U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE EXCHANGE ACT
For the transition period from to
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Commission file number 2-96455-LA
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WATER CHEF, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 86-0515678
- --------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
7707 E.Acoma Dr.Suite 109, Scottsdale, Arizona 85260
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(Address of principal executive offices)
602-991-4534
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(Issuer's telephone number)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AS OF SEPTEMBER 30, 1997
----- ------------------------------------
Common
Par Value $.001 per share 35,036,237
<PAGE>
WATER CHEF, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements:
Consolidated Balance Sheet as of September 30, 1997.......... 3
Consolidated Statements of Operations for the three and nine
month periods ended September 30, 1997 and 1996................. 5
Consolidated Statements of Cash Flows for the three and nine
month periods ended September 30, 1997 and 1996.................. 6
Notes to Consolidated Financial Statements....................... 7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition............................ 8
PART II - OTHER INFORMATION
Item 3. Exhibits and Reports on Form 8-K................................. 11
Signatures................................................................. 12
2
<PAGE>
WATER CHEF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, 1997
------------------
(Unaudited)
CURRENT ASSETS:
Cash ................................................... $ 55,765
Accounts receivable, net of allowance for
doubtful accounts of $51,940 at September 30, 1997
and $51,940 at December 31, 1996 ....................... 62,113
Inventories, net ....................................... 1,178,858
Deposits and other ..................................... 57,180
----------
Total Current Assets ............................... 1,353,916
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation of $666,729 at September 30, 1997 and
$278,375 at December 31, 1996 ........................... 374,642
PATENTS, DESIGNS AND TRADEMARKS, at cost less
accumulated amortization of $36,848 at September 30, 1997
and $18,943 at December 31, 1996......................... 181,381
INVESTMENT IN CHINA JOINT VENTURE (notes) ................. 148,000
FRANCHISE SALE ............................................ 500,000
OTHER ..................................................... 55,067
----------
$2,613,006
==========
The accompanying notes are an integral part
of these consolidated balance sheets.
3
<PAGE>
WATER CHEF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT
September 30, 1997
------------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable:
Trade ........................................... $ 818,291
Other ........................................... 3,418
Accrued expenses and other ........................ 369,041
Current portion of notes payable .................. 712,183
-----------
Total Current Liabilities ..................... 1,902,933
-----------
NOTES PAYABLE, net of current portion ................ 1,966,916
-----------
MINORITY INTEREST IN CONSOLIDATED JOINT
VENTURE (Note 3) ................................... 253,000
-----------
STOCKHOLDERS' DEFICIT:
Preferred Stock, $.001 par value,10,000,000 shares
authorized; 120,000 shares issued and outstanding
at September 30, 1996 ........................... 120
Common Stock, $.001 par value, 40,000,000 shares
authorized; 35,036,237 shares issued and
outstanding at September 30, 1996 ............... 35,036
Additional paid-in capital ........................ 2,909,914
Common Stock Issued ............................... 2,251,626
Treasury stock, ................................... (5,768)
Accumulated deficit ............................... (6,700,770)
-----------
Total Stockholders' Deficit ................... (1,509,842)
-----------
$ 2,613,006
===========
The accompanying notes are an integral part
of these consolidated balance sheets.
4
<PAGE>
WATER CHEF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30
----------------- --------------------
1997 1996 1997 1996
---------------- --------------------
Net sales .................... $ 289,948 $ 90,720 $ 524,527 $ 309,351
Cost of sales ................ 301,412 51,697 530,386 181,517
---------- ---------- ---------- ----------
Gross margin ................. (11,464) 39,023 (5,859) 127,834
Selling, general &
administrative expenses ...... 480,919 150,056 1,176,203 76,167
---------- ---------- --------- ----------
Profit (Loss) from operations (492,383) (111,033) 1,182,062) 51,667
Sale of WaterChef-Franchise .. 261,221
Gain-Relieve-Debt ............ 706,254 706,254
Other income (expense):
Interest expense .......... (39,942) (47,765) (108,323) (55,027)
---------- ---------- ---------- ----------
Net Profit (Loss) before
provision for income taxes .. 173,929 (158,798) (322,910) (3,360)
Provision for income taxes ... -- -- -- --
---------- ---------- ---------- ----------
NET PROFIT(LOSS) ............. 173,929 (158,798) (322,910) (3,360)
