<PAGE> 1
As filed with the Securities and Exchange Commission on November 16,
2000. Registration No. 333-30838
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2/A-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Exhaust Technologies, Inc.
(Name of small business issuer in its charter)
Washington 336300 91-1970433
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(State or Other (Primary Standard (IRS Employer
Jurisdiction of Industrial Identification
organization) Classification Code) Number)
EXHAUST TECHNOLOGIES, INC. Conrad C. Lysiak, Esq.
230 North Division 601 West First Avenue, Suite 503
Spokane, Washington 99202 Spokane, Washington 99201
(509) 838-4401 (509) 624-1475
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(Address and telephone of (Name, address and telephone
registrant's executive office) number of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
If this Form is filed to register additional common stock for an
offering pursuant to Rule 462(b) under the Securities Act, please 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, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Securities Offering Aggregate
to be Amount to be Price Offering Registration
registered Registered Per Share Price Fee (1)
Units each
consisting of: 550,000 $ 5.10 $ 2,805,000 $ 740.52
One share of
common stock 550,000
and one
redeemable
warrant 550,000
Shares of
common stock
issuable upon
exercise of
redeemable
warrants 550,000 $ 9.00 $ 4,950,000 $ 1,306.80
Loyalty Shares 550,000
Additional
redeemable
warrants 1,000,000 $ 0.10 $ 100,000 $ 26.40
Shares of
common stock
issuable upon
exercise of
additional
redeemable
warrants 1,000,000 $ 9.00 $ 9,000,000 $ 2,376.00
Underwriter
Warrants to
Purchase
Unit 55,000 $ 0.0001 $ 6 $ 0.01
Units each
consisting of:
One share of
common stock 55,000 $ 8.415 $ 462,825 $ 122.19
and one
redeemable
underwriter
warrant 55,000
Shares of
common stock
issuable upon
exercise of
redeemable
underwriter
warrants 55,000 $14.85 $ 816,750 $ 215.62
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TOTAL REGISTRATION FEE $ 18,134,575 $ 4,787.54
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[1] Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c).
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.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR
AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO
THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
<PAGE> 4
PROSPECTUS
EXHAUST TECHNOLOGIES, INC.
550,000 Units
Consisting of one Share of Common Stock
and One Redeemable Warrant, and
1,000,000 Additional Redeemable Warrants
One Unit/Warrant Minimum - $2,905,000 Maximum
Each unit consists of one share of common stock and one redeemable
warrant. Each redeemable warrant entitles the holder to purchase one
share of common stock at a price of $7.00 provided the same is
exercised from the closing of this offering to one year thereafter
and at a price of $9.00 if the redeemable warrant is exercised from one
year after the closing date to two years thereafter. If the
redeemable warrants are not exercised during the times set forth above,
they will expire and cannot be exercised thereafter. In addition to
the foregoing, each subscriber who is still the owner of the shares
included in the Unit one year after the closing date, will receive from
us, without any additional charge, one share of common stock for each
share that he still owns. The additional shares are referred to as
Loyalty Shares.
Further, we are selling 1,000,000 redeemable additional warrants
for $0.10 per warrant. Each additional redeemable warrant is
exercisable under the same terms as set forth above.
Unless Castle Securities Corp., our underwriter sells one unit
and/or one redeemable warrant within 90 days, unless extended by our
board of directors and underwriter for an additional 90 days from the
effective date of this offering, Castle Securities will not receive any
commissions or expense allowances.
Prior to this offering, there has been no public market for the
units, common stock or redeemable warrants.
Investing in the units and redeemable warrants involves certain
risks. See "Risk Factors" starting at page 6.
All payment for the securities is to be made by check or money
order payable to "HSBC Bank as escrow agent for Exhaust Technologies,
Inc. public offering."
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Price to Underwriting Proceeds
Public Commission to Us
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Per Unit $ 5.10 $ 0.51 $ 4.59
Per Warrant $ 0.10 $ 0.01 $ 0.09
Total $ 2,905,000 $ 290,500 $ 2,614,500
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities
or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
<PAGE> 5
The offering price of the units and redeemable warrants as well
as the exercise prices of the redeemable warrants have been
arbitrarily determined by the underwriter and us.
Our underwriter is Castle Securities Corp., 45 Church Street,
Suite 25, Freeport, New York 11520. Its telephone number is (516)
868-2000. It will be using its best efforts to sell our securities. It
has no obligation to purchase any of our securities and it is not
guarantying it will be able to sell any of our securities.
We and Castle Securities have the right to accept or reject
subscriptions in whole or in part, for any reason or for no reason. All
monies from rejected orders will be returned immediately by the
escrow agent to you, without interest or deductions. Orders for
securities will be accepted or rejected within 48 hours after Castle
Securities receives them.
CASTLE SECURITIES CORP.
45 Church Street, Suite 25
Freeport, New York 11520
Tel: (516) 868-2000
The date of this prospectus is ______________.
<PAGE> 6
EXHAUST TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page No.
SUMMARY OF PROSPECTUS . . . . . . . 7
RISK FACTORS . . . . . . . . . 8
USE OF PROCEEDS . . . . . . . . 15
DETERMINATION OF OFFERING PRICE . . . . . 16
DILUTION OF THE PRICE YOU PAY FOR YOUR SHARES . . 16
PLAN OF DISTRIBUTION; UNDERWRITING;
TERMS OF THE OFFERING . . . . . . . 18
BUSINESS . . . . . . . . . . 23
MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION . . . . . 27
MANAGEMENT . . . . . . . . . 31
EXECUTIVE COMPENSATION . . . . . . . 33
PRINCIPAL SHAREHOLDERS . . . . . . . 36
DESCRIPTION OF SECURITIES . . . . . . 38
CERTAIN TRANSACTIONS . . . . . . . 40
LITIGATION . . . . . . . . . 42
EXPERTS . . . . . . . . . . 42
LEGAL MATTERS . . . . . . . . . 42
FINANCIAL STATEMENTS . . . . . . . 42
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_____________________________________________________________________
SUMMARY OF PROSPECTUS
_____________________________________________________________________
This summary provides an overview of selected information
contained in this prospectus. It does not contain all the information
you should consider before making a decision to purchase the securities
we are offering. You should very carefully and thoroughly read the more
detailed information in this prospectus, particularly the Risk Factors
section, review our financial statements and review all other
information that is incorporated by reference in this prospectus.
Summary Information about Our Company
We incorporated in the State of Washington on July 21, 1998 and we
have not generated any significant revenues from operations.
In July 1998, we issued 4,500,000 shares of common stock to our
officers and our President's son for a licensing agreement and
services. In 1999, we sold 192,750 shares of our common stock to 41
people for $38,548 before deducting offering costs of $12,256. Upon
effectiveness of this registration statement our President, Robert
Sterling will return 1,692,750 shares to us the Company for
cancellation as a predetermined condition for Castle Securities
entering into an underwriting agreement with us to sell our securities.
Our office is located at 230 North Division Street, Spokane,
Washington 99202. Our telephone number is (509) 838-4401.
The Offering
Following is a brief summary of this offering.
Securities being offered . . Up to 550,000 units and up to
1,000,000 additional redeemable
warrants.
Offering price per unit . . $ 5.10
Offering price per additional
redeemable warrant . . . $ 0.10
Offering period . . . The units consisting of common stock
and redeemable warrants and
additional redeemable warrants are
being offered for a period not to
exceed 90 days, unless extended by
our board of directors and
underwriter for an additional 90
days.
Net proceeds to us . . . Approximately $2,469,250, after
deducting $435,750 in expenses
associated with this offering
including the underwriting
commission. See "Use of Proceeds."
This assumes all units and warrants
are sold.
<PAGE> 8
Use of proceeds . . . We will use the proceeds to pay for
production of inventory and for
working capital.
Number of shares outstanding
before the offering . . 4,692,750
Number of Shares Outstanding
after the Offering . . . 3,550,000. Includes the effect of
the 1,692,750 shares which will be
given back to us by the President
and Chief Executive Officer upon
effectiveness of this registration
statement. This does not include
the exercise of any redeemable
warrants or the issuance of Loyalty
Shares
Loyalty shares . . . . Each share unsold and still held by
purchaser one year from the offering
will entitle the holder to receive
one additional share of common
stock.
_____________________________________________________________________
RISK FACTORS
_____________________________________________________________________
Please carefully consider the following risk factors before
deciding to invest in the units and additional warrants.
1. We have a limited operating history and our auditors have
expressed concern that we may not be able to stay in business.
We are recently formed and have a limited operating history. We
cannot assure you that we will be successful in our plans. Therefore
our independent certified public accountants have modified their report
to include a paragraph wherein they expressed substantial doubt about
our ability to continue in business as a going concern. We face all of
the risks and uncertainties encountered by a new business. Because we
have no operating history we cannot reliably forecast our future
operations.
2. We have an accumulated deficit, a stockholder deficit and working
capital deficit.
As of July 31, 2000, we have an accumulated deficit of
$371,310; a stockholder deficit of $259,175; and, a working capital
deficit of $466,336.
3. We have no market research.
We have not conducted or engaged other entities to conduct market
research for our products. Accordingly, there is no assurance that
market demand exists for our products.
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4. No independent valuation or fairness opinion obtained.
We have not obtained an independent valuation of the price of the
units or warrants or obtained an opinion of the fairness of the price
of the units and warrants.
5. Year 2000.
We were aware of the issues associated with the programming code
in computer systems as the millennium (year 2000) approached. The "Year
2000" problem was pervasive and complex as virtually every computer
operation was affected in some way by the rollover of the two digit
year value to 00. The issue was whether computer systems would be able
to properly recognize date sensitive information when the year changed
to 2000. Systems that did not properly recognize such information could
generate erroneous data or cause a system to fail. Since we did not
acquire additional hardware or software technology in support of our
services at present, the year 2000 problem did not have a significant
impact on our operations. However, it may have a significant impact on
key suppliers and customers with whom we may do business in the future.
Even though this prospectus is being, filed after January 1, 2000, year
2000 compliance issues could continue into the future as software
manufactured prior to January 1, 2000 is sold into the marketplace.
6. We do not have key personnel insurance.
We do not maintain any life insurance on the lives of any of
our officers and directors. If one or all of our officers or directors
die of otherwise become incapacitated, our operations could be
interrupted or terminated. In the event that our underwriter
successfully completes the sale of any securities and we receive
$1,000,000, we will be obligated, pursuant to the underwriting
agreement, to acquire insurance on the life of our President, Robert
Sterling, his son, Matthew Sterling, and Robert Teed in the amount of
$500,000 on each of their lives. However, should any or all of them be
deemed to be uninsurable, we may not be able to obtain the required
insurance.
7. Liability insurance coverage.
Although we carry $2,000,000 in product liability insurance, such
insurance may not be sufficient to cover any potential liability. If
that happens and we are held liable, we could be sued for a large sum
of money in excess of our liability coverage. If we cannot pay the
judgment and become insolvent, or do not have the funds to defend a
lawsuit, we could be forced to stop doing business.
8. Uninsured risks.
We may not maintain insurance against all losses we suffer or
liabilities we incur because of our operations. This could be because
insurance is unavailable, we do not have the financial resources to
acquire the insurance, or because we have elected not to purchase
insurance.
<PAGE> 10
9. We need to successfully complete this offering.
We need to raise additional capital. If this offering is
unsuccessful, we may have to discontinue our operations.
10. We need additional key personnel.
We have no full time employees. Our success will depend in part,
upon our ability to attract and retain qualified employees. There is no
assurance we will be able to obtain or retain qualified employees. If
we are unable to engage and retain the necessary personnel, our
business would be materially and adversely affected.
11. We maintain broad discretion with respect to the use of the
offering proceeds.
We maintain broad discretion with respect to the use of proceeds
from this offering. As such the board of directors may amend the use of
the proceeds without your approval. Moreover, approximately 75% of the
net proceeds from this offering or $1,851,000, if all the securities
being offering are sold, is allocated for working capital, the
expenditure of which will be at the discretion of the Board of
Directors.
12. Reliance upon our directors and officers.
We are wholly dependent upon the personal efforts and abilities of
our officers who will exercise control over our day-to-day affairs and
upon our directors, most of whom are engaged in other activities. Our
officers will devote a substantial time but not less than 80% of their
time to our day-to-day operation. As such, while we will solicit
business through our officers, there can be no assurance as to the
volume of business, if any, which we may succeed in obtaining. Further
we can't be sure that our proposed operations will be profitable.
13. A conflict of interest exists between us and our president, Robert
Sterling and his son Matthew Sterling and his son Matthew
Sterling.
Our President, Robert Sterling and his son Matthew Sterling
own the patents and trademarks for the Turbolators and PHTEMs. They
granted licenses to us. Pursuant to the licensing agreement between
Messrs. Sterling and Sterling, and us, if we do not sell a minimum
number of Turbolators and PHTEMs, Messrs Sterling and Sterling can
terminate the licensing agreement. Therefore, in the future, it may be
to Messrs Sterling and Sterling's advantage to terminate the agreement
which would conflict with their duties. In the event we sue to defend
the patent and trademark rights, it could confer a benefit upon Messrs.
Sterling and Sterling.
14. Issuance of additional shares.
As of October 18, 2000, approximately 95,307,250 shares of common
stock or 95.31% of our 100,000,000 authorized shares remain unissued.
Mr. Sterling, our president, has agreed to return 1,692,750 of his
shares to us for cancellation upon this registration statement being
<PAGE> 11
declared effective by the SEC. We have the power to issue more shares
without shareholder approval. Although we presently have no
commitments, contracts or intentions to issue any additional shares to
other persons, we may in the future attempt to issue more shares to
acquire products, equipment or properties, or for other corporate
purposes.
15. Non-arms' length transactions.
The number of shares issued to some of our present shareholders
for property and services was arbitrarily determined by us and should
not be considered the product of arm's length transactions.
16. Indemnification of officers and directors for securities
liabilities.
