As filed with the Securities and Exchange Commission on December 11,
2000
Registration No. ________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 5 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 Registratio
Registered Unit Offering Price n 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.
This offering is being conducted on a "best efforts minimum/maximum
basis". There is no minimum purchase requirement. The offering will
end on the date 365 days from the date that this registration statement
becomes effective. Proceeds from this offering will be held in escrow.
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
sold through the efforts of 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).
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 December 11, 2000
/3/
TABLE OF CONTENTS
Page
Prospectus Summary 5
Risk Factors 7
Use of Proceeds 12
Dividend Policy 13
Plan of Distribution 14
Capitalization 15
Dilution 16
Management's Discussion and Analysis 17
of Financial Condition
Our Special Note Regarding Forward 21
Looking Statements
Business of the Company 22
Industry Background 22
Competition 22
Mag-Well, Inc. Patent and Product 23
Description
Manufacturing Process 24
Definition of Success 24
Target Markets 25
Oil & Gas Treatment 25
Diesel Fuel Treatment 26
Heat Transfer Treatment 27
Business Growth Strategy 28
Marketing Strategy 29
Operations Strategy 30
Business Condition 31
Facilities 31
Employees 31
Legal Proceedings 32
Management 33
Executive Compensation 35
Security Ownership of Certain 36
Beneficial Owners and Management
Stock Option Plan 36
Certain Transactions 37
Description of Securities 39
Legal Matters 40
Experts 40
Additional Information 40
Shares Eligible for Future Sale 41
Accounting, Tax, Insurance and Legal 42
Issues
Part F/S: Mag-Well, Inc., Financial 43
Statements
Signatures 60
/4/
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; and
(e) 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 & (b) (b)diesel (c) (c)water.
gas; fuel; and
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:
PICTURE PICTURE PICTURE
Oil & Gas Diesel Fuel Industrial
MFC MFC Water MFC
/5/
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 Six Months Ended June
31 30
1999 1998 2000 1999
---- ---- ---- ----
Statement of
operations data:
Total revenue $ 330,749 $ 206,326 $ 76,219 $ 169,111
Cost of goods sold &
loss on inventory $ 161,720 $ 150,958 $ 39,093 $ 78,312
impairment
General and $ 230,052 $ 314,210 $ 108,941 $ 105,180
administrative
expenses
Other income $ $ $ $
(expenses) (33,439) (39,826) (17,315) (15,682)
Income (loss) before $ $ $ $
extraordinary gain... (94,462) (298,668) (89,130) (30,063)
Extraordinary gain $ $ 0 $ 0 $ 0
18,448
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 $ $ (0.02) $ (0 .01) $ 0
(0.01)
Weighted average 12,264,000 12,000,000 12,313,000 12,000,000
shares (1) (1)
outstanding....
*Less than $(.01) per
share
As of As of
December June 30,
31, 1999 2000
Balance sheet data:
Working capital $ $
(deficit) (71,600) (179,136)
Total assets $ 476,123 $ 531,788
Total current debt $ 479,198 $ 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.
[Balance of this page intentionally left blank]
/6/
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.
The offering price has been arbitrarily determined, and bears no
relation to the actual book value of the company.
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 sold through the efforts
of 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.
Because our company has had a history of losses since inception, there
is doubt as to the Company's ability to continue as a going concern.
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,
and may be required to raise additional capital alternatively after
this offering to meet these 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.
A market may not develop for our company's stock because our company's
common stock may not be included in a quotation system.
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 Small Cap 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 Nasdaqr 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.
A market may not develop for our company's common stock because no
underwriters or broker/dealers have agreed to make a market in our
stock.
/7/
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.
The trading activity in our common stock may be hindered by the
applicability of penny stock regulations.
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 equity security with a price
of less than $5.00 (other than securities registered on certain national
securities exchanges or quoted on the Nasdaqr 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.
Increases and decreases of demand for our products will be correlated
with the fluctuation in the price of oil. Therefore, fluctuations in
the price of oil may negatively impact the profitability of our company.
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.
We do not currently carry product liability insurance, and it is
questionable as to whether we will be able to in the future.
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.
/8/
The long-term success of our company depends on the protection of our
patent and trade secrets. Failure to protect our patent rights could
harm our operating results.
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 successfully, 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 technology to third parties in foreign jurisdictions
to manufacture and sell our tool under their brand name. Therefore, it
may be difficult to protect or patent rights from infringement by these
licensees.
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 non-circumvent provisions (agreements) to
protect the intellectual property that we currently own and plan to
develop. If we believe that if 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.
