<PAGE>
As filed with the Securities and Exchange Commission on September 29, 2000
Registration No. 333-41826
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AQUACELL TECHNOLOGIES, INC.
(Name of small business issuer as specified in its charter)
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<S> <C> <C>
Delaware 3590 33-0750453
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
10410 Trademark Street
Rancho Cucamonga, California 91730
(909) 987-0456
(Address, telephone number of principal executive offices and principal place of
business)
____________________
James C. Witham
Chairman and Chief Executive Officer
AquaCell Technologies, Inc.
10410 Trademark Street
Rancho Cucamonga, California 91730
(909) 987-0456
(Name, address and telephone number of agent for service)
____________________
Copies to:
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<S> <C>
Gregory W. Preston, Esq. Steven Morse, Esq.
Allen Matkins Leck Gamble & Mallory LLP Lester Morse, P.C.
1900 Main Street, Fifth Floor 111 Great Neck Road, Suite 420
Irvine, California 92614-7321 Great Neck, New York 11021
Telephone: (949) 553-1313 Telephone: (516) 487-1446
Facsimile: (949) 553-8354 Facsimile: (516) 487-1452
</TABLE>
Approximate date of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
__________
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this registration statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. The securities may not be sold until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the sale is not permitted.
SUBJECT TO COMPLETION, DATED SEPTEMBER 29, 2000
PROSPECTUS
[LOGO]
1,750,000 Shares
AquaCell Technologies, Inc.
Common Stock
________________
This is an initial public offering of 1,750,000 shares of common stock of
AquaCell Technologies, Inc. No public market currently exists for our common
stock. We have applied to have the common stock quoted under the symbol "AQUA"
on the Nasdaq SmallCap Market and under the symbol "AQA" on the American Stock
Exchange. We presently expect that the initial public offering price of the
common stock will be $5.00 per share. The offering price may not reflect the
market price of our shares after the offering.
Please see "Risk Factors" beginning on page 5 to read about certain factors
that you should consider before buying shares of the common stock.
________________
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or passed upon the accuracy
or adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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<CAPTION>
Per Share Total
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Initial public offering price................................ $ $
Underwriting discount........................................ $ $
Proceeds before expenses..................................... $ $
</TABLE>
We have granted the underwriters a 45-day option to purchase up to an
additional 262,500 shares of common stock to cover over-allotments. The
underwriters expect to deliver the shares of common stock purchased in this
offering on _________, 2000.
GRADY & HATCH
AND COMPANY, INC.
Prospectus dated ______________________________, 2000.
<PAGE>
[Inside front cover graphic description
The background of the text starts off grayish at the top and then becomes a
copper brown color which gradually darkens as you move down the page. Across the
top of the page there is a black rectangular box with a white text heading
written in approximately 3/8 inch font, which states "The Patented Purific(R)
Self-Filling Water Cooler." In the right side of the black box next to the text
is the company's Purific(R) water cooler logo which is a circle of approximately
1 inch diameter as follows: the outside ring of the logo is yellow with blue
writing that says "NEVER CHANGE ANOTHER BOTTLE"; moving toward the center of the
circle there is a thin blue ring; the remainder and middle of the circle has a
white background with a blue drawing of a stick person bending over to lift a
bottle of water; and the entire circle is crossed out by one blue diagonal line
which starts at the top left. Directly below the right side of the circle in
white 1/16 inch font, it says "TM".
Below the black box and on the left side of the page, there is a picture of the
front of a Purific(R) bottle water cooler approximately 6 1/2 inches in length,
which has a water colored five-gallon bottle on top of a white base with a thick
blue band across slightly above the middle of the bottle that in white text says
"Aquacell" with a white partial globe design above and connecting to the word
"Aquacell," in the upper portion of the white base there are two spigots, one
with a small blue band on it and one with a small pink band on it. Directly
centered above the spigots is a blue box with "Purific(R)" written in white. In
black text directly below this Purific(R) water cooler written in 3/16 inch
font, it states "From the front Purific looks like an ordinary bottled water
cooler..."
To the right of that cooler, there is a second cooler of equal size, which shows
the back of the Purific(R) water cooler. There is a water colored five-gallon
bottle on top of a white base with a thick blue band across slightly above the
middle of the bottle. At the top center of the bottle of water there are two
tubes that are attached to the bottle at the top of the bottle, one is white and
one is blue. These tubes join to form one white tube at about the center of the
bottle. The tube connects to other portions of the stand and continues to the
bottom of the cooler. On the top left of the stand there is a red switch.
Below this and covering the rest of the back of the stand, is the inter-workings
of the cooler, including a blackish blue grate, many white cylindrical filters
with blue writing, and tubes which connect the filters. In black text directly
below this water cooler written in 3/16 inch font, it states "...but the back
reveals a comprehensive water purification plant!"]
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus in connection with this offering and, if given or made, such
information or representation must not be relied upon as having been authorized
by us or any underwriter. This prospectus does not constitute an offer to sell,
or solicitation of an offer to buy, any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information herein is correct as of any time subsequent to the date hereof or
that there has been no change in our affairs since such date.
____________________
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of our common stock
including over-allotment, stabilizing and short covering transactions. For a
description of these activities, see "Underwriting."
In connection with this offering, certain underwriters and selling group
members, if any, or their respective affiliates may engage in passive market
making transactions in our common stock on Nasdaq and Amex in accordance with
Rule 103 of Regulation M. See "Underwriting."
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
as of the date of this document, regardless of the time of delivery of this
document or any sale of our common stock.
____________________
<PAGE>
Table of Contents
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Page
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Prospectus Summary 2
Risk Factors 5
Use of Proceeds 10
Dividend Policy 11
Capitalization 11
Dilution 13
Selected Consolidated Financial Data 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations 16
Business 19
Management 26
Principal Stockholders 30
Description of Capital Stock 31
Certain Transactions 33
Shares Eligible for Future Sale 35
Underwriting 36
Changes in Accountants 38
Legal Matters 38
Experts 38
Additional Information 38
Index to Financial Statements 39
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this prospectus. AquaCell Technologies, Inc. is a start-up
company. We recently commenced operations in the water purification industry.
When we refer to water industry financial and statistical information, it is
based on trade articles and industry reports that we believe are reliable,
although we have not independently verified any of this information. An
investment in our common stock involves a high degree of risk, and you should
carefully consider the information set forth under "Risk Factors." As used in
this prospectus, except where the context clearly requires otherwise, references
made to "AquaCell", "we", "us", or "our" mean AquaCell Technologies, Inc. and
our wholly owned subsidiary Global Water-AquaCell, Inc.
This prospectus contains forward-looking statements which involve risks and
uncertainties and you should know that our actual results may differ from our
expectations. Factors that might cause a difference may include the matters
discussed under "Risk Factors" as well as those matters discussed elsewhere in
this prospectus.
The Company
We are in the business of providing drinking water purification products to
a broad base of national customers. Following our acquisition of selected
assets of KABB, Inc. and Aquacell International, Inc. in December 1998, we began
to manufacture, sell and lease a patented automatic refilling purified bottle
water cooler to office and industrial customers. We are a Delaware corporation
incorporated on March 19, 1997. Our main offices are located at 10410 Trademark
Street, Rancho Cucamonga, California 91730 and our Internet website is
www.aquacell.com.
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<PAGE>
The Offering
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Shares of common stock offered by us......... 1,750,000 shares (2,012,500 shares if underwriters' over-allotment is exercised in
full).
Common stock to be outstanding after
completion of this offering.................. 6,888,250 shares. This number excludes:
1,845,000 shares of common stock reserved for issuance upon the exercise of
outstanding warrants issued in connection with private debt financing
transactions;
1,000,000 shares of our common stock reserved for issuance upon the exercise
of options pursuant to our employee stock option plan of which options to
purchase 305,000 shares of common stock have been granted and 40,000 shares
of our common stock originally reserved for issuance pursuant to incentive
clauses of a sales representation agreement. These incentive clauses were not
met and the 40,000 shares of common stock have been reserved for issuance as
incentives in connection with the future hiring of sales and marketing
personnel;
175,000 shares of common stock reserved for issuance upon the exercise of
warrants granted to the underwriters of this offering; and
262,500 shares reserved for issuance upon exercise of the underwriters' over-
allotment option.
Use of proceeds.............................. We intend to use the net proceeds from the sale of the common stock for:
repayment of promissory notes, including accrued interest, issued in private
debt financing transactions;
marketing, advertising and promotions;
expansion of manufacturing facilities, research and new product development,
and potential improvement to our patented technology;
accrued expenses and other payments; and
working capital and general corporate purposes.
</TABLE>
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<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
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<CAPTION>
Year Ended June 30,
-------------------
2000 1999
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<S> <C> <C>
Statement of Operations Data:
Sales............................................................. $ 263 $ 29
Net loss.......................................................... $(1,405) $(1,618)
Net loss per common share-basic and diluted....................... $ (0.28) $ (0.34)
Weighted average common shares outstanding-
basic and diluted................................................. 4,975 4,731
</TABLE>
The following table provides a summary of our balance sheet at June 30, 2000:
on an actual basis;
on a pro forma basis to reflect the receipt of $200,000 in July, 2000
pursuant to a private loan offering with three-year warrants to purchase
200,000 shares; and
on a pro forma as adjusted basis to further reflect the deemed conversion
of 135,000 redeemable common stock into common stock and the receipt of the
net proceeds from our sale of 1,750,000 shares of common stock in this
offering, at an estimated initial public offering price of $5.00 per share
after deducting underwriting discounts and commissions and our estimated
offering expenses and the anticipated application of the estimated net
proceeds, including repayment of debt. See also "Use of Proceeds" and
"Capitalization."
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<CAPTION>
June 30, 2000 Pro Forma
------------- ---------
Actual Pro Forma As Adjusted
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<S> <C> <C> <C>
Balance Sheet Data:
Working capital (deficiency)......................... $(2,555) $(2,355) $4,730
Total assets......................................... $ 645 $ 845 $5,680
Redeemable common stock.............................. $ 149 $ 149 $ --
Stockholders' equity (capital deficiency)............ $(2,169) $(1,969) $4,996
</TABLE>
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<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk.
Prospective investors should carefully consider the following risk factors, in
addition to the other information contained in this prospectus, before
purchasing our common stock.
We have a limited operating history and our historical financial data is not
a reliable basis upon which to assess the prospects for our business.
Our historical financial data is not a reliable basis upon which to predict
our future revenues or operating expenses for a number of reasons, including our
limited operating history. Prior to the first fiscal quarter of 1999, we had
not commenced our principal operations. Our business must be considered in
light of the risks, expenses and problems frequently encountered by companies
with a limited operating history.
The continuation of our operations is contingent upon our success in
establishing markets for our products and services and achieving profitable
operations. Although we intend to expand our marketing of products and
services, no assurance can be given that we will be able to achieve these
objectives or that, if these objectives are achieved, we will ever be
profitable. Such operations could also require additional financing for us in
the form of debt or equity. There can be no assurance that we will achieve
profitability and, if achieved, sustain such profitability, nor can there be any
assurance as to when such profitability might be achieved. If we are
unsuccessful in addressing any of these risks, our business, results of
operations and financial condition could be materially adversely affected.
Also, the price at which our securities trade may be subject to substantial
volatility because of fluctuations in our financial results.
Our management has limited experience operating water purification companies
and that limited experience could adversely affect our business, results of
operation and financial condition.
Our success will depend, in part, on our ability to successfully operate as a
water purification company following our acquisition of selected assets of KABB,
Inc. and AquaCell International, Inc. in December 1998. Our management has
limited prior experience in operating water purification companies. There can
be no assurance that our management will be able to implement our operating or
growth strategies effectively. If we do not effectively manage our water
purification business, our business, results of operations and financial
condition could be materially adversely affected.
We may need to raise additional capital and it may not be available to us on
favorable terms or at all; inability to obtain any needed additional capital on
favorable terms would adversely affect our business, results of operation and
financial condition.
We anticipate, based on our currently proposed plans and assumptions, that
the proceeds of the sale of the shares of common stock offered hereby will be
sufficient to satisfy our contemplated cash requirements for at least the 12
month period following the completion of this offering. After that time, we may
require additional funding. There are no current arrangements with respect to
sources of additional financing. There can be no assurance that other financing
will be available on commercially reasonable terms, or at all. The inability to
obtain additional financing, when needed, would materially adversely affect us,
including possibly requiring us to curtail or cease operations. Also, a decline
in the trading price of our common stock could negatively impact our ability to
raise future financing. To the extent we incur indebtedness or otherwise issue
debt securities, we will be subject to risks associated with indebtedness,
including the risk that interest rates may fluctuate and cash flow may be
insufficient to pay principal and interest on such indebtedness. We currently
have no credit facilities. No assurance can be given that we will be able to
obtain the capital we may need to finance a successful growth strategy and
provide for our other cash needs.
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<PAGE>
We may have to cease or curtail our operations if we are unable to obtain
sufficient financing or achieve profitability.
The independent auditor's report on our financial statements contains
explanatory language that substantial doubt exists about our ability to continue
as a going concern. The report states that we have incurred net losses, and
have a working capital deficiency. If we are unable to obtain sufficient
financing in the near term or achieve profitability, then we would, in all
likelihood, experience severe liquidity problems and may have to curtail or
cease our operations.
We currently have limited sales and distribution capabilities and if we are
unable to expand our capabilities in these areas, our business, results of
operations and financial condition would be materially adversely affected.
Currently we have a limited number of sales and marketing employees and we
have not established comprehensive distribution channels for all of our products
and services. There can be no assurance that we will be able to develop a
sufficient sales force and marketing group. The inability to develop a
sufficient sales force and marketing group would have a material adverse effect
on our business, results of operations and financial condition.
We could be adversely affected if we do not effectively manage growth.
If we successfully implement our business strategy, the resulting growth will
place significant demands on our management and internal controls. There can be
no assurance that management will effectively be able to direct us through a
period of significant growth. In particular, the pursuit of our business
strategy will place a significant strain on our managerial, operational and
financial resources. We will need to improve our financial and management
controls, reporting systems and procedures. We will also need to expand, train
and manage our work force and manage multiple relationships with various
suppliers, strategic partners and other third parties. We will need to
continually expand and upgrade our technology infrastructure and systems and
ensure continued high levels of service, speedy operation and reliability. If
we do not effectively manage such growth, our business, results of operation and
financial condition will be materially adversely affected.
Fluctuation in our quarterly operation results could materially adversely
affect our business, financial condition and results of operations.
We may experience quarterly fluctuations in operating results. Quarterly
sales and operating results will depend in part on the volume and timing of
contracts received and performed within the quarter, which are difficult to
forecast. Any significant delay or cancellation of a contract could have a
material adverse effect on our operations in any particular period. As a
result, our operating results could prove to be volatile and this could have a
material adverse effect on our business, financial condition and results of
operations.
Part of our business will be conducted outside of the United States and this
will subject us to risks associated with foreign operations that could adversely
affect our business, results of operation and financial condition.
Our business operates nationally and internationally. Accordingly, we face
certain risks associated with doing business in foreign countries, including
risks resulting from certain political, economic and other uncertainties, such
as risks of war, expropriation or nationalization of assets, renegotiation or
nullification of existing contracts, changing political conditions, changing
laws and policies affecting trade and investment, overlap of different tax
structures and fluctuating currency exchange rates. We cannot determine to what
extent we may be affected by any such laws, regulations, changes in or new
interpretations of existing laws or regulations or other consequences of doing
business outside the United States.
We depend on key personnel and could be materially adversely affected if we
do not retain those personnel.
Our operations will depend on the efforts of our executive officers, in
particular James C. Witham, our Chairman and Chief Executive Officer, and Karen
B. Laustsen, our President, Chief Operating Officer and Secretary. Should we be
unable to retain any of our executive officers, our business and prospects could
be materially adversely affected. As of the date of this prospectus, we will
have entered into five year employment agreements with Mr. Witham and Ms.
Laustsen. Our business or prospects could be materially adversely affected if
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<PAGE>
any of these senior management personnel do not continue in their management
roles and if we are unable to attract and retain qualified replacements and
additional members of management. We have secured a $1,000,000 key man life
insurance policy on Mr. Witham.
We may sometimes have to provide guarantees for our services and products and
we could be materially and adversely affected if our services or products do not
perform as guaranteed.
In connection with providing certain products to customers, we may sometimes
be required to guarantee that the services and products we provide will attain
specified levels of quality or performance. Should a product fail to perform
according to a performance guarantee and should we be unable to remedy such
failure within any applicable cure period, we could incur financial penalties in
the form of liquidated damages or could be required to remove or replace the
equipment in order to meet the specifications. There can be no assurance that
we will be able to fulfill future guarantee obligations or that fulfilling such
obligations may not involve material costs that could have a material adverse
effect on our business, financial condition and results of operations.
We intend to have our common stock Quoted on Nasdaq and AMEX, but there can
be no assurances that we will be able to maintain those listings; if our common
stock is delisted from either Nasdaq or AMEX, it would be more difficult to sell
our stock and obtain quotations on its price.
