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As filed with the Securities and Exchange Commission on August 29,
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-1
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 Number)
organization) Classification Code)
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: 1,000,000 $ 5.10 $ 5,100,000 $ 1,346.40
One share of
common stock 1,000,000
and one
redeemable
warrant 1,000,000
Shares of
common stock
issuable upon
exercise of
redeemable
warrants 1,000,000 $ 9.00 $ 9,000,000 $ 2,376.00
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
Units each
consisting of: 100,000 $ 0.0001 $ 10 $ 0.01
One share of
common stock 100,000
and one
underwriter
warrant 100,000
Shares of
common stock
issuable upon
exercise of
underwriter
warrants 100,000 $ 8.415 $ 841,500 $ 222.16
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TOTAL REGISTRATION FEE $ 24,041,510 $ 6,346.97
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[1] Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c).
<PAGE> 3
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.
1,000,000 UNITS
CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE REDEEMABLE WARRANT, AND
1,000,000 ADDITIONAL REDEEMABLE WARRANTS
ONE UNIT/WARRANT MINIMUM - $5,200,000 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.
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."
Price to Underwriting Proceeds to
Public Commission Us
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Per Unit $ 5.10 $ 0.51 $ 4.59
Per Warrant $ 0.10 $ 0.01 $ 0.09
Total $ 5,200,000 $ 520,000 $ 4,680,000
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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.
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 September 12, 2000.
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ON THE INSIDE AND OUTSIDE FRONT AND BACK COVERS A COPY OF THE PATENTS FOR
THE COMPANY'S PRODUCTS WILL BE DISPLAYED. THIS DOCUMENTS ARE FILED UNDER
SEPARATE COVER.
EXHAUST TECHNOLOGIES, INC.
TABLE OF CONTENTS
Page No.
SUMMARY OF PROSPECTUS . . . . . . . . 6
RISK FACTORS . . . . . . . . . . 7
USE OF PROCEEDS . . . . . . . . . 13
DETERMINATION OF OFFERING PRICE . . . . . . 13
DILUTION OF THE PRICE YOU PAY FOR YOUR SHARES . . . 14
PLAN OF DISTRIBUTION; UNDERWRITING;
TERMS OF THE OFFERING . . . . . . . . 15
BUSINESS . . . . . . . . . . . 20
MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION . . . . . . 24
MANAGEMENT . . . . . . . . . . 27
EXECUTIVE COMPENSATION . . . . . . . . 30
PRINCIPAL SHAREHOLDERS . . . . . . . . 32
DESCRIPTION OF SECURITIES . . . . . . . 33
CERTAIN TRANSACTIONS . . . . . . . . 35
LITIGATION . . . . . . . . . . 36
EXPERTS . . . . . . . . . . . 36
LEGAL MATTERS . . . . . . . . . . 36
FINANCIAL STATEMENTS . . . . . . . . 37
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SUMMARY OF PROSPECTUS
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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 1,000,000 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 of offered for or 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 $4,680,000, before
deducting $260,000 in expenses
associated with this offering, but
after deduction for the underwriting
commission. See "Use of Proceeds."
This assumes all units are sold.
Use of proceeds . . . We will use the proceeds to pay for
production of inventory and for
working capital.
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Number of shares outstanding
before the offering . . 4,692,750
Number of Shares Outstanding
after the Offering . . . 4,000,000 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.
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RISK FACTORS
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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 April 30, 2000, we have an accumulated deficit of $301,582; a
stockholder deficit of $199,474; and, a working capital deficit of
$396,594.
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.
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
<PAGE> 8
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, we will be obligated, pursuant to the
underwriting agreement, to acquire insurance on the life of our
President, Robert Sterling and his son, Matthew Sterling in the
amount of $500,000 on each of their lives. However, should either our
president or his son or both of them be deemed to be uninsurable, we may
not be able to obtain the required insurance.