Less-Preferred Dividends ..... (--) (--) (--) (--)
---------- ---------- ---------- ----------
NET PROFIT(LOSS) AVAILABLE
FOR COMMON STOCK ........... $ 173,929 $ (158,798) $ (322,910) $ (3,360)
========== ========== ========== ==========
Profit (Loss) per common share
and common share equivalent ... $ .005 $ (.01) $ (.01) $
========== ========== ========== ==========
Weighted average number
of common shares and
common share equivalents
outstanding .................. 35,036,237 15,836,574 35,036,237 15,836,574
========== ========== ========== ==========
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE>
WATER CHEF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ (322,910) $ (3,360)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization ..................... (87,209) (107,666)
Non-Operating Cash Flow Adjustments ............... (47,356) (33,305)
Change in assets and liabilities:
(Increase) decrease in accounts receivable, net .. 29,872 167,814
Decrease (increase) in inventories ................ (682,948) (485,583)
Increase in investment in China Joint Venture ..... 0 0
Increase (decrease) in prepaid expenses
and other assets ............................... 0 0
Increase (decrease) in accounts payable ........... 85,094 230,034
Increase in accounts payable-China Joint Venture .. (148,000) (148,000)
Increase (decrease) in accrued expenses and other
liabilities .................................... (362,925) (194,806)
----------- ---------
Net cash used in operating activities ............. $(1,536,382) $(574,872)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment .............. $ 583,422 $ 689,009
Acquisition of patents, designs and trademarks ..... $ (142,084) $ (60,393)
Net cash used in investing activities .............. $ 441,338 $ 628,616
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on notes payable .......... $ (757,086) $(664,486)
Payments on notes payable .......................... 16,953 71,887
Proceeds from preferred and common stock, net ...... 1,872,389 463,234
Net cash provided by financing activities .......... $ 1,132,256 $(129,365)
----------- ---------
Net increase (decrease) in cash ...................... $ 37,212 $ (75,621)
CASH, beginning of period ............................ $ 18,553 $ 94,174
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CASH, end of period .................................. $ 55,765 $ 18,553
=========== =========
Supplemental Cash Flow Information:
Cash paid for interest ............................... $ 0 $ 0
=========== =========
The accompanying notes are an integral part
of these consolidated financial statements.
6
<PAGE>
WATER CHEF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(1) The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. Accordingly, they do
not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for all periods presented have been made. The results of operations
for the nine-month period ended September 30, 1997, are not necessarily
indicative of the operating results that may be expected for the year ending
December 31, 1997, or with the Company's December 31, 1997 Form 10-KSB,
financial statements and accompanying notes thereto.
Pursuant to a Merger Agreement and Plan of Reorganization between the Company
and Water Chef-Nevada dated June 4, 1993 ("the Agreement"), the Company issued
3,800,000 shares of its common stock to Water Chef-Nevada's three stockholders,
in exchange for all issued and outstanding common stock of Water Chef-Nevada.
The common stock issued represented 62% of the issued and outstanding shares of
its common stock after the merger. In connection with this transaction, Water
Chef-Nevada's officers and its director became officers and a director of the
Company. This resulted in Water Chef-Nevada's officers and director, and
directors appointed by Water Chef-Nevada, controlling the Company's day-to-day
operations.
In accordance with Accounting Principles Board Opinion No.16, the Water
Chef-Nevada acquisition has been accounted for as a reverse acquisition. The
historical financial statements prior to June 4, 1993 are those of Water
Chef-Nevada (Water Chef-Nevada was formed on January 25, 1993, therefore, no
financial statements are presented prior to that date). For financial statement
presentation purposes, the Company is considered to be the predecessor.
(2) As of September 30, 1997, Inventories consist of the following (including
$236,137 in China facility inventory) :
Raw Material 828,030
Work in Process 12,400
Finished Goods 338,428
----------
$1,178,858
(3) In February 1994, the Company entered into an agreement (the "Agreement") to
form a joint venture, Tianjin Tahoe Cooler Co., Ltd. (the "Joint Venture") to
establish and operate a facility to manufacture the Company's Series I water
coolers in the People's Republic of China. The Company's contribution to the
Joint Venture, in which it will have a 55% interest, will be in the form of
machinery and other equipment in the approximate value of $144,000 (based on the
price of the equipment to be supplied by the Company to the joint venture),
$140,000 cash and designs and technology with an agreed upon value of $156,000.
