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U.S. SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, DC
20549
FORM 10-QSB
(Mark
One)
[X] Quarterly report under Section 13 or 15(d)
of the Securities Exchange Act
of 1934
For
the quarterly period ended December 31, 2000
[_] Transition report under Section 13 or 15(d)
of the Securities Exchange Act
For
the transition period from _________ to _________
Commission
file number 0-25177
Advanced Engine
Technologies, Inc.
-----------------------------------------------------------------------
(Exact Name of Small Business Issuer as
Specified in Its Charter)
Colorado 84-1358194
--------------------------------- -----------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11150 W. Olympic Boulevard, Suite
1050 Los Angeles, CA 90064
------------------------------------------------------------
(Address of Principal
Executive Offices)
(310) 914-1849
------------------------------------------------
(Issuer's Telephone Number,
Including Area Code)
_______________________________________________________________
(Former Name, Former Address and
Former Fiscal Year, if Changed
Since Last
Report)
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 the past 90 days.
Yes
X No ______
--------
APPLICABLE ONLY TO ISSUERS
INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE
YEARS
Check whether the registrant 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 ISSUERS
State the number of shares outstanding of
each of the issuer's classes of
common
equity, as of the latest practicable date:
33,150,000 shares of common stock, $0.001
par value per share, as of
December
31, 2000.
Transitional Small Business Disclosure
Format (check one):
Yes _______ No X
-------
-2-
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
DECEMBER
31, 2000
-3-
ADVANCED ENGINE
TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE
COMPANY)
CONTENTS
Page
ACCOUNTANTS'
REPORT
5
FINANCIAL
STATEMENTS
Balance Sheet 6
Statements of Operations 7
Statements of Stockholders' Equity 9
Statements of Cash Flows 11
Notes to Financial Statements 13
-4-
Independent
Accountants' Report
Advanced
Engine Technologies, Inc.
(A
Development Stage Company)
We
have reviewed the accompanying balance sheet of Advanced Engine Technologies,
Inc.
(a development stage company) as of December 31, 2000, and the related
statements
of operations, stockholders equity, and cash flows for the quarter
and
the six months ended December 31, 2000 and 1999 and the period from
September
23, 1996 (inception) through December 31, 2000, in accordance with
Statements
on Standards for Accounting and Review Services issued by the
American
Institute of Certified Public Accountants. All information included in
these
financial statements is the representation of the management of Advanced
Engine
Technologies, Inc.
A
review of interim financial information consists principally of applying
analytical
procedures to financial data and making inquiries of persons
responsible
for financial and accounting matters.
It is substantially less in
scope
than an audit conducted in accordance with generally accepted auditing
standards,
the objective of which is the expression of an opinion regarding the
financial
statements taken as a whole.
Accordingly, we do not express such an
opinion.
Based
on our review, we are not aware of any material modifications that should
be
made to the accompanying December 31, 2000 financial statements in order for
them
to be in conformity with generally accepted accounting principles.
Albuquerque,
New Mexico
February
9, 2001
-5-
ADVANCED ENGINE
TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE
COMPANY)
BALANCE SHEET
December 31,
2000
See Accountants'
Report.
ASSETS
Current
Assets
Cash and cash equivalents
$10,711,827
Prepaid expenses 5,192
Due from related party 21,000
-----------
Total current assets 10,738,019
===========
Fixed
Assets
Automobile
10,000
Furniture
12,242
Computer equipment
44,156
Manufacturing equipment and tooling 67,922
Less accumulated depreciation
(61,825)
-----------
Total fixed assets 72,495
-----------
Other
Assets
Patent rights, net of accumulated
amortization of $253,439
1,268,280
Patent, copyrights and designs, net of
accumulated amortization of $18,230
25,520
-----------
Total other assets 1,293,800
-----------
Total assets
$12,104,314
===========
LIABILITIES
AND STOCKHOLDERS' EQUITY
Current
Liabilities
Accounts payable $ 137,181
-----------
Commitments
and Contingencies
Stockholders'
Equity
Common stock - 50,000,000 shares authorized,
33,150,000 issued and outstanding; $.001 par
value
33,150
Additional paid-in capital 16,231,100
Deficit accumulated during the development
stage
(4,297,117)
-----------
Total stockholders' equity
11,967,133
-----------
Total
liabilities and stockholders' equity $12,104,314
===========
See
Notes to Financial Statements.