We intend to have our common stock quoted on Nasdaq and AMEX. If we continue
to incur operating losses, we might be unable to maintain the standards for
continued listing on Nasdaq and AMEX. If our stock is not admitted for
quotation on Nasdaq or Amex or is subsequently delisted, our stock would be
quoted in the over-the-counter market in which case an investor would find it
more difficult to sell our stock and obtain accurate quotations of its price.
Any news coverage concerning our delisting may also adversely affect an
investor's ability to sell our securities. In addition, if our stock was
delisted, it would likely be subject to a rule that imposes additional sales
practice requirements on brokers who sell such stock to persons other than
established customers and accredited investors. Accredited investors are
generally persons having net worth in excess of $1,000,000 or annual income
exceeding $200,000, or $300,000 together with a spouse. For transactions
covered by this rule, the broker must disclose certain risks concerning low
priced stock, make a special suitability determination for the purchaser and
must receive the purchaser's written consent to the transaction prior to sale.
Consequently, if delisting occurred, it would be more difficult for brokers to
sell our stock.
Future sales of our common stock could adversely affect our stock price.
Following completion of this offering, 6,888,250 shares of our common stock
will be outstanding. The 1,750,000 shares to be sold in this offering, other
than those that may be purchased by our affiliates, will be freely tradeable.
The remaining outstanding shares of our common stock may be publicly resold only
following their effective registration under the Securities Act of 1933, as
amended, or pursuant to an available exemption from the registration
requirements of the Securities Act, such as provided by Rule 144 promulgated
pursuant to the Securities Act. Sales made pursuant to Rule 144 must comply
with applicable holding periods and volume limitations and certain other
requirements. Following completion of this offering and the expiration of the
one year lock-up period, all of the unregistered shares not held by our
affiliates could immediately be sold in the public market without registration.
Sales of substantial amounts of our common stock in the public market, or the
perception that such sales could occur, could adversely affect prevailing market
prices of our common stock.
Our current intellectual property protections may not adequately protect our
rights and investments in our intellectual property assets; infringement of our
intellectual property rights could materially adversely affect our business,
results of operation and financial condition.
We own a United States and a Canadian patent on our automatic-refilling
purified bottle water cooler. We also have federally registered our Purific
trademark and have a pending application to register our Artic Fresh and
Aquacell marks.
While we believe that we own our trademarks, no assurance can be given that
our pending trademark applications will mature into registration. Ownership of
a patent or registration of a trademark, still may not deter competitors or
other third parties from developing equivalent technology that does not infringe
on our rights or from
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<PAGE>
marketing competitive products under different marks. Also, any rights granted
to us through a patent or trademark do not guaranty that such rights will
adequately protect our investment in our technology and intellectual property.
Partial or complete denial of any or all of our trademark applications or
loss of an existing trademark registration or patent would substantially reduce
our ability to prevent others from copying our trademarks to develop and market
competitive products or services and significantly limit our ability to profit
from licensing or selling our technology, products and services to others. If
we are unable to prevent others from copying any or all of our trademarks or to
develop or market competitive products, we could also lose all or a substantial
portion of any technological and marketing advantages we may currently have over
any actual or potential competitors.
Even if we maintain patent protection and obtain trademark registration or
other proprietary rights for our technology or trademarks, no assurance can be
given that our products, trademarks or activities will not infringe on the
patents, trademarks or proprietary rights of others. Regardless of whether we
obtain or maintain any patents or trademarks, another party could bring an
action seeking to stop us from using some or all of our technology or trademarks
and to stop us from engaging in some or all of our activities. If another party
successfully prosecutes such an action, we may have to cease using some or all
of our technology or trademarks, have to cease some or all of our activities,
and be held liable for substantial damages.
If we fail to adequately protect our intellectual property rights, our
ability to compete could be seriously harmed.
Our success depends in large part on our ability to adequately protect our
intellectual property rights. We seek to protect our documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our technology or to obtain
and use information that we regard as proprietary. As we expand our operations
globally, we become increasingly exposed to intellectual property infringement
since the laws of some foreign countries do not protect our proprietary rights
to as great an extent as do the laws of the United States. If we fail to
adequately protect our intellectual property, our business, financial results
and the market price of our common stock could be significantly adversely
impacted.
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<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking
statements are contained principally in the sections entitled "Prospectus
Summary", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." These statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performances or achievements expressed or implied by the forward-
looking statements. Forward-looking statements include, but are not limited to,
statements about:
the future growth and size of the water purification industry;
marketing and commercialization of our products;
developing an in-house sales and marketing staff;
our estimates for future revenues and profitability;
establishing and expanding relationships with customers;
laws and regulations governing water quality;
our ability to offer our products at competitive prices;
our ability to maintain and effectively manage our "just-in-time" inventory
procedures; and
our estimates regarding our capital requirements and our needs for
additional financing.
This prospectus contains statistical data regarding the water purification
industry that we obtained from industry publications. These industry
publications generally indicate that they have obtained their information from
sources believed to be reliable, but do not guarantee the accuracy and
completeness of their information. Although we believe that the publications
are reliable, we have not independently verified their data.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "intends," "plans,"
"anticipates," "believes," "estimates," "projects," "predicts," "potential" and
similar expressions intended to identify forward-looking statements. These
statements reflect our current views with respect to future events and are based
on assumptions and subject to risks and uncertainties. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements. We discuss many of these risks in this prospectus in greater detail
under the heading "Risk Factors." Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievement. Also, the
forward-looking statements represent our estimates and assumptions only as of
the date of this prospectus.
You should read this prospectus and the documents that we reference in this
prospectus and have filed as exhibits to the registration statement, of which
this prospectus is a part, completely and with the understanding that our actual
future results may be materially different from what we expect. We qualify all
of our forward-looking statements by these cautionary statements.
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<PAGE>
USE OF PROCEEDS
The net proceeds that we will receive from the sale of shares of our common
stock are estimated to be approximately $7,035,000 ($8,177,000 if the
underwriters over-allotment option is exercised in full). These numbers take
into account underwriting discounts and commissions and other estimated offering
expenses that we will pay. We intend to use these net proceeds as follows,
assuming no exercise of the underwriters over-allotment option:
<TABLE>
<CAPTION>
Amounts Percent (%)
------- -----------
<S> <C> <C>
Payment of Private Transaction Notes Including
Accrued Interest through August 31, 2000............. $1,990,000 28.28%
Marketing and Sales................................... $2,500,000 35.54%
. We intend to use this amount to fund sales,
marketing, advertising and promotional programs
throughout our entire product line. If these
programs do not require the use of the entire
$2,500,000, the remaining amount will be used for
working capital and general corporate purposes.
Expansion of Manufacturing Facilities, Research and
New Product Development, and Potential Improvements
to our Patented Technology............................ $ 800,000 11.37%
. We intend to use this amount to expand
manufacturing facilities, for research and new
product development, and for potential
improvements to our patented technology. If
these programs do not require the use of the
entire $800,000, the remaining amount will be
used for working capital and general corporate
purposes.
Accrued Expenses and Other Payments................... $ 405,000 5.76%
. We intend to use a portion of the net proceeds to
pay $225,000 to our executive officers for unpaid
compensation through March 31, 2000 as follows:
James C. Witham - $118,000, Karen B. Laustsen -
$46,000, and Gary S. Wolff - $61,000; and will
use an additional $180,000 for other
miscellaneous accrued expenses and payments.
Working Capital and General Corporate Purposes........ $1,340,000 19.05%
---------- ------
. Working capital and general corporate purposes
consist primarily of selling, general and
administrative expenses. Proceeds from the sale
of common stock if the underwriters'
over-allotment option is exercised, will also be
used for working capital and general corporate
purposes.
Total....................................... $7,035,000 100.00%
========== ======
</TABLE>
Although we are using part of the net proceeds to pay all executives for
unpaid compensation through March 31, 2000, additional unpaid compensation of
$67,000 for the quarter ended June 30, 2000 and any unpaid compensation after
that date will be paid from the operations of Aquacell in 2001.
-10-
<PAGE>
The foregoing represents our best estimate of how we will allocate the net
proceeds from the sale of shares of common stock. This estimate is based upon
the current state of our business operations, our current plans and current
economic and industry conditions, and is subject to reallocation among the
categories listed above or for additional purposes. Accordingly, we will have
broad discretion as to the application of the net proceeds.
Investors will not be able to direct the use of these funds or have any
opportunity to review the development or marketing of products. We may not use
the net proceeds from this offering in the manner that, in hindsight, would have
been the most productive or efficient manner possible and inefficient allocation
of the proceeds from this offering would adversely affect our business, results
of operation and financial condition.
We believe that the net proceeds of this offering will be sufficient to
meet our projected needs for working capital and other capital requirements
through at least the 12 months following completion of this offering. Pending
such uses, we intend to invest the net proceeds from this offering in interest
bearing accounts, certificates of deposit, money market funds or other short
term investments, all of which have varying risks of loss.
DIVIDEND POLICY
We have never paid any dividends on our common stock. We do not intend to
declare or pay dividends on our common stock; rather, we intend to retain our
earnings from operations, if any, for use in the operation and expansion of our
business and we do not expect to pay cash dividends in the foreseeable future.
Also, we may obtain credit facilities which prohibit the payment of dividends
without the consent of the lenders. Any future decision with respect to
dividends will depend on future earnings, operations, capital requirements and
availability, restrictions in future financing agreements and other business and
financial considerations.
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
on an actual basis;
on a pro forma basis to reflect the receipt of $200,000 pursuant to a
private loan offering in July, 2000 with warrants to purchase 200,000
shares of common stock exercisable at $1.00 per share (valued at $834,000);
and
on a pro forma as adjusted basis to further reflect the deemed conversion
of 135,000 redeemable common stock into common stock and the receipt of the
net proceeds from our sale of common stock in this offering, at an
estimated initial public offering price of $5.00 per share, and the
anticipated application of the net proceeds, including repayment of debt.
See also "Use of Proceeds."
The pro forma as adjusted table does not give effect to the following:
262,500 shares of our common stock issuable upon the exercise of the
underwriters' over-allotment option;
175,000 shares of our common stock reserved for issuance upon the exercise
of the warrants granted to the underwriters of this offering exercisable
during the four-year period commencing one year from the date of this
prospectus at an exercise price of 165% of the public offering price;
1,000,000 shares of our common stock reserved for issuance upon the
exercise of options pursuant to our employee stock option plan, of which
options to purchase 305,000 shares of common stock have been granted, and
40,000 shares of our common stock originally reserved for issuance pursuant
to incentive clauses of a sales representation agreement. These incentive
clauses were not met and the 40,000 shares of common stock have been
reserved for issuance as incentives in connection with the future hiring of
sales and marketing personnel; and
1,845,000 shares of our common stock reserved for issuance upon the
exercise of warrants issued in connection with private debt financing
transactions.
-11-
<PAGE>
You should read this table in conjunction with our financial statements,
including the notes to our financial statements, which appear elsewhere in this
prospectus.
<TABLE>
<CAPTION>
June 30, 2000 Pro Forma
----------------------------- ----------
Actual Pro Forma As Adjusted
------ --------- -----------
(In thousands)
<S> <C> <C> <C>
Notes payable - private loan offerings --
(face value $1,095,000, actual, and $1,295,000 pro
forma)................................................... $ 1,089 $ 1,089 --
Note payable - Union Labor Life Insurance Co.
(face value $543,000 actual and pro forma)............... 530 530
------- -------
Total debt............................................. 1,619 1,619 --
------- -------
Redeemable common stock (135,000 shares actual and pro
forma)................................................... 149 149 --
Stockholder's equity (capital deficiency):
Preferred Stock, $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding.
Common stock, $.001 par value, 40,000,000 shares
authorized, 4,803,250 shares issued and outstanding,
actual; 5,003,250 issued and outstanding, pro forma;
and 6,888,250 shares issued and outstanding, pro
forma, as adjusted ...................................... 5 5 7
Additional paid-in capital............................... 1,436 2,270 9,452
Accumulated deficit...................................... (3,610) (3,610) (4,463)
Unamortized debt discount in excess of notes payable - (634) -
------- ------- -------
Total stockholders' equity (capital deficiency)......... (2,169) (1,969) 4,996
------- ------- -------
Total capitalization (deficiency)..................... $ ( 401) $ (201) $ 4,996
======= ======= =======
</TABLE>
-12-
<PAGE>
DILUTION
Purchasers of the shares of common stock offered hereby will experience an
immediate and substantial dilution in the net tangible book value of their
investment. The difference between the initial public offering price per share
of common stock and the net tangible book value per share of common stock after
this offering constitutes the dilution per share of common stock to investors in
this offering. Net tangible book value per share is determined by dividing the
net tangible book value (total tangible assets less total liabilities) by the
number of outstanding shares of common stock. The deficit in the pro forma net
tangible book value of AquaCell as of June 30, 2000, after giving effect to the
borrowing of $200,000 pursuant to our private loan offering completed during
July, 2000 and the deemed conversion of 135,000 redeemable common stock into
common stock, was approximately $1,986,000, or approximately $.39 per share.
After giving effect to the sale of the 1,750,000 shares offered in this
offering, repayment of discounted debt of $1,619,000 (face value of $1,838,000)
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses ($7,035,000 net), our pro forma net tangible book
value as adjusted as of June 30, 2000, would have been approximately $4,830,000,
or approximately $.70 per share. This represents an immediate increase in pro
forma net tangible book value of approximately $1.09 per share to existing
shareholders and an immediate dilution of approximately $4.30 per share to new
investors purchasing shares in this offering at the assumed public offering
price per share. The following table illustrates this pro forma per share
dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $ 5.00
Historical net tangible book value per share...................... $ (.47)
Increase in net tangible book value per share attributable to
the conversion of redeemable common stock and private loan
offering......................................................... .08
------
Pro forma net tangible book value per share before this offering.. $ (.39)
Increase in pro forma net tangible book value per share
attributable to new investors................................... 1.09
------
Pro forma net tangible book value per share after this Offering... .70
------
Dilution per share to new investors............................... $ 4.30
======
</TABLE>
Assuming the exercise of the underwriters over-allotment option in full,
the pro forma adjusted net tangible book value on June 30, 2000 would have been
$.84 per share. This represents an immediate increase in pro forma net tangible
book value of approximately $1.23 per share to existing shareholders and an
immediate dilution of approximately $4.16 per share to new investors purchasing
shares in this offering at the assumed public offering price per share.
The following table sets forth, as of June 30, 2000, the number of shares
of common stock purchased from us, the total consideration paid to us and the
average price per share paid to us by existing stockholders and the new
investors purchasing shares of common stock from us in this offering (before
deducting underwriting discounts and commissions and estimated offering
expenses). The following table does not include:
. 1,845,000 shares of common stock reserved for issuance upon the exercise
of outstanding warrants;
. 305,000 shares of common stock reserved for issuance upon the exercise
of outstanding stock options;
. 40,000 shares of common stock originally reserved for issuance pursuant
to incentive clauses of a sales representation agreement. These
incentive clauses were not met and the 40,000 shares of common stock
have have been reserved for issuance as incentives in connection with
the future hiring of sales and marketing personnel; and
-13-
<PAGE>
. 262,500 shares of common stock which may be sold in this offering if the
underwriters over-allotment option is exercised, in which case, new
investors will hold 2,012,500 shares of common stock representing 28.1%
of the outstanding shares after this offering, and the proceeds of
$10,062,500 would represent 89.8% of total consideration paid by all
investors.
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders................. 5,138,250 74.6% $1,142,000 11.5% $0.22
New investors......................... 1,750,000 25.4% $8,750,000 88.5% $5.00
--------- ----- ---------- -----
Total............................. 6,888,250 100.0% $9,892,000 100.0%
========= ===== ========== =====
</TABLE>
Purchasers may also experience further dilution in value from issuances of
our capital stock in connection with future equity offerings or acquisitions.
In addition, dilution may occur in the event we reserve additional shares of our
capital stock in the future for issuance under stock option or other incentive
employee compensation plans. Our Board of Directors has the legal power and
authority to determine the terms of an offering of shares of our capital stock
or securities convertible into or exchangeable for such shares, to the extent of
our shares of authorized and unissued capital stock. To the extent any future
financing involves the sale of our equity securities, our then existing
stockholders' shares, including shares purchased in this offering, would be
substantially diluted.
-14-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
Our statement of operations data for the fiscal years ended June 30,
2000 and 1999 and the balance sheet data as of June 30, 2000 included herein
have been derived from the Consolidated Financial Statements audited by Richard
A. Eisner & Company, LLP, independent auditors. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Result of Operations" and the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this prospectus.