Our articles of incorporation provide that we may indemnify any
director, officer, agent and/or employee for liabilities as are
specified in the Washington Business Corporation Act. Further, we may
purchase and maintain insurance on behalf of any of them whether or not
we have the power to indemnify such person against the liability
insured against. This could result in substantial expenditures by us
and prevent us from recovering from our officers, directors, agents and
employees for losses incurred by us as a result of their actions.
Further, we have been advised that in the opinion of the SEC,
indemnification is against public policy as expressed in the Securities
Act of 1933, and is, therefore, unenforceable.
17. Competition.
We have competitors and potential competitors, many of whom have
considerably greater financial and other resources than we do. Further,
if our products are successful, others will enter the market which may
draw our customers away from us or preclude us from obtaining any
customers.
18. Our licenses may not give us adequate protection.
We have licenses to sell our products. The licenses were granted
to us by Messrs Sterling and Sterling, who own the patents and
trademarks to the PHTEM and Turbolator. There is no assurance,
however, that third parties will not infringe on our licenses or their
patents and trademarks. In order to protect our license rights and
their patents and trademarks, we and/or Messrs Sterling and Sterling
may have to file lawsuits and obtain injunctions. If we do that, we
will have to spend large sums of money for attorney's fees in order to
obtain the injunctions. Even if we do obtain the injunctions, there is
no assurance that those infringing on our licenses or Messrs Sterling
and Sterling's patents and trademarks will comply with the injunctions.
Further, we and/or Messrs Sterling and Sterling may not have adequate
funds available to prosecute actions to protect or to defend the
licenses, patents and trademarks, in which case those infringing on the
licenses, patents and trademarks could continue to do so in the future.
<PAGE> 12
19. The licensed trademarks may not give us adequate protection.
Messrs Sterling and Sterling have obtained one registered
trademark and have applied for another. There is no assurance,
however, that third parties may not infringe on the licensed
trademarks. In order to protect their licensed trademark rights, we
and/or Messrs Sterling and Sterling may have to file lawsuits and
obtain injunctions. If that occurs, we and Messrs Sterling and Sterling
will have to spend large sums of money for attorney's fees in order to
obtain the injunctions. Even if injunctions are obtained, there is no
assurance that those infringing on the licensed trademarks will comply
with the injunctions. Further, we and Messrs Sterling and Sterling may
not have adequate funds available to prosecute actions to protect or to
defend the trademarks, in which case those infringing on their licensed
trademarks could continue to do so in the future.
20. Cumulative voting, preemptive rights and control.
There are no preemptive rights in connection with any of the
common stock . Cumulative voting in the election of directors is not
provided for. Accordingly, even if all of the units are sold, the
holders of a majority of the common stock will be able to elect all of
the directors. In fact, our president, by virtue of the amount of
common stock that would be owned by him after the offering , will be
able to elect all of the directors.
21. We do not anticipate paying dividends.
We do not anticipate paying dividends on the shares in the
foreseeable future. Future dividends will depend on our earnings and
our financial requirements. If you believe you will have a need for
immediate income from your investment in the units, shares or
redeemable warrants, you should not purchase our securities.
22. You will incur immediate and substantial dilution of your
investment.
Our existing stockholders acquired their shares at a cost
substantially less than that which you will pay for the units you
purchase in this offering. Accordingly, any investment you make in our
units will result in the immediate and substantial dilution of the net
tangible book value of the shares you received.
23. No public trading market for the units, shares or warrants.
There is no trading in our units, common stock or redeemable
warrants. We cannot guaranty you that a trading market in our
securities, active or otherwise , will develop in the future, even if
this offering is successfully completed. Even if a trading market is
developed, we cannot guaranty that it will be sustained for any period
of time.
<PAGE> 13
24. One unit and/or one warrant must be sold.
One unit and/or one warrant must be sold in our offering. The
money you pay for the units and warrants will be deposited in an escrow
account and held until up to one hundred eighty days have passed from
the effective date of our offering. The one hundred eighty days could
be further extended by an additional five business days to allow the
clearance of funds deposited into the escrow account and the closing of
the offering. Your money will then be delivered to us.
25. There are additional sales practices imposed on brokers.
The units, common stock and redeemable warrants are covered by
Section 15(g) of the Securities Exchange Act of 1934 which imposes
additional sales practice requirements on broker/dealers who sell our
securities in this offering or in the aftermarket. For sales of our
securities, the broker/dealer must make a special suitability
determination and receive from you a written agreement prior to making
a sale to you. Because of the imposition of the foregoing additional
sales practices and/or price of our securities, it is possible that
lending institutions will not accept our securities as collateral for
loans.
26. No firm commitment to purchase the units or redeemable Warrants.
Our underwriter is offering the units and redeemable warrants on a
best-efforts basis, no minimum, $2,905,000 maximum basis. Funds
received from the purchase of the securities will be deposited in an
escrow account maintained at HSBC Bank, 140 Broadway, New York, New
York, and will be delivered to us within one hundred eighty days after
the effective date. The one hundred eighty days could be further
extended by an additional five business days to allow the clearance of
funds deposited into the escrow account and the closing of the
offering. No money will be refunded to you after your money has been
received by the underwriter unless your order has been canceled in
whole or in part.
27. We have to maintain a current registration statement.
In order for the redeemable warrants to be exercised, we must
maintain a current registration statement on file with the SEC. If a
current registration statement is not on file, the redeemable warrants
cannot be exercised. Further, the redeemable warrants may only be
exercised in states where we have a current effective state
registration statement filed. If you move from your current state of
residence, you may not be able to exercise your redeemable warrants in
the future and accordingly, they will be of no value to you.
28. Our warrants are callable.
Our warrants are callable upon thirty (30) days written notice to
you. As such, if you do not exercise your warrants during the thirty
day call period, they terminate and have no value. You may not exercise
your warrants after the expiration of thirty day call period.
<PAGE> 14
29. Our underwriter may have to cease operations.
Our underwriter is subject to a pending civil action by the SEC.
An adverse decision in the action could cause the underwriter to cease
all operations. In the event that occurs, the underwriter would have to
terminate its sale of our securities.
30. Further dilution of your investment.
Further dilution is likely if we issue additional shares at a
lower price than the current offering price and either no trading
market exists for our stock or the trading is at a price lower than
this offering price.
31. Impact of potential future sales of our common stock.
A total of 4,692,750 shares of common stock are issued and
outstanding. Robert Sterling, our president, will return 1,692,750
shares to the Company for cancellation upon this registration statement
being declared effective by the SEC. Castle Securities believes that
our shareholders will likely sell a portion of their stock. If they do
sell their stock into the market, the sales may cause the market price
of the common stock to drop, should a market for the common stock ever
develop.
32. Lock-up.
Pursuant to our agreement with the underwriter, our officers,
directors and Matthew Sterling have agreed not to sell, transfer or
convey by registration or otherwise, without the prior consent of the
underwriter, any of our securities owned by them, directly or
indirectly, for a period of two years from the effective date of this
offering. However, Robert Sterling, our president and Matthew Sterling
his son, may resell up to a maximum of 200,000 shares in aggregate
provided the bid price for the common stock is at least $10.00 after
one year from the effective date. Further, all sales of such stock must
be made through our underwriter, should a market exist therefore.
33. Escrow of our president's shares.
Robert Sterling, our president, has agreed to escrow 550,000
shares of his common stock with our attorney, Conrad C. Lysiak, In the
event that we do not achieve sales of $19,250,000 and pre-tax income in
excess of $4,125,000 by January 31, 2004, the 550,000 shares will be
delivered by Mr. Lysiak to us and canceled. If the foregoing thresholds
are achieved by us, the 550,000 shares will be delivered by Mr. Lysiak
to Mr. Sterling. The $4,125,000 shall be computed based on pretax
income as determined in accordance with generally accepted accounting
standards before any effect created by the stock held in escrow. The
550,000 shares as well as the dollar amount of sales and pretax income
will be prorated downward if less than $2,805,000 is raised in the
offering.
<PAGE> 15
___________________________________________________________________
USE OF PROCEEDS
___________________________________________________________________
This offering is being made on a "best efforts basis." The net
proceeds, after deducting $435,750 for estimated expenses associated
with this offering, will be $2,469,250 assuming all the units and
redeemable warrants are sold. We will use the proceeds as follows:
Net Proceeds to Us
25% 50% 75% 100%
Inventory $ 154,000 $ 308,000 $ 462,938 $ 617,000
Working Capital$ 463,312 $ 926,625 $ 1,389,000 $ 1,852,250
--------- ----------- ----------- -----------
$ 617,312 $ 1,234,625 $ 1,851,938 $ 2,469,250
========= =========== =========== ===========
We expect the cash flow from operations, together with the net
proceeds of this offering to meet our cash requirements for at least
twelve months.
We intend to invest the proceeds of this offering in insured
certificates of deposits with national banks until such time as the
proceeds are needed for inventory or working capital.
We expect to use the amounts allocated to inventory to pay for
Turbolators and PHTEMs. We expect to use the proceeds allocated to
working capital to pay salaries, rents, administrative expenses and
advertising costs.
While we currently intend to use the proceeds of this offering
substantially in the manner set forth above, we reserve the right to
reassess and reassign such use if, in the judgement of our board of
directors, such changes are necessary or advisable. At present, no
material changes are contemplated. Should there be any material changes
in the above projected use of proceeds in connection with this
offering, we will issue an amended prospectus reflecting the same.
<PAGE> 16
__________________________________________________________________
DETERMINATION OF OFFERING PRICE
__________________________________________________________________
The price of the units and the exercise price of the redeemable
warrants we are offering was arbitrarily determined by us and the
underwriter in order for us to raise up to a total of $2,905,000 in
this offering. The offering price bears no relationship whatsoever to
our assets, earnings, book value or other criteria of value. Among the
factors considered were
* our lack of operating history
* the proceeds to be raised by the offering
* the recommendations and demands of the underwriter
* the amount of capital to be contributed by purchasers in this
offering in proportion to the amount of stock to be retained
by our existing Stockholders, and
* our relative cash requirements. See "Plan of Distribution;
Terms of the Offering."
__________________________________________________________________
DILUTION OF THE PRICE YOU PAY FOR YOUR SHARES
__________________________________________________________________
Assuming the maximum number of units and warrants are sold,
investors in our offering will collectively own 550,000 shares of our
common stock, or approximately 15.5% of the outstanding shares, for
which they will have paid $2,750,000 or $5.00 per share and redeemable
warrants to purchase 1,000,000 shares, for which they will have paid
$0.10 per warrant (assuming that $0.10 attributed to each warrant
included in the Units offered hereby and no exercise of the
Underwriter, stock purchase warrant option) . As a group, our existing
shareholders after this offering will own 3,000,000 shares of our
common stock (and after giving effect to the 1,692,750 shares which
Robert Sterling, President will return when this document becomes
effective), or 84.5% of the outstanding shares. Our pro forma net
tangible book value applicable to common stock (defined as our tangible
assets less the amount of our liabilities) on July 31, 2000 was
$(333,067), or $(0.07) per share immediately prior to this offering.
After giving effect only to the sale of the 550,000 shares (which are
part of the units) offered hereby and the application of the proceeds
therefrom and after deducting the underwriter commission and associated
estimated offering expenses associated with the entire offering, our
net tangible book value would be approximately $2,136,000, or $0.60 per
share. This represents an immediate increase in the net tangible book
value of $0.67 per share to existing shareholders and an immediate
dilution of approximately $4.40 per share to new shareholders, assuming
no value given to redeemable warrants which are part of the unit or the
additional redeemable warrants.
<PAGE> 17
The following table illustrates this per-share dilution:
Assumed initial public offering price per share
of which the value of $0.10 attributable to the
redeemable warrant is not included. $ 5.00
Pro forma net tangible book value per share before
this offering $ (0.07)
Increase per share attributable to new shareholders $ 0.67
Pro forma net tangible book value per share after
this offering $ 0.60
-------
Dilution Per Share to New Investors $ 4.40
=======
The following table sets forth as of July 31, 2000, the number of
shares of common stock purchased or to be purchased from us, the total
effective cash consideration to be paid to us, and the average price
per share paid by existing stockholders and by new investors purchasing
shares sold by us in the offering at an assumed initial offering price
of $5.10 per unit and $0.10 per additional redeemable stock purchase
warrant.
Shares Purchased Total Consideration
Average
Price
Number Percent Amount Percent Per
Share
Existing stockholders 3,000,000 15.49% $ 72,135 2.51% $ 0.10
New investors 550,000 84.51% $ 2,805,000 97.49% $ 5.10
--------- ------ ----------- ------
Total 3,550,000 100.00% $ 2,877,135 100.0%
========= ====== =========== =====
Does not include: (i) 550,000 shares of common stock issuable upon the
exercise of the redeemable warrants included in each unit; (ii)
1,000,000 shares of common stock underlying the redeemable warrants;
(iii) 100,000 shares of Common Stock included in the units issuable
upon exercise of the underwriter's warrant; (iv) 100,000 shares of
common stock underlying the redeemable warrants included in the units
subject to the underwriter's warrant; and, (v) issuance of up to
550,000 Loyalty Shares. Assumes the return of 1,692,750 shares of
common stock to us for cancellation by Robert Sterling upon this
offering being declared effective by the SEC.
<PAGE> 18
___________________________________________________________________
PLAN OF DISTRIBUTION; UNDERWRITING; AND, TERMS OF THE OFFERING
___________________________________________________________________
We have hired Castle Securities Corp. as our underwriter to sell
our units and redeemable warrants on an agency basis. Castle is a
broker/dealer registered with the Securities and Exchange Commission
and is a member of the National Association of Securities Dealers, Inc.
There is no minimum number of units or redeemable warrants that Castle
is committed to sell.
Castle Securities has agreed to act as our agent in selling the
units and redeemable warrants. They have no obligation to buy our
securities and may not be able to sell any of the units or redeemable
warrants. We have no legal recourse against Castle Securities for their
inability to sell our securities. Each subscriber who is still the
owner of the share included in the Unit one year after the closing
date, will receive from us, without payment of any additional money,
one Loyalty Share of common stock for each share of common stock he
still owns. Castle Securities will not be entitled to any Loyalty
Shares and will not receive any compensation, direct or indirect, for
the issuance of the Loyalty Shares.
