UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Year Ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 0-30544
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WATERCHEF
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(Exact Name of Small Business Issuer as specified in its charter)
DELAWARE 86-0515678
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1007 GLEN COVE AVENUE
GLEN HEAD, NY 11545
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(Address of principal executive offices)
(516) 656-0059
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(Issuer's telephone number)
Securities registered under section 12(b) of the Exchange Act: None.
Securities registered under section 12 (g) of the Exchange Act: Common
stock, Par value $.001
Redeemable Common Stock Purchase Warrants.
------------------------------------------
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
YES NO X
----- -----
The issuer's net sales for the most recent fiscal year were $40,000.
The aggregate market value of the voting stock held by non-affiliates based upon
the last sale price on May 21, 2003 was approximately $2,600,000.
As of May 21, 2003, the Registrant had 89,559,886 shares of its Common Stock,
$0.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be issued in
connection with the 2002 annual meeting of stockholders are incorporated by
reference into Part III
WATERCHEF, INC.
ANNUAL REPORT ON FORM 10-KSB/A
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS .....................................2
ITEM 2. DESCRIPTION OF PROPERTY .....................................8
ITEM 3. LEGAL PROCEEDINGS ...........................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .........9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ...10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ..11
ITEM 7. FINANCIAL STATEMENTS .......................................14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ........................15
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT ..........15
ITEM 10. EXECUTIVE COMPENSATION .....................................18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDERS MATTERS.................19
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............20
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K ...........................20
ITEM 14. CONTROLS AND PROCEDURES ....................................20
SIGNATURES ...................................................................21
1
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
WaterChef, Inc. (the "Company", "WaterChef"), designs and markets water
purification equipment Water coolers and filters were a substantial part of the
Company's business from 1993 until the fourth quarter of 2001, at which time
this business was sold so that WaterChef could concentrate on the further
development , manufacturing and marketing of their patented line of "PureSafe"
water purification systems. The accompanying financial statements have been
prepared assuming the Company will continue as a going concern. To date, the
Company has shipped 20 PureSafe units. Revenue has been recognized on only 2
PureSafe units as 18 units which were shipped to the Kingdom of Jordan have not
met the criteria for revenue recognition due to no reasonable assurance of
collectibility.
BACKGROUND
The Company was originally incorporated under Arizona law in 1985 and merged
into a Delaware corporation in 1987. In 1993 the Company, then known as Auto
Swap, U.S.A., entered into a reverse merger with WaterChef, Inc., a Nevada
corporation ("Water Chef-Nevada), which manufactured and marketed water coolers
and filters. The financial statements prior to June 4, 1993 are those of
WaterChef (Nevada), which is considered to be the Predecessor Company.
In 1994 the Company established a Joint Venture (the "JV") in the Peoples
Republic of China ("China") in which it held a 55% interest for an investment of
$475,000, funded by cash, machinery and equipment and transferred technology.
The Chinese investment provided a manufacturing and development site for
WaterChef's water cooler line. Product was shipped for further assembly to
WaterChef's leased facilities in Montana. In the year ended December 31, 2000
all remaining value attributed to the joint venture was written off. With the
sale of the water cooler, filter and accessory lines in the fourth quarter of
2001, WaterChef's interest in the joint venture was assigned to the purchaser
and the Montana facility was closed.
PRODUCTS
Prior to the fourth quarter of 2001, when the Company decided to concentrate its
efforts on the further development, manufacturing and marketing of the PureSafe
Water Station (the "PureSafe"), WaterChef believed that its water dispensers and
its wide variety of consumer oriented water filtration products met or exceeded
the design, quality and performance of competitive products. Market
considerations were such however as to limit the opportunities for profit and
growth. Management determined that in order to build considerable shareholder
value, they would transition out of the commodity dispenser and filter
businesses and develop products that they felt were unique to the marketplace.
2
In 1998, searching for a "killer application", WaterChef management focused on
the worldwide need for safe drinking water for populations who are unserved by
municipal water treatment facilities, or are served by municipal systems which
have malfunctioned because of improper maintenance or faulty design. The result
of that activity is the PureSafe Water Station, a turn-key unit that converts
"gray", or bathing grade, water into United States Environmental Protection
Agency ("EPA") grade drinking water. The PureSafe eliminates all living
pathogens that pollute non-processed water - bacteria, cysts, viruses,
parasites, etc. - at an affordable cost for the emerging economies of the world.
The PureSafe Water Station was tested by H2M Labs, Inc.which is approved by
Nassau and Suffolk counties in New York to perform drinking water testing for
the various municipalities in those counties. The specific test performed was a
total and fecal coliform bacteria test, wherein the source water storage tank
which feeds the PureSafe was tested for the presence of total and fecal coliform
bacteria. The source water tank was found to have 50 colonies of coliform
bacteria present. The source water tank was then "spiked" with a three (3) liter
concentration of laboratory grown and cultured bacteria and the storage tank
were measured again with 80,000,000 colonies of bacteria detected. After being
processed through the PureSafe system, the water was tested again, and "FEWER
THAN 2 COLONIES" were detected. In addition to the laboratory test conducted for
WaterChef by H2M Labs, the available scientific literature, in industry journals
such as Water Technology and Water Conditioning and Purification International,
supports the statement that an ozone system such as the one utilized in the
PureSafe effectively eliminates all living pathogens. Ozone was first used in
municipal water treatment in Nice, France in 1904, and then in the Jerome Park
Reservoir in the Bronx, New York in 1906.
The PureSafe Water Station is a self-contained, six stage water purification
center. It is housed in the equivalent of a small storage container -
approximately four feet wide, seven feet long, and six and one-half feet high.
The unit weighs approximately eleven hundred pounds (without water) and has been
configured for portability, durability, and easy access to its essentially
off-the-shelf components. It is constructed with weather and UV resistant
fiberglass, aluminum and steel, and is equipped with internal and external
lighting.
The PureSafe can purify and dispense up to 15,000 gallons per day for an
all-inclusive cost (labor, power, amortization of the capital cost, replacement
filters, cartridges and media) of approximately one-half cent per gallon. The
process wastes very little water, producing approximately one gallon of pure
drinking water for every gallon processed. The unit can be moved with a single
fork-lift and is transportable by truck or helicopter. Operating the PureSafe is
simple and straightforward. Turn-key in design, minimum wage personnel can be
trained to operate the unit. A system of fail-safes is built into the operation,
and aside from easily installable spares such as filters and cartridges, a
maintenance and oversight program established by WaterChef should maintain the
operating efficiencies built into the system. WaterChef warrantees each unit for
a period of one year as long as the required maintenance protocols, using
WaterChef supplied parts, as prescribed in the maintenance manual are adhered
to. To date, there is one unit that is still under warranty. WaterChef also
plans to have periodic inspections of installed equipment by the Company's
agents.
3
While each unit is configured to respond to the particular water quality of a
particular site, such as arsenic removal, seawater desalination, oil separation,
etc., the typical unit contains the following components:
a. Inlet connection with macro-filter - designed to strain the input
water, removes large particulate and directs water into the system
b. Inlet pump - self-priming pump which maintains water pressure at
minimum 40psi throughout the system
c. Pre-depth media filter - a multi-media mixed bed to remove pollutants.
Pressure gauges mounted on the exterior front panel of the unit allow
for visible monitoring of system performance.
d. Ozone generator - provides a rich ozone source that effectively kills
all living pathogens such as bacteria, viruses, cysts, parasites, etc.
Unused ozone reverts back to oxygen and produces no harmful
byproducts.
e. Ozone mixing tank - WaterChef's proprietary process for effectively
mixing the ozone into the water and maintaining the required contact
time to ensure oxidation of contaminants.
f. Process pump - provides optimal operation of the ozone processing.
g. Post-depth media filter - another, different, multi-media mixed bed
designed to filter out oxidized or precipitated pollutants and
contaminants after the ozone treatment. Effectively removes metals,
organics and inorganics. Pressure gauges on the front panel indicate
the need for backwashing to maintain optimal performance.
h. Ultraviolet treatment - provided by a UV lamp as a redundant
sterilizer step to eliminate any surviving pathogens or
micro-organisms. The UV lamp is tuned to a frequency which also
converts O3 (ozone) back to O2 (oxygen).
i. KDF filter - an ion exchange media containing a proprietary blend of
copper, zinc and other alloys, effectively adsorbs chlorine and
biological, inorganic and metallic contaminants.
j. Carbon filter - prevents bacteria regrowth while removing inorganic
compounds and improves water taste and removes odor. The carbon filter
also acts as a redundant ozone destruct mechanism.
k. Mixer - sends ozone treated water to the bottle washing stations.
l. Bottle washing stations - incorporated on the outside front of the
unit for easy access in order to effectively clean bottles used to
carry water treated at the site.
m. Dispensing stations - four individual dispensing lines, each with flow
adjusting valves to help regulate a smooth, steady flow of water into
clean bottles.
MANUFACTURING
Prior to the sale of its dispenser products, the Company manufactured its water
cooler products in Montana and through a Joint Venture ("JV") in China. With the
sale of this line of business, WaterChef negotiated an early termination of the
Montana lease and, with the consent of its JV partner, transferred its interest
in the JV to the purchaser of the water cooler and filter business in the fourth
quarter of 2001.
4
In 2000 the Company entered into a subcontracting agreement with Davis Aircraft
Products Inc, ("Davis") for the manufacture of the PureSafe Water Station
system. Based upon the experience and the resources of Davis, Company management
believes that Davis can provide the production and manufacturing support
services necessary to supply WaterChef's requirements over the foreseeable
future at a price, and with the quality and performance standards necessary to
meet, or exceed, the needs of the markets that the Company expects to serve.
RAW MATERIALS
The PureSafe has been designed to use, for the most part, readily available
off-the-shelf components, sub-systems and equipment. Inasmuch as each of the
components and sub-systems are available from multiple vendors, the Company does
not believe that obtaining these for its sub-contractor, for itself, or for
others if it chooses to manufacture elsewhere, will be a problem. WaterChef has
also incorporated patented and proprietary technology in the PureSafe and is
confident that it can protect this intellectual capital throughout the
manufacturing and distribution cycle.
