Commonwealth of
New Zealand and Papua New Guinea.
1.6 "A-55 Patent" means all present and future patents and applications
of A-55 filed (including without limitation A-55 improvements
insofar as patent applications have been made in respect thereto) in
the Territory (including without limitation the A-55 U.S. Patent No.
5,156,114, issued December 10, 1992, and Australian patent No.
654,941, issued March 23, 1995) insofar as they relate to A-55 Clean
Fuels and the processes pursuant to which A-55 Clean Fuels are made
and all divisions, continuation, continuation in part, supplemental
disclosure and reissues thereof and thereto.
1.7 "A-55 Clean Fuels" means all and any crude oil or natural gas based
aqueous fuel emulsion used for any purpose whatsoever (including,
without limitation, for use in internal combustion engines and in
open flame applications but not for aviation) manufactured or
capable of being manufactured utilizing any of the Technology and/or
A-55's Improvements (or any, combination of them).
1.8 "A-55 Processes" means any process or procedure to produce the A-55
Clean Fuels (or any other product claim of the A-55 Patent) and the
process or procedure to operate the equipment used to manufacture
A-55 Clean Fuels.
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<PAGE> 3
1.9 "A-55 Know-how" means proprietary information of a confidential
nature owned by A-55 relating to the techniques available for
commercial exploitation of A-55 Clean Fuels (including without
limitation the subject matter of any A-55 Patent if no patent should
issue thereon) and any A-55 Processes.
1.10 "Technology" means all know-how, trade secrets, confidential
information, and expertise including, but not limited to, designs,
plans, specifications and all other information and documentation,
whether patentable or not, relating to A-55 Clean Fuels. Unless the
context requires otherwise, the term "Technology" shall include the
A-55 Patent rights, the A-55 Processes, and the A-55 Know-how.
1.11 "A-55 Trademark" means United States registered trademark number
1,848,044 and any identical or substantially similar trademarks
which may be obtained by A-55.
1.12 "A-55 Product" means any product sold by Grantee associated with
the grant of this license. It is intended by the parties that this
term shall have the broadest meaning and not in any way be limited
to products which are capable of patent or contractual protection.
By way of example but not limitation, the term would include any
product bearing, utilizing or referring to the A-55 Trademark,
clothing, pens, souvenirs, and the like.
1.13 "Grantee" means A-55 Australia.
2. GRANT OF PATENT AND KNOW-HOW RIGHTS TO GRANTEE
2.1 Grant. A-55 hereby grants to Grantee:
2.1.1 The right under the A-55 Patent to manufacture, sell,
distribute and use A-55 Clean Fuels in the Territory and the
right to practice any A-55 Process necessary for such
manufacture or sale in the Territory.
2.1.2 The right to use A-55 Know-how in the Territory.
2.1.3 The right to practice any and all A-55 Technology in the
Territory, and the right to allow its purchasers to practice
any and all A-55 Technology and patent rights in the
Territory.
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<PAGE> 4
2.2 Patent Marking. Grantee shall, where possible, mark fuel produced
under any patent licensed hereunder with the number of the
applicable patent.
2.3 Excluded Applications. All aviation applications, including the
supplying of fuel for such applications, are excluded from this
license and specifically reserved to A-55.
2.4 Licenses to OEMs.
2.4.1 A-55 reserves the sole and exclusive right to negotiate
license agreements with original equipment manufacturers.
Grantee acknowledges that such licenses may be worldwide and
may include the right to utilize and practice the Technology
in the Territory. The grant of any such license to an OEM
shall not infringe on the grant of this license; provided,
however, that royalties for the use and practice of the
Technology within the Territory under such a license shall
inure to Grantee.
2.4.2 Any License granted to an original equipment manufacturer as
contemplated in subparagraph 2.4.1, must not permit it to
manufacture A-55 Clean Fuels in the Territory, whether for
distribution or sale or for its own consumption.
2.5 Nature of Grant.
2.5.1 Grantee acknowledges that, incident to the dissolution of
Advanced Fuels, L.L.C., Caterpillar Inc. retained licensed
rights to the Technology for use in products of the kind it
produces or will produce in the Territory. Except as otherwise
provided in paragraphs 2.2, 2.3 and 2.4, A-55 shall grant no
other license to the Technology in the Territory while this
Agreement is in force and not in default.
2.5.2 Pursuant to retained license rights, Caterpillar may sell, but
not license until October 24, 2001, a diesel emulsion based
aqueous fuel emulsion and may make, but not license, a naphtha
fuel emulsion for Caterpillar engines only.
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<PAGE> 5
2.6 Sublicenses. Subject to the express approval of A-55, first had and
obtained on each occasion, Grantee shall have the right and
obligation to grant sublicenses under this Agreement. Unless waived
by A-55, such sublicense that relates to the manufacture of Fuel by
the sublicensee shall, in addition to other pertinent provisions,
contain provisions for payment of royalties of an amount not less
than that specified in paragraph 3.1 below to Grantee, who shall
hold the same in trust for payment to A-55 to make some other
stipulation which is acceptable to A-55 to compensate A-55 for the
loss of such royalties (either direct with A-55 or with the
sublicensee).
2.7 Ampol. A-55 acknowledges that the Grantee is negotiating the grant
of a sublicense to Ampol Petroleum Pty. Ltd. (ACN 000 032 128)
("Ampol") relating to the manufacture, distribution and sale of A-55
Clean Fuels in the Commonwealth of Australia and that A-55 hereby
expressly approves Ampol as an appropriate sublicensee upon terms
and conditions not inconsistent with this Agreement.
2.8 Purchase and Sale of Additives
2.8.1 A-55 shall sell and deliver in a timely manner to the Grantee
or the grantee's order such quantities of the Additives as the
Grantee shall order from time to time.
2.8.2 The initial price of the surfactant (which shall exclude for
these purposes any cetane enhancer or methanol) to Grantee
will be US$8.00 per gallon plus all freight and transportation
costs. That price is fixed for 6 months from the date that
this License agreement comes into operation. The price of the
surfactant may be reviewed and adjusted by A-55 from time to
time after the initial period of six months. Any increase in
price must be fixed by A-55 in good faith by reference only to
increases in raw material costs of the surfactant. In any
event, A-55 may not charge Grantee a higher price for
surfactant than that charged by it at that time to any other
of its licensees outside the USA. Any increase in price will
operate on orders placed after notification."
2.8.3 The Grantee shall pay the price for the additives sold and
delivered within Thirty (30) days after delivery of the same
to the Grantee (or by its order)
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<PAGE> 6
2.8.4 The additives must be of a merchantable quality and fit for
their intended purpose.
2.8.5 Property and risk in the additives pass to the grantee on
dispatch from A-55's premises
2.8.6 The obligation to supply the Additives set forth in this
paragraph shall continue for a period of 20 years after the
termination referred to in clause 12.1.1
2.9 TransAdelaide In the event that the field tests to be conducted in
South Australia are not successful then Grantee may within 14 days
of the completion of those tests at its option elect to terminate
this Agreement by notice in writing to A-55. In this paragraph the
"success" of the field tests shall be measured by reference to the
criteria set out in clause 8 and 9 of a Memorandum of Understanding
between the Minister of Transport and A-55 dated 22 November 1996
without any account being taken of matters (except Technological
matters) beyond the control of A-55 (including but without
limitation strikes boycotts or other bans or limitations). Upon
termination A-55 shall refund to Grantee all moneys paid by it
pursuant to paragraph 3.2. The refund of the moneys shall be in full
and final settlement of all claims actions and demands which the
Parties may have in relation to any matters arising out of this
Agreement.
3. PAYMENTS FOR RIGHTS GRANTED UNDER PARAGRAPH 2.
3.1 Continuing Annual Royalty. For the rights granted under paragraph 2
above, Grantee shall pay to A-55 a royalty of 0.5% of the Net Sales
from all Fuel and A-55 Products in the Territory.
3.2 Initial Payment. As initial consideration to A-55 for the rights
granted herein, Grantee shall pay to A-55 an initial payment of Five
Million Dollars (US$5,000,000.00) payable in Three (3) installments
as follows:
3.2.1 US$500,000.00 on the signing of this Agreement; and
3.2.2 US$2,000,000 on or before September 8, 1997;
3.2.3 US$2,500,000 on or before March 1, 1998;
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<PAGE> 7
provided, however, that all cash moneys received by the Grantee
prior to September 30, 1997, pursuant to any sublicense,
distribution agreement, or the like, shall forthwith be paid to A-55
in reduction of the amounts referred to in this paragraph 3.2.
3.3 Equity Interest in Grantee. Contemporaneously with the payment of
the moneys referred to in subparagraph 3.2.1, and in consideration
of the grant, of this license and incident to the formation of
Grantee, Grantee shall deliver to A-55 a share certificate
evidencing the allotment to it of thirty percent (30%) of the issued
shares in Grantee deemed fully paid. In this regard 250,000 ordinary
shares of AUS$0.25 shall be applied at par for and allotted to A-55
in the capital of A-55 Holdings Ltd (the parent company of the
Grantee)
4. DISCLOSURE AND CONFIDENTIALITY OF KNOW-HOW
4.1 Disclosure. Within thirty (30) days after the effective date of this
Agreement, A-55 shall use its best efforts to disclose to Grantee
all of the technology it possesses relating to the manufacture, use
or sale of A-55 Clean Fuels, which is required by Grantee to
exercise and exploit its rights hereunder. Such disclosure shall
include design, engineering and manufacturing information and
specifications, including without limitation: identification of
commercially-available equipment (and the name of the manufacturers
thereof) required or useful in the production of the fuels,
engineering drawings of special equipment designed by or for A-55
required or useful in the production of the fuels, process
operations and parameters for the production of the fuels, and
quality control tests relating to the production of the fuels. It is
understood by Grantee that the foregoing obligation of disclosure
shall not include any obligation to disclose composition of the A-55
Clean Fuels surfactant package, which will be made and distributed
solely and exclusively by A-55 but which will be sold to Grantee for
its use in the manufacture of the A-55 Clean Fuels.
4.2 Confidentiality. Grantee agrees to use reasonable efforts to
maintain as confidential A-55 Clean Fuels Know-how disclosed to it
pursuant to paragraph 4.1, provided that:
4.2.1 All information in whatever form transmitted to Grantee from
A-55 shall be presumed to be Confidential Know-how unless
expressly identified to the contrary.
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<PAGE> 8
4.2.2 Grantee shall not be required to treat as confidential any
A-55 Clean Fuels Know-how which is
(a) publicly disclosed by A-55, or disclosed to another
party by A-55 without a confidential restriction,
including disclosure by A-55 in any patent,
published patent application, any other writing or
verbally disclosed by A-55; or
(b) publicly available prior to its disclosure by A-55,
or which becomes publicly available after
disclosure by A-55 through no fault of Grantee; or
(c) known to Grantee prior to its disclosure by A-55;
or
(d) disclosed to Grantee by a third party who did not
acquire the information directly or indirectly from
A- or
(e) independently developed by an employee or
consultant of Grantee subsequent to disclosure by
A-55 but who did not have knowledge of the
disclosure made by A-55; or
(f) considered, in the opinion of Grantee's attorneys,
material prior art required to be disclosed to the
United States Patent office if Grantee files a
patent application on any of its modifications,
variations or improvements in accordance with
subparagraph 9.3 hereof; or
(g) required to be disclosed to any local, state or
federal agency in connection with a proper and
lawful request, law or regulation; provided,
however, that prior to any such disclosure, Grantee
shall give notice of such request to A-55, which
shall have a reasonable opportunity to apply for
such orders as it may deem appropriate to protect
its interests.
4.2.3 Grantee will maintain internal procedures to protect any A-55
Clean Fuels Know-how that is to be treated as confidential
within paragraph 4.2 in the same manner in which it protects
its own confidential technical
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<PAGE> 9
information and will cause its authorized representatives to
execute a Confidential Disclosure Agreement in the form of the
attached Exhibit A.
4.2.4 A-55 represents and warrants that the information it
identifies in accordance with paragraph 4.2.1 is confidential
information and that it treats it as such.
5. GRANT OF RIGHTS UNDER TRADEMARKS
5.1 Grant. Subject to the due execution and registration of a User
agreement in a form approved by A-55, A-55 hereby grants to Grantee,
and its sublicensees and distributors, the right to use the A-55
Trademark, together with any other trademark that A-55 may acquire
in connection with its sale of A-55 Clean Fuels to third parties,
and to use the name "A-55" in a corporate name, division name, or
other name of any entity it may establish for the manufacture or
distribution of A-55 Clean Fuels. Should "A-55" not be trademarked
in any jurisdiction within the Territory, Grantee shall have the
obligation to do all things necessary to obtain such trademark and
register any related design or logos at its cost and to hold the
same for the sole and exclusive benefit of A-55. As used herein, the
term "A-55 Trademark" shall refer to any trademark or related design
obtained by Grantee hereunder.
5.2 Marking. Grantee shall mark the A-55 Trademark when used with an (R)
to denote its registration.
5.3 Use of Trademark. Grantee acknowledges that any use by it of the
A-55 Trademark shall inure to the exclusive benefit of A-55. Grantee
shall use the A-55 Trademark only in a manner approved and directed
from time to time by A-55. In connection with such use, Grantee
shall comply with all trademark notice, registered user, and other
requirements to maintain the validity of the A-55 Trademark
registration in the Territory. Grantee shall not make any use of the
A-55 Trademark that would misrepresent to the public that Grantee
rather than A-55 is the owner of such mark or the registration
thereof.
5.4 Quality Standards. A-55 shall establish product specifications or
quality standards of Fuel to be sold under either of the above
trademarks, and Grantee agrees that its products using either
trademark shall comply therewith to ensure that A-55's trademarks
are being property protected. A-55 may from time to time require
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<PAGE> 10
Grantee to ship actual production samples of Fuel to A-55 for
inspection and testing to ascertain compliance with such produce
specifications or quality standards. In order to ensure high and
consistent quality of the A-55 Clean Fuels, Grantee shall
manufacture and blend all A-55 Clean Fuels which it distributes
pursuant to this License with standard blending equipment sold to it
by A-55 unless the use of other equipment is approved in advance by
A-55.
5.5 Price. There shall be no additional royalty for the license under
the above trademarks.
6. TIME AND MANNER OF PAYMENTS.
6.1 Time for Payments. Payments required under subparagraph 3.1.1 shall
be made within fifteen (15) days following the last day of each
calendar quarter for Net Sales by Grantee and for Fuel used by
Grantee during the preceding calendar quarter.
6.2 Manner of Payments. Payments shall be made by certified or
registered mail to A-55's address as specified herein accompanied by
a written report signed by an authorized representative of Grantee
setting forth the dollar amount of net Sales or quantity of Fuel
used as to which a royalty is payable for each quarter.
6.3 Overdue Payments. Payments shall, when overdue, bear interest at an
annual rate of one percent (1%) above the prime rate of Citibank in
effect in New York City on the last day payment was due. In no event
shall the interest so charged exceed the legal limit that may be
charged for interest.
7. RECORDS, INSPECTION, AUDITS AND REPORTS
7.1 Records. Grantee shall keep true and accurate records and books of
account showing the use and/or practice of the Technology, and the
manufacture, marketing, use and/or sale of Fuel by Grantee, and all
other information necessary for the accurate determination of the
payments to be made to A-55 hereunder.
7.2 Inspection. It is a condition of this license, and Grantee
represents and guarantees, that it will permit a mutually acceptable
firm of certified public accountants as representatives of A-55 to
inspect and audit, at reasonable times during Grantees usual
business hours, any and all parts of the records kept by Grantee
pursuant to this
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paragraph 7 which are required to be rendered by Grantee herein, and
to make excerpts from such records. In the event that Grantee and
A-55 are unable to agree on a mutually acceptable firm of certified
public accountants it is hereby agreed that such inspection and
audit may be performed by the certified public accounting firm of
Coopers & Lybrand, whose principal offices are now at New York City,
New York. All fees of any such firm for such inspection and audit
shall be paid by A-55 except in the event of a discrepancy described
in paragraph 7.3 below, in which case Grantee shall pay such fees.
7.3 Discrepancy Expenses. In the event any audit performed by A-55
results in a finding that there is a discrepancy in excess of five
percent (5%) between the amounts paid to A-55 and the amounts which
should have been paid to A-55, the cost of such audit shall be borne
entirely by Grantee.