-6-
ADVANCED ENGINE
TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF
OPERATIONS
Six Months Ended December 31,
2000 and 1999 and the
Period From September 23,
1996 (Inception)
Through December
31, 2000
See Accountants'
Report.
9/23/96
(Inception)
Through
2000 1999 12/31/00
Operating
expenses
$ 394,471 733,456 2,192,901
Research
and development expenses
386,812 -- 2,253,188
----------- ----------
Loss
from operations
(781,283) (733,456) (4,446,089)
Interest
income
31,072 18,691 148,972
----------- ---------- ----------
Net
loss
$ (750,211) (714,765) (4,297,117)
=========== ========== ==========
Basic
net loss per share
$ (.03) (.03) (.19)
=========== ========== ==========
Weighted
average number of common
30,600,000 22,775,000 22,547,459
shares outstanding =========== ========== ==========
See
Notes to Financial Statements.
-7-
ADVANCED ENGINE
TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE
COMPANY)
STATEMENTS OF OPERATIONS
(CONTINUED)
Quarters Ended December 31,
2000 and 1999
2000 1999
Operating
expenses $ 244,157
237,330
Research
and development expenses 37,379 --
----------- ----------
Loss
from operations
(281.536) (237,330)
Interest
income 17,172 (14,475)
----------- ----------
Net
loss $ (264,364) (222,855)
=========== ==========
Basic
net loss per share $ (.01) (.01)
=========== ==========
Weighted
average number of common
shares outstanding
30,600,000 22,925,000
=========== ==========
See
Notes to Financial Statements.
-8-
ADVANCED ENGINE TECHNOLOGIES,
INC.
(A DEVELOPMENT STAGE
COMPANY)
STATEMENTS OF
STOCKHOLDERS' EQUITY
Quarters Ended December 31,
2000 and 1999 and the
Period From September 23,
1996 (Inception)
Through December
31, 2000
See Accountants'
Report.
(Deficit)
Accumulated
Common Stock Additional During the
-------------------------------
Paid-in Development
Shares Amount Capital Stage Total
------ ------ --------
------ -----
Issuance of common stock to parent 20,000,000 $20,000
(18,000) - 2,000
corporation
for license rights
Issuance of common stock for services 600,000 600
5,400 - 6,000
Issuance of common stock for cash 499,200 499
498,701 - 499,200
Net loss - - -
(164,233) (164,233)
----------------------------------------------------------------------------------
Balance, June 30, 1997 21,099,200 21,099
486,101 (164,233) 342,967
Issuance of common stock for cash 500,800 501
500,299 - 500,800
Net loss - -
- (309,635) (309,635)
----------------------------------------------------------------------------------
Balance, June 30, 1998 21,600,000
21,600 986,400 (473,868) 534,132
Issuance of stock for assets and 325,000 325
568,425 - 568,750
services
Issuance of common stock for cash 400,000
400 1,999,600 - 2,000,000
Net loss - - -
(902,381) (902,381)
----------------------------------------------------------------------------------
Balance, June 30, 1999 22,325,000 22,325
3,554,425 (1,376,249) 2,200,501
----------------------------------------------------------------------------------
Issuance of stock for assets and 200,000 200
299,800 - 300,000
services
Issuance of stock for cash 400,000 400 1,999,600 -
2,000,000
Net loss - - -
(491,910) (491,910)
----------------------------------------------------------------------------------
Balance, September 30, 1999 22,925,000 22,925 5,853,825
(1,868,159) 4,008,591
----------------------------------------------------------------------------------
See
Notes to Financial Statements.