The necessity to enforce or defend a patent infringement claim, should
it arise, could result in the company's inability to meet its financial
obligations.
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.
The management and operation of the company is largely dependant upon
the efforts of Mr. Dillard and Mr. Corney. The loss of either of them
could jeopardize the continued operation of the Company.
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.
The company's profitability depends on the hiring and training of an
effective sales force, which has not been accomplished yet.
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.
/9/
Our current financial and managerial controls, reporting systems and
procedures may be inadequate as the company's business grows.
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.
Purchasers in this offering will have a limited voice in the affairs of
the company.
Currently, officers and directors as a group directly own
8,738,000 shares of common stock or 70.97% of the 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
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.
The use of a portion of the proceeds from this offering will be at the
discretion of management. Therefore, if we do not use our discretion
wisely, the long-term success of the company could suffer.
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.
The use of a portion of the proceeds from this offering will be at the
discretion of management. Therefore, if we do not use our discretion
wisely, the long-term success of the company could suffer.
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:
(d) working capital;
(e) fees associated with our future capitalization strategy; and
(f) 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.
Our products may not be accepted by those in the oil industry as a
viable alternative to current technologies available and in use.
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.
/10/
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.
We generate a significant portion of our revenue from sales to companies
in foreign countries. Political instability in any of those foreign
countries could negatively impact the profitability of our company.
"Risks of International Sales" are those risks faced by
companies that do business overseas. For the Company, International
revenues as a percentage of total revenues were 46% in 1997, 16% in 1998
and 28% in 1999 (see Note 1 to Financials). Between 1997 & 1999 we sold
tools to the following countries: Australia, Austria, Brunei, Canada,
Germany, India, Indonesia, Kazakhstan, Malaysia, Mexico, Russia,
Singapore and Venezuela. The risks associated with doing business in
foreign markets mainly relate to the political environment in each
particular country and its impact on our ability to enforce the
stipulations set forth in each individual contract. Although over the
past 7 years we have not experienced a default on our contracts, the
risk of a potential default due to the varaties of conducting business
outside the U.S. does exist and should be considered before making an
investment in our Company. Our ability to successfully execute
contracts with foreign companies will be a determining factor in the
profitability of our Company and ultimately the value of your
investment.
Investors may not earn interest on their money invested with us while it
is in escrow.
Investors will not receive any return on their money submitted
with their subscription should the minimum offering requirement be
reached. The subscriber is considered to have made the purchase on the
date their check is cashed and deposited into escrow. Should the minimum
offering not be reached, interest will be paid up to the date the funds
are removed from escrow. The Escrow Agreement allows the Company to
extend the term of the escrow for an additional year. It could take two
years to receive back one's initial investment and interest because
subscriptions are irrevocable during the offering period.
The value of your investment may decrease between the time you invest
and the time a certificate is issued to you.
Investors could lose money because the market value of our
shares might decrease between the date that we close the offering and
when we provide you with certificates thirty days later.
[Balance of this page intentionally left blank]
/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- MINIMUM
RANGE
$5,000,000 $2,500,000 $500,000
Approxi Approxi Approxi
mate mate mate
Application of Dollar Percen Dollar Percen Dollar Percen
Proceeds amount tage amount tage amount tage
Marketing and $1,000,000 20.00% 500,000 20.00% 100,000 20.00%
sales
Research and
development (a) 700,000 14.00% 200,000 8.00% 0 0%
Manufacturing
upgrades 800,000 16.00% 300,000 12.00% 0 0%
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%
Debt Reduction(b)
350,000 7.00% 350,000 14.00% 100,000 20.00%
Working capital,
primarily general 1,478,610 29.57% 678,610 27.14% 228,610 45.72%
&
Administrative
expenses
Total Proceeds $5,000,000 100.00% $2,500,000 100.00% $500,000 100.00%
Net proceeds,
after deducting $4,928,610 98.57% $2,428,610 97.14% $428,610 85.72%
offering
Expenses
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) 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) $63,530.59 balance outstanding on Chase
Bank variable rate line of credit (annual interest rate 11.50%) (5)
$52,281.33 balance outstanding on MBNA variable rate credit card
(annual interest rate 13.49%) (6) $3,905.02 balance outstanding on
American Express variable rate credit card (annual interest rate
16.39%) (7) $24,770.66 balance outstanding on Suntrust line of credit
(annual interest rate 15.50%). These figures represent the outstanding
debt held by Mag-Well, Inc. as of the date of this filing. Notes (1),
(2) & (3) referenced above are currently past due.