COMPETITION
While the Company believed that its water coolers and filters were competitive,
substantial competition existed in the marketplace with almost all its
competitors possessing significantly greater financial resources. Recognizing
that this would not allow the revenues and margins required to give adequate
value to its shareholders, the Company wound-down the water cooler and filter
business, in the fourth quarter of 2001, and redirected their efforts and
financial resources to produce a product that addressed the needs of a
substantial marketplace in which they could be competitive.
WaterChef's modular, turn-key PureSafe Water Station directly addresses the
drinking water needs of those environs which do not today, and are unlikely to,
enjoy access to municipally treated water. The Company has produced a turnkey
solution that produces pure water to meet U.S.EPA drinking water standards. This
is a far different market than that addressed by the segment of the industry
which has concentrated on the multi-billion dollar municipal water treatment
sector, or the equally large residential sector. The municipal solution requires
significant investment for infrastructure development (building plants and
laying miles of distribution pipes), and products for residential markets do not
offer the performance or features to meet the needs of the underdeveloped
nations of the world.
Management does recognize that its potential competitors have far more
resources, and that being first to the marketplace is no assurance of success.
It must be assumed that others are working on systems which, if successfully
brought to market, could seriously impact the viability of the company.
5
MARKETING
The potential market for the PureSafe is substantial and is both world-wide and
domestic. According to studies performed by the World Health Organization (WHO)
and the United Nations, major parts of Africa, the Middle East, Southeast Asia,
the Indian sub-continent, Latin and South America, the Caribbean, and much of
Eastern Europe is in need of adequate supplies of pure water. So are parts of
Florida, Georgia, and other regions in the United States. In part, solving this
problem has been a question of appropriate technology. Secondarily, but just as
important, in a vast part of the world is the need to secure third party
financing so that the local populace can enjoy the benefits of clean water.
WaterChef believes that it has demonstrated that it possesses the technology.
The Company also believes that financing is available for third world economies
from a variety of sources. The challenge for the Company, a virtual unknown in
the industry and with limited capital, is in getting its message in front of
decision makers. To this end, WaterChef has enlisted the aid of some of the
world's most outstanding experts in water purification, especially as it relates
to the needs of underdeveloped countries.
The Company's Scientific Advisory Board is chaired by Dr. Ronald Hart, former
Director of The National Center for Toxicological Research and a U.S. Food and
Drug Administration "Distinguished Scientist in Residence". The Board also
includes Dr. Mohamed M. Salem, Professor of Occupational and Environmental
Medicine, Cairo University; Dr. Richard Wilson, Mallinckrodt Research Professor
of Physics, Harvard University; Dr. Mostafa K. Tolba, former
Under-Secretary-General of the United Nations and Director of the U.N.'s
Environmental Program; and Lord John Gilbert, former Minister of State for
Defence for the United Kingdom under three Prime Ministers and
Secretary/Treasurer of the Tri-Lateral Commission.
Not only have the members of the Scientific Advisory Board provided valuable
input and guidance to the Company with respect to system design, technological
input, remediation approaches and a great deal of information relative to the
unique water problems facing many areas of the world, but they have also been
active in introducing the Company to commercial opportunities
During 2000 the Company entered into a master distribution agreement with 4Clean
Waters Ltd., a newly formed Hong Kong corporation to market the PureSafe
internationally. In addition to lending the Company money, with an option to
convert to the Company's common stock, 4Clean Waters had certain threshold sales
requirements necessary to retain their exclusivity. In addition to cash
incentives, there were provisions that would have allowed 4Clean Waters to
purchase additional shares in WaterChef from commissions earned. While there
were a number of sales initiatives that had been initiated by 4Clean Waters, and
the relationship has been cooperative and ongoing, 4Clean Waters was not able to
produce sales for the Company as anticipated during the term of the agreement.
Notwithstanding the agreement with 4Clean Waters, the Company retained the right
to market the PureSafe Water Station itself, with the understanding that sales
made directly by WaterChef, with the exception of certain "grand-fathered"
accounts, would count against the minimum sales required in the year for 4Clean
Waters to retain their sales exclusivity. The limited sales of the PureSafe thus
far have been as a result of the Company's own marketing activities Until the
September 11, 2001 attacks on the World Trade Center and the Pentagon, the
Company had not considered the U.S. domestic market an important part of their
overall marketing strategy.
6
Now, however, with the creation of the Homeland Security Agency and a new focus
on possible terrorist attacks in the United States causing the creation of
programs to ensure the protection and preservation of our water resources,
opportunities for our products have opened up. WaterChef has been in discussion
with political and government contacts to explore the applications for the
PureSafe as a back-up drinking water system in case of damage to municipal
systems. On the basis of these discussions and other information relative to
homeland security, the Company will be pursuing various options for sales to
this market.
PATENTS
Included in the sale of assets in the sale of the water cooler and filter
business in December, 2001 were eight patents that related to the manufacture of
water dispensers. These patents covered the design of a new water dispenser,
creating and dispensing carbonated water through a water cooler, and the use of
ice as a thermal storage medium. As of December 31, 2001, the Company attributed
no value to these patents as they related to the business being sold. The water
dispenser patents were assigned to the buyer of the water cooler business upon
the payment of the last scheduled payment in second quarter, 2002.
The Company filed for patent protection on its PureSafe Water Station in October
of 1998 and received formal notification that the patent had been issued on
February 19, 2002. The Company feels that this patent upholds the claims that
the PureSafe system is a unique product. In addition to its U.S. patent, the
Company has filed for patent protection in the countries of the European Union,
and in Canada, Mexico, China, India, Korea and Japan.
The name PureSafe Water Station and the stylized water droplet mark have been
trademarked in the United States.
There can be no assurance that any application of the Company's technologies
will not infringe patent or proprietary rights of others, or that licenses which
might be required for the Company's processes or products would be available on
favorable terms. Furthermore, there can be no assurance that challenges will not
be made against the validity of the Company's patent, or that defenses
instituted to protect against patent violation will be successful.
SEASONALITY
The Company does not expect the Pure Safe to be influenced by seasonality.
RESEARCH AND DEVELOPMENT
Research and development takes place at the Company's office. Testing, modeling,
simulation and prototype manufacturing are outsourced with much of the ongoing
development taking place at the Company's contract manufacturing facilities
under the supervision of Davis Water Products.
7
INSURANCE
The Company maintains a $1,000,000 umbrella policy, in addition to a $2,000,000
general and product liability policy, which covers the manufacture and marketing
of its products. The Company believes its insurance coverage to be adequate.
EMPLOYEES
As of December 31, 2002 the Company employed two executive personnel in its
headquarters.
The Company believes that its relations with its employees are good. The Company
also believes there is a sufficient number of persons available at prevailing
wage rates in or near our manufacturing locations that should expansion of its
production require additional employees, they would be readily available. The
Company has no collective bargaining agreement with any of its employees.
ITEM 2. DESCRIPTION OF PROPERTY
In the fourth quarter of 2001 the Company closed its manufacturing facility in
Montana, and sold its water cooler and filter business and has transferred its
relationship with its JV in China to the buyer of this discontinued operation.
It presently has no owned or leased manufacturing facilities, nor does the
Company have a plan to acquire its own manufacturing facility. The PureSafe
Water Station is manufactured for the Company under a contract by Davis Water
Products.
ITEM 3. LEGAL PROCEEDINGS
WaterChef was a defendant in a legal action brought by certain debenture holders
("Bridge Loans") in New Hampshire Superior Court seeking repayment of debenture
principal of $300,000 and accrued interest from 1997. On June 22, 2002 a
settlement was reached whereby the Company agreed to pay $497,500 in the form of
shares of common stock. The number of shares to be issued was determined by
dividing $497,500 by the average daily trading price of the Company's common
stock over a 30 day period subsequent to the execution of the settlement
documents. Due to an average trading price of $0.029 over the measurement
period, the Company is obligated to issue 17,037,671 shares of common stock. The
stock has not yet been issued, and will not be issued, and the terms of the
settlement agreement will not be completed, until WaterChef's shareholders have
approved an increase in the authorized common stock of the Corporation. As such,
the Company has recorded these 17,037,671 shares as a liability, in common stock
to be issued, totaling $497,500 as of December 31, 2002.
In addition to the issuance of the above mentioned shares, attached to the
original Bridge Loans were warrants for the purchase of the Company's common
stock at $0.15 per share. The debenture holders that participated in the legal
action had the lives of their warrants extended. Those warrants that were to
have expired in March 2002 have been extended until March 2004. A total of
1,666,667 shares of common stock may be purchased under these extended warrants.
8
The Company was a defendant in an action brought by a customer/licensee relating
to a claim that the Company breached a contract by shipping certain goods in
November 1997 that did not conform to the contract. A negotiated settlement was
reached calling for the payment by WaterChef of $27,500, with the first payment
of $3,500 due in February, 2003 and $3,000 per month payable each month, for
eight consecutive months thereafter.
In May 2001, the Company entered into a distribution agreement with a company
(the "Sub Distributor") based in Jordan. The Sub Distributor has agreed to
purchase no fewer than 100 units of the Company's "Pure Safe Water Station"
during 2001 and a minimum of 50 units in each of 2002 and 2003. During the year
ended December 31, 2001, 18 units have been shipped under this agreement. The
sale will be recognized when the Company receives payments due to the fact that
collectiblity cannot be reasonably assured. The Company has recorded the cost of
the inventory shipped as a loss contingency of $242,035 during the year ended
December 31, 2001, since return of the items is uncertain. The Company has
engaged legal counsel in Jordan, to pursue legal remedies and obtain payment for
all units shipped.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A preliminary Proxy for the purpose of increasing the authorized common shares
of the Corporation was submitted to the SEC, whose questions and comments are
being addressed before resubmission. Upon approval by the SEC, the proxy will be
mailed to the shareholders and a vote by the shareholders will be scheduled.
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the OVER-THE-COUNTER ("OTC") Electronic
Bulletin Board under the symbol WTER.OB. This market is categorized as being
"thin" which means that there is generally a paucity of buyers and sellers as
found in the more heavily traded Small Cap and NASDAQ markets. The Bulletin
Board stocks generally do not have the trading characteristics of more seasoned
companies as they lack the market-makers that will make orderly markets as well
as the buyers and sellers that give depth, liquidity and orderliness to those
markets. In addition, the solicitation of orders and/or the recommendations for
purchase of Bulletin Board stocks is restricted in many cases by the National
Association of Securities Dealers (the "NASD") and by individual brokerage firms
as well.
