UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission File No. 0-12374
Digital Fuel, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 45-0375367
-------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6601 East Grant Road, Suite 101, Tucson, Arizona 85715
--------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(520) 886-5354
--------------
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- --------
Number of shares of common stock outstanding: 2,558,278 Shares of Common
Stock, par value $.01 per share, were outstanding as of November 7, 2000.
<PAGE>
DIGITAL FUEL, INC.
Part 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Digital Fuel, Inc.
We have reviewed the accompanying condensed balance sheet of Digital Fuel,
Inc. as of September 30, 2000, and the related condensed statements of
operations for the three-month and nine-month periods then ended; and the
statement of cash flows for the nine-month period then ended. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
WATSON & WATSON CPAs, P.C.
Tempe, Arizona
November 2, 2000
<PAGE>
DIGITAL FUEL, INC.
CONDENSED BALANCE SHEET
September 30, 2000
(Unaudited)
ASSETS
Current assets:
Cash $1,696
-----
Total current assets 1,696
-----
Investments (Note 4):
Preferred Stock, SiteScape -0-
-----
$1,696
=====
LIABILITIES AND SHAREHOLDERS' EQUITY DEFICIENCY
Current liabilities:
Notes payable:
Related parties (Note 2) $1,161,220
Other (Note3) 250,000
Accounts payable:
License agreements 205,000
Related parties 57,072
Other 81,429
Accrued management fees 188,878
Accrued interest expense, related parties (Note 2) 74,652
-------
Total current liabilities 2,018,251
---------
Long-term notes payable:
Related parties (Note 2) 25,000
Other (Note 3) 15,000
------
40,000
------
Shareholders' equity deficiency:
Preferred stock, $.01 par value; authorized 10,000,000 shares;
issued -0- shares:
Common stock, $.01 par value; authorized 20,000,000 shares;
issued 2,558,278 shares: 25,583
Capital in excess of par value 2,396,842
Accumulated deficit (4,478,980)
---------
(2,056,555)
---------
$ 1,696
=========
See Notes to Condensed Financial Statements
F-3
<PAGE>
DIGITAL FUEL, INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2000 1999
Expenses:
General and administrative 118,115 $243,541
------- -------
Operating loss (118,115) (243,541)
------- -------
Interest expense:
Related parties (Note 2) 26,573 3,911
Other (Note 3) 5,892
-----
32,465
------
Loss before extraordinary item $(150,580) $(247,452)
------- -------
Other item:
Gain on extinguishment of debt (Note 6) 8,692
-----
Net Loss $(141,888) $(247,452)
======= =======
Basic and diluted loss per common share $(.11) $ *
=== ==
Weighted average number of
shares outstanding 1,237,323 990,613,429
========= ===========
*Less than $.01 per share
See Notes To Condensed Financial Statements
F-4
<PAGE>
DIGITAL FUEL, INC.
CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2000 1999
---- ----
Expenses:
Research and development (Note 4) $94,050
Marketing and advertising (Note 4) 610,950
General and administrative 383,410 $245,214
------- -------
Operating loss (1,088,410) (245,214)
--------- -------
Interest expense:
Related parties (Note 2) 74,174 3,911
Other (Note 3) 15,243
------
89,417
------
Loss before extraordinary item (1,177,827) (249,125)
Other item:
Gain on extinguishment of debt (Note 6) 35,870
------ ------
Net loss $(1,141,957) $(249,125)
========= =======
Basic and diluted loss per common share:
Loss before extraordinary item $(2.09) $*
Extraordinary item .06
---
Net Loss $(2.03) $*
=== ==
Weighted average number of
shares outstanding 562,009 666,402,449
========= ===========
*less than $.01 per share
See Notes To Condensed Financial Statements
F-5
<PAGE>
DIGITAL FUEL, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(Unaudited)
2000 1999
---- ----
Cash flows from operating activities:
Net loss $(1,141,957) $(249,125)
--------- -------
Adjustments to reconcile net loss
to net cash used in operations:
Non-cash expense in connection with
SiteScape investment (Note 4) 705,000 600,000
Change in operating liabilities:
Decrease in prepaid expense 4,500
Increase in deposits (400,000)
Increase in accounts payable, related parties 38,747
Increase in accounts payable 23,045 1,881
Increase in accrued salaries 182,893
Increase in accrued interest, related parties 68,677
------
Total adjustments 1,018,362 206,381
--------- -------
Net cash used in operating activities (123,595) (42,744)
------- ------
Cash flows from financing activities:
Proceeds from the issuance of common stock 100,000
Proceeds from notes payable-related parties
(Note 2) 362,300 200,000
Repayments of notes payable-related parties (7,031) (71,600)
Proceeds from notes payable, other (Note 3) 250,000
------- ------
Net cash provided by financing activities 605,269 228,400
------- -------
Cash flows from investing activities:
SiteScape stock purchase (Note 4) (500,000)
-------
Net cash used in investing activities (500,000)
-------
Increase (decrease) in cash (18,326) 185,656
Cash, beginning 20,022 5,515
------ ------
Cash, ending $1,696 $191,171
====== ========
During the 9 months ended September 30, 2000, $6,469 was paid for interest.
