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 March 31, 1998
[ ] 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.
Outstanding as of
Class March 31, 1998
----- -----------------
Common
Par Value $.001 per share 36,606,792
<PAGE>
WATER CHEF, INC.
FORM 10-QSB
FOR FIRST QUARTER ENDED MARCH 31, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements:
Consolidated Balance Sheet as of March 31, 1998................... 3
Consolidated Statements of Operations for the three and six
month periods ended March 31, 1998 and 1997....................... 5
Consolidated Statements of Cash Flows for the six
month periods ended March 31, 1998 and 1997....................... 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
March 31, 1998
--------------
(Unaudited)
CURRENT ASSETS:
Cash $ 43,853
Accounts receivable, net of allowance for
doubtful accounts of $26,541.98 at March 31,
1998 and $26,541.98 at December 31, 1997 58,520
Inventories, net 1,083,045
Deposits and other 222,698
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Total Current Assets 1,408,117
PROPERTY AND EQUIPMENT, at cost less
accumulated depreciation of $380,862
at March 31, 1998 and $271,140 at
December 31, 1997 161,060
PATENTS, DESIGNS AND TRADEMARKS, at
cost less accumulated amortization of
$6,934 at March 31, 1998 and $5,200
at December 31, 1997 162,639
FRANCHISE-SALE 300,000
Investment In Subsidiaries 499,013
----------
$2,530,830
==========
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
March 31, 1998
--------------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable:
Trade $1,234,763
Other 5,846
Accrued expenses and other 889,668
Current portion of notes payable 481,488
-----------
Total Current Liabilities 2,611,766
-----------
NOTES PAYABLE, net of current portion 2,184,227
-----------
MINORITY INTEREST (Note 3) 246,125
-----------
STOCKHOLDERS' DEFICIT:
Preferred Stock, $.001 par value, 10,000,000
shares authorized; 145,000 shares issued
and outstanding at March 31, 1998 146
Common Stock, $.001 par value, 40,000,000
shares authorized; 36,606,792 shares issued
and outstanding at March 31, 1998 152,060
Comon Stock Issued 1,571
Additional paid-in capital 6,073,139
Treasury stock, at cost (5,768)
Accumulated deficit (8,978,561)
-----------
Total Stockholders' Deficit (2,511,288)
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$ 2,530,830
===========
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 MONTH PERIOD ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
Net sales $ 101,708 $ 40,025
Cost of sales 99,167 50,669
----------- -----------
Gross margin 2,541 (10,644)
Selling, general &
administrative expenses 337,029 288,434
----------- -----------
Profit (Loss) from operations (334,488) (299,078)
Interest expense (24,783) (24,225)
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Other Net -- --
Total Other Expense (359,271) (24,225)
Gain of Foreign Subsidiary (19,649) --
Net Profit (Loss) before
provision for income taxes (339,622) (62,081)
Provision for income taxes -- --
----------- -----------
NET PROFIT (LOSS) (339,622) (62,081)
Loss per common share and
common share equivalent $ (0.01) $ (0)
=========== ===========
Weighted average number
of common shares and
common share equivalents
outstanding 36,606,792 16,838,574
=========== ===========
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 THREE MONTH PERIOD ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(339,622) $ (62,081)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization (193,769) (186,389)
Non-Operating Cash Flow Adjustments 0 7,689
Change in assets and liabilities:
(Increase) decrease in accounts receivable, net 66,083 70,287
Decrease (increase) in inventories (12,323) (31,555)
Increase in investment in China Joint-Venture 0 0
Increase (decrease) in prepaid expenses and
other assets (14,404) (28,817)
Increase (decrease) in accounts payable (176,943) 72,711
Increase in accounts payable China Joint-Venture 0 (148,000)
Increase (decrease) in accrued expenses and
other liabilities 256,661 270,768
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Net cash used in operating activities $(405,317) $ (35,987)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment $ 0 $(133,240)
Acquisition of patents, designs and trademarks $ 32,974 $(154,187)
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Net cash used in investing activities $ 32,974 $(287,427)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on notes payable $ 91 $ 92,003
Payments on notes payable 0 (10,149)
Proceeds from preferred and common stock, net 360,111 261,536
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Net cash provided by financing activities $ 360,202 $ 343,390
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Net increase (decrease) in cash $ (12,141) $ 19,976
CASH, beginning of period $ 55,994 $ 18,553
CASH, end of period $ 43,853 $ 38,529
========= =========
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 three month period ended March 31, 1998, are not necessarily indicative
of the operating results that may be expected for the year ending December 31,
1998, or with the Company's December 31, 1998 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 March 31, 1998, Inventories consist of the following:
(including in China facility inventory)
Raw Material $ 393,639
Work in Progress 30,060
Finished Goods 659,346
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$1,083,045
==========
7
<PAGE>
(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 has a 55% interest, was in the form of machinery
and other equipment in the approximate value of $144,000 (based on the price of
the equipment 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 $246,125 reflected in the consolidated balance sheet represents the
minority shareholder's proportionate share of the equity of the Joint-Venture.