7. No liability insurance coverage.
We do not have any liability insurance. We have potential liability
if our products injure a user. If that happens and we are held liable, we
could be sued for a large sum of money. Further, we could be placed in a
situation whereby we could be forced to defend a frivolous lawsuit. 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.
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 $3,320,000, 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.
<PAGE> 9
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.
Our President owns the patents for the Turbolators and PHTEMs.
He granted licenses to us. Pursuant to the licensing agreement between
Robert Sterling, our president and us, if we do not sell a minimum number
of Turbolators and PHTEMs, Mr. Sterling can terminate the licensing
agreement. Therefore, in the future, it may be to Mr. Sterling's
advantage to terminate the agreement which would conflict with his duties
as the president.
14. Issuance of additional shares.
As of May 31, 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 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.
<PAGE> 10
18. Our patents may not give us adequate protection.
We have obtained patents for our products. There is no assurance,
however, that third parties may not infringe on our patents. In order to
protect our patent rights, we 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 obtain the
injunctions, there is no assurance that those infringing on our patents
will comply with the injunctions. Further, we may not have adequate funds
available to prosecute actions to protect or to defend our
patents, in which case those infringing on our patents could continue to
do so in the future.
19. Our trademarks may not give us adequate protection.
We have applied for trademarks. There is no assurance, however, that
third parties may not infringe on our trademarks. In order to protect
our trademark rights, we 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 obtain the
injunctions, there is no assurance that those infringing on our
trademarks will comply with the injunctions. Further, we may not have
adequate funds available to prosecute actions to protect or to defend our
trademarks, in which case those infringing on our 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. 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.
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> 11
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, $5,200,000 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.
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.
<PAGE> 12
30. 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.
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 1,000,000
shares of his common stock with our attorney, Conrad C. Lysiak, In the
event that we do not achieve sales of $35,000,000 and pre-tax income in
excess of $7,500,000 by January 31, 2004, the 1,000,000 shares will be
delivered by Mr. Lysiak to us and canceled. If the foregoing thresholds
are achieved by us, the 1,000,000 shares will be delivered by Mr. Lysiak
to Mr. Sterling. The $7,500,000 shall be computed based on pretax income
before any effect created by the stock held in escrow. The 1,000,000
shares as well as the dollar amount of sales and pretax income will be
prorated downward if less than $5,000,000 is raised in the offering.
<PAGE> 13
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USE OF PROCEEDS
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This offering is being made on a "best efforts basis." The net
proceeds, after deducting $780,000 for estimated expenses associated with
this offering, will be $4,420,000 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 $ 275,000 $ 550,000 $ 825,000 $ 1,100,000
Working Capital $ 830,000 $ 1,660,000 $ 2,490,000 $ 3,320,000
----------- ----------- ----------- -----------
$ 1,105,000 $ 2,210,000 $ 3,315,000 $ 4,420,000
=========== =========== =========== ===========
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.
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DETERMINATION OF OFFERING PRICE
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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 $5,200,000 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."
<PAGE> 14
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DILUTION OF THE PRICE YOU PAY FOR YOUR SHARES
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Assuming the maximum number of units and warrants are sold,
investors in our offering will collectively own 1,000,000 shares of our
common stock, or approximately 25% of the outstanding shares, for which
they will have paid $5,100,000 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 75% 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
April 30, 2000 was $(273,000), or $(0.06) per share immediately prior to
this offering. After giving effect only to the sale of the 1,000,000
units and the 1,000,000 additional redeemable stock purchase warrants
offered hereby and the application of the proceeds therefrom and after
deducting the underwriter commission and associated estimated offering
expenses, our net tangible book value would be approximately $4,220,553,
or $1.06 per share. This represents an immediate increase in the net
tangible book value of $1.12 per share to existing shareholders and an
immediate dilution of approximately $3.94 per share to new shareholders.
