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As filed with the Securities and Exchange Commission on September 1, 2000
Registration No. 333-40460
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO.1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
International Fuel Technology, Inc.
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(Exact name of Registrant as specified in its charter)
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Nevada 6770 88-0357508
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(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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7777 Bonhomme, Suite 1920
St. Louis, Missouri 63105
(314) 727-3333
--------------
(Address, Including Zip Code, and Telephone Number, Including Area Code
of Registrant's Principal Executive Offices)
William J. Lindenmayer
7777 Bonhomme, Suite 1920
St. Louis, Missouri 63105
(314) 727-3333
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(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
Copy to:
David W. Braswell, Esq.
Armstrong Teasdale LLP
One Metropolitan Square, Suite 2600
St. Louis, Missouri 63102-2740
(314) 621-5070
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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Subject to Completion, Dated September 14, 2000
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities, and it is not soliciting an offer to buy these
securities, in any state where the offer or sale is not permitted.
INTERNATIONAL FUEL TECHNOLOGY, INC.
UP TO 8,000,000 SHARES
COMMON STOCK
We have prepared this prospectus to allow GEM Global Yield Fund Limited and
Turbo International Ltd., or their pledgees, donees, transferees or other
successors in interest, to use a "shelf" registration process to sell up to
8,000,000 shares of our common stock which they may acquire upon conversion of
convertible debentures they will receive upon closing of a financing transaction
and which they have acquired through the exercise of warrants and issuances of
common stock previously acquired in private placements under the terms of the
convertible debenture purchase agreement. We will receive no proceeds from the
sale of these shares.
Our common stock is listed on the National Association of Securities Dealers'
OTC Bulletin Board under the symbol "IFUE." On September 13, 2000, the closing
price of our common stock was $.56 per share. If the selling shareholders were
to convert all of the convertible debentures as of September 13, 2000, the
conversion price for each of their shares would be $.34. Including the 585,000
shares received through the exercise of warrants and issuances of common stock
previously acquired in private placements under the terms of the convertible
debenture purchase agreement, the selling shareholders would thus own and be
able to sell a total of up to 4,996,765 shares of common stock of International
Fuel under this prospectus, or 20.9% of all shares of our common stock
outstanding as of September 13, 2000.
The purchase of the securities offered through this prospectus involves a high
degree of risk.
See section entitled "Risk Factors" on pages 4 through 10.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The Date Of This Prospectus Is: ______________
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TABLE OF CONTENTS
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PAGE
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Summary......................................................................... 2-3
Risk Factors.................................................................... 4-10
Use of Proceeds................................................................. 11
Determination of Offering Price................................................. 11
Dilution........................................................................ 11
Price Range Of Common Stock And Dividend Policy................................. 12
Selected Financial Data......................................................... 13-14
Selling Shareholders............................................................ 15
Plan of Distribution............................................................ 16-17
Description of Securities to be Registered...................................... 18-19
Interests of Named Experts and Counsel.......................................... 19
Description of Business......................................................... 20-30
Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................... 31-39
Quantitative and Qualitative Disclosures About Market Risk...................... 39
Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure........................................................ 39
Management...................................................................... 40-43
Security Ownership Of Certain Beneficial Owners and
Management...................................................................... 44
Certain Relationships and Related Transactions.................................. 45-46
Legal Matters................................................................... 46
Experts......................................................................... 46
Available Information........................................................... 47
Index to Financial Statements................................................... F-1
Part II......................................................................... II-1-8
Signatures...................................................................... II-9
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SUMMARY
-------
The following summary is only a shortened version of the more detailed
information, exhibits and financial statements appearing elsewhere in this
prospectus. Prospective investors are urged to read this prospectus in its
entirety.
International Fuel Technology, Inc.
We are in the business of developing a family of cost-effective fuels known as
Performance Enhanced Emission Reduced (PEER) fuels that are designed to improve
the efficiency of internal combustion engines, thus reducing the level of
certain harmful emissions created through the combustion process. Our company
and our products are in the development stage. We plan to market, license and
sell our PEER fuels upon completion of the development stage. See "Description
of Business."
While we believe that the objectives of our strategic development, production
and marketing plans are reasonably attainable, we caution you that our ability
to achieve these goals is subject to the risks described in "Risk Factors"
below, including the limited resources that we currently have available to
pursue our plans, our ability to comply with government regulations and to meet
product certification requirements, our reliance on third parties for
development and testing of PEER fuels, and the uncertainties associated with the
rapidly-changing business and technological environment for development stage
companies.
We have our principal executive offices at 7777 Bonhomme, Suite 1920, St. Louis,
Missouri 63105. Our telephone number is (314)727-3333.
Convertible Debenture Financing
We entered into a Convertible Debenture Purchase Agreement dated February 25,
2000, in which we agreed to sell a total of $3,000,000 worth of 2% convertible
debentures due June 24, 2005. This agreement was amended on June 16, 2000, to
agree to sell a total of $1,500,000 worth of 2% convertible debentures. In
connection with the June 16, 2000 amendment we issued 195,000 shares to the
investors in the convertible debentures. In addition to the convertible
debentures, GEM Global Yield Fund Limited, one of the investors in the
convertible debentures, received a warrant to purchase 390,000 shares of common
stock as part of its fee for arranging the convertible debenture financing. GEM
exercised the warrants on March 28, 2000 at an exercise price of $.01 per share.
The 195,000 common shares issued in connection with the June 16, 2000 amendment
and the 390,000 shares issued via the warrant will hereafter be referred to as
the 585,000 shares issued in connection with the convertible debentures. See the
section entitled "Description of Securities to be Registered" - "Convertible
Debentures" for a discussion of the convertible debentures and the conversion
formula.
Under the terms of the Convertible Debenture Purchase Agreement, we also entered
into a Registration Rights Agreement in which we are obligated to register with
the Securities and Exchange Commission all of the warrant shares, along with
400% of the shares we would be required to issue upon the conversion of the
debentures based on the conversion price that would apply on February 25, 2000.
The convertible debentures will not be issued until the shares become registered
with the Securities and Exchange Commission. See the section entitled
"Description of Securities to be Registered" - "Registration Rights" for a
discussion of the registration rights agreement.
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The common stock offered by the selling shareholders through this prospectus is
the common stock into which the convertible debentures may be converted and the
common stock received through the exercise of their warrants, and issuances of
common stock previously acquired in private placement under the terms of the
convertible debenture purchase agreement. We are filing this registration
statement in order to satisfy our obligations to the selling shareholders under
the registration rights agreement.
Offering Summary
----------------
Securities Being Offered Up to 8,000,000 shares of common stock;
See Section entitled "Description Of
Securities To Be Registered."
Securities Issued
And to be Issued As of the date of this prospectus,
19,492,698 shares of common stock are issued and
outstanding, including 585,000 shares previously
issued to the selling stockholders through the
exercise of warrants, and issuances of common
stock previously acquired in private placement
under the terms of the convertible debenture
purchase agreement. In addition, there are
approximately 4,411,765 shares represented by
convertible debentures that may be converted into
common stock based on the conversion price that
would apply on September 13, 2000. Therefore, upon
conversion of the debentures, there could be
approximately 23,904,463 shares of our common
stock issued and outstanding. Existing
shareholders will sell all of the common stock
sold under this prospectus. See section entitled
"Description Of Securities To Be Registered".
Use of Proceeds We will not receive any proceeds
from the sale of the common stock by the selling
shareholders. We will use the proceeds we receive
under the convertible debenture financing to
advance research and development and to support
investor relations and administrative costs.
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RISK FACTORS
An investment in the securities offered through this prospectus is highly
speculative and subject to a high degree of risk. Only those who can bear the
risk of loss of their entire investment should participate. Prospective
investors should carefully consider the following factors, among others, before
making an investment in the common stock described in this document.
If We Do Not Get Additional Financing, There is a Risk that Our Business May
Fail.
While we anticipate completing a financing through the sale of convertible
debentures, we will not be able to fully realize our strategic objectives or our
business plan without obtaining additional financing in the future. We expect
the $1,380,000 net proceeds, gross proceeds of $1,500,000 net of GEMs 8% fee,
from the sale of convertible debentures to cover our budget for the remainder of
our fiscal year. The $1,380,000 is expected to be used as follows: $700,000 for
research and development ($350,000 for CARB Certification and $350,000 for Fleet
Testing), $100,000 for investor relations, and $580,000 for administration and
other expenses. We expect our future capital needs to be significant due to a
number of factors, including the amount of additional research and development
that is necessary to bring our products to market and any acquisitions we may
wish to pursue. The projected amount for additional research and development
necessary after this fiscal year to bring PEERFUEL(TM) to market is
approximately $2 million. In addition, changes may occur in our current
operations that would use available capital resources sooner than anticipated.
If our capital resources are not sufficient to meet our future capital needs, we
will have to raise more funds to continue the development and commercialization
of our products, if any, realized from our technology. If this financing is not
available, investors may lose a substantial portion or all of their investment
and our business may fail. We currently have no immediate means for obtaining
this additional financing. Consequently, we cannot assure investors that
additional financing, when necessary, will be available to us on acceptable
terms, or at all.
We Have a History of Operating Losses and Expect to Continue to Realize Losses;
We May Not Become Profitable or Be Able to Sustain Profitability.
Since our inception we have incurred significant net losses. For the nine months
ended December 31, 1999, we lost approximately $5,600,000, and for the six
months ended June 30, 2000, we lost $1,966,000. Our accumulated deficit as of
June 30, 2000 was approximately $16.9 million. The auditors' report on the
December 31, 1999 financial statements has been modified for going concern and
includes an explanatory paragraph that states we have suffered recurring losses
from operations, have negative working capital and cash used in operating
activities and have a stockholders' deficit that raises substantial doubt about
our ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
We expect to continue to incur net losses and negative cash flow in the near
future. The size of these losses will depend, in large part, on our ability to
realize licensing revenues from marketing our products, which is dependent upon
achieving certain regulatory approvals or certifications. To date, we have not
had any operating revenue from the sale or licensing of our products. Even if we
achieve regulatory approvals and certifications, our ability to generate
revenues will be dependent upon, among other things, the successful negotiation
of licensing agreements, the marketing of our products and the possible sale of
our technology. Because we have not yet attempted to license, market or sell our
products or our technology, there can be no assurance that we will successfully
be able to do so. We expect to spend additional funds on testing for regulatory
approvals and certifications, marketing expenses and other research and
development efforts. As a result, we expect our operating expenses to increase
in the short term which will necessitate higher levels of revenue for
profitability when, and if, we begin to generate revenues. Should we achieve
profitability there is no assurance we can maintain or increase our level of
profitability in the future.
4
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Because We are a Development Stage Company with an Unproven Technology and
Little Experience in the Operation of Our Business, There is a Risk that Our
Business May Fail.
To date, we have been involved primarily in research, testing and product
development. We have only a limited operating history and no experience in
producing and bringing to market our products. Potential investors should be
aware that there is a substantial risk of failure associated with development
stage businesses because of problems encountered in connection with the
producing and marketing of products. These problems include, but are not limited
to:
(1) unanticipated difficulties relating to the marketing and sale of a new
product in the marketplace;
(2) the entry of new competition; and
(3) unknown or unexpected additional costs and expenses that may exceed
current estimates.
We have only a limited operating history upon which to base any projection of
the likelihood we will prove successful, and thus we cannot assure potential
investors that we will achieve profitable operations or even generate any
operating revenues.
In addition, our PEER fuel technology is a completely new approach to reducing
harmful emissions from certain internal combustion engines and the unproven
aspects of our technology may never prove commercially viable. There is the
potential that we may not be able to produce on a sustainable basis the
preliminary performance results achieved in certain of our research efforts. It
is also possible that our products will not meet certain regulatory requirements
and we may not be able to manufacture or successfully market our products at a
reasonable cost.
It may be several months before we are able to start both regulatory protocol
testing for certification and live vehicle fleet testing for our PEER fuel
technology. We are not able to gauge the exact amount of additional testing that
will be required to achieve the specific regulatory certifications we believe we
will need before taking our products to market. In addition, we are uncertain
how many fleet test programs will be necessary to definitively prove any fuel
economy benefits from our products, nor can there be any assurance that such
fleet test programs will prove successful. Difficulties in the development and
utilization of a new and unproven technology could limit our ability to develop
commercially viable products, which could cause our business to fail. A number
of companies have had fuels certified under the CARB equivalency certification
program and not all of the fuels have achieved commercial success. The success
of any given fuel in the marketplace is dependent upon many factors, with the
substantial emphasis being the ability to deliver a sustainable and meaningful
economic benefit to the user of that fuel. Despite gaining certification from
CARB, fuel processed through the PEERFUEL(TM) system may not contain a level of
benefits deemed economically meaningful by the market either through reduction
in pollution emissions or enhanced fuel economy.
We are Dependent on Third Parties for the Development of Our Products and any
Conflicts with These Third Parties May Prevent Us from Commercializing Our
Products.
We do not presently possess all of the resources needed to complete the
regulatory approval and certification process necessary to commercialize our
products. We have entered into consulting and other agreements with certain
third parties to help us achieve regulatory certification and to oversee certain
aspects of our fleet testing program. These contracts have no fixed expiration
date and are cancelable at any time. If these third parties elect to
discontinue their efforts, we may not be able to commercialize our products in a
timely manner, or to commercialize them at all.
5
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We do not control these third parties, nor are we able to control the amount of
time and effort they put forth on our behalf. It is possible that any of these
third parties may not perform as expected, and that they may breach or terminate
their agreements with us before completing their work. It is also possible that
they may choose to provide services to a competitor. Any failure of a third
party to provide us the services for which we have contracted could prevent us
from commercializing our products.
There is a Risk that Products Developed by Competitors Will Reduce Our Profits
or Force Us Out of Business.
We may face competition from companies that are developing products similar to
those we are developing. The petroleum/fossil fuels industry has spawned a
large number of efforts to create technologies that help reduce or eliminate
harmful emissions from the burning of fuels. These companies may have
significantly greater marketing, financial and managerial resources than us. We
cannot assure investors that our competitors will not succeed in developing and
distributing products that will render our products obsolete or noncompetitive.
Generally, such competition could potentially force us out of business.
Our Products Can Only Be Applied to a Limited Range of Uses With the Resulting
Concentration Possibly Limiting Our Potential Growth.
Our products are being developed with a limited set of functional uses relating
primarily to internal combustion engines. Significant efforts exist to find
alternatives to internal combustion engines. In addition, the regulatory
environment is becoming increasingly restrictive with regard to the performance
of internal combustion engines and the harmful emissions they produce. If
alternatives to internal combustion engines become commercially viable, it is
possible that the potential market for our products could be reduced, if not
eliminated.
Because of the Nature of Our Products, We May Be Subject to Government Approvals
and Regulations that Reduce Our Ability to Commercialize Our Products, Increase
Our Costs of Operations and Decrease Our Ability To Generate Income.
We are subject to United States and international laws and regulations regarding
the development, production, transportation and sale of the products we sell.
There is no single regulatory authority to which we must apply for certification
or approval to sell our products in the United States or outside its borders.
However, to sell our products in the State of California, which is a central
component of our marketing strategy, it is required that we receive a
certification from the California Air Resources Board (CARB) stating that we
produce CARB qualified products. To obtain this particular certification we
must submit our products to extensive testing with a laboratory facility
approved by CARB. This is a defined process with a generally accepted cost for
such testing, and the data obtained from this particular process is generally
not subject to interpretation. The generally accepted cost for the CARB testing
is approximately $150,000, as provided by the company expected to do the testing
and verified by our technical consultants. We also intend to seek certification
from CARB attesting to specific performance features of our products at an
additional estimated cost of $200,000. It is possible that CARB may change its
regulatory policy to require that all the certifications we are seeking be in
place before our products may be sold in California, or that additional testing
be required before any final certifications are given. It is also possible that
other states may adopt the CARB regulations for the sale of similar products or
create their own regulations regarding the sale of these products. Any such
changes in policy or state regulations may cause delays or rejections of our
attempts to commercialize our products. In addition,
6
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the regulatory agencies of foreign governments must approve our products before
they can be sold in those countries, and may in some cases set or approve prices
for our products.
There can be no assurance that we will obtain regulatory approvals and
certifications for our products. Even if we are granted such regulatory
approvals and certifications, we may be subject to limitations imposed on the
use of our products. In the future, we may be required to comply with certain
restrictive regulations, or potential future regulations, rules, or directives.
We cannot guarantee that restrictive regulations will not, in the future, be
imposed. Such potential regulatory conditions or compliance with such
regulations may increase our cost of operations or decrease our ability to
generate income.
The Market for our Stock is Subject to Rules Relating to Low-Priced Stock.
Out common stock is currently listed for trading in the NASD Over-The-Counter
Bulleting Board Market and is subject to the "penny stock rules" adopted
pursuant to Section 15(g) of the Securities Exchange Act of 1934, as amended. In
general, the penny stock rules apply to non-NASDAQ or non-national stock
exchange companies whose common stock trades at less than $5.00 per share or
which have tangible net worth of less than $5,000,000 ($2,000,000 if the company
has been operating for three or more years). Such rules require, among other
things, that brokers who trade "penny stock" to persons other than "established
customers" complete certain documentation, make suitability inquires of
investors and provide investors with certain information concerning trading in
the security, including a risk disclosure document, quote information, broker's
commission information and rights and remedies available to investors in penny
stocks. Many brokers have decided not to trade "penny stock" because of the
requirements of the penny stock rules and, as a result, the number of broker-
dealers willing to act as market makers in such securities is limited. The
"penny stock rules," therefore, may have an adverse impact on the market for our
common stock.
If Our Stock is Delisted, There is a Risk that the Market Value and Use of Our
Stock Would Decline.
In order for our shareholders to sell their common stock through the NASD Over-
The-Counter Bulletin Board Market, we must continue to meet the Bulletin Board's
listing qualifications. We cannot provide any assurance that in the future our
common stock will continue to meet these listing qualifications. Delisting from
the Bulletin Board or other market could cause, among other things:
. A decline in the market price of the common stock;
. Difficulty in obtaining future financing;
. Difficulty in using common stock as consideration for acquisitions; and
. Investors being unable to sell their stock
Because We are a Development Stage Company With an Untested Market, the Price of
Our Stock is Very Volatile and May Decline.
Recently, the stock market in general, and the shares of development stage
companies in particular, have experienced significant price fluctuations. These
broad market and industry fluctuations may cause the market price of our common
stock to decline dramatically. Factors such as quarterly fluctuations in results
of operations and general conditions in our industry may have a significant
impact on the market price of our stock. The market price of our common stock
has been and may continue to be very volatile.
If the Selling Shareholders Sell a Large Number of Shares All at Once or In
Blocks, The Market Price of Our Shares Would Most Likely Decline.
The selling shareholders are offering all of the common stock offered through
this prospectus. The selling shareholders are not restricted in the price at
which they can sell the common stock. Shares sold at a price below the current
market price at which the common stock is trading may cause that market price to
decline. The shares of common stock covered by this prospectus that are issuable
upon the conversion of the convertible debentures and that were previously
issued to the selling shareholders represent 20.9% of our outstanding shares as
of September 13, 2000, based on the conversion price that would apply on
September 13, 2000.
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If the Selling Shareholders Exercise Their Conversion Rights, The Ownership
Percentage Interest Of Existing Shareholders Will Be Diminished and The Price of
Our Stock May Decline.
Upon consummation of the convertible debenture financing we will have $1,500,000
worth of convertible debentures, convertible into common stock, issued and
outstanding. Consummation of the financing is contingent on the common stock
shares being registered with the Securities and Exchange Commission and upon GEM
agreeing to provide the funding contemplated by the financing. Depending on
market conditions, the number of shares issuable upon conversion of these
debentures will vary dramatically. The lower the stock price goes, the more
common stock the debenture holder receives as a result of conversion. This will
have the effect of diluting the interest of our existing shareholders.
The following table illustrates the number of shares that we would be required
to issue at various assumed prices upon conversion of the $1,500,000 of
debentures, subject to the limitations described in the text following the
table. This table is for illustrative purposes only, and should not be assumed
to represent our projections of the range of future stock prices.
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Ownership of
Conversion Shares Issuable Under the Selling Shareholders as a
Stock Price Debenture Agreement Result of Share Issuance /(1)(2)/
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$ .50 3,000,000 12.5%
$ .75 2,000,000 8.4%
$ .34/(3)/ 4,411,765 18.5%
$1.00 1,500,000 6.3%
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_______________________
(1) Based on 19,492,698 shares standing on September 13, 2000.
(2) Includes 585,000 shares received by the selling shareholders in connection
with the convertible debenture purchase agreement.
(3) The conversion price on September 13, 2000.
Investors could therefore experience dilution of their ownership percentage upon
conversion of the debentures.
In addition, investors should note that the conversion price of these debentures
as of September 13, 2000 of $.34 was below the market price of the common shares
which was $.56 per share as of September 13, 2000. The exercise of such a large
amount of stock, especially if close in time, may have a substantial negative
effect on the market price of the common stock.
If We are Unable to Achieve or Maintain the Effectiveness of this Registration
Statement, We Will Be Subject to Substantial Penalties.
We are subject to agreements with the selling stockholders that required us to
register certain of our common stock with the Securities and Exchange Commission
and for the registration to be effective by August 24, 2000. Because we failed
to meet the effectiveness deadline the selling stockholders may
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terminate the Convertible Debenture Purchase Agreement. Under the financing
agreements we must also maintain this registration until all of the securities
covered by the agreement are sold or can be sold publicly without benefit of
this registration. If we are unable to obtain or maintain this Registration, we
will be subject to substantial penalties.
If We Lose any Key Personnel or Management, We May Lose Business Sales or Be
Unable to Otherwise Fully Operate Our Business.
We are dependent on the principal members of our management staff, the loss of
any of whom could impair the development or sale of our products and projects.
Our success will be largely dependent on the decisions made by members of
management. The principal members of the management staff under contract are
Jonathan R. Burst, CEO and William J. Lindenmayer, President and COO. Patty
Foltz, the third member of the management staff is the CFO and is not under
contract. Furthermore, we may depend on our ability to attract and retain
additional qualified personnel to manage certain business interests. We may have
to recruit qualified personnel with competitive compensation packages, equity
participation and other benefits which may reduce the working capital available
for our operations. Management may seek to obtain outside independent
professionals to assist them in assessing the merits and risks of any business
proposals as well as assisting in the development and operation of any projects.
We cannot assure investors that we will be able to obtain this needed assistance
on reasonable terms, or that we will be able to retain our existing management
staff.
We are at Risk of Securities Class Action Litigation as a Result of Our Stock
Price Volatility.
Securities class action litigation is often brought against a company following
a decline in the market price of its securities. This risk is especially acute
for us because we have experienced greater than average stock price volatility
and, as a result, we could be subject to possible securities class action
claims. If a stockholder files a securities class action suit against us, we
would incur substantial legal fees and our management's attention and resources
would be diverted from operating our business in order to respond to the
litigation.
If a Significant Number of Shares Become Available for Sale After This Offering,
Our Stock Price Could Decline.
Many shares of our common stock presently issued and outstanding are "Restricted
Securities" as that term is defined in Rule 144 promulgated under the Securities
Act of 1933. In general, under Rule 144, a person (or persons whose shares are
aggregated) who has satisfied a one year holding period may sell, within any
three month period, an amount which does not exceed the greater of 1% of the
then outstanding shares of common stock or the average weekly trading volume
during the four calendar weeks prior to such sale. Rule 144 also permits the
sale of shares, under certain circumstances, without any quantity limitation, by
persons who are not affiliates of International Fuel and who have beneficially
owned the shares for a minimum period of two years. The possible sale of these
restricted shares may, in the future, increase the number of free-trading shares
and may have a depressive effect on the price of our securities. Moreover, such
sales, if substantial, might also adversely affect our ability to raise
additional equity capital.
We Create Products That May Have Harmful Effects on the Environment If Not
Stored and Handled Properly Prior to Use, Which Could Result in Significant
Liability and Compliance Expense.