The chart below sets forth the range of high and low bid prices for the
Company's common stock based on closing transactions during each specified
period as reported by the National Quotation Bureau, Inc. The prices reflect
inter-dealer prices without retail mark-up, markdown, quotation or commission
and do not necessarily represent actual transactions.
HIGH LOW
2001
First Quarter .17 .06
Second Quarter .46 .13
Third Quarter .33 .11
Fourth Quarter .18 .07
2002
First Quarter .13 .05
Second Quarter .08 .03
Third Quarter .04 .02
Fourth Quarter .03 .01
10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
INTRODUCTION
DEVELOPMENT OF THE COMPANY
The Company was originally incorporated under Arizona law in 1985 and merged
into a Delaware corporation in 1987. In 1993 the Company, then known as Auto
Swap, U.S.A., entered into a reverse merger with WaterChef, Inc., a Nevada
corporation which manufactured and marketed water coolers and filters. The
financial statements prior to June 4, 1993 are those of WaterChef (Nevada),
which is considered to be the Predecessor Company.
Until the fourth quarter of 2001 WaterChef was engaged in the manufacture and
marketing of water coolers and water purification and filtration equipment. In
the fourth quarter of 2001 the Company negotiated the sale of the water cooler
and filter businesses in order to focus its activities on its PureSafe business
line. The PureSafe has been designed by the Company to meet the needs of
communities who either did not have access to municipal water treatment systems,
or to those whose systems had been compromised, either by environmental factors
or by faulty design or maintenance.
RESULTS OF OPERATIONS
As a result of the restatement of the financial statements for the year ended
December 31, 2001, and certain adjustments to the financial statements for the
year ended December 31, 2002, the Company will be restating its Form 10-QSB
filings included in those periods as soon as practicable.
During 2001 WaterChef made the strategic decision to exit the water cooler and
consumer filter segments of its business in order to concentrate its resources
on the development of the market for the PureSafe Water Station. With the sale
of these assets consummated in December 2001, the Company's water cooler and
consumer filter businesses are reported as discontinued operations for 2001,
resulting in a loss from discontinued operations of $40,412. This loss was
offset by an extraordinary item, a gain on the early extinguishment of debt of
$93,062 related to the discontinued operations for the year ended December 31,
2001. In addition, a gain on the disposal of discontinued operations in the year
ended December 31, 2001 resulted in a gain of $38,791.
Sales for the fiscal years ended December 31, 2002 and December 31, 2001 were
$40,000 and $34,750, respectively. Revenues increased $5,250 or 15% from the
previous 12 months as the Company sold one PureSafe Water Station in 2002 to
White Cross Partners for installation in Juticalpa, Honduras.
Cost of sales increased from $123,250 for the year ended December 31, 2001 to
$246,430 for the year ended December 31, 2002, an increase of $123,180 or 100%.
The increase is due to rent and overhead payments made to the contract
manufacturer due to the absence of production orders, and inventory reserves
recorded in the two periods. An analysis of the components of cost of sales in
the 2001 and 2002 periods follows:
11
Rent and
Cost of Sales Inventory Actual Overhead Payments
Period Reserve CGS to Manufacturer Total
2001 $ 68,250 $ 25,000 $ 55,000 $148,250
2002 159,250 17,280 69,900 246,430
Selling general and administrative expenses for the twelve months ended December
31, 2002 were $789,120 compared to $723,036 for the twelve months ended December
31, 2001, an increase of $66,084 or 9%. The increase in expense is primarily due
to higher than normal professional fees, primarily related to the negotiated
settlement of litigation, and higher consulting and advisory board fees.
In 2001 the Company incurred $187,500 of research and development expense for
the completion of the development of the PureSafe Water Station, and there was
no R&D expensed in 2002.
Interest expense for the year ended December 31, 2002 was $179,111, compared to
$278,963 for the year ended December 31, 2001, a decrease of $99,852, or 36%.
The year earlier period included a non-cash debt discount of $90,200 which was
amortized and recorded as interest expense in 2001.
In 2002 the Company recognized a non-cash expense of $208,935 attributable to
the shares to be issued to the Company's CEO upon the voluntary surrender of his
non-dilution agreement.
The loss from continuing operations for the fiscal year ended December 31, 2002
was $1,589,746 compared to $1,545,034 for the fiscal year ended December 31,
2001, an increase of $44,712 or 3%.
For the fiscal year ended December 31, 2002 the Company had a net loss of
$1,702,734 compared to a net loss of $1,561,893 for the year ended December 31,
2001.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002 the Company had a stockholders' deficiency of approximately
$3,374,000 and a working capital deficiency of approximately $2,970,000. In
addition, the Company has incurred losses from continuing operations of
approximately $1,590,000 and $1,545,000 for the years ended December 31, 2002
and 2001, respectively. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The auditor's report
on its financial statements included elsewhere herein contains an explanatory
paragraph about the Company's ability to continue as a going concern. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans with respect to these matters include
restructuring its existing debt, raising additional capital through future
issuances of stock and / or debt. The accompanying financial statements do not
include any adjustments that might be necessary should the Company be unable to
continue as a going concern.
The Company, during 2002 and 2001, raised $247,700 and $612,393, respectively
through the sale of common and preferred stock.
12
During 2002 the Company continued the restructuring of its debt. In the second
quarter of 2002 the Company reached a negotiated settlement in an action brought
by certain debenture holders (the "Bridge Lenders") in New Hampshire Superior
Court. The litigants sought repayment of $300,000 of debenture principal,
together with interest from 1997, and the issuance of penalty shares for
non-payment of principal and interest. In addition, damages were sought relating
to the Company's failure to register the shares issued under a related warrant
agreement.
The Company and the Bridge Lenders settled this dispute for a total $497,500,
payable in shares of the Company's common stock. The number of shares of common
stock to be paid was determined by dividing $497,500 by the average daily
trading price of WaterChef common over a thirty(30)day trading period,
commencing upon the execution of the settlement agreement. Due to these
requirements, the Company is obligated to issue 17,037,671 shares of common
stock, based on an average price over the measurement period of $0.0292. The
total authorized common stock of the Company does not currently provide a
sufficient number of authorized and unissued, shares to fulfill the terms of the
settlement agreement. As such the Company has recorded these 17,037,671 shares
to be issued as a liability in common stock to be issued for $497,500 as of
December 31, 2002.
In addition to the issuance of the above mentioned shares, attached to the
original Bridge Loans were warrants for the purchase of the Company's common
stock at $0.15 per share. The debenture holders that participated in the legal
action had the lives of their warrants extended. Such warrants that were to have
expired in March 2002 have been extended until March 2004. A total of 1,666,667
shares of common stock may be purchased under these extended warrants. The
Company has recorded a non-cash charge of $111,000 related to the extension of
the lives of these warrants. Such charge is included in the loss on settlement
of debt.
In addition to the above settlement with Bridge Lender who participated in the
legal action, the Company settled its obligation with debenture holders that did
not participate ("non-participating debenture holders") in the legal action.
These non-participating debenture holders had total debentures of $75,000, plus
accrued interest of $9,850, totaling $84,850 as of the settlement date. In
conjunction with the above settlement, the Company settled these outstanding
non-participating debentures, plus accrued interest, with the issuance of
750,000 shares of common stock valued at $0.0292 per share, or $21,900. The
terms of their warrants were not extended, nor are they entitled to receive
additional shares based of the Company's common stock achieving a certain
average trading price 30 days subsequent to the settlement with the
participating debenture holders. The Company has recorded a $62,950 gain with
regard to the settlement of the non-participating debentures. As of December 31,
2002, the 750,000 shares have not been issued as the Company does not currently
have a sufficient number of authorized and unissued common shares to settle
these non-participating debentures. As such the Company has recorded these
750,000 shares to be issued as a liability in common stock to be issued for
$21,900 as of December 31, 2002.
During 2002 the Company also issued 450,000 shares of common stock, valued at
$36,000, for services rendered by the Company's scientific advisory board. In
addition the Company accrued $208,935 for the voluntary surrender by the
Company's President and CEO of his anti-dilution agreement. Such cost is
expected to be satisfied with the issuance of 14,923,958 shares of common stock,
upon approval by the Company's shareholders, in the number of authorized shares
of the Company common stock. As such the Company has recorded these 14,923,958
shares to be issued as a liability in common stock to be issued for $208,935 as
of December 31, 2002.
13
The Company intends to request approval of its stockholders for an increase in
the authorized shares of the Company from 100,000,000 shares to 200,000,000
shares. Upon approval, the issuance of the shares of common stock described
above will increase the outstanding common stock of the Corporation to
approximately 128,000,000 shares, in satisfaction of many of the above
obligations. This increase in the outstanding will dilute the ownership interest
of current shareholders and will adversely affect earnings per share and may
result in a lower market value for the Company's stock . Failure to obtain
shareholder approval of the proposed increase in the authorized common stock of
the Corporation will prevent the Company from discharging its obligations, as
listed above, which will have a material adverse impact on the Company's
financial position, its operations and its ability to continue as a going
concern.
Management is currently attempting to settle or restructure the remaining debt,
and plans to raise additional capital through future issuances of stock and/or
debentures to finance the growth of the Company.
ITEM 7. FINANCIAL STATEMENTS
As a result of the restatement of the financial statements for the year ended
December 31, 2001, and certain adjustments to the financial statements for the
year ended December 31, 2002, the Company will be restating its Form 10-QSB
filings included in those periods as soon as practicable.
The Company's financial statements for the fiscal years ended December 31, 2002
and 2001 are included herein and consist of:
Independent Auditors' Report F-1
Balance Sheet F-2
Statements of Operations F-3
Statement of Changes in Stockholders' Deficiency F-4A, 4B
Statements of Cash Flows F-5
Notes to Financial Statements F-6
14
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
At year-end 2002 the Company's Directors, Executive Officers and Scientific
Advisory Board Members are:
Name Age Position(s) with the Company
David A. Conway 61 Director, Chairman- President
And Chief Executive
Officer
Martin Clare++ (1) 68 Director
Ronald W. Hart + 60 Chairman, Scientific
Advisory Board
Mohamed M. Salem + 51 Scientific Advisory Board
Marshall S. Sterman++ 71 Director
Richard Wilson + 77 Scientific Advisory Board
Dr.Mostafa K. Tolba 81 Scientific Advisory Board
Lord John Gilbert 77 Scientific Advisory Board
----------
+ The chairman of the Advisory Board receives $3,000.00 per month and the
other members, $1,500.00 per month for their services as Advisory Board
members.
