U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-30544
WATER CHEF, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 86-051678
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1007 GLEN COVE AVENUE, SUITE 1, GLEN HEAD, NEW YORK 11545
(Address of principal executive offices)
516-656-0059
(Issuer's telephone number)
Securities registered under Section 12(g) of the Securities Exchange Act of
1934:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange act during the 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__
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State registrant's revenues for the year ended December 31, 1999 -$354,792
State the aggregate market value of the voting stock held by non-affiliates of
the registrant on March 31, 2000 computed by reference to the closing bid price
of the Water Chef Inc. Common Stock as reported by OCTBB on that date $0.31):
$10,248,606
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, 2000
Common --------------
Par value $0.001 per share 33,060,019
Transitional Small Business Disclosure Format (check one):Yes No X
2
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WATER CHEF, INC.
ANNUAL REPORT ON FORM 10-KSB
YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PART I PAGE
ITEM 1. BUSINESS 2
ITEM 2. PROPERTIES 8
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO VOTE 8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED 8
STOCKHOLDER MATTERS.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR 9
PLAN OF OPERATIONS.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH 11
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE 12
REGISTRANT.
ITEM 10. EXECUTIVE COMPENSATION. 13
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL 14
OWNERS AND MANAGEMENT.
ITEM 12. RELATED PARTY TRANSACTIONS 16
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
SIGNATURES
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PART I
ITEM I. BUSINESS
OVERVIEW
Water Chef, Inc. (the "Company"), is a Delaware Corporation design,
manufacturing and marketing company engaged in the manufacture and marketing of
water dispensers and purification equipment through the use of its equipment,
patents and other assets and its 55% owned joint venture, Tianjin Tahoe Cooler
Co., Ltd. (the "Joint Venture") in the Republic of China.
The Company designs and markets its products primarily to capitalize on the
growing demand for pure water dispensing appliances, which is driven by the
increasing market for purified water. Themarket growth for bottled water is at a
10% per year rate.
In the water market, WaterChef offers three lines of products designed to make
available purified water in the home, in offices, retail stores, and residential
areas. These are water dispensers (commonly called coolers) small filter
systems, and village water systems. The units have a capacity of between 6 &
5,000 gallons per day.
Because of this increasing demand for purified water, the Company believes that
it is positioned to experience growth as a result of the patented features that
have been incorporated into its products, in addition to their design and
presentation.
DEVELOPMENT OF THE COMPANY
As a result of the transaction discussed below, on July 14, 1993 the Board of
Directors approved a name change from Auto Swap U.S.A., Inc. to Water Chef, Inc.
The company was incorporated under Arizona law in 1985, but was subsequently
merged into a Delaware corporation in 1987. Prior management had operated and
sold several enterprises, including the last enterprise disposed of in March
1993.
Pursuant to a Merger Agreement and Plan of Reorganization between the Company
and Water Chef, a Nevada corporation ("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.
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PRODUCTS AND TECHNOLOGY
In May 1993, the Company began the construction of a facility to produce
TAHOE(R) "Traditional" model water dispensers in which the bottle of water rests
upside down on top of the dispenser cabinet with its neck protruding downward
into the cabinet. The first production occurred in July 1993. In November 1993
the Company also began limited production of its TAHOE(R) "New Century" model in
which the bottle rests inside of and on the bottom of the dispenser cabinet,
with the neck upwards.
The Company's present models are or will be equipped with various combinations
of tepid, cool, hot and carbonated water. In February 1994, the Company entered
into an agreement (the "Agreement") to form a joint venture, Tianjin Tahoe
Cooler Co., Ltd. to establish and operate a facility to manufacture the
Company's TAHOE(R) Series I (Infinity) 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 design and technology with an agreed
upon value of $156,000. The Joint Venture commenced limited parts production in
May 1996, and the first significant import of finished product and parts kits
for assembly in Havre, Montana occurred in the second half of 1997.
The Agreement also calls for a transfer of certain advanced production
technology from the Company to the Joint Venture and the payment of royalties by
the Joint Venture to Water Chef, Inc. for sales in the China Market. The
transfer of technology agreement is for a term of 15 years.
In addition to the above, the Company has entered into a Distributor Agreement
with the Joint Venture, whereby the Company becomes the exclusive sales and
distribution company of products manufactured by the Joint Venture for all parts
of the world except the People's Republic of China, Taiwan and Hong Kong.
As a result of the formation of the joint venture, a new design water dispenser
using updated technology and advanced composite materials was designed in the
United States and tooled by the Joint Venture in the Republic of China. The
molds are owned by the Joint Venture. All plastic parts for the Infinity model
dispenser are sourced from China and finished goods and parts kits for United
States assembly are shipped to WaterChef's Havre facility to meet market needs
in the U.S. and assigned export markets. Standard models will be assembled and
shipped directly from China to meet market needs. Variations of this product
line will be assembled and sold int the China Bloc.
Licensees of WaterChef will also buy parts from the Joint Venture.
In late 1999 WaterChef created a prototype for a revised front panel and quotes
for the necessary tooling have been requested by the joint venture company
engineering personnel. The tooling will be procured in China and the Company
expects to have the updated design ready for market in Second Quarter, 2000.
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During 1999 the Company entered into an agreement with a Long Island, New York
manufacturer to produce its patent-pending Community Water Source family of
products. The contract manufacturers' proximity to WaterChef's headquarters
affords WaterChef's marketing personnel frequent opportunity to participate in
design and performance meetings.
The Company also produces custom water filtration systems for installation in
various models of the Series I (Infinity) series of water coolers. Such systems
are connected directly to the water supply of the premises in which the cooler
is located, thus eliminating the need for the use of bottled water. This same
purification system can be used for an under counter installation where cooling
or heating of the water is not required.
The Company through its acquisition of Natural Water Systems, Inc. (acquired
December 1995) offers a line of shower filters, counter top filters and
under-counter filter products.