Non-cash financing activities:
Issuance of common stock in exchange for accounts payable $ 38,836
Issuance of common stock in exchange for management fees 93,412
Issuance of common stock in exchange for notes payable 10,000
------
$142,248
=======
F-6
<PAGE>
DIGITAL FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
1. Basis of presentation:
The financial statements of Digital Fuel, Inc. (The "Company") included
in this Form 10-QSB have been prepared without audit in accordance with
the rules and regulations of the Securities and Exchange Commission.
Although certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, the Company
believes that the disclosures are adequate to make the information
presented not misleading. The accompanying financial statements should
be read in conjunction with the audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1999.
In the opinion of management, all adjustments, including normal
recurring adjustments, necessary for a fair presentation of the results
of operations for the three and nine month periods ended September 30,
2000 and 1999 have been included. The results of operations for the
interim periods presented are not necessarily indicative of the results
to be expected for the full year.
On June 1, 2000, Deucalion held a Special Meeting of its stockholders
to consider and vote upon the reincorporation, recapitalization, and
merger of Deucalion with and into its wholly owned Delaware subsidiary,
Digital Fuel, Inc., as described in the Schedule 14C Information
Statement filed with the Securities and Exchange Commission on May 9,
2000 and incorporated herein by reference. The effect of the
transaction approved at the Special Meeting includes: changing the name
of the Company from Deucalion Research, Inc. to Digital Fuel, Inc.,
effecting a one-for-6,800 reverse stock split, reducing the authorized
capital of the Company from 1,500,000,000 shares to 30,000,000 shares,
increasing the par value of the Company's common stock from $.0001 to
$.01 per share, and authorizing the Board of Directors to issue up to
10,000,000 shares of blank check preferred stock. All share and per
share amounts in the accompanying financial statements reflect the
reverse stock split.
There has not been any change in the significant accounting policies of
the Company for the periods presented.
F-7
<PAGE>
DIGITAL FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
2. Notes payable, related parties:
Short-term:
Farley Family Partnership, 9%, unsecured, due on demand $200,000
Multiple advance promissory note, Metz Trust, maximum
borrowings of $150,000, 9%, unsecured, due on demand 107,000
Multiple advance promissory note, Grant Papanikolas, maximum
borrowings of $100,000, 9%, unsecured, due on demand 85,000
Multiple advance promissory note, Michael R. Farley, maximum
borrowings of $100,000, 9%, unsecured, due on demand 25,300
Multiple advance promissory note Farley & Associates, Inc.,
maximum borrowings of $800,000, 9%, unsecured,
due on demand 743,920
-------
$1,161,220
=========
Long-term:
Promissory note, Email Catalogue, LLC, 8%, unsecured,
due October, 2001 $25,000
======
Under the terms of the short-term notes, upon completion of the
recapitalization, the Company issued to Farley & Associates 100,000
shares, Farley Family Partnership 200,000 shares and Metz Trust 100,000
shares at par value of the Company's post recapitalization common stock.
Management believes that these shares have nominal market value based on
various factors including the Company's financial position and the fact
that there is no current market for the Company's stock.
F-8
<PAGE>
DIGITAL FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
2. Notes payable, related parties (Continued):
The Farley Family Partnership note, entered into on September 30, 1999,
provided the Company with working capital. The Farley & Associates,
Inc. (F&A) note was entered into in connection with the Company's
investment activities. Farley Family Partnership and F&A are entities
controlled by Michael R. Farley, who is also an officer, director and
major shareholder of the Company. The Metz Trust note, entered into on
October 28, 1999, provided the Company working capital. The Email
Catalogue, LLC note was entered into in connection with license
agreements. The Metz Trust and Email Catalogue, LLC are entities
controlled by Forrest L. Metz, who is also a member of the board of
directors and a major shareholder of the Company. The Papanikolas note,
entered into on February 22, 2000, provided the company with working
capital. Papanikolas is an officer of the Company. The Farley note,
entered into on April 28, 2000, provided the company with working
capital. Farley is an officer of the Company.