++ Also Audit Committee (Marshall Sterman)
Also Compensation Committee (Marshall Sterman)
(1) At year-end Martin Clare resigned from the Board due to health reasons.
In the previous two years the above list included Rudolf W. Schindler who
resigned as an officer of the Corporation in fourth quarter, 2002.
15
David A. Conway
Elected to the Board in 1997 and joined the Company as President and Chief
Executive Officer in 1998. Previous experience as President, CEO of a privately
held public relations and marketing company; Director and VP Administration of
KDI Corporation (NYSE); VP Administration Keene Corporation (NYSE) and earlier
positions with CBS and Goldman Sachs & Co. Mr. Conway who served as an infantry
officer in the US Army, holds undergraduate and graduate degrees from Fordham
University and is listed in Who's Who in America.
Martin Clare
Martin Clare resigned from membership on the Board effective at the end of 2002
for health-related reasons. The Company and its management appreciate his
contribution and wish him a speedy recovery.
Elected to the Board in 2000, Martin Clare was a principal of Civilization
Communications Inc., an international financial and marketing consultancy.
Previously he was a founder of Harris, Clare & Co., Inc., a NASD Broker-Dealer;
founder of Dougherty Clifford & Wadsworth, a noted media banking firm; and
founding partner of IIBC, a technology venture capital and consulting firm. Mr.
Clare is a graduate of Ithaca College, and served in the US Army.
Lord John Gilbert (Ph.D.)
Lord Gilbert served as Minister of State for Transportation, Minister of State
for Finance, and as Minister of State for Defence in the United Kingdom under
three Prime Ministers. Lord Gilbert is Secretary/Treasurer of the Tri-Lateral
Commission and a member of the House of Lords. He was educated at Marchant
Taylors' School and St. John's College, Oxford, and holds a Ph.D .in
International Economics and Statistics from New York University.
Ronald W. Hart (Ph.D.)
Agreed to form the Board of Scientific Advisors in 2000 and became Chairman. Dr.
Hart is an internationally recognized scientist and scholar who was Director of
the National Center for Toxicological Research and was named "Distinguished
Scientist in Residence" by the US Food and Drug Administration in 1992.
Recognized for his pioneering work on aging and his studies on nutrition and
health, Dr. Hart has been appointed visiting professor at a number of
universities, including Cairo University, Seoul National University and Gangzhou
University. He received his doctorate in physiology and biophysics from the
University of Illinois.
16
Mohamed M. Salem (MD/Ph.D.)
Appointed to the Scientific Advisory Board in early 2001, Dr. Salem is Professor
of Occupational and Environmental Medicine at the Kasr El-Aini School of Cairo
University. An internationally recognized expert on the health effects of
environmental and water contaminants including pesticides, lead and other
metals, Dr. Salem is credited with establishing infectious disease control
programs at medical centers and other public entities throughout the Middle
East. Dr. Salem is a principal of Salem Industries, an import and export
company, which is one of the leading suppliers of chemicals and oil field
equipment in the Middle East. Dr. Salem holds both an MD and Ph.D. from Cairo
University.
Marshall S. Sterman
Elected to the Board in 2000, Mr. Sterman is President of the Mayflower Group, a
Massachusetts based merchant bank. He previously served as managing partner of
Cheverie and Company and MS Sterman & Associates, merchant banking firms and
principal of Sterman & Gowell Securities, an investment banking and securities
firm. Mr. Sterman served as an officer in the US Navy and holds his BA from
Brandeis University and his MBA from Harvard University.
Mostafa K. Tolba (Ph.D.)
Dr. Tolba served as Under-Secretary-General of the United Nations, and Executive
Director of the United Nations Environmental Program from 1976 to 1992. Dr.
Tolba is currently President of the International Center for Environment and
Development headquartered in Geneva, Switzerland, and Emeritus Professor of
Science at the Kasr El-Aini School of Medicine at Cairo University. He received
his Ph.D. in Macrobiology from Imperial College, London, England.
Richard Wilson (Ph.D.)
Appointed to the Scientific Advisory Board in 2001, Dr. Wilson is the
Mallinckrodt Research Professor of Physics at Harvard University. Dr. Wilson is
one of the foremost scientific authorities in the fields of water quality
remediation and purification, and is currently Professor of the Energy Research
Group at the University of California. Dr. Wilson is a member of the Advisory
Board of the Atlantic Legal Foundation, and is one of the principal scientists
of the water problems in Chernobyl and in Bangladesh where toxic levels of
arsenic contaminate the water supply. Dr. Wilson holds his Ph.D. from Oxford
University.
17
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Name Non-Cash Total
Principal Position Year Salary Bonus Compensation Compensation
David A. Conway 2002 $165,000 0 0 $165,000
President/CEO
DIRECTORS' COMPENSATION
Directors of the Company do not receive cash compensation for serving as members
; they are reimbursed for their out of pocket expenses related to meetings and
other Company related activity for which they are called upon. In the past they
have received common stock for service to the Company.
In 2002 Mr. Sterman was compensated at the rate of $6,000 per month for
consulting services performed for the Company. The Company may pay for these
services in cash or stock, and may terminate these services at its option.
Company Directors have been paid success fees for helping the Company in various
equity and debt financings over the years. These payments have been both in cash
and common stock, such payments being made based on industry-wide, third party
standards.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated Certificate of Incorporation and Bylaws
eliminate, in certain circumstances, the liability of Directors for breach of
their fiduciary duty. This provision does not eliminate the liability of a
Director (i) for breach of the Director's duty of loyalty to the Company or its
stockholders (ii) for acts of omissions by the director not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) for
willful or negligent declaration of an unlawful dividend, stock purchase or
redemption; (iv) for transactions from which the Director derived an improper
personal benefit; or (v) for any act or omission occurring prior to the
effective date of the Amended and Restated Certificate of Incorporation.
The Company's Amended and Restated Certificate of Incorporation provides
generally for indemnification of the Directors and Officers to the full extent
permitted under Delaware law, and permits indemnification for all other persons
whom the Company is empowered to indemnify.
The Company's Bylaws provide that the Company may indemnify, to the fullest
extent permitted under Delaware law, any person, including officers and
directors, with regard to any action or proceeding.
18
The Company believes that it is the position of the Securities and Exchange
Commission that insofar as the foregoing provisions may be invoked to disclaim
liability for damages arising under the Securities Act, those provisions, if
against public policy as expressed in the Securities Act, will be unenforceable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS
Set forth below is information as of December 31, 2000, concerning stock
ownership of all persons known by the Company to own beneficially 5% or more of
the issued and outstanding common stock of the Company, all Directors, the
Executive Officers, and all Directors and Executive Officers of the Company as a
group based on the number of shares of common stock issued and outstanding as of
the date of this Offering Memorandum. For purposes of the Memorandum, beneficial
ownership is defined in accordance with the Rules of the Securities and Exchange
Commission and generally means the power to vote and/or dispose of the
securities regardless of any economic interest.
Name and Address of Number of Shares of Voting Percentage of
Beneficial Owner of Shares Stock Beneficially Owned (1) Total Voting
-------------------------- ---------------------------- -------------
David A. Conway (2) (3) 19,201,390 28.1%
WaterChef, Inc.
1007 Glen Cove Ave.
Glen Head, NY 11545
Martin Clare 249,999 ---
Civilization Communications Inc.
W. Hawthorne
Valley Stream, NY
Marshall S. Sterman 250,000 ---
The Mayflower Group
46 Neptune Street
Beverly, MA 01915
All executive officers and
Directors as a Group (3) 19,700,289 21.9%
--------------------------------------------
(Three-3-Persons)
1. Total Voting Shares are comprised of all common shares issued and
outstanding.
2. Includes 5,044,794 shares held by affiliates and 6,310,464 shares held
in and IRA Trust.
3. In March, 2002 Mr. Conway voluntarily surrendered the anti-dilution
agreement that insured 32.6% ownership of the voting shares to Mr.
Conway and his affiliates.
4. Does not include Officers or Directors of the Company who were not
such as of the date of record.
19
ITEM 12. RELATED PARTY TRANSACTIONS
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
DESCRIPTION OF EXHIBIT
10.1 10% Convertible Promissory Note dated November 17, 2000.
31 Certification of Chief Executive Officer pursuant to 18 U.S.C.ss.1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley act of 2002
32 Certification of Chief Executive Officer pursuant to 18 U.S.C.ss.1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2002
Reports on Form 8 K
- On April 25, 2003 the Company filed Form 8-K, announcing the dismissal
of their prior Certifying Accountants, and the engagement of their
current independent accountants commencing for the year ended December
31, 2002
ITEM 14. CONTROLS AND PROCEDURES
Based on an evaluation as of December 31, 2002, carried out under the
supervision and with the participation of the Company's Chief Executive Officer
/ Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in the Securities and Exchange Act of 1934 Rules 13a-14
and 15d - 14), the Chief Executive Officer / Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the time periods specified
in Securities and Exchange Commission rules and forms are disclosed.. Subsequent
to the date of their evaluation, there were no significant changes in the
Company's internal controls or in other factors that could significantly affect
the disclosure controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
WATER CHEF, INC.
May 21, 2003 /s/ David A. Conway
------------ -----------------------------------
Date: David A. Conway
President,
Chief Executive Officer
and Chief Financial Officer
(Principal Operating Officer)
21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Water Chef, Inc.
Glen Head, New York
We have audited the accompanying balance sheet of Water Chef, Inc., (a
development stage company commencing January 1, 2002) as of December 31, 2002
and the related statements of operations, stockholders' deficiency and cash
flows for the years ended December 31, 2002 and 2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Water Chef, Inc., (a
development stage company commencing January 1, 2002) as of December 31, 2002
and the results of its operations and its cash flows for the years ended
December 31, 2002 and 2001 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2(l) to the financial statements, the Company has restated
its statements of operations, stockholders' deficiency and cash flows for the
year ended December 31, 2001.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2(a) to the financial
statements, the Company has suffered recurring losses, and has working capital
and stockholders' deficiencies, which 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(a). The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Marcum & Kliegman LLP
-----------------------------
Marcum & Kliegman LLP
New York, New York
May 21, 2003
F-1
WATER CHEF INC.
