As filed with the Securities and Exchange Commission on October 4, 2000
Registration No. ________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MAG-WELL, INC.
(Exact name of Small Business Issuer as specified in its charter)
Texas 3533 74-2506600
(State or other (Primary standard (I.R.S. employer
jurisdiction of industrial identification
incorporation) classification code number)
number)
404 Lakeview Drive 122 East Wisconsin
Boerne, Texas 78006 Edinburg, Texas 78539
(830) 249-2610 (800) 488-1278
(Address and telephone number of principal executive offices and
principal place of business)
William W. Dillard, Jr.
404 Lakeview Drive
Boerne, Texas 78006
(830) 249-2610
(Name, address and telephone number of agent for service)
Copies to:
Thomas C. Cook, Esq.
Thomas C. Cook & Associates
3110 S. Valley View Suite #106
Las Vegas, Nevada 89102
(702) 876-5941
Approximate date of proposed sale to the public: As soon as practicable
after this registration statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, please check the following box. / /
___X____
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for
the same offering. / / ________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier
registration statement for the same offering. / / ________
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. / / ________
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment that specifically states this
registration statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the
registration statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
/1/
CALCULATION OF REGISTRATION FEE
Title of Each Class Proposed Maximum Maximum Amount of
of Securities to be Offering Price per Aggregate Registration
Registered Unit Offering Price Fee
(1)
Common Stock, $0.001 $1.00 Per Share $5,000,000 $1,390.00
par value (1)
5,000,000 shares of
Common Stock
------------------------------------------------------------------------
Total $1.00 Per Share $5,000,000 $1,390.00
5,000,000 shares of
Common Stock
------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee.
/2/
Prospectus
----------
Mag-Well, Inc.
Common Stock
5,000,000 Shares - $1.00 Per Share
_______________________________
Mag-Well, Inc. is a Texas corporation incorporated on June 20, 1988.
Currently, we possess a patent on proprietary technology to produce a
magnetic fluid conditioner tool that provides an environmentally-safe
solution to costly paraffin and scale deposit problems. We have
successfully designed and sold specialized tools that address these
problems to the oil & gas, marine diesel, sugar refining and water
treatment markets. To date, we have installed over 1,300 tools
worldwide.
This offering is being conducted on a "best efforts minimum/maximum
basis". The minimum amount of common stock required to be sold is
500,000 shares or $500,000 and the maximum is 5,000,000 shares or
$5,000,000. There is no minimum purchase requirement. The offering
will end on the date 365 days from the date that this registration
statement becomes effective. We will deliver stock certificates,
attributable to shares purchased, directly to you within 30 days of the
closing of this offering. All subscription funds received will be held
in an escrow account pending achievement of the minimum offering. (See
"Plan of Distribution" on page 14). Expenses related to this offering,
may be deducted from the proceeds as the offering progresses once the
minimum offering is achieved.
Neither the Nasdaq National Market nor any national securities exchange
lists our common stock. Prior to this offering, there has been no
public market for our common stock. These common shares are being
offered by the officers and directors of the Company. No commissions
will be received for their sale. There can be no assurance that a
market for our securities will develop. The offering price may not
reflect the market price of our shares after the offering. The initial
public offering price has been arbitrarily determined by us and bears
no basis in relation to assets, book value or any other established
criteria of value.
This investment involves a high degree of risk. You should purchase
shares only if you can afford a complete loss of your investment. (See
"Risk Factors" starting on Page 8 and "Dilution" on Page 16).
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined
if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
Per Total Total
Share Minimum Maximum
----- ------- -------
Public Offering $1.00 $500,000 $5,000,000
Price
Proceeds to Mag- $1.00 $500,000 $5,000,000
Well, Inc.
You should only rely on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. The
information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed
with the SEC is effective. It does not constitute an offer to sell, or
a solicitation to buy, any securities other than the shares of common
stock to which it relates. In addition, this prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where their offer or sale is not
permitted. During the offering period, we are required to update this
prospectus to reflect any facts or events arising after the effective
date of the registration statement filed with the SEC that represent a
fundamental change in the information set forth in the registration
statement.
____________________________________
Mag-Well, Inc.
404 Lakeview Drive
Boerne, TX 78006
(830) 249-2610
Date of this Prospectus is October 4, 2000
/3/
PROSPECTUS SUMMARY
This summary does not contain all of the pertinent information
necessary to make an informed investment decision. Please read the
entire prospectus and each exhibit carefully, paying special attention
to the "Risk Factors", before making any decision on the suitability of
this investment.
Our Business
Mag-Well, Inc. was incorporated in Texas on June 20, 1988 to
develop, manufacture and distribute Magnetic Fluid Conditioners (or
"MFCs") that address the problems associated with the build up of scale
and wax deposits within pipes and accompanying equipment. These build-
ups act to restrict the flow of fluid through pipelines and machinery.
MFCs consist of a series of powerful, magnetic circuits mounted in a
casing equipped with standard pipe threads or flanges at either end.
The tool is installed directly in the pipeline so that the fluid passes
through the magnetic fluid conditioner. Furthermore, through the
utilization of magnets in this process, no external electrical power or
recharging is required. Currently, we provide our products mainly to
oil and gas companies, and on a more limited basis to water treatment
plants. Diesel-driven machines like boats and transportation vehicles
(i.e. 18-wheelers) also can benefit from the use of our products.
Utilizing our tools has resulted in the progressive removal of solids
from:
a) oil and gas pipes,
b) boilers,
c) water towers,
d) heat-exchange units,
e) and domestic hot water systems.
Our Objective
Our objective is to generate revenues by offering a number of
industries a way to improve the efficiency of fluid transfer through
the use of our magnetic fluid conditioning technologies. To achieve
this objective, our priorities for the next 12 months of operations are
as follows:
(a) develop and expand our organizational structure;
(b) further advance product research and development;
(c) increase international sales through alliances;
(d) implement an aggressive marketing campaign; and
(e) upgrade facilities and equipment;
We cannot guarantee to our current shareholders and potential
investors that we will be able to effectuate the objectives described
above.
Our Magnetic Fluid Conditioners
Our MFC tools are categorized based on their intended application:
(a) oil & gas,
(b) diesel fuel,
(c) and water.
Each tool is custom-built according to specific parameters provided to
us by our clients. The diameter and length of the magnetic fluid
conditioner will depend on the volume of fluid and the intensity of the
treatment. The length of the tool can vary from 12 inches to 120
inches. The following images are samples of the types of MFC tools we
produce:
<insert picture> <insert picture> <insert picture>
Oil & Gas MFC Diesel Fuel MFC Industrial Water MFC
/4/
Summary of Selected Financial Data
We have set forth below financial information regarding Mag-Well,
Inc. for the years ended December 31, 1999 and 1998, and for the 6
month periods ending June 30, 2000 and 1999. This information is only
a summary and has been derived from our audited and un-audited
financial statements, including the related notes, found elsewhere in
this prospectus. You should read this financial information in
conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited financial
statements and notes.
Year Ended December 31 Six Months Ended June 30
1999 1998 2000 1999
---- ---- ---- ----
Statement of
operations data:
Total revenue $ 330,749 $ 206,326 $ 76,219 $ 169,111
Cost of goods sold & $ 161,720 $ 150,958 $ 39,093 $ 78,312
loss on inventory
impairment
General and $ 230,052 $ 314,210 $ 108,941 $ 105,180
administrative
expenses
Other income $(33,439) $(39,826) $(17,315) $(15,682)
(expenses)
Income (loss) before $(94,462) $(298,668) $(89,130) $(30,063)
extraordinary gain
Extraordinary gain $ 18,448 $ 0 $ 0 $ 0
Net income (loss) $(76,014) $(298,668) $(89,130) $(30,063)
Net loss per common
share (basic and
diluted):
Extraordinary gain $ 0 $ 0 $ 0 $ 0
Net loss $ (0.01) $ (0.02) $ (0.01) $ 0
Weighted average 12,264,000 12,000,000 12,313,000 12,000,000
shares outstanding (1)
*Less than $(.01) per
share
As of As of
December June 30,
31, 1999 2000
-------- --------
Balance sheet data:
Working capital $ (71,600) $(179,136)
(deficit)
Total assets $ 476,123 $ 531,788
Total current debt $ 479,123 $ 623,993
Total long-term debt $ 0 $ 0
Total stockholders' $ (3,075) $ (92,205)
equity (deficit)
(1) As adjusted to give effect to 120 to 1 forward stock split in
1999.
/5/
TABLE OF CONTENTS
Page
Prospectus Summary 4
Our Special Note Regarding Forward 7
Looking Statements
Risk Factors 8
Use of Proceeds 12
Dividend Policy 13
Plan of Distribution 14
Capitalization 15
Dilution 16
Management's Discussion and Analysis 17
of Financial Condition
Business of the Company 21
Industry Background 21
Mag-Well, Inc. Patent and 21
Product Description
Manufacturing Process 23
Definition of Success 23
Target Markets 24
Oil & Gas Treatment 24
Diesel Fuel Treatment 25
Heat Transfer Treatment 26
Business Growth Strategy 27
Marketing Strategy 27
Operations Strategy 28
Business Condition 29
Facilities 30
Employees 30
Legal Proceedings 30
Management 31
Executive Compensation 33
Security Ownership of Certain 34
Beneficial Owners and Management
Stock Option Plan 34
Certain Transactions 35
Description of Securities 37
Legal Matters 38
Experts 38
Additional Information 38
Shares Eligible for Future Sale 39
Accounting, Tax, Insurance and Legal 40
Issues
Part F/S: Mag-Well, Inc., Financial 41
Statements
/6/
OUR SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus constitute
"forward-looking statements," in particular under the captions:
(a) Prospectus Summary;
(b) Use of Proceeds;
(c) Management's Discussion and Analysis of Financial Condition and
Results of Operation; and
(d) Business of the Company.
Forward-looking statements can be identified by the use of
terminology such as:
(a) Anticipates
(b) Believes
(c) Expects
(d) May
(e) Will
(f) Should
These statements are subject to known and unknown risks,
uncertainties and other factors that could cause our actual or
intended results to differ materially from those contemplated by the
statements. The forward-looking information is based on various
factors and is derived using numerous assumptions. Important factors
that may cause actual results to differ from projections include, for
example:
(a) General economic and business conditions
(b) Our ability to implement our business
(c) Changes in the industrial fluid treatment industry and consumer
preferences
(d) Competition
(e) Increasing operating costs
(f) Unsuccessful advertising and promotional efforts
(g) Changes in brand awareness
(h) Acceptance of new product offerings
(i) Changes in, or the failure to comply with, government regulations
We do not promise to update forward-looking information to
reflect actual results or changes in assumptions or other factors that
could affect those statements.
/7/
RISK FACTORS
The following risk factors should be considered carefully before making
any investment decision with respect to purchasing our common stock.
We have endeavored to disclose all material risks relevant to our
business.
Investment Risk
An investment in shares of our common stock involves a high degree
of risk and is suitable only for investors with substantial financial
means and no need for initial liquidity. The offering price of the
common shares has been arbitrarily determined and bears no relationship
to any objective criterion of value. The price does not bear any
relationship to our assets, book value, historical earnings or net
worth. The common shares are being offered by our officers and
directors, Messieurs William W. Dillard and John D. Corney. In
addition, no broker/dealer has been retained as an underwriter, nor is
any broker/dealer under any obligation to purchase common shares in
this offering. Our officers and directors collectively have limited
experience in the offering and sale of securities. Consequently, there
can be no guarantee that we will be able to sell all, or any, of the
common shares. We anticipate that the maximum or mid-range proceeds
from the sale of the common shares being sold in this offering will be
sufficient to provide for our capital needs for the next 36 to 60
months. If we raise only the estimated minimum proceeds from this
offering we may not be able to meet our planned capital requirements.
Our Company will continue to lose money unless we generate
sufficient revenues or obtain adequate financing through this offering.
We have had a history of losses since inception, and according to our
auditors, our operations raise substantial doubt as to our ability to
continue as a going concern. For the 6 month period ended June 30,
2000, we had revenues of $76,219 but incurred a net loss of $89,130.
Comparatively, for the same period ended June 30, 1999, we had revenues
of $169,111 with a net loss of $30,063. Furthermore, for the year
ended December 31, 1999, we had revenues of $330,749 and net losses of
$76,014, while the preceding year of December 31, 1998, we had revenues
of $206,326 and net losses of $298,668. The potential for futute
operating losses also exists. We expect to incur up-front operating
costs related to the expansion of our marketing efforts, which may
result in additional losses. The Company's exclusive manufacturing and
distribution contract with a company by the name of PEMECO in Latin
America may result in lost sales opportunites. We will not be
profitable until we establish a broader customer base for our products
and services and derive substantial revenues from our sale of magnetic
fluid conditioners. The above outlined capital problems could
negatively impact the value of our Company's common shares and could
result in the loss of your entire investment.
Liquidity Risk
Before this offering, there has been no public trading market for
our common stock. We seek to have our shares of common stock trade in
the over-the-counter market on the NASD's Over-the-Counter Bulletin
Boardr, an inter-dealer automated quotation system for equity
securities not included in The Nasdaq SmallCap Market SM or National
Market. If we are unable to include our shares of common stock for
quotation on the Bulletin Board we expect our shares to trade on the
NQB "Pink Sheetsr" published by the Pink Sheets, LLC. Although the
Bulletin Board has recently begun to receive greater recognition from
the brokerage community, the trading volume of securities quoted on the
Bulletin Board is normally substantially less than that of securities
traded on The Nasdaq Small Cap Market SM and National Markets. Trading
volume in Pink Sheet securities is substantially less than that of
Bulletin Board securities.
You may have more difficulty selling our securities or obtaining
price quotations than if our stock was listed on the Nasdaq or a
national securities exchange, particularly if our shares are traded on
the Pink Sheets. Because our common stock is not listed on any
national securities exchange, our common stock may not be easily
traded, not only in the amount of shares that could be bought and sold,
but also through delays in the timing of transactions, and lower prices
for our shares of common stock than might otherwise be obtained.
Other drawbacks would include a reduction in the number of securities
analysts who follow our common stock and a lack of news media coverage
for our company.
Additionally, we are not using an underwriter to sell this
issuance, and cannot guarantee that any broker/dealer will make a
market in our common stock. "Making a market" means maintaining buy
and sell quotations and being able to fulfill transactions at those
quoted prices and in reasonable quantities, subject to various
securities laws and other regulatory requirements. The development of
a public trading market depends on the existence of willing buyers and
sellers, which we do not control. We cannot guarantee that a regular
trading market for our common stock will develop after this offering or
that, if developed, it will be sustained. The ability to withstand a
potential loss of all or a portion of one's investment in this offering
should be considered before making an investment decision.
Our common stock is subject to "penny stock" regulations and
broker/dealer practices in connection with transactions in "penny
stocks," which are regulated by certain penny stock regulations adopted
by the SEC. A penny stock generally is any
/8/
equity security with a price
of less than $5.00 (other than securities registered on certain national
securities exchanges or quoted on the Nasdaq system, provided that
current price and volume information with respect to transactions in the
security is provided by the exchange or system). In addition, a
security will be exempt from the penny stock regulations if the issuer
of the security has (i) net tangible assets in excess of $2,000,000, if
the issuer has been in continuous operation for at least three years, or
$5,000,000 if the issuer has been in continuous operation for less than
three years; or (ii) average revenue of at least $6,000,000 for the last
three years. None of these exemptions currently apply to our Company.
The penny stock regulations require a broker/dealer, prior to a
transaction in a penny stock not otherwise exempt from the regulations,
to deliver a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny stock market.
The broker/dealer must also provide the customer with current bid and
offer quotations for the penny stock, the compensation of the
broker/dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the
customer's account. In addition, the penny stock regulations generally
require that prior to a transaction in a penny stock the broker/dealer
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have
the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to the penny stock regulations.
Due to the fact that our common stock will be subject to these penny
stock regulations, you may find it more difficult to sell your
securities.
Product Demand Risk
An increase in demand for our products is directly correlated to an
increase in oil and gas prices and the increase in activity level for
exploration, development and production of oil and gas wells. A drop in
oil and gas prices has in the past caused a drop in demand for our
MFC's. This occured during the years of 1998 and 1999 when the per
barrel price of oil declined. The lower price did not help justify the
high cost of exploration, extraction and production of additional crude
oil deposits. Subsequently, the oil and gas industry experienced a
contraction in the exploration, development and production activities of
oil and gas companies and drilling contractors.
Price changes cause numerous shifts in the strategies, expenditure
levels and purchase patterns of oil and gas companies and drilling
contractors. Due to this shift, the decisions to purchase major capital
equipment like the type manufactured by Mag-Well, Inc. can fluctuate
dramatically. In effect, a drop in demand for our products would likely
be the result of a significant reduction in oil and gas prices. The
future price levels of oil and gas will have a direct impact on our
Company's ability to sell its products, and the level of exploration and
production-related activities will play an important role in the growth
and profitability of our company, and our ability to continue as a going
concern.