We have agreed to pay Castle Securities the following for their
services:
1. A commission 10% of all money raised in this offering.
2. A non-accountable expense allowance of $0.153 for each unit
sold.
3. A non-accountable expense allowance of $0.003 for each
warrant sold.
4. One underwriter warrant for each 10 units sold at a purchase
price of $0.0001 per warrant.
5. 1% of the gross proceeds of the offering for future
consulting services.
Unless Castle sells one unit and/or one redeemable warrant within
ninety days, unless extended by our board of directors and underwriter
for an additional 90 days, from the effective date of this offering,
it will not receive any commissions or expense allowances.
Each underwriter warrant allows Castle Securities to purchase one
unit at a purchase price of $8.415. The exercise period of the
underwriter warrants will be from 12 months to 60 months after this
offering is declared effective by the SEC. The underwriter warrants
are being registered in this offering. Should Castle exercise its
underwriter warrants, it will receive one share of common stock and one
redeemable warrant. The redeemable warrants will be the same as the
redeemable warrants being sold to you in this offering, except that the
<PAGE> 19
exercise price will be $11.55 for the period beginning on the closing
date of the offering until one year thereafter and $14.85 for the
period beginning one year after the closing date until two years
after the closing date when the redeemable warrants expires.
In the event the registration statement becomes stale, we have
agreed to register the underwriter warrants and/or securities
underlying the underwriter warrants on one additional occasion if we
receive a written request by holders of 40% of the underwriter warrants
and/or underlying securities. Our obligation to register the
underwriter's securities commences 12 months after this offering is
declared effective by the SEC and terminates five years after the
effective date. This is known as a demand registration right.
We have also agreed to include the underwriter warrants and/or
securities underlying the underwriter's warrants in any registration
statement we file with the SEC or if we seek an exemption from
registration pursuant to Regulation A of the Securities Act of 1933.
Our obligation to include Castle Securities' underwriter warrants
and/or securities underlying the underwriter warrants in a registration
commences twelve months after this offering is declared effective and
terminates seven years after the effective date. This is known as a
piggy-back registration right.
Castle may engage other broker/dealers to sell our securities and
may pay all or a portion of the foregoing fees to other broker/dealers
who sell our securities, but not greater than 10% of the offering
price. The amount to be paid to other broker/dealers will be determined
by Castle.
We have already advanced Castle $25,000 to engage them as our
underwriter.
Offering Period and Expiration Date
This offering will commence on the date of this prospectus and
continue for a period of 90 days. Castle Securities and our board of
directors may extend the offering period for an additional 90 days, or
unless the offering is completed or otherwise terminated.
All payments for securities is to be made by check or money order
payable to "HSBC Bank as escrow agent for Exhaust Technologies, Inc.
public offering."
Castle will not sell any units or warrants to accounts over which
it exercises discretionary authority. Further, there is no agreement
between us and Castle to allow Castle to designate or nominate a member
of the board of directors, but Castle has the right to have a
designated non-voting advisor appointed and attend board or directors
meetings.
<PAGE> 20
Escrow of Offering Price
The money you pay for the units and warrants will be deposited by
12:00 noon of the business day following receipt and held in an escrow
account at HSBC Bank USA, 140 Broadway, New York 10005-1180 until
ninety days has lapsed from the effective date of this offering.
Thereafter, the net proceeds will be delivered to us. All commissions
and fees owed to Castle will be deducted therefrom prior to delivery to
us. The ninety day period may be extended by mutual agreement between
Castle and us which means that your money could be held in escrow up to
180 days from the effective date of our offering. In addition, the one
hundred eighty days could be further extended by an additional five
business days to allow the clearance of funds deposited into the escrow
account and the closing of the offering.
Financial Consulting Agreement with Castle Securities
Upon closing we will enter into a Financial Consulting
Agreement with Castle Securities. The term of the agreement is one
year from the effective date and the fee we will pay Castle Securities
is 1% of the gross proceeds of the offering. Under the agreement,
Castle Securities, if requested by us, will consult with us on matters
concerning management, operations and finance.
Right to Reject Orders
We and Castle have the right to accept or reject orders in whole
or in part, for any reason or for no reason. All monies from rejected
orders will be returned immediately by Castle Securities to you,
without interest or the escrow agent if the money has been deposited
in the escrow account to you, without interest or deductions. Orders
for securities will be accepted or rejected within 48 hours after we
receive them.
Compensation for Exercise of Warrants
We will also pay Castle a commission of ten percent (10%) of the
exercise price of the redeemable warrants which are exercised
commencing one year after the effective dated provided:
1. Castle withdraws as a market maker, should it make a market,
during the exercise of warrants for which compensation will
be paid pursuant to Regulation M of the Securities Exchange
Act of 1934.
2. The market price for the common stock is greater than the
exercise price of the redeemable warrant.
3. Castle has solicited the exercise of the redeemable warrant.
4. The compensation arrangements were disclosed to the warrant
holders at the time of the exercise.
<PAGE> 21
Right of First Refusal
If at least one unit or one redeemable warrant is sold, we have
offered Castle the right to sell any other securities we might want to
sell to the public for a period beginning on the effective date of this
offering and terminating three years therefrom. Securities issued as
part of a merger, acquisition, recapitalization, reorganization or
stock option plan are not included and sales made by shareholders are
not included. If Castle does not want to sell our additional
securities, we are free to hire anyone we want to sell them.
For a period of three (3) years after the Closing Date, we will,
as soon as practicable and in any event within 120 days after the close
of each fiscal year, deliver: (1) to our security holders and Castle
Securities a copy of our annual report containing a balance sheet
setting forth our financial condition as of the end of such fiscal
year, together with statements of our income and surplus for such
fiscal year, all reasonably detailed. The balance sheet and statements
of income and surplus will be accompanied by a copy of the accountant's
report with respect thereto of independent public accountants, who may
be our regular accountants. (2) Castle Securities (a) a copy of all
reports which we file with the SEC or with any national securities
exchange promptly after they have been forwarded to the SEC or exchange
and a copy of all financial statements and other reports which we send
to our security holders, and (b) from time to time other information
that Castle Securities may reasonably request. In the event we create
any subsidiaries the accounts of which are customarily
consolidated, the financial statements to be furnished in this
paragraph will be our and our subsidiaries consolidated financial
statements. In addition, and for a period of three (3) years after the
Closing Time, we will furnish unaudited monthly financial statements to
Castle Securities on a timely basis. We will make available to our
security holders, as soon as practicable, but in no event later than 15
months after the effective date of this offering, an unaudited earnings
statement in reasonable detail, covering a period of at least twelve
months beginning after the effective date, which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act of
1933.
Indemnification
We and Castle have agreed to indemnify each other against certain
liabilities arising under the Securities Act of 1933. We have been
informed by the SEC is against public policy and is unenforceable. We
and Castle, however, intend to seek to enforce the contractual
indemnification provisions if the occasion to do so arises.
<PAGE> 22
The Redeemable Warrants
We must maintain an effective current registration statement on
file with the SEC in order for you to exercise your redeemable
warrants. If we do not, you will not be able to exercise your
redeemable warrants. Further, we must maintain a current effective
registration statement in the state of your residence in order for you
to exercise your redeemable warrants. If we do not maintain an
effective registration statement, you will not be able to exercise your
redeemable warrants. Finally, if you move to a state where we have no
state registration statement filed, you will not be able to exercise
your redeemable warrants.
Underwriter's Disciplinary History
Our underwriter, Castle, is appealing a decision of the Market
Surveillance Committee of the National Association of Securities
Dealers, Inc., which was affirmed by the SEC, to the United States
Court of Appeals for the Second Circuit wherein it was found that our
underwriter in 1991 and 1992 : (1) used manipulative, deceptive
and other fraudulent devices to create actual or apparent active
trading in securities and arbitrarily or artificially established and
maintained the price of securities; (2) charged excessive mark-ups;
and, (3) provided inadequate supervision. It was also determined that
Michael T. Studer, the underwriter's president failed to provide
adequate supervision regarding the aforementioned activity. Our
underwriter and Studer were jointly and severally fined $25,000; Our
underwriter and Studer were jointly and severally required to make
restitution in the amount of $19,373.56 plus interest to certain
customers; Studer was suspended for thirty (30) days in all capacities
and required to requalify as a general securities principal within
ninety (90) days of the decision. All sanctions are stayed pending the
determination of the appeal. An adverse decision in this matter will
not have any material impact upon the underwriter's operations.
There is currently pending against the underwriter, Michael Studer
and others in the United States District Court for the Southern
District of New York an action brought in 1992 by the
Securities and Exchange Commission alleging market manipulation and
failure to supervise by the underwriter. The SEC is seeking injunctive
relief and disgorgement of gains realized in connection with the
initial public offering of U.S. Environmental f/k/a as Windfall
Capital. An adverse decision against the underwriter could result in
the underwriter, for events which occurred in 1989-1990,
ceasing operations and immediate termination of this offering.
Section 15(g) of the Exchange Act
Our units, common stock and redeemable warrants are subject to
Section 15(g) of the Securities Exchange Act of 1934 which imposes
additional sales practice requirements on broker/dealers who sell our
securities in this offering or in the aftermarket. For sales of our
securities, the broker/dealer must make a special suitability
determination and receive from you a written agreement prior to making
a sale to you.
<PAGE> 23
__________________________________________________________________
BUSINESS
__________________________________________________________________
General
We are a development stage business formed under the laws of the
state of Washington on July 21, 1998, to develop, manufacture and
market two automotive devices.
The Devices
The two automotive devices we intend to develop, manufacture and
market are the Turbolator and the Pneumatic Hand Tool Exhaust Muffler.
Both devices are available for sale.
The Turbolator
The Turbolator was invented by Robert Sterling, our President and
a member of the Board of Directors, and his son, Matthew R. Sterling in
1990. A patent was issued on October 18, 1994 (No. 5,355,673). During
the period that the patent was pending, the Turbolator was marketed and
generated gross revenues of $160,364. The revenue was earned prior to
our formation and was not recognized as revenue to us. In addition to
obtaining a patent for the Turbolator, Robert Sterling obtained a
trademark with the United States Trademark office on the name
"Turbolator." Messrs. Sterling and Sterling have issued an exclusive
license to us to manufacture, develop and market the Turbolator in the
United States, provided we generate sales from the Turbolator of $-0-
through 2001 and $100,000 per year, thereafter. The term of the
license is for 99 years unless cancelled as a result of lack of sales.
The Turbolator is designed for installation on all vehicles, with
the exception of turbo-charged vehicles. It is composed of a spring
butterfly valve mounted in a tube housing. The butterfly valve is
regulated by a pre-loaded torsion spring. The tube housing or tip
housing is installed directly behind the catalytic converter or
directly behind the muffler. The Turbolator comes in five sizes which
are six inches long with an outside diameter varying from 2 7/8 inches
to 4 1/8 inches depending on the exhaust pipe size. Two Turbolators are
installed for a vehicle equipped with dual exhausts.
The purpose of the Turbolator is to regulate exhaust flow from the
engine. By regulating exhaust flow, the device creates a more efficient
fuel burning engine, thus creating more horsepower and torque without
other modifications to the engine.
The Turbolator operates in conjunction with the exhaust system
"OEM" computer controlled electronic port fuel injection and emission
control systems already certified with the stock engine. Installation
of the Turbolator does not alter the OEM location of the oxygen sensor
and the converter. The tune-up specifications for a vehicle remain the
same. In lab tests the Turbolator reduced certain emissions and
improved fuel mileage.
<PAGE> 24
Pneumatic Hand Tool Exhaust Muffler
The Pneumatic Hand Tool Exhaust Muffler (the "PHTEM") was invented
by Robert E. Sterling, in 1997. Mr. Sterling applied for a patent on
January 13, 1998 and the patent has been issued. The PHTEM is
currently being marketed. Limited sales of 1,560 PHTEMS have
been made to date. Mr. Sterling has granted us an exclusive 99 year
license to manufacture and market the PHTEM, in the United States,
provided the Company generates sales of $-0- in 1998, 1999, 2000 and
2001 and $100,000 per year thereafter.
The PHTEM is a tool with a noise muffling system that can reduce
sound levels and remove entrained solid and oil contaminates from the
exhaust air before it is discharged into the atmosphere. The PHTEM is
used in air powered tools. The PHTEM has a handle with an exhaust
passage where the contaminates pass. The PHTEM includes a number of
washers positioned longitudinally about the inner tube. The combination
of the inner tube and washers are located within the handle exhaust
passage. An end cap is provided in closing off the inner tube distal
end. During use, exhaust air enters the inner tube, flows out the inner
tube airflow openings into the washers, and out the end cap. The handle
muffles the sound the tool and retains the contaminates therein.
Messrs Sterling and Sterling have applied for the registration
of the trademark "Aircat," which is included in the licensing
agreement, to market a line of air powered tools which they have
designed that uses the PHTEM. The tools include a patent pending
handle design which has been ergonomically engineered to better
position and balance the tool during use. Several tools have been field
tested during the past year. The tools incorporating the PHTEM are
substantially quieter with essentially no loss of power. The trademark
examiner has authorized the publication of the trademark for comments.
As of the date hereof the trademark has not been approved and there is
no assurance that the trademark will ever be approved.
Testing
We have conducted independent performance tests of the Turbolator
through an EPA approved California testing facility. Based upon the
tests, we received a California CARB certificate (CARB #D-226-1). The
California CARB Certificate certifies that the Turbolator meets, or
exceeds, the air quality and vehicle performance guidelines set forth
in California. Because California's air quality standards are the
most stringent in the United States, such certification establishes
that the Turbolator meets or exceeds the air qualification standards in
all other states. The tests further established that the Turbolator
improves fuel economy and reduces carbon monoxide and hydrocarbon
emissions.