(A Development Stage Company Commencing January 1, 2002)
BALANCE SHEET
DECEMBER 31, 2002
ASSETS
CURRENT ASSETS:
Cash ....................................................... $ 22,758
Inventory .................................................. 26,500
------------
TOTAL CURRENT ASSETS ..................................... 49,258
PATENTS AND TRADEMARKS (net of
accumulated amortization of $3,235) ........................ 22,820
Other Assets .................................................. 3,162
------------
$ 75,240
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable ........................................... $ 441,793
Accrued expenses and other current liabilities ............. 698,570
Notes payable (including accrued interest of $265,987) ..... 949,957
Common stock to be issued .................................. 928,335
------------
TOTAL CURRENT LIABILITIES ................................ 3,018,655
------------
LONG-TERM LIABILITIES:
Loans payable to stockholder (including accrued
interest of $57,485) ..................................... 430,266
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.001 par value;
10,000,000 shares authorized;
270,500 shares issued and outstanding,
(liquidation preference $1,304,088) ...................... 271
Common stock, $.001 par value;
90,000,000 shares authorized;
89,564,286 shares issued;
89,559,886 shares outstanding ............................ 89,564
Additional paid-in capital ................................. 12,700,894
Subscription receivable .................................... (37,300)
Treasury stock, 4,400 common shares, at cost ............... (5,768)
Accumulated deficit through December 31, 2001
(as restated see note 2(l)) .............................. (14,531,596)
Deficit accumulated during development stage ............... (1,589,746)
------------
TOTAL STOCKHOLDERS' DEFICIENCY .......................... (3,373,681)
------------
$ 75,240
============
F-2
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------
2002 2001
------------ ------------
(As restated
see note 2(l))
Sales ............................................ $ 40,000 $ 34,750
------------ ------------
Costs and Expenses:
Cost of sales ................................. 246,430 148,250
Selling, general and administrative ........... 789,120 723,036
Research and development ...................... - 187,500
Non-dilution agreement termination costs ...... 208,935 -
Interest expense (including interest
expense for related party of $24,618 and
$33,617, respectively) ...................... 179,111 278,963
Loss on settlement of debt .................... 206,150 -
Loss contingency .............................. - 242,035
------------ ------------
1,629,746 1,579,784
------------ ------------
Loss from continuing operations .................. (1,589,746) (1,545,034)
------------ ------------
Discontinued operations:
Loss from discontinued operations ............. - (40,412)
Gain on disposal of discontinued operations ... - 38,791
------------ ------------
Loss from discontinued operations, net ........... - (1,621)
------------ ------------
Loss before extraordinary items .................. (1,589,746) (1,546,655)
Extraordinary item - gain on early
extinguishment of debt ...................... - 93,062
------------ ------------
Net loss ......................................... (1,589,746) (1,453,593)
Preferred stock dividends ........................ (112,988) (108,300)
------------ ------------
Net loss applicable to
common stock .................................. $ (1,702,734) $ (1,561,893)
============ ============
Basic and Diluted Loss Per Common Share:
Continuing operations ......................... $ (0.02) $ (0.02)
Discontinued operations ....................... - -
Extraordinary item - gain on early
extinguishment of debt ...................... - -
------------ ------------
$ (0.02) $ (0.02)
============ ============
Weighted Average Common Shares Outstanding -
Basic and Diluted ............................. 88,675,245 80,657,519
============ ============
See notes to financial statements.
F-3
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
STATEMENT OF STOCKHOLDERS' DEFICIENCY
Preferred Stock Common Stock Additional
------------------- ---------------------- Paid-in
Shares Amount Shares Amount Capital
------- -------- ---------- -------- -----------
BALANCE - January 1, 2001 (as restated see Note 2(l)). 145,500 $ 146 69,178,287 $ 69,178 $11,319,211
Shares issued for:
Cash .............................................. - - 13,043,749 13,044 599,349
Services .......................................... - - 2,050,000 2,050 194,656
Debt discount...................................... - - 600,000 600 101,900
Conversion of debt ................................ - - 710,000 710 57,885
Receivable ........................................ - - 1,032,250 1,032 66,468
Net loss ........................................... - - - - -
------- -------- ---------- -------- -----------
BALANCE - DECEMBER 31, 2001 (as restated see Note 2(l)) 145,500 146 86,614,286 86,614 12,339,469
Extension of life of warrants ...................... - - - - 111,000
Sale of preferred stock
($1.00 per share - December) 125,000 125 - - 117,375
Shares issued for:
Cash
.....($0.025 per share - April). - - 2,500,000 2,500 97,500
Services
.....($0.08 per share - April)....................... - - 450,000 450 35,550
Collection of subscription receivable
March ............ - - - - -
December - - - - -
Net loss ........................................... - - - - -
------- -------- ---------- -------- -----------
BALANCE - DECEMBER 31, 2002 .......................... 270,500 $ 271 89,564,286 $ 89,564 $12,700,894
======= ======== ========== ======== ===========
See notes to financial statements.
F-4A
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
STATEMENT OF STOCKHOLDERS' DEFICIENCY
Accumulated Deficit
Deficit Accumulated
Stock Through During Total
Subscription Treasury December Development Stockholders'
Receivable Stock 31, 2001 Stage Deficiency
------------ -------- ------------ ----------- ------------
-continued-
BALANCE - January 1, 2001 (as restated see Note 2(l)). $ - $(5,768) $(13,078,003) $ - $(1,695,236)
Shares issued for:
Cash ............................................. - - - - 612,393
Services ......................................... - - - - 196,706
Debt discount .................................... - - - - 102,500
Conversion of debt ............................... - - - - 58,595
Receivable ....................................... (67,500) - - - -
Net loss ........................................... - - (1,453,593) - (1,453,593)
------------ ------- ------------ ----------- -----------
BALANCE - DECEMBER 31, 2001 (as restated see Note 2(l)) (67,500) (5,768) (14,531,596) - (2,178,635)
Extension of life of warrants ...................... - - - - 111,000
Sale of Preferred stock
($1.00 per share) ................................ - - - - 117,500
Shares issued for:
Cash
($0.025 per share) ............................. - - - - 100,000
Services
($0.08 per share) .............................. - - - - 36,000
Collection of subscription receivable ............ 30,200 - - - 30,200
Net loss ........................................... - - - (1,589,746) (1,589,746)
------------ ------- ------------ ----------- -----------
BALANCE - DECEMBER 31, 2002 .......................... $ (37,300) $(5,768) $(14,531,596) $(1,589,746) $(3,373,681)
============ ======= ============ =========== ===========
See notes to financial statements.
F-4B
WATER CHEF INC.
(A Development Stage Company Commencing January 1, 2002)
STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------
2002 2001
----------- -----------
(As restated
see note 2(l))
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ......................................................... $(1,589,746) $(1,453,593)
Adjustments to reconcile net loss to
net cash used in operating activities
Loss from discontinued operations ........................... - 40,412
Extraordinary item - gain on early extinguishment
of debt from discontinued operations ..................... - (93,062)
Settlement of debt .......................................... - -
Gain on disposal of discontinued operations ................. - (38,791)
Amortization of patents ..................................... 1,853 1,264
Non-cash compensation ....................................... 36,000 196,706
Amortization of debt discount ............................... - 90,200
Common stock issued for non-payment
of note and interest payable .............................. - 12,300
Loss on settlement of debt .................................. 206,150 -
Non-dilution agreement termination cost ..................... 208,935 -
Inventory reserve ........................................... 159,250 68,250
Change in assets and liabilities
Inventory ..................................................... (26,500) (227,500)
Prepaid expenses and other current assets ..................... 56,500 (49,717)
Accounts payable .............................................. 34,597 (8,799)
Accrued expenses and other current liabilities ................ 452,508 353,294
----------- -----------
Net cash used in continuing operations ......................... (460,453) (1,109,036)
Net cash used in discontinued operations ....................... - (25,895)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES .............................. (460,453) (1,134,931)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ............................... - (551)
Purchase of patents .............................................. - (24,500)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES .............................. - (25,051)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable ...................................... - 450,000
Repayment of note payable ........................................ - (25,000)
Receipt of stock subscription receivable ......................... 30,200 -
Proceeds from sale of preferred stock ............................ 117,500 -
Proceeds from sale of common stock ............................... 100,000 612,393
Proceeds from sale of common stock to be issued .................. 200,000 -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......................... 447,700 1,037,393
----------- -----------
NET DECREASE IN CASH ............................................... (12,753) (122,589)
CASH AT BEGINNING OF YEAR .......................................... 35,511 158,100
----------- -----------
CASH AT END OF YEAR ................................................ $ 22,758 $ 35,511
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ....................................................... $ - $ -
=========== ===========
Income taxes ................................................... $ - $ -
=========== ===========
Non-cash financing and investing activities:
Common stock issued for conversion of debt ..................... $ - $ 48,995
=========== ===========
Common stock issued for conversion of debt
- discontinued operations . ........ $ - $ 9,600
=========== ===========
Common stock issued with debt discount.......................... $ - $ 102,500
=========== ===========
Accounts payable converted to note payable ..................... $ - $ 20,000
=========== ===========
Deferred finance fees included in accrued expenses ............. $ - $ 40,000
=========== ===========
Notes Payable and accrued interest converted to
common stock to be issued .................................. $ 424,250 $ -
=========== ===========
See notes to financial statements.
F-5
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. THE COMPANY
Water Chef, Inc. (the "Company"), is a Delaware Corporation currently
engaged in the design, marketing and sale of water dispensers and
purification equipment both in and outside the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation
- As disclosed in Note 3 the Company discontinued its
water cooler and filtration operations in November
2001. As a result the Company has refocused its
efforts on raising capital and developing markets for
its proprietary technology. Therefore, for financial
reporting purposes, the Company has determined that
it has re-entered the development stage commencing
January 1, 2002. The Company's statements of
operations, stockholders' deficiency and cash flows
for the year ended December 31, 2002 represent the
cumulative, from inception information, required by
Statement of Financial Accounting Standards ("SFAS")
No. 7, "Development Stage Enterprises".
