As filed with the Securities and Exchange Commission on November 9, 2006
Registration No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Water Chef, Inc.
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(Name of small business issuer in its charter)
Delaware 3850 86-0515678
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(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) lClassification Code Number) Identification
Number)
1007 Glen Cove Avenue, Suite 1
Glen Head, New York 11545
(516) 656-0059
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(Address and telephone number of principal executive offices)
David A. Conway
President
Water Chef, Inc.
1007 Glen Cove Avenue, Suite 1
Glen Head, New York 11545
(516) 656-0059
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(Name, address and telephone number of agent for service)
-----------------------------------
Copies to:
Robert H. Friedman, Esq.
Olshan Grundman Frome Rosenzweig & Wolosky LLP
Park Avenue Tower
65 East 55th Street
New York, New York 10022
(212) 451-2300
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Approximate Date of Proposed sale to the public: As soon as practicable after
this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
CALCULATION OF REGISTRATION FEE
===================================== ======================= ================ ======================= =====================
Proposed
Maximum Proposed Maximum
Title of Each Class of Securities Amount To Be Offering Price Aggregate Offering Amount of
To Be Registered Registered (1) Per Unit Price Registration Fee
------------------------------------- ----------------------- ---------------- ----------------------- ---------------------
Common Stock, par value $.001 7,882,352 shares $0.085 (2) $669,999.92 $71.69
per share
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TOTAL 7,882,352 shares $669,999.92 $71.69
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(1) In the event of a stock split, stock dividend or similar transaction
involving the Registrant's common stock, $.001 par value, the shares
registered hereby shall automatically be increased or decreased
pursuant to Rule 416 of the Securities Act of 1933, as amended.
(2) Estimated solely for the purpose of calculating the registration fee
in accordance with Rule 457(c) of the Securities Act, based on the
average of the bid and asked price of the Registrant's Common Stock on
the OTC Bulletin Board on November 6, 2006.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ii
Subject to Completion, Dated November 9, 2006
PROSPECTUS
7,882,352 SHARES OF COMMON STOCK
WATER CHEF, INC.
This prospectus relates to the resale of up to 7,882,352 shares of our
common stock which may be issued from time to time as follows:
o up to 7,000,000 shares of our common stock are issuable pursuant
to our convertible promissory note due February 17, 2007 all or a
portion of the principal amount and accrued interest of which may
be converted after the maturity date into shares of our common
stock at a conversion price for each share of common stock equal
to the current market price multiplied by eighty five percent
(85%); and
o up to 882,352 shares of our common stock are issuable upon the
exercise of warrants with an exercise price of $0.085 per share;
The selling security holder may offer or sell all or a portion of its
shares publicly or through private transactions at prevailing market prices or
at negotiated prices. We will not receive any of the proceeds from the sale of
the securities owned by the selling security holder.
Our common stock is traded and quoted on the Over the Counter Bulletin
Board (the "OTCBB") under the symbol "WTER.OB." On November 6, 2006, the last
reported sale price of our common stock was $0.085 per share. As of November 3,
2006 we had 198,977,497 shares of common stock outstanding.
Our executive offices are located at 1007 Glen Cove Avenue, Suite 1, Glen
Head, NY 11545 and our telephone number is (516) 656-0059.
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Investing in our common stock involves a high degree of risk. You should
read this entire prospectus carefully, including the section entitled "Risk
Factors" beginning on page 3, which describes the material risks.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-----------------------
The date of this prospectus is , 2006.
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The information in this prospectus is not complete and may be changed. The
selling security holders may not sell these securities or accept any other offer
to buy these securities until the registration statement filed with the
Securities and Exchange Commission becomes effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
TABLE OF CONTENTS
Prospectus Summary.............................................................2
The Company....................................................................2
Risk Factors...................................................................4
Special Note Regarding Forward-Looking Statements..............................8
Use of Proceeds................................................................9
Market for Our Common Stock and Related Shareholder Matters....................9
Management's Discussion and Analysis or Plan of Operation.....................10
Selling Securityholder........................................................11
Plan of Distribution..........................................................11
Business......................................................................13
Description of Property.......................................................17
Legal Proceedings.............................................................17
Directors, Executive Officers, Promoters and Control Persons..................18
Limitation of Liability and Indemnification Matters...........................20
Security Ownership of Certain Beneficial Owners and Management................21
Legal Matters.................................................................25
Experts.......................................................................25
Where You Can Find More Information...........................................25
i
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this prospectus. Because this is a summary, it
may not contain all of the information that may be important to you. You should
read this prospectus carefully and should consider, among other things, the
matters described under "Risk Factors" beginning on page 4 before making an
investment decision. Unless the context requires otherwise, references in this
prospectus to "the Company," "our Company," "we," "our," "us" and similar
expressions refer to Water Chef, Inc., a Delaware corporation, and its
predecessors and its subsidiaries.
