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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
FORM 10-SB
GENERAL FORM OF REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
ROYAL WATERLILY, INC.
(Name of Small Business Issuer in its charter)
NEVADA
(State or other jurisdiction of incorporation or organization)
86-0840145
(I.R.S. Employer Identification No.)
1-A DRIEMARKWEG 7102 EM
WINTERSWIJK, THE NETHERLANDS
(Address of principal executive offices) (Zip Code)
+ 31 543 533 136
(Issuer's telephone number)
Securities to be registered under Section 12(b) of the Act:
Title of each class to be Name of each exchange on which
so registered each class is to be registered
NONE NONE
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Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001
(Title of Class)
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DESCRIPTION OF BUSINESS
OVERVIEW
Royal Waterlily, Inc., a Nevada corporation, is involved through our
wholly-owned Dutch subsidiary, Wapro B.V., in the manufacture and sale of custom
waterbeds and, through Wapro B.V.'s wholly-owned subsidiary, RayFin B.V., in the
providing of personal financial services. We sell our products and services
exclusively in the Netherlands.
Our common stock currently trades on the National Quotation Bureau,
LLC "Pink Sheets" under the ticker symbol RYLW. A bid and ask price has been
quoted for our common stock since September 23, 1999. The latest closing
price, as of September 20, 2000, is 0.07.
SUBSIDIARIES
Our wholly-owned Dutch subsidiary, Wapro B.V., a Netherlands limited
liability company, operates through five wholly-owned subsidiaries, each a
Netherlands limited liability company: Premier Waterbedden B.V. ("Premier"),
Wekker Waterbedden B.V. ("Wekker"), RayMark B.V. ("RayMark"), RayPro B.V.
("RayPro"), and RayFin B.V. ("RayFin"). Each of the Wapro B.V. subsidiaries is
involved in the operation and management of a different element of our business.
Wapro B.V. develops strategy and coordinates the administration and personnel
for each of our subsidiaries.
Premier serves as the primary direct sales organization for our PREMIER
NR. 1 waterbed. Wekker serves as the direct sales and manufacturing organization
for our WEKKER waterbed. RayMark provides marketing and telemarketing support
services for us. RayPro manufactures and assembles waterbeds exclusively for us.
RayFin provides financial advice, planning and other financial services.
Wapro B.V. has an additional wholly owned Netherlands limited liability
company subsidiary, RayLex Europa B.V. ("RayLex"). RayLex is a dormant company
with no operations, employees or business.
PRODUCTS
The primary product manufactured and sold by us is the PREMIER NR. 1
waterbed. In addition, we recently began manufacturing and selling a new
product, the WEKKER waterbed. The structural elements comprising these waterbeds
are as follows:
WATER-BODY. The water-filled mattress or "water-body" in our waterbeds
is made of one sheet of very thin polyvinylchloride ("PVC"), sealed to form a
watertight enclosure. We use PVC produced by a company named Achilles. The
elasticity of the PVC ensures that each water-body reacts to the pressure of the
human body similarly and evenly over its entire surface. Our water-body can
endure an average of more than 15 million movements, which ensures a relatively
long life span.
SEALING. We use a maximum of three seals for each water-body used in
our waterbeds. Our manufacturing process places the longest seal on the
underside of the water-body. We place the longest seal here because the water
pressure is much lower on the underside of the water-body than on the side of
the water-body, where many waterbed manufacturers place their seals. The sealing
procedure employed by us uses molecular engineering to make the PVC molecules
rotate, which causes friction. This friction causes heat, as a result of which
the PVC melts together, creating a strong bond. We seal one meter (approximately
3.28 feet) of PVC at a time (currently the longest possible weld). This long
weld minimizes the possibility of leaks from the water-body.
STABILIZATION. Many consumers prefer firmness and stability in their
mattresses. We can provide this desired stability in a waterbed by injecting
between two and ten layers of special fibers into the water-body. More fiber
layers injected into the water-body provide more stability. We custom
manufacture our water-bodies to provide the level of firmness and stability
desired by each particular customer.
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FRAMEWORK. The framework of the waterbed provides the foundation upon
which the water-body rests. By using weight distributors, the waterbed can also
be placed on wooden blind floors. On top of the weight distributors is placed a
plate which supports two water-bodies, each filled with 225 liters
(approximately 58.14 gallons) of water. This system can also be adapted to the
customer's existing bed frame. This allows our customers to choose the style of
waterbed framework and construction which best suits their personal taste.
SOFT-SIDE. Each waterbed has soft-side slanted foam frames to hold the
water-bodies in place on the waterbed framework. The slanting soft-side frames
conduct water pressure from the side of the water-bodies downward rather than
sideways. This engineering ensures a more comfortable and stable waterbed
mattress.
TEXTILES. The textiles and fabrics used in our waterbeds are important
because they provide softness and allow the mattress to adapt to the position of
the body. Our textile and fabric mattress covers have three components: the
ticking, the border, and the lower layer. The most important element of the
fabric mattress cover is the ticking, which consists of six textile layers:
damask, synthetic fiber, membrane, white laundered cotton, synthetic fiber and
cloth. The ticking helps ensure optimal hygiene by absorbing and distributing
moisture from condensed water vapor.
We have also developed the EXCELLENCE waterbed, which offers all of the
conveniences a customer can possibly expect from a waterbed. Apart from the best
possible temperature control, optimal soft-side construction, extra height for
comfort and separate adjustable mattress halves, the most important component of
the EXCELLENCE Waterbed is the "Tilting Soft-side." The Titling Soft-side allows
the water-body to bend when pressure is applied. With this innovation, there is
significantly less body pressure placed on the mattress ticking, which means
less wear on the mattress and more comfort for the customer. In addition, labor
time and textiles are saved during the manufacturing process because the ticking
needs no zipper and is easier to replace.
FINANCIAL SERVICES
Through Wapro B.V.'s subsidiary RayFin, we provide financing to
qualified customers for their purchases of our waterbeds. In addition, through
RayFin we offer a personal financial planning service through which we evaluate
a customer's mortgage, insurance, and savings programs, and highlight
possibilities for improving the customer's financial choices. We draw up a
proposal in which, among other elements, the customer's home mortgage and other
loans are refinanced. Since mortgage interest rates in the Netherlands are
relatively low at the present time, we in many cases have been able to offer our
customers a reduction in their monthly mortgage payments.
BUSINESS STRATEGY
We view the U.S. capital markets as an opportunity to finance growth
through acquisitions. The acquisition of manufacturers, distributors and
retailers will complement our strategy of vertical integration. With a highly
fragmented market, and with the multitude of companies involved in the
manufacture and sale of waterbeds, Europe presents an opportunity for an
aggressive company which is focused upon quality and profitability, and which
possesses the comparative advantages of the U.S. capital markets. In developing
our growth strategy of acquisitions throughout Europe, we believe that Germany
represents the best and most profitable market opportunity. Our headquarters are
located only a few kilometers from Germany and minutes from its heavily
populated, industrial heartland. We evaluate acquisition opportunities on an
ongoing basis and at any given time may be, and at the present time are, engaged
in discussions with respect to possible acquisitions or other business
combinations.
Our business strategy also involves further developing our product
sales to penetrate new distribution channels through the use of retail and
wholesale dealers, private labeling and Internet-based e-commerce. We believe
that our expertise in direct sales, sales training and marketing, along with our
experience in customer service, positions us favorably to take advantage of
increased consumer demand for high quality waterbeds.
We believe that we must continue to offer our customers new products
and technology to anticipate and satisfy our customers' expectations and needs.
The successful continued development of these new products, and the
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implementation and integration of emerging technologies such as the Internet,
constitute a major part of our immediate strategy.
MANUFACTURING AND SERVICE
LOGISTICS. Our waterbeds are all custom-built and hand-made. We
carefully coordinate our manufacturing activities in order to ensure that the
proper materials are available in the right place and at the right time. This
allows us to stock an optimal, yet limited inventory of bulk cut wood, PVC
sheets, textiles and fabric.
ASSEMBLY. We currently use six full-time final assemblers to install
our waterbeds in customers' homes. We employ our own assemblers to ensure the
best possible control and coordination for complete customer satisfaction. All
of our assembly teams use a vehicle-based satellite navigation system, which
allows them to maximize the number of assemblies completed daily as well as save
on fuel costs, which are significant in the Netherlands.
SERVICE. Every customer's waterbed needs periodic maintenance. Unlike
many of our competitors, we provide direct maintenance service for our customers
instead of contracting with third parties to provide this service. Service is
available on a 24-hour emergency response basis if necessary. We also provide a
moving service whereby we will relocate a customer's waterbed upon request.
SALES AND MARKETING
We use telemarketing and direct marketing to sell our waterbeds
throughout the Netherlands. The average price of our PREMIER NR. 1 waterbed
in 2000 was approximately $5,800. In 2000, we received orders for
approximately 300 PREMIER NR. 1 waterbeds. In the summer of 1999, we
introduced a new product line, the WEKKER waterbed. The WEKKER waterbed
currently has a price range of $6,250 - $12,500.
The sales and marketing cycle for our products and services varies,
typically ranging from one to three months. The sales cycle is as follows:
- generation of a sales lead
- qualification of the lead
- analysis of the customer's needs
- presentation to the customer
- sign-off activities
- financial approval
- product shipment
- installation and customer acceptance.
From sign-off to installation, the process takes approximately six weeks.
An important element of the sales process consists of demonstrating to potential
customers that our waterbed products and features are superior, unique, and
cost-effective alternatives to traditional sleep choices.
DIRECT MARKETING. We utilize a variety of direct marketing activities
to solicit potential buyers. We use Wegener Arcade, De Heus, Multi-Responsmedia
and Calyx, marketing companies in the Netherlands, to distribute postcard flyers
throughout the Netherlands. Since waterbeds are a luxury purchase in Europe,
many consumers initially think they cannot afford a waterbed. Our flyers are
therefore designed to solicit significant response percentages by highlighting
the affordability and quality of our waterbeds.
In 2000, more than 40,000 prospective customers responded to our
flyers. The response data from the flyers is stored in our central computer
database. This data is then used to plan a series of marketing tasks beginning
with an initial telephone contact by one of our telemarketers.
The use of direct marketing provides our management with the advantage
of evaluating the effectiveness of the primary sales process, from response to
appointment to the final sale. This allows for a continuous process of
evaluation and adjustments in the sales approach on an individual basis.
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TELEMARKETING. Our goal is to set approximately 15,000 sales
appointments per year. To reach this goal, our telemarketers must make more than
100,000 telephone calls. This is a major logistic process which requires
significant coordination. Our agenda planning department coordinates all
appointments and acts as a link between the potential customer and our sales
representatives. All appointments, cancellations and requests for information
are centralized and processed through this department. We continuously strive to
improve the quality and effectiveness of our telemarketers through training and
education, script adaptations, listening sessions, coaching and external
training. We believe that this constant attention to adaptation of our direct
sales approach is the key to our success and the foundation for future sales
growth.
OTHER MARKETING TOOLS. In addition to our use of direct marketing and
telemarketing, we have developed a number of other marketing tools to help
define the profile of our ideal potential customer. These tools include a
biannual survey of our customers. We survey information contained in leasing
contracts with our customers in order to analyze the respondents' income, age,
family status and housing situation. This information is used to improve the
criterion for qualifying the best sales leads, which improves the quality of the
appointments our telemarketers can pass on to its sales teams.
In addition, we utilize customer satisfaction surveys to chart the
effectiveness of our sales organization. These surveys are accomplished by
questioning the customers directly, and their results provide us with
information about our customers and the waterbed market, which allow us to
tailor our waterbed products to the tastes and expectations of our customers. We
anticipate that the role of customer satisfaction surveys in our sales approach
will continue to grow.
SALES PERSONNEL AND PROCESS
We employ a Marketing and Sales Director to coordinate the coaching,
training and supervision of our sales force. The Marketing and Sales Director
oversees three sales managers, who report to her on a daily basis. Each sales
manager has a team of approximately 10 sales representatives. Each sales team is
responsible for a number of geographic regions in the Netherlands. The
geographic regions are designated on the basis of population density as a
quantitative factor. Every day, each sales team discusses and evaluates sales,
training, appointments, follow-up of orders and customer contacts.
Our sales representatives are essential to our business operations.
Their marketing efforts ensure a continuous flow of orders. Due to our direct
sales approach, approximately 85% of our sales appointments are scheduled in the
evening. For this reason, our sales division remains operational until 10 p.m.
every business day.