/12/
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.
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.
[Balance of this page intentionally left blank]
/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 through the efforts of 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.
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 at 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 promptly to
the purchasers including their pro-rated, accrued interest. Although
the escrow agreement allows for up to a one year extension of the
offering period, we have no plans to extend the offer over the 365-day
period. 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. The subscribers will not receive interest should the
offering occur because they are considered to have made the purchase on
the date their check is cashed and deposited into 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 $ $ $ $
and outstanding 12,313 12,813 14,813 17,313
Excess Paid-In-Capital $ $ $ $
(e) 2,443,335 2,685,195 4,483,195 6,730,695
Deferred Offering Costs $(136,250) $0 $0 $0
Accumulated Deficit $(2,411,603) $ $ $
(2,411,603) (2,411,603) (2,411,603)
Total Stockholders' $ $ $ $
Equity (92,205) 286,405 2,086,405 4,336,405
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 offering
expenses, which total $71,390.
[Balance of this page intentionally left blank]
/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 "Certain Transactions" on page 36). 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
Offering (a) Offering (a) (a)
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.
[Balance of this page intentionally left blank]
/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, $15.56 per barrel in
1999, and as of December 8, 2000 the price of domestic crude oil stood
at $29.69 per barrel. 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.
The auditor's report to our December 31, 1999 financial statements
includes a paragraph that expresses substantial doubt about our ability
to continue as a going concern due to our significant operating losses
and limited financial resources. Our financial statements do not include
any adjustments that might result if we were unable to continue as a
going concern. If we were unable to continue as a going concern, our
financial statements would be adjusted to reduce the carrying amounts of
assets to their estimated net realizable values and reduce the
liabilities to the amounts expected to be paid.
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,however, should only the minimum proceeds be raised through
this offering the possibility would exist that we may need to
alternatively raise additional capital to meet our expected capital
requirements. This could require us to assume additional debt and impact
our ability to continue as a going concern.
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. With adequate funding, we will be able to
capitalize and expand our business. 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.
If all we are able to raise is the minimum proceeds through our
offering of common stock, we will only have $100,000 to apply to
marketing and sales efforts, $100,000 to apply to the reduction of
outstanding debt, and no funds would be available for additional research
and development (See "Use of Proceeds" page 12). This might limit our
ability hire and retain qualified sales personnel, which would be
detrimental to our sales efforts and negatively impact our ability to
grow revenues. The money raised for debt reduction would be insufficient
to pay-off all three outstanding past due notes given a minimum offering
(See footnote (b) "Use of Proceeds page 12). Although we believe these
noteholders to be supportive of our current efforts to raise capital and
our future ability to repay these loans, the possibility exists that they
could escalate the collection of these notes, which would have a
/17/
negative
impact on our ability to continue as a going concern. Oil and gas prices
have begun to rise over the past year, however, there is no guarantee
that our revenues would increase sufficiently enough to retire the
remaining outstanding debt given a minimum offering. In fact, there is
normally a one year lag time between a significant rise in oil prices and
a subsequent rise in our revenues. As of the date of this filing, we
have not realized any material revenue increases due to the rising price
of oil. Additionally, a minimum offering would not allow us to perform
additional research and development to refine our MFC products to better
penetrate other industries that could benefit from their use (See
"Business of the Company" page 21). The following paragraph describes in
detail the current status of potential sales.
Currently, we have outstanding quotes from 10 different customers in
8 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 $87,200 exclusive of shipping and insurance
charges. All quotes combined total $883,867. 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 10 customers are "new" to Mag-Well, Inc.
and have never before used an MFC tool. As of June 2000, our outstanding
quote with Shell Petroleum, Nigeria resulted in a saleorder that has been
paid for and fulfilled. 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 additional
testing 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 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 PEMECO, 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.
Although the Export-Import Bank ultimately approved the guarantee
for the PEMECO order, the guarantee was only for $75,000. We were
uncomfortable sending the nine tools, which were manufactured for
PEMECO, with only $75,000 as a guarantee. Additionally, PEMECO
would not send the cash difference. Subsequently, Dr. Barquin,
our PEMECO contact and a member of PEMECO's board, left the
company and set up a separate distribution company to continue
distributing our products in Venezuela and Latin America. The
Export-Import Bank guarantee (aggregate limit of $600,000) is
still in effect and we anticipate renewing the policy in Jan '01.
