• Antonov has developed innovative gearbox designs which give size, weight and efficiency gains over conventional automatics whilst using mostly standard components and employing conventional manufacturing techniques. Current product lines include a 2-speed, 6-speed and a 6-speed dual clutch.

• Maiden revenues in Q4 will be generated by the sales of a 2-speed step-up gearbox that boosts Rotrex superchargers’ performance. Initial sales will be in the tuning aftermarket but the unit is also undergoing evaluation by 8 auto manufacturers and tier-1 suppliers for use both in performance cars and diesels.

• A similar 2-speed unit, completing final development, will increase a car’s efficiency by gearing the peripherals such as the alternator, starter-motor and A/C unit. Sales should be driven by environmental concerns and regulation.

• Energy and environmental factors are also key drivers for adoption of the company’s full electronically controlled planetary 6-speed automatic gearbox. This is likely to be especially popular in the Chinese and Asian markets that are demanding small and economic automatic vehicles.

• Antonov has production licences with Honda, NZWL (Germany), Sitma (France), and Gajra (India). MG Rover Powertrain took out a licence in September 2004 and with the company’s collapse Antonov has established relationships with SAIC as well as other interested Chinese manufacturers.

• Our DCF based target price, which excludes the potential from Honda, NZWL and other companies, and using highly conservative royalty, growth and cost of capital assumptions, is 151p per share.

• As adoption occurs, Antonov’s licensing model should generate substantial free cash flow, changing investor perception dramatically.

• Antonov has begun patent infringement proceedings against Toyota and its hybrid Powertrain used on the Prius, on the Lexus RS400h and also licensed out to Ford, Nissan, Porsche and Daihatsu. We have estimated a reasonable payout could be worth up to 31p cash per share.
======================================================

Background and History

Company founded to commercialise Roumen Antonov’s transmission design.
Antonov Automotive Technologies B.V. (AAT) was founded in 1991 as a joint venture between Roumen Antonov and Novem (a Dutch venture capital company) with the aim of commercialising an innovative automatic gearbox concept design conceived by founder Roumen himself.

Antonov is in line to deliver results as promised.
Having spent over 14 years and almost £30 million working to develop and commercialise this technology without achieving commercial sales, it may appear from an outsider’s perspective that the Company is failing to deliver on its promises. However, this is not the case. 14 years in the automotive industry is hardly regarded as a significantly protracted period and with the company about to register its first commercial sales and profitability in sight we believe that Antonov is now in line to deliver.

Antonov has three families of transmission technology, all based on simple but innovative concept. Antonov’s transmission technologies have evolved into three distinct families, all unified by their elegance in design and the improvement they offer over existing incumbents. The first and simplest of these is the mechanical module which uses axial and centrifugal forces already existent in the transmission to power a gear shift. The second is the 6-speed automatic which represents a major simplification over traditional automatic transmissions and generates savings in cost, efficiency, size and weight. The last is the dual clutch transmission which again has the potential to generate savings in cost, efficiency, size and weight.

Antonov possesses a number of prototypes and two running demonstrators.
Antonov has demonstrated a number of prototype gearboxes in these three families and currently possesses two working demonstrators: A Rover Streetwise which uses an Antonov 6-speed automatic, which was developed in partnership with Rover Powertrain, and a VW Golf 1.4 incorporating a geared Rotrex supercharger.

The Company has a wide range of partners and licensees.
Antonov has numerous relationships and licensing agreements: Shanghai Automotive Industry Corporation (from the original relationship with MG Rover Powertrain), Rotrex, Honda, Sitma, Gajra and NZWL. It is also in talks with a number of other world leading companies and we expect the number of partners and licensees to grow rapidly as commercial products incorporating the technology attract attention.

First commercial product in production and will enable maiden sales for FY2005.
Antonov’s first commercial product is a small 2-speed gearbox that is used to increase the efficacy of a Rotrex supercharger. The first units have been manufactured by production partner NZWL and are being shipped to a number of auto manufacturers and tier-1 suppliers for evaluation. Antonov and Rotrex are targeting the established tuning market as this market has low barriers to adoption for new technologies. The world’s first commercial 2-speed supercharger will be distributed by Wheel-to-Wheel Tecstar (a well known tuner who supplies race teams, General Motors and the general public with performance solutions) amongst others. Initial revenues will begin in Q4 2005 and will begin to ramp-up in Q2 2006.

Antonov is dual listed on AIM and NMAX due to significant Dutch investor appetite.
Antonov listed on the Alternative Investment Market (AIM) in 1995 at a share price equivalent to 160p (the stock underwent a 4 for 1 consolidation on 16 February 2005) and on the New Market of Amsterdam Exchanges (NMAX) in 1997 (to satisfy Dutch investor appetite). The Company is headquartered in Rotterdam, has a Commercial Operations office in Cambridge and its Technical Centre in Paris.