7.4 Retention of Records. Grantee's obligation to retain records and
A-55's right to inspect and audit and make excerpts with respect to
the records for each year in which royalty payments are due, in the
absence of a charge of fraud or intentional misrepresentations,
shall terminate three (3) years after the end of each such year to
which such records pertain.
8. REPRESENTATIONS AND WARRANTIES
8.1 Grantee represents and warrants that:
8.1.1 Organization, Standing, etc. A-55 Australia is a company duly
incorporated and in good standing under the laws of Australia
and has all requisite corporate power and authority to own and
operate its properties, to carry on its business as now
conducted, and as proposed to be conducted, to enter into this
Agreement, and to carry out the provisions hereof.
8.1.2 Qualification. A-55 Australia is duly qualified to do business
in the Territory.
8.1.3 Challenged Validity. If Grantee should challenge the validity
or enforceability of the A-55 Patent licensed under this
Agreement, in whole or in part, A-55 may at its unfettered
discretion, by notice in writing, terminate this License.
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<PAGE> 12
8.1.4 Business Plan. Grantee shall within thirty (30) days of the
date of this Agreement prepare and submit for approval to A-55
A business and financing plan for the use and exploitation of
the Technology in the Territory. The approval of this plan by
A-55 shall not be unreasonably withheld. Grantee shall expend
its best efforts to implement or exceed the business plan and,
during the term of this Agreement to exploit and commercialize
the Technology within the Territory to the fullest extent
commercially possible.
8.2 A-55 represents and warrants that:
8.2.1 Organization, Standing, etc. A-55 is a limited partnership
duly organized, validly existing, and in good standing under
the laws of the State of Nevada and has all requisite power
and authority to own and operate its properties, to carry on
its business as now conducted and as proposed to be conducted,
to enter into this Agreement, and to carry out the provisions
hereof.
8.2.2 Qualification. There is no jurisdiction wherein the character
of the properties owned by A-55 or the nature of the
activities conducted by A-55 makes necessary the licensing or
qualification of A-55 as a foreign partnership therein, in
which it is not so licensed.
8.2.3 Disclosure. Neither this Agreement nor any document,
certificate, or statement referred to herein or furnished to
Grantee pursuant hereto contains any untrue statement known to
A-55 of a material fact or omits to state a material fact
necessary to make the statements contained herein and therein
not misleading.
8.2.4 Ownership of Patent, etc. A-55 warrants and represents that Mr
Gunnerman is the sole and exclusive owner of the entire right,
title and interest in and to the A-55 Patent, and any reissues
or extensions of such Patents, and will be the sole and
exclusive owner of all patent improvements thereto which it
makes, in each case free and clear of all liens, claims,
charges, pledges, mortgages, security interests and other
encumbrances, and that A-55 has the full and sole right, power
and authority to enter into, consummate and perform the
transactions and
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obligations contemplated by this Agreement. Mr Gunnerman
executes this Agreement as the owner of the A-55 Patent for
the sole purpose of confirming A-55's rights hereunder.
8.2.5 No Conflicting Agreements. A-55 has not entered into any
agreement or understanding, written or oral, regarding the
Technology, any patent improvement thereof, or any know-how
licensed hereunder, which is in conflict or inconsistent with
any of the terms and conditions of this Agreement.
8.2.6 Validity. A-55 warrants and represents that it is not aware of
any law or facts which would permit any person or entity to
challenge the validity or enforceability of the patent rights
granted herein.
8.2.7 Infringement. The A-55 Patent, all patent improvements, and
know-how as now practiced by A-55 and all of its current
licensees do not to A-55's knowledge, violate, infringe or
conflict with the rights of any person, firm or government.
9. EXCHANGE OF TECHNICAL INFORMATION, MUTUAL TRANSFER
OF MODIFICATIONS, VARIATIONS, IMPROVEMENTS AND PATENT
PROTECTION.
9.1 Exchange of Technical Information. Each party hereto shall exchange
with the other in a timely manner all technical information acquired
during the term of this Agreement relating to the Technology and
developments with respect to same and will communicate to the other
all information and data obtained therefrom. Each party further
agrees that designated representatives of the other may, at
reasonable times, visit the laboratory, plants, and other
installations of the other in which research and operations relating
to Fuel, the A-55 Patent are being conducted.
9.2 Disclosure of Modifications. The parties shall promptly inform each
other in writing of any modifications, variations, or improvements
relating to Fuel, the A-55 Patent, and the know-how licensed
hereunder, which are developed by them or otherwise come to their
attention. It is expressly agreed that modifications, variations or
improvements disclosed to A-55 by any other licensee, grantee, joint
venturer, or any other party having the right to practice any rights
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<PAGE> 14
licensed hereunder, shall, subject to any contractual obligations
imposed upon A-55 be disclosed to Grantee under the scope of this
subparagraph in a timely manner
9.3 Rights to Modifications. Notwithstanding which party hereunder shall
have discovered any modification, variation or improvement to the
Technology, all such modifications, variations or improvements shall
be owned solely by A-55; provided, however, that Grantee shall have
the right to use all modifications, variations and improvements,
whether patented or unpatented, made or acquired by A-55 during the
term of this Agreement without additional compensation to A-55. The
parties shall cooperate with each other in connection with the
filing of any patent applications relating to any such
modifications, variations or improvements.
9.4 Intellectual Property Protection. A-55 and Grantee agree to
diligently seek patent protection for all inventions, modifications
and improvements to the Technology in the Territory at Grantees
expense. A-55 may, at its own option, apply for patent protection
which is not pursued by Grantee, in which case the cost thereof
shall be borne solely by A-55 and all benefits therefrom shall be
solely owned by A-55 and not subject to the terms of this license;
provided, however, that Grantee may, within three (3) months of the
issuance of a patent to A-55, give A-55 notice of its election to
take rights under such patent by paying all costs and expenses of
A-55, together with interest thereon at one percent (1%) over the
prime rate charged by Citibank New York from time to time. Any
annual fees with respect to maintenance of patents or trademarks
within the Territory shall be paid by Grantee or, at the option of
A-55, paid by A-55 and reimbursed upon invoice.
10. INFRINGEMENT.
10.1 Notification of Infringement. Grantee and A-55 shall each notify the
other promptly in writing of any known infringement of the A-55
Patent, unauthorized use of any confidential know-how licensed
hereunder, or any infringement or unfair competition relating to a
trademark licensed hereunder, which either party learns of during
the term of this Agreement.
10.2 Litigation by A-55. A-55 shall have no obligation to sue any such
infringers or competitors, but shall have the right to do so at its
own expense and the right to join Grantee and obtain Grantee's full
cooperation, if necessary, at no legal expense to Grantee. If A-55
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<PAGE> 15
brings suit against an infringer or competitor, A-55 shall have the
sole right to control such lawsuit and to settle the same on terms
and conditions approved by A-55. All monetary and other recoveries
resulting from such a lawsuit or any settlement thereof shall belong
to A-55. A-55 shall not be required to have pending more than one
(1) suit for infringement of any patent licensed under this
Agreement.
10.3 Litigation by Grantee. If, after notice of any infringement of the
A-55 Patent or any other patent licensed hereunder, unauthorized use
of any confidential know-how licensed hereunder, or infringement or
unfair competition relating to a trademark licensed hereunder, A-55
(a) is unable to bring any such infringement or unfair competition
to a halt, or (b) fails to file and commence diligent prosecution of
a suit against such third party for patent infringement or unfair
competition, within six (6) months after A-55 learns thereof, then
Grantee may take any action it deems necessary to stop the
infringement or unfair competition, joining A-55 therein if
necessary but at no expense to A-55. Any recoveries made upon any
such suit shall belong solely to Grantee except for any award made
by the court in favor of A-55.
10.4 Actions by Third Parties. If during the term of this Agreement one
(1) or more third parties file suit in the Territory against Grantee
or any of its purchasers for patent infringement due to Grantee's or
any purchaser's manufacture, marketing, use, export or sale of Fuel
in the best modes contemplated by A-55 or in modes approved by A-55,
Grantee shall notify A-55 of such suit and tender defense thereof to
A-55. If A-55 refuses the defense of same, Grantee may at its option
elect to defend said suit. A-55 shall indemnify and hold Grantee
harmless from damages assessed against Grantee in any third party
infringement suit, but said indemnification shall be limited to an
amount equal to the payments made to A-55 by Grantee under the terms
of this Agreement.
10.5 Conduct of Defense. In the event that an action described in
subparagraph 10.4 is commenced against Grantee in any jurisdiction,
A-55 hereby authorizes Grantee to join A-55 in said action as either
an additional original defendant or third party defendant.
10.6 Declaratory Judgment. Grantee may elect to file a declaratory
judgment action against any third party referred to in subparagraph
10.4, in which event it will notify A-55 of its intention
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<PAGE> 16
and tender the filing of any such suit to A-55. If A-55 refuses to
institute such declaratory judgment action against a third party,
Grantee shall have the option to institute such action. Further,
A-55 hereby authorizes Grantee to join A-55 as a plaintiff in any
such declaratory action.
11. CONSULTATION SERVICES
11.1 Consultation Services. During the currency of this Agreement A-55
shall in good faith promptly and regularly supply to the Grantee
(and to all the Grantee's sublicensees) within a reasonable period
of time such information, advice and assistance as grantee may
require in connection with the Technology.
11.2 All reasonable expenses incurred by A-55's personnel in dealing with
each such request, (including transportation and accommodation) are
to be met by the Grantee. A-55 may require that the Grantee fund
nominated and agreed expenses in advance.
12. TERMINATION AND CONSEQUENCES OF DEFAULT
12.1 Termination or Invalidity.
12.1.1 This Agreement shall terminate upon the expiration of
the A-55 Patent, in which event Grantee shall be
entitled to continue to exploit the rights granted under
this Agreement without the payment of any royalties to
A-55.
12.1.2 Upon a judgment of invalidity or unenforceability of the
A-55 Patent, Grantee shall be entitled to continue to
exploit the rights granted under this Agreement by
payment of the royalties specified in paragraph 3 if
Grantee continues to practice A-55 Know-how. Provided
such payments shall be payable by Grantee until
seventeen (17) years after the effective date of this
Agreement and Grantee shall then be entitled to exploit
the rights granted under this Agreement without payment
of any royalties nor initial payments to A-55.
12.2 Consequences of Default by Grantee. In the event of a default by
Grantee which is not cured in a timely manner as provided herein:
12.2.1 A-55 may, by written notice, terminate this license.
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<PAGE> 17
12.2.2 At its option, A-55 may at its unfettered discretion
elect to continue this license but convert it to a
non-exclusive license within the Territory.
12.2.3 All unpaid sums due A-55 under paragraph 3.1 herein to
and including the effective date of any such default
shall be due and payable within thirty (30) days
thereafter.
12.3 Consequences of Default by A-55: In the event of a default by A-55:
12.3.1 Grantee shall be entitled to exploit the rights granted
under the terms of this Agreement and shall pay all
royalties which accrue hereunder to the independent
auditors named in paragraph 7.2 until such default is
resolved or cured, whereupon the funds so held shall be
dispersed in accordance with such resolution. The costs
of the auditors shall be borne equally by A-55 and the
Grantee.
12.4 General Consequences
12.4.1 Termination pursuant to subparagraph 12.1 or the
consequences of default as specified in subparagraphs
12.2 or 12.3 shall not relieve either party of any
obligations due to the other under the terms of this
Agreement to and including the date of termination or
the effective date of any such default.
12.4.2 In no event will default operate to release Grantee or
A-55 from any damages, costs and expenses that may be
due as a result of such default.
12.4.3 Either of the parties hereto shall have the right to
give public notice of any termination or default in such
manner and at such times and places as it may deem
advisable.
12.5 In the event of termination of this license for whatever reason,
Grantee shall at the request of A-55, deliver to A-55 all papers,
drawings and other documents, samples, and models relating to any
matters that are the subject of this Agreement, shall execute such
documents as are reasonably requested by A-55 and shall cease to
exploit the rights granted under the terms of this Agreement.
Without limiting the activities which shall cease upon such
termination, Grantee shall remove all trademark designations from
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<PAGE> 18
A-55 Products; transfer any trademarks to A-55 which it has
acquired; change its name to delete reference to A-55; and transfer
to A-55 any related business names. The costs of any such delivery
shall borne by the defaulting party.
13. NOTICE OF OTHER LICENSE
A-55 shall notify Grantee of any license it may grant to an original
equipment manufacturer after the effective date of this Agreement which
does or could relate to any of the rights granted to Grantee hereby within
thirty (30) days of the effective date of each such license.
14. EVENTS OF DEFAULT, NOTICE OF DEFAULT, AND CURING THEREOF
14.1 Events of Default. A default shall occur hereunder if any one of the
following events shall occur:
14.1.1 Grantee fails to pay any sum due hereunder and such
default continues for thirty (30) days; or
14.1.2 Grantee fails to materially implement the business or
financial plan approved by A-55 or fails to exercise its
best efforts to commercialize the Technology; or
14.1.3 A party fails to perform or comply with any term hereof
which materially affects this License; or
14.1.4 A party files a voluntary petition for bankruptcy or any
similar relief under laws for the benefit of creditors;
a party is adjudged bankrupt or a receiver is appointed
by a court of competent jurisdiction, and such
adjudication is not vacated within thirty (30) days; or
an involuntary petition is filed for reorganization or
similar relief and is not dismissed or stayed within
sixty (60) days;
14.1.5 Any representation or warranty made in this License
proven to have been incorrect in any material respect
which significantly affects this License.
14.2 Notice of Default. Before any default is effective herein, the party
declaring the default shall provide the defaulting party with a
written notice specifying the claimed default. Such notice shall
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<PAGE> 19
provide a period of thirty (30) days from the date of the notice
within which the defaulting party may cure such default.
14.3 Failure to Cure. In the event the defaulting party fails to cure any
default to the reasonable satisfaction of the other party within the
thirty (30) day period described in paragraph 14.2, the default
will, unless the other party specifies otherwise, become effective
on the last day of the thirty (30) day period, provided that if
either party in good faith denies there is a breach or default
(other than a breach or default for the nonpayment of money), such
party may within such thirty (30) day period submit the matter to
binding arbitration and in the event it is finally determined that a
breach or default has occurred, such party shall have thirty (30)
days from the date of determination to cure the same.
15. INDEMNITY AND DISCLAIMER
15.1 Indemnification by Grantee. Grantee shall defend, indemnify and hold
A-55 harmless from and against any action, claim, or liability based
on loss or damage to persons or property resulting from any acts or
omissions of Grantee, its employees, agents, officers, sublicensees,
distributors, or any other party in privity with Grantee in
connection with the performance of this License or the manufacture,
use and sale of Fuel or A-55 Products hereunder.
15.2 Indemnification by A-55. A-55 shall indemnify Grantee against any
and all loss, damage (including consequential damages), expense,
liability or other obligation related to any breach or untruth of
any representation or warranty hereunder or failure to perform any
covenant hereunder, including reasonable attorneys' fees. Without
limiting the foregoing, the indemnity of A-55 shall include any
damage, loss or the like related to improperly blended or formulated
surfactant package which is sold to Grantee pursuant to this
license.
16. NO ASSIGNMENT
Except for the purpose of amalgamation or reconstruction Grantee shall
have no right to assign or otherwise transfer this License or any of the
rights granted to or obligations imposed upon Grantee without the express
prior written consent of A-55. A-55 may assign this License or any of the
rights granted to or obligations imposed upon Grantee without approval of
Grantor.
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<PAGE> 20
17. GENERAL PROVISIONS
17.1 Notices. Any notice required to be given under this Agreement shall
be in writing and shall be sent by certified or registered mail, or
its equivalent, postage prepaid, addressed to each party at the
address below or at such other address of which one party shall
notify the other in the same manner:
To A-55: A-55, L.P.
210 Gentry Way
Reno, NV 89502
USA
To Grantee: A-55 Australia, Ltd.
72 Sturt Street
Adelaide, 5000
South Australia
17.2 Governing Law. This Agreement shall be governed by the law of
Nevada for performance in the Territory.