The re-processing of refined fossil fuels through our PEER fuel system involves
the controlled use of materials that are hazardous to the environment. We cannot
eliminate the risk of accidental contamination or discharge and any resulting
problems that occur. Federal, state and local laws and regulations govern the
use, manufacture, storage, handling and disposal of these materials. We may be
named a defendant in any suit that arises from the improper handling, storage or
disposal of these products. We could be subject to civil damages in the event of
an improper or unauthorized release of, or exposure of individuals to, hazardous
materials. Claimants may sue us for injury or contamination that results from
use by third parties of PEER fuel products, and our liability may exceed our
total assets. Compliance with environmental laws and regulations may be
expensive, and current or future environmental regulations may impair our
research, development and production efforts.
If We are Unable to Protect Our Technology From Use By Competitors, There is a
Risk that We Will Sustain Losses or that Our Business May Fail.
Our success will depend, in part, on our ability to obtain and enforce
intellectual property protection for our technology in both the United States
and other countries. We have filed patent applications in the United States
Patent and Trademark Office and international counterparts of applications in
the United States Receiving Office under the Patent Cooperation Treaty. We
cannot provide any assurance that patents will issue from these applications or
that, with respect to any patents, issued or pending, the claims allowed are or
will be sufficiently broad to protect the key aspects of our technology or that
the patent laws will provide effective legal or injunctive remedies to stop any
infringement of our patents. In addition, we cannot assure investors that any
patent rights owned by us will not be challenged,
9
<PAGE>
invalidated or circumvented, that the rights granted under patents will provide
competitive advantages to us, or that our competitors will not independently
develop or patent technologies that are substantially equivalent or superior to
our technology. Our business plan assumes that we will obtain and maintain
comprehensive patent protection of our technologies. We cannot assure investors
that such protection will be obtained, or that, if obtained, it will withstand
challenge. Furthermore, if an action is brought, a court may find that we have
infringed on the patents owned by others. We may have to go to court to defend
our patents, to prosecute infringements, or to defend infringement claims made
by others. We are not aware of any such pending or threatened patent litigation
at this time. Patent litigation is expensive and time-consuming, and well-funded
adversaries can use such actions as part of a strategy for depleting the
resources of a small company such as ours. We cannot assure investors that we
will have sufficient resources to successfully prosecute our interests in any
litigation that may be brought.
We May Have Difficulties Managing Growth Which Could Lead to Higher Losses.
While we have not yet achieved any revenues through the sale or licensing of our
products, should certain events occur, such as CARB certification or significant
repeated fuel economy results from fleet testing, we might be in a position to
rapidly commercialize our products. Rapid growth would strain our human and
capital resources, potentially leading to higher operating losses. Our ability
to manage operations and control growth will be dependent upon our ability to
raise and spend capital to improve our operational, financial and management
controls, reporting systems and procedures, and to attract and retain adequate
numbers of qualified employees. Should we be unable to successfully create
improvements to our internal procedures and controls in an efficient and timely
manner, then management may receive inadequate information necessary to manage
the Company's operations, possibly causing additional expenditures and
inefficient use of existing human and capital resources.
10
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock offered
through this prospectus by the selling shareholders. We will use the proceeds we
receive under the convertible debenture financing to advance research and
development and to support investor relations and administrative costs.
DETERMINATION OF OFFERING PRICE
The offering price of the common stock will not be determined by us, but by
market factors and the independent decisions of the selling shareholders. See
section entitled "Selling Shareholders".
DILUTION
The shares of common stock covered by this prospectus that are issuable upon the
conversion of the convertible debentures and that were previously issued to the
selling shareholders represent 20.9% of our outstanding shares as of September
13, 2000, based on the conversion price that would apply on September 13, 2000.
As of September 13, 2000, 19,492,698 shares of our common stock were issued and
outstanding. We will also issue $1,500,000 worth of convertible debentures
convertible into shares of our common stock based on a negotiated formula.
Depending on market conditions at the time of conversion, the number of shares
issuable to the holders of the convertible debentures could prove to be
significantly greater in the event of a decrease in the trading price of the
common stock. This will have the effect of diluting the interest of our existing
shareholders.
11
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock has been traded on the National Association of Securities
Dealers OTC Bulletin Board system under the symbol "IFUE" since October 1998.
There can be no assurance that in the future the common stock will meet the
continued listing qualifications of the OTC Bulletin Board. The following table
provides the range of closing high and low bid prices shown below is as reported
by the OTC Bulletin Board since the stock began trading in October 1998. The
quotations shown reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Year Ended March 31,1999
------------------------
First Quarter - -
Second Quarter - -
Third Quarter $11.875 $5.000
Fourth Quarter $ 7.812 $2.969
Nine Months Ended December 31,1999
----------------------------------
First Quarter $ 3.125 $1.250
Second Quarter $ 5.562 $1.875
Third Quarter $ 5.000 $2.531
Year Ended December 31,2000
---------------------------
First Quarter $ 3.969 $1.875
Second Quarter $ 2.375 $ .406
Third Quarter (through August 30, 2000) $ .875 $ .375
</TABLE>
Reflects a one-for-ten reverse split of outstanding common stock effected on
July 22, 1999. All closing high and low bid prices have been restated to
reflect this reverse split.
As of the close of business on September 13, 2000, the last reported bid price
per share of our common stock was $ .56. There were 5200 holders of record of
our common stock at the close of business on September 13, 2000. Such number
does not include persons whose shares are held by a bank, brokerage house or
clearing company, but does include such banks, brokerage houses and clearing
companies.
No cash dividends have been paid on our common stock since our inception and we
do not anticipate paying dividends in the foreseeable future. We currently
intend to retain earnings for future growth and expansion opportunities.
12
<PAGE>
SELECTED FINANCIAL DATA
The following table provides certain comparative financial data for
International Fuel for the nine months ended December 31, 1999 and 1998, the
years ended March 31, 1999, 1998 and 1997, and the six month periods ended
June 30, 2000 and 1999. International Fuel was incorporated on April 9, 1996.
The information provided in this table is qualified by the more complete
information contained in the audited and un-audited financial statements
provided later in this document.
Effective October 27, 1999, International Fuel changed the date of its fiscal
year end from March 31 to December 31. The nine-month period ended December 31,
1999, is referred to as the transition period. All year and quarter references
relate to International Fuel's prior fiscal years and quarters, unless otherwise
stated.
The following tables set forth certain information concerning the Statement of
Operations and Balance Sheet of International Fuel and should be read in
conjunction with the Financial Statements and the notes thereto appearing
elsewhere in this report. International Fuel follows the same accounting
policies in preparation of interim reports.
The following tables for the interim periods reflect all adjustments, consisting
of normal recurring adjustments which, in the opinion of management, are
necessary for fair presentation of the information contained therein.
Results of operations for the interim periods are not indicative of annual
results.
(a) Selected Statement of Operations Data (In Thousands of Dollars, Except Per
------------------------------------------------------------------------------
Share Data)
-----------
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Revenues $ -- $ --
Operating Expenses 1,842 867
Net loss (1,967) (886)
Basic and Diluted Net Loss per Common Share ($.11) ($.07)
Weighted Average Shares 17,276,081 12,897,559
Nine Months Ended December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Revenues $ -- $ --
Operating Expenses 5,227 7,335
Net loss (5,632) (7,404)
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C>
Basic and Diluted Net Loss per Common Share ($.36) ($.57)
Weighted Average Shares 15,800,725 12,993,978
Fiscal Year Ended March 31,
---------------------------
1999 1998 1997
---- ---- ----
Revenues $ -- $ -- $ --
Operating Expenses 7,751 1,083 344
Net loss (7,839) (1,091) (344)
Basic and Diluted Net Loss per Common
Share ($.59) ($.20) ($1.68)
Weighted Average Shares 13,390,417 5,351,089 204,452
</TABLE>
(b) Selected Balance Sheet Data (In Thousands of Dollars)
-----------------------------------------------------
June 30, 2000
(Unaudited)
--------------
Total Assets $1,310
Long-Term Debt $ --
December 31, 1999
-----------------
Total Assets $ 68
Long-Term Debt $ --
March 31,
-------------------
1999 1998 1997
---- ---- ----
Total Assets $ 6 $ 7 $ 5
Long-Term Debt $ -- $ -- $ --
14
<PAGE>
SELLING SHAREHOLDERS
The common stock offered hereby consists of:
. 390,000 outstanding shares of common stock that were issued upon the
exercise of warrants granted to GEM Global Yield Fund Limited on February
25, 2000 through a private placement;
. 182,000 outstanding shares of common stock that were issued to GEM Global
Yield Fund Limited and 13,000 outstanding shares of common stock that were
issued to Turbo International Ltd. In connection with the June 16, 2000
amendment to the convertible debenture purchase agreement;
. 4,411,765 shares issuable upon the conversion of the $1,500,000 in
aggregate principal amount of convertible debentures to be issued to GEM
Global Yield Fund Limited and Turbo International Ltd. by International
Fuel, based on a conversion price calculated as of September 13, 2000. The
number of these shares registered as required by the Registration Rights
Agreement is 7,415,000, which represents approximately 4 times the amount
of shares that would have been issuable upon covers of the debentures as of
February 25, 2000. The difference in these two calculations (3,003,235
shares) is the difference between the total shares we are contractually
required to register under the terms of the registration rights agreement
and the total shares that would actually be available for sale if the
debentures were converted on September 13, 2000.
. The conversion price for each debenture in effect on any conversion date
shall be the lesser of (X) $0.8125 or 125% of the average closing bid price
for the five trading days immediately prior to the closing date or (Y) 91%
of the average of the three lowest closing bid prices during the twenty day
period immediately preceding the conversion date.
The following table provides, as of September 13, 2000, information regarding
the beneficial ownership of our common stock held by each of the selling
shareholders; their shares owned prior to this offering; the total number of
shares that are to be offered for each based on a conversion and exercise date
of their existing convertible debentures of September 13, 2000; the total
number of shares that will be owned by each upon completion of the offering.
<TABLE>
<CAPTION>
Shares Owned Shares To Shares Being Shares Owned
Name of Selling Prior to Be Sold in Registered in Upon Completion Beneficial
Stockholder This Offering This Offering This Offering Of This Offering/(1)/ Owner
----------- ------------- ------------- ------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
GEM Global Ashley Bolt
Yield Fund & Co. Ltd.
Limited 572,000 4,116,177 6,918,195 4,688,177/19.6% London, England
Turbo International Martin Christen
Ltd. 13,000 295,588 496,805 308,588/1.3% Nassau, Bahamas
</TABLE>
15
<PAGE>
_____________________
(1) Assumes that none of the selling shareholders sells shares of common stock
not being offered hereunder or purchases additional shares of common stock.
Based on 19,492,698 shares of common stock issued and outstanding as of
September 13, 2000.
None of the selling shareholders have had a material relationship with
International Fuel Technology, Inc., other than as a shareholder as noted above
at any time within the past three years.
16
<PAGE>
PLAN OF DISTRIBUTION
The selling shareholders, or their respective pledgees, donees, transferees or
other successors in interest, may sell some or all of the common stock in one or
more transactions, including block transactions:
(1) on the NASD OTC Bulletin Board, or on such other market on which the
common stock may from time to time be trading;
(2) in privately negotiated transactions;
(3) through the writing of options on the common stock;
(4) in short sales; or
(5) in any combination of these methods of distribution.
The sales price to the public may be: (i) the market price prevailing at the
time of sale; (ii) a price related to such prevailing market price; or (iii)
such other price as the selling shareholders determine from time to time.
The selling shareholders, or their respective pledgees, donees, transferees or
other successors in interest, may also sell the common stock directly to market
makers acting as principals or brokers or dealers, who may act as agent or
acquire the common stock as principal. Any broker or dealer participating in
such transactions as agent may receive a commission from the selling
shareholders, or, if they act as agent for the purchaser of such common stock,
from such purchaser. The selling shareholders will pay the usual and customary
brokerage fees. Brokers or dealers may agree with the selling shareholders to
sell a specified number of shares at a stipulated price per share and, to the
extent such broker or dealer is unable to do so acting as agent for the selling
shareholders, to purchase, as principal, any unsold shares at the price required
to fulfill the respective broker's or dealer's commitment to the selling
shareholders. Brokers or dealers who acquire shares as principals may thereafter
resell such shares from time to time in transactions in the over-the- counter
market, in negotiated transactions or otherwise, at market prices prevailing at
the time of sale or at negotiated prices, and in connection with such resales
may pay or receive commissions to or from the purchasers of such shares. These
transactions may involve cross and block transactions that may involve sales to
and through other brokers or dealers. If applicable, the selling shareholders
also may have distributed, or may distribute, shares to one or more of their
partners who are unaffiliated with us. Such partners may, in turn, distribute
such shares as described above. We can provide no assurance that the selling
shareholders will sell all or any of their shares.
We are bearing all costs relating to the registration of the common stock. All
commissions or other fees payable to brokers or dealers in connection with any
sale of the common stock will be borne by the selling shareholders or other
party selling such common stock. We have agreed to indemnify the selling
shareholders, or their transferees or assignees, against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the selling shareholders, or their transferees or assignees, may be required to
make.
The selling shareholders must comply with the requirements of the Securities Act
and the Securities Exchange Act in the offer and sale of the common stock. In
particular, during such times as the selling shareholders may be deemed to be
engaged in a distribution of the common stock, and therefore be considered to be
an underwriter under the Securities Act, they must comply with applicable law
and may, among other things:
17
<PAGE>
(a) not engage in any stabilization activities in connection with our
securities;
(b) furnish each broker or dealer through which common stock may be offered
such copies of this prospectus, as amended from time to time, as may be required
by such broker or dealer; and
(c) not bid for or purchase any securities of International Fuel or attempt
to induce any person to purchase any securities of International Fuel other than
as permitted under the Securities Exchange Act.
18
<PAGE>
DESCRIPTION OF SECURITIES TO BE REGISTERED
Common Stock
We have 150,000,000 authorized common shares with a par value of $0.01 per share
of common stock, of which 19,492,698 were outstanding as of September 13, 2000.
In addition, there are approximately 4,411,765 shares issuable upon the
conversion of the $1,500,000 an aggregate principal amount of convertible
debentures to be issued by International Fuel, based on a conversion price
calculated as of September 13, 2000.
Thus, there are a total of 4,996,765 shares that could be sold by the selling
shareholders, including 585,000 shares issued in connection with the convertible
debentures, based on a September 13, 2000 conversion date for the debentures.
There are, however, 8,000,000 shares of common stock registered by this
registration statement because the registration rights agreement requires
registration of 4 times the amount of shares that would be convertible based on
a conversion date of February 25, 2000, plus the 585,000 shares previously
acquired by the selling shareholders in connection with the convertible
debenture purchase agreement.
Holders of common stock have the right to cast one vote for each share held of
record on all matters submitted to a vote of holders of common stock, including
the election of directors. There is no right to cumulative voting in the
election of directors. Stockholders holding a majority of the voting power of
the capital stock issued and outstanding and entitled to vote, represented in
person or by proxy, are necessary to constitute a quorum at any meeting of our
stockholders. The vote by the holders of a majority of such outstanding shares
is required to effect certain fundamental corporate changes such as liquidation,
merger or amendment of our Articles of Incorporation.
Holders of common stock are entitled to receive dividends on a pro rata basis,
when, as and if declared by the Board of Directors, from funds legally
available, subject to the rights of holders of any outstanding preferred stock.
In the event of the liquidation, dissolution or winding up of our affairs, all
of our assets and funds remaining after the payment of all debts and other
liabilities, subject to the rights of the holders of any outstanding preferred
stock, shall be distributed, pro rata, among the holders of the common stock.
Holders of common stock are not entitled to pre-emptive or subscription or
conversion rights, and there are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are, and
the shares of common stock offered hereby will be when issued, fully paid and
non-assessable.
Public Market
Our shares are currently trading on the National Association of Securities
Dealers' OTC Bulletin Board under the stock symbol "IFUE". On September 13,
2000, the closing sale price of the common stock was $.56 per share.
Convertible Debentures
On February 25, 2000, we entered into a convertible debenture purchase agreement
with GEM Global Yield Fund Limited and Turbo International Ltd. under which we
agreed to issue convertible debentures in the amount of $3,000,000 and warrants
to purchase 390,000 shares of our common stock. This agreement was amended on
June 16, 2000, to agree to sell a total of $1,500,000 worth of 2% convertible
19
<PAGE>
debentures and required the issuance of 195,000 common shares to the purchasers.
The convertible debentures will be issued to the purchasers only upon a
declaration of effectiveness by the Securities and Exchange Commission of the
registration of the shares of common stock underlying the debentures and the
585,000 shares previously acquired by the selling shareholders in connection
with the convertible debenture purchase agreement. The debentures, when issued,
will bear interest at a rate of 2% per annum commencing on the date of issuance,
and mature on June 24, 2005. The debentures are convertible at the option of the
holder into that number of shares of our common stock equal to the principal
amount of the debentures to be converted including all accrued interest, divided
by the conversion price in effect on the conversion date, which is equal to the
lesser of (i) $0.8125 or 125% of the average closing bid prices for our common
stock for the five trading days prior to the closing of the sale of the
convertible debentures or (ii) 91% of the average of the three lowest closing
bid prices during the 20 day period immediately preceding the date of
conversion, subject to adjustment for stock splits, stock dividends, and similar
events. Accordingly, as of September 13, 2000, conversion of the entire
principal amount of the convertible debentures and accrued interest thereon
would yield 4,411,765 shares of common stock.
If all of the debentures have not been converted or redeemed by June 24, 2005,
they will automatically convert into shares of common stock as of that date
based on the conversion price formula described above. In the event the closing
bid price of our common stock falls below $1.00, we may redeem the debentures at
120% of the par value per debenture.
The occurrence of other specified events constituting an event of default under
the terms of the debenture may result in the acceleration of all payments due
under the debenture. These events include, but are not limited to, a delisting
of our common stock from the OTC Bulletin Board, our making an assignment for
the benefit of our creditors or our bankruptcy, insolvency, reorganization or
liquidation.
The foregoing has been a brief description of the material terms of the
debentures and warrants. For a more detailed description of the rights of the
holders of the debentures and warrants, prospective investors are directed to
the actual form of debenture that has been filed as an exhibit to the
registration statement of which this prospectus is a part.
Registration Rights
The selling shareholders have the right to require us to register their common
shares with the Securities and Exchange Commission. These rights are
evidenced by a registration rights agreement and are the sole reason for our
filing of the S-1 registration statement on behalf of the selling shareholders
of which this prospectus is a part. The registration rights agreement provides,
in part, that we are obligated to register all the warrant shares we have issued
to investors. In addition, we must register 400% of the shares we are required
to issue upon the conversion of the debentures at the conversion price in effect
on the closing date for the sale of the debentures. Under the financing
agreement, a registration statement must be filed with the SEC and become
effective by August 24, 2000. We failed to meet that deadline. That failure, or
our inability to maintain the registration statement as effective could result
in a suit by the selling shareholders to recover their damages and compel
specific performance of our obligations under the registration rights
agreement.
20
<PAGE>
INTERESTS OF NAMED EXPERTS AND COUNSEL
No expert or counsel named in this prospectus as having prepared or certified
any part of it or having given an opinion upon the validity of the securities
being registered or upon other legal matters in connection with the registration
or offering of the common stock was employed on a contingency basis, or had, or
is to receive, in connection with the offering, a substantial interest, direct
or indirect, in the registrant or any of its parents or subsidiaries. Nor was
any such person connected with the registrant or any of its parents or
subsidiaries as a promoter, managing or principal underwriter, voting trustee,
director, officer, or employee.
21
<PAGE>
DESCRIPTION OF BUSINESS
Overview
We are in the business of developing a family of cost-effective fuels known as
Performance Enhanced Emission Reduced fuels (PEERFUEL(TM)) that are designed to
improve the efficiency of internal combustion engines, thus reducing the level
of certain harmful emissions created through the combustion process. Our
company and our products are in the development stage. We plan to market,
license and sell our PEERFUEL(TM) products upon completion of the development
stage.
The PEERFUEL(TM) process has been designed to be flexible to accommodate usage
on a large scale (represented by refinery production) or a small scale
(represented by individual fleet operations of as few as several trucks). We
believe our PEERFUEL(TM) process will be commercially attractive to a wide range
of petroleum industry participants.
We have conducted research on the PEERFUEL(TM) process for over four years. We
are now in the final stages of commercialization in which targeted testing will
be performed to meet regulatory requirements. In addition, we believe there may
be potential benefits to be derived in the area of fuel economy from the
reprocessing of fuels through the PEERFUEL(TM) system. Specific independent
fleet testing will need to be completed to determine whether any fuel economy
benefits can be derived from PEERFUEL(TM) products. These tests are currently
being set up in four cities across the United States, and with several different
industries representing a variety of engine types.
We were founded in 1996 by a team of three individuals: Mr. Norman Barrett, Mr.
John Tinker and Dr. James Beecham, who together conceived of a processing system
based on altering specific elements of fossil fuel. We formally began testing a
contained system for re-processing refined diesel fuel #2 in 1998, and shortly
thereafter began the effort to raise the funding necessary to complete the
prototype system and substantially complete a testing program that today forms
the basis of the commercialization efforts now under way.
Pursuant to an Agreement and Plan of Merger effective as of October 27, 1999
between Blencathia Acquisition Corporation ("Blencathia") and International
Fuel, all the outstanding shares of common stock of Blencathia were to be
exchanged for 300,000 shares of common stock of International Fuel in a
transaction in which International Fuel was the surviving company. Blencathia
(a development stage company) was incorporated in Delaware on December 3, 1998
to serve as a vehicle to effect a merger, exchange of capital stock, asset
acquisition or other business combination with a domestic or foreign
22
<PAGE>
private business. As of the date of the merger, Blencathia had not yet commenced
any formal business operations.
The officers, directors, and by-laws of International Fuel continued without
change as the officers, directors, and by-laws of the successor issuer following
the merger with Blencathia. All financial statement information presented for
International Fuel reflects the operations of International Fuel and does not
include any operations of Blencathia.
Our office headquarters are located in St. Louis, Missouri with a satellite
location in Las Vegas, Nevada. Our corporate telephone number is (314) 727-
3333, and our Web site is www.peerfuel.com.
----------------
PEERFUEL(TM) Technology
Through our proprietary Pre-Combustion Fuel Treatment System (PCFTS), our
PEERFUEL(TM) products will be designed to improve the efficiency of internal
combustion engines, thus reducing the level of certain harmful emissions created
through the combustion process. The PEERFUEL(TM) processing system is based on
altering specific elements of fossil fuel.
Unlike certain post-refined fuels already in the marketplace that claim to
reduce levels of certain harmful emissions, no chemical additives of any kind
are used within the PCFTS or PEERFUEL(TM) process. Also, unlike emission
reduction systems that are attached to the engine and require sometimes-
expensive engine retrofitting, fuel processed through the PEERFUEL(TM) system
does not require any physical change to the engine itself. When burned in an
internal combustion engine, fuel processed through the PEERFUEL(TM) system will
burn more efficiently as a result of the oxidation process, therefore, burning
more of the fuel itself and leaving fewer remaining pollutants.
The PCFTS comprising the PEERFUEL(TM) system consists of a self-contained system
that is independent of the actual fuel refining process. The basis of our system
is to control the flow rate of pre-processed fuel through a special magnetic
field. The resulting re-processed fuel, when combusted in an engine, burns at a
more efficient rate, leaving a lower level of harmful emissions including
nitrogen oxide (NO\\2\\), commonly referred to as NOX, carbon monoxide (CO),
carbon dioxide (CO\\2\\), and carbon particulates (also referred to as
particulate matter). The impact of the PEERFUEL(TM) system on a broader spectrum
of pollutants represents a significant advantage over many of the current
refinery-based competitive technologies as they tend to impact a narrower range
of pollutants, and in fact, some technologies while positively reducing one
pollutant may cause an increase in the level of other pollutants.