THE COMPANY
Water Chef, Inc. ("Water Chef") designs and markets water purification
equipment. 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. 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 the PureSafe Water Station (the "PureSafe"), its patented line of
water purification systems. The PureSafe is a turn-key unit that converts
"gray," or bathing grade, water into United States Environmental Protection
Agency ("EPA") grade drinking water.
An investment in our stock involves a substantial degree of risk. See
"Risk Factors."
Our principal executive offices are located at 1007 Glen Cove Avenue,
Suite 1, Glen Head, NY 11545 and our telephone number is (516) 656-0059.
Recent Developments
On October 17, 2006, Water Chef entered into a loan agreement with
Southridge Partners LP pursuant to which the Company borrowed $300,000 at an
interest rate of 8% per annum. In consideration for such loan, Water Chef issued
a warrant for 882,352 shares of our common stock to Southridge Partners LP at an
exercise price of $0.085 per share. The outstanding principal amount of such
loan and all accrued and unpaid interest are due and payable on February 17,
2007. Such loan is further secured pursuant to a pledge agreement between
Southridge Partners LP and David A. Conway, the President and Chief Executive
Officer of Water Chef, pursuant to which Mr. Conway has granted a security
interest to Southridge Partners LP in 4,000,000 shares of common stock of Water
Chef owned by Mr. Conway. At any time after February 17, 2007, Southridge
Partners LP is entitled to convert all or a portion of such loan plus accrued
interest into shares of Water Chef's common stock.
The Offering
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Securities Offered: We are registering the resale of up to 7,882,352 shares
which may be issued from time to time of:
o Up to 7,000,000 shares of common stock issuable
pursuant to our convertible promissory note due
February 17, 2007 all or a portion of the principal
amount and accrued interest of which may be converted
after the maturity date into shares of our common stock
at a conversion price for each share of common stock
equal to the current market price multiplied by eighty
five percent (85%).
o Up to 882,352 shares of common stock issuable upon the
exercise of warrants with an exercise price of $0.085
per share.
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2
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Common Stock Outstanding After Offering: 206,859,849 shares, based on 198,977,497 shares outstanding
as of November 3, 2006 and assuming exercise of the warrant
and conversion of the convertible promissory note.
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Proceeds: We expect to use the net proceeds for general corporate
purposes including working capital, repayment of debt,
repurchase of common stock, temporary investment and/or the
financing of possible acquisitions or business expansion.
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Ticker Symbol:
Common Stock WTER.OB
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3
RISK FACTORS
An investment in our common stock involves a high degree of risk. The
following risk factors should be considered carefully in addition to the other
information in this prospectus, including under "Special Note Regarding
Forward-Looking Statements," before making an investment in our common stock.
Risks Related to Our Business
We have a history of losses. We could continue to incur losses in the future,
and we may never achieve or maintain profitability.
We had net losses of $1.2 million and $3.8 million for the years ended
December 31, 2005 and 2004, respectively. We had a net loss of $1,681,754 for
the nine months ended September 30, 2006. Our accumulated deficit as of
September 30, 2006 was approximately $26.3 million. We were not profitable
during the last two years and we may not be profitable in fiscal 2006.
Uncertainties still exist regarding whether or not we will attain profitability.
We can provide no assurance that we will be able to achieve profitable
operations in the future.
We may need additional capital to finance existing obligations and to fund our
operations and growth, and we may be unable to obtain additional capital under
terms acceptable to us or at all.
Our capital requirements in connection with our marketing efforts,
continuing product development and purchases of inventory and parts are expected
to be significant for the foreseeable future. In addition, unanticipated events
could cause our revenues to be lower and our costs to be higher than expected,
therefore, creating the need for additional capital. Historically, cash
generated from operations has not been sufficient to fund our capital
requirements, and we have relied upon sales of securities to fund our
operations. We have no current arrangements with respect to, or sources of,
additional financing, and we cannot assure you that we will have sufficient
funds available to meet our working capital requirements, or that we will be
able to obtain capital to finance operations on favorable terms or at all. If we
do not have, or are otherwise unable to secure, necessary working capital, we
may be unable to fund the manufacture of PureSafe systems, and we may have to
delay or abandon some or all of our development and expansion plans or otherwise
forego market opportunities, any of which could harm our business.