17.3 Arbitration. All disputes, differences, or questions between the
parties concerning the construction, interpretation, and effect of
this Agreement or of any clause herein contained or the rights and
liabilities of the parties, shall be settled by arbitration in
accordance with the Rules of Arbitration of the American
Arbitration Association by arbitrators appointed in accordance with
such rules; provided that either party shall have the right to
appeal the result of any such arbitration; and provided further
that arbitration under this subparagraph shall not apply to
disputes, differences or questions between the parties concerning
violations of United States Anti-Trust laws or regarding the
validity of the A-55 Patent or regarding the confidentiality of any
know-how licensed hereunder. Unless the parties otherwise agree,
the site for arbitration shall be Reno, Nevada.
17.4 No Affiliations. Nothing in this Agreement shall be construed to
create between the parties a partnership, association, joint
venture, or agency.
17.5 Prior Agreements; Amendments. This Agreement cancels and supersedes
all prior oral or written representations, agreements and
understandings between the parties with respect to the subject
matter hereof, and embodies all of the understandings and
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obligations between the parties with respect to the subject matter
hereof. This Agreement may be modified and amended at any time,
including the addition of new or deletion of existing know-how and
technology pertinent to the rights transferred under this
Agreement, provided that no agreement or modification or extension
of this Agreement shall be binding upon any of the parties hereto
unless made in writing and signed by both parties.
17.6 Waivers. Failure of either party to require strict performance of
any term of this Agreement shall not affect that party's right to
fully enforce the same, nor shall any waiver of a default be
construed to be a waiver of any succeeding default.
17.7 Provisions Severable. If any term or provision of this Agreement
shall be held or adjudged illegal, invalid, or unenforceable by any
court having jurisdiction, such shall not affect the validity of
any other term or provision hereof, and any such illegal, invalid,
or unenforceable term or provision shall be deemed to be severable
and shall be deleted from this Agreement. A-55 agrees to send
Grantee notice within thirty (30) days after the date any term or
provision of this Agreement is adjudged illegal, invalid or
unenforceable.
17.8 Binding Agreement. This Agreement shall be binding upon and inure
to the benefit of the parties, their successors and signs to the
extent this Agreement is assignable by its terms.
17.9 Authority to Contract; Counterparts. Each of the parties covenants
that this Agreement is executed under authority duly granted by its
board of directors. The Agreement has been signed in two (2)
counterparts, one for each party, each of which shall be deemed to
be an original.
17.10 Costs of Litigation. In the event of any dispute arising as the
result of the breach or alleged breach of any term of this
Agreement other than a dispute described in subparagraph 8.1.3
hereof, if such dispute is taken by either party to arbitration or
to any court, the successful party in any such arbitration or court
action shall be entitled, in addition to any damages suffered, to
receive its actual costs of arbitration or suit including, without
[limiting the generality of the foregoing, attorneys' fees,
experts' fees, the cost of exhibits and the preparation thereof,
and all other costs reasonably incident to such arbitration or
court action.
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17.11 Financial Statements. During the term hereof, Grantee shall furnish
A-55 annually with an annual report and a copy of the 10-K
statement of its parent, if any. A-55 shall provide to Grantee a
full set of its annual financial statements in a timely manner
provided that all such information shall be deemed to be
"confidential" to A-55 and subject to the provisions of the
Agreement relating to "confidentiality"
17.12 Injunction. The parties hereto acknowledge that the damages for any
breach of this Agreement by either party relating to any matter
other than the payment of money would be incapable of precise
determination and would cause the nondefaulting party irreparable
harm. Accordingly, each party accepts the other party's right to
obtain an injunction to prevent any further breach of the Agreement
should the nondefaulting party deem it necessary to do so.
17.13 Headings. Caption headings are for convenience of reference only.
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<PAGE> 23
In witness whereof, the parties have signed this Agreement as of the date
appearing above their respective signatures.
DATED: March 4 , 1997.
-----------------------
A-55, L.P., a Nevada limited
partnership by RWG, Inc., a
Nevada corporation
By /s/ Rudolf W. Gunnerman
--------------------------------
Rudolph W .Gunnerman,
President
Signed by
Rudolph W. Gunnerman
By /s/ Rudolf W. Gunnerman
---------------------------------
Rudolph W. Gunnerman,
A-55 Australia Ltd (ACN 076 598 475)
a company incorporated in Australia
By /s/ Roger N. Sexton
---------------------------------
Roger N. Sexton
Director
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<PAGE> 1
EXHIBIT 10.12
LICENSE AGREEMENT --
VANETIK & ASSOCIATES, INC.
PREAMBLE
The parties to this Agreement are A-55, L.P., a Nevada limited
partnership ("A-55"), and VANETIK & ASSOCIATES ("Grantee").
This Agreement shall become effective on the date it is executed by the
last party to execute same, as set forth on the signature page hereof.
This Agreement is made with reference to the following facts:
A. A-55 owns the rights to transfer to others the rights to certain
worldwide patent applications, issued patents and trademarks, and
valuable technology, know-how, trade secrets and prototypes which relate
to and/or use an aqueous fuel comprising a mixture of water and
carbonaceous material for combustion, in internal combustion engines,
and open flame applications, and the use thereof, including technologies
as set forth in the patent applications and issued patents as more fully
defined below ("A-55 Technology").
B. Grantee desires to be licensed to use such rights
and information from A-55 within a geographical
territory.
Now therefore, in consideration of the mutual promises and covenants,
and upon the conditions herein contained, the parties agree as follows:
1. DEFINITIONS:
As used herein, the following terms shall have the following meanings:
1.1 "A-55 Patent" means any product claim of (a) A-55 U.S. Patent No.
5,156,114, issued December 10, 1992; (b) pending patent applications
related to the A-55 Technology; and patents and patents pending relating
to the A-55 Technology.
1.2 "A-55 Clean Fuels" means fuel covered by any product claim of the
A-55 Patent.
1.3 "A-55 Processes" means any process or procedure to produce the A-55
Clean Fuels or any other product claim of the A-55 Patent.
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<PAGE> 2
1.4 "A-55 Know-how" means proprietary information of a confidential
nature owned by A-55 relating to the techniques available for commercial
exploitation of A-55 Patent and any A-55 Processes, including the
subject matter of any A-55 Patent, if no patent should issue thereon.
1.5 "A-55 Product" means any product sold or service rendered by Grantee
associated with the grant of this License or the A-55 Technology. It is
intended by the parties that this term shall have the broadest meaning
and not in any way be limited to products which are capable of patent or
contractual protection. By way of example but not limitation, the term
would include any product bearing, utilizing or referring to the A-55
Trademark, clothing, pens, souvenirs, and the like.
1.6 "A-55 Technology" means all know-how, trade secrets, confidential
information, and expertise including, but not limited to, designs,
plans, specifications and all other information and documentation,
whether patentable or not, relating to A-55 Patent. Unless the context
requires otherwise, the term "A-55 Technology" shall include all rights
and claims under the A-55 Patent, the A-55 Clean Fuels, the A-55
Processes, the A-55 Know-how, and A-55 Products but shall not under any
circumstances be deemed to include or refer to the A-55 Additive or its
manufacture.
1.7 "A-55 Trademark" means (a) United States registered trademark number
1,848,044; (b) United States Registered Service Mark No. 74/510,26
("Powered With Water"); and (c) any identical or substantially similar
trademarks or service marks which may be obtained by A-55.
1.8 "A-55 Additive" means the proprietary combination of certain
chemicals or compounds, including but not limited to certain
combinations of surfactants, anti-corrosive agents, lubricity agents,
anti-freezing agents, anti-foaming agents, biocides, cetaine enhancers,
and other similar or related compounds added to the base cabonaceous
material, water, and alcohol to form A-55 Clean Fuels.
1.9 "Net Sales" means the gross Selling Price of A-55 Clean Fuels and/or
all other A-55 Products for which an invoice or like sales record has
been prepared by Grantee, or any sublicensee of or party or entity
related to or affiliated with Grantee, less any trade, or quantity (but
not cash) discounts actually allowed, transportation charges, sales or
use taxes, if any,
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included in the invoice price, and the price of any Fuel
or other A-55 Product returned.
1.10 "Territory" means the Kaliningrad Region of the Russian Federation.
In addition, the Grantee shall have the exclusive negotiation rights and
the exclusive right of first refusal to those countries as defined in
Appendix "A".
1.11 "Effective Date" shall mean the date stated in the Preamble.
2. GRANT OF PATENT AND KNOW-HOW RIGHTS TO GRANTEE
2.1 Grant. A-55 hereby grants to Grantee:
2.1.1 The fight under the A-55 Patent to manufacture, sell,
distribute and use A-55 Clean Fuels and, A-55 Products in the
Territory and the right to practice any A-55 Process necessary
for such manufacture or sale in the Territory.
2.1.2 The fight to use A-55 Know-how in the
Territory.
2.1.3 The right to practice any and all A-55 Technology in the
Territory, and the right to allow its purchasers to practice any
and all A-55 Technology and patent rights in the Territory.
2.2 Patent Marking. Grantee shall, where possible, mark any A-55 Product
produced under any patent licensed hereunder with the number of the
applicable patent.
2.3 Excluded Applications. All aviation applications, including
supplying fuel for such applications, are excluded from this License and
specifically reserved to A-55.
2.4 Licenses to OEMs.
2.4.1 A-55 reserves the sole and exclusive right to negotiate
license agreements with original equipment manufacturers (OEMs).
Grantee acknowledges that such licenses may be worldwide and may
include the right to utilize and practice the A-55 Technology in
the Territory. The grant of any such license to an OEM shall not
infringe on the grant of this License; provided, however, that
royalties for the use and practice of the A- 55 Technology
within the Territory under such a license shall inure to
Grantee.
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2.4.2 Any license granted to an OEM as contemplated in
subparagraph 2.4.1 must not permit it to manufacture A-55 Clean
Fuels in the Territory, whether for distribution or sale or for
its own consumption.
2.4.3 A-55 shall, upon the grant of any license to an OEM, give
notice thereof to Grantee.
2.5 Nature of Grant.
2.5.1 Grantee acknowledges that, incident to the dissolution of
Advanced Fuels, L.L.C., Caterpillar Inc. retained certain
licensed rights to the A-55 Technology for use in products of
the kind it produces or will produce in the Territory. Pursuant
to retained the license rights, Caterpillar Inc. may sell, but
not license until October 24, 2001, a diesel emulsion based
aqueous fuel emulsion and may make, but not license, a naphtha
fuel emulsion for Caterpillar engines only.
2.5.2 Except as otherwise provided in paragraphs 2.3, 2.4, and
2.5.1, A-55 shall grant no other license to the A-55 Technology
in the Territory while this Agreement is in force and not in
default.
2.6 Sublicenses. Subject to the express approval of A-55, first had and
obtained on each occasion, Grantee shall have the right to grant
sublicenses under this Agreement. Unless waived by A-55, each such
sublicense that relates to the manufacture of A-55 Clean Fuels by the
sublicensee shall, in addition to other pertinent provisions, contain
provisions for the payment of royalties of an amount not less than that
specified in paragraph 3.1 below to Grantee, who shall hold the same in
trust for payment to A-55 or make some other stipulation which is
acceptable to A-55 to compensate fully A-55 for such royalties as if the
sale had been made directly by Grantee and for the preservation of A-
55's equity interest in Grantee specified in paragraph 3.3 below.
2.7 Purchase and Sale of A-55 Additive.
2.7.1 A-55 shall sell and deliver in a timely manner to the
Grantee or the Grantee's order such quantities of the A-55
Additive as the Grantee shall order from time to time.
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2.7.2 The initial price of the A-55 Additive (which shall
exclude for these purposes any cetane enhancer or methanol) to
Grantee will be US$14.50 per gallon for boiler applications and
$18.50 for internal combustion engine applications, F.O.B. port
of embarkation in the United States, or US$14.00 per gallon and
$18.00 per gallon, F.O.B. additive factory. That price is fixed
for 12 months from the date of this agreement. The price of the
A-55 Additive may be reviewed and adjusted by A-55 from time to
time after the initial period of 12 months. Any increase in
price must be fixed by A-55 in good faith by reference only to
increases in raw material costs of the A-55 Additive. Any
increase in price will operate on orders placed after
notification. Payment shall be made within 14 days of SGS
acceptance of additive at port of embarkation or factory
whichever may be the case.
2.7.3 The Grantee shall pay to A-55 L.P. the price for the A-55
Additive sold within 14 days of SGS inspection at the United
States port of embarkation through an Irrevocable Line of Credit
in United States Dollars from a Top 10 Western Bank.
2.7.4 The A-55 Additive must be of a merchantable quality and
fit for their intended purpose.
2.7.5 Property and risk in the A-55 Additive pass
to Grantee after SGS inspection at U.S. port of
embarkation.
3. PAYMENTS FOR RIGHTS GRANTED UNDER PARAGRAPH 2.
3.1 Continuing Annual Royalty. For the rights granted under paragraph 2
above, Grantee shall pay to A-55 a royalty of two percent (2%) of the
Net Sales from all A- 55 Clean Fuels A-55 Products in the Territory. The
royalty shall reduce to one percent (1%) 18 months after all moneys due
to A-55 under paragraph 3.2 below have been paid in full
3.2 Technical Transfer Fee. In consideration of the
rights granted herein, Grantee shall pay to A-55,
Technical Transfer Fees as follows:
(a) US$ 1,500,000.00 for the Kaliningrad Region, or 10% of the
Technical Transfer Fees as outlined in Appendix A, in accordance
with the terms and
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conditions of paragraph 4 of the Heads of
Agreement, and
(b) The remainder of the Technical Transfer Fees, not to exceed
the Technical Transfer Fees, less the initial payment, as
outlined in Appendix A, to be paid 24 months after the date of
the initial payment for each additional territory listed in
Appendix A.
3.3 Equity Interest in Grantee. In consideration of the grant of this
License and incident to the formation of Grantee, Grantee shall deliver
to A-55 a share certificate evidencing the allotment to it of thirty
percent (30%) of the issued shares in Grantee deemed fully paid. A-55's
equity interest shall be of the same quality and rights, including
rights to dividends and distributions, as all other owners of Grantee.
The constituent documents of Grantee shall provide that A-55 shall have
no obligation to make any contribution to the capital of Grantee for the
issuance of such interest other than the grant of this License, and
shall further provide that such interests shall not be subject to
dilution upon the first or second offerings only, but shall be subject
to dilution by subsequent offerings but then only upon the sole
discretion of A-55.
4. DISCLOSURE AND CONFIDENTIALITY OF KNOW-HOW
4.1 Disclosure. Within thirty (30) days after the effective date of this
Agreement, A-55 shall use its best efforts to disclose to Grantee all of
the technology it possesses relating to the manufacture, use or sale of
A-55 Technology, which is required by Grantee to exercise and exploit
its rights hereunder. Such disclosure shall include design, engineering
and manufacturing information and specifications, including without
limitation: identification of commercially- available equipment (and the
name of the manufacturers thereof), engineering drawings of special
equipment designed by or for A-55, and process operations and quality
control tests. It is understood by Grantee that the foregoing obligation
of disclosure shall not include any obligation to disclose composition
of the A-55 Additive, which will be made and distributed solely and
exclusively by A-55 but which will be sold, within the Territory, to
Grantee for its use in the manufacture of the A-55 Clean Fuels.
4.2 Confidentiality. Grantee agrees to use reasonable
efforts to maintain as confidential A-55 Know-how
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disclosed to it pursuant to paragraph 4.1, provided
that:
4.2.1 All information, in whatever form transmitted to Grantee
from A-55, shall be presumed to be confidential know-how unless
expressly identified to the contrary.
4.2.2 Grantee shall not be required to treat as confidential any
A-55 Know-how which is:
(a) publicly disclosed by A-55, or disclosed to another
party by A-55 without a confidential restriction,
including disclosure by A-55 in any patent, published
patent application, any other writing or verbally
disclosed by A-55; or
(b) publicly available prior to its disclosure by A-55,
or which becomes publicly available after disclosure by
A-55 through no fault of Grantee; or
(c) known to Grantee prior to its disclosure by
A-55; or
(d) disclosed to Grantee by a third party who did not
acquire the information, directly or indirectly, from
A-55; or
(e) independently developed by an employee or consultant
of Grantee subsequent to disclosure by A-55 but who did
not have knowledge of the disclosure made by A-55; or
(f) required to be disclosed to any local, state or
federal agency in connection with a proper and lawful
request, law or regulation; provided, however, that
prior to any such disclosure, Grantee shall give notice
of such request to A-55, which shall have a reasonable
opportunity to apply for such orders as it may deem
appropriate to protect its interests.