The following table illustrates this per-share dilution:
Assumed initial public offering price per share $ 5.00
Pro forma net tangible book value per share before
this offering $ (0.06)
Increase per share attributable to new shareholders $ 1.12
Pro forma net tangible book value per share after
this offering $ 1.06
The following table sets forth as of April 30, 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 25% $ 72,135 1.4% $ 0.10
New investors 1,000,000 75% 5,100,000 98.6% $ 5.10
--------- ---- ----------- ------
Total 4,000,000 100% $ 5,172,135 100.0%
========= ==== =========== ======
Does not include: (i) 1,000,000 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; and (iv) 100,000 shares of common stock
underlying the redeemable warrants included in the units subject to the
underwriter's warrant. 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> 15
----------------------------------------------------------------------
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.
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
exercise price will be $11.55 for the period beginning on the closing
date of the offering until one year thereafter and $13.05 for the
period beginning one year after the closing date until two years
after the closing date.
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.
<PAGE> 16
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 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.
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
We have also entered 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.
<PAGE> 17
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.
Right of First Refusal
If at least one unit or one redeemable warrant is sold, we have
offer 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
<PAGE> 18
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.
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:
(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 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 ceasing operations and immediate termination of
this offering.
<PAGE> 19
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> 20
----------------------------------------------------------------------
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> 21
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 approved. The PHTEM is currently
being test marketed. Limited sales 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.
We have registered the trademark "Aircat" to market a line
of air powered tools which we 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 CAR certificate (CAR #D-226). The
California CAR 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 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> 22
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.
Marketing
We intend to market the Turbolator and the PHTEM through automotive
suppliers. As of the date hereof, we have not contacted any automotive
suppliers and there is no assurance that any automotive suppliers will
ever sell Turbolators or PHTEMs.
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 of
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.
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.
<PAGE> 23
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.
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.
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 1,000,000 units at $5.10
per unit. Each unit consists of one share of common stock and one
redeemable warrant. 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 effective date of this offering to one year thereafter
and $9.00 if exercised from one year from the effective 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 100, 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 one year after the effective date to
two years thereafter and at a price of $13.05 from two years after the
effective date to three years thereafter.
<PAGE> 24
As of May 31, 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,
1. Complete agreements for the manufacture of the Turbolator and
PHTEM.
2. Initiate manufacturing of the Turbolator and PHTEM.
3. Expand our market and sell 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 April 30, 2000 had a working capital deficiency of
$397,000. Additionally, as of April 30, 2000, we had an accumulated
deficit of approximately $302,000 (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.
Further, it is our belief that both the Turbolator and the PHTEM are
ready for manufacture and marketing in their current state. At the
present time we have not engaged anyone to market our products. We have
located manufacturers for the Turbolator and PHTEM and are arranging for
product molds to be built. As of April 30, 2000, we require additional
funding to continue our efforts 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 may execute employment agreements with our chief executive of officer
and Matt Sterling, operations manager, upon completion of the
registration document for or the sale of units and redeemable warrants to
the public, provided funds are available to do so.
<PAGE> 25
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.
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.
<PAGE> 26
Three months ended April 30, 2000 (Unaudited) compared to the three
months ended April 30, 1999 (Unaudited)
During the three months ended April 30, 2000, the Company began to
sell limited quantities of its products. The Company recognized total
revenue in the first quarter of 2000 of approximately $38,000 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 March 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 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 three months ended April 30, 2000 to approximately $73,000 from
approximately $25,000 for the same three-month period in 1999. The
increase of $48,000 for the three month period was primarily due to the
Company ramping up operations to begin sales efforts related to initial
market penetration. Specifically, for the three months ending April 30,
2000, professional expenses increased approximately $3,000, advertising
increased approximately $12,000 and general and administrative expenses
increased $7,000. Additionally, the Company incurred costs in 2000
related to research and product development of approximately $25,000,
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 $77,000 and $25,000, respectively, for the three
month periods ended April 30, 2000 and 1999.