Our independent registered public accountants have stated in their report that
there is substantial doubt about our ability to continue as a going concern.
We have limited cash resources and have a working capital deficit. Our
independent registered public accountants have stated in their report that they
have a substantial doubt about our ability to continue as a going concern. By
being categorized in this manner, we may find it more difficult in the short
term to either locate financing for future projects or to identify lenders
willing to provide loans at attractive rates, which may require us to use our
cash reserves in order to expand. Should this occur, and unforeseen events also
require greater cash expenditures than expected, we could be forced to cease all
or a part of our operations. As a result, you could lose your total investment.
Our revenues are dependent upon sales of a single product, and our business will
fail if we do not increase sales of that product.
Our revenues are derived from sales of a single product, the PureSafe.
If we are not able to increase sales of this product, our business will fail.
The PureSafe is a relatively new product in the emerging market for water
purification systems and it is difficult to predict when or if sales of the
PureSafe will increase substantially or at all. We face a substantial risk that
our sales will continue to not cover our operating expenses and that we will
continue to incur operating losses.
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We have not been paid for a significant number of PureSafe systems that have
been shipped to a customer, and we may never receive payment for these items.
In May 2001, the Company entered into a distribution agreement with a
company (the "Sub Distributor") based in Jordan. The Sub Distributor agreed to
purchase no fewer than 100 PureSafe systems during 2001 and a minimum of 50
systems in each of 2002 and 2003. During the year ended December 31, 2001, 18
systems were shipped under this agreement. The Company has not received payment
for this shipment. 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 engaged legal counsel in Jordan to
pursue legal remedies and obtain payment for all systems shipped. There can be
no assurance that either the Company will obtain payment for systems shipped or
that the items will be returned.
We depend on our key personnel and the loss of their services would adversely
affect our operations.
If we are unable to maintain our key personnel and attract new
employees with high levels of expertise in those areas in which we propose to
engage, without unreasonably increasing our labor costs, the execution of our
business strategy may be hindered and our growth limited. We believe that our
success is largely dependent on the continued employment of our senior
management and the hiring of strategic key personnel at reasonable costs. If our
current chief executive officer was unable or unwilling to continue in his
present position, or we were unable to attract a sufficient number of qualified
employees at reasonable rates, our business, results of operations and financial
condition may be materially adversely affected.
We plan to expand and we may be unable to manage our growth.
We intend to grow our business, but we cannot be sure that we will
successfully manage our growth. In order to successfully manage our growth, we
must:
o expand and enhance our administrative infrastructure;
o improve our management, financial and information systems and
controls;
o expand, train and manage our employees effectively; and
o successfully retain and recruit additional employees.
Continued growth could place a further strain on our management,
operations and financial resources. We cannot assure you that our operating and
financial control systems, administrative infrastructure, facilities and
personnel will be adequate to support our future operations or to effectively
adapt to future growth. If we cannot manage our growth effectively, our business
may be harmed.
Difficulties presented by international factors could negatively affect our
business.
A component of our strategy is to expand our international sales
revenues. We believe that we face risks in doing business abroad that we do not
face domestically. Among the international risks we believe are most likely to
affect us are:
o export license requirements for our products;
o exchange rate fluctuations or currency controls;
o the difficulty in managing a direct sales force from abroad;
o the financial condition, expertise and performance of our
international distributors and any future international distributors;
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o domestic or international trade restrictions; or
o changes in tariffs.
Any of these factors could damage our business results.
Technological change and competition may render our potential products obsolete.
The water purification industry continues to undergo rapid change,
competition is intense and we expect it to increase. Competitors may succeed in
developing technologies and products that are more effective or affordable than
any that we are developing or that would render our technology and products
obsolete or noncompetitive. Many of our competitors have substantially greater
experience, financial and technical resources and production and development
capabilities than us. Accordingly, some of our competitors may succeed in
obtaining regulatory approval for products more rapidly or effectively than we
can for technologies and products that are more effective and/or affordable than
any that we are developing.
If our sole-source supplier is unable to meet our demands, our business results
will suffer.
We purchase certain key components for some of our products from a
single contract management supplier. For some of these components, there are
relatively few alternative sources of supply. Establishing additional or
replacement suppliers for any of the numerous components used in our products,
if required, may not be accomplished quickly and could involve significant
additional costs. Any supply interruption from our supplier or failure to obtain
alternative vendors for any of the components used to manufacture our products
would limit our ability to manufacture our products. Any such limitation on our
ability to manufacture our products would cause our business results to suffer.
Product liability exposure may expose us to significant liability.
