As filed with the Securities and Exchange Commission on July 11, 2001
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
International Fuel Technology, Inc.
-----------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 6770 88-0357508
------ ---- ----------
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
7777 Bonhomme, Suite 1920
St. Louis, Missouri 63105
-------------------------
(314) 727-3333
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(Address, Including Zip Code, and Telephone Number, Including Area Code
of Registrant's Principal Executive Offices)
Copy to:
William J. Lindenmayer David W. Braswell, Esq.
7777 Bonhomme, Suite 1920 Armstrong Teasdale LLP
St. Louis, Missouri 63105 One Metropolitan Square, Suite 2600
(314) 727-3333 St. Louis, Missouri 63102-2740
(Name, Address, Including Zip Code, and Telephone (314) 621-5070
Number, Including Area Code, of Agent for Service)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this post-effective amendment to the
Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Number of Proposed Proposed
Securities Be Maximum Maximum Amount Of
Title of Each Class of Securities to be Registered Be Offering Aggregate Offering Registration
Registered(1) Price Per Unit(2) Price(2) Fee(2)(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per share 21,430,000 $.49 $10,500,700 $875.65
====================================================================================================================================
(1) Based on: 21,430,000 shares registered pursuant to a registration rights
agreement which requires the Registrant to register approximately 200% of
the number of shares of Common Stock that would be available for purchase under
the Securities Purchase Agreement assuming a purchase date of June 20, 2001, as
determined by an agreed upon formula. The actual number of shares of Common
Stock purchased may vary from this number.
(2) The price is estimated in accordance with Rule 457 (c) under the Securities
Act of 1933, as amended solely for the purpose of calculating the registration
fee and is based on the average closing price of the common stock listed on the
NASD OTC Bulletin Board for July 2, 2001 through July 9, 2001.
(3) Based on a registration fee of $2,625.18 less $1,749.53 previously paid in
connection with the Registrant's Registration Statement on Form S-1 filed June
29, 2000, and registrant's Registration Statement on Form S-1 Amendment No. 2
filed January 16, 2001. The $1,749.53 represents the registration fee previously
paid for the 18,913,872 common shares that were withdrawn in connection with
the Registrant's Post-Effective Amendment No. 1 filed June 15, 2001.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Subject to Completion, Dated July 11, 2001
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities, and it is not soliciting an offer to buy these
securities, in any state where the offer or sale is not permitted.
INTERNATIONAL FUEL TECHNOLOGY, INC.
21,430,000 Shares
COMMON STOCK
We have prepared this prospectus to allow IIG Equity Opportunities Fund Ltd., or
their pledgees, donees, transferees or other successors in interest, to sell
shares of our common stock which they received pursuant to a financing
transaction. We will receive no proceeds from the sale of these shares by the
selling shareholders.
IIG Equity Opportunities Fund Ltd. is an "underwriter" within the meaning of the
Securities Act of the shares offered and sold under this prospectus.
Our common stock is listed on the National Association of Securities Dealers'
OTC Bulletin Board under the symbol "IFUE." On July 9, 2001, the closing price
of our common stock was $.52 per share.
The purchase of the securities offered through this prospectus involves a high
degree of risk.
See section entitled "Risk Factors" on pages 5 through 13.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The Date Of This Prospectus Is: July , 2001
--------------
Please read this prospectus carefully. It describes our company and finances.
Federal and state securities laws require that we include in this prospectus all
the important information that you will need to make an investment decision.
You should rely only on the information contained in this prospectus to make
your investment decision. We have not authorized anyone to provide you with
information that is different from what was contained in this prospectus.
The following table of contents has been designed to help you find important
information contained in this prospectus. We encourage you to read the entire
prospectus.
TABLE OF CONTENTS
PAGE
Summary............................................................. 3-4
Risk Factors........................................................ 5-13
Use of Proceeds..................................................... 13
Determination of Offering Price..................................... 13
Dilution............................................................ 13
Price Range Of Common Stock And Dividend Policy..................... 14
Selected Financial Data............................................. 15-16
Selling Shareholders................................................ 17
Plan of Distribution................................................ 18-19
Description of Securities to be Registered.......................... 20-21
Interests of Named Experts and Counsel.............................. 21
Description of Business............................................. 22-36
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 37-46
Quantitative and Qualitative Disclosures About Market Risk.......... 47
Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure............................................ 47
Management.......................................................... 47-52
Security Ownership Of Certain Beneficial Owners and Management...... 53
Certain Relationships and Related Transactions...................... 54-55
Legal Matters....................................................... 55
Experts............................................................. 55-56
Available Information............................................... 56
1
Index to Financial Statements....................................... F-1
PART II ............................................................ II-1-8
Signatures ......................................................... II-9
2
SUMMARY
-------
The following summary is only a shortened version of the more detailed
information, exhibits and financial statements appearing elsewhere in this
prospectus. Prospective investors are urged to read this prospectus in its
entirety.
International Fuel Technology, Inc.
We are in the business of developing a family of cost-effective fuels and fuel
additives that are designed to improve the efficiency of internal combustion
engines, thus reducing the level of certain harmful emissions created through
the combustion process. Our company and our products are in the development
stage. We plan to market, license and sell our products upon completion of the
development stage. See "Description of Business."
While we believe that the objectives of our strategic development, production
and marketing plans are reasonably attainable, we caution you that our ability
to achieve these goals is subject to the risks described in "Risk Factors"
below, including the limited resources that we currently have available to
pursue our plans, our ability to comply with government regulations and to meet
product certification requirements, our reliance on third parties for
development and testing of fuels and fuel additives, and the uncertainties
associated with the rapidly-changing business and technological environment for
development stage companies.
We have our principal executive offices at 7777 Bonhomme Avenue, Suite 1920, St.
Louis, Missouri 63105. Our telephone number is (314) 727-3333 and our website is
www.peerfuel.com.
Securities Purchase Agreement
We entered into a one year Securities Purchase Agreement dated July 10, 2001, in
which we agreed to sell up to a total of $3,000,000 worth of our $.01 par value
common stock, to IIG Equity Opportunities Fund Ltd. ("IIG Fund"). On the closing
date of the Securities Purchase Agreement dated July 10, 2001, the IIG Fund will
purchase common shares equal in value to $300,000, based on a pricing formula
equal to eighty percent of the average of the two lowest closing prices of our
common stock during the ten trading days beginning the day following the closing
date ,as the initial put amount. We have already received $150,000 from the IIG
Fund as an advance on the initial put amount. Subsequent to the closing date we
will provide the IIG Fund a minimum of 10 business days notice of our intention
to effect a put (the "Put Notice"). The date the Put Notice is submitted is the
subsequent put date (the "Subsequent Put Date") and will be used to perform the
applicable calculations required to determine the actual dollar amount of the
put (the "Subsequent Put Amount"). The Subsequent Put Amount will be calculated
at 200% of the average daily trading volume using the twenty trading days prior
to the Subsequent Put Date multiplied by the purchase price. The purchase price
is calculated as the price equal to 80% of the average of the two lowest closing
bid prices of the common stock for the ten trading days beginning the day after
the Subsequent Put Date. At least thirteen business days shall have passed since
the previous Subsequent Put Date for a Put Notice to be valid. We will pay to
IIG Capital, Inc. ("IIG Capital") a placement fee equal to 3% of the initial put
amount of and 3% of each Subsequent Put Amount. See the section entitled
"Description of Securities to be Registered" for a discussion of the private
equity line and the applicable formulas.
Under the terms of the Securities Purchase Agreement, we also entered into a
Registration Rights Agreement in which we are obligated to register with the
Securities and Exchange Commission all of the shares we would be required to
issue upon purchases of the common stock puts. In order to ensure that a
sufficient number of shares underlying the Securities Purchase Agreement are
registered, we elected to register approximately 2 times the number of shares we
would be required to issue based on a calculation date of June 20, 2001. See the
section entitled "Description of Securities to be Registered - Registration
Rights" for a discussion of the Registration Rights Agreement.
3
The common stock offered by the selling shareholders through this prospectus is
the common stock which will be received through the sale of common stock puts.
We are filing this registration statement in order to satisfy our obligations to
the selling shareholders under the Registration Rights Agreement.
Offering Summary
Securities Being Offered 21,430,000 shares of common stock;
See Section entitled "Description Of
Securities to be Registered."
Securities Issued
And to be Issued As of July 10, 2001, 50,500,988 shares of our common
stock were issued and outstanding. Approximately
7,257,413 shares of common stock are currently
available for resale in the public market in
reliance on Rule 144 of Securities Act of 1933.
Approximately 22,106,612 shares are in the public
market in reliance on Rule 144 of Securities Act of
1933 and become eligible for resale at various dates
thereafter. In addition, there are up to 10,714,286
shares represented by common stock puts that may be
sold based on the calculated put price that would
apply on June 20, 2001. Therefore, upon sale of all
of the common stock puts, there could be
approximately 61,215,274 shares of our common stock
issued and outstanding. The selling shareholders
will sell all of the common stock sold under this
prospectus. The selling shareholders may also sell
shares under Rule 144, if available, rather than
under this prospectus. See section entitled
"Description Of Securities To Be Registered".
Use of Proceeds We will not receive any proceeds from the sale of
the common stock by the selling shareholders. We
will use the proceeds we receive under the
Securities Purchase Agreement to advance research
and development, to provide for professional fees,
to provide for salary expenses and for working
capital and other capital needs, including to fund
the operations of acquisitions, if any.
4
RISK FACTORS
An investment in the securities offered through this prospectus is highly
speculative and subject to a high degree of risk. Only those who can bear the
risk of loss of their entire investment should participate. Prospective
investors should carefully consider the following factors, among others, before
making an investment in the common stock described in this document.
If We Do Not Get Additional Financing, There is a Risk that Our Business May
Fail.
While we anticipate completing a financing through the sale of common stock puts
under the Securities Purchase Agreement, we will not be able to fully realize
our strategic objectives or our business plan without obtaining additional
financing in the future. We expect proceeds of $3,000,000 from the sale of
common stock puts to cover our budget for the next twelve months. Our budget for
the next twelve months emphasizes the development of products acquired from
Interfacral Technologies (UK) Ltd. The $3,000,000 is expected to be used as
follows: $800,000 for research and development ($350,000 for CARB Certification,
$350,000 for Fleet Testing and $100,000 for Miscellaneous), $400,000 for
professional fees, $800,000 for salary expenses and $1,000,000 working capital
for administrative and other capital needs, including investigation of future
acquisitions, if any. We expect our future capital needs to be significant due
to a number of factors, including the amount of additional research and
development that is necessary to bring our products to market and any
acquisitions we may wish to pursue. The projected amount for additional research
and development necessary after the next twelve months to bring PEERFUEL/TM/ to
market is approximately $2.5 million. In addition, changes may occur in our
current operations that would use available capital resources sooner than
anticipated. If our capital resources are not sufficient to meet our future
capital needs, we will have to raise more funds to continue the development and
commercialization of our products, if any, realized from our technology. If this
future financing is not available, investors may lose a substantial portion or
all of their investment and our business may fail. We currently have no
immediate means for obtaining any additional financing. Consequently, we cannot
assure investors that additional financing, when necessary, will be available to
us on acceptable terms, or at all.
We Have a History of Operating Losses and Expect to Continue to Realize Losses;
We May Not Become Profitable or Be Able to Sustain Profitability.
Since our inception we have incurred significant net losses. For the three
months ended March 31, 2001, we lost approximately $1,500,000 and for the twelve
months ended December 31, 2000, we lost approximately $6,700,000. Our
accumulated deficit as of March 31, 2001 was approximately $22.6 million. The
auditors' report on the December 31, 2000 financial statements has been modified
for going concern and includes an explanatory paragraph that states we have
suffered recurring losses from operations, have negative working capital and
cash used in operating activities and have a stockholders' deficit that raises
substantial doubt about our ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. We expect to continue to incur net losses and
negative cash flow in the near future. The size of these losses will depend, in
large part, on our ability to realize licensing revenues from marketing our
products, which is dependent upon achieving certain regulatory approvals or
certifications. To date, we have not had any operating revenue from the sale or
licensing of our products. Even if we achieve regulatory approvals and
certifications, our ability to generate revenues will be dependent upon, among
other things, the successful negotiation of licensing agreements, the marketing
of our products and the possible sale of our technology. Because we have not yet
attempted to license, market or sell our products or our technology, there can
be no assurance that we will successfully be able to do so. We expect to spend
additional funds on testing for regulatory approvals and certifications,
marketing expenses and other research and development efforts. As a result, we
expect our operating expenses to increase in the short term which will
necessitate higher levels of revenue for profitability when, and if, we begin to
generate revenues. Should we achieve profitability there is no assurance we can
maintain or increase our level of profitability in the future.
5
Because We are a Development Stage Company with an Unproven Technology and
Little Experience in the Operation of Our Business, There is a Risk that Our
Business May Fail.
To date, we have been involved primarily in research, testing and product
development. We have only a limited operating history and no experience in
producing and bringing to market our products. Potential investors should be
aware that there is a substantial risk of failure associated with development
stage businesses because of problems encountered in connection with the
producing and marketing of products. We have experienced in the past and may
experience in the future many of the problems, delays and expenses encountered
by any early stage business, many of which are beyond our control. These
problems include, but are not limited to:
(1) substantial delays and expenses related to testing and development of our
new products,
(2) unanticipated difficulties relating to the production and marketing of a
new product in the marketplace;
(3) competition from larger and more established companies, and
(4) lack of market acceptance of our new products and technologies.
We have only a limited operating history upon which to base any projection of
the likelihood we will prove successful, and thus we cannot assure potential
investors that we will achieve profitable operations or even generate any
operating revenues.
In addition, our PEER fuel technology and our Interfacial technology is a
completely new approach to reducing harmful emissions from certain internal
combustion engines and the unproven aspects of our technology may never prove
commercially viable. There is the potential that we may not be able to produce
on a sustainable basis the preliminary performance results achieved in certain
of our research efforts. It is also possible that our products will not meet
certain regulatory requirements and we may not be able to manufacture or
successfully market our products at a reasonable cost.
It may be several months before we are able to start both regulatory protocol
testing for certification and live vehicle fleet testing for our PEER fuel
technology and our Interfacial technology. We are not able to gauge the exact
amount of additional testing that will be required to achieve the specific
regulatory certifications we believe we will need before taking our products to
market. In addition, we are uncertain how many fleet test programs will be
necessary to definitively prove any fuel economy benefits from our products, nor
can there be any assurance that such fleet test programs will prove successful.
Difficulties in the development and utilization of a new and unproven technology
could limit our ability to develop commercially viable products, which could
cause our business to fail. A number of companies have had fuels certified under
the CARB equivalency certification program and not all of the fuels have
achieved commercial success. The success of any given fuel in the marketplace is
dependent upon many factors, with the substantial emphasis being the ability to
deliver a sustainable and meaningful economic benefit to the user of that fuel.
Despite gaining certification from CARB, fuel processed through the PEERFUEL/TM/
system or processed with the Interfacial technology may not contain a level of
benefits deemed economically meaningful by the market either through reduction
in pollution emissions or enhanced fuel economy.
We May Experience Difficulties in the Introduction of New Products that Could
Result in Us Having to Incur Significant Unexpected Expenses or Delay the Launch
of New Products.
Our technologies and products are in various stages of development. These
development stage products may not be completed in time to allow production or
marketing due to the inherent risks of new product and
6
technology development, limitations on financing, competition, obsolescence,
loss of key personnel and other factors. Unanticipated technical obstacles can
arise at any time and result in lengthy and costly delays or in a determination
that further development is not feasible. The development of our technologies
has taken longer than anticipated and could be additionally delayed. Therefore,
there can be no assurance of timely completion and introduction of improved
products on a cost-effective basis, or that such products, if introduced, will
achieve market acceptance such that they will sustain us to achieve profitable
operations.
We are Dependent on Third Parties for the Development of Our Products and any
Conflicts with These Third Parties May Prevent Us from Commercializing Our
Products.
We do not presently possess all of the resources needed to complete the
regulatory approval and certification process necessary to commercialize our
products. We have entered into consulting and other agreements with certain
third parties to help us achieve regulatory certification and to oversee certain
aspects of our fleet testing program. These contracts have no fixed expiration
date and are cancelable at any time. If these third parties elect to discontinue
their efforts, we may not be able to commercialize our products in a timely
manner, or to commercialize them at all.
We do not control these third parties, nor are we able to control the amount of
time and effort they put forth on our behalf. It is possible that any of these
third parties may not perform as expected, and that they may breach or terminate
their agreements with us before completing their work. It is also possible that
they may choose to provide services to a competitor. Any failure of a third
party to provide us the services for which we have contracted could prevent us
from commercializing our products.
There is a Risk that Products Developed by Competitors Will Reduce Our Profits
or Force Us Out of Business.
We may face competition from companies that are developing products similar to
those we are developing. The petroleum/fossil fuels industry has spawned a large
number of efforts to create technologies that help reduce or eliminate harmful
emissions from the burning of fuels. These companies may have significantly
greater marketing, financial and managerial resources than us. We cannot assure
investors that our competitors will not succeed in developing and distributing
products that will render our products obsolete or noncompetitive. Generally,
such competition could potentially force us out of business.
Our Products Can Only Be Applied to a Limited Range of Uses With the Resulting
Concentration Possibly Limiting Our Potential Growth.
Our products are being developed with a limited set of functional uses relating
primarily to internal combustion engines. Significant efforts exist to find
alternatives to internal combustion engines. In addition, the regulatory
environment is becoming increasingly restrictive with regard to the performance
of internal combustion engines and the harmful emissions they produce. If
alternatives to internal combustion engines become commercially viable, it is
possible that the potential market for our products could be reduced, if not
eliminated.
Because of the Nature of Our Products, We May Be Subject to Government Approvals
and Regulations that Reduce Our Ability to Commercialize Our Products, Increase
Our Costs of Operations and Decrease Our Ability To Generate Income.
We are subject to United States and international laws and regulations regarding
the development, production, transportation and sale of the products we sell.
There is no single regulatory authority to which we must apply for certification
or approval to sell our products in the United States or outside its borders.
However, to sell our products in the State of California, which is a central
component of our marketing
7
strategy, it is required that we receive a certification from the California Air
Resources Board (CARB) stating that we produce CARB qualified products. To
obtain this particular certification we must submit our products to extensive
testing with a laboratory facility approved by CARB. This is a defined process
with a generally accepted cost for such testing, and the data obtained from this
particular process is generally not subject to interpretation. The generally
accepted cost for the CARB testing is approximately $150,000, as provided by the
company expected to do the testing and verified by our technical consultants. We
also intend to seek certification from CARB attesting to specific performance
features of our products at an additional estimated cost of $200,000. It is
possible that CARB may change its regulatory policy to require that all the
certifications we are seeking be in place before our products may be sold in
California, or that additional testing be required before any final
certifications are given. It is also possible that other states may adopt the
CARB regulations for the sale of similar products or create their own
regulations regarding the sale of these products. Any such changes in policy or
state regulations may cause delays or rejections of our attempts to
commercialize our products. In addition, the regulatory agencies of foreign
governments must approve our products before they can be sold in those
countries, and may in some cases set or approve prices for our products.
There can be no assurance that we will obtain regulatory approvals and
certifications for our products. Even if we are granted such regulatory
approvals and certifications, we may be subject to limitations imposed on the
use of our products. In the future, we may be required to comply with certain
restrictive regulations, or potential future regulations, rules, or directives.
We cannot guarantee that restrictive regulations will not, in the future, be
imposed. Such potential regulatory conditions or compliance with such
regulations may increase our cost of operations or decrease our ability to
generate income.
The Market for our Stock is Subject to Rules Relating to Low-Priced Stock.
Our common stock is currently listed for trading in the NASD Over-The-Counter
Bulletin Board Market and is subject to the "penny stock rules" adopted pursuant
to Section 15 (g) of the Securities Exchange Act of 1934, as amended. In
general, the penny stock rules apply to non-NASDAQ or non-national stock
exchange companies whose common stock trades at less than $5.00 per share or
which have tangible net worth of less than $5,000,000 ($2,000,000 if the company
has been operating for three or more years). Such rules require, among other
things, that brokers who trade "penny stock" to persons other than "established
customers" complete certain documentation, make suitability inquiries of
investors and provide investors with certain information concerning trading in
the security, including a risk disclosure document, quote information, broker's
commission information and rights and remedies available to investors in penny
stocks. Many brokers have decided not to trade "penny stock" because of the
requirements of the penny stock rules and, as a result, the number of broker-
dealers willing to act as market makers in such securities is limited. The
"penny stock rules," therefore, may have an adverse impact on the market for our
common stock.
If Our Stock is Delisted, There is a Risk that the Market Value and Use of Our
Stock Would Decline.
In order for our shareholders to sell their common stock through the NASD Over-
The-Counter Bulletin Board Market, we must continue to meet the Bulletin Board's
listing qualifications. We cannot provide any assurance that in the future our
common stock will continue to meet these listing qualifications. Delisting from
the Bulletin Board or other market could cause, among other things:
. A decline in the market price of the common stock;
. Difficulty in obtaining future financing;
. Difficulty in using common stock as consideration for acquisitions; and
. Investors being unable to sell their stock
8
Because We are a Development Stage Company With an Untested Market, the Price of
Our Stock is Very Volatile and May Decline.
Recently, the stock market in general, and the shares of development stage
companies in particular, have experienced significant price fluctuations. These
broad market and industry fluctuations may cause the market price of our common
stock to decline dramatically. Factors such as quarterly fluctuations in results
of operations and general conditions in our industry may have a significant
impact on the market price of our stock. The market price of our common stock
has been and may continue to be very volatile.
If the Selling Shareholders Sell a Large Number of Shares All at Once or In
Blocks, The Market Price of Our Shares Would Most Likely Decline.
The selling shareholders are offering all of the common stock offered through
this prospectus. The selling shareholders are not restricted in the price at
which they can sell the common stock. Shares sold at a price below the current
market price at which the common stock is trading may cause that market price to
decline. The shares of common stock covered by this prospectus that are issuable
upon sale of the common stock puts represent 21.2% of our outstanding shares as
of July 10, 2001, based on a calculated put price that would apply on June 20,
2001.
The Ownership Percentage Interest Of Existing Shareholders Will Be Diminished
and The Price of Our Stock May Decline Based on the Applicable Calculated Rate
of the Common Stock Puts.
Upon consummation of the Securities Purchase Agreement we will have up to
$3,000,000 worth of common stock puts which could be sold for common stock,
issued and outstanding. Consummation of the financing is contingent on the
common stock shares being registered with the Securities and Exchange Commission
and upon the IIG Fund agreeing to provide the funding contemplated by the
financing. Depending on market conditions, the number of shares issuable upon
sale of the common stock puts will vary dramatically. The lower our stock price,
the more common stock the IIG Fund will receive as a result of the put purchase.
This will have the effect of diluting the interests of our existing
shareholders.
The following table illustrates the number of shares that we would be required
to issue at various assumed prices upon sale of the $3,000,000 of common stock
puts, subject to the limitations described in the text following the table. This
table is for illustrative purposes only, and should not be assumed to represent
our projections of the range of future stock prices.
Ownership of
Put Sale Shares Issuable Under the Selling Shareholders as a
Stock Price Securities Purchase Agreement Result of Share Issuance (1)
- ------------- ----------------------------- -----------------------------
$.15 20,000,000 28.4%
$.25 12,000,000 19.2%
$.28(2) 10,714,286 17.5%
$.50 6,000,000 10.6%
$.75 4,000,000 7.3%
- -----------------------
(1) Based on 50,500,988 shares outstanding on July 10, 2001, plus the
applicable number of shares issuable under the Securities Purchase
Agreement
(2) The put sale price on June 20, 2001, based on the formula set forth in
"Description of Securities to be Registered - Common Stock Puts."
9
Investors could therefore experience dilution of their ownership percentage upon
sale of the common stock puts.
Investors should note that the sale price of these common stock puts as of June
20, 2001 of $.28 was below the market price of the common shares which was $.52
per share as of July 9, 2001. The exercise of such a large amount of stock,
especially if over a short period of time, may have a substantial negative
effect on the market price of our common stock.
If We are Unable to Achieve or Maintain the Effectiveness of this Registration
Statement, We Will Be Subject to Substantial Penalties.
We are subject to agreements with the selling stockholders that require us to
file a registration statement to register certain of our common stock with the
Securities and Exchange Commission within 60 days following the signing of the
Securities Purchase Agreement and for the registration of that certain common
stock to be effective within 120 days of filing the registration statement.
Under the agreements, we must also maintain this registration until all of the
securities covered by the agreements are sold or can be sold publicly without
benefit of this registration. If we are unable to file the registration
statement by the 60-day deadline or achieve effectiveness of the registration of
the common stock by the 120-day deadline we could be subject to liquidated
damages of up to 3% of the initial put amount of $300,000, or $9,000. If we are
unable to achieve effectiveness of the registration of the common stock within
150 days of filing the registration statement we could be subject to additional
liquidated damages of 1% of the initial put amount of $300,000, or $3,000. If we
are unable to maintain the registration of the common stock we could be subject
to liquidated damages of $1,000 per day until the registration default is cured.
Also, if we terminate the Securities Purchase Agreement after the registration
statement is effective we could be subject to monetary damages of 10% of the
undrawn amount of the $3,000,000 commitment.
If We Lose any Key Personnel or Management, We May Lose Business Sales or Be
Unable to Otherwise Fully Operate Our Business.
We are dependent on the principal members of our management staff, the loss of
any of whom could impair the development or sale of our products and projects.
Our success will be largely dependent on the decisions made by members of
management. The principal members of the management staff under contract are
Jonathan R. Burst, CEO, William J. Lindenmayer, President and COO and Ian
Williamson, Director-Technology Development. Our CFO, Steven D. Walters, is not
under contract. Furthermore, we may depend on our ability to attract and retain
additional qualified personnel to manage certain business interests. We may have
to recruit qualified personnel with competitive compensation packages, equity
participation and other benefits which may reduce the working capital available
for our operations. Management may seek to obtain outside independent
professionals to assist them in assessing the merits and risks of any business
proposals as well as assisting in the development and operation of any projects.
We cannot assure investors that we will be able to obtain this needed assistance
on reasonable terms, or that we will be able to retain our existing management
staff.
If a Significant Number of Shares Become Available for Sale After This Offering,
Our Stock Price Could Decline.
Many shares of our common stock presently issued and outstanding are "Restricted
Securities" as that term is defined in Rule 144 promulgated under the Securities
Act of 1933. In general, under Rule 144, a person (or persons whose shares are
aggregated) who has satisfied a one year holding period may sell, within any
three month period, an amount which does not exceed the greater of 1% of the
then outstanding shares of common stock or the average weekly trading volume
during the four calendar weeks prior to such sale. Rule
10
144 also permits the sale of shares, under certain circumstances, without any
quantity limitation, by persons who are not affiliates of International Fuel and
who have beneficially owned the shares for a minimum period of two years.
Currently, there are approximately 7,257,413 shares of common stock that are
executable for resale under Rule 144 and approximately 22,106,612 shares become
eligible for resale in the public market under Rule 144 at various dates
thereafter. The possible sale of these restricted shares may, in the future,
increase the number of free-trading shares and may have a depressive effect on
the price of our securities. Moreover, such sales, if substantial, might also
adversely affect our ability to raise additional equity capital.
We Create Products That May Have Harmful Effects on the Environment If Not
Stored and Handled Properly Prior to Use, Which Could Result in Significant
Liability and Compliance Expense.
The re-processing of refined fossil fuels through our PEER fuel system involves
the controlled use of materials that are hazardous to the environment. We cannot
eliminate the risk of accidental contamination or discharge and any resulting
problems that occur. Federal, state and local laws and regulations govern the
use, manufacture, storage, handling and disposal of these materials. We may be
named a defendant in any suit that arises from the improper handling, storage or
disposal of these products. We could be subject to civil damages in the event of
an improper or unauthorized release of, or exposure of individuals to, hazardous
materials. Claimants may sue us for injury or contamination that results from
use by third parties of PEER fuel products, and our liability may exceed our
total assets. Compliance with environmental laws and regulations may be
expensive, and current or future environmental regulations may impair our
research, development and production efforts.
If We are Unable to Protect Our Technology From Use By Competitors, There is a
Risk that We Will Sustain Losses or that Our Business May Fail.
Our success will depend, in part, on our ability to obtain and enforce
intellectual property protection for our technology in both the United States
and other countries. We have filed patent applications in the United States
Patent and Trademark Office and international counterparts of applications in
the United States Receiving Office under the Patent Cooperation Treaty. We
cannot provide any assurance that patents will issue from these applications or
that, with respect to any patents, issued or pending, the claims allowed are or
will be sufficiently broad to protect the key aspects of our technology or that
the patent laws will provide effective legal or injunctive remedies to stop any
infringement of our patents. In addition, we cannot assure investors that any
patent rights owned by us will not be challenged, invalidated or circumvented,
that the rights granted under patents will provide competitive advantages to us,
or that our competitors will not independently develop or patent technologies
that are substantially equivalent or superior to our technology. Our business
plan assumes that we will obtain and maintain comprehensive patent protection of
our technologies. We cannot assure investors that such protection will be
obtained, or that, if obtained, it will withstand challenge. Furthermore, if an
action is brought, a court may find that we have infringed on the patents owned
by others. We may have to go to court to defend our patents, to prosecute
infringements, or to defend infringement claims made by others. We are not aware
of any such pending or threatened patent litigation at this time. Patent
litigation is expensive and time-consuming, and well-funded adversaries can use
such actions as part of a strategy for depleting the resources of a small
company such as ours. We cannot assure investors that we will have sufficient
resources to successfully prosecute our interests in any litigation that may be
brought.
We May Have Difficulties Managing Growth Which Could Lead to Higher Losses.
While we have not yet achieved any revenues through the sale or licensing of our
products, should certain events occur, such as CARB certification or significant
repeated fuel economy results from fleet testing, we might be in a position to
rapidly commercialize our products. Rapid growth would strain our human and
11
capital resources, potentially leading to higher operating losses. Our ability
to manage operations and control growth will be dependent upon our ability to
raise and spend capital to improve our operational, financial and management
controls, reporting systems and procedures, and to attract and retain adequate
numbers of qualified employees. Should we be unable to successfully create
improvements to our internal procedures and controls in an efficient and timely
manner, then management may receive inadequate information necessary to manage
the Company's operations, possibly causing additional expenditures and
inefficient use of existing human and capital resources.
Achieving Regulatory Approval in California May Not Ensure Commercial Viability
An important element of our strategic plan for commercialization rests with the
ability to have Interfacial products and PEERFUEL/TM/ certified as an Air
Resources Board of California (CARB) equivalent fuel under the CARB program
implemented in 1988. A key regulatory measure as overseen by CARB for the State
of California requires that for fuels used in targeted mobile and stationary
engines, that fuel must meet certain standards for the generation of harmful
emissions. The benchmark for these standards is the use of what is known as CARB
equivalent fuel. All fuels used for these targeted engines must initially be
certified and then regularly tested to ensure they meet the CARB equivalency
levels.
Since 1988 approximately 26 fuels have successfully gone through the CARB
equivalency program. Of these successful fuels, approximately 14 were original
fuel formulations, with the remaining fuels being derivatives of the 14 original
fuels. From the number of original fuels, based upon the number of fuel
formulations now being sold commercially in California, it is believed that less
than half of the original formulas have become viable on a commercial scale. We
do not know the exact reasons for lack of commercial viability, however, we
believe these fuels failed due to lack of significant benefits in either fuel
economy or pollution emission reduction versus CARB certified fuels. Therefore,
is it possible that while CARB accepts our application for fuel equivalency
testing, and the subsequent testing meets the minimum CARB requirements so that
the Interfacial products and PEERFUEL/TM/ receive certification for sale, the
Interfacial products and PEERFUEL/TM/ may not have a market in California or
elsewhere in the United States.
We May Not Be Able to Receive the Full $3,000,000 Proceeds of the Put Sales from
the Securities Purchase Agreement Due to Limitations on Stock Issuance from the
Securities Purchase Agreement
A put purchase will not occur if the issuance of the common stock will cause the
number of shares of common stock issuable based on the Securities Purchase
Agreement in the aggregate to exceed 19.9% of our outstanding shares, unless the
issuances have been approved by our shareholders. Based upon the July 10, 2001
outstanding shares of 50,500,988 and a June 20, 2001 calculated put price of
$.28, common stock puts totaling $3,000,000 can be sold without reaching the
19.9% limitation. Based upon the July 10, 2001 outstanding shares of $50,500,988
the 19.9% limitation will not be reached if all of the calculated put prices are
at $.24 and above. If the calculated put prices for each Subsequent Put Amounts
results in common shares being issued under the Securities Purchase Agreement
totaling 19.9% of our outstanding shares there will be limitations on the
utilization of the full $3,000,000 proceeds of the common stock put sales. There
can be no assurances that the calculated put price will remain at a level
sufficient to allow full utilization of the $3,000,000 proceeds of the common
stock put sales. In addition, the occurrence of other specified events
constituting an event of default under the terms of the Securities Purchase
Agreement may result in the termination of the Securities Purchase Agreement.