The actual data presented below should be read in conjunction with the
financial information appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended
----------
June 30,
--------
2000 1999
---- ----
<S> <C> <C>
Statement of Operations Data:
Sales................................................ $ 263 $ 29
Cost of sales........................................ 109 11
------- -------
Gross profit......................................... 154 18
Selling, general and administrative expenses:
Salaries and wages................................... 532 401
Legal, accounting and other professional expenses.... 150 198
Stock-based compensation............................. -- 231
Other................................................ 530 605
Depreciation and amortization........................ 48 28
------- -------
Loss before interest expense......................... (1,106) (1,445)
Interest expense:
Amortization of debt discount...................... 146 127
Other.............................................. 153 46
------- -------
Net loss............................................. $(1,405) $(1,618)
Accretion of redemption amount of redeemable common
stock............................................... 9 5
------- -------
Net loss attributable to common stockholders......... $(1,414) $(1,623)
======= =======
Net loss per common share -
basic and diluted.................................... $(0.28) $(0.34)
======= =======
Weighted average common shares -
basic and diluted.................................... 4,975 4,731
</TABLE>
<TABLE>
June 30, 2000
-------------
Balance Sheet Data:
<S> <C>
Cash................................................. $ 2
Working capital (deficiency)......................... $(2,555)
Total assets......................................... $ 645
Redeemable common stock.............................. $ 149
Capital deficiency................................... $(2,169)
</TABLE>
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and accompanying notes, which appear elsewhere in this prospectus.
This discussion contains forward-looking statements that involve risk and
uncertainties. Our actual results could differ materially from those
anticipated in these forward looking statements as a result of various risk
factors, including those discussed below and elsewhere in this prospectus,
particularly under the heading "Risk Factors."
Overview
We were incorporated in March, 1997. We were a development stage
enterprise through June 30, 1999 and we incurred significant non-recurring
expenses through that date in connection with our initial formation, interim
financing transactions, start-up of operations and various other transactions
including: legal and accounting expenses; costs incurred in connection with
contracts for and audits of acquisitions and potential acquisitions; and stock
issued to consultants and employees.
During the thirty-nine month period from our inception through June 30,
2000, we paid $293,000 in compensation to our executive management team, after
$191,000 of unpaid salaries was contributed to capital by our officers and an
additional $292,000 was accrued and unpaid as of June 30, 2000.
In December, 1998 we completed the acquisition of selected assets of KABB
Inc. and Aquacell International, Inc., which included the rights to certain
products and the assignment of U.S. and Canadian patents for an automatic
refilling purified bottle water system. We paid a total of $250,000 for those
assets, including $50,000 in cash and $200,000 in shares of our common stock at
$1.00 per share. Upon completion of this acquisition we proceeded to set up our
manufacturing facility in Rancho Cucamonga, California.
In May, 1999 we began our business to business marketing program to 100 of
the Fortune 500 companies. In August 1999, we refocused our future direction
from an acquisition company to an operating company and expanded our operating
plan to market our point-of-use water purification systems to the Fortune 500
companies. We have created a business to business marketing strategy and, solely
through the limited efforts of our executive management team, have begun to
create a base of Fortune 500 customers that will be fully developed by our in-
house sales force, to be hired at the completion of the initial public offering.
We currently serve nine Fortune 500 Companies and are in negotiations with seven
others.
Our product has a low manufacturing cost due in part to the fact that less
than 10% of the product cost is in labor. Since our operations do not require a
large full time employee base and temporary employees are readily available, we
are able to achieve high gross profit margins. We believe that our gross
profits on sales could average approximately 58% of sales revenues based on
production at full capacity.
Plan of Operations
Our business to business marketing strategy is to sell our point-of-use
automatic refilling water cooler with its patented attached five-gallon bottle
to Fortune 500 and other large companies. This product is designed to replace
expensive and cumbersome bottle water coolers, as well as to replace antiquated
water fountains that go unused. To date, sales have not been significant as we
have focused on building a client base with only Fortune 500 companies, which
have long sales cycles. All sales to date have been generated by our executive
management team, and we believe that the best indication of future growth in
developing companies such as ours, more important than current sales statistics,
is the potential future revenue stream to be developed from our customers. We
believe that our growth will come from the vertical expansion and roll out of
our programs to branches and affiliates of our existing customer base as well as
the expansion of our customer base to include other Fortune 500 companies.
Upon completion of this initial public offering we intend to invest
approximately $2,500,000 of the net proceeds in the development of an in-house
sales and marketing staff to concentrate on different industry classifications
within the Fortune 500. We believe that the development of an in-house sales
staff, as opposed to hiring independent sales reps, provides us with
significantly increased control and management of the client
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<PAGE>
relationship. We intend to use our business to business marketing strategy to
build a blue chip customer base to produce significant repeat business and to
develop long term relationships with Fortune 500 companies.
We believe that the net proceeds from this offering in the amount of
approximately $7,035,000, will provide sufficient funds to implement our
business plan, and to provide sufficient working capital over at least the
ensuing 12 month period. We do not presently expect to raise any additional
funds during that period.
Results of Operations
Years Ended June 30, 2000 and June 30, 1999. We commenced operations
-------------------------------------------
during the year ended June 30, 2000 and therefore were no longer a development
stage enterprise. During the year ended June 30, 1999, we had limited
operations, generated minimal revenues and, accordingly management believes that
comparison of these periods is not relevant to an understanding of our current
financial condition and results of operations.
On a consolidated basis, we generated revenues of $263,000 for the year
ended June 30, 2000 at a gross profit of approximately 58%. Of the total
revenues, approximately 61%, or $161,000, was generated from the sale of Purific
water coolers of which $105,000 or approximately 65% was generated from sales to
Fortune 500 Companies. We intend to fully develop this base of Fortune 500
Companies by an in-house sales force we plan on hiring after completing this
offering. We incurred a cost of sales of $109,000, or approximately 42% of
revenues. Such gross profit percent is subject to variation based on current
capacity and future production volume.
Our operating expenses, exclusive of depreciation and amortization, were
$1,212,000 for the year ended June 30, 2000, representing an aggregate decrease
of 16% from the $1,435,000 of operating expenses incurred for the year ended
June 30, 1999. We paid salaries and wages of $250,000 for the year ended June
30, 2000 and we accrued an additional $292,000 to our executive management team.
Legal, accounting and other professional expenses were reduced from $198,000 for
the year ended June 30, 1999 to $150,000 for the year ended June 30, 2000
representing a decrease of 24%. We incurred no stock-based compensation during
the year ended June 30, 2000 representing a decrease of $231,000 from the year
ended June 30, 1999 when we issued 231,000 shares of common stock to employees
and consultants for services rendered. Other expenses decreased by $75,000
during the year ended June 30, 2000 as compared to the year ended June 30, 1999,
a reduction of 12.4%. For the year ended June 30, 1999, $50,000 was included as
an allowance for doubtful accounts on a loan receivable from a third party.
The amortization of debt discount, a non-cash charge, attributed to
warrants issued in connection with notes payable, amounted to $146,000 for the
year ended June 30, 2000 as compared to $127,000 during the year ended June 30,
1999. Interest expense for the year ended June 30, 2000 increased to $153,000
from $46,000 for the year ended June 30, 1999. This was the result of an
additional $570,000 in private loan offerings completed during the year ended
June 30, 2000 and the fact that $1,025,000 in private loan offerings completed
during the latter half of the year ended June 30, 1999 was outstanding for the
entire year ended June 30, 2000. All of these notes will be repaid from the
proceeds of the offering and interest should be significantly lower in the
ensuing fiscal year.
Liquidity and Capital Resources
Since inception our operations have been funded by equity and debt
offerings.
Year Ended June 30, 2000. During the year ended June 30, 2000 we financed
------------------------
our operations through sales of 200,000 shares of common stock in connection
with a private placement that raised $200,000. We raised $458,000 through the
sales of units in two private placements. Those private placements consisted of
$148,000 of current period loans from our officers and other lenders, as well as
$112,000 of loans outstanding from the prior year, which were converted into
units of the private note offering and $310,000 from subscriptions received from
non-affiliates. An additional $15,000 in net proceeds was received in the form
of additional loans from our officers. We paid $25,000 of costs in connection
with our planned initial public offering.
Cash used by investing activities during the year ended June 30, 2000
represented expenditures for property and equipment in the amount of $3,000.
Cash used by operations during the year ended June 30, 2000 amounted to
$661,000. Net loss of $1,405,000 was decreased by non-cash depreciation and
interest on stock warrant issuance in the amount of
-17-
<PAGE>
$194,000. Net loss was further decreased by increases in accounts payable and
accrued expenses, including interest, in the amount of $601,000 and was
increased by net changes in other operating asset and liability accounts of
$51,000.
Year Ended June 30, 1999. During the year ended June 30, 1999, we financed
------------------------
our operations through sales of 72,000 shares of common stock in connection with
a private placement that raised $72,000. We raised $500,000 from the Union
Labor Life Insurance Company through the placement of a 10% note payable with
attached warrants to acquire 500,000 shares of our common stock at an exercise
price of $1.00 per share for a four year period. A second private placement
raised $525,000 from 12 individuals by issuing 10% notes with warrants to
acquire 525,000 shares of our common stock at an exercise price of $1.00 per
share for a three year period.
Cash used by operations in the year ended June 30, 1999, amounted to
$1,079,000. A net loss of $1,618,000 was decreased by a net increase in
operating assets and liabilities of $153,000, decreased by non-cash depreciation
and interest on stock warrant issuance in the amount of $155,000 and decreased
by the issuance of stock to employees and in payment of consulting fees in the
amount of $231,000.
Cash used by investing activities in the amount of $103,000 represented
expenditures of property and equipment in the amount of $30,000, purchase of
KABB Assets in the amount of $50,000 and costs related to the KABB acquisition
in the amount of $23,000.
Cash, in the net amount of $1,198,000, was provided by financing activities
from the issuance of common stock and promissory notes, referred to above, in
the amount of $1,097,000, collection of a subscription receivable for the
purchase of $50,000 of common stock in the private placement, and loans, net of
repayments, from officers and others in the amount of $51,000.
Management believes that the anticipated net proceeds of the offering and
cash flows expected to be generated for future operations will be sufficient to
meet presently anticipated needs for working capital and capital expenditures
through at least the next 12 months. We presently have no material commitments
for future capital expenditures.
Recent Accounting Announcements
We are required to adopt Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information."
Statement No. 131 superseded statement No. 14, "Financial Reporting for Segments
of a Business Enterprise" and is effective for years beginning after December
31, 1997. Statement 131 establishes standards for the way that public business
enterprises report selected information about operating segments in financial
reports. Statement 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The addition of
statement 131 will not affect our results of operations or financial position,
but may affect the disclosure of the segment information in the future.
-18-
<PAGE>
BUSINESS
Overview
We provide point-of-use drinking water, filtration and purification
products to a variety of customers. Our strategic plan is to grow rapidly within
the fragmented drinking water industry. We are presently targeting Fortune 500
and other large companies with our patented five-gallon self-refilling bottle
water cooler. The filtration system on our cooler contains different
combinations of systems, which utilize sediment filters, reverse osmosis, carbon
block, multi-media filters and ultra-violet light.
We replace traditional five-gallon bottle water coolers with a permanently
installed convenient alternative where the bottle never needs changing and water
bottles no longer need to be delivered, stored or replaced. In addition, we
replace water fountains where users tend to have greater concerns as to
sanitation and water quality.
Water Purification Industry Background
The highly fragmented water purification industry has thousands of
companies involved in various capacities, including companies which design fully
integrated systems for processing millions of gallons of water for municipal,
industrial, and commercial applications, down to the independent water delivery
route person.
According to a recent article appearing in The Wall Street Journal, water
supply businesses generate approximately $400 billion in revenue worldwide.
Demand for water purification has continued to grow nationally and
internationally due to economic expansion, scarcity of usable water, concern
about water quality and regulatory requirements. One of the fastest growing
segments of the industry is the drinking water segment, including point-of-use
filtration systems for providing purified drinking water and bottled drinking
water.
Drinking Water Market Analysis
While many consumers use water filtration systems and drink bottled water
for improved taste, there are other more important reasons to do so.
Risks of Tap Water. Tap water, regardless of its source, may contain
------------------
certain contaminants that can effect one's health. Although municipalities are
required to provide drinking water which complies with the Safe Drinking Water
Act, the water supplied to homes from municipalities may contain startling
levels of chlorine in addition to bacteria, toxins and parasites. Although the
water may be purified upon leaving the treatment facility, impurities may be
picked up from the pipes used to transfer it to the tap. Lead may also leach
into the water from pipes, especially in older construction.
In the United States, water quality is being compromised by pollution,
aging municipal water systems, and contaminated wells and surface water. A USA
TODAY investigation in October 1998 reported that the nation's safe drinking
water laws are failing. This special report, "Drinking Water's Hidden Dangers",
discloses that 58 million people received water that violated testing and purity
standards, and that 25 million people received water that had "significant"
violations posing "serious threats to public health".
The awareness level of consumers of the potential hazards of drinking tap
water is continuously increasing, and we believe that more educated consumers
will be seeking to minimize such potential risks through the purchase of point-
of-use filtration systems.
Risks of Bottled Water. While some people have resorted to drinking
----------------------
bottled water as a safe alternative to tap water, even bottled water can contain
impurities. In February 1999, the Natural Resources Defense Council released an
extensive four year scientific study of bottled water sold in the United States,
titled "BOTTLED WATER: Pure Drink or Pure Hype?" This study included testing of
more than 1000 bottles of 103 brands of bottled water. One-third of the bottled
waters tested were found, in at least one test sample, to contain levels of
contamination that exceeded allowable limits under either state or bottled water
standards. Contaminants found in the bottled waters included synthetic organic
chemicals, bacteria and arsenic. The study further revealed that, according to
government and industry estimates, 25% to 40% of bottled water is just tap water
- sometimes with additional treatment, sometimes not. The conclusion of the
study was that while consumers spend between 240 to
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<PAGE>
10,000 times more per gallon for bottled water than they typically do for tap
water, "no one should assume that just because he or she purchases water in a
bottle that it is necessarily any better regulated, purer, or safer than most
tap water".
Business Marketing and Growth Strategy
Our strategic objective is to achieve rapid growth through the expansion of
our business marketing and product lines utilizing a business-to-business
marketing strategy primarily targeted at Fortune 500 and other large companies,
as well as through strategic alliances with marketing partners.
Our initial marketing thrust is to create revenue through the sale and
leasing of our patented Purific(R) water cooler. Our Purific cooler contains an
extensive state-of-the art filtration system with additional features to ensure
maximum reliability for the Fortune 500 level of customer. A strong market
exists for this product because (i) most Fortune 500 companies are using bottled
water and are familiar with its high costs and inconveniences; (ii) water
fountain use is a substantially less popular alternative; and (iii) our self-
refilling cooler can lead to significant savings.
We chose a business-to-business marketing approach over utilization of
distributors in order to allow us to "own the customer" and therefore manage the
relationship. We determined that utilizing in-house sales personnel, as opposed
to manufactures' representatives, is critical in the implementation of our
marketing plan because in-house sales people are more likely to build customer
relationships, whereas commissioned sales representatives typically are
transaction oriented. Also, many Fortune 500 and other large companies prefer to
deal directly with the manufacturer and not with outside representatives or
distributors.
Our focus is to build interdependent relationships with the decision-makers
of our targeted Fortune 500 customers who have the ability to provide long-term
revenues through sales to their expansive multiple locations, subsidiaries and
operating divisions.
We have established our target customer based upon the following criteria:
Number of employees
Number of locations
Geographical areas
Industry segment
We firmly believe that the best source for new business is the existing
customer, because it is far less costly to retain and further develop a current
client than it is to acquire a new one.
In order to provide our self-refilling coolers to Fortune 500 and other
major companies with locations throughout the country, we utilize a national
installation group.
We have sold our Purific water cooler to the headquarter locations of
several Fortune 500 companies, each of which has significant long-term customer
value. We will continue to build relationships with the decision-makers of those
companies, and we will increase business through incremental sales to our
existing and future customers.
To date, all sales to Fortune 500 clients have been attained through the
efforts of our executive management team. In these situations our Purific water
cooler has replaced conventional water fountains, bottled water programs and
flat-top filtration coolers. Upon completion of this offering, we will hire and
train a sales force to further expand our Fortune 500 client base and to
cultivate each customer for significant future business.
Historically, our leads have been primarily obtained through a targeted
direct-mail campaign. The CEOs of certain Fortune 500 and other identified
companies were sent our "Message in a Bottle" mailing. This mailing included a
full size five-gallon bottle with product literature placed inside. Upon hiring
of sales personnel, additional mailings will be made to the balance of the
Fortune 500 companies and will then be made to other large companies included in
the Fortune 1000 and 2000.
-20-
<PAGE>
In addition, we provide a national lease financing program for our water
cooler. Lease applications are available to customers through our Internet
website at www.aquacell.com and, in most cases, the review process will be
completed and customers will be notified within hours after an application is
submitted.
Additional marketing strategies that we intend to utilize include:
Cross Marketing Sales. Cross marketing partners in diverse industries
---------------------
are being developed to place our Purific water cooler into our
customers' places of business with the bottle band advertising our
partner's company or product. This banding process is interchangeable
and may be used to tie in with other advertising campaigns. Cross
marketing opportunities include: doctor's offices, real estate
offices, travel industry, insurance, Internet, investment banking and
many others.