When an order is completed by one of our sales representatives and
signed by the customer, the sales representative faxes it to our headquarters,
where the processing of the order is completed. A copy of the order is sent to
the local Dutch Chamber of Commerce, in compliance with the law on canvassing
and door-to-door sales in the Netherlands. This law is discussed further in the
"Government Regulation" section of this registration statement.
After the customer's sales order is faxed to our headquarters, the
order is in most cases submitted to Arenda B.V. ("Arenda"), a leasing company
subsidiary of the ING Group in the Netherlands. Arenda evaluates the customer's
financial situation and upon approval, finances the sales order. The customer
leases the waterbed from Arenda for a term of 10 years, with no residual payment
required for purchase. After financial approval, Arenda pays us directly for the
purchase price of the waterbed. On occasion, Arenda will submit the information
to RayFin to complete the financing for the customer. The sales order is then
forwarded for the final manufacturing of a waterbed as well as service of any of
the customer's special needs.
Because of the large number of administrative actions involved in the
sales process, it is very important that all documents are efficiently and
properly processed. Minor errors in a sales order immediately result in a
stagnation of the order's entire route through us. For this reason, we
established our Internal Sales Department to perform comprehensive project
administration tasks. The Internal Sales Department is also responsible for
several other tasks, including maintaining sales files, developing demonstration
kits, managing car leases, monitoring the sales process, and handling
communications to and from sales representatives and our customers. We believe
that
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professional and comprehensive attention to the details of the sales process is
integral in maintaining customer satisfaction.
In addition, we regard our service and product development subsidiaries
as a key part of our marketing strategy because of the length and nature of the
sales process. Service employees participate in the on-going sales process, and
continually educate customers on the advantages of using our products and
services rather than those of potential competitors.
We have embarked on a continuing training program that educates
employees about our lines of business. We believe our employees and customers
can benefit from a general understanding of the products and services provided
by each division of our company. In addition, we have an internal process of
sharing customer databases and references between divisions in order to
capitalize on potential cross-selling opportunities.
Until February 1, 2000, we provided our customers with a money-back
guarantee to underscore our commitment to quality assurance and total
customer satisfaction. This guarantee represented a significant expense for
us. In 1999, the expenditure for guarantees was 2,659,037 guilders or
approximately $1,076,533 at the spot exchange rate as of September 1, 2000.
The guarantee was provided by Stichting Betaal Garant, a non-profit
Netherlands foundation controlled by C.A.R. Bongers, our Chairman, CEO and
President. The guarantee is discussed further in the "Certain Relationships
and Related Transactions" section of this registration statement.
COMPETITION AND MARKETS
Competition is vigorous in all parts of the worldwide market for
waterbeds. Our competitors are numerous and vary considerably in size and
resources. Some have substantially greater resources, revenue and cash flow.
Some have superior manufacturing expertise, capacity and talent. In the
Netherlands and throughout most of Europe, there exist strong, well-entrenched
waterbed dealer networks loyal to specific manufacturers and wholesalers. In
some cases there exist competitors with larger advertising budgets, more
effective and innovative marketing campaigns and more technologically advanced
manufacturing processes.
Royal Waterlily's major direct competitors in the Netherlands waterbed
market include the following companies: Waterbedden Concurrent, a Netherlands
retail-oriented dealer, Baltimore, a Netherlands wholesaler, Sleeptrend, a
Netherlands wholesaler, Tilmans Trading International N.V., a Belgian
manufacturer, The Sleeping Society N.V., a Belgian wholesaler, and other diverse
retail dealers throughout the Netherlands.
The following table sets forth our estimates pertaining to brand
competition and market segmentation in the Netherlands waterbed market. All
figures are shown in Netherlands guilders and in United States dollars (at the
spot exchange rate as of September 1, 2000).
<TABLE>
<CAPTION>
Top Middle Lower
------------------ ------------------ -------------------
<S> <C> <C> <C>
Brand Premier Nr 1 Sleeptrend Waterbeddenconcurrent
Wekker Oase BeterBed
Poseidon Poseidon Cascade
Cascade Cascade Baltimore
Baltimore
Atlantic
Method of Distribution Direct Sales Retail Stores Retail Stores
Dealers Dealers Dealers
Average Price in
Netherlands Waterbed
Market >7,500 guilders 5,000 guilders < 2,500 guilders
($3,036) ($2,024) ($1,012)
</TABLE>
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According to the Centrale Branchevereniging Wonen ("CBW"), a
Netherlands-based organization that provides market and consumer data, the
Netherlands waterbed market accounts for approximately 9% of the western
European waterbed market. CBW estimates that waterbed sales in the
Netherlands for 1998 totaled approximately 113,000,000 guilders ($45,748,988
at the spot exchange rate as of September 1, 2000), with approximately 40,000
waterbeds sold at an average price of 2,825 guilders ($1,144 at the spot
exchange rate as of September 1, 2000). CBW estimates that in 1998 our sales
accounted for 10% of the Netherlands waterbed market.
We estimate that the Netherlands waterbed market will experience annual
growth rates of approximately 2.5% with annual price inflation of approximately
2%. We estimate the following growth in the Netherlands waterbed market through
the year 2001 (figures in United States dollars are calculated at the spot
exchange rate as of September 1, 2000):
<TABLE>
<CAPTION>
2000 2001
--------- ---------
<S> <C> <C>
Sales 124,727,125 guilders 127,845,303 guilders
($50,496,812) ($51,759,232)
Waterbeds 43,504 43,933
Price 2,867 guilders 2,910 guilders
($1,161) ($1,178)
</TABLE>
We estimate the approximate size of the European waterbed market for
the 1998 fiscal year as 1,266,800,000 guilders, or approximately $512,874,494
at the spot exchange rate as of September 1, 2000. The following table sets
forth sales information pertaining to the European waterbed market. All
figures are drawn in Netherlands guilders and in United States dollars (at
the spot exchange rate as of September 1, 2000).
<TABLE>
<CAPTION>
Country Sales in Guilders Sales in Dollars %
------------------- ------------------- ------------------ --------
<S> <C> <C> <C>
The Netherlands 113,000,000 45,748,988 9%
Germany 459,000,000 185,829,960 36%
England 208,800,000 84,534,413 16%
France 198,000,000 80,161,943 16%
Belgium 36,000,000 14,574,899 3%
Italy 198,000,000 80,161,943 16%
Austria 28,800,000 11,659,919 2%
Switzerland 25,200,000 10,202,429 2%
------------------- ------------------ --------
Total: 1,266,800,000 $512,874,494 100%
=================== ================== ========
</TABLE>
We believe that a general increase in population is the underlying
trend driving growth in the European waterbed market. To a lesser extent, this
includes a gradual, although minor, shift in customer demand from primarily
traditional beds to waterbeds. This gradual market growth dampens large scale
domination of the market by any one company and allows customers to select
waterbeds from a variety of small dealers and manufacturers throughout Europe.
The European waterbed market is highly fragmented among a myriad of
companies. Based on current trends, we believe that some industry consolidation
will occur in both the Netherlands and western European
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markets over the next five years. This consolidation will occur as companies
seek to increase market share and increase productivity and profitability
through the economies of scale afforded by strategic partnerships, mergers and
acquisitions. The conversion of the currencies of the European Monetary Union
member states within the European Union to the Euro in 2002 will certainly
facilitate the possibilities toward consolidation and cooperation. However, this
possibility is hampered by the fact that most European economies are relatively
high tax countries with democratic socialism. As a result, many waterbed
companies are operated in part due to the tax benefits they provide to their
owners.
As eastern European economies such as Poland, Hungary, and the Czech
Republic mature and standards of living increase, demand for waterbeds in these
countries should increase as companies seek to satisfy customer demands for more
expensive and higher quality sleep products.
COMPETITION IN THE FINANCIAL SERVICES MARKETS
Competition for the refinancing of residential mortgages in the
Netherlands is fierce. There exist substantially larger and better capitalized
financial institutions, such as banks and mortgage companies, within the
Netherlands. These financial institutions have significant competitive
advantages over us. Our volume of mortgage business at present is insignificant
compared to the billions of dollars in mortgages underwritten throughout the
Netherlands each year. Major competition comes from banks such as ABN Amro, ING
Bank, and Rabo Bank.
We estimate that approximately 665,000 mortgages are financed each
year in the Netherlands at an average value of 250,000 guilders (or $101,215
at the spot exchange rate as of September 1, 2000). According to the Dutch
Telegraaf, the volume of residential mortgages underwritten in the
Netherlands per year is on average approximately 73,000,000,000 guilders or
$29,554,655,870 at the spot exchange rate as of September 1, 2000.
SUPPLIERS
We source our materials for the manufacture of our waterbeds, including
wood, textiles, fabrics, vinyl and mechanical sub-assemblies, from a number of
diverse suppliers located throughout the Netherlands and Europe. We do not
depend upon a single supply source for any of our materials, nor do we have any
long-term contracts with suppliers.
CUSTOMERS
We focus our direct marketing and sales of waterbeds geographically
within the Netherlands, and as a result all of our customers are located in the
Netherlands. Our typical customer is a married male, with children, between the
age of 30 and 39. We have a diverse customer base because most of our customers
purchase only one waterbed.
Our financial services customers are all presently concentrated within
the Netherlands. These customers are initially selected from our existing
waterbed customer database, as well as from the telemarketing data gathered from
our solicitations for waterbed customers. We have a unique advantage in
marketing our financial services to these potential customers, since many of
them required financing for their waterbed purchases.
PROPRIETARY RIGHTS AND LICENSING
We regard our manufacturing processes and marketing techniques as
proprietary and unique in Europe. However, we do not hold any patents nor do we
have any patent applications pending. We have no proprietary rights, licensing,
or confidentiality agreements in place with respect to our processes or
techniques. While our ability to compete may be affected by our inability to
protect our proprietary information, we believe that, in view of the slow pace
of technological change within the industry, the combination of marketing
expertise and innovative and creative skills of our management is as important
to our business as the legal protection of our proprietary information.
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GOVERNMENT REGULATION
Our canvassing and door-to-door sales activities are regulated by Dutch
law. The canvassing law's purpose is to protect customers when they purchase
items from direct marketing merchants, such as canvassers and door-to-door
salesmen. It allows the customer eight days to cancel an order given to a
canvasser or door-to-door salesman. The canvassing law requires the buyer and
canvasser or door-to-door salesman to sign two identical copies of the sales
agreement, with each party keeping a copy. In addition, the canvassing law
requires the sales agreement to contain a clause that discloses the buyer's
right to dissolve the agreement within the eight days mentioned above. The
eight-day window to cancel the sales agreement begins once the sales agreement
is submitted to the Netherlands Chamber of Commerce and Industry for
certification (which usually occurs on the same day the sales agreement is
signed).
In addition to the canvassing law, it is possible that in the future
additional laws and regulations could be adopted in the Netherlands or in other
countries in which we desire to compete. These laws could address matters such
as the solicitation of clients through direct marketing and telemarketing.
Legislation and regulatory policies are unpredictable, and we could be subject
to increased regulation in the future. Laws or regulations could be adopted that
may decrease the growth and expansion of our direct sales approach, increase our
cost of doing business, or otherwise adversely affect our business. We cannot
predict whether, or to what extent, any such new legislation or rulemaking will
occur, or what effect any such potential legislation or rulemaking would have on
our business.
PRODUCT DEVELOPMENT
We are committed to improving and continually evolving our waterbed
design. In the last two years, we spent about 52 days per year on research and
development activities. We are particularly focused on such issues as hygiene,
stability, energy conservation, and safety. As a consequence, we recently
introduced a childproof thermostat for our waterbeds, as well as improved
sealing techniques for our water-bodies.
We also strive to anticipate new consumer trends, and use innovative
techniques to ensure that we will be the first to develop "the waterbed of the
future." We believe that the following special features will ensure that our
products remain attractive to consumers in the coming years:
- AUDIO, VIDEO, TELEVISION AND "SURF" FEATURES. These special features,
which are currently under development, will offer the customer a unique
entertainment experience and sensation. Sound waves released into the
water-body by stereo induce movement of the water so customers can
"feel" what they are watching on television. We intend to further
develop these features to allow our customers to "surf" the Internet
while lying in their waterbeds.
- OTHER NEW SPECIAL FEATURES. We currently offer other custom features,
including handles for pregnant women and disabled individuals, special
adapters for the use of dinner plates, integrated sun beds, massage
beds which utilize special water waves, and a therapeutic bed to
prevent hospital bedsores. We intend to continually refine these
special features through our product development process.
INSURANCE
We maintain general liability, automobile liability, worker's
compensation and umbrella coverage insurance in amounts we believe are customary
for a company of our size engaged in a comparable industry. However, there can
be no assurance that we will be able to maintain such insurance at acceptable
rates, or that we will not be subject to future claims that our insurance may
not cover or as to which our coverage limits may be inadequate.