These events include, but are not limited to, a delisting of our common stock
from the OTC Bulletin Board, our making an assignment for the benefit of our
creditors or our bankruptcy, insolvency, reorganization or liquidation.
We May Not Be Able to Receive the Full $3,000,000 Proceeds of the Put Sales from
the Securities Purchase Agreement Due to Limitations on Stock Ownership by the
IIG Fund
A put purchase will not occur if the issuance of the common stock will cause the
number of shares of owned by the IIG Fund in the aggregate to exceed 4.99% of
our outstanding shares on such date. Based upon the July 10, 2001 outstanding
shares of 50,500,988, a June 20, 2001 calculated put price of $.28, and the
IIG Fund being the owner of 796,676 common shares on July 10, 2001, common stock
puts totalling approximately $500,000 can be sold before the 4.99% ownership
limitation is reached.
12
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock offered
through this prospectus by the selling shareholders. We will use the proceeds we
receive under the Securities Purchase Agreement to advance research and
development, to provide for professional fees, to provide for salary expenses
and for working capital and other capital needs, including to fund the
operations of acquisitions, if any.
DETERMINATION OF OFFERING PRICE
The offering price of the common stock will not be determined by us, but by
market factors and the independent decisions of the selling shareholders. See
section entitled "Selling Shareholders".
DILUTION
The shares of common stock covered by this prospectus that are issuable upon the
sale of the common stock puts represent 21.2% of our outstanding shares as of
July 10, 2001, based on the calculated put price that would apply on June 20,
2001.
As of July 10, 2001, 50,500,988 shares of our common stock were issued and
outstanding. We will also sell up to $3,000,000 worth of common stock puts.
Depending on market conditions at the time of sale, the number of shares
issuable to the purchasers of the common stock puts could prove to be
significantly greater in the event of a decrease in the trading price of the
common stock. This will have the effect of diluting the interest of our existing
shareholders.
13
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock has been traded on the National Association of Securities
Dealers OTC Bulletin Board system under the symbol "IFUE" since October 1998.
There can be no assurance that in the future the common stock will meet the
continued listing qualifications of the OTC Bulletin Board. The following table
provides the range of closing high and low bid prices shown below is as reported
by the OTC Bulletin Board since the stock began trading in October 1998. The
quotations shown reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
HIGH LOW
------- ------
Year Ended March 31, 1999
- -------------------------
First Quarter - -
Second Quarter - -
Third Quarter $11.875 $5.000
Fourth Quarter $ 7.812 $2.969
Nine Months Ended December 31, 1999
- -----------------------------------
First Quarter $ 3.125 $1.250
Second Quarter $ 5.562 $1.875
Third Quarter $ 5.000 $2.531
Year Ended December 31, 2000
- ----------------------------
First Quarter $ 3.969 $1.875
Second Quarter $ 2.375 $ .406
Third Quarter $ .984 $ .375
Fourth Quarter $ .984 $ .328
Year Ended December 31, 2001
- ----------------------------
First Quarter $ .563 $ .250
Second Quarter $ .625 $ .250
Third Quarter (Through July 9, 2001) $ .550 $ .450
Reflects a one-for-ten reverse split of outstanding common stock effected on
July 22, 1999. All closing high and low bid prices have been restated to reflect
this reverse split.
As of the close of business on July 9, 2001, the last reported bid price per
share of our common stock was $.52. There were 1,481 holders of record of our
common stock at the close of business on May 31, 2001. Such number does not
include persons whose shares are held by a bank, brokerage house or clearing
company, but does include such banks, brokerage houses and clearing companies.
No cash dividends have been paid on our common stock since our inception and we
do not anticipate paying dividends in the foreseeable future. We currently
intend to retain earnings, if any, for future growth and expansion
opportunities.
14
SELECTED FINANCIAL DATA
The following table provides certain comparative financial data for
International Fuel for the twelve months ended December 31, 2000, the nine
months ended December 31, 1999 and 1998, and the years ended March 31, 1999,
1998 and 1997. International Fuel was incorporated on April 9, 1996. The
information provided in this table is qualified by the more complete information
contained in the audited and unaudited financial statements provided later in
this document.
Effective October 27, 1999, International Fuel changed the date of its fiscal
year end from March 31 to December 31. The nine-month period ended December 31,
1999, is referred to as the transition period. All year and quarter references
relate to International Fuel's prior fiscal years and quarters, unless otherwise
stated.
The following tables set forth certain information concerning the Statement of
Operations and Balance Sheet of International Fuel and should be read in
conjunction with the Financial Statements and the notes thereto appearing
elsewhere in this report. International Fuel follows the same accounting
policies in preparation of interim reports.
The following tables for the interim periods reflect all adjustments, consisting
of normal recurring adjustments which, in the opinion of management, are
necessary for fair presentation of the information contained therein.
Results of operations for the interim periods are not indicative of annual
results.
(a) Selected Statement of Operations Data (In Thousands of Dollars, Except Per
Share Data)
Three Months Ended March 31,
2001 (Unaudited)
----------------
Revenues $ --
Operating Expenses 1,477
Net loss (1,502)
Basic and Diluted Net Loss per Common Share ($.06)
Weighted Average Shares 24,422,973
Twelve Months Ended December 31,
2000
----
Revenues $ --
Operating Expenses 4,690
Net loss (6,688)
Basic and Diluted Net Loss
per Common Share ($.36)
Weighted Average Shares 18,827,802
15
Nine Months Ended December 31,
1999 1998
---- ----
(unaudited)
Revenues $ -- $ --
Operating Expenses 4,727 7,335
Net loss (5,132) (7,404)
Basic and Diluted Net Loss
per Common Share ($.32) ($.57)
Weighted Average Shares 15,800,725 12,993,978
Fiscal Year Ended March 31,
--------------------------------------
1999 1998 1997
---------- ----------- --------
Revenues $ -- $ -- $ --
Operating Expenses 7,751 1,083 344
Net loss (7,839) (1,091) (344)
Basic and Diluted Net Loss per Common Share ($.59) ($.20) ($1.68)
Weighted Average Shares 13,390,417 5, 351,089 204,452
(b) Selected Balance Sheet Data (In Thousands of Dollars)
- ---------------------------------------------------------
March 31,
----------------
2001 (Unaudited)
----------------
Total Assets $134
Long-Term Debt $230
December 31,
------------
2000 1999
----- -----
Total Assets $175 $ 68
Long-Term Debt $162 $ --
March 31,
----------------
1999 1998 1997
---- ---- ----
Total Assets $ 6 $ 7 $ 5
Long-Term Debt $-- $-- $--
16
SELLING SHAREHOLDERS
The common stock offered hereby consists of:
. 10,714,286 shares issuable upon the sale of up to $3,000,000 in common stock
puts that may be sold to the IIG Fund based on a price calculated as of June
20, 2001. The number of shares registered for the common stock puts pursuant
to the Registration Rights Agreement is 21,430,000, which represents
approximately 2 times the number of shares that would have been issuable upon
sale of the common stock puts as of June 20, 2001. The difference in these
two calculations (10,715,714) is the difference between the total shares we
elected to register under the terms of the Registration Rights Agreement and
the total shares that would actually be available for sale if the common
stock puts were sold on June 20, 2001.
. On the closing date of the Securities Purchase Agreement dated July 10, 2001,
the IIG Fund will purchase common shares equal in value to $300,000, based on
a pricing formula equal to eighty percent of the average of the lowest
closing prices of our common stock during the ten trading days beginning the
day following the closing date, as the initial put amount. We have already
received $150,000 from the IIG fund as an advance on the initial put amount.
Subsequent to the closing date we will submit a Put Notice on the Subsequent
Put Date to the IIG Fund and the Subsequent Put Amount will be calculated at
200% of the average daily trading volume using the twenty trading days prior
to the Subsequent Put Date multiplied by the purchase price. The purchase
price is calculated as the price equal to 80% of the average of the two
lowest closing bid prices of the common stock for the ten trading days
beginning the day after the Subsequent Put Date. At least thirteen business
days shall have passed since the previous Subsequent Put Date for a Put
Notice to be valid. We will pay IIG Capital a placement fee equal to 3% of
the amount of the initial put amount and of each Subsequent Put Amount.
The following table provides, as of July 10, 2001, information regarding the
beneficial ownership of our common stock held by each of the selling
shareholders; their shares owned prior to this offering; the total number of
shares that are to be offered for each selling shareholder based on a June 20,
2001 sale date for the common stock puts; the total number of shares that are
being registered for each selling shareholder in the offering; and the total
number of shares that will be owned by each selling shareholder upon completion
of the offering.
Shares/Percent
Shares Owned Shares To Shares Being Owned Upon
Name of Selling Prior to Be Sold in Registered in Completion of Beneficial
Shareholder This Offering This Offering This Offering This Offering(1) Owner
- ----------------- ------------- ------------- ------------- ---------------- -------------
IIG Equity 796,676 10,714,286 21,430,000 11,510,962/18.8% George Sandhu
Opportunities New York, NY
Fund Ltd.
(1) Assumes that none of the selling shareholders sells shares of common stock
not being offered hereunder or purchases additional shares of common stock.
Based on 50,500,988 shares of common stock issued and outstanding as of July 10,
2001. The 50,500,988 shares of common stock outstanding includes 8,500,002
shares that are contingently issued in connection with the acquisition of
Interfacial Technologies (UK) Limited.
None of the selling shareholders have had a material relationship with
International Fuel Technology, Inc., other than as a shareholder as noted above
at any time within the past three years.
17
PLAN OF DISTRIBUTION
The selling shareholders, or their respective pledgees, donees, transferees or
other successors in interest, may sell some or all of the common stock in one or
more transactions, including block transactions:
(1) on the NASD OTC Bulletin Board, or on such other market on which the common
stock may from time to time be trading;
(2) in privately negotiated transactions;
(3) through the writing of options on the common stock;
(4) in short sales; or
(5) in any combination of these methods of distribution.
The sales price to the public may be: (i) the market price prevailing at the
time of sale; (ii) a price related to such prevailing market price; or (iii)
such other price as the selling shareholders determine from time to time.
The selling shareholders, or their respective pledgees, donees, transferees or
other successors in interest, may also sell the common stock directly to market
makers acting as principals or brokers or dealers, who may act as agent or
acquire the common stock as principal. Any broker or dealer participating in
such transactions as agent may receive a commission from the selling
shareholders, or, if they act as agent for the purchaser of such common stock,
from such purchaser. The selling shareholders will pay the usual and customary
brokerage fees. Brokers or dealers may agree with the selling shareholders to
sell a specified number of shares at a stipulated price per share and, to the
extent such broker or dealer is unable to do so acting as agent for the selling
shareholders, to purchase, as principal, any unsold shares at the price required
to fulfill the respective broker's or dealer's commitment to the selling
shareholders. Brokers or dealers who acquire shares as principals may thereafter
resell such shares from time to time in transactions in the over-the-counter
market, in negotiated transactions or otherwise, at market prices prevailing at
the time of sale or at negotiated prices, and in connection with such resales
may pay or receive commissions to or from the purchasers of such shares. These
transactions may involve cross and block transactions that may involve sales to
and through other brokers or dealers. If applicable, the selling shareholders
also may have distributed, or may distribute, shares to one or more of their
partners who are unaffiliated with us. Such partners may, in turn, distribute
such shares as described above. We can provide no assurance that the selling
shareholders will sell all or any of their shares.
IIG Equity Opportunities Fund Ltd. is an "underwriter," within the meaning of
the Securities Act, of the shares offered and sold under this prospectus.
We are bearing all costs relating to the registration of the common stock. All
commissions or other fees payable to brokers or dealers in connection with any
sale of the common stock will be borne by the selling shareholders or other
party selling such common stock. We have agreed to indemnify the selling
shareholders, or their transferees or assignees, against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the selling shareholders, or their transferees or assignees, may be required to
make.
The selling shareholders must comply with the requirements of the Securities Act
and the Securities Exchange Act in the offer and sale of the common stock. In
particular, during such times as the selling shareholders may be deemed to be
engaged in a distribution of the common stock, and therefore be considered to be
an underwriter under the Securities Act, they must comply with applicable law
and may, among other things:
(a) not engage in any stabilization activities in connection with our
securities;
18
(b) furnish each broker or dealer through which common stock may be offered
such copies of this prospectus, as amended from time to time, as may be required
by such broker or dealer; and
(c) not bid for or purchase any securities of International Fuel or attempt
to induce any person to purchase any securities of International Fuel other than
as permitted under the Securities Exchange Act.
19
DESCRIPTION OF SECURITIES TO BE REGISTERED
Common Stock
We have 150,000,000 authorized common shares with a par value of $0.01 per share
of common stock, of which 50,500,988 were outstanding as of July 10, 2001. The
50,500,988 shares of common stock outstanding includes 8,500,002 shares that are
contingently issued in connection with the acquisition of Interfacial
Technologies (UK) Limited.
Holders of common stock have the right to cast one vote for each share held of
record on all matters submitted to a vote of holders of common stock, including
the election of directors. There is no right to cumulative voting in the
election of directors. Stockholders holding a majority of the voting power of
the capital stock issued and outstanding and entitled to vote, represented in
person or by proxy, are necessary to constitute a quorum at any meeting of our
stockholders. The vote by the holders of a majority of such outstanding shares
is required to effect certain fundamental corporate changes such as liquidation,
merger or amendment of our Articles of Incorporation.
Holders of common stock are entitled to receive dividends on a pro rata basis,
when, as and if declared by the Board of Directors, from funds legally
available. In the event of the liquidation, dissolution or winding up of our
affairs, all of our assets and funds remaining after the payment of all debts
and other liabilities, shall be distributed, pro rata, among the holders of the
common stock. Holders of common stock are not entitled to pre-emptive or
subscription or conversion rights, and there are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are, and the shares of common stock offered hereby will be when issued,
fully paid and non-assessable.
Public Market
Our shares are currently trading on the National Association of Securities
Dealers' OTC Bulletin Board under the stock symbol "IFUE". On July 9, 2001, the
closing sale price of our common stock was $.52 per share.
Common Stock Puts
On July 10, 2001, we entered into a Securities Purchase Agreement with the IIG
Fund under which we agreed to sell up to $3,000,000 of common stock puts. The
common stock Puts will be sold to the IIG Fund only upon a declaration of
effectiveness by the Securities and Exchange Commission of the registration of
the shares of common stock underlying the common stock puts.
On the closing date of the Securities Purchase Agreement dated July 10, 2001,
the IIG Fund will purchase common shares equal in value to $300,000, based on a
pricing formula equal to eighty percent of the average of the two lowest closing
prices of our common stock during the ten trading days beginning the day
following the closing date, as the initial put amount. We have already received
$150,000 from the IIG Fund as an advance on the initial put amount. Subsequent
to the closing date we will submit a Put Notice on the Subsequent Put Date to
the IIG Fund and the Subsequent Put Amount will be calculated at 200% of the
average daily trading volume using the twenty trading days prior to the
Subsequent Put Date multiplied by the purchase price. The purchase price is
calculated as the price equal to 80% of the average of the two lowest closing
bid prices of the common stock for the ten trading days beginning the day after
the Subsequent Put Date. At least thirteen business days shall have passed since
the previous Subsequent Put Date for a Put Notice to be valid. We will pay to
IIG Capital a placement fee equal to 3% of the initial put amount and 3% of each
Subsequent Put Amount.
A common stock put purchase will not be effected if the issuance of the common
stock will cause the number of shares of common stock issued based on the
Securities Purchase Agreement in the aggregate to exceed 19.9% of our
outstanding shares, unless the issuances have been approved by our shareholders.
20
A common stock put purchase will not be effected if the issurance of the common
stock will cause the number of shares owned by the IIG fund to be greater than
4.99%.
We have the option to extend the term of the Securities Purchase Agreement for
an additional twelve months and an additional $3,000,000 on similar terms and
conditions by giving written notice to the IIG Fund of our intention to exercise
such option not less than 60 days prior to the expiration of the original one
year commitment term.
The occurrence of other specified events constituting an event of default under
the terms of the Securities Purchase Agreement may result in the termination of
the Securities Purchase Agreement. These events include, but are not limited to,
a delisting of our common stock from the OTC Bulletin Board, our making an
assignment for the benefit of our creditors or our bankruptcy, insolvency,
reorganization or liquidation.
The foregoing has been a brief description of the material terms of the
Securities Purchase Agreement. For a more detailed description of the rights of
the IIG Fund, prospective investors are directed to the actual Securities
Purchase Agreement that has been filed as an exhibit to the registration
statement of which this prospectus is a part.
Registration Rights
The selling shareholders have the right to require us to register their common
shares with the Securities and Exchange Commission. These rights are evidenced
by a Registration Rights Agreement and are the sole reason for our filing of the
S-1 registration statement on behalf of the selling shareholders of which this
prospectus is a part. The Registration Rights Agreement provides, in part, that
we are obligated to register all the shares underlying the common stock puts
that we may sell pursuant to the Securities Purchase Agreement. Under the
Registration Rights Agreement, a registration statement must be filed with the
SEC by September 9, 2001 and become effective within 150 days of the
registration statement filing. If we are unable to file the registration
statement by the 60-day deadline or achieve effectiveness of the registration of
the common stock by the 120-day deadline we could be subject to liquidated
damages of up to 3% of the initial put amount of $300,000, or $9,000. If we are
unable to achieve effectiveness of the registration of the common stock within
150 days of filing the registration statement we could be subject to additional
liquidated damages of 1% of the initial put amount of $300,000, or $3,000. Our
inability to maintain the registration statement as effective could result in a
suit by the selling shareholders to recover their damages and significant
liquidated damages of $1,000 per day until the registration default is cured.
Also, if we terminate the Securities Purchase Agreement after the registration
statement is effective we could be subject to monetary damages of 10% of the
undrawn amount of the $3,000,000 commitment.
INTERESTS OF NAMED EXPERTS AND COUNSEL
No expert or counsel named in this prospectus as having prepared or certified
any part of it or having given an opinion upon the validity of the securities
being registered or upon other legal matters in connection with the registration
or offering of the common stock was employed on a contingency basis, or had, or
is to receive, in connection with the offering, a substantial interest, direct
or indirect, in the registrant or any of its parents or subsidiaries. Nor was
any such person connected with the registrant or any of its parents or
subsidiaries as a promoter, managing or principal underwriter, voting trustee,
director, officer, or employee.
21
DESCRIPTION OF BUSINESS
Overview
- --------
We are in the business of developing a family of cost-effective fuels and fuel
additives that are designed to improve the efficiency of internal combustion
engines, thus reducing the level of certain harmful emissions created through
the combustion process. Our company and our products are in the development
stage. We plan to market, license and sell our products upon completion of the
development stage.
The original family of fuels we have developed is known as Performance Enhanced
Emission Reduced fuels (PEERFUEL/TM/). The PEERFUEL/TM/ process has been
designed to be flexible to accommodate usage on a large scale (represented by
refinery production) or a small scale (represented by individual fleet
operations of as few as several trucks). We believe our PEERFUEL/TM/ process
will be commercially attractive to a wide range of petroleum industry
participants.
We have conducted research on the PEERFUEL/TM/ process for over four years. We
are now in the final stages of commercialization in which targeted testing will
be performed to meet regulatory requirements. In addition, we believe there may
be potential benefits to be derived in the area of fuel economy from the
reprocessing of fuels through the PEERFUEL/TM/ system. Specific independent
fleet testing will need to be completed to determine whether any fuel economy
benefits can be derived from PEERFUEL/TM/ products. These tests are currently
being set up in four cities across the United States, and with several different
industries representing a variety of engine types.
We were founded in 1996 by a team of three individuals: Mr. Norman Barrett, Mr.
John Tinker and Dr. James Beecham, who together conceived of a processing system
based on altering specific elements of fossil fuel. We formally began testing a
contained system for re-processing refined diesel fuel #2 in 1998, and shortly
thereafter began the effort to raise the funding necessary to complete the
prototype system and substantially complete a testing program that today forms
the basis of the commercialization efforts now under way.
On May 25, 2001 we completed the acquisition of Interfacial Technologies (UK)
Ltd. ("Interfacial"). Interfacial is a company based in Manchester, England that
is seeking to commercialize a fuel formulation whose derivative products enable
diesel and gasoline engines to emit lower levels of harmful pollutants such as
nitrous oxides (NOx) and particulate matter (PM) while increasing engine
efficiency. It is our objective to seek partners for the distribution of its
products on a worldwide basis through the licensing of its technology. With the
increasing pressure from public and private efforts around the world to reduce
the level of harmful engine emissions, we believe Interfacial is poised to be
one of the leading technologies that is adopted as part of the effort to clean
up the environment.
Interfacial is organized as a wholly owned division of IFT. It will report its
revenues and expenses both on a separate basis, as well as consolidated basis
with IFT. We intend to move Interfacial's corporate management to St. Louis, the
headquarters for IFT, and keep a sales and development office in Manchester,
England.
Our office headquarters are located in St. Louis, Missouri. Our corporate
telephone number is (314) 727-3333, and our Web site is www.peerfuel.com.
22
Corporate Organization
International Fuel Technology, Inc. ("IFT") was incorporated under the laws of
the State of Nevada on April 9, 1996. International Fuel has an authorized
capitalization of 150,000,000 shares of common stock, $.01 par value per share
and no authorized preferred stock. On July 22, 1999, International Fuel effected
a one-for-ten reverse split of its outstanding common stock. All references to
share information have been restated to reflect this split.
Effective March 31,1998, International Fuel merged with United States Fuel
Technology, Inc. United States Fuel Technology, Inc. was formed primarily to
market PEERFUEL/TM/ in North America. On May 29, 1998, International Fuel
entered into an agreement and plan of merger with Scientific Fuel Technology,
LLC, a company related through common ownership.
Pursuant to an Agreement and Plan of Merger effective as of October 27, 1999
between Blencathia Acquisition Corporation ("Blencathia") and International
Fuel, all the outstanding shares of common stock of Blencathia were to be
exchanged for $500,000 in shares of common stock of International Fuel in a
transaction in which International Fuel was the surviving company. Blencathia (a
development stage company) was incorporated in Delaware on December 3, 1998 to
serve as a vehicle to effect a merger, exchange of capital stock, asset
acquisition or other business combination with a domestic or foreign private
business. As of the date of the merger, Blencathia had not yet commenced any
formal business operations, and the $264 of operations costs through September
30, 1999 related to Blencathia's formation. In a related transaction following
the Blencathia merger, International Fuel paid consideration consisting of
$100,000 cash to TPG Capital Corporation ("TPG"), a former shareholder of
Blencathia, pursuant to an agreement entered into in October 1999 under which
International Fuel engaged TPG to provide services in connection with effecting
a business combination between International Fuel and a publicly reporting
company. Under the terms of the TPG agreement, IFT also agreed to register and
sell common shares on behalf of Blencathia shareholders to generate the
aggregate consideration of $500,000 for the acquisition of Blencathia.
The officers, directors, and by-laws of International Fuel continued without
change as the officers, directors, and by-laws of the successor issuer following
the merger with Blencathia. All financial statement information presented for
International Fuel reflects the operations of International Fuel and does not
include any operations of Blencathia.
The Blencathia acquisition was a decision made by the Board of Directors to
ensure we would remain a fully trading and reporting entity on the OTC Bulletin
Board. Blencathia was a public shell whose purchase price of $500,000 was
negotiated by our management and Blencathia's principal owner, TPG Capital. We
had previously pursued the purchase of two other shell corporations whose prices
were significantly higher than that paid for Blencathia. Prior to hearing of TPG
Capital in connection with this transaction we had no affiliation with TPG
Capital or Blencathia.
On May 8, 2000 IFT issued 300,000 common shares that were contingently issued
per the Blencathia merger agreement. The 300,000 shares of common stock are
included in the statement of stockholders' deficit for the twelve months ended
December 31, 2000 but are not included in earnings per share and weighted
average share calculations for the twelve month period ended December 31, 2000.
They will be included when the shares are sold to provide payment to the
shareholders of Blencathia. The shareholders of Blencathia have represented to
the management of IFT that the 300,000 shares will be sold only with IFT's
approval. If the shares are sold and $500,000 is not generated additional shares
may need to be issued to the shareholders of Blencathia. Based on the July 9,
2001 market price, $.52, of IFT's common stock, a total of 961,538 shares would
need to be issued to generate the $500,000 proceeds.
On May 25, 2001 IFT issued 21,000,003 common shares to the shareholders of
Interfacial Technologies (UK) Ltd., to acquire all of Interfacial's outstanding
common stock. The purchase price of approximately $6,750,000 was determined
based on the market price of IFT's common stock on the date the acquisition
23
was announced. Stock certificates totaling 12,500,001 common shares were
delivered to the Interfacial shareholders on May 25, 2001. Stock certificates
for the remaining 8,500,002 common shares were placed in an escrow account
subject to a performance escrow agreement that provides for the release of the
stock certificates to the Interfacial shareholders based on the achievement of
certain revenue levels by IFT within two years following May 25, 2001. Revenues
equal to, or more than, $3,500,000 for the one year period ending May 24, 2002,
or revenues equal to, or more than, $10,000,000 for the two year period ending
May 24, 2003 will result in all of the stock certificates for the 8,500,002
common shares being released to the Interfacial shareholders. Revenues more than
$5,000,000 but less than $10,000,000 for the two year period ending May 24, 2003
will result in a portion, as determined by a formula in the performance escrow
agreement, of the stock certificates for the 8,500,002 common shares being
released to the Interfacial shareholders. IFT has agreed to file a registration
statement with the Securities and Exchange Commission to register 2,000,000 of
the common shares issued to the Interfacial shareholders by July 24, 2001. In
connection with the closing of this transaction three of the Interfacial
shareholders have been appointed to IFT's board of directors. In addition, IFT
entered into an employment agreement with one of the Interfacial shareholders
and into a consulting agreement with three of the Interfacial shareholders on
May 25, 2001.
The acquisition will be accounted for using the purchase method of accounting,
with substantially all of the $6,750,000 purchase price being allocated to
intangible assets which are subject to amortization. The intangible assets are
expected to be comprised primarily of patents, technology and goodwill. The
8,500,002 common shares placed in the escrow account will be valued as an
addition to the purchase price if and when the shares are released to the
Interfacial shareholders in accordance with the performance escrow agreement at
the appropriate market price of IFT's common stock at that date.
International Fuel is engaged in one reportable industry segment. Financial
information regarding this segment is contained in International Fuel's
financial statements included in this registration statement.
Interfacial Technology
The foundation of Interfacial's formulation is based on a series of established
chemical technologies that when combined enable petroleum-based fuels to be
combined in a perfect emulsion with several alternative fuel additives including
ethanol and water. Water or aqueous fuel blends offer a greater reduction in NOx
relative to ethanol blends, which are more effective in reducing levels of PM.
Interfacial's formulation solves the issue of phase separation when trying to
combine petroleum-based fuels with other substances. For example, when mixing
diesel fuel and water the result is a milky white emulsification that
immediately starts to separate and combusts unevenly in an engine. With
Interfacial's formulation, the emulsification is the exact same color and
density as the original diesel fuel. It is the "micro-encapsulation" of the
water or ethanol under Interfacial's chemistry that enables the two base
substances to effectively combine, resulting in a significantly more efficient
combustion process.
As a result of Interfacial's technology, the reformulated fuel stays
stable/combined on a perpetual basis at temperature extremes, especially lower
temperatures when some fuel formulations start gelling. Once combined there is
no additional mixing or agitation required for the new fuel to remain
emulsified.
The amount of Interfacial's additive varies with the level of base fuel and
medium to be used (ethanol, water, etc.). The chemical components required for
the company's formulation are readily available in the marketplace, and multiple
sources exist around the world for the manufacture of the formulation.
Interfacial Prospective Markets & Marketing Strategy
24
The commercial development of fuel reformulations using substances such as water
and ethanol is in the initial stages. Interfacial will be targeting the diesel
fuel industry in selected marketplaces around the world where significant
pressures and benefits exist from regulatory authorities to promote immediate
product acceptance. The combination of regulatory and private efforts using
subsidies, tax credits, grant funds and a wide variety of other financial
incentives are being used to promote the growth of the alternative fuel market.
Critical to Interfacial's success is the targeting of specific industries
including surface transportation, off-road/construction, commercial marine, and
other industries where regulations are requiring significant reductions in
harmful emissions levels.
Interfacial intends to focus on two primary products: ethanol and water-blended
fuels. These products fall under the reformulated or alternative fuel categories
as established by the United States Environmental Protection Agency (EPA) and
various state regulatory agencies including the Air Resources Board of
California (CARB).
The majority of the market incentives now established in the United States
center on the use of ethanol in gasoline, but momentum is growing for the
blending of ethanol with diesel. This momentum is evidenced in the cooperative
efforts now underway for the development of a successful diesel/ethanol fuel
blend market. Companies representing a variety of industries, regulatory
entities (such as transit authorities and state environmental agencies), and
trade groups (American Corn Growers Association, Reformulated Fuels Association,
etc.) are working together in fleet trials to prove the efficacy of the ethanol
blend. Interfacial will seek to join such consortiums as part of its strategy to
form key distribution partnerships while working to help establish the
commercial potential of an ethanol/diesel blend.
While the aqueous/diesel blend has a relatively smaller constituency backing its
efforts, it does benefit from several significant elements, especially its cost
versus ethanol and the efforts by Lubrizol to build the aqueous market
worldwide. With the cost of a gallon of ethanol has come down over the past few
years to around $1.00 per gallon, and is expected to continue to decline, it
still can not compare to the cost of water. The differential with respect to the
amount of Interfacial's additive that is needed for the water blend still does
not negate the cost advantage, nor does it result in any appreciable loss of
power (up to water blends of 10% or even more).
The real hurdle to overcome in establishing the market for Interfacial's aqueous
blend lies in the connotation that exists in mixing water with diesel or
gasoline. There is wide resistance to the blending of water, while at the same
time it is acknowledged that water does have tremendous benefits (especially in
NOx and to a lesser extend PM reductions) provided it can be thoroughly
emulsified. The efforts of Lubrizol to establish its Purinox system have begun
to increase awareness of aqueous blends, and Interfacial will seek to follow the
lead of Lubrizol with respect to the markets it first seeks to penetrate (Europe
and California).
To penetrate the key targeted industries Interfacial will use a strategy
centered on forming distribution partnerships with certain companies that have
established operations in fuel additive markets. Interfacial will seek to
operate with partners whose clients include larger fleets, fuel refiners and
blenders, and other clients whose strategic value is high both in terms of
revenue potential and market recognition. At the same time, the company will
also seek to work with regional sales and distribution companies whose clients
are generally smaller, but whose acceptance of Interfacial's products may be
more immediate.
A final important element to Interfacial's strategy is the establishment of its
manufacturing relationship. Interfacial has been in discussions with a company
that may result in its becoming the exclusive manufacturer of its products. The
advantages to such a relationship include having a technical advisor who
intimately understands the chemistry underlying its formulations, and the
existing relationships this manufacturer can bring to Interfacial with companies
who specialize in the distribution of petroleum additives.
25
Interfacial Research & Development
Over the past five years the founding team of Interfacial has worked to solve
one of the most difficult issues facing the petroleum industry - how to blend
fuels such as diesel and gasoline with renewable energy sources such as water
and ethanol. The purpose of pursuing this objective is tied into two separate
but equal constituencies: achieving targeted emission reductions in key harmful
pollutant levels of oxides of nitrogen (NOx) and particulate matter (PM), and
finding a sustainable source of fuel to replace the expected tightening of
petroleum supplies around the world.
For some time it has been known in the petroleum industry that there are
specific and meaningful emissions reductions to be made from blending fuels with
either water or ethanol. The problem is that these fluids do not mix naturally
and so require an outside agent. The founding team of Interfacial developed the
foundation for its formulation approximately five years ago, and since then has
worked to refine its chemistry to allow for greater emissions reduction and fuel
performance at a lower cost.
Interfacial has recently pursued various testing efforts at Southwest Research
Institute (SwRI) that shows its aqueous (water) blend for diesel fuel is stable
in extreme temperatures of hot and cold, and remains stable over time while
delivering significant reductions in NOx without a meaningful change in the
power generated by the engine. In particular, the Interfacial aqueous blend of
diesel and water appears to outperform its competitors in the areas of stability
and power generation.
With the various efforts of a wide range of constituents, ethanol has attracted
a great deal of interest as an alternative or renewable fuel around the world.
