UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(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, 2004
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
WATER CHEF, INC
(Exact Name of Small Business Issuer as specified in its charter)
DELAWARE 86-0515678
------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1007 GLEN COVE AVENUE, SUITE 1
GLEN HEAD, NY 11545
--------------------------------------
(Address of principal executive offices)
(516) 656-0059
-------------------------
(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 $56,290.
The aggregate market value of the voting stock held by non-affiliates based upon
the last sale price on February 28, 2005 was approximately $21,100,000.
As of February 28, 2005, the Registrant had 157,854,527 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 2005 annual meeting of stockholders are incorporated by
reference into Part III
WATER CHEF, INC.
ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. DESCRIPTION OF BUSINESS .....................................2
ITEM 2. DESCRIPTION OF PROPERTY .....................................5
ITEM 3. LEGAL PROCEEDINGS ...........................................5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .........6
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ....6
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION ..10
ITEM 7. FINANCIAL STATEMENTS .......................................13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUTING
AND FINANCIAL DISCLOSURE ..................................13
ITEM 8A. CONTROLS AND PROCEDURES ....................................13
ITEM 8B. OTHER INFORMATION ..........................................13
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT ..........14
ITEM 10. EXECUTIVE COMPENSATION .....................................15
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDERS MATTERS.................16
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......17
ITEM 13. EXHIBITS ...................................................17
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES......................17
SIGNATURES ...................................................................19
1
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Water Chef, Inc. (the "Company", "Water Chef"), 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 Water Chef 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 21 PureSafe units. Revenue has been recognized on only 3
PureSafe units, as 18 units that 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 Water Chef, Inc., a Nevada
corporation, which manufactured and marketed water coolers and filters.
PRODUCTS
In 2001 the Company decided to concentrate its efforts on the further
development, manufacturing and marketing of the PureSafe Water Station (the
"PureSafe"), since Water Chef 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.
In 1998, searching for a "killer application," Water Chef management focused on
the worldwide need for safe drinking water for populations who are not served 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 has been 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 was
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
Water Chef 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 core version of 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 Water Chef should
maintain the operating efficiencies built into the system. Water Chef warrantees
each unit for a period of one year as long as the required maintenance
protocols, using Water Chef supplied parts, as prescribed in the maintenance
manual are adhered to. The Company also offers larger versions of the PureSafe
Water Station to provide pure water in quantities up to 5,000 gallons per hour.
To date, there have been no warranty claims for the PureSafe product operating
in the field. Water Chef also plans to have periodic inspections of installed
equipment by the Company's agents.
2
PRODUCTS (continued)
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 40
p.s.i. 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 - Water Chef'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 re-growth 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
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 Water Chef'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. In as much 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. Water Chef 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.
3
COMPETITION
Water Chef'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 that, if successfully
brought to market, could seriously impact the viability of the company.
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. Parts of Florida,
Georgia, and other regions in the United States have also reported fresh water
deficits. 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.
Water Chef 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, Water Chef 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
Defense 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 2004 Water Chef established a relationship with the International
Multiracial Shared Cultural Organization (IMSCO), an NGO (non-governmental
organization) specialized with the Economic and Social Council of the United
Nations. As a result of this relationship Water Chef has received United Nations
certification for its pure water humanitarian projects in Honduras and
Bangladesh, and became eligible to apply for third party funding of these
projects. As of year-end 2004, the Company has submitted these projects for
funding approval, but has received no assurance of funding.
With the recent funding of the Homeland Security Department budget, and a
renewed focus on preparedness in the event of possible future terrorist attacks
in the United States, programs have been initiated to ensure the protection and
preservation of our water resources. Water Chef 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. The
Company has also initiated contact with senior government personnel to explore
the use of our technology to safeguard water supplies at U.S. installations
overseas.
PATENTS
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, Hong Kong, Korea and Japan. The patent application
for the European Union (01-126 980.0) was filed on November 13, 2001; Canadian
Application No. 2,362,107 was filed on November 3, 2001; Mexican Application No.
PA/a/2001/12042 was filed on November 23, 2001;the Chinese Application No.
01136187.5 was filed on November 21, 2001, and was found to be in compliance on
4
June 20, 2003; the Hong Kong Application No. 03107837.9 was filed on October 3,
2003; and the Korean Patent Application No. 10-2001-0070453 was filed on
ovember 20, 2001. Requests for Examination have been made, and the Company
currently has patent protection in each country listed in this paragraph.
PATENTS (continued)
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.
GOVERNMENT APPROVALS
The Company's marketing efforts to date have been directed to Central and South
America, the Asian sub-continent, and the Middle East. No specific government
approvals are required, except for the possibility that export licenses will be
required in specific instances.
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. The Company estimates to date
that the design, prototyping, development and marketing of the PureSafe Water
Station has cost in excess of $2 million.
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, 2004, the Company employed one executive personnel and two
administrative personnel in its headquarters.
The Company believes there are 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
The Company 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.
The Company maintains its principle place of business at 1007 Glen Cove Avenue,
Suite 1, Glen Head, New York 11545. The company leases 1,100 square feet in such
building at $2,475 per month on a month-to-month basis.
To the extent possible the Company intends to utilize leased space for its
future needs.
ITEM 3. LEGAL PROCEEDINGS
Water Chef 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 (i) issue a minimum of
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 in this legal action.
The Company recorded the debentures at $300,000, plus accrued interest of
$39,400, for a total of $339,400. The difference between the $497,500, as valued
for the 3,000,000 shared, divided by the average daily trading price for the 30
days subsequent to the settlement, was greater than the original 3,000,000
shares. Due to these requirements, the Company was obligated to issue an
additional 14,037,671 shares. As of December 31, 2004, the Company has issued
5
the original 3,000,000 shares and the additional 14,037,671 shares originally
valued at $497,500. Attached to the original Bridge Loans were warrants for the
purchase of 1,666,667 shares of the Company's common stock at $0.15 per share.
The debenture holders that participated in the legal action had the expiration
date of the warrants extended to a date twelve months after the effective date
of the Registration Statement filed with the Securities and Exchange Commission
on January 24, 2005. There are 1,666,667 warrants currently outstanding.
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. 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. 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
Not Applicable
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
2003
First Quarter .07 .01
Second Quarter .07 .03
Third Quarter .17 .04
Fourth Quarter .22 .09
2004
First Quarter .36 .16
Second Quarter .37 .14
Third Quarter .34 .14
Fourth Quarter .29 .14
As of the close of business on December 31, 2004 there were 827 holders of
common stock.
6
DIVIDENDS
We have not paid any cash dividends on our common stock since our inception and
do not anticipate paying any cash dividends in the foreseeable future. We plan
to retain our earnings, if any, to provide funds for the expansion of our
business. Subject to our obligations to the holders of our Series A and Series D
Preferred shares, and to the holders of our Series C and Series F convertible
preferred stock, the holders of our common stock are entitled to dividends when
and if declared by our Board of Directors from legally available funds. Our
Board of Directors will determine future dividend policy based upon conditions
at that point, including our earnings and financial condition, capital
requirements and other relevant factors.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2004 with respect
to our shares of Common Stock that may be issued under our existing equity
compensation plans:
(a) (c)
Number of (b) Number of
Securities to be Weighted- securities
issued upon average remaining
exercise of exercise price available for
outstanding of outstanding future issuance
options, options, under equity
warrants, warrants, compensation
and rights and rights plans (1)
Plan Category
-------------
Equity compensation plans approved by security holders: - - -
Equity compensation plans not approved by security
Holders:
Stock option plans (2) 6,000,000 $0.25 None
(1) Excludes securities listed in column (a)
(2) Consists of 5,000,000 stock appreciation rights granted to David A. Conway
that vest over 5 years and 1,000,000 stock appreciation rights granted to
Marshall S. Sterman that vest over 2 years. These individuals were originally
granted stock options in January 2004 that were later converted to stock
appreciation rights.