-9-
ADVANCED ENGINE
TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE
COMPANY)
STATEMENTS OF STOCKHOLDERS'
EQUITY (CONTINUED)
Quarters Ended December 31,
2000 and 1999 and the
Period From September 23,
1996 (Inception)
Through December
31, 2000
See Accountants'
Report.
(Deficit)
Accumulated
Common
Stock Additional During the
--------------------------------
Paid-in Development
Shares Amount Capital
Stage Total
------ ------ -------
----- -----
Balance forward $22,925,000 22,925
5,853,825 (1,868,159) 4,008,591
Net loss - - -
(222,855) (222,855)
------------------------------------------------------------------------------------
Balance, December 31, 1999 22,925,000
22,925 5,853,825 (2,091,014) 3,785,736
Issuance of stock for services 25,000 25 87,475
- 87,500
Net loss - - -
(585,340) (585,340)
------------------------------------------------------------------------------------
Balance, March 31, 2000 22,950,000 22,950
5,941,300 (2,676,354) 3,287,896
Net loss (870,552) (870,552)
------------------------------------------------------------------------------------
Balance, June 30, 2000 22,950,000 22,950
5,941,300 (3,546,906) 2,417,344
Issuance of stock for services 200,000 200 299,800
- 300,000
Issuance of stock for cash 10,000,000
10,000 9,990,000 - 10,000,000
Net loss - - -
(485,847) (485,847)
------------------------------------------------------------------------------------
Balance, September 30, 2000 33,150,000 $33,150 16,231,100
(4,032,753) 12,231,497
Net loss - - - (264,364) (264,364)
------------------------------------------------------------------------------------
Balance, December 31, 2000 $33,150,000
33,150 16,231,100 (4,297,117) (11,967,133)
====================================================================================
See
Notes to Financial Statements.
-10-
ADVANCED ENGINE TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE
COMPANY)
STATEMENTS OF CASH
FLOWS
Quarters Ended December 31,
2000 and 1999 and the
Period From September 23,
1996 (Inception)
Through December
31, 2000
See Accountants'
Report.
9/23/96
(Inception)
Through
2000 1999
12/31/00
Reconciliation of net losses to net
cash
provided by operations:
Net
loss $ (750,211)
(714,765) (4,297,117)
Depreciation and amortization 95,650 99,374
333,494
Issuance of
common stock for assets or services 300,000
300,000 1,264,250
Changes in current assets and liabilities:
Prepaid
expenses 17,576 8,216 (5,192)
Accounts
payable 21,822 (2,881) 137,181
Accrued
payroll (5,000) -- --
Due from
related party (5,000) -- (21,000)
----------- --------- -----------
Net cash
flows used by investing activities (315,163)
(310,056) (2,588,384)
----------- ---------
-----------
Cash flows from investing activities:
Fixed asset
purchases -- (5,767) (134,320)
Intangible
asset purchases
-- (96,592) (1,565,469)
----------- --------- -----------
Net cash
flows used by investing activities --
(102,359) (1,699,789)
----------- --------- -----------
Cash flows from financing activities:
Issuance of
common stock
10,000,000 2,000,000 15,000,000
Loan
proceeds -- -- 50,000
Loan
payments -- -- (50,000)
----------- ---------
-----------
Net cash
flows provided by financing activities
10,000,000 2,000,000 15,000,000
----------- --------- -----------
Net increase in cash and equivalents 9,684,837 1,587,585 10,711,827
Cash at beginning of period
1,026,990 561,795 --
----------- --------- -----------
Cash and equivalents at end of period $10,711,827 2,149,380 10,711,827
=========== =========
===========
See
Notes to Financial Statements.