Insurance Risk
Claims for loss of oil and gas production and damages to formations
can occur. The liability for equipment being used in the well is
associated with the operating company and not the product manufacturer.
We may, in the future, be named as a defendant in product liability or
other lawsuits asserting potentially large claims due to litigation
arising from a major accident or product loss (i.e. oil & gas) at a
location where our equipment is used. Regardless, we do not carry any
product liability insurance and we do not intend on obtaining this
coverage. We are limited to general liability insurance from Hartford
Lloyds Insurance Company with a general aggregate limit of $1,000,000,
and may not be able to obtain and maintain proper insurance coverage, if
required, at levels we deem adequate and at rates we consider
reasonable. It is possible that the outcome of these or any other legal
and administrative proceedings could effect the ability of our Company
to continue as a going concern.
Patent and Licensing Infringement Risk
On January 12, 1993, the U.S. Patent and Trademark Office assigned
patent #5,178,757 for our magnetic fluid conditioner. We are currently
planning for additional patents to fully protect our tool, and we are
protecting new proprietary technology as trade secrets until appropriate
measures can be taken for protection. Our success and ability to
compete depends upon the protection of our patent and other proprietary
rights that we have developed in relation to the application of
magnetics in various MFC tools utilized for treating diesel fuel and
water fluids. If we deem that other parties or organizations have
infringed on our proprietary property, we will expend money filing suit
against such parties or organizations to try to recover any losses
incurred by said infringement. If we fail to protect or enforce our
property rights successsfully, our competitive position could suffer,
which in turn could harm our operating results. In addition, our patent
may not provide us a significant competitive advantage.
We may license our property to third parties whereby we partially
develop the MFC tool and agree to grant them the exclusive manufacturing
rights to complete and sell our MFC tool under their brand name. We
will rely on non-compete and
/9/
non-circumvent provisions (agreements) to
protect the intellectual property that we currently own and plan to
develop. If we believe that a third party, who may be located in a
foreign jurisdiction, has infringed on our proprietary technology, we
may expend capital defending our property. If unsuccessful, our efforts
can result in loss of capital for our operating budget. Third parties
may misappropriate our proprietary technology, and it cannot be
guaranteed that these provisions (agreements):
(a) will provide sufficient protection,
(b) will limit others from developing products and services that are
similar or superior to those of our magnetic fluid conditioner
technology, or
(c) will prevent third parties from copying or obtaining and using
proprietary information without our authorization.
Policing unauthorized use of proprietary and other intellectual
property rights could entail significant expense and could be difficult
or impossible for our company given our financial state. In addition,
we face the risk of third parties bringing claims that a process or
feature relevant to our magnetic fluid conditioner violates a patent,
copyright or trademark specific to their party. Any claims of
infringement, with or without merit, could be time consuming to defend,
result in costly litigation, divert our management's attention or
require us to enter into costly royalty or licensing arrangements to
prevent us from using important technologies or methods, any of which
could result in the inability of the Company to meet its financial
obligations.
Management Risk
Our ability to successfully offer our products and implement our
business growth strategy requires an effective planning and management
process. Our existing management consists of Messieurs William W.
Dillard and John D. Corney. Given that Mr. Dillard oversees the
management and direction of our company and that Mr. Corney is
responsible with regards to the manufacturing and development of our
MFC technology, their loss could affect the ability of the Company to
continue as a going concern.
We will continue to increase the scope of our operations
domestically and internationally through the hiring and development of
a sales force for our target markets. An increased sales force will
allow us to attract new customers and provide additional customer
support and service. If we are unable to give the proper training, our
expectations of increasing our clientele and sales of MFC's could be
hindered, and the profitability of our Company reduced.
We expect that we will need to continue to improve our financial
and managerial controls, reporting systems and procedures. If we
experience delays or cost overruns in implementing this system or if
this system is not as effective as we anticipate, we could experience
significant difficulties in managing our supply chain. In addition, we
will need to continue to expand, train and manage our work and sales
force. Furthermore, we expect that we will be required to manage
multiple relationships with various customers and other third parties.
This anticipated growth and our expected growth in future operations
will place, a significant strain on our management and resources.
Currently, officers and directors as a group directly own
approximately 8,738,000 shares of common stock or 70.97% of the
approximately 12,313,000 shares of common stock outstanding. Assuming
all 5,000,000 shares of this offering are sold, the officers and
directors will still directly own approximately 50.47% of the issued and
outstanding common stock - giving the individual investor a limited say
in matters relating to the Company's direction and management.
Therefore, the decision making ability of the acting management team
will play a major role in determining the future health of the company.
Although a portion of the net proceeds of this offering is intended
for specific uses, the balance will be available for whatever management
deems appropriate for the future success of the company. Generally,
this will include:
(a) working capital,
(b) fees associated with our future capitalization strategy and
(c) general corporate purposes.
Therefore, the application of the net proceeds of this offering is
substantially within the discretion of our management. You will be
relying on our management and business judgment based only upon limited
information about our specific intentions. Achieving our financial and
strategic objectives cannot be guaranteed with the application of the
net proceeds of this offering.
/10/
Competition Risk
Our revenues and earnings are affected by:
(a) a competitive paraffin and scale deposit treatment solutions
market,
(b) the introduction of new and improved products by competitors,
(c) increases in the supply of, or improvements in the deliverability
of, competing products, and
(d) significant price competition.
Many of our current and potential competitors have longer operating
histories, are substantially larger and have greater financial,
manufacturing, marketing, technical and other resources. As a result,
many current and potential competitors may be better able to initiate
and withstand significant price competition or downturns in the economy.
They may also have greater name recognition and a larger installed base
of products and services. In addition, uncertainties may arise
regarding the applicability or cost-effectiveness of products we design
and manufacture for use in other industries. Our planned expansion into
the water and diesel fuel purification markets may be impeded in a
similar manner as detailed above. If we are not be able to compete
effectively and profitably, the success of our business, financial
condition and operating results would suffer.
Product Acceptance Risk
While magnetic field technology is relatively new, it is possible
that alternative technologies could be developed that would make MFC's
obsolete. In addition, magnetic field technology is not completely
understood by many engineers and scientists in the global market, and
there may be a longer "lag time" or delay than is currently projected
before sales increase to profitable levels for our company. This slow
acceptance process can be traced directly to oil field workers who have
approached this new technology with a great deal of skepticism.
Generally, field-employees-managers of very large oil companies have
long established relationships with their vendors and are not likely to
adopt new scientific innovations. If the adoption of MFC technology
takes longer than anticipated, and these potential revenues are delayed
or never realized, our ability to continue to meet our capital
requirements would be jeopardized.
/11/
USE OF PROCEEDS
The gross and net proceeds that we will receive from the sale of
the common stock cannot be fully determined. The following table shows
the use of proceeds in 3 different situations depending on the success
of our offering. In each case, we assume our offering expenses will be
approximately $ 71,390. These expenses include, but are not limited to,
printing advertising, accounting and legal fees and other miscellaneous
items. The expenses of this offering shall not exceed a maximum of 10%
of the aggregate offering.
GROSS OFFERING:
MAXIMUM MID-RANGE MINIMUM
$5,000,000 $2,500,000 $500,000
Approx. Approx. Approx.
Dollar Dollar Dollar
Amount Prct.% Amount Prct.% Amount Prct.%
------- ------ ------- ------ ------- ------
Application of
Proceeds
Marketing and $1,000,000 20.00% $ 500,000 20.00% $ 100,000 30.00%
sales
Research and 500,000 10.00% 200,000 8.00% 0 0%
development(a)
Manufacturing 600,000 12.00% 300,000 12.00% 0 0%
upgrades
Office expansion 100,000 2.00% 50,000 2.00% 0 0%
Offering expenses 71,390 1.43% 71,390 2.86% 71,390 14.28%
Salaries 500,000 10.00% 350,000 14.00% 0 0%
Remunerations and 500,000 10.00% 250,000 10.00% 50,000 10.00%
commissions(b)
Debt Reduction(c) 250,000 5.00% 100,000 4.00% 0 0%
Working capital, 1,478,610 29.57% 678,610 27.14% 228,610 45.72%
primarily general
&
Administrative
expenses
----------------------------------------------------------------------------
Total Proceeds $5,000,000 100.00% $2,500,000 100.00% $ 500,000 100.00%
Net proceeds, $4,428,610 88.57% $2,178,610 87.14% $ 378,610 75.72%
after deducting
offering
Expenses and
commissions
NOTES TO USE OF PROCEEDS:
(a) Currently, patent applications are included in the line item
labeled "Research and Development." We believe, however, that given a
minimum offering scenario, the proceeds raised will not be sufficient
to support additional research and development, nor to cover the costs
associated with the filing of new patent applications.
(b) Should we decide to employ a broker/dealer to underwrite our
offering, we may incur selling commissions of $500,000 given maximum,
$250,000 given mid-range and $50,000 given minimum offering scenarios.
The Company has no plans at this time, nor do we expect to utilize the
services of an underwriter. These funds may therefore be reallocated to
cover expenses related to the offering with the balance of any
remaining funds applied to working capital.
(c) Any reduction of debt made possible by this offering would be
applied to the following in the order assigned: (1) $56,776 balance
outstanding on $110,000 original face note 10% due 10/01/2000 (2)
$71,062 balance outstanding on $50,000 original face note 10% due
10/01/2000 (3) $47,187.69 balance outstanding on $100,000 original face
note 16% due 10/01/2000 (4) $71,899 balance outstanding on Chase Bank
variable rate line of credit (5) $52,188.47 balance outstanding on MBNA
variable rate credit card (6) $13,978 balance outstanding on American
Express variable rate credit card (7) $28,000 balance outstanding on
Suntrust line of credit. These figures represent the outstanding debt
held by Mag-Well, Inc. as of the date of this filing.
Our allocation of net proceeds represents our best estimates for
their usage. We may reallocate some of the proceeds if our plans
change. We have broad discretion as to the application of a significant
portion of the net proceeds without having to seek the approval of the
investors in this offering. Future events may cause us to reallocate
our resources, including cash, for uses not presently contemplated by
us. We believe that the maximum or mid-range net proceeds from this
offering and revenues generated by planned operations will satisfy our
working capital needs for the next 36 to 60 months. If we raise only
the estimated minimum proceeds from this offering we may not be able to
meet our planned capital requirements.
/12/
DIVIDEND POLICY
We have not paid any cash dividends to date, and we do not
anticipate paying any cash dividends on our common stock in the near
future. We intend to retain earnings:
(a) to finance the expansion of our business,
(b) for additional and continued research and development and
(c) for other general corporate purposes.
Any payment of future dividends will be at the discretion of our
Board of Directors and will depend upon, among other factors, our:
(a) earnings,
(b) financial condition,
(c) capital requirements,
(d) level of indebtedness and
(e) contractual restrictions with respect to the payment of dividends.
/13/
PLAN OF DISTRIBUTION
We are offering up to 5,000,000 shares of common stock at an
offering price of $1.00 per share. There is no minimum purchase
requirement to invest in our common stock. We will sell this offering
on a "best efforts" basis through our directors and executive officers,
none of whom will receive any commissions or other form of remuneration.
Before the commencement of this offering, there are 12,313,000 shares of
common stock outstanding. If the shares being offered are sold, we will
receive proceeds totalling $5,000,000 given maximum, $2,500,000 given
mid-range or $500,000 given minimum offering scenarios before deducting
offering expenses and applicable fees. We are issuing these shares
according to the federal registration provisions required by the SEC and
the Securities Act of 1933.
Shares will be sold by our officers and directors. Consequently,
there can be no assurance that all, or any, of the shares will be sold.
As of the date of this prospectus, we have not entered into any
agreements or arrangements for the sale of the shares with any
broker/dealer or sales agent. Should we decide to employ these
underwriters, we anticipate that we will pay a comission or underwriting
fee to such broker/dealers of no more than 10%. Any underwriters,
dealers or agents who participate in the distribution of shares may be
deemed to be "underwriters" under the Securities Act of 1933, and any
discounts, commissions or concessions received by any "underwriters" may
be deemed to be underwriting discounts and commissions.
In order to comply with the applicable securities laws of certain
states, the securities may not be offered or sold unless they have been
registered or qualified for sale in such states or an exemption from
such registration or qualification requirement is available and with
which we have complied.
How to Subscribe
You can purchase common stock in this offering by completing a
"Subscription Agreement" (attached as Exhibit 99a) and sending it,
together with payment in full to "Chase Bank of Texas c/o Escrow Agent:
Mag-Well, Inc." located in 600 Travis Street, Suite #1150, Houston, TX
77002. All payments must be made in United States currency; either by
personal check, bank draft or cashiers check. There is no minimum
purchase requirement. Your failure to pay the full subscription amount
will entitle us to disregard your subscription. Your subscription is
not binding and will not become effective unless and until it is
accepted. The Company has 30 business days after receipt to either
accept or reject the subscription. Any subscription rejected within
this 30-day period will be returned to the subscriber within 5 business
days of the rejection date. Furthermore, once a subscription agreement
is accepted, it will be executed without reconfirmation to or from the
subscriber. Once we accept a subscription, it cannot be withdrawn by
the subscriber. We will notify accepted subscribers within 30 days
after the close of the offering.
Minimum Offering
If a minimum of 500,000 shares are not sold within 365-days
following the effective date of the registration statement of which this
prospectus is a part, the offering will automatically terminate and all
funds received from the sale of the shares will be returned to the
purchasers including their pro-rated, accrued interest within 30 days.
If 500,000 shares are sold, prior to the expiration of the 365-day
period, Chase Bank will release the funds from the escrow account for
deposit into the corporate account of Mag-Well, Inc. The Company will
continue to sell the offering to attempt to reach the maximum amount of
5,000,000 shares, and subscriber's funds will continue to be deposited
in escrow until such time as we decide to terminate the offering period.
The Company will make every effort to determine that subscribers are
resident in those jurisdictions where Mag-Well is authorized to sell
shares.
Conditions of the Offering
Our offering will expire at 5:00 p.m. Eastern Time, 365-days from
the effective date of the registration statement of which this
prospectus is a part. It is entirely possible that an investors
subscription may be held for this entire period while the Company is
soliciting for additional subscriptions. We may terminate the offering
at any time during its pendency at our discretion. In addition, if the
placement of this issuance were to occur, an investor may experience a
decrease in the market value of their securities between the date the
offering was closed and the date on which they receive their
certificates, and will not receive accrued interest on their money held
in escrow.
/14/
CAPITALIZATION
Our capitalization as of June 30, 2000, is set forth in the
following table and is adjusted to reflect the sale of the shares being
offered. (See "Part F/S: Mag-Well, Inc., Financial Statements").
Pro-Forma Pro-Forma Pro-Forma
(b)(e) (c)(e) (d)(e)
Actual Minimum Mid-Range Maximum
(a) Offering Offering Offering
------ -------- -------- --------
Short-Term Debt $ 623,993 $ 623,993 $ 523,993 $ 373,993
Long-Term Debt $ 0 $ 0 $ 0 $ 0
(Excluding short-term
portion)
-----------------------------------------------
Total Debt $ 623,993 $ 623,993 $ 523,993 $ 373,993
Stockholders' Equity
Common Stock: $0.001
Par value, 20,000,000
shares authorized;
12,313,000 shares issued $ 12,313 $ 12,813 $ 14,813 $ 17,313
and outstanding 12,313
Excess Paid-In-Capital $2,443,335 $2,685,195 $4,483,195 $6,730,695
(e)
Deferred Offering $(136,250) $ 0 $ 0 $ 0
Costs
Accumulated Deficit $(2,411,603) $(2,411,603) $(2,411,603) $(2,411,603)
---------------------------------------------------
Total Stockholders' $ (92,205) $ 286,405 $2,086,405 $4,336,405
Equity (Deficit)
Total Capitalization $ 531,788 $ 910,398 $2,610,398 $4,710,398
---------------------------------------------------
NOTES TO CAPITALIZATION:
(a) See "Part F/S: Mag-Well, Inc., Financial Statements."
(b) The pro-forma minimum offering estimates assumes the minimum
subscription of 500,000 shares of common stock being sold.
(c) The pro-forma mid-range offering estimates assumes the
subscription of only 2,500,000 shares of common stock being sold.
(d) The pro-forma maximum offering estimates assumes the subscription
of the entire 5,000,000 shares of common stock being sold.
(e) These figures are net of estimates accounting for commissions and
offering expenses, which total $121,390 given minimum, $321,390 given
mid-range and $571,390 given maximum offering scenarios.
/15/
DILUTION
"Dilution" represents the difference between the offering price of
the shares of common stock and the net book value per share of common
stock immediately after completion of the offering. "Net book value" is
the amount that results from subtracting total liabilities from total
assets. In this offering, the level of dilution is increased as a
result of the relatively low book value of our issued and outstanding
stock. This is due in part to shares of common stock issued to officers
and directors of the Company totalling 8,738,000 shares at par value
$0.001 per share versus investor stock purchases from previous
transactions that have ranged in the price of $0.05 to $0.50 per share.