23
<PAGE>
Prospective Markets
The PEERFUEL(TM) system is a potentially valuable element in a wide variety of
industries around the world, albeit limited to the application of pollution
reduction efforts and potential fuel economy within these industries. Our
marketing efforts will also include governmental agencies located outside of the
United States where there is a higher degree of direct involvement or control of
the market for the sale of petroleum products. Initially, we will focus on
targeted licensing opportunities to companies engaged in fuel refining
operations in California where the PEERFUEL(TM) system offers an immediate cost
advantage over current methods of meeting the more stringent pollution emission
reduction standards mandated in this State. In the event our current fleet
testing efforts yield a meaningful improvement in fuel economy, this will open
up the marketing of the PEERFUEL(TM) system to a wider market, especially larger
fleet operators.
The majority of our current marketing efforts will involve opportunities for
diesel fuel #2. Up to this point the Company has not performed any testing on
other refined fossil fuel products such as gasoline or jet fuel. The Company
does intend to perform testing similar to that already completed for pollution
abatement results on other post-refined fuels, which if proved successful would
significantly enforce the marketing efforts already in place.
In addition to the commercial or direct market for our PEERFUEL(TM) products, a
significant component of our future marketing efforts involves taking advantage
of specific incentives put in place by three separate sources: a consortium of
governments from around the world (represented by the Kyoto Treaty of 1999), the
United States government and certain state governments. These incentives have
been put in place to develop alternative fuels to the existing fossil fuels, as
well as to create new methodologies for reducing harmful emissions caused by the
combustion of fossil fuels. These incentives, which are most commonly applied
in the form of tax credits, represent a potentially significant economic benefit
to users of our PEERFUEL(TM) products.
Our Strategy
Our current strategy anticipates that after California Air Resources Board
(CARB) diploma certification is received, initial revenues will likely come from
the sale of equipment needed to install the PEER process and start the
processing of PEERDIESEL(TM). Licensing and affiliated revenues would follow
thereafter. Our business strategy is as follows:
. Complete South Coast Air Quality Management District
certification of PEERDIESEL(TM) and commercialization of
PEERDIESEL(TM) with CARB.
. Work with representatives from State of California to introduce
legislation to mandate use of PEERDIESEL(TM).
. Implement PEERDIESEL(TM) in Honduras as the pilot program for
Emission Reduction Credits international trading.
. Enter a joint venture to license refineries for use of
PEERDIESEL(TM) reformulation process worldwide.
24
<PAGE>
. Expand PEERDIESEL(TM) technology to other states that have
adopted California air quality regulations.
. Expand research and development of other diesel distillate
categories (jet fuel, home heating oil, bunkers for maritime).
. Initiate gasoline testing research and development for possible
inclusion in the PEERFUEL(TM) family of products.
Our strategy has three primary components:
. We will seek certification from the California Air Resources Board
(CARB) for diesel fuel #2 processed through our PEERFUEL(TM) system to
be accepted as a CARB equivalent fuel. This certification is important
because it enables PEERDIESEL(TM) to be sold immediately in the State
of California; all diesel fuel #2 sold in California must be a CARB
certified equivalent fuel. Smaller refineries and distribution
companies in California have approximately 10% of the market for
diesel fuel, in large part because they have a cost disadvantage
versus Arco and Chevron (the two largest refiners). The PEERFUEL(TM)
system is less expensive for smaller refiners who rely largely on
putting additives into their diesel fuel to meet the pollution
emission regulations of CARB. We have already begun working with CARB
and Southwest Research Institute (SRI), one of the leading engine and
fuel testing laboratories in the world, to define the necessary
testing protocol and submit our application. We expect to begin the
CARB protocol in the summer of 2000, and provided we meet required
performance levels, should have certification before the end of the
year. It is our expectation that with this certification, the
PEERFUEL(TM) system can immediately be marketed to specific refineries
and other potential licensees.
. The potential shareholder value that would be created by proving a
fuel economy benefit from PEERDIESEL(TM) could be significant and
additive to any value created through achievement of any regulatory
approvals (such as certification as a CARB-equivalent fuel). We will
pursue a fleet testing program that will involve conducting a series
of tests in different cities, with companies that use a variety of
engine types and are used under varying conditions. We have retained
MarketMatch, a leading professional services firm in the petroleum
industry, to oversee the fleet testing including the compilation of
the results. The protocol for our test program has already been
established and we have begun contacting potential candidate
companies. It is too early to determine if any additional fleet
testing will be required, however, we are committed to continuing our
efforts in the event conclusive evidence is found to support our
claims. Upon formal confirmation of a meaningful fuel economy benefit,
our goal will be to begin marketing the PEERFUEL(TM) system to
targeted companies that would be in the strongest position to gain
from use of our technology.
. We will apply for a special certification from CARB that will allow us
to make specific and detailed claims regarding PEERFUEL(TM) products
and their ability to reduce the levels of certain harmful emissions
caused by the combustion of fossil fuels in certain engine types. This
special certification is difficult to receive, and to this point, no
competitive product or
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process has yet been given such a certification. We believe that with
additional, targeted testing we can provide sufficient evidence to
CARB to warrant receiving a special certification.
Achieving these objectives is important for two reasons. First, with the
special certification, and even with the results achieved from the testing
required through the CARB protocol, users of PEERFUEL(TM) products would
potentially be eligible for special tax credits, providing a powerful economic
inventive for the licensing of our technology. Second, the ability to legally
make specific claims regarding the benefits of using PEERFUEL(TM) products
combined with the approval by CARB to make those claims, will immediately
enhance the marketability of the PEERFUEL(TM) process around the world. CARB is
recognized as one of if not the world leader in advancing the effort to reduce
harmful pollutants into the environment. With the special certification, we
would effectively have CARB's acceptance of the PEERFUEL(TM) process as a
significant and sustainable element for fighting pollution from the use of
fossil fuels in internal combustion engines. Once obtained, the number of
potential users or licensees of PEERFUEL(TM) technology could increase
significantly.
Our Progress To Date
Since our inception in 1996 we have worked to put together a team that
incorporates a number of key disciplines including extensive knowledge of the
petroleum industry and strong practical management skills. We have demonstrated
through extensive testing that the PEERFUEL(TM) process generates meaningful and
sustainable reductions in certain harmful pollutant emissions for a number of
different engine types. Testing of the fuels processed through the PEERFUEL(TM)
system has been conducted by a State of California certified laboratory allowing
us to compile extensive results. These results have been compiled into
presentation format and will form the core of our future efforts to seek
regulatory certification in California, as well as any additional efforts to
seek approval from other regulatory or governmental agencies.
On June 17, 1999 the Mobile Sources Division of the Air Resources Board of
California (CARB) issued Executive Order D-485-1 affirming that PEERDIESEL(TM)
does not negatively impact on either the performance of existing pollution
control systems contained on engines or on the performance of the engines
themselves. This is an important step in our efforts toward commercialization in
that it formally supports our contention that PEERFUEL(TM) products do not
require any engine re-fit, and more importantly, engine performance is not
affected in any way by using PEERFUEL(TM) products, paving the way for wider
acceptance of our technology.
For a twelve-month period from 1998 to 1999, we conducted initial fleet testing
to investigate any potential fuel economy benefits from fuel processed through
the PEERFUEL(TM) system. The results from this informal test program showed on
average the vehicles achieved 9% better fuel economy using PEERDIESEL(TM) versus
unprocessed diesel fuel #2. We intend to explore the potential fuel economy
benefits through a formal fleet testing program that will test a variety of
vehicle (engine) types under different operating conditions.
There is no laboratory testing that has been conducted in 2000, as the bulk of
the initial research and development testing was completed in 1998-1999. For
the remainder of 2000, we will spend most of our time reviewing the underlying
scientific effects of the PEER system on diesel fuel, leading up to a plan to
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try and achieve CARB fuel equivalency certification by the end of the year.
This step will require formal, specific testing at an approved laboratory
(Southwest Research Institute). The approximate cost of this testing is
$150,000, which includes the cost of "shadow" testing that will be done on a
limited basis to mimic the CARB required testing, so that we can better
understand how the PEER system will perform under CARB's program.
The Company will also be pursuing a fleet testing program in the second half of
the year, providing the GEM funding is secured, to evaluate the performance of
PEERFUEL(TM) with respect to engine efficiency or fuel economy. We are trying
to set up a total of 12 separate fleet testing programs, which will occur at a
variety of geographic locations using a number of different engine and vehicle
types. Each test will vary in length, but should average four-eight weeks.
Initial test data are expected within two weeks from the start of fleet testing.
The 1998-1999 research and testing at California Environmental Engineering (CEE)
was formal from a laboratory and market perspective. The research and testing
would be recognized and accepted by industry engineers and professionals at
companies such as refineries, fleet operations managers, environmental engineers
and other such individuals who would have a scientific and practical
understanding of the test performed. There is absolutely no intention of
performing this testing again. However, we do intend to update the results of
some of CEE's laboratory testing, especially those areas where we know CARB will
be interested in the results (for example, with certain engine types). We
believe this to be necessary because CEE does not carry the same level of
authority as Southwest Research Institute and having confirmation of all, or
some, of CEE's results will enhance our ability to open doors to key resources
in the future.
The specific plan for the summer months is to focus on the scientific elements
of the PEER system, and work to get all the details in place for both CARB
testing and fleet testing (as described earlier). In the event we are able to
secure the necessary financing earlier, we will start our CARB and fleet efforts
earlier.
Research and Development
Our research and development costs are related to the development and testing of
the PEERDIESEL(TM) product. The costs incurred in research and development
for the nine months ended December 31, 1999 were $330,353. Costs incurred in
research and development for the years ended March 31, 1999 and 1998, were
$842,905 and $330,089, respectively.
We have been performing research and development activities on PEERFUEL(TM)
since 1996, with the majority of our testing activities occurring in 1998 and
1999. Initial testing activities were conducted on a limited basis in July 1996
and again in January 1997, with smaller run times on few engine types. Initial
results from these tests were encouraging not only for reductions in key
emission substances, but also showed the potential for increased fuel economy.
We officially engaged California Environmental Engineering (CEE) located in
Santa Ana, California, to conduct a complete test program starting in 1998 using
a variety of engine types. CEE is a state/CARB certified laboratory and is also
recognized by the EPA. CEE has the ability to test both diesel fuel and
gasoline products. The list of entities for which CEE has conducted testing
includes CARB, EPA, Ford, General Motors, Volvo as well as other multi-national
corporations.
The formal research and development work consisted of running a series of tests
under EPA and Society of Automotive Engineers (SAE) recommended procedures to
determine the gaseous emissions levels of four separate diesel engines. The
test procedures consist of a prescribed sequence of engine operating conditions
on an engine dynamometer with measurements of hydrocarbons (HC), nitrogen oxides
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(NOX), carbon monoxide (CO), carbon dioxide (CO2), and particulate matter (PM).
The testing was done during 13 steady state modes consisting of five modes at
rated engine speed, five modes at an intermediate speed, and three modes at
idle. Four separate engines were used in the testing: Cummins L-10, Caterpillar
3208, and two separate Detroit Diesel engines. The test fuel used for the
baseline program was standard D-2 diesel fuel, and for the PEERFUEL(TM) testing
re-processed D-2 fuel was used which ranged in age from less than one month
old to nearly 12 months old.
We are not presently engaged in any research and development activities. We do
expect to continue testing some time in the near future in an effort to further
clarify the exact scientific elements involved in the processing of fuel through
the PEERFUEL(TM) system. In addition, further testing may be necessary to
continue to tightly define the emission reduction benefits to be realized from
PEERFUEL(TM) products. We have held several discussions with CARB officials
who have evidenced the need to conduct transient cycle testing, a specialized
form of engine testing. This testing will be part of our ongoing efforts to
achieve special certification from CARB that would enable us to make specific
claims with regard to emission reduction performance.
In addition to CARB certification-related research and development efforts, we
expect to put together a series of fleet testing programs to identify specific
fuel economy benefits from PEERFUEL(TM). We are presently in discussions with a
variety of companies representing different industries and geographical
conditions, which would participate in a three-six month fleet program. The
fleet testing efforts are planned for the second half of 2000.
Marketing
As a development stage company with no immediate revenue generation
capabilities, our marketing strategy and resulting efforts have been relatively
limited. We have worked over the past year to identify those companies that
would benefit specifically from access to PEERFUEL(TM) technology and the
resulting products. The companies we have targeted for marketing efforts once
we are in a position to commercialize our technology can be grouped into three
categories: production/distribution, sales, and other strategic businesses.
In a number of cases firms can be considered to be in both of the first two
segments, while other strategic businesses are generally not involved directly
in the petroleum industry (such as motor vehicle manufacturers).
It is our intention to remain conservative in our marketing efforts until such
time as either/both emission reduction gains are accepted on a regulatory basis
(CARB certification) and we have proven greater fuel economy from PEERFUEL(TM)
products. CARB certification is important because it immediately opens up the
California market for diesel fuel #2 to our technology. Given current refining
methods used to meet CARB fuel equivalency standards for diesel fuel #2, our
technology is appreciably less expensive, enabling us to market directly to
refiners. California is important as a market for two reasons: the size of its
market, and the positive perception that will accrue for our technology from
certification as a CARB equivalent fuel. Should the results from fleet testing
show conclusive evidence of fuel economy benefits from PEERDIESEL(TM), we will
immediately alter our marketing efforts to concentrate more heavily on the sales
segment, which we believe will have an immediate interest in knowing more about
our technology.
Currently, we are introducing PEERDIESEL(TM) into the market through its Web
site information, press releases, and publication of testing results. We
maintain an Internet Website at http://www.peerfuel.com.
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We intend to market PEERDIESEL(TM) by licensing arrangements with refineries
and/or other appropriate marketing strategies.
Competition
The growth in concern over the environment has stimulated significant efforts in
a range of areas that can be considered competitive to PEERFUEL(TM) technology.
Most experts agree that it is not an issue of if, but when a viable alternative
or set of alternatives will be available to replace or greatly reduce the use of
fossil fuels. The work now being performed is centered around either reducing
the harmful emissions of fossil fuels, or replacing fossil fuels altogether.
The majority of the technologies seeking to reduce or even eliminate harmful
emissions fall into three categories: cleaner fuels, engine emission reduction
devices, and fossil fuel alternatives. Clean fuel technology is centered around
either additional refining which pulls out harmful emission substances (such as
sulfur), or use additives (such as Methyl Tertiary Butyl Ether or MTBE) which
bind to the fuel causing reduction in certain harmful emissions. Engine
emission reduction devices include such items as the catalytic converter, which
trap or filter harmful emissions before they are released into the environment.
Fossil fuel alternatives include both alternative-fuel vehicles (electric cars)
and alternative-fuels (compressed natural gas).
The difficulty with most technologies now being pursued that work to reduce the
harmful emissions from combusting fossil fuel, whether through cleaner fuel or
engine devices, or a combination of the two, is that the improvements are only
incremental and are very costly. While it is possible to make cleaner fuels
that meet emission legislation targets for certain pollutants, to meet the more
meaningful reduction standards it may push the cost of diesel fuel to two or
even three times its current price. In addition, it has been proven that
attempts to reduce a particular level of a pollutant such as sulfur, may have
the unintended impact of increasing other pollutants. We are not aware of any
research to date that generates a broad spectrum of emission reduction. Federal
and state legislation covering emission reduction requirements also poses a
problem for competitors because it can shift with respect to certain pollutants,
leaving new technologies incompatible with new regulations and making them
commercially nonviable.
Alternative fuels and alternative vehicles are often acknowledged to hold the
highest potential on a long term basis to solve pollution abatement needs, but
face significant hurdles in crafting a solution in the near or medium term.
Issues such as vehicle cost, engine re-fit, engine performance, potential
environmental damage, scalability and others have effectively resulted in
limiting the economic viability of these alternative technologies. Added to the
problems just stated is the social cost of allowing for the potential
elimination of a material part of the petroleum industry and the resulting
effect on the world's economic system.
While the level of competition in the market is wide, it is not believed to be
especially deep in that no one emission reduction technology now dominates the
market, and therefore, no one company or group of companies has a meaningful
market share. We believe this is an opportune time for the introduction of
PEERFUEL(TM) technology because it offers a low cost, high value product that
can be seamlessly melded into the existing global economic framework.
IFT anticipates three possible sources of competition for PEERFUEL(TM):
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. Companies with greater resources and more financial strength that
offer similar technology to PEERDIESEL(TM);
. Vehicles utilizing alternative fuels; and
. Alternative fuels for use on current vehicles with engine
retrofitting.
Regulatory Approval and Certification Process
All petroleum-based fuels sold in the United States are subject to regulation by
a number of state and federal authorities, the most important of which are the
Environmental Protection Agency (EPA) and the Air Resources Board of California
(CARB). The EPA has formal jurisdiction over the majority of air and water
regulations as a result of the Clean Air Act. However, the EPA acknowledged the
special environmental conditions existing in California and the state's efforts
to create stringent regulations, some of which were more advanced than the
EPA's, and granted the state exemptions from specific areas of the Clean Air
Act. While a number of states have since adopted some pieces of CARB's
regulations, California still remains the standard within the United States, and
even around the world, for the regulation of air and water resources.
With respect to receiving approval for the sale of individual petroleum fuels in
California, such as diesel and gasoline fuels, CARB requires these fuels meet a
CARB certified standard. This standard is referred to as CARB equivalency
certification, and can only be obtained by submitting a fuel to a formal
certification procedure. The legislation for this process was passed in 1988,
and since that time over 25 individual fuels have received CARB equivalent
status, although a number of these fuels were derivatives of original
formulations that were changed (the CARB process still requires these to be
certified). Of the fuels that have achieved CARB equivalency certification,
only a few have actually achieved commercial viability.
The first step involved in obtaining CARB equivalency certification involves
completing an application. The application primarily involves disclosure of the
scientific basis for production of the target fuel to be certified. CARB has
the right to reject an application if it feels the underlying science of a
particular formulation or, in the case of the Company, the process for creating
fuel has not been fully described, could create an environmental or other
hazard, or has some other feature(s) that could put the public at risk through
the production, distribution or use of the target fuel.
Once an application has been reviewed and accepted, the target fuel or process
must be tested in a state certified laboratory using a specific, defined testing
methodology. Because of both the rigor and importance of the certification
testing procedure, only a limited number of laboratories have been approved by
California for this testing. The Company has elected to have Southwest Research
Institute (SRI), headquartered in San Antonio, Texas, perform the certification
testing. SRI is acknowledged as one of the world's foremost laboratories
specializing in the field of emission control work.
The CARB protocol itself takes approximately one week, during which time
baseline testing is performed, and then the target fuel is run through. CARB
regulations require that the target fuel pass all levels of the testing process
at or above specified levels, and if at any time the results fall below these
levels the entire testing process must be repeated. Any change to the
formulation or process for creating
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the fuel must be reported to CARB, and if the change is deemed material, a new
application may be required, effectively causing the entire process to be re-
started.
In the event the target fuel passes all levels of the testing protocol, within
30 days of submission of the final testing report by SRI, the Company will
receive the CARB equivalency certification. This last step will enable the
Company to immediately sell PEERFUEL(TM) in the state of California. Once
certified, PEERFUEL(TM) will not require any additional testing or other formal
procedures in the future to retain the fuel equivalency certification.
Patents and Trademarks
Our success substantially depends upon the proprietary technology used for
developing our PEERFUEL(TM) products. We presently have filed for a patent, File
#98-5251, entitled "Method of Verifying Vehicle Emissions," which focuses on the
method of verifying vehicle emissions and also verifying test fuel on both a
pre-and post-processed basis. We have two patents pending before the United
States Patent and Trademark Office and have been issued six trademarks and
service marks including PEERFUEL(TM) and PEERDIESEL(TM). In addition to the
foregoing proprietary technology restrictions, all testing by CEE or others is
subject to strict privacy and confidentiality controls. No outside entity will
be invited to evaluate the science underlying the PEER process until such time
as the testing is completed.
We regard the protection of our patents, trademarks and trade secrets as
critical to our future success and rely on a combination of patent, trademark
and trade secret laws and contractual restrictions to establish and protect our
proprietary rights in products and services. We have entered into
confidentiality agreements with certain of our consultants, contractors and
suppliers in order to limit access to and disclosure of our proprietary
information. There can be no assurance that these contractual arrangements or
the other steps taken by us to protect our intellectual property will prove
sufficient to prevent misappropriation of our technology or to deter independent
third-party development of similar technologies. While we intend to pursue
registration of our trademarks and service marks in the U.S. and
internationally, effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are made
available.
We also rely on technologies that we license from third parties, such as the
suppliers of computer technology, the operating system and specific hardware
components for our products and services. These licenses extend for terms
ranging from one year to perpetuity and are subject to satisfaction of
conditions laid out in the specific licensing agreements. There can be no
assurance that these third-party technology licenses will continue to be
available to us on commercially reasonable terms. The loss of such technology
could require us to obtain substitute technology of lower quality or performance
standards or at greater cost, which could materially adversely affect our
business, results of operations and financial condition.
Although we do not believe that we infringe the proprietary rights of third
parties, there can be no assurance that third parties will not claim
infringement by us with respect to past, current or future technologies. We
expect that participants in our markets will be increasingly subject to
infringement claims as the number of services and competitors in our industry
segment grows. Any such claim, whether meritorious or not, could be time-
consuming, result in costly litigation, cause service upgrade
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delays or require us to enter into royalty or licensing agreements. Such royalty
or licensing agreements might not be available on terms acceptable to us or at
all. As a result, any such claim could have a material adverse effect upon our
business, results of operations and financial condition.
Employees
Our four employees consist of a President, Chief Executive Officer,
Secretary/Financial Officer and Administrative Assistant. By the end of 2000,
we expect our full time employment to increase to 6 individuals. We have no
supplemental benefit or incentive arrangements with our employees other than
health insurance coverage. We believe that our future success will depend in
part on our continued ability to attract, integrate, retain and motivate highly
qualified technical and managerial personnel, and upon the continued service of
our senior management and key technical personnel. The competition for qualified
personnel in our industry and geographical location may be intense, and there
can be no assurance that we will be successful in attracting, integrating,
retaining and motivating a sufficient number of qualified personnel to conduct
our business in the future. From time to time, we also engage independent
contractors to support our research and development, marketing, sales and
support and administrative organizations. We have never had a work stoppage, and
no employees are represented under collective bargaining agreements. We consider
our relations with our employees to be good.
Subsidiaries
We do not presently have, and do not intend to form anytime in the near future,
any subsidiaries.
Description of Property
We maintain our administrative offices at 7777 Bonhomme, Suite 1920, St. Louis,
Missouri, 63105, under an annual lease agreement for office space and
administrative services of $5,000 per month for approximately 1,500 square feet
from a company related through common ownership. The original agreement expired
in July 2000 and automatically renewed for a six month term.
We maintain our operations offices at 7230 Raven Avenue, Las Vegas, Nevada,
89113 under a rent-free arrangement with an employee. If rent was charged the
amount would be nominal.
Our management believes that our current facilities are adequate to meet present
operating requirements.
Corporate Organization
International Fuel Technology, Inc. ("IFT") was incorporated under the laws of
the State of Nevada on April 9, 1996. International Fuel has an authorized
capitalization of 150,000,000 shares of common stock, $.01 par value per share
and no authorized preferred stock. On July 22, 1999, International Fuel effected
a one-for-ten reverse split of its outstanding common stock. All references to
share information have been restated to reflect this split.
Effective March 31,1998, International Fuel merged with United States Fuel
Technology, Inc. United States Fuel Technology, Inc. was formed primarily to
market PEERFUEL(TM) in North America. On May 29, 1998, International Fuel
entered into an agreement and plan of merger with Scientific Fuel Technology,
LLC, a company related through common ownership.