3. Notes payable, other:
Short-term:
Townsdin, 9%, unsecured, due on demand $200,000
Torrance, 9%, unsecured, due on demand 50,000
-------
$250,000
=======
Long-term:
Comm Enterprises, 8%, unsecured, due October 15, 2001. $10,000
Port Ability, 8%, unsecured, due October 15, 2001. 5,000
------
$15,000
======
The short-term notes were entered into during the three months ended
March 31, 2000, and provided the Company with working capital.
Under the terms of the short-term notes, upon completion of the
recapitalization, the Company issued to Torrance 50,000 shares at par
value of the Company's post recapitalization common stock. Management
believes that these shares have nominal market value based on various
factors including the Company's financial position and the fact that
there is no current market for the Company's stock. Additionally,
Townsdin and Torrance may convert through December 31, 2000, all or part
of any outstanding principal to post recapitalization Units at the rate
of $1.00 per Unit. Each Unit is to consist of one share of common stock
and one share of 8% preferred stock.
F-9
<PAGE>
DIGITAL FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
4. Option to purchase shares of SiteScape:
In February 2000, the Company exercised the remaining one-half of its
SiteScape option shares and purchased 258,333 shares of Preferred Stock
for $500,000. At the completion of the above-described transactions, the
Company owns 516,667 shares of SiteScape, Inc.'s Series A Convertible
Preferred Stock (the "Preferred Stock"), which represents approximately
20% of the voting stock of SiteScape.
The Preferred Stock has, among other rights, the right to vote on general
matters, the ability of a 1:1 conversion into Class A Voting Common Stock
of SiteScape, dividend participation with common shares, and the right to
elect two members to the Board of Directors of SiteScape. The Preferred
Stock is to be automatically converted to common stock if SiteScape
completes an initial public offering and realizes at least $20,000,000.
The Preferred stock is also entitled to receive dividends if, and when
declared by SiteScape's board of directors, at the cumulative rate of 8%
per year compounded annually. Dividends are due only if declared by the
board of directors and the tangible net worth of SiteScape exceeds $25
million. SiteScape is an Internet based start up company that acquired
AltaVista FORUM from Compaq Computer in April 1999. FORUM is a
collaboration software, which provides ways to communicate, share
resources, and collaborate with groups of people within a company or
across organizations. SiteScape is currently engaged in research and
development and marketing and advertising efforts to expand and grow
their customer base. The Company has and will continue to regularly
review the assumptions underlying the operation performance and cash flow
forecasts of SiteScape to assess the investment's recoverability.
Although SiteScape has revenues, it has operated at a loss. There are no
assurances that SiteScape will achieve profitability or that its existing
cash balances and cash flows from future operations will be sufficient to
meet its working capital requirements. SiteScape continues to consume
cash as it executes its business plan. During the second quarter of 2000,
these circumstances had indicated that the Company should charge a
portion of SiteScape's research and development and marketing and
advertising expenses against the carrying value of its investment.
Therefore, during the three-month period ending June 30, 2000, the
Company recorded a charge of $57,420 for research and development
expenses and a charge of $203,580 for marketing and advertising expenses.
Relating to the six months ended June 30, 2000, the Company recorded a
charge of $94,050 for research and development expenses and a charge of
$610,950 for marketing and advertising expenses. As of June 30, 2000,
these charges have reduced the carry value of the Company's investment to
zero. During the three months ending September 30, 2000, SiteScape has
continued to operate at a loss.
F-10
<PAGE>
DIGITAL FUEL, INC.
NOTES TO FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
5. Stock Purchase Agreement:
Per the terms of the Stock Purchase Agreement, certain liabilities of
Deucalion were settled including $38,836 owed for legal fees and $93,412
owed for management service fees. These liabilities were settled through
the issuance of common stock equal to 1/2% or 10,538 shares and 1% or
21,076 shares, respectively, after completion of the reincorporation,
recapitalization, and merger. Effective August 31, 1999, the Stock
Purchase Agreement between the Company and Michael Farley and Forrest
Metz was closed. Under the agreement, Farley and Metz purchased
2,002,226 shares of common stock for $110,000. Effective August 31,
1999, the Company issued 147,766 shares in exchange for $100,000 and
after the reincorporation, recapitalization, and merger, the purchasers
were issued 1,855,460 additional shares of the Company's common stock in
exchange for the $10,000 in debt due to them.