4.2.3 Grantee will maintain internal procedures to protect any
A-55 Know-how that is to be treated as confidential within
paragraph 4.2 in the same manner in which it protects its own
confidential technical information.
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4.2.4 A-55 represents and warrants that the information it
identifies in accordance with paragraph 4.2.1 is confidential
information and that it treats it as such.
5. GRANT OF RIGHTS UNDER TRADEMARKS
5.1 Grant. Subject to the due execution and registration of a user
agreement in a form approved by A-55, A-55 hereby grants to Grantee, and
its sublicensees and distributors, the right to use the A-55 Trademark,
together with any other trademark that A-55 may acquire in connection
with its sale of A-55 Clean Fuels to third parties, and to use the name
"A-55" in a corporate name, division name, or other name of any entity
it may establish for the manufacture or distribution of A-55 Clean
Fuels. Should "A-55" not be trademarked in any jurisdiction of the
Territory, Grantee shall have the obligation to do all things necessary
to obtain such trademark and register any related designs or logos at
its cost and to hold the same for the sole and exclusive benefit of
A-55. As used herein, the term "A-55 Trademark" shall refer to any
trademark or related design obtained by Grantee hereunder.
5.2 Marking. Grantee shall mark any A-55 Product which it produces or
sells pursuant to this License with the A-55 Trademark, which, when
used, shall bear an (R) to denote its federal registration.
5.3 Use of Trademark. Grantee acknowledges that any use by it of the
A-55 Trademark shall inure to the exclusive benefit of A-55. Grantee
shall use the A-55 Trademark only in a manner approved and directed from
time to time by A-55. In connection with such use, Grantee shall comply
with all trademark notice, registered user, and other requirements to
maintain the validity of the A-55 Trademark registration in the
Territory. Grantee shall not make any use of the A-55 Trademark that
would misrepresent to the public that Grantee rather than A-55 is the
owner of such mark or the registration thereof.
5.4 Quality Standards. A-55 shall establish product specifications or
quality standards of any A-55 Product, including A-55 Clean Fuels, to be
sold under the A-55 Trademarks, and Grantee agrees that its products
using the Trademark shall comply therewith to ensure that the A-55
Trademark is being properly protected.
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<PAGE> 9
In order to ensure high and consistent quality of the A- 55 Clean Fuels,
Grantee shall manufacture and blend all A-55 Clean Fuels which it
distributes pursuant to this License with standard blending equipment
sold to it by A-55 unless the use of other equipment is approved in
advance by A-55. A-55 may from time to time require Grantee to ship
actual production samples of A-55 Clean Fuel to A-55 for inspection and
testing to ascertain compliance with such product specifications or
quality standards.
5.5 Price. There shall be no additional royalty for the license under
the A-55 Trademarks.
6. TIME AND MANNER OF PAYMENTS.
6.1 Time for Payments. Payments required under subparagraph 3.1 shall be
made within fifteen (15) days following the last day of each calendar
Quarter in which there are Net Sales of A-55 Clean Fuels or A-55
Products by Grantee during the preceding Quarter.
6.2 Manner of Payments. Payments shall be made in immediately available
funds (United States dollars) by certified or registered mail or wire
transfer to A-55's address as specified herein and accompanied by a
written report signed by an authorized representative of Grantee setting
forth the dollar amount of the Net Sales of A-55 Clean Fuels or A-55
Products as to which a royalty is payable for each half year.
6.3 Overdue Payments. Payments shall, when overdue, bear interest at an
annual rate of one percent (1%) above the prime rate of Citibank in
effect in New York City on the last day payment was due. In no event
shall the interest so charged exceed the legal limit that may be charged
for interest.
7. RECORDS, INSPECTION, AUDITS AND REPORTS
7.1 Records and Reports. Grantee shall keep true and accurate records
and books of account showing the use and/or practice of the A-55
Technology by Grantee, the manufacture, marketing and sale of A-55 Clean
Fuels and A-55 Products by Grantee, and all other information necessary
for the accurate determination of the payments to be made to A-55
hereunder. In addition, Grantee shall provide A-55 with internally
prepared monthly, quarterly, and annual financial statements, prepared
in accordance with generally accepted accounting principles and
practices for public companies in the United States
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of America, within thirty (30) days of the end of the calendar month,
quarter, or year, respectively.
7.2 Inspection. It is a condition of this license, and Grantee
represents and guarantees, that it will permit A-55 or its designated
auditors to inspect and audit, at reasonable times during Grantee's
usual business hours, any and all parts of the records kept by Grantee
pursuant to this paragraph 7 which are required to be rendered by
Grantee herein, and to make excerpts from such records. In the event
that Grantee and A-55 are unable to agree on a mutually acceptable firm
of certified public accountants it is hereby agreed that such inspection
and audit may be performed by the certified public accounting firm of
Price Waterhouse, whose principal offices are now at New York City, New
York.
All fees of any such firm for such inspection and audit shall be paid by
A-55 except in the event of a discrepancy described in paragraph 7.3
below, in which case Grantee shall pay such fees.
7.3 Discrepancy Expenses. In the event any audit performed by A-55 or
its designee results in a finding that there is a discrepancy in excess
of five percent (5%) between the amounts paid to A-55 and the amounts
which should have been paid to A-55, the cost of such audit shall be
borne entirely by Grantee.
7.4 Retention of Records. Grantee's obligation to retain records and
A-55's right to inspect and audit and make excerpts with respect to the
records for each year in which royalty payments are due, in the absence
of a charge of fraud or intentional misrepresentations, shall terminate
three (3) years after the end of each such year to which such records
pertain.
7.5 Audit. The Grantee shall at its cost cause an audit of its financial
affairs to be conducted each year during the term of this Agreement to
coincide with the financial year of A-55. Such audit will be conducted
by an auditor selected by A-55 and the Grantee shall deliver such
audited financial statements prepared in accordance with generally
accepted accounting principles and practices for public companies in the
United States of America to A-55 within three (3) months of the end of
the financial year to which they relate.
7.6 Sublicensees. All obligations of the Grantee contained herein to
retain records and provide reports shall apply equally to all
sublicensees. All sublicense
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agreements submitted to A-55 for its approval shall
specifically include such provisions.
8. REPRESENTATIONS AND WARRANTIES
8.1 Grantee represents and warrants that:
8.1.1 Organization, Standing, etc. Grantee is a [INSERT TYPE OF
LEGAL ENTITY] duly organized, validly existing, and in good
standing under the laws of [INSERT COUNTRY OR TERRITORY] and has
all requisite corporate power and authority to own and operate
its properties, to carry on its business as now conducted, and
as proposed to be conducted, to enter into this Agreement, and
to carry out the provisions hereof.
8.1.2 Qualification. Grantee is duly qualified
to do business in the Territory.
8.1.3 Challenged Validity. If Grantee should challenge the
validity or enforceability of the A- 55 Patent licensed under
this Agreement, in whole or in part, A-55 shall have the option,
by notice in writing, to immediately terminate this License.
8.1.4 Business Plan. Grantee shall within six months of the date
of this Agreement prepare and submit for approval to A-55 a
business and financing plan for the use and exploitation of the
A-55 Technology in the Territory. The approval of this plan by
A-55 shall not be unreasonably withheld.
Grantee shall expend its best efforts to implement or exceed the
business plan and, during the term of this Agreement o exploit and
commercialize the A-55 Technology within the Territory to the fullest
extent commercially possible.
8.2 A-55 represents and warrants that:
8.2.1 Organization, Standing, etc. A-55 is a limited partnership
duly organized, validly existing, and in good standing under the
laws of the State of Nevada and has all requisite power and
authority to own and operate its properties, to carry on its
business as now conducted and as proposed to be conducted, to
enter into this Agreement, and to carry out the provisions
hereof.
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8.2.2 Qualification. There is no jurisdiction wherein the
character of the properties owned by A-55 or the nature of the
activities conducted by A-55 makes necessary the licensing or
qualification of A-55 as a foreign partnership therein, in which
it is not so licensed.
8.2.3 Disclosure. Neither this Agreement nor any document,
certificate, or statement referred to herein or furnished to
Grantee pursuant hereto contains any untrue statement known to
A-55 of a material fact or omits to state a material fact
necessary to make the statements contained herein and therein
not misleading.
8.2.4 Ownership of Patent, etc. A-55 warrants and represents
that Rudolf W. Gunnerman is the sole and exclusive owner of the
entire right, title and interest in and to the A-55 Patent, and
any reissues or extensions of such Patent, and will be the sole
and exclusive owner of all patent improvements thereto which it
makes, in each case free and clear of all liens, claims,
charges, pledges, mortgages, security interests and other
encumbrances, and that, pursuant to exclusive license from Mr.
Gunnerman, it has the full and sole right, power and authority
to enter into, consummate and perform the transactions and
obligations contemplated by this Agreement.
8.2.5 No Conflicting Agreements. A-55 has not entered into any
agreement or understanding, written or oral, regarding the A-55
Technology, any patent improvement thereof, or any know-how
licensed hereunder, which is in conflict or inconsistent with
any of the terms and conditions of this Agreement.
8.2.6 Validity. A-55 warrants and represents that it is not
aware of any law or facts which would permit any person or
entity to challenge the validity or enforceability of the patent
rights granted herein.
8.2.7 Infringement. The A-55 Patent, all patent improvements,
and know-how as now practiced by A- 55 and all of its current
licensees do not, to A- 55's knowledge, violate, infringe or
conflict with the rights of any person, firm or government.
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9. EXCHANGE OF TECHNICAL INFORMATION, MUTUAL TRANSFER
OF MODIFICATIONS, VARIATIONS, IMPROVEMENTS AND
PATENT PROTECTION.
9.1 Exchange of Technical Information. Each party hereto shall exchange
with the other all technical information acquired during the term of
this Agreement relating to the A-55 Technology and developments with
respect to same and will communicate to the other all information and
data obtained therefrom. Each party further agrees that designated
representatives of the other may, at reasonable times, visit the
laboratory, plants, and other installations of the other in which
research and operations relating to the A-55 Technology are being
conducted.
9.2 Disclosure of Modifications. The parties shall promptly inform each
other in writing of any modifications, variations, or improvements
relating to the A-55 Technology, and the know-how licensed hereunder,
which are developed by them or otherwise come to their attention. It is
expressly agreed that modifications, variations or improvements
disclosed to A-55 by any other licensee, grantee, joint venturer, or any
other party having the right to practice any rights licensed hereunder,
shall, subject to any contractual obligations imposed upon A-55, be
disclosed to Grantee under the scope of this subparagraph.
9.3 Rights to Modifications. Notwithstanding which party hereunder shall
have discovered any modification, variation or improvement to the A-55
Technology, all such modifications, variations or improvements shall be
owned solely by A-55; provided, however, that Grantee shall have the
right to use all modifications, variations and improvements, whether
patented or unpatented, made or acquired by A-55 during the term of this
Agreement without further compensation to A-55. The parties shall
cooperate with each other in connection with the filing of any patent
applications relating to any such modifications, variations or
improvements.
9.4 Intellectual Property Protection. A-55 and Grantee agree to
diligently seek patent protection for all inventions, modifications and
improvements to the A- 55 Technology in the Territory at Grantee's
expense. A- 55 may, at its own option, apply for patent protection which
is not pursued by Grantee, in which case the cost thereof shall be borne
solely by A-55 and all benefits therefrom shall be solely owned by A-55
and not subject to the terms of this license; provided, however, that
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Grantee may, within three (3) months of the issuance of a patent to
A-55, give A-55 notice of its election to take rights under such patent
by paying all costs and expenses of A-55, together with interest thereon
at one percent (1%) over the prime rate charged by Citibank New York
from time to time. Any annual fees with respect to maintenance of
patents or trademarks within the Territory shall be paid by Grantee or,
at the option of A-55, paid by A-55 and reimbursed upon invoice.
10. INFRINGEMENT.
10.1 Notification of Infringement. Grantee and A-55 shall each notify
the other promptly in writing of any known infringement of the A-55
Patent, unauthorized use of any confidential know-how licensed
hereunder, or any infringement or unfair competition relating to a
trademark licensed hereunder, which either party learns of during the
term of this Agreement.
10.2 Litigation by A-55. A-55 shall have no obligation to sue any such
infringers or competitors, but shall have the right to do so at its own
expense and the right to join Grantee and obtain Grantee's full
cooperation, if necessary, at no legal expense to Grantee. If A-55
brings suit against an infringer or competitor, A-55 shall have the sole
right to control such lawsuit and to settle the same on terms and
conditions approved by A- 55. All monetary and other recoveries
resulting from such a lawsuit or any settlement thereof shall belong to
A-55. A-55 shall not be required to have pending more than one (1) suit
for infringement of any patent licensed under this Agreement.
10.3 Litigation by Grantee. If, after notice of any infringement of the
A-55 Patent or any other patent licensed hereunder, unauthorized use of
any confidential know-how licensed hereunder, or infringement or unfair
competition relating to a trademark licensed hereunder, A-55 (a) is
unable to bring any such infringement or unfair competition to a halt,
or (b) fails to file and commence diligent prosecution of a suit against
such third party for patent infringement or unfair competition, within
six (6) months after A-55 learns thereof, then Grantee may take any
action it deems necessary to stop the infringement or unfair
competition, joining A-55 therein if necessary but at no expense to
A-55. Any recoveries made upon any such suit shall belong solely to
Grantee except for any award made by the court in favor of A-55
(provided that from such award A-55 shall pay to the Grantee its
reasonable legal
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expenses not recovered from the other party or parties
to the suit).
10.4 Actions by Third Parties. If during the term of this Agreement one
(1) or more third parties file suit in the Territory against Grantee or
any of its purchasers for patent infringement due to Grantee's or any
purchaser's manufacture, marketing, use, export or sale of A-55 Products
in the best modes contemplated by A-55 or in modes approved by A-55,
Grantee shall notify A-55 of such suit and tender defense thereof to
A-55. If A-55 refuses the defense of same, Grantee may at its option
elect to defend said suit. A-55 shall indemnify and hold Grantee
harmless from damages assessed against Grantee in any third party
infringement suit, but said indemnification shall be limited to an
amount equal to the payments made to A-55 by Grantee under the terms of
this Agreement.
10.5 Conduct of Defense. In the event that an action described in
subparagraph 10.4 is commenced against Grantee in any jurisdiction, A-55
hereby authorizes Grantee to join A-55 in said action as either an
additional original defendant or third party defendant.
10.6 Declaratory Judgment. Grantee may elect to file a declaratory
judgment action against any third party referred to in subparagraph
10.4, in which event it will notify A-55 of its intention and tender the
filing of any such suit to A-55. If A-55 refuses to institute such
declaratory judgment action against a third party, Grantee shall have
the option to institute such action. Further, A-55 hereby authorizes
Grantee to join A-55 as a plaintiff in any such declaratory action.
11. CONSULTATION SERVICES
11.1 Consultation Services. As mutually agreed upon in advance, A-55
shall provide to Grantee such qualified technical personnel to assist
Grantee in the exercise of the rights granted pursuant to this License
Agreement. Grantee shall pay for the cost of such assistance, including
all necessary travel, food, lodging and other expenses, and the pro rata
pay (plus 20%) of the persons rendering such technical assistance. If
travel is required, technical personnel shall fly coach, management
personnel shall fly business class, and the President or Chairman shall
fly first class.
11.2 Manner of Payment. As mutually agreed upon in paragraph 11.1, upon
a request from Grantee of technical assistance from A-55 pursuant to
this paragraph, A-55
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shall prepare and render to Grantee an estimate of the cost thereof,
together with an approximate time frame within which such assistance may
be rendered. Grantee shall, upon receipt and review of the same, forward
the amount to A-55 whereupon such assistance shall be rendered within
the agreed upon time. Any differences in the estimated and actual
expenses shall be accounted for and paid or refunded upon termination of
such services.
12. TERMINATION AND CONSEQUENCES OF DEFAULT
12.1 Termination or Invalidity.
12.1.1 This Agreement shall terminate in twenty-five (25) years,
or upon the expiration of the last A-55 Patent to expire,
whichever is later, in which event Grantee shall be entitled to
continue to exploit the rights granted under this Agreement
without the payment of any additional royalties to A-55.