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Pursuant to an Agreement and Plan of Merger effective as of October 27, 1999
between Blencathia Acquisition Corporation ("Blencathia") and International
Fuel, all the outstanding shares of common stock of Blencathia were to be
exchanged for 300,000 shares of common stock of International Fuel in a
transaction in which International Fuel was the surviving company. Blencathia
(a development stage company) was incorporated in Delaware on December 3, 1998
to serve as a vehicle to effect a merger, exchange of capital stock, asset
acquisition or other business combination with a domestic or foreign private
business. As of the date of the merger, Blencathia had not yet commenced any
formal business operations, and the $264 of operations costs through September
30, 1999 related to Blencathia's formation. In a related transaction following
the Blencathia merger, International Fuel paid consideration consisting of
$100,000 cash to TPG Capital Corporation ("TPG"), a former shareholder of
Blencathia, pursuant to an agreement entered into in October 1999 under which
International Fuel engaged TPG to provide services in connection with effecting
a business combination between International Fuel and a publicly reporting
company. Under the terms of the TPG agreement, International Fuel also agreed
to place the International Fuel shares granted to Blencathia shareholders under
the Blencathia merger agreement into escrow and to register and sell such shares
on behalf of Blencathia shareholders for aggregate consideration of $500,000.
Any remaining unsold shares will be returned to International Fuel after the
former shareholders have received proceeds of $500,000. In the event the value
of the shares generates less than $500,000 upon liquidation by Blencathia,
International Fuel will need to satisfy the remaining liability.
The officers, directors, and by-laws of International Fuel continued without
change as the officers, directors, and by-laws of the successor issuer following
the merger with Blencathia. All financial statement information presented for
International Fuel reflects the operations of International Fuel and does not
include any operations of Blencathia.
The Blencathia acquisition was a decision made by the Board of Directors to
ensure we would remain a fully trading and reporting entity on the OTC Bulletin
Board. Blencathia was a public shell whose purchase price of $500,000 was
negotiated by our management and Blencathia's principal owner, TPG Capital. We
had previously pursued the purchase of two other shell corporations whose prices
were significantly higher than that paid for Blencathia.
International Fuel is engaged in one reportable industry segment. Financial
information regarding this segment is contained in International Fuel's
financial statements included in this registration statement.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements and Associated Risks
This prospectus contains forward-looking statements made pursuant to the safe
harbor provisions of the Securities Litigation Reform Act of 1995. These
forward looking statements are based largely on our expectations and are subject
to a number of risks and uncertainties, many of which are beyond our control,
including, but not limited to, economic, competitive and other factors affecting
our operations, markets, products and services, expansion strategies and other
factors discussed elsewhere in this report and the documents filed by us with
the Securities and Exchange Commission. Actual results could differ materially
from these forward-looking statements. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained in this prospectus will in fact prove accurate. Our ability to
accomplish our objectives, and whether or not we will be financially successful,
is dependent upon numerous factors, each of which could have a material effect
on the results obtained. Some of these factors are within the discretion and
control of management and others are beyond management's control. Management
considers the assumptions and hypothesis used in preparing any forward-looking
assessments of profitability contained in this document to be reasonable by
management. However, we cannot assure investors that any projections or
assessments contained in this document or otherwise made by management will be
realized or achieved at any level. We make no representation or warranty as to
the accuracy or completeness of any of these assumptions, and nothing contained
in this document should be relied upon as a promise or representation as to any
future performance or events. We do not undertake any obligation to revise these
forward-looking statements to reflect future events or circumstances.
Prospective investors should have this prospectus reviewed by their personal
investment advisors, legal counsel or accountants to properly evaluate the risks
and contingencies of this offering.
Overview
IFT was incorporated under the laws of the State of Nevada in April 1996, to
develop and commercialize a proprietary scientific process, "Performance
Enhanced Emissions Reduced" ("PEER"), that reformulates various refined fuels,
including #2 diesel fuel, home heating oil, #6 (Bunker) fuel, jet engine fuel
and gasoline to improve combustion efficiency and reduce the amounts of harmful
exhaust emissions from internal combustion engines. The resulting reprocessed
fuels are known as PEERFUEL(TM). IFT is a development stage company, has had no
revenues to date and has raised capital for initial development through the
issuance of its securities and promissory notes. Effective October 27, 1999,
IFT changed the date of its fiscal year end from March 31 to December 31. The
nine-month period ended December 31, 1999, is referred to as the transition
period. All year and quarter references relate to IFT's prior fiscal years and
quarters, unless otherwise stated.
Three Months Ended June 30, 2000 and Six Months Ended June 30, 2000 Compared to
the Three Months Ended June 30, 1999 and Six Months Ended June 30, 1999
Total operating expenses from development stage operations were $567,701 for the
three months ended June 30, 2000, as compared to the development stage operating
expenses of $431,010 for the three month period ended June 30, 1999. This
represents an increase of $136,691, or 31.7%, from the prior period. Total
operating expenses from development stage operations were $1,842,328 for the six
months ended June 30, 2000, as compared to the development stage operating
expenses of $866,776 for the six month period ended June 30, 1999. This
represents an increase of $975,552 increase from the prior period. Increased
development stage operating expenses in the current six month period compared
to the prior six month period are a result of increased payroll expenses of
$921,335, increased consultant fees of $187,132, increased advertising and
marketing expenses of $2,288, increased board meeting expenses of $117,216,
increased professional services expenses of $332,460, and increased travel
expenses of $16,038.
Board meeting expenses for the six months ended June 30, 2000 were $117,216
representing an increase of $117,216 over the corresponding period of 1999. On
February 23, 2000 the Board of Directors adopted the Director's Stock
Compensation Plan, which provides for an annual award of 10,000 shares of IFT's
common stock to IFT's Board members as reimbursement for their attendance at the
Board meetings and an additional 1,000 shares of IFT's common stock for any
three-telephone conference call Board meetings attended. During March 2000,
45,000 shares of IFT's common stock were issued to three, non-employee, Board
members, calculated based on the trading price of IFT's stock at February 23,
2000 which was $2.75 per share, and are reflected in these financial statements
as Board meeting expense of $117,216 and travel expense $6,534.
Consulting expenses during the three months ended June 30, 2000 were $103,383 as
compared to $90,000 for the same period in 1999. This represents an increase of
$13,383, or 14.9%, from the corresponding period for 1999. Consulting expenses
during the six months ended June 30, 2000 were $278,632 as compared to $91,500
for the same period in 1999. This represents an increase of $187,132 from the
corresponding period in 1999. IFT sold 100,000 common shares to a company whose
sole director is a director of IFT for $200,000. The market value on the day of
issuance for these 100,000 common shares was $331,250. The $131,250 in market
value in excess of the cash amount received is reflected in these financial
statements as consulting expense and additional paid in capital. The remaining
amount of the increase is due to consultants used in the operations of IFT and
in the development of a market for IFT's common stock. Pursuant to a consulting
agreement dated June 5, 2000, IFT issued 250,000 shares of restricted common
stock to a company whose sole director is a director of IFT. The market value on
the day of the agreement was $218,750. The $218,750 in market value is reflected
in these financial statements as consulting expense and additional paid in
capital. In addition, consulting expenses were reduced by $110,367 due to the
elimination of a related party account payable that had previously been recorded
to consulting expenses.
Research and development costs during the three months ended June 30, 2000 were
$1,736 as compared to $232,253 for the same period in 1999. This represents a
decrease of $230,517 or 99.3%, from the corresponding period for 1999. Research
and development costs during the six months ended June 30, 2000 were $1,736 as
compared to $560,812 for the same period in 1999. This represents a decrease of
$559,076, or 99.7%, from the corresponding period for 1999. The decrease for the
six month period is primarily due to the reduction of the purchase of testing
supplies of $1,736 and decreased testing and laboratory fees of $557,340.
Payroll expenses during the three months ended June 30, 2000 were $245,467 as
compared to $29,989 for the same period in 1999. This represents an increase of
$215,478 from the corresponding period of 1999. Payroll expenses during the six
months ended June 30, 2000 were $1,014,978 compared to $93,643 for the same
period in 1999. This represents an increase of $921,335 from the corresponding
period of 1999. The increase for the six month period was primarily due to the
Board of Director's granting a bonus of 100,000 shares of IFT's common stock
paid to each of IFT's President/COO and to its Chief Executive Officer on
February 23, 2000, and these shares have been reflected in these financial
statements as payroll expense of $550,000. Additionally, on February 23, 2000
the Board of Directors adopted the Director's Stock Compensation Plan, which
provided for an annual award of 10,000 shares of IFT's common stock to Board
members as reimbursement for their attendance at the Board meetings. The
President/COO and the Chief Executive Officer were awarded 10,000 shares of
IFT's common stock as Board members, and these shares have been reflected in
these financial statements as payroll expense of $55,000. The stock-award shares
value was calculated based on the trading price of IFT's stock at February 23,
2000 which was $2.75 per share. Additionally, on January 31, 2000 IFT extended
the employment agreements with its President/COO and Chief Executive Officer
through December 31, 2000. Under these agreements, the President/COO will
receive an annual base salary of $180,000, 3,000 shares of IFT's common stock
per month and a bonus award as deemed appropriate by the Board of Directors of
IFT. The Chief Executive Officer will receive an annual base salary of $180,000,
6,000 shares of IFT's common stock per month and a bonus award as deemed
appropriate by the Board of Directors of IFT. The employment agreement shares in
the amount of 45,000 are reflected in these financial statements as payroll
expense and additional paid in capital, and the shares value was calculated
based on the trading price of IFT's stock at February 1, 2000 which was $3.25
per share. During the three month period ended March 31, 2000, payroll expense
from common stock issued totaled $341,500 for the Chief Executive Officer and
$322,000 for the President/COO. During the six month period ended June 30, 2000,
payroll expense from common stock issued totaled $400,000 for the Chief
Executive Officer and $351,250 for the President/COO. During the six month
period ended June 30, 2000, payroll expense from payroll accruals pursuant to
the employment agreements with the President/COO and Chief Executive Officer
totaled $86,633. During the six month period ended June 30, 2000, payroll tax
expense from payroll accruals pursuant to the employment agreements with the
President/COO and Chief Executive Officer totaled $7,159.
Professional services during the three months ended June 30, 2000 were $183,528
as compared to $9,152 for the same period in 1999. This represents an increase
of $174,376 over the corresponding period for 1999. Professional services during
the six months ended June 30, 2000 were $344,810 as compared to $12,350 for the
same period in 1999. This represents an increase of $332,460 over the
corresponding period for 1999. The increase for the six month period is
primarily due to the increased expenses for legal of $62,815, increased
accounting fees of $139,451, increased SEC Edgar filings of $11,204, increased
research professionals of $68,439, and the use of a temporary employment service
of $5,572.
Interest expense for the three months ended June 30, 2000 was $122,968 as
compared to $20 for the same period in 1999. This represents an increase of
$122,948 over the corresponding period for 1999. Interest expense for the six
months ended June 30, 2000 was $124,417 as compared to $19,357 for the same
period in 1999. This represents an increase of $105,060 over the corresponding
period for 1999. The increase for the six month period is primarily due to IFT's
issuance of common stock warrants to stockholders for advances received being
amortized by $120,595. The increase is lessened due to an agreement entered into
with certain promissory note holders on November 1, 1999 to issue 423,537 shares
of its common stock by December 31, 1999 in exchange for the balance of the
promissory notes due in the amount of $704,254 and interest on the notes due in
the amount of $142,820 at $2.00 per share. The exchange shares were issued on
December 31, 1999 that reduced interest expense for the three and six-month
periods ending June 30, 2000.
The net loss for the three months ended June 30, 2000 was $690,669 as compared
to the net loss of $431,030 for the three months ended June 30, 1999. This
represents an increase of $259,639 or 60.2% from the prior year. The net loss
per common share for the three months ended June 30, 2000 was $.04 as compared
to the net loss per common share of $.03 for the three months ended June 30,
1999. The net loss for the six months ended June 30, 2000 was $1,966,745 as
compared to the net loss of $886,133 for the six months ended June 30, 1999.
This represents an increase of $1,080,612 from the prior year. The net loss per
common share for the six months ended June 30, 2000 was $.11 as compared to the
net loss per common share of $.07 for the six months ended June 30, 1999.
34
<PAGE>
Comparison of Nine Months Ended 12/31/99 and Fiscal 3/31/99
Total operating expenses from development stage operations were $5,226,799 for
the nine months ended December 31, 1999, as compared to the development stage
operating expenses of $7,751,844 for the twelve month period ended March 31,
1999. This represents a 32.6% decrease from the prior period. The total
development stage operating expenses for the nine month period ended December
31, 1998, were $7,335,493. Decreased development stage operating expenses in the
current period compared to the fiscal year ended March 31, 1999 are a result of
decreased consulting fees of $6,047,000, increased professional fees of
$3,578,084, decreased testing laboratory fees of $512,552 and other expenses
related to product development. We are presenting this comparison as the nine
months ended December 31, 1999, compared to the nine months ended December 31,
1998. The primary expense incurred, of the $455,103 total expenses, during the
three month period ended March 31, 1999, was $328,559 of product development
costs.
Consulting expenses during the nine months ended December 31, 1999, were
$295,000 representing a decrease of $6,045,500 from the corresponding period for
1998. This represents a decrease of 95.3% from the prior period. The decrease
is primarily due to the issuance of 1,200,000 shares of our common stock to our
former Board Chairman during December 1998 as reimbursement for personally owned
common shares he issued to others for consulting services rendered. These
shares were valued at the estimated fair value per share of $5.00.
Research and development costs during the nine months ended December 31, 1999
was $330,353, representing a decrease of $183,994 from the corresponding period
for 1998. This represents a decrease of 35.8% from the prior period. The
decrease is primarily due to the reduction in the purchase of testing supplies
of $3,673, decreased rental equipment expenses of $4,617 and decreased testing
and laboratory fees of $175,704.
35
<PAGE>
Rent expense during the nine months ended December 31, 1999 was $32,685
representing a decrease of $84,948 from the corresponding period of 1998. This
represents a 72.2% decrease from the prior period. We rented our Las Vegas
office space and equipment on a month to month basis from a company related
through common ownership until May 5, 2000. Presently, we maintain our Las
Vegas operations offices under a rent-free arrangement with an employee. From
September 1, 1998 through March 31, 1999 the rent for the Las Vegas office
facility was $18,000 per month. After March 31, 1999 the office rent decreased
to $5,000 per month to reflect market and operations conditions. The revised
rental amount was retroactive to March 1, 1999. A credit was issued in the
amount of $13,000 during the nine month period ended December 31, 1999. Prior
to September 1, 1998 the office rent was $4,000 per month. We rent our St.
Louis office space and equipment on a six month lease from a company related
through common ownership. Payments totaled $32,500 during the nine month period
ended December 31, 1999.
Payroll expenses during the nine months ended December 31, 1999 were $318,036
representing an increase of $201,363 from the corresponding period of 1998.
This represents a 172.6% increase from the prior period. The increase was
primarily due to the hiring of additional employees to administer the day-to-day
operations. Additionally, on July 13, 1999 we entered into employment
agreements with our Chief Executive Officer and Chief Operating Officer which
expire January 31, 2000 with options to extend until July 31, 2000. Under the
terms of the agreement(s), these officers each receive base pay of $1,000 per
month plus a combined total of 90,000 shares of our common stock payable at the
end of the initial term of the agreement. The stock-based compensation earned
through December 31, 1999 was $166,587 and has been reflected in these financial
statements as payroll expense and as additional paid in capital, calculated
based on the trading price of our stock at July 13, 1999 which was $2.1875 per
share. Currently, we have five employees.
Professional services during the nine months ended December 31, 1999, were
$3,662,718 representing an increase of $3,581,282 over the corresponding period
of 1998. On July 1,1999, we entered into an agreement with Onkar Corporation,
Ltd. to issue 1,500,000 shares of common stock in exchange for various services
including introduction to brokers, dealers and potential investors and for
facilitating the writing of a minimum of three research reports on International
Fuel. We received $750,000 for these shares. The $3,468,750 difference between
the value of the shares using the market price at the date of the agreement and
the $750,000 of proceeds received from the agreement have been reflected in the
statement of operations for the nine month period ended December 31, 1999 as
professional services expense. The increase in professional services is also
due to hiring services for payroll of $1,275, web-site initialization of $900,
costs related to investigation of patent filing of $3,125, financial information
report filing of $1,882 and increased administrative expenses of $36,868.
Additionally, there were increases in legal and audit expenses of $68,482 during
the nine month period ended December 31, 1999.
Acquisition expense during the nine months ended December 31, 1999, was $500,000
representing an increase of $500,000 over the corresponding period of 1998.
Effective October 27, 1999, we merged with and into Blencathia Acquisition
Corporation. Blencathia had 300,000 shares outstanding at the time of merger,
which it redeemed and canceled. In exchange for 300,000 shares of Blencathia's
common stock, we will issue Blencathia 300,000 of our restricted common shares.
These restricted common shares are expected to be sold in an amount sufficient
to provide the former shareholders of Blencathia with proceeds of $500,000.
Other expenses for the nine months ended December 31, 1999, were $59,234
representing an increase of $12,166 from the corresponding period of 1998. This
represents a 25.8% increase from the prior period.
36
<PAGE>
The increase for the nine months ended December 31, 1999 is due primarily to the
cost to purchase postage and transfer agent fees to process the rights offering
stock certificates.
Interest expense during the nine months ended December 31, 1999 was $405,341
representing an increase of $336,769 for the corresponding period of 1998. This
represents a 491.1% increase from the prior period. Interest expense increased
primarily due to an agreement we entered into with certain promissory note
holders on November 1, 1999 to issue 423,537 shares of our common stock by
December 31, 1999 in exchange for the balance of the promissory notes due in the
amount of $704,255 and interest on the notes due in the amount of $142,820 at
$2.00 per share. The note and interest exchange value was calculated based on
the trading price of our stock at November 1, 1999. The $355,771 difference
between the $2.00 (per the agreement) value of the shares and the $2.84 trading
price of the shares has been reflected in these financial statements as interest
expense.
The net loss for the nine months ended December 31, 1999, was $5,632,140 as
compared to the net loss of $7,404,065 for the nine month period ended December
31, 1998. This represents a 23.9% decrease from the prior period. The net loss
per share for the nine months ended December 31, 1999 was $.36 as compared to
the net loss per common share of $.57 for the nine month period ended December
31, 1998.
Comparison of Fiscal 3/31/99 And Fiscal 3/31/98
Total operating expenses were $7,751,844 for the twelve months ended March 31,
1999, as compared to the operating expenses of $1,083,148 for the twelve months
ended March 31, 1998 representing an increase of $6,668,696. This represents a
615.7% increase from the prior period. Increased operating expenses are a result
of consulting fees of $5,798,588, costs incurred in product development of
$512,816, rent expense of $96,274, payroll expense of $85,498 and interest
expense of $80,391.
Consulting expenses during the twelve months ended March 31, 1999 were
$6,342,000 representing an increase of $5,798,588 from $543,412 during the
twelve months ended March 31, 1998. The increase is primarily due to the
issuance of 1,200,000 shares of the IFT's stock to the former Board Chairman
during December 1998 as reimbursement for consulting services he personally paid
for on behalf of IFT. These shares were valued at the estimated fair value per
share of $5.00.
Research and development costs during the twelve months ended March 31, 1999
were $842,905 representing an increase of $512,816 from $330,089 during the
twelve months ended March 31, 1998. This represents a 155.4% increase from the
prior period. The increase is primarily due to the enhanced laboratory testing
schedule and the purchase of additional shop and testing supplies.
Rent expense during the 12 months ended March 31, 1999 was $146,000 representing
an increase of $96,724 from $49,276 during the twelve months ended March 31,
1998. This represents a 196.3% increase from the prior period. IFT rents its
office space and equipment on a month-to-month basis from a company related
through common ownership. IFT moved to new offices in Las Vegas on September 1,
1998. The rental expense for the new facility was $18,000 per month, an
increase of $14,000 per month from $4,000 per month for the corresponding period
for 1998.
37
<PAGE>
Payroll expenses and related benefits during the twelve months ended March 31,
1999 were $180,327 representing an increase of $127,321 from $53,006 during the
twelve months ended March 31, 1998. This represents a 240.2% increase from the
prior period. The increase is due primarily to the hiring of additional
employees to administer the day-to-day operations of IFT.
Professional services during the twelve months ended March 31, 1999 were $84,634
representing an increase of $63,540 from $21,094 during the twelve months ended
March 31, 1998. This represents a 301.2% increase from the prior period. The
increase is due primarily to additional legal fees of $21,901.
Travel expenses for the twelve months ended March 31, 1999 were $41,164
representing a decrease of $2,552 from $43,716 during the twelve months ended
March 31, 1998. This represents a 5.8% decrease from the prior period. The
decrease is due primarily to a reduction of trips taken to the testing
laboratory in California.
Other expenses for the twelve months ended March 31, 1999 were $35,782
representing an increase of $32,100 from $3,682 during the twelve months ended
March 31, 1998. The increase is due primarily to postage for shareholder
mailings and increased meals and entertainment.
Interest expense during the twelve months ended March 31, 1999 was $87,909
representing an increase of $80,391 from $7,518 during the twelve months ended
March 31, 1998. The increase is due primarily to interest accrued on unsecured,
short-term loans used for working capital for IFT, which bear interest at 12%
per annum.
The net loss for the year ended March 31, 1999, was $7,839,753 as compared to
the net loss of $1,090,666 for the year ended March 31, 1998. This represents a
618.8% increase from the prior period. The net loss per share for the year
ended March 31, 1999 was $.59 as compared to the net loss per common share of
$.20 for the year ended March 31, 1998.
38
<PAGE>
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for years beginning after June 15, 2000
and requires comparative information for all fiscal quarters of fiscal years
beginning after June 15, 2000. We do not expect the adoption of this statement
to have significant impact on our results of operations, financial position or
cash flows.
Year 2000 Matters
The "Year 2000" problem refers to the potential for computational errors or
system malfunctions by computer hardware or software that fail to properly
recognize dates beginning with January 1, 2000, or which fail to recognize 2000
as a leap year. In anticipation of this problem, we implemented a Year 2000
readiness program intended to identify, evaluate and address our Year 2000
exposure.
At the time that this prospectus was prepared, we had not experienced any
material Year 2000 problems with our internal systems and were not aware of any
such problems experienced by our vendors and other service providers. As a
result, no material adverse impact of the Year 2000 problem on our business and
operations was expected at the time of this report, based upon the information
available to us. Although we believe that it is unlikely at the time of this
report, there can be no assurance that any Year 2000 problems will not result in
material cost to us or have a material, adverse impact on our business,
financial condition or results of operations.
Liquidity And Capital Resources
A critical component of our operating plan impacting the our continued existence
is the ability to obtain additional capital through additional debt and/or
equity financing. We do not anticipate that we will generate a positive internal
cash flow until such time as we can generate revenues from license fees from our
PEERFUEL(TM) process and/or direct sales of our PEERFUEL(TM) products, either or
both of which may take the next few years to realize. In the event we cannot
obtain the necessary capital to pursue our strategic plan, we may have to cease
or significantly curtail our operations. This would materially impact our
ability to continue as a going concern. The independent auditor's reports
included with the financial statements later in this prospectus indicate there
is a substantial doubt that IFT can continue as a going concern.
We have met our capital needs since inception primarily through the issuance of
common stock as compensation for services rendered, which have totaled
$11,305,666 since inception in April 1996, and for the six month period ended
June 30, 2000, totaled $1,355,190. In addition to these amounts, we have raised
$2,788,028 in cash from the issuance of common stock since IFT's inception,
with $204,350 of this total raised during the six month period ended June 30,
2000. Most of these funds have been raised through private placement
transactions. Finally, since IFT's inception, financing totaling $1,520,925 was
raised privately through notes payable to various sources, of which $549,171 was
repaid, $677,754 was converted to common stock, and $267,500 is recorded as a
liability on the June 30, 2000, balance sheet. For the six months ended June 30,
2000 proceeds from notes payable to stockholders totaled $205,000.
The cash used in operating activities is $428,453 for the six months ended June
30, 2000 as compared to cash used in operating activities of $542,539 for the
six months ended June 30, 1999. The primary use of the additional cash in
operations compared to the prior year was for accounts payable. The cash
provided by financing activities was $409,350 for the six months ended June 30,
2000 as compared to $473,804 provided by financing activities for the six months
ended June 30, 1999. Net cash decreased by $19,103 for the six months ended June
30, 2000 as compared to net cash decreasing by $68,735 for the six months ended
June 30, 1999.