Product Ranges, Technology and Applications

Design has progressed into three main families.
Antonov’s ideas and designs for transmissions have developed over the years into three distinct families. The families are:

Mechanical Module
6-Speed Automatic
Dual Clutch Automatic

Different families will target different markets.
The three distinct families of transmission products are based on three distinct technologies in order to target different markets. This makes it possible for the company to target a wider range of customers increasing its potential and spreading its risks.


Mechanical Module

Mechanical module is simplest form of Antonov design.
The mechanical module is the simplest of the Antonov range. It uses the axial and centrifugal forces present in the gearbox to accomplish the gear change from planetary gear set (See Appendix 1 for a more detailed description). It is therefore small, compact and relatively cheap to manufacture. There are currently no existing two and three speed automatic gearboxes of the size achieved in the Antonov Mechanical Module. In this respect Antonov is creating new markets for itself.

Design has many possible applications, some where there was no previous solution.
The mechanical module design lends itself to many possible applications where gearing could improve the efficiency of operation. For example, in an air compressor, a pump can push compressed air into the cylinder quickly (geared up) before gearing down (to give better torque) for when it is harder to push more air in. This means that the engine being used can be smaller, cheaper and more efficient. Other potential applications are car superchargers (discussed in more detail in an ensuing section) and car peripherals such as alternators.

Potential markets are in millions of units.
Potential market sizes in these applications are generally for millions of units however penetration will depend upon many factors. The most important will be showing manufacturers that the improved performance, long term cost savings and that the benefits outweigh the increased cost of the gearbox addition. In this respect the first applications for the module will be where they can be used to improve automotive efficiency by gearing car peripherals such as the alternator and supercharger.

Initial penetration will be in niche markets but these will open up mass markets opportunities.
Initially the unit is expected to be seen in small volume high value applications, such as superchargers (see later section), where cost increases are not as important as the potential performance increases and these should open the doors to mass market applications such as car peripherals.

Key market for low-torque automatics will be micro-cars and 2/3 wheelers.
These small automatic gearboxes can also be used as transmissions for a variety of vehicles, the most important of which (by volume) will be the micro car and low power two wheeler (scooter). They are also highly suitable for a range of other small vehicles, many recreational, such as quads, snowmobiles and golf carts. These markets are far smaller in size and are therefore not a priority to Antonov.

Shift timing can be precisely controlled with low cost electronics.
A key adaptation is the addition of a simple, low cost electronic shift that gives the total predictability of gear change – this will ease the set-up problems for automotive engineers.

6-Speed Automatic

Antonov created the first 6-speed gearbox in the world in 1998.
Antonov is credited with creating the first fully automatic 6-speed gearbox in the world. The design has developed greatly since the original concept and the Antonov 6-speed automatic now differs significantly from the original mechanical module family.

Shift patterns can be electronically controlled like all modern automatics.
The unit does not use centrifugal forces to change gears; these are instead controlled electronically and hydraulically by pistons. This allows the shift patterns of the gearbox to be varied and tuned electronically enabling the box to behave like other modern automatics: different modes of operation become possible such as sport (high rpm shifts), economy (low rpm shifts) and snow (low torque) as well as the possibility of a manual override (sequential).

The use of parallel shafts enables multiple direct drive gears and therefore excellent efficiency .
The 6-speed automatic gearbox uses parallel shafts to enable the greater number of gears and this design provides significant economy benefits over even the most efficient current automatics. This is because with multiple shafts, three out of the six gears can be direct drive and therefore friction and other energy losses are greatly reduced in the top three gears.

Antonov design negates the need for inefficient torque converters.
The Antonov design has also enabled the gearbox to possess a very low ratio first gear. This enables the transmission to be engaged using any form of launch mechanism, such as a wet or dry clutch, and therefore negates the need for a heavy and (power robbing) torque converter.

The Antonov 6-speed design is comparatively small and light.
The 6-speed design is also generally smaller and lighter than most modern automatics as the design makes for a more efficient use of space. Antonov’s design has therefore opened up the possibility to use planetary automatic gearboxes (economically) in a far greater range of vehicles than was currently possible.

Benefits include: better acceleration, top speed and fuel economy.
The Antonov 6-speed therefore provides many tangible benefits over conventional automatics such as improved acceleration, top speed and fuel economy. These benefits have been appraised by a number of independent car and transmission companies and testers whom have also reported it to drive well, an extremely important characteristic. The key driver for adoption is, however, the fuel economy benefits the 6-speed offers and this will become ever more important as we approach 2008 when more stringent emissions regulations will be implemented.