RECENT ISSUANCES OF UNREGISTERED SECURITIES
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Price per Purchase Date of Number
Purchaser Share Amount Class Purchase of Shares
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Barnett Fine $1.00 $7,000 Preferred 01/06/2004 2,500
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Howard Fine 1.00 1,400 Preferred 01/06/2004 500
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Haichel Esther 1.00 60,000 Preferred 01/06/2004 30,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Fee for annual
accounting services Series F
The Resnick Group LLC 1.00 26,000 Preferred 01/06/2004 8,125
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Peter Hoffman 1.00 3,750 Preferred 01/15/2004 1,563
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Rafael Moas 1.00 3,750 Preferred 01/15/2004 1,563
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
David Fried 1.00 475 Preferred 01/15/2004 195
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Dror Magori 1.00 475 Preferred 01/15/2004 195
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Florence Gut 1.00 825 Preferred 01/15/2004 344
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
7
RECENT ISSUANCES OF UNREGISTERED SECURITIES (continued)
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Price per Purchase Date of Number
Purchaser Share Amount Class Purchase of Shares
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Dror Magori 1.00 1,850 Preferred 02/05/2004 463
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Meryl Hagler 1.00 3,575 Preferred 02/05/2004 893
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
David Fried 1.00 3,575 Preferred 02/05/2004 893
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Ezra Moas 1.00 1,000 Preferred 02/05/2004 250
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Morris Sabbach 1.00 1,000 Preferred 02/05/2004 250
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Jac Steinberger 1.00 3,075 Preferred 02/05/2004 770
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Abraham Rotban 1.00 1,855 Preferred 02/05/2004 465
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Commission Series F
Raimond Irni 1.00 4,000 Preferred 02/05/2004 1,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Arnold Fonseca 1.00 50,000 Preferred 03/30/2004 19,231
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Efiezer Ely 1.00 2,480 Series F 03/30/2004 1,240
Preferred
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Moische Koffman 1.00 2,325 Preferred 03/30/2004 1,162
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Harold Friedman 1.00 775 Preferred 03/30/2004 388
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Aaron Groner 1.00 310 Preferred 03/30/2004 155
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Abraham Kiplinsky 1.00 775 Preferred 03/30/2004 388
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Annette Hunder 1.00 50,000 Preferred 03/30/2004 25,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Eugenie Trott 1.00 200,000 Preferred 03/30/2004 41,668
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Compensation Series F
Marshall Sterman 1.00 20,000 Preferred 03/30/2004 6,250
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Compensation Series F
John J. Clarke 1.00 20,000 Preferred 03/30/2004 6,250
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Compensation Series F
C. Trade Inc. 1.00 40,000 Preferred 03/30/2004 9,375
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Compensation
Web Design Series F
A. Elizier 1.00 3,500 Preferred 03/30/2004 1,765
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Commission Series F
E. McInerney 1.00 20,000 Preferred 03/30/2004 4,168
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Commission Series F
T. Mendirotta 1.00 25,000 Preferred 03/30/2004 12,500
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Series F
Haichel Esther 1.00 12,500 Preferred 05/20/2004 15,625
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Philip Kock 0.1475 885 Common 08/04/2004 6,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
David Fried 0.1475 5,530 Common 08/04/2004 37,500
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Harold Tishler 0.1475 3,685 Common 08/04/2004 25,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
8
RECENT ISSUANCES OF UNREGISTERED SECURITIES (continued)
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Price per Purchase Date of Number
Purchaser Share Amount Class Purchase of Shares
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
David Rappaport 0.1475 9,215 Common 08/04/2004 62,500
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Harold Jacobowitz 0.1475 1,685 Common 08/04/2004 11,428
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Michael Majerovic 0.1475 1,150 Common 08/04/2004 7,800
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Segoes Trust Ltd 0.08 72,000 Common 08/06/2004 900,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Compensation
Marketing
Richard Barsom 0.12 6,000 Common 08/06/2004 50,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Compensation
Financial Consult
Marshall Sterman 0.12 24,000 Common 08/06/2004 200,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Max Ollech 0.08 15,400 Common 08/20/2004 200,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Rafael Moas 0.08 5,800 Common 08/20/2004 72,500
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Dror Magori 0.08 800 Common 08/20/2004 10,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Morris Sabbach 0.08 800 Common 08/20/2004 10,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Randy Chalom 0.08 1,600 Common 08/20/2004 20,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Ezra Moas 0.08 800 Common 08/20/2004 10,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Ezra Mossieri 0.08 800 Common 08/20/2004 10,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Kelley Metzioynim 0.08 34,600 Common 08/20/2004 450,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Compensation
Tax Preparation
George Feinsod 0.10 10,000 Common 08/20/2004 100,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Fee for UN
Admission
Samaritan Group International 0.05 25,000 Common 09/08/2004 500,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Fee for UN
Admission
IMSCO/F. Weston .05 50,000 Common 09/08/2004 1,000,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Ellis International Trust 0.075 50,000 Common 09/17/2004 666,667
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Max Ollech 0.08 4,000 Common 09/17/2004 50,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Commission
WW Trading International 0.075 15,000 Common 10/06/2004 200,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Commission
Annette Hunter 0.075 7,500 Common 10/06/2004 100,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Compensation
Accrued Payroll
Rudolf Schindler 0.10 31,110 Common 10/29/2004 311,100
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
WW Trading International 0.08 25,000 Common 10/29/2004 312,500
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Commission
Raimond Irni 0.05 1,000 Common 11/15/2004 20,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Nachum Lis 0.05 40,000 Common 11/16/2004 800,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Lyons Capital Partners 0.08 50,000 Common 11/16/2004 625,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Commission
Jason Lyons 0.08 5,000 Common 11/24/2004 62,500
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Compensation
Marketing
Richard Barsom 0.08 12,000 Common 11/24/2004 150,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
9
RECENT ISSUANCES OF UNREGISTERED SECURITIES (continued)
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Price per Purchase Date of Number
Purchaser Share Amount Class Purchase of Shares
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Compensation
Accrued Payroll
Rudolf W Schindler 0.155 15,500 Common 12/17/2004 100,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Leonard Cohen 0.10 35,000 Common 12/17/2004 350,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
Haichel Esther 0.10 40,000 Common 12/17/2004 400,000
------------------------------------ ------------- -------------------- ----------------- ---------------- ----------------
The Company issued these shares in reliance of the exemption from registration
afforded by Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated there under. These shares were offered to less than 35
"non-accredited" investors and were purchased for investment purposes with no
view to resale.
Proceeds from the sales of these securities were used for general corporate
purposes.
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 Water Chef, Inc., a Nevada
corporation that manufactured and marketed water coolers and filters.