Internet. Our Purific water cooler is available for sale or lease on
--------
our web site, www.aquacell.com. Additionally, we are registering with
various business-to-business suppliers to include our Purific cooler
on their web sites.
General Services Administration. We have submitted extensive
-------------------------------
documentation to secure a General Services Administration contract
number. Assuming this contract number is awarded, we will begin our
marketing campaign towards government facilities through such means as
the exclusive General Services Administration tradeshow and direct
mail campaigns.
Marketing Partners. Sales to smaller businesses will be made through
------------------
our strategic market partners. Nearly every business, as well as
churches, doctor's offices, hospitals and other establishments have
water coolers to supply bottled water to their employees, members,
patients or visitors. Sales targets include:
Corporate offices Retail store employee lounges
Manufacturing facilities Lobbies and waiting rooms
Doctors/dentists/hospitals Airline club rooms
School administrative offices Churches
Auto dealers Country clubs
Banks Government facilities
Products
Our water purification products are geared towards the drinking water
market that, according to industry studies, is one of the fastest growing sector
of the water purification industry.
Our flagship product is our patented self-refilling Purific water cooler.
The cooler is hooked up to a standard municipal tap water supply. The water is
purified and filtered through multiple step systems and the purified water
automatically and continuously fills the permanently attached five-gallon bottle
on our cooler system.
The Purific cooler is available in four models:
HC-2 - Hot/Cold cooler with ProSystem II filtration system
HC-3 - Hot/Cold cooler with ProSystem III filtration system
RC-2 - Room Temp/Cold cooler with ProSystem II filtration system
RC-3 - Room Temp/Cold cooler with ProSystem III filtration system
Our self-refilling Purific cooler has many advantages over standard water
coolers with the replaceable five gallon bottles:
-21-
<PAGE>
Saves money. Our self-filling cooler has been proven to save most
-----------
companies a considerable amount of money over the costs of bottled
water alternatives.
No bottles to change. When changing water bottles, most people spill
--------------------
or splash the water, and often a relatively strong person must be
located to change the bottle. Also, the cleanliness of the hands of
the person changing the bottle is an issue, since anything on their
hands will end up in the water.
Reduce potential worker's compensation claims. Potential worker's
---------------------------------------------
compensation claims from injuries due to lifting the 40-pound bottle
can be costly. New proposed OSHA regulations will force companies to
take more precautions against potential claims.
No bottles to store. Replacement water bottles are cumbersome to
-------------------
store, taking up a lot of valuable space in an office. The higher the
rent, the more it costs to store the water.
Never run out of water. Since our Purific cooler continuously refills
----------------------
itself as water is dispensed, the cooler always has water available
when needed.
No delivery problems. Deliveries of bottled water can disrupt office
--------------------
operations. Additionally, in large office buildings wait time for
freight elevators can delay bottled water delivery by several hours,
further adding to the inconvenience of bottled water delivery.
Freshly filtered and purified water. The quality of bottled water
-----------------------------------
varies greatly depending upon the source and whether or not it is
filtered or purified. Also, water which has been stored in certain
areas can absorb taste and odor through the bottle. The water in our
Purific water cooler maintains its freshness as it is constantly being
replenished.
Air is filtered. The air used to displace water in our self-refilling
---------------
cooler is filtered through a 1-micron filter. When water is dispensed
from traditional water coolers, contaminated air from around the
cooler bubbles into the bottle. This air can contain invisible
elements from contaminants such as mold, algae, hair spray, oils,
grease, dirt, pollen paint and mildew, all of which can taint the
water.
All of our Purific water coolers are equipped with state-of-the-art
filtration systems designed to provide high quality filtration and purification.
Our filtration systems are tested and validated by the Water Quality
Association, which is a trade association comprised of 2,600 members in the
household, commercial, industrial and small system water treatment industry.
They are available in two models - ProSystem II or ProSystem III. Both systems
include a shut-off valve, pressure regulator, water monitor, sediment filter,
the AquaCell multi-media filter and a carbon block filter. The major difference
between our filtration systems is that our ProSystem II utilizes ultraviolet
light for disinfection, and our ProSystem III utilizes reverse osmosis.
ProSystem II - Ultraviolet ProSystem III - Reverse Osmosis
-------------------------- -------------------------------
Does not require a drain line Requires a drain line
Keeps minerals and salts in water Removes minerals and salts from
water
Fills bottle at a rate of .75 gallons Produces 25 gallons of water per
per minute day
Produces one gallon of water per one Produces one gallon of water per
gallon of tap water four gallons of tap water
For most customers, the ProSystem II will perfectly suit their needs. Some
customers, however, will prefer reverse osmosis water either because they have
gotten used to drinking water without minerals or because of poor quality water,
such as in areas where the water has a high salt content.
There are, however, certain times when the ProSystem III is not
recommended, such as:
-22-
<PAGE>
in offices with high employee concentration due to the fact that in a
typical 8-hour work day, more than eight gallons of water may be
consumed;
in areas where drain lines are not readily available; and
where water conservation concerns conflict with high water use.
Replacement Filters
We also sell replacement filters for our Purific water coolers. The
filtration systems on our patented water coolers require replacement after 2,000
gallons of water have passed through the system or after one year from the date
of installation, whichever comes first. The filtration system automatically
shuts off when the threshold for the preset number of gallons is met, alerting
the customer to call for replacement filters. We also contact our customers on
an annual basis to facilitate timely replacement of filters. Customers with
high water usage often stock replacement filters. The revenue from replacement
filters will be significant and will increase from year to year as we sell more
water coolers.
Other products to be offered by us include:
Filtration systems are available for under-the-sink usage and they may
also be connected to standard water-fountains.
Our "Traveler" system is a portable compact multi-stage filtration
system that provides drinkable water for campers, international
travelers or for emergency use.
Customers
Our customers currently consist mostly of Fortune 500 companies across a
broad range of industries including investment banking, consumer products,
aerospace, entertainment, banking, brokerage houses, manufacturing and
insurance. Our customers also include professional service providers and
governmental agencies.
Production, Raw Materials and Supplies
Our Products are manufactured in our 10,000 square foot manufacturing
facility located in Rancho Cucamonga, California. This strategically located
facility is located within a 100 mile radius of 95% of our suppliers allowing
for "just-in-time" inventory. Our product has a low cost of manufacturing. Less
than 10% of product cost is in labor, allowing for high gross profit margins
because our operations do not require a large full time employee base and, when
needed, temporary employees are readily available.
Our facility utilizes manufacturing processes that follow the guidelines of
the Water Quality Association. The manufacturing process of our various products
includes utilization of injection molded parts, for which we own the molds.
Multiple vendors have been identified as sources for parts and supplies for our
products and we do not anticipate any shortages of such materials.
We maintain a controlled low inventory of finished goods. Upon completion
of manufacture, each product undergoes quality assurance testing prior to
shipping and installation. The raw materials and components used in these
products are commonly available commodities such as off the shelf water coolers,
water bottles, various fittings, plastic tubing, wiring, valves, sediment
filters, reverse osmosis membrane filters and ultra-violet lights. Our products
are fabricated from these materials and assembled together with products bought
from other companies to form an integrated product. We do not depend on any
single supplier. If any supplier were to become unable to perform, we believe we
could readily find a substitute source. We are not a party to any material long-
term fixed price supply contracts.
Government Regulation
Federal, state, local and foreign environmental laws and regulations
require substantial expenditures and compliance with water quality standards and
impose liabilities for noncompliance. We believe that environmental
-23-
<PAGE>
laws and regulations and their enforcement are, and will continue to be, a
significant factor affecting the marketability of our products. The treatment of
drinking water in the United States is governed by the Safe Drinking Water Act.
The 1996 amendments to that Act emphasize risk-based standards for contaminants
in drinking water, afford small water supply systems operational flexibility and
provide assistance to water system infrastructures through a multi-billion-
dollar Drinking Water State Revolving Fund. The Fund program assists public
water systems with the financing of the costs of drinking infrastructure that is
necessary to achieve or maintain compliance with the Safe Drinking Water Act
requirements and to protect public health. The Fund, patterned after the State
Revolving Fund contained in the Clean Water Act, provides funding to the states
to establish a renewable source of financing for drinking water infrastructure
projects. The Fund program is designed to ensure that the drinking water
supplies in the United States remain safe and affordable, and that systems that
receive funding will be properly operated and maintained. Regulations under the
Safe Water Drinking Act also established maximum containment levels for a wide
variety of chemicals that may be present in drinking water treatment to meet
applicable standards.
Any changes in applicable regulations or their enforcement may affect our
operations by imposing additional regulatory compliance costs on our customers,
requiring modification of our products or affecting the market for our products.
To the extent that demand for our products is created by the need to comply with
such enhanced standards or their enforcement, any modification of the standards
or their enforcement may reduce demand, thereby adversely affecting our
business, financial condition or results of operations. The relaxation or repeal
of any such laws or regulations or the strict enforcement thereof could also
adversely affect our business and prospects. Conversely, changes in applicable
environmental requirements imposing additional regulatory compliance
requirements or causing stricter enforcement of these laws or regulations could
increase the demand for our products.
Competition
The drinking water purification industry is fragmented and highly
competitive due to the large number of businesses within certain product areas.
We compete with many companies which have greater market penetration, depth of
product line, resources and access to capital, all of which could be competitive
advantages. Competitors include: bottled water companies such as Arrowhead, Deer
Park, Poland Spring, and Sparkletts; water filtration system manufacturers such
as Culligan, which is owned by US Filter Corporation, Brita, which is owned by
Clorox and Pur, which is owned by Proctor and Gamble; and flat-top point-of-use
water cooler manufacturers such as Oasis, Cordley-Temprite, and Mutual of
Omaha's Innowave product.
While we believe that we can deliver our products on an economically
competitive basis, there can be no assurance in that regard. In addition, many
competitors have greater financial resources than us to finance their expansion
and internal growth opportunities. Consequently, we may encounter significant
competition in our efforts to achieve our strategic goals. There can be no
assurance that our competitors will not develop products that are superior to
ours or achieve greater market acceptance than our products. Competition could
have a material adverse effect on our ability to consummate arrangements with
customers or enter into strategic business alliances. Moreover, in response to
changes in the competitive environment, we may make certain pricing, service or
marketing decisions or enter into acquisitions or new ventures that could have a
material adverse effect on our business, financial condition and results of
operations.
Intellectual Property
We own a United States and Canadian patent on our automatic-refilling
purified bottle water cooler. These patents do not expire until November 20,
2006 and October 2, 2009, respectively. We have federally registered our Purific
trademark and have pending applications to federally register our AquaCell and
ArcticFresh marks. We also conduct business in California under the name Global
Water Solutions, Inc. We will seek to improve our patented technology and obtain
additional patent protection where appropriate. As part of our operating
strategy, we intend to focus on establishing brand name recognition in the
consumer and retail market segment of the water purification and treatment
industry with respect to our various product lines. We intend to seek
appropriate additional trademark or servicemark registrations in connection with
our product and service offerings.
-24-
<PAGE>
Employees
As of September 1, 2000, we had nine full-time employees and no part-time
employees. None of our employees are covered under collective bargaining
agreements. Management believes we maintain good relationship with our
employees.
Legal Proceedings
We are not currently subject to any material litigation nor, to our
knowledge, is any material litigation being threatened against us. However, in
the future we could be subject to claims for personal injury resulting from the
use of our products, including liability due to the presence of contaminants in
water to be purified through our products. There can be no assurance that we
will not be subject to a damage award or other liability in excess of available
product liability coverage, which could have a material adverse effect on our
business, financial condition and results of operations. In addition to direct
loss resulting from product liability claims, we may suffer adverse publicity
and damage to our reputation in the event of such product liability claims. Such
adverse publicity and harm to our reputation could have a material adverse
effect on our business, financial condition and results of operations.
Properties
Our principal executive office and our 10,000 square foot manufacturing
facility are located in Rancho Cucamonga, California under a five year lease
that commenced on January 1, 1999 and expires on December 31, 2004. That lease
has an average annual base rent of $69,600. We also maintain an approximately
1,000 square foot satellite office in Englewood Cliffs, New Jersey under a three
year lease that commenced on December 1, 1997 and expires on November 30, 2000.
That lease has an average annual base rent of $17,334. We believe that, if
necessary, alternative space is readily available at comparable rates and on
comparable terms with respect to all of our leased properties. We also believe
that we can obtain additional space necessary to support increases in our future
operation. We believe that the properties described above are currently
protected by adequate insurance.
-25-
<PAGE>
MANAGEMENT
Directors and Executive Officers
Information with respect to our directors and executive officers is set
forth below.
<TABLE>
<CAPTION>
Name Age Position
----------------- --- -------------------------------------------------
<S> <C> <C>
James C. Witham............ 59 Chairman of the Board and Chief Executive Officer
Karen B. Laustsen.......... 40 President, Chief Operating Officer, Secretary and Director
Gary S. Wolff.............. 62 Treasurer, Chief Financial Officer and Director
Glenn A. Bergenfield....... 47 Director
Dr. William DiTuro......... 44 Director
Gregory W. Preston......... 45 Director
</TABLE>
Mr. James C. Witham founded AquaCell in March, 1997 and serves as its
Chairman and Chief Executive Officer. Prior to founding AquaCell, Mr. Witham
founded JW Acquisition Co. in May, 1996 and served as its Chief Executive
Officer until March, 1997. From April, 1987 through May, 1996, Mr. Witham
founded and served as Chairman, Chief Executive Officer and President of U.S.
Alcohol Testing of America, Inc., a publicly traded company. Mr. Witham also
served as Chairman and Chief Executive Officer of U.S. Alcohol's two publicly
held subsidiaries, U.S. Drug Testing, Inc. and Good Ideas Enterprises, Inc. Mr.
Witham is the husband of Karen B. Laustsen, President of AquaCell.
Ms. Karen B. Laustsen is a founder of AquaCell and has served as its
President, Chief Operating Officer, Secretary, and as a Director since March,
1997. Prior to founding AquaCell, Ms. Laustsen served as President of JW
Acquisition Co. from May, 1996 through March, 1997. From April, 1986 through
May, 1996, Ms. Laustsen served as Executive Vice President and a director of
U.S. Alcohol. Ms. Laustsen also served on the board of directors of U.S. Drug
Testing, Inc. and Good Ideas Enterprises, Inc. Ms. Laustsen is the wife of James
C. Witham, Chairman of AquaCell.
Mr. Gary S. Wolff is a founder of AquaCell and has served as its Treasurer,
Chief Financial Officer and as a Director since March, 1997. Prior to founding
AquaCell, Mr. Wolff served as Chief Financial Officer and a director of U.S.
Alcohol, a publicly held company from April, 1987 through July, 1996. Mr. Wolff
also served as Chief Financial Officer and as a director of U.S. Drug Testing,
Inc. and as Treasurer and a director of Good Ideas Enterprises, Inc. He is
licensed as a Certified Public Accountant in the States of New York and New
Jersey and during the period from July, 1996 through March, 1997 he was self-
employed as a sole practitioner of accounting.
Mr. Glenn A. Bergenfield has been a director of AquaCell since July 1997.
For the past fifteen years, Mr. Bergenfield has been self-employed as a sole
practitioner of law in the State of New Jersey. Mr. Bergenfield served as
Treasurer and a director of U.S. Alcohol, and as a director of U.S. Drug
Testing, Inc. and Good Ideas Enterprises, Inc.
Dr. William DiTuro has been a director of AquaCell since July 1997. Dr.
DiTuro has been self-employed as a sole practitioner of general pediatrics since
1986 and has served as a clinical instructor of pediatrics at the Robert Wood
Johnson Medical School. Dr. DiTuro served as a director of U.S. Alcohol, U.S.
Drug Testing, Inc. and Good Ideas Enterprises, Inc.
Mr. Gregory W. Preston became a director of AquaCell in September, 1999.
Mr. Preston has been a partner in the law firm of Allen Matkins Leck Gamble &
Mallory LLP since October 1999. Previously he was a partner at McDermott, Will &
Emery from January, 1996 through September, 1999, and from January 1991 until
January 1996 he was a partner at Brobeck, Phleger & Harrison where he was also
an associate from 1983 until 1991. Mr. Preston received a L.L.M. degree from New
York University School of Law in 1983, a J.D. degree, cum laude, from
Southwestern University in 1982, and a B. A. degree from Colgate University in
1977.
-26-
<PAGE>
Classified Board
Our Restated Certificate of Incorporation provides for three classes of
directors. Directors Witham and Bergenfield have been appointed to Class I and
will serve until the meeting of stockholders in 2003; directors Laustsen and
DiTuro have been appointed to Class II and will serve until the meeting of
stockholders in 2002; and directors Wolff and Preston have been appointed to
Class III and will serve until the annual meeting of stockholders in 2001. After
these directors' terms expire, newly elected directors shall serve for three
year terms or until their successors are duly elected and qualified.