-11-
ADVANCED ENGINE
TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE
COMPANY)
STATEMENTS OF CASH FLOWS
(CONTINUED)
Quarters Ended December 31,
2000 and 1999
2000 1999
Reconciliation
of net losses to net cash
provided by operations:
Net loss $ (267,506) (222,855)
Depreciation and amortization 48,062 49,687
Issuance of common stock for
assets and services -- --
Changes
in current assets and liabilities:
Prepaid insurance 7,656 3,288
Accounts payable 58,000 --
Due from related party 5,000 --
----------- ---------
Net cash flows applied to
operating activities (148,788) (169,880)
----------- ---------
Cash
flows from investing activities:
Equipment purchases
-- --
----------- ---------
Net
decrease in cash and equivalents (148,788)
(169,880)
Cash
and equivalents at beginning of period 10,860,615
2,819,260
----------- ---------
Cash
at end of period and equivalents
$10,711,827 2,149,380
=========== =========
See
Notes to Financial Statements.
-12-
ADVANCED
ENGINE TECHNOLOGIES, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2000
See
Accountants' Report.
NOTE
1. NATURE OF BUSINESS
Advanced Engine Technologies, Inc. (the
"Company") was incorporated under
the laws
of Colorado and began operations on September 23, 1996. The Company
was
formed to acquire the rights to manufacture, distribute and market an OX2
Engine
(Distribution) Ltd. (OX2) combustion engine throughout the United States,
Canada
and Mexico. On October 18, 1996 the
Company entered into a contract with
OX2,
a company incorporated in the laws of the Republic of Vanuatu, whereby the
Company
acquired the rights to manufacture, distribute and market the OX2
combustion
engine. Performance under this contract
required the Company to
forthwith
issue 20,000,000 shares of its common stock plus an additional
19,000,000
upon the completion of certain emission tests (see Note 3). In
December
1999, both parties agreed to cancel the requirement to issue the
additional
19,000,000 shares. As of June 30, 1998, OX2 owned approximately 62
percent
of the Company's outstanding shares.
A dispute has arisen related to the
shares originally owned by OX2. As a
result,
two lawsuits were filed which included the Company as a defendant. The
suits
seek to have the disputed shares surrendered to the Company and the stock
records
amended to reflect OX2 as the beneficial owner of these shares. In
August
2000, the Company accepted the surrender of 10,713,238 shares of its
common
stock, which it subsequently deposited with the court. As a result, the
Company's
legal counsel expects the Company to be dismissed from the litigation.
In May of 1999, the Company acquired the
worldwide patent rights for the
OX2
engine pursuant to a written agreement with OX2, OX2 (Intellectual Property)
and
Advanced Engine Technology (PTY). The
Company has assumed responsibility
for
worldwide patent maintenance and enforcement.
As of December 31, 2000, the Company's
operations consisted of marketing,
testing
and developing the OX2 combustion engine for commercial applications,
and
raising any necessary capital investment.
Management does not expect to
generate
significant sales revenue during fiscal year 2001. Accordingly,
planned
principal operations have not commenced and the Company is a development
stage
enterprise.
Cash and Cash Equivalents. Cash and cash equivalents include all cash
balances
and highly liquid debt instruments with an original maturity of three
months
or less. The Company's cash is
deposited in financial institutions and
is
insured only up to $100,000 by the Federal Deposit Insurance Corporation.
Cash
equivalents consist of commercial paper and other securities, along with an
irrevocable
letter of credit facility in the amount of $10,000,000.
-13-
ADVANCED
ENGINE TECHNOLOGIES, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2000
See
Accountants' Report.
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Fixed Assets. Fixed assets are stated at cost. Depreciation expense is
calculated
using the straight-line method over the estimated useful lives of the
assets,
which range from 5 to 10 years.
Other Assets. Patent rights are amortized on a straight-line basis over
the
remaining estimated useful life of 10 years. The patents, copyrights and
designs
are amortized on a straight-line basis over the remaining estimated
useful
life of 5 years. The Company
continually reviews other assets to assess
recoverability
from estimated future net cash flows.