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
Sales for the years ended December 31, 2004 and 2003 were $56,290 and $0,
respectively. During the year ended December 31, 2004, the Company sold one
PureSafe Water Station unit for $56,290 to a domestic account. Cost of sales
decreased from $88,000 for the year ended December 31, 2003, to $62,250 for the
year ended December 31, 2004, a decrease of $25,750, or 29%. An analysis of the
components of cost of sales follows:
Cost of Sales Product Rent and Overhead Total Cost
Period CGS Payments to Manufacturer of sales
2003 $ 0 $88,000 $88,000
2004 $13,250 $49,000 $62,250
Selling, general and administrative expenses for the year ended December 31,
2004 were $1,296,265 compared to $817,625 for the year ended December 31, 2003,
an increase of $478,640 or 58%. The increase in expense is primarily due to
higher professional fees (approximately $187,000), marketing expenses
(approximately $70,000) and payroll expenses and related taxes (approximately
$168,000). In 2004, expenses included $125,000 paid to IMSCO (International
Multiracial Shared Cultural Organization) upon approval of the Company's
application for certification and consultant status with IMSCO, an NGO in
Specialized status with the Economic and Social Council of the United Nations.
The Company believes that the United Nations certification of its humanitarian
water projects will enhance its ability to secure the funding needed for the
successful completion of its projects.
Interest expense for the year ended December 31, 2004 was $150,228, compared to
$152,478 for the year ended December 31, 2003, a decrease of $2,250, or 1%.
In 2004, the Company recognized a loss on settlement of debt of $2,407,867
The net loss for the year ended December 31, 2004 was $3,757,802 compared to
$3,535,479 for the year ended December 31, 2003, an increase of $222,323.
10
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, the Company had a stockholders' deficiency of
approximately $3,005,000 and a working capital deficiency of approximately
$2,550,000. In addition, the Company has a net loss of approximately $3,758,000
and $3,535,000 for the years ended December 31, 2004 and 2003, respectively. The
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. 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 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 2004 and 2003, raised $790,356 and $599,871, respectively,
through the sale of its common and preferred stock.
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 (i) issue a minimum of
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 in this legal action.
The Company recorded the debentures at $300,000, plus accrued interest of
$39,400, for a total of $339,400. The difference between the $497,500, as valued
for the 3,000,000 shared, divided by the average daily trading price for the 30
days subsequent to the settlement, was greater than the original 3,000,000
shares. Due to these requirements, the Company was obligated to issue an
additional 14,037,671 shares. As of December 31, 2004, the Company has issued
the 3,000,000 shares and the additional 14,037,671 shares originally valued at
$497,500. Attached to the original Bridge Loans were warrants for the purchase
of 1,666,667 shares 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 from March 2002 to March 2004. In connection with the issuance
of the Bridge Lenders' shares the Company further extended the expiration date
of the warrants to a date twelve months after the effective date of the
Registration Statement filed with the Securities and Exchange Commission on
January 24, 2005.
In addition to the above settlement with Bridge Lenders 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. During 2004, the Company issued the 750,000
settlement shares.
Management is currently attempting to settle or restructure the remaining debt,
and plans to satisfy its existing obligations with the cash derived from the
profitable sale of its product.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements are prepared in accordance with accounting principle
generally accepted in the United States of America. Preparation of the
statements in accordance with these principles requires that we make estimates,
using available data and our judgment, for such things as valuing assets,
accruing liabilities and estimating expenses. The following is a list of what we
feel are the most critical estimations that we must make when preparing our
financial statements.
Revenue Recognition
Statement of Position 97-2, Software Revenue Recognitions ("SOP 97-2"), was
issued in October 1997 by the American Institute of Certified Public Accountants
("AICPA") and was amended by Statement of Position 98-4 ("SOP 98-4"). SOP 97-2
provides revised and expanded guidance of software revenue recognition and
applies to all entities that earn revenue from licensing, selling, or otherwise
marketing computer software. Based on interpretation of SOP 97-2 and SOP 98-4,
the Company believes its current revenue recognition policies and practices are
consistent with SOP 97-2 and SOP 98-4. Additionally, the AICPA issued SOP 98-9
in December 1998, which provides certain amendments to SOP 97-2, and is
effective for transactions, entered into during the year ended December 31,
2000.
Revenue is recognized when products are shipped, title passes and collectibility
is reasonably assured. Allowances for estimated bad debts, sales allowance and
discounts are provided when such sales are recorded.
11
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Shared-Based
Payment." SFAS 123(R) addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. SFAS 123(R) requires an entity to
recognize the grant-date fair-value of stock options and other equity-based
compensation issued to employees in the income statement. The revised statement
generally requires that an entity account for those transactions using the
fair-value-based method, and eliminates the intrinsic value method of accounting
in APB 25, which was permitted under SFAS No. 123, as originally issued.
The revised statement requires entities to disclose information about the nature
of the share-based payment transactions and the effects of those transactions on
the financial statements.
SFAS No. 123(R) is effective for small business issuers' financial statements
for the first interim or annual reporting period that begins after December 15,
2005.
We have used stock in the past to raise capital and as a means of compensation
to employees. We believe we will need to continue using stock for these same
purposes.
Effects of Recent Accounting Policies
In January 2003, Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
This interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," provides guidance for identifying a controlling interest
in a variable interest entity ("VIE") established by means other than voting
interest. FIN 46 also required consolidation of a VIE by an enterprise that
holds such controlling interest. In December 2003, the FASB completed its
deliberations regarding the proposed modifications to FIN No., 46 and issued
Interpretation Number 46R, "Consolidation of Variable Interest Entities - an
Interpretation of ARB 51" ("FIN No. 46R"). The decisions reached included a
deferral of the effective date and provisions for additional scope exceptions
for certain types of variable interests. Application of FIN No. 46R is required
in financial statements of public entities that have interests in VIEs, or
potential VIEs, commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public small business issuers'
entities is required in all interim and annual financial statements for periods
ending after December 15, 2004.
The adoption of this pronouncement did not have a material effect on the
Company's financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 123R, "Share Based Payment." This statement is a revision of SFAS
Statement No. 123, "Accounting for Stock-Based Compensation" and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS 123R addresses all forms of share based payment
("SBP") awards including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights. Under SFAS 123R,
SBP awards result in a cost that will be measured at fair value on the awards'
grant date, based on the estimated number of awards that are expected to vest.
This statement is effective for public entities that file as small business
issuers - as of the beginning of the first interim or annual reporting period
that begins after December 15, 2005.
The adoption of this pronouncement is not expected to have a material effect on
the Company's financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 153, "Exchanges of Nonmonetary Assets". This Statement amends
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provisions of this
Statement are effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in fiscal periods beginning after December
16, 2004. The provisions of this Statement should be applied prospectively.
The adoption of this pronouncement is not expected to have a material effect on
the Company's financial statements.
Emerging Issue Task Force (EITF) Issue 04-8, "The Effect of Contingently
Convertible Instruments on Diluted Earnings per Share." The EITF reached a
consensus that contingently convertible instruments, such as contingently
convertible debt, contingently convertible preferred stock, and other such
securities, should be included in diluted earnings per share (if dilutive)
regardless of whether the market price trigger has been met. The consensus is
effective for reporting periods ending after December 15, 2004.
The adoption of this pronouncement did not have a material effect on the
Company's financial statements.
12
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements for the years ended December 31, 2004 and
2003 are included herein and consist of:
Report of Independent Registered Public Accounting Firm F-1
Balance Sheet F-2
Statements of Operations F-3
Statement of Changes in Stockholders' Deficiency F-4-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the year ended December 31, 2004 no change in accountants occurred and
there were no disagreements with accountants.
ITEM 8A. CONTROLS AND PROCEDURES
Evaluation and Disclosure Controls and Procedures
-------------------------------------------------
The Company, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the design and operation of the
Company's "disclosure controls and procedures," as such term is defined in Rules
13a-15e promulgated under the Exchange Act as of this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer has
concluded that the Company's disclosure controls and procedures were effective
as of the end of the period covered by this report to provide reasonable
assurance that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.