(See "Part II - Item 26. Recent Sales of Unregistered Securities). Our
net book value on June 30, 2000, was a deficit of $92,205 or $(0.007)
per share. Assuming all shares offered are sold, and in effect we
receive the maximum estimated proceeds of this offering from
shareholders, our net book value will be approximately $4,336,405 or
$0.250 per share. Therefore, as an investor, you will suffer an
immediate and substantial dilution of approximately $0.750 per share
while the present stockholders of the company will receive an increase
of $0.257 per share in the net tangible book value of the shares that
they hold. This will result in a 75% dilution for purchasers of stock
in this offering.
In the event that only the mid-range of the offering is achieved
(the sale of 2,500,000 shares), our net book value will be approximately
$2,086,405 or $0.141 per share. You will suffer an immediate and
substantial dilution of approximately $0.859 per share while the present
stockholders of the company will receive an increase in value of $0.148
per share in the net tangible book value of the the shares they hold.
This will result in a 86% dilution for purchasers of stock in this
offering.
In the event that the minimum offering is achieved (the sale of
500,000 shares), our net book value will be approximately $286,405 or
$0.022 per share. Therefore, as an investor, you will suffer an
immediate and substantial dilution of approximately $0.978 per share
while the present stockholders of the company will receive an increase
of $0.029 per share in the net tangible book value of the shares they
hold. This will result in an 98% dilution for purchasers of stock in
this offering.
The following table illustrates the dilution to the purchaser of the
common stock in this offering:
Minimum Mid-Range Maximum Offering
(a)(b) (a)(b) (a)(b)
Offering Offering
-------- -------- ------------
Book Value Per Share $(0.007) $(0.007) $(0.007)
Before The Offering
Book Value Per Share $0.022 $0.141 $0.250
After The Offering
Net Increase To $0.029 $0.148 $0.257
Original Shareholders
Decrease In Investment $0.978 $0.859 $0.750
To New Shareholders
Dilution To New 98% 86% 75%
Shareholders (%)
NOTES TO DILUTION:
(a) Dilution figures were estimated using unaudited financial
statements for Mag-Well, Inc., dated June 30, 2000.
(b) The dilution figures are estimated accounting for commissions and
offering expenses, which total $121,390 given minimum, $321,390 given
mid-range and $571,390 given maximum offering scenarios. Commissions
are accounted for given that the company retains broker/dealers in
their plan of distribution.
/16/
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
The following discussion and analysis should be read in conjunction with
the financial statements and accompanying notes contained elsewhere in
this prospectus.
General
Since 1988, our focus has been on developing, distributing and
marketing magnetic fluid treatment products mainly to the oil and gas
industry. We selected this industry in the hopes of obtaining a
foothold from which to demonstrate the viability and effectiveness of
our products. Therefore, our profitability is heavily tied to our
ability to generate sales in this one industry. The demand for our
products within the oil and gas industry has been directly affected by
the uncertainty of oil prices, mainly the decreasing price per barrel of
oil that began in the latter part of 1997. According to Department of
Energy statistics, the average domestic price of crude oil was $17.23
per barrel in 1997, $10.87 per barrel in 1998 and $15.56 per barrel in
1999. As oil prices decline the investments made by large oil companies
on exploration and refining also decline. A sustained period of
depressed oil prices would affect our future gowth unless we are able to
substantially diversify our product sales into the industrial water and
diesel fuel markets. Although, we have been able to withstand the
depreciated price of oil we believe that diversification in our revenue
base is necessary to reduce the impact of such decreases in the future.
In May of 1998, we had 12 employees on salary and 4 full-time,
straight-commissioned salesmen. In February of 2000, the number of
employees decreased to 4 employees on salary (with 1 electing to defer
and accrue his/her salary) and 2 part-time, straight-commissioned
salesmen. All of the terminated employees were employed in an
administrative and manufacturing role. In addition, we cut back overhead
spending in the areas of advertising, research and development and
business travel.
Our internal sources of liquidity are the proceeds received from the
sale of our tools. During the fiscal year ending December 31, 1999,
there were no firm material commitments that existed for capital
expenditures. Subsequently, in February 2000 we entered into a licensing
agreement with Petroleum Metallurgic Corporation ("PEMECO") of Venezuela,
which we expect to have a positive material impact to our net sales and
revenues (see "Subsequent Events"). Otherwise, there are no new
uncertainties, trends or events that are expected to have a material
impact on net sales or revenues or the continuing operations of the
company.
Plan of Operation
Our post-offering plan of operation for the next 12 months is to
expand our sales and marketing efforts in the oil and gas industry, the
industrial water treatment industry and the diesel fuel industry. The
degree of expansion will depend on the success of the offering. We
believe that the cash proceeds from this offering, given a mid-range or
maximum scenario, together with forecasted revenue to be generated by
expanding sales and marketing should satisfy our cash requirements for
the next 3 to 5 years. It is our belief that we have achieved market
credibility with most major oil companies due to the viability of our MFC
product line. With adequate funding, we will be able to capitalize and
expand our business in countries where we have already successfully
introduced our tool. In the past, sales personnel were on a straight
commission basis. We believe that it will be necessary in the future to
hire qualified oil field and industrial sales personnel on a salaried
basis with commission to allow for the effective marketing of Mag-Well,
Inc. products.
Currently, we have outstanding quotes from 12 different customers in
12 different countries. The average unit price of an MFC tool ranges
from $4,000 to $10,000. Over half of the quotes include multiple tool
orders and each quote averages $97,560 exlusive of shipping charges. All
quotes combined total $1,937,500. Our quotes are estimated as a result
of MFC product inquiries accompanied by the completion of a client
information sheet. The initial quotes derived from these client
information sheets are not binding but rather approximate the cost of
purchase. Presently, 2 of the 12 customers are "new" to Mag-Well, Inc.
and have never before used an MFC tool. The remaining 10 customers are
returning for additional purchases. As of June 2000, our outstanding
quotes included PEMECO, Venezuela and Shell Petroleum, Nigeria. Both
quotes have resulted in sales orders. PEMECO issued an irrevocable
purchase order and Shell has paid in full. By employing high-quality,
salaried sales personnel (i.e. agents) worldwide, existing quotes can
become actual purchase orders.
If the Company is able to raise the mid-range or maximum proceeds of
this offering, we intend to file at least two more patent applications.
These patents would apply to variations of our existing tools that have
been modified for use in other industries. We anticipate expenditures in
the areas of research and development both internally and through the
use of an outside independent research institute to aid in testing the
viability of our products for use in the diesel fuel and industrial water
treatment markets.
Our manufacturing plant is located in Edinburg, Texas. This plant
accounts for all of the products manufactured by Mag-Well, Inc., and
requires a minimal amount of capital expenditure (i.e. repair and
maintenance of existing equipment) to maintain
/17/
operations. We believe
the plant can meet planned production levels for at least the next 2 1/2
years without the need for major upgrades or purchases of new equipment.
No plans for reallocating, relocating or expanding our operations
currently exists. We will consider equipment upgrades, and other
operational strategies to the degree required to meet future, additional
demand for our products.
Results of Operations
Six month period ended June 30, 2000 compared to six month period ended
June 30, 1999
For the initial six month period ending June 30, 2000, total
revenues amounted to $76,219. This represents a 55% (decrease) from the
comparable six month period ending June 30, 1999, whereby we realized
$169,111 in total revenues. The decrease was attributable to:
An order received from Venezuela for $574,000 worth of tools has
been manufactured, crated and invoiced. The payment date for this
order was originally scheduled for June 15, 2000. The payment
date was subsenquently moved to September 7, 2000, and as of the
date of this filing we are still awaiting payment. We now require
a wire transfer of funds before the tools will be shipped.
According to our auditors, we cannot book this into accounts
receivable because the tools have not left the factory. We
anticipate, in the near future, that the tools will be paid for in
full and shipped.
Cost of goods sold increased from 49% of total tool sales in 1999
to 54% in 2000. Cost of goods sold can fluctuate somewhat based
upon the mix of the types of tools sold.
General and administrative expenses increased by $3,761 or 4% from
1999 to 2000. This increase is attributable to the necessary
costs correlated with the increase in servicing the signed
contracts in this initial six month period.
Interest expense increased by $2,875 or 18% compared to 1999 due to
increased borrowings on the lines of credit.
The foregoing factors resulted in a net loss of $89,130 in the
initial six month period of 2000 compared to a net loss of
$30,063 in 1999.
Year ended December 31, 1999 compared to year ended December 31, 1998
Total revenue increased $124,423 or 60% for the year ended
December 31, 1999 compared to the year ended December 31, 1998. The
increase was primarily the result of an increase in orders with the
upturn in the oil and gas industry in the latter part of 1999. We
attribute our increased revenue to the upward shift in the price of oil
per barrel at that time.
Cost of goods sold was about 52% of tool sales in 1999 compared to
84% in 1998. Cost of goods sold in 1998 included a $53,000 impairment
in the value of inventory. The $53,000 impairment is in regards to
specialty tools that were manufactured but never delivered due to the
decline in oil prices and the lack of demand to initiate sales. The
impairment that was recorded in 1998 was necessary to reduce the
carrying value of these tools to their estimated market values. No such
impairment was required in 1999. Before the impairment charge in 1998,
cost of goods sold was 54% of total sales, which is comparable to the
percentage in 1999.
General and administrative expenses decreased by $84,158, or 27% in
1999 compared to 1998. This reduction was a continuation of
management's effort to reduce variable overhead costs that began in 1998
in response to a significant reduction in sales volume that began in
1998. As described above, sales volume began to recover in 1999, but
management's efforts to reduce overhead continued in 1999. The
termination of several employees over this 2 year period contributed to
this reduction in overhead.
Interest expense declined by $10,976 or 25% primarily due to the
conversion of a $52,961 note payable into common stock in 1999 and a
reduction in the amortization of discount on notes payable into interest
expense in 1999 compared to 1998.
The Company recorded an extraordinary gain on debt extinguishment
in 1999 of $18,448 due to the conversion of the debt mentioned above and
related accrued interest into common stock with an estimated value that
was $18,448 lower than the debt and accrued interest.
The forgoing factors resulted in a net loss in 1999 of $76,014 and
a loss before extraordinary gain of $94,462, compared to a net loss in
1998 of $298,668.
/18/
Subsequent Events
Since the fiscal year of December 31, 1999, ended, we have
experienced subsequent events that we deem to be material to the
operations of Mag-Well. Following is a list of those events:
(a) On February 14, 2000, Mr. N. Mark Varel, resigned his position
with the company as Executive VP of International Sales and Marketing
in order to pursue other business ventures. Upon his resignation, all
agreements between Mr. Varel and any international representatives
became null and void, and subsequently, letters were sent to all
international representatives and contacts serving notice that Mag-Well
Inc.'s commitment to the international community was in tact and moving
forward. We have since chosen to honor previous commitments by issuing
updated agreements. (See "Exhibit 10e: Sample of Sales Representative
Agreement"). The current format and provisions remain the same as the
previous agreements with Mr. Varel.
Agreements between international representatives consisted of the
following:
The representative agrees to:
1. Assist MagWell in selling product in a specified international
territory.
2. Liaison between MagWell and the customer by transmitting
quotes
and technical data.
3. Provide support to the customer before, during and after the
installation of the tool(s).
In return, Mag-Well agrees to:
1. Advise of sales plans and objectives in the specified
territory
2. Advise of potential customers in the specified territory
3. Provide technical support and data
4. Pay the representative a percent commission for products sold
(exclusive of shipping, handling. customs and
miscellaneous charges)
Furthermore, even with his resignation, Mr. Varel had retained the
shares afforded to him upon his employment with us on July 1, 1994.
Given effect to a 120-to-1 stock split in February 1999, Mr. Varel
has since sold his position of 600,000 shares of common stock in a
private transaction to individuals desirous of investing in Mag-
Well, Inc.
In light of Mr. Varel's departure, we believe that we have
benefitted from his efforts and have established strong contacts in
the international community during his tenure. This is evidenced
through the percentage of international sales derived in the years
1997,1998 and 1999 amounting to 46%, 16% and 28%, respectively.
The Company does not believe that his departure will negatively
impact Mag-Well, Inc.'s ability to service our international
clients.
(b) On March 21, 2000, we entered into a licensing agreement with
PEMECO of Venezuela. Under this agreement, we agreed to allow PEMECO
to partially manufacture three (3) different types of MFC tools in
Venezuela and gave PEMECO the exclusive right to distribute these tools
in Mexico and the rest of Latin America. In exchange, PEMECO executed
an irrevocable purchase order with Mag-Well, Inc. to purchase 240 MFC
tools over a 12 month period. (See "Exhibit 10d: Licensing Agreement
with Petroleum Metallurgic Corporation, C.A.").
Summary of the licensing arrangement with PEMECO is as follows:
* Mag-Well, Inc. agrees to give PEMECO an exclusive manufacturing
and sales agreement for all of Mexico and Latin America for an
intial term of 5 years.
* In return, Mag-Well, Inc. agrees to support sales in Mexico and
Latin America in the form of technical papers, oil shows, seminars
and work shops to expedite and endorse the distribution of Mag-Well
products.
* Mag-Well, Inc. will provide a full-time, on-site Petroleum
Engineer, Hector Partidas, at Mag-Well Inc.'s expense to assist in
all areas with engineering and application of the technology.
* Mag-Well, Inc. will supply PEMECO with completed or partially-
completed full bore tubing MFC units in the following sizes: 2 3/8
inches, 2 7/8 inches and 3 1/2 inches. PEMECO will finish
manufacturing the MFC, which will consist of threading the tubing
with the proper thread types to match the applications and casing
the outside of the MFC according to Mag-Well Inc.'s specification.
At this time, this agreement only covers applications and markets
in the oil & gas industry. The agreement does note that Mag-Well,
Inc. anticipates an expansion of the agreement to include
industrial water treatment tools and diesel fuel equipment.
/19/
(c) Subsequent to this executed agreement, we have applied to the
Export-Import Bank of the United States for approval to guarantee the
PEMECO order. The Export-Import Bank of the United States is an
organization that helps facilitate international trade commerce by
financing U.S. exports. Concurrently, we have also applied to Chase
Bank to extend our business line of credit to be able to handle and
meet the increased manufacturing costs of this particular order. We
believe that twenty tools per month is an optimal amount for our
manufacturing capability, and we estimate that an increase of up to
forty tools per month can be handled without major renovation to our
manufacturing facility.
As of June 2, 2000, our small business policy application has
been approved by the Export-Import Bank. The initial policy
period is for 6 months and the aggregate limit is $600,000. The
specific guarantee for the PEMECO order is limited to $75,000. We
believe that the Export-Import Bank guarantee is not necessary to
finance the PEMECO order. Mag-Well, Inc. is currently
manufacturing the first order for PEMECO with a due date scheduled
for June 15, 2000. As of the date of this filing, the tools have
been manufactured and are ready to be shipped. In addition, the
material terms of the increase to our Chase Bank line of credit
are still under negotiation as of the date of this filing.
/20/
BUSINESS OF THE COMPANY
Industry Background
Our business objective and main focus of operation is to aid oil
and gas producers in their efforts to combat the progressive
accumulation of paraffin and scale deposits found in pumps, pipes and
tubing that restrict the flow of oil and gas. Our process can be
especially useful to these oil and gas producers when applied to the
extraction of crude oil from the ground. (See photos below). Paraffin
is a waxy, crystalline, flammable substance obtained from concentrates
of petroleum or shale oil. Scale deposit is a thin, black, scaly
incrustation of oxide found forming on the surface of a metal.
Together, paraffin and scale deposits reduce a well's production rate,
and eventually, if not treated, will completely stop the flow of oil.
As a consequence, oil and gas producers suffer the expense of removing
these deposits and lose revenue due to periods of downtime in extraction
and production.
Cross-sectional diagram of the build-up of paraffin and scale
deposits in pipes:
<Insert <Insert
Picture> Picture>
Paraffin Scale
Generally, there are three traditional methods to fight paraffin
and scale build-up:
1. Chemical injection - involves using mechanical pumps to inject
chemical solvents into oil wells. The injection of chemical solvents
slows the formation of paraffin and scale deposits;
2. Slick line cutting - involves lowering a cutting device into the
well to physically remove the build-ups; and
3. Hot oil or water treatments - involves pumping hot oil or water
down the well to melt paraffin build-ups.
Each of these methods require oil and gas producers to stop
production for treatment of the pipes and accompanying equipment, and
this downtime translates into lost revenues for these companies.
There are two additional treatments currently being employed to
combat the build-up of paraffin and scale deposits:
4. Microbes or micro-organisms - whereby microbes are placed downhole
at the oil and water contact point. The microbes secrete substances
that act as paraffin inhibitors which slows or interferes with their
build-up. Unfortunately, the microbes are living organisms, and only
work in certain environments. They are unable to work with chemical
injection or hot oil/water treatments; and
5. Magnetic fields in equipment, known as magnetic fluid conditioners
("MFC's") - MFC's increase fluid production by passing the fluid
through strong magnetic fields. These magnetic fields inhibit the
formation and progressively reduces the build-up of paraffin and scale
deposits.