- The accompanying financial statements have been
prepared assuming that the Company will continue as a
going concern. The Company incurred losses from
continuing operations of $1,589,746 and $1,545,034
for the years ended December 31, 2002 and 2001,
respectively. Additionally, the Company has working
capital and stockholders' deficiencies of $2,969,397
and $3,373,681 at December 31, 2002. These conditions
raise substantial doubt about the Company's ability
to continue as a going concern.
Management's plans with respect to these matters
include restructuring its existing debt and raising
additional capital through future issuances of stock
and/or debt. The accompanying financial statements do
not include any adjustments that might be necessary
should the Company be unable to continue as a going
concern.
b. Inventory - Inventory is stated at the lower of cost (average)
or net realizable value.
c. Patents and Trademarks - Patents and trademarks are amortized
ratably over 9 to 14 years.
F-6
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
d. Stock-Based Compensation - The Company accounts for stock
transactions in accordance with Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees". In accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company adopted the pro forma
disclosure requirements of SFAS No. 123.
e. Revenue Recognition - Revenues are recognized when title
passes and collectibility is reasonably assured. Allowances
for estimated bad debts, sales allowance and discounts are
provided when the sales are recorded.
f. Income Taxes - Income taxes are accounted for under SFAS No.
109, "Accounting for Income Taxes", which is an asset and
liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the
Company's financial statements or tax returns. Valuation
allowances are established when necessary to reduce deferred
assets to the amounts expected to be realized.
g. Loss Per Share - Basic loss per share was computed using the
weighted average number of outstanding common shares. Diluted
per share amounts when applicable include the effect of
dilutive common stock equivalents from the assumed exercise of
options, warrants and convertible preferred stock. Diluted per
share amounts are computed excluding common stock equivalents
since their inclusion would be anti-dilutive. Total shares
issuable upon the exercise of warrants and the conversion of
preferred stock for the years ended December 31, 2002 and
2001, were 5,989,168 and 2,166,667 respectively. These share
shave been excluded from loss per share calculations as they
are anti-dilutive. In addition, common stock to be issued upon
stockholder approval of the increase in the authorized stock
of the Company (Note 7), aggregating 36,711,629 shares are
also excluded from loss per share calculations.
h. Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
i. Fair Value of Financial Instruments - The carrying amounts of
the financial instruments reported in the balance sheet
approximate their fair market value due to the short-term
maturity of these instruments.
j. Impairment of Long-Lived Assets - In the event that facts and
circumstances indicate that the cost of an asset may be
impaired, an evaluation of recoverability would be performed.
If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a
write-down to market value is required.
F-7
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
k. Research and Development - Research and development cost
consist of expenditures incurred during the course of planned
research and investigation aimed at the discovery of new
knowledge, which will be useful in developing new products or
processes. The Company expenses all research and development
costs as incurred.
l. Restatement - The Company has restated its statement of
stockholders' deficiency to give effect to the correction of
an error related to the accrual of cumulative preferred stock
dividends. The Company previously recorded the preferred stock
dividends as a liability prior to their declaration by the
Company's Board of Directors. To date, no dividends on any
class of preferred stock have been declared by the Board of
Directors. The correction decreased current liabilities and
accumulated deficit as previously reported by $666,106 and
$557,806 as of December 31, 2001 and 2000, respectively and
has been retroactively adjusted in the accompanying statement
of stockholders' deficiency. The correction had no effect on
previously reported losses, loss per share amounts or cash
flows for the periods presented.
The Company has restated its statement of stockholders'
deficiency to give effect to the correction of errors relating
to the valuation of certain equity transactions that occurred
in periods prior to January 1, 2001. The Company had issued
common stock with a value of $517,693 and warrants valued at
$368,734 in connection with an offering of Bridge Loans (See
Note 7c). The value of the common stock and warrants were not
reflected as a financing cost at the time the debt arose. The
amortization of the financing cost would have been over the
original 5 month term of the debt. As the financing cost would
have been fully amortized prior to January 1, 2001 the value
of the common stock and warrants has been recorded as an
increase to additional paid-in capital and an increase in
accumulated deficit.
The Company has restated its statement of stockholders'
deficiency to give effect to the correction of an error
related to the recording of a reserve of $135,615 that existed
at December 31, 2001 for litigation and liabilities that were
found not to represent actual obligations of the Company. The
correction has been recorded as a reduction in accumulated
deficit.
The Company has restated its statement of stockholders'
deficiency to give effect to the correction of an error
related to the valuation of shares issued prior to January 1,
2001 pursuant to an anti-dilution agreement with a stockholder
of the Company. The correction gave rise to additional
compensation expense of $1,366,502. As the compensation would
have been recorded prior to January 1, 2001 the cost has been
reflected as an increase to additional paid-in capital and an
increase in accumulated deficit.
F-8
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The cumulative effect of the preceding adjustments on
accumulated deficit at December 31, 2000 is an increase of
$1,559,508 from accumulated deficit as previously reported of
$11,518,495 to accumulated deficit as restated of $13,078,003.
The Company has also restated its statements of operations,
stockholders' deficiency and cash flows for the year ended
December 31, 2001 for the following:
The Company has corrected an error relating to the values used
for common stock issued in connection with various
compensatory transactions. The Company recorded additional
debt discount of $16,200, which was fully amortized to expense
by December 31, 2001, and additional consulting expense of
$20,456.
The Company has corrected an error relating to the accrual of
deferred financing fees arising in connection with short-term
debt incurred during the year. The Company recorded additional
debt discount of $40,000, which was fully amortized to expense
by December 31, 2001.
The Company has corrected an error relating to the accrual of
directors fees and the recording of certain other expenses and
adjustments. The Company recorded additional expense of
$119,218 for the year ended December 31, 2001 as a result of
these adjustments.
The Company has reclassified $120,685 in extraordinary gains
to costs and expenses.
The cumulative effect of the preceding adjustments on net loss
and net loss per share for the year ended December 31, 2001 is
as follows:
As
Previously As
Reported Adjusted
------------ ------------
Net loss from continuing
operations after preferred
dividend requirements ($1,578,145) ($1,653,334)
Net loss applicable to common
stock ($1,366,019) ($1,561,893)
Net loss per share from
continuing operations ($.02) ($.02)
Net loss per share ($.02) ($.02)
F-9
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
m. Recent Accounting Pronouncements:
(i) SFAS 145
In April 2002, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No.13, and Technical Corrections." The
rescission of SFAS No.4, "Reporting Gains and Losses
from Extinguishments," and SFAS No.64,
"Extinguishments of Debt made to Satisfy Sinking Fund
Requirements," which amended SFAS No.4, will affect
income statement classification of gains and losses
from extinguishment of debt. SFAS No.4 requires that
gains and losses from extinguishment of debt be
classified as an extraordinary item, if material.
Under SFAS No. 145, if the extinguishment of debt is
a routine and recurring transaction by the entity, as
in a risk management strategy, then it should not be
considered extraordinary under the criteria in APB
Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," as
it does not meet the unusual in nature and
infrequency of occurrence criteria in APB Opinion No.
30. SFAS No. 145 will be effective for fiscal years
beginning after May 15, 2002. Upon adoption,
extinguishments of debt shall be classified under the
criteria in APB Opinion No. 30. The adoption of SFAS
No.145 is not expected to have a material affect on
the Company's financial position and results of
operations.
(ii) SFAS 146
In June 2002, the FASB issued SFAS No.146,
"Accounting for Costs Associated with Exit or
Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs
associated with exit or disposal activities and
nullified Emerging Issues Task Force Issue ("EITF")
No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or
disposal activity be recognized when the liability is
incurred versus the date an entity commits to an exit
plan under EITF 94-3. SFAS No. 146 also establishes
that fair value is the objective for initial
measurement of the liability. The provisions of this
statement are effective for exit or disposal
activities that are initiated after December 31,
2002, with early application encouraged. The Company
does not expect the provisions of SFAS No.146 to
materially affect its financial position and results
of operations.
F-10
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(iii) SFAS 148
In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition
and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting
for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the
fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and
interim financial statements about the method of
accounting for stock-based employee compensation and
the effect of the method used on reported results.
The disclosure requirements apply to all companies
for fiscal years ending after December 15, 2002. The
interim disclosure provisions are effective for
financial reports containing financial statements for
interim periods beginning after December 15, 2002.
The Company will continue to account for stock-based
compensation according to APB Opinion No. 25. The
adoption of SFAS No. 148 did not have a material
impact on the Company's financial statements.
(iv) FIN 45
In November 2002, the FASB issued FASB Interpretation
No. 45 ("FIN 45"), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN
45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair
value of the obligation it assumes under that
guarantee. FIN 45 also requires additional
disclosures by a guarantor in its interim and annual
financial statements about the obligations associated
with guarantees issued. The initial recognition
requirements of FIN 45 are effective for guarantees
issued or modified after December 31, 2002 and
adoption of the disclosure requirements are effective
for the Company during the first quarter ending March
31, 2003. The Company does not expect the adoption of
FIN 45 will have a significant impact on its
financial position or results of operations.
(v) FIN 46
In January 2003, the FASB issued FASB Interpretation
No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities." FIN 46 provides guidance on the
identification of entities for which control is
achieved through means other than through voting
rights, variable interest entities, and how to
determine when and which business enterprises should
consolidate
F-11
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
variable interest entities. This interpretation
applies immediately to variable interest entities
created after January 31, 2003. It applies in the
first fiscal year or interim period beginning after
June 15, 2003, to variable interest entities in which
an enterprise holds a variable interest that it
acquired before February 1, 2003. The adoption of
this interpretation is not expected to have a
material impact on the Company's financial
statements.
(vi) SOP 01-6
In December 2001, the Accounting Standards Committee
(AcSEC) of the American Institute of Certified Public
Accountants issued Statement of Position 01-6,
"Accounting by Certain Entities (including Entities
with Trade Receivables) That Lend to or Finance the
Activities of Others" ("SOP 01-6"). SOP 01-6 provides
guidance on accounting and reporting matters for
entities that have trade receivables and entities
that finance their customers' purchases of goods and
services using trade receivables. SOP 01-6 is
effective for fiscal years beginning after December
15, 2001, and the Company has adopted the provisions
of SOP 01-6 effective January 1, 2002. The adoption
of SOP 01-6 has not had a material effect on the
Company's financial position, results of operations
or cash flows.