Cost Benefits

The final selling point of the Antonov 6-speed automatic is the potential cost improvements it can offer and these should be able to translate into higher profitability for the manufacturers that adopt it. There are several reasons why:

Simpler automatic design should reduce costs for manufacturers.
Currently, the gearbox can account for 10% of the cost of a small car. The Antonov design has been independently costed and, due to its simplicity will be price competitive with manual transmissions. Compared to CVT gearboxes and the automatic gearboxes currently in small cars the cost savings will be significant. The Antonov design will also be able to offer increased performance over existing technologies and will therefore form a superior value proposition to customers.

Standard manufacturing techniques will enable mass production without major changes to production lines.
Antonov’s transmission design uses conventional components and current manufacturing technologies which will enable it to be mass produced in current transmission plants and with low change over costs. The absence of radical technologies and untried systems will also mean that the durability and component lifetime will be as good as that of old-style transmissions. This factor is very important to OEMs who are extremely risk averse.

Lower development and investment expenditure will lead to greater ROI for manufacturers.
The simple design and the standard manufacturing techniques will also lower development and investment expenditure for manufacturers. This will lower their production risk and increase their return on investment.

Uses

The 6-speed gearbox targets the automotive consumer mass market with the most popular form of transmission, except in Europe, automatic.

Minimum efficient scales in mass market are over 100,000 units per annum.
Initial penetration of Antonov technology will depend upon key licences and partnerships however; any single deal will lead to hundreds of thousands of units due to the large volumes run by car manufacturers to induce economies of scale. Once in production, the gearbox would be expected to continue throughout the lifetime of the model, typically 10 to 15 years.

A detailed comparison of the Automatic gearbox and all competing technologies can be found in Appendix 2.

Dual Clutch Automatic

Dual clutch similar in design to original Borg Warner Dualtronic design.
The dual clutch gearbox developed by Antonov works using two gear sets; one for the odd gears and one for the even gears where the next gear is pre-selected before shift and the gears are changed almost instantaneously. In this way it is very similar in nature to the Dual Clutch gearbox developed by Borg Warner (Dualtronic) used on certain VW and Audis and, in fact, the Antonov design allows the use of existing clutches such as those by Borg Warner, which is accelerating development.

A key advantage in the design is the ability to have same box in both manual and automatic versions.
The Antonov dual clutch gearbox, in comparison to existing dual clutch gearboxes, is relatively smaller, lighter, less complicated and therefore more cost effective than its competitors. However, its key advantage is its flexible modular design, which allows for over 95% of components to be shared between the automatic and manual (Single Clutch Manual) versions. This modularity has been praised by OEM’s as it allows them to offer both variants of a vehicle for little extra cost than with conventional designs. This ability will become increasingly important as manufacturers produce more niche vehicles where design changes between manual and automatic are costly in proportion to the vehicle.

Manual version will be popular in EU.
The offer of a manual version is also likely to be well received by sophisticated European consumers who prefer to control shifts themselves and will appreciate the weight savings.

Initially the box is likely to be used on a passenger car before being adapted for SUVs.
Initial versions are likely to include a front drive transaxle for a high performance passenger car before a version for the highly popular SUV market. Volumes will be low initially due to high prices (e.g. VW’s DSG adds £1,500 on the price of a VW Golf GTI) but volumes will increase due to the demand. The volumes will not however be anywhere near as significant as the mass market lower priced cars and will only reach the hundreds of thousands for certain models.

Dual clutch design at early stage in development lifecycle.
It should be noted here that in comparison to the preceding gearboxes that have been real world tried, Antonov’s dual clutch is in the development stage and will take significant investment from a partner to achieve a commercial product.

Key IP

Company has a large IP portfolio.
Antonov’s business model is based upon the extremely strong and broad portfolio of intellectual property in the gearbox market. The Company has filed and received many patents covering a number of families and different inventions. The following is a list of the key patent families filed to date, however, Antonov possesses many more patents than are listed here:

Despite age of some patents Antonov is well protected.
It should be noted that despite the age of some patents, Antonov’s long term position is secure. This is because the strength of the Antonov patent portfolio lies not only in the number and content of each patent, but also on the fact that in order to produce a similar gearbox, a manufacturer would need access to a number of patents. Therefore if any one patent is made redundant the manufacturer would still require access to others.

New Ideas

Not a one track pony.
Antonov is not a company that is based upon one invention, or even one type of invention. The company has built a strong team of technological expertise in the transmission market and is continuously seeking to innovate and produce solutions to other problems.

Future will see Antonov enter hybrid and electric vehicle power-trains.
Antonov is currently developing alternative vehicle drives such as those for use in electric, hybrid and fuel cell vehicles as well as developing ultra low cost transmissions for use in emerging markets.