Like water, ethanol has known emissions reduction benefits attributable to a
diesel blend (primarily PM), but has perhaps a more immediate acceptance in the
marketplace from its potential as a replacement for methyl tertiary butyl ether
(MTBE) as an oxygenate for gasoline and other fuels. Interfacial has also
recently completed a series of tests at SwRI involving diesel and ethanol fuel
blends. These tests showed results consistent with other industry studies for
the reduction in PM, but were particularly encouraging in the area of engine
power and fuel economy.
Future research and development efforts for the Interfacial formulation are
likely to involve both the fine-tuning of aqueous and ethanol blends for
existing applications, plus the continued development of new formulations, such
as a water/ethanol/diesel blend. Interfacial and its team of researchers will
seek to find the right blend of its formulation, additives including water and
ethanol, and fuels to ensure maximum results with efficient pricing. In
addition, the company will seek to perform more live fleet trials in an attempt
to prove the benefits of its formulation under normative operating conditions
with a variety of engines.
Interfacial Progress To Date
Interfacial has taken several important steps toward its objectives of finding
strategic partners and then penetrating the aqueous and ethanol markets. A key
element in its efforts is the recently completed testing regimen at Southwest
Research Institute (SwRI), one of the leading independent emissions testing
laboratories in the world. The testing at SwRI was oriented toward determining
how the company's two product lines will impact emissions from a newer engine
with a sophisticated electronic control mechanism. The results were positive for
both fuel blends, and provide sufficient evidence for pursuit of extended
discussions with potential strategic partners, as well as seeking candidates for
live fleet trials.
26
Interfacial is in the process of setting up efforts with several potential
distribution partners. It has had multiple discussions with a company that had
also conducted testing of its aqueous blend. Interfacial has also signed a
confidentiality agreement with a regional distributor of fuel additives and
lubricants in anticipation of pursuing a series of fleet trials with a company
in California. The purpose of this effort will be to gauge live performance of
both the aqueous and ethanol blends on a side-by-side basis.
Critical to Interfacial's technology is the ability to adequately protect it
from infringement and reverse engineering. Since 1999 the company has followed a
patent strategy that works to promote only a single piece of its core
formulation technology; filing patents that differentiate between the core and
related intellectual information. To date Interfacial has filed several patents
(see Interfacial Patents and Trademarks section below) using the patent process
for both Great Britain and the Patent Cooperation Treaty (PCT) countries. In
keeping with its strategy of having an exclusive manufacturing relationship, it
has filed several of its recent patents jointly with Tomah3 Products, Inc. and
representatives from Tomah.
Interfacial Competition
Because the efforts to reduce harmful engine emissions are so widespread, the
market for competitive alternatives is relatively wide. In general, these
efforts can be place into four categories: fuel blends (including aqueous and
ethanol), additive technologies (catalysts such as metallic or precious mental
additives), alternative fuels (CNG, biodiesel, and others), and after-market
systems (catalytic converters and urea SCR systems). Despite the efforts of all
of these disparate technologies, the management of Interfacial believes no one
technology will come to dominate the emissions control market due to the
technological limitations inherent in each one. Rather a combination of
technologies will be used that maximizes their individual strengths while
limiting their weakness, all while delivering the highest cost/value
relationship.
Interfacial Regulatory Approval and Certification Process
There does not exist at this time a formal, required series of regulatory
approvals and/or certifications in order for Interfacial to market and sell its
fuel blends. This would appear to lower if not eliminate any barrier to entry
for most competing technologies (except for devices that are directly connected
to the engine and are deemed to impact engine performance, which do need
regulatory approval in certain markets). The practical issue is that with the
proliferation of new technologies there does need to exist some screening
measures to validate competitor claims, and so the use of regulatory measures
and certifications does play an important role.
The process for achieving regulatory approval and obtaining any necessary
certifications involves a pre-determined protocol that generally includes
testing in approved laboratories or some other medium where results can be
validated. At present most regulatory efforts evolve around either the EPA,
other federal agencies (such as the American Bureau of Shipping for the
commercial marine industry), or state agencies the most famous of which is CARB.
It is Interfacial's intention to pursue specific regulatory levels, especially
within CARB, to provide market support for the claims of effectiveness for both
the aqueous and ethanol fuel blends. With the testing already completed at SwRI,
the company is prepared to now approach CARB for alternative fuel certification
for specific results using CARB's required engine (a 1991 Detroit Diesel 60
Series). This certification is especially important, as it is the only one that
enables a technology to state it achieves specific levels of results. To date
only one aqueous fuel blend, that of Lubrizol's Purinox, has achieved this
certification, and no known ethanol blends have achieved this certification.
Timing for undergoing the CARB certification is dependent upon the availability
of space and the necessary engine at an approved laboratory (preferably SwRI).
The actual time for completion of the testing once in the lab cell is available
27
is 5-7 working days, and the total time needed for completion of the CARB
certification (from application to acceptance of test results) is 60-90 days.
Interfacial Patents
The need to protect Interfacial's technology is paramount, and the role that
patents play in this effort is crucial. Interfacial has since 1999 embarked on a
specific patent strategy that is designed to segment its proprietary
intellectual property so that no one filing results in the disclosure of its
core technology. In effect, the company seeks to file a new patent with
verifiable claims for each new product area that is discovered. This also has
the added impact of trying all the patents and claims together through citation
of key patents as prior art for new patents. Interfacial presently has several
patent applications pending with the United States, Great Britain, and the
Patent Cooperation Treaty.
As an added protection and competitive advantage, Interfacial has joined forces
with Tomah to jointly develop new products and to enlist their help with
building distributor relationships. With Tomah named as a joint patent filer,
there exists significantly more intellectual ability to ensure the continued
development of Interfacial's core technology.
Interfacial Employees and Facilities
At the present time Interfacial's corporate structure reflects the position of
the company as a licensee of technology. It employs a Director - Technology
Development who oversees the development of relationships with key distributors,
as well as the Tomah relationship. The remainder of the company's management
team consists of the professional staff of IFT, which is largely responsible for
the overall sales and marketing strategy, and the efforts involving CARB
certification. In addition, Interfacial employs several consultants whose
responsibilities involve fleet trials and limited business development
activities. It is the company's intent to add professional staff in the areas of
marketing and technical support as it develops operations in specific industry
and geographic markets.
In addition to the IFT facilities at its corporate headquarters in St. Louis,
Interfacial's operations are also conducted out of 1,000 square feet of space in
Manchester, England under a month-to-month lease.
PEERFUEL/TM/ Technology
Through our proprietary Pre-Combustion Fuel Treatment System (PCFTS), our
PEERFUEL/TM/ products will be designed to improve the efficiency of internal
combustion engines, thus reducing the level of certain harmful emissions created
through the combustion process. The PEERFUEL/TM/ processing system is based on
altering specific elements of fossil fuel.
Unlike certain post-refined fuels already in the marketplace that claim to
reduce levels of certain harmful emissions, no chemical additives of any kind
are used within the PCFTS or PEERFUEL/TM/ process. Also, unlike emission
reduction systems that are attached to the engine and require sometimes-
expensive engine retrofitting, fuel processed through the PEERFUEL/TM/ system
does not require any physical change to the engine itself. When burned in an
internal combustion engine, fuel processed through the PEERFUEL/TM/ system will
burn more efficiently as a result of the oxidation process, therefore, burning
more of the fuel itself and leaving fewer remaining pollutants.
The PCFTS comprising the PEERFUEL/TM/ system consists of a self-contained system
that is independent of the actual fuel refining process. The basis of our system
is to control the flow rate of pre-processed fuel through a special magnetic
field. The resulting re-processed fuel, when combusted in an engine, burns at a
28
more efficient rate, leaving a lower level of harmful emissions including
nitrogen oxide (NO2), commonly referred to as NOX, carbon monoxide (CO), carbon
dioxide (CO2), and carbon particulates (also referred to as particulate matter).
The impact of the PEERFUEL/TM/ system on a broader spectrum of pollutants
represents a significant advantage over many of the current refinery-based
competitive technologies as they tend to impact a narrower range of pollutants,
and in fact, some technologies while positively reducing one pollutant may cause
an increase in the level of other pollutants.
PEERFUEL/TM/ Prospective Markets
The PEERFUEL/TM/ system is a potentially valuable element in a wide variety of
industries around the world, albeit limited to the application of pollution
reduction efforts and potential fuel economy within these industries. Our
marketing efforts will also include governmental agencies located outside of the
United States where there is a higher degree of direct involvement or control of
the market for the sale of petroleum products. Initially, we will focus on
targeted licensing opportunities to companies engaged in fuel refining
operations in California where the PEERFUEL/TM/ system offers an immediate cost
advantage over current methods of meeting the more stringent pollution emission
reduction standards mandated in this State. In the event our current fleet
testing efforts yield a meaningful improvement in fuel economy, this will open
up the marketing of the PEERFUEL/TM/ system to a wider market, especially larger
fleet operators.
The majority of our current marketing efforts will involve opportunities for
diesel fuel #2. Up to this point the Company has not performed any testing on
other refined fossil fuel products such as gasoline or jet fuel. The Company
does intend to perform testing similar to that already completed for pollution
abatement results on other post-refined fuels, which if proved successful would
significantly enforce the marketing efforts already in place.
In addition to the commercial or direct market for our PEERFUEL/TM/ products, a
significant component of our future marketing efforts involves taking advantage
of specific incentives put in place by three separate sources: a consortium of
governments from around the world (represented by the Kyoto Treaty of 1999), the
United States government and certain state governments. These incentives have
been put in place to develop alternative fuels to the existing fossil fuels, as
well as to create new methodologies for reducing harmful emissions caused by the
combustion of fossil fuels. These incentives, which are most commonly applied in
the form of tax credits, represent a potentially significant economic benefit to
users of our PEERFUEL/TM/ products.
PEERFUEL/TM/ Strategy
. Our current strategy anticipates that after California Air Resources
Board (CARB) diploma certification is received, initial revenues will
likely come from the sale of equipment needed to install the PEER
process and start the processing of PEERDIESELTM. Licensing and
affiliated revenues would follow thereafter.
Our strategy has three primary components:
. We will seek certification from the California Air Resources Board
(CARB) for diesel fuel #2 processed through our PEERFUEL/TM/ system to
be accepted as a CARB equivalent fuel. This certification is important
because it enables PEERDIESEL to be sold immediately in the State of
California; all diesel fuel #2 sold in California must be a CARB
certified equivalent fuel. Smaller refineries and distribution companies
in California have approximately 10% of the market for diesel fuel, in
large part because they have a cost disadvantage versus Arco and Chevron
(the two largest refiners). The PEERFUEL/TM/ system is less expensive
for smaller
29
refiners who rely largely on putting additives into their diesel fuel
to meet the pollution emission regulations of CARB.
. The potential shareholder value that would be created by proving a
fuel economy benefit from PEERDIESEL/TM/ could be significant and
additive to any value created through achievement of any regulatory
approvals (such as certification as a CARB-equivalent fuel). We will
pursue a fleet testing program that will involve conducting a series
of tests in different cities, with companies that use a variety of
engine types and are used under varying conditions. We have retained
MarketMatch, a leading professional services firm in the petroleum
industry, to oversee the fleet testing including the compilation of
the results. The protocol for our test program has already been
established and we have begun contacting potential candidate
companies. It is too early to determine if any additional fleet
testing will be required, however, we are committed to continuing our
efforts in the event conclusive evidence is found to support our
claims. Upon formal confirmation of a meaningful fuel economy benefit,
our goal will be to begin marketing the PEERFUEL/TM/ system to
targeted companies that would be in the strongest position to gain
from use of our technology.
. We will apply for a special certification from CARB that will allow us
to make specific and detailed claims regarding PEERFUEL/TM/ products
and their ability to reduce the levels of certain harmful emissions
caused by the combustion of fossil fuels in certain engine types. This
special certification is difficult to receive, and to this point, no
competitive product or process has yet been given such a
certification. We believe that with additional, targeted testing we
can provide sufficient evidence to CARB to warrant receiving a special
certification.
Achieving these objectives is important for two reasons. First, with the special
certification, and even with the results achieved from the testing required
through the CARB protocol, users of PEERFUEL/TM/ products would potentially be
eligible for special tax credits, providing a powerful economic inventive for
the licensing of our technology. Second, the ability to legally make specific
claims regarding the benefits of using PEERFUEL/TM/ products combined with the
approval by CARB to make those claims, will immediately enhance the
marketability of the PEERFUEL/TM/ process around the world. CARB is recognized
as one of if not the world leader in advancing the effort to reduce harmful
pollutants into the environment. With the special certification, we would
effectively have CARB's acceptance of the PEERFUEL/TM/ process as a significant
and sustainable element for fighting pollution from the use of fossil fuels in
internal combustion engines. Once obtained, the number of potential users or
licensees of PEERFUEL/TM/ technology could increase significantly.
PEERFUEL/TM/ Progress To Date
Since our inception in 1996 we have worked to put together a team that
incorporates a number of key disciplines including extensive knowledge of the
petroleum industry and strong practical management skills. We have demonstrated
through extensive testing that the PEERFUEL/TM/ process generates meaningful and
sustainable reductions in certain harmful pollutant emissions for a number of
different engine types. Testing of the fuels processed through the PEERFUEL/TM/
system has been conducted by a State of California certified laboratory allowing
us to compile extensive results. These results have been compiled into
presentation format and will form the core of our future efforts to seek
regulatory certification in California, as well as any additional efforts to
seek approval from other regulatory or governmental agencies.
On June 17, 1999 the Mobile Sources Division of the Air Resources Board of
California (CARB) issued Executive Order D-485-1 affirming that PEERDIESEL/TM/
does not negatively impact on either the performance of existing pollution
control systems contained on engines or on the performance of the
30
engines themselves. This is an important step in our efforts toward
commercialization in that it formally supports our contention that PEERFUEL/TM/
products do not require any engine re-fit, and more importantly, engine
performance is not affected in any way by using PEERFUEL/TM/ products, paving
the way for wider acceptance of our technology.
For a twelve-month period from 1998 to 1999, we conducted initial fleet testing
to investigate any potential fuel economy benefits from fuel processed through
the PEERFUEL/TM/ system. The results from this informal test program showed on
average the vehicles achieved 9% better fuel economy using PEERDIESEL/TM/ versus
unprocessed diesel fuel #2. We intend to explore the potential fuel economy
benefits through a formal fleet testing program that will test a variety of
vehicle (engine) types under different operating conditions.
There is no laboratory testing that has been conducted in 2000, as the bulk of
the initial research and development testing was completed in 1998-1999. For a
significant part of 2001, we will spend most of our time reviewing the
underlying scientific effects of the PEER system on diesel fuel, leading up to a
plan to try and achieve CARB fuel equivalency certification. This step will
require formal, specific testing at an approved laboratory (Southwest Research
Institute). The approximate cost of this testing is $150,000, which includes the
cost of "shadow" testing that will be done on a limited basis to mimic the CARB
required testing, so that we can better understand how the PEER system will
perform under CARB's program.
The Company will also be pursuing a fleet testing program in 2001-2002,
providing the IIG Fund funding is secured, to evaluate the performance of
PEERFUEL/TM/ with respect to engine efficiency or fuel economy. We are trying to
set up a total of 12 separate fleet testing programs, which will occur at a
variety of geographic locations using a number of different engine and vehicle
types. Each test will vary in length, but should average four to eight weeks.
Initial test data are expected within two weeks from the start of fleet testing.
From 1998-1999 targeted research and testing efforts were conducted at
California Environmental Engineering (CEE) on PEERFUEL/TM/. There is absolutely
no need to perform this testing again. However, we do intend to update the
results of some of CEE's laboratory testing, especially those areas where we
know CARB will be interested in the results (for example, with certain engine
types and with transient cycle testing). We believe this to be necessary because
CEE does not carry the same level of authority as Southwest Research Institute
and having confirmation of all, or some, of CEE's results will enhance our
ability to open doors to key resources in the future.
PEERFUEL/TM/ Marketing
As a development stage company with no immediate revenue generation
capabilities, our marketing strategy and resulting efforts have been relatively
limited. We have worked over the past year to identify those companies that
would benefit specifically from access to PEERFUEL/TM/ technology and the
resulting products. The companies we have targeted for marketing efforts once we
are in a position to commercialize our technology can be grouped into three
categories: production/distribution, sales, and other strategic businesses. In a
number of cases firms can be considered to be in both of the first two segments,
while other strategic businesses are generally not involved directly in the
petroleum industry (such as motor vehicle manufacturers).
It is our intention to remain conservative in our marketing efforts until such
time as either/both emission reduction gains are accepted on a regulatory basis
(CARB certification) and we have proven greater fuel economy from PEERFUEL/TM/
products. CARB certification is important because it immediately opens up the
California market for diesel fuel #2 to our technology. Given current refining
methods used to meet
31
CARB fuel equivalency standards for diesel fuel #2, our technology is
appreciably less expensive, enabling us to market directly to refiners.
California is important as a market for two reasons: the size of its market, and
the positive perception that will accrue for our technology from certification
as a CARB equivalent fuel. Should the results from fleet testing show conclusive
evidence of fuel economy benefits from PEERDIESEL/TM/, we will immediately alter
our marketing efforts to concentrate more heavily on the sales segment, which we
believe will have an immediate interest in knowing more about our technology.
Currently, we are introducing PEERDIESEL/TM/ into the market through its Web
site information, press releases, and publication of testing results. We
maintain an Internet Website at http://www.peerfuel.com. We intend to market
PEERDIESEL/TM/ by licensing arrangements with refineries and/or other
appropriate marketing strategies.
PEERFUEL/TM/ Competition
The growth in concern over the environment has stimulated significant efforts in
a range of areas that can be considered competitive to PEERFUEL/TM/ technology.
Most experts agree that it is not an issue of if, but when a viable alternative
or set of alternatives will be available to replace or greatly reduce the use of
fossil fuels. The work now being performed is centered around either reducing
the harmful emissions of fossil fuels, or replacing fossil fuels altogether.
The majority of the technologies seeking to reduce or even eliminate harmful
emissions fall into three categories: cleaner fuels, engine emission reduction
devices, and fossil fuel alternatives. Clean fuel technology is centered around
either additional refining which pulls out harmful emission substances (such as
sulfur), or use additives (such as Methyl Tertiary Butyl Ether or MTBE) which
bind to the fuel causing reduction in certain harmful emissions. Engine emission
reduction devices include such items as the catalytic converter, which trap or
filter harmful emissions before they are released into the environment. Fossil
fuel alternatives include both alternative-fuel vehicles (electric cars) and
alternative-fuels (compressed natural gas).
The difficulty with most technologies now being pursued that work to reduce the
harmful emissions from combusting fossil fuel, whether through cleaner fuel or
engine devices, or a combination of the two, is that the improvements are only
incremental and are very costly. While it is possible to make cleaner fuels that
meet emission legislation targets for certain pollutants, to meet the more
meaningful reduction standards it may push the cost of diesel fuel to two or
even three times its current price. In addition, it has been proven that
attempts to reduce a particular level of a pollutant such as sulfur, may have
the unintended impact of increasing other pollutants. We are not aware of any
research to date that generates a broad spectrum of emission reduction. Federal
and state legislation covering emission reduction requirements also poses a
problem for competitors because it can shift with respect to certain pollutants,
leaving new technologies incompatible with new regulations and making them
commercially nonviable.
Alternative fuels and alternative vehicles are often acknowledged to hold the
highest potential on a long term basis to solve pollution abatement needs, but
face significant hurdles in crafting a solution in the near or medium term.
Issues such as vehicle cost, engine re-fit, engine performance, potential
environmental damage, scalability and others have effectively resulted in
limiting the economic viability of these alternative technologies. Added to the
problems just stated is the social cost of allowing for the potential
elimination of a material part of the petroleum industry and the resulting
effect on the world's economic system.
While the level of competition in the market is wide, it is not believed to be
especially deep in that no one emission reduction technology now dominates the
market, and therefore, no one company or group of companies has a meaningful
market share. We believe this is an opportune time for the introduction of
32
PEERFUEL/TM/ technology because it offers a low cost, high value product that
can be seamlessly melded into the existing global economic framework.
IFT anticipates three possible sources of competition for PEERFUEL/TM/:
. Companies with greater resources and more financial strength that offer
similar technology to PEERDIESEL/TM/;
. Vehicles utilizing alternative fuels; and
. Alternative fuels for use on current vehicles with engine retrofitting.
PEERFUEL/TM/ Research and Development
Our research and development costs are related to the development and testing of
the PEERDIESEL/TM/ product. The costs incurred in research and development for
the twelve months ended December 31, 2000 were $1,782, and for the nine months
ended December 31, 1999 were $330,353. Costs incurred in research and
development for the year ended March 31, 1999 were $842,905.
We have been performing research and development activities on PEERFUEL/TM/
since 1996, with the majority of our testing activities occurring in late 1998
through early 1999. Initial testing activities were conducted on a limited basis
in July 1996 and again in January 1997, with smaller run times on few engine
types. Results from the initial tests were encouraging not only for reductions
in key emission substances, but also showed the potential for increased fuel
economy.
We officially engaged California Environmental Engineering (CEE) located in
Santa Ana, California, to conduct a complete test program starting in 1998 using
a variety of engine types. CEE is a state certified laboratory and is also
recognized by the EPA for specific testing protocols. CEE has the ability to
test both diesel fuel and gasoline products. The list of entities for which CEE
has conducted testing includes CARB, EPA, Ford, General Motors, Volvo as well as
other multi-national corporations.
The formal research and development work conducted at CEE consisted of running a
series of tests under EPA and Society of Automotive Engineers (SAE) recommended
procedures to determine the gaseous emissions levels of four separate diesel
engines. The test procedures consist of a prescribed sequence of engine
operating conditions on an engine dynamometer with measurements of hydrocarbons
(HC), nitrogen oxides (NOX), carbon monoxide (CO), carbon dioxide (CO2), and
particulate matter (PM). The testing was done during 13 steady state modes
consisting of five modes at rated engine speed, five modes at an intermediate
speed, and three modes at idle. Four separate engines were used in the testing:
Cummins L-10, Caterpillar 3208, and two separate Detroit Diesel engines. The
test fuel used for the baseline program was standard D-2 diesel fuel, and for
the PEERFUEL/TM/ testing re-processed D-2 fuel was used which ranged in age from
less than one month old to nearly 12 months old.
We are not presently engaged in any active research and development activities.
We do expect to continue testing some time in the near future in an effort to
further clarify the exact scientific elements involved in the processing of fuel
through the PEERFUEL/TM/ system. In addition, further testing may be necessary
to continue to tightly define the emission reduction benefits to be realized
from PEERFUEL/TM/ products. We have held several discussions with CARB officials
who have evidenced the need to conduct transient cycle testing, a specialized
form of engine testing. This testing will be part of our ongoing efforts to
achieve special certification from CARB that would enable us to make specific
claims with regard to emission reduction performance.
33
In addition to CARB certification-related research and development efforts, we
expect to put together a series of fleet testing programs to identify specific
fuel economy benefits from PEERFUEL/TM/. We are presently in discussions with a
variety of companies representing different industries and geographical
conditions, which would participate in a three to six month fleet program. The
fleet testing efforts are planned for 2001-2002.
PEERFUEL/TM/ Regulatory Approval and Certification Process
All petroleum-based fuels sold in the United States are subject to regulation by
a number of state and federal authorities, the most important of which are the
Environmental Protection Agency (EPA) and the Air Resources Board of California
(CARB). The EPA has formal jurisdiction over the majority of air and water
regulations as a result of the Clean Air Act. However, the EPA acknowledged the
special environmental conditions existing in California and the state's efforts
to create stringent regulations, some of which were more advanced than the
EPA's, and granted the state exemptions from specific areas of the Clean Air
Act. While a number of states have since adopted some pieces of CARB's
regulations, California still remains the standard within the United States, and
even around the world, for the regulation of air and water resources.
With respect to receiving approval for the sale of individual petroleum fuels in
California, such as diesel and gasoline fuels, CARB requires these fuels meet a
CARB certified standard. This standard is referred to as CARB equivalency
certification, and can only be obtained by submitting a fuel to a formal
certification procedure. The legislation for this process was passed in 1988,
and since that time over 25 individual fuels have received CARB equivalent
status, although a number of these fuels were derivatives of original
formulations that were changed (the CARB process still requires these to be
certified). Of the fuels that have achieved CARB equivalency certification, only
a few have actually achieved commercial viability.
The first step involved in obtaining CARB equivalency certification involves
completing an application. The application primarily involves disclosure of the
scientific basis for production of the target fuel to be certified. CARB has the
right to reject an application if it feels the underlying science of a
particular formulation or, in the case of the Company, the process for creating
fuel has not been fully described, could create an environmental or other
hazard, or has some other feature(s) that could put the public at risk through
the production, distribution or use of the target fuel.
Once an application has been reviewed and accepted, the target fuel or process
must be tested in a state certified laboratory using a specific, defined testing
methodology. Because of both the rigor and importance of the certification
testing procedure, only a limited number of laboratories have been approved by
California for this testing. The Company has elected to have Southwest Research
Institute (SRI), headquartered in San Antonio, Texas, perform the certification
testing. SRI is acknowledged as one of the world's foremost laboratories
specializing in the field of emission control work.
The CARB protocol itself takes approximately one week, during which time
baseline testing is performed, and then the target fuel is run through. CARB
regulations require that the target fuel pass all levels of the testing process
at or above specified levels, and if at any time the results fall below these
levels the entire testing process must be repeated. Any change to the
formulation or process for creating the fuel must be reported to CARB, and if
the change is deemed material, a new application may be required, effectively
causing the entire process to be re-started.
In the event the target fuel passes all levels of the testing protocol, within
30 days of submission of the final testing report by SRI, the Company will
receive the CARB equivalency certification. This last step will enable the
Company to immediately sell PEERFUEL/TM/ in the state of California. Once
certified,
34
PEERFUEL/TM/ will not require any additional testing or other formal procedures
in the future to retain the fuel equivalency certification.
PEERFUEL/TM/ Patents and Trademarks
Our success substantially depends upon the proprietary technology used for
developing our PEERFUEL/TM/ products. On April 17, 2001 a patent, File #98-5251,
entitled "Method of Verifying Vehicle Emissions," which focuses on the method of
verifying vehicle emissions and also verifying test fuel on both a pre- and
post-processed basis was issued to us by the United States Patent and Trademark
Office. We have been issued six trademarks and service marks including
PEERFUEL/TM/ and PEERDIESEL/TM/. In addition to the foregoing proprietary
technology restrictions, all testing by CEE or others is subject to strict
privacy and confidentiality controls. No outside entity will be invited to
evaluate the science underlying the PEER process until such time as the testing
is completed.
We regard the protection of our patents, trademarks and trade secrets as
critical to our future success and rely on a combination of patent, trademark
and trade secret laws and contractual restrictions to establish and protect our
proprietary rights in products and services. We have entered into
confidentiality agreements with certain of our consultants, contractors and
suppliers in order to limit access to and disclosure of our proprietary
information. There can be no assurance that these contractual arrangements or
the other steps taken by us to protect our intellectual property will prove
sufficient to prevent misappropriation of our technology or to deter independent
third-party development of similar technologies. While we intend to pursue
registration of our trademarks and service marks in the U.S. and
internationally, effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are made
available.
We also rely on technologies that we license from third parties, such as the
suppliers of computer technology, the operating system and specific hardware
components for our products and services. These licenses extend for terms
ranging from one year to perpetuity and are subject to satisfaction of
conditions laid out in the specific licensing agreements. There can be no
assurance that these third-party technology licenses will continue to be
available to us on commercially reasonable terms. The loss of such technology
could require us to obtain substitute technology of lower quality or performance
standards or at greater cost, which could materially adversely affect our
business, results of operations and financial condition.
Although we do not believe that we infringe the proprietary rights of third
parties, there can be no assurance that third parties will not claim
infringement by us with respect to past, current or future technologies. We
expect that participants in our markets will be increasingly subject to
infringement claims as the number of services and competitors in our industry
segment grows. Any such claim, whether meritorious or not, could be time-
consuming, result in costly litigation, cause service upgrade delays or require
us to enter into royalty or licensing agreements. Such royalty or licensing
agreements might not be available on terms acceptable to us or at all. As a
result, any such claim could have a material adverse effect upon our business,
results of operations and financial condition.
Our Employees
Our five employees consist of a President, Chief Executive Officer, Director-
Technology Development, Chief Financial Officer and Director of Environmental
Policy. By the end of 2001, we expect our full time employment to increase to
six individuals. We have no supplemental benefit or incentive arrangements with
our employees other than health insurance coverage. We believe that our future
success will depend in part on our continued ability to attract, integrate,
retain and motivate highly qualified technical and managerial personnel, and
upon the continued service of our senior management and key technical personnel.
The competition for qualified personnel in our industry and geographical
location may be intense, and there can
35
be no assurance that we will be successful in attracting, integrating, retaining
and motivating a sufficient number of qualified personnel to conduct our
business in the future. From time to time, we also engage independent
contractors to support our research and development, marketing, sales and
support and administrative organizations. We have never had a work stoppage, and
no employees are represented under collective bargaining agreements. We consider
our relations with our employees to be good.
Subsidiaries
We do not presently have any subsidiaries other than Interfacial.
Description of Property
We maintain our administrative offices at 7777 Bonhomme, Suite 1920, St. Louis,
Missouri, 63105, under an annual lease agreement for office space and
administrative services of $5,000 per month for approximately 1,500 square feet
from a company related through common ownership. The original agreement expired
in July 2000 and has subsequently automatically renewed for two six month terms.
We presently expect to renew this lease agreement in July 2001 on a month to
month basis at a market rate.
Our management believes that our current facilities are adequate to meet present
operating requirements.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements and Associated Risks
This prospectus contains forward-looking statements made pursuant to the safe
harbor provisions of the Securities Litigation Reform Act of 1995. These forward
looking statements are based largely on our expectations and are subject to a
number of risks and uncertainties, many of which are beyond our control,
including, but not limited to, economic, competitive and other factors affecting
our operations, markets, products and services, expansion strategies and other
factors discussed elsewhere in this report and the documents filed by us with
the Securities and Exchange Commission. Actual results could differ materially
from these forward-looking statements. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained in this prospectus will in fact prove accurate. Our ability to
accomplish our objectives, and whether or not we will be financially successful,
is dependent upon numerous factors, each of which could have a material effect
on the results obtained. Some of these factors are within the discretion and
control of management and others are beyond management's control. Management
considers the assumptions and hypothesis used in preparing any forward-looking
assessments of profitability contained in this document to be reasonable by
management. However, we cannot assure investors that any projections or
assessments contained in this document or otherwise made by management will be
realized or achieved at any level. We make no representation or warranty as to
the accuracy or completeness of any of these assumptions, and nothing contained
in this document should be relied upon as a promise or representation as to any
future performance or events. We do not undertake any obligation to revise these
forward-looking statements to reflect future events or circumstances.
Prospective investors should have this prospectus reviewed by their personal
investment advisors, legal counsel or accountants to properly evaluate the risks
and contingencies of this offering.
Overview
IFT was incorporated under the laws of the State of Nevada in April 1996, to
develop and commercialize a proprietary scientific process, "Performance
Enhanced Emissions Reduced" ("PEER"), that reformulates various refined fuels,
including #2 diesel fuel, home heating oil, #6 (Bunker) fuel, jet engine fuel
and gasoline to improve combustion efficiency and reduce the amounts of harmful
exhaust emissions from internal combustion engines. The resulting reprocessed
fuels are known as PEERFUEL/TM/. IFT is a development stage company, has had no
revenues to date and has raised capital for initial development through the
issuance of its securities and promissory notes. Effective October 27, 1999, IFT
changed the date of its fiscal year end from March 31 to December 31. The nine-
month period ended December 31, 1999, is referred to as the transition period.
All year and quarter references relate to IFT's prior fiscal years and quarters,
unless otherwise stated.
Three Months Ended March 31, 2001 Compared to the Three Months Ended March 31,
- ------------------------------------------------------------------------------
2000
- ----
Total operating expenses from development stage operations were $1,477,247 for
the three months ended March 31, 2001, as compared to the development stage
operating expenses of $2,416,352 for the three month period ended March 31,
2000. This represents a $939,105 decrease from the prior period. Decreased
development stage operating expenses in the current period compared to the prior
period are a result of increased payroll expense of $466,572, increased research
and development costs of $51,941, decreased board meeting expense of $117,216,
decreased consulting expense of $169,269 and decreased investment advisory fee
of $1,141,725.