(vii) SFAS 149
In April 2003, the FASB issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments
and Hedging Activities." The statement amends and
clarifies accounting for derivative instruments,
including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS
133. This Statement is effective for contracts
entered into or modified after June 30, 2003, except
as stated below and for hedging relationships
designated after June 30, 2003. The guidance should
be applied prospectively. The provisions of this
Statement that relate to SFAS 133 Implementation
Issues that have been effective for fiscal quarters
that began prior to June 15, 2003, should continue to
be applied in accordance with respective effective
dates. In addition, certain provisions relating to
forward purchases or sales of when-issued securities
or other securities that do not yet exist, should be
applied to existing contracts as well as new
contracts entered into after June 30, 2003. The
adoption of SFAS No. 149 is not expected to have an
impact on the Company's financial statements.
F-12
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
3. DISCONTINUED OPERATIONS
In November 2001, the Company's sold the assets of their water cooler
and filter operations with a book value of $61,209 for $100,000,
resulting in a gain of $38,791. This segment of the Company's business
is reported as discontinued operations for the year ended December 31,
2001.
Loss from discontinued operations for the year ended December 31, 2001
consisted of the following:
Net sales .................................. $ 152,040
Cost of sales .............................. (84,029)
Selling, general and administrative expenses (108,423)
---------
$ (40,412)
=========
During the year ended December 31, 2001, the Company reduced its
outstanding debt through forgiveness by $93,062, as it related to its
discontinued operations. Such amount has been recorded as an
extraordinary item.
4. INVENTORY
At December 31, 2002, inventory consisted of nine complete and eight
partially complete units of the Company's water purification units.
Inventories are net of a lower of cost or market adjustment of
$159,000.
5. NOTES PAYABLE
Notes payable at December 31, 2002 consist of the following:
(a) 146,036
(b) 558,533
(c) 245,388
--------
$949,957
========
(a) Loans payable - other: These are unsecured notes bearing
interest ranging from 10% to 15% per annum, with no specific
due date for repayment. Amounts due on these notes, inclusive
of $62,816 in interest is $146,036, at December 31, 2002.
(b) In April 2001, the Company issued a $400,000 promissory note
at an interest rate of 2% per month. In consideration for the
issuance of this note, 500,000 shares of
F-13
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
the Company's common stock were issued to the note holder and
a $74,000 debt discount was recorded and fully amortized in
the year ended December 31, 2001. The principal balance and
accrued interest were payable on September 1, 2001. The
Company did not make such payment and was required to issue an
additional 100,000 penalty shares of its common stock to the
note holder. The Company recorded additional interest expense
of $12,300 related to the issuance of these penalty shares.
Amounts due on this note, inclusive of $158,533 in interest is
$558,533, at December 31, 2002. As of April 30, 2003, the note
holder has not demanded payment, although there is no
assurance that the note holder will continue to defer demand
for repayment.
(c) In November 2000, the Company entered into a Convertible
Promissory Note agreement, whereby the Company may be advanced
a maximum of $300,000. The Company was advanced the following:
$100,000 in November 2000, $50,000 in December 2000 and
$50,000 in January 2001. No further cash advances were made to
the Company. The Convertible Promissory Note agreement also
called for the payment of $100,000 of Company expenses. The
advances bear interest at 10% per annum and were to have been
repaid as of January 15, 2002. Further, if any payments due
after the original due date remain unpaid, a late charge of 4%
of the amount due is assessed. The agreement included a
provision that advances, accrued interest and late charges can
be converted into the Company's common stock. A maximum of
6,000,000 shares could have been issued upon conversion had
the full $300,000 been advanced. As of December 31, 2002, the
Company owed $240,000 on these advances, inclusive of $45,388
in interest. The Company and the note holder, by mutual
consent, had agreed to extend the due date of the note to May
1, 2002. All other terms and provisions of the note are
unchanged.
In April 2003, these note holders received a judgment against
the Company for the principal sum of $200,000 plus interest,
plus all costs and disbursements, totaling $245,388.
6. LOANS PAYABLE - STOCKHOLDER
At December 31, 2002, the Company is obligated to its Chief Executive
Officer for loans and advances made to the Company totaling $372,781,
plus accrued interest of $57,485. These advances have been accruing
interest ranging from 6% to 12% per annum. The loans have no repayment
terms and the stockholder has agreed not to demand payment until July
1, 2004 at the earliest.
F-14
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
7. COMMON STOCK TO BE ISSUED
In February 2002, the Company's Board of Directors approved, pending
stockholder approval, the increase in the number of authorized common
shares to be issued to 190,000,000 shares. Such approval has not been
received.
During the year ended December 31, 2002, the Company recorded a
liability for common stock to be issued for the following transactions:
a. Cash
During the year end December 31, 2002, the Company received
$200,000 for 4,000,000 shares of its common stock. These
shares, will be issued upon the approval by the stockholders
on the increase in the number of authorized common shares of
the Company. These shares are not included in the loss per
share calculations.
b. Non-Dilution Agreement Termination Cost
In May 2002, the Company agreed to issue to the Company's
President and Chief Executive Officer, and to related parties
of such, an aggregate of 14,923,958 shares of its common stock
in connection with the voluntary surrender of a non-dilution
agreement that the President had entered into with the Company
in June 1997. These shares are not included in the loss per
share calculations.
Since the issuance of these shares is subject to stockholder
approval, the measurement date for purposes of valuation will
be established when such stockholder approval has been
obtained. Accordingly, the Company is utilizing variable
accounting to determine the value of these shares and the
related liability is included in common stock to be issued.
The value of these shares as of December 31, 2002 is $208,935.
c. Settlement of Debt
The Company was a defendant in an action brought by certain
debenture holders (The "Bridge Loans") in New Hampshire
Superior Court seeking repayment of $300,000 of debenture
principal together with interest from 1997, and the issuance
of penalty shares for non payment of principal and interest.
In addition, the plaintiff's claim that they had suffered by
the Company's failure to register the shares issued under the
warrant agreement.
The Company had interposed defenses and counterclaims. In June
1997, in connection with the debentures, the Company had
issued 6,667 shares of common stock for every $1,000 of debt
at a price of $0.15 per share. The Company claimed that it was
owed the $300,000 consideration for such shares. In addition,
the Company had issued warrants for the purchase of 2,500,000
shares of common stock at an exercise price of $0.15 per share
exercisable until March 2002.
F-15
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Furthermore, the Company had issued another 100,000 shares of
common stock to each debenture holder, or 1,300,000 shares, at
a price of $0.15 per share.
In the second quarter of 2002, the Company and the Bridge
Lenders participating in the legal action, settled this
dispute requiring the Company to: (i) Issue 3,000,000 shares
of common stock valued at $497,500 in lieu of the principal
and interest owed to the debenture holders who participated
("participants") in this legal action. The Company prior to
the settlement had recorded the debentures at $300,000, plus
accrued interest of $39,400, for a total of $339,400. The
difference between the $497,500 settlement and the $339,400,
or $158,100, is recorded as a loss on settlement of debt. (ii)
Extend the warrants attached to the participants' debentures
for another two years until March 2004, for which the Company
has recorded a non cash expense charge of $111,000 (see Note
11) and (iii) Issue additional shares if the product of the
$497,500, as valued for the 3,000,000 shares above, divided by
the average daily trading price for the 30 days subsequent to
the settlement, is greater than the original 3,000,000 shares.
Due to these requirements the Company is obligated to issue an
additional 14,037,671 shares, due to the average trading price
of $0.0292 in the 30 days subsequent to the settlement. As of
December 31, 2002, neither the 3,000,000 nor the additional
shares of 14,037,671 have been issued, and accordingly the
Company has recorded these shares as common stock to be issued
valued at $497,500. These shares are not included in the loss
per share calculations.
The debenture holders that did not participate
("non-participating debentures") in the above legal action had
total debentures of $75,000, plus accrued interest of $9,850
as of the settlement date, totaling $84,850. In conjunction
with the above settlement, the Company settled these
outstanding non-participating debentures, plus accrued
interest, with the issuance of 750,000 shares of common stock
valued at $0.0292 per share, or $21,900. The terms of their
warrants were not extended, nor are they entitled to receive
additional shares based on the Company's common stock
achieving a certain average trading price 30 days subsequent
to the settlement with the participating debenture holders.
The Company has recorded a $62,950 gain with regard to the
settlement of the non-participating debentures. As of December
31, 2002, the 750,000 shares have not been issued, and
accordingly the Company has recorded these shares as common
stock to be issued valued at $21,900. These shares are not
included in the loss per share calculations.
The total shares to be issued upon stockholder approval of the increase
in the authorized stock of the Company as a result of the transactions
described above aggregate 36,711,629.
F-16
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
8. PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of $.001 par value
preferred stock, issuable in series with rights, preferences,
privileges and restrictions as determined by the board of directors.
At December 31, 2002, outstanding preferred shares were as follows:
Liquidation
Current Preference
Annual Total Dividend (including
Authorized Issued Par Dividend Dividend Arrearage dividend
Shares Shares Value Requirement Arrearage Per Share arrearage)
------- ------- ----- ----------- --------- --------- -----------
Series A 400,000 52,500 $ 53 $ 52,500 $ 412,600 $ 7.86 $ 936,600
Series D 400,000 93,000 93 55,800 361,800 3.89 361,800
Series C 400,000 125,000 125 18,750 4,688 .04 4,688
------- ----- --------- --------- -----------
270,500 $ 271 $ 127,050 $ 779,088 $ 1,304,088
======= ===== ========= ========= ===========
Series A:
The Series A preferred stock provides for a 10% cumulative dividend,
based on the $10 per share purchase price, payable annually in the
Company's common stock or cash, at the Company's option. The Series A
preferred stock is not convertible, and is redeemable solely at the
Company's option at a price of $11 per share plus accrued dividends.
The Series A preferred stockholders have voting rights equal to common
stockholders.
In the event of the liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, holders of the Series A
preferred stock are entitled to receive out of the assets of the
Company the sum of $10.00 per share of Series A preferred stock then
outstanding, plus a sum equal to all dividends (whether or not earned
or declared) on such shares accrued and unpaid thereon to the date of
final payment or distribution, before any payment or distribution upon
dissolution, liquidation or winding up shall be made on any series or
class of capital stock ranking junior to Series A preferred stock as to
such payment or distribution.