EMPLOYEES
As of July 1, 2000, we, through our subsidiaries, employed a total of
76 full and part-time employees. Of this number, 36 are full-time employees, and
40 are part-time employees. The following table breaks down the number of
employees per subsidiary:
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<TABLE>
<S> <C>
Wapro B.V. 5
Premier 18
Wekker 0
RayMark 42
RayPro 7
RayFin 4
-----
Total 76
</TABLE>
Under Dutch law, membership in a trade union is confidential. We
believe that certain of our employees may be members of various unions but that
none of our subsidiaries is a party to a collective labor agreement. We have
never been subject to a labor grievance filed by any trade union, and have never
experienced a work stoppage. We believe that our employee relations are
excellent.
CURRENCY
The currency in use within the Netherlands is the guilder. As of
September 1, 2000, the spot exchange rate was 2.47 guilders to the United
States dollar. In 2002, the guilder will be phased out in favor of the Euro,
a common currency of the member states of the European Union's Economic and
Monetary Union ("EMU"). The EMU Euro Zone member states are Austria, Belgium,
Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands,
Portugal, and Spain.
On January 1, 1999, the Euro became the official currency of the 11
member states of the EMU, including the Netherlands, with a fixed conversion
rate against their national currencies. Although Euro notes and coins will not
appear until January 1, 2002, the new currency can be used by consumers,
retailers, companies of all kinds and public administrations in the form of
"written money," i.e. by means of checks, travelers checks, bank transfers,
credit cards and through electronic accounts. As of September 1, 2000, the
spot exchange rate of the Euro was 1.18 Euros to the United States dollar.
RISKS RELATED TO THE COMPANY'S BUSINESS
OUR ABILITY TO CONTINUE AS A GOING CONCERN IS NOT CERTAIN AND WE NEED TO
GENERATE SIGNIFICANT REVENUES.
As shown in the accompanying financial statements, we incurred a net
loss of $5,645,895 during the year ended December 31, 1999, and as of that date,
our current liabilities exceeded our current assets by $981,154 and our total
liabilities exceeded our total assets by $8,192,408. Therefore, our ability to
continue as a going concern is uncertain. We expect to continue to incur
significant losses in the future. As a result, we will need to generate
significant revenues to achieve profitability and may never achieve
profitability.
CERTAIN SALES OF OUR PRODUCT WERE SUBJECT TO A PROMOTIONAL MONEY BACK GUARANTEE
PROGRAM. WE MAY NOT HAVE ADEQUATE LIQUIDITY TO PAY POTENTIAL CLAIMS OF A
CUSTOMER UNDER THE PROGRAM, WHICH MAY THEN AFFECT OUR FINANCIAL CONDITION AND
REPUTATION.
Our customers may have recourse against us under the cash-back
incentive program initiated in April 1998. The cash-back incentive program was
sponsored by Stichting Betaal Garant, a non-profit Netherlands foundation for
which C.A.R. Bongers, our Chairman, CEO and President, serves as a director. We
discontinued the cash-back incentive program during February 2000. We have
deferred revenues of $3,347,225 and $4,188,976 for the years ended December 31,
1998 and 1999, respectively. If claims are made against us, we may not have the
funds to pay the customer. Inability to pay potential payments under the
cash-back incentive program may have a material adverse impact on our financial
condition and reputation.
9
<PAGE>
OUR MONEY BACK GUARANTEE PROGRAM WAS A PROMOTIONAL TOOL TO SELL WATERBEDS.
SINCE THE TERMINATION OF THE PROGRAM, SALES OF OUR WATERBEDS HAVE FALLEN, AND
MAY CONTINUE TO FALL. THE DECREASE IN SALES MAY ADVERSELY IMPACT OUR
FINANCIAL CONDITION.
We initiated a cash-back incentive program in April 1998 as an
incentive for our customers to buy our products. We have terminated the program
in February 2000 and have not instituted another incentive program to replace
it. Since February of 2000, sales of our waterbeds have declined as a result of
the termination of this program. The decrease in sales may continue, and thus
adversely affect our financial condition and profitability.
OUR COMPETITORS HAVE GREATER RESOURCES AND MORE-DEVELOPED DEALER NETWORKS.
FUTURE COMPETITION MAY MATERIALLY AFFECT OUR FINANCIAL CONDITION.
The retail bedding industry, within and outside of the Netherlands, is
highly competitive and highly fragmented. Some of our competitors have
well-entrenched dealer networks to consistently supply them business. Moreover,
some of our competitors have substantially greater financial and other resources
than us. Therefore, we may face periods of intense competition in the future
that could have a material adverse effect on our planned growth and future
results of operations. If there is a decrease in customer demand of waterbeds,
we may not have adequate resources to compete effectively
FUTURE EVENTS MAY AFFECT THE NUMBER OF CLAIMS UNDER THE PRODUCT WARRANTY, WHICH
MAY INCREASE OUR SERVICE OBLIGATIONS AND, THEREFORE, MAY ADVERSELY AFFECT OUR
FINANCIAL CONDITION.
We generally provide a limited factory warranty for a period of ten
years from the date of installation of the waterbed. Under the provisions of
the limited warranty, we provide one free relocation of the bed, one
replacement linen, water conditioner, and general service for technical
difficulties. At the time of installation, we estimate the amount needed to
cover future warranty obligations for products sold, and this estimate is
recorded as a current charge to income. Amounts not expected to be paid in the
next twelve months are included in the long-term warranty reserve. Future
events may affect the number of claims under our product warranty. Any increase
in the claims experience could have a material adverse effect on our financial
condition, due to an increase in service obligations.
WE DO NOT HAVE PRODUCT LIABILITY INSURANCE. CONSEQUENTLY, A CUSTOMER'S
SUCCESSFUL PRODUCT LIABILITY CLAIM, AS WELL AS THE ADVERSE PUBLICITY THAT WOULD
ACCOMPANY THE CLAIM, COULD HAVE A NEGATIVE EFFECT ON OUR BUSINESS AND FINANCIAL
CONDITION.
We are engaged in a business that could result in possible claims for
injury or damage resulting from our products. We are not currently, nor have we
been in the past, a defendant in any product liability lawsuit. We do not
maintain product liability insurance. A successful claim brought against us by a
customer or a consumer of the waterbed, and the adverse publicity that could
accompany any harm caused to a consumer by a product manufactured by us, could
have a material adverse effect on our business, financial condition and results
of operations.
WE MAY NOT HAVE ADEQUATE FUNDS TO COVER CERTAIN PAYMENTS THAT ARE DUE UNDER
EARLY-PAYOFF PROVISIONS OF OUR INSURANCE CONTRACTS. OUR INABILITY TO PAY OFF
THESE TERMINATION FEES MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
REPUTATION.
We sell contracts for life insurance to our waterbed customers. If the
customer cancels these contracts earlier than the terms allow, we must pay early
termination fees to the insurance company who accepted the contract. We may not
have adequate funds to cover these termination fees if a customer cancels the
contract. Our inability to pay the termination fees may adversely affect our
financial condition and reputation.
WE MAY NOT MEET OUR GROWTH PLANS IF WE CANNOT SECURE FINANCING AND IDENTIFY AND
ACQUIRE MANUFACTURERS, DISTRIBUTORS AND RETAILERS IN THE NETHERLANDS AND
THROUGHOUT EUROPE.
Our planned growth depends, in part, on our ability to expand into new
markets. In order to expand into new markets, we must secure financing and
acquire manufacturers, distributors and retailers in the Netherlands and
10
<PAGE>
throughout Europe. There can be no assurance, however, that we will be able to
obtain such financing on favorable terms or at all, or that we will be able to
identify acceptable acquisition targets and/or complete acquisitions with them.
The failure by us to obtain financing or implement our proposed growth strategy
of acquisitions could have a material adverse impact on our proposed growth and
future results of operations. Similarly, there can be no assurance that we will
be successful in expanding into existing or contiguous markets.
THE LOSS OF ANY OF OUR SUPPLIERS, OR A PRICE INCREASE BY OUR SUPPLIERS, COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
We purchase materials from approximately four suppliers. We typically
do not maintain long-term purchase contracts with these suppliers and usually
operate on a purchase order basis. There can be no assurance that the loss of
any one or more of its suppliers would not have a material adverse effect on our
business, or that our suppliers could not increase prices such as to have an
adverse effect on the results of our operations.
ANY MISJUDGMENT ON OUR PART AS TO OUR CUSTOMERS' PREFERENCES, AND ANY SHIFT IN
CONSUMER DEMAND, MAY MATERIALLY AFFECT OUR BUSINESS.
Our success as a business depends on our ability to anticipate and
respond to changing merchandise trends and consumer demands in a timely manner.
We believe we are benefiting from a gradual shift in consumer demand from
traditional beds to waterbeds. Any change in this trend could adversely affect
consumer interest in our products. Moreover, our products must appeal to a broad
range of consumers whose preferences cannot always be predicted with certainty
and may change between sales seasons. If we misjudge either the market for our
merchandise or our customers' purchasing habits, we may experience a material
decline in sales or be required to sell inventory at reduced margins. We could
also suffer a loss of customer goodwill if our products or operations do not
adhere to our quality control or service procedures or otherwise fail to ensure
satisfactory quality of our products. These outcomes may have a material adverse
effect on our business, operating results and financial condition.
THE RETAIL WATERBED INDUSTRY IS POTENTIALLY CYCLICAL AND DEPENDS HIGHLY ON THE
GENERAL ECONOMIC CONDITIONS. DEPRESSED ECONOMIC CONDITIONS CAN HAVE A MATERIAL
EFFECT ON OUR OPERATIONS.
Although the retail waterbed industry has been relatively stable in
the last two years, there is the potential for the industry to be cyclical,
with periods of good years followed by bad, followed by good again. This is
because the industry is directly affected by, among other things, new housing
development, existing home sales, interest rates, taxation, consumer confidence
and general economic conditions. Waterbed purchases are generally based on
individual preferences and judgment, and, in view of the fact that they may
represent a significant expense to the average consumer, are often delayed
during times of economic uncertainty. The deferral of such purchases could have
a material adverse effect on our business, results of operations and financial
condition. There can be no assurance, however, that as economic conditions
improve, our operations will become more profitable.
WE HAVE TWO MAIN EXECUTIVES. THE LOSS OF EITHER EXECUTIVE OR THE FAILURE TO HIRE
AND INTEGRATE CAPABLE NEW EXECUTIVES COULD HARM OUR BUSINESS.
The success of our operation during the foreseeable future will depend
largely upon the continued services of C.A.R. Bongers, our Chairman of the
Board, Chief Executive Officer and President, and G.J. Hietkamp, our Executive
Vice President, Chief Financial Officer and Secretary. The loss of the services
of either of Mr. Bongers or Mr. Hietkamp could have a material adverse impact
on us. Neither Mr. Bongers nor Mr. Hietkamp has entered into an employment
agreement with us. In addition, the pool of capable executives in the
Netherlands is limited. If we are unable to hire new executives, our business
may be adversely affected.
WE HAVE ONE PRINCIPAL SHAREHOLDER. THIS SHAREHOLDER HAS THE ABILITY TO CONTROL
THE MANAGEMENT OF THE CORPORATION.
As of September 20, 2000, C.A.R. Bongers beneficially owned
approximately 63% of the outstanding shares of our common stock. Accordingly,
Mr. Bongers has the ability to control the election of all of the members of
our Board of Directors and the outcome of corporate actions requiring
majority shareholder approval. Even as to
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<PAGE>
corporate actions in which super-majority approval may be required, such as
certain fundamental corporate transactions, Mr. Bongers will effectively control
the outcome of such actions.
THE ABSENCE OF A PRIOR TRADING MARKET FOR OUR STOCK MIGHT LEAD TO POTENTIAL
VOLATILITY IN THE MARKET PRICE OF OUR COMMON STOCK.
There has been no significant public market for our common stock, and
although our common stock is currently traded on the National Quotation Bureau,
LLC "Pink Sheets," there can be no assurance that an actual trading market will
ever develop or be maintained for our common stock. The market price of the
shares of our common stock may be highly volatile. Factors such as fluctuation
in our operating results, the introduction of new products or services by us or
our competitors, and general market conditions may have a significant effect on
the market price of our common stock.
WE DO NOT INTEND TO PAY DIVIDENDS. ANY EARNINGS WILL BE REINVESTED.
We do not intend to pay any dividends to our shareholders in the
foreseeable future. We currently intend to reinvest earnings, if any, in the
development and expansion of its business.