Business Model

Antonov’s aim is to be a patent protected technology company.
Antonov’s primary strategy is to be a patent protected technology company earning royalty revenues and licensing fees. The Company has purposely developed its technology so that it is easy to produce using existing manufacturing techniques and components and hence facilitate adoption from mass manufacturers.

A “share and explore” strategy has enabled greater commercial success.
Antonov has, however, experienced difficulties in obtaining licensees (discussed in section below) and has therefore recently adopted a “share and explore” policy where they have been sharing the technology and development with partners. This methodology ensures the buy-in from the manufactures and reduces the development costs and risks of acceptance.

Antonov is now in a position to license validated commercial products.
After sharing and exploring with partners, Antonov will continue providing development and consultancy expertise, at clients’ expense, in order to guarantee the client can take full advantage of the technology and implement it correctly. After continued joint development Antonov then pursues the licensing of its technologies.

Antonov will also sell “off the shelf” blueprint designs.
Antonov also holds the rights to “blueprint” of designs and so will be able to sell the design and future designs “off the shelf” under licence to other manufactures.

Market Penetration Difficulties and Delays

Antonov has faced many difficulties in bringing its technology to market in a timely manner and there are many reasons for this.

Automotive industry is highly conservative and characterised by fast followers.
The first and most important factor that has slowed Antonov’s commercial success is the highly conservative nature of the automotive industry. Large automotive manufacturers and their suppliers are often unwilling to adopt new technology due to the potential risk of failure. Most large manufacturers, for example Ford and GM, are often referred to as fast followers as they will shadow new technologies, watching them emerge, before employing them. A clear example of this is the hybrid technology developed by Toyota as it now seems that almost all other manufacturers are investigating and commercialising hybrids.

Situation likely to have been exaggerated by complacency of manufacturers and fear of disruption.
We believe that the above factor has also been exaggerated by the complacency of some manufacturers in their market position and their fear of the disruption the new technology could achieve. These manufacturers could therefore be considered to be buying time in protecting themselves and their suppliers.

Dealing with automotive research departments has drained resources.
Antonov has also encountered difficulties in dealing with automotive companies’ research departments. These have demanded that Antonov undertake the development of gearboxes specifically tailored to particular new car programs (often in parallel to their own teams) so that they can evaluate them. This process has been time-consuming for Antonov and has not led to any breakthrough as research departments are often unwilling to acknowledge someone else has a better design or idea than they have.

Lead times in automotive industry are up to 8 years.
The final factor we consider is the long lead times of new projects in the automotive industry; these can be as much as 8 years for a new model. With this point in mind it becomes apparent that, with Antonov about to achieve its first commercial sales, the Company is delivering on its promises in a reasonable timescale.

Antonov’s strategy has been adapted and is now bearing fruit.
Antonov adapted its strategy to reflect these difficulties and after “sharing and exploring” and providing paid for consultancy and development work is repositioning itself as a licensor of developed technologies (as explained in the prior section).

Partners and Licensees

Rotrex A/S

Rotrex is the world’s largest provider of aftermarket superchargers.
Rotrex is a member of the huge Danish AP Möller – Maersk Group and is the world’s leading supplier of “after market” superchargers. The Company has been developing OEM superchargers since 1997, has grown well organically and is a supplier to many European car manufacturers.

Antonov’s mechanical module can improve efficacy of supercharger.
The Company recognised the huge potential of the Antonov Mechanical Module to improve the efficiency of its superchargers and signed a heads of agreement with Antonov to develop the technology in November 2004.

Geared supercharger offers more power (compression) at lower rpm.
The small two speed purely mechanical automatic gear box enables the supercharger to offer higher compression at lower engine revolutions and lower compression at high revolutions. This dramatically improves the boost to an engine at lower revolutions (rpm) as well as giving a more useful power curve as can be seen in the chart below

NZWL, an existing Antonov licensee, is production partner for unit.
The commercial version of the 2-speed drive for the M4 range of compressors has entered into full production with manufacturing partner Neue ZWL Zahnradwerk (who interestingly became an Antonov licensee in 1999 – see section below). The Company expects to produce around 4,000 units in the first full year of production and this volume can fairly easily be ramped up to meet demand.

First units have been shipped and initial sales will be made in Q4 2005.
The first units have been shipped to the US and are expected to prove popular in the vibrant tuning market. We anticipate minimal initial sales in Q4 this year hence providing Antonov with its first significant revenues in the full year ended December 2005. Volume sales are only expected to begin Q2 2006.
======================================================

US tuning market is price insensitive and Antonov will receive a high margin on its sales.
The fact that the Antonov’s first commercial market is the US tuning market is worth dwelling on for two reasons. Firstly, the US tuning aftermarket is relatively price insensitive (power is almighty) and therefore Antonov will be receiving a high margin on its sales.