Currently, there is no formal reporting available to quantify the
percentage attributable to each of the described treatments within the
scale and paraffin solutions market.
Mag-Well Patent and Product Description
The MFC is a magneto hydrodynamic generator specifically designed
for the magnetic treatment of precipitating fluids in producing wells.
Magneto Hydrodynamic Generation is the process by which fluids are
directed across a series of magnetic circuits causing a reaction to
solids in fluids (i.e. paraffin and scale) thereby inhibiting the
formation of solids. Fluids are directed across extremely powerful,
controlled magnetic fields. This process alters the growth of paraffin
crystals and scale, thereby inhibiting the formation of solids in the
well and surface equipment.
We own a United States patent for our magnetic fluid conditioner
that was assigned to us January 12, 1993. Our magnetic fluid
conditioner technology is protected under United States Patent No.
5,178,757. Our equipment is designed for the magnetic treatment of
fluids like oil and water that have a depositing tendency. Deposits
cause blockages to form and subsequently slow or halt fluid movement.
The following are specific fluid applications for our magnetic fluid
conditioner:
/21/
(a) oil well production,
(b) diesel fuel treatment,
(c) industrial water, and
(d) other fluids utilized in processing.
Deposit formation in fluids increase energy costs, damage equipment
and decrease the amount a system can produce. Our equipment is a
treatment for:
(a) removing and preventing the build-up of solid scale and paraffin
deposits in oil wells;
(b) treating combustible fuels such as diesel, which improves engine
efficiency while reducing emissions;
(c) treating industrial water in order to reduce scale build-up
(frequent in heat exchange and chemical processes); and
(d) the treatment of commercial buildings for hard water to reduce
scale build-up that damages the plumbing system.
The body and shell of the magnetic fluid conditioner are
constructed with 300 series stainless steel. This 300 series stainless
steel is corrosion resistant and contains at least 12% of the element
chromium. As long as the product is able to operate in a corrosive-free
environment, the MFC is designed to withstand 20 years of service under
normal conditions. The casing of the tool can also be made of titanium
for use in highly corrosive environments. Inside the equipment are a
series of magnetic circuits creating an amount of power per unit area
ranging from 1000 to 8000 Gauss (Gauss is the unit of measure for
magnetism). We have the option of adjusting the Gauss strength
depending on the application. For example, a water application may only
require 1000 Gauss and a diesel fuel application may require 8000 Gauss.
One hundred percent of the fluids produced pass across the magnetic
circuits, which prevent the crystallization of paraffin and scale
deposits inside the slot passage that all fluids flow through (venturi).
Listed below are a few of the strengths and weaknesses associated
with our magnetic fluid conditioner technology:
Strengths
(a) Our equipment requires no electrical or external power.
(b) Our technology is patented and our trade secrets are difficult to
duplicate.
(c) Our magnetic fluid conditioner offers savings by reducing
treatment costs. A reduction in treatment costs may increase a user's
revenues by improving the flow properties of the well, and reducing
production downtime.
(d) Our magnetic fluid conditioner may improve oil flow in cold
weather.
(e) Our magnetic fluid conditioner removes existing scale and inhibits
the formation of new deposits in pumps, tubing, heat exchangers,
separators and other equipment. In addition, it reduces corrosion by
eliminating scale that causes "under-deposit pitting". This is an
occurrence where corrosive elements in the fluid trap scale against the
pipe causing the ultimate failure of the pipe.
Weaknesses
(a) Our product may not provide the results our client requests or
requires. To some extent, praffin and scale problems vary in degree.
Severe build-ups due to these agents may require a combination of
solutions (i.e. our magnetic fluid conditioner along with chemical
treatments).
(b) The use of MFC's is relatively new to the treatment of scale and
paraffin build-up. With any new product or technology introduction,
the new product or technology receives resistance during its initial
commercialization. There are pundits who oppose the magnetic fluid
conditioner technology.
(c) There are a lot of corrosion inhibitors and different types of
chemicals that still need to be used to treat depositing agents,
especially in the oil industry.
Anecdotal Proof
We have accrued numerous field, case study anecdotes conducted by
oil industry leaders, as well as published articles that have
recognized magnetic fluid conditioning technology to be a cost-
effective and environmentally sound solution to the paraffin and
scale deposit problems. These case studies and published articles
were prepared in response to equipment that we sold to client
companies (who in turn did their own analysis and supplied us with a
copy of their analysis). We did not pay any of the client companies
to conduct any of these case studies.
/22/
Manufacturing Process
In order to manufacture our equipment, we purchase several
components that are used in the final MFC product. These components
consist of the following:
* varying sizes of tubing and pipe,
* solid round bar,
* carbon steel,
* stainless steel, and
* special sizes and kinds of rare earth magnets (depending on the
application).
Our manufacturing process consists of machining, welding, and
assembling these components to produce the final product. The magnets
are placed within the equipment so as to contain and focus all of the
magnetic force within the equipment. Although our component suppliers
are limited in number, they are located in the U.S. and materials are
readily available.
Definition of Success
It is important to understand what we call the "Definition of
Success," as the MFC is a mechanically installed tool but serves no
mechanical function. The function of the tool is to treat, or
condition, the fluid. To establish the "Definition of Success," the
end-user must first be given reasonable expectation of potential
benefits to be gained from the MFC. As a result of the treatment, the
response to be witnessed could be one or a combination of the following
fluid characteristic(s) changes:
(a) increase in percentage of asphaltic or paraffin content in fluid
samples taken down stream of the MFC treatment;
(b) reduction of cloud point temperature, which is the point at which
solids in a solution begin to form;
(c) softening of the post-treated, naturally-occurring deposits when
compared to solids that have separated out of a solution as a result of
a chemical reaction before treatment;
(d) reduction in fluid's resistance to flowing or fluid viscosity;
(e) reduction of wax accumulation in pipes to and from wells, pipes to
and from tanks and associated downhole equipment such as gas lift
valves, pumps and pump rods. Gas lift valves are a recovery method
that brings oil from the bottom of a well to the surface using
compressed gas. Gas is pumped to the bottom of the reservoir where it
mixes with the fluid, expands it through a valve and lifts the fluid to
the surface. Pumps are devices that are installed inside or on a
production string (small diameter pipe) that lifts liquids to the
surface. Pump rods assist in the working of the pumps;
(f) reversal of existing depositions;
(g) reduction in the water content found in base, sediment and water
("BS & W")
Our MFC "Definition of Success" of Organic Deposition: One or some
combination of all of the above events will be witnessed as a result of
magnetic fluid conditioning. The result of one or more of the
illustrative fluid changes creates a positive change in the flow
characteristics of the produced fluid. The treatment result(s)
provides an increase in the rate at which natural resources (i.e. oil &
gas) are taken out of the ground per annual producing hour, coupled
with a decrease in deferred production, flattens the projected annual
deferred production profile when compared to the "before treatment"
experience. The resulting increase in producing hours is economically
enhanced with the: (1) reduction or suspension of planned conventional
treatments; (2) reduction of continuous or batch chemical treatments;
(3) reduction of time required to utilize devices termed "pigs" used to
remove deposits as a result of less build-up and softening of new
deposits; (4) non-producing hours as a result of mechanical failures
are reduced due to diminished deposits and softening consistency causes
less physical stress and torque failures of equipment; (5) less
electricity consumption due to reduction of restrictive pressure drops
created by deposits. The combination of all these conditioned fluid
enhancements could result in the return of the initial capital invested
within the first year of use.
In addition, all our MFCs are guaranteed for satisfactory
performance, workmanship and materials for 1 full year from the date of
shipment. Should any manufacturing defects be observed during the
guarantee period and upon proper company examination, the MFC will be
repaired free of charge. Should any tampering with the MFC be evident
to the company, then the guarantee shall not be valid.
Each MFC is custom designed and fabricated to the specifications
of each well, as provided by the client. Should the MFC not perform
satisfactorily then we shall have the option of installing the MFC in
another well of similar conditions and dimensions before taking the MFC
back. If it is determined that the MFC is not performing as warranted,
then we agree to accept return of the MFC.
/23/
Target Markets
We market our MFC tools mainly to oil and gas producers in the oil
and gas industry. But we are expanding our marketing efforts, on a
limited basis, to apply our MFC technology to:
1. Diesel fuel markets on which trucking and marine shipping
companies heavily rely; and
2. Industrial processing markets which entails heat transfer surface
equipment, water towers and hot water systems.
The diesel fuel and industrial processing markets have been
targeted because they each can potentially benefit from the use of our
magnetic fluid conditioning technology applications currently used in
the oil and gas industry. We believe that the use of our tools can
increase production efficiency by minimizing downtime and reducing
costs related to cleaning, repair or replacement of equipment due to
scale and paraffin build-up. We must state that our penetration into
the above market segments has been minimal to date and is not a
material source of revenue for our operations.
Oil & Gas Treatment
Companies servicing oil and gas producers include:
1. Downhole Completion Equipment Companies;
2. Logging/Perforating or Testing Companies;
3. Workover Rigs/Service Companies; and
4. Fluid/Chemical Injection Companies.
MFC's and the other methods of treating paraffin and scale deposits
are also classified under the oil & gas equipment and services industry.
According to a "Standard & Poor's - Oil & Gas: Equipment & Services
Industry Survey" (June 17, 1999), it is estimated that the market for
servicing oil and gas producers is in excess of $100 billion per year.
This figure is approximately equal to the total capital expenditures of
oil and gas producers. Calculating the amount of these expenditures
directly related to addressing the problems associated with scale and
paraffin removal cannot be determined to any great extent. Therefore,
we estimate that oil and gas producers will spend approximately 1% of
that total to repair pipe damage caused by scale and paraffin deposits.
This estimate is based solely on our past experience, and relationships
with oil and gas producers whom we have come in contact with throughout
our years servicing the oil and gas industry. We believe our company is
poised to capitalize on that 1%. (See table below).
Table of the Thirteen Largest Markets Based on Producing Well Count
-------------------------------------------------------------------
Country Producing Poten- No. of Average Mkt. Size in $
(1) Wells tial Tools/ Unit (5)
* MFC Mkt Price
Mkt. (3) (4)
Size
(1)(2)
------- ----- ------- ------- --------------
USA 563,160 25% e 140,790 $ 4,000 $ 563,160,000
CIS 123,970 25% e 30,992 $10,000 $ 309,160,000
(former
Soviet
Union)
e
China 72,328 25% e 18,082 $10,000 $ 180,820,000
e
Canada 48,258 25% e 12,064 $10,000 $ 120,640,000
Venezuela 14,694 25% e 3,673 $10,000 $ 36,730,000
e
Argentina 13,964 25% e 3,491 $10,000 $ 34,910,000
Indonesia 8,661 25% e 2,165 $10,000 $ 21,650,000
Brazil 6,888 25% e 1,722 $10,000 $ 17,220,000
Mexico 3,507 25% e 876 $10,000 $ 8,760,000
Peru 4,031 25% e 1,007 $10,000 $ 10,070,000
Trinidad 4,113 25% e 1,028 $10,000 $ 10,280,000
& Tobago
Colombia 3,038 25% e 759 $10,000 $ 7,590,000
India 3,930 25% e 982 $10,000 $ 9,820,000
------- --------------
Total 870,542 $1,331,570,000
*Source: Oil and Gas Journal, December 20, 1999
/24/
Notes to Table of the Thirteen Largest Markets Based on Producing
Well Count:
(1) (e) - estimate
(2) Industry estimate factor of 25% of producing wells affected by
paraffin and scale deposits is a subjective determination. It was
derived through our network of relationships with oil and gas industry
participants, our experience in evaluating oil fields for this product
and an excess of over 100 oil producing clients whom we have worked
with throughout our operating history.
(3) The figures have been estimated by multiplying the "producing
well" counts of each country and our 25% industry estimate factor of
those wells being affected with deposition problems. It should not be
assumed that a Mag-Well, Inc. Product would be purchased in all cases.
(4) The average unit price of Mag-Well, Inc.'s MFC equipment is
$4,000 USD domestically and $10,000 USD internationally. There is
currently no statistical information relating to the average unit price
for the industry as a whole. Therefore, no inferences can be drawn as
to whether Mag-Well, Inc.'s average unit price is above or below the
industry average.
(5) The market size in $ for each country was calculated by
multiplying the respective number of tools per market with the
respective average price point established by Mag-Well, Inc.
Based on this table, we forecast an estimated oil and gas market
for our equipment totalling approximately $1.3 billion. This does not
necessarily mean that we will be able to successfully realize this
entire revenue potential. In fact, our best revenue producing year was
1997 when we generated $923,742 in MFC product sales. Also, in
reference to the table, we have sold MFC equipment to eleven of the
thirteen countries, excluding Columbia and Peru, since commencement of
operations in 1988.
Diesel Fuel Treatment
Business practices have placed more emphasis on transporting
freight via the road and seas. As a consequence, more regional and
local delivery companies are purchasing Class 8 size vehicles (or 18-
wheel long-haul trucks as they are more commonly known). Trucking and
marine shipping companies rely mainly on the use of diesel powered
transportation vehicles to transport freight. Today's increasing
environmental concerns, and a desire to decrease fuel costs have led
many of these companies to look for ways to decrease the amount of
diesel fuel they consume. We believe that the installation of our MFC
will result in savings due to the incremental reduction of diesel fuel
consumption. The following market data displays the market potential
available for the MFC fuel equipment:
(a) According to the U.S. Department of Transportation, Bureau of
Transportation Statistics, National Transportation Statistics 1999,
there are approximately 7 million trucks in the U.S. alone, to date;
(b) According to the U.S. Department of Energy, Energy Information
Administration, on-highway diesel consumption has increased annually
reaching an estimated 33 billion gallons in 1999 (See table below);
and
The following table demonstrates the increase in use of diesel
fuel in the United States, for the period 1994 to 1999.
Total Estimated Fuel Consumption (Thousand Gasoline-Equivalent
Gallons)
-----------------------------------------------------------------
Fuel 1994 1995 1996 1997(1) 1998(1)(2) 1999(1)(2)
----- ---- ---- ---- ---- ---- ----
Diesel 27,293,370 28,555,040 30,101,430 31,949,270 32,460,640 33,111,570
Source: U.S. Department of Energy, Energy Information Administration
Notes to Total Estimated Fuel Consumption:
(1) These estimates have been revised.
(2) These estimates are preliminary totals.
Given that it is a necessity to consume diesel fuel to operate a
diesel engine and that diesel operators' are desirous of improving
fuel efficiency, we believe our diesel MFC is a tool that can help
achieve this end. We believe that based on market data and initial,
internal anecdotal case studies using equipment manufacutered by Mag-
Well, Inc., we will be able to penetrate the diesel fuel treatment
industry. Initial pricing for our diesel fuel MFC is $1,000 per unit.
Initial revenues derived from the diesel fuel treatment market have
been insignificant and are immaterial to date.
Microbial Contamination (Algea)
Hydrorcarbon distillates such as diesel fuel, gasoline fuel, jet
fuel and hydraulic oil are oganic fluids. They are food for bacteria,
fungi, yeast and mold that deteriorate the quality of the fuel.
Microbes can be airborne or waterborne (water is always present in
fuels). Modern refining techniques, additives, fuel storage and
transport systems all contribute to contamination and are determining
factors in the shelf life of fuel. Additives, in particular those rich
in nitrogen and phosphosrus, enhance microbail growth and accelerate the
breakdown of fuel.
/25/
How the Diesel MFC Works
Microbes are very small, one-celled organisms - a membrane filled
with cellular fluid and electrolytes. Their metabolism and reproduction
depend on an electric balance over the cell membrane. Any disturbance
to this delicate balance is detrimental to the cell's life-sustaining
functions. The process of converting kinetic energy into electrical
energy by means of a magnetic field is known as induction. The diesel
MFC provides a magnetic treatment chamber through which the microbes
move, providing kinetic energy. This causes an electric current that
disrupts the electrical balance of the cell membrane thus killing the
microbes and decontaminating the fuel. The tool is installed in-line
with the intake process of diesel fuel to be used in combustible
engines. The diagram below depicts the installation of the diesel MFC:
<Insert Installation Diagram>
Heat Transfer Treatment
Heat exchanger fouling is caused by the initial deposition and
subsequent accumulation of unwanted material on a surface area where air
transfers from hot to cold. Fouling impacts the performance of heat
transfer. The unwanted deposits have low thermal conductivity (ability
to transfer heat), which increases the resistance to heat transfer and
reduces the thermal efficiency of the heat transfer surface.
Traditional methods of removing deposits from heat transfer areas
are costly and require the replacement of existing equipment. Through
initial successes using our equipment, the water MFC can rectify a wide
variety of scaling and depositing issues economically without the
replacement of existing equipment. Our initial revenues derived from
this market have been insignificant and are immaterial to date.
Benefits of Water MFC
Our water MFC equipment is able to retard scale formation in heat
exchange processes and may produce the following benefits:
(a) reduced maintenance costs through less frequent cleaning;
(b) minimization or elimination of hazardous cleaning operations and
disposal of hazardous cleaning chemicals;
(c) capital cost reduction with the elimination of heat transfer
equipment over-sizing and/or redundancy;
(d) lower energy cost due to reduced pumping power requirements to
overcome tube plugging by fouling solids.