Liquidity and Capital Resources
Financial Condition:
During the period from inception through April 30, 2000, we used
cash in operating activities of $249,000. For the three months ended
April 30, 2000 we used cash in operating activities of $35,000 as
compared to a $18,000 which was used in three months ended April 30,
1999. This increase in the cash used in operating activities was
primarily associated with the increase in the net loss for the three
months ended April 30, 2000. As of April 30, 2000 we had a cash balance
of $1,627 in cash and cash equivalents. From the date of inception
through April 30, 2000 we used cash in investing activities of $119,000,
which primarily related to the acquisition of certain licensing rights
and for limited production and testing equipment. We
<PAGE> 27
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 April 30, 2000 we obtained financing funds totaling
$444,000.
At April 30, 2000, we had a deferred tax asset of approximately
$110,000. 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.
As of April 30, 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 June 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 June 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.
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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> 28
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.
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.
<PAGE> 29
Robert Teed - Proposed President and Chief Executive Officer.
We have entered into an employment agreement with Robert Teed 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 March 1995 to March 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 April 1993 to April 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 April 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
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.
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.
<PAGE> 30
----------------------------------------------------------------------
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 Annual Restricted Underlying Other
Principal Compen- Stock options/ LTIP Compen
Position Year Salary Bonus sation Award(s) SARs Payouts sation
Robert E. 2000 30,000[3] - - - - - -
Sterling 1999 - - - $10,000[2] - - -
President 1998 - - - - - - -
Ronald L. 2000 - - - - - - -
Allen 1999 - - - $10,000 [2] - - -
Vice 1998 - - - - - - -
President
William A. 2000 - - - - - - -
Sutherland 1999 - - - $10,000 [2] - - -
Secretary- 1998 - - - - - - -
Treasurer
Matthew 2000 - - - - - - -
Sterling 1999 - - - - - - -
Vice 1998 - - - - - - -
President
(Proposed)
Robert F. 2000 - - - - - - -
Teed 1999 - - - - - - -
President 1998 - - - - - - -
CEO
(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. Mr. Sterling elected to waive the
compensation for or fiscal 1999 (expense was recorded with an
offset to contributed capital).
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.
<PAGE> 31
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.
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
<PAGE> 32
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.
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 65.18%
230 N. Division St.
Spokane, WA 99202
Ronald Allen 50,000 50,000 1.25%
3031 W. 22nd
Spokane, WA 99204
William Sutherland 50,000 50,000 1.25%
7202 S. Oak Road
Spokane, WA 99224
All Officers and
Directors as a Group
(3 Persons) 4,400,000 2,707,250 67.68%
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
<PAGE> 33
Future Sales by Existing Stockholders
A total of 4,692,750 shares of common stock were issued and
outstanding on June 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. While the foregoing 3,000,000 shares
are all free trading, 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 the underwriter.
Escrow of 1,000,000 Shares by Robert Sterling
Robert Sterling, our President, has agreed to escrow 1,000,000
shares of his common stock with our attorney, Conrad C. Lysiak, In the
event that we do not achieve sales of $35,000,000 and pre-tax income in
excess of $7,500,000 by January 31, 2004, the 1,000,000 shares will be
delivered by Mr. Lysiak to us and canceled. If the foregoing thresholds
are achieved by us, the 1,000,000 shares will be delivered by Mr. Lysiak
to Mr. Sterling. The $7,500,000 shall be computed based on pretax income
before any effect created by the stock held in escrow. The 1,000,000
shares as well as the dollar amount of sales and pretax income will be
prorated downward if less than $5,000,000 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. 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
effective 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 effective date
of the offering to two years thereafter. Redeemable warrants that are not
exercised within two years of the effective 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> 34
* 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
effective date of this offering to one year thereafter and at a price of
$9.00 if exercised from one year after the effective date to two years
after the effective 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.
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.
<PAGE> 35
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 effective 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 American Securities Transfer & Trust, Inc., 12039 West Alameda
Parkway, Suite Z-2, Lakewood, Colorado 80228 and its telephone number is
(303) 986-5400.