Hobbyists are less concerned with reliability issues.
Secondly, the majority of tuners in the US use their modified vehicle as a hobby and are therefore not so concerned about reliability issues. Indeed the hobbyists look to problem solve and improve the product and Antonov will, in effect, be benefiting from almost free product development in the field before the product is refined for the OEM markets. Also, by selecting the hobbyist market Antonov will also be able to achieve commercial sales earlier than possible with the longer OEM cycle, and at much reduced development cost.

US market is big enough to provide significant headroom to grow.
The US tuning market for superchargers is currently for over 30,000 units per annum. We have spoken to specialist tuning mechanics in the US who are excited at the new Rotrex offering and we believe that Antonov could easily surpass the 4,000 unit figure given in previous announcements. In fact, a recent announcement by Antonov mentioned that they have already received a quotation request for up to 100,000 units per annum, all be it that this is for an OEM who would fit the units as standard.

Other Implications

Antonov will be viewed differently now it has a commercial product.
Firstly, it cannot be stressed strongly enough how significant it is that Antonov is about to achieve its maiden sales, no matter how small. This is because the Company now has a fully commercial product and will be viewed very differently by the OEM’s and automotive manufacturers. Instead of being approached by researchers and developers, Antonov is now in contact with product planners looking for solutions to new model programmes.

Antonov’s unit will prove an invaluable marketing tool.
The 2-speed mechanical module will also prove to be an invaluable marketing tool for the Company as it demonstrates to the conservative automakers that Antonov technology is already commercial and less risky. In addition, the mechanical module will demonstrate the massive potential and that there are a multitude of other possibilities using this technology such as in sports car dual clutch gearboxes.

At lease 8 OEMs and tier-1 suppliers are evaluating the unit.
At least 8 requests have been received from auto manufacturers and tier-1 suppliers who have ordered units for evaluation purposes; a process that would not have been possible had Antonov not decided to partner with Rotrex and enter the marketplace via the low volume US tuner market. The outcome of these evaluations will become apparent, we believe, in the next 12 months.

The geared supercharger also has the potential to help diesels meet new emissions targets being introduced in 2008.
Three of the above mentioned companies are looking to evaluate the potential of this unit to increase the efficiency of diesels. This is especially important as current diesel designs incorporating turbochargers are unlikely to meet the tougher emissions standards being introduced from 2008. This is because turbocharged diesels emit black soot when the turbocharger is not operating at effective temperatures and pressures.

MG Rover Powertrain

MG Rover Powertrain was signed as a partner in February 2004 and marked a major breakthrough for Antonov as they had been pursuing a partnership of this nature for some time. The tie up with an international car manufacturer such as this would enable them to bypass many of the difficulties associated with dealing directly with larger car manufacturers.

Powertrain was to help with the development and commercialisation of 6 and 7 speed automatic and dual clutch designs.
Rover’s Powertrain unit was the largest independent motor engine and transmission manufacturer in the UK. It supplied engines and transmissions to MG, Rover, Land Rover, Lotus and Caterham and had a global reputation for its excellent performance products. In the proposed venture, Antonov was to present proven solutions with a clear edge over existing products in the market, such as the 6-Speed Automatic and the Dual Clutch Automatic. In turn MG Rover’s Powertrain division would bring to the partnership a wealth of knowledge and expertise in adapting and refining technology for mass-production processes and would therefore greatly speed up the development and manufacture of an OEM product to be installed primarily in the Rover 25 and 75. This transfer of expertise from Powertrain to Antonov had largely been completed at the time of Powertrain’s demise.

Powertrain was lacking automatic and dual clutch designs.
The deal would have enabled Powertrain to add an automatic and a dual clutch transmission to their product portfolio. This was important to both Powertrain and MG Rover as MG Rover’s contract for the supply of ZF automatic gearboxes was to end in 2007.

A running demonstrator with a 6-Speed Automatic gearbox was created.
Antonov had installed a 6-Speed Automatic in a Rover Streetwise car which was undergoing testing and also, a running demonstrator MG Rover 75, incorporating a dual clutch gearbox unit was expected to be available for appraisal before the end of 2005.

Chinese Involvement

SAIC involvement was to improve the nature of the relationship as SAIC manufacture almost a million vehicles per annum.
The proposed Rover-SAIC partnership was going to change the nature of the Antonov deal for the better. SAIC produces around ten times as many vehicles as Rover did, hence opening up the opportunity for real mass market production where minimum efficient scales are over 100,000 units per annum (SAIC produces around a million units per annum). SAIC also lacked the technology to produce automatic gearboxes for sale in its own vehicle designs and was therefore very keen on developing the Antonov automatic technology, especially for export markets.

SAIC bought rights to car and engine designs.
Over the protracted period of negotiations between the two companies, and prior to Rover’s collapse, it is understood that SAIC bought the rights to produce the Rover 25 and 75 models in China as well as the rights to the complete series of Rover engines. We return to this point in the ensuing section.

