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Advanced Engine Technologies,
Inc.
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended June 30, 2001
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OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from to
_______________ ____________
Commission file number 0-25177
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ADVANCED ENGINE TECHNOLOGIES, INC.
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(Name of Small Business Issuer in Its Charter)
Colorado 84-1358194
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
11150 W. Olympic Boulevard Suite 1050,
Los Angeles, California 90064
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(Address of Principal Executive Offices) (Zip Code)
(310) 914-9599
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange on Which
Title of Each Class Registered
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None None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value per share
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes X No____________
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this Form 10-KSB
or any amendment to this Form 10-KSB.[_]
State issuer's revenues for its most recent fiscal year. $-0-
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State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days. (See definition of
affiliate in Rule 12b-2 of the Exchange Act.) $3,963,972 as of October 3, 2001.
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ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court.
Yes________ No________
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 33,455,000 shares of Common
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Stock as of October 3, 2001.
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Transitional Small Business Disclosure Format (check one):
Yes________ No X
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DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").
The listed documents should be clearly described for identification purposes
(e.g., annual report to security holders for fiscal year ended December 24,
1990).
PART I
Item 1. Description of Business.
Forward-Looking Statements
This document contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "except," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under no duty to update any of the
forward-looking statements after the date of this report to conform such
statements to actual results or to changes in our expectations.
Readers are also urged to carefully review and consider the various
disclosures made by us which attempt to advise interested parties of the factors
that affect our business, including without limitation the disclosures made
under the caption "Management's Discussion and Analysis of Financial Condition
or Plan of Operation" and under the caption "Risk Factors" included herein.
General
Advanced Engine Technologies, Inc. ("we", "us" or the "Company") was
incorporated and commenced operations on September 23, 1996. We were formed to
develop and commercialize the OX2 internal combustion engine, a uniquely
designed engine. Our focus is on the development and commercial introduction of
the OX2 engine and the subsequent licensing of the OX2 engine technology to
approved manufacturers.
In 1996, we entered into an exclusive sub-licensing agreement with OX2
Engine (Distribution) Ltd. ("OX2 Ltd."), pursuant to which we acquired the right
to manufacture, distribute and market the OX2 engine in the North American Free
Trade Agreement countries (presently the United States, Canada and Mexico). OX2
Ltd. licensed the technology from OX2 Intellectual Property, Inc., a foreign
corporation that was assigned the technology from the original patent holders.
The sub-license was for the longer of (i) the life of the patent or (ii) twenty
(20) years. In May 1999, we acquired the worldwide patent rights for the OX2
engine from OX2 Ltd. in exchange for $1.5 million. We have taken responsibility
for patent maintenance and for future research and development on the OX2
engine.
We have spent $259,023 for the fiscal year ended June 30, 2001 and
$1,041,376 for the fiscal year ended June 30, 2000, on research and development
for the OX2 engine. On July 15, 1998, we entered into a joint venture agreement
with Carroll Shelby, our president,
-1-
to develop further the OX2 engine for use in a standard application for motor
vehicles and to promote the OX2 engine to the automotive industry.
Our Product
AT THE PRESENT TIME ONLY A PROTOTYPE OF THE OX2 INTERNAL COMBUSTION
ENGINE, PLUS ADDITIONAL PARTS THAT CAN BE USED FOR ENGINE DEVELOPMENT OR FOR THE
BUILDING OF ADDITIONAL PROTOTYPES, HAVE BEEN BUILT. NO OX2 ENGINES HAVE BEEN
MANUFACTURED FOR PRODUCTION USE, AND NO ASSURANCE CAN BE GIVEN THAT THE OX2
ENGINE WILL BE SUCCESSFULLY DEVELOPED OR MANUFACTURED.
The OX2 engine prototype is designed to be fuel efficient, light
weight, low-emission, multi-fueled and smaller and more inexpensive than
conventional internal combustion engines. We also believe that it will not have
the complex manufacturing/production requirements of conventional internal
combustion engines.
The OX2 engine prototype is designed to have only six major components,
of which only three move. We believe this design will result in low set-up,
production and manufacturing costs and a simplicity of design that will promote
a high level of quality assurance.
The major parts of the engine prototype are: (1) housing, (2) cylinder
block, (3) top piston plate, (4) lower piston plate, (5) cam track and (6) drive
shaft. The moving parts are: (1) cylinder block, (2) top piston plate and (3)
lower piston plate.
We expect that the OX2 engine, once completed, will have several
advantages over a four stroke conventional engine. Some of these advantages are
expected to include:
. The OX2 engine prototype has only six major components, which
should result in lower set-up, production and manufacturing costs
than a typical conventional engine.
. We believe the OX2 engine prototype has greater effective engine
capacity than a typical conventional engine.
. The OX2 engine prototype does not use a conventional crankshaft,
which we believe will result in a leverage advantage over a
typical conventional engine.
. The OX2 engine prototype design should enable the timing to be
adjusted, which we believe will produce a more effective burn on
the combustible fuel being used.