The Joint-Venture operated for all of the First Quarter 1998 and its results are
included in the consolidated stetements.
(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 Water Chef
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 and other fine filtration
products offered by WaterChef, Inc. can grow into a Multi-Million Dollar
Business.
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net sales for the First Quarter ended March 31, 1998 were $101,708 compared to
$40,025 in First Quarter, 1997. First Quarter sales yielded a gross margin of
$2,541, which included a gain of $12,086 from domestic operations and a loss of
$9,545 from the China Joint-Venture. The First Quarter of the year is typically
the slowest quarter for water cooler sales, and this year's results were also
adversely affected by returns from a major retailer to free up floor space for
other seasonal items. The Company's manufacturing facilities were staffed at
minimum levels with shipments made from inventory built during 1997.
Selling, general and administrative expenses for the Quarter were $337,029
compared to $299,078 in the 1997 Quarter, reflecting increased costs in the
China Joint-Venture and costs incurred in the First Quarter for the launch of
the Company's Sante line of products, which were introduced in late March.
The net loss for the Quarter was $(339,622) or $.01 per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficit increased from December 31, 1997 to
$1,203,649 at March 31, 1998. The deficit decreased primarily because of the net
profit for the quarter and account adjustments. The company's current ratio .71
to 1 on December 31, 1997, and .52 to 1 at March 31, 1998.
8
<PAGE>
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 the assets of the Company and are
guaranteed by an officer and director of the Company. The principal and accrued
interest will be converted to equity in the Second Quarter 1998, with the
issuance of 600,000 shares of common stock to Canaccord Capital.
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 is
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 fundeing effort was closed at this point.
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 on 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 1997, $400,000 had been raised.
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 company's operations until the working capital program was
completed a bridge loan in the amount of $375,000 was negotiated in March 1997.
9
<PAGE>
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, however the timing of the financing caused the
company to miss the prime selling season, and fell short of its revenue
forecast.
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 $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.
In the First Quarter 1998, a first payment of penalty shares in the amount of
1,570,555 shares were issued due to the Company's failure to repay the bridge
loan on a timely basis.
Management of the Company believes that the current product mix and the
marketing plan to penetrate new markets (both domestic and international) while
increasing sales to current accounts will allow the Company to operate
profitably in 1998. There can be no assurance that additional debt or equity
funding will be available to the Company.
PART II - OTHER INFORMATION
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits:
Exhibit 1 - Calculation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K:
There were no Reports on Form 8-K filed during the quarter ended
March 31, 1998.
10
<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: May 21, 1998 /s/ David A. Conway
-----------------------------
David A. Conway
President, Director and Chief
Executive Officer
(Principal Operating Officer)
11
EXHIBIT 1
WATER CHEF, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
March 31, 1998
Common Shares outstanding
beginning of period $36,606,792
Effect of weighted Shares:
Shares issued 36,606,792
The net loss per share was
calculated as follows:
Net Loss 339.622
Weighted shares 36,606,792
NET PROFIT (LOSS) PER COMMON AND COMMON EQUIVALENT SHARES
Net loss per share $ (.01)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-QSB FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 43,853
<SECURITIES> 300,000
<RECEIVABLES> 58,520
<ALLOWANCES> 0
<INVENTORY> 1,083,045
<CURRENT-ASSETS> 1,408,117
<PP&E> 261,060
<DEPRECIATION> 380,862
<TOTAL-ASSETS> 2,530,830
<CURRENT-LIABILITIES> 2,611,766
<BONDS> 300,000
0
146
<COMMON> 153,631
<OTHER-SE> (2,665,065)
<TOTAL-LIABILITY-AND-EQUITY> 2,530,830
<SALES> 101,708
<TOTAL-REVENUES> 101,708
<CGS> 99,167
<TOTAL-COSTS> 436,196
<OTHER-EXPENSES> 19,649
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,783
<INCOME-PRETAX> (334,622)
<INCOME-TAX> 0
<INCOME-CONTINUING> (339,622)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (339,622)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
