U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 Commission file number 1-12350 FuelNation Inc. ---------------------------------------------- (Name of Small Business Issuer in its Charter) Florida 65-0827283 ------------------------------- ---------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 4121 SW 47th Ave., Suite 1301 Davie, Florida ---------------------------------------- (Address of Principal Executive Offices) 33314 (Zip Code) (Former Address of Principal Executive Offices) (954) 587-3775 (Issuer's Telephone Number) Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value $.01 per share (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] The issuer's revenue for its most recent fiscal year was $0 The aggregate market value of the common stock held by non-affiliates of the issuer, 1,576,345 Shares, as of December 24, 2004, was approximately $6,935,918, based on the closing bid of $4.40 for the issuer's common stock as reported on the Pink Sheets. Shares of common stock held by each director, each officer named in Item 9, and each person who owns 10% or more of the outstanding common stock have been excluded from this calculation in that such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily conclusive. As of December 24, 2004, the issuer had 2,624,165 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE - NONE Transitional Small Business Disclosure Format (Check one): YES [ ] NO [X] Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12-b-2 of the Securities Exchange Act of 1934 YES [ ] NO [X] TABLE OF CONTENTS FORM 10-KSB ANNUAL REPORT FUELNATION INC. PAGE ---- Facing Page Index PART I Item 1. Description of Business.......................................... 4 Item 2. Description of Property.......................................... 9 Item 3. Legal Proceedings................................................ 9 Item 4. Submission of Matters to a Vote of Security Holders............................................. 9 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............................. 9 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 12 Item 7 Financial Statements............................................. 17 Item 8. Changes in and Disagreements on Accounting and Financial Disclosure..................................... 18 Item 8A. Controls and Procedures ........................................ 18 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons, Compliance with Section 16(a) of the Exchange Act............................ 19 Item 10. Executive Compensation........................................... 20 Item 11. Security Ownership of Certain Beneficial Owners and Management........................................ 23 Item 12. Certain Relationships and Related Transactions................................................. 24 PART IV Item 13. Exhibits and Reports of Form 8-K................................. 27 Item 14. Principal Accountant Fees and Services........................... 28 SIGNATURES.................................................................. 29 1 All share numbers in this Report have been adjusted for the 1-150 reverse stock split effected January 27, 2003. CAUTION CONCERNING FORWARD-LOOKING STATEMENTS The following discussion should be read in conjunction with our audited Financial Statements and notes thereto included herein. Certain statements in this document are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are subject to the safe harbor provisions of this legislation. Words such as "expects," "intends," "plans," "projects," "believes," "estimates," "will" and similar expressions typically identify such forward-looking statements. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Even though we believe our expectations regarding future events are based on reasonable assumptions, forward-looking statements are not guarantees of future performance. Important factors that could cause actual results to differ materially from those contained in our forward-looking statements include, among others, changes in: . Industry-wide petroleum margins; . Construction materials and labor, availability of underground and above Ground petroleum storage, dispensing and transportation equipment; . Petroleum and other raw material costs, the cost of transportation of petroleum, embargoes, industry expenditures for the discovery and production of crude oil, military conflicts between, or internal instability in, one or more oil-producing countries, governmental actions, and other disruptions of our ability to obtain refined petroleum products; . Market volatility due to world and regional events; . Availability and cost of debt and equity financing; . Our ability to service our existing indebtedness; . Our ability to raise additional capital, obtain debt financing, or generate sufficient revenues to fund our operating and development plan; . Changes in Russian and Venezuelan law, currency regulations, and taxation . Labor relations; . U.S. and world economic conditions; . Our success in completing development and exploration activities and political stability in Russia and Venezuela; . Our present company structure; . Our accumulated deficit and tax obligation; . Supply and demand for refined petroleum products; . Actions taken by competitors which may include both pricing and expansion or retirement of fuel supply capacity; . Civil, criminal, regulatory or administrative actions, claims or proceedings and regulations dealing with protection of the environment, including refined petroleum product composition and characteristics; . Acts of war or terrorism; 2 . Ability to purchase, transport and sell refined petroleum products And lubricants; . Other unpredictable or unknown factors not discussed. Readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements included in this report are made only as of the date of this report and we undertake no obligation to publicly update these forward-looking statements to reflect new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events might or might not occur. We cannot assure you that projected results or events will be achieved. SUMMARY Description of Development Stage Activities - FuelNation, Inc. [the "Company" or "FuelNation"], a Florida corporation, located in Davie, Florida has been in the development stage since its reorganization on October 13, 2000. The Company has continuously worked on plans to build travel centers from 2000 to the present, initially in the state of Florida, followed by additional locations in other key states. Getting the approvals and permitting for the first couple of travel centers are very capital intensive and time consuming. In addition, the Company has also been engaged in the development of providing real-time e-commerce communications in the petroleum marketing and energy services industry from 2000 to 2003. Currently the real-time-e-commerce has been re-prioritized with generating income from oil trading in order to self fund the real-time e-commerce development from the projected profits of the oil trading. Extensive reorganizing and restructuring, as well as, seeking business procurement opportunities have taken place to keep the company as a going concern and to execute our plan of operation. FuelNation Inc., through its newly established, wholly owned subsidiary, Leman Energy Trading, Inc., a Panamanian Corporation, is engaged in oil and gas wholesale marketing of unbranded petroleum transportation fuels and crude oil trading in Western Siberia, Russia; Middle East and Southeast Asia. In this regard, on May 28, 2004, FuelNation entered into a Frame Agreement for (1) Establishment of Relationship and Procedure for Agreeing Sale Contracts; and (2) Grant of Exclusive Rights to Distribute Petroleum Products And/Or Petrochemicals in the United States and Europe (the "Frame Agreement") with Yugra Holding, a Russian joint stock company, in the business of the exploration, extraction, refinement and distribution of petroleum products and petrochemicals in Russia. The Frame Agreement provides a basis and framework for the subsequent petroleum product or petrochemical sale agreements during the Frame Agreement. The initial term of the Frame Agreement is five years and renewable for an additional five years at the option of FuelNation. As additional inducement for Yugra Holding, FuelNation issued a Preferred Series A stock certificate to Yugra Holding, that will be earned equally over the term of the contract that is equivalent to 5% (five percent) of the issued and outstanding shares of FuelNation at the signing of the agreement when earned over the term of the agreement. Further, on May 28, 2004, FuelNation entered into a Contract with Yugra Holdings for delivery of 500,000 MT of gas oil over the 12 months commencing July 2004. The total value of the Contract is approximately $163,500,000. Subsequently, after signing the delivery contract, due to the banks restrictions on disclosures and reporting for multiple foreign entities, both Yugra Holding and FuelNation had difficulty providing for the banking of the contract at our local banks. We therefore cancelled the existing contract, established a wholly owned subsidiary, Leman Energy Trading, Inc., a Panamanian Corporation and opened a bank account and credit facility for oil trading in Geneva, Switzerland. In order to be vertically integrated in the oil trading, and being able to take title to oil contracts in large quantities, the Company has also engaged the expertise of a world class Oil Trader to manage this operation and our global oil trading activities which will be based in Geneva, Switzerland. In this regard, financing is in place for all the fuel and crude oil products that will be purchased by our European operations. These measures have enabled the Company to purchase whatever available supply it can locate and profitably acquire. The Company's new Senior Oil Trader, Mr. Hammed Yaghoobi, will be managing European operations. Finally, an agreement has been reached for an initial $500 million USD of existing oil contracts to be purchased through our European subsidiary, thus providing immediate cash flow to the Company. As additional inducement for the oil trader to manage and transact business through Leman Energy Trading, Inc., FuelNation issued a Preferred Series A stock certificate to the oil trader, that will be earned equally over five years that is equivalent to 5% (five percent) of the issued and outstanding shares of FuelNation at the signing of the agreement when earned over the term of the agreement. 3 FuelNation Inc., in addition, to the oil and gas wholesale marketing, is in the final stages of planning to build and develop a portfolio of real estate assets across the United States using our concept of the "Super Store" of Travel Centers. Thus far all of the investment capital have been provided by Gerald A. Brauser and his company Brauser Real Estate, LLC. Tentatively the development of the project will be managed by Gerald A. Brauser who has established his real estate career in 1955 as a Real Estate Management and Development Firm. Throughout the 48 plus years history, the firm has been credited with a number of notable accomplishments and a real estate portfolio exceeding $150 million. Gerald A. Brauser's growing list of properties ranges in size from 7,200 to over 320,000 square feet in New York and Florida. At the time of filing this report, Mr. Brauser's total investment nears $3,000,000 USD on behalf of the Travel Center project for approvals and pre-closing expenses. The advances include $250,000 in earnest deposit on the land, $600,000 pre-closing advance to seller of the land, and over an additional $2,250,000 for architectural, engineering, design, renderings, loan commitments, business expense and legal, etc. Currently, FuelNation does not have any formal agreement signed with Mr. Brauser for assumption of his contract or to jointly develop/operate the property. FuelNation has worked directly with the architects and engineers and advanced funds from Mr. Brauser for their services and work product. Mr. Brauser has verbally offered to allow FuelNation to participate in the form of leasing the property for fuel supply and operation or partnering by providing a loan on the construction. In this regard, our director, Shaikh Isa Mohammed Isa Alkhalifa, individually signed for a loan in the amount of $51,500,000 and received a loan commitment to fund the construction of the project, subject to standard loan conditions and we are reviewing the offer. Shaikh Isa has also signed for a credit enhancement that will guarantee a bond issuance in the total amount of $100 million dollars, in increments of $25 million dollars. Both loan offers and the possibility for leasing are being analyzed by the board of directors and Mr. Brauser for a final decision. PART I ITEM 1. DESCRIPTION OF BUSINESS STRUCTURE OF FUELNATION FuelNation Inc, through our 100 % wholly owned subsidiary, Leman Energy Trading, Inc., a Panamanian Corporation registered in the Panamanian Registry Public Deed No. 9421 on August 31, 2004. is engaged in oil and gas wholesale marketing of unbranded petroleum transportation fuels and crude oil trading in Western Siberia, Russia; Middle East and Southeast Asia. Currently, our director of FuelNation, Shaikh Isa Mohammed Isa Alkhalifa, and our manager of Leman Energy Trading, Inc., Hammed Yaghoobi, have been contacting ministries of oil and major crude oil suppliers in Western Siberia, Russia; Middle East and Southeast Asia to acquire crude oil and refined products. Credit facilities are in place to acquire products and multiple offers are being sent to suppliers for purchases. In this regard, we are prepared to acquire quantities of crude oil of 75,000 to 250,000 barrels per day and refined petroleum products of 50,000 to 100,000 metric tons per month. FuelNation Inc., in addition to the oil and gas wholesale marketing, is in the final stages of our planning to build and develop a portfolio of real estate assets with our concept of the "Super Store" of Travel Centers located across The United States. In this regard, our director, Shaikh Isa Mohammed Isa Alkhalifa, individually signed for a loan in the amount of $51,500,000 and received a loan commitment to fund the construction of the project, subject to standard loan conditions and we are reviewing the offer. Shaikh Isa has also signed for a credit enhancement that will guarantee a bond issuance in the total amount of $100 million dollars, in increments of $25 million dollars. The Travel Center operations and ownership will be owned in a wholly owned subsidiary of FuelNation Inc. FuelNation Inc. will be establishing a Russian Joint Stock Company in Moscow, Russia to take title to purchases of crude oil and refined petroleum products as part of our oil and fuels trading business. A glossary of certain oil and gas terms used in this report is found at "DESCRIPTION OF PROPERTY- Glossary of Terms." We are subject to the informational requirements of the Securities Exchange Act of 1934 and, in accordance with the Exchange Act, file annual, quarterly, and current reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. You may read and copy any documents filed by us at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. Our SEC filings are also available to the public through the SEC's internet site at www.sec.gov. Our website address is www.FuelNation.com. We make available on this website under "Investor Relations", free of charge, our annual reports on Form 10-KSB, our quarterly reports on Form 10-QSB, our current reports on Form 8-K, Forms 3, 4 4 and 5 filed via Edgar by our directors and executive officers and various other SEC filings, including amendments to these reports, as soon as reasonably practicable after we electronically file or furnish such reports to the SEC. The information on our website, or on the site of our third-party service provider, is not incorporated by reference into this report. Our principal executive offices are located at 4121 SW 47th avenue, Suite 1301, Davie, Florida 33314, and our telephone number is (954) 587-3775 FUELNATION HISTORY FuelNation, Inc. was organized under the laws of the State of Florida on July 6, 1993 under the name International Pizza Corporation. On October 30, 1995, the Company changed its name to QPQ Corporation, and on November 4, 1997, changed its name to Regenesis Holdings, Inc. On October 17, 2000, the Company changed its name to FuelNation, Inc. On January 27, 2003, the Company effected a 150:1 reverse split of its common stock. At the same time, the Company amended its certificate of incorporation authorizing it to issue 105,000,000 shares of capital stock, of which 5,000,000 shares are classified as preferred stock, par value of $.01 per share, issuable in one or more series and 100,000,000 shares are classified as common stock, par value $.01. EMPLOYEES. FuelNation currently has two full time employees. We also utilize the services of independent contractors on an as-needed basis. Leman Energy Trading, Inc. currently employs one person at its representative office in Geneva, Switzerland. Leman Energy Trading, Inc. also uses independent contractors on as needed basis. RISK FACTORS We Have Been in the Development Stage Since October 2000. We have generated no revenues and have a deficit accumulated during our development stage. We expect to incur additional losses during the time period we are reviewing and negotiating potential opportunities to grow our services and products. It is anticipated that we will, in all likelihood, sustain operating expenses without corresponding revenues, at least until 2005, of which there can be no assurance. This may result in our incurring a net operating loss which will increase continuously until we achieve profitability. Revenues and profits, if any, will depend upon various factors, including market acceptance of our products, market awareness and general economic conditions. There is no assurance that we will achieve our expansion goals and the failure to achieve such goals would have an adverse impact on us. We are entering a new business in which we have no experience. FuelNation has never engaged in oil and gas wholesale marketing and trading. Accordingly, we are unable to guarantee success and there is no assurance that we can succeed in this new business. We Have Not Paid Dividends on our Common Stock and do not Anticipate the Payment of Dividends in the Future. No dividends have been paid on our shares of Common Stock and management does not anticipate the payment of cash dividends in the foreseeable future. If operations become profitable, it is anticipated that, for the foreseeable future, any income received there from would be devoted to future operations and that cash dividends would not be paid to shareholders. Issuance of Future Shares and the conversion of preferred shares to common shares May Dilute Investors Share Value. Our Articles of Incorporation, as amended, authorizes the issuance of 100,000,000 Common Shares, $.01 par value per share, and 5,000,000 Preferred Shares, $.01 par value per share. As of the date of this Report, there are 2,294,493 shares of Common Stock issued and outstanding and 23,454 Preferred shares that can be converted into common shares at a fixed percentage of .00255 per preferred share. The future issuance of all or part of the remaining authorized Common or preferred Stock may result in substantial dilution in the percentage of Common and preferred stock held by our then existing shareholders. Moreover, any Common Stock issued in the future may be valued on an arbitrary basis by our Board of Directors. The issuance of shares for future services or acquisitions or other corporate actions may have the effect of diluting the value of the shares held by investors, and might have an adverse effect on our trading market. In addition, the preferred shares are non-dilutive and could cause additional dilution to common shareholders when converted to common shares of stock. There is a Limited Market for Our Common Stock. Currently, our Common Stock trades on the Over-the-Counter Pink Sheets. By its nature, the Pink Sheets is a limited market and investors may find it more difficult to dispose of our securities which are owned by them. 5 Our Common Stock is Classified as a "Penny Stock," which has Adverse Effects. The Securities and Exchange Commission has adopted Rule 15g-9, which established the definition of a "penny stock," for purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (i) that a broker or dealer approve a person's account for transactions in penny stocks; and (ii) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must (i) obtain financial information and investment experience and objectives of the person; and (ii) make a reasonable determination that the transactions in penny stocks