Management is aware that there is a lack of segregation of duties at the Company
due to the small number of employees dealing with general administrative and
financial matters. This constitutes a material weakness in the financial
reporting. However, at this time management has decided that considering the
employees involved and the control procedures in place, the risks associated
with such lack of segregation are insignificant and the potential benefits of
adding additional employees to clearly segregate duties do not justify the
expenses associated with such increases. Management will periodically reevaluate
this situation. If the situation changes and sufficient capital is secured, it
is the Company's intention to increase staffing to mitigate the current lack of
segregation of duties within the general administrative and financial functions.
Changes in Internal Controls
----------------------------
There have been no changes in internal controls or in other factors that could
significantly affect those controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Limitations on the Effectiveness of Controls
--------------------------------------------
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a Company have been detected.
ITEM 8B. OTHER INFORMATION
NONE
13
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
At year-end 2004 the Company's Directors, Executive Officers and Scientific
Advisory Board Members are:
Name Age Position(s) with the Company
David A. Conway 63 Director, Chairman,President,
Chief Executive Officer and
Chief Financial Officer
John J. Clarke ++ 63 Director
Ronald W. Hart + 62 Chairman, Scientific
Advisory Board
Mohamed M. Salem + 53 Scientific Advisory Board
Marshall S. Sterman++ 73 Director
Richard Wilson + 79 Scientific Advisory Board
Mostafa K. Tolba + 83 Scientific Advisory Board
Lord John Gilbert + 79 Scientific Advisory Board
+ Members of the Advisory Board will receive an honorarium, in the form of cash
or common stock, for their service at the discretion of the Board of Directors.
++ Member of Audit Committee and Compensation Committee. Mr. Sterman, by reason
of education, training and experience is the Company's "recognized financial
expert" on the Audit Committee
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, COO 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.
John J. Clarke
John J. Clarke rejoined the Water Chef Board of Directors in March 2004. Mr.
Clarke had previously served as a member of the Company's Board of Directors
from July 1997 to February 2000 when he resigned from the Board due to his heavy
workload. Mr. Clarke is a Principal and co-founder of the Baldwin and Clarke
Companies, a diversified financial services organization, and is a founding
director of two New Hampshire commercial banks. Mr. Clarke currently serves as a
Director of Centrix Bank.
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.
Mohamed M. Salem (MD/PhD.)
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 M.D. and Ph.D. from Cairo
University.
14
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.
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
studying the resolution 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.
Mostafa K. Tolba (Ph.D.)
Dr. Tolba joined the Scientific Advisory Board in June, 2001. 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.
Lord John Gilbert (Ph.D.)
Lord John Gilbert joined the Scientific Advisory Board in 2001. Lord Gilbert
served as Minister of State for Transportation, Minister of State for Finance,
and as Minister of State for Defense 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.
Code of Ethics
Due to its limited size, the Company has not yet enacted a formal Code of
Ethics. A Code of Ethics has been prepared and will be enacted in the second
quarter of 2005.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Name and Principal Long Term
Position Annual Compensation Compensation
--------------------- -------------------------------- ----------------------------------
Securities
Restricted Underlying All
Other Annual Stock Options/ Other
Salary Bonus Compensation Award(s) SARs Compensation
Year ($) ($) ($) ($) (#) ($)
---- ------ ----- ------------ -------- -------- --------
David A. Conway 2004 $303,750 -- -- -- 5,000,000 --
President/CEO 2003 $165,000 -- -- -- -- --
2002 $165,000 -- -- -- -- --
15
Option/SAR Grants in Last Fiscal Year
The following table sets forth information regarding common stock appreciation
rights made to the named executive officers and directors during fiscal 2004:
Number of
Securities Percent of Total SARs
Underlying SARs Granted to Employees Exercise or Base
Name Granted # In Fiscal Year Price ($/Sh) Expiration Date
------------------- --------- -------------- ------------ ---------------
David A. Conway 5,000,000(1) 83% $0.25 January 31, 2009
Marshall S. Sterman 1,000,000(2) 17% $0.25 January 31, 2006
---------------------------
(1) These SARs were granted on January 1, 2004 and vest 20% on each
anniversary of such grant.
(2) These SARs were granted on January 1, 2004 and vest 50% on each
anniversary of such grant.
The Company has no Long-Term Incentive Plans at this time.
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 certain directors have received common stock for service to the
Company.
In 2004, 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. There
is $147,500 due to him as of December 31, 2004.
The Company's directors have been paid success fees for helping the Company in
various equity and debt financings in previous years. These payments have been
both in cash and common stock, such payments being made based on industry-wide
standards and arms-length transactions
EMPLOYMENT AGREEMENTS
Mr. Conway entered into a five-year employment agreement in January 2004. The
agreement provides for base salary of $350,000 per year, participation in the
company's employee benefit programs and a life insurance policy in the amount of
$5,000,000. In addition Mr. Conway was granted a stock appreciation right,
vesting at 20% per year for five years, for 5,000,000 shares of Water Chef
common stock at a strike price of $0.25 per share. Mr. Conway was originally
granted stock options in January 2004, that were later converted to stock
appreciation rights.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS
Set forth below is information as of December 31, 2004, 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) 25,110,782 16.1%
Water Chef, Inc.
1007 Glen Cove Ave.
Glen Head, NY 11545
John J. Clarke 1,500,000 1.0
116B South River Road
Bedford, NH 03110
Marshall S. Sterman 1,650,000 1.0
46 Neptune Street ---------- ----------
Beverly, MA 01915
All executive officers and
Directors as a Group (2)(4) 28,260,782 18.1%
========== ==========
16
1. Total Voting Shares are comprised of all common shares issued and
outstanding.
2. Includes 10,495,067 shares held in an 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.
ITEM 12.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS
(a) Exhibits:
Exhibit No. Description
----------- -----------
31 Certification of Chief Executive Officer and Chief Financial
officer pursuant to Section 302 of the Sarbanes-Oxley Act.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 8 U.S.C. Section 1350 As adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
ITEM 14. PRINCIPAL ACCOUNTANT FEES
Audit Fees
Audit fees billed to the Company by Marcum & Kleigman LLP ("M&K") for the
fiscal years ended December 31, 2004 and December 31, 2003, for professional
services rendered by M&K for the contemporaneous audit of the Company's annual
financial statements and the review of quarterly financial statements or
services that are normally provided by M&K in connection with statutory and
regulatory filings or engagements, totaled approximately $35,000 and $52,675,
respectively.
Audit-Related Fees
Audit fees billed to the Company by M&K for the fiscal years ended December
31, 2003 and December 31, 2004, for assurance and related services by M&K,
totaled approximately $22,500 and $37,500, respectively.
Tax Fees
There were no tax fees billed by M&K for tax advice to the Company for the
fiscal years ended December 31, 2004 and the fiscal year ended December 31,
2003.
17
All Other Fees
There were no fees billed by M&K to the Company for products and services
not included in the foregoing categories. Fees billed to the Company by M&K
during the fiscal year ended December 31, 2004 for products and services not
included in the foregoing categories totaled approximately $10,000. For the
fiscal year ended December 31, 2004 such fees consisted mainly of fees relating
to a registration statement the Company filed.