. The OX2 engine prototype's piston speed should remain constant
throughout the entire power stroke, which we believe will allow
exhaust gases to be more efficiently expelled than a typical
conventional engine.
-2-
In the short term, our plans are to complete the research and
development of the OX2 engine in order to prepare it for production and
marketing. We currently have an agreement with Steven Manthey, the inventor of
the OX2 engine, that provides that Mr. Manthey will continue to develop and
maintain the OX2 engine prototype. We have an agreement with the University of
California, Riverside ("UCR") that provides that UCR will continue to conduct
research and development on the OX2 engine prototype in conjunction with us. The
research and development at UCR is being conducted under the guidance of Dr.
Joseph Norbeck (of the CE-CERT program at UCR) and Dr. Roberta Nichols, one of
our consultants. We are also conducting research and development activities in
Gardena, California.
Marketing
Assuming the completion of the necessary research and development
required to complete our product and assuming that the tests of our OX2 engine
prototype are successful, we will attempt to introduce the OX2 engine into the
market. The total size of the internal combustion engine industry makes the
introduction of any significant change to industry standards a complex
promotional and marketing exercise. We believe that the multi-purpose nature of
the OX2 engine should make it compatible to several different market
applications.
Upon completion of the OX2 engine, we expect, initially, to market it
to specialist engine manufacturers that produce stationary engines. We expect to
grant sub-licenses allowing the manufacture of OX2 engines only to a limited
number of engine manufacturers, to achieve a manageable and controlled market
introduction.
Sources of Income
We expect to generate income in two ways: (1) we expect to receive a
licensing fee from approved manufacturers in return for the right to produce and
sell the OX2 engine; license fees will be determined by territory size and
market potential; and (2) we expect to receive a royalty payment for each engine
produced and sold; we expect that royalty payments will be determined by engine
capacity and application.
Patents
We have been granted a U.S. patent for an Axial Piston Rotary Engine
(U.S. Patent No. 5,813,372). We have filed a patent application for an Axial
Piston Rotary Engine in Australia (No. PCT/AU95/00815). In addition, we have
patent applications pending in countries throughout the world.
Employees
We have two employees, our president and our chief operating officer.
We are currently evaluating the need to hire additional employees to assist in
the daily operations and market placement of our product. We also engage
consultants who receive fees for their consulting services.
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Other Agreements
In June 1999, we agreed to grant 1,000,000 shares of the Company's
common stock, par value $0.001 per share ("Common Stock"), to the University of
California Riverside Foundation. The stock is to be issued in five annual
installments of 200,000 shares of Common Stock each. Three installments have
been granted, in July 1999, July 2000 and September 2001, for a total of 600,000
shares. The shares were donated to provide an endowment for research funds for
the College of Engineering-Center for Environmental Research and Technology.
This donation is independent of our relationship with UCR for research and
development of the OX2 engine.
Risk Factors
You should carefully consider the following risks and the other
information contained in this Report and in our other filings with the
Securities and Exchange Commission before you decide to invest in us or to
maintain or increase your investment. The risks and uncertainties described
below are not the only ones facing us. Additional risks and uncertainties may
also adversely impact and impair our business. If any of the following risks
actually occur, our business, results of operations or financial condition would
likely suffer. In such case, the trading price of our Common Stock could
decline, and you may lose all or part of your investment.
. There can be no assurance that we will be able to develop successfully the
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OX2 engine. No OX2 engines have been developed or manufactured for
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production use, and no assurance can be given that the OX2 engine will be
successfully developed or manufactured. Testing and development on the
engine are still in progress and are being conducted in conjunction with
UCR. Until further testing, research and development have been completed,
we will not have a finished product for introduction into the market. We do
not have an estimated completion date for the testing, research and
development. Furthermore, we cannot provide assurance that we will be
successful in the ultimate development of the engine for commercial
applications.
. A market for our OX2 engine may take longer to develop than anticipated or
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may never develop, which would adversely affect revenues and profitability.
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Our OX2 engine represents an innovation in the industry for internal
combustion engines. The size of the internal combustion engine industry
makes the introduction of changes to industry standards a complex
promotional and marketing exercise. We cannot ensure that our targeted
customers will purchase our engine. If the market for our engines fails to
develop, or develops more slowly that anticipated, we may not be able to
meet our expenses and may not achieve profitable results. In addition, we
cannot provide assurance that we will be successful with our marketing
efforts or the development of our joint ventures.
. Our cash reserves may not be adequate to cover our costs of operations. To
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date, we have covered our operating losses by privately placing securities.
We expect to fund our general operations and marketing activities for 2002
with our current cash reserves, which were obtained from the sale of
securities. However, our cost estimates do not
-4-
include provisions for any contingencies, unexpected expenses or increases
in costs that may arise.
. We may not be able to raise the capital we need. It is likely that we will
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need to raise additional capital at some point in the future. If additional
funds are raised through the issuance of equity, our shareholders'
ownership will be diluted. There can be no assurance that additional
financing will be available on terms favorable to us or at all. If funds
are not available or are not available on terms acceptable to us, we may
not be able to continue the development of our product, respond to our
competitors or continue our business.