6. Extraordinary Income:
From 1992 until July 1999 the Company was inactive. The current
management has embarked on settling certain outstanding payables that
have been on the books from 1992 to present. During the three months
ended March 31, 2000 and the three months ended September 30, 2000, the
company settled accounts payable with a carrying value of $42,370 for
$6,500, resulting in extraordinary income from the extinguishment of debt
of $35,870. The Company's net tax loss carryforward will be reduced by
this $35,870 gain.
Part 1. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
This report may contain certain "forward-looking" statements as such term is
defined in the Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases,
which represent our expectations or beliefs, including but not limited to,
statements concerning our operations, economic performance, financial
condition, growth and acquisition strategies, investments, and future
operational plans. For this purpose, any statements contained herein that
are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the generality of the foregoing, words such as
"may," "will," "expect," "believe," "anticipate," "intent," "could,"
"estimate," "might," or "continue" or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
F-11
<PAGE>
statements. These statements by their nature involve substantial risks and
uncertainties, certain of which are beyond our control, and actual results
may differ materially depending on a variety of important factors, including
uncertainty related to the registrant's operations, mergers or acquisitions,
governmental regulations, the value of the registrant's assets and any other
factors discussed in this and other registrant filings with the Securities
and Exchange commission.
Management's Discussion and Analysis and Plan of Operation.
Plan of Operation
Change in Control and Restructure of Deucalion
On July 29,1999 and effective August 31, 1999, the Stock Purchase Agreement
between the Company and Michael R. Farley and Forrest L. Metz was closed.
Effective August 31, 1999, we completed a transaction whereby we sold
approximately 95% of our post transaction voting common stock (
2,002,226shares) for an aggregate purchase price of $110,000. Also,
effective August 31, 1999, the former directors and officers of Deucalion
resigned and the purchasers were elected as directors and officers of the
Company. Pursuant to the terms of the transaction, the purchasers paid us
$100,000, in August 1999, of the purchase price in exchange 147,766 shares
of the Company's common stock. After the reincorporation, recapitalization,
and merger, the purchasers were issued 1,855,460 additional shares of the
Company's common stock in exchange for $10,000 in debt due to them.
Per the terms of the Stock Purchase Agreement, certain liabilities of
Deucalion were settled including $38,836 owed for legal fees and $93,412 owed
for management service fees. These liabilities were settled through the
issuance of common stock equal to 1/2% or 10,538 shares and 1% or 21,076
shares, respectively, after completion of the reincorporation,
recapitalization, and merger. After the reincorporation, recapitalization,
and merger, the purchasers were issued 1,855,460 additional shares of the
Company's common stock in exchange for $10,000 in debt due to them, which
resulted in the purchasers owning 95% of the Company.
As a result of a special meeting of the Shareholders on June 1, 2000, and
effective June 22, 2000, the domicile of the Company was changed from the
State of North Dakota to the State of Delaware by merging Deucalion with and
into its recently formed and wholly owned Delaware subsidiary Digital Fuel,
Inc. The merger also effected the following additional objectives: a 1-for-
6,800 reverse stock split, with fractional shares being rounded up to the
nearest whole share: a reduction in the authorized capital stock from
1,500,000,000 shares to 30,000,000; an increase in the par value of capital
stock from $.0001 to $.01 per share and the authorization of the Board of
Directors to issue up to 10,000,000 shares of blank check preferred stock.
Licensed Software
The Company received a letter on May 5, 2000 (dated May 3, 2000) informing us
that M2Direct had filed for protection under Chapter 11 on April 25, 2000 in
the Bankruptcy Court of the Northern District of Georgia, Atlanta Division.
F-12
<PAGE>
As a result of receiving this notification, we have contacted a bankruptcy
attorney and will pursue the protection of our rights under these licenses.
We have been informed that there is an intellectual properties doctrine and
legal precedents that can be interpreted to provide us with the rights to the
software, if our licenses do not survive the impending bankruptcy
proceedings. All costs related to the Company's acquisition of the M2Direct
license rights were previously expensed in 1999.