are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the Commission relating to the penny stock market, which, in highlight form, (i) sets forth the basis on which the broker or dealer made the suitability determination; and (ii) that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Disclosure also has to be made about the risks of investing in penny stock in both public offering and in secondary trading, and about commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The foregoing required penny stock restrictions currently apply to our Common Stock. If our Common Stock is ever approved for listing on a national stock exchange, it would have certain price and volume information provided on a current and continuing basis. While it is management's intention to have our Common Stock approved for trading on a national stock exchange in the future, we currently do not qualify under the various listing criteria for such listing. There can be no assurances that any of our securities will qualify for exemption from these restrictions in the future. Because our Common Stock is subject to the rules on penny stocks, the market liquidity for our Common Stock has been severely adversely affected. COMPETITION Many companies that are competitors have longer operating histories, substantially greater financial, technical, marketing or other resources, or greater name recognition than we do. Our competitors may be able to respond more quickly than we can to new or emerging technologies and changes in customer requirements. Competition could seriously impede our ability to sell additional services on terms favorable to us. Our potential competitors may develop and market new technologies that render our existing or future services obsolete, unmarketable or less competitive. Our potential competitors may establish or strengthen cooperative relationships with our current or future channel partners, thereby limiting our ability to sell services through these channels. Competitive pressures could reduce our market share or require the reduction of the prices of our services, either of which could materially and adversely affect our business, results of operations or financial condition. REGULATIONS GOVERNING RUSSIAN JOINT STOCK COMPANIES Russian joint stock companies are corporate entities with limited liability similar to corporations formed under United States laws. Shareholders of Russian joint stock companies generally are not liable for debts and obligations of the company. However, shareholders of a bankrupt joint stock company may be held liable for debts and obligations of the bankrupt company if they have exercised their authority to undertake an action knowing that bankruptcy would be the result of their actions. In closed joint stock companies, i.e. companies with a limited number of shareholders, any transfer of shares by a shareholder to a third party is subject to the pre-emptive right of the other shareholders to acquire such shares at the price offered to a third party. Under Russian law, a simple majority of voting shares is sufficient to control adoption of most resolutions. Resolutions concerning amendment of the company charter, reorganizations (including mergers), liquidation, any increase in authorized shares, or certain "large" transactions require the approval of the shareholders holding 75% of the outstanding shares. A Russian joint stock company has no obligation to pay dividends to the holders of common shares. Any dividends paid to shareholders must be recommended by the board of directors and then approved by a majority vote at the general meeting of shareholders. Dividends may be paid every quarter of a year. 6 ENVIRONMENTAL REGULATION. The government of the Russian Federations, Ministry of Natural Resources, and other agencies establish special rules, restrictions and standards for enterprises conducting activities affecting the environment. The general principle of Russian environmental law is that any environmental damage must be fully compensated. Under certain circumstances, top officers of the entity causing substantial environmental damage may be subject to criminal liability. RUSSIAN TAXATION. As a Russian resident entity, a company is subject to all applicable Russian taxes, many of which currently impose a significant burden on profits. The most significant Russian taxes and duties affecting a company include: (i) 20% value added tax (established pursuant to Chapter 21 of the Tax Code of Russia), applicable only to domestic sale of goods in Russia and the Ukraine. Starting from 1/1/2004 VAT was reduced to 18%. No value added tax is payable on goods exported to the West from Russia; (ii) 20 to 24% profit tax which includes 6% federal profit tax, 12 to 16% regional profit tax and 2% local tax (in accordance with Chapter 25 of the Tax Code of Russia). Russian law allows the carry forward and use of losses, subject to limitations; (iii) Income tax on dividends payable to a Company's shareholders. The tax must be withheld by a Company from the amount distributed to each shareholder. The current rate of tax on dividends payable to corporate foreign shareholders is 15%. However, dividends payable to a foreign owned Company, if a United States resident company, are subject to the regulations of the United States - Russia's tax treaty limits the tax on dividends payable to a foreign owned Company to 5% (as long as a Company's holds more than a 10% interest in the Russian Company); (iv) Tax on production of minerals applicable to all subsoil users producing minerals, including crude oil. For the period ending on December 31, 2004, the tax is temporarily established at 340 rubles (ca. USD 11.50) per metric ton produced by the taxpayer multiplied by a factor (F) calculated pursuant to the formula: F = (U-8) x R/252 where: U - means the average market price of Urals blend crude oil (in dollars per barrel) during the relevant tax period; R - means the average ruble for dollar exchange rate quoted by the Central Bank of Russia for the relevant tax period. After expiration of the temporary tax rate period, the tax will apply at the rate of 16.5% of the value of the oil produced by the taxpayer; (v) Unified social tax (established pursuant to Chapter 24 of the Tax Code of Russia) at the rate of up to 35.6% of the payroll; (vi) Transport tax (established pursuant to Chapter 28 of the Tax Code of Russia) payable by owners of motor vehicles at the rate established by regional authorities based on the type and capacity of the vehicle. The maximum amount of tax payable by an owner of a motor car per year is RUR 150 (ca. USD 5.1) per horsepower; (vii) Oil export duty, currently in the amount of USD 33.9 per ton of crude oil being exported, increasing to USD 35.2 in 2004; (viii) Regional property tax payable annually at 2.2% of the value of net assets of the entity. The Russian tax system currently is undergoing a major reorganization. New tax laws including those setting forth rules for application of the value-added tax, profit tax, and tax on the production of minerals were enacted within the last four years. The cost of legal and accounting advice to keep up with changes in 7 the Russian tax laws may be significant and penalties for violations, even inadvertent ones, may be steep. If revisions impose confiscatory taxes, our profitability will be adversely affected. Credit Losses. Our petroleum marketing businesses will be extending secured credit to most of their customers. We recognize that extending credit and setting the appropriate reserves for receivables is largely a subjective decision based on knowledge of the customer and the industry. Active management of our credit risk is essential to our success. We will be insuring our receivables with Sovereign Risk insurance, when applicable or available. Diversification of credit risk is difficult since the petroleum marketing business will be our sole income for approximately the next twelve months of operations Our sales executives and their respective staff will meet regularly to evaluate credit exposure, in the aggregate and by individual credit. Credit exposure also includes the amount of estimated unbilled sales. Our bank has offered to provide credit risk insurance and commodity price hedging insurance, when applicable and available. World oil prices have been very volatile over the last several years, and since fuel costs represent a significant part of some companies operating expenses, the volatility in fuel prices can adversely affect our customers' business, and consequently our credit losses. We may also incur credit losses due to other causes, including deteriorating conditions in the world economy, or in the shipping, and continued conflicts and instability in the Middle East, Asia and Latin America, as well as potential future terrorist activities and possible military retaliation. Any credit losses, if significant, will have a material adverse effect on our financial position and results of operations. Senior Management. Our ability to maintain our competitive position is dependent largely on the services of our senior management and professional team. If we are unable to retain the existing senior management and professional personnel, or to attract other qualified senior management and professional personnel, our businesses will be adversely affected. Loan agreements and demand notes. We are a party to certain loan agreements and demand notes from time to time. These loan agreements and demand notes impose certain operating and financial restrictions on us. Our failure to comply with obligations under these loan agreements and demand notes, including meeting certain financial ratios, could result in an event of default. An event of default, if not cured or waived, would permit acceleration of any outstanding indebtedness under the agreement, and impair our ability to receive advances and issue letters of credit, and may have a material adverse effect on us. Market Risks. Our fuel services are provided through relationships with the large independent oil suppliers and government owned oil companies. We could be adversely affected by industry consolidation due to increased merger activity in the petroleum and transportation business. We could also be adversely affected because of increased competition from the larger oil companies who may choose to directly market to smaller companies or to provide less advantageous credit and price terms to us. Moreover, a rapid and sustained increase in fuel prices could affect the credit limits extended to us by our suppliers, potentially impacting our liquidity and profitability. Conversely, a rapid decline in fuel prices could adversely affect our profitability because of any inventory that may be held by us in pipelines or during delivery. We conduct the vast majority of our business transactions in U.S. dollars. However, in certain markets, primarily in Europe, payments are sometimes denominated in local currency. This subjects us to foreign currency exchange risk, which may adversely affect our results of operations and financial condition. We seek to minimize the risks from currency exchange rate fluctuations through our regular operating and financing activities. REGULATION The principal laws and regulations affecting our businesses are as follows: Environmental Regulations. Our activities, including discontinued operations, are subject to substantial regulation by federal, state and local government agencies, both in and outside the United States, which enforce laws and regulations governing the transportation, sale, storage and disposal of fuel and the collection, transportation, processing, storage, use and disposal of hazardous substances and wastes, including waste oil and petroleum products. For example, United States Federal and state environmental laws applicable to us include statutes that: (i) allocate the cost of remedying contamination among specifically identified parties, and prevent future contamination; (ii) impose national ambient standards and, in some cases, emission standards, for air pollutants which present a risk to public health or welfare; (iii) govern the management, treatment, storage and disposal of hazardous wastes; and (iv) regulate the discharge of pollutants into waterways. International treaties also prohibit the discharge of petroleum products at sea. The penalties for 8 violations of environmental laws include injunctive relief, recovery of damages for injury to air, water or property, and fines for non-compliance. See "Risk Factors," above. TRADEMARKS/PATENTS We received a trademark registration for the name FUELNATION from United States Patent and Trademark Office), Serial Number 76056889. We received a Service Mark registration for the R2R (Rack 2 Retail) service name with United States Patent and Trademark Office, Serial Number 76171137. GOVERNMENT REGULATIONS We are not subject to any extraordinary governmental regulations relating to our business. ITEM 2. DESCRIPTION OF PROPERTY In March 2002, we moved our principal place of business to 4121 SW 47th Ave., Suite 1301, Davie, Florida. This location consists of approximately 700 square feet of executive office space and approximately 500 square feet of warehouse and storage space. FuelNation Group, LLC, a company 100% owned by the current CEO, signed a 3 year lease renewal on July 8, 2004, and sub leases to FuelNation Inc. for the same terms and conditions. This lease obligates the company to a base monthly rent of $1,184.50, year one, $1,220.04, Year two, $1,256.64 year three, plus tax pursuant to a written lease which expires in August 31, 2007. We believe that this new space is adequately sufficient to meet our future growth demands. Furthermore, we believe that there exists sufficient available office space and that we could effectively lease additional space within the immediate area, if so required. Our data center in the United States is located at leased facilities at Echosat in Lexington, Kentucky. A data center is a facility containing servers, modem banks, network circuits and other physical equipment necessary to connect users to the Internet. The data center has multiple levels of redundant connectivity to the Internet, back-up power, fire suppression, seismic reinforcement and security surveillance 24 hours a day, 7 days a week. The current base monthly rent is $2,000 per month, on a month to month basis. ITEM 3. LEGAL PROCEEDINGS FuelNation currently is not a party to any material legal proceedings. (See additional information under the heading "Subsequent events" in Note 16 of the Notes to Financial Statements.) ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the year ended December 31, 2003 the following were approved by a majority of our shareholders by written consent: 1. Reverse stock split. We have approved a 150 to 1 reverse stock split of the outstanding common stock. 2. Amendment to Certificate of Incorporation: We have approved an amendment to our Certificate of Incorporation that, when effective, will change our authorized capital stock to 100,000,000 shares of common stock and 5,000,000 shares of preferred stock. The Certificate of Amendment to be filed with the Secretary of State of the State of Florida is attached to this document as Exhibit A. 3. Stock Option Plan. Our 2002 Stock Option Plan has been approved. The 2002 Plan is attached to this document as Exhibit B. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Common stock. FuelNation Inc's common stock is currently traded on the Pink Sheets under the symbol "FLNA." As of December 24, 2004 FuelNation Inc.'s common stock was held by 604 stockholders of record and an estimated 2,000 additional 9 stockholders whose shares were held for them in street name or nominee accounts. Set forth below are the high and low closing sale prices per share of our common stock for each quarter of 2003 and 2002, as reported by NASDAQ. These quotations reflect prices between dealers, do not include retail mark-ups, markdowns, commissions and may not necessarily represent actual transactions. All share numbers in this Report have been adjusted for the 1-150 reverse stock split effective January 27, 2003. Sales Price per share Quarter Ended High Low ------------- -------- -------- First Quarter ended 3/31/03 $ 0.300 $ 0.300 Second Quarter ended 6/30/03 $ 0.300 $ 0.300 Third Quarter ended 9/30/03 $ 0.300 $ 0.300 Fourth Quarter ended 12/31/03 $ 8.500 $ 8.500 First Quarter ended 3/31/02 $ 10.500 $ 9.150 Second Quarter ended 6/30/02 $ 3.300 $ 2.700 Third Quarter ended 9/30/02 $ 0.570 $ 0.480 Fourth Quarter ended 12/31/02 $ 0.555 $ .465 The transfer agent for our common stock is Continental Stock Transfer and Trust Company, 17 Battery Place, 8th Floor, New York, New York 10004, telephone (212) 509-4000. We have never paid cash dividends on our common stock. We do not anticipate paying cash dividends on our common stock in the foreseeable future. We currently intend to retain our future earnings to finance the improvement and expansion of our business. Future dividends on our common stock, if any, will be at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements and surplus, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. SALES OF UNREGISTERED SECURITIES In June 2001, we issued 30,000 shares of our common stock as consideration for equipment deposits and consulting services valued at $1,442,500. Additionally, in April 2001, Mr. Salmonson, then our CEO, transferred 17,917 shares of our common stock owned by him valued at $1,209,375 to the same entity. In December 2001, we entered into an agreement (the "Put Option") to repurchase all such stock at a price of $97.50 per share (an aggregate of $4,671,875) at the option of the holders. We do not expect the Put Option to be exercised in the near term and have valued them at the fair market value of the common stock when issued ($2,651,875). Mr. Salmonson has agreed to accept shares of common stock equal to the number of common shares he transferred to pay these expenses. In December 2001, we entered into an agreement (the "Put Agreement") to repurchase 3,790 and 5,401 shares of our common stock from two separate groups of individuals at a price of $97.50 per share (an aggregate of $896,098) at the option of the holders. Such individuals had purchased their stock through our Regulation D offering in December 2000 at the same price of $97.50 as the Put Agreement. The amount of $896,098 has been reclassified from stockholders' equity to common stock subject to repurchase at December 31, 2002. In February 2002, Christopher Salmonson, exercised options to purchase 8,352 shares of our common stock at an exercise price of $1.50 per share. The Company incurred a non-cash charge to operations of $85,187 and the proceeds from the exercise of $12,528 were utilized to offset the due to affiliate. In May 2002, options to purchase 111,722 shares of Company common stock were granted to the CEO and employees of the Company at an option price of $1.50 per share as consideration for accrued compensation owed .The relevant shares were registered as part of an S-8 registration statement filed with the SEC. The Company incurred a non-cash charge to operations of $370,373. These options were exercised in May 2002. During the second quarter of 2002, options to purchase 36,667 shares of our common stock were granted to consultants at an exercise price of $3.00 per 10 share. The options were exercise the second quarter of 2002 for a total exercise price of $110,000. The options were valued at $197,175. The relevant shares were registered as part of an S-8 registration statement filed with the SEC. Three demand notes came due in the months of August and September of 2002 and the Company was unable to extend the term on the notes or make payment on the notes. Restricted common shares owned and pledged by an affiliate, Fuel America, secured the collateral for these demand notes. Loans were advanced to Fuel America, using restricted common shares of FuelNation Inc as collateral. The funds were advanced to FuelNation from the affiliate and treated as a demand note. These amounts are included in due to affiliates in the accompanying financial statements. During August 2002 the Company was required to pay $330,000 on a demand note resulting from a 12-month loan advanced by a group of shareholders of FuelNation Inc. that matured on April 19, 2002. This note was extended until August 2002 while waiting for the note funding to be completed. Since the delay of the note funding the lender group has defaulted against the collateral of 133,333 restricted common shares of FuelNation stock pledged by an affiliate Fuel America. In 2002 the Company has replaced these shares to the affiliate. The collateral has a restrictive legend and is subject to all rules as may be imposed by Rule 144 of the Securities Act of 1933, as amended. The Company has received confirmation