Board Committees
The Board of Directors maintains an Executive Committee currently
consisting of directors Witham, Laustsen and Wolff, which has all of the
authority of the Board of Directors except as limited by applicable law. In
addition we have an Audit Committee and a Compensation Committee which are
required to consist of a majority of outside directors. The Audit Committee,
currently consisting of directors Bergenfield and DiTuro, oversees actions taken
by our independent auditors and reviews our internal audit controls. The
Compensation Committee, currently consisting of directors Witham, Bergenfield
and DiTuro, reviews the compensation levels of our employees and makes
recommendations to the Board regarding compensation.
Director Compensation
The members of the Board of Directors and any advisors to the Board are
reimbursed for out-of-pocket and travel expenses incurred in attending Board
meetings. We have granted options to purchase 275,000 shares of common stock to
our independent directors at an exercise price of $1.00 per share. See
"Principal Stockholders" below. Additionally, each independent director and any
advisor will receive $2,000 for each Board meeting attended following completion
of this offering and they are also entitled to receive an option to purchase up
to 15,000 shares of our common stock for each year of service. Directors receive
no other compensation for service on the Board of Directors.
Compensation of Executive Officers
Summary Compensation Table. The following table sets forth compensation
information for James C. Witham, our Chairman of the Board and Chief Executive
Officer. No other officer or director received compensation in excess of
$100,000 for fiscal years 1998, 1999 or 2000.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-----------------------
Options All Other
Name and Principal Position Year Salary Bonus Granted Compensation
--------------------------------------------------------------- ---- -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
James C. Witham................................................ 2000 $153,000 $23,000 - - $ - -
Chairman of the Board and Chief Executive Officer 1999 $ 53,000 $ -- - - $ - -
1998 $ 76,000 $ -- - - $ 30,000
</TABLE>
All of Mr. Witham's compensation for fiscal year 2000 was accrued and unpaid at
June 30, 2000 except for the $23,000 bonus. In fiscal year 2000, Mr. Witham
contributed to capital $100,000 of his 1999 accrued and unpaid salary. Mr.
Witham received consulting fees of $30,000 during the period from September 1,
1997 through December 31, 1997, prior to his becoming an employee.
Employment Agreements. Effective with the completion of this offering, we
will enter into five-year employment agreements with each of Mr. Witham and Ms.
Laustsen, and a two-year employment agreement with Mr. Wolff. These agreements
are to provide for base salaries of $265,000, $160,000, and $142,000,
respectively, and are also to provide for bonuses to be paid based upon
established financial performance targets. Each of these employment agreements
is to contain standard noncompete, confidentiality and benefit provisions,
including provisions for severance compensation in the event of a termination
without cause or transactions that result in a change in control of AquaCell.
Each of these contracts provide that after the first year, the base salary
amounts will
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<PAGE>
be subject to increase by 50% of the amount of any bonus, with such bonus to be
based on net sales and net income earned during the prior year. The terms of the
employment agreements, including bonus criteria have been reviewed and approved
by the Compensation Committee.
Summary of Incentive Stock Plan
Our 1998 Incentive Stock Plan, covering 1,000,000 shares of our common
stock, will be administered by the Compensation Committee of our Board of
Directors. Among the Compensation Committee's powers will be the authority to:
interpret the plan;
establish rules and regulations for its operation;
select officers, other key employees, consultants and advisors to receive
awards; and
determine the form, amount and other terms and conditions of awards.
Directors, officers, key employees and independent contractors will be
eligible to participate in the plan. The selection of participants is within the
discretion of the Compensation Committee.
The plan provides for the grant of any or all of the following types of
awards:
stock options, including nonqualified stock options and incentive stock
options;
stock awards;
stock appreciation rights;
performance shares; and
performance units.
Awards may be granted by themselves, in combination or in tandem with other
awards as determined by the Compensation Committee.
Under the plan, the Compensation Committee may grant awards in the form of
nonqualified stock options or incentive stock options, shares of our common
stock, stock appreciation rights, performance shares or performance units.
The Compensation Committee, with regard to each stock option, will
determine the number of shares subject to the option, the manner and time
of the option's exercise and vesting, and the exercise price per share of
stock subject to the option. The following limitations are applicable under
the plan: no incentive stock options may be exercisable later than ten
years after the date they are granted and no nonqualified stock options may
be exercisable later than fifteen years after the date they are granted;
the aggregate fair market value at the time of grant of shares of common
stock with respect to which incentive stock options are exercisable for the
first time by a participant during any calendar year cannot be more than
$100,000;
the exercise price of a stock option will not be less than 100% of the fair
market value of the shares of common stock on the date the option is
granted for incentive stock options or less than 85% of the market value
for non qualified stock options or, in either case, not less than 110% of
fair market value if the optionee is an officer, director or a 10%
stockholder;
the option price must be paid by a participant by check or, in the
discretion of the Compensation Committee, by delivery of our common stock;
and
awards may be subject to such terms, conditions, restrictions or
limitations, as the Compensation Committee deems appropriate, including
restrictions on transferability and continued employment.
Under the plan, each stock appreciation right will entitle the holder to
elect to receive the appreciation in the fair market value of the shares subject
to the stock appreciation right up to the date the right is exercised. Stock
appreciation rights may be granted independent of, or in connection with, stock
options. In the case of stock
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<PAGE>
appreciation rights issued independent of stock options, the appreciation shall
not be measured from a value less than 85% of the fair market value of the
shares on the date of grant. If the stock appreciation rights are issued in
connection with stock options, the appreciation shall be measured from not less
than the option price. No stock appreciation right may be exercised earlier than
six months after the date of grant or later than the earlier of the term of the
related option or fifteen years after the date it was granted.
Performance shares and units may be awarded either alone or in addition to
other awards and will consist of:
in the case of performance shares, the right to receive shares of common
stock or cash of equal value at the end of a specified performance period;
or
in the case of performance units, the right to receive a fixed dollar
amount, payable in cash or shares of common stock or a combination of both
at the end of a specified performance period.
The Compensation Committee may condition the performance shares or units on the
attainment of specified performance goals or such other facts or criteria as the
committee shall determine.
The plan provides that awards shall not be transferable otherwise than by
law or by will or the laws of descent and distribution. However, the
Compensation Committee may permit the transferability of an award to members of
the participant's immediate family or trusts or family partnerships for the
benefit of such family members.
The Board of Directors has the right to amend, suspend or terminate the
plan at any time, subject to the rights of participants under any outstanding
awards. However, no amendment to the plan may be made without the approval of
our stockholders if such approval is required by law or regulatory authority.
Management's Control of Voting Stock
Upon the completion of this offering, management, consisting of Messrs.
Witham and Wolff and Ms. Laustsen, will own or control approximately 43% of our
outstanding voting stock. Together with our other existing stockholders,
approximately 75% of our voting stock will be owned or controlled by these
stockholders. Collectively, such stockholders will be able to effectively
control the decisions by us that require a majority vote of holders of the
outstanding shares of our voting stock to authorize actions. Therefore, the
majority of our outstanding voting stock will be owned by our existing
stockholders who will possess voting control, giving them the ability to amend
corporate filings, elect all of our board of directors and otherwise control all
matters requiring approval by our stockholders, including approval of
significant corporate transactions. The purchasers of the shares of common stock
in this offering will have no effective voice in our management and we will be
controlled by our existing stockholders. This concentration of ownership by
existing stockholders may also have the effect of delaying or preventing a
change in control.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our common stock and presently exercisable options to
acquire common stock, as of September 1, 2000, as adjusted to reflect the sale
of our common stock offered through this prospectus, held by:
. each person known by us to own beneficially more than 5% of our common
stock,
. each of our directors,
. the Chief Executive Officer and each other executive officer, and
. all directors and executive officers as a group.
Except as otherwise noted, we believe the persons listed below have sole
investment and voting power with respect to our common stock owned by them.
<TABLE>
<CAPTION>
Shares of Common
----------------
Stock Underlying Percentage of Common
---------------- --------------------
Shares of Common Warrants and Options Stock, Warrants and Options
---------------- -------------------- ---------------------------
Stock Beneficially Exercisable Within Before After
------------------ ------------------ ------ -----
Name and Address Owned 60 Days Offering Offering
----------------------------------------------------- ----- ------- -------- --------
<S> <C> <C> <C> <C>
James C. Witham /(1)/................................ 2,000,000 100,000 40.1% 30.1%
10410 Trademark Street
Rancho Cucamonga, CA 91730
Karen B. Laustsen.................................... 500,000 100,000 11.5% 8.6%
10410 Trademark Street
Rancho Cucamonga, CA 91730
Michael Witham....................................... 337,500 -0- 6.6% 4.9%
10410 Trademark Street
Rancho Cucamonga, CA 91730
Gary S. Wolff........................................ 457,500 50,000 9.8% 7.3%
10410 Trademark Street
Rancho Cucamonga, CA 91730
Glenn A. Bergenfield................................. 87,500 90,000 3.4% 2.6%
10410 Trademark Street
Rancho Cucamonga, CA 91730
Dr. William DiTuro................................... 77,500 55,000 2.6% 1.9%
10410 Trademark Street
Rancho Cucamonga, CA 91730
Gregory W. Preston................................... -0- 115,000 2.2% 1.6%
10410 Trademark Street
Rancho Cucamonga, CA 91730
Union Labor Life Insurance Co........................ -0- 550,000 9.7% 7.4%
111 Massachusetts Ave., NW
Washington, DC 20001
All officers and directors as a group (six persons).. 3,127,500 510,000 64.3% 49.1%
</TABLE>
________________________________________
/(1)/ Includes an aggregate of 500,000 shares owned of record by Witham Group,
LLC and JW Acquisitions, LLC which are entities in which Mr. Witham
controls 100% of the outstanding equity.
-30-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 50 million shares of capital
stock, par value $0.001 per share. Currently 40 million of such shares of
capital stock are classified as common stock and 10 million are classified as
Preferred Stock. As of September 1, 2000, 5,138,250 shares of our common stock
were outstanding and held of record by 52 stockholders. Our Restated Certificate
of Incorporation authorizes the Board to classify any of the unissued shares of
authorized Preferred Stock into one or more different classes or series of
Preferred Stock which may be issued from time to time with such distinctive
designations, rights and preferences as may be determined by the Board. We may
issue Preferred Stock for possible future financings of acquisitions or for
general corporate purposes without any legal requirement that further
stockholder authorization for such issuance be obtained. The issuance of
Preferred Stock could have the effect of making an attempt to gain control of us
more difficult by means of a merger, tender offer, proxy contest or otherwise.
Preferred Stock, if issued, could have a preference on dividend payments which
could affect our ability to make dividend distributions to the holders of our
common stock.
Prior to this offering, there has been no public market for our common
stock. Although we intend to apply for quotation of our common stock on Nasdaq
and AMEX, there can be no assurance that an active trading market will develop
or be maintained. The market prices for securities of public companies can be
highly volatile. Such price changes have often been unrelated to the operating
performance of the affected companies. These broad market fluctuations may adver
sely affect the market price of our common stock.
If we are unable to meet Nasdaq and AMEX listing or maintenance
requirements and the price per share of our common stock were to drop below
$5.00 per share, then certain "penny stock" rules of the Securities and Exchange
Commission would apply to our stock. Under such rules, brokers who recommend
such securities to persons other than established customers and accredited
investors must make a special written suitability determination for the
purchaser and receive the purchaser's written agreement to a transaction prior
to sale. Consequently, if our stock becomes subject to "penny stock" rules, it
will be more difficult for brokers to sell our stock.
Common Stock
Dividends. Holders of our common stock will be entitled to dividends
---------
declared and payable at such times and in such amounts as the Board will from
time to time determine out of funds legally available therefore. The rights of
holders of our common stock to receive dividends will be subject and subordinate
to the rights of any future holders of Preferred Stock as may be authorized by
us.
Liquidation. Upon our voluntary or involuntary liquidation, dissolution or
-----------
winding up, after payment of liabilities, any future holders of classes of our
Preferred Stock or other senior stock, as may be authorized by us, will be
entitled to receive the payment of all liquidation and other preference amounts;
the holders of our common stock will be entitled to receive our remaining assets
available for distribution to our stockholders pro rata according to the number
of shares held. The following shall not constitute a liquidation, dissolution or
winding up for the foregoing purposes:
. our consolidation or merger with or into another corporation;
. a merger of any other corporation with or into us, or
. the sale of all or substantially all of our property or business, other
than in connection with a winding up of our business.
Voting. Each holder of our common stock is entitled to one vote for each
------
share held of record on each matter submitted to vote of holders of our common
stock.
-31-
<PAGE>
Other Rights. There are no preemptive or other subscription conversion,
------------
redemption or sinking fund rights or provisions with respect to shares of our
common stock. We hold annual stockholder meetings, and special meetings may be
called by the President or Secretary or holders of at least 20% of the total
voting power of all outstanding share of our capital stock then entitled to vote
or a majority of the Board. Our Restated Certificate of Incorporation may be
amended in accordance with the Delaware General Corporation Law, subject to
certain limitations set forth therein.
Redeemable Common Stock. In connection with the purchase of selected
-----------------------
assets of KABB Inc. and Aquacell International, Inc., an option was granted to
the holder of 135,000 shares of common stock to put the stock back to the
Company at a price of $1.00 per share plus interest at 7% per annum if the
Company does not complete an initial public offering by December 21, 2000.
Outstanding Options, Warrants and Contingent Shares. As of the date of
---------------------------------------------------
this prospectus, up to 2,190,000 shares of common stock are issuable pursuant to
outstanding options, warrants and contingent shares excluding the 175,000 shares
of common stock reserved for issuance upon the exercise of warrants granted to
the underwriters as follows:
1,845,000 shares of common stock are issuable, in connection with
outstanding warrants, of which 1,795,000 shares are issuable at an exercise
price of $1.00 per share and the remaining 50,000 shares are issuable at an
exercise price of $5.00 per share;
305,000 shares of common stock are issuable, in connection with outstanding
options, at an exercise price of $1.00 per share; and
40,000 shares of common stock are issuable at an exercise price of $1.00
per share upon achieving certain performance criteria contained in a sale
representation agreement. These criteria were not met and the 40,000 shares
of common stock have been reserved for issuance as incentives in connection
with the future hiring of sales and marketing personnel.
Underwriters' Warrants. At the closing of this offering, we will sell to
----------------------
Grady & Hatch and Company, Inc. underwriters' stock warrants to purchase up to
175,000 shares of our common stock for an aggregate purchase price of $100. The
underwriters' stock warrants will be exercisable to purchase our common stock at
a price equal to $8.25 per share at any time during the four year period
commencing one year from the effective date of this prospectus. The
underwriters' stock warrants will expire four years after the date of this
prospectus.
Section 203 of the Delaware General Corporation Law
Our Restated Certificate of Incorporation expressly provides that we have
elected not to be governed by section 203 of the Delaware General Corporation
Law, which prohibits certain business combinations with certain stockholders for
a period of three years after they acquire 15% or more of the outstanding voting
stock of a corporation.
Indemnification
Our Restated Certificate of Incorporation requires us to indemnify our
directors and officers, and allows us to indemnify our employees and other
agents, and to pay or reimburse expenses for such individuals to the maximum
extent permitted from time to time by the Delaware General Corporation Law. The
Delaware General Corporation Law permits us to indemnify any of our directors,
officers, employees or agents who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, other than an action
by us or on our behalf. Such indemnification is limited to persons involved in
such actions or proceedings by reason of being a director, officer, employee or
agent of ours, or serving or having served at our request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise. The permitted indemnification covers expenses,
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with such action, suit or
proceeding if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to our best interests, and, with
respect to any criminal action or proceeding, the person had no reasonable cause
to believe the conduct was unlawful. The Delaware General Corporation Law also
permits us to indemnify any of these people regarding a civil action or suit by
us or on our behalf.
-32-
<PAGE>
As authorized by the Delaware General Corporation Law, our Restated
Certificate of Incorporation provides that none of our directors will be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director except liability for:
. any breach of the director's duty of loyalty to us or our stockholders,
. acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law,
. certain unlawful dividend payments or stock redemptions or repurchases, and
. for any transaction from which the director derives an improper personal
benefit.
The effect of this provision is to eliminate our rights and our
stockholders rights to recover monetary damages against a director for breach of
the fiduciary duty of care as a director, including breaches resulting from
negligent or grossly negligent behavior, except in the situations described in
the four bullet points above. This provision does not limit or eliminate our
rights or the rights of any stockholder to seek nonmonetary relief such as an
injunction or rescission in the event of a breach of a director's duty of care.
In addition, our Restated Certificate of Incorporation provides that if the
Delaware General Corporation Law is amended to authorize the further elimination
or limitation of the liability of a director, then the liability of the
directors shall be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law, as so amended.