MANUFACTURING FACILITIES
The Company's manufacturing facilities are located in Havre, Montana, and
Tianjin, China. The Company leases approximately 13,000 sq. ft. of manufacturing
space at $0.21 per sq. ft. per month including utilities. The lease is for three
years and extends to November, 2002. The Company's water dispensers include a
one year warranty, requiring the Company to repair or replace, at its option,
all defective parts on such products. The refrigeration system included in the
coolers includes a 5 year limited warranty which is provided by the manufacturer
of the system.
MARKETS AND COMPETITION
Based on market studies conducted by others, the Company estimates that
approximately 750,000 water dispensers were produced in 1997 in the United
States. The water dispenser market in 1999 grew to about $145 million with a 10%
per year growth rate. There are three privately-owned companies which the
Company estimates account for approximately 75% of these sales. The Company will
be at a competitive disadvantage with these companies as they are better
financed, have greater depth of management and have established channels of
distribution for their products.
The traditional market for water dispensers has been the bottled water
companies, which lease the water dispensers to their customers for use in
connection with delivery of the bottle water companies' products, and coffee
service businesses, which provide coffee and other hot drink appliances to
offices and frequently provide water dispensers and purified water as well.
Sales of the Company's products to the small water companies and coffee service
companies are presently made through direct sales and independent sales
representatives in the United States who are paid on a commission basis. A new
market that has recently developed is the "water store," which is a retail store
that sells purified water and water dispensers directly to consumers. Sales of
water dispensers by water stores have increased as consumers elect to purchase,
rather than lease, a water dispenser. Further, mass merchandisers such as The
Home Depot and Sam's are entering
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the market. The Company's line of Infinity WaterChef water dispensers was
designed to be user friendly with styling along appliance lines. This and other
features make the line attractive to mass merchandisers who are expected to sell
a significant share of water dispensers over the next five years.
The Company, via its acquisition of Natural Water Systems, has entered the
lifestyle products market. The product lines are shower filters, counter-top and
under-counter filters and purifiers and water coolers. Market data shows that
over 12 million of these products were sold in 1998, mostly through mass
merchandising outlets. The public is becoming aware of the need for these
products and increasing the purchases about 11% per year.
WaterChef began the development of its Community Water Source product in 1997,
responding to the world-wide need for an affordable, local solution for the
potable water needs of smaller populations in emerging economies. Development
and advanced engineering continued into 1998 and a systems patent application
was filed in October, 1998. The Company has been notified that the U.S. Patent
and Trademark Office examiner has upheld claims made by the Company and the
patent will issue.
In June 1997, the Company received a memorandum of understanding from a
Philippine Building Contractor to provide water center systems for a series of
low-income housing developments. The product is designed to produce 5,000
gallons per day of purified water. The Philippine government agency, PITC, was
appointed as Water Chef's sales representative. Although the need for housing
and water systems persists Water Chef to date has received no purchase order for
this project.
In 1998, Washington D.C. based Counterpart International selected Water Chef's
Village Water Center as the potable water system for its planned housing
development in the Phillippines.
Originally planned for 1999, the project has not yet begun.
In 1999 the Company entered into an agreement with First Argentum, LLC to
qualify and select international distributors to market and sell the Company's
patent pending water purification systems for small communities.
BACKLOG
Because of the Company's practice to immediately fill water dispenser orders for
shipment in the U.S. there is no significant backlog.
RAW MATERIALS
The Company believes that there are alternative sources of supply for most of
the materials used in manufacturing its products. Some of these materials,
however, must be obtained from foreign suppliers, which subjects the Company to
the risks inherent in obtaining materials from foreign sources, including supply
interruptions. The Company's suppliers are adequately meeting the requirements
of the Company.
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PATENTS
The Company owns and holds eight patents that are or will be used in connection
with the manufacture of its water dispensers. The issued patents, two of which
expire in 2006, three of which expire in 2007, and three in 2008 cover such
items as the designs for cabinets for the "new Century" water dispenser, certain
methods of providing carbonated water through a water cooler, and the
refrigeration unit for the water dispensers which features the use of ice as a
thermal storage medium to extend the peak draw capacity of a water dispenser,
e.g., the number of cups of cold water that may be drawn from the water coolers
in an hour. There can be no assurance that any of its issued patents will afford
protection against a competitor or that any patents issued to the Company could
not be designed around or invalidated. In addition, the Company has filed for
patent protection for its Community Water Source (October, 1998).
There can be no assurance that any application of the Company's technologies
will not infringe patent or proprietary rights of others or that licenses, which
might be required for the Company's processes or products, would be available on
favorable terms. Furthermore, there can be no assurance that challenges will not
be instituted against the validity or enforceability of any patent owned by the
Company, or, if instituted, that such challenge will not be successful. The cost
of litigation to uphold the validity of a patent and prevent infringement can be
substantial and may have a material adverse effect on the Company's financial
position.
SEASONALITY
The Company expects to experience seasonal fluctuations in the level of sales in
the North American market for water dispensers. In particular, the Company
anticipates that the first and, to a lesser extent, the fourth calendar quarters
will be characterized by lower sales, due to the winter season. As the
international market grows, the Company expects these seasonal fluctuations to
be offset in part by sales in foreign markets, such as Australia, that
experience their summer season while North America is experiencing its winter
season. Further, the Company is seeking retail outlets in the U.S.
whose sales are not as seasonal as the bottled water companies.
Large purification systems such as Village Water Systems and point-of-use water
dispensers have very little seasonal variation. Shower filters and counter top
filter products are gift type items which TYPICALLY RESULTS IN ABOUT 40% OF
THEIR SALES IN THE 4TH calendar quarter.
RESEARCH AND DEVELOPMENT
Product design is coordinated from Glen Head, New York and accomplished by
engineering personnel in New York, Havre, Montana and Tianjin, People's Republic
of China.