Rover’s Collapse

Sale to Nanjing Auto surprised many, including SAIC.
The sale of Rover to Nanjing Auto by administrator Price Waterhouse Coopers surprised many industry observers, as well as SAIC. The reason for the sale to Nanjing Auto and not SAIC is still debatable but it is our understanding that either

SAIC attached too many conditions over the purchase of Rover (which PwC didn’t like), SAIC already owned the majority of the IP and therefore didn’t want to pay for it again or Nanjing had promised to keep some production at Longbridge.

Nanjing cannot produce Rover models without SAIC.
Nanjing Auto initially indicated that it intended to restart full-scale production of all MG and Rover models however, complications soon appeared. Nanjing Auto cannot produce the models without SAIC as SAIC had purchased the rights to use the 25 and 75 models in China as well as possessing the rights to all the engines which powered those models (rights to the 45 were co-owned by Honda and therefore neither SAIC or Nanjing can produce that model). The two companies have therefore been negotiating and it is our belief that the companies will agree a compromise arrangement. At the very least this will give Nanjing Auto access to the Powertrain expertise in return for some concessions regarding rights to engines and car designs. It may even be possible that we see the two companies working together to produce the full range of Rover cars and engines (other than the 45).

It is unclear who owns Rover’s research and development projects.
A last point is that it has also yet to transpire who, SAIC or Nanjing, has purchased the research and/or rights to Rover’s projects under development (and what the projects were).

MG Rover Powertrain Outcome

MG Rover Powertrain relationship has been beneficial to Antonov.
The relationship with MG Rover Powertrain has undoubtedly been highly beneficial to Antonov despite Rover’s collapse. This is because the technology has managed to attract the interest of Chinese auto manufacturers. There are several reasons why:

Chinese manufacturers do not have access to proprietary automatic transmissions.

• Manufacture of automatics under license is more expensive and they do not like being reliant on the major Japanese gearbox manufacturers.

Chinese manufacturers are planning, in the future, to export cars to other markets

• They are not currently permitted to export transmissions made under license

The Chinese and Asian markets are dominated by small inexpensive cars which are increasingly demanding automatic transmissions.

Antonov have confirmed the relationship with Chinese manufacturers has continued.
The interest has been confirmed by Antonov in their Q3 update, with the announcement that discussions with SAIC are ongoing and that there is very strong interest from other Chinese manufacturers. The interest from Chinese manufacturers is highly beneficial to Antonov because:

Chinese manufacturers are keen to adopt new technologies and have a much shorter development lifecycle than their western counterparts.

• This decreases time to market and speeds up the commercialisation of Antonov’s technologies

The Chinese auto market is growing rapidly

China gives Antonov direct access to vibrant Asian market

China is a strategically important base as many automotive giants have already moved to Asia.

Shanghai Automotive Industry Corporation

SAIC is looking to begin production of 6-Speed Automatic in 2008.
Antonov’s Q3 trading update confirmed that the relationship between the two companies has progressed throughout this year. SAIC is looking to begin commercial production of the 6-Speed Automatic in 2008 and is also performing pre-production planning for the Dual Clutch Automatic gearbox.

Volumes of 6-Speed Automatic will ramp quickly due to SAIC’s scale of operations and international aspirations.
The 6-Speed Automatic gearbox should provide Antonov significant revenues from its launch in 2008. Minimum efficient scales for a mass produced transmission are over 100,000 units per annum and SAIC has ambitions to become a leading exporter and expects to manufacture well over 1 million vehicles per annum by 2008

Dual Clutch Automatic is undergoing pre-produciton planning.
The prospects for the dual clutch gearbox are just as great however, as mechatronic support (clutches and pre-selection mechanism) is needed to complete development, we do not foresee mass production beginning before 2009 without significant financial and technical support. Antonov is in discussions with potential partners to provide such support, though, the extent of financial support provided for the development is not yet clear and will depend upon SAIC’s medium and long term product plans.

Antonov will be able to sell the final designs “off the shelf” to other interested parties.
Antonov will undoubtedly benefit from the final stages of development for either transmission as they will hold the rights to the transmission blueprints. Once other manufacturers have tested a vehicle incorporating an Antonov designed transmission and an “off the shelf” solution is available to them, we would expect to see the number licensees grow.

Honda

Honda took out a full production licence in 2002 after 5 years of evaluation.
Honda, a company considered to be at the forefront of engine and transmission technologies, was one of the first car manufacturers to take out a licence with Antonov. They signed, in February 2002, a non-exclusive worldwide licence which is not restricted to cars and light commercial vehicles.