THE GENERAL POLITICAL, SOCIAL AND ECONOMIC SITUATION IN THE NETHERLANDS MAY
AFFECT OUR BUSINESS AND OUR FINANCIAL CONDITION.
We conduct all of our manufacturing and sales activities operations in
the Netherlands. In addition, all of our administrative, finance and accounting
and marketing operations are located in the Netherlands. As a result, our
business, financial condition and results of operations may be influenced by the
general political, social and economic situation in the Netherlands.
Accordingly, we may be subject to political and economic risks, including
political instability, currency controls and exchange rate fluctuations, tax
rates and structure, and changes in import/export regulations, tariffs, duties
and quotas.
WE COULD BE NEGATIVELY AFFECTED BY AN INCREASE IN THE NETHERLANDS' INFLATION
RATE.
The annual inflation rate in the Netherlands was approximately 2.0% in
1999. We do not believe that inflation in the Netherlands has had a material
impact on our results of operations in recent years, as our prices are adjusted
to reflect the then existing level of the inflation. However, no assurance can
be given that inflation in the Netherlands will not have a material adverse
effect on our business, financial condition and results of operations in the
future.
THERE ARE RULES FOR LOW-PRICED STOCKS THAT MAY AFFECT OUR SHAREHOLDER'S ABILITY
TO RESELL THEIR SHARES.
The Securities and Exchange Commission's regulations define a "penny
stock" to be any equity security that has a market price less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. Our common stock is currently considered "penny stock" under federal
securities laws. Penny stock rules generally impose additional sales practice
and disclosure requirements on broker-dealers who sell our shares to certain
investors. These rules may affect the ability of broker-dealers to make a market
in or trade our shares. This, in turn, may affect our shareholder's ability to
resell those shares in the public market.
FORWARD-LOOKING STATEMENTS
Some of the information in this registration statement contains
forward-looking statements that involve substantial risks and uncertainties.
These statements are identified by forward-looking words such as "may," "will,"
"expect," "anticipate," "could," "believe," "estimate," and "continue" or
similar words. Statements that contain these words should be read carefully
because they:
- discuss our future expectations;
- contain projections of our future results of operations or of our
financial condition; and
- state other "forward-looking" information.
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<PAGE>
We believe it is important to communicate our expectations. However,
there may be events in the future that we are not able to accurately predict or
over which we have no control. The risk factors listed above, as well as any
cautionary language in this registration statement, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from our expectations as described in our forward-looking statements. The
occurrence of the events described in these risk factors and elsewhere in this
registration statement could have an adverse effect on our business, results of
operations and financial condition.
CORPORATE HISTORY
Royal Waterlily, Inc., incorporated in Nevada on February 29, 1996,
under the name Autocapital, Inc. ("Autocapital"). Autocapital was initially
conceived and established as a financial services business, but remained dormant
until it acquired all of the issued and outstanding capital stock of Electronic
Security Systems, Inc., a Texas corporation ("ESSI"), for 510,000 shares of
Autocapital common stock. ESSI was incorporated on January 12, 1994, for the
purpose of developing, manufacturing and marketing auto alarms and security
devices. ESSI was a development stage enterprise, and its business plans were
abandoned and the company was subsequently merged with Autocapital on October
23, 1998. The Autocapital and ESSI entities were combined in a merger under an
Exchange Agreement dated October 23, 1998. As a result of this transaction, ESSI
became a wholly-owned subsidiary of Autocapital, and the number of issued and
outstanding shares of Autocapital common stock increased to 2,510,000.
On December 8, 1998, Autocapital effected a 2 for 1 forward stock
split, increasing the total number of outstanding shares of its common stock
from 2,510,000 shares to 5,020,000 shares.
In January 1999, Autocapital common stock was first quoted on the
National Quotation Bureau, LLC "Pink Sheets" under the stock symbol AUCU.
On August 2, 1999, the Autocapital Board of Directors transferred all
of the assets and technology of ESSI equally to Mr. Whitaker B. Irvin and Teresa
Williams Irvin, Autocapital shareholders. As a consequence of this transfer, Mr.
Irvin personally assumed all of the liabilities of ESSI as of August 5, 1999.
ESSI was dissolved effective October 11, 1999.
On August 6, 1999, Autocapital acquired all of the capital stock of
Wapro B.V., and the entities were combined in a reverse merger under an Exchange
Agreement and through a Deed of Transfer in Registered Shares in Wapro B.V. The
latter document was necessary because in the Netherlands, there is a statutory
requirement to execute a notarial deed before a public notary effecting the
transfer and exchange of shares in a limited liability company.
The reverse acquisition resulted in the exchange of 400 fully paid,
issued and outstanding common shares of Wapro B.V. held by Wapro B.V.'s sole
shareholder C.A.R. Bongers Holding Meddo B.V., a Netherlands limited liability
company controlled by C.A.R. Bongers, for 21,180,000 newly issued shares of
Autocapital common stock. After taking into account the issuance of 1,800,000
newly issued shares of Autocapital common stock to Pierson & Niederdorfer for
investment banking services rendered, the total outstanding shares of
Autocapital common stock increased to 28,000,000 as a result of this
transaction.
As a result of this acquisition, the previous shareholder of Wapro B.V.
owned more than 50% of the issued and outstanding voting shares of the Company.
Consequently, this business combination has been accounted for as a reverse
acquisition. For accounting purposes, the transaction is treated as a reverse
merger since Autocapital had no active business. The management and shareholders
of Wapro B.V. gained actual and effective operating control of Autocapital after
the merger. This transaction was equivalent to the issuance of stock by Wapro
B.V. for the net assets of Autocapital accompanied by a recapitalization. The
fair value of the net assets of Autocapital deemed acquired as a result of the
reverse acquisition were ascribed a nominal value.
Autocapital subsequently changed its name to Wapro Group, Inc. on
August 24, 1999. Effective September 8, 1999, the Company's stock symbol changed
from AUCU to PREM.
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On June 1, 2000, we declared a 1 for 25 reverse stock split. After the
stock split, we issued 1,032,800 additional shares to C.A.R. Bongers Holding
Meddo B.V., a Netherlands personal holding company controlled by Mr. Bongers,
our CEO and President, for forgiveness of indebtedness and release of certain
future obligations. In addition, after this reverse stock split we issued
480,000 additional shares to Driekeer H (G. J. Hietkamp), our Executive Vice
President, CFO and Secretary, in consideration for past obligations relating to
services. We also issued 309,200 additional shares to Pierson & Niederdorfer,
for past and future obligations relating to services rendered. The net effect of
the June 2000 recapitalization was to realign ownership of the Company to the
levels as originally agreed to by the parties in connection with the August 6,
1999 merger described above.
Wapro Group, Inc. subsequently changed its name to Royal Waterlily,
Inc. on July 18, 2000. In August 2000, the Company's stock symbol changed from
PREM to RYLW.
ADDITIONAL INFORMATION
We intend to provide an annual report to our security holders, and to
make quarterly reports available for inspection by our security holders. The
annual report will include audited financial statements.
We maintain, for investor relations purposes, a facsimile number at
+31 (543) 533-210, and an electronic mail address at [email protected]. We are
in the process of developing an Internet website for shareholder and public
relations at www.waprogroup.com. Additionally, the Company owns several
Internet domain names for its various Netherlands subsidiaries. However, this
registration statement does not incorporate any information found on any
website.
Once this registration statement is declared effective by the
Securities and Exchange Commission, if ever, we will be subject to the
informational requirements of the Securities Exchange Act of 1934 (the "Exchange
Act"). As a result, we will have to file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be inspected at public reference facilities
of the Commission at the following locations:
- Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549
- Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661
- 7 World Trade Center, New York, New York, 10048
- 5670 Wilshire Boulevard, Los Angeles, California 90036
Copies of such material can be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. The public may obtain information on the operation of the
Public Reference Room by calling the Securities and Exchange Commission at
1-800-SEC-0330.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND THE RELATED NOTES. THIS DISCUSSION CONTAINS FORWARD-LOOKING
STATEMENTS BASED UPON CURRENT EXPECTATIONS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. OUR
ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE SET FORTH UNDER "DESCRIPTION OF THE BUSINESS," AND THE
SUBHEADINGS THEREUNDER, SUCH AS "RISKS RELATED TO THE COMPANY'S BUSINESS."
RESULTS OF OPERATIONS
The following table sets forth certain operations data for the years
ended December 31, 1998 and December 31, 1999 and for the six months ended
June 30, 1999 and June 30, 2000. This information should be read in
conjunction with our financial statements and notes included elsewhere in
this prospectus. The financial information as of June 30, 2000 and for the
six months ended June 30, 2000 and 1999 has not been audited. However, this
information includes all adjustments, consisting of only normal recurring
adjustments, that we consider necessary for a fair presentation of the
financial position, operating results, and cash flows for such period.
Results for the six months ended June 30, 2000 are not necessarily indicative
of results for the full year or any future period.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
1998 1999 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Sales $ 1,361,753 $ 1,921,225 $ 1,234,958 $ 860,226
Gain on sale of installment contracts 60,103 155,026 83,360 91,360
Commission 16,548 71,612 16,167 93,309
------------- ------------- ------------- -------------
Net revenue 1,438,404 2,147,863 1,334,485 1,044,895
Costs and expenses
Material cost of sales 1,148,660 1,269,931 750,985 346,816
Sales and marketing 1,762,088 2,642,123 1,472,688 642,104
General and administrative 1,598,130 3,185,346 1,462,409 1,615,941
Depreciation and amortization 36,205 70,507 35,531 32,761
------------- ------------- ------------- -------------
4,545,083 7,167,907 3,719,613 2,637,622
------------- ------------- ------------- -------------
Operating loss (3,106,679) (5,020,044) (2,385,128) (1,592,727)
Other expense (income)
Interest income (3,004) (447) (179) (8,765)
Interest expense 14,626 34,252 11,943 47,958
Investment banking fees - 650,000 - -
------------- ------------- ------------- -------------
11,622 683,805 11,764 39,193
------------- ------------- ------------- -------------
Loss before taxes (3,118,301) (5,703,849) (2,396,892) (1,631,920)
Income taxes (benefit) 120,044 (57,954) (57,954) (11,434)
------------- -------------- ------------- -------------
NET LOSS $ (3,238,345) $ (5,645,895) $ (2,338,938) $ (1,620,486)
============= ============= ============= =============
</TABLE>
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SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES: Revenues for the first six months of 2000 decreased
$289,590 or 22% to $1,044,895 from $1,334,485 for the six months ended June
30, 1999. This decrease is principally attributed to a 30% decrease in
waterbed related sales. The sales of our waterbeds decreased primarily
because of the loss of sales representatives, and the discontinuance of the
cash-back incentive program in February 2000. In addition, revenue from
commissions and gain on sale of installment contracts increased from $99,527
in 1999 to $184,669 in 2000.
As a result of our cash back arrangement with certain customers, we
deferred revenue of $772,450 in 2000 versus $2,267,397 in 1999. We began to
offer cash back for our sales beginning in spring 1998 and as a result, the
majority of our sales have been deferred until the customer cash back
provisions have expired.
COSTS AND EXPENSES: Costs and expenses for the first six months of 2000
decreased $1,081,991 or 29% to $2,637,622 from $3,719,613 for the six months
ended June 30, 1999. This decrease is principally due to reductions in
waterbed sales. In addition, during 2000, we streamlined our operations and
made numerous cost cutting measures which reduced sales, marketing, general
and administrative expenses. Included in General and Administrative expense
in 2000 is a charge of $491,200 related to the Company's recapitalization of
ownership interest during June 2000.
INTEREST EXPENSE: Interest expense for the first six months of 2000 was
$47,958 versus $11,453 in 1999. This increase is associated with a $41,005
retroactive interest charge for unpaid amounts due to a related party.
INCOME TAXES: We recorded a $57,954 income tax benefit in 1999 due to our
ability to carryback net operating losses to prior years. During 2000, we
recorded income tax valuation reserves to offset any benefits of operating
losses.
NET LOSS: Net loss for the six months ended June 30, 2000 decreased
$718,452 or 31% to $1,620,486 compared to $2,338,938 loss reported for the
six months ended June 30, 1999. The decrease was due to the various factors
discussed above.
TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1998
REVENUES: Revenues for the year ended December 31, 1999 increased
$709,459 or 49% to $2,147,863 from $1,438,404. This increase is attributed to
an increase in waterbed unit sales. Sales of our waterbeds increased primarily
because of the initiation of the cash-back incentive program in April 1998.
Total deferred revenue for the year ended December 31, 1999 was $4,188,976
compared to $3,347,225 for the year ended December 31, 1998.