All of the Company's products have been designed to offer the broadest appeal to
the markets they serve.
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ENVIRONMENTAL LIABILITY
The Company's manufacturing process does not generate any hazardous waste in its
operations.
INSURANCE
The Company maintains a $1,000,000 umbrella liability policy, in addition to a
$2,000,000 general and product liability policy which covers the manufacture and
marketing of its products. The
Company believes its insurance coverage to be adequate.
EMPLOYEES
The Company (as of December 31, 1999) employed a core of two management
personnel in the Havre, Montana plant. The number of hourly personnel employed
on the production line fluctuates with demand schedules.
The Company (as of December 31, 1999) employed three people in its headquarters
operations, of whom one is engaged in management, one in administration, sales
and marketing and one in operations and engineering management.
The Company believes that its relations with its employees are good. The Company
also believes there is a sufficient number of persons available at prevailing
wage rates in or near Havre, Montana that should expansion of its production
require additional employees, they would be readily available. The Company has
no collective bargaining agreement with any of its employees.
ITEM 2. PROPERTIES
The company's manufacturing facilities are located in Havre, Montana and at the
Tianjin, Tahoe Joint Venture facility located at Electronic Park, Tianjin
Economic and Technology Development Zone, Tianjin, People's Republic of China.
In November 1999 the Company concluded the sale of its owned manufacturing
facility in Havre, Montana to the BIG Equipment Co., LLC. Coincidentally the
Company negotiated its release from a lease agreement with Hill County, Montana
and became a tenant of the BIG Equipment Company, occupying approximately 13,000
sq. ft. of production space.
ITEM 3. LEGAL PROCEEDINGS
The Company was involved in no significant legal proceedings in 1999.
ITEM 4. SUBMISSION OF MATTER TO VOTE
No matters were submitted to the shareholders for vote during 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
Trading activity with respect to common stock, and the fact that certain shares
of common stock have been registered under the Exchange Act which may be and are
traded in the over-the-counter market, should not of itself be deemed to
constitute an "established trading market." A public trading market having the
characteristics of depth, liquidity and orderliness, depends upon the existence
of market-makers as well as the presence of willing buyers and sellers, which
are circumstances over which the Company has no control.
The Company's common stock was included on NASDAQ under the symbol SWAP, until
July 31, 1992. Subsequent to that date, the common stock has been quoted through
the NASD "Electronic Bulletin Board" under the symbol WTER.
The chart below sets forth the range of high and low bid prices for the
Company's common stock based on closing transactions during each specified
period as reported by the National Quotation Bureau, Inc. The prices reflect
inter-dealer prices without retail mark-up, mark-down, quotation or commission
and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
<S> <C> <C>
1996 HIGH LOW
First Quarter .11 .08
Second Quarter .10 .06
Third Quarter .34 .09
Fourth Quarter .25 .10
1997 HIGH LOW
First Quarter .23 .10.5
Second Quarter .29 .14
Third Quarter .28 .11.5
Fourth Quarter .39 .13
1998 HIGH LOW
First Quarter .21 .10
Second Quarter .13 .10
Third Quarter .07 .04
Fourth Quarter .03 .01
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1999 HIGH LOW
First Quarter .02 .01
Second Quarter .17 .02
Third Quarter .08 .04
Fourth Quarter .07 .03
2000
First Quarter .86 .04
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
INTRODUCTION
Water Chef, Inc. (the "Company") is a manufacturing and marketing company
engaged in the manufacture and marketing of water dispensers and water
purification and filtration equipment through the use of its equipment, patents
and other assets.
DEVELOPMENT OF THE COMPANY
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 it 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.
RESULTS OF OPERATIONS
Net revenues for the fiscal years ended December 31, 1999 and December 31, 1998
were $354,792 and $238,548. Revenues increased $115,244 or 48% over the earlier
period.
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Cost of Sales increased from $176,233 in 1998 to $247,416 in 1999, an increase
of $71,183 or 40% from 1998 primarily due to higher unit sales.
Selling general and administrative expenses for 1999 were $736,357 compared to
$1,078,742 for 1998, a decrease of $342,385, or 32%. The decrease is
attributable to lower staffing and consulting expenses as well as reduced rental
and business travel expenses compared to 1998.
The loss from operations for the fiscal year ended December 31, 1999 was
$628,981 compared to $1,016,427 for the previous year, a reduction of $387,446,
or 38%.
In fiscal year 1999, the Company negotiated the restructuring the major elements
of its debt, resulting in an extraordinary gain of $344,055.
In fiscal year 1999, the Company wrote-off accrued expenses and accounts payable
of $801,875, which had been incurred under prior management during the year
ended December 31, 1994, as it was determined that these obligations would not
have to be paid.
For fiscal year ended December 31, 1999 the Company had net income of $159,353
compared to a net loss of $1,517,971 for the year ended December 31,1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999 the Company had a stockholders' deficit of $4,759,140 and a
working capital deficit of $4,877,661.
In 1999 the Company began the restructuring of its debt. With the sale of its
manufacturing facility in Havre, Montana The Company generated proceeds to pay
all outstanding real estate and personal property taxes in Hill County, Montana.
To assist the Company in its restructuring, Hill County forgave a $300,000
mortgage obligation and approximately $120,000 of accrued rental related
expenses. The balance of the proceeds were paid, in the First Quarter, 2000, to
U.S. Small Business Administration to reduce the Company's debt to that agency,
and preliminary agreement was reached with the Bear Paw Development Corporation
of Northern, Montana and the Montana Department of Commerce to convert debt to
equity. These transactions will close in 2000.
In 1999, the Company canceled 425,000 share of common stock which were
previously issued, in error, to a former officer of the Company.