Working capital at June 30, 2000 was ($599,026) as compared to ($808,659) at
December 31, 1999. The primary increase in working capital is due to the
decrease of accounts payable during the six month period ended June 30, 2000 and
the issuance of warrants to stockholders for advances received during the six
month period ended June 30, 2000.
During the three month period ended June 30, 2000 IFT received advances from
stockholders who are accredited investors totaling $105,000. The advances are
expected to be repaid in the three month period ending September 30, 2000. In
addition to the repayment of principal each stockholder will receive a warrant
to purchase from IFT up to 25,000 shares of common stock at $.01 per share for
each $5,000 in principal advanced to IFT. The value of the warrants, $452,730,
based on the market value of IFT's common stock on the day(s) the advances were
received has been recorded as a discount on the notes payable to stockholders
and as an addition to additional paid in capital. During the three month and six
month periods ended June 30, 2000, $120,595 was amortized against the discount
on notes payable to stockholders and recognized as interest expense.
39
<PAGE>
We have met our capital needs since inception through December 31, 1999
primarily through the issuance of common stock as compensation for services
rendered, which have totaled $9,950,476 since inception in April 1996, and for
the nine-month period ended December 31, 1999, totaled $3,642,335. In addition
to these amounts, we have raised $2,583,678 in cash from the issuance of common
stock since the IFT's inception, with $1,146,450 of this total raised during the
nine-month period ended December 31, 1999. Most of these funds have been raised
through private placement transactions. Finally, since IFT's inception,
financing totaling $1,031,425 was raised privately through notes payable to
various sources, of which $291,171 was repaid, $677,754 was converted to common
stock, and $62,500 is recorded as a liability on the December 31, 1999, balance
sheet. For the nine months ended December 31, 1999 proceeds from notes payable
totaled $325,700, with $258,000 repaid and $677,754 converted to common equity.
The notes payable were converted at an average price of $2.00 per share, and
included both the outstanding principal and interest owed as of November 1,
1999.
The cash used in operating activities for the nine months ended December 31,
1999 was $1,162,743 as compared to $1,396,056 and $773,808 used in operating
activities for the years ended March 31, 1999 and 1998, respectively. The cash
provided by financing activities was $1,214,150 for the nine months ended
December 31, 1999 as compared to $1,395,724 and $767,243 provided by financing
activities for the years ended March 31, 1999 and 1998, respectively. Net cash
increased by $26,358 for the nine months ended December 31, 1999 as compared to
net cash decreasing by $4,612 and $6,207 for the years ended March 31, 1999 and
1998, respectively.
While management cannot make any assurance as to the accuracy of our projections
of future capital needs, it is anticipated that a total of approximately $1.5
million over the next year will be necessary in order to enable us to meet our
capital needs. We believe the net proceeds of $1.38 million from the $1.5
million convertible debenture sale will be used as follows: $350,000 for
specific testing as part of required regulatory procedures as set by the Air
Resources Board of California ("CARB"), $350,000 for commercial fleet testing
programs, $100,000 for investor relations, and $580,000 for salary and related
administrative expenses (rent, telephone, etc.). The budget includes officers
deferring a portion of their salary for over the next twelve months. In February
2000, we entered into a convertible debenture purchase agreement to raise
$3,000,000 through the sale of convertible debentures. During June 2000 this
agreement was amended to raise $1,500,000 through the sale of convertible
debentures. In connection with the convertible debenture purchase agreement IFT
issued a warrant for the purchase 390,000 shares of common stock at $.01 per
common
40
<PAGE>
share. This warrant was exercised on March 28, 2000. We additionally issued
195,000 shares of common stock to the purchasers of the convertible debenture
purchase agreement in conjunction with an amendment to the convertible debenture
purchase agreement dated June 16, 2000. Consummation of the financing is
contingent upon our ability to register the shares of common stock underlying
the warrants and debentures with the Securities and Exchange Commission (the
"SEC") and upon GEM agreeing to provide the funding contemplated by the
financing. There can be no assurance that the registration will be granted
effectiveness by the SEC or that the selling shareholders will fund the
financing in the case of a declaration of effectiveness, in which case IFT would
be required to seek alternate sources of financing.
IFT expects to have the CARB application completed by December 2000. IFT will
contact Southwest Research Institute to begin the equivalency testing at their
laboratory. If Southwest Research can fit IFT into their schedule by April 1,
2001, and assuming it will take 30 days for the testing process itself, IFT will
submit the results of the tests to CARB by the end of April. IFT expects the
CARB equivalency certification process to take approximately 60 days and be
completed by the end of June 2001. After CARB issues the equivalency
certification, IFT will begin marketing target refiners in California. Also, IFT
has determined an appropriate third-party fleet testing program and plans to
have the details worked out regarding the logistics with MarketMatch in the next
60 to 90 days. Furthermore, IFT plans to manufacture at least two more fuel
processors to successfully conduct the fleet testing program. Once the fleet
testing has commenced, on or about October 1, 2000, IFT should start seeing
actual test data results with respect to the value of the PEER process by
October 15th. By the end of December IFT expects to have substantial completion
of all the fleet testing efforts, which includes correlation of the fuel
efficiency data. In February 2000, we entered into a convertible debenture
purchase agreement to raise $3,000,000 through the sale of convertible
debentures. During June 2000 this agreement was amended to raise $1,500,000
through the sale of convertible debentures. The amendment of the original
agreement from $3,000,000 to $1,500,000 was made by the Company to prevent
excess shareholder dilution. These funds were originally budgeted to be used for
ancillary corporate activities including hiring of additional personnel for
administrative and investor relations activities, accelerated sales and
marketing activities, and possibly for acquisition of and/or investment in other
companies whose technologies are centered around pollution reduction efforts.
These are all effectively discretionary uses of funds, and therefore, there is
no need to raise the full $3,000,000 at this time. The projected amount for
additional research and development necessary after this fiscal year to bring
PEERFUEL/TM/ to market is approximately $2 million.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, operations of IFT may be exposed to
fluctuations in interest rates. These fluctuations can vary the costs of
financing, investing and operating transactions. Because we had minimum debt
there is no material impact on earnings of fluctuations in interest.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
As of March 7, 2000, the Board of Directors have unanimously agreed to engage
BDO Seidman, LLP to be IFT's new principal accountant. At no time during the
past two fiscal years or any subsequent period prior to engagement as principal
auditor did the Registrant consult with BDO Seidman, LLP regarding either the
application of accounting principles to a specified transaction or type of audit
opinion which might be rendered on the Registrant's financial statements or any
other matter. The former accountant, McGladrey & Pullen, LLP declined to stand
for re-election for the December 31, 1999 engagement. The independent auditors'
reports for March 31, 1999 and 1998, were modified as to uncertainties about the
entity's ability to continue as a going concern. IFT and its former accountants
had no disagreements during the fiscal years ended March 31, 1999 and 1998, and
through the date they declined to stand for re-election.
41
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following are the names of our directors and executive officers, their
present positions with International Fuel and information about their
background.
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
Jonathan R. Burst 41 Chief Executive Officer, Director
William J. Lindenmayer 40 President, Chief Operating Officer, Director
Patty Foltz 45 Chief Financial Officer
Fred K. Jensen 64 Director, Chairman
David B. Norris 51 Director
Harry Demetriou 56 Director
</TABLE>
All directors hold office until the next annual meeting of shareholders or until
their successors are elected and qualified. At present, our Articles of
Incorporation provide for not less than one nor more than nine directors.
Currently, we have five directors. Our Bylaws permit the Board of Directors to
fill any vacancy and such director may serve until the next annual meeting of
shareholders or until his successor is elected and qualified. Officers serve at
the discretion of the Board of Directors.
Background of Directors and Executive Officers:
JONATHAN R. BURST has served as our Chief Executive Officer since July 1999.
From July 1999 to February 2000 he also served as our President. In February
2000, Mr. Burst was appointed to our Board of Directors. In 1998, Mr. Burst
founded Burcor International, St. Louis, Missouri, an insurance brokerage firm,
and has served as its President since its inception. From 1992 to 1998, Mr.
Burst served as Executive Vice President and Managing Director of mergers and
acquisitions at Aon Risk Services, a St. Louis, Missouri, mergers and
acquisition risk management consulting company. Mr. Burst received his Bachelor
of Arts degree in Economics from the University of Missouri in 1981.
WILLIAM J. LINDENMAYER has served as our President since February 2000. He has
also served as our Chief Operating Officer since July 1999. In February 2000,
Mr. Lindenmayer was appointed to our Board of Directors. From 1999 to the
present, Mr. Lindenmayer has served as Managing Director of Burcor Capital, LLC,
a venture capital merger and acquisitions subsidiary of Burcor International,
St. Louis, Missouri. From 1997 to 1999, Mr. Lindenmayer served as president of
DLW Partners, LLC, St. Louis, Missouri, a video tape distribution company. From
1995 to 1997, Mr. Lindenmayer served as President of WLI William Lindenmayer
Group, Inc., St. Louis, Missouri, a financial consulting company. Mr.
Lindenmayer received his Bachelor of Science degree from Cornell University in
1982 and his Masters of Business Administration from University of Virginia in
1988.
PATTY FOLTZ has served as our Chief Financial Officer since August 1998. From
1995 to 1998, Ms. Foltz served as Corporate Secretary, Treasurer and Chief
Financial Officer of Jake's Crane Rigging & Transport International, Inc., Las
Vegas, Nevada, a large equipment rental company. From 1994 to 1995,
42
<PAGE>
Ms. Foltz served as Accounting Manager at Jake's Crane Rigging & Transport
International, Inc. From 1989 to 1997, Ms. Foltz served as Corporate Secretary,
Treasurer and Chief Financial Officer of Jake's Wire Rope, a crane rigging
supply sales division of Jake's Crane Rigging & Transport International.
FRED K. JENSEN has served on our Board of Directors since April 1999 and became
chairman of the Board of Directors in February 2000. Since 1975, Mr. Jensen has
served as President of Jensen Oven Co., Inc., Farmington Hills, Michigan, a
manufacturer of industrial heating equipment. Since 1978, Mr. Jensen has also
served as a consultant to casualty insurance companies regarding cause and
origin investigations of fires and explosions in industrial process heating
equipment and related equipment. Mr. Jensen received his Bachelor of Science
degree in Mechanical Engineering in 1957 from Michigan State University.
DAVID B. NORRIS has served on our Board of Directors since April 1999. Since
1983, Mr. Norris has been the owner and President of Addicks Services, Inc.,
Richmond, Texas, a construction company.
HARRY DEMETRIOU has served on our Board of Directors since February 2000. Mr.
Demetriou has been a ship owner for over 25 years. The ships are bulk carriers
of and transport goods in bulk on a worldwide basis.
43
<PAGE>
Compensation
The following table sets forth information concerning all cash and non-cash
compensation paid or to be paid, as well as certain other compensation awarded,
earned by and paid, during the fiscal years indicated, to our Chief Executive
Officer and for each of our other executive officers whose annual salary and
bonus exceeds $100,000 for such period in all capacities in which they served.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards
------
Other All
Name and Annual Restricted Other
Principal Period Compen- Stock Compen-
Position Ended Salary Bonus sation Awards sation
-------- ----- ------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Jonathan R. Burst,
Chief Executive
Officer 12/31/99 $5,493 0 0 $ 111,056 0
Norman C. Barrett,
NOPEC Consultant
and former
Board Chairman 12/31/99 0 0 0 0 0
3/31/99 0 0 $ 100,000/1/ 0 0
3/31/98 0 0 0 0 0
</TABLE>
_________________
/1/Consultant Fees.
Perquisites and other personal benefits are omitted because they do not exceed
either $50,000 or 10% of the total of annual salary and bonus for the named
executive officer.
Employment Agreements
On July 13, 1999, we entered into an employment agreement with Jonathan R. Burst
serving as President and Chief Executive Officer. Under the agreement, Mr. Burst
received a base pay of $1,000 per month plus 10,000 shares of our common stock
during the initial term for an aggregate of 60,000 shares. The employment
agreement provided that the initial term of office would expire on January 31,
2000 with extensions until July 31, 2000, unless either party elected not to
continue the agreement. The value of the shares earned through December 31,
1999, $111,056, has been recorded as payroll expense. The agreement was extended
during January 2000 with Mr. Burst serving as Chief Executive Officer with an
annual base salary of $180,000, 6,000 shares per month and a bonus award as
deemed appropriate by our
44
<PAGE>
Board of Directors. The new agreement extends through December 31, 2000 and will
automatically renew unless either party elects not to continue the agreement. On
February 23, 2000 the Board of Directors granted Mr. Burst 100,000 shares of our
common stock for his appointment as Chief Executive Officer.
On July 13, 1999, we entered into an employment agreement with William J.
Lindenmayer, serving as Chief Operating Officer. Under the agreement, Mr.
Lindenmayer received a base pay of $1,000 per month plus 5,000 shares of our
common stock during the initial term for an aggregate of 30,000 shares. The
employment agreement provided that the initial term of office would expire on
January 31, 2000 with extensions until July 31, 2000 unless either party elected
not to continue with the agreement as so stated. The agreement was extended in
January 2000. Pursuant to the new agreement, Mr. Lindenmayer is entitled to an
annual base salary of $180,000, 3,000 shares per month and a bonus award as
deemed appropriate by our Board of Directors. The new agreement extends through
December 31, 2000 and will automatically renew unless either party elects not to
continue the agreement. On February 8, 2000, the Board of Directors appointed
Mr. Lindenmayer as President and increased his annual base salary to $180,000.
On February 23, 2000 the Board of Directors awarded an initial grant of 100,000
shares of our common stock to Mr. Lindenmayer for his appointment as President
and Chief Operating Officer.
Incentives
----------
On February 23, 2000, the Board of Directors passed a resolution authorizing
stock awards to be paid in the amount of 100,000 shares of our common stock to
senior management upon the execution of a subordinated debt financing agreement
providing for funding to cover our budget for the next 24 months, progress
toward creation and enactment of our Business Plan and the initiation of final
protocol testing for the reference standard fuel.
Options
-------
We currently do not have any plan or agreement related to the grant of stock
option awards for employees or directors.
Compensation of Directors
-------------------------
On February 23, 2000, the Board of Directors adopted the Director's Stock
Compensation Plan, which provides for an annual award of 10,000 shares of our
common stock to the Board members as reimbursement for their attendance at the
Board meetings. Each Board member will be awarded additional 1,000 shares of
our common stock for any three telephone conference call Board meetings
attended.
45
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information as of September 13, 2000, regarding
the beneficial ownership determined in accordance with the rules of the
Securities and Exchange Commission, which generally attributes beneficial
ownership of securities to persons who possess sole or shared voting power
and/or investment power with respect to those securities, of our common stock
of: (i) each person known by us to own beneficially more than five percent of
our common stock; (ii) each director and nominee for director; (iii) each
executive officer named in the Summary Compensation Table (see "Compensation");
and (iv) all of our directors and executive officers as a group. Except as
otherwise specified, the named beneficial owner has sole voting and investment
power over the shares listed.
<TABLE>
<CAPTION>
Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Common Stock/1/
---------------- -------------------- ----------------
<S> <C> <C>
GEM Global Yield
Fund Limited 4,688,177 19.6%
--------- -----
Jonathan R. Burst/2/ 966,250 4.1%
William J. Lindenmayer/3/ 190,000 .8%
Patty Foltz 69,648 0.3%
Fred K. Jensen/4/ 162,833 0.7%
David B. Norris 246,562 1.0%
Harry F. Demetriou/5/ 705,000 2.9%
All directors and executive
Officers as a group 2,340,293 9.8%
</TABLE>
__________________________________________
/1/ Based upon 19,492,698 outstanding shares of common stock as of September 13,
2000 and 4,411,765 shares to be issued based on a September 13, 2000 conversion
date .
/2/ Includes 150,000 shares owned by Burcor Capital, L.L.C. of which Mr. Burst
is an executive officer and deemed to be the beneficial owner of such shares.
/3/ Includes 50,000 shares owned by Burcor Capital, L.L.C. of which Mr.
Lindenmayer is an executive officer and deemed to be the beneficial owner of
such shares.
/4/ Includes 3,260 shares owned by Jensen Fabricating Co., Inc. of which Mr.
Jensen is an executive officer and deemed to be the beneficial owner of such
shares; includes 104,500 shares held jointly with Mr. Jensen's spouse; includes
24,054 shares held by Mr. Jensen's spouse.
/5/ Includes 705,000 shares owned by Observor Acceptances, Ltd. of which Mr.
Demetriou is the sole owner and deemed to be the beneficial owner of such
shares.
46
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We issued 1,200,000 restricted shares (reimbursement shares) to a consultant, a
former IFT Board Chairman, on December 21, 1998. This consultant had been a
founder of International Fuel and had several individuals provide services in
connection with our technology, provide business contacts to assist us in our
business plan and to assist in the raising of capital. These shares served as a
reimbursement to this consultant for 1,699,800 of his personal shares
distributed to others in exchange for their services to International Fuel. The
value of their services was based on $.10 per share as determined by the Board
of Directors. The market value of the reimbursement shares was determined by the
Board of Directors based upon the private placement of common stock sold in
November 1998 at $5.00 per share. The $6,000,000 value has been included in
consulting services for the year ended March 31, 1999.
Until May 5, 2000, we rented office space and equipment from Nevada Offshore
Petroleum Export Corp., a company related through common ownership, under a
month to month agreement requiring monthly payments. Prior to September 1, 1998
the office rent was $4,000 per month. From September 1, 1998 through March 31,
1999 the rent for the Las Vegas office facility was $18,000 per month. After
March 31, 1999 the office rent decreased to $5,000 per month. The revised
rental amount was retroactive to March 1, 1999. A credit was issued in the
amount of $13,000 during the nine month period ended December 31, 1999.
Presently, we maintain our Las Vegas operations offices under a rent-free
arrangement with an employee. If rent was charged the amount would be nominal.
We obtain general and administrative services and rent office space and
equipment from Burcor Capital, L.L.C., a company related through common
ownership (Mr. Jonathan Burst, executive officer and director of International
Fuel, is the founder and president of Burcor Capital, L.L.C.) , under an
agreement requiring monthly payments of $5,000. Payments totaled $32,500 during
the nine month period ended December 31, 1999.
On April 26, 1999, at the Annual Shareholders Meeting, our shareholders approved
the engagement of Burcor Capital, L.L.C. as our investment bankers to develop
investment and marketing relationships in connection with a merger or
consolidation of International Fuel with any other business entity, the sale of
all or part of International Fuel securities for cash or in exchange for other
tangible or intangible consideration ("Potential Transactions") and the planning
and actions taken for the purpose of effecting one or more Potential
Transactions. As of December 31, 1999 no amounts have been paid related to this
agreement.
On October 7, 1999, we entered into an Advisory Agreement with Mr. Harry
Demetriou on a non-exclusive basis to render financial advisory services in
connection with the possible sale of International Fuel. As of December 31,
1999 no payments had been made related to this agreement. During June 2000 this
agreement was canceled and replaced with an agreement that provided for payment
of 250,000 common shares. These shares were issued on June 16, 2000.
On November 1, 1999, we entered into an agreement with certain related party
promissory note holders to issue 423,537 shares of its common stock by December
31, 1999 in exchange for the balance of the promissory notes due in the amount
of $677,254, a related party account payable of $26,500 and interest on the
notes due in the amount of $142,820 at $2.00 per share. The stock-based note
and interest
47
<PAGE>
exchange value was calculated based on the trading price of our stock at
November 1, 1999. The $355,771 difference between the $2.00 (per the agreement)
value of the shares and the trading price of the shares has been reflected in
the financial statements as interest expense.
At December 31, 1999, we owed one of our shareholders approximately $89,000 for
legal services performed. Subsequent to December 31, 1999, the shareholder
agreed to accept 27,559 shares of our common stock in lieu of cash for the
amounts due to him.
During October 1999 we entered into an agreement with TPG Capital Corporation, a
company related through common ownership, for consulting services. A payment of
$100,000 was made during the nine month period ended December 31, 1999.
Our policy regarding related transactions requires that any director or officer
who has an interest in any transaction to be approved by our board of directors
must disclose the presence and the nature of the interest to the board of
directors prior to any approval of the transaction by the board of directors.
The transaction may then be approved by a majority of the disinterested
directors, provided that an interested director may be counted in the
determining the presence of a quorum at the meeting of the board of directors to
approve the transaction. Our policy regarding compensation for directors and
officers is that the board of directors may, without regard to personal
interest, establish the compensation of directors for services in any capacity.
LEGAL MATTERS
We are not a party to any material legal proceedings and to our knowledge, no
such proceedings are threatened or contemplated.
EXPERTS
The financial statements and schedules included in this 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 appearing elsewhere
in the Registration Statement, and are included in reliance upon such reports
given upon the authority of said firm as experts in auditing and accounting.
The financial statements and schedules included in this Registration Statement
have been audited by McGladrey & Pullen, LLP, independent certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere in the Registration Statement, and are included in reliance
upon such reports given upon the authority of said firm as experts in auditing
and accounting.
48
<PAGE>
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities and Exchange
Act of 1934, and as a result we file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy and
information statements may be inspected and copied at the Public Reference
Section of the Commission at 450 Fifth Street, N.W. Washington, D.C. 20549, and
at the Commission's Regional Offices at 7 World Trade Center, 13th Floor, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can also be
obtained from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549 at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding International Fuel, Inc.
at the address http://www.sec.gov.
The public may obtain information on the operation of the public reference room
by calling the Securities and Exchange Commission at 1-800-SEC-0330.
We have filed with the Securities Exchange Commission a registration statement
on Form S-1, under the Securities Act of 1933, with respect to the offered
common stock. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information provided in the registration
statement, certain parts of which are omitted in compliance with the rules and
regulations of the Commission. Copies of the registration statement, including
all exhibits, may be obtained from the Commission's principal office in
Washington D.C. upon payment of a fee or may be examined without charge at the
offices of the Commission as described above.
49
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
(a) The following financial statements are included:
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
AS OF AND FOR THE NINE MONTH PERIOD
ENDED DECEMBER 31, 1999, AND AS OF AND
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
<S> <C>
Report of Independent Certified Public Accountants F-2
Independent Auditor's Report F-3
Financial Statements
--------------------
Balance Sheets - December 31, 1999 and March 31, 1999 F-4
Statements of Operations - Nine Months Ended December 31, 1999,
Twelve Months Ended March 31, 1999 and 1998, and From Inception
(April 9, 1996 to December 31, 1999) F-5
Statements of Stockholders' Deficit - Nine Months Ended December
31, 1999, Twelve Months Ended March 31, 1999 and 1998, and From
Inception (April 9, 1996 to December 31, 1999) F-6
Statements of Cash Flows - Nine Months Ended December 31, 1999,
Twelve Months Ended March 31, 1999 and 1998, and From Inception
(April 9, 1996 to December 31, 1999) F-7
Notes to Financial Statements F-8--F-20
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2000
Balance Sheets - June 30, 2000 (unaudited) and December 31, 1999 F-21
Statements of Operations - Three Month and Six Month Periods Ended
June 30, 2000 and 1999 (unaudited), and From Inception (April 9,
1996 to June 30, 2000) (unaudited) F-22
Statement of Stockholders' Equity (Deficit) - Six Months Ended
June 30, 2000 (unaudited) F-23
Statements of Cash Flows - Six Months Ended June 30,
2000 and 1999 (unaudited), and From Inception (April 9, 1996 to
June 30, 2000) (unaudited) F-24
Notes to Financial Statements F-25--F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS'
To the Board of Directors and Stockholders
International Fuel Technology, Inc.