Dr. Barquin has a verbal agreement with our Company to sell our
products and receives a 25% commission, which is industry
standard. Of the nine tools originally manufactured for Pemeco,
one has been sold to Perenco-Gabon, Venezuela. Currently we have
six tools ordered through Dr. Barquin for PDVSA (Pedevesa),
Venezuela.
The focus we had placed on trying to execute the PEMECO order
occupied a substantial amount of our resources. Additionally, on
February 14, 2000, Mr. Varel resigned from Mag-Well, Inc.
Although all customers were retained
/18/
and relationships sustained,
contracts needed to be redrawn. This also required the attention
of management, and hindered the ability of the Company to generate
revenues over a several month period. The Company believes the
departure of Mr. Varel has had no other significant impact on
revenues other than that previously discussed. In the first half
of the year 2000 the Company was manufacturing the tools to
fulfill the PEMECO order. This was a custom order and required
additional materials as well as labor, which had an adverse affect
on cost of goods sold in the recent period.
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 borrowing 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.
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 all previous commitments by
issuing
/19/
updated agreements between April and June 2000. (See Exhibits
10f through 10k). The current format and provisions remain the same as
the previous agreements with Mr. Varel.
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) Agreements between international representatives are for a term of
one year from the date of execution and consist 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)
[Balance of this page intentionally left blank]
/20/
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.
[Balance of this page intentionally left blank]
/21/
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:
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.
Competition
As our Company is the only company manufacturing magnetic fluid
conditioners, we have no direct competition, however; as discussed
previously in this prospectus, there are other alternative methods for
the removal of paraffin and scale deposits. It is these chemical and
mechanical treatment manufacturers with whom we compete. Although we
have been incorporated since June 20, 1988, in terms of asset size,
revenue production, and product sales our competitive position within
the industry has yet to be established. There exist many competing
manufactures with greater resources and a better ability to withstand a
prolonged downturn in oil prices. In addition, ours is a new
technology. The alternative chemical and mechanical treatments have
greater market acceptance due to the fact that these are the historical
ways of dealing with paraffin and scale build-up. Our ability to
effectively compete with these alternative treatments, and gain
acceptance for our method of treatment will determine the ultimate
profitability of our Company, and our ability to continue as a going
concern.
/22/
Mag-Well, Inc. 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:
(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
/23/
individuals within the industry who still
are skeptical in regards to the effectiveness of 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.
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; and
(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
/24/
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 intial 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.
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 Potent No. of Average Mkt. Size
* Wells(1)* ial Tools/M Unit in $ (5)
MFC kt(3) Price 4
Mkt.
Size
(1&2)
USA 563,160 25% e 140,790 $ $
4,000 563,160,000
CIS 123,970e 25% e 30,992 $ $
(former 10,000 309,920,000
Soviet
Union)
China 72,328e 25% e 18,082 $ $
10,000 180,820,000
Canada 48,258 25% e 12,064 $ $
10,000 120,640,000
Venezuel 14,694e 25% e 3,673 $ $
a 10,000 36,730,000
Argentin 13,964 25% e 3,491 $ $
a 10,000 34,910,000
Indonesi 8,661 25% e 2,165 $ $
a 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 $ $
& Tobago 10,000 10,280,000
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
/25/
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. Our product acts to purify the fuel. Cleaner fuel burns
longer and therefore less fuel is required to achieve a similar result.
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;
and
(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).
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 27,293,3 28,555,0 30,101,4 31,949,2 32,460,6 33,111,5
70 40 30 70 40 70
Source: U.S. Department of Energy, Energy Information Administration
Notes to Total Estimated Fuel Consumption:
(1) These estimates have been revised.
/26/
(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.
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 depicts the installation of the diesel
MFC:
Heat Transfer Treatment
A "heat exchanger" is a device (as an automobile radiator) for
transferring heat from one fluid to another without allowing them to
mix. 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.
PICTURE-DIAGRAM
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. We draw these conclusions based
solely on anecdotal evidence, and have conducted no formal research to
substantiate or disprove these claims. Additionally, 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:
/27/
(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; and
(d) lower energy costs due to reduced pumping power requirements to
overcome tube plugging by fouling solids.
PICTURE
Water MFC installed in a water tower
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
/28/
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:
(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.
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:
/29/
(a) major clients;
(b) new countries where our MFC equipment is introduced; and
(c) 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. 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
(d) implement an aggressive marketing campaign.
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 was performed as
in-house, preliminary and unvalidated testing. If we are able to raise
the maximum or mid-range proceeds from our common stock offering, we
will use allocated monies (refer to Use of Proceeds page 12) to expand
these efforts and validate the preliminary testing. Our research and
development efforts will focus primarily on: (i) enhancing the magnetic
fluid conditioner and its reliability and (ii) assisting our
/30/
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. To increase gross revenues we needed to expand and diversify
our operations into other markets. 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.