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services
performed by the Company's independent accountants must now be approved in
advance by the Audit Committee to assure that such services do not impair the
accountants' independence from the Company. Accordingly, the Audit Committee has
adopted an Audit and Non-Audit Services Pre-Approval Policy (the "Policy") which
sets forth the procedures and the conditions pursuant to which services to be
performed by the independent accountants are to be pre-approved. Pursuant to the
Policy, certain services described in detail in the Policy may be pre-approved
on an annual basis together with pre-approved maximum fee levels for such
services. The services eligible for annual pre-approval consist of services that
would be included under the categories of Audit Fees, Audit-Related Fees, Tax
Fees and All Other Fees in the above table as well as services for limited
review of actuarial reports and calculations. If not pre-approved on an annual
basis, proposed services must otherwise be separately approved prior to being
performed by the independent accountants. In addition, any services that receive
annual pre-approval but exceed the pre-approved maximum fee level also will
require separate approval by the Audit Committee prior to being performed. The
Audit Committee may delegate authority to pre-approve audit and non-audit
services to any member of the Audit Committee, but may not delegate such
authority to management.
All of the engagements and fees for the year ended December 31, 2004 were
approved by the Audit Committee. Of the total number of hours expended M&K's
engagement to audit the Company's financial statements for the year ended
December 31, 2004, none of the hours were attributed to work performed by
persons other than M&K's full-time, permanent employees.
18
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.
WATERCHEF, INC.
April 5, 2005 /s/ David A. Conway
-----------------------------------
Date David A. Conway
President, Chief Executive
Officer and Chief Financial
Officer (Principal Operating
Officer)
19
Index of Exhibits
-----------------
Exhibit No. Description
----------- -----------
31 Certification of Chief Executive Officer pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 8 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004
and the related statements of operations, stockholders' deficiency and cash
flows for the years ended December 31, 2004 and 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, 2004
and the results of its operations and its cash flows for the years ended
December 31, 2004 and 2003 in conformity with accounting principles generally
accepted in the United States of America.
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
March 11, 2005
F-1
WATER CHEF INC.
(A Development Stage Company Commencing January 1, 2002)
BALANCE SHEET
DECEMBER 31, 2004
ASSETS
CURRENT ASSETS:
Cash $ 81,732
Prepaid expenses 17,113
Subscriptions receivable 20,000
------------
TOTAL CURRENT ASSETS 118,845
PATENTS AND TRADEMARKS (net of
accumulated amortization of $6,944) 19,111
Other assets 3,162
------------
TOTAL ASSETS $ 141,118
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable (including related party of $9,375) $ 222,066
Accrued expenses and other current liabilities 1,112,612
Notes payable (including accrued interest of $499,455) 1,182,677
Accrued dividends payable 81,034
Customer deposit 70,000
------------
TOTAL CURRENT LIABILITIES 2,668,389
LONG-TERM LIABILITIES:
Loans payable to stockholder (including accrued
interest of $105,221) 478,002
------------
TOTAL LIABILITIES 3,146,391
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.001 par value;
10,000,000 shares authorized;
614,413 shares issued and outstanding,
(liquidation preference $1,516,000) 615
Common stock, $.001 par value;
190,000,000 shares authorized;
155,885,729 shares issued;
155,881,329 shares outstanding 155,886
Additional paid-in capital 20,258,617
Treasury stock, 4,400 common shares, at cost ( 5,768)
Accumulated deficit through December 31, 2001 ( 14,531,596)
Deficit accumulated during development stage ( 8,883,027)
------------
TOTAL STOCKHOLDERS' DEFICIENCY ( 3,005,273)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 141,118
============
See notes to financial statements.
F-2
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
STATEMENTS OF OPERATIONS
For the Period
Year Ended December 31, January 1, 2002
------------------------------- to December 31,
2004 2003 2004
------------- ------------- -------------
Sales $ 56,290 $ - $ 96,290
------------- ------------- -------------
Costs and Expenses:
Cost of sales 62,250 88,000 396,680
Selling, general and administrative 1,296,265 817,625 2,903,010
Non-dilution agreement termination costs (223,858) 2,477,376 2,462,453
Interest expense (including interest
expense for related party of $23,868
in both years and $71,604 for the period
January 1, 2002 to December 31, 2004) 150,228 152,478 481,817
Loss on settlement of debt 2,407,867 - 2,614,017
Stock appreciation rights 121,340 - 121,340
------------- ------------- -------------
3,814,092 3,535,479 8,979,317
------------- ------------- -------------
Net loss ( 3,757,802) ( 3,535,479) ( 8,883,027)
Deemed dividend on preferred stock ( 2,072,296) - ( 2,072,296)
Preferred stock dividends ( 134,366) ( 152,876) ( 400,230)
------------- ------------- -------------
( 2,206,662) ( 152,876) ( 2,472,526)
Net loss applicable to
common stock $( 5,964,464) $( 3,688,355) $( 11,355,553)
============= ============= =============
Basic and Diluted Loss Per Common Share: $ ( 0.05) $( 0.04)
============= =============
Weighted Average Common Shares Outstanding -
Basic and Diluted 121,549,857 89,559,886
============= =============
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, 2002 145,500 $ 146 86,614,286 $ 86,614 $ 12,339,469
Extension of life of warrants -- -- -- -- 111,000
Proceeds from sale preferred stock
($1.00 Per share) 125,000 125 -- -- 117,375
Proceeds from sale of common stock
($0.025 Per share) -- -- 2,500,000 2,500 97,500
Common stock issued for services
($0.08 Per share) -- -- 450,000 450 35,550
Collection of subscription receivable -- -- -- -- --
Net Loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2002 270,500 $ 271 89,564,286 $ 89,564 $ 12,700,894
Proceeds from sale of preferred stock
March 31, 2003
($1.00-$2.00 Per share) 62,500 63 -- -- 74,937
June 30, 2003
($0.50 Per share) 75,000 75 -- -- 37,425
September 30, 2003
($1.00-$2.40 per share) 163,281 163 -- 228,346
December 31, 2003
($1.33-$2.80 Per share) 145,450 145 -- -- 258,717
Preferred stock issued for services
March 31, 2003
($1.00 Per share) 30,000 30 -- -- 29,970
June 30, 2003
($1.00 Per share) 51,250 51 -- -- 51,199
September 30, 2003
($1.00 per share) 67,035 67 -- 66,968
December 31, 2003
($1.88-$4.00 Per share) 22,150 22 -- -- 65,378
Collection of subscription receivable -- -- -- -- --
Write-off of subscription receivable -- -- -- -- --
Net Loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2003 887,166 $ 887 89,564,286 $ 89,564 $ 13,513,834
Proceeds from sale of preferred stock
March 31, 2004
($2.40-$4.80 Per share) 130,077 130 -- -- 400,126
June 30, 2004
($0.80 Per share) 15,625 16 -- -- 12,484
Preferred stock issued for services
March 31, 2004
($2.00-$4.80 Per share) 49,433 49 -- -- 158,483
Proceeds from sale of common stock
September 30,2004
($0.03-$0.15 per share) -- -- 2,541,595 2,541 205,059
December 31, 2004
($0.05-$0.10 Per share) -- -- 2,487,500 2,488 187,512
Common stock issued for services
March 31, 2004
($0.05 Per share) -- -- 477,133 477 23,380
September 30,2004
($0.05-$0.15 per share) -- -- 1,857,800 1,858 126,792
December 31, 2004
($0.08-$0.10 Per share) -- -- 532,500 533 40,968
Preferred stock dividend -- -- -- -- (81,034)
Common stock issued for satisfaction of liabilities
June30, 2004
($0.15 Per share) -- -- 37,786,629 37,787 5,635,934
December 31, 2004
($0.134 Per share) -- -- 411,100 411 54,839
Preferred stock converted to common stock
June 30, 2004 (133,250) (133) 5,108,332 5,108 (4,975)
September 30, 2004 (269,263) (269) 12,103,854 12,104 (11,835)
December 31, 2004 (65,375) (65) 3,015,000 3,015 (2,950)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2004 614,413 $ 615 155,885,729 $ 155,886 $ 20,258,617
============ ============ ============ ============ ============
See notes to financial statements.