St. Louis, Missouri
We have audited the accompanying balance sheet of International Fuel Technology,
Inc. (a Nevada corporation in the development stage) as of December 31, 1999,
and the related statements of operations, stockholders' deficit and cash flows
for the nine month period then ended and the related statements of operations
and cash flows for the period from inception (April 9, 1996) to December 31,
1999. 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 audit. We did not audit the financial statements of
International Fuel Technology, Inc. for the period from inception (April 9,
1996) to March 31, 1999. Such statements are included in the cumulative
inception to December 31, 1999 totals of the statements of operations and cash
flows and reflect a net loss of 61% of the related cumulative total. Those
statements were audited by other auditors whose report has been furnished to us
and our opinion, insofar as it relates to amounts for the period from inception
(April 9, 1996) to March 31, 1999 included in the cumulative totals, is based
solely upon the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
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 audit and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of International Fuel Technology, Inc. as of December 31,
1999 and the results of its operations and its cash flows for the nine month
period then ended and for the period from inception (April 9, 1996) to December
31, 1999 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
International Fuel Technology, Inc. will continue as a going concern. As
discussed in Note 2 to the financial statements, International Fuel Technology,
Inc. has suffered recurring losses from operations, has negative working
capital, cash used in operating activities and has a stockholders' deficit that
raise substantial doubt about International Fuel Technology, Inc.'s ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
St. Louis, Missouri
April 7, 2000
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
International Fuel Technology, Inc.
Las Vegas, Nevada
We have audited the accompanying balance sheet of International Fuel Technology,
Inc., a development stage company, as of March 31, 1999, and the statements of
operations, stockholders' deficit and cash flows for the years ended March 31,
1999 and 1998. These financial statements are the responsibility of IFT'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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 International Fuel Technology,
Inc. as of March 31, 1999, and the results of its operations and its cash flows
for the years ended March 31, 1999 and 1998, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that IFT will
continue as a going concern. As more fully described in Note 2 to the financial
statements, IFT has not yet commenced the operations for which it was organized
and its total liabilities exceeds its total assets. Furthermore, IFT may need
to raise substantial capital in order to implement its business plan. This
raises substantial doubt about IFT's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
McGLADREY & PULLEN, LLP
Las Vegas, Nevada
September 27,1999
F-3
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
ASSETS 1999 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash $ 26,846 $ 488
Employee receivable 468 -
Note receivable, stockholder (Note 6) 15,000 -
Prepaid insurance 12,719 -
---------------------------------
Total current assets 55,033 488
Machinery and equipment 15,505 5,924
Accumulated depreciation (2,374) (760)
---------------------------------
$ 68,164 $ 5,652
=================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current Liabilities
Accounts payable $ 110,691 $ 313,979
Accounts payable-other (Note 5) 500,000 -
Accounts payable-stockholders (Note 6) 187,095 -
Accrued expenses 3,406 54,367
Accrued interest expense - 93,270
Due to related party - 26,500
Notes payable to stockholders (Note 4) 62,500 672,554
---------------------------------
Total current liabilities 863,692 1,160,670
---------------------------------
Commitments and Contingencies (Note 2)
Stockholders' Deficit (Note 5)
Common stock, $.01 par value; authorized, 150,000,000,
16,818,339 and 14,097,559 shares issued and outstanding
at December 31, 1999 and March 31, 1999, respectively 168,184 140,976
Discount on common stock (816,923) (816,923)
Additional paid-in capital 14,760,243 8,795,821
Deficit accumulated during the development stage (14,907,032) (9,274,892)
---------------------------------
(795,528) (1,155,018)
---------------------------------
Total stockholders' deficit $ 68,164 $ 5,652
=================================
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
From
Inception
(April 9,
Nine Months Twelve Months 1996)
Ended Ended Through
December 31, March 31, December 31,
1999 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ - $ - $ - $ -
Cost of Revenues - - - -
------------ ------------ ------------ ------------
Gross Profit - - - -
------------ ------------ ------------ ------------
Operating Expenses:
Acquisition expense (Note 5) 500,000 - - 500,000
Advertising and marketing 12,913 11,106 - 24,019
Consulting 295,000 6,342,000 543,412 7,358,264
Research and development costs 330,353 842,905 330,089 1,543,077
Office 1,002 26,377 25,973 55,154
Other 59,234 35,782 3,682 107,499
Payroll (Note 5) 318,036 180,327 53,006 567,558
Professional services (Note 5) 3,662,718 84,634 21,094 3,792,534
Rent 32,685 146,000 49,276 275,961
Stock transfer fees 5,249 18,378 - 23,627
Telephone 2,957 23,171 12,900 43,696
Travel 6,652 41,164 43,716 114,875
------------ ------------ ------------ ------------
Total operating expenses 5,226,799 7,751,844 1,083,148 14,406,264
------------ ------------ ------------ ------------
Net loss from operations 5,226,799 $ 7,751,844 1,083,148 14,406,264
Interest expense (Note 5) 405,341 87,909 7,518 500,768
------------ ------------ ------------ ------------
Net loss before income taxes 5,632,140 7,839,753 1,090,666 $ 14,907,032
============
Provision for income taxes - - -
------------ ------------ ------------
Net loss $ 5,632,140 $ 7,839,753 $ 1,090,666
============ ============ ============
Basic and diluted net loss
per common share $ .36 $ .59 $ .20
Weighted average common shares outstanding 15,800,725 13,390,417 5,351,089
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
STATEMENTS OF STOCKHOLDERS' DEFICIT
Common Stock Common Stock Discount on Additional
Shares Amount Common Stock Paid-In Capital
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuances of common stock for cash $ 41,616 $ 416 $ - $ 148,960
Issuances of common stock for technology (Note 5) 146,700 1,467 (14,670) 13,203
Issuances of common stock (Note 5) 8,500 85 - (85)
Issuances of common stock for services (Note 5) 84,623 846 - 7,616
Issuance of common stock for compensation (Note 5) 15,000 150 - 1,350
Net loss - - -
-------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 296,439 2,964 (14,670) 171,044
Issuances of common stock for cash 158,350 1,584 - 286,268
Issuances of common stock for technology (Note 5) 5,320,952 53,209 (532,095) 478,886
Issuances of common stock (Note 5) 142,280 1,423 - (1,423)
Issuances of common stock for services (Note 5) 1,211,883 12,119 - 109,070
Expense recorded for services rendered by stockholders (Note 5) - - 169,980
Issuance of common stock for compensation (Note 5) 70,100 701 - 6,309
Issuances of common stock in connection with the 346,545
acquisition of United States Fuel Technology, Inc. (Note 3) 2,795,979 27,960 - 94,907
Cancellation of shares (Note 3) (94,400) (944) 9,440 (8,496)
Net loss - - -
-------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 9,901,583 99,016 (537,325) 1,558,183
Issuances of common stock for cash 200,000 2,000 - 998,000
Issuances of common stock for services (Note 5) 1,200,000 12,000 - 5,988,000
Issuances of common stock in connection with the
acquisition of Scientific Fuel Technology, LLC (Note 3) 2,795,979 27,960 (279,598) 251,638
Net loss - - -
-------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 14,097,562 140,976 (816,923) 8,795,821
Issuances of common stock for services and cash (Note 5) 1,500,000 15,000 - 4,203,750
Issuances of common stock for cash (Note 5) 794,740 7,947 - 388,503
Issuances of common stock for compensation (Note 5) 2,500 25 - 6,975
Conversion of debt (Note 4) 423,537 4,236 - 1,198,609
Accrued stock based compensation (Note 5) - - 166,585
Net loss - - -
-------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 16,818,339 $ 168,184 $ (816,923) $ 14,760,243
===============================================================================================================================
<CAPTION>
Accumulated
Deficit During
Development
Stage Total
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Issuances of common stock for cash $ - $ 149,376
Issuances of common stock for technology (Note 5) - -
Issuances of common stock (Note 5) - -
Issuances of common stock for services (Note 5) - 8,462
Issuance of common stock for compensation - 1,500
Net loss (344,473) (344,473)
------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 (344,473) (185,135)
Issuances of common stock for cash - 287,852
Issuances of common stock for technology (Note 5) - -
Issuances of common stock (Note 5) - -
Issuances of common stock for services (Note 5) - 121,189
Expense recorded for services rendered by stockholders (Note 5) - 169,980
Issuance of common stock for compensation (Note 5) - 7,010
Issuances of common stock in connection with the
acquisition of United States Fuel Technology, Inc. (Note 3) - 374,505
Cancellation of shares (Note 3) - -
Net loss (1,090,666) (1,090,666)
------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 (1,435,139) (315,265)
Issuances of common stock for cash - 1,000,000
Issuances of common stock for services (Note 5) - 6,000,000
Issuances of common stock in connection with the
acquisition of Scientific Fuel Technology, LLC (Note 3) - -
Net loss (7,839,753) (7,839,753)
------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 (9,274,892) (1,155,018)
Issuances of common stock for services and cash (Note 5) - 4,218,750
Issuances of common stock for cash (Note 5) - 396,450
Issuances of common stock for compensation (Note 5) - 7,000
Conversion of debt (Note 4) - 1,202,845
Accrued stock based compensation (Note 5) - 166,585
Net loss (5,632,140) (5,632,140)
------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ (14,907,032) $ (795,528)
======================================================================================================
</TABLE>
See Notes to Financial Statements
F-6
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
From
Nine Months Twelve Months Twelve Months Inception
Ended Ended Ended (April 9, 1996)
December 31, March 31, March 31, to December 31,
1999 1999 1998 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $ (5,632,140) $ (7,839,753) $ (1,090,666) $(14,907,032)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,614 760 - 2,374
Stock issued and additional paid in capital
recognized for services and compensation 3,642,335 6,000,000 298,179 9,950,476
Interest expense recognized on conversion of debt 355,771 - - 355,771
Change in assets and liabilities:
(Increase) decrease in prepaid insurance (12,719) 590 (590) (12,719)
Increase (decrease) in accounts payable 483,807 313,979 - 797,786
Increase (decrease) in accrued expenses (1,411) 128,368 19,269 146,226
------------------------------------------------------------------------
Net cash used in operating
activities (1,162,743) (1,396,056) (773,808) (3,667,118)
------------------------------------------------------------------------
Cash Flows from Investing Activities
Acquisition of machinery and equipment (9,581) (4,280) - (13,861)
Increase in employee and stockholder receivables (15,468) - - (15,468)
Cash acquired in connection with the purchase of
United States Fuel Technology, Inc. - - 358 358
------------------------------------------------------------------------
Net cash (used in) provided by investing
activities (25,049) (4,280) 358 (28,971)
------------------------------------------------------------------------
Cash Flows from Financing Activities
Increase (decrease) in amount due to
related party - (142,000) 168,500 26,500
Increase in due to United States Fuel Technology, Inc. - - 224,391 372,503
Proceeds from common stock issued 1,146,450 1,000,000 287,852 2,583,678
Proceeds from notes payable 325,700 828,895 86,500 1,289,425
Payment on notes payable (258,000) (291,171) - (549,171)
------------------------------------------------------------------------
Net cash provided by financing
activities 1,214,150 1,395,724 767,243 3,722,935
------------------------------------------------------------------------
Net increase (decrease) in cash 26,358 (4,612) (6,207) 26,846
Cash, beginning 488 5,100 11,307 -
------------------------------------------------------------------------
Cash, ending $ 26,846 $ 488 $ 5,100 $ 26,846
========================================================================
Supplemental Cash Flow Information
Interest paid $ - $ 2,100 $ - $ 2,100
========================================================================
Taxes paid $ - $ - $ - $ -
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business
------------------
International Fuel Technology, Inc., ("IFT") is a developmental stage company
which was incorporated under the laws of the State of Nevada on April 9, 1996
and was formerly known as MagnoDynamic Corporation. IFT was formed primarily for
the production of a family of proprietary fuels known as PEERFUEL(R). IFT
developed a process, which it believes will make diesel fuel burn more
efficiently and with less emissions. IFT, as described in Note 3, has acquired
United States Fuel Technology, Inc., and Scientific Fuel Technology, LLC, to
streamline the selling of PEERFUEL/TM/. IFT, as described in Note 5, has
acquired Blencathia Acquisition Corporation to ensure IFT would remain a fully
trading and reporting entity on the OTC Bulletin Board. United States Fuel
Technology, Inc., Scientific Fuel Technology, LLC, and Blencathia Acquisition
Corporation were all dissolved subsequent to their merger into IFT. IFT, as
described in Note 10, has changed its fiscal year end effective with the merger
with Blencathia Acquisition Corporation to December 31. Currently, IFT is
testing the treated diesel fuel in the State of California and hopes the test
results will persuade the State of California to use IFT's product in the
State's diesel engines.
Summaries of IFT's significant accounting policies follow:
Use of estimates in the preparation of financial statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statement and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash
----
IFT maintains cash in a bank account, which, at times, exceeds federally insured
limits. IFT has experienced no losses relating to these excess amounts of cash
in a bank.
Machinery and equipment
-----------------------
Machinery and equipment are stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of five years.
Research and Development
------------------------
Research and development costs are expensed in the period incurred.
Deferred taxes
--------------
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences, operating losses and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between
F-8
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some or all of the deferred tax assets will not
be realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Basic and dilutive net loss per common share
--------------------------------------------
IFT adopted Statement of Financial Accounting Standards No. 128 (SFAS 128),
Earnings per Share. SFAS 128 establishes standards for computing and presenting
earnings per share and replaces primary earnings per share with a presentation
of basic and dilutive earnings per share. Basic earnings per share are based
upon the weighted average number of common shares outstanding for the period.
Dilutive earnings per share are based upon the weighted average number of common
and potentially dilutive common shares outstanding for the period. Pursuant to
SFAS 128, no adjustment is made for diluted earnings per share purposes since
IFT is reporting a net loss and common stock equivalents would have an anti-
dilutive effect.
Fair value of financial instruments
------------------------------------
Statement of Financial Accounting Standards FASB No. 107 (SFAS 107), Disclosures
about Fair Value of Financial Instruments, requires the disclosure of fair value
for all financial instruments as defined in SFAS 107 for which it is practicable
to estimate fair value.
The carrying amounts of accounts payable approximate fair value because of their
short maturity.
The fair value of notes payable approximate their carrying basis based on the
short-term nature of these obligations and current interest rates approximating
stated interest rates.
New Accounting Pronouncements
-----------------------------
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for years beginning after June 15, 2000
and requires comparative information for all fiscal quarters of fiscal years
beginning after June 15, 2000. IFT does not expect the adoption of this
F-9
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
statement to have significant impact on its results of operations, financial
position or cash flows.
Reclassifications
-----------------
Certain amounts from the prior years' financial statements have been
reclassified to conform to the current period presentation.
Note 2. Ability to Continue as a Going Concern
IFT's financial statements are presented on the going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. IFT has incurred significant losses since
inception and has limited funds with which to operate. Management anticipates
receiving diploma certification in 2000 from the California Air Resources Board
that its PEERDIESEL(R) product reduces polluting emissions from internal
combustion engines. Shortly thereafter, IFT expects to begin licensing its
product which management believes will generate sufficient revenue to continue
the IFT's operations. However, there is no assurance that IFT will receive
diploma certification or be able to generate sufficient revenue through the
licensing of its product to provide sufficient working capital. Management
believes approximately $3 million of additional capital will be required over
the next two years. Management does not have an estimate of the amount of
revenue necessary to attain positive cash flow. In February 2000, IFT entered
into a convertible debenture purchase agreement to raise $3,000,000 through the
sale of convertible debentures. In connection with the convertible debenture
purchase agreement IFT issued a warrant to purchase 390,000 shares of common
stock. (See Footnote 9) IFT is additionally required to issue 195,000 shares of
common stock to place in escrow pending the sale of the convertible debentures.
(See Footnote 9) Such financing is contingent upon IFT's ability to register the
shares of common stock underlying the warrants and debentures with the
Securities and Exchange Commission (the "SEC"). There can be no assurance that
the registration will be granted effectiveness by the SEC, in which case IFT
would be required to seek alternate sources of financing. IFT's continued
existence is dependent upon its ability to resolve its liquidity shortfall
principally by obtaining this additional debt financing or raising equity
capital. IFT must continue to operate on limited cash flow generated internally.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
IFT to continue as a going concern.
F-10
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Note 3. Acquisitions of Subsidiaries
On April 3, 1998, the stockholders approved a merger with United States Fuel
Technology, Inc. ("USFT"), effective March 31, 1998. USFT was formed primarily
to market PEERFUELS(R) in North America. IFT granted USFT an exclusive license
to market its product pursuant to an Amended and Restated License Agreement
dated October 16, 1997, in exchange for 94,400 shares of USFT common stock.
Because IFT did not have a commercially viable product, USFT did not have any
revenues but had incurred some general and administrative expenses through the
date of the merger, the most significant of which were consulting and
professional fees. As a result of the merger, each non-dissenting holder of
outstanding shares of USFT Common Stock received one share of IFT Common Stock.
IFT issued 2,795,979 shares. This merger has been accounted for as a purchase
based upon the net asset value, which represented the fair value, of USFT as of
March 31, 1998.
The assets and liabilities of USFT at March 31, 1998 consisted of:
<TABLE>
<S> <C>
Cash $ 358
Due from IFT 372,503
Computer equipment 1,644
---------
374,505
Liabilities -
---------
$ 374,505
=========
</TABLE>
IFT's investment in USFT consisted of the 94,400 shares of USFT common stock
issued to IFT in exchange for certain marketing rights. These 94,400 shares were
valued at zero by IFT and were redeemed and canceled in connection with the
acquisition of USFT.
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisition of USFT had occurred on April 1, 1996. These
pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisition been
made on April 1, 1996, nor are they indicative of future results. As a result,
the unaudited pro forma net loss and pro forma per share amounts do not purport
to represent what IFT's results of operations would have been if the acquisition
of USFT had occurred on April 1, 1996, and is not intended to project IFT's
results of operations for any future period.
<TABLE>
<CAPTION>
Year Ended March 31,
1998
--------------------
<S> <C>
Total Revenues as reported $ -
Total Revenues - Pro forma $ -
Net loss as reported $ (1,090,666)
Net loss - Pro forma $ (1,154,424)
Loss Per Share:
Basic as reported $ .20
Diluted as reported $ .20
Basic - Pro forma $ .14
Diluted - Pro forma $ .14
</TABLE>
F-11
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
On May 29, 1998 IFT entered into an agreement and plan of merger with Scientific
Fuel Technology, LLC ("SFT"), a company related through common ownership. The
assets and liabilities of SFT consisted solely of an agreement whereby SFT would
receive 50% of USFT's rights pursuant to the Amended and Restated License
Agreement dated October 16, 1997 with IFT. As IFT did not have a commercially
viable product at the time of the merger with SFT, there had been no payments
made to SFT and SFT had not yet begun operations. This marketing agreement was
valued by SFT at zero due to the uncertainty of the future revenues. SFT had no
revenues, expenses, assets or liabilities as of the date of the purchase.
Management believed it was no longer in IFT's best interest to be contractually
bound to acquire these sales and marketing services from SFT and, accordingly it
initiated the merger with SFT. As a result of the merger, 2,795,979 shares of
IFT were exchanged for the member interests in SFT. The issuance of these shares
was accounted for by recording a discount on common stock equal to the par value
of the stock issued.
Note 4. Notes Payable to Stockholders
All notes payable at March 31, 1999 bear interest at 12%, are unsecured and are
due at various date through March 2000. On November 1, 1999, IFT offered the
note holders the option of extending the due dates of these notes for another
two years at 12% interest or converting the notes to common stock at a
conversion price of not less than $2.00 per share. (Notes 5 and 6) The market
value of IFT's stock on the day of the offer was $2.84. The option to convert
the notes into restricted stock was effective as of November 1, 1999 and expired
on November 15, 1999. All of the note holders elected to convert their notes to
common stock. IFT also had an amount due to a related party in the amount of
$26,500 with no terms of repayment or interest due at March 31, 1999.
On November 1, 1999, $26,500 due to related party, notes payable of $677,754
and related accrued interest of $142,820 were converted to common stock at $2.00
per share. At that date, the closing price of IFT's stock was $2.84. Additional
interest expense of $355,771 was recorded at the time of conversion reflecting
the $.84 difference between the closing market price and the conversion price
multiplied by the 423,537 shares issued as a result of the conversion.
At December 31, 1999 IFT has a note payable to ONKAR Corporation, LTD. for
$67,500 at an annual interest rate of 6%.
Note 5. Stockholders' Deficit
On July 7, 1999 the stockholders approved a 1 for 10 reverse stock split which
was effected on July 22, 1999. The effect of the split is presented within
stockholders' deficit at March 31, 1999 by transferring the par value for the
reduction in shares issued from common stock to additional paid in capital. All
references in the financial statements referring to shares, share prices, per
share amounts and stock plans have been adjusted retroactively for the split.
IFT issued shares to certain founding stockholders during fiscal years 1998 and
1997 in exchange for the technology related to its diesel fuel treatment
business. This technology constituted research and development expenditures to
these stockholders and consistent with Generally Accepted Accounting Principles,
was not recorded as an asset but rather was recorded as an expense by these
shareholders. Because the subsequent transfer of this technology to IFT was a
transaction between entities under common control, it was accounted for using
the carrying value of the technology which was zero. A discount on common stock
was recorded equal to the par value of the stock issued in exchange for the
technology. The shares were issued as follows:
F-12
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<CAPTION>
Date Shares
---- ---------
<S> <C>
April 1996 71,000
June/July 1996 75,700
---------
146,700
=========
April 1997 1,558,084
July 1997 783,944
August 1997 51,800
September 1997 2,927,124
---------
5,320,952
=========
</TABLE>
IFT also issued shares to certain stockholders in exchange for services and
certain corporate officers were issued stock as additional compensation.
Management valued the services that were received at their fair value. Common
stock shares were issued, at par, to equal the fair value of the services. The
fair value of the services was $9,962 and $128,199 in fiscal 1997 and 1998,
respectively. The shares were issued as follows:
<TABLE>
<CAPTION>
Date Shares
---- ---------
<S> <C>
April 1996 13,000
June 1996 11,220
July 1996 19,250
August-October 1996 4,630
November 1996 12,275
February 1997 16,098
March 1997 8,150
---------
84,623
=========
July 1996 5,000
February 1997 10,000
---------
15,000
=========
April 1997 6,900
May 1997 10,900
July-August 1997 251,315
September 1997 942,768
---------
1,211,883
=========
April 1997 10,000
July 1997 10,100
September 1997 50,000
---------
70,100
=========
</TABLE>
F-13
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Certain stockholders who purchased stock for cash were subsequently issued
additional shares of stock for no consideration to adjust the amount of shares
previously issued to them. The original shares had been issued on various dates
between July 30, 1996 and September 13, 1997. Since IFT has no retained
earnings, a charge to additional paid-in-capital was recorded to reflect the par
value of the stock issued. The shares were issued as follows:
Date Shares
---- ------
July 1996 4,000
November 1996 300
March 1997 4,200
-------
8,500
=======
July 1997 6,350
August 1997 40,000
September 1997 95,930
-------
142,280
=======
During December 1998, the Board of Directors approved the issuance of 1,200,000
restricted shares (reimbursement shares) to a consultant and former Board
Chairman. This consultant had been a founder of IFT and had several individuals
provide services in connection with the technology of IFT, provide business
contacts to assist IFT in its business plan and to assist in the raising of
capital. These shares served as a reimbursement to this consultant for 1,699,800
of his personal shares distributed to others between January and March 1998 in
exchange for their services to IFT during the fiscal year ended March 31, 1998.
Because there were no formal service agreements and no specified time frame for
the performance of these services, the cost of the services was recognized as
expense at the date the shares were distributed. The value of their services,
determined by the Board of Directors based on their review, determined the
number of shares to be issued at $.10 per share. The market value of the
reimbursement shares was determined by the Board of Directors based upon the
private placement of common stock sold in November 1998 at $5.00 per share.
On April 26, 1999 IFT offered all stockholders of record on March 31, 1999 the
right to purchase 900 common shares at $.50 per share, a price determined by
IFT's Board of Directors. The market price of IFT's stock on April 26, 1999 was
$1.40 per share. IFT issued 794,740 shares and received proceeds of $396,450 as
a result of this offering which expired May 28, 1999.
IFT issued 2,500 shares on June 2, 1999 to a director. The shares were issued in
exchange for serving as a director. The value of these services was determined
based upon the market value at the date of issuance. IFT has recorded a charge
to operations in the amount of $7,000.