COSTS AND EXPENSES: Costs and expenses increased by $2.6 million or
58% to $7,167,907 from $4,545,083 for the year ended December 31, 1998. This
increase is principally due to increase in numbers of personnel, increase in
cash back premiums paid and increases in certain transportation costs. Total
amounts charged to operations for cash back premiums amounted to $1,287,784 for
the year December 31, 1999 compared to $826,467 for the year ended December 31,
1998.
INCOME TAXES: We recorded an income tax benefit of $57,954 due to
having taxable income for the year ended December 31, 1999.
NET LOSS: Net loss for the year ended December 31, 1999 increased
$2,407,550 or 74% to $5,645,895 compared to $3,238,345 loss reported for the
year ended December 31, 1998. The increase was due to various factors discussed
above.
TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1997
REVENUES: Revenues for the year ended December 31, 1998 increased
$19,062 or 1.3% to $1,438,404 from $1,419,342 for the year ended December 31,
1997. This increase is principally attributed to increase in commissions and
gain on sale of installment contracts.
As a result of our cash back arrangement with certain customers, we
deferred revenue of $3.3 million in 1998 versus none in 1997. We did not begin
to offer the cash back program until spring 1998.
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<PAGE>
COSTS AND EXPENSES: Costs and expenses for the year ended December 31,
1998 increased $3.1 million or 212% to $4,545,083 from $1,452,620 for the year
ended December 31, 1997. This increase is principally due to:
- increase in the associated material cost of sales of $726,005 due to
the increased deliveries and installations of waterbeds in 1998
- increase in sales and marketing costs of $1,468,401 due to increased
direct costs associated with the sale such as commissions and premiums
paid for the cash back program
- increase in general and administrative costs of $869,576 due to
increases in staff numbers, warehousing and occupancy costs and
management fees.
INCOME TAXES: We recorded an income tax provision of $120,044 due to having
taxable income during the year ended December 31, 1998. During the year ended
1997, we recorded the benefit of a net operating loss carryforward which was
utilized in 1998.
NET LOSS: Net loss for the year ended December 31, 1998 increased
$3,260,475 to $3,238,375 compared to $22,100 loss reported for the year ended
December 31, 1997. The increase was due to the various factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital and liquidity needs historically have been
related to funding the working capital, sales and marketing activities, the
development of manufacturing infrastructure, the establishment of customer
service and support operations. Our capital needs have been predominantly met
through our ability to sell customer lease contracts on a nonrecourse basis to
financing institutions.
During April 1998, we entered into an agreement with a foundation
affiliated with our shareholders to sponsor a cash back incentive program for
our customers. In return, we pay the foundation 18.5% of the total sales
price of each waterbed sold under this incentive program. Under this program,
the foundation agreed to refund the customer their purchase price of the
waterbed after a 12.5-year period if certain conditions and restrictions are
met. For the years ended December 31, 1998 and 1999 and for the six months
ended June 30, 1999 and 2000, we expensed $826,467, $1,287,784, $737,512, and
$206,403, respectively, for premiums paid to the foundation under this
program. However, we obtained legal advice from counsel in the Netherlands
indicating that our customers may have recourse against us under this cash
back incentive program. Accordingly, we have accounted for this revenue
consistently with Statement of Financial Accounting Standards No. 48,
"Revenue Recognition When Right of Return Exists." Consequently, we have
deferred $3,347,225 and $4,188,976, of revenue for the year ended December
31, 1998 and December 31, 1999, respectively, and $2,267,397 and $772,450 of
revenue for the six months ended June 30, 1999 and 2000, respectively.
Net cash from operating activities was ($3,919,956), ($5,806,318),
($3,428,662) and ($1,768,356) for the years ended December 31, 1998 and 1999
and for the six months ended June 30, 1999 and 2000, respectively. As
described below, we sell our installment contracts to financial institutions.
The proceeds received from these financial institutions offset the usages of
cash from operating activities.
Net cash from investing activities was $4,450,666, $5,996,659,
$3,547,498, and $1,776,356 for the years ended December 31, 1998 and 1999 and
the six months ended June 30, 1999 and 2000, respectively. The majority of
the cash from investing activities comprise from proceeds on the sale of
installment contracts. We sell these installment contracts to financial
institutions on a nonrecourse basis.
On August 6, 1999, Autocapital, Inc. exchanged 57,450 shares of its
common stock in exchange for each share of Wapro B.V. common stock. This
transaction was accounted for as a reverse merger in accordance with Accounting
Principles Board Opinion No. 16. As a result, the shareholders of Wapro B.V.
retained the majority of the outstanding stock of Autocapital, Inc. after the
merger. Autocapital, Inc. was a public shell company.
During January 1999, we established a bank line of credit of $106,045.
The line bears interest at 1.75% over the Bank's prime rate and is due on
demand. Borrowings are secured by substantially all the assets of the company
and the guarantee of certain shareholders. This line also requires the company
to maintain certain financial covenants. As of December 31, 1999, we were in
default of one of the financial covenants.
17
<PAGE>
Management has reviewed operating results, replaced certain executives
in the sales management team, and performed other analyses to improve product
salability. In addition, we discontinued the cash back incentive program
described above. Our continued existence is dependent upon our ability to
achieve profitable operations and maintain adequate bank financing and working
capital, as well as our ability to sell our installment sales contracts.
YEAR 2000 PREPAREDNESS
We successfully completed our Year 2000 changeover without any problems
in our core business processes. We have confirmed normal operations across all
products and markets on a sustained basis.
While unlikely, problems associated with noncompliant third parties
could still occur. Management will continue to monitor all business processes
and relationships with third parties during 2000 to ensure all processes
continue to function properly.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued FAS 133,
"Accounting for Derivative Instruments and Hedging Activities." We are required
to adopt FAS 133 for the year ending December 31, 2001. FAS 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities.
Because we hold no derivative financial instruments and do not currently engage
in hedging activities, adoption of FAS 133 is expected to have no material
impact on our financial position or results of operations.
INTEREST RATE RISK
As of June 30, 2000, we have an outstanding balance of $86,727 under a
bank line of credit with interest at prime rate plus 1.75%. A 10% movement in
market interest rates would not significantly impact our financial position or
results of operations.
DESCRIPTION OF PROPERTY
Our manufacturing, service and telemarketing operations are housed in
two facilities located at Driemarkweg 1a, in Winterswijk, the Netherlands. We
also have telemarketing operations located at Mollevite 15, in Westervoort, the
Netherlands. Our financial support services and executive offices are located at
40 Eelinkstraat, in Winterswijk, the Netherlands.
We lease our office, warehouse, and manufacturing facility from
Krozenbrink Holding B.V., a personal holding company of G.A.W. Bongers, a former
shareholder, and from C.A.R. Bongers, a current shareholder. Under the terms of
the leases, we are required to pay a base rent up to $116,866, adjusted annually
by the consumer price index. In addition, we are required to pay maintenance and
other occupancy costs. The leases run through February 2004, with renewal
provisions through March 1, 2008. In addition, we lease certain equipment under
terms for up to 60 months. We have treated these leases as operating losses.
Total rent expense amounted to $432,859 and $524,585 for 1998 and 1999,
respectively. Amounts paid to related parties amounted to $42,960 for 1998 and
$95,354 for 1999.
18
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of September 20, 2000:
- each person who is known by us to own beneficially more than 5% of our
common stock
- each of our directors
- all of our officers and directors as a group
Except as set forth below, each person's address is c/o Royal Waterlily, Inc.,
40 Eelinkstraat 7101 JL, Winterswijk, the Netherlands.
<TABLE>
<CAPTION>
Name and Address of Beneficial Amount and Nature of
Owner Beneficial Owner Percentage of Class (1)
------------------------------ -------------------- -------------------
<S> <C> <C>
C.A.R. Bongers (2) 1,880,000 62.67%
G.J. Hietkamp (3) 480,000 16%
Pierson & Niederdorfer (4) 420,000 14%
All Executive Officers and
Directors (as a group) 2,360,000 78.67%
</TABLE>
(1) Percentages are based upon 3,000,000 shares of common stock outstanding
as of September 20, 2000.
(2) Includes 1,880,000 shares held by C.A.R. Bongers Holding Meddo B.V., a
Netherlands personal holding company controlled by Mr. Bongers. C.A.R.
Bongers Holding Meddo B.V.'s address is 40 Eelinkstraat 7101JL
Winterswijk, the Netherlands.
(3) G.J. Hietkamp's address is Kobstederstraat 68, Winterswijk, the
Netherlands.
(4) Pierson & Niederdorfer's address is c/o Dr. Alexander Abfalterer,
Lexadmin Trust Reg., Staedtle 7 Postfach 70 FL 9490, Vaduz,
Liechenstein. The 420,000 shares includes 50,000 shares (pre-reverse
split) pledged to Attorney David Stocker pursuant to the Exchange
Agreement between Autocapital and Wapro B.V. and for the purpose of
securing a $50,000 debt owed by Pierson & Niederdorfer to Mr. Stocker.
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth certain information with respect to our
directors and executive officers.
<TABLE>
<CAPTION>
Name Age Position
---------------------------- ----- -----------------------------------------------------------------
<S> <C> <C>
C.A.R. Bongers 27 Chairman of the Board, Chief Executive Officer and President
G.J. Hietkamp 34 Executive Vice President, Chief Financial Officer, Secretary and
Director
F. Nieweg 39 Managing Director, RayPro B.V.
G. Bongers 30 Managing Director, RayMark B.V. and RayFin B.V.
</TABLE>
Following are brief descriptions of our current executive officers and
directors:
C. A. RAYMOND BONGERS has served as the Chairman, President and Chief
Executive Officer for the Company since August 1999. Mr. Bongers is the founder
of Wapro B.V., and controls a majority of our shares through his Netherlands
personal holding company, CAR Bongers Holding Meddo, B.V. In August 1999, Mr.
Bongers successfully completed a reverse merger of Wapro B.V. with Autocapital,
Inc., a publicly held Nevada
19
<PAGE>
corporation. The reverse merger of Wapro B.V. created the first publicly held
waterbed company of which we are aware. From March 1996 until August 1999,
Mr. Bongers served as the managing director of Wapro B.V., our operating
subsidiary in the Netherlands. Mr. Bongers implemented our new business
development plan with the addition of professional managers for each of our
new subsidiaries. In June 1990, Mr. Bongers founded Raylex Waterbedden
Nederland B.V., a retail waterbed company in the Netherlands which until 1996
imported waterbeds from Toronto, Canada. In 1988, Mr. Bongers founded Rainbow
Video Pictures which he subsequently sold in 1990.
G.J. (HENRI) HIETKAMP has served as our director and as our Executive
Vice President and Secretary since August 1999. Mr. Hietkamp has served as the
director for business development for Wapro B.V. since May 1998. From January
1992 until April 1998, Mr. Hietkamp served as the Marketing Director for Exakta
Beheer, a Netherlands company engaged in the direct sales of windows, wooden
floors, and financial services. Mr. Hietkamp also served as the manager for
Business Development for each of six Exakta Beheer subsidiaries. From April 1998
until May 1999, Mr. Hietkamp was a management consultant for f.i Wegener Arcade,
Exakta Beheer and for Wapro B.V. He completed his business studies at Hoger
Sociaal Agogisch Onderwijs, in Arnhem, the Netherlands in 1993. Mr. Hietkamp
completed the following academic qualifications in the Netherlands: 1984-1988
HSAO, social study, 1990 Nima A and Moderne Bedrijsfadministratie, 1991 Nima B,
1993 Nima C, theory.
F. NIEWEG has served as the Managing Director for RayPro B.V. since
June 1999, and in that capacity manages our manufacturing and logistics
operations. Mr. Nieweg has ten years of experience in logistics management. From
1995 until March 1999, Mr. Nieweg managed the commercial, financial and
operational aspects of the logistics services of Wim Bosman, a Netherlands
company involved in the international freight forwarding business. From 1989
until 1995, he was the site manager for a dedicated freight forwarding warehouse
for Wim Bosman Logistic Services. From 1986 until 1989, Mr. Nieweg worked for
Wim Bosman Expediting Services as a supervisor involved with domestic and
international contracts.
G. BONGERS has served as the Managing Director for RayMark B.V. since
March 1998 and as the Managing Director for RayFin, B.V. since June 1998. Mr.
Bongers manages the telemarketing and sales operations for RayMark, and the
financial services operations for RayFin. Mr. Bongers is the brother of C.A.R.
Bongers, our Chairman, President and CEO.
All directors hold office until the next annual meeting of shareholders
and until their successors are elected. Officers are elected to serve, subject
to the discretion of the Board of Directors, until their successors are
appointed.