. Our business depends on the protection of our intellectual property and may
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suffer if we are unable to protect adequately our intellectual property.
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Currently, we have been granted one U.S. Patent for an Axial Piston Rotary
Engine. We have one patent application pending in Australia for an Axial
Piston Rotary Engine. We also have patent applications pending in countries
throughout the world. We believe that our ability to establish and maintain
our position in the market depends on these patents. We cannot provide
assurance that our patent will not be invalidated, circumvented or
challenged, that the rights granted under the patents will give us
competitive advantages or that our patent applications will be granted.
. If we are found to infringe on the intellectual property rights of others,
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we may not be able to continue the development and production of our
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engine, or we may have to enter into costly license or settlement
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agreements. Third parties may allege infringement by us with respect to
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past, current or future intellectual property rights. Any claim of
infringement, regardless of merit, could be costly, time consuming and
could require us to develop non-infringing technology or enter into
royalty, licensing or settlement agreements. These agreements could be on
terms unfavorable or unacceptable to us and could significantly harm the
development of our product, and, ultimately, our business. In the future,
we may also have to enforce our patent and other intellectual property
rights through litigation. Any such enforcement could also result in
substantial costs and could materially affect our financial condition and
our business.
. Our business is dependent on our relationships with other parties.
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Research, development and testing of our engine is being carried out in
conjunction with UCR. Steven Manthey, the inventor of the engine, is also
actively participating in the research and development. In addition, we
have a joint venture agreement with Carroll Shelby to further develop and
promote our engine. Completion of the research, development and testing is
essential to the success of our business. Until such testing, research and
development have been completed, we will not have a finished product to
introduce to the market. Thus, if we are unable maintain our relationships
with UCR, Steven Manthey and Carroll Shelby, our business will be adversely
affected.
. We have a history of losses. We have a history of operating losses and an
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accumulated deficit, as of June 30, 2001, of $6,231,758. Our ability to
generate revenues and profits is subject to the risks and uncertainties
encountered by development stage companies.
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. Our future revenues and profitability are unpredictable. We currently have
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no signed contracts that will produce revenue, and we do not have an
estimate as to when we will be entering into such contracts. Furthermore,
we cannot provide assurance that management will be successful in
negotiating such contracts.
. Rapid technological changes could adversely affect our business. The market
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for internal combustion engines is characterized by rapidly changing
technology, evolving industry standards and changing customer demands.
Thus, if we are unable to adapt to rapidly changing technologies and to
adapt our product to evolving industry standards, our business will be
adversely affected.
. Our Common Stock is not widely traded, which may result in illiquidity and
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increased volatility. Our Common Stock is not widely traded, and, as a
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result, the prices quoted for our stock may not reflect its fair market
value. Because of the low volume of trading in our Common Stock, our
shareholders may find it difficult to sell their shares.
. Our principal shareholders can exercise significant control over us and
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could limit the ability of our other shareholders to influence the outcome
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of transactions requiring a shareholder vote. As of June 30, 2001,
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approximately 74% of our outstanding Common Stock is owned by our executive
officers, directors and principal shareholders. These shareholders will
have the ability to exercise influence over all matters requiring approval
by our shareholders, including the election of directors and approval of
significant corporate transactions.
Item 2. Description of Property.
We lease office space for our headquarters in Los Angeles, California
and work space for engine development in Gardena, California.
Item 3. Legal Proceedings.
The following two lawsuits previously named us as a defendant. One
action was filed in the State of New Mexico and the other in the State of
California. Both actions were filed by the Estate of Paul Gerrard Ebbage (the
"Estate") and concerned the Estate's beneficial entitlement to a percentage of
shares of Common Stock that originally were issued to OX2 Ltd. (the "Disputed
Shares"). In August 2000, we accepted the surrender of 10,713,238 shares of
Common Stock, which we subsequently deposited with the Superior Court of the
State of California, County of Los Angeles (the "Los Angeles Superior Court"),
for the court to then determine who rightfully owns the Disputed Shares as
between the plaintiff and the named defendants (other than us). In April 2001 a
Joint Stipulation and Order Dismissing Verified Derivative Complaint and
Verified Cross Complaint in Interpleader Without Prejudice (the "Joint
Stipulation and Order") was entered into pursuant to which the action filed in
the State of California was dismissed without prejudice. The Disputed Shares are
still being held by the Los Angeles Superior Court pending the outcome of the
action filed in the State of New Mexico. We were dismissed from the action filed
in the State of New Mexico in May 2001.
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The two lawsuits are:
1) Raymond J. Ebbage, as executor of the Estate of Paul Gerrard Ebbage
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v. Steven Charles Manthey, et.al. Superior Court of the State of
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California, County of Los Angeles, No. BC 232758.
2) Raymond J. Ebbage, as executor of the Estate of Paul Gerrard Ebbage
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v. Steven Charles Manthey, et.al. Second Judicial District, County
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of Bernalillo, State of New Mexico, CV No. 2000-02628.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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