F-4
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, 2002 (67,500) (5,768) (14,531,596) -- (2,178,635)
Extension of life of warrants -- -- -- -- 111,000
Proceeds from sale preferred stock
($1.00 Per share) -- -- -- -- 117,500
Proceeds from sale of common stock
($0.025 Per share) -- -- -- -- 100,000
Common stock issued for 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)
Proceeds from sale of preferred stock
March 31, 2003
($1.00-$2.00 Per share) -- -- -- -- 75,000
June 30, 2003
($0.50 Per share) -- -- -- -- 37,500
September 30, 2003
($1.00-$2.40 per share) -- -- -- -- 228,509
December 31, 2003
($1.33-$2.80 Per share) -- -- -- -- 258,862
Preferred stock issued for services
March 31, 2003
($1.00 Per share) -- -- -- -- 30,000
June 30, 2003
($1.00 Per share) -- -- -- -- 51,250
September 30, 2003
($1.00 per share) -- -- -- 67,035
December 31, 2003
($1.88-$4.00 Per share) -- -- -- -- 65,400
Collection of subscription receivable 15,500 -- -- -- 15,500
Write-off of subscription receivable 21,800 -- -- -- 21,800
Net Loss -- -- -- (3,535,479) (3,535,479)
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2003 -- (5,768) ( 14,531,596) ( 5,125,225) (6,058,304)
Proceeds from sale of preferred stock
March 31, 2004
($2.40-$4.80 Per share) -- -- -- -- 400,256
June 30, 2004
($0.80 Per share) -- -- -- -- 12,500
Preferred stock issued for services
March 31, 2004
($2.00-$4.80 Per share) -- -- -- -- 158,532
Proceeds from sale of common stock
September 30,2004
($0.03-$0.15 per share) -- -- -- -- 207,600
December 31, 2004
($0.05-$0.10 Per share) -- -- -- -- 190,000
Common stock issued for services
March 31, 2004
($0.05 Per share) -- -- -- -- 23,857
September 30,2004
($0.05-$0.15 per share) -- -- -- -- 128,650
December 31, 2004
($0.08-$0.10 Per share) -- -- -- -- 41,501
Preferred stock dividend -- -- -- -- (81,034)
Common stock issued for satisfaction of liabilities
June 30, 2004
($0.15 Per share) -- -- -- -- 5,673,721
December 31, 2004
($0.134 Per share) -- -- -- -- 55,250
Preferred stock converted to common stock
June 30, 2004 -- -- -- -- --
September 30, 2004 -- -- -- -- --
December 31, 2004 -- -- -- -- --
Net loss -- -- -- (3,757,802) (3,757,802)
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2004 -- $ (5,768) $(14,531,596) $ (8,883,027) $ (3,005,273)
============ ============ ============ ============ ============
See notes to financial statements.
F-5
WATER CHEF INC.
(A Development Stage Company Commencing January 1, 2002)
STATEMENTS OF CASH FLOWS
For the period
Years Ended December 31, January 1, 2002
-------------------------- to December 31,
2004 2003 2004
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,757,802) $(3,535,479) $(8,883,027)
Adjustments to reconcile net loss to
net cash used in operating activities
Amortization of patents 1,855 1,854 5,562
Non-cash compensation 473,878 213,685 723,563
Loss on settlement of debt 2,407,867 -- 2,614,017
Non-dilution agreement termination cost (223,858) 2,477,376 2,462,453
Inventory reserve -- -- 159,250
Write-off of stock subscription receivable -- 21,800 21,800
Change in assets and liabilities
Inventory 26,500 -- --
Prepaid expenses and other current assets ( 5,893) (11,220) 39,387
Accounts payable, accrued expenses, accrued dividends
and customer deposits 265,998 296,686 1,049,789
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (811,455) ( 535,298) (1,807,206)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Reduction of stock subscription receivable -- 15,500 45,700
Proceeds from sale of preferred stock 412,756 599,871 1,130,127
Proceeds from sale of common stock 377,600 -- 477,600
Proceeds from sale of common stock to be issued -- -- 200,000
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 790,356 615,371 1,853,427
----------- ----------- -----------
NET(DECREASE)INCREASE IN CASH (21,099) 80,073 46,221
CASH AT BEGINNING OF YEAR 102,831 22,758 35,511
----------- ----------- -----------
CASH AT END OF YEAR $ 81,732 $ 102,831 $ 81,732
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 20,000 $ 2,250 $ 20,250
=========== =========== ===========
Income taxes $ -- $ -- $ --
=========== =========== ===========
NON-CASH FINANCING ACTIVITIES
COMPENSATION SATISFIED BY ISSUANCE OF COMMON STOCK $ 55,250 $ -- $ 55,250
=========== =========== ===========
COMMON STOCK ISSUED IN SATISFACTION OF LIABILITIES $ 5,673,721 $ -- $ 5,673,721
=========== =========== ===========
See notes to financial statements.
F-6
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
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. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
a. Basis of Presentation
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
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, 2004
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
operations of $3,757,802 and $3,535,479 for the years ended December 31, 2004
and 2003, respectively. Additionally, the Company has working capital and
stockholders' deficiencies of approximately $2,550,000 and $3,005,000 at
December 31, 2004. 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. Patents and Trademarks - Patents and trademarks are amortized ratably over 9
to 14 years.
c. Stock-Based Compensation - 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 Company will continue to account for
stock-based compensation according to APB Opinion No. 25.
The following table summarizes relevant information as to reported results under
the Company's intrinsic value method of accounting for stock awards, with
supplemental information as if the fair value recognition provision of FAS 123
had been applied for the following periods ended December 31, 2004 and 2003 as
follows:
Years ended December 31,
2004 2003
------------- -------------
Net loss applicable to common stock $ ( 5,964,469) $ ( 3,535,479)
Add: Stock -based employee
compensation expense included in
reported net loss 121,340 --
Less: Stock-based employee
compensation cost, net of tax effect
under fair value method (291,210) --
------------- -------------
Pro-forma net loss under fair
value accounting $ ( 6,134,339) $ ( 3,535,479)
============= =============
Loss per share - basic and diluted
as reported $ (0.05) $ (0.04)
============= =============
Pro-forma loss per share -
basic and diluted $ (0.05) $ (0.04)
============= =============
F-7
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
d. Revenue Recognition - Revenues are recognized when product is shipped, title
passes and collectibility is reasonably assured. Allowances for estimated bad
debts, sales allowance and discounts are provided when such sales are recorded.
e. 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.
f. Loss Per Share - Basic loss per share was computed using the weighted average
number of outstanding common shares. Diluted loss per share includes the effect
of dilutive common stock equivalents from the assumed exercise of options,
warrants and convertible preferred stock. Common stock equivalents were excluded
in the computation of diluted loss per share since their inclusion would be
anti-dilutive. Total shares issuable upon the exercise of optinons, warrants and
the conversion of preferred stock for the years ended December 31, 2004 and
2003, were 34,230,804 and 35,382,471, respectively.
g. 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.
h. 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.
i. 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.
j. 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. There were no research and development expenses incurred in year
2004 and 2003.
k. Recent Accounting Pronouncements
In January 2003, Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
This interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," provides guidance for identifying a controlling interest
in a variable interest entity ("VIE") established by means other than voting
interest. FIN 46 also required consolidation of a VIE by an enterprise that
holds such controlling interest. In December 2003, the FASB completed its
deliberations regarding the proposed modifications to FIN No., 46 and issued
Interpretation Number 46R, "Consolidation of Variable Interest Entities - an
Interpretation of ARB 51" ("FIN No. 46R"). The decisions reached included a
deferral of the effective date and provisions for additional scope exceptions
for certain types of variable interests. Application of FIN No. 46R is required
in financial statements of public entities that have interests in VIEs, or
potential VIEs, commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public small business issuers'
entities is required in all interim and annual financial statements for periods
ending after December 15, 2004.