We face an inherent business risk of exposure to product liability and
other claims and lawsuits in the event that the development or use of our
technology or prospective products is alleged to have resulted in adverse
effects. We may not be able to avoid significant liability exposure. We maintain
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 our products.
Although we believe our insurance coverage to be adequate, we may not have
sufficient insurance coverage, and we may not be able to obtain sufficient
coverage at a reasonable cost. An inability to obtain product liability
insurance at acceptable cost or to otherwise protect against potential product
liability claims could prevent or inhibit the commercialization of our products.
A product liability claim could hurt our financial performance. Even if we avoid
liability exposure, significant costs could be incurred that could hurt our
financial performance and condition.
Our inability to protect our intellectual property rights may force us to incur
unanticipated costs.
Our success will depend, in part, on our ability to obtain and
maintain protection in the United States and other countries for certain
intellectual property incorporated into our water purification systems and our
proprietary methodologies. We may be unable to obtain patents relating to our
technology. Even if issued, patents may be challenged, narrowed, invalidated or
circumvented, which could limit our ability to prevent competitors from
marketing similar solutions that limit the effectiveness of our patent
protection and force us to incur unanticipated costs. In addition, existing laws
of some countries in which we may provide services or solutions may offer only
limited protection of our intellectual property rights.
Our products may infringe the intellectual property rights of third parties, and
third parties may infringe our proprietary rights, either of which may result in
lawsuits, distraction of management and the impairment of our business.
As the number of patents, copyrights, trademarks and other
intellectual property rights in our industry increases, products based on our
technology may increasingly become the subject of infringement claims. Third
parties could assert infringement claims against us in the future. Infringement
claims with or without merit could be time consuming, result in costly
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litigation, cause product shipment delays or require us to enter into royalty or
licensing agreements. Royalty or licensing agreements, if required, might not be
available on terms acceptable to us. We may initiate claims or litigation
against third parties for infringement of our proprietary rights or to establish
the validity of our proprietary rights. Litigation to determine the validity of
any claims, whether or not the litigation is resolved in our favor, could result
in significant expense to us and divert the efforts of our technical and
management personnel from productive tasks. If there is an adverse ruling
against us in any litigation, we may be required to pay substantial damages,
discontinue the use and sale of infringing products, expend significant
resources to develop non-infringing technology or obtain licenses to infringing
technology. Our failure to develop or license a substitute technology could
prevent us from selling our products.
Risk Factors Relating to Our Common Stock
Exercise of our warrants or conversion of our convertible preferred stock will
dilute the ownership interest of existing stockholders.
The exercise of our warrants into shares of our common stock will
dilute the ownership interests of existing stockholders. Any sales in the public
market of the shares of our common stock issuable upon exercise of our warrants
or conversion of our convertible preferred stock could adversely affect
prevailing market prices of our common stock. In addition, the existence of the
warrants or the convertible preferred stock may encourage short selling by
market participants due to this dilution or facilitate trading strategies
involving the notes and our common stock.
Future sales of shares of our common stock in the public market could adversely
affect the trading price of shares of our common stock and our ability to raise
funds in new stock offerings.
Future sales of substantial amounts of shares of our common stock in
the public market, or the perception that such sales are likely to occur, could
affect prevailing trading prices of our common stock and, as a result, the value
of the notes. As of November 3, 2006, we had 198,977,497 shares of common stock
outstanding.
We do not anticipate paying cash dividends in the foreseeable future, which
could adversely affect the price of our stock.
We, by reason of our anticipated financial status and our contemplated
financial requirements, do not contemplate or anticipate paying any dividends
upon our common stock in the foreseeable future. Any payment of cash dividends
in the future will be dependent upon the amount of funds legally available, the
earnings, financial conditions, capital requirements and other factors that the
board of directors may think are relevant. As a result, you may never receive a
stream of cash payments from dividends, which could adversely affect the price
of our stock.
Although we are subject to the information and reporting requirements of the
Securities Exchange Act of 1934, our common stock is not quoted or traded on a
national exchange and investors in our common stock will be subject to risks
associated with the public trading market generally.
We cannot predict the extent to which a trading market will develop or
how liquid that market might become. If you exercise your warrants and receive
common stock, you will pay a price that was not established in the public
trading markets. You may suffer a loss of your investment.
A significant number of our shares will be available for future sale and could
depress the market price of our stock.