<Insert Water Diagram>
Water MFC installed in a water tower
/26/
Alternative Applications of the Water MFC
Our water MFC can be used in commercial building to reduce calcium
and other forms of scale from damaging pipes in large buildings and
manufacturing complexes. The annual expenditure in the chemical
treatment of water may also be minimized through the use of our water
MFC.
Our water MFC can also apply to the treatment of hard water for
homes. There will be a more efficient design and installation of the
residence's plumbing collage, fewer destroyed pipes, less clog filtering
and an increase to the life of the water heater. The majority of our
efforts, however, have been focused on industrial uses for our
equipment. Making our products cost-efficient for home use will take
more research and development. At present, we have no material plans in
place for expanding the use of our products into the home market.
Further utilization of the water MFC can be applied to desalination
plants, nuclear power plants and the food processing industries.
Desalination plants suffer from scale problems due to the large amounts
of water processing and heat transfer. Nuclear power plants suffer from
similar water processing problems as desalination plants, and have water
storage issues that can benefit from MFC treatment. In food processing
industries, the MFC equipment is marketable due to the restrictions on
chemical usage. Other alternative applications include unique forms of
process-oriented, biological manufacturing. We mention these other
usages only to show the vast potential applications for our products.
Business Growth Strategy
Principal elements that are essential to our growth strategy are as
follows:
Regional Sales Representation
We seek to recruit and develop a professional sales force who have
previous experience in selling to each of the target markets we hope to
penetrate. Through these established relationships, we hope to ensure
the proper introduction of the our magnetic fluid conditioner into each
market. Also, we believe that by instituting regional sales teams we
will enhance our Company's ability to provide quality customer support
services, and at the same time allow us to react quickly to changes in
local markets and customer demands. It is our intention to develop
strong relationships with our customers and prospective customers to
attempt to identify and anticipate their needs.
Alternative Financing Programs
We will attempt to assist clients desirous of obtaining financing
to purchase our MFC equipment. We do not personally provide financing
for our customers, but rather help them to coordinate this process with
an outside leasing agency. Leases are obtained by clients who cannot
afford to pay a lump sum amount for multiple equipment orders. The
development of this alternative financing program will allow us to close
more substantive contracts and generate more predictable revenue
streams. Under this program, the customer will make fixed payments that
are typically less than their current treatment expenditures. To date,
revenues attributable to this alternative financing program are minimal.
Pursue Strategic Acquisitions and Alliances
We believe that there are numerous opportunities to acquire other
businesses with:
(a) established bases,
(b) compatible operations,
(c) experience in additional or emerging magnetic fluid treatment
services and technologies, and
(d) experienced management.
We believe that these acquisitions, if successful, will allow us an
opportunity to increase our revenue and income growth. At this point in
time, we logically cannot pursue such a strategy given our present
financial condition.
Marketing Strategy
Following the completion of this offering, we intend to expand the
scope of our marketing and distribution channels and to enhance our
ability to identify, reach and retain a broad range of customers
through:
/27/
(a) a focused marketing approach,
(b) various advertising and media channels, and
(c) a targeted market education.
Our intention to implement a marketing campaign will educate
targeted decision-makers on our magnetic fluid conditioner technology
and help them realize the benefits and reliability obtained through its
use. Our marketing campaign will coincide with the hiring of sales
staff so as not to outsell the ability to maintain quality customer
relationships. The industry focused marketing campaign is intended to
leverage our sales efforts by qualifying customers needs and interests
before a salesperson sets an initial meeting. It is our objective that
the campaign will increase brand visibility and product awareness. To
implement this campaign, we will need the following:
(a) mailing or publishing firm,
(b) client tracking database system, and
(c) printed marketing material.
Advertising
Industry journals offer a direct communication vehicle to decision-
makers in each of our target markets. For example, the petroleum
industry offers several major magazines aimed at decision-makers in the
oil and gas industry. We may utilize previous advertisements to run
current ads in these publications. In addition, we intend to hire a
leading marketing and advertising firm to maximize our communications
impact. Ad placements in industry journals and magazines will create
brand awareness and increase perceived product efficacy, which will in
turn support the direct efforts of our company's sales force.
In addition, we have implemented and are generating new business
leads from our Internet web site at www.magwell.com. A "Customer
Information Sheet" can be found on the website that enables customers to
compile their specific product requirements prior to speaking with a
sales representative. Future plans include the addition of a "Monthly
News Page." This page will cover a different story each month
describing a client's success with our product and will also summarize
press releases and published articles covering our progress.
Additionally, we have plans to pursue networking opportunities,
because the oil industry offers hundreds of conferences, seminars and
meetings for all industry segments each year. We have designed a
portable exhibition center that will be used for major conferences, such
as the annual Offshore Technology Conference held in Houston, Texas.
Another channel we intend to develop is public relations.
Generally, magazine editors find space to cover topical issues that
include their advertisers. It is our intent to utilize press releases
to announce:
(a) major clients,
(b) new countries where our MFC equipment is introduced
(c) and other success stories.
Executive assistance from strategic partners, major customers and
research institutes will assist in making appointments with trade
journal editors for our representatives. In addition, we plan to
utilize the PR Newswire to generate broad interest in application of
magnetic technologies.
Education
Magnetic fluid conditioner technology is in its infancy. We will
need to educate potential clients of the applications and benefits of
this technology. The implementation of our marketing campaign will be
aided by tools to educate the market on magnetic fluid conditioner
enhancement. We will utilize an interactive CD-ROM video and regional
seminars as mediums to reach potential clients. We hope to expand our
market size and create new business opportunities by educating
potential clients as to the benefits of using our technology.
Operations Strategy
Our initial operating objectives following this offering are to:
(a) develop and expand our organizational structure;
(b) further product(s) research and development;
(c) increase geographical sales coverage; and
/28/
(d) implement an aggressive marketing campaign.
In addition, obtaining increased manufacturing efficiency and cost-
effectiveness from our existing operations are core to our objectives.
This will result in increased productivity and lower operating costs.
Additionally, cost and process improvement programs will be implemented
to:
(a) reduce delivery time,
(b) increase distribution capacity,
(c) continue customer orientation and
(d) improve process control.
Organizational Development
We intend to staff several positions key to implementing our growth
strategy. Due to the increased need for investor relations and business
reporting, a Chief Financial Officer will be hired. In addition, a Vice
President of Sales and Marketing will be retained, who will be
responsible for staffing and managing the Sales Department. It is our
belief that the addition of these and other key staff positions will
prepare us to develop and manage revenue growth.
Facilities and Equipment Upgrade
We currently seek to maximize internal growth through the
maintainenance of our facilities, machinery and equipment. Given the
ability to generate adequate capital, we hope to modernize and improve
our facilities to respond to competition resulting from changes in
industry standards with the objective of focusing operations on
increasing production capacity and efficiency. In addition, we plan to
develop material handling and processing systems because we recognize
that efficient systems (not just efficient equipment) increase
productivity.
Engineering and Product Development
It is our intention to continue product research and development
that will allow us to pursue additional patents to fully protect our
proprietary technologies. Our research and development efforts will
focus primarily on: (i) enhancing the magnetic fluid conditioner and
its reliability and (ii) assisting our sales organization and customers
with special requirements and products. For the past 2 years we have
not been able to expand our research and development efforts due to
limited capital budgeting.
Geographical Coverage
Given the completion of this offering and the receipt of adequate
funding, we plan to hire, train and place 2 salespersons every few
months. The sales staff will be hired in their respective regions to
open both domestic and international offices. Regional demand will
determine which areas will be opened first. The strategic placement of
salespersons will reduce travel expenses and increase the personal
contact with existing and potential clients.
Business Condition
For the year ended December 31, 1997, we had $923,742 in gross
revenues. It was obvious that we needed to expand and diversify our
operations into other markets in order to increase our revenue base. We
began modifying our MFC equipment utilized in oil wells by applying our
technology to scaled-down magnetic fluid conditioning equipment used in
diesel fuel and industrial processing treatments. An oil and gas
industry downturn occurred within the latter half of 1997, which
continued on into the 1998 and 1999 calendar years, whereby the price
per barrel of oil decreased. This decrease in oil price hindered our
ability to continue research and development activities due to financial
constraints. In addition, Halliburton Energy Services was a material
customer who accounted for 33% of total sales in 1998, with whom we
subsequently had terminated our distribution arrangement on July 8,
1998.
With over a decade's worth of experience marketing and selling our
magnetic fuel conditioners, we have amassed a number of internal
anecdotal case studies that support the efficacy and viability of the
magnetic fluid conditioner. We continue to believe that the MFC
equipment and technology are viable alternatives to costly chemical
treatment processes encountered in the oil and gas, transportation and
industrial processing industries. We believe that the capital raised
through this offering will allow us to continue our focus on the oil and
gas industry while allowing us to diversify our business into the
transportation (i.e. trucking and marine) and industrial processing
(i.e. heat exchanger, water purification) market segments.
/29/
Facilities
Our office is located at 404 Lakeview Drive, Boerne, Texas 78006.
An officer and director at no expense provide this office to us. In
addition, our manufacturing facility is located at 122 East Wisconsin,
Edinburg, Texas 78539, and is comprised of 4,000 square feet. There is
an outside fenced storage yard and parking lot approximately 1 acre in
size. We currently lease these facilities at a rate of $1,062.00 USD
per month, which expires on January of 2001 with a 90-day notice of
cancellation or renewal. If additional facilities are needed, we
believe that suitable expansion space is available to meet our future
needs at commercially reasonable terms. Currently, our offices and
manufacturing facility provides sufficient workspace to continue with
operations. (See "Exhibit 10c - Manufacturing Facility Lease
Agreement").
Employees
We currently have 6 full-time and 2 part-time employees. Within
the first 12 months of operations following the successful completion of
this offering, we expect to have approximately 10 full time employees.
Our employees are currently not represented by a collective bargaining
agreement, and we believe that our employee relations are good. We
have entered into employment contracts with Messieurs William W.
Dillard, Jr., and John Corney. (See "Executive Compensation").
Legal Proceedings
To our current knowledge, no current or pending litigation, and no
claims or counter claims involving us as a plaintiff or a defendant
exist.
/30/
MANAGEMENT
The following sets forth certain information with respect to the
executive officers, directors, key employees and advisors of our company
as of the date of this prospectus:
NAME AGE POSITION
---- --- --------
William W. 49 President and Chief Executive
Dillard, Jr. Officer
John D. 53 Chief Operations Officer
Corney
Fawaz Mourad 48 Director
William W. Dillard, Jr., President and CEO - Our Chief Executive
Officer, William W. Dillard, Jr., has more than 20 years of business
management and entrepreneurial experience. Mr. Dillard graduated from
the University of Mississippi before starting in the real estate
business in Dallas, Texas. He founded "Dillard & Associates," a
commercial real estate firm that owned and managed real estate
investment projects. As a Commercial/Industrial Real Estate Broker,
Mr. Dillard was involved in every facet of the business, including
industrial site selection for many major industrial users, industrial
leasing and development, shopping center development, re-development,
leasing and management, apartment re-development and management and
land sales, ownership, and development. His company was one of the
larger commercial brokerage companies in Dallas. Mr. Dillard's
experience also includes acquisitions and divestitures for large
finance and publicly owned companies in the process of restructuring.
During the 1980's, several large companies and financial institutions
utilized Mr. Dillard's experience to assist in the disposal of excess
real estate holdings. In 1990, Mr. Dillard became President and
majority stockholder of our company by providing the "seed money" to
help develop and test-prove the magnetic fluid conditioner's
effectiveness, as well as start the current manufacturing facilities
located in Edinburg, Texas. As a co-founder of the company, Mr.
Dillard has developed successful methods and strategies for the sale of
the MFC.
John D. Corney, Chief Operations Officer - John Corney, the
inventor of Mag-Well's magnetic fluid conditioner, was educated in
Australia at the University of Queensland (he graduated in 1961) where
he specialized in electronics and geophysics. He is considered an
expert and one of the world's most knowledgeable individuals in magnetic
fluid technology and has published many articles and papers on Magnetic
Fluid Treatments, including the Southwest Petroleum Short Course Paper
presented at Texas Tech University in 1993. Prior to founding Mag-Well,
Inc., in June of 1988, Mr. Corney was employed with the Hydroworld
Corporation (circa 1980-1988) and held the positions of Vice President
and Design Engineer. During his tenure, he headed the design and
manufacturing of MFC's for industrial water treatment and technical
sales. In addition, for seven years (1963-1970), Mr. Corney was a field
engineer for a major geophysical exploration company (United GeoPhyiscal
Corporation) specializing in the development and operation of magnetic
playback centers.
Since founding the company, Mr. Corney is in charge of design,
research and development, and manufacturing. His early work with
magnetic and water treatment led directly to his development and
application of MFC's for the treatment of oil wells. His work led to
the patent now held by Mag-Well. Mr. Corney has worked diligently in
developing and expanding Mag-Well's patented MFC technology and trade
secrets. Additionally, he has redesigned the production process of the
MFC to improve the product line's gross margin.
Fawaz Mourad, Director - Mr. Mourad was born in London, England,
and now lives in Beirut, Lebanon. Mr. Mourad has a Master's Degree in
Business Administration from the University of Southern California and a
Joint Honors Degree in Physics and Chemistry (Bachelor of Science) from
the University of Manchester in the United Kingdom. He presently is co-
owner of one of the largest Middle Eastern oilfield distribution and
service companies, Al Fardouss International. In addition, Mr. Mourad
is a co-owner of Envirotech, a full-service engineering company
providing enviromental alternatives to major industries throughout the
Middle East. Mr. Mourad's businesses operate in Egypt, Lebanon, Oman,
Yemen, Syria, Lebanon and the United Arab Emirates.
Mr. Mourad became a Director of Mag-Well, Inc. on August 31, 1995,
and brings forth 15 years of experience in marketing and providing
services to the oilfield and industrial markets in the Middle East. He
is a member of the International Chamber of Commerce in Lebanon and
Syria, and is a member in Egypt's International Economic Forum in Cairo.
/31/
NOTES TO MANAGEMENT:
(1) Officers serve at the discretion of the Board of Directors.
Directors are elected for 1 year terms until their successors are
elected and qualified. This election is at the annual meeting of
shareholders that is presently scheduled for a day in the month of
April in each year, beginning with the year 1989, unless a decision to
choose another date is fixed by the Board of Directors.
(2) None of our executive officers or directors have been the subject
of any order, judgment or decree by any federal or state agency that
would prevent him/her from acting as an investment advisor,
underwriter, broker or dealer in the securities offered.
(3) Effective February 14, 2000, Mr. N. Mark Varel (Executive Vice
President of International Sales and Marketing) resigned his position
with the company in order to pursue other business ventures. We expect
to hire a replacement for the vacated post within the next 12 to 24
months. (See "Management's Discussion and Analysis - Subsequent
Events").
Limitation of Director's Liability
Our "Articles of Incorporation" eliminate, subject to certain
exceptions, the personal liability of directors to the company or our
shareholders for monetary damages for breaches of a directors' duty of
care or other duties as a director. Our "Articles of Incorporation" do
not provide for the elimination of or any limitation on the personal
liability of a director for:
(a) any appropriation, in violation of the director's duties, or any
business opportunity of the company,
(b) acts or omissions that involve intentional misconduct or a knowing
violation of law,
(c) unlawful corporate distributions or
(d) any transaction from which the director received an improper
benefit.
In addition, our Bylaws provide broad indemnification rights to
directors and officers so long as the director or officer acted in a
manner believed in good faith to be in, or not opposed to, the best
interests of the company; and with respect to criminal proceedings, if
the director had no reasonable cause to believe his or her conduct was
unlawful.
These provisions of the "Articles of Incorporation" and "Bylaws"
generally limit the remedies available to a you, as a shareholder, who
may be dissatisfied with a decision by us. We have been advised that,
in the opinion of the SEC, indemnification for certain directors,
officers and controlling persons of our company in accordance with the
foregoing provisions explained and listed above is unenforceable.
/32/
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid to our
executive officers for the calander years of 1998 & 1999:
Annual Compensation Awards Payouts
--------------------------------------- -------------- ----------------
Name & Other Restr Securit Long-Ter All Ot
Principal Annual icted ies Und m Incent her Co
Position Compen Stock erlying ive Plan mpensa
Year Salary Bonus sation Award Options Payouts tion
($) ($) ($) (#) ($) ($)
William W. 1999 60,000 0 0 0 0 0 0
Dillard, Jr.