Halliburton is a large distributor of oil and gas equipment
parts offering a variety of product lines to its customers. Their
representatives will offer a client products from different
manufacturers in order to solve a particular problem. Although Mag-
Well Inc.'s MFC may have been presented to their clients, the Company
did not feel as if they were placing enough emphasis on the benefits of
Mag-Well, Inc.'s MFC over competing products. Therefore, the agreement
was terminated.
The following table reflects the companies responsible for more
than 10% of our 1998, 1999 and 2000 revenues:
Company 1998 Revenues = 1999 Revenues = 2000 Revenues =
$236,551 $322,765 $298,718
Headington Oil $93,682
Henry $41,675
Petroleum
Mag-Well $76,261 $82,765
International1
Perenco - $116,158
Gaban
Syria $47,256
WCS Oil $34,997
1 Mag-Well International is a completely unrelated entity to Mag-Well,
Inc.
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.
Facilities
Our office is located at 404 Lakeview Drive, Boerne, Texas
78006. William W. Dillard, Jr., President and Chief Executive Officer
of Mag-Well, Inc., is providing this office space at no expense to the
Company. 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 one 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").
/31/
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.
[Balance of this page intentionally left blank]
/32/
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, Director, and
Dillard, Jr. Chief Executive Officer
John D. 53 Chief Operations Officer, and
Corney Director
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.
/33/
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.
[Balance of this page intentionally left blank]
/34/
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 Securi Long- All
icted ties Term Other
Principal Annual Stock Underl Incenti Compe
Compen- ying ve Plan n-
Position Year Salary Bonus sation Award Options Payouts sation
($) ($) ($) (s) (#) ($) ($)
William W. 19 0 0 0 0 0 0
Dillard, Jr. 99 60,000
President
and CEO
19 0 0 0 0 0 0
98 60,000
John D. 19 0 0 0 0 0
Corney 99 60,000 2,500
Chief
Operations
Ofcr.
19 0 0 0 0 0 0
98 60,000
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, Director
John D. Chief Operations Officer, $60,000
Corney Director
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. As of
the date of this filing, if the option is exercised, the purchase price
shall be equal to the greater of:
(a) $250,000; 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").
/35/
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 % Post Offer %
Beneficial Shares of 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
(3persons)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 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 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.
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.
[Balance of this page intentionally left blank]
/36/
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. We have no
predecessors or subsidiaries and have never merged into another
company.
We filed a "Certificate of Amendment of Articles of Incorporation
- (After Issuance of Stock)" on March 12, 1999. In this statement, it
certified:
(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.
Sale of Our Securities
On June 20, 1988, we issued 19,887 shares of common stock at a
price of par $.001 per share to our founder, Mr. John Corney, which
were fully paid and non-assessable. This original stock offering was
made in accordance with Section 4(2) of the Securities Act of 1933, as
amended.
On December 1, 1989, we issued 51,763 shares of common stock at a
price of par $.001 per share to the second founder, Mr. William W.
Dillard, Jr., which were fully paid and non-assessable. This issuance
was also made under Section 4(2) of the Act.
On July 1, 1994, we issued 5,000 shares of common stock at a price
of par $.001 per share 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. All shares were issued under Section
4(2) of the Act.
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, as amended. We sold 23,350 shares of common stock, with
no par value, at a price of $50 per share to 16 unaffiliated
shareholders of record, none of whom were or are officers and
directors.
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 sold 150,000 shares to 1
unaffiliated shareholder, 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 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.
Issuance of Debt Securities and Loans
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.
/37/
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 has established two lines of credit. There
currently exists a $63,530.59 balance outstanding with Chase Bank
variable rate line of credit (annual interest rate 11.50% as of June
30, 2000) establised June 1999 and $24,770.66 balance outstanding with
Suntrust line of credit (annual interest rate 15.50% as of June 30,
2000) established January 1999 both finance companies. These loans are
unsecured by the Company, but rather are guaranteed by the individual
who is President and the major stockholder of the Company, William W.
Dillard, Jr. by personal assets.
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).
Related Party Transactions
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.
[Balance of this page intentionally left blank]
/38/
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.
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 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.
[Balance of this page intentionally left blank]
/39/
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.
[Balance of this page intentionally left blank]
/40/
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 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.
[Balance of this page intentionally left blank]
/41/
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.