As of November 3, 2006, there were 198,977,497 shares of common stock
outstanding, outstanding warrants to purchase 2,500,000 shares of our common
stock at an exercise price of $0.15 per share, 430,000 shares of our common
stock at $0.14 per share, 4,000,000 shares of our common stock at $0.14 per
share and 882,352 shares of our common stock at $0.085 per share, all of them
fully vested, 1,736,680 shares of common stock issuable upon conversion of our
Series F convertible preferred stock, and 5,000,000 stock appreciation rights.
Sales of large amounts of our common stock in the market could adversely affect
the market price of the common stock and could impair our future ability to
7
raise capital through offerings of our equity securities. A large volume of
sales by holders exercising the warrants or stock appreciation rights could have
a significant adverse impact on the market price of our common stock.
The market price of our common stock is volatile, leading to the possibility of
its value being depressed at a time when you want to sell your holdings.
The market price of our common stock has in the past been, and may in
the future continue to be, volatile. For instance, between January 1, 2004 and
November 6, 2006, the closing bid price of our common stock has ranged between
$0.06 and $0.37. Many factors could cause the market price of our common stock
to fluctuate substantially, including:
o future announcements concerning us, our competitors or other
companies with whom we have business relationships;
o changes in government regulations applicable to our
business;
o changes in market conditions for our industry;
o overall volatility of the stock market and general economic
conditions;
o changes in our earnings estimates or recommendations by
analysts; and
o changes in our operating results from quarter to quarter.
In addition, the stock market in recent years has experienced
significant price and volume fluctuations for reasons unrelated to operating
performance. These market fluctuations may adversely affect the price of our
common stock at a time when you want to sell your interest in us.
Your ability to influence corporate decisions may be limited because our major
stockholders own a large percentage of our common stock.
Our significant stockholders own a substantial portion of our
outstanding stock. As a result of their stock ownership, if these stockholders
were to choose to act together, they would be able to control all matters
submitted to our stockholders for approval, including the election of directors
and approval of any merger, consolidation or sale of all or substantially all of
our assets. This concentration of voting power could delay or prevent an
acquisition of our Company on terms that other stockholders may desire. In
addition, as the interests of our majority and minority stockholders may not
always be the same, this large concentration of voting power may lead to
stockholder votes that are inconsistent with your best interests or the best
interests of us as a whole.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes and incorporates by reference forward-looking
statements. When used or incorporated by reference in this prospectus,
statements which are not historical in nature, including the words "may,"
"will," "should," "continue," "future," "potential," "believe," "expect,"
"anticipate," "project," "plan," "intend," "seek," "estimate" and similar
expressions are intended to identify forward-looking statements.
The forward-looking statements in this prospectus are based upon our
management's beliefs, assumptions and expectations of our future operations and
economic performance, taking into account the information currently available to
us. These statements are not statements of historical fact. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, performance or financial
condition to be materially different from any future results expressed or
implied by these statements. Such factors include, among other things, the risks
discussed in this prospectus under the caption "Risk Factors."
8
In light of these and other uncertainties, the forward-looking
statements included or incorporated by reference in this prospectus should not
be regarded as a representation by us that our plans and objectives will be
achieved. You should not place undue reliance on any forward-looking statements,
and we undertake no obligation to publicly update or revise any forward-looking
statements after the date of this prospectus, whether as a result of new
information, future events or otherwise.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares
owned by the selling securityholders We may receive proceeds of up to $75,000
less expenses in connection with the exercise of warrants, the underlying shares
of which may in turn be sold by the selling securityholder. Although the amount
and timing of our receipt of any such proceeds are uncertain, such proceeds, if
received, will be used for general corporate purposes, including, without
limitation, the following (in order of priority):
o working capital;
o the repayment of debt;
o the repurchase of our common stock;
o temporary investment; and/or
o the financing of possible acquisitions or business expansion.
To the extent that proceeds are available following repayment of our
debt, we reserve the right to reallocate or change the specific use of the net
proceeds to respond to fluctuations in our business and to take advantage of
opportunities which may be complementary to our operations.
MARKET FOR OUR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Our Common Stock is quoted on the OTCBB under the symbol WTER.OB. As
of November 3, 2006, there were approximately 816 holders of record of our
common stock. The following table sets forth the high and low bid prices for our
common stock for the periods indicated as reported by the OTCBB. The prices
state inter-dealer quotations, which do not include retail mark-ups, mark-downs
or commissions. Such prices do not necessarily represent actual transactions.