We have entered into indemnification agreements with our directors and
officers. Those agreements require us to indemnify such directors and officers
against liabilities that may arise by reason of their status or service as
directors or officers, other than liabilities arising from willful misconduct of
a culpable nature, to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance, if available on reasonable terms. If we
indemnify our directors, officers or employees for actions involving them, our
business, results of operation and financial condition could be materially
adversely affected.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted for directors, officers and controlling persons of
AquaCell pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
Limitations on Change in Control
Provisions of our Restated Certificate of Incorporation and Bylaws may have
the effect of delaying, discouraging, inhibiting, preventing or rendering more
difficult an attempt to obtain control of us by means of a tender offer,
business combination, proxy contest or otherwise. These provisions include the
charter authorization of "blank check" preferred stock, classification of the
Board of Directors and restrictions on the ability of stockholders to take
actions by written consent and to call special meetings. These provisions could
discourage another party from trying to acquire us and could materially
adversely affect your ability to profit from such a transaction.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be U.S. Stock
Transfer Corporation, 1745 Gardena Avenue, Glendale, California 91204.
CERTAIN TRANSACTIONS
On August 6, 1998 we completed the sale of 507,000 shares of our common
stock to individuals pursuant to a private placement and raised $507,000. A
total of 90,000 shares out of those 507,000 shares were purchased by Mr.
Bergenfield and Dr. DiTuro.
-33-
<PAGE>
During November 1998 we sold six units of our note payable-private loan
offering. Each unit consists of a $25,000 six month promissory note with
interest at the rate of 10% per annum and a three year warrant exercisable for
25,000 shares of our common stock at $1.00 per share. Purchasers of these units
included Ms. Laustsen, Messrs. Wolff, Bergenfield and Dr. DiTuro.
On October 31, 1999, $200,000 in notes payable, representing a total of two
units in a $500,000 note payable-private loan offering, were purchased by our
executive officers as follows: James Witham $100,000; Karen Laustsen $75,000;
and Gary Wolff $25,000. Each full unit consists of a $100,000 six month
promissory note with interest at the rate of 10% per annum and a three year
warrant exercisable for 100,000 shares of our common stock at $1.00 per
share.
During September 1999 we had a capital contribution of $191,000 of prior
year accrued and unpaid salaries to our executive officers as follows: James
Witham $100,000; Karen Laustsen $39,200; and Gary Wolff $51,800.
At March 31, 2000 we had an aggregate of $225,000 in accrued and unpaid
salaries to our executive officers as follows: James Witham $118,000; Karen
Laustsen $46,000; and Gary Wolff $61,000. We intend to pay these accrued
salaries out of available working capital following the completion of this
offering. Additional unpaid compensation of $67,000 for the quarter ended June
30, 2000 and any unpaid compensation after that date will be paid from the
operations of AquaCell in 2001.
During March 2000 we sold a unit in our note payable-private loan offering
to Mr. Bergenfield. The unit consisted of a $35,000 six month promissory note
with interest at the rate of 10% per annum and a three year warrant exercisable
for 35,000 shares of our common stock at $1.00 per share.
-34-
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
On the closing of this offering, 6,888,250 shares of our common stock will
be outstanding. The 1,750,000 shares of our common stock to be sold in this
offering, other than those that may be purchased by our affiliates, will be
freely tradeable. The remaining outstanding shares of our common stock may be
publicly resold only following their effective registration under the Securities
Act or pursuant to an available exemption from the registration requirements of
the Securities Act, such as provided by Rule 144 promulgated pursuant to the
Securities Act. These remaining shares were issued and sold by us in private
transactions in reliance on exemptions from registration under the Securities
Act. The holders of our outstanding common stock have agreed that they will not,
without the prior written consent of Grady & Hatch and Company, Inc., offer,
sell or otherwise dispose of any shares of common stock, or any securities
convertible into, or exercisable for, shares of our common stock, until after
the expiration of the one year Lock-up Period, except that they may transfer
shares of our common stock in a transaction not involving any public offering,
including to a family member, or in the event of death by will or by operation
of law, provided that any such transferee of our common stock agrees to be bound
by the one year Lock-up Period. These restrictions will be applicable to any
shares any of those persons acquire in this offering or otherwise during the one
year Lock-up Period. Sales made pursuant to Rule 144 must comply with applicable
holding periods and volume limitations and certain other requirements.
As of the date of this prospectus, up to 2,190,000 shares of common stock
are issuable pursuant to outstanding options, warrants and contingent shares
excluding the 175,000 shares of common stock reserved for issuance upon the
exercise of warrants granted to the underwriters as follows:
1,845,000 shares of common stock are issuable, in connection with
outstanding warrants, of which 1,795,000 shares are issuable at an
exercise price of $1.00 per share and the remaining 50,000 shares are
issuable at an exercise price of $5.00 per share;
305,000 shares of common stock are issuable, in connection with
outstanding options, at an exercise price of $1.00 per share; and
40,000 shares of common stock are issuable at an exercise price of $1.00
per share upon achieving certain performance criteria contained in a
sale representation agreement. These criteria were not met and the
40,000 shares of common stock have been reserved for issuance as
incentives in connection with the future hiring of sales and marketing
personnel.
Sales of substantial amounts of our common stock in the public market, or
the perception that such sales could occur, could adversely affect prevailing
market prices of our common stock and could impair our future ability to raise
capital through an offering of our equity securities.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement among us
and Grady & Hatch and Company, Inc., as representative, each of the underwriters
named below has severally agreed to purchase from us, and we have agreed to sell
to each of the underwriters, the respective number of shares of our common stock
set forth opposite each underwriter's name.
Number of
Underwriter Shares
----------- ------
Grady & Hatch and Company, Inc.
Total
The underwriters propose to offer the shares of our common stock initially
at the public offering price set forth on the cover page of this prospectus, and
to selling group members at that price less a 10% discount, or $_____ per share.
The underwriters may allow concession not in excess of $______ per share of our
common stock to certain other dealers who are members of the National
Association of Securities Dealers, Inc. The underwriters may allow and such
dealers may reallow concessions not in excess of $______ per share to certain
other dealers. After the public offering, the offering price and other selling
terms may be changed by the Underwriters. Our initial public offering price for
our common stock will be determined by negotiations between us and Grady & Hatch
and Company, Inc. and may bear no relationship to the price at which our common
stock may trade after completion of this offering.
We have agreed to pay Grady & Hatch and Company, Inc. a non-accountable
expense allowance of 3% of the aggregate offering price of our common stock sold
in this offering, including any shares purchased pursuant to the over-allotment
option, of which $10,000 has been paid by us to Grady & Hatch and Company, Inc.
to cover a portion of the due diligence expenses and underwriting costs related
to this offering.
The underwriters have been granted a 45-day over-allotment option to
purchase from us up to 262,500 additional shares of our common stock at the
public offering price less the underwriting discount. If the underwriters
exercise such over-allotment option, then each of the underwriters will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage thereof as the number of shares of our common stock to be
purchased by it as shown in the above table bears to the 1,750,000 shares of our
common stock offered hereby exclusive of the underwriters' over-allotment
option. The underwriters may exercise such option only to cover over-allotments
made in connection with the sale of the shares of our common stock.
The underwriting agreement provides that we will indemnify the underwriters
and controlling persons, if any, against certain civil liabilities, including
liabilities under the Securities Act of 1933, or will contribute to payments
that the underwriters or any such controlling persons may be required to make.
The underwriting agreement also provides that Grady & Hatch and Company,
Inc. shall have the right to designate a non-voting advisor to our Board of
Directors for a period of two years after the effective date of this prospectus,
provided such advisor is acceptable to us. This advisor shall attend meetings of
our Board of Directors and shall be entitled to receive reimbursement for all
reasonable costs incurred in attending such meetings. As of the date of this
prospectus, no such advisor has been designated.
We have agreed to sell to Grady & Hatch and Company, Inc. or its designees,
for nominal consideration, warrants to purchase an aggregate of 175,000 shares
of common stock at an exercise price of $8.25 per share. The shares of our
common stock subject to those warrants will be identical in all respects to the
shares of our common stock offered to the public by this offering. All of the
warrants sold to Grady & Hatch and Company, Inc. will be exercisable for a four-
year period commencing one year after the date of this prospectus. The warrants
to be acquired by Grady & Hatch and Company and related persons will be
restricted from sale, transfer, assignment, or hypothecation, for a period of
one year from the effective date of the offering except to officers
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<PAGE>
or partners, but not directors, of Grady & Hatch and Company and members of the
selling group and/or their officers or partners. We have agreed to register the
shares underlying the warrants on one occasion only, and at our expense, within
the period commencing one year after the date of this prospectus and for a
period of five years from the date of this prospectus. We have also granted
certain piggyback registration rights to the holders of these warrants for
a period commencing one year after the date of this prospectus and ending seven
years after the date of this prospectus. We have agreed to file and maintain a
current registration statement with respect to the underlying common stock
during the period beginning one year after the date of this prospectus and
ending five years after the date of this prospectus. Those warrants will contain
anti-dilution provisions providing for appropriate adjustment of the exercise
price and number of securities that may be purchased upon the occurrence of
certain specified events. Under NASD rules, the warrants may be transferred to
co-underwriters, members of the selling group and to their respective officers
and partners.
Upon closing the offering, we will enter into a financial consulting
agreement with Grady & Hatch and Company, Inc. providing Grady & Hatch and
Company, Inc. a consulting fee in an amount equal to 1% of the dollar amount of
our common stock sold in this offering, which common stock shall include
securities sold pursuant to the over-allotment option, to the extent exercised,
for consulting services which shall be rendered by Grady & Hatch and Company,
Inc. for a period of one year from the date of this prospectus. Such consulting
services shall include, but shall not be limited to, advising us in connection
with possible acquisition opportunities, advising us regarding stockholder
relations including the preparation of our annual report and other releases,
assisting in long-term financial planning, advising us in connection with
corporate reorganizations, expansion and capital structure, and other financial
assistance. Such consulting fee shall be paid in full in advance at each closing
of this offering.
The underwriting agreement also provides that if we, within three years
from the effective date of this prospectus, enter into any agreement or
understanding with any person or entity exclusively introduced by Grady & Hatch
and Company, Inc. involving any of the following transactions which were
originated exclusively by Grady & Hatch and Company, Inc.:
the sale of all or substantially all of our assets;
the merger or consolidation of us with another entity, other than a merger
or consolidation effected for the purpose of changing our domicile, or
the acquisition by us of the assets or stock of another business entity,
which agreement or understanding is thereafter consummated, whether or not
during such three year period.
then we, upon such consummation, shall pay to Grady & Hatch and Company, Inc. an
amount equal to the following percentages of the consideration paid by us in
connection with such transaction: 5% of the first $1,000,000 or portion thereof,
of such consideration; 4% of the second $1,000,000 or portion thereof of such
consideration; and 3% of such consideration in excess of the first $2,000,000 of
such consideration. The fees payable to Grady & Hatch and Company, Inc. will be
in the same form of consideration as that paid by or to us, as the case may be,
in any such transactions.
In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise affect
the price of our common stock during and after this offering. Specifically, the
underwriters may over-allot or otherwise create a short position in our common
stock for their own account by selling more shares of our common stock than have
been sold to them. The underwriters may elect to cover any such short position
by purchasing shares of our common stock in the open market or by exercising the
over-allotment option granted to the underwriters. In addition, such persons may
stabilize or maintain the price of our common stock by bidding for or purchasing
shares of our common stock in the open market and may impose penalty bids, under
which selling concessions allowed to syndicate members or other broker-dealers
participating in this offering are reclaimed if shares of our common stock
previously distributed in this offering are repurchased in connection with
stabilizing transactions or otherwise. The effect of these transactions may be
to stabilize or maintain the market price of our common stock at a level above
that which might otherwise prevail in the open market. The imposition of a
penalty bid may also affect the price of our common stock to the extent that it
discourages resales thereof. No representation is made as to the magnitude or
effect of any such stabilization or other transactions. Such transactions may be
effected on Nasdaq and AMEX and, if commenced, may be discontinued at any time.
In connection with this offering, certain underwriters and selling group
members or their respective affiliates who are qualified market makers on Nasdaq
or AMEX may engage in passive market making transactions in our common stock on
Nasdaq or AMEX in accordance with Rule 103 of Regulation M under the Securities
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<PAGE>
Exchange Act of 1934. Passive market makers must comply with applicable volume
and price limitations and must be identified as such. In general, a passive
market maker must display its bid at a price in excess of the highest
independent bid for such security; if all independent bids are lowered below the
passive market maker's bid, however, such bid must then be lowered when certain
purchase limits are exceeded.
CHANGES IN ACCOUNTANTS
In January 2000, we appointed Richard A. Eisner & Company, LLP to replace
Deloitte & Touche LLP, who were dismissed as our independent auditors. The
decision to change independent auditors was approved by our Board of Directors.
During the fiscal years ended June 30, 1998 and 1999 and through January 2000,
there were no disagreements between us and Deloitte on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements, if not resolved to the satisfaction of Deloitte
would have caused it to make reference to the subject matter of the disagreement
in connection with its report. Deloitte had not issued a report on the Company's
financial statements for the fiscal years ended June 30, 1999 or 1998 that
contained an adverse opinion or disclaimer of opinion, or was modified as to
uncertainty, audit scope or accounting principles, except that their report for
the fiscal year ended June 30, 1999 included an explanatory paragraph regarding
substantial doubt about the Company's ability to continue as a going concern.
LEGAL MATTERS
The validity of the issuance of our common stock offered hereby will be
passed upon by Allen Matkins Leck Gamble & Mallory LLP. Certain legal matters in
connection with this offering will be passed upon for the underwriters by Lester
Morse, P.C. A partner in Allen Matkins is a director of AquaCell and holds an
option to purchase 215,000 shares of our common stock.
EXPERTS
Our consolidated financial statements as of June 30, 2000 and 1999 and for
the years then ended, included in this prospectus have been audited by Richard
A. Eisner & Company, LLP, independent auditors, as stated in their report which
is included herein, and has been given upon their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
We have not previously been subject to the reporting requirements of the
Securities and Exchange Act of 1934, as amended. We have filed a registration
statement on Form SB-2 under the Securities Act with the Securities and Exchange
Commission with respect to this offering. This prospectus, filed as part of the
registration statement, does not contain all of the information set forth in the
registration statement, or the exhibits or schedules thereto, in accordance with
the rules and regulations of the Commission, and reference is hereby made to
such omitted information. The statements made in this prospectus concerning
documents filed as exhibits to the registration statement accurately describe
the material provisions of such documents and are qualified in their entirety by
reference to such exhibits for complete statements of their provisions. The
registration statement, of which this prospectus is a part, and exhibits and
schedules thereto can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's Regional Offices located at 7 World Trade
Center, New York, New York 10048 and Northwest Atrium, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission also maintains a
World Wide Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report....................................................................... F-1
Consolidated Balance Sheet as of June 30, 2000..................................................... F-2
Consolidated Statements of Operations for the years ended June 30, 2000 and June 30, 1999.......... F-3
Consolidated Statements of Capital Deficiency for the years ended June 30, 2000 and June 30, 1999.. F-4
Consolidated Statements of Cash Flows for the years ended June 30, 2000 and June 30, 1999.......... F-5
Notes to Financial Statements...................................................................... F-6-F-13
</TABLE>
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<PAGE>
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Aquacell Technologies, Inc.