37
There were no board meeting expenses for the three months ended March 31, 2001,
representing a decrease of $117,216 from the corresponding period of 2000. On
February 23, 2000 the Board of Directors adopted the Director's Stock
Compensation Plan, which provides for an annual award of 10,000 shares of IFT's
common stock to IFT's Board members as reimbursement for their attendance at the
Board meetings and an additional 1,000 shares of IFT's common stock for any
three telephone conference call Board meetings attended. During March 2000,
45,000 shares of IFT's common stock were issued to three, non-employee Board
members, calculated based on the trading price of IFT's stock at February 23,
2000 which was $2.75 per share, and are reflected in these financial statements
as Board meeting expense of $117,216 and travel expense of $6,534. As of May 4,
2001 IFT's Board of Directors has not authorized the issuance of common stock
under the Director's Stock Compensation Plan for the year 2001.
Consulting expenses during the three months ended March 31, 2001 were $5,980
representing a decrease of $169,269 from the corresponding period for 2000. IFT
sold 100,000 common shares to a company whose sole director is a director of IFT
for $200,000 in January 2000. The market value on the day of issuance for these
100,000 common shares was $331,250. The $131,250 in market value in excess of
the cash amount received is reflected in these financial statements as
consulting expense and additional paid in capital for the three month period
ended March 31, 2000.
There was no investment advisory fee expense for the three months ended March
31, 2001, representing a $1,141,725 decrease from the corresponding period for
2000. On March 28, 2000 a warrant for 390,000 shares of common stock was
exercised by GEM Global Yield Fund Limited at a cost of $.01 per share. The
value over par value of these shares, reflected in the financial statements for
the three month period ended March 31, 2000, as an investment advisory fee, has
been calculated based on the trading price of IFT's stock at March 28, 2000 in
the amount of $1,141,725.
Payroll expenses during the three months ended March 31, 2001 were $1,236,083
representing an increase of $466,572 from the corresponding period of 2000. The
increase was primarily due to the Board of Director's granting a bonus of
1,000,000 shares of IFT's common stock payable to each of IFT's President/COO
and to its Chief Executive Officer on February 23, 2001, and these shares have
been reflected in the financial statements for the three month period ended
March 31, 2001, as payroll expense of $875,000. Also, stock awards totaling
425,000 restricted shares of IFT's common stock were granted to the three non-
employee directors of IFT and a stock award totaling 50,000 restricted shares of
IFT's common stock was granted to one employee on February 23, 2001. The 475,000
restricted shares have been reflected in the statement of operations as payroll
expense of $207,812 for the three months ended March 31, 2001. The February 23,
2001 restricted stock award shares value was calculated based on the closing
trading price of IFT's stock on February 23, 2001, which was $.4375 per share.
On January 1, 2001 IFT entered into employment agreements with its President/COO
and Chief Executive Officer through December 31, 2003. Under these agreements,
the Chief Executive Officer and the President/COO will each receive an annual
base salary of $200,000, a stock award of 20,834 each month and a bonus award as
deemed appropriate by the Board of Directors of IFT. During the three month
period ended March 31, 2001, payroll expense from common stock issued and
authorized totaled $458,751 for the Chief Executive Officer and $458,751 for the
President/COO.
Professional services during the three months ended March 31, 2001 were $145,792
representing an decrease of $15,490, or 9.6%, from the corresponding period for
2000. The decrease is primarily due to decreased expenses for legal and
accounting services.
Research and development costs during the three months ended March 31, 2001 were
$51,941 representing an increase of $51,941 from the corresponding period for
2000. The increase is primarily due to consulting fees for research and
development activities of $48,930.
38
Interest expense for the three months ended March 31, 2001 was $25,039
representing an increase of $23,590 over the corresponding period for 2000. The
increase is primarily due to $15,300 in interest expense recognized in
connection with the issuance of convertible debentures and $6,666 in interest
expense recognized in connection with the issuance of IFT common stock for a
payment on a note payable to a stockholder.
The net loss for the three months ended March 31, 2001 was $1,502,286 as
compared to the net loss of $2,417,801 for the three months ended March 31,
2000. This represents a $915,515 decrease from the prior period. The basic and
dilutive net loss per common share for the three months ended March 31, 2001 was
$.06 as compared to the basic and dilutive net loss per common share of $.14 for
the three months ended March 31, 2000.
Comparison of Twelve Months Ended 12/31/00 and Nine Months Ended 12/31/99
- -------------------------------------------------------------------------
Total operating expenses from development stage operations were $4,689,953 for
the twelve months ended December 31, 2000, as compared to the development stage
operating expenses of $4,726,799 for the nine months ended December 31, 1999.
Total operating expenses for the twelve months ended December 31, 2000
represents a $36,846, or .8%, decrease from the prior period. Total operating
expenses for the twelve months ended December 31, 2000 is consistent with the
prior year. Operating expenses should remain consistent while IFT maintains its
status as a development stage company.
Board meeting expenses were $117,216 for the twelve months ended December 31,
2000, as compared to $0 for the nine months ended December 31, 1999. On February
23, 2000, the Board of Directors adopted the Director's Stock Compensation Plan,
which provides for an annual award of 10,000 shares of IFT's common stock to
IFT's Board members as reimbursement for their attendance at the Board meetings
and an additional 1,000 shares of IFT's common stock for any three telephone
conference call Board meetings attended. During March 2000, 45,000 shares of
IFT's common stock were issued to three non-employee Board members. The market
value of these shares was calculated based on the trading price of IFT's stock
at February 23, 2000, $2.75 per share, and is reflected in these financial
statements as Board meeting expense of $117,216 and travel expense of $6,534.
Consulting expenses were $285,132 for the twelve months ended December 31, 2000,
as compared to $295,000 for the nine months ended December 31, 1999. Consulting
expenses for the twelve months ended December 31, 2000 represents a decrease of
$9,868, or 3.3%, from the prior period. Consulting expenses decreased due to
consulting expenses during the twelve months ended December 31, 2000 being
reduced by $95,367 due to the elimination of a related party account payable
that had previously been recorded to consulting expense. This decrease partially
offset the increase in consulting expenses resulting from IFT issuing common
stock in two separate transactions. In the first transaction, IFT sold 100,000
restricted common shares for $200,000 to a company whose sole director is a
director of IFT. The market value on the day of issuance for those 100,000
common shares was $331,250. The $131,250 in market value in excess of the cash
amount received is reflected in the statement of operations for the twelve month
period ended December 31, 2000 as consulting expense. In the second transaction,
pursuant to a consulting agreement dated June 5, 2000, IFT issued 250,000 shares
of restricted common stock to the same company described in the prior
transaction. The market value on the day of the agreement was $218,750. The
$218,750 in market value is reflected in the statement of operations for the
twelve months ended December 31, 2000 as consulting expense.
Investment advisory fees were $1,251,413 during the twelve months ended December
31, 2000, as compared to $0 for the nine months ended December 31, 1999. IFT
entered into a convertible debenture purchase agreement dated February 25, 2000
with GEM Global Yield Fund Limited ("GEM"). In addition
39
to the convertible debentures, GEM, one of the investors in the convertible
debentures, received a warrant to purchase 390,000 shares of common stock as
part of its fee for arranging the convertible debenture financing. On March 28,
2000 a warrant for 390,000 shares of common stock was exercised by GEM at a cost
of $.01 per share. The closing trading price of IFT's stock on March 28, 2000
was $2.9375, resulting in a total market value of $1,145,625 for the 390,000
common shares. The market value in excess of the $.01 warrant exercise cost,
$1,141,725, is reflected in the statement of operations for the twelve months
ended December 31, 2000 as an investment advisory fee. During February 2000, IFT
issued 195,000 shares of common stock and placed them in escrow in accordance
with the convertible debenture purchase agreement entered into on February 25,
2000. The 195,000 shares were to be released from escrow and issued to the
purchasers of the convertible debenture in the event of an uncured default by
IFT prior to the closing of the convertible debenture purchase agreement. The
195,000 shares of common stock were released to the purchasers of the
convertible debenture purchase agreement in conjunction with an amendment to the
convertible debenture purchase agreement dated June 16, 2000, and were recorded
as an investment advisory fee of $109,688 based on the closing trading price of
IFT's stock on that date. The term of GEM's commitment period expired August 24,
2000. GEM was conditionally willing to further extend the deadline, however IFT
management determined that the terms and conditions of the extension were not in
the best interests of IFT's shareholders and elected not to enter into the
extension.
Payroll expenses were $2,212,305 during the twelve months ended December 31,
2000, as compared to $275,080 for the nine month period ended December 31, 1999.
Payroll expenses for the twelve month period ended December 31, 2000 represents
an increase of $1,937,225 from the prior period. The increase was primarily due
to the Board of Director's granting of restricted stock awards to the executive
officers of IFT at two separate times in 2000. The first stock award of 100,000
restricted shares of IFT's common stock was granted to IFT's President/COO and
IFT's Chief Executive Officer on February 23, 2000. The 200,000 restricted
shares have been reflected in the statement of operations as payroll expense of
$550,000 for the twelve months ended December 31, 2000. Additionally, on
February 23, 2000, the Board of Directors adopted the Director's Stock
Compensation Plan, which provided for an annual award of 10,000 shares of IFT's
common stock to Board members as reimbursement for their attendance at the Board
meetings. The President/COO and the Chief Executive Officer were each awarded
10,000 restricted shares of IFT's common stock as Board members. These
restricted shares have been reflected in the statement of operations as payroll
expense of $55,000 for the twelve months ended December 31, 2000. The February
23, 2000 restricted stock award shares value was calculated based on the closing
trading price of IFT's stock on February 23, 2000, which was $2.75 per share.
The second stock award of 475,000 restricted shares of IFT's common stock was
granted to IFT's President/COO and IFT's Chief Executive Officer on October 13,
2000. The 950,000 restricted shares have been reflected in the statement of
operations as payroll expense of $593,750 for the twelve months ended December
31, 2000. The October 13, 2000 restricted stock award shares value was
calculated based on the closing trading price of IFT's stock on October 13,
2000, which was $.625 per share. Additionally, on January 31, 2000, IFT entered
into revised employment agreements with its President/COO and Chief Executive
Officer. The revised employment agreements term extended through December 31,
2000 and automatically renewed on January 1, 2001, for another one year term.
Under these agreements, the President/COO will receive an annual base salary of
$180,000 and 3,000 restricted shares of IFT's common stock per month, and a
bonus award as deemed appropriate by the Board of Directors of IFT. The Chief
Executive Officer will receive an annual base salary of $180,000 and 6,000
restricted shares of IFT's common stock per month, and a bonus award as deemed
appropriate by the Board of Directors of IFT. The 99,000 restricted shares
related to the two employment agreements are reflected in the statement of
operations as payroll expense of $321,750 for the twelve months ended December
31, 2000. The restricted shares value was calculated based on the closing
trading price of IFT's stock on February 1, 2000, which was $3.25 per share.
During the twelve month period ended December 31, 2000, payroll expense from
restricted common stock issued totaled $834,067 for the Chief Executive Officer
and $716,721 for the President/COO. During the twelve month period ended
December 31, 2000, payroll expense from payroll accruals pursuant to the
employment agreements with the President/COO and the
40
Chief Executive Officer totaled $204,325. Also, stock awards totaling 275,000
restricted shares of IFT's common stock were granted to the three non-employee
directors of IFT on October 13, 2000. The 275,000 restricted shares have been
reflected in the statement of operations as payroll expense of $171,875 for the
twelve months ended December 31, 2000. The October 13, 2000 restricted stock
award shares value was calculated based on the closing trading price of IFT's
stock on October 13, 2000, which was $.625 per share. On February 23, 2001,
IFT's Board of Directors has authorized the issuance of 2,575,000 shares of
restricted common stock to executive officers or non-employee directors for
stock awards for the year 2001. Restricted common shares totaling 2,475,000 were
issued on April 10, 2001. The 2,475,000 restricted shares have been reflected as
payroll expense of $1,082,813 in the year 2001. The value of these restricted
stock award shares was calculated based on the closing trading price of IFT's
stock on February 23, 2001, which was $.4375 per share.
Professional services were $684,367 during the twelve months ended December 31,
2000 as compared to $3,662,718 for the nine months ended December 31, 1999.
Professional services for the twelve months ended December 31, 2000 represents a
decrease of $2,978,351, or 81.3%, from the prior period. Approximately $350,000
of the professional services for the twelve months ended December 31, 2000 is
for accounting and legal fees related to IFT's attempt to obtain financing
through the issuance of convertible debentures. The agreements related to the
issuance of the convertible debentures required IFT to obtain an effective
registration statement from the Securities and Exchange Commission on the
unrestricted common shares that would be issued if the convertible debentures
were submitted for conversion. IFT obtained an effective registration for the
unrestricted shares required by the convertible debenture agreement on March 1,
2001. Accounting and legal fees related to general business development and
operations totaled approximately $100,000 for the year 2000. Professionals used
for development of IFT's 2000 and 2001 product and business strategy totaled
approximately $112,000 and investor relations totaled approximately $42,500 for
the year 2000. On July 1, 1999, IFT entered into an agreement with Onkar
Corporation, Ltd. to issue 1,500,000 shares of common stock in exchange for
various services including introduction to brokers, dealers and potential
investors and for facilitating the writing of research reports on IFT. IFT
received $750,000 for these shares. The $3,468,750 difference between the value
of the shares using the market price at the date of the agreement and the
$750,000 of proceeds received from the agreement were reflected in the statement
of operations for the nine month period ended December 31, 1999 as professional
services expense.
Research and development costs were $1,782 during the twelve months ended
December 31, 2000 as compared to $330,353 for the nine months ended December 31,
1999. Research and development for the twelve months ended December 31, 2000
represents a decrease of $328,571 from the prior period. The decrease is
primarily due to decreased testing and laboratory fees of $304,887. IFT
conducted a significant portion of its product testing during late 1998 and
early 1999. Management expects expenditures for research and development during
the year 2001 to be approximately $700,000.
Interest expense was $1,997,583 for the twelve months ended December 31, 2000 as
compared to $405,341 for the nine months ended December 31, 1999. Interest
expense for the twelve months ended December 31, 2000 represents an increase of
$1,592,242 from the prior period. The increase is primarily due to the
amortization of discounts on notes payable in connection with IFT's issuance of
common stock warrants to stockholders for advances received. The discount amount
amortized during the twelve month period was $1,228,424. During the twelve month
period ended December 31, 2000, IFT received advances from stockholders totaling
$416,000. In addition to the repayment of principal, each stockholder received a
warrant to purchase from IFT up to 25,000 shares of common stock at $.01 per
share for each $5,000 in principal advanced to IFT. The value of the warrants,
$1,228,424, was based on the market value of IFT's common stock on the day(s)
the advances were received. The warrant value was recorded as a discount on the
notes payable to stockholders to be amortized as interest expense over the
expected repayment period of the advance. The notes payable were repaid during
December 2000 either by the issuance of a new note or
41
by the issuance of restricted common stock. The restricted common stock was
issued based on a value price of $.30 per share. The market value of IFT's
common stock on the day this value was determined was $.50 per share. IFT issued
1,186,669 restricted shares as payment on $356,000 of note principal. The $.20
per share difference between the market value and the determined payment value,
or $237,333, is included as interest expense in the statement of operations for
the twelve months ended December 31, 2000. In addition, IFT repaid $374,000 of
note principal from other advances received with 1,626,086 restricted common
shares. The restricted common stock was issued based on a value price of $.23
per share. The market value of IFT's common stock on the day this value was
determined was $.55 per share. The $.32 per share difference between the market
value and the determined payment value, or $520,347, is included as interest
expense in the statement of operations for the twelve months ended December 31,
2000. In the year 2001 IFT has recognized approximately $141,000 in interest
expense related to the sale of convertible debentures.
The net loss was $6,687,536 for the twelve months ended December 31, 2000 as
compared to the net loss of $5,132,140 for the nine months ended December 31,
1999. Net loss for the twelve months ended December 31, 2000 represents a
decrease of $1,555,396, or 30.3%, from the prior period. The net loss per common
share was $.36 for the twelve months ended December 31, 2000 as compared to the
net loss per common share of $.32 for the nine months ended December 31, 1999.
Comparison of Nine Months Ended 12/31/99 and Fiscal 3/31/99
- -----------------------------------------------------------
Total operating expenses from development stage operations were $4,726,799 for
the nine months ended December 31, 1999, as compared to the development stage
operating expenses of $7,751,844 for the twelve month period ended March 31,
1999. This represents a 39.0% decrease from the prior period. The total
development stage operating expenses for the nine month period ended December
31, 1998, were $7,335,493. Decreased development stage operating expenses in the
current period compared to the fiscal year ended March 31, 1999 are a result of
decreased consulting fees, increased professional fees, and other expenses
related to product development. IFT is presenting this comparison as the nine
months ended December 31, 1999, compared to the nine months ended December 31,
1998. The primary expense incurred, of the $416,351 total expenses, during the
three month period ended March 31, 1999, was $328,558 of product development
costs.
Consulting expenses during the nine months ended December 31, 1999, were
$295,000 representing a decrease of $6,045,500 from the corresponding period for
1998. This represents a decrease of 95.3% from the prior period. The decrease is
primarily due to the issuance of 1,200,000 shares of IFT common stock to the
former Board Chairman during December 1998 for consulting services rendered.
These shares were valued at the estimated fair value per share of $5.00.
Research and development costs during the nine months ended December 31, 1999
was $330,353, representing a decrease of $183,994 from the corresponding period
for 1998. This represents a decrease of 35.8% from the prior period. The
decrease is primarily due to the reduction in the purchase of testing supplies,
rental equipment and decreased testing and laboratory fees.
Rent expense during the nine months ended December 31, 1999 was $32,685
representing a decrease of $84,948 from the corresponding period of 1998. This
represents a 72.2% decrease from the prior period. IFT rents its Las Vegas
office space and equipment on a month to month basis from a company related
through common ownership. From September 1, 1998 through March 31, 1999 the rent
for the Las Vegas office facility was $18,000 per month. After March 31, 1999,
the office rent decreased to $5,000 per month to reflect market and operations
conditions. The revised rental amount was retroactive to March 1, 1999. A credit
was issued in the amount of $13,000 during the nine month period ended December
31, 1999. Prior to September 1, 1998, the office rent was $4,000 per month. IFT
rents its St. Louis office space and
42
equipment on a six month lease from a company related through common ownership.
Payments totaled $32,500 during the nine month period ended December 31, 1999.
Payroll expenses during the nine months ended December 31, 1999 were $275,080
representing an increase of $158,407 from the corresponding period of 1998. The
increase was primarily due to the hiring of additional employees to administer
the day-to-day operations. Additionally, on July 13, 1999, IFT entered into
employment agreements with its Chief Executive Officer and Chief Operating
Officer which expire January 31, 2000 with options to extend until July 31,
2000. Under the terms of the agreement(s), these officers will each receive base
pay of $1,000 per month plus a combined total of 90,000 shares of IFT's common
stock payable at the end of the initial term of the agreement. The stock-based
compensation earned through December 31, 1999 is $166,587 and has been reflected
in these financial statements as payroll expense and as additional paid in
capital, calculated based on the trading price of IFT's stock at July 13, 1999
which was $2.1875 per share.
Professional services during the nine months ended December 31, 1999, were
$3,662,718 representing an increase of $3,581,282 over the corresponding period
of 1998. On July 1,1999, IFT entered into an agreement with Onkar Corporation,
Ltd. to issue 1,500,000 shares of common stock in exchange for various services
including introduction to brokers, dealers and potential investors and for
facilitating the writing of a minimum of three research reports on IFT. IFT
received $750,000 for these shares. The $3,468,750 difference between the value
of the shares using the market price at the date of the agreement and the
$750,000 of proceeds received from the agreement have been reflected in the
statement of operations for the nine month period ended December 31, 1999 as
professional services expense. The increase in professional services is also due
to hiring services for payroll, web-site initialization, costs related to
investigation of patent filing, financial information report filing and new
administrative expenses. Additionally, there were increases in legal and audit
expenses during the nine month period ended December 31, 1999.
Other expenses for the nine months ended December 31, 1999, were $59,234
representing an increase of $12,166 from the corresponding period of 1998. This
represents a 25.8% increase from the prior period. The increase for the nine
months ended December 31, 1999 is due primarily to the cost to purchase postage
for shareholder news mailings, the rights offering information mailing to
shareholders, the mailing of the rights offering stock certificates, printing
costs for the new rights offering stock certificates, transfer agent fees to
process the rights offering stock certificates and the purchase of a Director's
and Officers Liability Insurance Policy.
Interest expense during the nine months ended December 31, 1999 was $405,341
representing an increase of $336,769 for the corresponding period of 1998. This
represents a 491.1% increase from the prior period. Interest expense increased
primarily due to IFT's agreement entered into with certain promissory note
holders on November 1, 1999 to issue 423,537 shares of its common stock by
December 31, 1999 in exchange for the balance of the promissory notes due in the
amount of $704,255 and interest on the notes due in the amount of $142,820 at
$2.00 per share. The note and interest exchange value was calculated based on
the trading price of IFT's stock at November 1, 1999. The $355,771 difference
between the $2.00 (per the agreement) value of the shares and the $2.84 trading
price of the shares has been reflected in these financial statements as interest
expense.
The net loss for the nine months ended December 31, 1999, was $5,132,140 as
compared to the net loss of $7,404,065 for the nine month period ended December
31, 1998. This represents a 30.7% decrease from the prior period. The net loss
per share for the nine months ended December 31, 1999 was $.32 as compared to
the net loss per common share of $.57 for the nine month period ended December
31, 1998.
43
New Accounting Pronouncements
- -----------------------------
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for years beginning after June 15, 2000
and requires comparative information for all fiscal quarters of fiscal years
beginning after June 15, 2000. IFT adopted SFAS 133 effective January 1, 2001.
The adoption of SFAS 133 did not have a material effect on IFT's financial
position or results of operations.
Liquidity and Capital Resources
- -------------------------------
A critical component of IFT's operating plan impacting the continued existence
of IFT is the ability to obtain additional capital through additional debt
and/or equity financing. We do not anticipate IFT will generate a positive
internal cash flow until such time as IFT can generate revenues from license
fees from its PEERFUEL process and/or direct sales of its PEERFUEL products,
either or both of which may take the next few years to realize. In the event we
cannot obtain the necessary capital to pursue our strategic plan, IFT may have
to cease or significantly curtail its operations. This would materially impact
our ability to continue as a going concern. The independent auditor's reports
included with the financial statements later in this Form S-1 indicate there is
a substantial doubt that IFT can continue as a going concern.
We have met our capital needs since inception primarily through the issuance of
common stock as compensation for services rendered, which have totaled
$14,570,405 since inception in April 1996, and with $1,125,313 in authorized
issuances for the three month period ended March 31, 2001. In addition to these
amounts, we have raised $2,808,328 in cash from the issuance of common stock
since the IFT's inception, with no amounts raised during the three month period
ended March 31, 2001. Most of these funds have been raised through private
placement transactions. Since IFT's inception, financing totaling $2,179,425 was
raised privately through notes payable to various sources, of which $579,171 was
repaid, $1,417,754 was converted to common stock, and $182,500 is recorded as a
liability on the March 31, 2001, balance sheet. For the three months ended March
31, 2001, there were no proceeds from notes payable with $2,500 repaid and
$10,000 converted to common stock. Notes payable totaling $10,000 were converted
at a price of $.30 per share, and included both the outstanding principal and
interest owed as of January 31, 2001.
Financing totaling $250,000 was raised through the issuance of convertible
debentures during the three months ended March 31, 2001. In connection with the
issuance of the $250,000 in convertible debentures IFT recognized $165,167 in
discount on convertible debentures due to the beneficial conversion feature of
the convertible debentures. The $165,167 discount will be amortized to December
31, 2003 or the date the convertible debenture is converted into common stock,
whichever occurs first. For the three months ended March 31, 2001, interest
expense includes $3,909 amortization of the $165,167 discount. Also, in
connection with the issuance of the $250,000 in convertible debentures IFT
recognized $21,750 in discount on convertible debentures due to the issuance of
a two year term warrant that expires on March 1, 2003 to purchase 75,000 shares
of IFT stock at an exercise price equal to 130% of the closing bid price, $.53,
of the common stock on March 6, 2001. The $21,750 discount will be amortized to
December 31, 2003 or the date the warrant is exercised, whichever occurs first.
For the three months ended March 31, 2001, interest expense includes $515
amortization of the $21,750 discount.
The cash used in operating activities is $311,327 for the three months ended
March 31, 2001 as compared to cash used in operating activities of $261,206 for
the three months ended March 31, 2000. The cash used in investing activities was
$1,642 for the three months ended March 31, 2001 as compared to $0 used in
investing activities for the three months ended March 31, 2000. The cash
provided by financing activities was $247,500 for the three months ended March
31, 2001 as compared to $254,350 provided by financing
44
activities for the three months ended March 31, 2000. Net cash decreased by
$65,469 for the three months ended March 31, 2001 as compared to net cash
decreasing by $6,856 for the three months ended March 31, 2000.
Working capital at March 31, 2001 was ($1,502,618) as compared to ($316,210) at
December 31, 2000. The decrease in working capital at March 31, 2001 is
primarily due to the increase of $1,105,889 in accrued payroll expenses.
The cash used in operating activities is $977,594 for the twelve months ended
December 31, 2000 as compared to cash used in operating activities of $1,162,743
for the nine months ended December 31, 1999. Cash used in operations for the
twelve months ended December 31, 2000 decreased primarily due to an increase of
$200,919 in accrued expenses. The cash used in investing activities was $8,198
for the twelve months ended December 31, 2000 as compared to $25,049 used in
investing activities for the nine months ended December 31, 1999. Cash used in
investing activities for the twelve months ended December 31, 2000 decreased
primarily due to the nine month period ended December 31, 1999 including $15,468
in cash used for employee and stockholder advances. The cash provided by
financing activities was $1,087,150 for the twelve months ended December 31,
2000 as compared to $1,214,150 provided by financing activities for the nine
months ended December 31, 1999. Cash provided by financing activities for the
twelve months ended December 31, 2000 decreased due to $921,800 less in proceeds
being received from issuance of common stock while the net activity of notes
payable provided funds of $794,800. Net cash increased by $101,358 for the
twelve months ended December 31, 2000 as compared to net cash increasing by
$26,358 for the nine months ended December 31, 1999.
The cash used in operating activities for the nine months ended December 31,
1999 was $1,162,743 as compared to $1,396,056 used in operating activities for
the year ended March 31, 1999. The cash provided by financing activities was
$1,214,150 for the nine months ended December 31, 1999 as compared to $1,395,724
provided by financing activities for the year ended March 31, 1999. Net cash
increased by $26,358 for the nine months ended December 31, 1999 as compared to
net cash decreasing by $4,612 for the year ended March 31, 1999.
Working capital at December 31, 2000 was ($316,210) as compared to ($308,659) at
December 31, 1999.
During the twelve month period ended December 31, 2000, IFT received advances
from stockholders totaling $516,000. For $416,000 of the advances, each
stockholder received a warrant to purchase from IFT up to 25,000 shares of
restricted common stock at $.01 per share for each $5,000 in principal advanced
to IFT. IFT issued 2,030,000 restricted common shares based upon the exercise of
the warrants. In addition, IFT repaid $356,000 of the advances received from the
stockholders by issuing 1,186,669 restricted common shares and $27,500 of the
advances received from stockholders by check disbursement. $132,500 of the
advances received from stockholders is recorded as a liability on the December
31, 2000 balance sheet.
Effective October 27, 1999, IFT merged with and into Blencathia Acquisition
Corporation. Blencathia had 300,000 shares outstanding at the time of merger,
which it redeemed and canceled. In exchange for 300,000 shares of Blencathia's
common stock, IFT issued Blencathia 300,000 shares of its restricted common
stock. These restricted common shares are expected to be sold in an amount
sufficient to provide the former shareholders of Blencathia with proceeds of
$500,000.
On May 8, 2000, IFT issued 300,000 common shares that were contingently issued
per the Blencathia merger agreement. The 300,000 shares of common stock are
included in the statement of stockholders' deficit for the twelve months ended
December 31, 2000 but are not included in earnings per share and weighted
average share calculations for the twelve month period ended December 31, 2000.
They will be
45
included when the shares are sold to provide payment to the shareholders of
Blencathia. The shareholders of Blencathia have represented to the management of
IFT that the 300,000 shares will be sold only with IFT's approval. If the shares
are sold and $500,000 is not generated additional shares may need to be issued
to the shareholders of Blencathia. Based on the July 9, 2001 market price,
$.52, of IFT's common stock, a total of 961,538 shares would need to be issued
to generate the $500,000 proceeds.
While management cannot make any assurance as to the accuracy of our projections
of future capital needs, it is anticipated that a total of approximately $1.75
million over the remainder of the current fiscal year will be necessary in order
to enable us to meet our current capital needs. Management believes the proceeds
from financing will be used as follows: $350,000 for specific testing as part of
required regulatory procedures as set by the Air Resources Board of California
("CARB"), $350,000 for commercial fleet testing programs, $282,500 for
professional fees, $400,000 for salary expenses and $367,500 working capital for
administrative and other capital needs, including investigation of future
acquisitions, if any. On January 3, 2001 we entered into a Securities Purchase
Agreement with IIG Equity Opportunities Fund Ltd. ("IIG Fund"), which has a one-
year commitment amount of $3 million, with an option at our control for an
additional $3 million in financing after the completion of the one-year
commitment. On March 1, 2001, IFT completed registration of the common shares
required by the Securities Purchase Agreement (the "Agreement"). On March 2,
2001 IFT initiated the first convertible debenture purchase and on March 7, 2001
received $200,000 and on March 22, 2001 received $50,000. The proceeds from the
convertible debentures were primarily used as follows: $61,150 for research and
development, $60,800 for salaries and related expenses and $96,800 for
administrative and other capital needs.
Subsequent Events
During April 2001 IFT issued 160,978 common shares to the IIG Fund as payment on
$50,000 of outstanding convertible debentures. During April 2001 IFT issued
10,000 restricted common shares as payment for $4,375 in consulting services and
10,000 restricted common shares as a payment on a $4,125 account payable. During
April 2001 IFT issued 2,485,000 common shares to consultants, employees and non-
employee directors of IFT for the stock awards that were granted by the Board of
Directors on February 23, 2001. During April 2001 IFT received $225,000 for the
issuance of convertible debentures to IIG Equity. In connection with the
issuance of the $225,000 in convertible debentures IFT issued a two year term
warrant that expires on April 5, 2003 to purchase 75,000 shares of IFT stock at
an exercise price of $.46. During April 2001 IFT issued 406,523 common shares to
a total of four individuals as a recalculation of the beneficial conversion rate
used for the payment of notes payable in November 2000. The recalculation was
required due to the 1,626,086 common shares issued in November 2000 not being
registered with the United States Securities and Exchange Commission by March
31, 2001. During May 2001 IFT issued 610,444 common shares to the IIG Fund as
payment on $125,000 of outstanding convertible debentures. During May 2001 IFT
issued 21,000,003 common shares for the purchase of all of the outstanding
common stock of Interfacial Technologies (UK) Ltd. During May 2001 IFT issued
960,000 common shares for payments on employment and consulting agreements
related to the acquisition of Interfacial that will be expensed as consulting
and employee compensation. During May 2001 IFT received notification that due to
regulatory issues relating to the structure of the transactions contemplated by
the Securities Purchase Agreement, 18,163,872 shares issuable upon possible
future conversion of debentures not yet issued and 750,000 shares issuable upon
possible future exercise of not yet issued warrants will never be issued. IFT is
in the process of negotiating a revised financing structure that is acceptable
to the regulatory authorities. During June 2001 IFT received an advance of
$150,000 from the IIG Fund. During July 2001 IFT issued 175,254 common shares
to the IIG Fund as payment on $50,000 of outstanding convertible debentures.
46
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, operations of IFT may be exposed to
fluctuations in interest rates. These fluctuations can vary the costs of
financing, investing and operating transactions. At March 31, 2001 IFT has debt
totaling 13.5% of total liabilities at fixed interest rates and fluctuations in
the interest rate could have a material impact on the underlying fair value.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On March 7, 2000, the Board of Directors unanimously agreed to engage BDO
Seidman, LLP to be IFT's new principal accountant. At no time during the past
two fiscal years or any subsequent period prior to engagement as principal
auditor did the Registrant consult with BDO Seidman, LLP regarding either the
application of accounting principles to a specified transaction or type of audit
opinion which might be rendered on the Registrant's financial statements or any
other matter. The former accountant, McGladrey & Pullen, LLP declined to stand
for re-election for the December 31, 1999 engagement. The independent auditors'
reports for March 31, 1999 and 1998, were modified as to uncertainties about the
entity's ability to continue as a going concern. IFT and its former accountants
had no disagreements during the fiscal years ended March 31, 1999 and 1998, and
through the date they declined to stand for re-election.