Fiscal Year-Ended December 31, 2006 High Low
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First Quarter $0.19 $ 0.07
Second Quarter 0.23 0.10
Third Quarter 0.13 0.09
Fourth Quarter (through November 6, 2006) 0.11 0.07
Fiscal Year-Ended December 31, 2005 High Low
---- ---
First Quarter $0.28 $ 0.14
Second Quarter 0.21 0.11
Third Quarter 0.29 0.13
Fourth Quarter 0.17 0.06
Fiscal Year-Ended December 31, 2004 High Low
---- ---
First Quarter $0.36 $ 0.16
Second Quarter 0.37 0.14
Third Quarter 0.34 0.14
Fourth Quarter 0.29 0.14
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We have not paid any dividends on our common stock and do not
anticipate declaring or paying any cash dividends in the foreseeable future. We
currently expect to retain future earnings, if any, to finance the growth and
development 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 convertible
preferred stock (See "Description of Securities"), the holders of our common
stock are entitled to dividends when and if declared by our Board of Directors
from legally available funds.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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. Until the
fourth quarter of 2001, the Company was engaged in the manufacture and marketing
of water coolers and water purification and filtration products. In the fourth
quarter of 2001, the Company completed the sale of this business in order to
focus its activities on its PureSafe line of business. The PureSafe Water
Station has been designed by the Company to meet the needs of communities which
either do not have access to municipal water treatment systems, or for those
which systems have been compromised, either by environmental factors or by
faulty design or maintenance.
RESULTS OF OPERATIONS
Revenue for the nine months ended September 30, 2006 and 2005 was
$115,000 and $260,000 respectively. During the nine months ended September 30,
2006, the Company recognized the sale of two PureSafe Water Station Systems.
Cost of sales for the nine-month period ended September 30, 2006 and 2005 was
$93,000 and $42,000, respectively. An analysis of the components of cost of
sales in the 2006 and 2005 periods follows:
Cost of Sales Product Rent and Overhead
Period CGS Payments to Manufacturer Total
------------------- --------- ------------------------- ---------
For the nine months ended
September 30, 2006 $ 30,000 $ 63,000 $ 93,000
For the nine months ended
September 30, 2005 $ -- $ 42,000 $ 42,000
Selling, general and administrative expenses for the nine months ended
September 30, 2006 were $1,282,272, compared to $920,505 for the nine months
ended September 30, 2005, an increase of $361,767 or 39%.
The net loss for the nine months ended September 30, 2006 was
$1,681,754 compared to $768,161 in the same period ended September 30, 2005.
Selling, general and administrative expenses for the three months
ended September 30, 2006 were $118,335, compared to $275,299 for the three
months ended September 30, 2005, a decrease of $156,964 or 57%.
The net loss for the three months ended September 30, 2006 was
$182,363 compared to $333,481 in the same period ended September 30, 2005.
In the second quarter 2006, the Company entered into a consulting
agreement with a marketing professional and granted three year stock purchase
warrants for four million shares of common stock at an exercise price of $0.10
per share. The Company incurred a stock-based compensation charge of $464,000
which was charged to operations during nine months ended September 30, 2006.
In addition, the Company granted three-year stock purchase warrants
for 1,250,000 shares to each of two independent Directors. The warrants are
exercisable at $0.15 per share. The fair value of the stock purchase warrants
estimated on the date of grant using the Black-Scholes option pricing model is
$.19 per share or $241,200.
10
The Company issued 866,666 shares of common stock for services
provided primarily by our independent directors and the Chairman of our
Scientific Advisory Board. The Company recorded a charge to operations during
the nine months ended September 30, 2006 of $62,499.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2006, the Company had a working capital deficiency of
approximately $2,445,000. In addition, the Company continues to suffer recurring
losses from operations and has an accumulated deficit since inception of
approximately $26,265,000. The accompanying financial statements have been
prepared assuming that that the Company will continue as a going concern. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans with respect to these matters include
restructuring its existing debt, raising additional capital through future
issuances of stock and/or equity, and finding sufficient profitable markets for
its products to generate sufficient cash to meet its business obligations.
However, there can be no assurance that the Company will be able to obtain
sufficient funds to continue the development of its product, marketing plan and
distribution network.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern.
SELLING SECURITYHOLDER
The following table sets forth the names of the selling
securityholder, the number of shares beneficially owned by the selling
securityholder, the number of shares that may be offered under this prospectus
and the number of shares of common stock owned by the selling securityholder
after the offering is completed. The selling securityholder has not been an
officer, director or had any material relationship with us within the past three
years.