As part of its restructuring, the Company issued 1,911,666 shares of common
stock to pay certain accounts payable and salaries. In addition, the Company
issued 1,428,500 shares of common stock for services preformed on behalf of the
Company.
Early in 2000 the Company entered into an agreement with a securities firm to
raise capital for the Company.
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Management has undertaken a program to restructure its existing debt and plans
to raise additional capital through future issuances of stock and/or debentures
to finance the growth of the Company.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
At year-end 1999 the Company's Directors and Executive officers are:
NAME AGE POSITION(S) WITH COMPANY
David A. Conway 58 Director, Chairman, President, and
Chief Executive Officer
John J. Clarke 58 Director
Richard P. Farkas 76 Director
Rudolf W. Schindler 47 Vice President Marketing & Sales
DAVID A. CONWAY
Was elected to the Board in July of 1997 and joined the Company as President and
CEO in early 1998. Previous experience includes President and CEO of a privately
held public relations and marketing company; Director and Vice President,
Administration of KDI Corporation, a NYSE conglomerate until taken private by
management; Vice President Administration, Keene Corporation and earlier
positions with Goldman Sachs & Co. and CBS, Inc. Mr Conway holds undergraduate
and graduate degrees from Fordham University and is listed in Who's Who in
American Business.
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JOHN J. CLARKE
Jack Clarke is co-founder of Baldwin & Clarke Corporate Finance, Inc. and
Baldwin & Clarke Capital Markets, Inc. and a principal and co-founder of The
Baldwin & Clarke Companies, a diversified financial services organization made
up of five independent companies. Jack has a broad industry background with
special emphasis on banking, healthcare and manufacturing. He is a registered
securities principal of the National Association of Securities Dealers.
A graduate of Northeastern University, Jack is a founding Director of two New
Hampshire commercial banks, a principal of several substantial commercial real
estate ventures and has served as a trustee and member of a number of non-profit
and civic organizations.
RICHARD P. FARKAS
Founder and Chairman of IMC Corporation, Inc. an international business
consultancy providing broad based business services to multi-national
corporations.
Mr. Farkas is a graduate of Princeton and Yale Universities, attended New Jersey
Law School and served as a line officer in the U.S. Navy for four years.
After holding a number of corporate executive and operating positions with
international companies such as Owens Illinois, ACF Industries, American
Standard and Westvaco, Mr. Farkas acquired, and later sold, a major paper
products company.
In addition to WaterChef, Mr. Farkas currently serves on the boards of Arista
Insurance Company, Environmental Solutions, Inc. and T.A. Lehman Corporation.
RUDOLF W. SCHINDLER
Vice President Sales and Marketing - Joined WaterChef, Inc. in September of 1998
after making a significant investment in the Company. Prior to WaterChef he
served as Executive Vice President and CEO of Stocko Connectors Corp., a
subsidiary of a leading European connector manufacturer for the appliance
industry since 1995. He served as Director of Sales and Marketing for Stocko in
the U.S. for 5 years and prior to that, 9 years as Manager, Special Projects and
application engineer for Schenck, the world leading manufacturer of vibrations
technology equipment. He hold an MS in Mechanical Engineering from the Technical
University of Darmstadt, Germany and an MBA from Adelphi University.
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ITEM 10. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Name Year Salary Bonus Non - Cash Total
Principal Position Compensation Compensation
<S> <C> <C> <C> <C> <C>
David A. Conway 1999 $150,000 0 0 $150,000
</TABLE>
DIRECTORS' COMPENSATION
Directors of the Company do not receive compensation for serving as members of
the Company's Board of Directors. All directors are reimbursed for their
expenses in attending meetings of the Board.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated Certificate of Incorporation and Bylaws
eliminate in certain circumstances the liability of Directors of the Company for
monetary damages for breach of their fiduciary duty as Directors. This provision
does not eliminate the liability of a Director (i) for breach of the Director's
duty of loyalty to the Company or its stockholders; (ii) for acts of omissions
by the director not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for willful or negligent declaration of an
unlawful dividend, stock purchase or redemption; (iv) for transactions from
which the Director derived an improper personal benefit; or (v) for any act or
omission occurring prior to the effective date of the Amended and Restated
Certificate of Incorporation.
The Company's Amended and Restated Certificate of Incorporation provides
generally for indemnification of the Directors and Officers to the full extent
permitted under Delaware law, and permits indemnification for all other persons
whom the Company is empowered to indemnify.
The Company's Bylaws provide that the Company may indemnify, to the fullest
extent permitted under Delaware law, any person, including officers and
directors, with regard to any action or proceeding.
The Company believes that it is the position of the Securities and Exchange
Commission that insofar as the foregoing provisions may be invoked to disclaim
liability for damages arising under the Securities Act, those provisions are
against public policy as expressed in the Securities Act and are therefore
unenforceable.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Set forth below is information as of December 31, 1999, concerning stock
ownership of all persons known by the Company to own beneficially 5% or more of
the issued and outstanding common stock of the Company, all Directors, the
Executive Officers, and all Directors and Executive Officers of the company as a
group based on the number of shares of common stock issued and outstanding as of
the date of this Offering Memorandum. For purposes of the Memorandum, beneficial
ownership is defined in accordance with the Rules of the Securities and Exchange
Commission and generally means the power to vote and/or dispose of the
securities regardless of any economic interest.
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Address of Number of Shares of Voting Percentage of
BENEFICIAL OWNER OF SHARES STOCK BENEFICIALLY OWNED (1) CLASS/TOTAL VOTING
David A. Conway (2) (3) 3,333,334 Common 9.5%
c/o Water Chef, Inc. 6,936,666 Preferred E 87.0%
1007 Glen Cove Ave. % of Total Voting
Glen Head, NY 11545 23.8%
John J. Clarke 433,334 Common 1.2%
c/o Baldwin & Clarke Corp. Finance % of Total Voting
116B South River Road 1.0%
Bedford, New Hampshire 03110
Richard P. Farkas 250,000 Common __
IMC, Inc.