Manufacturing
We are currently manufacturing the PHTEM in Taiwan and the
Turbolator in Spokane, Washington. We believe there are a number
of manufacturers who are capable of producing the Turbolator and the
PHTEM. Raw materials for the Turbolator and PHTEM are readily available
from numerous sources. Our founders have spent in excess of $50,000
during the two years prior to our incorporation in the development of
the Turbolator and PHTEM.
<PAGE> 25
In August 1999, we entered into a purchase agreement with Apex
Industries, Inc. ("Apex"), whereby Apex agreed to manufacture, and we
agreed to purchase, 10,000 Turbolator assemblies. We have an
unconditional obligation to purchase the 10,000 Turbolator assemblies
and we have no right to return any unsold Turbolator assemblies. The
total cost of the 10,000 Turbolator assemblies is estimated to be
approximately $200,000, of which $28,500 relates to tooling cost that
will become our property. In conjunction with the purchase agreement,
our president secured an irrevocable standby letter of credit with a
bank for $80,000 on our behalf and for the benefit of Apex. Drawings
under the letter of credit bear interest payable monthly at the bank's
prime rate plus two percent (2%) and matured on November 23, 1999. The
Company has taken delivery of 2,500 units. The letter of credit has
expired. We are current on our account with Apex.
Distribution
We intend to distribute the Turbolator and the PHTEM by direct
shipment from the manufacturer and from Spokane, Washington.
Marketing
We are currently selling to warehouse distributors. We are
also selling to retail customers and through catalogue sales.
On February 25, 2000, we entered into an exclusive consulting and
marketing agreement with Clarkson International Corporation. Under the
terms of the agreement, Clarkson is to provide consulting, marketing
and sales services to us. Clarkson will receive as consideration for
its services, the following commissions on the sale of all products by
us:
* Sales under $10,000 - 15% of total sales
* Sales $10,000-$20,000 - $1,500 plus 12% of the amount of the
sales over $10,000
* Sales $20,000-$30,000 - $2,700 plus 11% of the amount of the
sales over $20,000
* Sales over $30,000 - $3,800 plus 10% of the amount of the
sales over $30,000
The commission is payable on or before the 20th of the month
immediately following the month during which the payment of the invoice
applicable to an order in whole or in part is received by us.
Clarkston is owned by unaffiliated third parties.
In the event Clarkson is instrumental in locating a third person
to execute a licensing agreement with us, Clarkson will receive 15% of
the royalties or other fees paid to us under the licensing agreement.
<PAGE> 26
The term of our agreement with Clarkson is three years and shall
automatically renew from year to year thereafter unless the agreement
is terminated by written notice from the party desiring termination
ten days prior to the annual renewal date. The agreement will then
terminate 90 days thereafter. If the agreement is terminated for any
reason, Clarkson will receive its full commission for a period of
twelve months thereafter.
Defective Product Allowance
We pay the manufacturer a fee of 4% of the net cost for a one year
warranty on parts and labor at their service center.
Competition
With respect to the Turbolator, we are not aware of any
competitors within the industry that manufacture a similar product.
With respect to the PHTEM, we are aware of a number of competitors
within the industry that manufacture a similar, but not an identical
product. Some manufacturers have considerably greater financial and
other resources than us and some have less resources.
Governmental Regulation
There are no governmental regulations which effect the
manufacture, development or sale of the Turbolator or PHTEM.
Company's Office
Our offices are located at 230 North Division, Spokane, Washington
99202. These are the offices of Robert Sterling, our President and
major shareholder. We use the offices on a rent free basis. If we move
to a new office location, we will have to pay rent. At this time we
have not made any plans to change office locations.
Employees
We have no full-time employees. Upon the completion of this
offering, our three officers will devote 80% of their time to our
operations. See "Management."
Legal Proceeding
We are not involved in any pending legal proceeding.
Market for Common Equity and Related Stockholder Matters
There is no public market for our units, common stock or
redeemable warrants. There is no assurance that a public market for our
securities will develop in the future, or if a public market does
develop, that it will be sustained over a period of time.
<PAGE> 27
Currently, there are no options or warrants to purchase, or
securities convertible into our common stock. All of the outstanding
shares of common stock were issued pursuant to Reg. 504 of the
Securities Act and are free trading. Shares of common stock owned by
officers and directors may only be resold pursuant to Rule 144 of the
Securities Act of 1933, but do not have to be held for one year as
provided therein.
We are proposing to offer in this offering 550,000 units at $5.10
per unit. Each unit consists of one share of common stock and one
redeemable warrant. In addition, each share, exclusive of the
warrants that may be exercised, unsold and still held by the purchaser
one year from the closing date will entitle the holder to receive one
additional shares of common stock (the "Loyalty Shares"). Each
redeemable warrant is convertible into one share of common stock. The
exercise price of the redeemable warrant is $7.00 if exercised from the
closing date of this offering to one year thereafter and $9.00
if exercised from one year from the closing date to two years
thereafter. We are also offering an 1,000,000 additional redeemable
warrants at $0.10 per warrant. The exercise price of the additional
redeemable warrants is set forth above. We are also selling to the
underwriter, up to 55,000 underwriter warrants exercisable at $8.415
per warrant. Upon the exercise on an underwriter warrant, the
underwriter will receive one unit consisting of one share of common
stock and one redeemable warrant. Each redeemable underwriter warrant
is exercisable at a price of $11.55 if exercised from the closing
date to one year after the closing date and at a price of $14.85 from
one year after the closing date to two years after the closing date
when the redeemable warrants will expire.
As of October 15, 2000, there were 45 shareholders of our common
stock.
We have not paid any dividends on our common stock and do not
intend to do so in the immediate future.
__________________________________________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
__________________________________________________________________
Plan of Operation
The following Plan of Operation contains forward-looking
statements, which involve risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth
elsewhere in this document.
Our plan and focus during the next twelve months include the
following,
<PAGE> 28
1. Complete agreements for the manufacture of the Turbolator and
PHTEM.
2. Continue manufacturing of the Turbolator and PHTEM.
3. Expand our market and continue selling the Turbolator and
PHTEM.
We are considered to be in the development stage, as defined in
Statement of Financial Accounting Standards No. 7. We have been in the
development stage since our inception. We have had no substantial
recurring source of revenue, we have incurred operating losses since
inception and at July 31, 2000 had a working capital deficiency of
$466,336. Additionally, as of July 31, 2000, we had an accumulated
deficit of approximately $371,310 (unaudited).
The development and marketing of new automotive technology is
capital intensive. We have funded operations to date either from the
sale of our common stock or through advances made by our chief
executive officer through a line of credit agreement. We have utilized
funds obtained to date for organizational purposes and to complete
certain research and development. We do not currently intend to conduct
any additional product research or development in the next twelve
months. Both the Turbolator and the PHTEM are being manufactured
and marketed in their current state. We require additional funding
to expand our marketing and inventory levels and have
therefore entered into an understanding with Castle Securities to sell
our units and redeemable warrants to the public market.
We do not currently intend to purchase a plant or to expend
significant amounts for additional equipment in the next twelve months.
We have entered into employment agreements with Robert Teed and
Matthew Sterling which will commence upon receipt of a minimum of
$1,000,000 from this offering. If we do not receive $1,000,000 of the
proceeds from the escrow agent, HSBC Bank, after deduction of Castle
Securities' compensation, neither Mr. Teed nor Matthew Sterling will be
employed by us.
In August 1999, we entered into a purchase agreement with Apex
Industries, Inc. whereby Apex agreed to manufacture, and we agreed to
purchase, 10,000 Turbolator assemblies. The total cost of the 10,000
Turbolator assemblies is estimated to be approximately $200,000, of
which $28,500 relates to tooling cost that will become our property. In
conjunction with the purchase agreement, our chief executive officer
secured an irrevocable standby letter of credit with a bank for $80,000
on our behalf and for the benefit of Apex. Drawings under the letter of
credit were to bear interest payable monthly at the bank's prime rate
plus two percent (2%) . No drawings were made under this letter of
credit and the letter of credit matured on November 23, 1999. The
Company has taken delivery of 2,500 units. The letter of credit
expired. We are current on account with Apex.
<PAGE> 29
Year ended January 31, 2000 compared to period from date of inception
(July 21, 1998) Through January 31, 1999.
Operating Expenses:
Operating expenses include those costs incurred for professional
services provided to us in connection with certain agreements executed
by us. In addition we incurred certain expenses necessary to complete
the necessary research and development associated with our products, as
of January 31, 2000. Operating expenses totaling $215,000 have been
incurred since inception. For the year ended January 31, 2000 our
operating expenses totaled $180,000 as compared to $35,000 for the
period from inception July 21, 1998 through January 31, 1999. This
increase of approximately $145,000 or 414% was primarily the result of
an increase of $65,000 from professional services, $44,000 in research
and development costs, $30,000 in compensation costs and $24,000 in
advertising expenses, as partially offset by $30,000 in fees paid to
our directors in the form of common stock. Finally, approximately
$17,000 of additional expense was incurred during the year ended
January 31, 2000, and was primarily the result of the increase in our
general administrative activities.
Other Expenses:
Other expenses consist of interest expense incurred by us on
borrowings on the related party line of credit. Interest expense
totaling approximately $10,000 has been incurred since inception, as of
January 31, 2000. During the year ended January 31, 2000 we recognized
interest expense of approximately $9,000. There were no outstanding
borrowings on the related party line of credit for the comparable
period of the prior year.
Net Loss:
Primarily as a result of the foregoing factors, our aggregate
losses were $225,000 as of the period from inception through January
31, 2000. The net loss for the year ended January 31, 2000 was $189,000
as compared to $36,000 for the period from inception July 21, 1998
through January 31, 1999. This increase of approximately $153,000 leads
to a $0.03 increase in the loss per share to $0.04 for the year ended
January 31, 2000.
Six months ended July 31, 2000 (Unaudited) compared to the six months
ended July 31, 1999 (Unaudited)
During the six months ended July 31, 2000, the Company
began to sell limited quantities of its products. The Company
recognized total revenue in the first half of 2000 of
approximately $60,000 as compared to $0 for the same period of
the prior year. The Company has discounted its product prices to its
initial customers, which has reduced revenues and contributed to a
lower gross margin than management expects for future periods. In
addition, due to the limited sales for the period ended July 31, 2000,
the Company has not been able to take advantage of purchasing
components with volume discounts or efficiently use its production
staff or facilities which increases the cost of its products. As the
<PAGE> 30
Company ramps up its production efforts, the Company expects to reduce
product costs and efficiencies should be gained through economies of
scale. However, there can be no assurances that such efficiencies or
other cost controls can be implemented, and if implemented will result
in an increased gross margin.
Operating Expenses:
Operating expenses include those costs incurred to bring the
Company's product to market relative to research and development,
sales, marketing, and general administration. operating expenses
increased for the six months ended July 31, 2000 to approximately
$138,000 from approximately $61,000 for the same six-month period in
1999. The increase of $77,000 for the six month period was primarily
due to the Company ramping up operations to begin sales efforts related
to initial market penetration. Specifically, for the six months ending
July 31, 2000, professional expenses increased approximately $4,000,
advertising increased approximately $20,000 and general and
administrative expenses increased $31,000. These increases were all
related to activities associated with the introduction of the product
to the market. Additionally, the Company incurred costs in 2000
related to research and product development of approximately $41,000,
which was necessary to finalize development of the product for market
introduction.
Net Loss:
Primarily as a result of the foregoing factors, the Company's net
loss was approximately $146,000 and $62,000, respectively, for the six
month periods ended July 31, 2000 and 1999.
Liquidity and Capital Resources
Financial Condition:
During the period from inception through July 31, 2000, we used
cash in operating activities of $274,000. For the six months ended July
31, 2000 we used cash in operating activities of $60,000 as compared to
$61,000 which was used in the first six months of our fiscal year
ended July 31, 1999. This decrease in the cash used in operating
activities was primarily associated with the Company generating
revenue in the six months ended July 31, 2000. As of July 31, 2000
we had a cash balance of $2,638 in cash and cash equivalents. From the
date of inception through July 31, 2000 we used cash in investing
activities of $134,000, which primarily related to the acquisition of
certain licensing rights and for limited production and testing
equipment. We have historically financed our operation from either the
sale of our common stock or from borrowings on the related party line
of credit. From inception through July 31, 2000 we obtained financing
funds totaling $411,000.
At July 31, 2000, we had a deferred tax asset of approximately
$180,000. We do not believe that our present condition or past results
makes it more likely than not that we will be able to realize the
benefit of this deferred tax asset. As such a valuation allowance has
been established equal to the net deferred tax asset.
<PAGE> 31
As of July 31, 2000, we had incurred losses since inception and
had a working capital deficiency. While the Company has commenced
selling its products, sales have not been sufficient to pay expenses.
Primarily as a result of these factors, our independent certified
public accountants included an explanatory paragraph in their report on
our financial statements for the year ended January 31, 2000, which
expressed substantial doubt about our ability to continue as a going
concern. We believe the ability of our Company to continue as a going
concern and achieve profitability is highly dependent on a number of
factors including, but not limited to: our ability to market and
distribute our products, obtain sufficient financing, and to secure an
agreement with a manufacturer to produce in sufficient quantity and at
a cost efficient price, our two products, the Turbolator and the PHTEM.
Impact of recently issued accounting standards
In July 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 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
gain or loss recognition on the hedging derivative with the recognition
of (i) the changes in the fair value of the hedged asset or liability
that are attributable to the hedged risk or (ii) the earnings effect of
the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized as income in the
period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after July 15, 2000. Based on our current and
planned future activities relative to derivative instruments, we
believe that the adoption of SFAS No. 133 on January 1, 2001 will not
have a significant effect on our financial statements.
___________________________________________________________________
MANAGEMENT
___________________________________________________________________
Officers and Directors
Each of our directors is elected by the stockholders to a term of
one year and serves until his or her successor is elected and
qualified. Each of our officers is elected by the board of directors to
a term of one year and serves until his or her successor is duly
elected and qualified, or until he or she is removed from office. The
board of directors has no nominating, auditing or compensation
committees.