Based on M2Direct filing bankruptcy and the violations that M2Direct
heretofore created within the license agreements, we have suspended all
license payments. In anticipation of our rights under these licenses and the
technology itself surviving the bankruptcy proceedings, we are continuing our
efforts to explore and develop business opportunities that will potentially
create revenue for the Company.
We are currently developing business plans to utilize the M2Direct licensed
technology in a variety of ways. Even though we have presented the technology
and our ideas to several companies and have more meetings scheduled, we have
no contracts with other companies at this time. Even though we will continue
to have discussions about the application of the envelope technology with
prospect companies, no contracts will be entered into until and unless our
licenses survive the M2Direct bankruptcy.
Based on the legal precedents that exist protecting our ongoing and post
bankruptcy rights to the envelope technology and software, the Company has
developed a dialogue with the Bankruptcy Trustee, written a business plan and
submitted a bid to purchase this technology from the Bankruptcy Court. The
Company had embarked on raising the necessary capital required to purchase
this technology, but was not the successful bidder for the technology.
Therefore, we will continue to pursue any and all legal remedies that will
provide the Company full access to this technology, up to and including
obtaining the source code and setting up our own servers. This would be done
for purposes of maintaining the Company's ability to implement its business
plans for these licenses and the pursuit of revenue from the application of
this technology in the electronic commerce marketplace.
SiteScape, Inc. Investment
SiteScape is an Internet based start up company that acquired AltaVista FORUM
from Compaq Computer in April 1999. FORUM is collaboration software that
provides ways to communicate, share resources, and collaborate with groups of
people within a company or across organizations.
In February 2000, the Company exercised the remaining one-half of its
SiteScape option shares and purchased 258,333 shares of Preferred Stock for
$500,000. At the completion of the above-described transactions, the Company
owns 516,667 shares of SiteScape, Inc.'s Series A Convertible Preferred Stock
(the "Preferred Stock"), which represents approximately 20% of the voting
stock of SiteScape.
F-13
<PAGE>
The Preferred Stock has, among other rights, the right to vote on general
matters, the ability of a 1:1 conversion into Class A Voting Common Stock of
SiteScape, dividend participation with common shares, and the right to elect
two members to the Board of Directors of SiteScape. The Preferred Stock is
to be automatically converted to common stock if SiteScape completes an
initial public offering and realizes at least $20,000,000. The preferred
stock is also entitled to receive dividends if, and when declared by
SiteScape's board of directors, at the cumulative rate of 8% per year
compounded annually. Dividends are due only if declared by the board of
directors and the tangible net worth of SiteScape exceeds $25 million.
Rainbow Investment
Consistent with our business strategy, our management identified this early
stage company and provided Rainbow Country, Inc. (Rainbow) with advances of
$25,245 in 1999. These funds were part of Rainbow's seed capital to continue
exploring the feasibility of delivering potable water to Tucson, Arizona.
This feasibility study included but was not limited to determining the costs
associated with securing the water rights, plus designing and building a
delivery system. In addition, some work was done to quantify the demand and
price point for deliverable water to Tucson.
The results of this nine-month effort has been the determination that the
scope of this project is beyond our technical and capital resources.
Therefore, the Company charged off the entire advance of $25,245 as expense
in 1999. A Settlement Agreement had been successfully negotiated providing
the Company with a promissory note in the amount of $25,245, due and payable
not later than December 1, 2000. However, the Settlement Agreement
collapsed and the Company is seeking the advice of legal council.
Management's Discussion and Analysis for the three and nine months ended
September 30, 2000
Results of Operations
From September 1992 until July 1999, the Company had no operations and
activities primarily consisted of maintaining the corporation's status as a
corporation in good standing with the state of North Dakota and negotiating
the Asset Purchase Agreement. From July 29, 1999 through December 31, 1999
activities primarily consisted of bringing the Company's filings under the
Securities and Exchange Act of 1934 current, closing the Asset Purchase
Agreement, beginning the process to effect a reverse stock split, name change
and reincorporation into Delaware, seeking business opportunities in the
software and Internet businesses, specifically the M2Direct licensing
agreements, the SiteScape investment and the Rainbow investment, and
accounting for these transactions. During the three-months ended September
30, 2000, the Company incurred general and administrative expenses of
$118,115 related to these activities and the purchase of the M2Direct
technology from the Bankruptcy Court, which includes payroll expense of
approximately $83,456. For the nine-months ended September 30, 2000, the
Company incurred general and administrative expenses of $383,410, which
included payroll expense of approximately $262,215.