121 Highway #38
West Long Branch, NJ 07764
Rudolf W. Schindler (4) 1,166,666 Common 3.3%
c/o WaterChef, Inc. 1,000,000 Preferred E 12.6%
1007 Glen Cove Avenue % of Total Voting
Glen Head, NY 11545 5.0%
All Executive Officers and 5,183,334 Common 14.7%
Directors as a Group (5) 7,936,666 Preferred E 100%
(Four -4- Persons) % of Total Voting
30.4%
</TABLE>
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(1) All shares of Voting Stock are comprised of Common Stock and Preferred
Class E, with full voting rights and convertible into Common at the
discretion of the Company.
(2) Includes 2,666,666 Preferred E Shares held by affiliates and 3,333,334
Shares of Common held in an IRA Trust.
(3) 6,666,666 Shares of Preferred E and 3,333,334 Shares of Common held by
Mr. Conway and affiliates are subject to anti-dilution provisions to
insure that said shareholders maintain 32.6% ownership of the Total
Voting Shares.
(4) 1,000,000 Shares of Preferred E held by Mr. Schindler are subject to
anti-dilution provisions to insure that the shareholder maintains
ownership of 2.46% of the Total Voting Shares.
(5) Does not include Officers or Directors of the Company who were not such
as of the date of record.
ITEM 12. RELATED PARTY TRANSACTIONS
None.
Page 15
<PAGE>
WATER CHEF, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report ............................... F-2
Balance Sheet . ........................................... F-3
Statements of Operations .................................... F-4
Statements of Stockholders' Deficit.......................... F-5
Statements of Cash Flows .................................... F-6
Notes to Financial Statements ............................... F-7 - F-14
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Water Chef, Inc.
Glen Cove, New York
We have audited the accompanying balance sheet of Water Chef,
Inc. as of December 31, 1999 and the related statements of operations, changes
in stockholders' deficit and cash flows for the years ended December 31, 1999
and 1998. 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 also includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects the financial position of Water Chef,
Inc. as of December 31, 1999 and the results of its operations and its cash
flows for the years ended December 31, 1999 and 1998 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the financial statements the Company incurred operating losses of
approximately $878,000 and $1,409,000 in 1999 and 1998, respectively.
Additionally, the Company had working capital and total capital deficiencies of
approximately $4,878,000 and $4,759,000 at December 31, 1999. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are described in Note 2
to the financial statements. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/Feldman Sherb Horowitz & Co., P.C.
Feldman Sherb Horowitz & Co., P.C.
Certified Public Accountants
April 6, 2000
New York, New York
F-2
<PAGE>
WATER CHEF INC.
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
CURRENT ASSETS:
Cash $ 4,426
Due from factor 2,073
Inventories 98,565
Cash held in escrow 161,988
Prepaid expenses and other current assets 3,401
--------------
TOTAL CURRENT ASSETS 270,453
PROPERTY AND EQUIPMENT - at cost, net 15,194
INVESTMENT IN JOINT VENTURE 52,184
INTANGIBLE AND OTHER ASSETS 51,143
--------------
$ 388,974
===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable and accurred interest $ 3,375,238
Accounts payable 675,293
Preferred dividends payable 449,506
Loan payable-shareholder 327,781
Accrued expenses and other current liabilities 320,296
--------------
TOTAL CURRENT LIABILITIES 5,148,114
--------------
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value;
10,000,000 shares authorized;
8,082,166 shares issued and outstanding 8,082
Common stock, $.001 par value;
90,000,000 shares authorized;
35,254,181 shares issued and outstanding 35,254
Additional paid-in capital 7,266,138
Treasury stock, 4,400 common shares, at cost (5,768)
Accumulated deficit (12,062,846)
---------------
TOTAL STOCKHOLDERS' DEFICIT (4,759,140)
---------------
$ 388,974
===============
See Notes to financial statements.
F-3
<PAGE>
WATER CHEF INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------
1999 1998
----------- ----------
<S> <C> <C>
NET SALES $ 354,792 $ 238,548
COSTS AND EXPENSES:
Cost of sales 247,416 176,233
Selling, general, and administrative 736,357 1,078,742
983,773 1,254,975
LOSS BEFORE OTHER INCOME (EXPENSES) AND
--------- -----------
EXTRAORDINARY ITEM (628,981) (1,016,427)
--------- -----------
OTHER INCOME (EXPENSES)
Non-recurring income 801,875 -
Interest expense (179,044) (233,075)
Equity in loss of joint venture (73,757) (160,169)
Gain on sale of land and building 3,505 -
--------- -----------
Other Income expenses, net 552,579 (393,244)
--------- -----------
Loss before extraordinary item (76,402) (1,409,671)
Extraordinary item - Gain on early extinguishment of debt 344,055 -
--------- -----------
Net income (loss) 267,653 (1,409,671)
Preferred stock dividends (108,300) (108,300)
--------- -----------
Net income (loss) applicable to common stock $ 159,353 $ (1,517,971)
========= ===========
Basic and diluted loss per common share:
Loss before extraordinary item $ (0.01) $ (0.05)
--------- -----------
Extraordinary item 0.01 -
Net income (loss) per common share-basic and diluted $ 0.00 $ (0.05)
=============== ==============
=============== ==============
Weighted average common shares outstanding 32,478,507 33,257,256
=============== ==============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
Water Chef, Inc.
Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Additional Total
Preferred Stock Common Stock Paid-in Treasury Accumulated Stockholde
--------------- ------------
Shares Amount Shares Amount Capital Stock Deficit Deficit
---------- --------- ----------- --------- ----------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1,
1998 145,500 $ 145 35,036,237 $ 35,036 $ 6,322,814 $ (5,768) $ (10,704,228)$ $(4,352,001)
Exchange of common
for preferred stock 7,936,666 7,937 (7,936,666) (7,937) - - - -
Shares issued for:
Cash - - 2,077,778 2,078 205,700 - - 207,778
Services - - 270,000 270 47,730 - - 48,000
Extinguishment of
Debt - - 2,891,666 2,892 527,263 - - 530,155
Preferred stock
dividend - - - - - - (108,300) (108,300)
Net Loss - - - - - - (1,409,671) (1,409,671)
BALANCE - DECEMBER 31,---------- ----- ----------- ------ --------- ------ ----------- ----------
1998 8,082,166 8,082 32,339,015 32,339 7,103,507 (5,768) (12,222,199) (5,084,039)
Cancellation of
shares - - (425,000) (425) (42,075) - - (42,500)
Shares issued for:
Services - - 1,428,500 1,429 62,971 - - 64,400
Payment of Accounts
Payable and Salaries - - 1,911,666 1,911 141,735 - - 143,646
Preferred stock dividend - - - - - - (108,300) (108,300)
Net Loss - - - - - - 267,653 267,653
-------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31,
1999 8,082,166 $ 8,082 35,254,181 $ 35,254 $ 7,266,138 $ (5,768) $ (12,062,846) $ (4,759,140)
========== ======== ========== ======== =========== ========== ============== ==============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
WATERCHEF INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
--------------------------------
Year Ended December 31,
--------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 267,653 $ (1,409,671)
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization 26,502 57,387
Gain on sale of land and building (3,505) -
Issuance of shares for services,
Salaries and Payment of Accounts Payable 64,400 48,000
Equity in loss of joint venture 73,757 160,169
Extraordinary gain on extinguishment of debt (344,055) -
Non-recurring income (801,875) -
Change in assets and liabilities
Due from factor 5,977 86,779
Cash held in escrow (161,988) -
Prepaid expenses and other current assets 466 -
Inventories 121,751 205,644
Other assets (4,100) 26,263
Accounts payable and accrued expenses 346,303 (9,820)
-------------- ---------------
CASH USED IN OPERATING ACTIVITIES (408,714) (835,249)
-------------- ---------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Net proceeds from the sale of land and building 246,778 -
Purchase of property and equipment - (5,693)
-------------- ---------------
CASH PROVIDED(USED) BY FINANCING ACTIVITIES 246,778 (5,693)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes payable - 468,622
Increase in loan payable - shareholder 158,368 169,413
Proceeds from sale of common stock - 207,778
-------------- ---------------
CASH PROVIDED BY FINANCING ACTIVITIES 158,368 845,813
-------------- ---------------
NET INCREASE(DECREASE) IN CASH (3,568) 4,871
CASH - Beginning of year 7,994 3,123
============== ===============
CASH - End of year $ 4,426 $ 7,994
============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ - $ -
============== ===============
Income taxes $ - $ -
============== ===============
Non-cash financing and investing activities:
Common stock issued for debt 143,646 530,155
============== ===============
Common stock issued for services 64,400 48,000
============== ===============
</TABLE>
See notes to financial statements.
F-6
<PAGE>
WATER CHEF, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1. THE COMPANY
Water Chef, Inc. (The "Company"), is a Delaware Corporation currently
engaged in the design and marketing of water dispensers and
purification equipment both in the United States and internationally.
In December 1999, the Company's board of directors approved an
increase in the authorized common shares from 40,000,000 to 90,000,000
shares.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. BASIS OF PRESENTATION - The accompanying financial statements have
been prepared assuming that the Company will continue as a going
concern. The Company incurred losses from continuing operations of
$878,000 and $1,409,00 for the year ended December 31, 1999 and 1998.
Additionally, the Company had working capital and total capital
deficiencies of $4,878,000 and $4,759,000 at December 31, 1999. These
conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans with respect to these
matters include restructuring its existing debt, raising additional
capital through future issuances of stock and or debentures. The
accompanying financial statements do not include any adjustments that
might be necessary should the Company be unable to continue as a going
concern.
b. INVENTORIES - Inventories are stated at the lower of cost (average) or
net realizable value.
c. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is calculated using the straight-line method over
estimated useful lives of seven to thirty years.
d. INVESTMENT IN JOINT VENTURE - The Company is unable to exercise
economic control over the joint venture's operations, and accordingly,
the investment is accounted for under the equity method of accounting.
e. INTANGIBLE ASSETS - Patents and trademarks are amortized ratably over
five to fourteen years.
F-7
<PAGE>
f. STOCK-BASED COMPENSATION - The Company accounts for stock
transactions in accordance with APB No. 25, "Accounting for
Stock Issued to Employees". In accordance with Statement of
Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation", the Company adopted
the pro forma disclosure requirements of SFAS 123.
g. WARRANTIES - The Company provides limited warranties of one
year on its coolers and five years on its compressors. No
reserve for future warranty costs has been provided due to
limited sales volume.
h. REVENUE RECOGNITION - Revenues are recognized when products
are shipped and collectibility is reasonably assured.
Allowances for estimated bad debts, sales allowance and
discounts are provided when the sales are recorded.
i. INCOME TAXES - Income taxes are accounted for under Statement
of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", which is an asset and liability approach that
requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial
statements or tax returns.
j. INCOME (LOSS) PER SHARE - Basic loss per share was computed
using the weighted average number of outstanding common
shares. Diluted per share amounts when applicable include the
effect of dilutive common stock equivalents from the assumed
exercise of options and warrants.
k. USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
l. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of
the financial instruments reported in the balance sheet
approximate their fair market value due to the short-term
maturity of these instruments.
m. IMPAIRMENT OF LONG-LIVED ASSETS - In the event that facts and
circumstances indicate that the cost of an asset may be
impaired, an evaluation of recoverability would be performed.