and written verification from the lender that the total proceeds they received on the securities satisfied the obligation. During September 2002, the Company was required to pay $65,000 on a 60-day demand note and resulted in the lender, Richard Gladstone, defaulting against the collateral of 26,680 restricted common shares of FuelNation stock pledged by an affiliate Fuel America. In 2002 the Company has replaced these shares to the affiliate. The collateral has a restrictive legend and is subject to all rules as may be imposed by Rule 144 of the Securities Act of 1933, as amended. The Company has received confirmation and written verification from the lender that the total proceeds they received on the securities satisfied the obligation. During September 2002 the Company was required to pay $100,000 on a 60-day demand note, and resulted in the lender, defaulting against the collateral of 175,717 restricted common shares of FuelNation stock pledged by an affiliate Fuel America. In 2002 the Company has replaced these shares to the affiliate. The collateral has a restrictive legend and is subject to all rules as may be imposed by Rule 144 of the Securities Act of 1933, as amended. The Company has received confirmation and written verification from the lender that the total proceeds they received on the securities satisfied the obligation. During the fourth quarter of 2002, 23,334 shares of our common stock were issued to William C. Schlecht a director and secretary of the Company in exchange for additional service's incurred by him in his capacity as director and Secretary of the Company. The value of these shares was $21,000. During the fourth quarter 2002, the Company granted options to purchase 66,667 shares of Company common stock to Mr. Salmonson, for Consulting Services at an exercise price of $.82 per share. The Company incurred a non-cash charge to operations of $38,251, the proceeds upon exercise reduced the amount due to affiliate by $54,667. In December 2002, the Company granted options to purchase 66,667 shares of common stock to the then new CEO and President, Mr. Brodzki, pursuant to the terms and conditions of his employment contract. The Company incurred a non-cash charge to operations of $40,000. During the fourth quarter of 2002, 156,667 shares of our common stock were issued to Shaikh Isa Mohammed Isa Al-Khalifa a director of the Company as payment for his corporate guarantee and payment of bills in Bahrain. The value of these shares was $94,000. During 2002, 65,555 shares of common stock were issued to various individuals for consulting and printing services, which resulted in a non-cash charge to operations of $307,000. During 2002, the Company granted options to purchase 124,665 shares of common stock to various individuals for consulting services, the various consultants had an exercise price ranging from $0.41 to $1.50 per share. The Company incurred a non-cash charge to operations of $213,387. During 2002, the Company issued 335,730 shares of common stock to Mr. Salmonson in replacement of shares pledged by him as collateral for a third party loan to an affiliated entity. These funds were advanced to the Company by the affiliated entity. The Company was unable to repay the advance causing the affiliate to default the collateralized shares to be surrendered. In addition, the Company granted options to purchase 80,000 shares of common stock to the affiliate as partial repayment of advances made by the affiliate to fund the Company's operations. These options were exercised in 2002 at a price of $1.50 per share. The value of the replacement shares amounted to $201,438 and the value of the options plus the proceeds upon exercise approximated $234,000 and were offset against the amount due to affiliate. 11 On January 27,2003, the Company affected a 150:1 reverse split of its common stock. At the same time, the Company amended its certificate of incorporation authorizing it to issue 105,000,000 shares of capital stock, of which 5,000,000 shares are classified as preferred stock, par value of $.01 per share, issuable in one or more series and 100,000,000 shares are classified as common stock, par value $.01. All periods presented have been restated to reflect the 150:1 reverse split of common stock. In February 2003, an additional 23,334 shares of common stock, valued at $14,900 were issued to a consultant to finalize a settlement of a civil suit. In October 2003, the Company issued 376 shares of preferred stock in exchange for the release of an agreement the Company entered into to repurchase 3,790 shares of common stock valued at $396,500. In December 2003, 25 shares of preferred stock was issued to a former convertible note holder as full release to the Company of all obligations and liabilities attached to the convertible note. In October 2003, 409 shares of preferred stock was issued to three (3) individual convertible note holders in exchange for release to the Company of all obligations and liabilities attached to the convertible notes. In December 2003, 164 shares of preferred stock was issued for a subscription of $105,000 and replacement of 53,800 shares of common stock. The subscription receivable was still outstanding as of December 31, 2003. In December 2003, 1,064 shares of preferred stock was issued for $180,200 and replacement of 61,849 shares of common stock. In December 2003, 162 shares of preferred stock was issued as a replacement of 6,995 shares of common stock owned by existing shareholders. In December 2003, Mr. Salmonson, was issued 2,800 shares of preferred stock as consideration under the non-dilution clause in his employment contract. As of December 2003, 134,143 shares of common stock owned by existing shareholders were replaced by the Company by virtue of various settlement and subscription agreements. The 134,143 shares of common stock have subsequently been subscribed for by a unrelated third party for $1,340,900. The $1,340,900 subscription receivable has been shown as a contra equity account in the financial statements. In December 2003, 8,000 preferred shares were issued to Alkhalifa Petroleum Corporation. These shares were issued in payment for Shaikh Isa Alkhalifa guaranteeing a credit facility for the purchase of petroleum products. All of the above shares were issued pursuant to an exemption provided by Section 4(2) under the Securities Act of 1933. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION The following discussion and analysis of our plan of operation should be read in conjunction with the financial statements and the related notes. This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors," "Business" and elsewhere in this document. We have identified certain policies as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. See the section entitled "Critical Accounting Policies" at the end of this discussion. 12 OVERVIEW FuelNation Inc. is an independent oil and gas marketing company whose current focus is Western Siberia, Russia; Middle East and Southeast Asia. In 2003, FuelNation achieved several milestones in its finances and operations, as well as faced some challenges. Highlights include the following: We have been able to assemble the management to assist in executing the oil trading in Geneva, Switzerland and we have also completed the agreement to buy crude oil in Russia and have it refined for export. An even more important factor in executing our acquisition strategy is the Company's ability to attract the capital necessary to acquire and develop its acquisition targets. In this regard, the Company has been working to develop strong relationships with commercial, primarily European banks, which are active in Russia and the former Soviet Union. FuelNation has traditionally financed its operations by raising equity or borrowing from affiliates, but it is the opinion of its management that the acquisition of crude oil and refined petroleum products is best financed with a combination of debt and equity. This approach is less dilutive to existing shareholders and offers the Company greater flexibility. Based on its discussions with various lending institutions, FuelNation management is confident of its ability to secure bank financing for crude oil and refined petroleum products. Most acquisitions will require FuelNation to provide at least some equity financing, The Company needs to engage and maintain an active investor relations program and is also in frequent contact with investment banks, both in the U.S. and abroad, as well as with institutional and industry sources of private capital. 2005 OPERATIONAL AND FINANCIAL OBJECTIVES In 2005, FuelNation intends to continue its efforts to procure crude oil supply contracts and refined petroleum from Western Siberia, Russia; Middle East and Southeast Asia. These contracts will generally range from one to five years in duration and sometimes longer. We anticipate the company can procure contracts that provide quantities of crude oil of 75,000 to 250,000 barrels per day and refined petroleum products of 50,000 to 100,000 metric tons per month and much larger. This procurement of crude oil can provide the company approximately $3,000,000 to $10,000,000 per day of revenues and approximately $22,500 to $75,000 per day in trading profits based on today's oil prices and margins. This procurement of refined petroleum products can provide the company approximately $25,750,000 to $128,750,000 per month of revenues and approximately $100,000 to $500,000 per month in trading profits based on today's oil prices and margins. We also intend to finalize the loan commitment to acquire the travel center property and partner with a developer and management company to oversee and build the project. We currently have identified two management companies and have proposals in front of three major developers. This first location is in the final stages and we have already prepared the way for our second location in central Florida. These travel centers will give us a solid distribution channel for our petroleum products acquired abroad. SOURCES AND USES OF FUNDS To date the Company's primary source of liquidity is cash provided by equity offerings. Capital markets will continue to be utilized in order to maintain the Company's indebtedness at moderate levels to enable the Company to have the necessary financial flexibility to react to future opportunities. The Company's primary needs for cash are for the operation, development, production, exploration and acquisition of oil and gas properties and working capital obligations. RESULTS OF OPERATIONS (Comparison of Results of Operations for the years ended December 31, 2003 and 2002) We generated no revenues during the years ended December 31, 2003 and 2002. It is anticipated that we will be able to generate revenues in 2005 once we finalize our fuel supply agreement and begin delivering fuel to petroleum 13 marketers and end users. In addition, once we finalize the financing and complete the building of Phase One of the travel center we will generate revenues from that facility. Total operating expenses were $ 2,499,117 for the year ended December 31, 2003, compared to $ 4,398,465 for the year ended December 31, 2002. The expenses incurred during the year ended December 31, 2003 arose primarily from salaries and wages, including related payroll expenses ($608,143), legal and professional ($115,348),loss on deposits ($1,022,500), write down of inventory($499,749) and other general and administrative expenses ($79,615). These expenses decreased in 2003 over the same period in 2002, primarily due to impairment loss of technology of $1,581,747, decrease in consulting fees of ($84,879), decrease in non-cash consulting fees ($794,813), and a reduction in the employment of staff to support the related technology and general overhead which resulted in a decrease in non -cash employee compensation of ($495,561)and other general and administrative expenses of (107,046).The decreases were offset by an increase in loss on equipment deposit of ($752,500), loss on application deposit of ($270,000) and write down of inventory of ($499,749). Additionally, we incurred interest expense of $18,030 in 2003 compared with interest expense of $26,687 in 2002. As a result, we incurred a net loss of $2,517,147 for the year ended December 31, 2003, compared to a Net Loss of $4,425,152 for the year ended December 31, 2002. PLAN OF OPERATION Because we have not generated any revenues as of the date of this Report, we hereby submit our Plan of Operation pursuant to the requirements of Regulation SB, promulgated under the Securities Act of 1933, as amended. Our objective is to attain vertical integration to the extent that we have an ownership stake in every phase of an oil sale, from the extraction of oil, to the refining and storage stage, to the shipping stage, and ultimately to the wholesale and retail sale of oil products. We intend to build this vertical integration through strategic partnerships and through strategic joint ventures and acquisitions. Once we achieve the above described vertical integration, we will sign crude oil and refined oil supply contracts and wholesale these shipments for immediate profit and cash flow. We have established the banking credit facility with one of the largest European banking centers for the oil purchasing. We are currently making purchase offers to oil suppliers to acquire long term supply contracts. Our next objective is to build and develop a portfolio of real estate assets with our concept of the "Super Store" of Travel Centers across the United States. We intend to accomplish this goal, grow our business, enhance earnings and improve our return on capital by executing the following strategies, which we believe capitalize on our existing competitive strengths. Growth Through Acquisitions and Discretionary Capital Expenditure Projects. We intend to pursue timely and cost-effective acquisitions of Petroleum Marketers and undertake discretionary capital expenditure projects to improve, upgrade, and potentially expand and automate their distribution. We will pursue opportunities that we believe will be promptly accretive to earnings and improve our return on capital, assuming historic average margins. We believe that the continuing consolidation in our industry, the strategic divestitures by major integrated oil companies will present us with attractive acquisition opportunities. We believe we are well situated to capitalize on these acquisitions and discretionary capital project opportunities. In executing the strategies outlined above, we want to own and operate Travel Centers and Petroleum Marketers, whether they be acquired or supplied in the future, which not only prosper in good market conditions, but are resilient during downturns in the market. We believe this resiliency can be created by, among other things: o being a low-cost operator of safe and reliable petroleum marketing with a continuous focus on controlling cost; o having an inherent cost advantage due to economies of scale, such as the cost advantage which comes from having e-commerce connectivity and centralized processing capabilities; o owning petroleum marketers in strategic geographic locations; and o having the capability to distribute a variety of the fuels required by varying regional fuel specifications. 14 We intend to create an organization in which employees are highly motivated to enhance earnings and improve return on capital. In order to create this motivation, we will adopt a new annual incentive program under which the annual bonus award for every employee in the organization is dependent to a substantial degree upon earnings. The primary parameter for determining bonus awards under the program for our executive officers and our senior level management team members is earnings. The program allows our executive officers and other senior management team members to earn annual bonus awards only if certain predetermined earnings levels are met, and provides them significant bonus opportunities if those levels are exceeded. For the remainder of our employees, earnings will be a substantial factor which determines whether a bonus pool is available for annual rewards. In approving annual awards under the program, the compensation committee of our board of directors will also consider our return on capital, and our environmental, heath and safety performance. DATA CENTERS AND NETWORK ACCESS Our data center in the United States is located at leased facilities at Echosat in Lexington, Kentucky. A data center is a facility containing servers, modem banks, network circuits and other physical equipment necessary to connect users to the Internet. The data center has multiple levels of redundant connectivity to the Internet, back-up power, fire suppression, seismic reinforcement and security surveillance 24 hours a day, 7 days a week. The current base monthly rent is $2,000 per month, on a month to month basis. TRENDS The US fuel retailing market is the largest single market in the world, accounting for 26% of the global market's value in 2002. The market reached a value of $237 billion in 2002, having grown with a compound annual growth rate (CAGR) of 7.9% in the 1998-2002 period. This growth was considerably stronger than that of the global market itself leading to the US market's share of the wider market increasing by 6.3% between 1998 and 2002, accounting for 26% of the global market by the end of this period. Top World Oil Producers, 2003* Country Total Oil Production** (million barrels per day) 1) Saudi Arabia 9.95 2) United States 8.84 3) Russia 8.44 4) Iran 3.87 5) Mexico 3.79 6) China 3.54 7) Norway 3.27 8) Canada 3.11 9) United Arab Emirates 2.66 10) Venezuela 2.58 11) United Kingdom 2.39 12) Kuwait 2.32 13) Nigeria 2.25 *Table includes all countries total oil production exceeding 2 million barrels pre day in 2002. **Total Oil Production includes crude oil, natural gas liquids, condensate, refinery gain, and other liquids. Top World Oil Net Exporters, 2003* Country Net Oil Exports (million barrels per day) 1) Saudi Arabia 8.38 2) Russia 5.81 3) Norway 3.02 4) Iran 2.48 5) United Arab Emirates 2.29 6) Venezuela 2.23 7) Kuwait 2.00 8) Nigeria 1.93 9) Mexico 1.74 10) Algeria 1.64 11) Libya 1.25 *Table includes all countries with net exports exceeding 1 million barrels per day in 2002. This information is provided from the Energy Information Association. http://www.eia.doe.gov/emeu/cabs/topworldtables1_2.html 15 These trends taken together create a picture of opportunity for our future growth. We anticipate that the vertical integration strategy will bode well for our future, as activity along the entire value chain should increase not just in the domestic sense but globally as well. However, there can be no assurances that this will occur. INFLATION Inflation has not had a significant impact on our results of operations and is not anticipated to have a significant negative impact in the foreseeable future. However, there is no assurance that inflation will not have a material adverse impact on our future results of operations. LIQUIDITY AND CAPITAL RESOURCES Future cash flows will be influenced, among other factors, by the market price of oil and gas as well as the number of existing signed petroleum contracts. To the extent that oil prices decline, the Company's revenues, cash flows and earnings could be adversely affected. The Company's management believes that even if oil prices were to decline to a level that would have a material adverse effect on cash flows, the Company would continue to meet its working capital obligations and its 2004 capital budget (as discussed below). At December 31, 2003 we had a working capital deficit of $3,113,313. For the year ended December 31, 2003, net cash used by operating activities was $185,624. This was primarily attributable to a net loss for the year of $2,517,147 and offset by increase of payables and liabilities of $759,609, loss of application deposit of $270,000, write -down of inventory of $499,748 and the loss on equipment deposit of $752,000. For the year ended December 31, 2003, net cash used in investing activities was $190,000 which resulted from a bond issuance application deposit. For the year ended December 31, 2003, net cash provided by financing activities was $375,012 which mainly resulted from the proceeds of sale of preferred stock of $180,200 and net proceeds from related party of $ $203,889 The company intends to pay off its existing obligations in the approximate amount of $3.1 million from the profits made by the future sales of petroleum products It is anticipated that we will, in all likelihood, sustain operating expenses without corresponding revenues, at least into 2005. There is no assurance that we will achieve our expansion goals and the failure to achieve such goals would have an adverse impact on us. Add capital commitments Need the long-term obligations table Contractual Obligations And Commercial Commitments The following tables summarize our contractual obligations and commercial commitments as of December 31, 2003: Payments Due By Period ----------------------------------------------------- Significant Contractual Obligations Total Within 1 Year 2-3 Years 4-5 Years After 5 Years ----------------------------------- ----- ------------- --------- --------- ------------- Operating Leases $50,859 $12,852 $14,391 $14,820 $8,796 Capital Leases -- We are committed under a non-cancelable operating lease for our office space, expiring at 2007. These leases generally provide minimum rent plus payments for real estate taxes and operating expenses, subject to escalations. Our lease payment obligations under these leases totaled $12,280 for 2003, and an aggregate of $63,139 through 2007. We do not have any capital leases. We also have a month to month lease with Echosat for a facility which houses its data centers at $2,000 per month. 