EXECUTIVE COMPENSATION
EXECUTIVE OFFICER COMPENSATION
The following table sets forth information regarding compensation
awarded to, earned by or paid to our President and Chief Executive Officer for
all services rendered to us during 1999, 1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER
--------------------------- ---- ------ ----- -----
<S> <C> <C> <C> <C> <C>
C.A.R. Bongers(1) 1999 184,042.65 guilders N/A N/A N/A
Chairman, CEO and President ($74,511) (2)
1998 120,000.00 guilders N/A N/A N/A
($48,583)
1997 120,000.00 guilders N/A N/A N/A
($48,583)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER
--------------------------- ---- ------ ----- ------
<S> <C> <C> <C> <C> <C>
G.J. Hietkamp(3) 1999 117,500 N/A N/A N/A
($47,571) (2)
1998 40,000 N/A N/A N/A
($16,194)
1997 NONE
</TABLE>
(1) C.A.R. Bongers is currently employed by Wapro B.V. through his personal
holding company, C.A.R. Bongers Holding Meddo B.V.
(2) At the spot exchange rate as of September 1, 2000.
(3) G.J. Hietkamp is currently employed by Wapro B.V. through his personal
holding company, B.V. Drie keer H.
DIRECTOR COMPENSATION
We currently do not compensate our directors or reimburse their
expenses.
EMPLOYMENT AGREEMENTS
We currently do not have employment agreements with our executive
officers.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Beginning in April 1998, we provided our waterbed customers with
a 150-month money back guarantee through Stichting Betaal Garant ("Betaal
Garant"), a private foundation organized under the laws of the Netherlands to
provide insurance guarantees. Betaal Garant is a non-profit Netherlands
foundation for which C.A.R. Bongers, our Chairman, CEO and President, serves
as a director. In 1998, Mr. Bongers received 29,000 guilders (approximately
$11,741 at the spot exchange rate as of September 1, 2000) in compensation
from Betaal Garant. Starting in April 1998, we agreed to pay Betaal Garant
18.5% of the total sales price of each waterbed sold in exchange for its
obligation to provide the money back guarantee to our customers. We agreed in
2000 to pay Betaal Garant interest at the rate of 5% on any unpaid balances
owed. This agreement is retroactive to January 1, 1999. Total interest
charged to operations is $41,005 for the six months ended June 30, 2000.
Betaal Garant, in turn, reinsured this risk with Crown Insurance Group, an
insurance company of which Mr. Bongers is a shareholder. As of June 30, 2000,
we owed Betaal Garant $671,457. We discontinued the money back guarantee
program effective February 1, 2000.
We pay management fees to our stockholders in exchange for management
services of the individual owners. Total management fees paid during 1998, 1999
and January - March 2000 (unaudited) amounted to $122,044, $262,119 and
$67,108, respectively. Part of the management fees for 1999 were paid to Jan
Sofat B.V., a wholly owned subsidiary of C.A.R. Bongers Holding Meddo B.V.,
C.A.R. Bongers' Netherlands personal holding company. Jan Sofat B.V. receives
commissions from Arenda B.V., the company that provides financing for customers
purchasing our waterbeds. The commissions are awarded as referral fees for
customers referred to Arenda by Jan Sofat B.V., and are calculated based on the
number of financing transactions referred. In 1999, Jan Sofat B.V. received a
total of $84,139 in commissions from Arenda B.V.
Krozenbrink Holding B.V., a personal holding company of G.A.W. Bongers,
is the landlord for our manufacturing, service and telemarketing facility
located at Driemarkweg la, in Winterswijk, the Netherlands. G.A.W. Bongers is a
former Wapro B.V. shareholder, and is the father of C.A.R. Bongers, our
Chairman, CEO and President.
21
<PAGE>
At December 31, 1998, $101,074 was due from Krozenbrink Holding B.V., a
personal holding company of G.A.W. Bongers, from advances we made. This loan was
repaid in 1999. During 1999, $5,956 was advanced to Krozenbrink Holding B.V.
This advance was non-interest-bearing and due on demand. During the 2nd quarter
of 2000, this loan was fully redeemed. At March and June 2000, $5,658 and $0
respectively, was due from Krozenbring Holding B.V. from advances we made.
Interest was charged on the advances at the rate of 5% per annum. Total interest
income received from Krozenbrink Holding B.V. amounted to $3,004, $0 and $0 for
1998, 1999 and 2000, respectively.
We periodically make advances to, and receive payments from, C.A.R.
Bongers Holding Meddo B.V., C.A.R. Bongers' personal holding company. The
advances bear interest at a rate of 5% per annum and are due on demand. At
December 31, 1998 we owed the holding company $22,803. At December 31, 1999, the
holding company owed us $22,221. At March and June 2000, we owed the holding
company $8,244 and $14,938, respectively. The increase of the debt to the
holding company in 2000 is mainly because we received 2 payments.
We lease our office, warehouse, and manufacturing facility from a
former shareholder and a current shareholder of our company. Under the terms of
the leases, we are required to pay a base rent up to $116,866, adjusted annually
by the consumer price index. In addition, we are required to pay maintenance and
other occupancy costs. The leases run through February 2004, with renewal
provisions through March 1, 2008. In addition, we lease certain equipment under
terms of up to 60 months. We have treated these leases as operating losses.
Total rent expense amounted to $432,859 and $524,585 for 1998 and 1999,
respectively. Amounts paid to related parties amounted to $42,960 for 1998 and
$95,354 for 1999.
DESCRIPTION OF SECURITIES
We are authorized to issue 50,000,000 shares of capital stock, divided
as follows: 45,000,000 shares of common stock at $0.001 par value, and 5,000,000
shares of preferred stock at $0.001 par value.
COMMON STOCK
We had 3,000,000 shares of common stock issued and outstanding as of
September 20, 2000.
The following summarizes the rights of holders of our common stock:
- each holder of our common stock is entitled to dividends, pro rata,
when, as and if declared by the Board of Directors out of funds
available therefore
- each holder of our common stock is entitled to cast one vote for each
share held at all shareholder meetings for all purposes, including the
election of directors
- upon liquidation or dissolution, the holder of each outstanding common
stock is entitled to share equally in our assets legally available for
distribution to such shareholder after payment of all liabilities
Holders of more than 50% of the common stock issued and outstanding and
entitled to vote, present in person or by proxy, constitute a quorum at all
meetings of shareholders. The vote of the holders of a majority of common stock
present at such a meeting will decide any question brought before such meeting,
except for certain actions such as amendments to our Articles of Incorporation,
mergers or dissolutions which require the vote of the holders of a majority of
the outstanding common stock.
Holders of common stock are not granted any preemptive, subscription,
redemption or registration rights. All outstanding shares of common stock are
fully paid and nonassessable.
22
<PAGE>
PREFERRED STOCK
Our Articles of Incorporation empower our Board of Directors to issue up to
5,000,000 shares of Preferred Stock, in one or more series and to fix the
designations, preferences, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of the common stock. The Board of
Directors have authorized Series A Preferred Stock consisting of 5,000,000
shares. As of the date of this registration statement, there are no issued and
outstanding shares of Preferred Stock. The Series A Preferred Stock have rights
and preferences which are superior to the rights of the holders of our common
stock. These rights and preferences include:
- The entitlement to ten (10) votes for each share held on all matters on
which the holders of common stock are entitled to vote.
- Shares of Series A Preferred Stock are not subject to the operation of
a sinking fund.
- The right to convert to shares of common stock.
23
<PAGE>
PART II
MARKET FOR COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
Our common stock is traded on the National Quotation Bureau, LLC "Pink
Sheets" under the symbol "RYLW." The following table sets forth, for the fiscal
period indicated, the high and low closing bid prices for our common stock, and
the common stock of Autocapital, Inc., as reported on the Pink Sheets. The
quotations for the common stock traded on the Pink Sheets may reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
AUTOCAPITAL, INC.(1)(2)
===================================================================================
<S> <C> <C>
FISCAL YEAR 1999
FIRST QUARTER N/A N/A
SECOND QUARTER N/A N/A
ROYAL WATERLILY GROUP, INC.
===================================================================================
FISCAL YEAR 1999
THIRD QUARTER 0.75 0.25
FOURTH QUARTER 0.625 0.25
FISCAL YEAR 2000
FIRST QUARTER 0.55 0.007
SECOND QUARTER 0.3 0.07
</TABLE>
(1) Figures shown for the first and second quarters of Fiscal Year 1999
reflect bid prices for Autocapital, Inc. (trading symbol: "AUCU").
(2) No trading activity occurred in the first and second quarters of Fiscal
Year 1999 for Autocapital, Inc.
As of September 20, 2000, our common stock was held by 71
shareholders of record. The transfer agent for our common stock is Holladay
Stock Transfer, 2939 N. 67th, Scottsdale, Arizona 85251. Our sole market
maker is J. Alexander Securities, 523 W. 6th Street, Los Angeles, California
90014.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
currently anticipate that we will retain all future earnings for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future.
LEGAL PROCEEDINGS
We are not subject to any legal proceedings in the United States;
however, our subsidiaries and we are currently prosecuting and defending several
actions in the Netherlands which have arisen in the ordinary course of our
business and which involve former employees, waterbed customers and suppliers.
24
<PAGE>
These proceedings primarily involve claims for damages and the amounts
involved, exclusive of interest and costs, do not exceed 10% of our current
assets. Therefore, we believe these actions are not of material significance to
the financial performance of the business or our operations. We have retained
counsel in the Netherlands and will vigorously defend these actions in the Dutch
courts.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
We have not had any disagreements with our independent outside auditors
since inception.
RECENT SALES OF UNREGISTERED SECURITIES
In March 1996, Autocapital issued a total of 2,000,000 shares of its
common stock to six individuals in consideration for consulting services
previously rendered by those individuals. The total value of the services
rendered to Autocapital by these individuals was $2,000.00.
In October 1998, Autocapital acquired all of the issued and outstanding
capital stock of ESSI in exchange for 510,000 shares of newly issued Autocapital
common stock, pursuant to Articles of Exchange dated October 23, 1998.
In August 1999, Autocapital acquired all of the issued and outstanding
capital stock of Wapro B.V., pursuant to an Articles and Plan of Exchange dated
August 6, 1999, and a Deed of Transfer in Registered Shares dated August 6,
1999. In connection with the acquisition, Autocapital issued 21,180,000 shares
of common stock to C.A.R. Bongers Holding Meddo B.V., as the sole shareholder
of Wapro B.V., and 1,800,000 shares of common stock to Pierson & Niederdorfer,
in consideration for investment banking services rendered.
On June 1, 2000, we declared a 1 for 25 reverse stock split. After the
stock split, we issued 1,032,800 additional shares to C.A.R. Bongers Holding
Meddo B.V., a Netherlands personal holding company controlled by Mr. Bongers,
our CEO and President, for forgiveness of indebtedness and release of certain
future obligations. In addition, after this reverse stock split we issued
480,000 additional shares to Driekeer H (G. J. Hietkamp), our Executive Vice
President, CFO and Secretary, in consideration for past obligations relating to
services. We also issued 309,200 additional shares to Pierson & Niederdorfer,
for past and future obligations relating to services rendered.
These transactions were entered into in reliance on Section 4(2) of
the Securities Act of 1933, as amended.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation Law of the State of Nevada and our Articles of
Incorporation provide for indemnification of our officers and directors for
liabilities and expenses that they may incur in such capacities. In general, our
officers and directors are indemnified with respect to actions taken in good
faith and, in the case of conduct in such an individual's official capacity with
us, in a manner he reasonably believed to be in the best interest of the company
or, in all other cases, that his conduct was at least not opposed to our best
interests. In the case of any criminal proceeding, he must have no reasonable
cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors or officers pursuant to the foregoing
provisions, we have been informed that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is therefore unenforceable.
25
<PAGE>
ROYAL WATERLILY, INC. AND SUBSIDIARIES
Winterswijk, Netherlands
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT AUDITORS.............................................. F-1
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS............................................ F-2
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME (LOSS)........................................................ F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)........... F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................. F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................. F-6
</TABLE>
26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Royal Waterlily, Inc.