To date, these reviews
have
not resulted in a reduction of other assets.
Income Taxes. The Company accounts for its income taxes using the
liability
method. Under this method, deferred tax
liabilities and assets are
determined
based on the difference between the financial statement carrying
amounts
and tax basis of assets and liabilities using enacted tax rates in
effect
in the years in which the differences are expected to reverse. The
Company
has provided a valuation allowance to offset the benefit of any net
operating
loss carryforwards or deductible temporary differences.
Research and Development Costs. Research and development costs are
expensed
as incurred.
Advertising Costs. The Company expenses advertising costs as
incurred.
Advertising
costs amounted to $5,863 and $18,844 for the quarters ending
December
31, 2000 and 1999, and $7,193 and $67,703 for the six months ended
December
31, 2000 and 1999, respectively, and $181,693 from September 23, 1996
(inception)
to December 31, 2000.
Loss per Share. Loss per share is computed on the basis of the weighted
average
number of common shares outstanding during the year and did not include
the
effect of common stock equivalents, as their effect would be antidilutive.
The
numerator for the computation is the net loss and the denominator is the
weighted
average shares of common stock outstanding.
-14-
ADVANCED
ENGINE TECHNOLOGIES, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2000
See
Accountants' Report.
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(CONTINUED)
Use of Estimates. The preparation of financial statements in
conformity
with
generally accepted accounting principles requires management to make
estimates
and assumptions that affect the reported amounts of assets and
liabilities
and disclosure of contingent assets and liabilities at the date of
the
financial statements and the reported amounts of revenues and expenses
during
the reporting period. Actual results
could differ from those estimates.
NOTE
3. RELATED PARTY TRANSACTIONS
The Company paid consulting fees to its
former President, who is also a
shareholder
and former director, in the amount of $293,503 from September 23,
1996
(inception) to December 31, 2000, including $19,885 for the quarter ended
December
31, 1999, and $3,200 and $39,775 for the six months ended December 31,
2000
and 1999, respectively.
The Company paid administrative fees and
reimbursed expenses to a company
that
is owned by one of its shareholders in the amount of $117,693 from
September
23, 1996 (inception) to December 31, 2000, including $6,496 and $9,543
for
the quarters ended December 31, 2000 and 1999, and $16,123 and $24,949 for
the
six months ended December, 31, 2000 and 1999, respectively.
The Company has paid research and development
costs and rent to a company
owned
by its current President in the amount of $165,013 from September 23, 1996
(inception)
to December 31, 2000, including $28,328 for the quarter ended
December
31, 2000, and $40,576 for the six months ended December 31, 2000.
Also,
starting in May 2000, a monthly salary of $5,000 is paid to the President,
who
is also a shareholder and director.
The Company has paid or accrued legal
fees and reimbursed expenses,
including
rent, to a company that is owned by its Secretary in the amount of
$287,587
from September 23, 1996 (inception) to December 31, 2000, including
$37,430
for the quarter ended December 31, 2000, and $96,603 for the six months
ended
December 31, 2000.
The Company has paid for services to a company
that is a shareholder in the
amount
of $71,956 from September 23, 1996 (inception) to December 31, 2000.
-15-
ADVANCED
ENGINE TECHNOLOGIES, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2000
See
Accountants' Report.
NOTE
3. RELATED PARTY TRANSACTIONS
(CONTINUED)
In May 2000, the Company paid engine
development costs to an individual who
is a
shareholder of OX2 in the amount of $300,000.
In October 1996, the Company issued
600,000 shares of its common stock to
one
of its founders in exchange for his services in organizing the Company. The
transaction
was recorded at the estimated fair market value of the services
provided
($6,000), as this was more readily determinable than the fair market
value
of the stock.