<PAGE> 32
The name, age and position of our present officers and directors
are set forth below:
Name Age Position
Robert E. Sterling 56 President and a member of the Board
of Directors
Ronald L. Allen 59 Vice President and a member of the
Board of Directors
William A. Sutherland 54 Secretary/Treasurer and a member of
the Board of Directors
All directors hold office until the next annual meeting of
shareholders and until their successors have been elected and
qualified. Our officers are elected by the Board of Directors after
each annual meeting of shareholders and hold office until their death,
or until they resign or have been removed from office.
Robert E. Sterling - President and a member of the Board of Directors.
Mr. Sterling, one of our founders, has been our President and a
member of the Board of Directors since our inception. Mr. Sterling is
the founding principal and sole owner of Bob Sterling Enterprises,
Inc., a Washington corporation, located in Spokane, Washington.
Sterling Enterprises was formed in 1967 and conducts business through
itself and several subsidiary corporations in general contracting, real
estate and retail stores. Since 1967, Mr. Sterling has owned Midas
Muffler Shops in Washington and Idaho and has from time-to-time owned
and operated Midas Muffler Shops in Hawaii in 1978 and Nevada from 1979
to 1984. Mr. Sterling has also served as an officer and director of the
following publicly traded corporations: Gold Express Corporation from
1984 to 1989 and Gold Coin Mining, Inc. from 1984 to 1989.
Ronald L. Allen - Vice President and a member of the Board of
Directors.
Mr. Allen, one of our founders, has been our Vice President and a
member of the Board of Directors since our inception. Mr. Allen has
been engaged in the commodity futures business since 1973 and since
1994 has owned Merchants Futures of the Northwest, a commodity
brokerage company located in Spokane, Washington. Mr. Allen has served
as an officer and director of the following publicly traded
corporations: Gold Capital, Inc. in 1983; Remco Enterprises, Inc. in
1978 and, Calco Enterprises, Inc. in 1981.
<PAGE> 33
William A. Sutherland - Secretary/ Treasurer, Chief Financial Officer,
and a member of the Board of Directors.
Mr. Sutherland, one of our founders, has been our
Secretary/Treasurer, Chief Financial Officer and a member of the Board
of Directors since our inception. Since 1970, Mr. Sutherland has been
involved in the automotive industry as a consultant from
1979 to the present and automobile dealer from 1975 to 1989. He has
owned Lincoln, Mercury, and Mercedes Benz car dealerships and is
currently a consultant to a number of auto dealerships located in
Spokane, Washington.
Robert Teed - Proposed President and Chief Executive Officer.
We have entered into an employment agreement with Robert Teed,
age 57 which will commence upon receipt of a minimum of $1,000,000
from this offering. If we do not receive $1,000,000 of proceeds from
the Escrow Agent, HSBC Bank after deduction of Castle Securities'
compensation, Mr. Teed will not be employed by us. Mr. Teed will be
employed as a replacement to Robert Sterling as president and chief
executive officer. Mr. Sterling will be retained as chief operations
officer. If Mr. Teed does not replace Mr. Sterling, Mr. Sterling will
remain as president and chief executive officer. From February 1999 to
December 1999, Mr. Teed was the vice president, sales and operations
and an executive board member of Tuneup Masters, Inc., located in
Dallas, Texas. Tuneup Masters is engaged in the business of automotive
repair. From January 1997 to December 1998, Mr. Teed was president and
chief executive officer of Bill King's Brake-O, Inc. located in Dallas,
Texas. Bill King's Brake-O, Inc. is a brake center chain. From May
1995 to December 1996, Mr. Teed was president and chief executive
officer of Brownwood Muffler and Automotive, Inc. located in Dallas,
Texas. Brownwood Muffler is engaged in the business of automotive
repair. From August 1994 to May 1995, Mr. Teed was vice
president and general manager of Master Muffler Shops Inc. located in
Salt Lake City, Utah. Master Muffler Shops are engaged in the business
of muffler installation. From July 1993 to July 1994, Mr. Teed was the
owner of Justice Tire and Auto Care located in Reno, Nevada. Justice
Tire and Auto Care was engaged in the business of tire and automotive
car center. From January 1986 to July 1993, Mr. Teed was president and
chief executive officer of Business Improvement Resources, Inc. located
in Chicago, Illinois. Business Improvement Resources is engaged in the
business of consulting with companies to restructure/turnaround
strategies for profitable sales.
Matthew R. Sterling - Proposed Vice President of Research and
Development.
We have entered into an employment agreement with Matthew Sterling
age 33 which will commence upon receipt of a minimum of
$1,000,000 from from this offering. If we do not receive $1,000,000 of
proceeds from the Escrow Agent, HSBC Bank, after deduction of Castle
Securities' compensation, Mr. Sterling will not be employed as Vice
President of Research and Development. Since January 1, 1985 Mr.
Sterling has been employed by Midas Muffler in Spokane, Washington as
an installer. The Midas Muffler shop in Spokane, Washington is owned
by Robert Sterling, Matthew Sterling's father and our President.
<PAGE> 34
All of our officers and directors are engaged in other business.
As such, they will not be devoting time exclusively to our operations.
Our officers and directors, including Robert Teed and Matthew Sterling
intend to devote substantial time, but not less than approximately 80%
of their time to the operation of our business.
__________________________________________________________________
EXECUTIVE COMPENSATION
__________________________________________________________________
Summary Compensation
The following table sets forth the compensation paid to our officers
during the last three fiscal years. This information includes the dollar
value of base salaries, bonus awards and number of stock options granted,
and certain other compensation, if any.
SUMMARY COMPENSATION TABLE [1]
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities All
Name and Anuual Restricted Underlying Other
Principal Compen- Stock options/ LTIP Compensa-
Position Year Salary Bonus sation Award(s) SARs Payouts tion
Robert E.
Sterling 2000 30,000[3] - - - - - -
President 1999 - - - $10,000[2] - - -
1998 - - - - - - -
Ronald L.
Allen 2000 - - - - - - -
Vice 1999 - - - $10,000 [2] - - -
President 1998 - - - - - - -
William A. 2000 - - - - - - -
Sutherland 1999 - - - $10,000 [2] - - -
Secretary- 1998 - - - - - - -
Treasurer
Matthew
Sterling 2000 - - - - - - -
Vice 1999 - - - - - - -
President 1998 - - - - - - -
(Proposed)
Robert F.
Teed 2000 - - - - - - -
President, 1999 - - - - - - -
CEO 1998 - - - - - - -
(Proposed)
[1] All compensation received by the officers and directors has been
disclosed.
[2] Represents the value of 50,000 shares issued to each individual
for services as a director.
[3] Mr. Sterling was entitled to compensation of $30,000 for services
performed during fiscal 1999 and $10,000 for the six months
ended July 31, 2000. Mr. Sterling elected to waive the
compensation for fiscal 1999 (expense was recorded with an offset
to contributed capital).
<PAGE> 35
There are no stock option, retirement, pension, or profit sharing
plans for the benefit of our officers and directors.
Option/SAR Grants
No individual grants of stock options, whether or not in tandem
with stock appreciation rights ("SARs") and freestanding SARs have been
made to any executive officer or any director since our inception,
accordingly, no stock options have been exercised by any of the
officers or directors in fiscal 2000.
Long-Term Incentive Plan Awards
We do not have any long-term incentive plans that provide
compensation intended to serve as incentive for performance to occur
over a period longer than one fiscal year, whether such performance is
measured by reference to our financial performance, our stock price, or
any other measure.
Compensation of Directors
Each member of the board of directors received 50,000 shares of
common stock to serve on the Board of Directors during fiscal 1999. The
directors did not receive any other compensation for serving as members
of the board of directors. The Board has not implemented a plan to
award options. There are no contractual arrangements with any member of
the board of directors.
Employment Agreements
We do not expect to pay any salaries to our officers for the
fiscal year-ending January 31, 2001. We intend to begin paying salaries
to Robert Sterling, Matthew Sterling and Robert Teed upon completion of
this offering and receipt of $1,000,000 in proceeds from HSBC Bank
after deduction of Castle Securities' compensation. The employment
agreements are subject to the following terms and conditions:
1. The term of each employment agreement, with the exception of
Robert Sterling, will be for a period of three years beginning upon
receipt of $1,000,000 in proceeds from from the Escrow Agent, HSBC
Bank, after deduction of Castle Securities' compensation. In the event
that we do not receive the $1,000,000 in proceeds from HSBC, Robert
Teed and Matthew Sterling will not be employed as President and Vice
President of Research and Development, respectively. Robert
Sterling's agreement will commence upon the closing date of this
offering regardless of the amount of money received by us from HSBC.
2. Robert Sterling will be employed as Chief Operations Officer
and will be paid $100,000 per year.
3. Matthew Sterling will be employed as Vice President of
Research and Development and will be paid $75,000 per year.
4. Robert Teed will be employed as President and Chief Executive
Officer and will be paid $125,000.
<PAGE> 36
5. We will obtain life insurance on Robert Sterling in the
amount of $500,000. Further, we will obtain life insurance on Robert
Teed and Matthew Sterling in the amount of $500,000 each, subject to
their employment agreements becoming effective.
6. Each employment agreement will provide for the payment of
accrued salaries upon termination as well as payment by us of other
benefits relating to vacation, automobile, medical expenses and life
insurance.
Indemnification
Pursuant to the articles of incorporation and bylaws of the
corporation, we may indemnify an officer or director who is made a
party to any proceeding, including a law suit, because of his position,
if he acted in good faith and in a manner he reasonably believed to be
in our best interest. In certain cases, we may advance expenses
incurred in defending any such proceeding. To the extent that the
officer or director is successful on the merits in any such proceeding
as to which such person is to be indemnified, we must indemnify him
against all expenses incurred, including attorney's fees. With respect
to a derivative action, indemnity may be made only for expenses
actually and reasonably incurred in defending the proceeding, and if
the officer or director is judged liable, only by a court order. The
indemnification is intended to be to the fullest extent permitted by
the laws of the state of Washington.
Regarding indemnification for liabilities arising under the
Securities Act of 1933 which may be permitted to directors or officers
pursuant to the foregoing provisions, we are informed that, in the
opinion of the Securities and Exchange Commission, such indemnification
is against public policy, as expressed in the Act and is, therefore
unenforceable.
___________________________________________________________________
PRINCIPAL STOCKHOLDERS
___________________________________________________________________
The following table sets forth, as of the date of this prospectus,
the total number of shares owned beneficially by each of our directors,
officers and key employees, individually and as a group, and the
present owners of 5% or more of our total outstanding shares. The table
also reflects what such ownership will be assuming completion of the
sale of all shares in this offering, which we can't guarantee. The
stockholders listed below has direct ownership of his shares and
possesses sole voting and dispositive power with respect to the shares.
<PAGE> 37
Name and
Address Number of Number of Percentage
Beneficial Share Before Shares After of Ownership
owner Offering Offering After Offering
Robert Sterling 4,300,000 2,607,250 73.44%
230 N. Division St.
Spokane, WA 99202
Ronald Allen 50,000 50,000 1.41%
3031 W. 22nd
Spokane, WA 99204
William Sutherland 50,000 50,000 1.41%
7202 S. Oak Road
Spokane, WA 99224
All Officers and
Directors as a Group
(3 Persons) 4,400,000 2,707,250 76.26%
The persons named above are our parents and promoters within the
meaning of such terms under the Securities Act of 1933 by virtue of
their direct and indirect stock holdings. Messrs. Sterling, Allen and
Sutherland are our only promoters.
The following persons will be retained as our officers subject to
receipt from Castle Securities of $1,000,000:
Matthew Sterling 100,000 100,000 2.50%
4821 North Larch Court
Spokane, WA 99216
Robert Teed 0 0 0%
209 Cherry Lane
Momence, IL 60954
Future Sales by Existing Stockholders
A total of 4,692,750 shares of common stock were issued and
outstanding on July 19, 2000. Mr. Sterling has agreed to return
1,692,750 shares which he owns to us upon the registration statement
being declared effective by the SEC. After Mr. Sterling returns
1,692,750 shares to us, there will be outstanding, prior to this
offering, 3,000,000 shares of common stock. The foregoing 3,000,000
shares are all free trading, except that our officers and directors
may only resell their shares pursuant to Rule 144 of the Act with the
exception of the one year holding period. Our officers, directors
and Matthew Sterling have agreed not to sell transfer or convey by
registration or otherwise, without the prior consent of the
underwriter, any of our securities owned by them, directly or
indirectly, for a period of two years from the effective date of this
<PAGE> 38
offering. However, Robert Sterling, our President and Matthew Sterling
his son, may resell up to a maximum of 200,000 shares in aggregate
provided the bid price for the common stock is at least $10.00 after
one year from the effective date. Further, all sales of such stock must
be made through the underwriter.
Escrow of 550,000 Shares by Robert Sterling
Robert Sterling, our President, has agreed to escrow 550,000
shares of his common stock with our attorney, Conrad C. Lysiak, In the
event that we do not achieve sales of $19,250,000 and pre-tax income in
excess of $4,125,000 by January 31, 2004, the 550,000 shares will be
delivered by Mr. Lysiak to us and canceled. If the foregoing thresholds
are achieved by us, the 550,000 shares will be delivered by Mr. Lysiak
to Mr. Sterling. The $4,125,000 shall be computed based on pretax
income before any effect created by the stock held in escrow. The
550,000 shares as well as the dollar amount of sales and pretax income
will be prorated downward if less than $2,905,000 is raised in this
offering.
The units and redeemable warrants sold in this offering will be
immediately resalable. Sales of our other shares could have a
depressive effect on the market price, if any, of our common stock and
the shares we are offering.
___________________________________________________________________
DESCRIPTION OF SECURITIES
____________________________________________________________________
Units
Each unit consists of one share of common stock and one redeemable
warrant and each share unsold and still held by the purchaser one
year from the offering will entitle the holder to receive one
additional share of common stock. Each warrant entitles the holder
to purchase one share of common stock at a price of $7.00 provided the
same is exercised from the closing date of this offering to
one year thereafter and at a price of $9.00 if the warrant is exercised
from one year after the closing date of the offering to two
years thereafter. Redeemable warrants that are not exercised within two
years of the closing date cannot be exercised thereafter.