12.1.2 Upon a judgment of invalidity or unenforceability of the
A-55 Patent, Grantee shall be entitled to continue to exploit
the rights granted under this Agreement by payment of the
royalties specified in paragraph 3 if Grantee continues to
practice A-55 Know-how; provided such payments shall be payable
by Grantee until twenty-five (25) years after the effective date
of this Agreement and Grantee shall then be entitled to exploit
the rights granted under this Agreement without payment of any
royalties to A-55.
12.2 Consequences of Default by Grantee. In the event of a default by
Grantee which is not cured in a timely manner as provided herein:
12.2.1 A-55 may, by written notice, terminate this License.
12.2.2 At its option, A-55 may, in its unfettered discretion,
elect to continue this license but convert it to a non-exclusive
license, as to any third party or entity, within the Territory.
12.2.3 All unpaid sums due A-55 under paragraph 3.1 herein to
and including the effective date of any such default shall be
due and payable within thirty (30) days thereafter.
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<PAGE> 17
12.3 Consequences of Default by A-55: In the event of a default by A-55
Grantee shall be entitled to exploit the rights granted under the terms
of this Agreement and shall pay all royalties which accrue hereunder to
an independent trust account until such default is resolved or cured,
whereupon the funds so held shall be dispersed in accordance with such
resolution.
12.4 General Consequences
12.4.1 Termination pursuant to subparagraph 12.1 or the
consequences of default as specified in subparagraphs 12.2 or
12.3 shall not relieve either party of any obligations due to
the other under the terms of this Agreement to and including the
date of termination or the effective date of any such default.
12.4.2 In no event will default operate to release Grantee or
A-55 from any damages, costs and expenses that may be due as a
result of such default.
12.4.3 Either of the parties hereto shall have the right to give
public notice of any termination or default in such manner and
at such times and places as it may deem advisable.
12.5 Delivery of A-55 Technology In the event of termination of this
License for whatever reason, Grantee shall at the request of A-55,
deliver to A-55 all papers, drawings and other documents samples and
models relating to any matters that are the subject of this Agreement,
shall execute such documents as are reasonably requested by A-55 and
shall cease to exploit the rights granted under the terms of this
Agreement. Without limiting the activities that shall cease upon such
termination, Grantee shall remove all trademark designation from A-55
Products; transfer any trademarks to A-55 which it has acquired, change
its name to delete reference to A-55; and transfer to A-55 any related
business names which it has used in the practice of the A-55 Technology.
13. EVENTS OF DEFAULT, NOTICE OF DEFAULT, AND CURING
THEREOF
13.1 Events of Default. A default shall occur hereunder if any one of
the following events shall occur:
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<PAGE> 18
13.1.1 Grantee fails to pay any sum due hereunder and such
failure continues for thirty (30) days; or
13.1.2 Grantee fails to materially implement the business plan
or the financial plan approved by A- 55 or fails to exercise
reasonable efforts to commercialize the A-55 Technology; or
13.1.3 A party fails to perform or comply with any term hereof
which materially affects this Agreement; or
13.1.4 Without the prior written approval of A-55 first had and
obtained, there is a change in control of the Grantee; or
13.1.5 Without the prior written approval of A-55 first had and
obtained, by virtue of any issue of shares, capital reduction or
any means whatsoever, A-55's shareholding (representing voting
shares or entitlement to equity) in Grantee falls below 30%; or
13.1.6 A party files a voluntary petition for bankruptcy or any
similar relief under laws for the benefit of creditors; a party
is adjudged bankrupt or a receiver is appointed by a court of
competent jurisdiction, and such adjudication is not vacated
within thirty (30) days; or an involuntary petition is filed for
reorganization or similar relief and is not dismissed or stayed
within sixty (60) days; or
13.1.7 Any representation or warranty made in this Agreement
proves to have been incorrect in any material respect which
significantly affects this Agreement; or,
13.1.8 Grantee defaults in the timely performance of any of its
obligations under that certain Heads of Agreement between A-55
and Grantee dated DECEMBER 2, 1997.
13.2 Notice of Default. Before any default is effective herein, the
party declaring the default shall provide the defaulting party with a
written notice specifying the claimed default. Such notice shall provide
a period of thirty (30) days from the date of the notice within which
the defaulting party may cure such default.
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<PAGE> 19
13.3 Failure to Cure. In the event the defaulting party fails to cure
any default to the reasonable satisfaction of the other party within the
thirty (30) day period described in paragraph 13.2, the default will,
unless the other party specifies otherwise, become effective on the last
day of the thirty (30) day period, provided that if either party in good
faith denies there is a breach or default (other than a breach or
default for the nonpayment of money), such party may within such thirty
(30) day period submit the matter to binding arbitration and in the
event it is finally determined that a breach or default has occurred,
such party shall have thirty (30) days from the date of determination to
cure the same.
14. INDEMNITY AND DISCLAIMER
14.1 Indemnification by Grantee. Grantee shall defend, indemnify and
hold A-55 L.P., its Corporate officers, mangers, and staff harmless from
and against any action, claim, liability, expense (including reasonable
attorneys' fees and costs) or damage (including consequential damages)
to persons or property resulting from any acts or omissions of Grantee
and its employees and agents in connection with the performance of this
Agreement or the manufacture, use and sale of A-55 Technology hereunder.
14.2 Indemnification by A-55. A-55 shall defend, indemnify and hold
Grantee harmless from and against any action, claim, liability, expense
(including reasonable attorneys' fees and costs) or damage (including
consequential damages) to persons or property resulting from any breach
or untruth of any representation or warranty hereunder or failure to
perform any covenant hereunder).
15. GENERAL PROVISIONS
15.1 Notices. Any notice required to be given under this Agreement shall
be in writing and shall be sent by certified or registered mail, or its
equivalent, postage prepaid, to each party at the address below or at
such other address of which one party shall notify the other in the same
manner:
To: A-55: A-55, L.P.
5270 Neil Road
Reno, NV 89502
USA
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<PAGE> 20
To Grantee: Vanetik & Associates
8502 E. Chapman
Suite 604
Orange, CA 92869
USA
15.2 Governing Law. This Agreement shall be governed
by the law of Nevada for performance in the Territory.
15.3 Arbitration. All disputes, differences, or questions between the
parties concerning the construction, interpretation, and effect of this
Agreement or of any clause herein contained or the rights and
liabilities of the parties, shall be settled by arbitration in
accordance with the Rules of Arbitration of the American Arbitration
Association by arbitrators appointed in accordance with such rules;
provided that either party shall have the right to appeal the result of
any such arbitration; and provided further that arbitration under this
subparagraph shall not apply to disputes, differences or questions
between the parties concerning violations of United States AntiTrust
laws or regarding the validity of the A-55 Patent or regarding the
confidentiality of any know-how licensed hereunder. Unless the parties
otherwise agree, the site for arbitration shall be Reno, Nevada.
15.4 No Affiliations. Nothing in this Agreement shall be construed to
create between the parties a partnership, association, joint venture, or
agency.
15.5 Prior Agreements, Amendments. This Agreement cancels and supersedes
all prior oral or written representations, agreements and understandings
between the parties with respect to the subject matter hereof, and
embodies all of the understandings and obligations between the parties
with respect to the subject matter hereof.
This Agreement may be modified and amended at any time, including the
addition of new or deletion of existing know-how and technology
pertinent to the rights transferred under this Agreement, provided that
no agreement or modification or extension of this Agreement shall be
binding upon any of the parties hereto unless made in writing and signed
by both parties.
15.6 Waivers. Failure of either party to require strict performance of
any term of this Agreement shall not affect that party's right to fully
enforce the same, nor shall any waiver of a default be construed to be a
waiver of any succeeding default.
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<PAGE> 21
15.7 Provisions Severable. If any term or provision of this Agreement
shall be held or adjudged illegal, invalid, or unenforceable by any
court having jurisdiction, such shall not affect the validity of any
other term or provision hereof, and any such illegal, invalid, or
unenforceable term or provision shall be deemed to be severable and
shall be deleted from this Agreement. A-55 agrees to send Grantee notice
within thirty (30) days after the date any term or provision of this
Agreement is adjudged illegal, invalid or unenforceable.
15.8 Binding Agreement. This Agreement shall be binding upon and inure
to the benefit of the parties, their successors and signs to the extent
this Agreement is assignable by its terms.
15.9 Authority to Contract; Counterparts. Each of the parties covenants
that this Agreement is executed under authority duly granted by its
board of directors. The Agreement has been signed in two (2)
counterparts, one for each party, each of which shall be deemed to be an
original.
15.10 Costs of Litigation. In the event of any dispute arising as the
result of the breach or alleged breach of any term of this Agreement, if
such dispute is taken by either party to arbitration or to any court,
the successful party in any such arbitration or court action shall be
entitled, in addition to any damages suffered, to receive its actual
costs of arbitration or suit including, without limiting the generality
of the foregoing, attorneys' fees, experts' fees, the cost of exhibits
and the preparation thereof, and all other costs reasonably incident to
such arbitration or court action.
15.11 Injunction. The parties hereto acknowledge that the damages for
any breach of this Agreement by either party relating to any matter
other than the payment of money would be incapable of precise
determination and would cause the nondefaulting party irreparable harm.
Accordingly, each party accepts the other party's right to obtain an
injunction to prevent any further breach of the Agreement should the
nondefaulting party deem it necessary to do so.
15.12 No Assignment. Grantee shall have no right to assign or otherwise
transfer this License or any of the rights granted to or obligations
imposed upon Grantee without the express prior written consent of A-55.
A-55 may transfer this License or any of the rights granted
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<PAGE> 22
hereunder to it, without the prior consent of Grantee; provided, however
that A-55 shall not be relieved of any obligations hereunder unless such
transfer is consented to in writing by Grantee.
15.13 Headings. Caption headings are for convenience of reference only.
In witness whereof, the parties have signed this Agreement as of the
date appearing above their respective signatures.
DATED: Dec. 2 , 1997. DATED: 12-02 , 1997.
A-55, L.P., a Nevada limited Vanetik & Associates
partnership
By RWG, Inc., a Nevada By/s/
corporation ------------------------------------
President, Vanetik &
Associates
By/s/ Rudolf W. Gunnerman
- --------------------------
Rudolf W. Gunerman,
Chairman, A-55 LP
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<PAGE> 23
Exhibit A
Territories for Exclusive Rights of Technical Transfer
Negotiation Fees
Russian Federation US $22,420,000.00
Republic of Ukraine US $ 3,330,000.00
Republic of Kaszakhstan US $ 2,100,000.00
Territories for Rights of First Refusal
Belarus
Georgia
Armenia
Moldova
Lithuania
Uzbekistan
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<PAGE> 1
EXHIBIT 10.13
LICENSE AGREEMENT --
VANETIK & ASSOCIATES, INC.
PREAMBLE
The parties to this Agreement are A-55, L.P., a Nevada limited
partnership ("A-55"), and VANETIK & ASSOCIATES ("Grantee").
This Agreement shall become effective on the date it is executed by
the last party to execute same, as set forth on the signature page
hereof.
This Agreement is made with reference to the following facts:
A. A-55 owns the rights to transfer to others the rights to certain
worldwide patent applications, issued patents and trademarks, and
valuable technology, know-how, trade secrets and prototypes which
relate to and/or use an aqueous fuel comprising a mixture of water
and carbonaceous material for combustion, in internal combustion
engines, and open flame applications, and the use thereof, including
technologies as set forth in the patent applications and issued
patents as more fully defined below ("A-55 Technology").
B. Grantee desires to be licensed to use such rights and information
from A-55 within a geographical territory.
Now, therefore, in consideration of the mutual promises and
covenants, and upon the conditions herein contained, the parties
agree as follows:
1. DEFINITIONS:
As used herein, the following terms shall have the following
meanings:
1.1 "A-55 Patent" means any product claim of (a) A-55 U.S. Patent No.
5,156,114, issued December 10, 1992; (b) pending patent applications
related to the A-55 Technology; and (c) patents and patents pending
relating to the A-55 Technology within the Territory.
1.2 "A-55 Clean Fuels" means fuel covered by any product claim of the
A-55 Patent.
1.3 "A-55 Processes" means any process or procedure to produce the
A-55 Clean Fuels or any other product claim of the A-55 Patent.
CONFIDENTIAL Page 1 of 22
<PAGE> 2
1.4 "A-55 Know-how" means proprietary information of a confidential
nature owned by A-55 relating to the techniques available for
commercial exploitation of A-55 Patent and any A-55 Processes,
including the subject matter of any A-55 Patent, if no patent should
issue thereon.
1.5 "A-55 Product" means any product sold or service rendered by
Grantee associated with the grant of this License or the A-55
Technology. It is intended by the parties that this term shall have
the broadest meaning and not in any way be limited to products which
are capable of patent or contractual protection. By way of example
but not limitation, the term would include any product bearing,
utilizing or referring to the A-55 Trademark, clothing, pens,
souvenirs, and the like.
1.6 "A-55 Technology" means all know-how, trade secrets, confidential
information, and expertise including, but not limited to, designs,
plans, specifications and all other information and documentation,
whether patentable or not, relating to A-55 Patent. Unless the
context requires otherwise, the term "A-55 Technology" shall include
all rights and claims under the A-55 Patent, the A-55 Clean Fuels,
the A-55 Processes, the A-55 Know-how, and A-55 Products but shall
not under any circumstances be deemed to include or refer to the A-55
Additive or its manufacture.
1.7 "A-55 Trademark" means (a) United States registered trademark
number 1,848,044; (b) United States Registered Service Mark No.
74/510,26 ("Powered With Water"); and (c) any identical or
substantially similar trademarks or service marks which may be
obtained by A-55.
1.8 "A-55 Additive" means the proprietary combination of certain
chemicals or compounds, including but not limited to certain
combinations of surfactants, anti-corrosive agents, lubricity agents,
anti-freezing agents, anti-foaming agents, biocides, cetaine
enhancers, and other similar or related compounds added to the base
cabonaceous material, water, and alcohol to form A-55 Clean Fuels.
1.9 "Net Sales" means the gross Selling Price of A-55 Clean Fuels
and/or all other A-55 Products for which an invoice or like sales
record has been prepared by Grantee, or any sublicensee of or party
or entity related to or affiliated with Grantee, less any trade, or
quantity (but not cash) discounts actually allowed, transportation
charges, sales or use taxes, if any, included in the invoice price,
and the price of any Fuel or other A-55 Product returned.
CONFIDENTIAL Page 2 of 22
<PAGE> 3
1.10 "Grantee" means VANETIK & ASSOCIATES which shall be the
exclusive licensee of A-55 within the Territory during the currency
of this agreement.
1.11 "Territory" means the the Russian Federation.
1.12 "Effective Date" shall mean the date this agreement is executed
by them last party to execute the same.
2. GRANT OF PATENT AND KNOW-HOW RIGHTS TO GRANTEE
2.1 Grant. A-55 hereby grants to Grantee:
2.1.1 The right under the A-55 Patent to manufacture, sell,
distribute and use A-55 Clean Fuels and, A-55 Products in
the Territory and the right to practice any A-55 Process
necessary for such manufacture or sale in the Territory.
2.1.2 The right to use A-55 Know-how in the
Territory.
2.1.3 The right to practice any and all A-55 Technology in
the Territory, and the right to allow its purchasers to
practice any and all A-55 Technology and patent rights in
the Territory.
2.2 Patent Marking. Grantee shall, where possible, mark any A-55
Product produced under any patent licensed hereunder with the number
of the applicable patent.
2.3 Excluded Applications. All aviation applications, including
supplying fuel for such applications, are excluded from this License
and specifically reserved to A-55.
2.4 Licenses to OEMs.
2.4.1 A-55 reserves the sole and exclusive right to
negotiate license agreements with original equipment
manufacturers (OEMs). Grantee acknowledges that such
licenses may be worldwide and may include the right to
utilize and practice the A-55 Technology in the Territory.
The grant of any such license to an OEM shall not infringe
on the grant of this License; provided, however, that
royalties for the use and practice of the A-55 Technology
within the Territory under such a license shall inure to
Grantee.
2.4.2 Any license granted to an OEM as
contemplated in subparagraph 2.4.1 must not permit
CONFIDENTIAL Page 3 of 22
<PAGE> 4
it to manufacture A-55 Clean Fuels in the
Territory, whether for distribution or sale or for
its own consumption.
2.4.3 A-55 shall, upon the grant of any license to an OEM,
give notice thereof to Grantee.