MANAGEMENT
Directors and Executive Officers
The following are the names of our directors and executive officers, their
present positions with International Fuel and information about their
background.
Name Age Title
- ---- --- -----
Jonathan R. Burst 42 Chief Executive Officer, Director, Chairman
William J. Lindenmayer 41 President, Chief Operating Officer, Director
Ian Williamson 45 Director-Technology Development, Director
Steven D. Walters 33 Chief Financial Officer
David B. Norris 52 Director
Harry Demetriou 57 Director
John P. Stupp, Jr. 51 Director
Simon Orange 33 Director
Geoff Robinson 48 Director
All directors hold office until the next annual meeting of shareholders or until
their successors are elected and qualified. At present, our Articles of
Incorporation provide for not less than one nor more than nine directors.
Currently, we have eight directors. Our Bylaws permit the Board of Directors to
fill any vacancy and such director may serve until the next annual meeting of
shareholders or until his successor is elected and qualified. Officers serve at
the discretion of the Board of Directors.
Background of Directors and Executive Officers:
JONATHAN R. BURST has served as our Chief Executive Officer since July 1999.
From July 1999 to February 2000 he also served as our President. In February
2000, Mr. Burst was appointed to our Board of Directors and became chairman in
June 2000. In 1998, Mr. Burst founded Burcor International, St. Louis, Missouri,
an insurance brokerage firm, and has served as its President since its
inception. From 1992 to 1998, Mr. Burst served as Executive Vice President and
Managing Director of mergers and acquisitions at
47
Aon Risk Services, a St. Louis, Missouri, mergers and acquisition risk
management consulting company. Mr. Burst received his Bachelor of Arts degree in
Economics from the University of Missouri in 1981.
WILLIAM J. LINDENMAYER has served as our President since February 2000. He has
also served as our Chief Operating Officer since July 1999. In February 2000,
Mr. Lindenmayer was appointed to our Board of Directors. From 1999 to February
2000, Mr. Lindenmayer has served as Managing Director of Burcor Capital, LLC, a
venture capital merger and acquisitions subsidiary of Burcor International, St.
Louis, Missouri. From 1997 to 1999, Mr. Lindenmayer served as president of DLW
Partners, LLC, St. Louis, Missouri, a video tape distribution company. From 1995
to 1997, Mr. Lindenmayer served as President of WLI William Lindenmayer Group,
Inc., St. Louis, Missouri, a financial consulting company. Mr. Lindenmayer
received his Bachelor of Science degree from Cornell University in 1982 and his
Masters of Business Administration from University of Virginia in 1988.
STEVEN D. WALTERS, CPA has served as our Chief Financial Officer since October
2000. From 1997 to September 2000, Mr. Walters provided controller and
accounting services through Steven D. Walters, CPA. From 1994 to 1997, Mr.
Walters served as Chief Financial Officer of Leggoons, Inc., an apparel
manufacturing company that was located in Vandalia, Missouri. From 1989 to 1994,
Mr. Walters served in various positions with two local public accounting firms
in St. Louis, Missouri. Mr. Walters received his Bachelor of Science-Business
Administration degree from the University of Missouri-St. Louis in May 1989. Mr.
Walters passed all four parts of the Uniform CPA Exam in November 1989.
DAVID B. NORRIS has served on our Board of Directors since April 1999. Since
1983, Mr. Norris has been the owner and President of Addicks Services, Inc.,
Richmond, Texas, a construction company.
HARRY DEMETRIOU has served on our Board of Directors since February 2000. Mr.
Demetriou has been a ship owner for over 25 years. The ships are bulk carriers
of and transport goods in bulk on a worldwide basis.
JOHN P. STUPP, JR. has served as a Director of the Company since May 2001. Mr.
Stupp is the Executive Vice President and Chief Operating Officer of Stupp
Bros., Inc., a diversified holding company. Mr. Stupp has served in such
capacities since 1989 and 1996, respectively. From January 1992 to August 1995
Mr. Stupp also served as President, and since August 1995 he has served as Chief
Executive Officer of Stupp Corporation, the pipe manufacturing division of Stupp
Bros., Inc. Mr. Stupp has been a Director of Atrion Corporation, a publicly
traded medical devices and components company, since 1985 and he is an Advisory
Director of Midwest BankCentre. Mr. Stupp holds a 1972 Bachelor of Science
degree in Business and Economics from Lehigh University.
IAN WILLIAMSON has served as Director of Technology Development and as a
Director of the Company since May 2001. Mr. Williamson has also served as a
Director of Interfacial Technology Limited from May 2000 to 2001. Since 1993 Mr.
Williamson has been self-employed working as an inventor and consultant. Mr.
Williamson commenced his career studying the design of mechanical services
including steam and combustion, particularly alternatives to oil fired systems.
He has worked as an independent design consultant, designing large-scale
heating, air conditioning and waste management systems. In 1993, Mr. Williamson
became involved with the invention and development of emissions reduction
technology and co-founded Interfacial Technology Limited. Mr. Williamson remains
an integral part of Interfacial's ongoing research and development efforts. He
is the author of over 10 patents and applications.
SIMON ORANGE has served as a Director the Company since May 2001. Mr. Orange has
also served as a director of Interfacial Technology Limited from May 2000 to
2001. For several years Mr. Orange has been self-employed as a consultant. Mr.
Orange is a fully qualified financial adviser and has extensive experience both
investing in and managing diversified businesses including property, retail,
finance and
48
software technology. Mr. Orange's primary role in these businesses has been
management at board level and assistance in raising seed capital. Mr. Orange has
been a major shareholder in Temple Court Independent Limited, an independently
authorized financial services business for the last eight years. He has also
served on the board of three property companies, a software business (recently
sold out to a London Stock Exchange quoted company) and is currently a director
of AAE Holding Plc.
GEOFF ROBINSON has served as a Director of the Company since May 2001. Prior to
May 1983, Mr. Robinson held a number of positions with large multinational
corporations including BET Group Plc and Lex Service Group Plc. Mr. Robinson
served as local and regional managers with both companies and ended up becoming
Managing Director of two separate business units of Lex Service Group. In May
1983, Mr. Robinson became Managing Director of TKLT Limited, an independent hire
company. Between 1987 and 1993, Mr. Robinson formed a holding company, N R
Development Limited, which eventually spawned a total of nine independent
companies. Mr. Robinson sold all these business interests in 1993-1994 and since
then has served as the owner, or part owner, of 5 businesses and has served, or
is serving, as a Director of two companies.
49
Executive Compensation
The following table sets forth information concerning all cash and non-cash
compensation paid or to be paid, as well as certain other compensation awarded,
earned by and paid, during the fiscal years indicated, to our Chief Executive
Officer and for each of our other executive officers whose annual salary and
bonus exceeds $100,000 for such period in all capacities in which they served.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
----------------------------- ------------
All
Name and Other Restricted Other
Principal Period Compen- Stock Compen-
Position Ended Salary Bonus sation Awards sation
- -------- ------ ------ ----- ------ ---------- -------
Jonathan R. Burst,
Chief Executive 12/31/00 $180,000 $0 $0 $834,067 $0
Officer 12/31/99 5,493 0 0 $111,056 0
William J. Linden-
meyer, President 12/31/00 180,000 0 0 716,721 0
Perquisites and other personal benefits are omitted because they do not exceed
either $50,000 or 10% of the total of annual salary and bonus for the named
executive officer.
Employment Agreements
In January 2000, the Company entered into an employment agreement with Mr. Burst
to serve as Chief Executive Officer with an annual base salary of $180,000 and
6,000 non-registered common shares per month, and a bonus award as deemed
appropriate by the Board of Directors. On January 1, 2001 the Company entered
into an employment agreement with its Chief Executive Officer through December
31, 2003. Under this agreement, the Chief Executive Officer will receive an
annual base salary of $200,000, a stock award of 20,834 each month and a bonus
award as deemed appropriate by the Board of Directors. On February 23, 2000, the
Board of Directors granted Mr. Burst 100,000 shares of non-registered common
stock for his appointment as Chief Executive Officer. On March 6, 2000, Mr.
Burst received 10,000 shares of non-registered common stock for reimbursement of
expenses to be incurred as a member of the Company's Board of Directors. On
October 13, 2000, the Board of Directors granted Mr. Burst 475,000 shares of
non-registered common stock for achieving a milestone event. On April 10, 2001,
the Board of Directors awarded Mr. Burst 1,000,000 shares of non-registered
common stock for achieving a milestone event.
In January 2000, the Company entered into an employment agreement with Mr.
Lindenmayer to serve as President/Chief Operating Officer with an annual base
salary of $180,000 and 3,000 non-registered common shares per month, and a bonus
award as deemed appropriate by the Board of Directors. On January 1, 2001 the
Company entered into an employment agreement with its President/COO through
December 31, 2003. Under this agreement, the President/COO will receive an
annual base salary of $200,000, a stock award of 20,834 each month and a bonus
award as deemed appropriate by the Board of Directors. On February 23,
50
2000, the Board of Directors granted Mr. Lindenmayer 100,000 shares of non-
registered common stock for his appointment as President/Chief Operating
Officer. On March 6, 2000, Mr. Lindenmayer received 10,000 shares of non-
registered common stock for reimbursement of expenses to be incurred as a member
of the Company's Board of Directors. On October 13, 2000, the Board of Directors
granted Mr. Lindenmayer 475,000 shares of non-registered common stock for
achieving a milestone event. On April 10, 2001, the Board of Directors awarded
Mr. Lindenmayer 1,000,000 shares of non-registered common stock for achieving a
milestone event.
On May 25, 2001, IFT entered into a two year term employment agreement with Ian
Williamson, a director of IFT. Mr. Williamson will receive an annual salary of
$120,000. In addition, Mr. Williamson will be issued 1,000,000 non-registered
shares of IFT's common stock as compensation with 300,000 shares delivered upon
execution of the employment agreement, 300,000 shares to be delivered on May 25,
2002 and 400,000 shares to be delivered on May 25, 2003.
Consulting Agreements
- ---------------------
On May 25, 2001, IFT entered into a two year term consulting agreement with
Simon Orange, a director of IFT. Mr. Orange will receive a fee of $500.00 for
each day he performs services for IFT at the written request of IFT. During any
calendar month for which he provides consulting services for a minimum of one
day he will receive a minimum of $3000.00 for those consulting services. In
addition, Mr. Orange will be issued 1,000,000 non-registered shares of IFT's
common stock as compensation with 300,000 shares delivered upon execution of the
consulting agreement, 300,000 shares to be delivered on May 25, 2002 and 400,000
shares to be delivered on May 25, 2003.
On May 25, 2001, IFT entered into a two year term consulting agreement with
Geoff Robinson, a director of IFT. Mr. Robinson will be issued 200,000 non-
registered shares of IFT's common stock as compensation with 60,000 shares
delivered upon execution of the consulting agreement, 60,000 shares to be
delivered on May 25, 2002 and 80,000 shares to be delivered on May 25, 2003.
Consultant and Employee Stock Compensation Plan
- -----------------------------------------------
The Board of Directors adopted a Consultant and Employee Stock Compensation Plan
that became effective January 14, 2000. The Board of Directors will be
responsible for the administration of this Plan, and will grant Awards under
this Plan. Subject to the express provisions of the Plan, the Board of Directors
shall have full authority and sole and absolute discretion to interpret and
amend this Plan, to prescribe, amend and rescind rules and regulations relating
to it, and to make all other determinations which it believes to be necessary or
advisable in administering this Plan. The determinations of the Board of
Directors on the matters referred to in this Section shall be conclusive. No
member of the Board of Directors shall be liable for any act or omission in
connection with the administration of this Plan unless it resulted from the
member's willful misconduct.
The maximum number of shares of common stock as to which awards may be granted
under this Plan, subject to subsequent amendments, is 5,000,000 shares. The
common stock which is issued on grant of awards may be authorized but unissued
shares or shares which have been issued and reacquired by the Company. The Board
of Directors may increase the maximum number of shares of common stock as to
which awards may be granted at such time as it deems advisable. Awards may be
granted to employees or consultants of the Company in their individual capacity
only.
The Board of Directors shall have complete discretion to determine when and to
which employees or consultants awards are to be granted, and the number of
shares of common stock as to which awards granted to each employee or consultant
will relate. No grant will be made if, in the judgment of the Board of
51
Directors, such a grant would constitute a public distribution within the
meaning of the Securities Act of 1933, as amended (the "Act"), or the rules and
regulations promulgated thereunder. In January 2000 the Board of Directors
adopted the Amended and Restated January 2000 Consultant and Employee Stock
Compensation Plan. The purpose of the plan is to further the growth of IFT by
allowing IFT to compensate officers, directors, consultants and certain other
persons providing bona fide services to IFT through the award of IFT's common
stock. As of July 10, 2001, 4,431,559 shares of IFT common stock have been
awarded under this plan.
Options
- -------
We currently do not have any plan or agreement related to the grant of stock
option awards for employees or directors.
Compensation of Directors
- -------------------------
On February 23, 2000, the Board of Directors adopted the Director's Stock
Compensation Plan, which provides for an annual award of 10,000 shares of our
common stock to the Board members as reimbursement for their attendance at the
Board meetings. Each Board member will be awarded additional 1,000 shares of
IFT's common stock for any three telephone conference call Board meetings
attended. On March 6, 2000, IFT issued 15,000 shares of non-registered common
stock to each of its non-employee members of the Board of Directors.
On October 13, 2000, the three non-employee members received non-registered IFT
common shares totaling 275,000 for achieving a milestone event.
On February 23, 2001, the three non-employee members were granted non-registered
IFT common shares totaling 425,000 for achieving a milestone event.
52
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information as of July 10, 2001, regarding the
beneficial ownership determined in accordance with the rules of the Securities
and Exchange Commission, which generally attributes beneficial ownership of
securities to persons who possess sole or shared voting power and/or investment
power with respect to those securities, of our common stock of: (i) each person
known by us to own beneficially more than five percent of our common stock; (ii)
each director and nominee for director; (iii) each executive officer named in
the Summary Compensation Table (see "Compensation"); and (iv) all of our
directors and executive officers as a group. Except as otherwise specified, the
named beneficial owner has sole voting and investment power over the shares
listed.
Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Common Stock/1/
- ---------------- -------------------- ---------------
Jonathan R. Burst/2/ 2,541,000 5.0%
William J. Lindenmayer/3/ 1,801,000 3.6%
Steven D. Walters 60,000 0.1%
John P. Stupp, Jr. 118,233 0.2%
David B. Norris 1,096,562 2.2%
Harry F. Demetriou/4/ 1,066,667 2.1%
Ian Williamson 5,404,996 10.7%
Simon Orange 3,169,143 6.3%
Geoff Robinson 468,237 0.9%
All directors and executive
officers as a group 15,725,838 31.1%
/1/This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D filed with the SEC. Unless otherwise
indicated in the footnotes to this table and subject to community property laws
where applicable, the Company believes that each of the stockholders named in
this table has sole voting and investment power with respect to the shares
indicated as beneficially owned. Unless otherwise indicated, the principal
address of each of the stockholders named in this table is: c/o International
Fuel Technology, Inc., 7777 Bonhomme Avenue, Suite 1920, St. Louis, Missouri,
63105. Applicable percentages are based on 50,500,988 shares outstanding on
July 10, 2001.
/2/Includes 150,000 shares owned by Burcor Capital, L.L.C. of which Mr. Burst is
an executive officer and deemed to be the beneficial owner of such shares.
/3/Includes 150,000 shares owned by Burcor Capital, L.L.C. of which Mr.
Lindenmayer is an executive officer and deemed to be the beneficial owner of
such shares.
/4/Includes 1,066,667 shares owned by Observor Acceptances, Ltd. of which Mr.
Demetriou is the sole owner and deemed to be the beneficial owner of such
shares.
53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
IFT obtains general and administrative services and rents office space and
equipment from Burcor Capital, LLC, a company related through common ownership
(Mr. Jonathan Burst, executive officer and director of IFT, is the founder and
president of Burcor Capital, LLC), under an agreement requiring monthly payments
of $5,000. Expenses recorded as professional services totaled $60,000 during the
twelve month period ended December 31, 2000 and $32,500 during the nine month
period ended December 31, 1999.
On April 26, 1999, at the Annual Shareholders Meeting, the Shareholders of IFT
approved the engagement of Burcor Capital, LLC as IFT's investment bankers to
develop investment and marketing relationships in connection with a merger or
consolidation of IFT with any other business entity, the sale of all or part of
IFT securities for cash or in exchange for other tangible or intangible
consideration ("Potential Transactions") and the planning and actions taken for
the purpose of effecting one or more Potential Transactions. As of December 31,
2000 no amounts have been paid related to this agreement.
On October 7, 1999, we entered into an Advisory Agreement with Mr. Harry
Demetriou, a director of IFT, on a non-exclusive basis to render financial
advisory services in connection with the possible sale of IFT. As of December
31, 1999 no payments had been made related to this agreement. During June 2000
this agreement was canceled and replaced with an agreement that provided for
payment of 250,000 restricted common shares. These shares were issued on June
16, 2000 with a value of $218,750.
During October 1999 IFT entered into an agreement with TPG Capital Corporation,
a company related through common ownership, for consulting services. A payment
of $100,000 was made and expensed during the nine month period ended December
31, 1999.
On November 1, 1999, IFT entered into an agreement with certain related party
promissory note holders to issue 423,537 shares of its common stock by December
31, 1999 in exchange for the balance of the promissory notes due in the amount
of $677,254, a related party account payable of $26,500 and interest on the
notes due in the amount of $142,820 at $2.00 per share. The stock-based note and
interest exchange value was calculated based on the trading price of IFT's stock
at November 1, 1999. The $355,771 difference between the $2.00 (per the
agreement) value of the shares and the trading price of the shares has been
reflected in these financial statements as interest expense.
At December 31, 1999, IFT owed one of its stockholders approximately $87,000 for
legal services performed. Subsequent to December 31, 1999, the stockholder
agreed to accept 27,559 shares of IFT's common stock in lieu of cash for the
amounts due to him.
During June 2000, IFT purchased a Directors and Officers Liability insurance
policy from Burcor Insurance Group, a company owned by Jonathan Burst.
During the year 2000, IFT paid MarketMatch, Inc. $106,293 for professional
services. MarketMatch, Inc. is owned and operated by William Center. William
Center became a director of IFT in October 2000.
During the year 2000, IFT paid Steven D. Walters, CPA $25,168 for professional
services. Steven D. Walters, CPA was owned and operated by Steven Walters.
Steven Walters was appointed as the Chief Financial Officer of IFT in October
2000.
During the year 2000, IFT received advances from stockholders totaling $516,000.
For $416,000 of the advances each stockholder received a warrant to purchase
from IFT up to 25,000 shares of restricted common stock at $.01 per share for
each $5,000 in principal advanced to IFT. IFT issued 2,030,000 restricted common
shares based upon the exercise of the warrants. In addition, IFT repaid $356,000
of the
54
advances received from the stockholders by issuing 1,186,669 restricted common
shares and $27,500 of the advances received from stockholders by check
disbursement. $132,500 of the advances received from stockholders is recorded as
a liability on the December 31, 2000 balance sheet.
IFT issued 1,200,000 restricted shares to a consultant on December 21, 1998.
This consultant had been a founder of IFT served as Board Chairman and provided
services in connection with the technology of IFT. These shares served as
payment to this consultant for his past services. Because there were no formal
service agreements and no specified time frame for the performance of these
services, the cost of the services was recognized as expense at the date the
shares were distributed. The market value of the shares was determined by the
Board of Directors based upon the private placement of common stock sold in
November 1998 at $5.00 per share. The $6,000,000 value has been included in
consulting services for the year ended March 31, 1999. IFT management
acknowledges that the $6,000,000 value of these shares is disproportionate to
the value of the services provided. From January through March 1998, the
consultant distributed 1,699,800 of his personal shares to others for services
without any expectation of receiving any additional shares from IFT. These
services included providing business contacts to assist IFT in its business plan
and to assist IFT in raising capital. Because there were no formal service
agreements and no specified time frame for the performance of these services,
the cost of the services was recognized at the date the personal shares were
distributed. The value of the services was deemed to be $169,980 by the Board of
Directors. This amount was expensed in the year ended March 31, 1998 with an
increase to additional paid-in capital.
Until May 5, 2000, we rented office space and equipment from Nevada Offshore
Petroleum Export Corp., a company related through common ownership, under a
month to month agreement requiring monthly payments. Prior to September 1, 1998
the office rent was $4,000 per month. From September 1, 1998 through March 31,
1999 the rent for the Las Vegas office facility was $18,000 per month. After
March 31, 1999 the office rent decreased to $5,000 per month. The revised rental
amount was retroactive to March 1, 1999. A credit was issued in the amount of
$13,000 during the nine month period ended December 31, 1999.
Our policy regarding related transactions requires that any director or officer
who has an interest in any transaction to be approved by our board of directors
must disclose the presence and the nature of the interest to the board of
directors prior to any approval of the transaction by the board of directors.
The transaction may then be approved by a majority of the disinterested
directors, provided that an interested director may be counted in the
determining the presence of a quorum at the meeting of the board of directors to
approve the transaction. Our policy regarding compensation for directors and
officers is that the board of directors may, without regard to personal
interest, establish the compensation of directors for services in any capacity.
All related transactions are required to be recorded by IFT in accordance with
generally accepted accounting principles in the accounting period that they
occur.
LEGAL MATTERS
We are not a party to any material legal proceedings and to our knowledge, no
such proceedings are threatened or contemplated.
EXPERTS
The financial statements included in this Prospectus and in the Registration
Statement have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods set forth in their report (which
contains an explanatory paragraph regarding the Company's ability to continue as
a going concern) appearing elsewhere herein and in the Registration Statement,
and are included in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting.
55
The financial statements included in this Registration Statement have been
audited by McGladrey & Pullen, LLP, independent certified public accountants, to
the extent and for the periods set forth in their report appearing elsewhere in
the Registration Statement, and are included in reliance upon such report given
upon the authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities and Exchange
Act of 1934, and as a result we file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy and
information statements may be inspected and copied at the Public Reference
Section of the Commission at 450 Fifth Street, N.W. Washington, D.C. 20549, and
at the Commission's Regional Offices at 7 World Trade Center, 13th Floor, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be
obtained from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549 at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding International Fuel, Inc.
at the address http://www.sec.gov.
The public may obtain information on the operation of the public reference room
by calling the Securities and Exchange Commission at 1-800-SEC-0330.
We have filed with the Securities Exchange Commission a registration statement
on Form S-1, under the Securities Act of 1933, with respect to the offered
common stock. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information provided in the registration
statement, certain parts of which are omitted in compliance with the rules and
regulations of the Commission. Copies of the registration statement, including
all exhibits, may be obtained from the Commission's principal office in
Washington D.C. upon payment of a fee or may be examined without charge at the
offices of the Commission as described above.
56
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
The following table sets forth an itemization of various expenses, all of which
we will pay, in connection with the sale and distribution of the securities
being registered. All of the amounts shown are estimates, except the Securities
and Exchange Commission registration fee.
Securities and Exchange Commission Registration Fee $ 2,625
Accounting Fees and Expenses $ 50,000
Legal Fees and Expenses $ 40,000
Miscellaneous $ 30,000
Total* $122,625
* All amounts are estimates other than the Commission's registration fee. No
portion of these expenses will be borne by the selling shareholders.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Nevada Private Corporation Law provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party, by reason of
the fact that such person was an officer or director of such corporation, or is
or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, to:
- - any action or suit by or in the right of the corporation against expenses,
including amounts paid in settlement and attorneys' fees, actually and
reasonably incurred, in connection with the defense or settlement believed to be
in, or not opposed to, the best interests of the corporation, except that
indemnification may not be made for any claim, issue or matter as to which such
a person has been adjudged by a court of competent jurisdiction to be liable to
the corporation or for amounts paid in settlement to the corporation; and
- - any other action or suit or proceeding against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement, actually and reasonably
incurred, if he or she acted in good faith and in a manner which he or she
reasonably believed to be in, or not opposed to, the best interest of the
corporation and had reasonable cause to believe his or her conduct was lawful.
To the extent that a director, officer, employee or agent has been "successful
on the merits or otherwise" the corporation must indemnify such person. The
articles of incorporation or bylaws may provide that the expenses of officers
and directors incurred in defending any such action must be paid as incurred and
in advance of the final disposition of such action. The Nevada Private
Corporation Law also permits the corporation to purchase and maintain insurance
on behalf of the corporation's directors and officers against any liability
arising out of their status as such, whether or not the corporation would have
the power to indemnify him against such liability. These provisions may be
sufficiently broad to indemnify such persons for liabilities arising under the
Securities Act.
The Company's Bylaws provide for the following:
57
Actions Other Than By the Corporation - The corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, except an action by or in the right of the
corporation, by reason of the fact that he/she is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action, suit or
proceeding if he/she acted in good faith and in a manner which he/she reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, has no reasonable cause to
believe his/her conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, does not, of itself, create a presumption that the
person did not act in good faith and in a manner which he/she reasonably
believed to be in or not opposed to the best interests of the corporation, and
that, with respect to any criminal action or proceeding, he/she had reasonable
cause to believe that his conduct was unlawful.
Actions By the Corporation - The corporation may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he/she is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys' fees, actually and
reasonably incurred by him/her in connection with the defense or settlement of
the action or suit if he/she acted in good faith and in a manner which he/she
reasonably believed to be in or not opposed to the best interests of the
corporation. Indemnification may not be made for any claim, issue or matter as
to which such a person has been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals therefrom, to be liable to the corporation or
for amounts paid in settlement to the corporation, unless and only to the extent
that the court in which the action or suit was brought or other court of
competent jurisdiction determines upon application that in view of all the
circumstances of the case, the person of fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
Successful Defense - To the extent that a director, officer, employee or agent
of the corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to above, or in defense of any claim,
issue or matter therein, he/she must be indemnified by the corporation against
expenses, including attorneys' fees, actually and reasonably incurred by him/her
in connection with the defense.
Required Approval - Any indemnification, unless ordered by a court, must be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances. The determination must be made: (a) By the stockholders or
persons holding their proxies; or (b) By the board of directors by majority vote
of a quorom consisting of directors who were not parties to the act, suit or
proceeding; or (c) If a quorom consisting of directors who were not parties to
the act, suit or proceeding cannot be obtained, by independent legal counsel in
a written opinion.
The Company has obtained liability insurance for its directors and officers
covering, subject to exceptions, any actual or alleged negligent act, error,
omission, misstatement, misleading statement, neglect or breach of duty by such
directors or officers, individually or collectively, in the discharge of their
duties in their capacity as directors or officers of the Company.
58
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order is information regarding shares of common stock
issued and options and warrants and other convertible securities granted by IFT
during the past three years (June 1997 through May 2001). Also included is the
consideration, if any, received by IFT for such shares and options and
information relating to the section of the Securities Act of 1933, or rule of
the Securities and Exchange Commission under which exemption from registration
was claimed.
On July 7, 1999 the stockholders of IFT approved a 1 for 10 reverse stock split
which was effective on July 22, 1999. All references in Item 15 Recent Sales of
Unregistered Securities have been adjusted retroactively for the split.
(1) In June 1997, IFT conducted a private offering of its common stock. Pursuant
to that offering, a total of 7,200 shares of common stock were issued in
exchange for $26,000. The price per share was $5.00 for 4,200 of the shares and
$1.667 for 3,000 of the shares. The issuance was made in reliance on Section
4(2) of the Securities Act of 1933 and/or Regulation D promulgated under the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to IFT that the shares were being acquired for investment.
(2) In July 1997, IFT issued 783,944 shares of common stock to certain founding
stockholders in exchange for the technology related to its diesel fuel treatment
business. The number of shares issued was recorded as a discount equal to the
par value of the stock of $0.01 per share. The issuance was made in reliance on
Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated under
the Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to IFT that the shares were being acquired for investment.
(3) In July 1997, IFT conducted a private offering of its common stock. Pursuant
to that offering, a total of 22,580 shares of common stock were issued in
exchange for $118,500. The price per share was $5.00 for 19,001 of the shares,
$3.00 for 2,499 of the shares, and $14.815 for 1,080 of the shares. The issuance
was made in reliance on Section 4(2) of the Securities Act of 1933 and/or
Regulation D promulgated under the Securities Act of 1933 and were made without
general solicitation or advertising. The purchasers were sophisticated investors
with access to all relevant information necessary to evaluate these investments,
and who represented to IFT that the shares were being acquired for investment.
(4) In July 1997, IFT issued 94,415 shares of common stock to certain
stockholders for services provided and to certain corporate officers as
additional compensation. The shares issued were valued using the stock at its
par value of $.01 per share and approximates the fair value of the services
rendered. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(5) In July 1997, IFT issued 6,350 additional shares of common stock to certain
stockholders who had previously purchased common stock for cash. The shares
issued were valued using the stock at its par value of $0.01 per share and was
charged against additional paid-in-capital. The issuance was made in reliance on
Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated under
the Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were
59
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(6) In August 1997, IFT issued 167,000 shares of common stock to certain
stockholders for services provided and to certain corporate officers as
additional compensation. The number of shares issued were valued at the stocks
par value of $0.01 per share and approximates the fair value of the services
rendered. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(7) In August 1997, IFT issued 40,000 additional shares of common stock to
certain stockholders who had previously purchased common stock for cash. The
issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to IFT that the shares were being acquired for
investment.
(8) In August 1997, IFT issued 70,000 shares of common stock to David Sindelar
in exchange for $25,000. The price per share was $.3571 for the 70,000 shares.
The issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate these
investments, and who represented to IFT that the shares were being acquired for
investment.
(9) In August 1997, IFT issued 51,800 shares of common stock to certain founding
stockholders in exchange for the technology related to its diesel fuel treatment
business. A discount was recorded equal to the par value of the stock of $0.01
per share. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(10) In September 1997, IFT issued 942,768 shares of common stock to certain
stockholders for services provided and 50,000 shares of common stock to certain
corporate officers as additional compensation. The number of shares issued were
valued at the stocks par value of $0.01 per share and approximates the fair
value of the services rendered. The issuance was made in reliance on Section
4(2) of the Securities Act of 1933 and/or Regulation D promulgated under the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to IFT that the shares were being acquired for investment.
(11) In September 1997, IFT issued 95,930 additional shares of common stock to
certain stockholders who had previously purchased common stock for cash. The
number of shares issued and the par value of the stock of $0.01 per share was
charged against additional paid-in-capital. The issuance was made in reliance on
Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated under
the Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to IFT that the shares were being acquired for investment.
60
(12) In September 1997, IFT conducted private offering of its common stock.
Pursuant to that offering, a total of 20,050 shares were issued in exchange for
$90,000. The price per share was $5.00 for 15,000 of the shares and $2.971 for
5,050 of the shares. The issuance was made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Regulation D promulgated under the Securities Act
of 1933 and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to IFT that the
shares were being acquired for investment.
(13) In September 1997, IFT issued 2,927,124 shares of common stock to certain
founding stockholders in exchange for the technology related to its diesel fuel
treatment business. A discount was recorded equal to the par value of the stock
of $0.01 per share. The issuance was made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Regulation D promulgated under the Securities Act
of 1933 and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to IFT that the
shares were being acquired for investment.
(14) In December 1998, IFT conducted a private offering of its common stock.
Pursuant to that offering, a total of 200,000 shares of common stock were issued
in exchange for $1,000,000. The price per share was $5.00 for the 200,000
shares. The issuance was made in reliance on Section 4(2) of the Securities Act
of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(15) In January 1999, IFT issued 1,200,000 shares of common stock to a
consultant who had been a founder of IFT. This consultant had several
individuals provide services in connection with the technology of IFT, provide
business contacts to assist IFT in its business plan and to assist in the
raising of capital. The number of shares issued was valued at $5.00 per share
and approximates the fair value of the IFT's common stock at the time of
issuance. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(16) In April 1999, IFT conducted a rights offering of its common stock to all
shareholders of record on March 31, 1999 to purchase 900 common shares at $.50
per share, a price set by IFT's Board of Directors. Pursuant to that offering, a
total of 797,440 shares of common stock were issued in exchange for $397,800
through January 2000. The issuances were made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Regulation D promulgated under the Securities Act
of 1933 and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to IFT that the
shares were being acquired for investment.
(17) In June 1999, IFT issued 2,500 shares to a director. These shares were
issued in exchange for serving as a director. The value of these services,
$7,000, was determined based on the market value of IFT's stock on the day of
issuance. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
61
(18) In July 1999, IFT entered into an advisory agreement with ONKAR
Corporation, Ltd. for various services and the right to purchase 1,500,000
shares of IFT's restricted common stock at $.50 per share. IFT issued 500,000
shares of common stock in exchange for $250,000. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate these investments, and
who represented to IFT that the shares were being acquired for investment.