On July 1,1999, IFT entered into a one year advisory agreement with ONKAR
Corporation, Ltd. ("ONKAR") for various services including introductions to
brokers, dealers and potential investors and ONKAR agrees to facilitate the
writing of a minimum of three research reports on IFT. Two of these research
reports have been received by IFT, one dated July 22, 1999 and one dated August
25, 1999. The third research report will not be generated and no services were
provided after September 30, 1999. As consideration for the services, ONKAR
received the right to purchase 1.5 million shares of restricted common stock at
$.50 per share. These rights were issued and exercised with IFT receiving cash
proceeds of $750,000. IFT determined the value of the services to be provided
based upon the market value of the common stock on July 1, 1999, the date of the
agreement. The total value of this agreement was determined to be $4,218,750.
The amount in excess of the cash proceeds received of $750,000 has been charged
to operations as professional services.
F-14
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
------------------------------
On July 13, 1999 IFT entered into employment agreements with its Chief Executive
Officer and Chief Operating Officer which expire January 31, 2000 with options
to extend until July 31, 2000. Under the terms of these agreements, these
officers will each receive base pay of $1,000 per month plus up to a total of
60,000 and 30,000 shares of IFT's stock, respectively, payable at the end of the
initial term of the agreements. The shares are earned ratably on a monthly
basis. The stock based compensation earned through December 31, 1999, $166,585,
reflected in these financial statements as payroll expense and as additional
paid in capital, has been calculated based on the trading price of IFT's stock
at July 13, 1999.
Effective October 27, 1999, IFT merged with and into Blencathia Acquisition
Corporation ("Blencathia"). Blencathia had 300,000 shares outstanding at the
time of the merger, which it redeemed and canceled. In exchange for 300,000
shares of Blencathia's common stock, IFT will issue 300,000 shares of its
restricted common stock. These shares are expected to be sold in an amount
sufficient to provide the former shareholders of Blencathia with proceeds of
$500,000, the negotiated cost of the acquisition. The 300,000 shares are
considered issuable for purposes of determining weighted average shares
outstanding and are included in weighted average shares outstanding for the nine
month period ended December 31, 1999. Blencathia, which was incorporated on
December 3, 1998, had not commenced any significant operations, and was
considered a public "shell" IFT acquired no identifiable assets or liabilities.
The shareholders of Blencathia provided to IFT a "shell" entity that enabled IFT
to become a public reporting entity. Blencathia ceased to exist after the
merger. Based on the December 31, 1999 market price of IFT's common stock,
$4.375, 114,286 shares would need to be issued. As IFT acquired no assets, the
financial statements reflect $500,000 of acquisition expense related to this
merger that is included in accounts payable at December 31, 1999.
Note 6. Related Party Transactions
IFT rents its administrative offices and administrative services from Burcor
Capital, LLC, a company related through common ownership, under a lease
agreement requiring monthly rentals of $5,000 per month through July 13, 2000.
Total payments incurred in connection with this agreement were $32,500 for the
nine months ended December 31, 1999, and $0 for the years ended March 31, 1999
and 1998, respectively. Payments related to this agreement are included in
professional services expense.
IFT rents additional office space located at 6170 W. Desert Inn Road, Las Vegas,
Nevada and equipment from Nevada Offshore Petroleum Export Corp. ("NOPEC"), a
company related through common ownership, under a month-to-month agreement.
Total rent incurred in connection with this lease
F-15
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
was $32,000 for the nine months ended December 31, 1999 and $146,000 and $48,000
for the years ended March 31, 1999 and 1998, respectively.
IFT has consulting arrangements with certain stockholders and related parties.
Consulting expense includes $6,000,000 and $278,712 for the years ended March
31, 1999 and 1998, respectively, paid through the issuance of common stock at
its then fair value as determined by IFT and the Chairman of IFT's Board of
Directors. IFT also incurred $180,000 in consulting fees for the nine month
period ended December 31, 1999.
Total interest on stockholder loans incurred in connection with stockholders
loans (Note 4) for the nine months ended December 31, 1999 was $405,341. Total
interest on stockholder loans for the years ended March 31, 1999 and 1998 was
$87,909 and $7,461 respectively.
At December 31, 1999, IFT owed one of its stockholders approximately $89,000 for
legal services performed. Subsequent to December 31, 1999, the stockholder
agreed to accept 27,559 shares of IFT's stock in lieu of cash for the amounts
due to him. The value of the shares issued were based upon the market value
average for January 3 through January 10, 2000.
At December 31, 1999, IFT was owed $15,000 by one of its stockholders for a
short term advance with interest at 6%. The amount was due December 31, 1999.
The amount has not been paid pending resolution of amounts included in accounts
payable to this stockholder. The total amount due to this stockholder included
in accounts payable at December 31, 1999 was $100,000.
During October 1999, IFT entered into an agreement with TPG Capital Corporation,
a company related through common ownership, for consulting services. A payment
of $100,000 was made during the nine month period ended December 31, 1999 and
was recorded as consulting expense. TPG Capital Corporation provided consulting
and administrative services in connection with the acquisition of
Blencathia.
Note 7. Income Taxes
For income tax purposes approximately $7,350,000 of IFT's expenses are
considered start-up costs to be amortized over five years beginning with the
commencement of operations. IFT has not started amortization of these startup
costs as of December 31, 1999. For accounting purposes these start-up costs have
been expensed. IFT has an approximate net operating loss carryforward of
$7,556,000 as of December 31, 1999. This approximate net operating loss will
expire as follows: $33,000 in year 2011, $600,000 in year 2012, $5,000,000 in
year 2018 and $1,923,000 in year 2019. Due to the inherent uncertainty in
forecasts of future events and operating results, IFT has provided for a
valuation allowance in an amount equal to the net deferred tax asset arising
from this net operating loss carryforward and startup costs. No income tax
benefit has been recorded in the statement of operations due to the valuation
allowance on the deferred tax assets.
F-16
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
December 31, 1999 March 31, 1999
----------------- --------------
Deferred Tax Assets
Start up costs $2,499,000 $ 819,000
Net operating loss 2,549,000 2,336,000
---------- ----------
Total gross deferred tax asset 5,048,000 3,155,000
Less Valuation Allowance 5,048,000 3,155,000
---------- ----------
Net Deferred Tax Asset $ - $ -
========== ==========
Income tax expense for the period ended December 31, 1999 and the years ended
March 31, 1999 and 1998 differed from the amount computed by applying the
statutory U.S. federal corporate income tax rate of 34% to income before income
tax benefit as a result of the following:
December 31, March 31, March 31,
1999 1999 1998
-------------- ----------- ---------
Expected income tax
(benefit) expense $(1,915,000) $(2,665,000) $(371,000)
Increase (decrease) in
Income tax resulting from:
Valuation allowance
Increase 1,915,000 2,665,000 371,000
----------- ----------- ---------
Income tax expense
(benefit) $ - $ - $ -
=========== =========== =========
Note 8. Lease Commitment
As of December 31, 1999, IFT leased office space, certain equipment and
administrative services under two operating leases from companies related
through common ownership. Future minimum leases payments are $35,000 for the
year 2000.
Note 9. Subsequent Events
Effective January 14, 2000 IFT adopted a Consultant and Employee Stock
Compensation Plan. This plan provides that the Board of Directors may award
shares of IFT's stock to officers, directors, consultants and employees as
compensation for services. The maximum number of shares of common stock, which
may be awarded under this plan, is 500,000 shares.
During January 2000 IFT issued 100,000 shares of common stock in a private
placement for $200,000 to a company whose sole owner is a director of IFT. The
market value of the shares on the date of issuance was $331,250. The $131,250 of
market value in excess of the cash amount received has been recorded as
consulting expense.
During January 2000, IFT entered into an employment agreement with Jonathan R.
Burst to serve as Chief Executive Officer of IFT until December 31, 2000 at a
base annual
F-17
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
salary of $180,000. In addition, Mr. Burst is to receive 6,000 shares of common
stock each month. The value of the stock based compensation for these shares is
$214,500 and is based on the trading price of IFT's stock on February 1, 2000.
During January 2000, IFT entered into an employment agreement with William J.
Lindenmayer to serve as Chief Operating Officer of IFT until December 31, 2000
at a base annual salary of $125,000. In addition, Mr. Lindenmayer is to receive
3,000 shares of common stock each month. The value of the stock based
compensation for these shares is $107,250 and is based on the trading price of
IFT's stock on February 1, 2000.
On February 23, 2000 the Board of Directors granted Jonathan Burst 100,000
shares of IFT's common stock for his appointment as Chief Executive Officer. On
February 23, 2000 the Board of Directors awarded an initial grant of 100,000
shares of IFT's common stock to William Lindenmayer for his appointment as
President and Chief Operating Officer. The value of these shares, $550,000, has
been calculated on the trading price of IFT's stock on February 23, 2000 and has
been recorded to payroll expense.
In February 2000 an immediately exercisable warrant for 390,000 shares was
issued to GEM Global Yield Fund Limited. During March 2000 the warrant for
390,000 shares of common stock was exercised at a cost of $.01 per share. The
value over par value of these shares, $1,141,725, has been calculated based on
the trading price of IFT's stock on March 28, 2000 and has been recorded as
deferred financing charge.
During February 2000 IFT issued 195,000 shares of common stock and placed them
in escrow in accordance with the convertible debenture purchase agreement
entered into in February 2000. The shares are issuable if IFT is unable to
register the shares of common stock underlying the convertible debenture
purchase agreement discussed in No. 2 by June 24, 2000.
During March 2000 IFT issued a total of 65,000 shares of common stock to five
directors as reimbursement for directors' expenses. The value of these shares,
$178,750, has been calculated based on the trading price of IFT's stock on
February 23, 2000 and has been recorded as $55,000 payroll expense, $117,216
board meeting expense and $6,534 travel expense.
Note 10. Fiscal Year End Change
Effective October 27, 1999, IFT changed the date of its fiscal year end from
March 31 to December 31. The nine-month period ended December 31, 1999, is
referred to as the transition period. All year and quarter references relate to
IFT's prior fiscal years and quarters, unless otherwise stated. Unaudited
financial information for the comparable nine-month period ended December 31,
1998, is presented in the table below and includes any adjustments (consisting
of normal, recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation.
For the Nine Months Ended
December 31,
1999 1998 (Unaudited)
--------------- -----------------
Revenues $ - $ -
Cost of Revenues - -
--------------- -----------------
Gross Profit - -
--------------- -----------------
Acquisition Expense 500,000 -
Advertising and Marketing 12,913 4,772
Consulting 295,000 6,340,500
Research & Development Costs 330,353 514,347
F-18
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
Office 1,002 30,669
Other 59,234 47,068
Payroll 318,036 116,673
Professional Services 3,662,718 81,436
Rent 32,685 117,633
Stock Transfer Fees 5,249 17,293
Telephone 2,957 27,400
Travel 6,652 37,702
----------- -----------
Total Operating Expenses 5,226,799 7,335,493
----------- -----------
Net Loss from Operations 5,226,799 7,335,493
Interest Expense 405,341 68,572
----------- -----------
Net Loss Before Income Tax 5,632,140 7,404,065
Provision for Income Tax - -
----------- -----------
Net Loss $ 5,632,140 $ 7,404,065
=========== ===========
Basic and Diluted Net Loss
Per Common Share $ .36 $ .57
=========== ===========
Weighted Average Common
Shares Outstanding 15,800,725 12,993,978
=========== ===========
F-19
<PAGE>
Note 11. Supplemental Disclosures of Cash Flow Information
Supplemental non-cash investing and financing activities were as follows:
Nine months ended December 31, 1999
-----------------------------------
IFT exchanged $26,500 due to a related party, $677,754 notes payable and
$498,591 accrued interest for 423,537 common shares; $4,235 common stock and
$1,198,610 additional paid in capital.
Twelve months ended March 31, 1999
----------------------------------
IFT issued 2,795,979 common shares for the common stock of the inactive SFT. The
issuance of $279,598 of common stock was offset by a discount to common stock as
SFT had no net assets or market value.
Twelve months ended March 31, 1998
----------------------------------
IFT issued 2,795,979 common shares for the net book value of the assets of USFT
in the amount of $374,505.
F-20
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS (Note 2) 2000 1999
--------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Current Assets
Cash $ 7,743 $ 26,846
Employee receivable - 468
Note receivable, stockholder - 15,000
Discount on notes payable to stockholders, net (Note 3) 332,135 -
Prepaid expenses 38,909 12,719
-------------- --------------
Total current assets 378,787 55,033
-------------- --------------
Property and Equipment
Machinery and equipment 15,505 15,505
Accumulated depreciation (3,983) (2,374)
-------------- --------------
Total property and equipment 11,522 13,131
-------------- --------------
Deferred Financing Charge (Note 4) 1,251,413 -
-------------- --------------
$ 1,641,722 $ 68,164
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current Liabilities
Accounts payable $ 266,745 $ 110,691
Accounts payable-other 500,000 500,000
Accounts payable-stockholders - 187,095
Accrued expenses 102,246 3,406
Accrued interest expense 3,822 -
Notes payable to stockholder - 62,500
Notes payable to stockholders (Note 3) 105,000 -
-------------- --------------
Total current liabilities 977,813 863,692
-------------- --------------
Long-Term Liabilities
-------------- --------------
Notes payable to stockholder (Note 3) 162,500 -
-------------- --------------
Commitments and Contingencies
Stockholders' Equity (Deficit) (Notes 2 and 4)
Common stock, $.01 par value; authorized, 150,000,000,
18,537,698 and 16,818,339 shares issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively 185,377 168,184
Discount on common stock (816,923) (816,923)
Additional paid-in capital 18,006,732 14,760,243
Deficit accumulated during the development stage (16,873,777) (14,907,032)
-------------- --------------
Total stockholders' equity (deficit) 501,409 (795,528)
-------------- --------------
$ 1,641,722 $ 68,164
============== ==============
</TABLE>
See Notes to Financial Statements.
F-21
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
From
Inception
Three Months Six Months (April 19, 1996)
Ended Ended Through
June 30, June 30, June 30,
2000 1999 2000 1999 2000
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ - $ - $ - $ - $ -
Cost of Revenues - - - - -
-------------- -------------- -------------- ------------ ---------------
Gross Profit - - - - -
-------------- -------------- -------------- ------------ ---------------
Operating Expenses:
Acquisition expense - - - - 500,000
Advertising and marketing 3,085 5,854 13,813 11,525 37,832
Board meeting expense (Note 4) - - 117,216 - 117,216
Consulting (Note 4) 103,383 90,000 278,632 91,500 7,636,896
Insurance 7,824 - 16,571 - 16,571
Office 5,620 4,867 8,805 4,993 63,959
Other 13,194 52,301 20,231 53,290 127,730
Payroll (Note 4) 245,467 29,989 1,014,978 93,643 1,582,536
Professional services 183,528 9,152 344,810 12,350 4,137,344
Research and development costs 1,736 232,253 1,736 560,812 1,544,813
Rent - - 5,000 28,367 280,961
Stock transfer fees 705 5,981 1,345 7,067 24,972
Telephone 519 613 2,309 2,385 46,005
Travel 2,640 - 16,882 844 131,757
-------------- -------------- -------------- ------------ ---------------
Total operating expenses 567,701 431,010 1,842,328 866,776 16,248,592
-------------- -------------- -------------- ------------ ---------------
Net loss from operations 567,701 431,010 1,842,328 866,776 16,248,592
Interest expense 122,968 20 124,417 19,357 625,185
-------------- -------------- -------------- ------------ ---------------
Net loss before income taxes 690,669 431,030 1,966,745 886,133 16,873,777
Provision for income taxes - - - - -
-------------- -------------- -------------- ------------ ---------------
Net loss $ 690,669 $ 431,030 $ 1,966,745 $ 886,133 $ 16,873,777
============== ============== ============== ============ ===============
Basic and diluted net loss
per common share $ .04 $ .03 $ .11 $ .07
Weighted average common shares outstanding 17,908,365 12,897,559 17,421,932 12,897,559
</TABLE>
See Notes to Financial Statements.
F-22
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
During
Common Stock Common Stock Discount on Additional Development
Shares Amount Common Stock Paid-In Capital Stage
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 2000 16,818,339 $ 168,184 $ (816,923) $ 14,760,243 $ (14,907,032)
Issuances of common stock for cash and services
(Note 4) 101,800 1,018 - 330,682 -
Issuances of common stock for compensation (Note 4) 90,000 900 - 29,388 -
Issuance of common stock (Note 4) 100,000 1,000 - (1,000) -
Issuances of common stock for services (Note 4) 92,559 925 - 277,726 -
Issuances of common stock for compensation (Note 4) 200,000 2,000 - 548,000 -
Issuances of common stock for deferred financing
charge (Note 4) 195,000 1,950 - 107,738 -
Issuance of common stock for deferred financing
charge and cash (Note 4) 390,000 3,900 - 1,141,725 -
Issuance of common stock for an account payable
(Note 4) 300,000 3,000 - (3,000) -
Issuance of common stock warrants for deferred
financing charge (Note 3) - 452,730 -
Issuance of common stock for services (Note 4) 250,000 2,500 - 216,250 -
Accrued stock based compensation (Note 4) - - - 146,250 -
------------------------------------------------------------------------------------------------------------------------------------
Net loss - - - (1,966,745)
------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 18,537,698 $ 185,377 $ (816,923) $ 18,006,732 $ (16,873,777)
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
-------------------------------------------------------------------------------------
<S> <C>
Balance, January 1, 2000 $ (795,528)
Issuances of common stock for cash and services
(Note 4) 331,700
Issuances of common stock for compensation (Note 4) 30,288
Issuance of common stock (Note 4) 0
Issuances of common stock for services (Note 4) 278,651
Issuances of common stock for compensation (Note 4) 550,000
Issuances of common stock for deferred financing
charge (Note 4) 109,688
Issuance of common stock for deferred financing
charge and cash (Note 4) 1,145,625
Issuance of common stock for an account payable
(Note 4) 0
Issuance of common stock warrants for deferred
financing charge (Note 3) 452,730
Issuance of common stock for services (Note 4) 218,750
Accrued stock based compensation (Note 4) 146,250
-------------------------------------------------------------------------------------
Net loss (1,966,745)
-------------------------------------------------------------------------------------
Balance, June 30, 2000 $ 501,409
=====================================================================================
</TABLE>
See Notes to Financial Statements
F-23
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
From
Six Months Six Months Inception
Ended Ended (April 9, 1996)
June 30, June 30, to June 30,
2000 1999 2000
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $ (1,966,745) $ (886,133) $(16,873,777)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,609 650 3,983
Stock issued and additional paid in capital
recognized for services and compensation 1,355,190 - 11,305,666
Interest amortization of discount on notes payable 120,595 - 120,595
Interest expense recognized on conversion of debt - - 355,771
Change in assets and liabilities:
Increase in prepaid expenses (26,190) (6,250) (38,909)
Increase in accounts payable 84,426 340,230 782,212
Decrease in accounts payable-stockholders (100,000) - -
Increase in accrued expenses and interest 102,662 8,964 248,888
---------------------------------------------------------
Net cash used in operating activities (428,453) (542,539) (4,095,571)
---------------------------------------------------------
Cash Flows from Investing Activities
Acquisition of machinery and equipment - - (13,861)
Increase in employee and stockholder receivables - - (15,468)
Cash acquired in connection with the purchase of
United States Fuel Technology, Inc. - - 358
---------------------------------------------------------
Net cash used in investing activities - - (28,971)
---------------------------------------------------------
Cash Flows from Financing Activities
Increase in due to United States Fuel Technology, Inc. - - 372,503
Proceeds from common stock issued 204,350 396,450 2,788,028
Proceeds from notes payable 205,000 77,354 1,520,925
Payment on notes payable - - (549,171)
---------------------------------------------------------
Net cash provided by financing activities 409,350 473,804 4,132,285
---------------------------------------------------------
Net increase (decrease) in cash (19,103) (68,735) 7,743
Cash, beginning 26,846 68,735 -
---------------------------------------------------------
Cash, ending $ 7,743 $ - $ 7,743
=========================================================
Supplemental Cash Flow Information
Interest paid $ - $ - $ 2,100
=========================================================
Taxes paid $ - $ - $ -
=========================================================
</TABLE>
See Notes to Financial Statements
F-24
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The interim financial statements included herein have been prepared by
International Fuel Technology, Inc. ("IFT"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
IFT believes that the disclosures are adequate to make the information presented
not misleading.
In the opinion of management, the information furnished in these financial
statements reflect all adjustments, consisting of normal recurring adjustments
which, in the opinion of management, are necessary for fair presentation of the
information contained therein. It is suggested that these financial statements
be read in conjunction with the audited financial statements and notes thereto
included in IFT's transitional report for the period ended December 31, 1999 as
filed with the SEC on Form 10-K (Commission File No. 000-25367). IFT follows
the same accounting policies in preparation of interim reports.
Results of operations for the interim periods are not indicative of annual
results.
Primary and diluted loss per share is based upon the weighted average number of
common shares outstanding during each period.
Note 2 -- Ability to Continue as a Going Concern
------------------------------------------------
IFT's financial statements are presented on the going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. IFT has incurred significant losses since
inception and has limited funds with which to operate. Management anticipates
receiving diploma certification in 2000 from the California Air Resources Board
that its PEERDIESEL(R) product reduces polluting emissions from internal
combustion engines. Shortly thereafter, IFT expects to begin licensing its
product which management believes will generate sufficient revenue to continue
the IFT's operations. However, there is no assurance that IFT will receive
diploma certification or be able to generate sufficient revenue through the
licensing of its product to provide sufficient working capital. Management
believes approximately $1.5 million of additional capital will be required
through the end of this fiscal year. Management does not have an estimate of the
amount of revenue necessary to attain positive cash flow. In February 2000, IFT
entered into a convertible debenture purchase agreement to raise $3,000,000
through the sale of convertible debentures. This agreement was amended in June
2000 to raise $1,500,000 through the sale of convertible debentures. In
connection with the convertible debenture purchase agreement IFT issued a
warrant to purchase 390,000 shares of common stock. (See Footnote 4) IFT
additionally issued 195,000 shares of common stock to the proposed purchasers of
the convertible debentures in conjunction with an amendment to the convertible
debenture purchase agreement dated June 16, 2000. (See Footnote 4).
F-25
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Such financing is contingent upon IFT's ability to register the shares of common
stock underlying the warrants and debentures with the SEC. There can be no
assurance that the registration will be granted effectiveness by the SEC, in
which case IFT would be required to seek alternate sources of financing. IFT's
continued existence is dependent upon its ability to resolve its liquidity
shortfall principally by obtaining this additional debt financing or raising
equity capital. IFT must continue to operate on limited cash flow generated
internally. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
possible inability of IFT to continue as a going concern.
Note 3 - Note Payable to Stockholders
In March 2000 ONKAR Corporation, Ltd. ("ONKAR"), a stockholder of IFT, advanced
IFT $50,000 which is due in March 2005 and has an annual interest rate of 6%. In
April 2000 ONKAR advanced IFT $50,000 which is due in April 2005 and has an
annual interest rate of 6%. In addition, IFT has note payable to ONKAR for
$62,500 which is due in November 2004 at an annual interest rate of 6%.
During the three month period ended June 30, 2000 IFT received advances from
stockholders totaling $105,000. The advances are expected to be repaid in the
three month period ending September 30, 2000. In addition to the repayment of
principal each stockholder will receive a warrant to purchase from IFT up to
25,000 shares of common stock at $.01 per share for each $5,000 in principal
advanced to IFT. The value of the warrants, $452,730, based on the market value
of IFT's common stock on the day(s) the advances were received has been recorded
as a discount on the notes payable to stockholders and as an addition to
additional paid in capital. During the three month and six month periods ended
June 30, 2000, $120,595 was amortized against the discount on notes payable to
stockholders and recognized as interest expense.