Also in October 1996, the Company entered
into a contract with OX2 whereby
the
Company acquired the rights to manufacture, distribute and market the OX2
combustion
engine in the United States, Canada and Mexico for the life of the
world
wide patent. As part of this contract, the Company issued 20,000,000
shares
of its common stock and was to issue an additional 19,000,000 upon the
completion
of emission tests. In December 1998, both
parties agreed to rescind
and
terminate the requirement to issue the additional 19,000,000 shares. The
Company
was also to pay a royalty of 15 percent of the gross proceeds of its
revenue. In May 1999, the Company acquired the
worldwide patent and
manufacturing
rights to the OX2 engine in a four-party agreement between the
Company,
OX2, OX2 (Intellectual Property) and Advanced Engine Technology (PTY).
The
Company has assumed responsibility for patent maintenance and enforcement.
The Company has an outstanding receivable
from its Secretary. The
receivable
at December 31, 2000 is $21,000.
NOTE
4. INCOME TAXES
At December 31, 2000 the Company had
deferred tax assets amounting to
approximately
$1,650,000. The deferred tax assets
consist primarily of the tax
benefit
of net operating loss carryforwards and are fully offset by a valuation
allowance
of the same amount.
The net change in the valuation allowance
for deferred tax assets was an
increase
of approximately $100,000 and $94,000 for the quarters ending December
31,
2000 and 1999, and $300,000 and $306,000 for the six months ended December
31,
2000 and 1999, respectively. The net
change is due primarily to the
increase
in net operating loss carryforwards.
-16-
ADVANCED
ENGINE TECHNOLOGIES, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2000
See
Accountants' Report.
NOTE
4. INCOME TAXES (CONTINUED)
At December 31, 2000, the Company had net
operating loss carryforwards of
approximately
$4,250,000 available to offset future state and federal taxable
income. These carryforwards will expire in 2017 to
2019 for federal tax
purposes
and 2002 to 2004 for state tax purposes.
NOTE
5. COMMON STOCK
The Company offered one million shares of
its common stock at the price of
one
dollar per share in an offering memorandum pursuant to Rule 504 of
Regulation
D of the Securities Act of 1933. The
Company sold 499,200 shares as
of
June 30, 1997, and 500,800 during fiscal year 1998. As of June 30, 1997, the
Company
had stock subscribed in the amount of $74,000 that was recorded as a
receivable
and subsequently received in fiscal year 1998.
On August 6, 1998, the Company entered
into a joint venture agreement with
Carroll
Shelby under which the Company was to issue 300,000 shares of restricted
common
stock in exchange for services related to possible future applications of
the
engine in a street vehicle that utilizes the OX2 combustion engine. These
shares
were issued in November 1998. They were
valued at $525,000 and expensed
as
research and development costs. In
addition, the Company will issue an
additional
250,000 shares upon completion of additional tasks relating to
applications
in a vehicle utilizing the OX2 combustion engine. Subsequent to
this
transaction, Carroll Shelby was appointed to the Board of Directors.
In November 1998, the Company issued
25,000 shares of restricted stock to
purchase
patents, copyrights, designs and prototypes to be used with the
Company's
technology. This transaction was valued
at $43,750 and recorded as an
intangible
asset.
In April 1999, the Company issued 400,000
shares of common stock for
$2,000,000
in a private placement. During the
quarter ended September 30, 1999,
the
Company issued an additional 400,000 shares of common stock to the same
party
for $2,000,000 in a private placement.
In June 1999, the Company agreed to issue
1,000,000 shares of its common
stock
to the University of California Riverside Foundation. The stock is to be
issued
in five annual installments of 200,000 shares each. The first and second
installments
were issued in July of 1999 and 2000.
The donated stock is to
provide
an endowment for research funds for the College of Engineering-Center
for
Environmental Research and Technology.
-17-
ADVANCED
ENGINE TECHNOLOGIES, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2000
See
Accountants' Report.
NOTE
5. COMMON STOCK (CONTINUED)
In January 2000, the Company issued
25,000 shares of common stock in
exchange
for services related to the performance testing of the OX2 engine. This
transaction
was valued at $87,500 and was charged to expense.