If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a
write-down to market value is required. At December 31, 1999,
the Company does not believe that any impairment has occurred.
F-8
<PAGE>
n. RECENT ACCOUNTING PRONOUNCEMENTS - Statement of Position 98-5
("SOP 98-5") "Reporting on the Costs of Start-Up Activities"
was issued in April 1998. SOP 98-5 requires the costs of
start-up activities, including organization costs, to be
expensed as incurred. SOP 98-5 is effective for financial
statements for fiscal years beginning after December 15, 1998.
The Company will adopt SOP 98-5 in for calendar year 2000 and
does not expect the adoption to have a material impact on the
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for
Derivative instruments and Hedging Activities." SFAS No. 133
is effective for all fiscal periods beginning after June 15,
1999. SFAS No. 133 require that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in
fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if
it is, the type of hedge transaction. The Company does not
expect the adoption of SFAS No. 133 to have any impact on the
consolidated financial statements as they do not currently
hold any derivative instruments nor have they held any in the
past.
3. DUE FROM FACTOR
The Company sells a substantial portion of its trade receivables to a
commercial factor, without recourse, up to maximum credit limits
established by the factor for each individual account. Receivables sold
in excess of these limits are subject to recourse in the event of
nonpayment by the customer. At December 31, 1999, there were no
significant receivables subject to recourse. Under the terms of the
agreement, advances made by the commercial factor prior to maturity of
the accounts receivable will charge a discount rate of 3.5% on invoices
that are collected within 34 days. An additional 1% is added when the
average collection days increases by 10 days up to a maximum of 9.5%.
At December 31, 1999, factor advances of approximately $16,400 were
offset against accounts receivable assigned to the factor.
4. INVENTORIES
Inventories consisted primarily of parts and supplies which, at
December 31, 1999, amounted to $98,565.
5. INVESTMENT IN JOINT VENTURE
In February 1994, the Company formed Tianjin Tahoe "Cap" Cooler Co.,
Ltd. ("Tianjin Tahoe") a joint venture with Tianjin Electronics &
Instruments Import and Export Corporation ("TEIIEC") for the purpose of
manufacturing certain Company designed water coolers in Tianjin,
Peoples Republic of China. The Company contributed $440,000, inclusive
of cash, machinery and equipment and engineering designs in exchange
for a fifty-five
F-9
<PAGE>
percent interest in the joint venture. Limited production commenced in
May 1996. The first significant importation of finished products and
parts kits occurred in 1997.
The agreement calls for a transfer by the Company of certain advanced
production technology to the joint venture in exchange for royalties on
sales made by the joint venture to the China market for a term of
fifteen years.
The Company also has a distribution agreement with the joint venture
whereby the Company is the exclusive sales agent for products
manufactured by the joint venture. The exclusive territory covers all
parts of the world, except the People's Republic of China, Taiwan and
Hong Kong.
The Company is unable to exercise economic control over the joint
venture's operations, and accordingly, the investment is accounted for
under the equity method of accounting which, at December 31, 1999, was
$52,184. At December 31, 1999, accounts payable included $14,734 due to
the joint venture. Purchases in 1999 and 1998 were insignificant.
6. PROPERTY AND EQUIPMENT
At December 31, 1999, property and equipment consisted of the
following:
Machinery and equipment $ 278,888
Furniture, fixtures and equipment 96,622
------------------
375,510
Less: accumulated depreciation 360,316
------------------
$ 15,194
==================
7. INTANGIBLE AND OTHER ASSETS
At December 31, 1999, intangible and other assets consisted of the
following:
Patents and trademarks, less accumulated
amortization of $35,601 $ 42,581
Deposits 8,562
------------------
$ 51,143
==================
Amortization of patents and trademarks in 1999 and 1998 was $5,924 in
each year.
F-10
<PAGE>
8. NOTES PAYABLE
Notes payable - Bear Paw Development Corporation of Northern
Montana, interest payable at 5% per annum; the notes are
secured by the general assets of Water Chef, Inc; amounts
due inclusive of $367,248 interest were: $ 1,828,203
Note payable - U.S. Small Business Administration, interest payable
at 11.00% per annum; the note is secured by real property located
in Havre, Montana and additionally by certain machinery,
equipment, furniture, fixtures, receivables and inventory. A former
officer has personally guaranteed the note payable.
In November 1999, the Company sold land and building for $245,816, net of
closing costs of $11,684. The carrying value of the property was $242,311, net
of accumulated depreciation of $57,689 and resulted in a gain of $3,505. The net
proceeds were used to pay property taxes of $73,028. The balance of proceeds
were held in escrow to pay part of the SBA note payable balance at December 31,
1999. The escrow funds were paid in March 2000 to the holder of the SBA note
payable;amounts due inclusive of $88,219 interest were: $ 482,306
Bridge loans - unsecured, interest payable at 12% per annum;
amounts due inclusive of $26,250 interest were: 401,250
Loans payable - other - unsecured, interest ranging from 10% to
15% per annum - amounts due inclusive of $177,592 interest were: 663,479
-----------
$ 3,375,238
===========
All of the above notes and loans are in default and, accordingly, are
due and payable on demand. Management, with the forbearance of the
noteholders, intends to restructure the debt and is currently in the
process of formulating a plan for submission to the various creditors
(see Note 2 (a)).
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
At December 31, 1999, accrued expenses were as follows:
Payroll $ 159,017
Rent 18,664
Other 142,615
----------
$ 320,296
==========
10. PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of preferred
stock, issuable in series with rights, preferences, privileges and
restrictions as determined by the board of directors.
At December 31, 1999, outstanding preferred shares were as follows:
Shares Amount
------------------ -----------------
Series A 52,500 $ 52
Series D 93,000 93
Series E 7,936,666 7,937
------------------ -----------------
8,082,166 $ 8,082
================== =================
SERIES A:
The Series A preferred stock provides for a 10% cumulative dividend,
based on the $10 per share purchase price, payable annually in the
Company's common stock or cash, at the Company's option. The Series A
preferred stock is not convertible, and is callable by the Company at a
price of $11 per share.