Note 4 - Stockholders' Equity (Deficit)
On April 26, 1999 IFT offered all stockholders of record on March 31, 1999 the
right to purchase 900 common shares at $.50 per share. During January 2000 IFT
issued 1,800 shares and received proceeds of $450 as a result of this offering
which expired May 28, 1999. The $450 for the other 900 shares was received
during the nine month period ended December 31, 1999.
During January 2000 IFT issued 100,000 shares of common stock in a private
placement for $200,000 to a company whose sole owner is a director of IFT. The
market value of the shares on the date of issuance was $331,250. The $131,250
of market value in excess of the cash amount received has been recorded as
consulting expense during the three month period ended March 31, 2000.
On July 13, 1999 IFT entered into employment agreements with its Chief Executive
Officer and Chief Operating Officer which expire January 31, 2000 with options
to extend until July 31, 2000. Under the terms of these agreements, these
officers will each receive base pay of $1,000 per month plus up to a total of
60,000 and 30,000 shares of IFT's stock, respectively, payable at the end of the
initial term of the agreements. The shares are earned ratably on a monthly
basis. The 90,000 shares earned under these employment agreements were issued
on January 31, 2000.
At December 31, 1999, IFT owed one of its stockholders approximately $89,000 for
legal services performed. In February 2000, the stockholder agreed to accept
27,559 shares of IFT's stock in lieu of cash for the amounts due to him. The
value of the shares issued, $99,901, was based upon the market value price of
the common shares on February 9, 2000.
F-26
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
On February 9, 2000 IFT issued 100,000 common shares related to the Blencathia
merger agreement. IFT determined that these shares were issued to the incorrect
parties and the number of shares issued were incorrect. On May 8, 2000, IFT
agreed to the return of these shares to be canceled with these shareholders. The
shares were outstanding as of June 30, 2000 and the par value of these shares is
reflected in these financial statements as a deduction from additional paid in
capital. See Note 5 for subsequent cancellation.
Effective January 14, 2000 IFT adopted a Consultant and Employee Stock
Compensation Plan. This plan provides that the Board of Directors may award
shares of IFT's stock to officers, directors, consultants and employees as
compensation for services. The maximum number of shares of common stock, which
may be awarded under this plan, is 500,000 shares. During March 2000 IFT issued
a total of 65,000 shares of common stock to five directors as reimbursement for
directors' expenses. The value of these shares, reflected in these financial
statements as payroll expenses for Jonathan Burst and William J. Lindenmayer in
the amount of $55,000 and as board meeting and travel expenses in the amount of
$117,216 and $6,534, respectively, for the remaining directors, has been
calculated based on the trading price of IFT's stock at February 23, 2000.
On February 23, 2000 the Board of Directors granted Jonathan Burst 100,000
shares of IFT's common stock for his appointment as Chief Executive Officer.
The value of these shares, reflected in these financial statements as payroll
expense, has been calculated based on the trading price of IFT's stock at
February 23, 2000. On February 23, 2000 the Board of Directors awarded an
initial grant of 100,000 shares of IFT's common stock to William Lindenmayer for
his appointment as President and Chief Operating Officer. The value of these
shares, reflected in these financial statements as payroll expense, has been
calculated based on the trading price of IFT's stock at February 23, 2000. The
total charged to payroll expense for these transactions was $550,000.
During February 2000 IFT issued 195,000 shares of common stock and placed them
in escrow in accordance with the convertible debenture purchase agreement
entered into in February 2000. The shares were to be released from escrow and
issued to the purchasers of the convertible debenture in the event of an uncured
default by IFT prior to the closing of the convertible debenture purchase
agreement. The 195,000 shares of common stock were released to the purchasers of
the convertible debenture purchase agreement in conjunction with an amendment to
the convertible debenture purchase agreement dated June 16, 2000, and were
recorded as a deferred financing charge of $109,688 based on the trading price
of IFT's stock. This amount will be amortized over future periods using the
interest method over the life of the GEM convertible debentures. These charges
will be reclassed as debt discount upon issuance of the debt.
On March 28, 2000 a warrant for 390,000 shares of common stock was exercised by
GEM Global Yield Fund Limited at a cost of $.01 per share. The value over par
value of these shares, reflected in these financial statements as a deferred
financing charge, has been calculated based on the trading price of IFT's stock
at March 28, 2000 in the amount of $1,141,725. This amount will be amortized
over future periods using the interest method over the life of the GEM
convertible debentures. These charges will be reclassed as debt discount upon
issuance of the debt.
F-27
<PAGE>
INTERNATIONAL FUEL TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
On May 8, 2000 IFT issued 300,000 common shares that were placed into escrow per
the Blencathia merger agreement. The par value of these shares, $3,000, has
been recorded as a deduction from additional paid in capital pending sale of the
shares from escrow.
On June 19, 2000 IFT issued 250,000 common shares to a director of the company
for consulting services. The value of the shares, $218,750, was recorded to
consulting expense and was based on the trading price of IFT's stock.
During January 2000, IFT entered into an employment agreement with Jonathan R.
Burst to serve as Chief Executive Officer of IFT until December 31, 2000 at a
base annual salary of $180,000. In addition, Mr. Burst is to receive 6,000
shares of common stock each month. During January 2000, IFT entered into an
employment agreement with William J. Lindenmayer to serve as Chief Operating
Officer of IFT until December 31, 2000 at a base annual salary of $180,000. In
addition, Mr. Lindenmayer is to receive 3,000 shares of common stock each month.
The shares are earned ratably on a monthly basis. The stock based compensation
earned through June 30, 2000, reflected in these financial statements as
payroll expense and as additional paid in capital, has been calculated based on
the trading price of IFT's stock at February 1, 2000 in the amount of $146,250.
Note 5 -- Subsequent Events
During July 2000 IFT canceled 100,000 common shares that had previously been
issued as discussed in Note 4.
On July 26, 2000 IFT issued 100,000 common shares due to the exercise of a
warrant issued in connection with advances received from stockholders.
On August 9, 2000 IFT issued 25,000 common shares due to the exercise of a
warrant issued in connection with advances received from stockholders.
Note 6 -- Supplemental Disclosures of Cash Flow Information
Supplemental non-cash investing and financing activities were as follows:
Six months ended June 30, 2000
------------------------------
During the six month period ended June 30, 2000, IFT issued 585,000 shares of
common stock pursuant to the exercise of a warrant issued in connection with a
convertible debenture purchase agreement. The value of the shares, $1,251,413,
is recorded as a deferred financing charge.
During the six month period ended June 30, 2000, IFT reduced a note
receivable-stockholder by $15,000 and an employee receivable by $468 as a
payment on an account payable-stockholder.
During the six month period ended June 30, 2000, IFT issued 27,559 shares of
common stock as a $87,095 payment on accounts payable-stockholder.
Six months ended June 30, 1999
------------------------------
None
F-28
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
The following table sets forth an itemization of various expenses, all of
which we will pay, in connection with the sale and distribution of the
securities being registered. All of the amounts shown are estimates, except the
Securities and Exchange Commission registration fee.
Securities and Exchange Commission Registration Fee $ 1,267
Accounting Fees and Expenses $ 50,000
Legal Fees and Expenses $ 50,000
Miscellaneous $114,000
Total* $215,267
* All amounts are estimates other than the Commission's registration fee. No
portion of these expenses will be borne by the selling shareholders.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Nevada Private Corporation Law provides that a corporation may
indemnify any person who was or is a party or is threatened to be made a party,
by reason of the fact that such person was an officer or director of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, to:
- any action or suit by or in the right of the corporation against expenses,
including amounts paid in settlement and attorneys' fees, actually and
reasonably incurred, in connection with the defense or settlement believed to
be in, or not opposed to, the best interests of the corporation, except that
indemnification may not be made for any claim, issue or matter as to which
such a person has been adjudged by a court of competent jurisdiction to be
liable to the corporation or for amounts paid in settlement to the corporation;
and
- any other action or suit or proceeding against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement, actually and reasonably
incurred, if he or she acted in good faith and in a manner which he or she
reasonably believed to be in, or not opposed to, the best interest of the
corporation and had reasonable cause to believe his or her conduct was lawful.
To the extent that a director, officer, employee or agent has been "successful
on the merits or otherwise" the corporation must indemnify such person. The
articles of incorporation or bylaws may provide that the expenses of officers
and directors incurred in defending any such action must be paid as incurred and
in advance of the final disposition of such action. The Nevada Private
Corporation Law also permits the corporation to purchase and maintain insurance
on behalf of the corporation's directors and officers against any liability
arising out of their status as such, whether or not the corporation would have
the power to indemnify him against such liability. These provisions may be
sufficiently broad to indemnify such persons for liabilities arising under the
Securities Act.
The Company's Bylaws provide for the following:
Actions Other Than By the Corporation - The corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or
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proceeding, whether civil, criminal, administrative or investigative, except an
action by or in the right of the corporation, by reason of the fact that he/she
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with the action, suit or proceeding if he/she acted in good faith and in a
manner which he/she reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, has no reasonable cause to believe his/her conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, does not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he/she reasonably believed to be in or not opposed to the best
interests of the corporation, and that, with respect to any criminal action or
proceeding, he/she had reasonable cause to believe that his conduct was
unlawful.
Actions By the Corporation - The corporation may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he/she is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys' fees, actually and
reasonably incurred by him/her in connection with the defense or settlement of
the action or suit if he/she acted in good faith and in a manner which he/she
reasonably believed to be in or not opposed to the best interests of the
corporation. Indemnification may not be made for any claim, issue or matter as
to which such a person has been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals therefrom, to be liable to the corporation or
for amounts paid in settlement to the corporation, unless and only to the extent
that the court in which the action or suit was brought or other court of
competent jurisdiction determines upon application that in view of all the
circumstances of the case, the person of fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
Successful Defense - To the extent that a director, officer, employee or agent
of the corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to above, or in defense of any claim,
issue or matter therein, he/she must be indemnified by the corporation against
expenses, including attorneys' fees, actually and reasonably incurred by him/her
in connection with the defense.
Required Approval - Any indemnification, unless ordered by a court, must be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances. The determination must be made: (a) By the stockholders or
persons holding their proxies; or (b) By the board of directors by majority vote
of a quorom consisting of directors who were not parties to the act, suit or
proceeding; or (c) If a quorom consisting of directors who were not parties to
the act, suit or proceeding cannot be obtained, by independent legal counsel in
a written opinion,
The Company intends to obtain liability insurance for its directors and
officers covering, subject to exceptions, any actual or alleged negligent act,
error, omission, misstatement, misleading statement, neglect or breach of duty
by such directors or officers, individually or collectively, in the discharge of
their duties in their capacity as directors or officers of the Company. No such
liability coverage is presently in place.
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ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order is information regarding shares of common stock
issued and options and warrants and other convertible securities granted by IFT
during the past three years (June 1997 through June 2000). Also included is the
consideration, if any, received by IFT for such shares and options and
information relating to the section of the Securities Act of 1933, or rule of
the Securities and Exchange Commission under which exemption from registration
was claimed.
On July 7, 1999 the stockholders of IFT approved a 1 for 10 reverse stock split
which was effective on July 22, 1999. All references in Item 15 Recent Sales of
Unregistered Securities have been adjusted retroactively for the split.
(1) In June 1997, IFT conducted a private offering of its common stock.
Pursuant to that offering, a total of 7,200 shares of common stock were issued
in exchange for $26,000. The price per share, as determined by IFT's management,
was $5.00 for 4,200 of the shares and $1.667 for 3,000 of the shares. The
issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to IFT that the shares were being acquired for
investment.
(2) In July 1997, IFT issued 783,944 shares of common stock to certain
founding stockholders in exchange for the technology related to its diesel fuel
treatment business. The number of shares issued was determined by IFT's
management and a discount was recorded equal to the par value of the stock. The
issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to IFT that the shares were being acquired for
investment.
(3) In July 1997, IFT conducted a private offering of its common stock.
Pursuant to that offering, a total of 22,580 shares of common stock were issued
in exchange for $118,500. The price per share, as determined by IFT management,
was $5.00 for 19,001 of the shares, $3.00 for 2,499 of the shares, and $14.815
for 1,080 of the shares. The issuance was made in reliance on Section 4(2) of
the Securities Act of 1933 and/or Regulation D promulgated under the Securities
Act of 1933 and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to IFT that the
shares were being acquired for investment.
(4) In July 1997, IFT issued 94,415 shares of common stock to certain
stockholders for services provided and to certain corporate officers as
additional compensation. IFT's management determined the number of shares issued
or believes that valuing the stock at its par value of $.01 per share
approximates the fair value of the service rendered. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to IFT that the shares were being acquired for investment.
(5) In July 1997, IFT issued 6,350 additional shares of common stock to certain
stockholders who had previously purchased common stock for cash. IFT's
management determined the number of shares issued and the par value of the stock
was charged against additional paid-in-capital. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to IFT that the shares were being acquired for investment.
(6) In August 1997, IFT issued 167,000 shares of common stock to certain
stockholders for services provided and to certain corporate officers as
additional compensation. IFT's management determined the number of shares issued
or believes that valuing the stock at its par value of $.01 per share
approximates the fair value of the service rendered. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were
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<PAGE>
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(7) In August 1997, IFT issued 40,000 additional shares of common stock to
certain stockholders who had previously purchased common stock for cash. The
issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to IFT that the shares were being acquired for
investment.
(8) In August 1997, IFT issued 70,000 shares of common stock to David
Sindelar in exchange for $25,000. The price per share, as determined by IFT
management, was $.3571 for the 70,000 shares. The issuance was made in reliance
on Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated
under the Securities Act of 1933 and were made without general solicitation or
advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate these investments, and who
represented to IFT that the shares were being acquired for investment.
(9) In August 1997, IFT issued 51,800 shares of common stock to certain
founding stockholders in exchange for the technology related to its diesel fuel
treatment business. The number of shares issued was determined by IFT's
management and a discount was recorded equal to the par value of the stock. The
issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to IFT that the shares were being acquired for
investment.
(10) In September 1997, IFT issued 992,768 shares of common stock to certain
stockholders for services provided and to certain corporate officers as
additional compensation. IFT's management determined the number of shares issued
or believes that valuing the stock at its par value of $.01 per share
approximates the fair value of the services rendered. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to IFT that the shares were being acquired for investment.
(11) In September 1997, IFT issued 95,930 additional shares of common stock
to certain stockholders who had previously purchased common stock for cash.
IFT's management determined the number of shares issued and the par value of the
stock was charged against additional paid-in-capital. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to IFT that the shares were being acquired for investment.
(12) In September 1997, IFT conducted private offering of its common stock.
Pursuant to that offering, a total of 20,050 shares were issued in exchange for
$90,000. The price per share, as determined by IFT management, was $5.00 for
15,000 of the shares and $2.971 for 5,050 of the shares. The issuance was made
in reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to IFT that the shares were being acquired for investment.
(13) In September 1997, IFT issued 2,927,124 shares of common stock to
certain founding stockholders in exchange for the technology related to its
diesel fuel treatment business. The number of shares issued was determined by
IFT's management and a discount was recorded equal to the par value of the
stock. The issuance was made in reliance on Section 4(2) of the Securities Act
of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
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<PAGE>
(14) In December 1998, IFT conducted a private offering of its common stock.
Pursuant to that offering, a total of 200,000 shares of common stock were issued
in exchange for $1,000,000. The price per share, as determined by IFT
management, was $5.00 for the 200,000 shares. The issuance was made in reliance
on Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated
under the Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to IFT that the shares were being acquired for investment.
(15) In January 1999, IFT issued 1,200,000 shares (reimbursement shares) of
common stock to a consultant who had been a founder of IFT. This consultant had
several individuals provide services in connection with the technology of IFT,
provide business contacts to assist IFT in its business plan and to assist in
the raising of capital. These shares served as a reimbursement to this
consultant for personal shares distributed to others in exchange for their
services to IFT. IFT's management determined the number of shares issued and
believes that valuing the stock at $5.00 per share approximates the fair value
of IFT's common stock at the time of issuance. The issuance was made in reliance
on Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated
under the Securities Act of 1933 and were made without general solicitation or
advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate these investments, and who
represented to IFT that the shares were being acquired for investment.
(16) In April 1999, IFT conducted a rights offering of its common stock to
all shareholders of record on March 31, 1999 to purchase 900 common shares at
$.50 per share, a price set by IFT's Board of Directors. Pursuant to that
offering, a total of 797,440 shares of common stock were issued in exchange for
$397,800 through January, 2000. The issuances were made in reliance on Section
4(2) of the Securities Act of 1933 and/or Regulation D promulgated under the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to IFT that the shares were being acquired for investment.
(17) In June 1999, IFT issued 2,500 shares to a director. These shares were
issued in exchange for serving as a director. The value of these services,
$7,000, was determined based on the market value of IFT's stock on the day of
issuance. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(18) In July 1999, IFT entered into an advisory agreement with ONKAR
Corporation, Ltd. for various services and the right to purchase 1,500,000
shares of IFT's restricted common stock at $.50 per share. IFT issued 500,000
shares of common stock in exchange for $250,000. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate these investments, and
who represented to IFT that the shares were being acquired for investment.
(19) In September 1999, IFT issued 1,000,000 shares of common stock to ONKAR
Corporation, Ltd. pursuant to their advisory agreement in exchange for $500,000.
The issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate these
investments, and who represented to IFT that the shares were being acquired for
investment.
(20) In December 1999, IFT issued 423,537 shares of common stock to note
holders as conversion of their promissory notes and interest due through October
31, 1999 in the amount of $847,074 at a conversion price of $2.00 per share. The
issuance was made in reliance on Section 4(2) of the Securities
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<PAGE>
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(21) In January 2000, IFT issued 100,000 shares of common stock in a private
placement offering to Observor Acceptances Ltd. in exchange for $200,000. The
price per share, as determined by IFT's Board of Directors, was $2.00 for the
100,000 shares. The sole owner of Observor Acceptances Ltd. is a director of
IFT. The issuance was made in reliance on Section 4(2) of the Securities Act of
1933 and/or Regulation D promulgated under the Securities Act of 1933 and were
made without general solicitation or advertising. The purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(22) In January 2000, IFT issued 90,000 shares of common stock pursuant to
an employment agreement with its Chief Executive Officer and Chief Operating
Officer. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(23) In February 2000, IFT issued 27,559 shares of common stock for legal
services performed by Donald Stoecklein. The services performed were valued at
$89,000. The stockholder agreed to accept 27,559 shares of IFT's stock as
payment for an amount due him. The issuance was made in reliance on Section
4(2) of the Securities Act of 1933 and/or Regulation D promulgated under the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate these investments, and who
represented to IFT that the shares were being acquired for investment.
(24) In February 2000, IFT issued 100,000 shares of common stock related to
a consulting agreement in effect at that time. Subsequent to March 31, 2000 the
consulting agreement has been amended and the 100,000 shares were recalled and
canceled. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(25) In March 2000, IFT issued 65,000 shares of common stock, pursuant the
Consultant and Employee Stock Compensation Plan dated January 14, 2000, to five
directors as reimbursement for directors' expenses. These shares were valued at
$178,750 based on the trading price of IFT's stock at February 23, 2000 of $2.75
per share. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares were
being acquired for investment.
(26) In March 2000, IFT issued 200,000 shares of common stock, pursuant to
an award by the Board of Directors, to its Chief Executive Officer and
President/Chief Operating Officer. The value of these shares was calculated
based on the trading price of IFT's stock at February 23, 2000 totaling
$550.000. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising.
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<PAGE>
The purchasers were sophisticated investors with access to all relevant
information necessary to evaluate these investments, and who represented to IFT
that the shares were being acquired for investment.
(27) In May 2000, IFT issued 300,000 shares of its common stock in exchange
for 300,000 shares of Blencathia's common stock. IFT merged with and into
Blencathia Acquisition Corporation effective October 27, 1999. The shares were
valued at $500,000. The issuance was made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Regulation D promulgated under the Securities Act
of 1933 and were made without general solicitation or advertising. The
purchaser was a sophisticated investor with access to all relevant information
necessary to evaluate these investments, and who represented to IFT that the
shares were being acquired for investment.
(28) In June 2000, IFT issued 250,000 shares of common stock to Observor
Acceptances, Ltd. pursuant to a consulting agreement with Harry Demetriou, sole
owner of Observor Acceptances, Ltd. The issuance was made in reliance on Section
4(2) of the Securities Act of 1933 and/or Regulation D promulgated under the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate these investments, and who
represented to IFT that the shares were being acquired for investment.
(29) In July 2000, IFT issued 100,000 shares of common stock to Stephen C. Juan
("Holder") at $.01 per share as extra consideration for the funds he advanced to
IFT pursuant to the terms of the Letter Agreement between IFT and Holder. The
issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate these
investments, and who represented to IFT that the shares being acquired for
investment.
(30) In August 2000, IFT issued 725,000 shares of common stock to fourteen
shareholders ("Holders") at $.01 per share as extra consideration for the funds
they advanced to IFT pursuant to the terms of the Letter Agreement between IFT
and Holders. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares being
acquired for investment.
(31) In September 2000, IFT issued 230,000 shares of common stock to 12
shareholders ("Holders") at $.01 per share as extra consideration for the funds
they advanced to IFT pursuant to the terms of the Letter Agreement between IFT
and Holders. The issuance was made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchaser was a
sophisticated investor with access to all relevant information necessary to
evaluate these investments, and who represented to IFT that the shares being
acquired for investment.
ITEM 16. EXHIBITS.
*2.1 Agreement and Plan of Merger between Blencathia Acquisition
Corporation and International Fuel Technology, Inc.
*3.1 Certificate of Incorporation of International Fuel Technology,
Inc. and all amendments.
*3.2 By-laws of International Fuel Technology, Inc.
**5 Consent of Armstrong Teasdale LLP
*10.1 TPG Consulting Agreement
*10.2 Convertible Debenture Purchase Agreement
10.2.1 Amendment to Convertible Debenture Purchase Agreement
*10.3 Jonathan R. Burst Employment Agreement
*10.4 William J. Lindenmayer Employment Agreement
*16.1 Letter, dated January 21, 2000, from McGladrey & Pullen, LLP
to the Registrant regarding resignation of certifying
accountant
*16.2 Letter, dated February 10, 2000, from McGladrey & Pullen,
LLP regarding client-auditor relationship.
23.1 Consents of BDO Seidman, LLP
23.2 Consents of McGladrey & Pullen, LLP
*Incorporated by reference to Exhibits to Transitional Report on Form 10-K
filed on May 10, 2000
**To be filed by amendment
Financial Statement Schedules
-----------------------------
All other schedules for which provision is made in the applicable accounting
regulations of the SEC are not required under the related instructions or are
inapplicable and therefore have been omitted.
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ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a post-
effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of this registration statement, or most recent post-effective
amendment, which, individually or in the aggregate, represent a fundamental
change in the information set forth in this registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or any
material change to such information in the registration statement.
2. That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. To remove from registration by means of a post-effective amendment any of the
securities being registered hereby which remain unsold at the termination of the
offering.
Insofar as indemnifications for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described under Item 15 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities, other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding, is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act, and will be governed by the final adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing Form S-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned thereunto duly
authorized in the City of Clayton, State of Missouri on September 14, 2000.
INTERNATIONAL FUEL TECHNOLOGY, INC.
By: /s/ William J. Lindenmayer
-----------------------------------
William J. Lindenmayer, President
Pursuant to the requirements of the Securities Act of 1933, the following
persons in the capacities noted, have signed this registration statement on
September 14, 2000.
Signature Title Date
/s/ Jonathan R. Burst Chief Executive Officer, Director September 14, 2000
------------------------
Jonathan R. Burst
/s/ William J. Lindenmayer President, Director September 14, 2000
--------------------------
William J. Lindenmayer
/s/ Patty Foltz Secretary/Treasurer September 14, 2000
--------------------------
Patty Foltz
/s/ Fred K. Jensen Director September 14, 2000
--------------------------
Fred K. Jensen
/s/ David B. Norris Director September 14, 2000
--------------------------
David B. Norris
/s/ Harry Demetriou Director September 14, 2000
--------------------------
Harry Demetriou
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