In August 2000, the Company entered into
a subscription agreement with a
current
shareholder to issue 10 million shares at one dollar per share in a
private
placement. On September 6, 2000, the
Company issued the stock under
subscription
in exchange for an irrevocable letter of credit in the amount of
$10,000,000. The Board of Directors may draw on this
letter of credit at its
discretion. No interest is being earned at December 31,
2000.
Also in August 2000, the Company adopted
a stock option plan and reserved 5
million
shares for the plan. As of December 31,
2000, no stock options had been
granted.
-18-
Item 2. Management's
Discussion and Analysis or Plan of Operation.
Cautionary
Statement
--------------------
You should read the following discussion
and analysis in conjunction with
the
Financial Statements and related Notes thereto contained elsewhere in this
Form
10-QSB ("Report"). The information in this Report is not a complete
description
of our business or the risks associated with an investment in our
common
stock. We urge you to carefully review and consider the various
disclosures
made by us in this Report and in our other reports filed with the
SEC,
including our Annual Report on Securities and Exchange Commission
("SEC")
Form
10-KSB for the year ended June 30, 2000.
The section entitled "Risk
Factors" set forth in this Report and similar
discussions
in our Annual Report on Form 10-KSB for the year ended June 30, 2000
and
in our other SEC filings, discuss some of the important risk factors that
may
affect our business, results of operations and financial condition. You
should
carefully consider those risks, in addition to the other information in
this
Report and in our other filings with the SEC, before deciding to invest in
our
company or to maintain or increase your investment.
This Report 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. These statements are not
guarantees
of future performance and are subject to certain risks, uncertainties
and
assumptions that are difficult to predict. Therefore, our actual results
could
differ materially and adversely from those expressed in any forward-
looking
statements as a result of various factors. 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.
Overview
--------
Advanced Engine Technologies, Inc.
("we," "us" or the "Company") was formed
to
develop and commercialize the OX2 internal combustion 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.
Based on its design, we believe our OX2
engine prototype will be fuel-
efficient,
lightweight, low-emission, multi-fueled and smaller and less
expensive
than conventional internal combustion engines. We also believe that it
will
not have the complex manufacture/production requirements of conventional
internal
combustion engines.
-19-
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, has been built. The development and testing
of
the prototype are ongoing. 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.
Plan
of Operation
-----------------
We plan to continue the research and
development of our OX2 engine
prototype
during the 2001 fiscal year. We currently have an agreement with
Steven
Manthey, the inventor of the OX2 engine, which 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"), which provides
that
it will continue to conduct research and development on the OX2 engine
prototype,
in conjunction with us. The research and development at UCR are 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.
Assuming the completion of the necessary
research and development required
to
complete our product, and assuming the tests of our OX2 prototype are
successful,
we will attempt to introduce the OX2 engine into the market. Such
marketing
activities include demonstrations to prospective original equipment
manufacturers
of products using internal combustion engines and the development
of
additional joint venture partners to assist in marketing the engine.
In the shorter term, our plans are to
develop an engine for stationary
generator
applications, and in the longer term, we plan to develop an engine for
automobile
and/or aircraft applications.
We expect that our cash flow requirements
to fund general operations in
2001
will total approximately $1,500,000, including outside consulting fees and
expenditures
for equipment. We expect to fund these costs with our cash
reserves,
which were $10,711,827 as of December 31, 2000. Our cost estimates do
not
include provisions for any contingencies or unexpected expenses that may
arise
or any unanticipated increases in costs. As a result, our cash reserves
may
not be adequate to cover the actual costs of operations in the 2001 fiscal
year,
in which event we will be required to raise additional capital.
Historically,
we have obtained cash through private placements of securities.
Our net loss since inception (September
23, 1996) is $4,297,117.
Currently, there are no signed contracts
that will produce revenue, and we
can
provide no assurance that management will be successful in negotiating these
contracts.