The minority interest of $253,000 reflected in the consolidated balance sheet
represents the minority shareholder's proportionate share of the equity of the
7
<PAGE>
Joint Venture. No minority interest has been reflected in the accompanying
consolidated statements of operations as the Joint Venture did not have any
material operations during the nine months ended September 30, 1997. However,
design work on the plastic molds (4) In December 1996 the company purchased all
of the outstanding common stock of Natural Water Systems Inc. Boulder, Co for 1,
Million shares of WaterChef common. The company supplies water dispensing
systems for Natural Water stores and a shower filter of patented design that
removes 95% of the chlorine. Chlorine causes dry skin, split ends, scalp flaking
and red eyes, Chlorine absorbed by the body during a shower has been known to
cause cancer of the colon and bladder. It is believed this shower filter product
can grow into a $100 Million business.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net sales for the 3rd quarter and 9 months ending September 30, 1997 were
$289,948 and $524,527 respectively. This compares to a like period of 1996 of
$90,720 and $309,351. The sales increase was 170%. Sales in the 3rd quarter were
limited by 2 occurrences. The late arrival of parts for the Company's totally
new water dispenser line, which arrived from China in mid August. This pushed
production into the September period. Second, there were delays in implementing
a new sales program involving national coverage of The Home Depot stores. The
Home Depot selected the Company's new Tri-Temp dispenser line as the product to
be offered. Production of the new line started in September and shipments to The
Home Depot started in mid October. As with any totally new product there were
non recurring start up costs. They totaled $115,000 and were included in the
cost of sales figures. These costs include charges incurred in both the U.S. and
China facilities.
The Company will deliver 2 other new products in the 4th quarter, they are the
Village Water stations and an in store dispensing system. Both are involved in
the contracts totaling $200 Million over 10 years for the Philippines which were
previously announced.
Delivery of both products to start in the 3rd quarter but were delayed by
financing problems of the customers. We are informed these problems have now
been solved.
Selling, general and administrative expenses for the quarter and nine month
periods were $480,919 and $1,176,203 respectively. These year to year figures
are not comparable when considering actual operating expenses. Non recurring
adjustments totaling $482,000 were made in 1996 which distort the final data.
The 1997 figure represents a realistic figure for the operating rate for the
period. On this basis SG & A increased 18% while operations activity increased
170%.
Net profit for the 3rd quarter and 9 months was $173,929 and ($322,910).
Comparing these figures with 1996 the 3rd quarter loss was ($158,798) and the 9
month loss was ($3,360). The losses incurred in the first 2 quarters were due to
low operating levels. Working capital financing was obtained late in June which
enabled the Company to bring operating levels to a profitable level.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficit decreased from $961,922 at December 31,
1996 to $549,017 at September 30, 1997. The deficit decreased primarily because
of the net profit for the quarter and account adjustments. The Company's current
ratio was .71 to 1 at September 30, 1997 and .52 to 1 at December 31, 1996.
In January 1994, the Company commenced a private placement of Units (each Unit
consisting of one share of the Company's Series A Preferred Stock, one share of
the Company's common stock and one Series A Warrant to purchase four shares of
the Company's common stock at a price of $1.00 per share) at a Unit purchase
price of $10.00.
The Series A Preferred Stock provides for a 10% cumulative dividend, payable
annually in the Company's common stock or cash, at the Company's option, based
upon the $10.00 Unit purchase price. The Series A Preferred Stock is not
convertible, and is callable by the Company at any time following January 17,
1998 at a price of $11.00 per share. In total, the Company sold 52,500 Units and
received net proceeds of approximately $335,000, after deduction of offering
expenses of approximately $190,000. The private placement expired in April 1994.
In January and February 1994, Canaccord Capital; Corporation loaned the Company
a total of $170,000 to meet the temporary working capital needs of the Company.
These notes bear interest at 10% and were payable on February 28, 1994. The
notes are secured by substantially all these assets of the Company and are
guaranteed by an officer and director of the Company. These notes have been paid
off.
During February and March 1994, the Chairman and Chief Executive Officer of the
Company, and an affiliate of his advanced the Company a total of $26,000 to meet
temporary working capital needs of the Company. A portion of these loans
($13,000) was repaid out of the proceeds of the Company's private placement in
March 1994.
The Company's operations and cash flow has been hampered due to an inability to
raise sufficient capital with which to fund its operations. This lack of capital
has prevented the Company from being able to purchase sufficient inventory with
which to fill sales orders.
In September 1994, the Company completed a private placement of 2,578,750 units
at $0.80 per unit, each unit consisting of two shares of common stock and one
Series C warrant to purchase one share of common stock at a price of $1.00 per
share. Net proceeds to the Company were $2,000,442 plus the conversion of
$25,000 of debt then outstanding into 62,500 shares of the Company's common
stock. A partnership in which the Company's former Executive Vice-President is a
controlling partner purchased 350,000 shares of common stock in the offering.
In October 1994, the Company commenced efforts to raise up to $1,200,000 in debt
funding through several sources. As part of this effort, the Company was
attempting to raise $800,000 in debt funding (the "Note" or "Notes") through
private sources. The Notes would be unsecured and payable in one year, including
interest at 10% per annum. Each Note holder would receive Series D Warrants
entitling the Note holder to purchase, at a purchase price of $0.60 per share,
one share of the Company's common stock for each dollar of note principal.