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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 Reg. 504 of the Securities Act of 1933 (the "Act"):
Total consideration
Name 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
$424,660 at April 30, 2000 from Robert Sterling. Borrowings under the
line of credit accrue interest at the rate of prime plus 2% per annum and
mature on July 31, 2003. The foregoing is evidenced by a promissory
note.
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.
<PAGE> 36
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.
----------------------------------------------------------------------
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.
<PAGE> 37
----------------------------------------------------------------------
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 July 31,
1999; and our unaudited financial statements for the quarter ended April
30, 2000 immediately follow:
INDEX TO FINANCIAL STATEMENTS
Financial Statements begin on following page.
Exhaust Technologies, Inc. (a development stage company)
Report of Independent Certified Public Accountant . . F-1
Balance Sheets . . . . . . . . . F-2
Statements of Loss . . . . . . . . F-3
Statements of Changes in Stockholders' (Deficit) Equity. F-4
Statements of Cash Flows . . . . . . . F-5
Summary of Accounting Policies . . . . . F-6 to F-8
Notes to Financial Statements . . . . . F-7 to F-12
<PAGE> 38
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-1
<PAGE> 39
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS (Note 1)
April 30, January 31, January 31,
2000 2000 1999
(Unaudited)
----------- ----------- ----------
Current assets:
Cash $ 1,627 $ 352 $ 27,265
Accounts receivable 31,697 - -
Inventory 115,958 108,545 7,991
---------- ---------- ---------
Total current assets 149,282 108,897 35,256
Equipment, net (Note 2) 101,192 95,186 -
Other assets:
Licenses, net of accumulated
amortization of $9,371,
$7,871 and $1,584 (Note 3) 22,062 23,562 14,257
Deferred stock offering
costs (Note 7) 73,893 39,300 -
---------- ---------- ---------
$ 346,429 $ 266,945 $ 49,513
========== ========== =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 100,859 $ 34,955 $ -
Accrued interest 20,353 9,503 785
Line of credit - related
party (Note 4) 424,660 345,266 22,509
---------- ---------- ---------
Total current liabilities 545,876 389,724 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 102,088 102,088 62,039
Deficit accumulated during
the development stage (301,582) (224,914) (35,866)
---------- ---------- ---------
Total stockholders, (deficit)
equity (199,447) (122,779) 26,219
---------- ---------- ---------
$ 346,429 $ 266,945 $ 49,513
========== ========== =========
See accompanying summary of accounting policies and notes to financial
statements.
F-2
<PAGE> 40
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF LOSS
Date of
Inception Three Three Date of Date of
(07/21/98) Months Months Inception Inception
Through Ended Ended (07/21/98) Year (07/21/98)
04/30/00 04/30/00 04/30/99 Through Ended Through
(Unaudited) (Unaudited) (Unaudited) 01/31/00 01/31/00 01/31/99
---------- ---------- ---------- ---------- -------- ---------
Sales $ 37,853 $ 37,853 $ - $ - $ - $ -
Costs of sales 30,946 30,946 - - - -
--------- --------- --------- ---------- --------- ---------
Gross Profit 6,907 6,907 - - - -
--------- --------- --------- ---------- --------- ---------
Operating expenses:
Professional
services 89,734 25,104 22,173 64,630 64,630 -
Research and
development 69,025 25,322 - 43,703 43,703 -
Compensation 30,000 - - 30,000 30,000 -
Advertising 37,266 13,600 1,300 23,666 23,666 -
Travel 9,872 666 - 9,206 6,368 2,838
Amortization 9,371 1,500 550 7,871 6,287 1,584
Office expense 3,608 194 925 3,414 2,755 659
Directors fees 30,000 - - 30,000 - 30,000
Dues and
subscriptions 3,155 2,880 - 275 275 -
Supplies 2,711 65 - 2,646 2,646 -
Repairs 800 800 - - - -
Depreciation 2,594 2,594 - - - -
--------- --------- --------- ---------- --------- ---------
Total operating
expenses 288,136 72,725 24,948 215,411 180,330 35,081