[Balance of this page intentionally left blank]
/42/
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) 44
Statement of Operations 45
(Unaudited)
Statements of Cash Flows 46
(Unaudited)
Notes to Financial Statements 47
FINANCIAL STATEMENTS
For the Fiscal Years Ended
December 31, 1999 and 1998
Independent Auditors' Report 48
Balance Sheet 49
Statements of Operations 50
Statements of Stockholders' Equity 51
(Deficiency)
Statements of Cash Flows 52
Notes To Financial Statements 52-57
/43/
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 2,443,33
5
Deferred offering costs (136,250
)
Accumulated deficit
(2,411,6
03)
Total stockholders' deficiency
(92,205)
Total liabilities and stockholders' deficiency $
531,788
See accompanying notes to these financial statements.
/44/
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
12,313,00 12,000,000
0
* Less than $(.01) per share
See accompanying notes to these financial statements
/45/
MAG-WELL, INC.
STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
2000 1999
(Unaudit (Unaudit
ed) ed)
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
activities (35,482) (16,173)
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
period 34,508 18,443
CASH AND CASH EQUIVALENTS, end of period $ $
521 -
See accompanying notes to these financial statements
/43/
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 financial
statements and the notes thereto included in the Company's Form SB-2
Registration Statement.
/44/
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
/45/
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 2,443,33
5
Deferred offering costs (136,250)
Accumulated deficit
(2,322,4
73)
Total stockholders' deficiency
(3,075)
Total liabilities and stockholders' deficiency $
476,123
See accompanying notes to these financial statements.
/46/
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
impairment in 1998 161,720 150,958
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
/47/
<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
Deficit
Shares Amount Capital Costs Total
<C> <C> <C> <C> <C> <C>
<S>
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
1998 12,000 2,227,148 - (2,246,459) (7,311)
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, $ $ $ $ $
1999 12,313,000 12,313 2,443,375 (136,250) (2,322,473) (3,075)
</TABLE>
See accompanying notes to these financial statements
/48/
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
/49/
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
/50/
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.
/51/
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
payable in 12 quarterly installments beginning in 53,149
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.
/52/
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.
/53/
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
(499,00
0)
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.
***********
/54/
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Our Directors and Officers
Our Bylaws 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:
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 $ 10,000
and Expenses
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.
/55/
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 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).
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).
Issuance of Debt Securities and Loans
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 has established two lines of credit. There currently
exists a $63,530.59 balance outstanding with Chase Bank variable rate
line of credit (annual interest rate 11.50% as of June 30, 2000)
establised June 1999 and $24,770.66 balance outstanding with Suntrust
line of credit (annual interest rate 15.50% as of June 30, 2000)
established January 1999 both finance companies. These loans are
unsecured by the Company, but rather are guaranteed by the individual
who is President and the major stockholder of the Company, William W.
Dillard, Jr. by personal assets.
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 Beneficial Common Percenta Date Offeri Transacti Exemption
Owner Stock Owned ge OwnedPurchas ng on Type 1
ed Price
Campbell Mello 150,000 1.21% 3/2/99 $0.05 $ Reg. D,
Associates...... 7,500.00 Rule 504
Total Sold = 150,000 1.21% Total $
$ = 7,500.00
/56/
Name of Beneficial Common Percenta Date Offeri Transacti Exemption
Owner Stock ge OwnedPurchas ng on Type 1
Owned ed Price
Joe 2,000 0.02% 4/6/99 $0.50 $ Reg. D,
McCart............ 1,000.00 Rule 504
Ted 2,000 0.02% 4/6/99 $0.50 $ Reg. D,
Geistweidt.......... 1,000.00 Rule 504
..
Mangold 4,000 0.03% 4/6/99 $0.50 $ Reg. D,
Roofing............ 2,000.00 Rule 504
Gary 2,000 0.02% 4/6/99 $0.50 $ Reg. D,
Shuler.............. 1,000.00 Rule 504
L.D. 4,000 0.03% 4/2/99 $0.50 $ Reg. D,
Webb............ 2,000.00 Rule 504
Gauntt Gamily 2,000 0.02% 4/6/99 $0.50 $ Reg. D,
L.L.C......... 1,000.00 Rule 504
Patricia Eytcheson, 2,000 0.02% 4/6/99 $0.50 $ Reg. D,
Trustee...... 1,000.00 Rule 504
Bob 2,000 0.02% 4/6/99 $0.50 $ Reg. D,
Dimler.............. 1,000.00 Rule 504
.