(19) In September 1999, IFT issued 1,000,000 shares of common stock to ONKAR
Corporation, Ltd. pursuant to their advisory agreement in exchange for $500,000.
The issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate these
investments, and who represented to IFT that the shares were being acquired for
investment.
(20) In December 1999, IFT issued 423,537 shares of common stock to note holders
as conversion of their promissory notes and interest due through October 31,
1999 in the amount of $847,074 at a conversion price of $2.00 per share. The
issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to IFT that the shares were being acquired for
investment.
(21) In January 2000, IFT issued 100,000 shares of common stock in a private
placement offering to Observor Acceptances Ltd. in exchange for $200,000. The
sole owner of Observor Acceptances Ltd. is a director of IFT. The price per
share, as determined by IFT's Board of Directors, was $2.00 for the 100,000
shares. The issuance was made in reliance on Section 4(2) of the Securities Act
of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(22) In January 2000, IFT issued 90,000 shares of common stock pursuant to an
employment agreement with its Chief Executive Officer and Chief Operating
Officer. The issuance was made in reliance on Section 4(2) of the Securities Act
of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(23) In February 2000, IFT issued 27,559 shares of common stock for legal
services performed by Donald Stoecklein. The services performed were valued at
$87,000. The stockholder agreed to accept 27,559 shares of IFT's stock as
payment for an amount due him. The issuance was made in reliance on Section 4(2)
of the Securities Act of 1933 and/or Regulation D promulgated under the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate these investments, and who
represented to IFT that the shares were being acquired for investment.
(24) In February 2000, IFT issued 100,000 shares of common stock related to a
consulting agreement in effect at that time. Subsequent to March 31, 2000 the
consulting agreement has been amended and the 100,000 shares were recalled and
canceled. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made
62
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to IFT that the shares were being acquired for
investment.
(25) In March 2000, IFT issued 65,000 shares of common stock, pursuant the
Consultant and Employee Stock Compensation Plan dated January 14, 2000, to five
directors as reimbursement for directors' expenses. These shares were valued at
$178,750 based on the trading price of IFT's stock at February 23, 2000 of $2.75
per share. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(26) In March 2000, IFT issued 200,000 shares of common stock, pursuant to an
award by the Board of Directors, to its Chief Executive Officer and
President/Chief Operating Officer. The value of these shares was calculated
based on the trading price of IFT's stock at February 23, 2000 totaling
$550,000. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(27) In May 2000, IFT contingently issued 300,000 shares of its common stock in
exchange for 300,000 shares of Blencathia's common stock. IFT merged with and
into Blencathia Acquisition Corporation effective October 27, 1999. The issuance
was made in reliance on Section 4(2) of the Securities Act of 1933 and/or
Regulation D promulgated under the Securities Act of 1933 and were made without
general solicitation or advertising. The purchaser was a sophisticated investor
with access to all relevant information necessary to evaluate these investments,
and who represented to IFT that the shares were being acquired for investment.
(28) In June 2000, IFT issued 250,000 shares of common stock to Observor
Acceptances, Ltd. pursuant to a consulting agreement with Harry Demetriou, sole
owner of Observor Acceptances, Ltd. The value of these shares, $218,750, was
based on the trading price of IFT's stock on June 19, 2000. The issuance was
made in reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation
D promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate these investments, and
who represented to IFT that the shares were being acquired for investment.
(29) In July 2000, IFT issued 100,000 shares of common stock to Stephen C. Juan
("Holder") at $.01 per share as extra consideration for the funds he advanced to
IFT pursuant to the terms of the Letter Agreement between IFT and Holder The
issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate these
investments, and who represented to IFT that the shares being acquired for
investment.
(30) In August 2000, IFT issued 725,000 shares of common stock to fourteen
shareholders ("Holders") at $.01 per share as extra consideration for the funds
they advanced to IFT pursuant to the terms of the Letter Agreement between IFT
and Holders. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchaser was a
sophisticated investor with access to all relevant
63
information necessary to evaluate these investments, and who represented to IFT
that the shares being acquired for investment.
(31) In September 2000, IFT issued 555,000 shares of common stock to 17
shareholders ("Holders") at $.01 per share as extra consideration for the funds
they advanced to IFT pursuant to the terms of the Letter Agreement between IFT
and Holders. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares being
acquired for investment.
(32) In October 2000, IFT issued 650,000 shares of common stock to 6
shareholders ("Holders") at $.01 per share as extra consideration for the funds
they advanced to IFT pursuant to the terms of the Letter Agreement between IFT
and Holders. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares being
acquired for investment.
(33) In October 2000, IFT issued 1,235,000 shares of common stock, pursuant to
an award by the Board of Directors, to its Chief Executive Officer,
President/Chief Operating Officer and its Board of Directors. The value of these
non-vesting shares was calculated based on the trading price of IFT's stock at
October 13, 2000 totaling $771,875. The issuance was made in reliance on Section
4(2) of the Securities Act of 1933 and/or Regulation D promulgated under the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to IFT that the shares were being acquired for investment.
(34) In December 2000, IFT issued 20,000 shares of common stock, pursuant to an
award by the Board of Directors, to its Corporate Secretary. The value of these
shares was calculated based on the trading price of IFT's stock at December 18,
2000 totaling $8,400. The issuance was made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Regulation D promulgated under the Securities Act
of 1933 and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to IFT that the
shares were being acquired for investment.
(35) In December 2000, IFT issued 10,000 shares of common stock to Michael
Gianino and 15,000 shares of common stock to Henry Urbanowicz pursuant to
consulting agreements. The value of these shares, $10,500, was based on the
trading price of IFT's stock on December 18, 2000. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate these investments, and
who represented to IFT that the shares were being acquired for investment.
(36) In December 2000, IFT issued 1,186,669 shares of common stock to note
holders as a payment of their promissory notes and interest due through December
18, 2000 in the amount of $356,000 at a conversion price of $.30 per share. The
issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to IFT that the shares were being acquired for
investment.
64
(37) In December 2000, IFT issued 1,626,086 shares of common stock to
convertible note holders as conversion of their promissory notes through
November 27, 2000 in the amount of $374,000 at a conversion price of $.23 per
share. The issuance was made in reliance on Section 4(2) of the Securities Act
of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(38) In January 2001, IFT issued 33,333 shares of common stock to a note holder
as a payment of their promissory note and interest due through December 18, 2000
in the amount of $10,000 at a conversion price of $.30 per share. The issuance
was made in reliance on Section 4(2) of the Securities Act of 1933 and/or
Regulation D promulgated under the Securities Act of 1933 and were made without
general solicitation or advertising. The purchasers were sophisticated investors
with access to all relevant information necessary to evaluate these investments,
and who represented to IFT that the shares were being acquired for investment.
(39) In January 2001, IFT issued 99,000 shares of common stock pursuant to an
employment agreement with its Chief Executive Officer and Chief Operating
Officer. The issuance was made in reliance on Section 4(2) of the Securities Act
of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(40) In April 2001, IFT issued 2,485,000 shares of common stock, pursuant to an
award by the Board of Directors, to its Chief Executive Officer, President/Chief
Operating Officer, Chief Financial Officer, consultants and its Board of
Directors. The value of these non-vesting shares was calculated based on the
trading price of IFT's stock on February 23, 2001, the grant date, totaling
$1,087,188. In addition, IFT issued 10,000 shares of common stock to its Chief
Financial Officer as a payment on an account payable incurred prior to his
employment with IFT. The issuances were made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Regulation D promulgated under the Securities Act
of 1933 and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to IFT that the
shares were being acquired for investment.
(41) In April 2001, IFT issued 406,523 shares of common stock to convertible
note holders as an additional payment on the conversion of their promissory
notes through November 27, 2000 at a conversion price of $.23 per share. The
additional shares were required to be issued due to the 1,626,086 shares issued
in December 2000 not being registered with the SEC by March 31, 2001. The
issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to IFT that the shares were being acquired for
investment.
(42) In May 2001, IFT issued 21,000,003 shares of common stock to the
shareholders of Interfacial Technologies (UK) Ltd. for the purchase of all of
their outstanding common stock. The issuance was made in reliance on Section
4(2) of the Securities Act of 1933 and/or Regulation S promulgated under the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to IFT that the shares were being acquired for investment.
65
(43) In May 2001, IFT issued 960,000 shares of common stock to four Interfacial
shareholders for employment and consulting agreements. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation S
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to IFT that the shares were being acquired for investment.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits
--------
*2.1 Agreement and Plan of Merger between Blencathia Acquisition
Corporation and International Fuel Technology, Inc.
**2.2 Share Purchase Agreement with Shareholders of Interfacial
Technologies (UK) Ltd.
*3.1 Certificate of Incorporation of International Fuel Technology,
Inc. and all amendments.
*3.2 By-laws of International Fuel Technology, Inc.
5 Consent of Armstrong Teasdale LLP
*10.1 TPG Consulting Agreement
***10.3 Jonathan R. Burst Employment Agreement
***10.4 William J. Lindenmayer Employment Agreement
***10.5 Ian Williamson Employment Agreement
10.6 IIG Securities Purchase Agreement
**10.7 Performance Escrow Agreement
*16.1 Letter, dated January 21, 2000, from McGladrey & Pullen,
LLP to the Registrant regarding resignation of
certifying accountant
*16.2 Letter, dated February 10, 2000, from McGladrey & Pullen,
LLP regarding client-auditor relationship.
23.1 Consents of BDO Seidman, LLP
23.2 Consents of McGladrey & Pullen, LLP
*Incorporated by reference to Registrant's Exhibits to Transitional Report on
Form 10-K filed on May 10, 2000.
**Incorporated by reference to Registrant's Exhibits to Current Report on Form
8-K filed on June 8, 2001.
***Incorporated by reference to Registrant's Exhibits to Post Effective
Amendment No. 1 to the S-1 filed on June 15, 2001.
Financial Statement Schedules
-----------------------------
All other schedules for which provision is made in the applicable
accounting regulations of the SEC are not required under the related
instructions or are inapplicable and therefore have been omitted.
66
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a post-
effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of this registration statement, or most recent post-effective
amendment, which, individually or in the aggregate, represent a fundamental
change in the information set forth in this registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or any
material change to such information in the registration statement.
2. That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. To remove from registration by means of a post-effective amendment any of the
securities being registered hereby which remain unsold at the termination of the
offering.
Insofar as indemnifications for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described under Item 15 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities, other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding, is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act, and will be governed by the final adjudication of such issue.
67
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned thereunto duly
authorized in the City of Clayton, State of Missouri on July 10, 2001.
INTERNATIONAL FUEL TECHNOLOGY, INC.
By: /s/ Jonathan R. Burst
---------------------
Jonathan R. Burst,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, the following
persons in the capacities noted, have signed this registration statement on
July 10, 2001.
Signature Title Date
/s/ Jonathan R. Burst Chief Executive Officer, Director July 10, 2001
- ----------------------------
Jonathan R. Burst
/s/ William J. Lindenmayer President, Director July 10, 2001
- ----------------------------
William J. Lindenmayer
/s/ Steven D. Walters Chief Financial Officer July 10, 2001
- ----------------------------
Steven D. Walters
/s/ John P. Stupp, Jr. Director July 10, 2001
- ----------------------------
John P. Stupp, Jr.
/s/ David B. Norris Director July 10, 2001
- ----------------------------
David B. Norris
/s/ Harry Demetriou Director July 10, 2001
- ----------------------------
Harry Demetriou
/s/ Ian Williamson Director July 10, 2001
- ----------------------------
Ian Williamson
/s/ Simon Orange Director July 10, 2001
- ----------------------------
Simon Orange
/s/ Geoff Robinson Director July 10, 2001
- ----------------------------
Geoff Robinson
68
INDEX TO FINANCIAL STATEMENTS
(a) The following financial statements are included:
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
AS OF AND FOR THE TWELVE MONTH PERIOD ENDED DECEMBER 31, 2000,
AS OF AND FOR THE NINE MONTH PERIOD ENDED DECEMBER 31, 1999,
AND FOR THE TWELVE MONTHS ENDED MARCH 31, 1999
Report of Independent Certified Public Accountants F-2
Independent Auditor's Report F-3
Financial Statements
- --------------------
Balance Sheets F-4
Statements of Operations F-5
Statements of Stockholders' Deficit F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8 - F-22
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 2001 (UNAUDITED)
Balance Sheets F-23
Statements of Operations F-24
Statement of Stockholders' Deficit F-25
Statements of Cash Flows F-26
Notes to Financial Statements F-27 - F-30
INTERFACIAL TECHNOLOGIES (UK) LIMITED
FOR THE PERIOD ENDED
31 DECEMBER 2000
Contents F-31
Report of the directors F-32 - F-33
Report of the auditors F-34
Profit and loss account F-35
Balance sheet F-36
Notes forming part of the financial statement F-37 - F-40
Cash flow statement F-41
Supplemental information F-42 - F-44
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Financial Information F-45
Unaudited Pro Forma Statement of Operations - For the Year
Ended December 31, 2001 F-46
Unaudited Pro Forma Statement of Operations - For the Three
Months Ended March 31, 2001 F-47
Notes to Unaudited Pro Forma Condensed Statement of Operations F-48
Unaudited Pro Forma Condensed Balance Sheet as of March 31, 2001 F-49
Notes to Unaudited Pro Forma Condensed Balance Sheet F-50
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS'
To the Board of Directors and Stockholders
International Fuel Technology, Inc.
St. Louis, Missouri
We have audited the accompanying balance sheets of International Fuel
Technology, Inc. (a Nevada corporation in the development stage) as of
December 31, 2000 and 1999, and the related statements of operations,
stockholders' deficit and cash flows for the twelve month and nine month
periods then ended and the related statements of operations and cash flows
for the period from inception (April 9, 1996) to December 31, 2000. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits. We did not audit the financial statements of
International Fuel Technology, Inc. for the period from inception (April 9,
1996) to March 31, 1999. Such statements are included in the cumulative
inception to December 31, 2000 totals of the statements of operations and
cash flows and reflect a net loss of 44% of the related cumulative total.
Those statements were audited by other auditors whose report has been
furnished to us and our opinion, insofar as it relates to amounts for the
period from inception (April 9, 1996) to March 31, 1999 included in the
cumulative totals, is based solely upon the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of International Fuel Technology, Inc. as
of December 31, 2000 and 1999 and the results of its operations and its
cash flows for the twelve month and nine month periods then ended and for
the period from inception (April 9, 1996) to December 31, 2000 in
conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming that
International Fuel Technology, Inc. will continue as a going concern. As
discussed in Note 2 to the financial statements, International Fuel
Technology, Inc. has suffered recurring losses from operations, has
negative working capital, cash used in operating activities and has a
stockholders' deficit that raise substantial doubt about International Fuel
Technology, Inc.'s ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
BDO SEIDMAN, LLP
St. Louis, Missouri
February 7, 2001 (except for Notes 2 and 9, as to which the date is March
7, 2001)
F-2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
International Fuel Technology, Inc.
Las Vegas, Nevada
We have audited the accompanying statements of operations, stockholders'
deficit and cash flows of International Fuel Technology, Inc., a
development stage company, for the year ended March 31, 1999. These
financial statements are the responsibility of IFT's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
International Fuel Technology, Inc. for the year ended March 31, 1999 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will conduct operations as a going concern. The Company has not yet
commenced the operations for which it was organized and its total
liabilities exceed its total assets. Furthermore, the Company may need to
raise substantial capital in order to implement its business plan. This
raises substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
McGLADREY & PULLEN, LLP
Las Vegas, Nevada
September 27, 1999
F-3
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
December 31, December 31,
ASSETS 2000 1999
- ----------------------------------------------------------------------------------------------------------------
Current Assets
Cash $ 128,204 $ 26,846
Employee receivable - 468
Note receivable, stockholder (Note 6) - 15,000
Prepaid insurance 29,107 12,719
-------------- -------------
Total current assets 157,311 55,033
-------------- -------------
Machinery and Equipment
Machinery and equipment 23,703 15,505
Accumulated depreciation (5,592) (2,374)
-------------- -------------
Total machinery and equipment 18,111 13,131
-------------- -------------
$ 175,422 $ 68,164
============== =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current Liabilities
Accounts payable $ 227,748 $ 110,691
Accounts payable-stockholders (Note 6) - 187,095
Accrued payroll expenses 204,325 3,406
Accrued interest 8,948 -
Notes payable to stockholders (Note 4) 32,500 62,500
-------------- -------------
Total current liabilities 473,521 363,692
-------------- -------------
Long-Term Liabilities
Notes payable to stockholder (Note 4) 162,500 -
-------------- -------------
Total liabilities 636,021 363,692
-------------- -------------
Commitments and Contingencies (Note 2)
Stockholders' Deficit (Note 5)
Common stock, $.01 par value; authorized, 150,000,000,
24,560,453 and 16,818,339 shares issued and outstanding at
December 31, 2000 and 1999, respectively 245,604 168,184
Discount on common stock (819,923) (816,923)
Additional paid-in capital 21,208,288 14,760,243
Deficit accumulated during the development stage (21,094,568) (14,407,032)
-------------- -------------
Total stockholders' deficit (460,599) (295,528)
-------------- -------------
$ 175,422 $ 68,164
============== =============
See Notes to Financial Statements.
F-4
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
Twelve From Inception
Months Nine Months Twelve Months (April 9, 1996)
Ended Ended Ended Through
December 31, December 31, March 31, December 31,
------------ ------------ ------------- --------------
2000 1999 1999 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ - $ - $ - $ -
Cost of Revenues - - - -
------------ ----------- ----------- -----------
Gross Profit - - - -
------------ ----------- ----------- -----------
Operating Expenses:
Advertising and marketing 20,522 12,913 11,106 44,541
Board meeting expense (Note 5) 117,216 - - 117,216
Consulting (Notes 5 and 6) 285,132 295,000 6,342,000 7,643,396
Insurance 34,454 17,806 - 52,260
Investment advisory fee (Note 5) 1,251,413 - - 1,251,413
Office 9,208 12,741 26,377 76,101
Other 24,014 72,645 35,782 144,924
Payroll (Note 5) 2,212,305 275,080 180,327 2,736,907
Professional services (Note 5) 684,367 3,662,718 84,634 4,476,901
Rent 9,219 32,685 146,000 285,180
Research and development costs 1,782 330,353 842,905 1,544,859
Stock transfer fees 2,825 5,249 18,378 26,452
Telephone 8,889 2,957 23,171 52,585
Travel 28,607 6,652 41,164 143,482
------------ ----------- ----------- -----------
Total operating expenses 4,689,953 4,726,799 7,751,844 18,596,217
------------ ----------- ----------- -----------
Net loss from operations 4,689,953 $ 4,726,799 7,751,844 18,596,217
Interest expense (Note 4) 1,997,583 405,341 87,909 2,498,351
------------ ----------- ----------- -----------
Net loss before income taxes 6,687,536 5,132,140 7,839,753 $21,094,568
===========
Provision for income taxes - - -
------------ ----------- -----------
Net loss $ 6,687,536 $ 5,132,140 $ 7,839,753
============ =========== ===========
Basic and diluted net loss
per common share $ .36 $ .32 $ .59
============ =========== ===========
Weighted average common shares outstanding 18,827,802 15,800,725 13,390,417
See Notes to Financial Statements.
F-5
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIT
Discount
Common Common on
Stock Stock Common Additional
Shares Amount Stock Paid-In Capital
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, April 1, 1997 296,439 $ 2,964 $ (14,670) $ 171,044
Issuances of common stock for cash 158,350 1,584 - 286,268
Issuances of common stock for technology (Note 5) 5,320,952 53,209 (532,095) 478,886
Issuances of common stock (Note 5) 142,280 1,423 - (1,423)
Issuances of common stock for services (Note 5) 1,211,883 12,119 - 109,070
Expense recorded for services rendered by consultants (Note 5) - - 169,980
Issuance of common stock for compensation (Note 5) 70,100 701 - 6,309
Issuances of common stock in connection with the
acquisition of United States Fuel Technology, Inc. (Note 3) 2,795,979 27,960 - 346,545
Cancellation of shares (Note 3) (94,400) (944) 9,440 (8,496)
Net loss - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, April 1, 1998 9,901,583 99,016 (537,325) 1,558,183
Issuances of common stock for cash 200,000 2,000 - 998,000
Issuances of common stock for services (Note 5) 1,200,000 12,000 - 5,988,000
Issuances of common stock in connection with the
acquisition of Scientific Fuel Technology, LLC (Note 3) 2,795,979 27,960 (279,598) 251,638
Net loss - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, April 1, 1999 14,097,562 140,976 (816,923) 8,795,821
Issuances of common stock for services and cash (Note 5) 1,500,000 15,000 - 4,203,750
Issuances of common stock for cash (Note 5) 794,740 7,947 - 388,503
Issuances of common stock for compensation (Note 5) 2,500 25 - 6,975
Conversion of debt (Note 4) 423,537 4,236 - 1,198,609
Accrued stock based compensation (Note 5) - - 166,585
Net loss - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2000 16,818,339 168,184 (816,923) 14,760,243
Issuances of common stock for cash and services (Note 5) 101,800 1,018 - 330,682
Issuances of common stock for compensation (Note 5) 90,000 900 - 29,388
Issuances of common stock for services (Note 5) 92,559 925 - 277,726
Issuances of common stock for compensation (Note 5) 200,000 2,000 - 548,000
Issuances of common stock for services (Note 5) 195,000 1,950 - 107,738
Issuance of common stock for services and cash (Note 5) 390,000 3,900 - 1,141,725
Issuance of common stock for services (Note 5) 250,000 2,500 - 216,250
Issuance of common stock warrants for notes payable-
stockholders (Note 4) - - - 1,228,424
Issuance of common stock for warrants exercised (Note 5) 2,030,000 20,300 - -
Issuance of common stock for compensation (Note 5) 1,255,000 12,550 - 776,511
Issuance of common stock for services (Note 5) 25,000 250 - 10,298
Conversion of debt (Note 4) 1,626,086 16,261 - 878,086
Conversion of debt and interest (Note 4) 1,186,669 11,866 - 581,467
Issuance of contingently issued common stock (Note 5) 300,000 3,000 (3,000) -
Accrued stock based compensation (Note 5) - - - 321,750
Net loss - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 24,560,453 $ 245,604 $ (819,923) $ 21,208,288
==================================================================================================================================
Accumulated
Deficit During
Development
Stage Total
- ------------------------------------------------------------------------------------------------
Balance, April 1, 1997 $ (344,473) $ (185,135)
Issuances of common stock for cash - 287,852
Issuances of common stock for technology (Note 5) - -
Issuances of common stock (Note 5) - -
Issuances of common stock for services (Note 5) - 121,189
Expense recorded for services rendered by consultants (Note 5) - 169,980
Issuance of common stock for compensation (Note 5) - 7,010
Issuances of common stock in connection with the
acquisition of United States Fuel Technology, Inc. (Note 3) - 374,505
Cancellation of shares (Note 3) - -
Net loss (1,090,666) (1,090,666)
- ------------------------------------------------------------------------------------------------
Balance, April 1, 1998 (1,435,139) (315,265)
Issuances of common stock for cash - 1,000,000
Issuances of common stock for services (Note 5) - 6,000,000
Issuances of common stock in connection with the
acquisition of Scientific Fuel Technology, LLC (Note 3) - -
Net loss (7,839,753) (7,839,753)
- ------------------------------------------------------------------------------------------------
Balance, April 1, 1999 (9,274,892) (1,155,018)
Issuances of common stock for services and cash (Note 5) - 4,218,750
Issuances of common stock for cash (Note 5) - 396,450
Issuances of common stock for compensation (Note 5) - 7,000
Conversion of debt (Note 4) - 1,202,845
Accrued stock based compensation (Note 5) - 166,585
Net loss (5,132,140) (5,132,140)
- ------------------------------------------------------------------------------------------------
Balance, January 1, 2000 (14,407,032) (295,528)
Issuances of common stock for cash and services (Note 5) - 331,700
Issuances of common stock for compensation (Note 5) - 30,288
Issuances of common stock for services (Note 5) - 278,651
Issuances of common stock for compensation (Note 5) - 550,000
Issuances of common stock for services (Note 5) - 109,688
Issuance of common stock for services and cash (Note 5) - 1,145,625
Issuance of common stock for services (Note 5) - 218,750
Issuance of common stock warrants for notes payable-
stockholders (Note 4) - 1,228,424
Issuance of common stock for warrants exercised (Note 5) - 20,300
Issuance of common stock for compensation (Note 5) - 789,061
Issuance of common stock for services (Note 5) - 10,548
Conversion of debt (Note 4) - 894,347
Conversion of debt and interest (Note 4) 593,333
Issuance of contingently issued common stock (Note 5) - 0
Accrued stock based compensation (Note 5) - 321,750
Net loss (6,687,536) (6,687,536)
- ------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ (21,094,568) $ (460,599)
================================================================================================
See Notes to Financial Statements
F-6
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
Twelve Months Nine Months Twelve Months From Inception
Ended Ended Ended (April 9, 1996)
December 31, December 31, March 31, to December 31,
2000 1999 1999 2000
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net loss $ (6,687,536) $ (5,132,140) $ (7,839,753) $ (21,094,568)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 3,218 1,614 760 5,592
Stock issued and additional paid in capital
recognized for services and compensation 3,494,616 3,642,335 6,000,000 13,445,092
Interest expense recognized-discount on notes payable 1,228,424 - - 1,228,424
Interest expense recognized-conversion of debt 757,680 355,771 - 1,113,451
Change in assets and liabilities:
(Increase) decrease in prepaid insurance (16,388) (12,719) 590 (29,107)
Increase (decrease) in accounts payable 132,525 (203,288) 313,979 243,216
Increase (decrease) in accounts payable-stockholders (100,000) 187,095 - 87,095
Increase (decrease) in accrued payroll expenses 200,919 (1,411) 128,368 204,325
Increase in accrued interest 8,948 - - 151,768
-------------------------------------------------------------------
Net cash used in operating activities (977,594) (1,162,743) (1,396,056) (4,644,712)
-------------------------------------------------------------------
Cash Flows from Investing Activities
Acquisition of machinery and equipment (8,198) (9,581) (4,280) (22,059)
Increase in employee and stockholder receivables - (15,468) - (15,468)
Cash acquired in connection with the purchase of
United States Fuel Technology, Inc. - - - 358
-------------------------------------------------------------------
Net cash used in investing activities (8,198) (25,049) (4,280) (37,169)
-------------------------------------------------------------------
Cash Flows from Financing Activities
Increase (decrease) in amount due to
related party - - (142,000) 26,500
Increase in due to United States Fuel Technology, Inc - - - 372,503
Proceeds from common stock issued 224,650 1,146,450 1,000,000 2,808,328
Proceeds from notes payable 890,000 325,700 828,895 2,179,425
Payment on notes payable (27,500) (258,000) (291,171) (576,671)
-------------------------------------------------------------------
Net cash provided by financing activities 1,087,150 1,214,150 1,395,724 4,810,085
-------------------------------------------------------------------
Net increase (decrease) in cash 101,358 26,358 (4,612) 128,204
Cash, beginning 26,846 488 5,100 -
-------------------------------------------------------------------
Cash, ending $ 128,204 $ 26,846 $ 488 $ 128,204
===================================================================
Supplemental Cash Flow Information
Interest paid $ 2,531 $ - $ 2,100 $ 4,631
===================================================================
Taxes paid $ - $ - $ - $ -
===================================================================
See Notes to Financial Statements.
F-7
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business
------------------
International Fuel Technology, Inc., ("IFT") is a developmental stage
company which was incorporated under the laws of the State of Nevada on
April 9, 1996 and was formerly known as MagnoDynamic Corporation. IFT was
formed primarily for the production of a family of proprietary fuels known
as PEERFUELTM. IFT developed a process, which it believes will make diesel
fuel burn more efficiently and with less emissions. IFT, as described in
Note 3, has acquired United State Fuel Technology, Inc, and Scientific Fuel
Technology, LLC, to streamline the selling of PEERFUELTM. IFT, as
described in Note 5, has acquired Blencathia Acquisition Corporation to
ensure IFT would remain a fully trading and reporting entity on the OTC
Bulletin Board. United States Fuel Technology, Inc., Scientific Fuel
Technology, LLC, and Blencathia Acquisition Corporation were all dissolved
subsequent to their merger into IFT. IFT, as described in Note 10, has
changed its fiscal year end effective with the merger with Blencathia
Acquisition Corporation to December 31. Currently, IFT is testing the
treated diesel fuel in the State of California and hopes the test results
will persuade the State of California to use IFT's product in the State's
diesel engines.
Summaries of IFT's significant accounting policies follow:
Use of estimates in the preparation of financial statements
-----------------------------------------------------------
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 statement and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash
----
IFT maintains cash in a bank account, which, at times, exceeds federally
insured limits. IFT has experienced no losses relating to these excess
amounts of cash in a bank.
Machinery and equipment
-----------------------
Machinery and equipment are stated at cost. Depreciation is computed on
the straight-line method over the appropriate estimated useful lives of the
assets.
Deferred taxes
--------------
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences, operating
losses and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more
F-8
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
likely than not that some or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of enactment.
Research and Development
------------------------
Research and development costs are expensed in the period incurred.
Basic and dilutive net loss per common share
--------------------------------------------
IFT adopted Statement of Financial Accounting Standards No. 128 (SFAS 128),
Earnings per Share. SFAS 128 establishes standards for computing and
presenting earnings per share and replaces primary earnings per share with
a presentation of basic and dilutive earnings per share. Basic earnings
per share are based upon the weighted average number of common shares
outstanding for the period. Dilutive earnings per share are based upon the
weighted average number of common and potentially dilutive common shares
outstanding for the period. Pursuant to SFAS 128, no adjustment is made
for diluted earnings per share purposes since IFT is reporting a net loss
and common stock equivalents would have an anti-dilutive effect.
Fair value of financial instruments
------------------------------------
Statement of Financial Accounting Standards FASB No. 107 (SFAS 107),
Disclosures about Fair Value of Financial Instruments, requires the
disclosure of fair value for all financial instruments as defined in SFAS
107 for which it is practicable to estimate fair value.
The carrying amounts of accounts payable approximate fair value because of
their short maturity.
The fair value of notes payable approximate their carrying basis based on
the nature of these obligations and current interest rates approximating
stated interest rates.
New Accounting Pronouncements
-----------------------------
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", issued in June 1998, requires companies to recognize all
derivative contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge, the objective of
which is to match the timing of the gain or loss recognition on the hedging
derivative with the recognition of (1) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (2)
the earnings effect of the hedged forecasted transaction. For a derivative
not designated as a hedging instrument, the gain or loss is recognized in
income in the period of change. SFAS No. 133, as amended by SFAS No. 137
and 138, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. Management does not believe it will have any impact
on the financial statements.
Reclassifications
-----------------
Certain amounts from the prior years' financial statements have been
reclassified to conform to the current period presentation.
F-9
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Note 2. Ability to Continue as a Going Concern
IFT's financial statements are presented on the going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. IFT has incurred significant losses since
inception and has previously had limited funds with which to operate.
Management is in the process of executing a strategy based upon developing
pollution emission control technologies that also offer enhanced engine
performance with respect to greater fuel economy. IFT already has one
technology in development, and is seeking to add other technologies through
acquisitions. Management anticipates receiving necessary regulatory and
commercial acceptance for its existing technology and acquired technologies
within the next twelve months. Immediately thereafter, IFT expects to begin
licensing its products and or selling them directly to the commercial
marketplace, with IFT eventually generating a level of revenues sufficient
to meet IFT's working capital requirements. On March 1, 2001, IFT completed
registration of the common shares required by the January 3, 2001
Securities Purchase Agreement (the "Agreement"). The Agreement provides for
IFT to sell up to $250,000 in convertible debentures to the IIG Fund every
thirty days. On March 2, 2001 IFT initiated the first convertible debenture
purchase and on March 7, 2001 received $200,000. On October 16, 2000 we
signed a term sheet with The International Investment Group ("IIG") for a
$6 million equity line of credit to be funded $3 million over one year with
a one-year extension, at our option, for an additional $3 million. During
the following months we revised the terms of the October 16, 2000 IIG term
sheet and on January 3, 2001 entered into a Securities Purchase Agreement
with IIG Equity Opportunities Fund Ltd. ("IIG Fund"), which has a one-year
commitment amount of $3 million, with an option at our control for an
additional $3 million in financing after the completion of the one-year
commitment. The January 3, 2001 Securities Purchase Agreement with the IIG
Fund replaced the October 16, 2000 IIG term sheet. While management can not
make any assurance as to the accuracy of our projections of future capital
needs, it is anticipated that a total of approximately $1.8 million over
the remainder of 2001 will be necessary in order to enable us to meet our
current capital needs. We believe the proceeds from the convertible
debenture financing will be used as follows: $350,000 for specific testing
as part of required regulatory procedures as set by the Air Resources Board
of California ("CARB"), $350,000 for commercial fleet testing programs,
$250,000 for production development and engineering consulting, $1,150,000
for salary and $900,000 working capital for administrative and other
capital needs, including investigation of future acquisitions, if any.