There has now been sufficient time for Honda to have developed the technology to commercialisation.
There has been no news flow from Honda since the licence was signed as Honda has always been very secretive about future developments. We believe there has now been sufficient time for Honda to have developed the technology and we believe we will hear about their developments in the near future.

Honda produces a wide range of motorised products all of which could benefit from the technology. Honda sold 2.9 million cars and light trucks in 2003 as well as producing many other products such as lawnmowers, recreational vehicles, air compressors and boat engines which all could benefit from the Antonov technology (Source: OICA). This licence therefore represents huge opportunities for Antonov. However, it is not possible to predict the level of take up of the technology by Honda and therefore we do not include this potential in our forecasts.

Minimum efficient scale for a car at Honda is over 350,000 units.
The only guidance we can give is that the minimum efficient scale of production for a new car at Honda would be in the region of 350,000 to 500,000 units per annum.

NZWL

NZWL took out a production licence in 1999.
NZWL, based in Leipzig Germany, is a medium volume manufacturer of manual transmissions for their major customer Daimler Chrysler. They acquired a non-exclusive licence in 1999 to develop automatic transmission for small cars.

NZWL initially were developing a 4-speed box for a vehicle that never made it into production.
Initial indications were that NZWL was pursuing development of a 4-speed automatic gearbox for use in the failed Merlin Commuter and we have yet to hear about the licence being used for any other vehicle.

NZWL is manufacturing partner for supercharger step-up drive.
NZWL has now been chosen as Antonov’s manufacturing partner for the two speed mechanical module. We believe that as this relationship progresses and NZWL sees the capabilities of Antonov’s technology in the marketplace that there may be some interesting future developments, especially in the German marketplace which is historically very resistant to using product from a non-German source.

Sitma

Sitma, a French gearbox manufacturer, took a licence in 2002.
Sitma, a producer of small-specialised gearboxes for the French automotive industry, took out a manufacturing licence with Antonov in the first half of 2002. There has been no news regarding this licence since it was acquired, however, in the interim period we are led to believe that Sitma has worked together with Antonov on many of the prototypes produced, including both the Rotrex two speed unit and the 6-spped automatic units installed in the MG Rover streetwise. We believe that with such a close relationship and with the typically long lead times in automotive projects there is the possibility this relationship may lead to production of Antonov gearbox for the French auto industry.

Gajra

Gajra, an Indian, gearbox manufacturer was first to take out a production licence.
Gajra, a leading Indian transmission producer, signed its production license in 1996 to develop a 4-speed automatic for their local market. These gearboxes would be targeted at the local auto suppliers Maruti and Suzuki. The license was signed nine years ago in anticipation of a deal with Maruti that did not happen and as there has been no news since then it is unlikely this relationship will lead to any significant outcome.

Other Companies

There are a number of other manufacturers evaluating the technology.
The Antonov technology is under evaluation by a large number car manufacturers and tier-1 suppliers including:

Aisin, BMW, Daimler Chrysler, FIAT, Ford, GM-Opel, Jatco, KIA, Matra, Mazda, New Venture Gear, Peugeot, Phoenix, Polaris, Renault, Suzuki, Tata, and ZF.

2-speed supercharger box is giving Antonov a lot of publicity.
These manufacturers have increasingly become interested in the latest innovations from Antonov, especially the dual clutch gearbox (which received a lot of attention at last year’s Paris motor show) and the mechanical module (which received a lot of interest at this year’s Frankfurt motor show).

Having a commercial product will help turn interest into sales.
The key factor which will turn these potential customers from being “interested” in the product to actually buying production licences or “off the shelf designs” is the ability for Antonov to demonstrate that its technology is not just a curiosity but is actually a commercial reality.

Mechanical module is expected to be a catalyst for adoption by others.
It is important to emphasise the point that the mechanical module is likely to change the view on Antonov and the technology’s commercial viability and therefore we would hope that contracts and licences from the above parties will materialise over the coming years.

Group Structure

Antonov Group split into 3 main entities.
The Antonov group is split into three main entities: AAT (Antonov Automotive Technologies) Commercial Operations based in Cambridge, UK, AAT Technical Centre based in Paris, France and AAT B.V. the financial and corporate entity based in Rotterdam, Netherlands. These three entities are the all under the umbrella of Antonov plc, the holding company, as can be seen in the following diagram:

Structure designed to accommodate Roumen and key Dutch backers…
The structure has been carefully chosen to ensure that the Company can keep its development centre in Paris (Roumen’s city of choice), whilst being headquartered in the Netherlands where the group’s primary backers, Novem and Quivest BV, originate.

…but is also tax efficient.
The structure is tax efficient and, in the short to medium term, profits can also be offset against the group’s accumulated tax losses of over £27m.

Management

Management has undergone significant change.
Antonov’s management has undergone significant change over the last year in order to change the Company’s focus from being research driven to one of product development and sales.