Clifford H. Collen, 2,000 0.02% 4/6/99 $0.50 $ Reg. D,
Jr......... 1,000.00 Rule 504
Gregg R. 2,000 0.02% 4/6/99 $0.50 $ Reg. D,
Gandy........... 1,000.00 Rule 504
Kirk 2,000 0.02% 4/6/99 $0.50 $ Reg. D,
Rentz............ 1,000.00 Rule 504
Jerry Rentz, 2,000 0.02% 4/6/99 $0.50 $ Reg. D,
Jr........... 1,000.00 Rule 504
Frances J. Metheny, 2,000 0.02% 4/6/99 $0.50 $ Reg. D,
Trustee....... 1,000.00 Rule 504
Robert A. and 2,000 0.02% 4/6/99 $0.50 $ Reg. D,
Frances J. 1,000.00 Rule 504
Metheny....
Catherine F. 2,000 0.02% 4/5/99 $0.50 $ Reg. D,
James.......... 1,000.00 Rule 504
Thomas R. and Stacy 2,000 0.02% 4/5/99 $0.50 $ Reg. D,
C. James....... 1,000.00 Rule 504
Thomas R. 2,000 0.02% 4/5/99 $0.50 $ Reg. D,
James............ 1,000.00 Rule 504
Frances D. 2,000 0.02% 4/5/99 $0.50 $ Reg. D,
James............ 1,000.00 Rule 504
David Hamilton 2,000 0.02% 4/5/99 $0.50 $ Reg. D,
James......... 1,000.00 Rule 504
Wm. G. and Susan D. 4,000 0.03% 4/5/99 $0.50 $ Reg. D,
Hendrickson..... 2,000.00 Rule 504
Robin 2,000 0.02% 4/5/99 $0.50 $ Reg. D,
Hendrickson......... 1,000.00 Rule 504
William R. 2,000 0.02% 4/5/99 $0.50 $ Reg. D,
Hendrickson....... 1,000.00 Rule 504
Sarah M. and Robert 2,000 0.02% 4/5/99 $0.50 $ Reg. D,
W. Woodward, Jr... 1,000.00 Rule 504
Harold D. 1,000 0.01% 4/5/99 $0.50 $ Reg. D,
Wright............ 500.00 Rule 504
Marcy G. 1,000 0.01% 4/5/99 $0.50 $ Reg. D,
Wright.......... 500.00 Rule 504
Eric D. 1,000 0.01% 4/5/99 $0.50 $ Reg. D,
Wright............. 500.00 Rule 504
Steve B. 1,000 0.01% 4/5/99 $0.50 $ Reg. D,
Wright........... 500.00 Rule 504
T. McCullough 2,000 0.02% 4/5/99 $0.50 $ Reg. D,
Strother....... 1,000.00 Rule 504
James M. 2,000 0.02% 4/5/99 $0.50 $ Reg. D,
Stabler.......... 1,000.00 Rule 504
Douglas L. 2,000 0.02% 4/1/99 $0.50 $ Reg. D,
Phillips.......... 1,000.00 Rule 504
Andreas 5,000 0.04% 3/30/99 $0.50 $ Reg. D,
Grossman......... 2,500.00 Rule 504
Robert W. 500 0.00% 4/6/99 $0.50 $ Reg. D,
Floyd.......... 250.00 Rule 504
M. Craig 500 0.00% 4/6/99 $0.50 $ Reg. D,
Clark............. 250.00 Rule 504
John 500 0.00% 4/6/99 $0.50 $ Reg. D,
Nichols............ 250.00 Rule 504
Christopher P. 500 0.00% 4/5/99 $0.50 $ Reg. D,
Renaud.......... 250.00 Rule 504
Armand Smith, 500 0.00% 4/5/99 $0.50 $ Reg. D,
Jr........... 250.00 Rule 504
Matthew J. 500 0.00% 4/5/99 $0.50 $ Reg. D,
Parsley.......... 250.00 Rule 504
Charles Wesley 2,000 0.02% 4/6/99 $0.50 $ Reg. D,
Goyer, Jr......... 1,000.00 Rule 504
C. Wesley Goyer, 2,000 0.02% 4/6/99 $0.50 $ Reg. D,
III......... 1,000.00 Rule 504
John T. 500 0.00% 4/5/99 $0.50 $ Reg. D,
Beecherl.......... 250.00 Rule 504
Thirsty Assets, 500 0.00% 4/5/99 $0.50 $ Reg. D,
L.P......... 250.00 Rule 504
Robert R. 500 0.00% 4/5/99 $0.50 $ Reg. D,
Beecherl......... 250.00 Rule 504
Gordon D. 2,000 0.02% 4/5/99 $0.50 $ Reg. D,
May........... 1,000.00 Rule 504
WCS Oil & Gas 4,000 0.03% 4/5/99 $0.50 $ Reg. D,
Corp........ 2,000.00 Rule 504
Richard C. 5,000 0.04% 4/5/99 $0.50 $ Reg. D,
Latham......... 2,500.00 Rule 504
Sueann T. 2,000 0.02% 3/31/99 $0.50 $ Reg. D,
Fernandes......... 1,000.00 Rule 504
Sandy M. 2,000 0.02% 3/31/99 $0.50 $ Reg. D,
Fernandes.......... 1,000.00 Rule 504
Mark J. 2,000 0.02% 3/31/99 $0.50 $ Reg. D,
Fernandes........... 1,000.00 Rule 504
Robert 2,000 0.02% 4/5/99 $0.50 $ Reg. D,
Osborn............ 1,000.00 Rule 504
Diana 2,000 0.02% 4/5/99 $0.50 $ Reg. D,
Osborn........... 1,000.00 Rule 504
Addison 2,000 0.02% 4/5/99 $0.50 $ Reg. D,
Osborn.......... 1,000.00 Rule 504
Austin 2,000 0.02% 4/5/99 $0.50 $ Reg. D,