F-14
<PAGE>
SiteScape is currently engaged in research and development and marketing and
advertising efforts to expand and grow their customer base. The Company has
and will continue to regularly review the assumptions underlying the
operation performance and cash flow forecasts of SiteScape to assess the
investment's recoverability. Although SiteScape has revenues, it has operated
at a loss. There are no assurances that SiteScape will achieve profitability
or that its existing cash balances and cash flows from future operations will
be sufficient to meet its working capital requirements. SiteScape continues
to consume cash as it executes its business plan. During the second quarter,
the Company did charge a portion of SiteScape's research and development and
marketing and advertising expenses against the carrying value of its
investment, which reduced the investment to zero on its Balance Sheet.
During the three months ending September 30, 2000, SiteScape has continued to
operate at a loss.
The Company also incurred interest expense for the three months and nine
months ended September 30, 2000 of approximately $32,000 and $89,000
respectively, in connection with the various loans as described in the notes
to the financial statements. Through September 30, 2000, entities controlled
by Mr. Farley and Mr. Farley himself have made loans to the Company totaling
$969,220 for certain investment transactions and the ongoing cash needs of
the Company. During the three months ended March 31, 2000 and the three
months ended September 30, 2000, the company settled accounts payable with a
carrying value of $42,370 for $6,500, resulting in extraordinary income from
the extinguishment of debt of $35,870. The Company's net tax loss
carryforward will be reduced by this $35,870 gain
Liquidity and Capital Resources
The independent auditors' report on the Company's financial statements as of
December 31, 1999, and for each of the years in the two-year period ended
December 31, 1999, includes a "going concern" paragraph that describes
substantial doubt about the Company's ability to continue as a going concern.
As of September 30, 2000, the Company had a working capital deficiency of
$2,016,555.
The Company anticipates a significantly increased need for working capital
during remainder of 2000 to maintain the required filings under the
Securities and Exchange Act of 1934 in a timely fashion. The Company is
seeking additional working capital through debt and/or equity offerings,
which will be used for the above-described purposes and to market and further
develop the M2Direct technology once the bankruptcy proceedings have been
resolved.
F-15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
Effective June 22, 2000, Deucalion Research, Inc. ("Deucalion") was
merged into its wholly owned Delaware subsidiary in a
reincorporation/recapitalization merger which, effected a one-for-6,800
reverse stock split, reduced the authorized capital of the Company from
1,500,000,000 shares to 30,000,000 shares, increased the par value of
the Company's common stock from $.0001 to $.01 per share, and
authorized the Board of Directors to issue up to 10,000,000 shares of
blank check preferred stock.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On June 1, 2000, Deucalion held a special meeting of its stockholders
to consider and vote upon the reincorporation/recapitalization merger
of Deucalion with and into its wholly owned Delaware subsidiary,
Digital Fuel, Inc. ("Special Meeting"), as described in the Schedule
14C Information Statement filed with the Securities and Exchange
Commission on May 9, 2000 and incorporated herein by reference.
998,000,000 shares were voted in favor of the reincorporation/
recapitalization merger representing approximately 66.9% of the shares
of common stock entitled to vote at the meeting. Because the principal
stockholders of the Company controlled enough shares to approve the
transaction, no other votes were solicited and there were no votes
against the proposal, no votes withheld, no broker non-votes and no
abstentions. The effect of the transaction approved at the Special
Meeting includes: changing the name of the Company from Deucalion
Research, Inc. to Digital Fuel, Inc., effecting a one-for-6,800 reverse
stock split, reducing the authorized capital of the Company from
1,500,000,000 shares to 30,000,000 shares, increasing the par value of
the Company's common stock from $.0001 to $.01 per share, and
authorizing the Board of Directors to issue up to 10,000,000 shares of
blank check preferred stock.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Description:
15 Letter on unaudited interim financial information (see
Independent Accountants' Report included herein).
27 Financial data schedule.
(b) The Company filed no reports on Form 8-K during the quarter covered by
this report.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGITAL FUEL, INC.
(Registrant)
By: /s/ Michael R. Farley By: /s/ Forrest L. Metz
--------------------- -------------------
Michael R. Farley, Forrest L. Metz, President
Chief Executive Officer and Chief Financial Officer
Date: November 7, 2000
F-17