---------- --------- --------- ---------- --------- ---------
Loss from
operations (281,229) (65,818) (24,948) (215,411) (180,330) (35,081)
Other expense:
Interest
expense (20,353) (10,850) (450) (9,503) (8,718) (785)
---------- --------- --------- --------- --------- --------
Net loss $ (301,582) $ (76,668) $ (25,398) $(224,914) $(189,048) $(35,866)
========== ========= ========= ========= ========= ========
Net loss per
share basic
and diluted $ (0.02) $ (0.01) $ (0.04) $ (0.01)
========= ========= ========= ========
Weighted average number
of shares - 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-3
<PAGE> 41
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
For the Three Months Ended April 30, 2000 (Unaudited), the
year ended January 31, 2000 and
the Period Ended January 31, 1999
Deficit
Accumulated
Common Stock Additional During the
------------------ 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)
Net loss for the
period (unaudited) - - - (76,668) (76,668)
--------- ---- ---------- ---------- ----------
Balance,
April 30, 2000
(Unaudited) 4,692,750 $ 47 $ 102,088 $ (301,582) $ (199,447)
========= ==== ========== ========== ==========
See accompanying summary of accounting policies and notes to financial
statements.
F-4
<PAGE> 42
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
Date of
Inception Three Three Date of Date of
(07/21/98) Months Months Inception Inception
Through Ended Ended (07/21/98) Year (07/21/98)
04/30/00 04/30/00 04/30/99 Through Ended Through
(Unaudited) (Unaudited) (Unaudited) 01/31/00 01/31/00 01/31/99
--------- ---------- ---------- --------- -------- --------
Cash flows from
operating
activities:
Net loss $ (301,582) $ (76,668) $ (25,398) $(224,914) $(189,048) $(35,866)
Adjustments to
reconcile net loss
to net cash used
in operating
activities:
Amortization and
depreciation 11,965 4,094 550 7,871 6,287 1,584
Contributed
services 30,000 - - 30,000 30,000 -
Issuance of
common stock
for services 30,000 - - 30,000 - 30,000
Changes in assets and
liabilities:
Accounts
receivable (31,697) (31,697) - - - -
Accounts
payable 100,859 65,904 7,516 34,955 34,955 -
Inventory (108,747) (7,413) (1,030) (101,334) (100,554) (780)
Accrued
interest 20,353 10,850 450 9,503 8,718 785
---------- ---------- --------- ---------- ---------- ---------
Net cash used in
operating
activities (248,849) (34,930) (17,912) (213,919) (209,642) (4,277)
---------- ---------- --------- ---------- ---------- ---------
Cash flows from
investing activities:
Cash paid for
licenses (15,592) - (6,600) (15,592) (15,592) -
Cash paid for
equipment (103,786) (8,600) - (95,186) (95,186) -
---------- --------- --------- ---------- ---------- ---------
Net cash used
in investing
activities (119,378) (8,600) (6,600) (110,778) (110,778) -
---------- --------- --------- ---------- ---------- ---------
See accompanying summary of accounting policies and notes to financial
statements.
F-5a
<PAGE> 43
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash
Date of
Inception Three Three Date of Date of
(07/21/98) Months Months Inception Inception
Through Ended Ended (07/21/98) Year (07/21/98)
04/30/00 04/30/00 04/30/99 Through Ended Through
(Unaudited) (Unaudited) (Unaudited) 01/31/00 01/31/00 01/31/99
Cash flows from
financing activities:
Borrowings under
line of credit -
related party 417,453 79,398 - 338,055 322,757 15,298
Deferred stock
offering costs (73,893) (34,593) - (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 369,854 44,805 10,050 325,049 293,507 31,542
---------- ---------- --------- ---------- ---------- --------
Net increase
(decrease)
in cash 1,627 1,275 (14,462) 352 (26,913) 27,265
Cash, beginning
of period - 352 27,265 - 27,265 -
---------- ---------- --------- ---------- --------- ---------
Cash, end of
period $ 1,627 $ 1,627 $ 12,803 $ 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-5b
<PAGE> 44
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
For the three months ended April 30, 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.