President 1998 60,000 0 0 0 0 0 0
and CEO
John D. 1999 60,000 0 0 0 0 0 0
Corney
Chief
Operations
Ofcr. 1998 60,000 0 0 0 0 0 0
-------------------------------------------------------------------------
The following table sets forth all cash compensation to be paid to
our executive officers when this offering is complete and the activities
of our company grow:
Name of Position with Company Annual
Individual Salary
------------ --------------------- ------
William W. President and Chief $60,000
Dillard, Jr. Executive Officer
John D. Chief Operations Officer $60,000
Corney
Employment Agreements
Mr. William W. Dillard, Jr., formally entered into an employment
contract with Mag-Well as Chief Executive Officer on August 15, 1995,
for a period of 4 years commencing on the date of execution and, from
that point forward, on an at will basis. As such, Mr. Dillard is
currently working on an at will basis with us. This agreement provided
for the services of Mr. Dillard, to the fullest extent, as President and
CEO at a salary of $60,000. His salary is payable in bi-weekly
installments, with additional future compensation at the sole and
absolute discretion of the Board of Directors. The employment agreement
includes confidentiality and non-competition provisions that restrict
him from using the company's information and clientele for personal uses
and from engaging in a competing business. (See "Exhibit 10a:
Employment Contract - Mr. William W. Dillard, Jr.").
Mr. John D. Corney formally entered into an employment contract
with Mag-Well as Chief Operating Officer on August 15, 1995, for a
period of 4 years commencing on the date of execution and, from that
point forward, on an at will basis. As such, Mr. Corney is currently
working on an at will basis with us. This agreement provided for the
services of Mr. Corney, to the fullest extent, as Chief Operations
Officer at a salary of $60,000. His salary is payable in bi-weekly
installments, with additional future compensation at the sole and
absolute discretion of the Board of Directors. The employment agreement
includes confidentiality and non-competition provisions that restrict
him from using the company's information and clientele for personal uses
and from engaging in a competing business. In addition, upon voluntary
and involuntary termination of Mr. Corney's employment, the company
shall have the option for a period of 90 days from the date of such
termination to purchase his ownership interest in the company. If the
option is exercised, the purchase price shall be equal to the greater
of:
(a) $100,000 (said amount increases to $250,000 during year 2 and 3)
or
(b) 50% of the fair market value of Mr. Corney's ownership interest in
Mag-Well.
(See "Exhibit 10b: Employment Contract - Mr. John D. Corney").
/33/
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents certain information as of May 4, 2000,
with respect to the beneficial ownership of our common stock by:
(a) each person who is known to be the beneficial owner of more than
5.0% of any outstanding share;
(b) each director and executive officer of our company; and
(c) all executive officers and directors as a group.
Currently, there are 12,313,000 shares issued and outstanding
common stock. Please note that unless otherwise specified, the named
beneficial owner has, to our knowledge, sole voting and investment
power.
Common Stock
------------
Name of Number of Pre-Offer % of Post Offer %
Beneficial Shares Class of Class1
Owner
---------- --------- --------------- -----------
William W. 5,811,560 47.20% 33.57%
Dillard, Jr.4
John Corney 2,386,440 19.38% 13.78%
Fawaz Mourad3 540,000 4.39% 3.12%
All Directors
and Executive
Officers as a 8,738,000 70.97% 50.47%
group (4
persons)2
NOTES:
(1) The post offer percentage of class assumes that the maximum number
of shares of common stock will be issued from this offering (i.e.
5,000,000 shares). The total amount of shares outstanding after a
maximum offering will be 17,313,000.
(2) Officers and directors as a group control approximately 8,738,000
of the 12,313,000 issued and outstanding shares of common stock
(70.97%). After the maximum offering, the group of officers and
directors will control approximately 50.47%.
(3) Mr. Fawaz Mourad is the sole owner of "AP GeoCenter Consultancy,
Ltd.," and owns stock of Mag-Well through this entity. The total
amount the entity owns is 540,000 shares of common stock.
(4) Mr. William W. Dillard, Jr., President and CEO, sold 400,000 of
his personal shares to various individuals. Mr. Dillard did not
solicit these individuals to purchase personal stock that he owned of
Mag-Well, Inc. These transactions are private transactions according
to Section 4(2) of the Securities Act. Proceeds from the sales of the
shares were used to reduce personal debt.
STOCK OPTION PLAN
We currently do not have a formal employee stock option plan. Our
Board of Directors may institute a formal stock option plan upon the
successful conclusion of the offering.
/34/
CERTAIN TRANSACTIONS
Our History and Organization
On June 20, 1988, we were incorporated under the laws of the State
of Texas as Mag-Well, Inc. At the time, we were authorized to issue
1,000,000 shares of common stock at no par value.
On June 20, 1988, we issued 19,887 shares of common stock to our
founder, Mr. John Corney, which were fully paid and non-assessable.
All shares were issued under Section 4(2) of the Securities Act of
1933.
On December 1, 1989, we issued 51,763 shares of common stock to
the second founder, Mr. William W. Dillard, Jr., which were fully paid
and non-assessable. All shares were issued under Section 4(2) of the
Securities Act of 1933.
In a statement filed with the Secretary of State of Texas on
November 14, 1991, it was amended that our registered agent be changed
from Mr. John Corney to proclaim that Mr. William W. Dillard, Jr., as
the duly appointed registered agent of Mag-Well, Inc.
On July 1, 1994, we issued 5,000 shares of common stock to an
officer and director, Mr. N. Mark Varel, which were fully paid and non-
assessable. These shares were issued as part of an employee
compensation incentive to Mr. Varel at the time of his joining our
company. He has since left his position as an employee and
commissioned sales agent of our company. All shares were issued under
Section 4(2) of the Securities Act of 1933.
During 1994, we completed an offering of shares of common stock of
the company in accordance with Regulation D, Rule 505 of the Securities
Act of 1933, whereby we sold 23,350 shares to approximately 16
unaffiliated shareholders of record, none of whom were or are officers
and directors of our company. These shares were sold at a price of
$50.00 per share.
In 1996 the Company issues the following debt instruments:
A note with an original face amount of $100,000 payable to an
individual was issued June 1996 at an interest rate of 16% to mature
after the payment of monthly principal and interest through September
1999 collateralized by an interest in leased equipment.
Unsecured notes with a total original face of $110,000 payable to
individuals was issued March 1996 at an interest rate of 10% to mature
after the payment of 36 monthly installments of principal and interest
beginning in May 1996.
Unsecured notes with an original face amount of $50,000 payable to an
individual was issued June 1996 at an interest rate of 10% to mature
after the payment of 12 quarterly installments of principal and
interest.
The Company had sold products to a separate company owned by Mr.
N. Mark Varel, an officer and director of Mag-Well, Inc., totaling
$91,505 in 1999 and $71,286 in 1998. The amount receivable from this
company was $44,450 at December 31, 1999 and $5,932 at December 31,
1998. In February 2000 Mr. Varel resigned from Mag-Well, Inc. and
dissolved his company. The balance due Mag-Well, Inc. was paid at that
time.
We filed a "Certificate of Amendment of Articles of Incorporation
- (After Issuance of Stock)" on March 12, 1999. In this statement it
certified that:
(a) There were 100,000 shares of common stock issued and outstanding.
(b) On February 15, 1999, at a duly noticed meeting of the
shareholders of Mag-Well, Inc., a vote was taken whereby 71,650 shares
voted in favor and none voted against a motion to approve the
amendments to the Articles of Incorporation. The amendments, in
effect, authorized us to issue 20,000,000 shares of common stock and
5,000,000 shares of preferred stock, par value $0.001
(c) On February 15, 1999, at a duly noticed meeting of the
shareholders of Mag-Well, Inc., a vote was taken whereby 71,650 shares
voted in favor and none voted against a motion to approve the proposal
to split forward the common shares outstanding (100,000 shares at the
time) at a rate of 120 to 1.
In 1999, a note payable totalling $52,961 was converted to 60,000
shares of common stock (see Note 6 to the Notes to Financial
Statements).
/35/
On March 2, 1999, we completed an offering of shares of common
stock of the company in accordance with Regulation D, Rule 504 or the
Securities Act of 1933, whereby we sold 150,000 shares to approximately
1 unaffiliated shareholder of record, who was not and is not an officer
or director of our company. The shares were sold at a price of $0.05
per share.
On April 5, 1999, we completed an offering of shares of common
stock of the company in accordance with Regulation D, Rule 504 of the
Securities Act of 1933, whereby we sold 223,000 shares of common stock
to approximately fifty-three (53) shareholders of record, none of whom
were or are officers or directors of our company. One of these
shareholders was the purchaser of the 150,000 shares on March 2, 1999.
The shares were purchased at a price of $0.50 per share.
On or about April 7, 1999, we filed 5 copies, one of which was an
original, of an amended Form D "Notice of Sales Pursuant to Regulation
D" notifying the Securities and Exchange Commission that the offering
was exempt from the registration provisions of Section 5 of the
Securities Act in accordance with Regulation D, Rule 504 of this same
act. On August 25, 1999, an amended copy of our Form D was filed with
the SEC, correcting a typographical error.
/36/
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 20,000,000 shares of
common stock and 5,000,000 shares of preferred stock, $0.001 par value
per share. The common stock being registered will have the same
dividend, voting and preemption rights as the outstanding common
described in this section. The following summary about certain
provisions of our common stock and preferred stock is not complete and
is subject to the provisions of our "Articles of Incorporation" and
bylaws.
Common Stock
As a holder of our common stock,:
(a) you have equal rights to dividends from funds legally available,
ratably, when as and if declared by our Board of Directors;
(b) you are entitled to share, ratably, in all of our assets available
for distribution upon liquidation, dissolution, or winding up of our
business affairs;
(c) you do not have preemptive, subscription or conversion rights and
there are no redemption or sinking fund provisions applicable;
(d) you are entitled to 1 vote per share of common stock you own, on
all matters that stockholders may vote, and at all meetings of
shareholders; and
(e) your shares are fully paid and non-assessable.
There is no cumulative voting for the election of directors. We
have approximately 12,313,000 shares of common stock issued and
outstanding that are held by 72 shareholders of record. (See "Principal
Shareholders").
Preferred Stock
We are also authorized to issue up to 5,000,000 shares of preferred
stock, $0.001 par value. Although, we have not issued any preferred
stock to date, nor have we developed the descriptive attributes of these
preferred shares, we can issue shares of preferred stock in series with
such preferences and designations as our board of directors may
determine. Our board can, without shareholder approval, issue preferred
stock with voting, dividend, liquidation, and conversion rights. This
could dilute the voting strength of the holders of common stock and may
help our management impede a takeover or attempted change in control.
/37/
LEGAL MATTERS
The validity of our shares of common stock offered will be passed
upon by Thomas C. Cook & Associates, Ltd., Las Vegas, Nevada.
EXPERTS
Our audited financial statements, as of December 31, 1999, and for
the years ended December 31, 1999 and 1998 are included in this
registration statement. These financial statements are in reliance upon
the reports of Hein + Associates, LLP, independent certified public
accountants. Upon the authority of these said individuals, Hein +
Associates, LLP, are considered experts in accounting and auditing.
ADDITIONAL INFORMATION
Inquiries to the SEC
We have filed with the SEC a registration statement on Form SB-2 with
respect to the shares of common stock offered. This prospectus does not
contain all of the information set forth in the registration statement.
You can find additional information about us and our common stock in the
registration statement. For example, in this prospectus we've
summarized or referred to some contracts, agreements and other documents
that have been filed as exhibits to the registration statement. The
registration statement, including its exhibits and schedules, may be
inspected without charge at the SEC's principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies may be obtained from
that office, upon payment of the applicable fees. Information about the
Commission's public reference room can be obtained by calling 1-(800)
SEC-0330. The registration statement, including its exhibits and
schedules, are also available on the SEC's website at www.sec.gov.
We are subject to the information requirements of the Securities
and Exchange Act of 1934, and accordingly will file reports, proxy
statements, and other information with the SEC. These materials can be
inspected and copied at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, or at its
regional offices at 500 West Madison Street, Suite #1400, Chicago,
Illinois 60661, and 7 World Trade Center, Suite #1300, New York, New
York 10048. And copies of these materials can be obtained from the
SEC's Public Reference Section at 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. Some information about us is also
available on the SEC's website at www.sec.gov.
/38/
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 17,313,000 shares of
common stock outstanding given a maximum offering.
(a) Of these outstanding shares, the 5,000,000 shares being sold in
this offering, in addition to approximately 373,000 shares that are
currently unrestricted, will be immediately eligible for resale in the
public market without restriction.
(b) The remaining 12,000,000 shares of common stock held by certain
officers, directors, employees, consultants and other shareholders were
sold by us in reliance on exemptions from the registration requirements
of the Securities Act and are "restricted" securities within the
meaning of Rule 144 under the same act. These restricted securities
may not be sold publicly unless they are:
(1) registered under the Securities Act;
(2) sold in accordance with Rule 144; or
(3) another exemption from registration.
In general, under Rule 144 as currently in effect, beginning
approximately 90 days after the effective date of the registration
statement of which this prospectus is a part, a stockholder, including
an affiliate, who has beneficially owned his or her restricted
securities (as that term is defined in Rule 144) for at least 1 year
from the later of the date such securities were acquired from the
company or (if applicable) the date they were acquired from an affiliate
is entitled to sell, within any 3 month period, a number of such shares
that does not exceed the greater of 1% of the then outstanding shares of
common stock or the average weekly trading volume in the common stock
during the 4 calendar weeks preceding the date on which notice of such
sale was filed under Rule 144, provided certain requirements concerning
availability of public information, manner of sale and notice of sale
are satisfied. In addition, under Rule 144(k), if a period of at least
2 years has elapsed between the later of the date restricted securities
were acquired from the company or (if applicable) the date they were
acquired from an affiliate of the company, a stockholder who is not an
affiliate of the company at the time of sale and has not been an
affiliate of the for at least 3 months prior to the sale entitled to
sell the shares immediately without compliance with the foregoing
requirements under Rule 144.
/39/
ACCOUNTING, TAX, INSURANCE, AND LEGAL ISSUES
Accounting Policies
We intend to furnish our stockholders with annual reports
containing financial statements audited by our independent certified
public accountants, who will be engaged during or immediately upon the
completion of this offering, and such other reports as we deem
appropriate or as may be required by law. All accounting policies and
audits will be conducted in accordance with the generally accepted
accounting principles ("GAAP") of the United States. We intend to
utilize the FIFO (First In, First Out) inventory accounting methods
under GAAP.
Tax Issues
Under the current U.S. tax codes, our corporate tax rate will be
about 36%. Additionally, we will be able to deduct up to $19,000 for tax
years beginning in 1999 and $20,000 for tax years beginning in 2000 on
certain capital expenditures for office equipment (i.e. personal
computers, copiers, telephones systems, etc.), instead of amortizing
such equipment over several years. The maximum amount is reduced by a
dollar for each dollar of the cost of qualified property placed in
service during the tax year over $200,000. This deduction is in
accordance with the United States Federal Tax Code amendments enacted in
1993 for small businesses like us. Specifically, this deduction
allowance is included in Section 179 of the I.R.S. Tax Code.
Currently, we have no state corporate income tax as it is not
required in the state of Texas. We are assessed a franchise tax
according to the Texas Administrative Code (Tax Code-Chapter 171:
Franchise Tax). The franchise tax is imposed on each corporation that
is chartered in Texas or has a "Certificate of Authority" to do business
in Texas. The company pays the greater of the tax on (1) net taxable
capital or (2) net taxable earned surplus.
Taxable capital is a corporation's stated capital (capital stock)
plus surplus. Surplus means the net assets of a corporation minus its
stated capital. Taxable capital is apportioned using a single gross
receipts factor. Taxable capital for an annual report is based on the
end of the corporation's last accounting period in the year prior to the
year in which the report is due. The tax rate on taxable capital is
0.25% per year of privilege period.
Earned surplus basically includes federal net taxable income, plus
compensation paid to officers and directors of a corporation. S-
corporations and corporations with fewer than 36 shareholders are
generally exempt form the compensation add-back. For the earned surplus
calculation, unitary income is apportioned using a single gross receipts
factor. In addition, non-unitary income is allocated to Texas if Texas
is the corporation's commercial domicile. Earned surplus for an annual
report should be reported beginning with the day after the ending date
on the previous franchise tax report and ending with the end of the
corporation's last federal accounting period in the year prior to the
year in which the report is due. The tax rate on earned surplus is
4.5%.
Key Man Insurance
We currently have a $250,000 "Key Man" life insurance on John
Corney, Chief Operations Officer. There are no additional "Key Man"
life insurance polices for any of our other officers and directors, but
we intend to provide such coverage in the near future.
Legal Matters
We are not currently involved in any litigation or other legal
matter that could adversely effect our company's performance. Any
future litigation could have a materially adverse effect on the ultimate
success of our business.
/40/
PART F/S
Mag-Well, Inc.
Financial Statements
Index To Financial Statements
Page
FINANCIAL STATEMENTS
For the Six Month Period Ended
June 30, 2000
Balance Sheet (Unaudited) 42
Statement of Operations 43
(Unaudited)
Statements of Cash Flows 44
(Unaudited)
Notes to Financial Statements 45
FINANCIAL STATEMENTS
For the Fiscal Years Ended
December 31, 1999 and 1998
Independent Auditors' Report 46
Balance Sheet 47
Statements of Operations 48
Statements of Stockholders' Equity 49
(Deficiency)
Statements of Cash Flows 50
Notes To Financial Statements 51-55
/41/
MAG-WELL, INC.