2.5 Nature of Grant.
2.5.1 Grantee acknowledges that, incident to the
dissolution of Advanced Fuels, L.L.C., Caterpillar Inc.
retained certain licensed rights to the A-55 Technology for
use in products of the kind it produces or will produce in
the Territory. Pursuant to retained the license rights,
Caterpillar Inc. may sell, but not license until October
24, 2001, a diesel emulsion based aqueous fuel emulsion and
may make but not license, a naphtha fuel emulsion for
Caterpillar engines only.
2.5.2 Except as otherwise provided in paragraphs 2.3, 2.4,
and 2.5.1, A-55 shall grant no other license to the A-55
Technology in the Territory while this Agreement is in
force and not in default.
2.6 Sublicenses. Subject to the express approval of A-55, first had
and obtained on each occasion, Grantee shall have the right to grant
sublicenses under this Agreement. Unless waived by A-55, each such
sublicense that relates to the manufacture of A-55 Clean Fuels by the
sublicensee shall, in addition to other pertinent provisions, contain
provisions for the payment of royalties of an amount not less than
that specified in paragraph 3.1 below to Grantee, who shall hold the
same in trust for payment to A-55 or make some other stipulation
which is acceptable to A-55 to compensate fully A-55 for such
royalties as if the sale had been made directly by Grantee and for
the preservation of A-55's equity interest in Grantee specified in
paragraph 3.3 below.
2.7 Purchase and Sale of A-55 Additive.
2.7.1 The Grantee shall purchase and pay for 210,000
gallons of A-55 Additive during the period January 1, 1999
and June 30, 1999; 601,000 gallons of A-55 Additive during
the period July 1, 1999 and December 31, 1999 and a minimum
monthly quantity of A-55 Additive of 150,000 gallons
thereafter. A-55 shall sell and use its best efforts to
deliver in a timely manner to the Grantee or the Grantee's
order such purchased quantities of the A-55 Additive.
CONFIDENTIAL Page 4 of 22
<PAGE> 5
2.7.2 The initial price of the A-55 Additive (which shall
exclude for these purposes any cetane enhancer or methanol)
to Grantee will be US$18.00 per gallon for boiler
applications and $22.00 per gallon for internal combustion
engine applications, F.O.B. factory gate. That price is
fixed for 12 months from the date of this agreement. The
price of the A-55 Additive may be reviewed and adjusted by
A-55 from time to time after the initial period of 12
months. Any increase in price must be fixed by A-55 in good
faith by reference only to increases in raw material costs
of the A-55 Additive. Any increase in price will operate on
orders placed after notification.
2.7.3 Payment for all A-55 Additive ordered by the Grantee
shall be made in the currency of the United States. Until
otherwise advised in writing by A-55 (at its sole and
unfettered discretion), payment shall be effected by A-55
making a request for funds transfer to a top ten US bank
selected by Grantee that has issued a confirmed irrevocable
revolving letter of credit guaranteeing payment of
Grantee's obligation to A-55. The letter of credit shall
contain such terms as are acceptable to A-55 including an
obligation upon the bank to make full payment to A-55 upon
sighting a copy of a bill of lading (FOB factory gate)
signed by Grantee's freight forwarding agent. Payment shall
not be deemed to have been made until all funds have been
cleared in A-55's account
2.7.4 The A-55 Additive must be of a merchantable quality
and fit for their intended purpose.
2.7.5 Property and risk in the A-55 Additive pass to
Grantee at factory gate.
3. PAYMENTS FOR RIGHTS GRANTED UNDER PARAGRAPH 2.
3.1 Continuing Annual Royalty. For the rights granted under
paragraph 2 above, Grantee shall pay to A-55 a royalty of two percent
(2%) of the Net Sales from all A-55 Clean Fuels and A-55 Products in
the Territory. The royalty shall reduce to one percent (1%) 18 months
after all moneys due to A-55 under paragraph 3.2 below have been paid
in full
3.2 Technical Transfer Fee. In consideration of the rights
granted herein, Grantee shall pay to A-55 a Technical Transfer Fees
of TWENTY MILLION DOLLARS (US$20,000,000) as follows:
CONFIDENTIAL Page 5 of 22
<PAGE> 6
(a) December 31, 1998: US One million dollars
(US$ 1,000,000)
(b) June 30, 1999: US Five million dollars
(US$5,000,000)
(c) December 31, 1999: US Seven million dollars
(US$7,000,000)
(d) June 30, 2000: US Seven million dollars
(US$7,000,000)
3.3 Equity Interest in Grantee. In consideration of the grant
of this License and incident to the formation of Grantee, Grantee
shall deliver to A-55 a share certificate evidencing the allotment to
it of thirty percent (30%) of the issued shares in Grantee deemed
fully paid. A-55's equity interest shall be of the same quality and
rights, including rights to dividends and distributions, as all other
owners of Grantee. The constituent documents of Grantee shall provide
that A-55 shall have no obligation to make any contribution to the
capital of Grantee for the issuance of such interest other than the
grant of this License, and shall further provide that such interests
shall not be subject to dilution without the prior written approval
of A-55 first had and obtained, which approval may be withheld by
A-55 at its sole discretion.
4. DISCLOSURE AND CONFIDENTIALITY OF KNOW-HOW
4.1 Disclosure. Within thirty (30) days after the effective
date of this Agreement, A-55 shall use its best efforts to disclose
to Grantee all of the technology it possesses relating to the
manufacture, use or sale of A-55 Technology, which is required by
Grantee to exercise and exploit its rights hereunder. Such disclosure
shall include design, engineering and manufacturing information and
specifications, including without limitation: identification of
commercially-available equipment (and the name of the manufacturers
thereof), engineering drawings of special equipment designed by or
for A-55, and process operations and quality control tests. It is
understood by Grantee that the foregoing obligation of disclosure
shall not include any obligation to disclose composition of the A-55
Additive, which will be made and distributed solely and exclusively
by A-55 but which will be sold, within the Territory, to Grantee for
its use in the manufacture of the A-55 Clean Fuels.
4.2 Confidentiality. Grantee agrees to use reasonable efforts
to maintain as confidential A-55 Know-how disclosed to it pursuant to
paragraph 4.1, provided that:
CONFIDENTIAL Page 6 of 22
<PAGE> 7
4.2.1 All information, in whatever form transmitted to Grantee
from A-55, shall be presumed to be confidential know-how unless
expressly identified to the contrary.
4.2.2 Grantee shall not be required to treat as confidential any
A-55 Know-how which is:
(a) publicly disclosed by A-55, or disclosed to another
party by A-55 without a confidential restriction,
including disclosure by A-55 in any patent, published
patent application, any other writing or verbally
disclosed by A-55; or
(b) publicly available prior to its disclosure by A-55, or
which becomes publicly available after disclosure by A-55
through no fault of Grantee; or
(c) known to Grantee prior to its disclosure by A-55; or
(d) disclosed to Grantee by a third party who did not
acquire the information, directly or indirectly, from
A-55; or
(e) independently developed by an employee or consultant
of Grantee subsequent to disclosure by A-55 but who did
not have knowledge of the disclosure made by A-55; or
(f) required to be disclosed to any local, state or
federal agency in connection with a proper and lawful
request, law or regulation; provided, however, that prior
to any such disclosure, Grantee shall give notice of such
request to A-55, which shall have a reasonable opportunity
to apply for such orders as it may deem appropriate to
protect its interests.
4.2.3 Grantee will maintain internal procedures to protect any
A-55 Know-how that is to be treated as confidential within paragraph
4.2 in the same manner in which it protects its own confidential
technical information.
4.2.4 A-55 represents and warrants that the information it
identifies in accordance with
CONFIDENTIAL Page 7 of 22
<PAGE> 8
paragraph 4.2.1 is confidential information and that it treats it as
such.
5. GRANT OF RIGHTS UNDER TRADEMARKS
5.1 Grant. Subject to the due execution and registration of a
user agreement in a form approved by A-55, A-55 hereby grants to
Grantee, and its sublicensees and distributors, the right to use the
A-55 Trademark, together with any other trademark that A-55 may
acquire in connection with its sale of A-55 Clean Fuels to third
parties, and to use the name "A-55" in a corporate name, division
name, or other name of any entity it may establish for the
manufacture or distribution of A-55 Clean Fuels. Should "A-55" not be
trademarked in any jurisdiction of the Territory, Grantee shall have
the obligation to do all things necessary to obtain such trademark
and register any related designs or logos at its cost and to hold the
same for the sole and exclusive benefit of A-55. As used herein, the
term "A-55 Trademark" shall refer to any trademark or related design
obtained by Grantee hereunder.
5.2 Marking. Grantee shall mark any A-55 Product which it
produces or sells pursuant to this License with the A-55 Trademark,
which, when used, shall bear an (R) to denote its federal
registration.
5.3 Use of Trademark. Grantee acknowledges that any use by it
of the A-55 Trademark shall inure to the exclusive benefit of A-55.
Grantee shall use the A-55 Trademark only in a manner approved and
directed from time to time by A-55. In connection with such use,
Grantee shall comply with all trademark notice, registered user, and
other requirements to maintain the validity of the A-55 Trademark
registration in the Territory. Grantee shall not make any use of the
A-55 Trademark that would misrepresent to the public that Grantee
rather than A-55 is the owner of such mark or the registration
thereof.
5.4 Quality Standards. A-55 shall establish product
specifications or quality standards of any A-55 Product, including
A-55 Clean Fuels, to be sold under the A-55 Trademarks, and Grantee
agrees that its products using the Trademark shall comply therewith
to ensure that the A-55 Trademark is being properly protected. In
order to ensure high and consistent quality of the A-55 Clean Fuels,
Grantee shall manufacture and blend all A-55 Clean Fuels which it
distributes pursuant to this License with standard blending equipment
sold to it by A-55 unless the use of other equipment is approved in
advance by A-55. A-55 may from time to time require Grantee to ship
actual
CONFIDENTIAL Page 8 of 22
<PAGE> 9
production samples of A-55 Clean Fuel to A-55 for inspection and
testing to ascertain compliance with such product specifications or
quality standards.
5.5 Price. There shall be no additional royalty for the
license under the A-55 Trademarks.
6. TIME AND MANNER OF PAYMENTS.
6.1 Time for Payments. Payments required under subparagraph
3.1 shall be made within fifteen (15) days following the last day of
each calendar Quarter in which there are Net Sales of A-55 Clean
Fuels or A-55 Products by Grantee during the preceding Quarter.
6.2 Manner of Payments. Payments shall be made in immediately
available funds (United States dollars) by certified or registered
mail or wire transfer to A-55's address as specified herein and
accompanied by a written report signed by an authorized
representative of Grantee setting forth the dollar amount of the Net
Sales of A-55 Clean Fuels or A-55 Products as to which a royalty is
payable for each half year.
6.3 Overdue Payments. Payments shall, when overdue, bear
interest at an annual rate of one percent (1%) above the prime rate
of Citibank in effect in New York City on the last day payment was
due. In no event shall the interest so charged exceed the legal limit
that may be charged for interest.
7. RECORDS, INSPECTION, AUDITS AND REPORTS
7.1 Records and Reports. Grantee shall keep true and accurate
records and books of account showing the use and/or practice of the
A-55 Technology by Grantee, the manufacture, marketing and sale of
A-55 Clean Fuels and A-55 Products by Grantee, and all other
information necessary for the accurate determination of the payments
to be made to A-55 hereunder. In addition, Grantee shall provide A-55
with internally prepared monthly, quarterly, and annual financial
statements, prepared in accordance with generally accepted accounting
principles and practices for public companies in the United States of
America, within thirty (30) days of the end of the calendar month,
quarter, or year, respectively.
7.2 Inspection. It is a condition of this license, and Grantee
represents and guarantees, that it will permit A-55 or its
designated auditors to inspect and audit, at reasonable
times during Grantee's usual business hours, any and all
parts of the
CONFIDENTIAL Page 9 of 22
<PAGE> 10
records kept by Grantee pursuant to this paragraph 7 which
are required to be rendered by Grantee herein, and to make
excerpts from such records. In the event that Grantee and
A-55 are unable to agree on a mutually acceptable firm of
certified public accountants it is hereby agreed that such
inspection and audit may be performed by the certified
public accounting firm of Price Waterhouse, whose principal
offices are now at New York City, New York.
All fees of any such firm for such inspection and audit shall be paid
by A-55 except in the event of a discrepancy described in paragraph
7.3 below, in which case Grantee shall pay such fees.
7.3 Discrepancy Expenses. In the event any audit performed by
A-55 or its designee results in a finding that there is a discrepancy
in excess of five percent (5%) between the amounts paid to A-55 and
the amounts which should have been paid to A-55, the cost of such
audit shall be borne entirely by Grantee.
7.4 Retention of Records. Grantee's obligation to retain
records and A-55's right to inspect and audit and make excerpts with
respect to the records for each year in which royalty payments are
due, in the absence of a charge of fraud or intentional
misrepresentations, shall terminate three (3) years after the end of
each such year to which such records pertain.
7.5 Audit. The Grantee shall at its cost cause an audit of its
financial affairs to be conducted each year during the term of this
Agreement to coincide with the financial year of A-55. Such audit
will be conducted by an auditor selected by A-55 and the Grantee
shall deliver such audited financial statements prepared in
accordance with generally accepted accounting principles and
practices for public companies in the United States of America to
A-55 within three (3) months of the end of the financial year to
which they relate.
7.6 Sublicensees. All obligations of the Grantee contained
herein to retain records and provide reports shall apply equally to
all sublicensees. All sublicense agreements submitted to A-55 for its
approval shall specifically include such provisions.
8. REPRESENTATIONS AND WARRANTIES
8.1 Grantee represents and warrants that:
CONFIDENTIAL Page 10 of 22
<PAGE> 11
8.1.1 Organization, Standing, etc. Grantee is a duly
organized, validly existing, and in good standing under
the laws of the territory in which it is established and
has all requisite corporate power and authority to own and
operate its properties, to carry on its business as now
conducted, and as proposed to be conducted, to enter into
this Agreement, and to carry out the provisions hereof.
8.1.2 Qualification. Grantee is duly qualified to do
business in the Territory.
8.1.3 Challenged Validity. If Grantee should
challenge the validity or enforceability of the A-55
Patent licensed under this Agreement, in whole or in part,
A-55 shall have the option, by notice in writing, to
immediately terminate this License.
8.1.4 Business Plan. Grantee shall within six months
of the date of this Agreement prepare and submit for
approval to A-55 a business and financing plan for the use
and exploitation of the A-55 Technology in the Territory.
This plan shall identify the capital necessary to fund
Grantee's operations and identify the confirmed source of
such capital The approval of this plan by A-55 shall not
be unreasonably withheld. Grantee shall expend its best
efforts to implement or exceed the business plan and,
during the term of this Agreement to exploit and
commercialize the A-55 Technology within the Territory to
the fullest extent commercially possible.
8.2 A-55 represents and warrants that:
8.2.1 Organization, Standing, etc. A-55 is a limited
partnership duly organized, validly existing, and in good
standing under the laws of the State of Nevada and has all
requisite power and authority to own and operate its
properties, to carry on its business as now conducted and
as proposed to be conducted, to enter into this Agreement,
and to carry out the provisions hereof.
8.2.2 Qualification. There is no jurisdiction wherein
the character of the properties owned by A-55 or the
nature of the activities conducted by A-55 makes necessary
the licensing or qualification of A-55 as a foreign
partnership therein, in which it is not so licensed.
CONFIDENTIAL Page 11 of 22
<PAGE> 12
8.2.3 Disclosure. Neither this Agreement nor any
document, certificate, or statement referred to
herein or furnished to Grantee pursuant hereto
contains any untrue statement known to A-55 of
a material fact or omits to state a material
fact necessary to make the statements contained
herein and therein not misleading.
8.2.4 Ownership of Patent, etc. A-55 warrants and
represents that Rudolf W. Gunnerman is the sole
and exclusive owner of the entire right, title
and interest in and to the A-55 Patent, and any
reissues or extensions of such Patent, and will
be the sole and exclusive owner of all patent
improvements thereto which it makes, in each
case free and clear of all liens, claims,
charges, pledges, mortgages, security interests
and other encumbrances, and that, pursuant to
exclusive license from Mr. Gunnerman, it has
the full and sole right, power and authority to
enter into, consummate and perform the
transactions and obligations contemplated by
this Agreement.