------------------------------------------- ------------------- -------------------------- --------------------------
Number of Common
Number of Shares/Percentage of
Common Shares Class to Be Owned After
Owned Prior to Number of Common Completion of the
Name the Offering Shares to be Offered Offering
---- ------------ -------------------- --------
------------------------------------------- ------------------- -------------------------- --------------------------
------------------------------------------- ------------------- -------------------------- --------------------------
Southridge Partners LP (1) 7,882,352 7,882,352 0/0%
------------------------------------------- ------------------- -------------------------- --------------------------
TOTAL: 8,894,899 7,882,352 1,012,547/*
------------------------------------------- ------------------- -------------------------- --------------------------
* Less than 1%
(1) Represents up to 7,000,000 shares to be issued pursuant to a
convertible promissory note due February 17, 2007 and 882,352 shares
to be issued upon the exercise of warrants. Stephen Hicks, the
President of the general partner of Southridge Partners LP, has voting
and dispositive power over the shares of common stock to be issued to
upon exercise of the warrants and conversion of the convertible
promissory held by Southridge Partners LP.
Our registration of the shares included in this prospectus does not
necessarily mean that the selling securityholders will opt to sell any of the
shares offered hereby. The shares covered by this prospectus may be sold from
time to time by the selling securityholders so long as this prospectus remains
in effect.
PLAN OF DISTRIBUTION
We are registering the resale of up to 7,000,000 shares of our common
stock issuable pursuant to our convertible promissory note due February 17, 2007
all or a portion of the principal amount and accrued interest of which may be
converted after the maturity date into shares of our common stock at a
conversion price for each share of common stock equal to the current market
price multiplied by eighty five percent (85%). We will not receive any proceeds
from the subsequent sale of this common stock. We will bear all fees and
expenses incident to registering these shares of common stock.
11
We are also registering the resale of up to 882,352 shares of our
common stock issuable, otherwise than through underwriters, upon exercise of
warrants. We anticipate we will receive $0.085 per share upon the exercise of
the warrants. The warrants also carry a cashless exercise provision. The
warrants were issued to in connection with a loan agreement dated as of October
11, 2006. The warrants are currently exercisable. The warrants expire on October
10, 2009. We will not receive any proceeds from the subsequent sale of the
common stock, although we may receive up to $75,000 (less expenses) if all the
warrants are exercised by the warrant holders. We will bear all fees and
expenses incident to registering the shares of common stock.
Neither we, nor the selling securityholder, have employed an
underwriter for the sale of common stock by the selling securityholder. The
selling securityholder has advised us that it has not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of its securities, nor is there an underwriter
or coordinating broker acting in connection with the proposed sale of the shares
by the selling securityholder. We will not receive any proceeds from the
subsequent sale of the shares of common stock. We will bear all expenses in
connection with the preparation of this prospectus and registration of the
shares. The selling securityholder will bear brokerage commissions and similar
selling expenses associated with the sale of its common stock.
If any shares of common stock being registered for resale in the
accompanying registration statement are transferred from the selling
securityholder listed in this prospectus and such transferees wish to rely on
this prospectus to resell these shares, then a prospectus supplement or, if
appropriate, a post-effective amendment to the registration statement of which
this prospectus is a part, would need to be filed with the Securities and
Exchange Commission naming these individuals as selling securityholder.
The selling securityholder may offer its shares of common stock from
time to time directly or through pledgees, donees, transferees or other
successors in interest in one or more of the following transactions (which may
include block transactions):
o On any stock exchange or automated quotation system on which the
shares of common stock may be listed at the time of sale;
o In negotiated transactions;
o In the over-the-counter market;
o Put or call option transactions relating to the shares;
o Short sales relating to the shares; or
o In a combination of any of the above transactions.
The selling securityholder may offer its shares of common stock at any
of the following prices, which may reflect discounts from the prevailing market
prices at the time of sale:
o Fixed prices that may be changed;
o Market prices prevailing at the time of sale;
o Prices related to such prevailing market prices;
o At negotiated prices; or
o Varying prices determined at the time of sale.
12
The selling securityholder may effect such transactions by selling
shares directly to purchasers or to or through broker-dealers, which may act as
agents or principals. Such broker-dealers may receive compensation in the form
of discounts, concessions, or commissions from the selling securityholder and/or
the purchasers of shares of common stock for whom such broker-dealers may act as
agents or to whom they sell as principals, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions).
Any broker-dealer acquiring common stock from the selling
securityholder may sell the shares either directly, in its normal market-making
activities, through or to other brokers on a principal or agency basis or to its
customers. Any such sales may be at prices then prevailing on the OTCBB or at
prices related to such prevailing market prices or at negotiated prices to its
customers or a combination of such methods. The selling securityholder and any
broker-dealers that act in connection with the sale of the common stock
hereunder might be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act of 1933, as amended (the "Securities Act") any
commissions received by such broker-dealers and any profit on the resale of
shares sold by them as principals might be deemed to be underwriting discounts
and commissions under the Securities Act. The selling securityholder may agree
to indemnify any agent, dealer or broker-dealer that participates in
transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act.