The adoption of this pronouncement did not have a material effect on the
Company's financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 123R, "Share Based Payment." This statement is a revision of SFAS
Statement No. 123, "Accounting for Stock-Based Compensation" and supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS 123R addresses all forms of share based payment
("SBP") awards including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights. Under SFAS 123R,
SBP awards result in a cost that will be measured at fair value on the awards'
grant date, based on the estimated number of awards that are expected to vest.
This statement is effective for public entities that file as small business
issuers - as of the beginning of the first interim or annual reporting period
that begins after December 15, 2005.
The adoption of this pronouncement is not expected to have a material effect on
the Company's financial statements.
F-8
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
In December 2004, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 153, "Exchanges of Nonmonetary Assets". This Statement amends
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provisions of this
Statement are effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges occurring in fiscal periods beginning after December
16, 2004. The provisions of this Statement should be applied prospectively.
The adoption of this pronouncement is not expected to have a material effect on
the Company's financial statements.
Emerging Issue Task Force (EITF) Issue 04-8, "The Effect of Contingently
Convertible Instruments on Diluted Earnings per Share." The EITF reached a
consensus that contingently convertible instruments, such as contingently
convertible debt, contingently convertible preferred stock, and other such
securities, should be included in diluted earnings per share (if dilutive)
regardless of whether the market price trigger has been met. The consensus is
effective for reporting periods ending after December 15, 2004.
The adoption of this pronouncement did not have a material effect on the
Company's financial statements.
3. NOTES PAYABLE
Notes payable at December 31, 2004 consist of the following:
(a) 166,756
(b) 750,533
(c) 265,388
--------------
Total $ 1,182,677
(a) Loans payable - other: These are unsecured notes bearing interest ranging
from 10% to 15% per annum, with no specific due date for repayment. An amount
due on these notes, inclusive of $83,535 in interest is $166,756, at December
31, 2004. No demands for repayment have been made by the note holder.
F-9
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
(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 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. The amount due on this note, inclusive of
$350,533 in interest, is $750,533 at December 31, 2004. No demands for repayment
have been made by the note holder.
(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. A maximum of
6,000,000 shares could have been issued upon conversion had the full $300,000
been advanced. As of December 31, 2004, the Company owed $265,388 on these
advances, inclusive of $65,388 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
which has not been further extended. All other terms and provisions of the note
are unchanged. In May 2003, these note holders entered a judgment against the
Company for the principal sum of $200,000 plus interest. During 2004, the
Company paid $20,000 of accrued interest on these notes.
4. LOANS PAYABLE - STOCKHOLDER
At December 31, 2004, the Company is obligated to its Chief Executive Officer
who is also a significant stockholder for loans and advances made to the Company
totaling $372,781, plus accrued interest of $105,221. 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, 2006 at
the earliest.
5. COMMON STOCK ISSUED
On June 4, 2004, the Company convened a special meeting of its common, Series A
Preferred, Series C Preferred, Series D Preferred, Series F Preferred
stockholders (together the "Stockholders"). The Stockholders, voting as a single
class, voted and approved a proposal to amend the Certificate of Incorporation
to increase the Company's authorized capital stock from 100,000,000 shares to
200,000,000 shares, consisting of 190,000,000 shares of common stock and
10,000,000 shares of preferred stock.
During the year ended December 31, 2004, the Company recorded the following
transactions:
a. Cash and Subscriptions
In 2002, The Company received $100,000 for 2,500,000 shares of its common stock.
The Company also received $200,000 in 2002 for the issuance of 4,000,000 shares
of its common stock. These shares were issued in June 2004 upon approval of the
stockholders of the increase in the number of authorized common shares of the
Company.
During the year ended December 31, 2004, the Company received $377,600 for
4,229,095 shares of its common stock. During the year ended December 31, 2004,
the Company also recorded a subscription for 400,000 shares of its common stock
for $20,000. The $20,000 was received by the Company in January 2005.
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
1997.
Since the issuance of these shares is subject to stockholder approval, the
measurement date for purposes of valuation is established when such stockholder
approval has been obtained. Accordingly, the Company was utilizing variable
accounting to determine the value of these shares. These shares were issued
during June 2004 upon approval by the stockholders of the increase in the number
of authorized common shares of the Company.
F-10
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
c. Services
During 2002, the Company agreed to issue to various parties an aggregate of
1,075,000 shares of its common stock for a value of $84,000 in connection with
professional services. These shares were issued in June 2004 upon the approval
by the stockholders of the increase in the number of authorized common shares of
the Company.
The Company also issued 450,000 shares of its common stock for services with a
value of $36,000 in 2002.
During 2004, the Company issued to various parties an aggregate of 2,867,433
shares of its common stock for a value of $194,000 in connection with
professional services.
d. Debenture Liabilities
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.
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 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 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, was 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 (iii) In 2004, in connection with the issuance of the
Bridge Lender shares, the Company further extended the term of the warrants for
twelve months until March 2005 and recorded $94,151 as a loss on settlement of
debt in connection with such warrant extension; and (iv) Issued additional
shares since 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, was grater than the original 3,000,000 shares. Due to these
requirements, the Company was obligated to issue an additional 14,037,671
shares. During June 2004, the Company issued the 3,000,000 shares and the
additional 14,037,761 shares originally valued at $495,500. The Company recorded
a loss on settlement of debt of $2,313,716 since the total value of the shares
on the date of issuance was $2,811,216.
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. During 2004, the 750,000 shares
were issued.
e. Conversion of preferred stock into common stock
During year ended December 31, 2004, the Company agreed to issue various parties
an aggregate of 20,227,186 shares of its common stock in connection with the
conversion of preferred stock, The Company recorded the deferred contingent
beneficial conversion adjustment of $2,072,296 as a deemed dividend since the
contingency was resolved in June 2004.
F-11
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
f. Payroll Liability Settlement
During the year ended December 31, 2004, the Company agreed to issue 411,100
shares of its common stock in connection with a settlement of payroll
liabilities of $55,250.
6. 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, 2004, 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 $ 517,600 $ 9.86 $1,042,600
Series C 400,000 120,500 121 -- -- --
Series D 2,000,000 93,000 93 55,800 473,400 5.09 473,400
Series F 1,000,000 348,413 348 26,066 82,162 .23 --
---------- ---------- ---------- ---------- ---------- ----------
614,413 $ 615 $ 134,366 $1,073,162 -- $1,516,000
========== ========== ========== ========== ========== ==========
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 C:
During the year ended December 31, 2002 the Company sold Series C 15%
Convertible Preferred stock at $1.00 per share. These shares convert in one
year. All dividends are cumulative and 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. During 2002, the Company sold 125,000 shares of Series C preferred
stock. For each share of preferred stock purchased, the buyers also receive the
right to receive an additional 33.33 shares of common stock upon conversion as
the market value of the stock was $0.015 at issuance. In connection with the
maturity of the Series C Preferred Stock, the Company recorded accrued dividends
of $39,119.