Osborn............. 1,000.00 Rule 504
Campbell Mello 122,500 0.99% 3/30/99 $0.50 $ Reg. D,
Associates...... 61,250.00 Rule 504
Total Sold = 223,000 1.80% Total $
Sold = 119,000.0
0
Total Outstanding 12,313,000 100.00%
Common Stock =
/57/
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.
/58/
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 Rendered as
2b: of Texas, N.A. Previously Filed
Exhibit Amendment No. 2 to Escrow Agreement with
2c: Chase Bank of Texas, N.A.
Exhibit 3: Articles of Incorporation
Exhibit Bylaws of Mag-Well, Inc. Rendered as
3e: Previously Filed
Exhibit 5: Attorney Legal Opinion and Consent Letter Rendered as
Previously Filed
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 Rendered as
10e: Previously Filed
Exhibit Sales Representative Agreement with Bob
10f: Carroll dtd April 10, 2000
Exhibit Sales Representative Agreement with Francis
10g: Chiang S.H. dtd May 9, 2000
Exhibit Sales Representative Agreement with IOR
10h: Energy Pty Ltd. dtd June 9, 2000
Exhibit Sales Representative Agreement with PT Saga
10i: Trade Murni dtd April 11, 2000
Exhibit Sales Representative Agreement with Atikol
10j: Foreign Trade dtd May 16, 2000
Exhibit Sales Representative Agreement with ACC
10k: Ingenieria Y Servicos Especializados S.A. De
C.V. dtd May 16, 2000
Exhibit 14 Material Patents Rendered as
Previously Filed
Exhibit Independent Auditor's Consent Rendered as
23: Previously Filed
Exhibit Financial Data Schedule Rendered as
27: Previously Filed
Exhibit Subscription Agreement Rendered as
99a: Previously Filed
/58/
Item 28. Undertakings
The Registrant hereby undertakes that it will:
o File, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
o Include any prospectus required by section 10(a)(3) of the
Securities Act;
o Reflect in the prospects any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement; and
o Include any additional or changed material information on
the plan of distribution.
o File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the
offering.
o For determining liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part
of the Registration Statement pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this Registration
Statement as of the time the Commission declared it effective.
o For determining liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus
as a new Registration Statement for the securities offered in the
Registration Statement, and the offering of such securities at the
time as the initial bona fide offering of those securities.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant, pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
In the event a claim for indemnification against such liabilities
(other than payment by the Registrant of expenses incurred or paid by
a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
/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 December
21, 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 December 21,
Dillard, Jr. Executive Officer 2000
William W. Dillard,
Jr.
/s/ John D. Corney Chief Operating December 21,
Officer 2000
John D. Corney
/s/ William W. Principal Financial December 21,
Dillard, Jr. Officer 2000
William W. Dillard,
Jr.
/s/ William W. Principal Accounting December 21,
Dillard, Jr. Officer 2000
William W. Dillard,
Jr.
Signatures of a
Majority of Board of
Directors
/s/ William W. Director December 21,
Dillard, Jr. 2000
William W. Dillard,
Jr.
/s/ John D. Corney Director December 21,
2000
John D. Corney
___________________ ________________
/60/