Common Stock
Our authorized capital stock consists of 100,000,000 shares of
common stock, par value $0.00001 per share. The holders of our common
stock:
* have equal ratable rights to dividends from funds legally
available therefor, when, as and if declared by our board of
directors;
<PAGE> 39
* are entitled to share ratably in all of our assets available
for distribution to holders of common stock upon liquidation,
dissolution or winding up of our affairs;
* do not have preemptive, subscription or conversion rights and
there are no redemption or sinking fund provisions or rights;
and,
* are entitled to one non-cumulative vote per share on all
matters on which stockholders may vote.
All shares of common stock now outstanding are fully paid for and
non-assessable and all shares of common stock which are the subject of
this offering, when issued, will be fully paid for and nonassessable.
We refer you to our articles of incorporation, bylaws and the
applicable statutes of the state of Washington for a more complete
description of the rights and liabilities of holders of our securities.
Non-Cumulative Voting
Holders of shares of our common stock do not have cumulative
voting rights, which means that the holders of more than 50% of the
outstanding shares, voting for the election of directors, can elect all
of the directors to be elected, if they so choose, and, in such
event, the holders of the remaining shares will not be able to elect
any of our directors. After this offering is completed, the present
stockholders will own approximately 75% of our outstanding shares and
our president will own 69% of our outstanding shares.
Cash Dividends
As of the date of this prospectus, we have not paid any cash
dividends to stockholders. The declaration of any future cash dividends
will be at the discretion of our board of directors and will depend upon
our earnings, if any, our capital requirements and financial position,
our general economic conditions, and other pertinent conditions. It is
our present intention not to pay any cash dividends in the foreseeable
future, but rather to reinvest earnings, if any, in our business
operations.
Redeemable Warrants
Each redeemable warrant entitles the holder to purchase one share of
common stock at a price of $7.00 provided the same is exercised from the
closing date of this offering to one year thereafter and at a
price of $9.00 if exercised from one year after the closing date
to two years after the closing date. If the redeemable warrants
are not exercised by then, they will expire and cannot be exercised
thereafter.
The redeemable warrants are subject to redemption by us upon the
following conditions:
1. Thirty (30) days written notice to you.
<PAGE> 40
2. The effectiveness of a current registration statement.
3. Our common stock having traded at least $10.00 per share for
thirty (30) trading days immediately preceding the date of the notice to
you during the exercise period from the effective date to one year
thereafter.
4. Our common stock having traded at least $15.00 per share for
thirty (30) trading days immediately preceding the date of the notice to
you during the exercise period from one year after the closing
date of this offering to two years thereafter.
If we call the redeemable warrants for redemption, and you do not
exercise your redeemable warrant, the redeemable warrant will terminate
on the date set forth in the notice to you.
Reports
We are subject to certain reporting requirements and will furnish
annual financial reports to you certified by our independent accountants,
and, will furnish unaudited quarterly financial reports.
Stock Transfer and Warrant Agent
The stock transfer and redeemable warrant agent for our securities
is Computershare Investor Services, Inc., 12039 West Alameda Parkway,
Suite Z-2, Lakewood, Colorado 80228 and its telephone number is (303)
986-5400.
___________________________________________________________________
CERTAIN TRANSACTIONS
____________________________________________________________________
On July 21, 1998, we entered into a Licensing Agreement with Robert
Sterling, our President, and Matthew Sterling, the son of Robert Sterling
for the licensing of the development, manufacturing and marketing of the
Turbolator. Further, on the same date, we entered into a licensing
agreement with Robert Sterling, for the development, manufacturing and
marketing of the PHTEM. The foregoing agreements were subsequently
amended to extend the time period that we have to generate revenues from
the sale of our products.
On July 31, 1998, we issued 4,500,000 shares of Common Stock to the
following pursuant to Regulation 504 of the Securities Act of 1933 (the
"Act"):
<PAGE> 41
Name
Total consideration and shares acquired
Robert E. Sterling 4,250,000 shares and the Licensing Agreement
and 50,000 shares for services as a director
Ronald L. Allen 50,000 shares for services as a director
William A. Sutherland 50,000 shares for services as a director
Matthew R. Sterling 100,000 shares for the Licensing Agreement
TOTAL 4,500,000 shares for Licensing Agreements and
Services valued at $45,841
We received cash advances under a line of credit totaling
$465,842 at July 31, 2000 from Robert Sterling. Outstanding
borrowings under the line of credit accrue interest at prime plus 2%
and mature at the date of receipt of funds by us from this
underwriting. At that date, the note converts to a note with a due
date of three years from the date of the receipt of funds at the same
interest rate as the demand note, interest paid monthly until the date
of maturity. At July 31, 2000, we were indebted to Mr. Sterling in the
amount of $465,842.
Upon this registration statement being declared effective by the
SEC, Robert Sterling will return 1,692,750 shares to us for
cancellation as a condition to Castle Securities Corp. acting as our
underwriter.
A conflict of interest exists between us and Robert Sterling, our
president. Pursuant to the licensing agreements between us and Robert
Sterling, if we do not sell a minimum number of Turbolators and PHTEMs
the licensing agreements will terminate. Therefore, it may be to Mr.
Sterling's advantage to cause the termination of the licensing
agreements. This directly conflicts with his duty as our president to
do all things necessary to assure that we meet the minimum sales in
order to maintain the licensing agreements.
In the, future, we may borrow money from our officers and
directors, if necessary. If we do so, the terms of the loans will be no
less favorable to us than those that can be obtained from unaffiliated
third parties. We will not loan money to our officers and directors.
Forgiveness of a loan between us an affiliate must be approved by a
majority of the board of directors who do not have an interest in the
transaction and who have access, at our expense, to our counsel or an
independent counsel.
All of our current transactions were approved and ratified by all
of our directors. In each case, our directors had access to our counsel
or any counsel of their choosing. All past transactions which are now
closed had at least two disinterested directors at the time of each
transaction.
<PAGE> 42
__________________________________________________________________
LITIGATION
__________________________________________________________________
We are not a party to any pending litigation and none is
contemplated or threatened.
__________________________________________________________________
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 contained an explanatory paragraph regarding our
ability to continue as a going concern) appearing elsewhere herein and in
the registration statement, and are included herein in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.
__________________________________________________________________
LEGAL MATTERS
__________________________________________________________________
Conrad C. Lysiak, Attorney at Law, 601 West First Avenue, Suite 503,
Spokane, Washington 99201, telephone (509) 624-1475 has acted as legal
counsel for our company. Robert C. Beers, P.C., Attorney at Law, 3 Linden
Street, Selden, New York 11784, telephone (631) 698-7794 and Stephen W.
Wilk, Attorney at Law, 1600 Stewart Avenue, Suite 600, Westbury, New York
11590 telephone (516) 683-0225 have acted as legal counsel for Castle
Securities.
__________________________________________________________________
FINANCIAL STATEMENTS
__________________________________________________________________
Our fiscal year end is January 31. We will provide audited financial
statements to our stockholders on an annual basis; the statements will be
audited by an Independent Certified Public Accountant.
Our audited financial statements from inception through January
31, 2000 ; and our unaudited financial statements for the
six months ended July 31, 2000 immediately follow:
<PAGE> 43
INDEX TO FINANCIAL STATEMENTS
Financial Statements begin on following page.
Exhaust Technologies, Inc. (a development stage company)
Report of Independent Certified Public Accountant . . F-2
Balance Sheets . . . . . . . . . F-3
Statements of Loss . . . . . . . . F-4
Statements of Changes in Stockholders' (Deficit) Equity. F-5
Statements of Cash Flows . . . . . .F-6 to F-7
Summary of Accounting Policies . . . F-8 to F-11
Notes to Financial Statements . . . F-12 to F-14
F-1
<PAGE> 44
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Exhaust Technologies, Inc.
We have audited the accompanying balance sheets of Exhaust
Technologies, Inc. (a development stage company) as of January 31, 2000
and 1999, and the related statements of loss, changes in stockholders'
(deficit) equity and cash flows for the year ended January 31, 2000 and
for the period from July 21, 1998 (date of inception) through January
31, 1999. We have also audited the statements of loss, changes in
stockholders' equity (deficit) and cash flows from July 21, 1998 (date
of inception) through January 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 conducted our audits in accordance with generally accepted auditing
standards. 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Exhaust
Technologies, Inc. as of January 31, 2000 and 1999, and the results of
its operations and its cash flows for the year ended January 31, 2000,
the period from July 21, 1998 (date of inception) through January 31,
1999 and the period from July 21, 1998 (date of inception) through
January 31, 2000, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1
to the financial statements, the Company has no recurring source of
revenue, has incurred losses since inception and has significant cash
needs and will require substantial capital from outside sources in
order to complete its business plan. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BDO SEIDMAN, LLP
Spokane, Washington
February 22, 2000
except for Note 4, which is as of July 31, 2000
F-2
<PAGE> 45
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS (Note 1)
July 31, January 31, January 31,
2000 2000 1999
(Unaudited)
Current assets:
Cash $ 2,638 $ 352 $ 27,265
Accounts receivable 14,823 - -
Inventory 103,238 108,545 7,991
Prepaid expenses 10,177 - -
---------- ---------- ---------
Total current assets 130,876 108,897 35,256
Equipment, net (Note 2) 112,707 95,186 -
Other assets:
Licenses, net of accumulated
amortization of $10,871,
$7,871 and $1,584 (Note 3) 20,562 23,562 14,257
Deferred stock offering costs
(Note 7) 73,892 39,300 -
---------- ---------- ---------
$ 338,037 $ 266,945 $ 49,513
========== ========== =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 98,808 $ 34,955 $ -
Accrued interest 32,562 9,503 785
Line of credit - related
party (Note 4) 465,842 345,266 22,509
---------- ---------- ---------
Total current liabilities 597,212 389,724 23,294
---------- ---------- ---------
Commitments and contingencies
(Notes 1, 6 and 7)
Stockholders' (deficit) equity:
Common stock, $.00001 par value;
100,000,000 shares authorized;
4,692,750, 4,692,750 and
4,642,500 shares issued and
outstanding 47 47 46
Additional paid-in capital 112,088 102,088 62,039
Deficit accumulated during
the development stage (371,310) (224,914) (35,866)
---------- ---------- ---------
Total stockholders'
(deficit) equity (259,175) (122,779) 26,219
---------- ---------- ---------
$ 338,037 $ 266,945 $ 49,513
========== ========== =========
See accompanying summary of accounting policies and notes to financial
statements.
F-3
<PAGE> 46
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF LOSS
Date of Date of Date of
Inception Six Six Inception Inception
(07/21/98) Months Months (07/21/98) Year (07/21/98)
Through Ended Ended Through Ended Through
07/31/00 07/31/00 07/31/99 01/31/00 01/31/00 01/31/99
(Unaudited) (Unaudited) (Unaudited)
Sales $ 60,041 $ 60,041 $ - $ - $ - $ -
Cost of sales 45,564 45,564 - - - -
---------- ---------- -------- ---------- ---------- --------
Gross profit 14,477 14,477 - - - -
---------- ---------- -------- ---------- ---------- --------
Operating expenses:
Professional
services 110,138 45,508 41,445 64,630 64,630 -
Research and
development 84,311 40,608 15,171 43,703 43,703 -
Compensation 40,000 10,000 - 30,000 30,000 -
Advertising 45,173 21,507 1,619 23,666 23,666 -
Travel 9,872 666 - 9,206 6,368 2,838
Amortization 10,871 3,000 1,274 7,871 6,287 1,584
Office expense 4,353 939 1,300 3,414 2,755 659
Directors fees 30,000 - - 30,000 - 30,000
Dues and
subscriptions 4,126 3,851 - 275 275 -
Supplies 3,268 622 - 2,646 2,646 -
Repairs 800 800 - - - -
Depreciation 5,723 5,723 - - - -
Insurance 810 810 -
Royalties 3,619 3,619 -
---------- ---------- -------- ---------- ---------- --------
Total operating
expenses 353,064 137,653 60,809 215,411 180,330 35,081
---------- ---------- -------- ---------- ---------- --------
Loss from
operations (338,587) (123,176) (60,809) (215,411) (180,330) (35,081)
Other expense:
Interest
expense (32,723) (23,220) (1,232) (9,503) (8,718) (785)
---------- ---------- -------- ---------- --------- --------
Net loss $ (371,310) $ (146,396) $ (62,041) $ (224,914) $(189,048) $(35,866)
========== ========== ========= ========== ========= ========
Net loss per
share - basic
and diluted $ (0.03) $ (0.01) $ (0.04) $ (0.01)
========== ========= ========= =======
Weighted average
number of shares
outstanding - basic
and diluted 4,692,750 4,682,385 4,690,223 4,516,264
========== ========= ========= =========
See accompanying summary of accounting policies and
notes to financial statements.
F-4
<PAGE> 47
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
For the Six Months Ended July 31, 2000 (Unaudited), the Year Ended
January 3,1 2000 and the Period Ended January 31, 1999
Deficit
Accumulated
Additional During the
Common Stock Paid-in Development
Shares Amount Capital Stage Total
Common stock issued
to inventors at
inception for licenses
at $0.01 per share 4,350,000 $ 43 $ 15,798 $ - $ 15,841
Common stock issued for
services at $0.20 per
share 150,000 2 29,998 - 30,000
Common stock issued for
cash at $0.20 per share 142,500 1 16,243 - 16,244
Net loss for the period - - - (35,866) (35,866)
--------- ---- ---------- ---------- ----------
Balance,
January 31, 1999 4,642,500 46 62,039 (35,866) 26,219
Common stock issued for
cash at $0.20 per share 50,250 1 10,049 - 10,050
Contributed services - - 30,000 - 30,000
Net loss for the year - - - (189,048) (189,048)
--------- ---- ---------- ---------- ----------
Balance,
January 31, 2000 4,692,750 47 102,088 (224,914) (122,779)
Contributed services
(Unaudited) - - 10,000 - 10,000
Net loss for the period
(Unaudited) - - - (146,396) (146,396)
--------- ---- ---------- ---------- ----------
Balance, July 31, 2000
(Unaudited) 4,692,750 $ 47 $ 112,088 $ (371,310) $ (259,175)
========= ==== ========== ========== ==========
See accompanying summary of accounting policies and
notes to financial statements.