Cash
During 2003, the Company issued 12,500 shares of preferred stock and raised
$25,000 through the sale of Series C Convertible Preferred stock.
Services
During 2003, the Company issued an aggregate of 81,250 shares of its Series C
Convertible Preferred Stock for professional services totaling $81,250.
F-12
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
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.
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 F:
In April 2003, management authorized the Company to raise up to $550,000 through
a private placement by issuing 10% two-year convertible preferred instruments.
The preferred, designated as Series F, and providing for one million shares in
total and can be convertible into shares of Water Chef's common stock at such
time as the stockholders of the corporation approve an increase in the
authorized capital stock of the corporation, which occurred on June 4, 2004. All
dividends are cumulative and are payable in shares of the Company's common stock
valued at the then current market price per share, at the time of maturity, or
upon conversion, whichever is earlier. The conversion rate for shares and
accrued dividends payable is 40 shares of common for each share of preferred
stock. The Series F convertible preferred stockholders have voting rights equal
to the common stockholders. The Series F convertible preferred stock has no
stated rights in the assets of the company upon liquidation.
Although there was a discount upon the issuance of all of the Series F preferred
stock in accordance with Emerging Issue Task Force ("EITF") 98-5, a security is
not yet convertible if certain contingencies exist which are dependent upon the
occurrence of a future event outside the control of the security holder. In this
case, the shares can only be converted into common stock after the stockholders
of the Company approve an increase in the authorized capital stock of the
corporation. In accordance with EITF 98-5, any beneficial conversion (discount)
feature is measured at the commitment date, but will not be recognized as an
adjustment to earnings until the contingency is resolved, (the date the increase
in shares are approved). In June 2004, the Company voted and approved a proposal
to amend the Certificate of Incorporation to increase the Company's authorized
capital stock from 100,000,000 to 200,000,000 shares, consisting of 190,000,000
shares of common stock and 10,000,000 shares of preferred stock. During June
2004, the Company recorded the deferred contingent beneficial conversion
adjustment of $2,072,296 as a deemed dividend since the contingency was
resolved.
In connection with Series F Preferred Stock conversions, the Company recorded
accrued dividends of $41,915.
Cash
During 2003, the Company issued 433,731 shares of preferred stock and raised
$574,872 through the sale of Series F Convertible Preferred stock. During 2004,
the Company issued 145,702 shares and raised $412,756 through the sale of Series
F Convertible Preferred Stock.
Services
During 2003, the Company issued an aggregate of 89,185 shares of its Series F
Convertible Preferred Stock for professional services totaling $132,435. During
2004, the Company issued an aggregate of 49,433 shares of its Series F
Convertible Preferred Stock for professional services totaling $158,530.
F-13
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
7. STOCK OPTION, STOCK APPRECIATION RIGHTS AND WARRANT GRANT PLAN
The Company's president and director were issued 6,000,000 options to purchase
common stock of the Company in January 2004. The total options granted may be
converted to common stock at an exercise price of $ .25 and expire in five
years. Those options were converted to stock appreciation rights in November
2004. It consists of 5,000,000 stock appreciation rights granted to the
President which vest over 5 years and 1,000,000 stock appreciation rights
granted to the director which vest over 2 years.
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
and then later for another twelve months until March 2005. The remaining balance
of 500,000 warrants was 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 that had brought a legal action against
the Company.
The fair value of each stock option, or warrant granted, is estimated on the
date of grant using the Black-Scholes option-pricing model. The Company did not
grant, nor issue, options or warrants in the year ended December 31, 2004.
The following tables illustrate the Company's stock option and warrant issuances
and balances outstanding as of, and during the years ended December 31, 2004 and
2003:
Shares Underlying Weighted Average
Warrants Exercise Price
----------------- ----------------
Outstanding at December 31, 2002 2,166,667 $ 0.15
Granted - -
Expired ( 500,000) 0.15
Exercised - -
----------------- ---------------
Outstanding at December 31, 2003 1,666,667 $ 0.15
Granted - -
Expired - -
Exercised - -
----------------- ---------------
Outstanding at December 31, 2004 1,666,667 $ 0.15
================= ===============
The following is additional information with respect to the Company's warrants
as of December 31, 2004:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
----------------------------------------------- -----------------------------
Weighted
Average Weighted
Number of Remaining Average Number of Weighted
Exercise Outstanding Contractual Exercise Exercisable Average
Price Warrants Life Price Warrants Exercise Price
--------- ------------ ------------ ------- ------------ --------------
$ 0.15 1,666,667 3 Months $ 0.15 1,666,667 $ 0.15
========= ============ ============ ======= ============ ============
F-14
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
8. LEASES
The Company's lease for its administrative facilities located in Glen Head, New
York on a month to month basis.
Rent expense, for the years ended December 31, 2004 and 2003 was $29,246 and
$25,797, respectively.
9. 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.
For the year ended December 31, 2004 and 2003, no provision for income taxes has
been provided for, as a result of continued net operating losses. The Company is
subject to certain state and local taxes based on capital.
The Company has net operating loss carry-forwards for federal income tax
purposes totaling approximately $18,000,000 at December 31, 2004. These
carry-forwards expire between the years 2009 through 2024. Utilization of these
loss carry-forwards may be limited under Internal Revenue Code Section 382. The
deferred tax asset arising from the net operating loss carry-forwards has been
offset by a corresponding valuation allowance.
The valuation allowance primarily relates to the federal and state net operating
losses for which utilization in future periods is uncertain. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. The Company considers projected future taxable income and tax
planning strategies in making this assessment. Based on projections for future
taxable income over the periods that the deferred tax assets are deductible, the
Company believes it is more likely than not that the Company will not realize
the benefits of these deductible differences in the near future and therefore a
full valuation allowance of $6,900,000 is provided. The valuation allowance
increased approximately $900,000 during 2004 related to increased net operating
losses.
10. MAJOR CUSTOMERS
During the year ended December 31, 2004 the Company's entire sales were to one
customer. During the year December 31, 2003 the Company had no sales.
11. COMMITMENTS AND CONTINGENCIES
In January 1, 2004, the Company entered into a 5 year employee agreement with
its Chief Executive Officer ("Employee"). The Company agreed to pay to employee
for the services to be rendered a base salary at an annual rate of three hundred
and fifty thousand dollars. The Company granted to its employee a five-year
option to 5,000,000 shares of the Company's outstanding common stock for an
option price of $.25 per share. The Option will vest in fifty equal, consecutive
monthly increments of 100,000 shares each on the first day of each month
beginning with January of 2004 and ending with February of 2008. Those options
were converted to stock appreciation rights in November 2004.
In March 9, 2004, The Company extended for two additional years of the
consulting agreement with a director. The Company agreed to increase his monthly
payment to $10,000 per month. The Company also gave him the right to purchase
one million shares of the Company's common stock at a price of $0.25 per share,
such right to vest at the rate of 50% per year. Those options were converted to
stock appreciation rights in November 2004.
In May 2001, the Company entered into 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 is 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 had been shipped under this agreement. The sale will be recognized when
the Company receives payments. The Company 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.
F-15