8.2.5 No Conflicting Agreements. A-55 has not entered
into any agreement or understanding, written or
oral, regarding the A-55 Technology, any patent
improvement thereof, or any know-how licensed
hereunder, which is in conflict or inconsistent
with any of the terms and conditions of this
Agreement.
8.2.6 Validity. A-55 warrants and represents that it
is not aware of any law or facts which would
permit any person or entity to challenge the
validity or enforceability of the patent rights
granted herein.
8.2.7 Infringement. The A-55 Patent, all patent
improvements, and know-how as now practiced by
A-55 and all of its current licensees do not,
to A-55's knowledge, violate, infringe or
conflict with the rights of any person, firm or
government.
CONFIDENTIAL Page 12 of 22
<PAGE> 13
9. EXCHANGE OF TECHNICAL INFORMATION MUTUAL TRANSFER OF
MODIFICATIONS, VARIATIONS, IMPROVEMENTS AND PATENT PROTECTION.
9.1 Exchange of Technical Information. Each party hereto shall
exchange with the other all technical information acquired during the
term of this Agreement relating to the A-55 Technology and
developments with respect to same and will communicate to the other
all information and data obtained therefrom. Each party further
agrees that designated representatives of the other may, at
reasonable times, visit the laboratory, plants, and other
installations of the other in which research and operations relating
to the A-55 Technology are being conducted.
9.2 Disclosure of Modifications. The parties shall promptly
inform each other in writing of any modifications, variations, or
improvements relating to the A-55 Technology, and the know-how
licensed hereunder, which are developed by them or otherwise come to
their attention. It is expressly agreed that modifications,
variations or improvements disclosed to A-55 by any other licensee,
grantee, joint venturer, or any other party having the right to
practice any rights licensed hereunder, shall, subject to any
contractual obligations imposed upon A-55, be disclosed to Grantee
under the scope of this subparagraph.
9.3 Rights to Modifications. Notwithstanding which party
hereunder shall have discovered any modification, variation or
improvement to the A-55 Technology, all such modifications,
variations or improvements shall be owned solely by A-55; provided,
however, that Grantee shall have the right to use all modifications,
variations and improvements, whether patented or unpatented, made or
acquired by A-55 during the term of this Agreement without further
compensation to A-55. The parties shall cooperate with each other in
connection with the filing of any patent applications relating to any
such modifications, variations or improvements.
9.4 Intellectual Property Protection. A-55 and Grantee agree
to diligently seek patent protection for all inventions,
modifications and improvements to the A-55 Technology in the
Territory at Grantee's expense. A-55 may, at its own option, apply
for patent protection which is not pursued by Grantee, in which case
the cost thereof shall be borne solely by A-55 and all benefits
therefrom shall be solely owned by A-55 and not subject to the terms
of this license; provided, however, that Grantee may, within three
(3) month of the issuance of a patent to
CONFIDENTIAL Page 13 of 22
<PAGE> 14
A-55, give A-55 notice of its election to take rights under such
patent by paying all costs and expenses of A-55, together with
interest thereon at one percent (1%) over the prime rate charged by
Citibank New York from time to time. Any annual fees with respect to
maintenance of patents or trademarks within the Territory shall be
paid by Grantee or, at the option of A-55, paid by A-55 and
reimbursed upon invoice.
10. INFRINGEMENT.
10.1 Notification of Infringement. Grantee and A-55 shall each
notify the other promptly in writing of any known infringement of the
A-55 Patent, unauthorized use of any confidential know-how licensed
hereunder, or any infringement or unfair competition relating to a
trademark licensed hereunder, which either party learns of during the
term of this Agreement.
10.2 Litigation by A-55. A-55 shall have no obligation to sue
any such infringers or competitors, but shall have the right to do so
at its own expense and the right to join Grantee and obtain Grantee's
full cooperation, if necessary, at no legal expense to Grantee. If
A-55 brings suit against an infringer or competitor, A-55 shall have
the sole right to control such lawsuit and to settle the same on
terms and conditions approved by A-55. All monetary and other
recoveries resulting from such a lawsuit or any settlement thereof
shall belong to A-55. A-55 shall not be required to have pending more
than one (1) suit for infringement of any patent licensed under this
Agreement.
10.3 Litigation by Grantee. If, after notice of any
infringement of the A-55 Patent or any other patent licensed
hereunder, unauthorized use of any confidential know-how licensed
hereunder, or infringement or unfair competition relating to a
trademark licensed hereunder, A-55 (a) is unable to bring any such
infringement or unfair competition to a halt, or (b) fails to file
and commence diligent prosecution of a suit against such third party
for patent infringement or unfair competition, within six (6) months
after A-55 learns thereof, then Grantee may take any action it deems
necessary to stop the infringement or unfair competition, joining
A-55 therein if necessary but at no expense to A-55. Any recoveries
made upon any such suit shall belong solely to Grantee except for any
award made by the court in favor of A-55 (provided that from such
award A-55 shall pay to the Grantee its reasonable legal expenses not
recovered from the other party or parties to the suit).
CONFIDENTIAL Page 14 of 22
<PAGE> 15
10.4 Actions by Third Parties. If during the term of this
Agreement one (1) or more third parties file suit in the Territory
against Grantee or any of its purchasers for patent infringement due
to Grantee's or any purchaser's manufacture, marketing, use, export
or sale of A-55 Products in the best modes contemplated by A-55 or in
modes approved by A-55, Grantee shall notify A-55 of such suit and
tender defense thereof to A-55. If A-55 refuses the defense of same,
Grantee may at its option elect to defend said suit. A-55 shall
indemnify and hold Grantee harmless from damages assessed against
Grantee in an third party infringement suit, but said indemnification
shall be limited to an amount equal to the payments made to A-55 by
Grantee under the terms of this Agreement.
10.5 Conduct of Defense. In the event that an action described
in subparagraph 10.4 is commenced against Grantee in any
jurisdiction, A-55 hereby authorizes Grantee to join A-55 in said
action as either an additional original defendant or third party
defendant.
10.6 Declaratory Judgment. Grantee may elect to file a
declaratory judgment action against any third party referred to in
subparagraph 10.4, in which event it will notify A-55 of its
intention and tender the filing of any such suit to A-55. If A-55
refuses to institute such declaratory judgment action against a third
party, Grantee shall have the option to institute such action.
Further, A-55 hereby authorizes Grantee to join A-55 as a plaintiff
in any such declaratory action.
11. CONSULTATION SERVICES
11.1 Consultation Services. As mutually agreed upon in advance,
A-55 shall provide to Grantee such qualified technical personnel to
assist Grantee in the exercise of the rights granted pursuant to this
License Agreement. Grantee shall pay for the cost of such assistance,
including all necessary travel, food, lodging and other expenses, and
the pro rata pay (plus 20%) of the persons rendering such technical
assistance. If travel is required, technical personnel shall fly
coach, management personnel shall fly business class, and the
President or Chairman shall fly first class.
11.2 Manner of Payment. As mutually agreed upon in paragraph
11.1, upon a request from Grantee of technical assistance from A-55
pursuant to this paragraph, A-55 shall prepare and render to Grantee
an estimate of the cost thereof, together with an approximate time
frame within which such assistance may be rendered. Grantee shall,
upon receipt and review of the same, forward the
CONFIDENTIAL Page 15 of 22
<PAGE> 16
amount to A-55 whereupon such assistance shall be rendered within the
agreed upon time. Any differences in the estimated and actual
expenses shall be accounted for and paid or refunded upon termination
of such services.
12. TERMINATION AND CONSEQUENCES OF DEFAULT
12.1 Termination or Invalidity.
12.1.1 This Agreement shall terminate in twenty-five
(25) years, or upon the expiration of the last A-55 Patent
to expire, whichever is later, in which event Grantee
shall be entitled to continue to exploit the rights
granted under this Agreement without the payment of any
additional royalties to A-55.
12.1.2 Upon a judgment of invalidity or
unenforceability of the A-55 Patent, Grantee shall be
entitled to continue to exploit the rights granted under
this Agreement by payment of the royalties specified in
paragraph 3 if Grantee continues to practice A-55
Know-how; provided such payments shall be payable by
Grantee until twenty-five (25) years after the effective
date of this Agreement and Grantee shall then be entitled
to exploit the rights granted under this Agreement without
payment of any royalties to A-55.
12.2 Consequences of Default by Grantee. In the event of a
default by Grantee which is not cured in a timely manner as provided
herein:
12.2.1 A-55 may, by written notice, terminate this
License.
12.2.2 At its option, A-55 may, in its unfettered
discretion, elect to continue this license but convert it
to a non-exclusive license, as to any third party or
entity, within the Territory.
12.2.3 All unpaid sums due A-55 under paragraph 3.1
herein to and including the effective date of any such
default shall be due and payable within thirty (30) days
thereafter.
12.3 Consequences of Default by A-55: In the event of a default
by A-55 Grantee shall be entitled to exploit the rights granted under
the terms of this Agreement and shall pay all royalties which accrue
hereunder to an independent trust account until such default is
resolved or cured,
CONFIDENTIAL Page 16 of 22
<PAGE> 17
whereupon the funds so held shall be dispersed in accordance with
such resolution.
12.4 General Consequences
12.4.1 Termination pursuant to subparagraph 12.1 or
the consequences of default as specified in subparagraphs
12.2 or 12.3 shall not relieve either party of any
obligations due to the other under the terms of this
Agreement to and including the date of termination or the
effective date of any such default.
12.4.2 In no event will default operate to release
Grantee or A-55 from any damages, costs and expenses that
may be due as a result of such default.
12.4.3 Either of the parties hereto shall have the
right to give public notice of any termination or default
in such manner and at such times and places as it may deem
advisable.
12.5 Delivery of A-55 Technology In the event of termination of
this License for whatever reason, Grantee shall at the request of
A-55, deliver to A-55 all papers, drawings and other documents
samples and models relating to any matters that are the subject of
this Agreement, shall execute such documents as are reasonably
requested by A-55 and shall cease to exploit the rights granted under
the terms of this Agreement. Without limiting the activities that
shall cease upon such termination, Grantee shall remove all trademark
designation from A-55 Products; transfer any trademarks to A-55 which
it has acquired, change its name to delete reference to A-55; and
transfer to A-55 any related business names which it has used in the
practice of the A-55 Technology.
13. EVENTS OF DEFAULT, NOTICE OF DEFAULT, AND CURING
THEREOF
13.1 Events of Default. A default shall occur hereunder if any
one of the Following events shall occur:
13.1.1 Grantee falls to pay any sum due hereunder and such
failure continues for thirty (30) days; or
13.1.2 Grantee fails to purchase the minimum monthly
quantity of A-55 Additive as set forth in subparagraph
2.7.1.
CONFIDENTIAL Page 17 of 22
<PAGE> 18
13.1.3 Grantee fails to materially implement the business
plan or the financial plan approved by A-55 or fails to
exercise reasonable efforts to commercialize the A-55
Technology; or
13.1.4 A party fails to perform or comply with any term
hereof which materially affects this Agreement; or
13.1.5 Without the prior written approval of A-55 first
had and obtained, there is a change in control of the
Grantee; or
13.1.6 Without the prior written approval of A-55 first had
and obtained, by virtue of any issue of shares, capital
reduction or any means whatsoever, A-55's shareholding
(representing voting shares or entitlement to equity) in
Grantee falls below 30%; or
13.1.7 A party files a voluntary petition for bankruptcy or
any similar relief under laws for the benefit of creditors;
a party is adjudged bankrupt or a receiver is appointed by
a court of competent jurisdiction, and such adjudication is
not vacated within thirty (30) days; or an involuntary
petition is filed for reorganization or similar relief and
is not dismissed or stayed within sixty (60) days; or
13.1.8 Any representation or warranty made in this
Agreement proves to have been incorrect in any material
respect which significantly affects this Agreement; or,
13.1.9 Grantee defaults in the timely performance of any of
its obligations under that certain Heads of Agreement
between A-55 and Grantee dated December 2, 1997.
13.2 Notice of Default. Before any default is effective herein,
the party declaring the default shall provide the defaulting party
with a written notice specifying the claimed default. Such notice
shall provide a period of thirty (30) days from the date of the
notice within which the defaulting party may cure such default.
13.3 Failure to Cure. In the event the defaulting party fails
to cure any default to the reasonable satisfaction of the other party
within the thirty (30) day period described in paragraph 13.2, the
default will, unless the other party specifies otherwise, become
effective on the
CONFIDENTIAL Page 18 of 22
<PAGE> 19
last day of the thirty (30) day period, provided that if either party
in good faith denies there is a breach or default (other than a
breach or default for the nonpayment of money), such party may within
such thirty (30) day period submit the matter to binding arbitration
and in the event it is finally determined that a breach or default
has occurred, such party shall have thirty (30) days from the date of
determination to cure the same.
14. INDEMNITY AND DISCLAIMER
14.1 Indemnification by Grantee. Grantee shall
defend, indemnify and hold A-55 L.P., its Corporate officers, mangers, and staff
harmless from and against any action, claim, liability, expense (including
reasonable attorneys' fees and costs) or damage (including consequential
damages) to persons or property resulting from any acts or omissions of Grantee
and its employees and agents in connection with the performance of this
Agreement or the manufacture, use and sale of A-55 Technology hereunder.
14.2 Indemnification by A-55. A-55 shall
defend, indemnify and hold Grantee harmless from and against any action, claim,
liability, expense (including reasonable attorneys' fees and costs) or damage
(including consequential damages) to persons or property resulting from any
breach or untruth of any representation or warranty hereunder or failure to
perform any covenant hereunder).
15 GENERAL PROVISIONS.
15.1 Notices. Any notice required to be given under this
Agreement shall be in writing and shall be sent by certified or registered mail,
or its equivalent, postage prepaid, to each party at the address below or at
such other address of which one party shall notify the other in the same manner:
To A-55: A-55, L.P.
5270 Neil Road
Reno, NV 89502
USA
To Grantee: Vanetik & Associates
8502 E. Chapman
Suite 604
Orange, CA 92869
USA
15.2 Governing Law. This Agreement shall be governed by
the law of Nevada for performance in the Territory.
CONFIDENTIAL Page 19 of 22
<PAGE> 20
15.3 Arbitration. All disputes, differences, or questions
between the parties concerning the construction, interpretation, and
effect of this Agreement or of any clause herein contained or the
rights and liabilities of the parties, shall be settled by
arbitration in accordance with the Rules of Arbitration of the
American Arbitration Association by arbitrators appointed in
accordance with such rules; provided that either party shall have the
right to appeal the result of any such arbitration; and provided
further that arbitration under this subparagraph shall not apply to
disputes, differences or questions between the parties concerning
violations of United States Anti-Trust laws or regarding the validity
of the A-55 Patent or regarding the confidentiality of any know-how
licensed hereunder. Unless the parties otherwise agree, the site for
arbitration shall be Reno, Nevada.
15.4 No Affiliations. Nothing in this Agreement shall be
construed to create between the parties a partnership, association,
joint venture, or agency.
15.5 Prior Agreements; Amendments. This Agreement cancels and
supersedes all prior oral or written representations, agreements and
understandings between the parties with respect to the subject matter
hereof, and embodies all of the understandings and obligations
between the parties with respect to the subject matter hereof. This
Agreement may be modified and amended at any time, including the
addition of new or deletion of existing know-how and technology
pertinent to the rights transferred under this Agreement, provided
that no agreement or modification or extension of this Agreement
shall be binding upon any of the parties hereto unless made in
writing and signed by both parties.
15.6 Waivers. Failure of either party to require strict
performance of any term of this Agreement shall not affect that
party's right to fully enforce the same, nor shall any waiver of a
default be construed to be a waiver of any succeeding default.
15.7 Provisions Severable. If any term or provision of this
Agreement shall be held or adjudged illegal, invalid, or
unenforceable by any court having jurisdiction, such shall not affect
the validity of any other term or provision hereof, and any such
illegal, invalid, or unenforceable term or provision shall be deemed
to be severable and shall be deleted from this Agreement. A-55 agrees
to send Grantee notice within thirty (30) days after the date any
term or provision of this Agreement is adjudged illegal, invalid or
unenforceable.
CONFIDENTIAL Page 20 of 22
<PAGE> 21
15.8 Binding Agreement. This Agreement shall be binding upon
and inure to the benefit of the parties, their successors and signs
to the extent this Agreement is assignable by its terms.