Rancho Cucamonga, California
We have audited the accompanying consolidated balance sheet of Aquacell
Technologies, Inc. (formerly Global Water Solutions, Inc.) and subsidiary (the
"Company") as of June 30, 2000 and the related consolidated statements of
operations, capital deficiency and cash flows for the years ended June 30, 2000
and 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
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 enumerated above present fairly, in all
material respects, the consolidated financial position of Aquacell Technologies,
Inc. and subsidiary as of June 30, 2000, and the consolidated results of their
operations and their consolidated cash flows for the years ended June 30, 2000
and 1999, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring net losses since
inception and, as of June 30, 2000, has negative working capital and a capital
deficiency which raises substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note A. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Richard A. Eisner & Company, LLP
New York, New York
July 19, 2000
With respect to Note J
July 27, 2000
With respect to Note N[2]
July 28, 2000
F-1
<PAGE>
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheet
June 30, 2000
<TABLE>
<CAPTION>
ASSETS
Current assets:
<S> <C>
Cash $ 2,000
Accounts receivable 36,000
Inventories 71,000
Prepaid expenses and other current assets 1,000
-----------
Total current assets 110,000
Property and equipment, net 90,000
Other assets:
Patents, net 166,000
Deferred offering costs 269,000
Security deposits 10,000
-----------
$ 645,000
===========
LIABILITIES
Current liabilities:
Accounts payable $ 307,000
Accrued expenses 606,000
Loan payable 1,000
Advances payable to officers/stockholders 14,000
Notes payable - private loan offerings, including accrued interest of $104,000, net of
debt discount of $6,000 1,193,000
Note payable - Union Labor Life Insurance Co., including accrued interest of $14,000,
net of debt discount of $13,000 544,000
-----------
Total current liabilities 2,665,000
-----------
Redeemable common stock (135,000 shares outstanding), including accretion of
$14,000 149,000
-----------
Commitments and contingencies
CAPITAL DEFICIENCY
Preferred stock, par value $.001; 10,000,000 shares authorized; no shares issued
Common stock, par value $.001; 40,000,000 shares authorized; 5,003,250 shares issued and
outstanding (net of 135,000 redeemable shares outstanding) 5,000
Additional paid-in capital 1,436,000
Accumulated deficit (3,610,000)
-----------
(2,169,000)
-----------
$ 645,000
===========
</TABLE>
F-2
<PAGE>
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended
June 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net sales $ 263,000 $ 29,000
Cost of sales 109,000 11,000
----------- -----------
Gross profit 154,000 18,000
----------- -----------
Selling, general and administrative expenses:
Salaries and wages 532,000 401,000
Legal, accounting and other professional expenses 150,000 198,000
Stock-based compensation 231,000
Other 530,000 605,000
Depreciation and amortization 48,000 28,000
----------- -----------
1,270,000 1,463,000
----------- -----------
Loss before interest expense (1,106,000) (1,445,000)
----------- -----------
Interest expense:
Amortization of debt discount 146,000 127,000
Other 153,000 46,000
----------- -----------
299,000 173,000
----------- -----------
Net loss (1,405,000) (1,618,000)
Accretion of redemption amount of redeemable common stock 9,000 5,000
----------- -----------
Net loss attributable to common stockholders $(1,414,000) $(1,623,000)
=========== ===========
Net loss per common share - basic and diluted $ (0.28) $ (0.34)
=========== ===========
Weighted average number of common shares outstanding - basic and
diluted 4,975,000 4,731,000
=========== ===========
</TABLE>
See independent auditors' report and notes to financial statements
F-3
<PAGE>
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Capital Deficiency
<TABLE>
<CAPTION>
Common Stock Additional
Number of Par Paid-In Accumulated
Shares Value Capital Deficit Total
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance - July 1, 1998 4,435,000 $4,000 $ 386,000 $ (573,000) $ (183,000)
Sale of common stock for cash in
connection with private placement 72,000 72,000 72,000
Issuance of common stock to employees
and consultants in exchange for
services at $1.00 per share 231,250 1,000 230,000 231,000
Issuance of common stock in connection
with the purchase of certain assets
of KABB, Inc. at $1.00 per share 200,000 200,000 200,000
Less shares which are mandatorily
redeemable (135,000) (135,000) (135,000)
Issuance of 525,000 common stock
warrants in connection with
private loan offering at $1.00 per share 56,000 56,000
Issuance of 500,000 common stock
warrants to ULLICO at $1.00 per share 86,000 86,000
Accretion of redemption amount of
redeemable common stock (5,000) (5,000)
Net loss for the year ended June 30, 1999 (1,618,000) (1,618,000)
---------- --------- ----------- ------------ ------------
Balance - June 30, 1999 4,803,250 5,000 895,000 (2,196,000) (1,296,000)
Sale of common stock at $1.00 per share in
connection with private placement 200,000 200,000 200,000
Issuance of 570,000 common stock
warrants exercisable at $1.00 per share in
connection with private loan offering 95,000 95,000
Reduction of warrant exercise price from
$2.00 to $1.00 per share 16,000 16,000
Issuance of 50,000 common stock warrants
exercisable at $5 per share to ULLICO to
extend note maturity 39,000 39,000
Accrued officers'/stockholders' salaries
contributed to additional paid-in capital 191,000 191,000
Accretion of redemption amount of
redeemable common stock (9,000) (9,000)
Net loss for the year ended June 30, 2000 (1,405,000) (1,405,000)
---------- --------- ----------- ------------ ------------
Balance - June 30, 2000 5,003,250 $5,000 $1,436,000 $(3,610,000) $(2,169,000)
========== ========= ========== ============ ===========
</TABLE>
See independent auditors' report and notes to financial statements
F-4
<PAGE>
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended
June 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,405,000) $(1,618,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock based compensation 231,000
Interest expense related to amortization of discount on debt for fair value
of stock warrants issued 146,000 127,000
Depreciation and amortization 48,000 28,000
Changes in:
Accounts receivable (30,000) (6,000)
Prepaid expenses and other current assets 2,000 (2,000)
Inventories (24,000) (37,000)
Security deposits 1,000 (6,000)
Accounts payable 126,000 (39,000)
Accrued expenses 335,000 222,000
Accrued interest 140,000 21,000
----------- -----------
Net cash used in operating activities (661,000) (1,079,000)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (3,000) (30,000)
Purchase of KABB assets (73,000)
----------- -----------
Net cash used in investing activities (3,000) (103,000)
----------- -----------
Cash flows from financing activities:
Sales of common stock 200,000 122,000
Offering costs deferred (25,000)
Proceeds of notes payable 42,000
Proceeds of notes payable - private loan offering 310,000 525,000
Proceeds of notes payable - Union Labor Life Insurance Co. 500,000
Proceeds from loans from officers and others, net 163,000 9,000
----------- -----------
Net cash provided by financing activities 648,000 1,198,000
----------- -----------
(Decrease) increase in cash (16,000) 16,000
Cash - beginning of year 18,000 2,000
----------- -----------
Cash - end of year $ 2,000 $ 18,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 9,000 $ 25,000
Supplemental disclosures of non-cash investing and financing activities:
In December 1998, the Company purchased certain assets of KABB, Inc./Aquacell International, Inc. through
the issuance of 200,000 shares of common stock valued at $1 per share and a cash payment of $50,000. In
connection with this purchase, the Company granted the seller the option to put 135,000 shares of common
stock back to the Company (Note J):
Details of asset purchase:
Inventory $ 10,000
Property $ 65,000
Patent $ 175,000
Redeemable common stock $ (135,000)
Common stock $ (65,000)
Cash paid $ (50,000)
Accrual of offering costs deferred $ 88,000 $ 156,000
Contribution to capital of accrued officers'/stockholders' compensation $ 191,000
Conversion of accrued interest to principal $ 43,000
Exchange of notes and loans from officers and others for notes issued in
private loan offering $ 260,000
Debt discount arising from repricing and issuance of warrants $ 150,000
</TABLE>
See independent auditors' report and notes to financial statements
F-5
<PAGE>
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
June 30, 2000
Note A - Description of Business
Aquacell Technologies, Inc. (formerly Global Water Solutions, Inc.) (the
"Company") was incorporated in Delaware on March 19, 1997. The Company was
inactive until July 1, 1997; its principal business objective is to operate in
the water purification business.
The Company commenced its principal operations and has generated sufficient
revenues during the fiscal year beginning July 1, 1999 to no longer be
considered a "development stage enterprise", for accounting purposes as defined
by Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting by Development Stage Enterprises".
The accompanying consolidated financial statements have been prepared on a
going-concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. At June 30, 2000,
the Company had a capital deficiency of $2,169,000 and negative working capital
of $2,555,000. For the year ended June 30, 2000, the Company incurred a net
loss of $1,405,000, and is reliant on current and future stockholders' financial
support to assist in meeting cash flow needs and is attempting to raise
additional financing through a proposed public offering (see Note O).
Management plans to continue raising capital, expand in-house marketing
activities and achieve sufficient sales volume to support the Company's cost
structure.
The Company's continuation as a going concern is dependent on its ability to
achieve the operational improvement goals discussed in the preceding paragraph,
raise capital and ultimately to attain profitable operations. However, no
assurance can be given at this time as to whether the Company will be able to
achieve these objectives. These factors, among others, raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern for a reasonable period of time.
Note B - Purchase of Selected Assets of KABB, Inc./Aquacell International, Inc.
On December 21, 1998, the Company completed its purchase of selected assets,
principally patents, of KABB, Inc./Aquacell International, Inc. for a total
price of $250,000, which was comprised of $50,000 cash and 200,000 shares of its
common stock valued at $1.00 per share (see Note K).
Note C - Summary of Significant Accounting Policies
[1] Principles of consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Such subsidiaries are Global
Water Holdings, Inc. and Global Water - Aquacell, Inc., both of which were
incorporated December 21, 1998. Global Water Holdings, Inc. had no activity
and was dissolved during the year ended June 30, 2000. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
[2] Inventories:
Inventories are carried at the lower of cost, determined using the FIFO
(first-in, first-out) method or market.
F-6
<PAGE>
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
June 30, 2000
Note C - Summary of Significant Accounting Policies (continued)
[3] Property and equipment:
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets of five years.
[4] Patents:
The value of patents is amortized over nine years, their remaining useful
lives, using the straight-line method. Patents at June 30, 2000 are stated
net of accumulated amortization of approximately $32,000.
[5] Revenue recognition:
Revenues are recorded at the time our products are shipped, unless we agree
to install the products, in which case we recognize revenue at time of
installation.
[6] 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.
[7] Income taxes:
The Company accounts for income taxes using the asset and liability method
described in SFAS No.109, "Accounting For Income Taxes", the objective of
which is to establish deferred tax assets and liabilities for the temporary
differences between the financial reporting and the tax bases of the
Company's assets and liabilities at enacted tax rates expected to be in
effect when such amounts are realized or settled. A valuation allowance
related to deferred tax assets is recorded when it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
[8] Net loss per common share:
Loss per common share is based upon the weighted average number of common
shares outstanding during the year including redeemable common stock.
Diluted loss per common share is the same as basic loss per share, as the
effects of potentially dilutive securities are antidilutive.
[9] Long-lived assets:
The Company accounts for the impairment and disposition of long-lived
assets in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". In
accordance with SFAS No.121, long-lived assets to be held are reviewed
whenever events or changes in circumstances indicate that their carrying
value may not be recoverable. The Company periodically reviews the carrying
value of long-lived assets to determine whether or not an impairment to
such value has occurred, and has determined that as of June 30, 2000 and
1999, there was no impairment.
F-7
<PAGE>
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
June 30, 2000
Note C - Summary of Significant Accounting Policies (continued)
[10] Concentrations:
The Company utilizes a limited number of suppliers for certain components
used in its products but has no long-term supply contracts with them. Due
to the competitive conditions in the industry, there can be no assurance
that the Company will not experience difficulties in meeting its supply
requirements in the future.
[11] Financial instruments:
The carrying amounts of the Company's cash, receivables, and accounts
payable approximate fair value. The carrying amounts of the Company's loans
and notes payable approximate their fair value due to the short-term nature
of these items. The fair value of certain loans to officer/stockholders are
not readily determinable due to the related party nature of those
instruments.
Note D - Inventories
Inventories consist of the following at June 30, 2000:
Raw materials $60,000
Work in progress 9,000
Completed product 2,000
-------
$71,000
=======
Note E - Property and Equipment
Property and equipment is summarized as follows at June 30, 2000:
Furniture and fixtures $ 34,000
Equipment - office 26,000
Machinery and equipment 70,000
Leasehold improvements 8,000
--------
138,000
Less accumulated depreciation (48,000)
--------
$ 90,000
========
Note F - Loan Receivable
On February 2, 1999, the Company advanced $50,000 to a third-party. The loan
bore interest at 8% per annum, and was due January 29, 2000. During the year
ended June 30, 1999, the Company recorded an allowance of $50,000, representing
the full balance of the note. On May 30, 2000, such loan was written-off.
F-8
<PAGE>
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
June 30, 2000
Note G - Loan Payable
At June 30, 2000, the loan payable consisted of an unsecured note bearing
interest at 10% per annum and is due on demand.
Note H - Advances Payable to Officers/Stockholders
Advances payable to officers/stockholders consist of unsecured demand interest
free loans of $14,000 at June 30, 2000.
Note I - Notes Payable - Private Loan Offerings
At June 30, 2000, notes payable- private loan offerings represent the proceeds
from the sale of units in three private loan offerings. The first loan offering
commenced in November 1998 and was terminated September 1, 1999. The offering
consisted of thirty units, each unit consisting of a $25,000 six-month
promissory note with three-year warrants to purchase 25,000 shares of the
Company's common stock at exercise prices of $1.00 and $2.00 per share. A total
of twenty-one units were sold yielding gross proceeds of $525,000 through June
30, 1999, seventeen with warrants at $1 per share and four with warrants at
$2.00 per share. The Company recorded a debt discount based upon the estimated
value of the warrants totaling $56,000. The warrants were valued using the
Black-Scholes valuation method using the following assumptions: risk-free
interest rates ranging from 4.43% to 5.09%, volatility of 1%, and a term of
three years. On September 1, 1999, the warrants exercisable at $2.00 per share
were repriced to $1.00 per share. In connection with the repricing, the Company
recorded an additional debt discount based upon the estimated value of the
warrants totaling $16,000. The warrants were valued using the Black-Scholes
valuation method using the following assumptions: a risk-free interest rate of
5.82%, volatility of 1% and a term of three years. Amortization of the debt
discount for the years ended June 30, 2000 and 1999 totaled $26,000 and $46,000,
respectively.
The Company sold five units in the second loan offering commenced in October
1999 and completed in February 2000. Each unit consisted of a $100,000 six-
month promissory note with three-year warrants to purchase 100,000 shares of the
Company's common stock at an exercise price of $1.00 per share. The Company
recorded a debt discount based upon the estimated value of the warrants totaling
$83,000. The warrants were valued using the Black-Scholes valuation method
using the following assumptions: risk-free interest rates ranging from 6.01% to
6.71%, volatility of 1%, and a term of three years. During the year ended June
30, 2000 amortization of the debt discount amounted to $83,000.
The Company sold two units in the third loan offering commenced in February 2000
and terminated on March 25, 2000 raising gross proceeds of $70,000. Each unit
consisted of a $35,000 six-month promissory note with three year warrants to
purchase 35,000 shares of the Company's common stock at an exercise price of
$1.00 per share. The Company recorded a debt discount based upon the estimated
value of the warrants totaling $12,000. The warrants were valued using the
Black-Scholes valuation method with the following assumptions: risk-free
interest rates ranging from 6.50% to 6.57%, volatility of 1% and a term of three
years. During the year ended June 30, 2000 amortization of the debt discount
amounted to $6,000.
At June 30, 2000, interest accrued on these notes amounted to $104,000.
Interest expense during the years ended June 30, 2000 and 1999 amounted to
$83,000 and $21,000, respectively.
F-9
<PAGE>
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
June 30, 2000
Note I - Notes Payable - Private Loan Offerings (continued)
The original due dates of the notes have been extended and are due as follows:
Due Date Principal
--------------------- ---------------
September 15, 2000 $ 75,000
September 24, 2000 35,000
September 30, 2000 915,000
October 31, 2000 70,000
Note J - Note Payable - Union Labor Life Insurance Company
On January 11, 1999, the Company closed a $500,000 note and warrant purchase
agreement with the Union Labor Life Insurance Co. ("ULLICO"). Under the terms of
the agreement, the Company issued a six-month senior note, with interest at the
rate of 10% per annum and a warrant to purchase 500,000 shares of the Company's
common stock to be exercisable for a four-year period at $1.00 per share. The
maturity date was subsequently extended to April 30, 2000. The Company
estimated the fair value of these warrants to be $86,000, using the Black-
Scholes valuation method: a risk-free interest rate of 4.76%, volatility of 1%
and a term of four years. Such amount was amortized to interest expense over
the six-month term of the note. Amortization amounted to $5,000 and $81,000
during the years ended June 30, 2000 and 1999, respectively. At January 1,
2000, interest accrued at December 31, 1999 in the amount of $17,000 was added
to principal on the note and the rate was changed to 15% per annum from January
1, 2000. On May 4, 2000 the note was extended to July 30, 2000 and accrued
interest at April 30, 2000 in the amount of $26,000 was added to principal on
the note. In connection with the note extension, the Company issued 50,000
warrants to ULLICO at an exercise price of $5.00 per share and expiring on
January 11, 2003. The Company recorded debt discount based upon the estimated
value of the warrants totaling $39,000. The warrants were valued utilizing the
Black-Scholes valuation method using the following assumptions: a risk-free
interest rate of 6.74%, volatility of 1% and a term of 2.58 years. On July 27,
2000, the note's maturity was extended to October 31, 2000. During the year
ended June 30, 2000 amortization of the debt discount amounted to $26,000. At
June 30, 2000, unamortized debt discount of $13,000 has been reflected as a
reduction of the notes payable amount in the accompanying financial statements.
Interest expense in relation to this loan amounted to $65,000 and $24,000 during
the years ended June 30, 2000 and 1999, respectively.
Note K - Redeemable Common Stock
In connection with the purchase of selected assets of KABB, Inc./Aquacell
International, Inc. (consideration for which included 200,000 shares of the
Company's common stock), an option was granted to the holder of 135,000 shares
of common stock to put the stock back to the Company at a price of $1.00 per
share plus interest at 7% per annum if the Company does not complete an initial
public offering by December 21, 2000. Pending the Company's completion of such
an offering, interest has been accrued in the amount of $14,000, and the stock
is being reflected outside of the capital deficiency section of the June 30,
2000 balance sheet.