BALANCE SHEET
June 30, 2000
(Unaudited)
ASSETS
--------
CURRENT ASSETS:
Cash and cash equivalents $ 521
Trade accounts receivable (net of allowance for 18,720
doubtful accounts of $10,253)
Inventory (net of valuation allowance of $80,000) 425,616
-------
Total current assets 444,857
PROPERTY AND EQUIPMENT, net 57,981
OTHER ASSETS -
Deferred offering costs 28,950
----------
Total assets $ 531,788
==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Trade accounts payable $ 82,893
Lines of credit payable 73,801
Current portion of notes payable 132,546
Accrued payroll 147,900
Accrued expenses and other liabilities 186,853
-------
Total current liabilities 623,993
COMMITMENTS
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.001 stated value, 5,000,000 shares
authorized, -
no shares issued and outstanding
Common stock, $.001 stated value, 20,000,000 shares
authorized, 12,313
12,313,000 shares issued and outstanding
Additional paid-in capital 2,443,335
Deferred offering costs (136,250)
Accumulated deficit (2,411,603)
-----------
Total stockholders' deficiency (92,205)
Total liabilities and stockholders' deficiency ---------
$ 531,788
=========
See accompanying notes to these financial statements.
/42/
MAG-WELL, INC.
STATEMENTS OF OPERATIONS
Six Months Ended June
30,
2000 1999
(Unaudited) (Unaudited)
REVENUES:
Tool sales $ 72,336 $ 158,574
Lease revenue 3,883 10,537
------- -------
Total revenue 76,219 169,111
COST OF GOODS SOLD 39,093 78,312
------- -------
Gross margin 37,126 90,799
GENERAL AND ADMINISTRATIVE EXPENSES 108,941 105,180
OTHER INCOME (EXPENSES):
Interest expense (18,557) (15,682)
Gain on disposition of assets 935 -
Other 307 -
-------- --------
Total other income (expense) (17,315) (15,682)
NET LOSS $ (89,130) $ (30,063)
========== ==========
NET LOSS PER SHARE (basic and diluted): $ (0.01) $ *
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 12,313,000 12,000,000
========== ==========
* Less than $(.01) per share
See accompanying notes to these financial statements
/43/
MAG-WELL, INC.
STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
2000 1999
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(89,130) $(30,063)
Adjustments to reconcile net loss to net cash
provided (used)
by operating activities:
Depreciation and amortization 14,000 17,000
Change in receivables 67,137 (116,573)
Change in inventory (138,383) 93,762
Change in accounts payable, accrued expenses
and other liabilities 104,393 31,443
Other 6,501 (11,742)
------ --------
Net cash provided (used) by operating (35,482) (16,173)
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (29,406) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) of line of credit 33,901 -
Checks issued in excess of balances - 23,680
Deferred offering costs (3,000) (25,950)
------- --------
Net cash provided (used) by financing 30,901 (2,270)
activities
NET CHANGE IN CASH AND CASH EQUIVALENTS (33,987) (18,443)
CASH AND CASH EQUIVALENTS, beginning of 34,508 18,443
period ------- -------
CASH AND CASH EQUIVALENTS, end of period $ 521 $ -
======= =======
See accompanying notes to these financial statements
/44/
MAG-WELL, INC.
NOTE TO UNAUDITED FINANCIAL STATEMENTS
Six Months ended June 30, 2000
1. Unaudited Information
The financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. However, in the opinion of management, all
adjustments (which consist only of normal recurring adjustments)
necessary to present fairly the financial position and results of
operations for the periods presented have been made.
These financial statements should be read in conjunction with the
Company's December 31, 1999 financial statements and the notes included
in the Company's Form SB-2 Registration Statement.
/45/
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Mag-Well, Inc.
McAllen, Texas
We have audited the accompanying balance sheet of Mag-Well, Inc. as of
December 31, 1999, and the related statements of operations, changes in
stockholders' equity (deficiency) and cash flows for the two years then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Mag-Well,
Inc. as of December 31, 1999, and the results of its operations and its
cash flows for the two years then ended, 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,
the Company's significant operating losses and limited financial
resources raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 2. The accompanying financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Hein + Associates llp
Dallas, Texas
March 17, 2000
/46/
MAG-WELL, INC.
BALANCE SHEETS
December 31, 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 34,508
Trade accounts receivable (net of allowance for 41,407
doubtful accounts of $10,737)
Receivable from related party 44,450
Inventory (net of valuation allowance of $80,000) 287,233
-------
Total current assets 407,598
PROPERTY AND EQUIPMENT, net 42,575
OTHER ASSETS -
Deferred offering costs 25,950
-------
Total assets $ 476,123
=========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Trade accounts payable $ 27,232
Lines of credit payable 39,900
Current portion of notes payable 126,045
Accrued payroll 117,900
Accrued expenses and other liabilities 168,121
-------
Total current liabilities 479,198
COMMITMENTS (Note 7)
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.001 stated value, 5,000,000 shares
authorized, -
no shares issued and outstanding
Common stock, $.001 stated value, 20,000,000 shares
authorized, 12,313
12,313,000 shares issued and outstanding
Additional paid-in capital 2,443,335
Deferred offering costs (136,250)
Accumulated deficit (2,322,473)
Total stockholders' deficiency (3,075)
Total liabilities and stockholders' deficiency $ 476,123
See accompanying notes to these financial statements.
/47/
MAG-WELL, INC.
STATEMENTS OF OPERATIONS
Years Ended
December 31,
1999 1998
REVENUES:
Tool sales $ 313,317 $ 180,249
Lease revenue 17,432 26,077
Total revenue 330,749 206,326
COST OF GOODS SOLD, including $53,000
valuation 161,720 150,958
impairment in 1998
Gross margin 169,029 55,368
GENERAL AND ADMINISTRATIVE EXPENSES 230,052 314,210
OTHER INCOME (EXPENSES):
Interest expense (33,439) (44,415)
Gain (loss) on disposition of assets - 4,557
Other - 32
Total other income (expense) (33,439) (39,826)
LOSS BEFORE EXTRAORDINARY GAIN (94,462) (298,668)
EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT 18,448 -
NET LOSS $ (76,014) $ (298,668)
LOSS PER SHARE (basic and diluted):
Extraordinary gain $ * $ -
Net loss (0.01) (0.02)
WEIGHTED AVERAGE SHARES OUTSTANDING 12,264,000 12,000,000
* Less than $0.01 per share
See accompanying notes to these financial statements
/48/
<TABLE>
<CAPTION>
MAG-WELL, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1999 AND 1998
Additional Deferred
Common Stock Paid-In Offering Accumulated
<S> Shares Amount Capital Costs Deficit Total
<C> <C> <C> <C> <C> <C> <C>
BALANCES, January 1, 1998 12,000,000 $ 12,000 $ 2,227,148 $ - $ (1,947,791) $ 291,357
Net loss - - - - (298,668) (298,668)
---------- -------- ----------- -------- ------------- ---------
BALANCES, December 31, 12,000,000 12,000 2,227,148 - (2,246,459) (7,311)
1998
Shares rescinded (120,000) (120) 120 - - -
Conversion of notes 60,000 60 29,940 - - 30,000
payable to equity
Shares issued for cash 100,500 100 50,150 - - 50,250
Shares issued for deferred 272,500 273 135,977 (136,250) - -
offering costs
Net loss - - - - (76,014) (76,014)
---------- -------- ----------- ---------- ----------- --------
BALANCES, December 31, 12,313,000 $ 12,313 $ 2,443,375 $(136,250) $(2,322,473) $ (3,075)
1999
</TABLE>
See accompanying notes to these financial statements
/49/
MAG-WELL, INC.
STATEMENTS OF CASH FLOWS
Years Ended
December 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES: ------- -------
Net income (loss) $ (76,014) $(298,668)
Adjustments to reconcile net loss to net cash
provided (used)
by operating activities:
Extraordinary gain (18,448) -
Depreciation and amortization 38,076 46,430
Loss on inventory impairment - 53,000
(Gain) loss in disposition of assets - (4,557)
Change in receivables (63,036) 137,107
Change in inventory (7,291) (76,562)
Change in accounts payable, accrued expenses
and other liabilities 76,962 154,967
Other - (4,491)
-------- --------
Net cash provided (used) by operating (49,751) 7,226
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of leased equipment (5,162) (2,415)
Sale of leased equipment 6,778 9,094
-------- --------
Net cash provided by investing activities 1,616 6,679
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of stock 50,250 -
Proceeds from line of credit 39,900 -
Repayments of notes payable - (15,717)
Deferred offering costs (25,950) -
-------- --------
Net cash provided (used) by financing 64,200 (15,717)
activities
NET CHANGE IN CASH AND CASH EQUIVALENTS 16,065 (1,812)
CASH AND CASH EQUIVALENTS, beginning of year 18,443 20,255
------- -------
CASH AND CASH EQUIVALENTS, end of year $ 34,508 $ 18,443
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 14,674 $ 3,315
Notes payable converted to equity 30,000 -
Stock issued for deferred offering costs 136,250 -
See accompanying notes to these financial statements
/50/
MAG-WELL, INC.
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business
Mag-Well, Inc. (the "Company"), is engaged in manufacturing and
marketing throughout the world certain patented Magnetic Fluid
Conditioner tools. Sales in total to companies outside the
United States were approximately 28% and 16%,respectively of
total sales in 1999 and 1998. These tools control the buildup of
deposits in pipelines, flowlines and other equipment causing
blockages. In addition, the Company pursues research and
development programs to extend its current product line and to
improve existing products.
2. Summary of Significant Accounting Policies
Statement of Cash Flows
The Company considers all short-term investments with an original
maturity of three months or less to be cash equivalents.
Inventory
Inventory, consisting of raw materials, sub-assemblies, finished
product and accessories, is stated at the lower of cost (first-
in, first-out) or market value. Inventory by major classification
consisted of the following at December 31, 1999:
Raw materials $ 50,069
Work-in-process 92,123
Finished goods 225,041
---------
Total 367,233
---------
Less valuation allowance (80,000)
$ 287,233
===========
Revenue Recognition
The Company records the sale of tools upon shipment. In
addition, the Company occasionally leases equipment to customers
under operating leases. The Company records rental income when
payments are due under the leases.
Earnings (Loss) Per Share
Basic earnings or loss per share ("EPS") is calculated by
dividing the income or loss available to common shareholders by
the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
Property and Equipment
The Company's property and equipment is stated at cost.
Depreciation expense is computed on the straight-line method over
the estimated useful lives of the assets, which range from 5 to 7
years. Leased equipment consists of finished tools leased to
customers by the Company. Tools are recorded at cost and
depreciated using the straight line method over the lease term.
Income Taxes
The Company accounts for income taxes under the liability method,
which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been
included in the financial
/51/
MAG-WELL, INC.
NOTES TO FINANCIAL STATEMENTS
statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference
between the financial statements and tax bases of assets and
liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
Comprehensive Income (Loss)
Comprehensive income is defined as all changes in stockholders'
equity, exclusive of transactions with owners, such as capital
investments. Comprehensive income includes net income or loss,
changes in certain assets and liabilities that are reported
directly in equity such as translation adjustments on investments
in foreign subsidiaries, and certain changes in minimum pension
liabilities. The Company's comprehensive income (loss) was equal
to its net income (loss) for the years ended December 31, 1999
and 1998.
Use of Estimates
The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires
the Company's management to make estimates and assumptions that
affect the amounts reported in these financial statements and
accompanying notes. Actual results could differ from those
estimates.
Going Concern
The accompanying financial statements have been prepared on a
going concern basis, which contemplates the realization of assets
and liquidation of liabilities in the normal course of business.
The Company has incurred recurring losses and has a working
capital deficit of approximately $71,600 as of December 31, 1999.
The continuation of the Company as a going concern is dependent
upon obtaining additional long-term debt and/or equity financing
to meet its obligations and provide marketing and operating funds
to achieve and maintain profitable operations. With the increase
in oil prices in 2000, management anticipates an increase in
capital spending by oil companies which would significantly
reduce or eliminate net losses through improved sales to oil and
gas industry customers. Management is also in the process of
attempting to raise capital through a $5,000,000 direct public
offering. Management expects to use funds received through the
offering to expand upon newly identified markets and to continue
development of new applications for its tools in order to
diversify its customer base. Management of the Company has
committed to reducing expenses and attempting to settle and
obtain extended terms on its existing debt.
3. Property and Equipment
Property and equipment consisted of the following at December 31,
1999:
Office furniture, equipment and
improvements $ 79,972
Machinery and equipment 75,946
Vehicles 29,957
-------
185,875
Less accumulated depreciation (148,595)
---------
$ 37,280
=========
Leased equipment $ 40,378
Less accumulated depreciation (35,083)
---------
$ 5,295
Depreciation expense was $27,775 in 1999.
/52/
MAG-WELL, INC.
NOTES TO FINANCIAL STATEMENTS
4. Lines of Credit
The Company established a line of credit during 1999 with a bank
for up to $75,000 with interest payable at prime plus 2% (total
of 10.5% at December 31, 1999), and with a finance company for up
to $30,000, with interest at prime plus 6% (total of 14.5% at
December 31, 1999). The borrowings under the lines of credit are
unsecured, but are guaranteed by a major stockholder of the
Company. The total borrowings at December 31, 1999 were $39,900.
5. Notes Payable
Notes payable and long-term debt consisted of the following at
December 31, 1999:
Note payable to an individual, interest at 16%,
payable in monthly installments through September
1999, collateralized by an interest in leased $ 42,445
equipment
Unsecured notes payable to individuals, interest
at 10%, principal and interest are payable in 36
monthly installments beginning in May 1996 (1) 43,559
Unsecured notes payable to an individual,
interest at 10%, principal and interest are 53,149
payable in 12 quarterly installments beginning in
October 1997 (1) ------
Total notes payable 139,153
Discounts on notes payable (net of accumulated
amortization of $49,391) (1)
(13,108)
--------
Notes payable, net of discounts 126,045
Less current portion (126,045)
---------
$ -
=========
(1)Discounts on notes payable result because the notes included
an agreement to issue shares of common stock to the
noteholders. The discount is the amount of cash received
which was allocated to equity. The equity component of the
amount invested by the noteholders was recorded based on the
amount paid by investors who acquired equity interests only
during the same time period. The discounts are amortized to
interest expense using the interest method, based on an
average effective interest rate of 40%, over the terms of the
notes. The amortization of the discounts was $10,301and
$13,857 in 1999 and 1998, respectively.
The Company is delinquent on the payments on these notes as of
December 31, 1999, and principal and interest are thus payable
upon demand.
6. STOCKHOLDERS' EQUITY
In February 1999, the Company's stockholders authorized a 120 to
1 stock split with par value changing from $.01 per share to
$.001 per share. At the same time, total authorized common stock
was increased to 20,000,000 shares from 1,000,000 shares and
5,000,000 shares of preferred stock were authorized.
In 1999, a note payable totaling $52,961 was converted into
60,000 shares of common stock, valued at $30,000. The related
accrued interest of $4,851 was forgiven. The note payable, net of
discount, was recorded at $43,597. This amount and the related
accrued interest exceeded the estimated fair value of the stock
by $18,448. The Company recorded an extraordinary gain for this
amount.
/53/
MAG-WELL, INC.
NOTES TO FINANCIAL STATEMENTS
7.Commitments
The Company leases a manufacturing facility in McAllen, Texas
subject to a non-cancellable operating lease agreement which
expires in January 2001. The Company had total rent expense of
$13,714 and $13,560 for the years ended December 31, 1999 and 1998,
respectively. The total minimum rental commitments at December 31,
1999 are as follows:
Years Ending
------------
2000 $ 13,910
2001 1,168
----------
$ 15,078
==========
The Company has employment agreements with two stockholders, which
require total annual payments of $120,000 through August 2000.
8. Fair Value of Financial Instruments and Concentrations of Credit
Risk
The Company's financial instruments are cash, accounts receivable
and payable, lines of credit payable and notes payable. Management
believes the fair values of these instruments approximate the
carrying values, due to the short-term nature of the instruments,
and the interest rates, as applicable.
Financial instruments that subject the Company to credit risk are
cash equivalents and accounts receivable. The Company's accounts
receivable are primarily from large oil companies throughout the
world. At December 31, 1999, the Company had accounts receivable
in excess of 10% of the total accounts receivable from four
customers, which aggregated 82% of the total balance. The Company
does not ordinarily require collateral from its customers, nor
perform credit evaluations. The Company believes the allowance for
doubtful accounts is adequate.
9. Major Customers
The Company had sales to three customers in 1999 that amounted to
68% of total sales that year. The Company had sales to one customer
in 1998 that amounted to 33% of total sales that year.
10. Related Party Transactions
The Company had sales to a company owned by an officer and director
of the Company totaling $91,505 and $71,286 for 1999 and 1998,
respectively. The amount receivable from this company was $44,450
and $5,932 at December 31, 1999 and 1998, respectively. In
February 2000 the officer and director resigned from the Company
and dissolved his company. The balances due the Company were paid
at that time.