F-5
<PAGE> 48
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
Date of Date of Date of
Inception Six Six Inception Inception
(07/21/98) Months Months (07/21/98) Year (07/21/98)
Through Ended Ended Through Ended Through
07/31/00 07/31/00 07/31/99 01/31/00 01/31/00 01/31/99
(Unaudited) (Unaudited) (Unaudited)
Cash flows from
operating activities:
Net loss $ (371,310) $ (146,396) $ (62,041) $(224,914) $(189,048) $(35,866)
Adjustments to
reconcile net
loss to net cash
used in operating
activities:
Amortization and
depreciation 16,594 8,723 1,274 7,871 6,287 1,584
Contributed
services 40,000 10,000 - 30,000 30,000 -
Issuance of
common stock
for services 30,000 - - 30,000 - 30,000
Changes in assets
and liabilities:
Accounts
receivable (14,823) (14,823) - - - -
Accounts
payable 98,808 63,853 16,256 34,955 34,955 -
Inventory (96,027) 5,307 7,991 (101,334) (100,554) (780)
Prepaid
expenses (10,177) (10,177) (26,105)
Accrued
interest 32,562 23,059 1,232 9,503 8,718 785
---------- ---------- --------- --------- ---------- --------
Net cash used in
operating
activities (274,373) (60,454) (61,393) (213,919) (209,642) (4,277)
---------- ---------- --------- --------- ---------- --------
Cash flows from
investing
activities:
Cash paid for
licenses (15,592) - (15,602) (15,592) (15,592) -
Cash paid for
equipment (118,430) (23,244) (10,239) (95,186) (95,186) -
---------- ---------- --------- --------- --------- --------
Net cash used in
investing
activities (134,022) (23,244) (25,841) (110,778) (110,778) -
---------- ---------- --------- --------- ---------- ---------
Cash flows from
financing
activities:
Borrowings under
line of credit -
related
party 458,631 120,576 52,000 338,055 322,757 15,298
Deferred stock
offering
costs (73,892) (34,592) - (39,300) (39,300) -
Net proceeds
from sale of
common stock 26,294 - 10,050 26,294 10,050 16,244
---------- ---------- --------- ---------- ----------- ---------
Net cash provided
by financing
activities 411,033 85,984 62,050 325,049 293,507 31,542
---------- ---------- --------- ---------- ----------- ---------
See accompanying summary of accounting policies and
notes to financial statements
F-6
<PAGE> 49
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
Date of Date of Date of
Inception Six Six Inception Inception
(07/21/98) Months Months (07/21/98) Year (07/21/98)
Through Ended Ended Through Ended Through
07/31/00 07/31/00 07/31/99 01/31/00 01/31/00 01/31/99
(Unaudited) (Unaudited) (Unaudited)
Net increase
(decrease) in
cash 2,638 2,286 (25,184) 352 (26,913) 27,265
Cash, beginning
of period - 352 27,265 - 27,265 -
-------- ------- --------- -------- --------- --------
Cash, end of
period $ 2,638 $ 2,638 $ 2,081 $ 352 $ 352 $ 27,265
======== ======= ========= ======== ========= ========
Supplemental
disclosures of
cash flow
information:
Cash paid during
the period for:
Interest $ - $ - $ - $ - $ - $ -
======== ======= ========= ======== ========= ========
Income taxes $ - $ - $ - $ - $ - $ -
======== ======= ========= ======== ========= ========
Noncash investing
and financing
activities:
Issuance of
common stock
in exchange for
licenses $ 15,841 $ - $ - $ 15,841 $ - $ 15,841
======== ======= ========= ======== ========= ========
Inventory advanced
under line of
credit - related
party $ 7,211 $ - $ - $ 7,211 $ - $ 7,211
======== ======= ========= ======== ========= ========
See accompanying summary of accounting policies and
notes to financial statements.
F-7
<PAGE> 50
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY
SUMMARY OF ACCOUNTING POLICIES
For the six months ended July 31, 2000 and 1999 (Unaudited),
the Year Ended January 31, 2000 and the Period From
Date of Inception (July 21, 1998) through January 31, 1999
Nature of Business
Exhaust Technologies, Inc. ("Exhaust Technologies" or "the Company") is
a development stage enterprise which holds exclusive manufacturing,
developing, and marketing rights in the United States for the Turbolator,
a tube-housing designed for installation on vehicles to regulate exhaust
flow from the engine, and for the Pneumatic Hand Tool Exhaust Muffler
("PHTEM"), a noise muffling system installed on pneumatic wrenches which
can reduce the sound levels and remove contaminates from the exhaust air
before discharging into the atmosphere. The Company was incorporated
pursuant to the laws of the state of Washington in July 1998. The
Company's fiscal year end is January 31.
Cash Equivalents
For financial reporting purposes, the Company considers all highly liquid
investments with an original maturity of three months or less when
purchased to be a cash equivalent. Financial instruments, which
potentially subject the Company to a concentration of credit risk,
consist of cash and cash equivalents. Cash and cash equivalents consist
of funds deposited with various high credit quality financial
institutions.
Inventory
Inventory consists of supplies and component parts. Inventory is stated
at the lower of cost (first-in, first-out method) or market.
Equipment
Equipment is recorded at cost. Depreciation and amortization are
provided using the straight-line method over the useful lives of the
respective assets. Major additions and betterments are capitalized.
Upon retirement or disposal, the cost and related accumulated
depreciation or amortization are removed from the accounts and any gain
or loss is reflected in operations. Equipment with a nominal value was
contributed by the founders at inception, and accordingly, no asset has
been recognized. Equipment held for use in future production is recorded
at cost. Depreciation will begin when the equipment is placed into
service.
F-8
<PAGE> 51
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY
SUMMARY OF ACCOUNTING POLICIES
For the six months ended July 31, 2000 and 1999 (Unaudited),
the Year Ended January 31, 2000 and the Period From
Date of Inception (July 21, 1998) through January 31, 1999
Deferred Stock Offering Costs
In conjunction with the Company's registration statement to sell shares
of the Company's common stock and common stock purchase warrants, certain
costs and fees have been capitalized. Amounts capitalized as deferred
stock offering costs will be offset against the total amount of funds
received from the offering as a reduction to additional paid-in capital.
Licenses
The costs associated with acquiring exclusive licensing rights to
patented technology have been capitalized and are being charged to
expense using the straight line method of amortization over five years,
the estimated useful lives of the patents.
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of," management of the
Company reviews the carrying value of its intangible assets on a regular
basis. Estimated undiscounted future cash flows from the intangible
assets are compared with the current carrying value. Reductions to the
carrying value are recorded to the extent the net book value of the
property exceeds the estimate of future undiscounted cash flows.
Income Taxes
Income taxes are provided based on the liability method of accounting
pursuant to SFAS No. 109, "Accounting for Income Taxes." Under this
approach, deferred income taxes are recorded to reflect the tax
consequences on future years of differences between the tax basis of
assets and liabilities and their financial reporting amounts at each year
end. A valuation allowance is recorded against deferred tax assets if
management does not believe the Company has met the "more likely than
not" standard imposed by SFAS No. 109 to allow recognition of such an
asset.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
F-9
<PAGE> 52
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY
SUMMARY OF ACCOUNTING POLICIES
For the six months ended July 31, 2000 and 1999 (Unaudited),
the Year Ended January 31, 2000 and the Period From
Date of Inception (July 21, 1998) through January 31, 1999
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheet as of
July 31, 2000, January 31, 2000 and 1999 for cash equivalents and accrued
expenses approximate fair value because of the immediate or short-term
maturity of these financial instruments. The fair value of the line of
credit - related party approximates its carrying value as the stated rate
of the debt reflects recent market conditions.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Net Loss Per Share
SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on
the face of all income statements issued after December 15, 1997 for all
entities with complex capital structures. Basic EPS is computed as net
income divided by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur from common shares issuable through stock options,
warrants and other convertible securities. The Company had no dilutive
potential common stock at January 31, 2000 and 1999 and therefore, basic
and diluted EPS are the same for both periods.
New Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 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 gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged
asset or liability that are attributable to the hedged risk, or (ii) the
earnings effect of the hedged forecasted transaction. For a derivative
not designated as a hedging instrument, the gain or loss is recognized as
income in the period of change. In July 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the effective date of SFAS No. 133." SFAS No. 137 amends the
effective date of SFAS No. 133 to now be for all fiscal quarters of
fiscal years beginning after June 15, 2000. Based on its current and
planned future activities relative to derivative instruments, the Company
believes that the adoption of SFAS No. 133 will not have a significant
effect on its financial statements.
F-10
<PAGE> 53
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY
SUMMARY OF ACCOUNTING POLICIES
For the six months ended July 31, 2000 and 1999 (Unaudited),
the Year Ended January 31, 2000 and the Period From
Date of Inception (July 21, 1998) through January 31, 1999
Interim Accounting Policy
In the opinion of the Company's management, the accompanying unaudited
financial statements include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the balance
sheet of the Company and the statements of operations and cash flows as
of and for the six months ended July 31, 2000 and 1999. The results of
operations for the six months ended July 31, 2000 are not necessarily
indicative of results of operations to be expected for the year ended
January 31, 2001.
F-11
<PAGE> 54
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
For the six months ended July 31, 2000 and 1999 (Unaudited),
the Year Ended January 31, 2000 and the Period From
Date of Inception (July 21, 1998) through January 31, 1999
1. Development Stage Operations and Going Concern
The Company has been in the development stage since its inception. The
Company has incurred losses since inception. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that
may be necessary if the Company is unable to continue as a going concern.
Management of the Company has undertaken certain actions to address these
conditions. Management currently has commenced sales and production.
Marketing representatives are attempting to establish a product channel.
Funds required to carry out management's plans are expected to be derived
from future stock sales or borrowings from the Company's shareholders
(See Note 7). There can be no assurances that the Company will be
successful in executing its plans.
2. Equipment
Major classes of equipment consist of the following:
July 31, January 31, January 31,
2000 2000 1999
(Unaudited)
Equipment $ 6,715 $ 6,715 $ 6,715
Equipment held for use
in future production 118,430 95,186 -
--------- --------- -------
Total equipment 125,145 101,901 6,715
Less accumulated depreciation 12,438 6,715 6,715
--------- --------- -------
Net equipment $ 112,707 $ 95,186 $ -
========= ========= =======
3. Licenses
In 1998, the Company acquired exclusive ninety-nine (99) year licensing
rights to manufacture, develop and market the Turbolator and the PHTEM
from the Company's president and his son ("the inventors") under separate
licensing agreements. The licenses were acquired through the issuance of
4,350,000 shares of common stock, valued at $15,841, which represented
the inventors' historical cost basis in the licenses. Pursuant to the
terms of the agreements, and a modification to these agreements executed
on December 14, 1999, the Company is required to generate sales of the
Turbolator and the PHTEM of at least $100,000 per year, beginning in
fiscal 2002 and continuing for all years thereafter, in order to retain
the licensing rights.
F-12
<PAGE> 55
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
For the six months ended July 31, 2000 and 1999 (Unaudited),
the Year Ended January 31, 2000 and the Period From
Date of Inception (July 21, 1998) through January 31, 1999
4. Line of Credit - Related Party
The Company has a line of credit with the Company's president which
allows for borrowings up to $500,000. Borrowings under the line of
credit are unsecured. Outstanding borrowings under the line of credit
accrue interest at prime plus 2% and mature at the date of receipt of
funds by the Company from an anticipated underwriting. At that date, the
note converts to a note with a due date of three years from the date of
the receipt of funds at the same interest rate as the demand note,
interest paid monthly until the date of maturity. At July 31, 2000, the
Company was indebted to Mr. Sterling in the amount of $465,842.
5. Income Taxes
At July 31, 2000, January 31, 2000 and 1999, the Company had net deferred
tax assets of approximately $180,000, $73,000 and $12,500 principally
arising from net operating loss carryforwards for income tax purposes.
As management of the Company cannot determine that it is more likely than
not that the Company will realize the benefit of the net deferred tax
asset, a valuation allowance equal to the net deferred tax asset has been
established at July 31, 2000, January 31, 2000 and 1999. The difference
in the expected federal benefit and the actual tax benefit recorded is
due to the increase in the valuation allowance.
At January 31, 2000, the Company has net operating loss carryforwards
totaling approximately $220,000, which expire in the years 2014 through
2015.
6. Commitments and Contingencies
In August 1999, the Company entered into a purchase agreement with Apex
Industries, Inc. ("Apex"), whereby Apex agreed to manufacture, and the
Company agreed to purchase, 10,000 Turbolator assemblies. The total cost
of the 10,000 Turbolator assemblies is estimated to be approximately
$200,000, of which $28,500 relates to tooling costs that will become the
property of the Company. In conjunction with the purchase agreement, the
Company's president secured an irrevocable standby letter of credit with
a bank for $80,000 on the Company's behalf and for the benefit of Apex.
Drawings under the letter of credit were to bear interest payable monthly
at the bank's prime rate plus 2%. No drawings were made under this
letter of credit, and the letter of credit matured on November 23, 1999.