Winterswijk, Netherlands
We have audited the accompanying consolidated balance sheets of Royal Waterlily,
Inc. and subsidiaries (formerly Wapro Group, Inc.) (the Company) as of December
31, 1998 and 1999 and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity (deficiency), and cash flows
for the years then ended. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Royal Waterlily,
Inc. and subsidiaries as of December 31, 1998 and 1999 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 9 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 9. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
April 28, 2000, except for Note 10
as to which the date is July 18, 2000
F-1
<PAGE>
ROYAL WATERLILY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1998 1999 2000
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash $ 83,660 $ 205,772 $ 203,866
Trade accounts receivable 49,275 14,819 91,020
Due from related party 101,074 28,759 13,011
Inventory 186,326 159,628 86,494
Income taxes receivable 134,435 280,948 69,245
Prepaid expenses 2,826 5,495 10,075
------------ ------------ ------------
Total current assets 557,596 695,421 473,711
Property and equipment 378,598 411,100 395,155
Accumulated depreciation (47,725) (108,365) (135,869)
------------ ------------ ------------
Net property and equipment 330,873 302,735 259,286
Other 16,821 36,386 34,675
------------ ------------ ------------
$ 905,290 $ 1,034,542 $ 767,672
============ ============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
Current liabilities
Bank line of credit $ - $ 91,054 $ 86,727
Accounts payable 206,705 449,114 378,446
Payroll and other taxes payable 397,103 263,062 129,620
Due to related parties 52,358 496,478 689,438
Warranty reserve 59,657 51,622 58,042
Other 246,469 325,245 271,597
------------ ------------ ------------
Total current liabilities 962,292 1,676,575 1,613,870
Long-term warranty reserve 491,844 582,999 586,856
Deferred revenue 3,347,225 6,967,376 7,495,612
Commitments and contingencies
Stockholders' equity (deficiency)
Preferred stock, $.001 par value, authorized 5,000,000,
none outstanding - - -
Common stock, $.001 par value, authorized 5,000,000 shares;
issued and outstanding 22,980,000, 28,000,000, and 3,000,000
for 1998, 1999, and 2000, respectively 22,980 28,000 3,000
Additional paid-in capital - 644,980 1,161,180
Accumulated other comprehensive income (22,017) 824,319 1,217,347
Accumulated deficit (3,897,034) (9,689,707) (11,310,193)
------------ ------------ ------------
(3,896,071) (8,192,408) (8,928,666)
------------ ------------ ------------
$ 905,290 $ 1,034,542 $ 767,672
============ ============ ============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
ROYAL WATERLILY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-------Six months ended------
December 31, December 31, June 30, June 30,
1998 1999 1999 2000
------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Revenue
Sales $ 1,361,753 $ 1,921,225 $ 1,234,958 $ 860,226
Gain on sale of installment contracts 60,103 155,026 83,360 91,360
Commission 16,548 71,612 16,167 93,309
------------- ------------- ------------- -------------
Net revenue 1,438,404 2,147,863 1,334,485 1,044,895
Costs and expenses
Material cost of sales 1,148,660 1,269,931 750,985 346,816
Sales and marketing 1,762,088 2,642,123 1,472,688 642,104
General and administrative 1,598,130 3,185,346 1,462,409 1,615,941
Depreciation and amortization 36,205 70,507 33,531 32,761
------------- ------------- ------------- -------------
4,545,083 7,167,907 3,719,613 2,637,622
------------- ------------- ------------- -------------
Operating loss (3,106,679) (5,020,044) (2,385,128) (1,592,727)
Other expense (income)
Interest income (3,004) (447) (179) (8,765)
Interest expense 14,626 34,252 11,943 47,958
Investment banking fees - 650,000 - -
------------- ------------- ------------- -------------
11,622 683,805 11,764 39,193
------------- ------------- ------------- -------------
Loss before taxes (3,118,301) (5,703,849) (2,396,892) (1,631,920)
Income taxes (benefit) 120,044 (57,954) (57,954) (11,434)
------------- ------------- ------------- -------------
NET LOSS $ (3,238,345) $ (5,645,895) $ (2,338,938) $ (1,620,486)
============= ============= ============= =============
Basic net loss per share $ (1.08) $ (1.88) $ (.78) $ (.54)
============= ============== ============= =============
Weighted average number of common
shares outstanding 3,000,000 3,000,000 3,000,000 3,000,000
============= ============= ============= =============
Comprehensive income (loss)
Net loss $ (3,238,345) $ (5,645,895) $ (2,338,938) $ (1,620,486)
Change in cumulative translation
adjustment (27,803) 846,336 587,340 393,028
------------- ------------- ------------- -------------
Comprehensive income (loss) $ (3,266,148) $ (4,799,559) $ (1,751,598) $ (1,227,458)
============= ============= ============= =============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ROYAL WATERLILY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Stock Paid-in Comprehensive Accumulated
Shares Amount Capital Income Deficit
------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1998 22,980,000 $ 22,980 $ - $ 5,786 $ (154,453)
Net loss - - - - (3,238,345)
Translation adjustment - - - (27,803) -
Dividends - - - - (504,236)
------------- ------------ ------------ ------------ -------------
Balance December 31, 1998 22,980,000 22,980 - (22,017) (3,897,034)
Net loss - - - - (5,645,895)
Acquisition of public shell (Note 8) 2,000,000 2,000 (2,000) - -
Shares issued for investment banking fees 3,020,000 3,020 403,980 - -
Investment banking fees resulting from
principal stockholder's transfer of stock
to investment banker (Note 8) - - 243,000 - -
Translation adjustment - - - 846,336 -
Dividends - - - - (146,778)
------------- ------------ ------------ ------------ -------------
Balance December 31, 1999 28,000,000 28,000 644,980 824,319 (9,689,707)
Net loss - - - - (1,620,486)
Reverse stock split (Note 10) (26,880,000) (26,880) 26,880 - -
Recapitalization and shares issued for
compensation (Note 10) 1,880,000 1,880 489,320 - -
Translation adjustment - - - 393,028 -
------------- ------------ ------------ ------------ -------------
Balance June 30, 2000 (unaudited) 3,000,000 $ 3,000 $ 1,161,180 $ 1,217,347 $ (11,310,193)
============= ============ ============ ============ =============
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ROYAL WATERLILY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-------Six months ended------
December 31, December 31, June 30, June 30,
1998 1999 1999 2000
------------- ------------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
CASH FROM OPERATING ACTIVITIES
Net loss $ (3,238,345) $ (5,645,895) $ (2,338,938) $ (1,620,486)
Adjustments to reconcile net loss
to net cash from operating activities
Depreciation 36,205 70,507 32,545 32,761
Gain on sale of installment contracts (60,103) (155,026) (83,360) (91,360)
Deferred income taxes 35,324 - - -
Stock issued for compensation - 650,000 - 491,200
Deferred revenue 3,347,225 4,415,240 2,303,875 828,293
Changes in operating assets and liabilities
Accounts receivable (4,705,316) (5,926,020) (3,502,067) (1,765,676)
Inventory (41,050) 380 (35,446) 65,762
Refundable income taxes (84,382) (175,548) (247,072) 198,999
Prepaid expenses and other (68,879) 58,289 87,841 9,572
Accounts payable 150,883 288,089 242,174 (49,484)
Accrued expenses 708,482 613,666 111,786 132,063
------------- ------------- ------------- -------------
Net cash from operating activities (3,919,956) (5,806,318) (3,428,662) (1,768,356)
CASH FROM INVESTING ACTIVITIES
Proceeds from the sale of installment
contracts 4,788,861 6,110,202 3,622,193 1,779,879
Purchase of property and equipment (322,198) (90,271) (69,757) (3,604)
Increase in other assets (15,997) (23,272) (4,938) (18)
------------- ------------- ------------- -------------
Net cash from investing activities 4,450,666 5,996,659 3,547,498 1,776,257
CASH FROM FINANCING ACTIVITIES
Borrowings under bank line of credit - 96,572 96,572 -
Dividends paid (504,236) (144,858) (144,858) -
------------- ------------- -------------- -------------
Net cash from investing activities (504,236) (48,286) (48,286) -
Effect of exchange rate changes on cash 5,042 (19,943) (14,532) (9,807)
------------- ------------- ------------- -------------
Net change in cash 31,516 122,112 56,018 (1,906)
Cash at beginning of period 52,144 83,660 83,660 205,772
------------- ------------- ------------- -------------
Cash at end of period $ 83,660 $ 205,772 $ 139,678 $ 203,866
============= ============= ============= =============
Supplemental disclosure of cash paid
Interest paid $ 13,022 $ 34,252 $ 11,943 $ 5,253
Income taxes paid 169,102 204,467 171,328 -
Supplemental schedule of noncash
investing and financing activities
Stock issued for acquisition of public shell - 2,000 - -
</TABLE>
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ROYAL WATERLILY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS
Royal Waterlily, Inc. (formerly Wapro Group, Inc.) (the Company), a Nevada
corporation, is involved through its wholly owned Dutch subsidiaries (Wapro,
B.V.; Premier Waterbedden, B.V.; Wekker Waterbedden B.V.; RayMark, B.V.; and
RayPro, B.V.) in the manufacture and direct marketing of custom waterbeds in the
Netherlands. In addition, the consolidated financial statements includes RayFin
B.V. a brother-sister company in the business of providing financing services
for the customers of the Company. Effective December 10, 1999 the RayFin B.V.'s
stockholders contributed the stock of RayFin B.V. to the Company. The
transaction was accounted for in a manner similar to a pooling of interest.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION: The consolidated financial statements present the financial
position and results of operations of Royal Waterlily, Inc. and its wholly owned
subsidiaries described above and RayFin B.V. All significant intercompany
transactions and accounts have been eliminated in the consolidated financial
statements.
REVENUE RECOGNITION: The Company records revenue upon the satisfactory
installation of the waterbeds. The Company excludes from net revenue amounts
attributed to sales under a special cash-back program sponsored by a related
party (see Note 3). Amounts subject to this program are reflected as deferred
revenue in the accompanying balance sheets. The Company sells its products
utilizing installment sale contracts, which are sold to finance companies on a
non-recourse basis.
COMMISSION INCOME AND GAIN ON SALE OF INSTALLMENT CONTRACTS: The Company earns
commissions from selling life insurance and homeowner's mortgage insurance
coverage to the buyers of its waterbeds. The Company also records a gain on the
sale of nonrecourse installment contracts. Income from these sources is
recognized when the contracts are accepted by the insurance company or the
financial institution. The Company is subject to certain charges based upon
early payoffs of the insurance contracts. The Company estimates the provisions
for early payoffs at the time of sale. Both the commission and revenue are
primarily associated with the underlying sale of a waterbed, and accordingly,
the Company believes it operates in one segment.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of the Company's
financial instruments, which include cash, receivables, and debt, approximates
fair value due to the short-term maturities of those instruments.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Inventory consists
principally of raw materials.
--------------------------------------------------------------------------------
(Continued)
F-6
<PAGE>
ROYAL WATERLILY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost.
Improvements and betterments are capitalized; maintenance and repairs are
charged to operations as incurred. Depreciation is provided for financial
reporting using accelerated and straight-line methods over the estimated useful
asset lives.
PRODUCT WARRANTY: The Company generally provides a limited factory warranty for
a period of ten years from the date of installation. Under the provisions of the
limited warranty, the Company provides one free relocation of the bed, one
replacement linen, water conditioner, and general service for technical
difficulties. A current charge to income is recorded at the time of installation
to reflect the amount the Company estimates will be needed to cover future
warranty obligations for products sold. Amounts not expected to be paid in the
next twelve months are included in the long-term warranty reserve.
INCOME TAXES: Income taxes include taxes currently due and deferred income
taxes, determined utilizing a liability approach. This method gives
consideration to the estimated future tax consequences of differences between
financial accounting and tax basis of assets and liabilities. At December 31,
1998 and 1999, significant temporary differences arose principally from deferred
revenue and accrued warranty.
A valuation allowance is recorded, if necessary, to reduce deferred tax assets
to the amount considered more likely than not to be realized.
ADVERTISING EXPENSES: Included in sales and marketing costs are advertising
expenses of $459,372 and $478,197 in 1998 and 1999, respectively.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes foreign currency
translation adjustments, which are also recognized as a separate component of
equity.
SEGMENT REPORTING: The Company operates in one market segment, the sale of
installed waterbeds. The Company operates in one geographical segment, the
Netherlands. Substantially all of the Company's sales are made to customers in
the Netherlands.
EARNINGS PER COMMON SHARE: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
During the periods presented, the Company had no dilutive securities. Earnings
and dividends per share are restated for all stock splits and dividends through
the date of issue of the financial statements. Stock issued within twelve months
prior to the Company's registration with the Securities and Exchange Commission
is treated as outstanding for all periods presented.
--------------------------------------------------------------------------------
(Continued)
F-7
<PAGE>
ROYAL WATERLILY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FOREIGN CURRENCY: The local currency is the functional currency of each of the
foreign subsidiaries. Assets and liabilities of the Company's foreign
subsidiaries are translated using the fiscal year-end exchange rates, and
revenue and expenses are translated using average exchange rates prevailing
during the year. The effects of translating foreign subsidiaries' financial
statements are included as a separate component of stockholders' equity.
ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect certain reported amounts and disclosures, and actual
results may differ from these estimates. It is at least reasonably possible that
a significant change may occur in the near term for the estimates of warranty
reserves.
INTERIM FINANCIAL INFORMATION: The financial information as of June 30, 2000 and
for the six months ended June 30, 2000 and 1999 is unaudited but, in the opinion
of management, includes all adjustments, consisting of only normal recurring
adjustments, that the Company considers necessary for a fair presentation of the
financial position, operating results, and cash flows for such period. Results
for the six months ended June 30, 2000 are not necessarily indicative of results
for the full year or any future period.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1998, the Financial Accounting
Standards Board issued FAS 133, "Accounting for Derivative Instruments and
Hedging Activities." The Company is required to adopt FAS 133 for the year
ending December 31, 2001. FAS 133 establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. Because the Company holds no
derivative financial instruments and does not currently engage in hedging
activities, adoption of FAS 133 is expected to have no material impact on the
Company's financial position or results of operations.
NOTE 3 - RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1999, $101,074 and $5,956, respectively, was due from
an entity that was a former stockholder of the Company. These amounts represent
advances made to this entity, and the 1998 advances were repaid during 1999.
Interest was charged on the advances at the rate of 5% per annum. Total interest
income received from this entity amounted to $3,004 and $0 for 1998 and 1999,
respectively. During 1999, $5,956 was advanced to an entity that was a former
stockholder of the Company. This advance is non-interest-bearing and due on
demand.
--------------------------------------------------------------------------------
(Continued)
F-8
<PAGE>
ROYAL WATERLILY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - RELATED PARTY TRANSACTIONS (Continued)
At December 31, 1998 and 1999, amounts due from (to) the stockholder of the
Company amounted to the following:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Due from (to) stockholder $ (22,803) $ 22,221
</TABLE>
During 2000, amounts due from the stockholder were repaid.
The advances bear interest at 5% and are due on demand. Interest received or
paid was not material.
During April 1998, the Company entered into an agreement with a foundation
affiliated with the stockholders of the Company to sponsor a cash-back incentive
program for customers of the Company. In return, the Company pays the foundation
18.5% of the total sales price of each waterbed sold under this incentive. The
foundation has agreed to refund the customer their purchase price of the
waterbed after a period of 12.5 years if certain conditions and restrictions are
met. At December 31, 1998 and 1999 and at June 30, 2000 (unaudited), the Company
owes the foundation $30,137, $496,478, and $671,457, respectively, which is
included in due to related parties. During 2000, the Company agreed to pay the
foundation interest at the rate of 5% on any unpaid balances retroactive to
January 1, 1999. Total related interest charged to operations amounted to
$41,005 (unaudited) for the six months ended June 30, 2000. Total amounts
charged to operations under this incentive program amounted to $826,467 for
1998, $1,287,784 for 1999, and $206,403 for 2000 (unaudited) and are included in
sales and marketing expenses. The foundation has reinsured this risk with an
insurance company that is affiliated with the stockholders of the Company.
The Company has obtained legal advice from counsel in the Netherlands indicating
that its customers may have recourse against the Company under this cash-back
incentive program. Accordingly, the Company has accounted for this revenue
consistently with Statement of Financial Accounting Standards No. 48, "Revenue
Recognition When Right of Return Exists," and has deferred $3,347,225 and
$4,188,976 of revenues for the years ended December 31, 1998 and 1999,
respectively. Amounts included in deferred revenue represent all customers that
have registered with the foundation and are eligible under this cash-back
incentive program. The Company also defers revenue for outstanding certificates
during the registration period. Insurance premiums paid to the foundation have
been expensed since the recovery of losses from the foundation is uncertain.
The Company pays management fees to its stockholders in exchange for management
services of the individual owners. Total management fees paid during 1998 and
1999 amounted to $122,044 and $262,119, respectively.
--------------------------------------------------------------------------------
(Continued)
F-9
<PAGE>
ROYAL WATERLILY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Leasehold improvements $ 116,685 $ 138,792
Machinery and equipment 55,562 50,940
Furniture and fixtures 198,197 214,367
Transportation equipment 8,154 7,001
------------ ------------
378,598 411,100
Accumulated depreciation and amortization (47,725) (108,365)
------------ ------------
$ 330,873 $ 302,735
============ ============
</TABLE>
NOTE 5 - BANK LINE OF CREDIT
During January 1999, the Company established a bank line of credit of $106,045.
The line bears interest at 1.75% over the Bank's prime rate (4.0% at December
31, 1999) and is due on demand. Borrowings are secured by inventory and property
and equipment and the guarantee of certain stockholders. The line also has
financial covenants that the Company is required to maintain. At December 31,
1999, the Company is in default of one of the financial covenants.
NOTE 6 - INCOME TAXES
Income tax expense (benefit) was as follows:
<TABLE>
<CAPTION>
1998 1999
--------------- --------------
<S> <C> <C>
Benefit of net operating loss carryforward $ (35,324) $ -
Current 120,044 (57,954)
Deferred (1,146,172) (1,996,347)
Change in valuation allowance 1,181,496 1,996,347
--------------- --------------
$ 120,044 $ (57,954)
=============== ==============
</TABLE>
--------------------------------------------------------------------------------
(Continued)
F-10
<PAGE>
ROYAL WATERLILY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - INCOME TAXES (Continued)
Effective tax rates differ from statutory rates (34%) due to the following:
<TABLE>
<CAPTION>
1998 1999
--------------- --------------
<S> <C> <C>
U.S. federal statutory rate times financial statement
income (loss) $ (1,060,222) $ (1,939,309)
Effect of difference between U.S. and Netherlands rates (31,183) (57,038)
Change in valuation allowance 1,181,496 1,996,347
Other 29,953 (57,954)
--------------- --------------
$ 120,044 $ (57,954)
=============== ==============
</TABLE>
Year-end deferred tax assets were due to the following:
<TABLE>
<CAPTION>
1998 1999
--------------- --------------
<S> <C> <C>
Deferred tax assets
Deferred revenue $ 1,171,529 $ 2,388,291
Tax benefit of net operating loss 9,967 789,552
Less valuation allowance (1,181,496) (3,177,843)
--------------- --------------
$ - $ -
=============== ==============
</TABLE>
At December 31, 1999, the Company has net operating losses of approximately
$4,000,000, which have no expiration under Netherlands tax law.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
LEASES: The Company leases its office, warehouse, and manufacturing facility
from a former stockholder and a stockholder of the Company. Under the terms of
the leases, the Company is required to pay a base rent up to $116,866, adjusted
annually by the consumer price index. In addition, the Company is required to
pay maintenance and other occupancy costs. The leases expire through February
2004, with renewal provisions through March 1, 2008. In addition, the Company
leases certain equipment under terms up to 60 months. These leases have been
treated as operating leases by the Company. Total rent expense amounted to
$432,859 and $524,585 for 1998 and 1999, respectively. Amounts paid to related
parties amounted to $42,960 for 1998 and $95,354 for 1999.
--------------------------------------------------------------------------------
(Continued)
F-11
<PAGE>
ROYAL WATERLILY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
The future minimum rentals as of December 31, 1999 under the above leases are as
follows:
<TABLE>
<CAPTION>
Year Related Party Other Total
---- ------------- ------------ ------------
<S> <C> <C> <C>
2000 $ 116,866 $ 323,899 $ 440,765
2001 103,196 47,488 150,684
2002 103,196 2,073 105,269
2003 89,498 - 89,498
2004 14,460 - 14,460
------------- ------------ ------------
$ 427,216 $ 373,460 $ 800,676
============= ============ ============
</TABLE>
LITIGATION: There are various legal proceedings against the Company. The Company
is of the opinion that, although the outcome of the litigation cannot be
predicted with any certainty, the ultimate liability, if any, will not have a
material adverse effect on the Company's financial statements.
The Company is proceeding against a number of past customers for certain
cancellation provisions of its waterbed purchase contract. These claims result
from the customer canceling the order prior to the bed's installation. At
December 31, 1999, legal counsel estimates that there are approximately $63,000
of claims that may be realized. The Company does not recognize these claims as
income until the final settlement is received.
NOTE 8 - STOCKHOLDERS' EQUITY
On August 6, 1999, Autocapital, Inc. exchanged 57,450 shares of its common stock
in exchange for each share of Wapro B.V. common stock in a transaction accounted
for as a reverse merger in accordance with Accounting Principles Board Opinion
No. 16, wherein the stockholders of Wapro B.V. retained the majority of the
outstanding stock of Autocapital, Inc. after the merger. As part of the
transaction, the certificate of incorporation of Autocapital, Inc. was amended
to change its name to Wapro Group, Inc. (see Note 10).
As reflected in the Statement of Stockholders' Equity, the Company recorded the
merger with the public shell at its cost, which was zero, since at the time the
public shell did not have any assets or equity. The 2,000,000 shares represent
the exchange of shares between the companies at the time of the merger.
--------------------------------------------------------------------------------
(Continued)
F-12
<PAGE>
ROYAL WATERLILY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - STOCKHOLDERS' EQUITY (Continued)
In accordance with Staff Accounting Bulletin Topic 1-B, the Company recorded
investment banking fees of $243,000 during 1999, resulting from the transfer of
the principal stockholder's stock (1,800,000 shares of common stock of the
Company) to an investment banker as partial compensation for the transaction
described above.
In addition, the Company issued 3,020,000 shares for direct compensation to an
investment banker and other financial advisors in connection with the reverse
merger described above. As a result, the Company recorded investment banking
fees of $407,000 during 1999.
NOTE 9 - MANAGEMENT'S PLANS REGARDING CONTINUING OPERATIONS
As shown in the accompanying financial statements, the Company incurred a net
loss of $5,645,895 during the year ended December 31, 1999, and as of that date,
the Company's current liabilities exceeded its current assets by $981,154 and
its total liabilities exceeded its total assets by $8,192,408. Those factors
create an uncertainty about the Company's ability to continue as a going
concern.
Future operations of the Company are intended to continue. Management has
reviewed operating results, replaced certain executives in the sales management
team, and performed other analyses to improve product saleability. In addition,
the Company discontinued its cash-back incentive program during February 2000.
The Company's continued existence is dependent upon its ability to achieve
profitable operations and maintain adequate bank financing and working capital
and its ability to sell its installment sales contracts. These financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
NOTE 10 - SUBSEQUENT EVENTS
On June 1, 2000, the Company authorized and effectuated a 1 to 25 reverse stock
split of all outstanding common shares of the Company. In addition, the Company
recapitalized ownership and as a result, the Company recorded compensation
expense during 2000 for certain shareholders and officers whose ownership
interest increased as a result of this recapitalization. Further, on July 18,
2000, the Company changed its name to Royal Waterlily, Inc. The Company's
calculation of loss per share has been restated to reflect the reverse stock
split and the recapitalization.
--------------------------------------------------------------------------------
F-13
<PAGE>
PART III
INDEX TO EXHIBITS
2.1* Articles and Plan of Exchange by and between Autocapital, Inc., Wapro
B.V., C.A.R. Bongers holding Meddo B.V. and Pierson & Niederdorfer
2.2* Deed of Transfer in Registered Shares in Wapro B.V.
2.3* Articles of Exchange by and between Autocapital, Inc. and Electronic
Security Solutions, Inc.
3.1* Articles of Incorporation, as amended
3.2* Bylaws
10.1* Letter Agreement between Autocapital, Inc. and Miller Capital
Corporation
10.2* Form of Sales Representative Employment Contract
10.3* Form of Leasing Agreement and related documentation
10.4* Form of Money Back Guarantee
10.5* Lease Agreement between Wapro B.V. and Krozenbrink Holding B.V. for the
business-space at Driemarkweg 1A at Winterswijk
10.6* Lease Agreement between Rayfin B.V. and C.A.R. Bongers for the
business-space at Eelinkstraat 40 at Winterswijk
10.7* Lease Agreement between Wekker Waterbedden B.V. and H.W. Hartman for
the business-space at Mollevite 15 at Westervoort
21* Subsidiaries of the Registrant
27* Financial Data Schedule
* Previously filed
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
ROYAL WATERLILY, INC.
Date: September 22, 2000 By: /s/ C.A.R. Bongers
------------------------
C.A.R. Bongers
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ C.A.R. Bongers Chairman of the Board and
----------------------------------------------------- Chief Executive Officer September 22, 2000
C.A.R. Bongers
Executive Vice President,
/s/ G.J. Hietkamp Chief Financial Officer,
----------------------------------------------------- Secretary and Director September 22, 2000
G.J. Hietkamp
</TABLE>