F-10
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
possible inability of IFT to continue as a going concern.
Note 3. Acquisitions of Subsidiaries
On April 3, 1998, the stockholders approved a merger with United States
Fuel Technology, Inc. ("USFT"), effective March 31, 1998. USFT was formed
primarily to market PEERFUELSTM in North America. IFT granted USFT an
exclusive license to market its product pursuant to an Amended and Restated
License Agreement dated October 16, 1997, in exchange for 94,400 shares of
USFT common stock. Because IFT did not have a commercially viable product,
USFT did not have any revenues but had incurred some general and
administrative expenses through the date of the merger, the most
significant of which were consulting and professional fees. As a result of
the merger, each non-dissenting holder of outstanding shares of USFT Common
Stock received one share of IFT Common Stock. IFT issued 2,795,979 shares.
This merger has been accounted for as a purchase based upon the net asset
value, which represented the fair value, of USFT on March 31, 1998.
IFT's investment in USFT consisted of the 94,400 shares of USFT common
stock issued to IFT in exchange for certain marketing rights. These shares
were valued at zero by IFT and were redeemed and canceled in connection
with the acquisition of USFT.
F-11
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
On May 29, 1998 IFT merged with Scientific Fuel Technology, LLC ("SFT"), a
company related through common ownership. The assets and liabilities of SFT
consisted solely of an agreement whereby SFT would receive 50% of USFT's
rights pursuant to the Amended and Restated License Agreement dated October
16, 1997 with IFT. As IFT did not have a commercially viable product at the
time of the merger with SFT, there had been no payments made to SFT and SFT
had not yet begun operations. This marketing agreement was valued by SFT at
zero due to the uncertainty of the future revenues. SFT had no revenues,
expenses, assets or liabilities as of the date of the purchase. Management
believed it was no longer in IFT's best interest to be contractually bound
to acquire these sales and marketing services from SFT and, accordingly it
initiated the merger with SFT. As a result of the merger, 2,795,979 shares
of IFT were exchanged for the member interests in SFT. The issuance of
these shares was accounted for by recording a discount on common stock
equal to the par value of stock issued.
Note 4. Notes Payable to Stockholders
In March 2000 ONKAR Corporation, Ltd. ("ONKAR"), a stockholder of IFT,
advanced IFT $50,000 which is due in March 2005 and has an annual interest
rate of 6%. In April 2000 ONKAR advanced IFT $50,000 which is due in April
2005 and has an annual interest rate of 6%. In addition, at December 31,
2000 and 1999, IFT has a note payable to ONKAR for $62,500 which is due in
November 2004 at an annual interest rate of 6%. At December 31, 1999 the
$62,500 note payable was classified as a current liability due to payment
provisions in effect at that time.
During the twelve month period ended December 31, 2000 IFT received
advances from stockholders totaling $416,000. IFT repaid $356,000 of the
advances received from the stockholders by issuing 1,186,669 restricted
common shares and repaid $27,500 of the advances received from stockholders
by cash. In connection with the issuance of the 1,186,669 restricted common
shares IFT recognized $237,333 in interest expense due to the fair value of
the stock on the date of extinguishment exceeding the carrying value by
this amount. Notes payable to stockholders totaling $32,500 with an annual
interest of 10% and a due date of April 30, 2001 is recorded as a liability
on the December 31, 2000 balance sheet. In addition to the repayment of
principal each stockholder received a warrant to purchase from IFT up to
25,000 shares of common stock at $.01 per share for each $5,000 in
principal advanced to IFT. The value of the warrants, $1,228,424 based on
the market value of IFT's common stock on the day(s) the advances were
received has been recorded as a discount on the notes payable to
stockholders and as an addition to additional paid in capital. During the
twelve months ended December 31, 2000, $1,228,424 was amortized against the
discount on notes payable to stockholders and recognized as interest
expense.
During the twelve month period ended December 31, 2000 IFT received
advances totaling $374,000 from four individuals. IFT repaid $374,000 of
the advances received by issuing 1,626,086 restricted common shares. In
connection with the issuance of the 1,626,086 restricted common shares IFT
recognized $520,347 in interest expense due to the fair value of the stock
on the date of extinguishment exceeding the carrying value by this amount.
On November 1, 1999, $26,500 due to related party, notes payable of
$677,754 and related accrued interest of $142,820 were converted to common
stock at $2.00 per share. At that date, the closing price of IFT's stock
was $2.84. Additional interest expense of $355,771 was recorded
F-12
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
at the time of conversion reflecting the $.84 difference between the
closing market price and the conversion price multiplied by the 423,537
shares issued as a result of the conversion.
Note 5. Stockholders' Deficit
On July 7, 1999 the stockholders approved a 1 for 10 reverse stock split
which was effected on July 22, 1999. The effect of the split is presented
within stockholders' deficit at March 31, 1999 by transferring the par
value for the reduction in shares issued from common stock to additional
paid in capital. All references in the financial statements referring to
shares, share prices, per share amounts and stock plans have been adjusted
retroactively for the split.
IFT issued shares to certain founding stockholders during fiscal years 1998
and 1997 in exchange for the technology related to its diesel fuel
treatment business. This technology constituted research and development
expenditures to these stockholders and consistent with Generally Accepted
Accounting Principles, was not recorded as an asset but rather was recorded
as an expense by these shareholders. Because the subsequent transfer of
this technology to IFT was a transaction between entities under common
control, it was accounted for using the carrying value of the technology
which was zero. A discount on common stock was recorded equal to the par
value of the stock issued in exchange for the technology. The shares were
issued as follows:
Date Shares
---- -----------
April 1997 1,558,084
July 1997 783,944
August 1997 51,800
September 1997 2,927,124
---------
Total year ended March 31, 1998 5,320,952
=========
IFT also issued shares to certain stockholders in exchange for services and
certain corporate officers were issued stock as additional compensation.
Management valued the services that were received at their fair value.
Common stock shares were issued, at par, to equal the fair value of the
services. The fair value of the services and additional compensation was
$128,199 in fiscal 1998. The shares were issued as the services were
rendered as follows:
Expense
Date Shares Amount
---- ------ ------
SERVICES:
--------
April 1997 6,900
May 1997 10,900
July-August 1997 251,315
September 1997 942,768
---------
Total year ended March 31, 1998 1,211,883 $ 121,189
========= =========
COMPENSATION:
------------
April 1997 10,000
July 1997 10,100
September 1997 50,000
---------
Total year ended March 31, 1998 70,100 $ 7,010
========= =========
F-13
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Certain stockholders who purchased stock for cash were subsequently issued
additional shares of stock for no consideration to adjust the amount of
shares previously issued to them. The adjustment was required due to
shares being sold to stockholders at different prices while the fair value
of the common stock remained consistent. The original shares had been
issued on various dates between July 30, 1996 and September 13, 1997 and
the additional shares were issued with the same date as the original
shares. Since IFT has no retained earnings, a charge to additional paid-
in-capital was recorded to reflect the par value of the stock issued. The
additional shares were issued as follows:
Date Total Additional Shares
---- -----------------------
July 1997 6,350
August 1997 40,000
September 1997 95,930
-------
Total year ended March 31, 1998 142,280
=======
From January through March 1998, a principal shareholder of IFT distributed
1,699,800 of his personal shares to others for services. These services
included providing business contacts to assist IFT in its business plan and
to assist IFT in raising capital. Because there were no formal service
agreements and no specified time frame for the performance of these
services, the cost of the services was recognized at the date the shares
were distributed. The value of the services was deemed to be $169,980 by
the Board of Directors. This amount was expensed in the year ended March
31, 1998 with an increase to additional paid-in capital. During December
1998, the Board of Directors approved issuance of 1,200,000 restricted
shares to a consultant and former Board Chairman. This consultant had been
a founder of IFT, served as Board Chairman and provided services in
connection with the technology of IFT. These shares served as payment to
this consultant for his past services. Because there were no formal service
agreements and no specified time frame for the performance of these
services, the cost of the services was recognized as expense at the date
the shares were distributed. The market value of these shares was
determined by the Board of Directors based upon the private placement of
common stock sold in November 1998 at $5.00 per share. This $6,000,000 was
expensed in the year ended March 31, 1999.
On April 26, 1999 IFT offered all stockholders of record on March 31, 1999
the right to purchase 900 common shares at $.50 per share, a price
determined by IFT's Board of Directors. The market price of IFT's stock on
April 26, 1999 was $1.40 per share. IFT issued 794,740 shares and received
proceeds of $396,450 as a result of this offering which expired May 28,
1999.
IFT issued 2,500 shares on June 2, 1999 to a director. The shares were
issued in exchange for serving as a director. The value of these services
was determined based upon the market value at the date of issuance. IFT
has recorded a charge to operations in the amount of $7,000.
On July 1,1999, IFT entered into a one year advisory agreement with ONKAR
Corporation, Ltd. ("ONKAR") for various services including introductions to
brokers, dealers and potential investors and ONKAR agrees to facilitate the
writing of a minimum of three research reports on IFT. Two of these
research reports have been received by IFT, one dated July 22, 1999 and one
dated August 25, 1999. The third research report was not generated and no
services were
F-14
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
provided after September 30, 1999 due to IFT terminating the agreement. As
consideration for the services, ONKAR received the right to purchase 1.5
million shares of restricted common stock at $.50 per share. These rights
were issued and exercised with IFT receiving cash proceeds of $750,000.
IFT determined the value of the services to be provided based upon the
market value of the common stock, $2.81, on July 1, 1999, the date of the
agreement. The total value of this agreement was determined to be
$4,218,750. The amount in excess of the cash proceeds received of $750,000
has been charged to operations as professional services. No shareholders
of IFT were shareholders of ONKAR prior to this transaction.
On July 13, 1999 IFT entered into employment agreements with its Chief
Executive Officer and Chief Operating Officer which expired on January 31,
2000. Under the terms of these agreements, these officers each received
base pay of $1,000 per month plus up to a total of 60,000 and 30,000 shares
of IFT's stock, respectively, payable at the end of the initial term of the
agreements. The shares were earned ratably on a monthly basis. The value of
the stock based compensation for these 90,000 shares is $196,875. The stock
based compensation earned through December 31, 1999, $166,585, reflected in
these financial statements as payroll expense and as additional paid in
capital, has been calculated based on the trading price of IFT's stock at
July 13, 1999.
On April 26, 1999 IFT offered all stockholders of record on March 31, 1999
the right to purchase 900 common shares at $.50 per share. During January
2000 IFT issued 1,800 shares and received proceeds of $450 as a result of
this offering which expired May 28, 1999. The $450 for the other 900
shares was received during the nine month period ended December 31, 1999.
During January 2000 IFT issued 100,000 shares of common stock in a private
placement for $200,000 to a company whose sole owner is a director of IFT.
The market value of the shares on the date of issuance was $331,250. The
$131,250 of market value in excess of the cash amount received has been
recorded as consulting expense during the twelve month period ended
December 31, 2000.
The 90,000 shares earned by the Chief Executive Officer and Chief Operating
Officer under employment agreements which expired on January 31, 2000 were
issued on January 31, 2000. The stock based compensation earned through
January 31, 2000, $30,288, reflected in these financial statements as
payroll expense and as additional paid in capital, has been calculated
based on the trading price of IFT's stock at July 13, 1999.
At December 31, 1999, IFT owed one of its stockholders approximately
$87,000 for legal services performed. In February 2000, the stockholder
agreed to accept 27,559 shares of IFT's stock in lieu of cash for the
amounts due to him. The value of the shares issued, $99,901, was based
upon the market value price of the common shares on February 9, 2000.
F-15
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Effective January 14, 2000 IFT adopted a Consultant and Employee Stock
Compensation Plan. This plan provides that the Board of Directors may
award shares of IFT's stock to officers, directors, consultants and
employees as compensation for services. The maximum number of shares of
common stock, which may be awarded under this plan, is 500,000 shares.
During March 2000 IFT issued a total of 65,000 shares of common stock to
five directors as reimbursement for directors' expenses. The value of
these shares, reflected in these financial statements as payroll expenses
for Jonathan Burst and William J. Lindenmayer in the amount of $55,000 and
as board meeting and travel expenses in the amount of $117,216 and $6,534,
respectively, for the remaining directors, has been calculated based on the
trading price of IFT's stock at February 23, 2000.
On February 23, 2000 the Board of Directors granted Jonathan Burst 100,000
shares of IFT's common stock for his appointment as Chief Executive
Officer. The value of these shares, reflected in these financial
statements as payroll expense, has been calculated based on the trading
price of IFT's stock at February 23, 2000. On February 23, 2000 the Board
of Directors awarded an initial grant of 100,000 shares of IFT's common
stock to William Lindenmayer for his appointment as President and Chief
Operating Officer. The value of these shares, reflected in these financial
statements as payroll expense, has been calculated based on the trading
price of IFT's stock at February 23, 2000. The total charged to payroll
expense for these transactions was $550,000.
In February 2000, we entered into a convertible debenture purchase
agreement to raise $3,000,000 through the sale of convertible debentures to
GEM Global Yield Fund, Ltd. and Turbo International Ltd. ("GEM"). During
June 2000 this agreement was amended to raise $1,500,000 through the sale
of convertible debentures to GEM. In connection with the convertible
debenture purchase agreement IFT issued a warrant to GEM for the purchase
of 390,000 shares of common stock at $.01 per common share. During February
2000 IFT issued 195,000 shares of common stock and placed them in escrow in
accordance with the convertible debenture purchase agreement entered into
in February 2000. The shares were to be released from escrow and issued to
the purchasers of the convertible debenture in the event of an uncured
default by IFT prior to the closing of the convertible debenture purchase
agreement. The 195,000 shares of common stock were released to the
purchasers of the convertible debenture purchase agreement in conjunction
with an amendment to the convertible debenture purchase agreement dated
June 16, 2000, and were recorded as an investment advisory fee of $109,688
based on the trading price of IFT's stock.
On March 28, 2000 a warrant for 390,000 shares of common stock was
exercised by GEM Global Yield Fund Limited at a cost of $.01 per share. The
closing trading price of IFT's stock on March 28, 2000 was $2.9375,
resulting in a total market value of $1,145,625 for the 390,000 common
shares. The market value in excess of the $.01 warrant exercise cost,
$1,141,725, is reflected in the statement of operations for the twelve
months ended December 31, 2000 as an investment advisory fee.
On June 19, 2000 IFT issued 250,000 common shares to a director of IFT for
consulting services. The value of the shares, $218,750, was recorded to
consulting expense and was based on the trading price of IFT's stock on
June 19, 2000.
During the twelve month period ended December 31, 2000 IFT issued 2,030,000
common shares due to the exercise of warrants issued in connection with the
advances received from stockholders discussed in Note 4. There are no
warrants outstanding at December 31, 2000.
F-16
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
On October 13, 2000 the Board of Directors granted Jonathan Burst 475,000
shares of IFT's common stock for achievement of a milestone event for IFT.
The value of these shares, reflected in these financial statements as
payroll expense of $296,875, has been calculated based on the trading price
of IFT's stock at October 13, 2000. On October 13, 2000 the Board of
Directors granted William Lindenmayer 475,000 shares of IFT's common stock
for achievement of a milestone event for IFT. The value of these shares,
reflected in these financial statements as payroll expense of $296,875, has
been calculated based on the trading price of IFT's stock at October 13,
2000. On October 13, 2000 the Board of Directors granted the three non
employee directors of IFT a total of 275,000 shares of IFT's common stock
for achievement of a milestone event for IFT. The value of these shares,
reflected in these financial statements as payroll expense of $171,875, has
been calculated based on the trading price of IFT's stock at October 13,
2000. On October 10, 2000 the Board of Directors granted an employee of IFT
30,000 shares of IFT's common stock for achieving a milestone event. The
value of these shares, reflected in these financial statements as payroll
expense of $23,436, has been calculated based on the trading price of IFT's
stock at October 10, 2000.
On December 18, 2000 IFT issued 25,000 common shares for consulting
services. The value of the shares, $10,548, was recorded to consulting
expense and was based on the trading price of IFT's stock on December 18,
2000.
Effective October 27, 1999, IFT merged with and into Blencathia Acquisition
Corporation ("Blencathia"). Blencathia had 300,000 shares outstanding at
the time of the merger, which it redeemed and canceled. In exchange for
300,000 shares of Blencathia's common stock, IFT issued 300,000 shares of
its restricted common stock. These shares are expected to be sold in an
amount sufficient to provide the former shareholders of Blencathia with
proceeds of $500,000, the negotiated cost of the acquisition.
On May 8, 2000 IFT issued 300,000 common shares that were contingently
issued per the Blencathia merger agreement. The 300,000 shares of common
stock are included in the statement of stockholders' deficit for the year
ended December 31, 2000 but are not included in earnings per share and
weighted average share calculations for the year ended December 31, 2000.
They will be included when the shares are sold to provide payment to the
shareholders of Blencathia. The shareholders of Blencathia have represented
to the management of IFT that the 300,000 shares will be sold only with
IFT's approval. If the shares are sold and $500,000 is not generated
additional shares may need to be issued to the shareholders of Blencathia.
Based on the December 31, 2000 market price, $.34, of IFT's common stock, a
total of 1,470,588 shares would need to be issued to generate the $500,000
proceeds.
During January 2000, IFT entered into an employment agreement with Jonathan
R. Burst to serve as Chief Executive Officer of IFT until December 31, 2000
at a base annual salary of $180,000. In addition, Mr. Burst is to receive
6,000 shares of common stock each month. During January 2000, IFT entered
into an employment agreement with William J. Lindenmayer to serve as Chief
Operating Officer of IFT until December 31, 2000 at a base annual salary of
$180,000. In addition, Mr. Lindenmayer is to receive 3,000 shares of
common stock each month. The shares are earned ratably on a monthly basis.
The stock based compensation earned through December 31, 2000, reflected in
these financial statements as payroll expense and as additional paid in
F-17
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
capital of $321,750, has been calculated based on the trading price of IFT's
stock at February 1, 2000. As of December 31, 2000 the 99,000 common shares
related to these employment agreements have not been issued. The 99,000 common
shares were issued on January 31, 2001.
Note 6. Related Party Transactions
IFT rents its administrative offices and administrative services from Burcor
Capital, LLC, a company related through common ownership, under a lease
agreement requiring monthly rentals of $5,000 per month through July 13, 2001.
Total payments incurred in connection with this agreement were $60,000 for the
twelve months ended December 31, 2000, and $32,500 for the nine months ended
December 31, 1999. Payments related to this agreement are included in
professional services expense.
IFT rented additional office space located at 6170 W. Desert Inn Road, Las
Vegas, Nevada and equipment from Nevada Offshore Petroleum Export Corp.
("NOPEC"), a company related through common ownership, under a month-to-month
agreement. Total rent incurred in connection with this lease was $0 for the
twelve months ended December 31, 2000, $32,000 for the nine months ended
December 31, 1999 and $146,000 for the twelve months ended March 31, 1999.
Payments related to this agreement are included in rent expense.
IFT has consulting arrangements with certain stockholders and related parties.
Consulting expense includes $254,632 for the twelve months ended December 31,
2000, $180,000 for the nine months ended December 31, 1999 and $6,000,000 for
the twelve months ended March 31, 1999, paid through the issuance of common
stock at its then fair value as determined by IFT and the Chairman of IFT's
Board of Directors.
Total interest on stockholder loans incurred in connection with stockholders
loans was $1,475,315 for the twelve months ended December 31, 2000, $405,341 for
the nine months ended December 31, 1999 and $87,909 for the twelve months ended
March 31, 1999.
At December 31, 1999, IFT owed one of its stockholders $87,095 for legal
services performed. Subsequent to December 31, 1999, the stockholder agreed to
accept 27,559 shares of IFT's stock in lieu of cash for the amounts due to him.
The value of the shares issued were based upon the market value average for
January 3 through January 10, 2000. The total amount due to this stockholder
included in accounts payable-stockholders at December 31, 1999 was $87,095.
At December 31, 1999, IFT was owed $15,000 by one of its stockholders for a
short term advance with interest at 6%. The amount was due December 31, 1999.
The amount was paid during the twelve months ended December 31, 2000 as part of
the resolution of disputed amounts included in accounts payable to this
stockholder. As a result of this resolution consulting expense was decreased by
$95,367. The total amount due to this stockholder included in accounts payable-
stockholders at December 31, 1999 was $100,000.
During October 1999, IFT entered into an agreement with TPG Capital Corporation,
a company related through common ownership, for consulting services. A payment
of $100,000 was made during the nine month period ended December 31, 1999 and
was recorded as a consulting
F-18
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
expense. TPG Capital Corporation provided consulting and administrative services
in connection with the acquisition of Blencathia.
Note 7. Income Taxes
For income tax purposes approximately $13,535,000 of IFT's expenses are
considered start-up costs to be amortized over five years beginning with the
commencement of operations. IFT has not started amortization of these startup
costs as of December 31, 2000. For accounting purposes these start-up costs have
been expensed. IFT has an approximate net operating loss carryforward of
$7,559,000 as of December 31, 2000. This approximate net operating loss will
expire as follows: $33,000 in year 2011, $600,000 in year 2012, $5,140,000 in
year 2018, $1,784,000 in year 2019 and $2,000 in the year 2020. Due to the
inherent uncertainty in forecasts of future events and operating results, IFT
has provided for a valuation allowance in an amount equal to the net deferred
tax asset arising from this net operating loss carryforward and startup costs.
No income tax benefit has been recorded in the statement of operations due to
the valuation allowance on the deferred tax assets.
December 31, 2000 December 31, 1999
----------------- -----------------
Deferred Tax Assets
Start up costs $ 4,602,000 $ 2,329,000
Net operating loss 2,571,000 2,571,000
-------------- --------------
Total gross deferred tax asset 7,173,000 4,900,000
Less Valuation Allowance 7,173,000 4,900,000
-------------- --------------
Net Deferred Tax Asset $ - $ -
============== ==============
Income tax expense for the twelve months ended December 31, 2000, nine months
ended December 31, 1999 and the year ended March 31, 1999 differed from the
amount computed by applying the statutory U.S. federal corporate income tax rate
of 34% to income before income tax benefit as a result of the following:
December 31, December 31, March 31,
2000 1999 1999
--------------------------------------------
Expected income tax
(benefit) expense $ (2,273,000) $ (1,745,000) $ (2,665,000)
Increase (decrease) in
Income tax resulting from:
Valuation allowance
Increase 2,273,000 1,745,000 2,665,000
------------ ------------ ------------
Income tax expense
(benefit) $ - $ - $ -
============ ============ ============
F-19
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 8. Lease Commitment
As of December 31, 2000, IFT leased office space, certain equipment and
administrative services under an operating lease from a company related through
common ownership. Future minimum leases payments are $35,000 for the year 2001.
Note 9. Subsequent Events
On January 31, 2001 IFT issued 33,333 shares of restricted common stock as
payment of $10,000 principal and interest on a note payable to a stockholder.
On February 23, 2001 IFT's Board of Directors authorized the issuance of a total
of 2,575,000 shares of restricted stock to employees and directors of IFT.
On March 1, 2001 IFT was granted effectiveness of the registration statement
related to the January 3, 2001 Securities Purchase Agreement by the Securities
and Exchange Commission.
On March 7, 2001 IFT received funding of $200,000 under the January 3, 2001
Securities Purchase Agreement.
Note 10. Fiscal Year End Change
Effective October 27, 1999, IFT changed the date of its fiscal year end from
March 31 to December 31. The nine-month period ended December 31, 1999, is
referred to as the transition period. All year and quarter references relate to
IFT's prior fiscal years and quarters, unless otherwise stated. Unaudited
financial information for the comparable nine-month period ended December 31,
1998, is presented in the table below and includes any adjustments (consisting
of normal, recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation.
For the Nine Months Ended
December 31,
1999 1998 (Unaudited)
----------- ----------------
Revenues $ - $ -
Cost of Revenues - -
----------- ----------------
Gross Profit - -
----------- ----------------
Advertising and Marketing 12,913 4,772
Consulting 295,000 6,340,500
Research & Development Costs 330,353 514,347
Office 1,002 30,669
Other 59,234 47,068
Payroll 318,036 116,673
Professional Services 3,662,718 81,436
Rent 32,685 117,633
Stock Transfer Fees 5,249 17,293
F-20
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Telephone 2,957 27,400
Travel 6,652 37,702
----------- -----------
Total Operating Expenses 4,726,799 7,335,493
----------- -----------
Net Loss from Operations 4,726,799 7,335,493
Interest Expense 405,341 68,572
----------- -----------
Net Loss Before Income Tax 5,132,140 7,404,065
Provision for Income Tax - -
----------- -----------
Net Loss $ 5,132,140 $ 7,404,065
=========== ===========
Basic and Dilutive Net Loss
Per Common Share $ .32 $ .57
=========== ===========
Weighted Average Common
Shares Outstanding 15,800,725 12,993,978
=========== ===========
Note 11. Supplemental Disclosures of Cash Flow Information
Supplemental non-cash investing and financing activities were as follows:
Twelve months ended December 31, 2000
-------------------------------------
IFT issued 27,559 shares of common stock as an $87,095 payment on accounts
payable-stockholder.
IFT reduced a note receivable-stockholder by $15,000 and an employee
receivable by $468 as a payment on an account payable.
IFT issued 1,186,669 shares of common stock as a $356,000 payment on notes
payable to stockholders.
IFT issued 1,626,084 shares of common stock as a $374,000 payment on notes
payable.
Nine months ended December 31, 1999
-----------------------------------
IFT exchanged $26,500 due to a related party, $677,754 notes payable,
$142,820 accrued interest and $355,771 interest expense for 423,537 common
shares; $4,235 common stock and $1,198,610 additional paid in capital.
Twelve months ended March 31, 1999
----------------------------------
IFT issued 2,795,979 common shares for the common stock of the inactive
SFT. The issuance of $279,598 of common stock was offset by a discount to
common stock as SFT had no net assets or market value.
F-21
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 12. Quarterly Statements of Operation Information (Unaudited)
For the Three Month Period Ended
March 31, 2000 June 30, 2000 September 30, 2000 December 31, 2000
-------------- ------------- ------------------ -----------------
Revenues $ 0 $ 0 $ 0 $ 0
Gross profit 0 0 0 0
Net loss $2,417,801 800,357 1,200,778 2,268,600
Basic and diluted net
loss per share $ .14 $ .04 $ .06 $ .12
Weighted average common
shares outstanding 17,096,481 17,879,918 18,716,339 18,905,000
For the Three Month Period Ended
June 30, 1999 September 30, 1999 December 31, 1999
------------- ------------------ -----------------
Revenues $ 0 $ 0 $ 0
Gross profit 0 0 0
Net loss 431,030 3,804,159 896,951
Basic and diluted net
loss per share $ .03 $ .23 $ .06
Weighted average common
shares outstanding 12,897,559 16,429,900 16,429,900
F-22
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
March 31, December 31,
ASSETS (Note 2) 2001 2000
- -------------------------------------------------------------------------------
(Unaudited)
Current Assets
Cash $ 62,735 $ 128,204
Prepaid expenses 55,071 29,107
------------ ------------
Total current assets 117,806 157,311
------------ ------------
Machinery and Equipment
Machinery and equipment 19,421 23,703
Accumulated depreciation (3,222) (5,592)
------------ ------------
Total machinery and equipment 16,199 18,111
------------ ------------
$ 134,005 $ 175,422
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT (Note 2)
- ----------------------------------------------
Current Liabilities
Accounts payable $ 277,689 $ 227,748
Accrued payroll expenses (Note 3) 1,310,214 204,325
Accrued interest 12,521 8,948
Notes payable to stockholders (Note 5) 20,000 32,500
------------ ------------
Total current liabilities 1,620,424 473,521
------------ ------------
Long-Term Liabilities
Notes payable to stockholder (Note 5) 162,500 162,500
Convertible debentures, net of discount
(Note 4) 67,507 -
------------ ------------
Total liabilities 1,850,431 636,021
------------ ------------
Commitments and Contingencies
Stockholders' Deficit (Notes 4, 5 and 6)
Common stock, $.01 par value; authorized,
150,000,000, 24,692,786 and 24,560,453
shares issued and outstanding at
March 31, 2001 and December 31, 2000,
respectively 246,927 245,604
Discount on common stock (819,923) (819,923)
Additional paid-in capital 21,453,424 21,208,288
Deficit accumulated during the development
stage (22,596,854) (21,094,568)
------------ ------------
(1,716,426) (460,599)
------------ ------------
$ 134,005 $ 175,422
============ ============
See Notes to Financial Statements.
F-23
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(Unaudited)
From Inception
Three Months (April 9, 1996)
Ended March 31, Through
----------------------- March 31,
2001 2000 2001
- ---------------------------------------------------------------------------------------
Revenues $ -- $ -- $ --
Cost of Revenues -- -- --
---------- ---------- -----------
Gross Profit -- -- --
---------- ---------- -----------
Operating Expenses:
Advertising and marketing -- 10,728 44,541
Board meeting expense -- 117,216 117,216
Consulting 5,980 175,249 7,649,376
Insurance 8,500 8,747 60,760
Investment advisory fee -- 1,141,725 1,251,413
Office 5,947 3,185 82,048
Other 8,525 7,037 153,449
Payroll (Note 3) 1,236,083 769,511 3,972,990
Professional services 145,792 161,282 4,622,693
Rent 3,710 5,000 288,890
Research and development costs 51,941 -- 1,596,800
Stock transfer fees -- 640 26,452
Telephone -- 1,790 52,585
Travel 10,769 14,242 154,251
---------- ---------- -----------
Total operating expenses 1,477,247 2,416,352 20,073,464
---------- ---------- -----------
Net loss from operations 1,477,247 2,416,352 20,073,464
Interest expense (Note 4) 25,039 1,449 2,523,390
---------- ---------- -----------
Net loss before income taxes 1,502,286 2,417,801 22,596,854
Provision for income taxes -- -- --
---------- ---------- -----------
Net loss $1,502,286 $2,417,801 $22,596,854
========== ========== ===========
Basic and diluted net loss
per common share $ .06 $ .14
Weighted average common shares outstanding 24,422,973 17,096,481
See Notes to Financial Statements.
F-24
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(Unaudited)
Deficit
Accumulated
Common Common Discount on Additional During
Stock Stock Common Paid-In Development
Shares Amount Stock Capital Stage Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2001 24,560,453 $245,604 $(819,923) $21,208,288 $(21,094,568) $ (460,599)
Conversion of debt and interest
(Note 5) 33,333 333 - 16,708 - 17,041
Issuances of common stock for
compensation (Note 6) 99,000 990 - (990) - -
Discount on issuance of
convertible debenture (Note 4) - - 165,167 - 165,167
Issuances of common stock
warrants (Note 4) - - 21,750 - 21,750
Accrued stock based compensation
(Note 6) - - - 42,501 42,501
Net loss - - - (1,502,286) (1,502,286)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 2001 24,692,786 $246,927 $(819,923) $21,453,424 $(22,596,854) $(1,716,426)
================================================================================================================================
F-25
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(Unaudited)
From
Three Months Three Months Inception
Ended Ended (April 9, 1996)
March 31, March 31, to March 31,
2001 2000 2001
- ---------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities $(1,502,286) $(2,417,801) $(22,596,854)
Net loss
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 667 804 6,259
Stock issued and additional paid in capital
recognized for services and compensation 1,125,313 2,103,320 14,570,405
Interest expense recognized-discount on debt 4,424 - 1,232,848
Interest expense recognized-conversion of debt 6,666 - 1,120,117
Loss on disposal of machinery and equipment 2,887 - 2,887
Change in assets and liabilities:
Increase in prepaid expenses (25,964) (17,369) (55,071)
Increase in accounts payable 49,941 45,881 293,157
Increase in accounts payable-stockholders - 10,367 87,095
Increase in accrued payroll expenses 23,077 13,592 227,402
Increase in accrued interest 3,948 - 155,716
------------------------------------------------
Net cash used in operating activities (311,327) (261,206) (4,956,039)
------------------------------------------------
Cash Flows from Investing Activities
Acquisition of machinery and equipment (1,642) - (23,701)
Increase in employee and stockholder receivables - - (15,468)
Cash acquired in connection with the purchase of
United States Fuel Technology, Inc. - - 358
------------------------------------------------
Net cash used investing activities (1,642) - (38,811)
------------------------------------------------
Cash Flows from Financing Activities
Increase in amount due to related party - - 26,500
Increase in due to United States Fuel Technology, Inc. - - 372,503
Proceeds from common stock issued - 204,350 2,808,328
Proceeds from convertible debentures 250,000 - 250,000
Proceeds from notes payable - 50,000 2,179,425
Payment on notes payable (2,500) - (579,171)
------------------------------------------------
Net cash provided by financing activities 247,500 254,350 5,057,585
------------------------------------------------
Net increase (decrease) in cash (65,469) (6,856) 62,735
Cash, beginning 128,204 26,846 -
------------------------------------------------
Cash, ending $ 62,735 $ 19,990 $ 62,735
================================================
Supplemental Cash Flow Information
Interest paid $ - $ - $ 4,631
================================================
Taxes paid $ - $ - $ -
================================================
See Notes to Financial Statements
F-26
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The interim financial statements included herein have been prepared by
International Fuel Technology, Inc. ("IFT"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although IFT
believes that the disclosures are adequate to make the information presented not
misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes thereto included in IFT's annual report on Form 1O-K for the twelve month
period ended December 31, 2000. IFT follows the same accounting policies in
preparation of interim reports.