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.
F-6
<PAGE> 45
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
For the three months ended April 30, 2000 and 1999 (Unaudited),
the Year Ended January 31, 2000 and the Period From
Date of Inception (July 21, 1998) through January 31, 1999
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.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheet as of April
30, 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.
F-7
<PAGE> 46
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
For the three months ended April 30, 2000 and 1999 (Unaudited),
the Year Ended January 31, 2000 and the Period From
Date of Inception (July 21, 1998) through January 31, 1999
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.
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 three months ended April 30, 2000 and 1999. The results of operations for
the three months ended April 30, 2000 are not necessarily indicative of
results of operations to be expected for the year ended January 31, 2001.
F-8
<PAGE> 47
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
For the three months ended April 30, 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 no recurring source of revenue and 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 plans to commence production in fiscal 2000.
To this end, management is currently in negotiations with manufacturers to
produce the Company's products and with marketing representatives 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:
April 30, January 31, January 31,
2000 2000 1999
(Unaudited)
---------- ---------- ----------
Equipment $ 6,715 $ 6,715 $ 6,715
Equipment held for use
in future production 103,786 95,186 -
--------- --------- --------
Total equipment 110,501 101,901 6,715
Less accumulated depreciation 9,309 6,715 6,715
--------- --------- --------
Net equipment $ 101,192 $ 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-9
<PAGE> 48
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
For the three months ended April 30, 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 on August 1, 2000. At April 30,
2000, the Company was indebted to Mr. Sterling in the amount of $424,660 and
the maturity date of the credit line has been extended to July 31, 2001.
5. Income Taxes
At April 30, 2000, January 31, 2000 and 1999, the Company had net deferred
tax assets of approximately $110,000, $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 April
30, 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-10
<PAGE> 49
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
For the three months ended April 30, 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
1,000,000 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 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 100,000 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 $13.05 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. The agreement 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, $100,000 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 1,000,000 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 $35,000,000 and pretax income of
$7,500,000. If these targets are not attained by January 31, 2004, the shares
will be cancelled. The 1,000,000 shares as well as the dollar amount of
sales and pretax income set forth above shall be prorated downward if less
than $5,000,000 is raised in this offering. The 1,000,000 shares as well as
the dollar amount of the sales and pretax income will be prorated downward if
less than $5,000,000 is raised in the offering.
F-11
<PAGE> 50
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.
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
Underwriter Non-Accountable
Expense Allowance 156,000.00
Printing Expenses 20,000.00
Accounting Fees and Expenses 25,000.00
Legal Fees and Expenses 10,000.00
Blue Sky Fees/Expenses 20,000.00
Transfer Agent Fees 3,000.00
Escrow Fee 5,000.00
Miscellaneous Expenses 7,706.06
-----------
TOTAL $ 260,000.00
============
<PAGE> 51
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
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
<PAGE> 52
Name and Address Date Shares Consideration
------------------- ------- --------- ---------------
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
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
<PAGE> 53
Name and Address Date Shares Consideration
------------------- ------- --------- ---------------
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
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
<PAGE> 54
Name and Address Date Shares Consideration
------------------- ------- -------- -------------------
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
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.
<PAGE> 55
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.
23.3 Consent of BDO Seidman, LLP.
23.4 Consent of Conrad C. Lysiak, Attorney at Law.
27.2 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.
<PAGE> 56
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;
* 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> 57
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. 1 to the Form SB-2 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Spokane, Washington, on this 30th day of August, 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. 1 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 August 30, 2000
Robert E. Sterling of the Board of Directors
/s/ Ronald L. Allen Vice President and a August 30, 2000
Ronald L. Allen member of the Board of
Directors
/s/ William A.
Sutherland Secretary/Treasurer, August 30, 2000
William A. Sutherland Chief Financial Officer,
and a member of the
Board of Directors