16 CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management of the Company to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. The Company considers its critical accounting policies to be those that require the more significant judgments and estimates in the preparation of the Company's financial statements, including the following: impairment of long-lived assets; capitalized technology costs and accounting for expenses in connection with stock issuances, stock options and warrants. Management relies on historical experience and on other assumptions believed to be reasonable under the circumstances in making its judgment and estimates. Actual results could differ materially from those estimates. There have been no significant changes in the assumptions, estimates and judgments in the preparation of these financial statements from the assumptions, estimates and judgments used in the preparation of the Company's prior years audited financial statements. ITEM 7. FINANCIAL STATEMENTS Our financial statements required to be included in this Form 10-KSB are appended hereto commencing on page F-1. 17 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ITEM 8A. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES The Company carried out an evaluation, under the supervision and participation of the Company's Chief Executive Officer and acting Chief Financial Officer (the "Officers") of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Officers concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings, including this report. INTERNAL CONTROLS There were no significant changes made in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 18 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS The following table sets forth the names, positions with our Company and ages of our executive officers and directors as of December 31, 2003. Our directors will be elected at our annual meeting of stockholders. One half of the total number of directors is elected at each annual meeting, and, therefore, each director serves for two years or until his successor is elected and qualifies. The Board elects officers and their terms of office are, excepting to the extent governed by employment contract, at the discretion of the Board. The directors and officers of our Company as of the date of this Report are as follows: Name Age Position ------------------------- --- ------------------------ Christopher R. Salmonson 38 Chief Executive Officer, President & Chairman Shaikh Isa Mohammed Isa AlKhalifa 66 Director William C. Schlecht 39 Secretary, Director Christopher R. Salmonson, CEO, President and Chairman of our Board of Directors from October 2000 to November 2002 when he stepped aside due to his pending criminal prosecution. Mr. Salmonson has maintained his management with the company and has resumed his position of CEO, Chairman of the board and President in November 2003. Since 1993, Mr. Salmonson has engaged in a multi-faceted career specializing in international business and finance, primarily operating out of: The Peoples Republic of China; Jakarta, Indonesia; Manila, Philippines; and the Middle East (including Manama, Bahrain and Riyadh, Saudi Arabia). Mr. Salmonson has experience in matters concerning trade and project finance, international negotiations, and Chinese and Indonesian currency conversion efforts. Since 1994, Mr. Salmonson has been employed as a financial advisor to the ruling family of Bahrain. Since 1997, Mr. Salmonson has been a licensed mortgage broker in the State of Florida. On August 15, 2002 the then CEO and President of the Company, Chris Salmonson, was arrested by the Sheriff's Office in Broward County, Florida and was charged with grand theft relating to a real estate transaction, which failed. This real estate transaction is unrelated to the company and his positions in the company. It is alleged that he received $1,670,000 from the Plaintiff in exchange for real property that was never conveyed. The CEO and President denies that he has committed any offense or violation of law and has assured the Company that he will vigorously defend himself against the charges made against him. Mr. Salmonson has retained counsel with respect to these matters, and counsel is working toward his defense. 19 Charles Brodzki was appointed interim President and CEO of the Company in December 2002 to November 2003. Since 1979 he has served as partner/owner of various law firms in South Florida. Currently he is a solo practitioner in Montana. He graduated from the Wharton School of the University of Pennsylvania in 1976 with B.S. Economics (majored in accounting) and University of Miami School of Law in 1979 with J.D. He served as adjunct instructor of Business law at Florida Atlantic University(1982-88) and has been a member of Florida Bar since 1979. He is a former officer/director of various public companies and consultant to various public companies. Shaikh Isa Mohammed Isa AlKhalifa has served as a director of our company since November 2000. In addition, he is a member of the ruling family of Bahrain. From 1988 to 1994, he served as the Bahrainian ambassador to Saudi Arabia. Since 1994 until the present, Shaikh Isa Mohammed Isa AlKhalifa has managed several companies engaged primarily in business management, financial services and management consulting. Shaikh Isa Mohammed Isa AlKhalifa's companies have operations in Bahrain and throughout the Middle East. He holds degrees in petroleum and chemical engineering. William C. Schlecht, director, has served as a director of our company since April 2001. Since December 1998, Mr. Schlecht has been the general manager and a principal in Summit Body and Equipment, a privately held company that specializes in the manufacture of custom and high volume van bodies and specialty trailers. From June 1984 to December 1998, Mr. Schlecht served in the United States Army where he was a sergeant in charge of the battalion wheeled vehicles maintenance and operations, and oversaw the fleet of several hundred trucks and trailers and the mechanics responsible for their operation. ITEM 10. EXECUTIVE COMPENSATION The following table shows, for the years ended December 31, 2003, 2002 and 2001, the cash and other compensation paid by us to our Chief Executive Officer and to each of the executive officers of our Company who had annual compensation in excess of $100,000. Annual Compensation Long-Term Compensation ------------------------------ -------------------------------- Other Restricted Securities Name and Annual Stock Underlying Principal Position Year Salary Bonus Compensation Awards Options/SARs ($) ($) (#) ---------------------- ------ ------------ ------- ------------ ---------- ------------ Chris Salmonson(1) 2003 240,000 (3) -- Chairman and Chief 2002 240,000 (3) -- 8,352 (4)(6) Executive Officer 2001 240,000 95,868 (5) Charles Brodzki(2) 2002 -- -- -- -- 66,667 (7) Chief Executive Officer (1) Mr. Salmonson stepped aside from his position in December 2002 and reclaimed it in November 2003. (2) Mr. Brodzki was appointed in December 2002 until November 2003. The position held by Mr. Brodzki was relinquished when Mr. Brodzki's letter agreement expired in November 2003. Mr. Salmonson has resumed his former positions, since November 2003. (3) As of December 31, 2003 and 2002, $240,000 and $166,152 of his salary due Mr. Salmonson has been accrued respectively.. (4) In February 2002 Mr Salmonson was granted options to purchase 8,352 shares of our common stock pursuant to the terms of his Employment Agreement. This option was exercisable at a price of $1.50 per share. He exercised these options in February 2002. (5) In April 2001, Mr. Salmonson was granted options to purchase 95,868 shares of our common stock pursuant to the terms of his Employment Agreement. This option was exercisable at a price of $1.50 per share. He exercised these options in September 2001. (6) This number does not include an option to purchase 66,667 shares of our common stock granted to Mr. Salmonson pursuant to his consulting agreement. These options were exercised in fourth quarter 2002. (7) In December 2002, Mr. Brodski was granted options to purchase 66,667 shares of our common stock pursuant to the terms of his Employment Agreement. This option was exercisable at a price of $.60 per share. He exercised these options in December 2002. 20 OPTION/SAR GRANTS IN CURRENT FISCAL YEAR ---------------------------------------------------------------------------------------------------------------- Name Number of Securities Percent of Exercise Or Base Expiration Date Underlying Total Options/ Price Options/SARs SARs Granted To ($/Sh) Granted (#) Employees In Fiscal Year ---------------------------------------------------------------------------------------------------------------- Chris Salmonson -- -- -- -- ---------------------------------------------------------------------------------------------------------------- Charles Brodzki -- -- -- -- ---------------------------------------------------------------------------------------------------------------- AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES ---------------------------------------------------------------------------------------------------------------- Name Shares Value Number Of Value Of Acquired On Realized Securities Unexercised Exercise (#) ($) Underlying In-The-Money Unexercised Options/SARs Options/SARs At FY-End ($) At FY-End (#) Exercisable/ Exercisable/ Unexercisable Unexercisable ---------------------------------------------------------------------------------------------------------------- Chris Salmonson 8,352 $85,187 0/0 0/0 ---------------------------------------------------------------------------------------------------------------- Charles Brodzki 66,667 $40,000 0/0 0/0 ---------------------------------------------------------------------------------------------------------------- EQUITY COMPENSATION PLAN INFORMATION ------------------------------------------------------------------------------------------------------------- Number of securities remaining Number of available for securities to future issuance be issued Weighted- under equity upon average exercise compensation exercise of price of plans outstanding outstanding (excluding options, options, securities warrants warrants reflected in and rights and rights column (a)) (a) (b) (c) ------------------------------------------------------------------------------------------------------------- Equity compensation plans approved by 12,670 $1.50 60,278 security holders........................... ------------------------------------------------------------------------------------------------------------- Equity compensation plans not approved 0 0 0 security holders........................... ------------------------------------------------------------------------------------------------------------- Total........................ 12,670 $1.50 60,278 ------------------------------------------------------------------------------------------------------------- Employment Agreements In April 2001, we entered into employment agreements with Chris Salmonson, and James L. Wilson, our former CFO and on February 10, 2001, we entered into employment agreements with Daniel Willmott, John T. Leta, Kevin A. White and Michael D. Freudenberg. Mr. Wilmott, Mr. Leta, Mr. White and Mr. 21 Freudenberg were computer engineers employed to develop and maintain our technology, information systems and website. The employment agreements all provide for annual salaries ranging from $90,000/year to $130,000/year and also provide for three-year terms, with three of the agreements commencing retroactive to October or November of 2000. As of December 31, 2003 all agreements have expired with the exception of Mr Salmonson. The employment agreement with our former Chairman, Chief Executive Officer and President, Chris Salmonson provides for an annual base salary of $240,000, and stock options equal to 8% of the total amount of issued and outstanding stock. As of December 31, 2003, $406,152 of the salary due Mr. Salmonson has been accrued. In October 2001, we entered into a two year employment agreement with Trevor Klein as Director of Finance. The employment agreement provides for annual salary of$125,000 the first year and $130,000 the second year. Mr. Klein resigned in October 2002. In November 2002, Mr. Salmonson relinquished his positions until in order to have adequate time to prepare a defense of the charges and allegations against him. He continued to be a consultant for FuelNation during such period on the same economic terms set forth in his employment agreement. As of December 2003 he has resumed his position as President, CEO and Chairman. Effective December 5, 2002 Charles Brodzki became CEO and President pursuant to a letter agreement executed on November 27, 2002. Mr. Brodzki's compensation will be shares of common stock equal to 10% of the outstanding common stock and an additional 10% of the outstanding common stock upon the receipt of funding in excess of $1,000,000 or of completion of the note funding. 2002 Stock Option Plan The purpose of the 2002 Plan is to advance FuelNation's interests by providing an additional incentive to attract and retain qualified and competent persons as employees and consultants, upon whose efforts and judgment our success is largely dependent, through the encouragement of stock ownership by these persons. The 2002 Plan was effective as of April 18, 2002 and amended on December 2, 2002, and unless sooner terminated by our board of directors in accordance with the terms of the 2002 Plan, will terminate on July 4, 2010. Employees of FuelNation and its subsidiaries, who are selected by the stock option committee of the committee, or if there is no Stock Option committee by the board of directors, may participate in the 2002 Plan; however, no incentive stock option, as defined in Section 422 of the Internal Revenue Code of 1986 (the "Code" or "Internal Revenue Code") will be granted to a consultant who is not also our employee. The 2002 Plan provides for the issuance of incentive stock options ("Incentive Stock Options") and nonqualified Stock Options ("Nonqualified Stock Options"). An Incentive Stock Option is an option to purchase common stock that meets the definition of "incentive stock option" set forth in Section 422 of the Code. A Nonqualified Stock Option is an option to purchase common stock that meets certain requirements in the Plan but does not meet the definition of an "incentive stock option" set forth in Section 422 of the Code. Nonqualified Stock Options and Incentive Stock Options are sometimes referred to herein as "Options." 180,000 shares of common stock were originally reserved under the 2002 Plan and options for all of the shares have been granted and shares issued pursuant to Options. In November 2002, an additional 480,000 shares (as adjusted for the reverse split) were authorized, and only 233,334 were reserved under thePlan due to the availability of authorized shares until the reverse split was completed. In 2004 the remaining shares of 246,668 were reserved for the plan. If any Option granted pursuant to the 2002 Plan terminates, expires, or is canceled or surrendered, in whole or in part, shares subject to the unexercised portion may again be issued pursuant to the exercise of Options granted under the 2002 Plan. The shares acquired upon exercise of Options granted under the 2002 Plan will be authorized and unissued shares of common stock. The 2002 Plan is administered by a committee of two or more directors (the "Committee") or, if a Committee is not designated by the Board of Directors, by the Board of Directors as a whole. The Committee has the right to determine, among other things, the persons to whom Options are granted, the number of shares of common stock subject to Options, the exercise price of Options and the term thereof. All of our employees, including officers and directors and consultants, are eligible to receive grants under the 2002 Plan; however, no Incentive Stock Options may be granted to a consultant who is not also an employee of FuelNation or any of our subsidiaries. Upon receiving grants of Options, each holder of the Options (the "Optionee") will enter into an option agreement with that contains the terms and conditions deemed necessary by the Committee. 22 Terms and Conditions of Options Option Price For any Option granted under the 2002 Plan, the option price per share of common stock may be any price not less than par value per share as determined by the Committee; however, the option price per share of any Incentive Equity Incentive may not be less than the fair market value of the common stock on the date such Incentive Equity Incentive is granted. Under the 2002 Plan, the "fair market value" is the closing price of shares on the business day immediately preceding the date of grant; however, if the shares are not publicly traded, then the fair market value will be as the Committee will in its sole and absolute discretion determine in a fair and uniform manner. Exercise of Options Each Option is exercisable in such amounts, at such intervals and upon such terms as the Committee may determine. In no event may an Option be exercisable after ten years from the date of grant. If (i) FuelNation will sell all or substantially all of its assets to an unaffiliated entity, (ii) FuelNation consummates a merger, consolidation, share exchange or reorganization with another corporation or other entity and, as a result of such merger, consolidation, share exchange or reorganization, less than a majority of the combined voting power of the outstanding securities of the surviving entity immediately after such transaction is held in the aggregate by the holders of securities of FuelNation that were entitled to vote generally in the election of directors of FuelNation ("Voting Stock") immediately before such transaction, or (iii) when the common stock is publicly traded pursuant to a tender offer or exchange offer for securities of FuelNation, or in any other manner, any person or group within the meaning of the Securities Exchange Act of 1934, acquires beneficial ownership of more than 50% of the Voting Stock (the surviving corporation or purchaser described in this paragraph, the "Purchaser", and any such event described in this paragraph, a "Change of Control"), then FuelNation will negotiate in good faith to reach an agreement with the Purchaser that the Purchaser will either assume the obligations of FuelNation under the outstanding Options or convert the outstanding Options into options of at least quality value as to capital stock of the Purchaser; but if such an agreement is not reached, then the Options will become fully vested and exercisable and FuelNation will provide written notice to each Optionee, that his Option has become fully vested and exercisable, whether or not such Option will then be exercisable under the terms of his Option Agreement. To the extent that the Optionees exercise the Options before or on the effective date of the Change of Control, FuelNation will issue all Common Stock purchased by exercise of those Options, and those shares of Common Stock will be treated as issued and outstanding for purposes of the Change of Control. Upon a Change of Control, where the outstanding Options are not assumed by the surviving corporation or the acquiring corporation, the Plan will terminate, and any unexercised Options outstanding under the Plan at that date will terminate. Unless further limited by the Committee in any Option, shares of common stock purchased upon the exercise of Options must be paid for in cash, by certified or official bank check, by money order, with already owned shares of common stock, or a combination of the above. The Committee, in its sole discretion, may accept a personal check in full or partial payment. Outstanding Options As of December 17, 2004, Options for 353,054 shares had been granted pursuant to the 2002 Plan. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The table below lists the beneficial ownership of our voting securities by each person known by us to be the beneficial owner of more than 5% of such securities, as well as by all our directors and officers. Unless otherwise indicated, the shareholders listed possess sole voting and investment power with respect to the shares shown. ----------------------------------------------------------------------------------------- Name and Address Number of Shares Percent of Class Common Preferred Common Preferred ----------------------------------------------------------------------------------------- Chris Salmonson 634,727(1)(2) 2,800 27.6% 21.5% 4121 SW 47th Ave Davie, Florida 33314 ----------------------------------------------------------------------------------------- 23 ----------------------------------------------------------------------------------------- Name and Address Number of Shares Percent of Class Common Preferred Common Preferred ----------------------------------------------------------------------------------------- Robert Simmons 433,334(3) 18.9% 222 N. Ocean Blvd Delray Beach, Florida 33483 ----------------------------------------------------------------------------------------- Shaikh Isa Mohammed Isa AlKhalifa 156,667 8,000(6) 6.8% 61.5% P.O Box 20257 Manama, Bahrain ----------------------------------------------------------------------------------------- Charles Brodzki 233,092 10.2% % 1325 North 7th Avenue Bozeman, Montana 59715 ----------------------------------------------------------------------------------------- William Schlecht 23,334(4) % 24 NE Middlefield road Portland, OR 97211 ----------------------------------------------------------------------------------------- All officers and directors as a group 1,047,820 45.7% % (3 persons) ------------------------------------------------------------------------------------------ * Less than 1% (1) Includes 409,200 shares owned by Fuel America LLC, of which Mr. Salmonson and his wife are sole principals. (2) Mr. Salmonson has voting rights over 634,727 shares beneficially owned by himself and Fuel America LLC. (3) 433,333 shares held in the name of Rapture Holdings, Inc., of which Mr. Simmons is principal and sole shareholder. (4) Mr. Schlecht owns 23,334 shares beneficially owned by him. (5) Mr. Brodzki has only been issued 66,667 shares in December 2002 of the 233,092 required by the Company under his employment agreement. (6) These represent shares owned by Alkhalifa Petroleum Corp., which Shaikh Isa Mohammed Isa AlKhalifa is an affiliated party. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has borrowed monies from related parties to fund operations. In 2003 the Company borrowed $328,000 from the Chief Executive Officer ["CEO"]and in 2002, the Company borrowed approximately $504,000 from Fuel America LLC ["Fuel America"] and Fuel Nation Group, LLC ["FNG"],( entities controlled by the Chairman of the Board/Chief Executive Officer ["CEO"]), At December 31, 2003 and 2002, the balance owed to affiliates was $325,221 and $121,332,respectively. Currently, there are no interest or repayment terms for the debt and it is treated as if due on demand. Interest at the rate of 5% per annum is being charged on the amount advanced in 2003. At December 31, 2003 and 2002 , interest booked on loans from related parties was $11,709 and $0 respectively. The amount borrowed from the CEO in 2003 arose by the CEO personally guaranteeing and pledging shares of common stock owned by him for a $320,000 deposit made by a third party on behalf of the Company to fund a loan committment application. The amount of the loan has subsequently been assigned between the CEO and the Company and has been recorded in the balance owed to affiliates. During 2003, the Company issued 8,000 shares of preferred stock to Alkhalifa petroleum Corp. a company controlled by a director of the Company, Shaikh Isa 24 Mohammed Isa Alkhalifa, in exchange for personally guaranteeing an $8,000,000 bank line of credit on behalf of the Company.As of December 31, 2003 the line of credit had not been utilized. In December 2003, the CEO was issued 2,800 shares of preferred stock as consideration under the non-dilution clause in his employment contract. During 2002, the Company used proceeds from common stock issuances in the amount of approximately $180,000 to repay amounts borrowed from Fuel America and Fuel Nation Group. In July 2002, the Company granted options to purchase 80,000 shares of common stock valued at approximately $234,000 to Fuel America and Fuel Nation Group as repayment for amounts borrowed such options were exercised in 2002. In February and December 2002, the then former CEO, Mr Salmonson, was granted and exercised options to purchase 8,352 and 66,667 shares of common stock at exercise prices of $1.50 and $.82 per share as consideration under the non-dilution clause in his employment contract [See Note 11 for compensation expense related to issuance of these options]. The proceeds of $12,528 and $54,667 were utilized to reduce the amounts due to affiliates In May 2002, options to purchase 78,240 shares of common stock were granted and exercised by the then former CEO, Mr Salmonson, at an exercise price of $1.50 per share as consideration for accrued compensation. In June 2002, the former CEO paid a nonrefundable fee related to the proposed bond issuance at that time to an investment banker of $90,000 on behalf of the Company. The amount is included in due to affiliates. In December 2002, the then CEO, Mr Brodski, was granted and exercised options to purchase 66,667 shares of common stock valued at $40,000 per his employment agreement. In December 2002, the Company issued 156,667 shares of common stock to a director of the Company in exchange for the satisfaction of accrued liabilities in the amount of $94,000 assumed by the director. In December 2002, the Company issued 23,333 shares of common stock valued at $21,000 to a director of the Company for consulting services. In October 2001, the then CEO, Mr Salmonson, exercised options to purchase 95,868 shares of common stock at an exercise price of $1.50 per share [See Note 11 for compensation expense related to issuance of these options]. The proceeds of $143,802 were used to reduce the amount due to Fuel America. Also, in 2001, a Company loan payable of $30,000 was settled by the then CEO issuing shares of Company common stock owned by him to the loanholder. The loan amount of $30,000 was offset against the amount due to Fuel America. In 2001, the then CEO, Mr Salmonson, transferred 94,917 shares of common stock owned personally by him to several non-affiliated entities for consulting and professional services incurred by the Company. The Company recorded a non-cash charge to operations in 2001 of $4,052,875 for such services which represented the fair value of such stock when transferred. This amount was credited to additional paid-in capital. The then CEO has agreed to accept shares of common stock equal to the number of shares he transferred to pay the Company's expenses. In 2001, the Company shared office space with Triad, who together leased such facility from an entity controlled by a principal stockholder of the Company. The lease expired in the fourth quarter of 2001 and since then rent was on a month-to-month basis until March 2002 when the Company vacated these premises. Rent expense amounted to $38,974 and $6,413 in 2001 and 2000, respectively. In 2001, the Company, through its then former CEO,Mr Salmonson, pledged shares of common stock to be issued for various consulting services. The Company recorded a non-cash charge to expense of $9,200,880 which was equal to the fair value of such shares at the time they were pledged. Such shares were not issued as of December 31, 2001 and the total amount of $9,200,880 was credited to additional paid-in capital. Three demand notes came due in the months of August and September 2002 and the company was unable to extend the term on the notes or make payment on the notes. Restricted common shares owned and pledged by an affiliate Fuel America secured the collateral for these demand notes. Loans were advanced to Fuel America, using restricted common shares of FuelNation Inc as collateral. The funds were advanced to FuelNation from the affiliate and treated as a demand note. These amounts are included in due to affiliates in the accompanying financial statements. During the month of August 2002 the company was required to pay $330,000 on a demand note resulting from a 12-month loan advanced by a group of shareholders of FuelNation Inc. that matured on April 19, 2002. This note was extended until 25 August 2002 while waiting for the note funding to be completed. Since the delay of the note funding the lender group has defaulted against the collateral of 133,333 restricted common shares of FuelNation stock pledged by an affiliate Fuel America. As of December 31, 2002 the Company has replaced these shares to the affiliate. The collateral has a restrictive legend and is subject to all rules as may be imposed by Rule 144 of the Securities Act of 1933, as amended. The company has received confirmation and written verification from the lender that the total proceeds they received on the securities satisfied the obligation. During the month of September 2002, the company was required to pay $65,000 on a 60-day demand note and resulted in the lender, Richard Gladstone, defaulting against the collateral of 26,680 restricted common shares of FuelNation stock pledged by an affiliate Fuel America. As of December 31, 2002 the Company has replaced these shares to the affiliate. The collateral has a restrictive legend and is subject to all rules as may be imposed by Rule 144 of the Securities Act of 1933, as amended. The Company has received confirmation and written verification from the lender that the total proceeds they received on the securities satisfied the obligation. During September 2002 the company was required to pay $100,000 on a 60-day demand note, and resulted in the lender, defaulting against the collateral of 175,717 restricted common shares of FuelNation stock pledged by an affiliate Fuel America. As of December 31, 2002 the Company has replaced these shares to the affiliate. The collateral has a restrictive legend and is subject to all rules as may be imposed by Rule 144 of the Securities Act of 1933, as amended. The Company has received confirmation and written verification from the lender that the total proceeds they received on the securities satisfied the obligation. In August, 2002, the board of Directors pursuant to the purchase contract dated September 14, 2000 between Triad Petroleum, Inc. and Regenesis Holdings, Inc. exercised our rights in the purchase contract article 6, item 6.7, (resignation of directors and officers) to demand the resignation of Edwin Ruh, Jr. as a director. The current active board of directors consist of three individuals; Shaikh Isa Mohammed Isa Alkhalifa, William Schlecht and Chris Salmonson. On or about December 1, 2000, we retained Veritas Venture Labs, LLC to perform consulting services for us pursuant to a written consulting agreement. Based in Boston, Massachusetts, Veritas Ventures Lab, LLC is owned and/or controlled by Edwin Ruh, one of our former directors. Pursuant to two separate consulting agreements, Veritas was paid $221,000. In addition, its individual constituents were issued a total of 6,667 shares of our Common Stock and were granted an option to purchase 10,000 shares at $1.50 per share, which they exercised in 2001.The Company incurred a non-cash charge to operations of $3,585,000 related to the stock issuance and options granted. During September 2002, three of the four programmers have resigned from employment of the Company and have found alternative employment. The programmers have agreed to assist the Company on a consulting basis with the technology and support and have continued to provide their services for the Company. We have currently stopped providing any free or discounted services to clients for Beta testing and are awaiting the note funding to commence in order to implement our strategy. The current technologies is running seamlessly at the Echosat Communications location in Lexington, Kentucky and discussions for joint marketing or add on services to the satellite installations are being pursued. 26 FUELNATION INC. (A Development Stage Company) September 30, 2002 (Unaudited) ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Index to Exhibits 2 Regenesis-Triad Share Sale and Contribution Agreement dated September 14, 2000(1) 3.1 Articles of Incorporation of International Pizza Corporation(2) 3.2 Bylaws of International Pizza Corporation(2) 3.3 Amendment to Articles Incorporation, setting forth Designations, rights and preferences of Series A Preferred Stock (2) 3.4 Amendment to Articles of Incorporation changing name to Regenesis Holdings, Inc.(2) 3.5 Amendment to Articles of Incorporation, increasing authorized capital and setting forth designations, rights and Preferences of Series B and Series C Preferred Stock(3) 3.6 Amendment to Articles of Incorporation, restating Designations, rights and preferences of Series C Preferred Stock (4) 3.7 Amendment to Articles of Incorporation (5) 3.8 Amendment to Articles of Incorporation (6) 3.9 Amendment to Articles of Incorporation (13) 10.0 Triad-FuelNation Assignment & Assumption Agreement dated October 13, 2000 (1) 10.1 Trial-Regenesis Assignment and Assumption of License Agreement with Licensor (1) 10.2 Employment Agreement with Christopher Salmonson (1) 10.3 Employment Agreement with James L. Wilson (1) 10.4 Consulting Agreement with EchoSat (7) 10.5 Consulting Agreement with Veritas Venture (7) 10.5 Employment Agreement with Paul Sapita (8) 10.6 Restated Employment Agreement with Chris Salmonson (8) 10.7 Agreement with Charles Brodzki (13) 10.8 Board resolution modifying Salmonson Employment Agreement 10.9 Contribution and Distribution Agreement dated January 23, 2003 among William Schlecht, FuelNation Travel Center LLC and FuelNation, Inc. 27 10.10 2002 Stock Option Plan (14) 17.1 Letter of Resignation of James L. Wilson(12) 31.1 Certification 31.2 Certification 32.1 Certification 32.2 Certification (1) Previously filed as an exhibit in the Company's Form 10-KSB/A1 for the fiscal year ended December 31, 2000. (2) Previously filed as an exhibit in the Company's Form 10-KSB for the fiscal year ended December 31, 1997. (3) Previously filed as an exhibit in the Company's Form 8-K dated 02/18/99 February 18, 1999. (4) Previously filed as an exhibit in the Company's Form 10-KSB for the fiscal year ended December 31, 1998. (5) Previously filed as an exhibit in the Company's Form 10-QSB for the period ended June 30, 2000. (6) Previously filed as an exhibit in the Company's Form 10-QSB for the period ended September 30, 2000. (7) Previously filed as an exhibit in the Company's Registration Statement on Form S-8 dated June 14, 2001. (8) Previously filed as an exhibit in the Company's Registration Statement on Form S-8 dated August 8, 2001 (9) Previously filed as an exhibit in the Company's Form 8-K dated January 19, 2001. (10) Previously filed as an exhibit in the Company's Form 8-K/A1 dated April 25, 2001. (11) Previously filed as an exhibit in the Company's Form 8-K/A1 dated February 7, 2002. (12) Previously filed as an exhibit in the Company's Form 8-K dated December 12, 2001. (13) Previously filed as an exhibit in the Company's Registration Statement on Form S-8 dated December 13, 2002 (14) Previously filed as an exhibit in the Company's Information Statement on Schedule 14C. (b) Reports on Form 8-K (1) January 27, 2003. (2) October 22, 2003. Item 14. Principal Accountant Fees and Services 2003 2002 ------- ------- 14.1 AUDIT FEES $75,000 $73,000 14.2 AUDIT-RELATED FEES 14.3 TAX FEES 14.4 ALL OTHER FEES 14.5 (i) DISCLOSURE OF AUDIT COMMITTEE'S PRE-APPROVAL POLICIES AND PROCEDURES; (ii) DISCLOSE THE PERCENTAGE OF SERVICES DESCRIBED THAT WERE APPROVED BY THE AUDIT COMMITTEE. 28 14.1 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on December 28, 2004. FUELNATION INC. (Registrant) By: /s/ CHRIS R. SALMONSON ------------------------------------------- CHRIS R.SALMONSON, President, Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 28, 2004. By: /s/ SHAIKH ISA MOHAMMED ISA ALKHALIFA ------------------------------------------- Shaikh Isa Mohammed Isa AlKhalifa, Director By: /s/ WILLIAM C. SCHLECHT ------------------------------------------- William C. Schlecht, Director By: /s/ CHRIS R. SALMONSON ------------------------------------------- CHRIS R. SALMONSON, President, Chief Executive Officer and Chairman of the board 29 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of FuelNation, Inc. Davie, Florida We have audited the accompanying balance sheet of FuelNation, Inc. [a development stage company] as of December 31, 2003, and the related statements of operations, changes in stockholders' equity [deficit], and cash flows for each of the two years and the cumulative period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the Standards of The Public Company Accounting Oversight Board (United States). 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 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 FuelNation, Inc. [a development stage company] as of December 31, 2003, and the results of its operations and its cash flows for each of the two years and the cumulative period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company is in the development stage, has suffered significant losses and has a working capital deficiency of $3,113,313 and a deficit accumulated in the development stage of $36,644,792 as of December 31, 2003 that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments which might arise from the outcome of these uncertainties. MOORE STEPHENS, P.C. Certified Public Accountants. Cranford, New Jersey November 23, 2004 F-1 FUELNATION INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET ASSETS December 31, 2003 ------------- Current Assets $ -- Property and equipment, net of accumulated depreciation of $170,100 76,580 Other assets 835 ------------ TOTAL ASSETS $ 77,415 ============ LIABILITIES AND STOCKHOLDERS' [DEFICIT] CURRENT LIABILITIES: Cash Overdraft $ 2,465 Accounts payable 764,196 Accrued Liabilities 407,786 Payroll and Taxes Payable 1,439,145 Due to Affiliates 325,221 Note payable 25,000 Other Payables 149,500 ------------ TOTAL CURRENT LIABILITIES 3,113,313 ------------ COMMITMENTS AND CONTINGENCIES -- ------------ COMMON STOCK SUBJECT TO REPURCHASE, 53,318 SHARES ISSUED AND OUTSTANDING AT DECEMBER 31, 2003 3,178,474 ------------ STOCKHOLDERS' EQUITY [DEFICIT]: Preferred Stock, $.01 par value, 5,000,000 shares authorized; 13,000 issued and outstanding 130 Common Stock, $.01 par value, 100,000,000 shares authorized; 2,241,174 issued and outstanding 22,412 Subscriptions Receivable (1,445,900) Additional paid-in capital 31,853,778 (Deficit) Accumulated in the Development Stage (36,644,792) ------------ TOTAL STOCKHOLDERS' [DEFICIT] (6,214,372) ------------ TOTAL LIABILITIES AND STOCKHOLDERS' [DEFICIT] $ 77,415 ============ F-2 FUELNATION INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS Accumulative in the Development Stage From Years Ended September 30, 2000 December 31, To 2003 2002 December 31, 2003 ----------- ----------- ------------------ REVENUE $ -- $ -- $ -- ----------- ----------- ------------ OPERATING EXPENSES: Salaries and wages including related taxes 608,143 688,498 2,118,661 Consulting fees 13,903 98,782 142,119 Consulting fees - related party -- 221,162 Legal and professional 115,348 212,776 938,933 Marketing and promotion 60,591 467,158 Rent 67,437 117,900 293,337 Rent - related party -- 45,387 Depreciation 50,136 50,136 170,100 Other general and administrative expenses 79,615 186,661 616,958 Impairment loss on technology 1,581,747 1,581,747 Write down of inventory 499,749 499,749 Loss - deposits 1,022,500 1,022,500 Financing costs 23,042 90,000 113,042 Non - cash consulting fees 735,562 17,014,280 Non - cash consulting fees - related party 59,251 3,644,251 Non - cash financing costs 19,244 -- 112,200 Non - Cash printing costs 21,000 21,000 Non - cash employee compensation 495,561 6,863,527 Research and development cost -- -- 10,000 ----------- ----------- ------------ TOTAL OPERATING EXPENSES 2,499,117 4,398,465 35,896,111 ----------- ----------- ------------ OPERATING LOSS (2,499,117) (4,398,465) (35,896,111) OTHER INCOME (EXPENSE): Other (Expense) Income -- -- (694,982) Interest expense - related party (11,709) (11,709) Interest expense (6,321) (26,687) (41,990) ----------- ----------- ------------ TOTAL OTHER (EXPENSE), NET (18,030) (26,687) (748,681) ----------- ----------- ------------ NET LOSS $(2,517,147) $(4,425,152) $(36,644,792) ======================================================== Basic and Diluted Net Loss per Common Share $ (1.10) $ (3.08) =========== =========== Basic and Diluted Weighted Average Common Shares Outstanding 2,290,677 1,437,012 =========== =========== F-3 FUELNATION INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ( DEFICIT) (Deficit) Additional Acumulated in Preferred Stock Common Stock Paid-In the Development Subscription Shares Amount Shares Amount Capital Stage Receivable Total ------ ------ ------ ------ ---------- --------------- ------------ ----- Balance - December 31, 1999 33,333 $50,000 626,667 $6,267 $ 390,577 $ 446,844 October 2000 - Acquired Equity of Shell in Stock Acquisition 40,444 404 (774,124) (773,720) October 2000 - Retirement of Common Stock in Lieu of Debt Paid by Related Party (2,267) (23) 23 November 2000 - Conversion of Preferred Stock to Common Stock (33,333) (50,000) 333,333 3,334 46,666 December 2000 - Issuance of Common Stock in Private Placement Transaction 34,621 346 3,144,762 3,145,108 Net Loss (1,205,251) (1,205,251) ------------------------------------------------------------------------------------------------------ Balance - December 31, 2000 -- -- 1,032,798 10,328 2,807,904 (1,205,251) 1,612,981 February 2001 - Issuance of Common Shares in Private Placement Transactions 256 3 24,997 25,000 February 2001 - Issuance of Stock Options for Consulting Services 2,985,000 2,985,000 March 2001 - Issuance of Common Shares in Private Placement Transactions 677 7 101,493 101,500 March 2001 - Shares Pledged for Consulting Costs 9,200,880 9,200,880 April 2001 - Issuance of Common Shares and Affiliate- Owned Company Common Stock for Consulting Costs 13,333 133 3,149,242 3,149,375 April 2001 - Cancellation of Shares Issued in Private Placement Transaction (103) (1) (9,999) (10,000) April 2001 - Issuance of Stock Options to Employees 6,212,966 6,212,966 June 2001 - Issuance of Common Stock in Satisfaction of Liabilities and Payment of Professional Expenses 2,704 27 275,473 275,500 F-4 FUELNATION INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ( DEFICIT) (Deficit) Additional Acumulated in Preferred Stock Common Stock Paid-In the Development Subscription Shares Amount Shares Amount Capital Stage Receivable Total ------ ------ ------ ------ ---------- --------------- ------------ ----- June 2001 - Issuance of Common Stock for Payment of Technology and Consulting Costs 30,000 300 1,442,200 1,442,500 June 2001 - Issuance of Common Stock to Acquire Assignment of Contract 1,933 19 208,781 208,800 June 2001 - Issuance of Common Stock for Payment of Consulting Costs and Exercise of Stock Options 16,667 167 614,833 615,000 August 2001 - Issuance of Warrants and Affiliate-Owned Company Common Stock for Consulting Costs 3,024,796 3,024,796 September 2001 - Stock Options Exercised by Officers Pursuant to Employment Agreements 96,868 969 144,332 145,301 October 2001 - Issuance of Stock Options to Employees and Warrants and Affiliate- Owned Company Common Stock to Non-Employee for Financing and Consulting Costs 696,850 696,850 November 2001 - Consulting Costs - Shares not yet Issued 240,000 240,000 December 2001 - Grant of Put Options (57,107) (572) (3,547,401) (3,547,973) Net Loss (28,497,242) (28,497,242) ------------------------------------------------------------------------------------------------------ Balance - December 31, 2001 -- -- 1,138,026 11,380 27,572,347 (29,702,493) (2,118,766) F-5 FUELNATION INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ( DEFICIT) (Deficit) Additional Acumulated in Preferred Stock Common Stock Paid-In the Development Subscription Shares Amount Shares Amount Capital Stage Receivable Total ------ ------ ------ ------ ---------- --------------- ------------ ----- February 2002 - Stock Options Issued and Exercised by Officer Pursuant to Employment Agreement 8,352 84 97,631 97,715 May 2002 - Issuance of Common Stock for Payment of Consulting Services 40,000 400 284,600 285,000 May 2002 - Issuance and Exercise of Stock Options by Consultant for Payment of Consulting Services 49,999 500 407,421 407,921 May 2002 - Stock Options Issued and Exercised by Employees in Lieu of Payroll and Accrued Payroll 111,722 1,117 536,839 537,956 July 2002 - Stock Options Issued and Exercised by an Affiliate Company for Debt Repayment 80,000 800 233,200 234,000 July 2002 - Issuance and Exercise of Stock Options by Consultant for the Payment of Consulting Services 18,000 180 53,820 54,000 August 2002 - Issuance and Exercise of Stock Options by Consultant for the Payment of Consulting Services 33,333 333 73,917 74,250 October 2002 - Issuance and Exercise of Stock Options by Consultant for the Payment of Consulting Services 20,000 200 8,950 9,150 December 2002 - Stock Options Issued and Exercised by Officer Pursuant to Employment Agreement 66,667 667 39,333 40,000 December 2002 - Issuance and Exercise of Stock Options by Former Officer Pursuant to Employment Agreement 66,667 667 92,251 92,918 December 2002 - Issuance of Common Stock to Replace Shares Pledged as Collateral by Affiliate 335,730 3,357 198,081 201,438 F-6 FUELNATION INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ( DEFICIT) (Deficit) Additional Acumulated in Preferred Stock Common Stock Paid-In the Development Subscription Shares Amount Shares Amount Capital Stage Receivable Total ------ ------ ------ ------ ---------- --------------- ------------ ----- December 2002 - Issuance and Exercise of Stock Options by Consultant for the Payment of Consulting Services 39,999 400 55,351 55,751 December 2002 - Issuance of Common Stock for the Payment of Consulting Services 2,222 22 1,978 2,000 December 2002 - Issuance of Common Stock for Payment of Printing Services 23,333 234 20,766 21,000 December 2002 - Issuance of Common Stock to Director to Replace Shares Pledged as Collateral 156,667 1,567 92,433 94,000 December 2002 - Issuance of Common Stock to Director for Payment of Consulting Services 23,333 233 20,767 21,000 December 2002 - Consulting Costs - Shares not yet Issued 14,000 14,000 Net Loss (4,425,152) (4,425,152) ------------------------------------------------------------------------------------------------------ Balance - December 31, 2002 -- $ -- 2,214,050 22,141 29,803,685 (34,127,645) (4,301,819) F-7 FUELNATION INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ( DEFICIT) (Deficit) Additional Acumulated in Preferred Stock Common Stock Paid-In the Development Subscription Shares Amount Shares Amount Capital Stage Receivable Total ------ ------ ------ ------ ---------- --------------- ------------ ----- February 2003 - Issuance of common stock in satisfaction of liability 23,334 233 (233) -- December 2003 - Issuance of preferred stock to affiliate for guarantee of line of credit 8,000 80 (80) -- December 2003 - Issuance of preferred stock to replace convertible debt and conversion of common stock for preferred stock 409 4 (7,709) (77) 54,968 54,895 October 2003 - Issuance of preferred stock to replace common stock subject to repurchase 376 4 -- -- 369,496 369,500 December 2003 - Issuance of preferred stock in settlement of convertible debt 25 1 (1) -- December 2003 -Issuance of preferred stock for subscription of stock 164 2 (53,800) (538) 105,536 (105,000) -- December 2003 -Purchases of preferred stock and issuance of preferred stock for conversion of common stock 1,064 10 (61,849) (618) 180,808 180,199 December 2003- Issuance of preferred stock for conversion of common stock 162 2 (6,995) (70) 68 -- December 2003 -Issuance of preferred stock to Officer pursuant to employment agreement 2,800 28 (28) -- December 2003 - Subscription of common stock 134,143 1,341 1,339,559 (1,340,900) -- Beneficial conversion feature of preferred stock issuance (2,070,463) 2,070,463 -- Amortization of beneficial conversion feature on preferred stock issuance 2,070,463 (2,070,463) -- Net Loss (2,517,147) (2,517,147) ------------------------------------------------------------------------------------------------------ Balance December 31, 2003 13,000 $ 130 2,241,174 $ 22,412 $ 31,853,778 $ (36,644,792) $ (1,445,900) $ (6,214,372) ====================================================================================================== F-8 FUELNATION INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS Accumulative Years Ended During December 31, Development 2003 2002 Stage ----------- ----------- ------------ Cash Flows: Net loss $(2,517,147) $(4,425,152) $(36,644,792) Adjustments to reconcile net loss to net cash provided by (used) in operating activities: Depreciation 50,136 50,136 170,100 Write- down of Technology 1,581,747 1,581,747 Write- down of Inventory 499,749 499,749 Non- Cash Employee Compensation 495,561 6,863,527 Non- Cash Consulting Fees 735,562 17,014,280 Non- Cash Consulting Fees -Related Party 59,251 3,644,251 Non- Cash Financing Costs 19,244 -- 112,200 Non- Cash Printing Costs 21,000 21,000 Write- Down of Investments -- 657,686 Write- Down of Deposits 1,022,500 -- 1,022,500 Other 33,508 58,508 Amortization of Discount on Convertible Debt 22,894 30,394 ------------ Changes in Assets and Liabilities: [Increase] Decrease in: Inventory 60,591 (499,748) Due from Escrow Accounts -- (45,000) Due from Affiliates -- 304,680 Other 285 -- 8,990 Increase [Decrease] in : Accounts Payable 91,393 305,281 797,109 Accrued Liabilites 89,485 188,731 499,117 Payroll and Taxes Payable 558,731 355,987 1,439,145 ----------- ----------- ------------ Net cash provided by (used) in operating activities (185,624) (514,903) (2,464,557) ----------- ----------- ------------ Cash Flows from Investing Activities: Payments for Technology -- -- (544,903) Purchase of Fixed Assets (2,666) (246,679) Bond Issuance Deposit (240,000) (80,000) (320,000) Refund of Bond Issuance Deposit 50,000 50,000 Advances Toward Pending Acquisition -- (402,724) Cash Received in Acquisition -- -- 1,109 ----------- ----------- ------------ Net cash used in investing activities (190,000) (82,666) (1,463,197) ----------- ----------- ------------ ------------ Cash Flows from Financing Activities: Cash Overdraft 2,465 2,465 Net Proceeds from issuance of common stock 191,510 3,453,118 Net Proceeds from issuance of preferred stock 180,200 180,200 Proceeds from Issuance of Convertible Debt -- 35,953 Proceeds from Related Party Debt 328,000 504,069 832,069 Payment of Related Party Debt (124,111) (99,594) (223,705) Payment of Convertible Debt (11,542) (11,542) Exercise of Stock Options -- 15,000 Debt Restructuring (255,804) Payment of Loans Payable -- -- (100,000) ----------- ----------- ------------ Net cash provided by financing activities 375,012 595,985 3,927,754 ----------- ----------- ------------ Net (Decrease) in Cash (612) (1,584) -- Cash, Beginning of Period 612 2,196 -- ----------- ----------- ------------ Cash, End of Period $ -- $ 612 $ -- =========== =========== ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest: $ -- $ 2,043 $ 2,716 =========== =========== ============ Cash paid during the period for Income Taxes: $ -- $ -- $ -- =========== =========== ============ F-9 FUELNATION INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES: During the year ended December 31, 2003: 1) The Company issued 376 shares of preferred stock in exchange for the satisfaction of 3,790 shares of common stock subject to repurchase totaling $369,500 2) The Company entered into a subscription agreement to increase the amount of convertible debt owed by the Company by $24,412. Accordingly the company recorded a finance cost charge of $19,244 and offset accrued interest by $5,168. An addendum to the subscription agreement was signed whereby the Company agreed to issue 409 shares of preferred stock in exchange for the satisfaction of convertible debt of $ 48,897, interest expense of $2,197 and replacement of 7,709 shares of common stock. 3) The Company issued 8,000 shares of preferred stock to Alkhalifa Petroleum Corporation a corporation controlled by a director of the Company, for such director personally guaranteeing an $8,000,000 line of credit on behalf of the Company. 4) The Company issued 25 shares of preferred stock to settle an amount owing to a convertible debt holder valued at $25,000. 5) The Company issued 164 shares of preferred stock for replacement of 53,800 shares of common stock and a subscription of $105,000 of preferred stock. As of December 31, 2003 the Company had not yet received the subscription amount. The subscription receivable has been shown as a contra - equity account in the financial statements. 6) The Company replaced 1,064 shares of common stock owned by existing shareholders by issuing preferred shares in conjunction with a Subscription agreement for preferred shares valued at $1,064,000. 7) The Company replaced 6,995 shares of common stock owned by existing shareholders by issuing 162 shares of preferred stock valued at $162,000. 8) The Company issued 2,800 shares of preferred stock to the CEO of the Company pursuant to the terms of the CEO's employment agreement. 9) As of December 31, 2003, 134,143 shares of common stock owned by existing shareholders were replaced with preferred stock of the Company by virtue of various settlement and subscription agreements between the Company and the shareholders. In turn, the 134,143 shares of common stock were subscribed for by a unrelated third party for $1,340,900. As of December 31, 2003 the amount had not been received. The $1,340,900 subscription receivable has been shown as a contra- equity account in the financial statements SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES: During the year ended December 31, 2002: The Company issued the following: Issued for Consulting Consulting Services - Employee Printing Issued Services Related Party Compensation Services ------ ---------- ------------- ------------ -------- 88,888 Shares of Common Stock $ 286,000 $ 21,000 $21,000 204,665 Stock Options 378,040 40,000 -------------------------------------------------------------------- $ 664,040 $ 21,000 $ 40,000 $21,000 ==================================================================== Additionally, the following transactions occurred in 2002: 1) The Company entered into a consulting contract settlement agreement and recorded a non-cash expense of $46,522 which was the fair value of options issued and exercised for 23,333 shares of common stock and 23,333 additional shares of common stock issuable by the Company per the agreement. 23,333 shares were not issued as of December 31, 2002 and the fair value of $14,000 was credited to additional paid-in capital. The settlement also required the Company to pay an additional $25,000 of consulting costs. The Company executed a six month note payable for $25,000 which accrues interest at 8% per annum. 2) Options to purchase 8,352 and 66,667 shares of common stock were issued and exercised by the then CEO of the Company at the exercise price of $1.50 and $.81 per share, respectively. The proceeds totaling $67,195 were offset against the amount due to affiliates and $85,187 was recorded as non-cash employee compensation and $38,251 was recorded as non-cash consulting fees - related party. 3) The Company issued 335,730 shares of common stock to the former CEO of the Company in replacement of shares pledged by the then CEO as collateral for third party loans to an affiliated company. The funds were advanced to the Company by the affiliate. The Company was unable to repay the advance causing the affiliate to default and the pledged shares to be surrendered. The fair value of the replacement shares in the amount of $201,438 was offset against the amount due to affiliate. 4) The Company issued 156,667 shares of common stock in exchange for the satisfaction of accrued liabilities totaling $94,000 which were assumed by a director of the Company. 5) Options to purchase 111,722 shares of common stock were granted and exercised by employees of the Company in satisfaction of accrued payroll costs of $167,582, as well as current year non-cash employee compensation of $370,374. 6) The Company granted options to purchase 80,000 shares of common stock, which were exercised at a price of $1.50 per share, to an affiliated company as a partial repayment of the loan due to the affiliated entity. The fair value of the options plus the proceeds upon exercise approximated $234,000 which was the amount offset against the amount due to the affiliate. F-10 FUELNATION, INC. [A DEVELOPMENT STAGE COMPANY] NOTES TO FINANCIAL STATEMENTS [1] Description of Business Organization - FuelNation, Inc. was organized under the laws of the State of Florida on July 6, 1993 under the name International Pizza Corporation. On October 30, 1995, the Company changed its name to QPQ Corporation, and on November 4, 1997, changed its name to Regenesis Holdings, Inc. On October 17, 2000, the Company changed its name to FuelNation, Inc. On January 27, 2003, the Company effected a 150:1 reverse split of its common stock. At the same time, the Company amended its certificate of incorporation authorizing it to issue 105,000,000 shares of capital stock, of which 5,000,000 shares are classified as preferred stock, par value of $.01 per share, issuable in one or more series and 100,000,000 shares are classified as common stock, par value $.01. All periods presented have been restated to reflect the 150:1 reverse split of common stock. Description of Development Stage Activities - FuelNation, Inc. [the "Company" or "FuelNation"], a Florida corporation, located in Davie, Florida has been in the development stage since its reorganization on October 13, 2000. The Company has continuously worked on plans to build travel centers from 2000 to the present, initially in the state of Florida, followed by additional locations in other key states. Getting the approvals and permitting for the first couple of travel centers are very capital intensive and time consuming. In addition, the Company has also been engaged in the development of providing real-time e-commerce communications in the petroleum marketing and energy services industry from 2000 to 2003. Currently the real-time-e-commerce has been re-prioritized with generating income from oil trading in order to self fund the real-time e-commerce development from the projected profits of the oil trading. FuelNation Inc, through our 100 % wholly owned subsidiary, Leman Energy Trading, Inc., a Panamanian Corporation registered in the Panamanian Registry Public Deed No. 9421 on August 31, 2004. is engaged in oil and gas wholesale marketing of unbranded petroleum transportation fuels and crude oil trading in Western Siberia, Russia; Middle East and Southeast Asia. Currently, our director of FuelNation, Shaikh Isa Mohammed Isa Alkhalifa, and our manager of Leman Energy Trading, Inc., Hammed Yaghoobi, have been contacting ministries of oil and major crude oil suppliers in Western Siberia, Russia; Middle East and Southeast Asia to acquire crude oil and refined products. Credit facilities are in place to acquire products and multiple offers are being sent to suppliers for purchases. In this regard, we are prepared to acquire quantities of crude oil of 75,000 to 250,000 barrels per day and refined petroleum products of 50,000 to 100,000 metric tons per month. Reorganization - The financial statements give effect to the acquisition agreement [the "agreement"] of FuelNation, Inc. [formerly Regenesis Holdings, Inc. ["Regenesis"] with Triad Petroleum, LLC ["Triad"]. The closing date of the agreement was October 13, 2000, however, for accounting purposes the transaction is treated as being effective September 30, 2000. In connection with the agreement, Regenesis issued 626,667 shares of common stock and 33,333 shares of newly designated Series D preferred stock, convertible into 333,333 shares of common stock to the members of Triad. As a result of the agreement, the members of Triad will own approximately 96% of the outstanding common stock of Regenesis. For accounting purposes, the agreement is being recorded as a recapitalization with the members of Triad as the acquirers. The 626,667 shares of common stock and 33,333 shares of Series D preferred stock are shown as outstanding for all periods presented in the same manner as for a stock split. In November 2000, the 33,333 shares of Series D preferred stock were converted into 333,333 shares of common stock. The members of Triad relinquished their entire rights and ownership in the technology of the proprietary computer and software system [the "Technology"] in exchange for such shares. The financial statements of the Company reflect the results of operations of the development stage operations of the Technology acquired from Triad and Regenesis from October 13, 2000. The financial statements prior to October 13, 2000 reflect the development stage operations of the Technology acquired from Triad. Pro forma information on this transaction is not presented as, at the date of this transaction, Regenesis is considered a public shell and accordingly, the transaction will not be considered a business combination. Concurrent with the transaction, Regenesis Holdings, Inc. changed its name to FuelNation, Inc. No adjustment of assets to "fair value" has been recorded. [2] Summary of Significant Accounting Policies Cash and Cash Equivalents - Cash equivalents are comprised of certain highly liquid investments with a maturity of three months or less when purchased. The Company had no cash equivalents as of December 31, 2003. Inventory - Inventory consists of technological components which will be used in the Company's operations. Inventory is stated at the lower of cost [determined by the first in, first out ["FIFO"] method] or market. During 2003 and 2002 inventory in the amount of $499,749 and $60,590 were written off respectively. F-11 FUELNATION, INC. [A DEVELOPMENT STAGE COMPANY] NOTES TO FINANCIAL STATEMENTS, Sheet #2 [2] Summary of Significant Accounting Policies [Continued] Property and Equipment and Depreciation - Expenditures for improvements and additions are capitalized at cost while expenditures for normal repairs and maintenance are charged against income as incurred. Depreciation and amortization are provided primarily using the straight-line method over estimated useful lives as follows: Office Furniture and Equipment 5 Years Computer Equipment 5 Years During 2003 and 2002, depreciation expense was $50,136 and $50,136, respectively. Deposits On Equipment - Deposits on equipment represent amounts paid, through the issuance of common stock, on equipment purchased. The Company entered into a stock repurchase agreement ["put option"] with the vendor [See Note 8]. The vendor has retained title to the equipment until the put option is satisfied. During 2003, the deposit on the equipment in the amount of $ 752,500 was reserved for 100% Concentration of Credit Risk - Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents. The Company places its cash with a high credit quality financial institution, and as a result feels its exposure to such credit risk is limited. At December 31, 2003, the Company had no amounts in the financial institution in excess of FDIC insurance limits. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Impairment - In August 2001, the Financial Accounting Standards Board ["FASB"] approved Statement of Financial Accounting Standards ["SFAS"] No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement requires that long-lived assets to be disposed of other than by sale be considered held and used until they are disposed of. SFAS No. 144 requires that long-lived assets to be disposed of by sale be measured at the lower of carrying amounts or fair value less cost to sell and to cease depreciation [amortization]. SFAS No. 144 recommends a probability-weighted cash flow estimation approach in situations where alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range of possible future cash flow amounts are estimated. Discontinued operations will no longer be measured on a net realizable basis, and future operating losses will no longer be recognized before they occur. Additionally, goodwill will be removed from the scope of SFAS No. 144. As a result, goodwill will no longer be required to be allocated to long-lived assets [unless they qualify as a reporting unit] to be tested for impairment. Capitalized Technology Costs - Capitalization of technology costs, including computer software development costs begins upon the establishment of technological feasibility. Technological feasibility for the Company's technology is generally based upon achievement of a detail program design free of high risk development issues. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized technology costs requires considerable judgement by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life and changes in software and hardware technology. F-12 FUELNATION, INC. [A DEVELOPMENT STAGE COMPANY] NOTES TO FINANCIAL STATEMENTS, Sheet #3 [2] Summary of Significant Accounting Policies [Continued] Capitalized Technology Costs [Continued] - Amortization of capitalized technology costs commences when the related products become available for general release to customers. Amortization is provided on a product by product basis. The annual amortization is the greater of the amount computed using (a) the ratio that current gross revenue for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product. The Company periodically performs reviews of the recoverability of such capitalized technology costs. At the time a determination is made that capitalized amounts are not recoverable based on the estimated cash flows to be generated from the applicable technology net realizable value, any remaining capitalized amounts are written off. During 2002, the primary objective of the Company became obtaining funding for the construction of a travel center, initially in the state of Florida, followed by additional centers in locations in other key states. The sale and installation of the Company's proprietary software system to the petroleum marketing and energy services industry, as well as the acquisition of targeted companies in this industry, while still an integral part of the Company's operational plan, is currently secondary to the travel centers. As a result, in 2002, the Company incurred a charge of $1,581,747 for a total impairment loss on the capitalized technology costs. Advertising Expense - It is the Company's policy to expense advertising costs as incurred. Advertising expense amounted to $-- and $60,591 in 2003 and 2002, respectively. Income Taxes - Pursuant to SFAS No. 109, "Accounting for Income Taxes," income tax expense [or benefit] for the year is the sum of deferred tax expense [or benefit] and income taxes currently payable [or refundable]. Deferred tax expense [or benefit] is the change during the year in a company's deferred tax liabilities and assets. Deferred tax liabilities and assets are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Income [Loss] Per Share - Basic earnings [loss] per share is computed by dividing income [loss] available to common stockholders by the weighted average number of common shares outstanding during the period. SFAS No. 128 also requires a dual presentation of basic and diluted earnings per share on the face of the statement of operations for all companies with complex capital structures. Diluted earnings per share reflects the amount of earnings for the period available to each share of common stock outstanding during the reporting period, while giving effect to all dilutive potential common shares that were outstanding during the period, such as common shares that could result from the potential exercise or conversion of securities into common stock. The computation of diluted earnings per share does not assume conversion, exercise, or contingent issuance of securities that would have an antidilutive effect on per share amounts [i.e., increasing earnings per share or reducing loss per share]. The dilutive effect of outstanding options and warrants and their equivalents are reflected in dilutive earnings per share by the application of the treasury stock method which recognizes the use of proceeds that could be obtained upon exercise of options and warrants in computing diluted earnings per share. It assumes that any proceeds would be used to purchase common stock at the average market price during the period. Options and warrants will have a dilutive effect only when the average market price of the common stock during the period exceeds the exercise price of the options or warrants. The Company's options and warrants were not included in the computation of loss per share for 2003 and 2002 because to do so would have been antidilutive for these years. See Note 11 for a detail of options and warrants that could potentially dilute future earnings per share. F-13 FUELNATION, INC. [A DEVELOPMENT STAGE COMPANY] NOTES TO FINANCIAL STATEMENTS, Sheet #4 [2] Summary of Significant Accounting Policies [Continued] Stock-Based Compensation - The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" [APB No. 25] with regard to the accounting for its employee stock options. Under APB No. 25, compensation expense is recognized only when the exercise price of options is below the market price of the underlying stock on the date of grant. The Company applies the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" to non- employee stock-based compensation and the pro forma disclosure provisions of SFAS No. 123 as amended by SFAS No. 148 [See Note 15] to employee stock-based compensation. Reclassification - Certain items in the comparative financial statements have been reclassified to conform to the current period's presentation. [3] Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in the financial statements, the Company is in the development stage, has a working capital deficiency and has suffered significant losses. These factors, among others, raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management plans for the Company to raise capital to fund operations through equity and/or debt financing. It is not possible to predict at this time the success of management's efforts to raise capital. [4] Related Party Transactions The Company has borrowed monies from related parties to fund operations. In 2003 the Company borrowed $328,000 from the Chief Executive Officer ["CEO"]and in 2002, the Company borrowed approximately $504,000 from Fuel America LLC ["Fuel America"] and Fuel Nation Group, LLC ["FNG"],( entities controlled by the Chairman of the Board/Chief Executive Officer ["CEO"]). In 2003 and 2002 repayment of debt to related parties was $124,111 and $99,594 respectively. At December 31, 2003 and 2002, the balance owed to affiliates was $325,221 and $121,332,respectively. Currently, there are no repayment terms for the debt and it is treated as if due on demand. Interest at the rate of 5% per annum is being charged on the amount advanced in 2003. At December 31, 2003 and 2002 , interest expense on loans from related parties was $11,709 and $0 respectively. During 2003, the Company issued 8,000 shares of preferred stock to Alkhalifa petroleum Corp. a company controlled by a director of the Company, Shaikh Isa Mohammed Isa Alkhalifa, in exchange for personally guaranteeing an $8,000,000 bank line of credit on behalf of the Company. The line of credit is to be utilized for future purchases and resale of petroleum products. As of December 31, 2003 the line of credit had not been utilized. In December 2003, the CEO was issued 2,800 shares of preferred stock as consideration under the non-dilution clause in his employment contract as amended. The company intends to extend the employment agreement and add additional incentives for income and shares of equity based on performance. During 2002, the Company used proceeds from common stock issuances in the amount of approximately $180,000 to repay amounts borrowed from Fuel America and FuelNation group, LLC. In July 2002, the Company granted options to purchase 80,000 shares of common stock valued at approximately $234,000 to these affiliates as repayment for amounts borrowed, these options were exercised in 2002. In December 2002, the Company issued 335,730 shares of common stock valued at approximately $201,000 to its then former CEO to replace shares of common stock owned by him [through Fuel America] and pledged as collateral to secure three loans in the amounts of $330,000, $65,000 and $100,000 which proceeds were used on behalf of the Company through loans from the affiliates. The lenders defaulted against the collateral for non payment. The lender of the $330,000 loan has confirmed that the collateral of 133,333 shares of common stock has satisfied the obligation. . The company has received confirmation and written verification from the lender that the total proceeds they received on the securities satisfied the obligation. In February and December 2002, the then former CEO was granted and exercised options to purchase 8,352 and 66,667 shares of common stock at exercise prices of $1.50 and $.82 per share as consideration under the non-dilution clause in his employment contract [See Note 11 for compensation expense related to issuance of these options]. The proceeds of $12,528 and $54,667 were utilized to reduce the amounts due to affiliates. In May 2002, options to purchase 78,240 shares of common stock were granted and exercised by the then former CEO at an exercise price of $1.50 per share as consideration for accrued compensation. F-14 FUELNATION, INC. [A DEVELOPMENT STAGE COMPANY] NOTES TO FINANCIAL STATEMENTS, Sheet #5 [4] Related Party Transactions [Continued] In June 2002, the then CEO paid a nonrefundable fee related to the proposed bond issuance at that time to an investment banker of $90,000 on behalf of the Company. The amount is included in due to affiliates. In December 2002, the then current CEO was granted and exercised options to purchase 66,667 shares of common stock valued at $40,000 per his employment agreement. In December 2002, the Company issued 156,667 shares of common stock to a director of the Company in exchange for the satisfaction of accrued liabilities in the amount of $94,000 assumed by the director. In December 2002, the Company issued 23,333 shares of common stock valued at $21,000 to a director of the Company for consulting services. [5] Notes Payable In December 2002, the Company settled a civil action with a consultant. The Company incurred a $25,000 promissory note payable in six months with interest at 8%. See Subsequent Event [Note 16] F-15 FUELNATION, INC. [A DEVELOPMENT STAGE COMPANY] NOTES TO FINANCIAL STATEMENTS, Sheet #6 [6] Convertible Debt In October 2001, the Company borrowed approximately $36,000 from four (4) individuals and issued 9% convertible subordinated promissory notes [the "Notes"], which were due by September 30, 2002 and are convertible into 1,725 shares of the Company's common stock (a rate of one share of common stock for each $20.85 principal amount of notes). Additionally, the Company issued stock purchase warrants to the noteholders, which entitled the noteholders to purchase 3,449 shares of common stock at an exercise price of approximately $22.50 per share. The warrants were issued at twice the conversion rate of the common stock (two warrants for each $20.85 principal amount of notes). The notes were recorded net of a discount of approximately $30,000 which represents the fair value assigned to the warrants that were issued. The discount was amortized over the life of the debt. Amortization amounted to approximately $22,500 and $7,500 in 2002 and 2001, respectively, and is charged to interest expense. At December 31, 2002, such notes were in default. One of the note holders filed a civil action in July 2002 and subsequently received a final default judgment. During 2003 in accordance with the final default judgment against the Company, $15,000 was paid to the former note holder to settle a default on a convertible note. In addition 25 shares of preferred stock was also issued to the former note holder as full release to the Company of all obligations and liabilities attached to the convertible note. The Company incurred expense on the amount of $3,000 as a result of the judgement. In September 2003, the Company entered into new convertible debt agreements with three (3) individual existing note holders to increase the face value of the notes by $24,412 as compensation for the Company being in default of the original notes and accrued interest. Interest is to be paid at 18% per annum. In December 2003 the Company signed a addendum to the debt agreement, whereby the Company agreed to issue a combined total of 409 shares of preferred stock to the three note holders in exchange for full release of all obligations and liabilities the Company may have with regard to the convertible debt holders. The preferred shares were issued to the note holders in December 2003. [7] Payroll and Taxes Payable The Company has primarily funded its payroll costs through borrowing from related parties [See Note 4]. Payroll taxes have become delinquent since the second quarter of 2001. These liabilities which include penalties and interest through December 31, 2003 amount to approximately $794,332. Penalties [to the maximum limits] and interest will accrue on such payroll tax liabilities, as well as additional payroll tax liabilities incurred subsequent to December 31, 2003, until paid. In 2004, the CEO pledged shares of preferred stock owned by him to the Internal Revenue Service as guarantee for the payment of payroll tax liabilities. [8] Common Stock Subject to Repurchase In October 2003, the Company issued 376 shares of preferred stock in exchange for the release of an agreement the Company entered into to repurchase 3,790 shares of common stock valued at $396,500. The remaining Common Stock Subject to Repurchase ["Put Option"] has been valued at the fair market value of the common stock when issued[$3,178,474]. The Company does not expect the Put Option to be exercised in the near term. In June 2001, the Company issued 30,000 shares of the Company's common stock as consideration for equipment deposits and consulting services valued at $1,442,500. Additionally, in April 2001, the CEO transferred 17,917 shares of Company common stock owned by him valued at $1,209,375 to the same entity. In December 2001, the Company entered into an agreement ["Put Option"] to repurchase all such stock at a price of $97.50 per share [an aggregate of $4,671,875] at the option of the holders. [9] Stockholders' Equity Capital Stock - On January 27, 2003, the Company affected a 150:1 reverse split of its common stock. At the same time, the Company amended its certificate of incorporation authorizing it to issue 105,000,000 shares of capital stock, of which 5,000,000 shares are classified as preferred stock, par value of $.01 per share, issuable in one or more series and 100,000,000 shares are classified as common stock, par value $.01. All periods presented have been restated to reflect the 150:1 reverse split of common stock. F-16 Preferred Stock Up to 30,000 shares of Series A Convertible Preferred Stock has been authorized.The price is $1,000 per share. Each Series A convertible Preferred share is equal to .00255% of the total issued and fully diluted common stock of the Company. Each Preferred share will always maintain a conversion ratio to common stock such that the percentage ownership in the Company represented by one share of Series A Convertible Preferred Stock is constant. Noncumulative dividend on the Series A preferred will be at the rate of 8% per share per annum. Dividends will be payable only if, and when declared by the Board of Directors. In February 2003 23,334 shares of common stock was issued to settle a liability in the amount of $25,000. In October 2003, the Company issued 376 shares of preferred stock in exchange for the release of an agreement the Company entered into to repurchase 3,790 shares of common stock valued at $396,500. In December 2003, the Company issued 8,000 shares of preferred stock to Alkhalifa petroleum Corp. a company controlled by a director of the the Company, Shaikh Isa Mohammed Isa Alkhalifa, in exchange for personally guaranteeing an $8,000,000 bank line of credit on behalf of the Company. In December 2003, 25 shares of preferred stock was issued to a former convertible note holder as full release to the Company of all obligations and liabilities attached to the convertible note. In December 2003, 409 shares of preferred stock was issued to three (3) individual convertible note holders in exchange for release to the Company of all obligations and liabilities attached to the convertible notes. In December 2003, 164 shares of preferred stock was issued for a subscription of $105,000 and replacement of 53,800 shares of common stock. The subscription receivable was still outstanding as of December 31, 2003. In December 2003, 1,064 shares of preferred stock was issued for $180,200 and replacement of 61,849 shares of common stock. In December 2003, 162 shares of preferred stock was issued as a replacement of 6,995 shares of common stock owned by existing shareholders. In December 2003, the CEO was issued 2,800 shares of preferred stock as consideration under the non-dilution clause in his employment contract as amended. As of December 2003, 134,143 shares of common stock owned by existing shareholders were replaced by the Company by virtue of various settlement and subscription agreements. The 134,143 shares of common stock have subsequently been subscribed for by a unrelated third party for $1,340,900. The $1,340,900 subscription receivable