15.9 Authority to Contract; Counterparts. Each of the parties
covenants that this Agreement is executed under authority duly
granted by its board of directors. The Agreement has been signed in
two (2) counterparts, one for each party, each of which shall be
deemed to be an original.
15.10 Costs of Litigation. In the event of any dispute arising
as the result of the breach or alleged breach of any term of this
Agreement, if such dispute is taken by either party to arbitration or
to any court, the successful party in any such arbitration or court
action shall be entitled, in addition to any damages suffered, to
receive its actual costs of arbitration or suit including, without
limiting the generality of the foregoing, attorneys' fees, experts'
fees, the cost of exhibits and the preparation thereof, and all other
costs reasonably incident to such arbitration or court action.
15.11 Injunction. The parties hereto acknowledge that the
damages for any breach of this Agreement by either party relating to
any matter other than the payment of money would be incapable of
precise determination and would cause the nondefaulting party
irreparable harm. Accordingly, each party accepts the other party's
right to obtain an injunction to prevent any further breach of the
Agreement should the nondefaulting party deem it necessary to do so.
15.12 No Assignment. Grantee shall have no right to assign or
otherwise transfer this License or any of the rights granted to or
obligations imposed upon Grantee without the express prior written
consent of A-55. A-55 may transfer this License or any of the rights
granted hereunder to it without the prior consent of Grantee;
provided, however that A-55 shall not be relieved of any obligations
hereunder unless such transfer is consented to in writing by Grantee.
15.13 Headings. Caption headings are for convenience of
reference only.
CONFIDENTIAL Page 21 of 22
<PAGE> 22
In witness whereof, the parties have signed this Agreement as of the date
appearing above their respective signatures.
DATED: June 22, 1998. DATED: 6/22, 1998.
------------------------------ ---------------------------------
A-55, L.P., a Nevada limited Vanetik & Associates
partnership
By RWG, Inc., a Nevada By /s/
corporation -------------------------------------
President, Vanetik &
Associates
By /s/ Rudolf W. Gunnerman
----------------------------------
Rudolf W. Gunnerman,
Chairman, A-55 LP
CONFIDENTIAL Page 22 of 22
<PAGE> 1
EXHIBIT 10.14
RESTATEMENT OF PROMISSORY NOTE
The following Promissory Note is executed by and between A-55,
L.P., a Nevada limited partnership, as maker and Rudolf W. Gunnerman as payee
with reference to the following facts:
A. Payee has previously advanced funds to maker pursuant to various
promissory notes, lines of credit and open accounts.
B. As of the date of this restatement, certain of the advances by
payee to maker are due and owing or overdue.
C. Maker wishes to restate its obligation to payee in its
entirety, including principal and interest, as of the date
hereof.
PROMISSORY NOTE
$9,210,000.00 September 30, 1997
Reno, Nevada
On demand, A-55 L.P., a Nevada limited partnership, promises to
pay to the order of Rudolf W. Gunnerman, at 5270 Neil Road, Reno, Nevada 89502
the sum of Nine Million Two Hundred Ten Thousand Dollars ($9,210,000.00),
together with interest on the declining principal balance from date hereof.
Interest shall be the prime rate of interest charged from time to time by
Pioneer Citizens Bank.
Principal and interest are payable in full on demand. Interest
and all or any portion of the unpaid principal balance may be prepaid at any
time without penalty.
The maker promises and agrees that in the case of a default in
the payment of any sums required hereunder or if the maker becomes insolvent,
makes a general assignment for the benefit of creditors, or is adjudged
bankrupt, then the unpaid principal balance and accrued interest shall, at the
option of the holder or holders of this Note, immediately become due and payable
although the time of maturity as expressed in this Note may not have arrived.
In the event of a default under the terms of this Promissory
Note, the maker agrees to pay all costs, including reasonable attorneys' fees,
incurred in the collection of any unpaid amounts.
The maker, endorsers, and guarantors waive presentment for
payment, demand, notice, protest, notice of protest,
-1-
<PAGE> 2
diligence, and non-payment of this Note, and all defenses on the ground of any
extension of time for payment that may be given by the holder or holders to
them.
A-55, L.P., a Nevada limited
partnership
By RWG, Inc., a Nevada
corporation, General Partner
By /s/ Rudolf W. Gunnerman
---------------------------------
Rudolf W. Gunnerman,
President
By /s/ Paul C. Knauff
---------------------------------
Paul C. Knauff,
Chief Financial Officer
-2-
<PAGE> 1
EXHIBIT 10.15
PROMISSORY NOTE
$_______________ _______________
Reno, Nevada
On or before ______________, A-55, L.P., a Nevada limited
partnership, promises to pay to the order of Rudolf W. Gunnerman, at 5270 Neil
Road, Reno, Nevada 89502 the sum of __________________________, together with
interest on the declining principal balance from date hereof. Interest shall be
the prime rate of interest charged from time to time by Pioneer Citizens Bank.
Principal and interest are payable in full on the due date of the
note. Interest and all or any portion of the unpaid principal balance may be
prepaid at any time without penalty.
The maker promises and agrees that in the case of a default in
the payment of any sums required hereunder or if the maker becomes insolvent,
makes a general assignment for the benefit of creditors, or is adjudged
bankrupt, then the unpaid principal balance and accrued interest shall, at the
option of the holder or holders of this Note, immediately become due and payable
although the time of maturity as expressed in this Note may not have arrived.
In the event of a default under the terms of this Promissory
Note, the maker agrees to pay all costs, including reasonable attorneys' fees,
incurred in the collection of any unpaid amounts.
The maker, endorsers, and guarantors waive presentment for
payment, demand, notice, protest, notice of protest, diligence, and non-payment
of this Note, and all defenses on the ground of any extension of time for
payment that may be given by the holder or holders to them.
A-55, L.P., a Nevada limited
partnership
By RWG, Inc., a Nevada
corporation, General Partner
By__________________________________
Rudolf W. Gunnerman,
President
By__________________________________
______________________________,
Chief Financial Officer
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<PAGE> 1
EXHIBIT 10.16
COMMERCIAL LEASE AND DEPOSIT RECEIPT
Received from A-55 Limited Partnership, hereinafter referred to as LESSEE, the
sum of $_________________ (None dollars), evidenced by ________________, as a
deposit which shall belong to Lessor and shall be applied as follows:
<TABLE>
<CAPTION>
TOTAL RECEIVED BALANCE DUE
PRIOR TO
OCCUPANCY
<S> <C> <C> <C>
Rent for the period from May 1, 1997 to May 30, 1997........ $61,346.60 $ None $61,346.60
Security deposit (not applicable toward last month's rent).. $_________ $__________ $__________
Other....................................................... $_________ $__________ $__________
Total....................................................... $61,346.60 $ None $61,346.60
</TABLE>
In the event this Lease is not accepted by the Lessor within N/A days, the total
deposit received will be refunded.
Lessee offers to lease from Lessor the premises situated in the City of Reno,
County of Washoe, State of Nevada, described as 5270 Neil Road, upon the
following conditions:
1. TERM: The term will commence on May 1, 1997 and end on
May 1, 2000.
2. RENT: The total rent will be $61,346.60 payable as follows: paid on the
1st day of each month. All rents will be paid to Lessor or his/her
authorized agent, at the following address:____________________________
_______________________________________________________________________
or at such other places as may be designated by Lessor from time to
time. In the event rent is not paid within 10 days after due date,
Lessee agrees to pay a late charge of $1.00 plus interest at 9% per
annum on the delinquent amount. Lessee further agrees to pay $1.00 for
each dishonored bank check. The late charge period is not a grace
period, and Lessor is entitled to make written demand for any rent if
not paid when due.
3. USE: The premises are to be used for the operation of Corporate Office
Headquarters and for no other purpose, without prior written consent of
Lessor. Lessee will not commit any waste upon the premises, or any
nuisance or act which may disturb the quiet enjoyment of any tenant in
the building.
4. USES PROHIBITED: Lessee will not use any portion of the premises for
purposes other than those specified. No use will be made or permitted
to be made upon the premises, nor acts done, which will increase the
existing rate of insurance upon the property, or cause cancellation of
insurance policies covering the property. Lessee will not conduct or
permit any sale by auction on the premises.
5. ASSIGNMENT AND SUBLETTING: Lessee will not assign this Lease or sublet
any portion of the premises without prior written consent of the Lessor,
which will not be
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<PAGE> 2
unreasonably withheld. Any such assignment or subletting without consent
will be void and, at the option of the Lessor, will terminate this
Lease.
6. ORDINANCES AND STATUTES: Lessee will comply with all statutes,
ordinances, and requirements of all municipal, state and federal
authorities now in force, or which may later be in force, regarding the
use of the premises. The commencement or pendency of any state or
federal court abatement proceeding affecting the use of the premises
will, at the option of the Lessor, be deemed a breach of this Lease.
7. MAINTENANCE, REPAIRS, ALTERATIONS: Unless otherwise indicated, Lessee
acknowledges that the premises are in good order and repair. Lessee
shall, at his/her own expense, maintain the premises in a good and safe
condition, including plate glass, electrical wiring, plumbing and
heating and air conditioning installations, and any other system or
equipment. The premises will be surrendered, at termination of the
Lease, in as good condition as received, normal wear and tear excepted.
Lessee will be responsible for all repairs required, except the
following which will be maintained by Lessor: roof, exterior walls,
structural foundations (including any retrofitting required by
governmental authorities) and: _______________________________________.
Lessee will also maintain in good condition property adjacent to the
premises, such as sidewalks, driveways, lawns, and shrubbery, which
would otherwise be maintained by Lessor.
No improvement or alteration of the premises will be made without
the prior written consent of the Lessor. Prior to the commencement of
any substantial repair, improvement, or alteration, Lessee will give
Lessor at last two (2) days written notice in order that Lessor may post
appropriate notices to avoid any liability for liens.
8. ENTRY AND INSPECTION: Lessee will permit Lessor or Lessor's agents to
enter the premises at reasonable times and upon reasonable notice for
the purpose of inspecting the premises, and will permit Lessor, at any
time within sixty (60) days prior to the expiration of this Lease, to
place upon the premises any usual "For Lease" signs, and permit persons
desiring to lease the premises to inspect the premises at reasonable
times.
9. INDEMNIFICATION OF LESSOR: Lessor will not be liable for any damage or
injury to Lessee, or any other person, or to any property, occurring on
the premises. Lessee agrees to hold Lessor harmless from any claims for
damages arising out of Lessee's use of the premises, and to indemnify
Lessor for any expense incurred by Lessor in defending any such claims.
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<PAGE> 3
10. POSSESSION: If Lessor is unable to deliver possession of the premises
at the commencement date set forth above, Lessor will not be liable for
any damage caused by the delay, nor will this Lease be void or voidable,
but Lessee will not be liable for any rent until possession is
delivered. Lessee may terminate this Lease if possession in not
delivered within N/A days of the commencement term in Item 1.
11. LESSEE'S INSURANCE: Lessee, at his/her expense, will maintain plate
glass, public liability, and property damage insurance insuring Lessee
and Lessor with minimum coverage as follows: $1,000,000.
Lessee will provide Lessor with a Certificate of Insurance
showing Lessor as additional insured. The policy will require ten (10)
day's written notice to Lessor prior to cancellation or material change
of coverage.
12. LESSOR'S INSURANCE: Lessor will maintain hazard insurance covering one
hundred percent (100%) actual cash value of the improvements throughout
the Lease term. Lessor's insurance will not insure Lessee's personal
property, leasehold improvements, or trade fixtures.
13. SUBROGATION: To the maximum extent permitted by insurance policies which
may be owned by the parties, Lessor and Lessee waive any and all rights
of subrogation which might otherwise exist.
14. UTILITIES: Lessee agrees that he/she will be responsible for the payment
of all utilities, including water, gas, electricity, heat and other
services delivered to the premises, except: None.
15. SIGNS: Lessee will not place, maintain, nor permit any sign or awning on
any exterior door, wall, or window of the premises without the express
written consent of Lessor, which will not be unreasonably withheld.
16. ABANDONMENT OF PREMISES: Lessee will not vacate or abandon the promises
[sic] at any time during the term of this Lease. If Lessee does abandon
or vacate the premises, or is dispossessed by process of law, or
otherwise, any personal property belonging to Lessee left on the
premises will be deemed to be abandoned, at the option of Lessor.
17. CONDEMNATION: If any part of the premises is condemned for public use,
and a part remains which is susceptible of occupation by Lessee, this
Lease will, as to the part taken, terminate as of the date the condemnor
acquires possession. Lessee will be required to pay such proportion of
the rent for the remaining term as the value of the premises remaining
bears to the total value of the premises at the date of condemnation;
provided, however, that Lessor may at his/her option, terminate this
Lease as of the date the condemnor acquires
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<PAGE> 4
possession. In the event that the premises are condemned in whole, or
the remainder is not susceptible for use by the Lessee, this Lease will
terminate upon the date which the condemnor acquires possession. All
sums which may be payable on account of any condemnation will belong
solely to the Lessor; except that Lessee will be entitled to retain any
amount awarded to him/her for his/her trade fixtures or moving expenses.
18. TRADE FIXTURES: Any and all improvements made to the premises during the
term will belong to the Lessor, except trade fixtures of the Lessee.
Lessee may, upon termination, remove all his/her trade fixtures, but
will pay for all costs necessary to repair any damage to the premises
occasioned by the removal.
19. DESTRUCTION OF PREMISES: In the event of a partial destruction of the
premises during the term, from any cause, Lessor will promptly repair
the premises, provided that such repairs can be reasonably made within
sixty (60) days. Such partial destruction will not terminate this
Lease, except that Lessee will be entitled to a proportionate reduction
of rent while such repairs are being made, based upon the extent to
which the making of such repairs interferes with the business of Lessee
on the premises. If the repairs cannot be made within sixty (60) days,
this Lease may be terminated at the option of either party by giving
written notice to the other party within the sixty (60) day period.
20. HAZARDOUS MATERIALS: Lessee will not use, store, or dispose of any
hazardous substances upon the premises, except the use and storage of
such substances that are customarily used in Lessee's business, and are
in compliance with all environmental laws. Hazardous substances means
any hazardous waste, substance or toxic materials regulated under any
environmental laws or regulations applicable to the property. Lessee
will be responsible for the cost of removal of any toxic contamination
caused by lessee's use of the premises.
21. INSOLVENCY: The appointment of a receiver, an assignment for the
benefits of creditors, or the filing of a petition in bankruptcy by or
against Lessee, will constitute a breach of this Lease by Lessee.
-5-
<PAGE> 1
EXHIBIT 10.17
Commercial Lease
A-55 Limited Partnership and R.W. Gunnerman
Premises described as 5270 Neil Road, Reno Nevada.
Lease dated April 16, 1997
Addendum Number One:
1. The term of the lease will commence on June 1, 1997 and end on
June 30, 2000.
2. The lessee (A-55 Limited Partnership) intends to cause certain
extensive alterations and improvements in and to the third floor
of the building, subject to the approval of the lessor (R.W.
Gunnerman), for which the lessor (R.W. Gunnerman) will be fully
financially responsible.
Acceptance
The undersigned accepts the foregoing amendments to the lease for 5270 Neil
Road.
Lessor Rudolf W. Gunnerman Date: June 2, 1997
------------------- -------------
R.W. Gunnerman
Lessor acknowledges receipt of a copy of the accepted Addendum Number One.
Lessee Paul C. Knauff Date: June 2, 1997
------------------------ ------------
A-55 Limited Partnership
Paul C. Knauff, Chief Financial Officer
<PAGE> 1
EXHIBIT 10.20
CONSENT
The undersigned hereby consents to being named in the Registration
Statement of A-55, Inc. filed pursuant to Rule 462(b) under the Securities Act
of 1933, as amended, as a director to be appointed prior to the consummation of
the initial public offering of A-55, Inc.
IN WITNESS WHEREOF, the undersigned has executed this Consent effective
as of the 17th day of August, 1998.
/s/ William C. Tao
-------------------
Dr. William C. Tao
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<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports dated August 7, 1998, relating
to the financial statement of A-55, Inc.; October 5, 1998 relating to the
financial statements of A-55, L.P.; and September 15, 1997, relating to the
financial statements of Advanced Fuels L.L.C., which appear in such Prospectus.
We also consent to the reference to us under the headings "Experts" and
"Selected Financial Data" in such Prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Financial Data".
PricewaterhouseCoopers LLP
Sacramento, CA
October 7, 1998