-20-
Risk
Factors
------------
You should carefully consider the
following risks and the other information
in
this Report and our other filings with the SEC 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 successfully develop the
--------------------------------------------------------------------------
OX2 engine. No OX2 engines have been
developed or manufactured for 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
--------------------------------------------------------------------------
may never develop, which would adversely
affect revenues and profitability.
--------------------------------------------------------------------------
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
----------------------------------------------------------------------
date, we have covered our operating losses
by privately placing securities.
We expect to fund our general operations
and marketing activities for 2001
with our current cash reserves, which were
obtained from the sale of
securities. However, our cost estimates do
not 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
-----------------------------------------------
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
-21-
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
---------------------------------------------------------------------------
suffer if we are unable to adequately
protect our intellectual property.
-----------------------------------------------------------------------
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, we
-----------------------------------------------------------------------------
may not be able to continue the development
and production of our engine, or
-----------------------------------------------------------------------------
we may have to enter into costly license or
settlement agreements. Third
-----------------------------------------------------------------
parties may allege infringement by us with
respect to past, current or future
intellectual property rights. Any claim of
infringement, regardless of merit,
could be costly, time-consuming and 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. 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 to 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
---------------------------
accumulated deficit, as of December 31,
2000, of $4,297,117. Our ability to
generate revenues and profits is subject to the risks and uncertainties
encountered by development stage companies.
. Our future revenues and profitability are
unpredictable. We currently have
-------------------------------------------------------
no signed contracts that will produce
revenue, and we do not have an estimate
as to when we
-22-
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
---------------------------------------------------------------
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
--------------------------------------------------------------------------
increased volatility. Our common stock is
not widely traded, and, as a
--------------------
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
stockholders may find it difficult to sell
their shares.
. Our principal stockholders can exercise
significant control over us and could
-----------------------------------------------------------------------------
limit the ability of our other stockholders
to influence the outcome of
-----------------------------------------------------------------------
transactions requiring a shareholder vote.
As of December 31, 2000,
-----------------------------------------
approximately 74.884% of our outstanding
common stock is owned by our
executive officers, directors and principal
stockholders. These stockholders
will have the ability to exercise influence
over all matters requiring
approval by our stockholders, including the
election of directors and
approval of significant corporate
transactions.
None.
Item 2. Changes in
Securities and Use of Proceeds.
None.
Item 3. Defaults Upon
Senior Securities.
None.
Item 4. Submission of
Matters to a Vote of Security Holders.
On December 28, 2000, the annual meeting
of shareholders was held.
Shareholders
present in person or by proxy, representing 23,628,427 shares of
common
stock, voted on the following matters:
1.
The shareholders elected the following four directors of the Company to
hold
office until the next annual meeting of shareholders or until their
successors
are elected and qualified:
-23-
Number of Shares Cast
Number of Shares for
which
Cast in Favor Authority
Withheld
-------------
-------------------
Noel
Holmes..........................
12,844,926 10,783,501
Alexandria
Phillips..................
12,888,434
10,739,993
Richard
C. Ronzi.....................
12,872,751
10,755,676
Carroll
Shelby.......................
12,884,576 10,743,851
2.
The shareholders ratified the appointment of Neff & Ricci LLP as the
Company's
independent auditors for the year ended June 30, 2000, as follows:
Number of Shares Number of Shares Number of Shares
Cast in Favor Cast Against Abstaining
------------- ------------ ----------
12,897,272 0 10,731,155
None.
Item 6. Exhibits and
Reports on Form 8-K.
None.
-24-
SIGNATURES
In accordance with the requirements of
the Exchange Act, the registrant
caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Advanced Engine Technologies, Inc.
----------------------------------
(Registrant)
Date:
March 1, 2001 By: /s/ Carroll Shelby
-------------- ---------------------------
Carroll Shelby, President
Date:
March 1, 2001 By: /s/ M. Neil Cummings
-------------- ---------------------------
M.
Neil Cummings, Secretary
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