Appointment of John Moore as CEO brings considerable commercial experience.
The first step in this process was the appointment of John Moore as CEO in January 2005. John brings 20 years experience in the automotive industry and most crucially commercial experience as Commercial Director of Lotus Engineering (see Appendix 3 for full profiles).

Appointment of Christopher Ross to Chairman continues trend.
The second important step was the appointment of Non-Executive Director Christopher Ross, former CEO of Ricardo plc, as Chairman in July 2005. With this appointment Roumen Antonov stepped down from his position as Chairman to become Deputy Chairman and Technical Director to enable him to concentrate all his efforts on the Group’s IP portfolio.

Jos Haag will also strengthen the board’s commercial experience.
The last step in the board strengthening process was the appointment of Dr Jos Haag as a non-executive director and Chairman of the Audit Committee. Dr Haag has good corporate experience having served as CEO of a number of international companies and was most recently Executive Chairman of Intellect Holdings plc an IP licensing company.

New management’s initiatives are improving all areas of the business.
The fresh senior management has begun a series of initiatives, which have been designed to improve the Company’s day-to-day working in areas such as finance, logistics and project management. These changes have reinforced our confidence that the Company is prepared for sales of its very first product as well as the management of simultaneous development programs.

Past Funding

Past funding was on a “drip feed” basis.
Throughout its history Antonov has been funded on a running basis (drip feed) by its key backers (see section below for information regarding key shareholders). Antonov has, since 1998 been through 12 placings (some sweetened with warrants) and the issue of six different series of convertible notes.

Funding strategy is in stark contrast to that of other Technology companies and was valid considering Company’s backing.
This complicated capital history and funding strategy is in stark contrast to that of other technology companies who have traditionally raised large lump sums in the capital markets. There are arguments as to the merits of each strategy. However, the reasoning for Antonov’s drip feed strategy is clear: the Company’s key backers had promised to always be there for the company and therefore it was not necessary to raise more capital than was appropriate for the ensuing year.

Three fund raisings totalling €9.9m performed this year.
This year Antonov has arranged three fundraisings. The first was the issue of €150,000 of convertible loan notes to three directors:

Roumen Antonov, David Bovell and Cees Minaar. The second was the issue of a €3m convertible loan note, placed with 9 investors, both new and old, and three directors. The last was the completion of a €6.75m convertible loan facility that can be drawn on at the company’s discretion placed with five investors including Quivest BV, the Company’s largest shareholder.

Convertible loan notes provide a variable effect on dilution.
The €6.75m and €3m convertible notes are convertible at a 5% discount to the share price on the drawdown rate. The variable conversion element therefore provides a variable effect on dilution the potential effect of which is discussed in our ensuing section on risks.

Key Backers

Seed funding was provided by Dutch venture capitalist Novem.
Antonov received much of its initial seed funding from a Dutch venture capitalist called Novem. This Dutch backer’s holding is held under the name Green Investments BVBA which is the investment holding company Novem International BV.

Largest recent backer is property millionaire Henk Steenstra.
The most important of Antonov’s backers (by involvement in recent fundraisings and current shareholding) are: Quivest BV (run by CEO Marius Ritskes) and Mercurius Beleggingsmaatschappij (owned by the Dutch property entrepreneur Henk Steenstra who is also believed to have made significant investment in Antonov in the recent past).

Exact holdings difficult to calculate.
Both the above shareholder’s shares are held through nominees and therefore are not directly visible on the shareholder and warrantholder registers in Appendix 4. It is estimated that Novem holds 6%, Quivest 17% and Mercurius Beleggingsmaatschappij 2%.

Dutch backing influenced NMAX listing in 1997.
Because of the strong Dutch influence, Antonov obtained a New Market of Amsterdam Exchange (NMAX) listing in 1997. In Holland, in contrast to the UK, Antonov is a well known, popular and a highly traded stock. It attracts many retail and high net worth investors and has good liquidity.



Future Funding

Antonov should have sufficient funds to reach profitability

Antonov currently possesses two forms of funding which, according to our model should enable the company to reach profitability:

*Convertible note facility which can be drawn upon at the company’s discretion of circa. Estimated value of facility left: €5m.

*Warrants in issue which are valued at over £5m listed and unlisted (There are 3.5m listed warrants with an exercise price £1.00, which are currently traded at 45-85p)



The need for further funding will depend on four factors:

*The rate of take-up of the 2-speed mechanical module

*When mass production of the 6-speed gearbox will begin

*The outcome of the patent infringement case with Toyota (see ensuing section for details)

*The timing of warrants being exercised (which will depend upon share price performance)

Future funding routes, if necessary (for example, to fund a particularly large development project), will be considered and may include equity share issues via the UK capital markets.