Through September 30, 1995 the Company raised approximately $485,000 through
this funding source. This funding effort was closed at this point.
9
<PAGE>
In August 1996, the Montana Department of Commerce amended its open Community
Development Block Grant project to assist the Company with an additional loan of
$340,000. The Company borrowed $200,000 of these funds through November 20, 1996
to meet working capital requirements. The balance was drawn in January 6, 1997.
In December 1996 the company commenced efforts to raise $2, Million from private
placement of $5pfd 12% with 5 shares of common stock .As of the end of the first
quarter $400,000 had been raised. This private placement has been modified as of
July 1, 1997 by adding an addition 5 shares of incentive stock.
The company's operations and cash flow have been hampered due to an inability to
raise sufficient capital with which to fund its operations. This lack of capital
has prevented the Company from being able to purchase sufficient inventory with
which to fill sales orders.
To carry the companies operations until the working capital program was
completed a bridge loan in the amount of $375,000 was negotiated. The loan will
be repaid by the end of 1997.
The Company raised $1.5 Million in working capital late in June 1997. Funds to
purchase parts for coolers from China and US sources were immediately released.
These parts will be used to fill the Company's backlog of orders for delivery in
the 3rd quarter and 4th quarter. The funds were not available in time to affect
the company's 2nd quarter operations.
Management of the Company believes that the marketing and distribution network
it has created along with the creation of new markets (such as retail and
international), will produce a volume of sales sufficient to operate profitably.
There can be no assurance that additional debt or equity funding will be
available to the Company.
Additional shares were issued as part of the Company's program to improve the
balance sheet and working capital. In total 19,199,663 shares were issued broken
down as follows 10 million shares to raise the $1.5M. 2.43 million shares for
the bridge loan. Seven key employees purchased 2.3 million shares at market
price. Of these shares which are restricted, Gus Grant Chairman and CEO
purchased 960,000. 1 million shares were issued to settle debt which has been
removed from the balance sheet. 663,000 shares were issued for a private
placement and 400,000 shares were issued as incentive shares for stock sales.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
Exhibit 11 Statement RE: Computation of earnings per share
Exhibit 27 Financial Data Schedule
B. Reports on Form 8-K:
The company filed Form 8-K, dated February 27, 1997, to report that
Arthur Andersen resigned as auditor for the Company.
The company filed Form 8-K, dated May 30, 1997, to report that the
Company had engaged Semple and Cooper, LLP. as auditor for the
Company.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
WATER CHEF, INC.
Date: October 21, 1997 /s/ C. Gus Grant
-----------------------------
C. Gus Grant
President, Director and Chief
Executive Officer
(Principal Operating Officer)
12
EXHIBIT 11
WATER CHEF, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30
------------------ -------------------
1997 1996 1997 1996
------------------ -------------------
<S> <C> <C> <C> <C>
Common shares outstanding
beginning of period ........... 35,036,237 15,836,574 35,036,237 15,836,574
Effect of weighting shares:
Shares issued ................. -- -- -- --
---------- ----------- ----------- -----------
Weighted shares ................. 35,036,237 15,836,574 35,036,237 15,836,574
========== =========== =========== ===========
The net gain (loss) per share was calculated as follows:
Net gain (loss) available
for common stock .............. $ 173,929 $ (158,798) $ (322,910) $ (3,360)
Weighted Shares ................. 35,036,237 15,836,574 35,036,237 15,836,574
========== ========== ========== ==========
NET GAIN (LOSS) PER COMMON AND COMMON EQUIVALENT SHARES
Net gain (loss) per share ....... $ .005 $ (.01) $ (.01) $
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 55,765
<SECURITIES> 0
<RECEIVABLES> 62,113
<ALLOWANCES> 51,940
<INVENTORY> 1,178,858
<CURRENT-ASSETS> 1,353,916
<PP&E> 374,642
<DEPRECIATION> 666,729
<TOTAL-ASSETS> 2,613,006
<CURRENT-LIABILITIES> 1,902,933
<BONDS> 3,237,858
0
0
<COMMON> 19,769
<OTHER-SE> (3,935,779)
<TOTAL-LIABILITY-AND-EQUITY> 3,289,800
<SALES> 234,579
<TOTAL-REVENUES> 234,579
<CGS> 228,997
<TOTAL-COSTS> 228,997
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6,711)
<INCOME-PRETAX> (491,888)
<INCOME-TAX> 0
<INCOME-CONTINUING> (491,888)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (491,888)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