F-10
<PAGE>
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
June 30, 2000
Note L - Equity Transactions
[1] Contribution to capital
On September 30, 1999, three officers/stockholders and directors agreed to
contribute to capital accrued salaries totalling $191,000.
[2] Common stock issued to employees and consultants:
During the year ended June 30, 1999, the Company issued a total of 231,250
shares of common stock to employees and consultants for services rendered.
The statement of operations for the year ended June 30, 1999, reflects a
charge of $231,000 for those services, representing management's estimate
of the value of the stock and services received. None of these shares was
issued to management of the Company.
[3] Private placement:
During the year ended June 30, 1999 the Company sold 72,000 shares of its
common stock at $1.00 per share.
Between April 4, 2000 - April 27, 2000 the Company completed a private
placement of 200,000 shares of its common stock at $1.00 per share.
[4] Stock option plan:
During August 1998, the Company adopted the 1998 Incentive Stock Plan (the
"Plan") under which options (either incentive or nonqualified), stock
appreciation rights, stock and other awards, covering an aggregate of
1,000,000 shares of common stock, may be granted to officers, directors,
employees and consultants of the Company. The exercise price established
for any awards granted under the Plan shall be determined by a Compensation
Committee appointed by the Company's Board of Directors. The exercise price
of incentive stock options cannot be less than 100% (110% for 10% or
greater shareholder employees) of the fair market value ("FMV") at the date
of grant and the exercise price of nonqualified options cannot be less than
85% of the FMV at the date of grant. The exercise period of incentive
options cannot extend beyond 10 years from the date of grant and
nonqualified options cannot extend beyond 15 years from the date of grant.
No options were granted during the year ended June 30, 1999. On September
15, 1999, the Company issued 305,000 options under the Plan to employees
and directors exercisable at the then current fair value of $1.00 per share
vesting over periods from immediately to five years and are exercisable
through September 15, 2004. At June 30, 2000 125,000 options were
exercisable. If the options had been accounted for under SFAS 123, net loss
attributable to common stockholders for the year ended June 30, 2000 would
have been $(1,448,000) or $(0.29) per common share. The fair value of
options granted during the year ended June 30, 2000 was $.20 per share on
the date of grant using the Black-Scholes valuation method with the
following assumptions: risk-free interest rate of 5.76%, volatility of 1%
and expected life of 4 years. The Company had reserved 40,000 options in
connection with incentive clauses of a sales representation agreement. As
of June 30, 2000, the required sales levels were not achieved and the
options were forfeited. The Company has reserved 40,000 options for
issuance as incentives in connection with the future hiring of sales and
marketing personnel.
F-11
<PAGE>
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
June 30, 2000
Note L - Equity Transactions (continued)
[5] Common stock purchase warrants:
At June 30, 2000, the Company had warrants outstanding as follows:
Exercise
Price Shares Expiration Date
-------- ------------ ---------------------------------
1.00 500,000 January 2003
5.00 50,000 January 2003
1.00 525,000 November 2002 to June 2003 (1)
1.00 465,000 October 2003 to December 2003 (1)
1.00 105,000 February 2004 to March 2004 (1)
---------
1,645,000
=========
(1) Warrants expire three years from issuance.
At June 30, 2000, the weighted average exercise price of the outstanding
warrants was $1.12 and the weighted average remaining contractual life of
the warrants was 2.21 years.
[6] Shares reserved:
At June 30, 2000, the Company has reserved 2,645,000 shares for issuance
upon exercise of options and warrants.
Note M - Income Taxes
At June 30, 2000, the Company had available federal net operating loss
carryforward to reduce future taxable income of approximately $3,470,000. The
net operating loss carryforwards expire at various dates through 2020.
At June 30, 2000, the Company has a deferred tax asset of approximately
$1,440,000, representing the benefit of its net operating loss carryforwards and
certain start-up costs capitalized for tax purposes. The Company has not
recorded a tax benefit because realization of the benefit is uncertain and
therefore a valuation allowance has been fully provided against the deferred tax
asset. The difference between the federal statutory rate of 34% and the
Company's effective tax rate of 0% is due to an increase in the valuation
allowance of $560,000 and $650,000 in 2000 and 1999, respectively.
The Company may be subject to annual limitations on the utilization of its net
operating loss carryforwards under Section 382 of the Internal Revenue Code.
F-12
<PAGE>
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARY
Notes to Financial Statements
June 30, 2000
Note N - Commitments and Contingencies
[1] Lease commitments:
The Company occupies office space in California and New Jersey. As of June
3, 2000, future minimum commitments under the leases are as follows:
Year Ending
June 30,
---------------
2001 $ 75,000
2002 71,000
2003 74,000
2004 38,000
--------
$258,000
========
Rent expense amounted to $86,000 and $74,000 for the years ended June 30,
2000 and 1999, respectively.
[2] Consulting agreement:
In connection with the purchase of certain assets of KABB, Inc./Aquacell
International, Inc. (see Note B), the Company entered into 18-month
consulting agreements with the two founders of KABB, Inc./Aquacell
International, Inc. which commenced in January 1999 with a total cost of
$77,000. On July 28, 2000 the agreement was extended through December 21,
2000 which will cost an additional $24,000.
Note O - Proposed Public Offering
The Company received a letter of intent from an underwriter with respect to a
proposed initial public offering of shares of common stock. There is no
assurance that such offering will be consummated. The Company anticipates
incurring substantial expenses in connection with the proposed public offering
which, if the offering is not consummated, will be charged to expense.
Note P - Subsequent Event
During July 2000 the Company closed on a private loan offering consisting of two
units of $100,000 six-month promissory notes with interest at 10% per annum and
three-year warrants to purchase 200,000 shares of the Company's common stock at
an exercise price of $1.00. The Company will record a debt discount based upon
the estimated value of the warrants totalling $834,000. The warrants were
valued using the Black-Scholes valuation method using the following assumptions:
a risk-free rate of 6.3%, volatility of 1%, stock price of $5.00 and a term of
three years and the discount will be amortized over the life of the notes.
F-13
<PAGE>
[Inside back cover graphic description
The background of the text starts off grayish at the top and then becomes a
copper brown color which gradually darkens as you move down the page. Across
the top of the page is a black rectangular box, which contains the heading "The
Patented Purific(R) Self-Filling Water Cooler" written in approximately 3/8
inch, white font. In the left side of the black box, there is a white, thin,
wavy line approximately 2 inches long next to the heading. Below the black box
and approximately 3 inches to the right, in white text approximately 3/16 inch
font, it is written "Automatically refills the permanently attached five-gallon
bottle with freshly filtered and purified water each time water is
dispensed."
Below the black box and on the left side of the page, there is a picture of an
approximately 6 1/2 inch high Purific(R) bottle water cooler, which has a water
colored five-gallon bottle on top of a white base with a thick blue band across
slightly above the middle of the bottle that says in white "Aquacell" with a
white partial globe design above and connecting to the word "Aquacell." In the
upper portion of the white base there are two spigots, one with a small blue
band on it and one with a small pink band on it. Directly centered above the
spigots is a blue box with "Purific(R)" written in white.
To the right of the Purific(R) bottle water cooler, there are three columns of
black text separated by thin black lines. The first column is titled "COST" in
bold approximately 3/16 inch font, under which there are blue, water-shaped
bullet points which state in approximately 1/8 inch font: "Saves money; Costs
less than bottled water; Reduces possibility of Worker's Compensation Claims;
and No paying for bottle storage space." The second column is titled
"CONVENIENCE" in bold approximately 3/16 inch font, under which there are blue,
water-shaped bullet points which state in approximately 1/8 inch font: "No
heavy bottles to change; No bulky bottles to store; No spilling or splashing
water; No water delivery hassles; and Never run out of water." The third column
is titled "QUALITY" in bold approximately 3/16 inch font, under which there are
blue, water-shaped bullet points which state in approximately 1/8 inch font:
"Great tasting water; Multiple step filtration and disinfection; Tested and
validated by the Water Quality Association; Completely closed system keeps germs
out; Filters air that displaces dispensed water; and No contaminants from dirty
hands of bottle handlers."
On the bottom right of the page there is the company's Purific(R) water cooler
logo which is a circle with an approximately 2 3/4 inch diameter as follows:
the outside ring of the logo is yellow with blue writing that says "NEVER CHANGE
ANOTHER BOTTLE"; moving toward the center of the circle there is a thin blue
ring; the remainder and middle of the circle has a white background with a blue
drawing of a stick person bending over to lift a bottle of water; and the entire
circle is crossed out by one blue diagonal line which starts at the top left.
Directly below the right side of the circle in black 1/16 inch font, it
says "TM".]
<PAGE>
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<S> <C>
No dealer, salesperson or other person has been
authorized to give any information or to make
any representations other than those contained
in this prospectus in connection with this
offering and, if given or made, such
information or representation must not be
relied upon as having been authorized by us or
any underwriter. This prospectus does not 1,750,000 Shares
constitute an offer to sell, or solicitation
of an offer to buy, any of the securities
offered hereby in any jurisdiction in which or
to any person to whom it is unlawful to make
such offer in such jurisdiction. Neither the
delivery of this prospectus nor any sale made AQUACELL TECHNOLOGIES, INC.
hereunder shall, under any circumstances,
create any implication that the information
herein is correct as of any time subsequent to Common Stock
the date hereof or that there has been no
change in our affairs since such date.
PROSPECTUS
----------------------
Table of Contents
----------------------
Page
----
Prospectus Summary 2
Risk Factors 5
Use of Proceeds 10
Dividend Policy 11
Capitalization 11
Dilution 13
Selected Consolidated Financial Data 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16
Business 19
Management 26
Principal Stockholders 30
Description of Capital Stock 31 Grady & Hatch and Company, Inc.
Certain Transactions 33
Shares Eligible for Future Sale 35 __________, 2000
Underwriting 36
Changes in Accountants 38
Legal Matters 38
Experts 38
Additional Information 38
Index to Financial Statements 39
Until ____________________, 2000, (25 days
after the commencement of this offering), all
dealers effecting transactions in our common
stock, whether or not participating in this
distribution, may be required to deliver a
prospectus. This delivery requirement is in
addition to the obligation of dealers to
deliver a prospectus when acting as
underwriters and with respect to their unsold
allotments or subscriptions.
================================================== ================================
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth an itemized statement of our expenses in
connection with the sale of the common stock being registered hereby. All of
the expenses are estimated, except for the SEC registration fee, the NASD filing
fee and the NASDAQ listing fee.
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<S> <C>
SEC registration fee...................................... $2,656.50
NASD filing fee........................................... $1,506.25
Representative's nonaccountable expense allowance......... $ *
Blue Sky fees and expenses
(including legal expenses)............................... $ *
Printing and engraving expenses........................... $ *
Legal fees and expenses................................... $ *
Auditors' fees and expenses............................... $ *
Transfer Agent and Registrar fees......................... $ *
NASDAQ listing fee........................................ $ *
AMEX listing fee.......................................... $ *
Miscellaneous expenses.................................... $ *
---------
Total................................................ $ *
=========
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______________
*To be filed by amendment.
Item 26. Recent Sales of Unregistered Securities
Within the last three years we have issued securities without registration
under the Securities Act in the transactions set forth below and in reliance on
the exemptions provided by Section 4(2) of the Securities Act of 1933, as
amended. In connection with all of these transactions, the Company determined
that all of the investors were sophisticated and had access to the kind of
information that would otherwise be contained in a registration statement.
1. Between March 19, 1997 and July 30, 1997, we issued an aggregate of
4,000,000 shares of our common stock to eight founding stockholders at the price
of $.001 per share.
2. Between September 18, 1997 and August 13, 1998, we issued an aggregate
of 507,000 shares of our common stock to 27 investors at the price of $1.00 per
share.
3. Between August 11, 1998 and September 24, 1999, we issued an aggregate
of 231,250 shares of our common stock to five employees for no cash
consideration and to six consultants for services in lieu of cash. The value of
the transactions was $231,250 based upon the most recent price of the common
stock, which was $1.00 per share.
4. On December 21, 1998 we completed our purchase of selected assets of
KABB, Inc. and Aquacell International, Inc., and issued 200,000 shares of our
common stock to six individual sellers at a price of $1.00 per share.
5. Between November 1998 and June 1999, we sold 21 units of our note
payable-private loan offering to 12 investors. Each unit consisted of a $25,000
six month promissory note with interest at the rate of 10% per annum and a three
year warrant exercisable for 25,000 shares of our common stock at the price of
$1.00 per share which was the most recent sales price at the time of grant.
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<PAGE>
6. On January 11, 1999 we closed a $500,000 note and warrant purchase
agreement with the Union Labor Life Insurance Company (ULLICO). Under the terms
of the agreement we issued a six month senior note with interest at the rate of
10% per annum and four year warrants to purchase 500,000 shares of common stock
at the price of $1.00 per share which was the most recent sales price at the
time of grant. In connection with an extension of the note, ULLICO was granted
warrants to purchase an additional 50,000 shares of our common stock at the
exercise price of $5.00 per share, while the most recent sales price at the time
of grant was $1.00 per share.
7. Between October 1999 and February 2000, we completed a $500,000 note
payable-private loan offering to eight investors. Each unit consists of a
$100,000 six month promissory note with interest at the rate of 10% per annum
and a three year warrant exercisable for 100,000 shares of our common stock at
the price of $1.00 per share which was the most recent sales price at the time
of grant. Fractional shares were made available at the discretion of
management.
8. Between February and March 2000 we sold $70,000 of a $140,000 note
payable-private loan offering to two investors. Each unit sold consists of a
$35,000 six month promissory note with interest at the rate of 10% per annum and
a three year warrant exercisable for 35,000 shares of our common stock at the
price of $1.00 per share which was the most recent sales price at the time of
grant. The balance of the $140,000 loan offering was canceled.
9. Between April 4 and April 27, 2000, we sold an aggregate of 200,000
shares of our common stock to two investors at the price of $1.00 per share.
10. Between July 1, 2000 and July 17, 2000, we sold two units of a note
payable-private loan offering to two investors. Each unit consists of a
$100,000 six month promissory note with interest at the rate of 10% per annum
and a three-year warrant exercisable for 100,000 shares of our common stock at
the price of $1.00 per share which was the most recent sales price at the time
of grant.
Item 27. Exhibits
A. Exhibits:
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<S> <C>
1.1 Form of Underwriting Agreement.*
1.2 Form of Agreement Among Underwriters.*
1.3 Form of Selected Dealer Agreement.*
3.1 Second Amended and Restated Certificate of Incorporation, together
with Amendment No. 1 thereto.*
3.2 Bylaws.*
4.1 Second Amended and Restated Certificate of Incorporation (filed as
Exhibit 3.1).*
4.2 Bylaws, as amended (filed as Exhibit 3.2).*
5.1 Legal Opinion of Allen Matkins Leck Gamble & Mallory LLP with respect
to the validity of the securities being registered.
10.1 1998 Incentive Stock Plan.*
10.2 Forms of Employment Agreements with Ms. Laustsen and Messrs. Witham
and Wolff.*
10.3 Form of Representative's Warrant.
10.4 Form of Representative's Financial Consulting Agreement.
16.1 Letter from Deloitte & Touche LLP agreeing with certain statements in
this registration statement.
23.1 Consent of Allen Matkins Leck Gamble & Mallory LLP (included in
Exhibit 5.1).
23.2 Independent Auditors' Consent of Richard A. Eisner & Company, LLP.
24.1 Power of Attorney (included on page II-6 of the registration
statement initially filed on July 20, 2000).*
27.1 Financial Data Schedule.*
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_________________
*Previously filed.
B. Schedules:
No supporting schedules have been included because they are not required.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant authorizes this Amendment No. 2 to its Registration Statement on Form
SB-2 to be signed on its behalf by the undersigned, in the City of Englewood
Cliffs, New Jersey, on September 28, 2000.
AQUACELL TECHNOLOGIES, INC.
By: /s/ JAMES C. WITHAM
-------------------------------------------
James C. Witham
Chairman and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed be by the following persons in the
capacities and on the dates stated.
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<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ JAMES C. WITHAM Chairman and Chief Executive Officer September 28, 2000
-- -------------------------------------- (Principal Executive Officer)
James C. Witham
/s/ Gary S. Wolff* Chief Financial Officer (Principal September 28, 2000
-- -------------------------------------- Financial and Accounting Officer)
Gary S. Wolff
/s/ Karen B. Laustsen* President, Chief Operating Officer September 28, 2000
-- -------------------------------------- and Secretary
Karen B. Laustsen
/s/ Glenn A. Bergenfield* Director September 28, 2000
-- --------------------------------------
Glenn A. Bergenfield
/s/ William S. DiTuro, M.D.* Director September 28, 2000
-- --------------------------------------
William S. DiTuro, M.D.
/s/ Gregory W. Preston* Director September 28, 2000
------------------------------------------
Gregory W. Preston
*By /s/ JAMES C. WITHAM (Attorney-in-fact)
------------------------------------------
James C. Witham
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