Results of operations for the interim periods are not indicative of annual
results.
Note 2 -- Ability to Continue as a Going Concern
IFT's financial statements are presented on the going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. IFT has incurred significant losses since
inception and has previously had limited funds with which to operate. Management
is in the process of executing a strategy based upon developing pollution
emission control technologies that also offer enhanced engine performance with
respect to greater fuel economy. IFT already has one technology in development,
and is seeking to add other technologies through acquisitions. Management
anticipates receiving necessary regulatory and commercial acceptance for its
existing technology and acquired technologies within the next twelve months.
Immediately thereafter, IFT expects to begin licensing its products and or
selling them directly to the commercial marketplace, with IFT eventually
generating a level of revenues sufficient to meet IFT's working capital
requirements. On October 16, 2000 we signed a term sheet with The International
Investment Group ("IIG") for a $6 million equity line of credit to be funded $3
million over one year with a one-year extension, at our option, for an
additional $3 million. During the following months we revised the terms of the
October 16, 2000 IIG term sheet and on January 3, 2001 entered into a Securities
Purchase Agreement with IIG Equity Opportunities Fund Ltd. ("IIG Fund"), which
has a one-year commitment amount of $3 million, with an option at our control
for an additional $3 million in financing after the completion of the one-year
commitment. The January 3, 2001 Securities Purchase Agreement with the IIG Fund
replaced the October 16, 2000 IIG term sheet. On March 1, 2001, IFT completed
registration of the common shares required by the January 3, 2001 Securities
Purchase Agreement (the "Agreement"). The Agreement provides for IFT to sell up
to $250,000 in convertible debentures to the IIG Fund every thirty days. On
March 2, 2001 IFT initiated the first convertible debenture purchase and on
March 7, 2001 received $200,000 and on March 22, 2001 received $50,000. While
management can not make any assurance as to the accuracy of our projections of
future capital needs, it is anticipated that a total of approximately $1.8
million over the remainder of 2001 will be necessary in order to enable us to
meet our current capital needs. We believe the proceeds from the convertible
debenture financing will be used as follows: $350,000 for specific testing as
part of required regulatory procedures as set by the Air Resources Board of
California ("CARB"), $350,000 for commercial fleet testing programs, $250,000
for production development and engineering consulting, $800,000 for salary and
$1,250,000 working capital for administrative and other capital needs, including
investigation of future acquisitions, if any.
F-27
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
IFT to continue as a going concern.
Note 3 - Accrued Payroll Expenses
On February 23, 2001 the Board of Directors of IFT authorized the issuance of
2,475,000 shares of common stock to employees and non-employee directors IFT.
The value of the common shares, $1,082,812, has been included in payroll expense
for the three months ended March 31, 2001, and was calculated based on the
closing stock price of $.4375 on February 23, 2001. The 2,475,000 shares of
restricted common stock were issued to the employees and non-employee directors
of IFT on April 10, 2001. The $1,082,812 is included in accrued payroll expenses
at March 31, 2001.
Note 4 - Convertible Debentures
IFT issued to the IIG Fund a convertible debenture for $200,000 on March 7, 2001
and a convertible debenture for $50,000 on March 22, 2001. The debentures bear
interest at a rate of 6% per annum commencing on the date of issuance, are
convertible upon issuance, and will mature on December 31, 2003.
The convertible debentures are immediately convertible at the option of the
holder into the number of shares of our common stock equal to the principal
amount of the debentures to be converted, including all accrued interest,
divided by the conversion price in effect on the conversion date. The conversion
price is calculated at 80% of the average of the three lowest closing bid prices
for the twenty trading days immediately prior to the conversion date, but in no
event more than 110% of the average of the three lowest closing bid prices for
the ten trading days immediately preceding the convertible debenture issuance
date.
In connection with the issuance of the $250,000 in convertible debentures IFT
recognized $165,167 in discount on convertible debentures due to the beneficial
conversion feature of the convertible debentures. The $165,167 discount will be
amortized to December 31, 2003 or the date the convertible debenture is
converted into common stock, whichever occurs first. For the three months ended
March 31, 2001, interest expense includes $3,909 amortization of the $165,167
discount.
In connection with the issuance of the $250,000 in convertible debentures IFT
recognized $21,750 in discount on convertible debentures due to the issuance of
a two year term warrant that expires on March 1, 2003 to purchase 75,000 shares
of IFT stock at an exercise price equal to 130% of the closing bid price, $.53,
of the common stock on March 6, 2001. The $21,750 discount will be amortized to
December 31, 2003 or the date the warrant is exercised, whichever occurs first.
For the three months ended March 31, 2001, interest expense includes $515
amortization of the $21,750 discount.
March 31, 2001
--------------
Convertible Debentures $ 250,000
Discount on Convertible Debentures (182,493)
---------
Convertible Debentures, net of discount $ 67,507
=========
Note 5 - Notes Payable to Stockholders
During the three month period ended March 31, 2001 IFT repaid $10,000 of notes
payable to stockholders by issuing 33,333 restricted common shares. In
connection with the issuance of the 33,333 restricted common shares IFT
recognized $6,666 in interest expense due to the fair value of the stock on the
date of extinguishment exceeding the carrying value by this amount.
F-28
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
In March 2000 ONKAR Corporation, Ltd. ("ONKAR"), a stockholder of IFT, advanced
IFT $50,000 which is due in March 2005 and has an annual interest rate of 6%. In
April 2000 ONKAR advanced IFT $50,000 which is due in April 2005 and has an
annual interest rate of 6%. In addition, at March 31, 2001 and December 31,
2000, IFT has a note payable to ONKAR for $62,500 which is due in November 2004
at an annual interest rate of 6%.
Note 6 - Stockholders' Deficit
The 99,000 shares earned by the Chief Executive Officer and Chief Operating
Officer under employment agreements which expired on December 31, 2000 were
issued on January 31, 2001.
During January 2001, IFT entered into an employment agreement with Jonathan R.
Burst to serve as Chief Executive Officer of IFT until December 31, 2003 at a
base annual salary of $200,000. In addition, Mr. Burst is to be granted 20,834
shares of common stock at the end of each month. During January 2001, IFT
entered into an employment agreement with William J. Lindenmayer to serve as
President and Chief Operating Officer of IFT until December 31, 2003 at a base
annual salary of $200,000. In addition, Mr. Lindenmayer is to be granted 20,834
shares of common stock at the end of each month. The shares are earned ratably
on a monthly basis. The stock based compensation earned through March 31, 2001,
reflected in these financial statements as payroll expense and as additional
paid in capital of $42,501, has been calculated based on the trading price of
IFT's stock at January 1, 2001. As of March 31, 2001 the 125,004 common shares
related to these employment agreements have not been issued.
Effective October 27, 1999, IFT merged with and into Blencathia Acquisition
Corporation ("Blencathia"). Blencathia had 300,000 shares outstanding at the
time of the merger, which it redeemed and canceled. In exchange for 300,000
shares of Blencathia's common stock, IFT issued 300,000 shares of its restricted
common stock. These shares are expected to be sold in an amount sufficient to
provide the former shareholders of Blencathia with proceeds of $500,000, the
negotiated cost of the acquisition.
On May 8, 2000 IFT issued 300,000 common shares that were contingently issued
per the Blencathia merger agreement. The 300,000 shares of common stock are
included in the statement of stockholders' deficit for the three months ended
March 31, 2001 but are not included in earnings per share and weighted average
share calculations for the three months ended March 31, 2001. They will be
included when the shares are sold to provide payment to the shareholders of
Blencathia. The shareholders of Blencathia have represented to the management of
IFT that the 300,000 shares will be sold only with IFT's approval. If the shares
are sold and $500,000 is not generated additional shares may need to be issued
to the shareholders of Blencathia. Based on the March 31, 2001 market price,
$.45, of IFT's common stock, a total of 1,111,111 shares would need to be
issued to generate the $500,000 proceeds.
Note 7 - Subsequent Events
During April 2001 IFT issued 160,978 common shares to the IIG Fund as payment on
$50,000 of outstanding convertible debentures.
During April 2001 IFT issued 10,000 restricted common shares as payment for
$4,375 in consulting services and 10,000 restricted common shares as a payment
on a $4,125 account payable.
F-29
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
During April 2001 IFT received $225,000 for the issuance of convertible
debentures to IIG Equity. In connection with the issuance of the $225,000 in
convertible debentures IFT issued a two year term warrant that expires on April
5, 2003 to purchase 75,000 shares of IFT stock at an exercise price of $.46.
During April 2001 IFT issued 406,523 common shares to a total of four
individuals as a recalculation of the beneficial conversion rate used for the
payment of notes payable in November 2000. The recalculation was required due to
the 1,626,086 common shares issued in November 2000 not being registered with
the United States Securities and Exchange Commission by March 31, 2001, as the
notes payable specified.
As of May 15, 2001 IFT is negotiating to buy Interfacial Technologies Ltd.,
("Interfacial") a UK-based company which has developed a formulation that blends
hydrocarbon fuels (diesel, gasoline, etc.) with agents including water, urea and
ethanol, resulting in significant improvements to engine performance and
substantial reductions in levels of harmful emission (NOx, particulate matter,
etc.). IFT will issue 12.5 million shares at closing to the shareholders of
Interfacial, and place another 8.5 million shares in escrow to be released upon
achievement of specific revenue targets for Interfacial within the next two
years, bringing the total potential consideration for the acquisition to 21
million shares. The shareholders of Interfacial have agreed to take restricted
144 shares for all but two million of the total shares they receive, with IFT
agreeing to file an S-2 registration statement to register the two million
shares within 60 days of closing. Both companies' boards have approved the
acquisition, with the only step to be completed before closing being final
review by IFT of Interfacial's patent filings.
Note 8 - Supplemental Disclosures of Cash Flow Information
Supplemental non-cash investing and financing activities were as follows:
Three months ended March 31, 2001
- ---------------------------------
During the three month period ended March 31, 2001, IFT issued 33,333 shares of
common stock as a payment of $10,000 on notes payable to stockholders, $375 in
accrued interest and $6,666 in interest expense recognized due to a beneficial
conversion.
Three months ended March 31, 2000
- ---------------------------------
During the three month period ended March 31, 2000, IFT issued 27,559 shares of
common stock as an $87,095 payment on accounts payable-stockholders.
F-30
Interfacial Technologies (UK) Limited
Report and financial statements for the period ended 31 December 2000
- --------------------------------------------------------------------------------
Contents
Page:
2 Report of the directors
4 Report of the auditors
5 Profit and loss account
6 Balance sheet
7 Notes forming part of the financial statements
- --------------------------------------------------------------------------------
Directors
Simon Orange
Ian Williamson
Secretary and registered office
Simon Orange, 2 Dunham House, Charcoal Road, Bowdon, Altrincham,
Cheshire WA 14 4RY
Company number
03996824
Auditors
DDO Stoy Hayward, Beneficial Building, 28 Paradise Circus Queensway,
Birmingham, BI 2BJ
F-31
Interfacial Technologies (UK) Limited
Report of the directors for the period ended 31 December 2000
- -------------------------------------------------------------------------------
The directors present their report together with the audited financial
statements for the period ended 31 December 2000.
Incorporation
The company was incorporated on 15 May 2000.
Results and dividends
The profit and loss account is set out on page 5 and shows the loss for the
period.
Principal activities, review of business and future developments
The company's principal activity is that of developing technology to
improve fuel. The directors are pleased with progress to date, which continues
to be satisfactory.
Directors
The directors of the company during the period and their interests in the
ordinary share capital of the company were:
Ordinary shares
of 0,000lp each
Number Number
31 December 15 May
2000 2000
Simon Orange (appointed 15 May 2000) 10,952.500 -
Ian Williamson (appointed 15 May 2000) 12,495.000 -
First Directors - -
Limited (resigned 15 May 2000)
Directors' responsibilities
Company law requires the directors to prepare financial statements for each
financial period which give a true and fair view of the state of affairs of the
company and of the profit or loss of the company for that period. In preparing
those financial statements, the directors are required to:
. select suitable accounting policies and then apply them consistently;
. make judgments and estimates that are reasonable and prudent;
. prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the company will continue in business.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
company and to enable them to ensure that the financial statements comply with
the Companies Act 1985. They are also responsible for safeguarding the assets of
the company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
F-32
Interfacial Technologies (UK) Limited
Report of the directors for the period ended 31 December 2000 (Continued)
- -------------------------------------------------------------------------------
Auditors
BDO Stoy Hayward were appointed as auditors during the period and have
expressed their willingness to continue in office. A resolution to re-appoint
them will be proposed at the annual general meeting.
By order of the board
/s/ Simon Orange
Simon Orange
Secretary
17 May 2001
F-33
Interfacial Technologies (UK) Limited
Report of the auditors
- --------------------------------------------------------------------------------
To the shareholders of Interfacial Technologies (UK) Limited
We have audited the financial statements on pages 5 to 9, together with the
cash-flow statement and notes on page 10, which have been prepared under
the accounting policies set out on page 7.
Respective responsibilities of directors and auditors
As described on page 2 the company's directors are responsible for the
preparation of the financial statements. It is our responsibility to form
an independent opinion, based on our audit, on those statements and to
report our opinion to you.
Basis of opinion
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board which are substantially similar to US GAAS. An
audit includes examination, on a test basis, of evidence relevant to the
amounts and disclosures in the financial statements. It also includes an
assessment of the significant estimates and judgments made by the directors
in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial
statements are free from material misstatement, whether caused by fraud or
other irregularity or error. In forming our opinion we also evaluated the
overall adequacy of the presentation of information in the financial
statements.
Opinion
In our opinion the financial statements give a true and fair view of the
state of the company's affairs as at 31 December 2000 and of its loss for
the period then ended and have been properly prepared in accordance with
the Companies Act 1985.
In our opinion the information contained within the cash-flow statement and
notes thereto fairly presents the adjustments which would be required if
these financial statements, which have been prepared under generally
accepted accounting principles in the United Kingdom, had been prepared
under generally accepted accounting principles in the United States.
/s/ Bdo Stoy Hayward
BDO STOY HAYWARD
Chartered Accountants
and Registered Auditors
Birmingham
17 May 2001
F-34
Interfacial Technologies (UK) Limited
Profit and loss account for the 7 1/2 months ended 31 December 2000
- --------------------------------------------------------------------------------
7 1/2 months
ended
31 December
Note 2000
(Pounds)
Administrative expenses 351,043
--------
Loss on ordinary activities before and after taxation (351,043)
--------
All amounts relate to continuing activities.
All recognized gains and losses in the current period are included in the
profit and loss account.
The notes on pages 7 to 10 form part of these financial statements.
F-35
Interfacial Technologies (UK) Limited
Balance sheet at 31 December 2000
- --------------------------------------------------------------------------------
31 December 31 December
Note 2000 2000
(Pounds) (Pounds)
Current assets
Debtors 4 7,113
Cash at bank and in hand 139,336
-------
146,449
Creditors: amounts falling due within one year 5 38,746
-------
Total assets less current liabilities 107,703
--------
Capital and reserves
Called up share capital 6 4,233
Share premium account 7 454,513
Profit and loss account 7 (351,043)
--------
Equity shareholders' funds 107,703
--------
The financial statements were approved by the Board on 17 May 2001.
Simon Orange
/s/ Simon Orange
Director
The notes on pages 7 to 10 form part of those financial statements.
F-36
Interfacial Technologies (UK) Limited
Notes forming part of the financial statements for the 7 1/2 months ended 31
December 2000
- --------------------------------------------------------------------------------
1. Accounting policies
The financial statements have been prepared under the historical cost
convention and are in accordance with applicable accounting standards. The
following principal accounting policies have been applied:
Cash flow statement
The company has taken advantage of the exemption conferred by Financial
Reporting Standard I "Cash Flow Statements (Revised 1996)" not to prepare a
cash flow statement on the grounds that it is a "small" company under the
Companies Act 1985.
2. Operating loss
This is arrived at after charging:
7 1/2 months
ended
31 December
2000
(Pounds)
Auditors; remuneration - audit services 3,000
=====
3. Directors' remuneration
During the period payments were made to directors consultancy agreements.
Payments of (Pounds)55,885 were made to Dunham Consultancy in which Simon
Orange has an interest. Also payments of (Pounds)87,755 were made to Ian
Williamson.
31 December
2000
(Pounds)
Other debtors 7,113
=====
All amounts shown under debtors fall due for payment within one year.
F-37
Interfacial Technologies (UK) Limited
Notes forming part of the financial statements for the 7-1/2 months ended 31
December 2000 (Continued)
- -------------------------------------------------------------------------------
5 Creditors: amounts falling due within one year
31 December
2000
(Pounds)
Trade creditors 3,331
Directors Loans 31,415
Accruals and deferred income 4,000
------
38,746
======
6 Share capital
Authorised Allotted
called up
and
fully paid
31 December 31 December
2000 2000
(Pounds) (Pounds)
Equity share capital
Ordinary shares of (Pounds)0.0001 each 10,000 4,233
"A" Ordinary shares of (Pounds)0.0001 each 2,000 -
------ -----
12,000 4,233
====== =====
During the period, the following Ordinary shares of (Pounds)0.0001p each
were allotted for cash:-
Number Price Nominal Share
of shares per share value Premium
Date issued (Pounds) (Pounds) (Pounds)
07 July 2000 21,570,000 0.0001p 2,157 Nil
03 Oct 2000 325,000 0.0769p 33 24,968
17 Oct 2000 2,250,000 0.1000p 225 224,775
17 Oct 2000 600,000 0.05833p 60 34,940
17 Nov 2000 1,400,000 0.0100p 140 139,860
01 Dec 2000 15,885,000 0.0001p 1,588 Nil
01 Dec 2000 300,000 0.0100p 30 29,970
---------- ----- -------
Total 42,330,000 4,233 454,513
========== ===== =======
F-38
Interfacial Technologies (UK) Limited
Notes forming part of the financial statements for the 7 1/2 months ended 31
December 2000 (Continued)
- -------------------------------------------------------------------------------
7 Reserves
Share Profit and loss
premium
account account
(Pounds) (Pounds)
Premium on shares issued during the period 454,513 --
Loss for the period -- (351,043)
------- --------
At 31 December 2000 454,513 (351,043)
======= ========
8 Reconciliation of movements in shareholders'
funds
7 1/2 months
ended
31 December
2000
(Pounds)
Loss for the period (351,043)
New share capital subscribed 4,233
Premium on shares issued during the period 454,513
--------
Net additions to shareholders' funds 107,703
Opening shareholders' funds --
--------
Closing shareholders' funds 107,703
========
9 Related party disclosures
As well as the payments disclosed in note 3, consultancy payments of (Pounds)64,900
were made to Cliff Hazel, who is a shareholder of the company.
F-39
Interfacial Technologies (UK) Limited
Notes forming part of the financial statements for the 7 1/2 months ended 31
December 2000 (Continued)
- -------------------------------------------------------------------------------
10 RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED
KINGDOM ("UK GAAP") TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED
STATES OF AMERICA ("US GAAP")
The financial statements of the Company have been prepared in accordance with
generally accepted accounting principles applicable in the United Kingdom ("UK
GAAP"), which differ in certain significant respects from those applicable in
the US ("US GAAP"). The material difference as it applies to the Company's
financial statements is as follows:
SHARES ISSUED TO CONSULTANTS
The Company sold shares to consultants at prices that were less than fair value.
Under US GAAP, the difference between the fair value and the sales price is
recognized as expense. Under UK GAAP, the Company is not required to recognize
expense for this transaction. In addition, for one of the transactions, the
shares were not paid for at December 31, 2000 and were therefore not included in
the outstanding stock. Under US GAAP, this would be recognized as common stock
of the Company as well as a stock subscription receivable.
The table below sets out the effect on loss for the period.
Period ended
December 31, 2000
-----------------
EFFECT ON LOSS
Net Loss as stated under UK GAAP (351,043)
US GAAP adjustments:
Expense recognition under FAS 123 (1,719,312)
----------
NET LOSS AS STATED UNDER US GAAP (2,070,355)
==========
December 31, 2000
-----------------
EFFECT ON SHAREHOLDERS' EQUITY (DEFICIT):
Shareholders' equity as stated under UK GAAP 107,703
US GAAP adjustments:
Increase in common stock additional paid-in capital 100
Increase in stock subscriptions receivable (100)
Increase in additional paid-in capital 1,719,312
Expense recognition under FAS 123 (1,719,312)
----------
SHAREHOLDERS' DEFICIT AS STATED UNDER US GAAP 107,703
==========
F-40
Cash flow statement for the 7 1/2 months ended 31 December 2000
- --------------------------------------------------------------------------------
7 1/2 months 7 1/2 months
ended ended
31 December 31 December
Note 2000 2000
(Pounds) (Pounds)
Net cash outflow from operating activities before
financing 1 (319,410)
Financing
Share capital issued 4,233
Share premium thereon 454,513
------------
458,746
------------
Increase in cash 2 139,336
============
1. Reconciliation of operating loss before exceptional items to net cash flow from
operating activities 7 1/2 months
ended
31 December
2000
(Pounds)
Operating loss (351,043)
Increase in debtors (7,113)
Increase in creditors 38,746
------------
Net cash outflow from operating activities (319,410)
============
2. Reconciliation of net cash flow to movement in net funds 7 1/2 months
ended
31 December
2000
(Pounds)
Increase in cash 139,336
Cash outflow from changes in debt -
------------
Movement in net debt 139,336
Opening net funds -
------------
Closing net funds 139,336
============
F-41
Interfacial Technologies (UK) Limited
- -------------------------------------------------------------------------------
The pages which follow do not
form part of the statutory
financial statements of the company
F-42
Interfacial Technologies (UK) Limited
Detailed profit and loss account for the period ended 31 December 2000
- -------------------------------------------------------------------------------
7-1/2 months
ended
31 December
2000
Page (Pounds)
Administrative expenses 12 351,043
--------
Loss on ordinary activities (351,043)
========
F-43
Interfacial Technologies (UK) Limited
Detailed profit and loss account for the 7-1/2 months ended 31 December 2000
(Continued)
- -------------------------------------------------------------------------------
Administrative expenses
7-1/2 months
ended
31 December
2000
(Pounds)
Auditors remuneration 4,000
Consultancy Fees 211,782
Bank Charges 71
Legal and Professional Fees 24,974
Motor Expenses 7,506
Car Lease/Hire 7,642
Entertainment 35
Travel and Subsistence 54,736
Printing and Stationery 9,345
Postage 55
Computer Costs 404
Exhibition Costs 8,688
Telephone Costs 6,233
General Expenses 15,572
-------
351,043
=======
F-44
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following Pro Forma Condensed Financial Information reflects financial
information with respect to the acquisition effective May 25, 2001 by
International Fuel Technology, Inc. ("IFT") of all the outstanding common stock
of Interfacial Technologies (UK) Ltd. ("Interfacial") for a purchase price of
approximately $6,750,000. The purchase price of approximately $6,750,000 has
been paid by the issuance of 12,500,001 IFT common shares based on the market
price of IFT's common stock on the date the acquisition was announced. The
acquisition has been accounted for under the purchase method of accounting. The
unaudited Pro Forma Condensed Financial Information is derived from the audited
and unaudited financial statements of IFT included herein and the audited and
unaudited historical financial statements of Interfacial included herein.
The unaudited Pro Forma Condensed Balance Sheet for March 31, 2001 assumes that
the acquisition of Interfacial occurred as of this date and British pounds were
translated to U.S. dollars at the rate of $1.42.
The unaudited Pro Forma Condensed Statements of Operations for the period ended
December 31, 2000 gives effect to the acquisition of Interfacial as if it
occurred at the beginning of the earliest period presented. The financial
statements of Interfacial were translated from British pounds to U.S. dollars at
the rate of $1.46 and $1.47 with respect to the March 2001 and December 2000
statement of operations, respectively.
The following pro forma statements are presented as of and for the three months
ended March 31, 2001:
IFT - January 1, 2001 through March 31, 2001
Interfacial - January 1, 2001 through March 31, 2001
The following pro forma statements are presented for the periods ended December
31, 2000:
IFT - January 1, 2000 through December 31, 2000
Interfacial - May 15, 2000 (date of inception) through December 31, 2000
The unaudited Pro Forma Condensed Financial Information gives effect to the
acquisition of Interfacial based upon estimated allocations of the purchase
price, and includes all adjustments described in the notes thereto. The pro
forma adjustments are based on certain assumptions that IFT's management
believes are reasonable under the circumstances and do not reflect any potential
cost savings. The unaudited Pro Forma Condensed Financial Information is not
necessarily indicative of the results that would have been reported if such
events had occurred on the date specified nor is it intended to project IFT's
results of operations or financial position for any future period or date. The
unaudited Pro Forma Condensed Financial Information set forth should be read in
conjunction with IFT's audited financial statements as of and for the twelve
months ended December 31, 2000 and the unaudited financial statements as of and
for the three months ended March 31, 2001 included herein and the audited
financial statements of Interfacial as of and for the seven and one half months
ended December 31, 2000 included herein.
F-45
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
Historical
International
Fuel Interfacial
Technology, Technologies Pro Forma
Inc. (UK) Ltd. Adjustments Pro Forma
------------- ----------- ------------ ------------
Revenues $ - $ - $ - $ -
Cost of Revenues - - - -
------------- ----------- ------------ ------------
Gross Profit - - - -
------------- ----------- ------------ ------------
Operating Expenses:
Advertising and
marketing - - - -
Amortization - - (1) 111,955 111,955
Consulting 5,980 89,133 - 95,113
Insurance 8,500 - - 8,500
Office 5,947 2,263 - 8,210
Other 8,525 276 - 8,801
Payroll 1,236,083 - - 1,236,083
Professional services 145,792 9,490 - 155,282
Rent 3,710 - - 3,710
Research and
development costs 51,941 - - 51,941
Telephone - 426 - 426
Travel 10,769 22,050 - 32,819
------------- ----------- ------------ ------------
Total operating
expenses 1,477,247 123,638 111,955 1,712,840
------------- ----------- ------------ ------------
Net loss from operations 1,477,247 123,638 111,955 1,712,840
Interest expense 25,039 - - 25,039
------------- ----------- ------------ ------------
Net loss before income
taxes 1,502,286 123,638 111,955 1,737,879
Provision for income taxes - - - -
------------- ----------- ------------ ------------
Net loss $ 1,502,286 $ 123,638 $ 111,955 $ 1,737,879
============= =========== ============ ============
Basic and diluted loss
per share $ .06 $ .05
============= ============
Weighted average shares
outstanding 24,422,973 36,922,974
============= ============
F-46
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
Historical
International
Fuel Interfacial
Technology Technologies Pro Forma
Inc. (UK) Ltd. Adjustments Pro Forma
Revenues $ - $ - $ - $ -
Cost of Revenues - - - -
----------- ----------- ------------ -----------
Gross Profit - - - -
----------- ----------- ------------ -----------
Operating Expenses:
Advertising and
marketing 20,522 12,771 - 33,293
Amortization - -(1) 447,821 447,821
Automotive expenses - 22,268 - 22,268
Board meeting expense 117,216 - - 117,216
Consulting 285,132 2,838,709 - 3,123,841
Insurance 34,454 - - 34,454
Investment advisory fee 1,251,413 - - 1,251,413
Office 9,208 22,891 - 32,099
Other 24,014 14,567 - 38,581
Payroll 2,212,305 - - 2,212,305
Professional services 684,367 42,592 - 726,959
Rent 9,219 - - 9,219
Research and
development costs 1,782 - - 1,782
Stock transfer fees 2,825 - - 2,825
Telephone 8,889 9,162 - 18,051
Travel 28,607 80,462 - 109,069
----------- ----------- ------------ -----------
Total operating
expenses 4,689,953 3,043,422 447,821 8,181,196
----------- ----------- ------------ -----------
Net loss from operations 4,689,953 3,043,422 447,821 8,181,196
Interest expense 1,997,583 - - 1,997,583
----------- ----------- ------------ -----------
Net loss before income
taxes 6,687,536 3,043,422 447,821 10,178,779
Provision for income taxes - - - -
----------- ----------- ------------ -----------
Net loss $ 6,687,536 $ 3,043,422 $ 447,821 $10,178,779
=========== =========== ============ ===========
Basic and diluted loss
per share $ .36 $ .32
=========== ==========
Weighted average shares
outstanding 18,827,802 31,327,803
=========== ==========
F-47
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Three Months Year
Ended Ended
March 31, 2001 December 31, 2000
-------------- -----------------
(1) Intangible asset(s) amortization $111,955 $447,821
(estimated life 15 years)
F-48
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF MARCH 31, 2001
Historical
International
Fuel Interfacial
Technology, Technologies Pro Forma
Inc. (UK) Ltd. Adjustments Pro Forma
------------- ------------ ------------ ------------
Current Assets:
Cash $ 62,735 $ 124,977 $ - $ 187,712
Prepaid expenses 55,071 - - 55,071
------------ ---------- ---------- ------------
Total current assets 117,806 124,977 - 242,783
------------ ---------- ---------- ------------
Machinery and Equipment:
Machinery and equipment 19,421 - - 19,421
Accumulated depreciation (3,222) - - (3,222)
------------ ---------- ---------- ------------
Total machinery and equipment 16,199 - - 16,199
------------ ---------- ---------- ------------
Intangibles - - (1) 6,717,313 6,717,313
------------ ---------- ---------- ------------
$ 134,005 $ 124,977 $6,717,313 $ 6,976,295
============ ========== ========== ============
Current Liabilities:
Accounts payable $ 277,689 $ 63,072 $ - $ 340,761
Accrued payroll expenses 1,310,214 - - 1,310,214
Accrued interest 12,521 - - 12,521
Notes payable to stockholders 20,000 29,218 - 49,218
------------ ---------- ---------- ------------
Total current liabilities 1,620,424 92,290 - 1,712,714
Long-Term Liabilities:
Notes payable to stockholder 162,500 - - 162,500
Convertible debentures, net 67,507 - - 67,507
------------ ---------- ---------- ------------
Total liabilities 1,850,431 92,290 - 1,942,721
------------ ---------- ---------- ------------
Stockholders' Equity
(Deficit):
Common stock 246,927 6,153 (2) 118,847 371,927
Discount on common stock (819,923) - - (819,923)
Stock subscription receivable - (142)(3) 142 -
Additional paid-in capital 21,453,424 3,086,831 (3) 3,538,169 28,078,424
Accumulated deficit (22,596,854) (3,060,155)(4) 3,060,155 (22,596,854)
------------ ---------- ---------- ------------
Total stockholders' equity (deficit) (1,716,426) 32,687 6,717,313 5,033,574
------------ ---------- ---------- ------------
$ 134,005 $ 124,977 $6,717,313 $ 6,976,295
============ ========== ========== ============
F-49
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
(1) To reflect the acquistion of Interfacial and the allocation of purchase
price on the basis of the fair values of the assets acquired and the
liabilities assumed. The components of purchase price and its allocation are
as follows:
Market value of IFT stock issued $6,750,000
Allocation of purchase price:
Stockholders' equity of Interfacial 32,687
Patents and Technology 5,062,500
----------
Costs in excess of net assets acquired $1,654,813
==========
(2) To reflect:
a) The par value of IFT common stock issued $ 125,000
b) The elimination of historical common stock
balance of Interfacial (6,153)
------------
$ 118,847
============
(3) To reflect:
a) The excess of the market value over the par value of
the IFT common stock issued $ 6,625,000
b) The elimination of historical additional paid-in
capital of Interfacial (3,086,831)
------------
$ 3,538,169
============
(4) To reflect the elimination of historical accumulated
deficit of Interfacial $ 3,060,155
============
F-50