/54/
MAG-WELL, INC.
NOTES TO FINANCIAL STATEMENTS
11. Income Taxes
The Company had no income tax expense in 1999 and 1998 due to net
losses. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. The Company's deferred tax assets and
liabilities as of December 31, 1999 were as follows:
Deferred tax assets
(primarily net operating
loss carryforward) $ 515,000
Deferred tax liabilities
(primarily property and (16,000)
equipment)
Valuation allowance (499,000)
---------
Net deferred tax $ -
balance =========
The Company had a net operating loss carryforward for federal
income tax purposes as of December 31, 1999 of approximately
$1,500,000 which will expire, if unused, in 2006 through 2019.
/55/
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Our Directors and Officers
Our Bylaws, when approved by the present Board of Directors,
provide for indemnification of our directors, officers and employees,
past and present, as follows:
(a) All expenses and liabilities reasonably incurred by or imposed
upon him/her in connection with any proceeding to which he/she may be
made a party, or in which he/she may become involved as an agent of
the corporation.
(b) Our Board of Directors may direct the purchase of liability
insurance by way of implementing the provisions of this Article.
(c) Our Bylaws do not authorize indemnification in such cases where
the director, officer, employee or agent is legally found guilty of
any willful act of unlawful manner in the performance of his/her
duties.
Furthermore, our Articles of Incorporation states that a director
or officer shall not be personally liable to the company or our
stockholders for damages due to breach of fiduciary duty as a director
or officer, and shall be indemnified and held harmless to the fullest
extent legally permissible under the laws of the state.
Our Articles of Incorporation do not authorize indemnification in
such cases where:
(a) There are acts or omissions which involve intentional misconduct,
fraud or a knowing violation of the law.
(b) There is unlawful payment of dividends.
(c) It is ultimately determined by a court of competent jurisdiction
that he or she is not entitled to be indemnified by the corporation.
Our Bylaws provide for indemnification of officers, directors and
others to the fullest extent permitted by the laws of the state of
Texas. We have been advised that, in the opinion of the SEC,
indemnification for liabilities arising under the Securities Act is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. Given this information, we may submit to a
court of appropriate jurisdiction the question of whether such
indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final judicial decision of
that issue.
By appointment, our Bylaws and Articles of Incorporation are
available for review by all appropriate persons, during the
appropriate business hours of the company.
Item 25. Other Expenses of Issuance and Distribution1
The following table sets forth the estimated expenses payable by
us in connection with this offering (excluding commissions):
Nature of Expenses Amount
------------------ -------
SEC Registration
Fee $ 1,390
Accounting Fees and
Expenses $ 18,000
Legal Fees and
Expenses $ 30,000
Printing
Expenses $ 7,000
Blue Sky Qualification Fees and
Expenses $ 10,000
Transfer Agent's
Fee $ 5,000
--------
TOTAL $ 71,390
(1) The amounts set forth above, except for the SEC fees, are in each
case estimated.
/56/
Item 26. Recent Sales of Unregistered Securities
During the past 5 years, we have issued unregistered securities
to a limited number of persons, as described below. No underwriters
or underwriting discounts or commissions were involved. We believe
that each transaction was exempt from the registration requirements of
the Securities Act, in accordance with Regulation D, Rules 504 and
505, and in accordance with Section 4(2) of the same act.
Accordingly, on or about April 7, 1999, we filed five copies, one of
which was an original, of an amended Form D "Notice of Sales Pursuant
to Regulation D" notifying the SEC that the offering was exempt from
the registration provisions of Section 5 of the Securities Act in
accordance to Regulation D, Rule 504 of the same act. Furthermore, on
August 25, 1999, an amended copy of our Form D was filed with the SEC,
correcting a typographical error.
(a) During April 1994, we completed an offering of shares of common
stock of the company in accordance with Regulation D, Rule 505 of the
Securities Act of 1933, whereby we sold 23,350 shares to approximately
16 unaffiliated shareholders of record, none of whom were or are
officers and directors of our company. The shares were sold at a
price of $50.00 per share.
(b) On July 1, 1994, we issued 5,000 shares to an officer and
director, Mr. N. Mark Varel, which were fully paid and non-assessable.
All shares were issued under Section 4(2) of the Securities Act of
1933. Subsequently, effective February 14, 2000, the aforementioned
officer and director resigned to pursue other business ventures. (See
"Management's Discussion and Analysis - Subsequent Events"). Mr.
Varel sold his personal stock totaling 600,000 shares, reflective of
the 120-to-1 stock split, to individuals desirous of investing in Mag-
Well, Inc. This transaction is considered a private transaction
according to Section 4(2) of the Securities Act.
(c) We filed a "Certificate of Amendment of Articles of Incorporation
- (After Issuance of Stock)" on March 12, 1999. In this statement it
certified that:
(1) There were 100,000 shares of common stock issued and outstanding.
(2) On February 15, 1999, at a duly noticed meeting of the
shareholders of Mag-Well, Inc., a vote was taken whereby 71,650 shares
voted in favor and none voted against a motion to approve the
amendments to the "Articles of Incorporation." The amendments, in
effect, authorizes us to issue 20,000,000 shares of common stock and
5,000,000 shares of preferred stock, par value $0.001
(3) On February 15, 1999, at a duly noticed meeting of the
shareholders of Mag-Well, Inc., a vote was taken whereby 71,650 shares
voted in favor and none voted against a motion to approve the proposal
to split forward the common shares outstanding (100,000 shares at the
time) at a rate of 120 to 1.
(d) On March 2, 1999, we completed an offering of shares of common
stock of the company in accordance with Regulation D, Rule 504 of the
Securities Act of 1933, whereby we issued 150,000 shares in exchange
for $7,500 of offering costs to 1 unaffiliated shareholder of record,
who was not and is not an officer or director of our company. (See
Table below).
(e) On April 6, 1999, we completed an offering of shares of common
stock of the company in accordance with Regulation D, Rule 504 of the
Securities Act of 1933, whereby we sold 100,500 shares to
approximately 52 unaffiliated shareholders of record for cash, none of
whom were or are officers and directors of our company. In addition,
122,500 shares were issued in exchange for offering costs to the
purchaser of the 150,000 shares on March 2, 1999. (See Table below).
The following table represents the beneficial ownership of shares
held by each person as completed on March 2, 1999 and April 6,
1999, respectively, for the offering of shares.
Name of Common Percenta Date Offeri Transacti Exemption
Beneficial Stock ge Owned Purchase ng on Type
Owner Owned d Price
----------- ------ -------- -------- ------ --------- ---------
Campbell Mello 150,000 1.21% 3/2/99 $0.05 $7,500.00 Reg. D,
Associates Rule 504
---------
Total Sold = 150,000 1.21% Total $ = 7,500.00
/57/
Name of Beneficial Common Percenta Date Offeri Transacti Exemption
Owner Stock ge Owned Purchase ng on Type
Owned d Price
------------------- ------ -------- -------- ----- -------- ---------
Joe McCart 2,000 0.02% 4/6/99 $0.50 $1,000.00 Reg. D,
Rule 504
Ted Geistweidt 2,000 0.02% 4/6/99 $0.50 $1,000.00 Reg. D,
Rule 504
Mangold Roofing 4,000 0.03% 4/6/99 $0.50 $2,000.00 Reg. D,
Rule 504
Gary Shuler 2,000 0.02% 4/6/99 $0.50 $1,000.00 Reg. D,
Rule 504
L.D. Webb 4,000 0.03% 4/2/99 $0.50 $2,000.00 Reg. D,
Rule 504
Gauntt Gamily L.L.C. 2,000 0.02% 4/6/99 $0.50 $1,000.00 Reg. D,
Rule 504
Patricia Eytcheson, 2,000 0.02% 4/6/99 $0.50 $1,000.00 Reg. D,
Trustee Rule 504
Bob Dimler 2,000 0.02% 4/6/99 $0.50 $1,000.00 Reg. D,
Rule 504
Clifford H. Collen, 2,000 0.02% 4/6/99 $0.50 $1,000.00 Reg. D,
Jr Rule 504
Gregg R. Gandy 2,000 0.02% 4/6/99 $0.50 $1,000.00 Reg. D,
Rule 504
Kirk Rentz 2,000 0.02% 4/6/99 $0.50 $1,000.00 Reg. D,
Rule 504
Jerry Rentz, Jr. 2,000 0.02% 4/6/99 $0.50 $1,000.00 Reg. D,
Rule 504
Frances J. Metheny, 2,000 0.02% 4/6/99 $0.50 $1,000.00 Reg. D,
Trustee Rule 504
Robert A. and 2,000 0.02% 4/6/99 $0.50 $1,000.00 Reg. D,
Frances J. Metheny Rule 504
Catherine F. James 2,000 0.02% 4/5/99 $0.50 $1,000.00 Reg. D,
Rule 504
Thomas R. and Stacy 2,000 0.02% 4/5/99 $0.50 $1,000.00 Reg. D,
C. James Rule 504
Thomas R. James 2,000 0.02% 4/5/99 $0.50 $1,000.00 Reg. D,
Rule 504
Frances D. James 2,000 0.02% 4/5/99 $0.50 $1,000.00 Reg. D,
Rule 504
David Hamilton James 2,000 0.02% 4/5/99 $0.50 $1,000.00 Reg. D,
Rule 504
Wm. G. and Susan D. 4,000 0.03% 4/5/99 $0.50 $2,000.00 Reg. D,
Hendrickson Rule 504
Robin Hendrickson 2,000 0.02% 4/5/99 $0.50 $1,000.00 Reg. D,
Rule 504
William R. 2,000 0.02% 4/5/99 $0.50 $1,000.00 Reg. D,
Hendrickson Rule 504
Sarah M. and Robert 2,000 0.02% 4/5/99 $0.50 $1,000.00 Reg. D,
W. Woodward, Jr. Rule 504
Harold D. Wright 1,000 0.01% 4/5/99 $0.50 $ 500.00 Reg. D,
Rule 504
Marcy G. Wright 1,000 0.01% 4/5/99 $0.50 $ 500.00 Reg. D,
Rule 504
Eric D. Wright 1,000 0.01% 4/5/99 $0.50 $ 500.00 Reg. D,
Rule 504
Steve B. Wright 1,000 0.01% 4/5/99 $0.50 $ 500.00 Reg. D,
Rule 504
T. McCullough 2,000 0.02% 4/5/99 $0.50 $1,000.00 Reg. D,
Strother Rule 504
James M. Stabler 2,000 0.02% 4/5/99 $0.50 $1,000.00 Reg. D,
Rule 504
Douglas L. Phillips 2,000 0.02% 4/1/99 $0.50 $1,000.00 Reg. D,
Rule 504
Andreas Grossman 5,000 0.04% 3/30/99 $0.50 $2,500.00 Reg. D,
Rule 504
Robert W. Floyd 500 0.00% 4/6/99 $0.50 $ 250.00 Reg. D,
Rule 504
M. Craig Clark 500 0.00% 4/6/99 $0.50 $ 250.00 Reg. D,
Rule 504
John Nichols 500 0.00% 4/6/99 $0.50 $ 250.00 Reg. D,
Rule 504
Christopher P. 500 0.00% 4/5/99 $0.50 $ 250.00 Reg. D,
Renaud Rule 504
Armand Smith, Jr. 500 0.00% 4/5/99 $0.50 $ 250.00 Reg. D,
Rule 504
Matthew J. Parsley 500 0.00% 4/5/99 $0.50 $ 250.00 Reg. D,
Rule 504
Charles Wesley 2,000 0.02% 4/6/99 $0.50 $1,000.00 Reg. D,
Goyer, Jr. Rule 504
C. Wesley Goyer, III 2,000 0.02% 4/6/99 $0.50 $1,000.00 Reg. D,
Rule 504
John T. Beecherl 500 0.00% 4/5/99 $0.50 $ 250.00 Reg. D,
Rule 504
Thirsty Assets, L.P 500 0.00% 4/5/99 $0.50 $ 250.00 Reg. D,
Rule 504
Robert R. Beecherl 500 0.00% 4/5/99 $0.50 $ 250.00 Reg. D,
Rule 504
Gordon D. May 2,000 0.02% 4/5/99 $0.50 $1,000.00 Reg. D,
Rule 504
WCS Oil & Gas Corp 4,000 0.03% 4/5/99 $0.50 $2,000.00 Reg. D,
Rule 504
Richard C. Latham 5,000 0.04% 4/5/99 $0.50 $2,500.00 Reg. D,
Rule 504
Sueann T. Fernandes 2,000 0.02% 3/31/99 $0.50 $1,000.00 Reg. D,
Rule 504
Sandy M. Fernandes 2,000 0.02% 3/31/99 $0.50 $1,000.00 Reg. D,
Rule 504
Mark J. Fernandes 2,000 0.02% 3/31/99 $0.50 $1,000.00 Reg. D,
Rule 504
Robert Osborn 2,000 0.02% 4/5/99 $0.50 $1,000.00 Reg. D,
Rule 504
Diana Osborn 2,000 0.02% 4/5/99 $0.50 $1,000.00 Reg. D,
Rule 504
Addison Osborn 2,000 0.02% 4/5/99 $0.50 $1,000.00 Reg. D,
Rule 504
Austin Osborn 2,000 0.02% 4/5/99 $0.50 $1,000.00 Reg. D,
Rule 504
Campbell Mello 122,500 0.99% 3/30/99 $0.50 $61,250.00 Reg. D,
Associates Rule 504
Total Sold = 223,000 1.80% Total Sold = $ 119,000.00
Total Outstanding
Common Stock = 12,313,000 100.00%
/58/
NOTES TO TABLE:
(1) The facts that we relied on in claiming exemptions under
Regulation D, Rule 504 for these transactions are as follows: The
Company was not, at that time, subject to the reporting requirements
of section 13 or 15(d) of the Exchange Act (see Rule 504 (a)(1)), was
not an investment company (see Rule 504 (a)(2)), was not a development
stage company with no specific business purpose or a business purpose
to engage in a merger or acquisition (see Rule 504 (a)(3)), and the
aggregate offering price of the two combined Rule 504 offerings did
not exceed $1,000,000, nor did the company sell in excess of
$1,000,000 worth of securities in the 12 months previous to the
offerings (see Rule 504 (b)). The requirements of the current Rule
504 (b)(1) were not in effect until April 7, 1999, and thus would not
apply to the offerings in question.
Item 27. Exhibits and Financial Data Schedule
Exhibits. The following is a complete list of Exhibits filed as
part of this registration statement.
Exhibit Escrow Agreement with Chase Bank of Texas, Rendered as
2a: National Association Previously Filed
Exhibit Amendment to Escrow Agreement with Chase Bank
2b: of Texas, N.A.
Exhibit Articles of Incorporation - June 20, 1998 Rendered as
3a: Previously Filed
Exhibit Articles of Amendments to Articles of Rendered as
3b: Incorporation - November 14, 1991 Previously Filed
Exhibit Articles of Amendments to Articles of Rendered as
3c: Incorporation - May 4, 1994 Previously Filed
Exhibit Articles of Amendments to Articles of Rendered as
3d: Incorporation - March 12, 1999 Previously Filed
Exhibit Bylaws of Mag-Well, Inc.
3e:
Exhibit 5: Attorney Legal Opinion and Consent Letter
Exhibit Employment Contract - Mr. William W. Dillard, Rendered as
10a: Jr. Previously Filed
Exhibit Employment Contract - Mr. John D. Corney Rendered as
10b: Previously Filed
Exhibit Manufacturing Facility Lease Agreement Rendered as
10c: Previously Filed
Exhibit Licensing Agreement with Petroleum Rendered as
10d: Metallurgic Corporation, C.A. (PEMECO) Previously Filed
Exhibit Sample of Sales Representative Agreement
10e:
Exhibit 14 Material Patents Rendered as
Previously Filed
Exhibit Independent Auditor's Consent
23:
Exhibit Financial Data Schedule
27:
Exhibit Subscription Agreement Rendered as
99a: Previously Filed
Item 28. Undertakings
Not Applicable
/59/
Signatures
In accordance with the requirements of the Securities Act of
1933, the registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form SB-2
and authorized this registration statement to be signed on its behalf
by the undersigned, in the City of Boerne, State of Texas, on
September 22, 2000.
Mag-Well, Inc.
By: /s/ William W. Dillard, Jr
William W. Dillard, Jr., President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to this registration statement has been signed below by the
following persons on behalf of the registrant in the capacities and on
the dates indicated.
Signature Title Date
---------- ---------------- ------
/s/ William W. President and Chief September 22,
Dillard, Jr. Executive Officer 2000
William W. Dillard,
Jr.
/s/ John D. Corney Chief Operating September 20,
Officer 2000
John D. Corney
___________________ Principal Financial ________________
Officer
___________________ Principal Accounting ________________
Officer
Signatures of a
Majority of Board of
Directors
/s/ William W. Director September 22,
Dillard, Jr. 2000
William W. Dillard,
Jr.
/s/ John D. Corney Director September 20,
2000
John D. Corney
___________________ Director ________________
/60/