Series D:
The Series D preferred stock provides for a 12% cumulative dividend,
based on the $5 per share purchase price, payable semi-annually in the
Company's common stock or cash, at the Company's option. The Series D
preferred stock is not convertible, and is redeemable solely at the
Company's option at a price of $5.75 per share plus accrued dividends.
The Series D Preferred stockholders have voting rights equal to the
common stockholders.
F-17
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In the event of the liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, holders of the Series D
preferred stock are entitled to receive out of the assets of the
Company the sum all dividends (whether or not earned or declared) on
such shares accrued and unpaid thereon to the date of final payment or
distribution, before any payment or distribution upon dissolution,
liquidation or winding up shall be made on any series or class of
capital stock ranking junior to Series D preferred stock as to such
payment or distribution.
Series C:
During the year ended December 31, 2002 the Company sold 125,000 shares
of 15% Convertible Preferred stock at $1.00 per share. These shares
convert in one year. All dividends are payable in shares of the
Company's common stock valued at the then-current market price per
share, or upon conversion, whichever is earlier. The conversion rate
for shares, and accrued dividends payable, is 33.33 shares of common
for each $1.00 of preferred stock and dividends payable, or $0.03 for
each share of common stock. The Series C Preferred stockholders have
voting rights equal to the common stockholders. The Series C preferred
stock has no stated rights in the assets of the Company upon
liquidation.
10. COMMON STOCK
In February 2002, the Company's Board of Directors approved, pending
stockholder approval, the increase in the number of authorized common
shares to be issued to 190,000,000 shares. Such approval has not been
received.
During the years ended December 31, 2002 and 2001, the following common
stock transactions occurred:
a. Cash -
In the year ended December 31, 2001, the Company sold an
aggregate of 13,034,749 shares of its common stock at prices
ranging from $.04 to $.08 depending on the market price on the
dates of issue. Net proceeds from such sales were $612,393.
In the year ended December 31, 2002, the Company sold
2,500,000 shares of its common stock for total proceeds of
$100,000, or $.04 per share. Such shares were sold based on
the market price on the date of issuance.
F-18
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
b. Services -
In the year ended December 31, 2001, the Company issued an
aggregate of 2,050,000 shares of its common stock for
consulting services provided to the Company, valued at
$196,706. Such shares were issued throughout the year at
prices ranging from $.06 to $.16 depending on market prices on
the dates of issue. Included in these shares are 370,000
shares issued as commissions for shares sold for cash.
During the year ended December 31, 2002, the Company issued an
aggregate of 450,000 shares of its common stock for consulting
services totaling $36,000.
c. Debt -
In April 2001, the Company, in connection the issuance of a
$400,000 promissory note payable, was required to issue
500,000 shares of its common stock to the note holder. The
Company has recorded a debt discount of $90,200 for such
shares. In September 2001, the Company was to have repaid this
note payable, which did not occur. As a penalty for such
non-payment, the Company was required to issue 100,000
additional shares of common stock. The Company has recorded a
$12,300 debt discount for these shares.
d. Conversion of Debt -
The Company, during the year ended December 31, 2001, issued
an aggregate of 710,000 shares of common stock to settle notes
payable with accrued interest of $48,995 for continuing
operations, and 60,000 shares of common stock were issued to
settle a payable of $9,600 for their discontinued operations.
11. Stock Option and Warrant Grant Plan
In 1994, the Company instituted a stock option plan, which is available
to selected directors, officers, employees and consultants of the
Company (the "Participants"). The term of each option is ten years from
the date of grant or a shorter term as determined by the Stock Option
Committee (the "Committee"). The exercise price is determined by the
Committee and cannot be less than 110% of the fair market value of the
shares on the date of the grant. The Committee as of the date of grant
determines the terms, conditions and restrictions of the options. No
options have been awarded under the plan.
F-19
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
In March 1997, the Company, in connection with Bridge Loans for
$375,000 issued warrants to purchase 2,500,001 shares of common stock
at $.15 per share. These warrants had a life of five years and were to
have expired in March 2002. In the year ended December 31, 2000, a
total of 333,334 common shares were issued upon the exercise of a like
number of warrants, for net proceeds of $50,000. Of the remaining
2,166,667 un-exercised warrants at March 2002, a total of 1,666,667
warrants had their lives extended for an additional two years until
March 2004. The remaining balance of 500,000 warrants were not
extended, and accordingly they have expired. The extension of the
exercise date
was part of a settlement that the Company had reached with certain
debenture holders (see Note 8) that had brought a legal action against
the Company.
The Company has valued the extension of these warrants at $111,000,
which has been included in the loss on settlement of debt.
The fair value of each stock option, or warrant granted, is estimated
on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions used for stock options
granted during the years ended December 31, 2002: (i) annual dividends
of $0.00, (ii) expected volatility of 274%, (iii) risk-free interest
rate of 4.25%, and (iv) expected option lives of two years. The Company
did not grant, nor issue, options or warrants in the year ended
December 31, 2001. The weighted average fair value of the above
warrants, per share, extended for an additional life of two years as
part of a settlement with certain debenture holders, was $.06 per
share.
The following tables illustrates the Company's stock option and warrant
issuances and balances outstanding as of, and during the years ended
December 31, 2002 and 2001:
Shares Underlying Weighted Average
Warrants Exercise Price
----------------- ----------------
Outstanding at December 31, 2000 2,166,667 $ 0.15
Granted - -
Expired - -
Exercised - -
----------------- ---------------
Outstanding at December 31, 2001 2,166,667 $ 0.15
Granted - -
Expired (500,000) 0.15
Exercised - -
----------------- ---------------
Outstanding at December 31, 2002 1,666,667 $ 0.15
================= ===============
F-20
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The following is additional information with respect to the Company's
warrants as of December 31, 2002:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
----------------------------------------------- -----------------------------
Number of Weighted Number of
Outstanding Average Weighted Exercisable
Shares Remaining Average Shares Weighted
Exercise Underlying Contractual Exercise Underlying Average
Price Warrants Life Price Warrants Exercise Price
-------- ----------- ----------- -------- ----------- ---------------
$ 0.15 1,666,667 1.25 years $ 0.15 1,666,667 $ 0.15
12. MAJOR CUSTOMERS
The Company recorded one sale in each of the years ended December 31,
2002 and 2001. The sale in each year was to different customers.
13. LEASES
The Company's lease for its administrative facilities located in Glen
Head, New York expired in September 2001. The Company has been leasing
such facilities since the expiration on a month to month basis.
In November 1999, the Company entered into a new factory lease used in
the Company's discontinued operations that was to operate through
November 2002. The Company, in February 2002, was released from its
remaining obligation. All lease payments, required subsequent to
December 31, 2001, have been accrued in net liabilities of discontinued
operations.
Rent expense, from continuing operations, for the years ended December
31, 2002 and 2001 was $22,548 and $22,320, respectively.
14. INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, Accounting
for Income Taxes. SFAS No. 109 requires the recognition of deferred tax
assets and liabilities for both the expected impact of differences
between the financial statements and tax basis of assets and
liabilities, and for the expected future tax benefit to be derived from
tax loss and tax credit carry forwards. SFAS No. 109 additionally
requires the establishment of a valuation allowance to reflect the
likelihood of realization of deferred tax assets.
F-21
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
The income tax benefit differs from the amount computed by applying the
statutory federal income tax rate to the loss before the income taxes
income as follows:
Year ended December 31,
-----------------------
2002 2001
--------- ---------
Benefit (provision) computed at
the Federal statutory rate ........... $ 836,000 $ 428,000
Benefit of net operating losses ............. - -
Deductions for which no benefit is recognized (836,000) (428,000)
--------- ---------
$ - $ -
========= =========
The Company has net operating loss carryforwards for federal income tax
purposes totaling approximately $14,600,000 at December 31, 2002. These
carryforwards expire between the years 2009 through 2022. Utilization
of these loss carryforwards may be limited under Internal Revenue Code
Section 382. The deferred tax asset arising from the net operating loss
carryforwards has been offset by a corresponding valuation allowance.
15. COMMITMENTS AND CONTINGENCIES
- The Company was a defendant in an action brought by a customer
on June 6, 2001, relating to a series of contracts that the
Company entered into. The customer had claimed that the
Company breached these contracts by shipping certain goods in
November 1997, that did not conform to the contract. Most of
the damages that the customer sought consist of lost business
profits. Company management, and legal counsel, believed that
the action was without merit. However, due to the costs in
defending the Company in such a legal action, Company
management opted for a settlement in 2003 as the most cost
effective manner to handling this matter. The Company has
agreed to pay the customer a total of $27,500 over nine
months. The Company has made the first three monthly payments.
In the event that the Company fails to make their settlement
payments, a stipulated judgment of $71,000, less any payment
made to such time, would be in effect. The settlement calls
for a pledge of Preferred stock to serve as collateral. The
customer has not provided proper documentation, therefore no
pledge has been executed. However, the Company believes that
it is bound by the settlement, and accordingly has accrued for
the entire settlement of $27,500 as of December 31, 2002.
F-22
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
- In May 2001, the Company entered a distribution agreement with
a company (the "Sub distributor") based in the State of
Jordan. The Sub distributor has agreed to purchase no fewer
than 100 units of the Company's "Pure Safe Water Station", in
the calendar year commencing January 1, 2001. A minimum
purchase of 50 units are required to be purchased in each of
the subsequent years commencing January 1, 2002 and 2003,
respectively. During the year ended December 31, 2001, 18
units have been shipped under this agreement. The sale will be
recognized when the Company receives payments. The Company has
recorded the cost of the inventory shipped as a loss
contingency of $242,035 during the year ended December 31,
2001, since return of the items is uncertain.
- On November 17, 2000, the Company entered into a three-year
master distribution agreement for their "Pure Safe Water
Station" with a distributor based out of Hong Kong ("the
distributor"). Under this agreement, upon meeting minimum
quantities of sales in each of the years of agreement, the
distributor will receive a rebate of 20% of the total price
for all products, parts and supplies purchased from the
Company. Furthermore, the distributor, upon meeting these
minimum sales quantities will have the right to purchase up to
30,000,000 shares of the Company's common stock at $0.05 per
share. The sales targets were never met and the agreement was
cancelled on June 17, 2002.
F-23