has been shown as a contra- equity account in the financial statements. In December 2002, 156,667 shares of common stock were issued to a member of the Board of Directors in repayment of liabilities of $94,000 assumed personally by the director. F-17 FUELNATION, INC. [A DEVELOPMENT STAGE COMPANY] NOTES TO FINANCIAL STATEMENTS, Sheet #7 [9] Stockholders' Equity [Continued] During 2002, 65,555 shares of common stock were issued to various individuals for consulting and printing services, which resulted in a non-cash charge to operations of $307,000, and 23,333 shares of common stock were issued to a member of the Board of Directors for consulting services which resulted in a non-cash charge to operations of $21,000. During 2002, the Company issued 335,730 shares of common stock to Chris Salmonson, the former CEO of the Company in replacement of shares pledged by the then CEO as collateral for third party loans to an affiliated entity. These funds were advanced to the Company by the affiliated entity. The Company was unable to repay the advance causing the affiliate to default and the collateralized shares to be surrendered. The stock was valued at $201,438, which was offset against the amount due to affiliates. See Notes 6, 8, 11 and 13 for additional equity transactions. [10] Income Taxes An analysis of the components of income taxes is as follows: Years ended December 31, ------------------------------ 2003 2002 ------------ ------------ Current: Federal $ -- $ -- State -- -- ------------ ------------ Totals -- -- ------------ ------------ Deferred: Federal -- -- State -- -- ------------ ------------ Totals -- -- ------------ ------------ Totals $ -- $ -- ------ ============ ============ F-18 FUELNATION, INC. [A DEVELOPMENT STAGE COMPANY] NOTES TO FINANCIAL STATEMENTS, Sheet #8 [10] Income Taxes [Continued] Income taxes for continuing operations differs from the amount computed by applying the statutory federal income tax rate as follows: Years ended December 31, -------------------------- 2003 2002 ----------- ----------- Computed Federal Statutory Tax Benefit $ 856,000 $ 1,505,000 Permanent Difference - Non-Deductible Expense (27,000) (269,000) Valuation of Temporary Differences (829,000) (1,236,000) ----------- ----------- Actual $ -- $ -- ------ =========== =========== The components of the net deferred tax asset and liability are as follows: Years ended December 31, -------------------------- 2003 2002 ----------- ----------- Deferred Tax Assets - Current: Vacation Accrual $ 49,000 $ 34,000 Accrued Compensation 82,000 -- Valuation Allowance (131,000) (34,000) Current Deferred Tax Asset $ -- $ -- -------------------------- =========== =========== Deferred Tax Asset - Long-Term: Net Operating Loss Carryforward $3,120,000 $ 2,309,000 Stock Options 2,208,000 2,208,000 Valuation Allowance (5,328,000) (4,517,000) ----------- ----------- Long-Term Deferred Tax Asset $ -- $ -- ---------------------------- =========== =========== Total valuation allowance increased by $908,000 and $1,236,000 in 2003 and 2002, respectively. At December 31, 2003, the Company had approximately $9,200,000 of federal net operating tax loss carry forwards expiring at various dates through 2022. The Tax Reform Act of 1986 enacted a complex set of rules which limit a company's ability to utilize net operating loss carry forwards and tax credit carry forwards in periods following an ownership change. These rules define an ownership change as a greater than 50 percent point change in stock ownership within a defined testing period which is generally a three-year period. As a result, the Company's utilization of its net operating loss carry forwards could be significantly limited. [11] Stock Options and Warrants Effective April 18, 2002 [amended December 2, 2002], the Company adopted the 2002 stock option plan [the "Plan"] which provides for the issuance of stock options to key employees and consultants of the Company. Initially, 180,000 shares of common stock were reserved under the Plan. In November 2002, an additional 480,000 shares were registered to be reserved under the Plan, however, due to a lack of authorized shares available only 233,332 shares were reserved under the Plan. In 2004 the remaining 246,668 shares were reserved under the plan. The Plan, which provides for the issuance of both incentive stock options [employees] and non-qualified stock options [employees and consultants], will terminate on July 4, 2010, unless terminated earlier by the Board of Directors. F-19 FUELNATION, INC. [A DEVELOPMENT STAGE COMPANY] NOTES TO FINANCIAL STATEMENTS, Sheet #9 [11] Stock Options and Warrants [Continued] The terms and conditions of each option granted are determined by a committee consisting of two or more directors, or if no such committee is designated by the Board of Directors, then by the Board of Directors as a whole, except for the pricing of incentive stock options, which is determined using guidelines established in the Internal Revenue Code. As of December 31, 2003, 60,278 options were available to grant under the Plan. During 2002, 353,054 options were granted under the Plan, of which 353,054 were exercised. During 2002, the Company granted options to purchase 161,331 shares of Company common stock to various consultants at an exercise price ranging from $.41 to $3.00 per share. The Company incurred non-cash charge to operations of $410,562, the fair value at the date of grant. In December 2002, the Company granted options to purchase 66,667 shares of Company common stock to the then former CEO for consulting services at an exercise price of $.82 per share. The Company incurred a non-cash charge to operations of $38,251, the fair value at the date of grant, and the proceeds upon exercise reduced the amount due to affiliates by $54,667. In February 2002, the Company granted options to purchase 8,352 shares of common stock at an exercise price of $1.50 to the then CEO pursuant to the terms of his employment contract. The Company incurred a non-cash charge to operations of $85,187, the fair value at the date of grant, and the proceeds upon exercise reduced the amount due to affiliates by $12,528. In July 2002, the Company granted options to purchase 80,000 shares of common stock, which were exercised at a price of $1.50 per share, to an affiliated company as a partial repayment of the loan due to the affiliated entity. The fair value of the options plus the proceeds upon exercise approximated $234,000 which was the amount offset against the amount due to affiliate. In May 2002, the Company granted options to purchase 111,722 shares of Company common stock to the five employees including the then CEO at an exercise price of $1.50 per share. The Company incurred a non-cash charge to operations of $370,374 and reduced accrued payroll by $167,582, the fair value at the date of grant totaling $537,956. In December 2002, the Company granted options to purchase 66,667 shares of common stock to the then CEO and President, pursuant to the terms and conditions of his employment agreement. The Company incurred a non-cash charge to operations of $40,000, the fair value at the date of grant. F-20 FUELNATION, INC. [A DEVELOPMENT STAGE COMPANY] NOTES TO FINANCIAL STATEMENTS, Sheet #10 [11] Stock Options and Warrants [Continued] A summary of the changes in outstanding common stock options and warrants is as follows: Stock Options Warrants ---------------------------- --------------------------- Weighted-Average Weighted-Average Shares Exercise Price Shares Exercise Price ------------ ------------ ------------ ------------ Balance - December 31, 2001 12,670 1.50 25,222 222.56 Granted 494,739 1.51 -- -- Exercised (494,739) (1.51) -- -- Canceled -- -- -- -- ------------ ------------ ------------ ------------ Balance - December 31, 2002 12,670 $ 1.50 25,222 $ 222.56 Granted -- -- -- -- Exercised -- -- -- -- Canceled -- -- -- -- ------------ ------------ ------------ ------------ Balance Outstanding and Exercisable- December 31, 2003 12,670 $ 1.50 25,222 $ 222.56 ============ ============ ============ ============ The options and warrants granted during 2002 are distributed as follows, relative to the difference between the exercise price and the stock price at grant date: Number Weighted-Average Weighted-Average Granted Exercise Price Fair Value ------------ ------------ ------------ Options - Exercise Price is Less Than Stock Price 318,074 $ 1.61 $ 4.43 ============ ============ ============ Options - Exercise Price is Equal to Stock Price 176,665 $ .69 $ .69 ============ ============ ============ F-21 FUELNATION, INC. [A DEVELOPMENT STAGE COMPANY] NOTES TO FINANCIAL STATEMENTS, Sheet #11 [11] Stock Options and Warrants [Continued] The following table summarizes information about stock options at December 31, 2003: Outstanding and Exercisable Stock Options Outstanding and Exercisable Warrants ---------------------------------------------- ----------------------------------------------- Weighted- Weighted- Average Weighted- Average Weighted- Range of Remaining Average Remaining Average Exercise Prices Shares Contractual Life Exercise Price Shares Contractual Life Exercise Price ------------------- ------------ ---------------- -------------- ------------- ------------- $ 1.50 - $ 1.50 12,670 4.41 Years $ 1.50 -- $ -- $ 21.89 - $ 23.51 -- $ -- 5,449 2.38 Years $ 22.48 $ 75.00 - $ 225.00 -- $ -- 10,000 2.58 Years $ 150.00 $300.00 - $ 375.00 -- $ -- 8,813 2.20 Years $ 346.64 $750.00 - $1,125.00 -- $ -- 960 1.17 Years $ 975.00 ----------- ------------- 12,670 25,222 =========== ============= The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, for stock options issued to employees in accounting for its stock option plans. Total compensation costs recognized for stock based employee compensation awards was $-- and $495,561 for the years ended December 31, 2003 and 2002, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The weighted average fair value of stock options granted to employees used in determining pro forma amounts is estimated at $- and $3.96 during 2003 and 2002, respectively. Pro forma information regarding net income or loss and net income or loss per share has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed under SFAS No. 123, Accounting for Stock Based Compensation. The fair value of options and warrants issued to non-employees, as well as, the pro forma amounts attributable to employee stock options is estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: December 31, ---------------------- 2003 2002 -------- -------- Risk-Free Interest Rate -- 3.00% Expected Life -- 1 Year Expected Volatility -- 204.05% Expected Dividends -- None F-22 FUELNATION, INC. [A DEVELOPMENT STAGE COMPANY] NOTES TO FINANCIAL STATEMENTS, Sheet #12 [11] Stock Options and Warrants [Continued] The pro forma amounts are indicated below: Years ended December 31, ---------------------------- 2003 2002 ------------ ------------ Net Loss as Reported $ (4,425,152) Stock-based Compensation Expense as Reported 495,561 Stock-based Compensation Expense Under Fair Value Method (603,991) ------------ ------------ Pro Forma Net Loss $ (4,533,582) Basic and Diluted Net Loss Per Share As Reported $ (3.08) Pro Forma Basic and Diluted Net Loss Per Share $ (3.15) [12] Commitments and Contingencies Employment Contracts - The Company has only one outstanding employment contracts with its employees as of December 31, 2003. The aggregate commitment for future salary at December 31, 2003 was approximately $406,000. In accordance with these contracts, the employees were issued options to purchase 109,538 shares of the Company's common stock in 2001 [See Note 11]. In November 2002, the then former CEO, Chris Salmonson agreed to relinquish his position, to make available additional time to fight a personal legal battle filed against him. He continued to be a consultant of the Company during such period on the same economic terms set forth in his employment agreement, which includes among other things annual compensation of $240,000 through March 2004. There is also a non-dilution clause for the common stock ownership which maintans ownership of 27.63%, as defined in the consulting agreement. The contract is automatically renewed for two, two year periods. The former CEO was issued options to purchase 75,019 shares of common stock in 2002 under this agreement. In November 2003 Chris Salmonson resumed his position as CEO. Effective December 5, 2002, a new CEO and President, Chas Brodzki, was hired pursuant to a letter agreement executed on November 27, 2002. Per the terms of the agreement, compensation is the issuance of shares of Company common stock equal to 10% of the total outstanding shares of common stock with an additional 10% of the total outstanding common stock issuable upon the receipt of funding in excess of $1,000,000 or the completion of the bond funding. No additional funding was obtained and only 10% of the total outstanding shares were earned [See Note 16]. As of December 31, 2002, 66,667 shares of common stock were issued to the then CEO under his employment agreement. The balance of 166,425 shares were issued in the fourth quarter of 2004 and simultaneously converted into 667 shares of Preferred stock. F-23 FUELNATION, INC. [A DEVELOPMENT STAGE COMPANY] NOTES TO FINANCIAL STATEMENTS, Sheet #13 [12] Commitments and Contingencies [Continued] Operating Leases - FuelNation Group, LLC, an entity 100% owned by Chris Salmonson, signed a 3 year lease renewal on July 8, 2004, for the office location in Davie, Florida, and sub leases to FuelNation Inc. for the same terms and conditions. This lease obligates the company to a base monthly rent of $1,184.50, year one, $1,220.04, year two, $1,256.64 year three, plus tax pursuant to a written lease which expires in August 31, 2007. Commitments for future rent expense amount to $12,280 in 2003, $12,852 in 2004, $14,391 in 2005, $14,820 in 2006 and $8,796 in 2007 for an aggregate amount of $63,139. The Company leases a facility in Lexington, Kentucky which houses its data centers. Rent is on a month-to-month basis $2,000 - Kentucky. Rent expense amounted to $67,437 and $117,900 in 2003 and 2002, respectively. Other - The Company has entered into several consulting and financial agreements for which it issued stock or granted options or warrants as non-refundable retainers. Primarily, these agreements have no future commitments unless some event, such as a financing, occurs. See Notes 13 and 16. [13] Litigation In the normal course of business, the Company is exposed to a number of other asserted and unasserted potential claims. Management, after review and consultation with counsel, believes it has meritorious defenses and considers that any liabilities from these matters would not materially affect the financial position, liquidity or results of operations of the Company. See additional information in Subsequent events paragraph [16] below. In February, 2003 the Company was served with a civil suit from Exodus Resources, Inc. vs FuelNation Inc. and Chris Salmonson (Case# 03-5178-CA-06) Dade County, Florida (11th Judicial Circuit). The Company and former CEO were named as co-defendants, jointly and severally, by a shareholder in a securities related suit for money damages exceeding $15,000.00 (plus special damages) based on allegations of breach of fiduciary duty and fraud. FuelNation filed a third party claim against its attorney for malpractice. Exodus had its attorney enter an appearance on behalf of FuelNation and agreed not to execute on any judgment against FuelNation. In January, 2003 the Company was served with a civil suit from Andrew Telsey vs. FuelNation Inc. (Case# 03-001019-CACE-11) Broward County, Florida (17th Judicial Circuit). The Company was named as defendant in a collection suit for attorneys fees in the amount of $24,197.93 based on allegations of breach of agreement and quantum merit. This case has been settled with the issuance of 10 preferred shares. In July, 2002 the Company was served with a civil action from one of the four individual note holders, Peter Gianoukas vs. FuelNation Inc. (Docket No. L4202-02 in the Superior Court of New Jersey), in the amount of $11,541 principal amount. The note has been repurchased by the company in 2003 and the case has been dismissed with Prejudice. In December, 2002 in a case entitled Richard Maddox vs. FuelNation Inc. (CASE#02-22492-CACE-25) Broward County, Florida (17th Judicial Circuit), the Company was named as a defendant by a shareholder in a securities-related suit for money damages in the amount of $25,000 based on allegations of unjust enrichment. The company entered into a stipulation for settlement with the shareholder, and agreed to purchase back his shares for $25,000. This case has been settled. See Subsequent Events Note [16]. F-24 FUELNATION, INC. [A DEVELOPMENT STAGE COMPANY] NOTES TO FINANCIAL STATEMENTS, Sheet #14 [14] Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. In assessing the fair value of its cash and cash equivalents, and accounts payables, accrued expenses and short-term debt, management concluded that the carrying amount of these financial instruments approximates fair value because of their short maturities. [15] Recently Issued Accounting Standards In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. "SFAS No. 150 changes the accounting for certain financial instruments that under previous guidance, could be classified as equity or "mezzanine" equity by now requiring those instruments to be classified as liabilities (or assets in some circumstances) in the statement of financial position. Further, SFAS No. 150 requires disclosure regarding terms of those instruments and settlement alternatives. The guidance in SFAS No. 150 generally is effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. In November 2004 - The Financial Accounting Standards Board (FASB) has issued FASB Statement No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. The amendments made by statement 151 will improve financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 3004. The provisions of Statement 151 should be applied prospectively. In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003. In December 2003, the FASB issued Interpretation No. 46(R) ("FIN 46R") which revised certain provisions of FIN 46. Publicly reporting entities that are small business issuers must apply FIN 46R to all entities subject to FIN 46R no later than the end of the first reporting period that ends after December 15, 2004 (as of December 31, 2004, for a calendar year enterprise). The effective date includes those entities to which FIN 46 had previously been applied. However, prior to the application of FIN 46R, a public entity that is a small business issuer shall apply FIN 46 or FIN 46R to those entities that are considered special-purpose entities no later than as of the end of the first reporting period that ends after December 15, 2003 (as of December 31, 2003 for a calendar year enterprise). In December 2004 the FASB published FASB Statement No. 123(revised 2004), Share- Based Payment. Statement 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instrument issued. Public entities that file as small business issuers will be required to apply Statement 123(R) in the first interim or annual reporting period that begins after December 15, 2005. With the exception of FIN 46,and 123(R) which may have an impact on future financial statements, the Company expects that the adoption of the new Statements will not have a significant impact on its financial statements. F-25 FUELNATION, INC. [A DEVELOPMENT STAGE COMPANY] NOTES TO FINANCIAL STATEMENTS, Sheet #15 [16] Subsequent Events In August 2004, we incorporated a 100% wholly owned subsidiary, Leman Energy Trading, Inc., a Panamanian Corporation registered in the Panamanian Registry Public Deed No. 9421. In 2004, the CEO pledged shares of preferred stock owned by him to the Internal Revenue Service as guarantee for the payment of payroll tax liabilities. In 2004 in order to resolve a pending civil action with a third party ["Consultant"], the Company released 23,334 shares of restricted common stock held by the Consultant and in turn the Consultant cancelled a $25,000 promissory note held by him. The Company also entered into a consulting agreement with the Consultant for a period of one year and in consideration for this agreement the Company shall issue the consultant 10,000 restricted shares of common stock within 30 days of the date of this agreement [See Note 5]. In 2004 in order to settle a Stipulation for Settlement in the case Richard Maddox vs. FuelNation, Inc., whereby the Company would buy back the shares of common stock held by the shareholder for $25,000,the Company paid the shareholder $25,000 and in turn Mr. Maddox specifically waives and releases any claims that he may have or may have had to such shares of stock. F-26