SERIES D:
The Series D preferred stock provides for a 12% cumulative dividend,
based on the $5 per share purchase price, payable twice annually in the
Company's common stock or cash, at the Company's option. The Series D
preferred stock is not convertible, and is redeemable at the Company's
option.
SERIES E:
The Series E preferred stock is convertible into common stock on a one
for one basis, at the option of the Company and provides voting rights
to its holders. No interest or dividends are payable to such holders.
In May 1998, the Company issued 7,936,666 Series E preferred shares to
an officer in exchange for a like number of common shares.
At December 31, 1999, dividends in arrears on the Series A and Series D
preferred shares were $255,106 and $194,400, respectively.
11. COMMON STOCK
In 1999, the Company canceled 425,000 shares of common stock which were
previously issued, in error, to a former officer of the Company.
In 1999, as part of the Company's restructuring plan, they issued
1,911,666 shares of common stock to pay certain accounts payable and
salaries valued at $143,646. In addition, the Company issued 1,428,500
shares of common stock for consulting services valued at $64,400.
F-11
<PAGE>
12. WARRANTS
All outstanding warrants issued prior to 1997 have expired as of
December 31, 1998. The Company issued 3,083,338 warrants in 1997 in
connection with private placements of which 750,000 warrants expired in
June 1999. The remaining 2,333,338 warrants entitle the holders to a
like number of common shares and are exercisable at $0.15 each through
May 2002.
13. STOCK OPTIONS
In 1994, the Company instituted a stock option plan which is available
to selected directors, officers, employees and consultants of the
Company ("Participants").
The term of each option is ten years from the date of grant or a
shorter term as determined by the Stock Option Committee (the
"Committee"). The exercise price is determinable by the Committee and
cannot be less than 110% of the fair market value of the shares on the
date of the grant. The terms, conditions and restrictions of the
options are determinable by the Committee as of the date of grant.
Options to purchase up to 75,000 shares of common stock at $0.10 per
share were granted to two employees prior to 1997. Such options remain
unexercised at December 31, 1999 and expire in the year 2002.
14. MAJOR CUSTOMERS
Sales to two individual customers approximated 14% and 15% in 1999 and
15% to a single customer in 1998.
15. LEASES
The Company is currently obligated under a lease for its administrative
facilities located in Glen Head, New York. The lease expires in
September 2001. Minimum annual lease payments are $20,556 and $16,129
in 2000 and 2001, respectively.
On December 9, 1999, the Company was released from all obligations
under their factory lease agreement, effective October 1, 1999. In
November 1999, the Company entered into a new factory lease which
expires in November 2002. The future minimum lease payments are $32,400
in 2000, 2001, and $29,700 in 2002.
Rent expense for 1999 and 1998 was $63,306 and $28,270, respectively.
F-13
<PAGE>
16. INCOME TAXES
The following is a reconciliation of income taxes and amounts computed
using the U.S. Federal statutory rate and the effective tax rate for
the years ended December 31, 1999 and 1998:
1999 1998
------------ -------------
Pre-tax income(loss) 267,000 $ (1,409,000)
------------ -------------
Tax (benefit) at Federal statutory rate (35%) 94,000 (493,000)
Temporary differences 26,000 56,000
Net operating loss carryforwards (120,000) -
Tax benefit not recognized - 437,000
------------ -------------
Taxes per financial statements - $ -
============ =============
The Company has adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes". Under this standard, the Company
records as an asset its net operating loss carryforward ("NOL") based
upon current tax returns, and establishes a valuation allowance to the
extent of any NOL which will not be utilized in the foreseeable future.
At this time, the Company cannot reliably predict future profitability.
Accordingly, the deferred tax asset has been reduced in its entirety by
the valuation allowance. As of December 31, 1998, the Company had net
operating loss carry forwards of approximately $10,380,000 expiring
variously through 2013.
A significant portion of these carry forwards may be subject to
limitations on annual utilization due to "equity structure shifts" or
"owner shifts" involving "5 percent stockholders" (as defined in the
Internal Revenue Code), which resulted in more than a 50% change in
ownership.
17. NON-RECURRING INCOME AND EXTRAORDINARY ITEM
Included in non-recurring income is a write-off of accrued management
salaries, certain trade payables and accrued rent totaling $801,875
from the year ended December 31, 1994. The accrued expenses and
accounts payable were from prior management and during the year ended
December 31, 1999, current management wrote-off these liabilities as it
was determined that they would not be paid.
On December 9, 1999, Hill County, State of Montana, forgave the
Company's indebtedness on a note payable for $300,000 plus accrued
interest of $44,055.
F-14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000764839
<NAME> Water Chef Inc.,
<MULTIPLIER> 1
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 4,426
<SECURITIES> 0
<RECEIVABLES> 2,073
<ALLOWANCES> 0
<INVENTORY> 98,565
<CURRENT-ASSETS> 270,453
<PP&E> 375,510
<DEPRECIATION> (360,316)
<TOTAL-ASSETS> 388,974
<CURRENT-LIABILITIES> 5,148,114
<BONDS> 0
0
8,082
<COMMON> 35,254
<OTHER-SE> 7,266,138
<TOTAL-LIABILITY-AND-EQUITY> 388,974
<SALES> 354,792
<TOTAL-REVENUES> 354,792
<CGS> 247,416
<TOTAL-COSTS> 983,773
<OTHER-EXPENSES> 73,757
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 179,044
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 344,055
<CHANGES> 0
<NET-INCOME> 267,653
<EPS-BASIC> (0.00)
<EPS-DILUTED> (0.00)
</TABLE>