F-13
<PAGE> 56
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY
NOTES TO FINANCIAL STATEMENTS
For the six months ended July 31, 2000 and 1999 (Unaudited),
the Year Ended January 31, 2000 and the Period From
Date of Inception (July 21, 1998) through January 31, 1999
7. Stock Offering
The Company has entered into a letter of intent with an underwriter
pursuant to which the underwriter has agreed to sell, on a best efforts
basis, up to 550,000 units (each unit consisting of one share of the
Company's common stock and one warrant) at a per unit price of $5.10 and
1,000,000 warrants at a per warrant price of $0.10. Each warrant would
grant the holder the right to purchase a share of the Company's common
stock at an initial per share price of $7.00 for a one year period from
the closing date of the offering, then increasing to $9.00 through the
date of the second anniversary from the offering. The Company has
advanced a fee of $25,000 which is refundable under certain circumstances
to the underwriter and has agreed to pay the underwriter commissions and,
based on the results of the offering, to issue the underwriter warrants
to purchase up to 55,000 units at $8.415 per unit (each unit consisting
of one share of the Company's common stock and one warrant to purchase
one share of stock at $11.55 to $14.55 per share). This nonrefundable
fee and certain other costs incurred in connection with the offering have
been capitalized as deferred offering costs which will be offset against
proceeds received.
In connection with the underwriting, the Company has entered into
employment agreements with its present President and its proposed Chief
Executive Officer and Vice President of Operations. The agreements with
the proposed Chief Executive Officer and Vice President of Operations
commence upon receipt of $1,000,000 from the offering. These employment
agreements will be effective for a period of three years and contain
terms, which specify annual compensation of $100,000, $125,000 and
$75,000, respectively. Further, one of the Company founders will deliver
back to the Company at the date the Company's registration statement is
declared effective a total of 1,692,750 shares of the Company's common
stock held by him. Additionally, this founder will place 550,000 shares
of the Company's common stock held by him into an escrow account. These
shares will be held until the Company achieves annual sales of
$19,250,000 and pretax income of $4,125,000. If these targets are not
attained by January 31, 2004, the shares will be cancelled. The 550,000
shares as well as the dollar amount of sales and pre-tax income will be
prorated downward if less than $2,805,000 is raised in the offering.
F-14
<PAGE> 57
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The only statute, charter provision, bylaw, contract, or other
arrangement under which any controlling person, director or officer of
the Registrant is insured or indemnified in any manner against any
liability which he may incur in his capacity as such, is as follows:
1. Article X of the Articles of Incorporation of the company, filed as
Exhibit 3.1 to the Form 10SB as filed with the Securities and
Exchange Commission.
2. Article IX of the Bylaws of the company, filed as Exhibit 3.2 to the
Registration Statement.
3. Revised Code Washington.
The Corporation shall indemnify its Directors and Officers to the
fullest extent permitted by the Washington Business Act now or hereafter
in force. However, such indemnity shall not apply on account of:
a. Acts or omissions of the Director or Officer finally adjudged
to be intentional misconduct or a knowing violation of law;
b. Conduct of the Director or Officer finally adjudged to be in
violation of RCW 23B.08.310; or,
c. Any transaction with respect to which it was finally adjudged
that such Director or Officer personally received a benefit in money,
property, or services to which the Director was not legally entitled.
The Corporation shall advance expenses for such persons pursuant to
the terms set forth in the Bylaws, or in a separate Directors' resolution
or contract.
<PAGE> 58
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the offering (assuming all shares are
sold), all of which are to be paid by the registrant, are as follows:
SEC Registration Fee $ 6,346.97
NASD Registration Fee 6,946.97
Underwriting Commission 290,500.00
Underwriter Non-Accountable
Expense Allowance 87,150.00
Printing Expenses 5,000.00
Accounting Fees and Expenses 18,806.00
Legal Fees and Expenses 10,000.00
Blue Sky Fees/Expenses 5,000.00
Transfer Agent Fees 1,000.00
Escrow Fee 5,000.00
------------
TOTAL $ 435,749.94
============
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has sold the following
securities which were not registered under the Securities Act of 1933, as
amended:
On July 31, 1998, we issued 4,500,000 shares of Common Stock to the
following pursuant to Reg. 504 of the Securities Act of 1933 (the "Act")
Robert E. Sterling 4,250,000 shares and the Licensing
Agreement
50,000 shares for services as a director
Ronald L. Allen 50,000 shares for services as a director
William A. Sutherland 50,000 shares for services as a director
Matthew R. Sterling 100,000 shares for the Licensing Agreement
Between August 1998 and March 1999, we issued the following pursuant
to Reg. 504 of the Act:
Name and Address Date Shares Consideration
------------------- ------- --------- ----------------------
Jerry W. Johnson 08/27/98 5,000 $ 1,000 in Cash
3298 Mill Road
Moscow, Idaho 83843
<PAGE> 59
Name and Address Date Shares Consideration
------------------- ------- --------- ----------------------
Win Dire 09/22/98 20,000 $ 4,000 in Cash
304 Cedar Street
Wallace, Idaho 83873
Alta Grant 10/23/98 5,000 $ 1,000 in Cash
3298 Mill Road
Moscow, Idaho 83843
Chris Schutte 12/26/98 2,500 $ 500 in Cash
628 Ninth Avenue
Camanche, Iowa 52730
Byron Rhoades 12/29/98 5,000 $ 1,000 in Cash
3850 E. Payment Park Rd.
Post Falls, Idaho 83854
Joan H. Rhoades 12/29/98 5,000 $ 1,000 in Cash
3850 E. Payment Park Rd.
Post Falls, Idaho 83854
Eddie Roberts 12/30/98 2,500 $ 500 in Cash
5303 E. Twain Road
Suite 212
Las Vegas, Nevada 89122
Mary Wyatt 12/30/98 2,500 $ 500 in Cash
5303 E. Twain Road
Suite 212
Las Vegas, Nevada 89122
David L. Overstreet II 12/26/98 2,500 $ 500 in Cash
P. 0. Box 3251
Moscow, Idaho 83843
Ronald Freitas 11/04/98 5,000 $ 1,000 in Cash
74 - 4920 Kiwi Street
Kailua - Kona, Hawaii 96740
Kenneth M. Lewis 11/04/98 5,000 $ 1,000 in Cash
73-1149 Anikawa
Suite #A
Kailua - Kona, Hawaii 96740
Keith W. Lewis 11/04/98 5,000 $ 1,000 in Cash
P. 0. Box 2642
Kailua - Kona, Hawaii 96745
Sandra D. Dunn 10/21/98 5,000 $ 1,000 in Cash
1528 Pine Cone Road
Moscow, Idaho 83843
<PAGE> 60
Name and Address Date Shares Consideration
------------------- ------- --------- ----------------------
Genevieve A. Pereira 10/25/98 5,000 $ 1,000 in Cash
1811 Cornell Drive
Alameda, California 94501
Charles Littlejohn 09/21/98 5,000 $ 1,000 in Cash
2756 Park Blvd.
Oakland, California 94606
Terry Applegate 09/08/98 10,000 $ 2,000 in Cash
532 Huntgate Road
Woodstock, Georgia 30189
Ray Loesche 08/13/98 10,000 $ 2,000 in Cash
P. 0. Box 1112
Palm City, Florida 34991
Willard Gutman 11/24/98 5,000 $ 1,000 in Cash
P.O. Box 71029
Fairbanks, Alaska 99707
Larry Wood 11/25/98 15,000 $ 3,000 in Cash
2505 Swan Lake
Las Vegas, Nevada 89121
Eleanor L. Nevin 11/25/98 5,000 $ 1,000 in Cash,
2505 Swan Lake
Las Vegas, Nevada 89121
Rick Blackwood 03/03/99 1,750 $ 350 in Cash
2630 Blackwood Road
Bozeman, Montana 59715
Jerry Allen 03/05/99 2,500 $ 500 in Cash
77-357 Nohealani
Kailua - Kona, Hawaii 96740
William D. Ross 03/03/99 2,500 $ 500 in Cash
78-6650 Mamelehoa Hwy.
Holualoa, Hawaii 96725
Linda M. Kelly 03/03/99 2,500 $ 500 in Cash
P.O. Box 599
Holualoa, Hawaii 96725
Denny Martin 03/04/99 2,500 $ 500 in Cash
1050 E. Brigham Road
Suite 39
St. George, Utah 84790
William S. Waller 03/01/99 5,000 $ 1,000 in Cash
73-4280 Keokeo St.
Kailua - Kona, Hawaii 96740
<PAGE> 61
Name and Address Date Shares Consideration
------------------- ------- --------- ----------------------
Charles Bush 02/26/99 1,000 $ 200 in Cash
4171 West Beryl Avenue
Phoenix, Arizona 85051
Jerry Scarsella 01/07/99 5,000 $ 1,000 in Cash
5977 E. Weaver Circle
Englewood, Colorado 80111
Phil Allen 12/21/98 2,500 $ 500 in Cash
1605 Springdale Drive
Clinton, Iowa 52732
James W. Babb 09/08/98 10,000 $ 2,000 in Cash
819 West Kidd Island Rd.
Coeur d'Alene, Idaho 83814
Joseph E. Ausich 12/15/98 5,000 $ 1,000 in Cash
1414 South Main
Moscow, Idaho 83843
Ronald Hasson 12/24/98 2,500 $ 500 in Cash
6478 Broadway Avenue
Newark, California 94560
Edward F. Pereira 12/25/98 2,500 $ 500 in Cash
5575 Tait Court
Newark, California 94560
Lonnie Wharf 02/02/99 2,500 $ 500 in Cash
1706 Summer Hills Court
Post Falls, Idaho 83854
John Hamilton 10/31/98 5,000 $ 1,000 in Cash
4724 S.E. Mason Hill Dr.
Milwaukee, Oregon 97222
Benjamin McNutt 12/23/98 2,500 $ 500 in Cash
2814 Hillside Avenue
Concord, California 94520
Marion A. Sherman 12/24/98 2,500 $ 500 in Cash
1815 Cornell Drive
Alameda, California 94501
Janine Ragsdale 03/08/99 2,500 $ 500 in Cash
3799 Neal Road
Bailey, Colorado 80421
Donald R. Benson 03/09/99 2,500 $ 500 in Cash
435 Sea Village Drive
Imperial Beach, California 91932
<PAGE> 62
Name and Address Date Shares Consideration
------------------- ------- --------- ----------------------
Dawna Dia Patton 03/15/99 2,500 $ 500 in Cash
4584 Adams Street
Carlsbad, California 92008
Dennis R. Cintas 03/13/99 2,500 $ 500 in Cash
P. 0. Box 2666
Kailua - Kona, Hawaii 96745
Further, no commissions were paid to anyone in connection with the
sale of the shares and no general solicitation was made to anyone.
ITEM 27. EXHIBITS.
The following Exhibits are incorporated herein by reference from the
Registrants's Form 10SB Registration Statement filed with the Securities
and Exchange Commission, SEC file #000-25875 on April 27, 1999. Such
exhibits are incorporated herein by reference pursuant to Rule 12b-32:
Exhibit No. Document Description
------------ ------------------
10.1 Licensing Agreement for Turbolator
10.2 Licensing Agreement for Pneumatic Hand Tool Exhaust
Muffler.
The following Exhibits are filed as part of this Registration
Statement, pursuant to Item 601 of Regulation K:
Exhibit No. Document Description
------------ ------------------
1.1 Underwriting Agreement.
1.2 Selected Dealers Agreement.
1.3 * Unit Purchase Warrant.
1.4 * Consulting Agreement between the Underwriter and the
Company.
3.1 * Articles of Incorporation.
3.2 * Bylaws.
4.1 * Specimen Stock Certificate.
4.2 * Specimen Warrant Certificate.
5.1 * Opinion of Conrad C. Lysiak.
10.3* Modification to Licensing Agreement for Turbolator.
10.4* Modification to Licensing Agreement for Pneumatic Hand
Tool Exhaust Muffler.
10.5* Second Modification of Licensing Agreement for Turbolator
10.6* Second Modification of Licensing Agreement for PHTEM.
10.7* Consulting and Marketing Agreement with Clarkstone.
10.8* Purchase Agreement with Apex Industries, Inc.
23.7 Consent of BDO Seidman, LLP.
<PAGE> 63
Exhibit No. Document Description
------------ ------------------
23.8 Consent of Conrad C. Lysiak, Attorney at Law.
27.3 Financial Data Schedule.
99.1 Escrow Agreement - Conrad C. Lysiak
99.2 Warrant Agreement.
99.3 Escrow Agreement - Castle Securities
99.4* Employment Agreement of Robert Sterling.
99.5* Employment Agreement of Robert Teed.
99.6* Employment Agreement of Matthew Sterling.
99.7* Lock-up Agreement with Robert Sterling.
99.8* Lock-up Agreement with Matthew Sterling.
99.9* Lock-up Agreement with Ronald Allen.
99.10* Lock-up Agreement with William Sutherland.
* Previously filed.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, 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 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, of 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 Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
* To include any prospectus required by Section 10(a) (3) of the
Securities Act of 1933;
* To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
<PAGE> 64
* To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any change to such information in the registration
statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
<PAGE> 65
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing of this Form SB-2 Registration
Statement and has duly caused this Amendment No. 2 to the Form SB-2
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Spokane, Washington, on this 16th day of
November, 2000.
EXHAUST TECHNOLOGIES, INC.
BY: /s/ Robert Sterling
Robert Sterling, President
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below constitutes and appoints Robert Sterling, as true and
lawful attorney-in-fact and agent, with full power of substitution, for
his and in his name, place and stead, in any and all capacities, to sign
any and all amendment (including post-effective amendments) to this
registration statement, and to file the same, therewith, with the
Securities and Exchange Commission, and to make any and all state
securities law or blue sky filings, granting unto said attorney-in- fact
and agent, full power and authority to do and perform each and every act
and thing requisite or necessary to be done in about the premises, as
fully to all intents and purposes as he might or could do in person,
hereby ratifying the confirming all that said attorney-in-fact and agent,
or any substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to the Form SB-2 Registration Statement has been signed
by the following persons in the capacities and on the dates indicated:
Signature Title Date
/s/ Robert E. Sterling President and member November 16, 2000
Robert E. Sterling of the Board of Directors
/s/ Ronald L. Allen Vice President and a November 16, 2000
Ronald L. Allen member of the Board of
Directors
/s/ William A. Sutherland
William A. Sutherland Secretary/Treasurer, November 16, 2000
Chief Financial Officer,
and a member of the
Board of Directors