Because the selling securityholder may be deemed to be an
"underwriter" within the meaning of Section 2(11) of the Securities Act the
selling securityholder will be subject to the prospectus delivery requirements
of the Securities Act.
The selling securityholder also may resell all or a portion of the
shares in open market transactions in reliance upon Rule 144 under the
Securities Act, provided they meet the criteria and conform to the requirements
of such Rule.
If we are notified by a selling securityholder that any material
arrangement has been entered into with a broker-dealer for the sale of the
shares through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, we will file a
post-effective amendment to the registration statement of which this prospectus
is a part under the Act disclosing:
o the name of each such selling securityholder and of the participating
broker-dealer(s);
o the number of shares involved;
o the price at which such shares were sold;
o the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
o that such broker-dealer(s) did not conduct any investigation to verify
the information set out or incorporated by reference in this
prospectus; and
o other facts material to the transaction.
The selling securityholder is not a broker-dealer or an affiliate of a
broker-dealer.
There can be no assurance that the selling securityholder will sell
any or all of the shares offered by them under this prospectus.
BUSINESS
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 its patented line of "PureSafe" water purification systems. To
13
date, the Company has shipped 26 PureSafe systems. Revenue has been recognized
on only 8 PureSafe systems, as 18 systems that were shipped to the Kingdom of
Jordan have not met the criteria for revenue recognition due to no reasonable
assurance of collectibility. In addition to those systems shipped in 2005, Water
Chef received payment in 2005 for two additional systems shipped in 2006.
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 because although 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 as to limit
the opportunities for profit and growth.
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 that have malfunctioned because of improper maintenance or faulty
design. The result of that activity is the PureSafe Water Station, a turn-key
system that converts "gray," or bathing grade, water into 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 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 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 system 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 of water 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
system can be moved with a single fork-lift and is transportable by truck or
helicopter. Operating the PureSafe is simple and straightforward. Due to its
turn-key design, minimum wage personnel can be trained to operate the system. 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 warrants each system for a period of one year
so long as the consumer adheres to required maintenance protocols, using Water
Chef supplied parts, as prescribed in the maintenance manual. The Company also
offers larger stand-alone versions of the PureSafe to provide pure water in
quantities up to 20,000 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.
14
MANUFACTURING
In 2000, the Company entered into a subcontracting agreement with
Davis Aircraft Products Inc, ("Davis") for the manufacture of the PureSafe.
Based upon the experience and the resources of Davis, Water Chef's 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. In
addition, Davis supervises much of the Company's research and development
activities.
RAW MATERIALS
The PureSafe has been designed to use, for the most part, readily
available off-the-shelf components, sub-systems and equipment. Inasmuch as each
of the components and sub-systems isavailable 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.
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.
The Company currently has contracts to sell PureSafe systems in Laos
and Ecuador. In addition, the Company is actively marketing its products to
potential customers in Bangladesh, China, El Salvador, Egypt and Honduras, and
to agencies and departments of the U.S. Government.
MARKETING
The potential market for the PureSafe is substantial and is both
worldwide 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.
15
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 Water Chef 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 its
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 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 November 20, 2001. Each of the patent applications
has been accepted, Requests for Examination have been made, and the Company
currently has patent protection in the requested venues.
The name PureSafe Water Station and the stylized water droplet mark
have been trademarked in the United States.
Water Chef has also incorporated patented and proprietary technology
in the PureSafe and believes that it can protect this intellectual capital
throughout the manufacturing and distribution cycle.
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 PureSafe to be influenced by
seasonality.
16
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 November 8, 2006, the Company employed one executive officer 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.
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 principal 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 $2,638 per month on a month-to-month basis.
To the extent possible, the Company intends to utilize leased space
for its future needs.
LEGAL PROCEEDINGS
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 systems of the Company's "Pure Safe Water Station"
during 2001 and a minimum of 50 systems in each of 2002 and 2003. To date, the
Company has shipped 18 systems to the Kingdom of Jordan, none of which have 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 systems shipped.
On July 14, 2006, Funding Group, Inc. filed a complaint with the
Supreme Court of the State of New York in New York County seeking damages due to
an alleged breach of contract related to a $25,000 loan made by the plaintiff to
the Company. On October 11, 2006, the Company filed a counter claim against
Funding Group, Inc. with the Supreme Court of the State of New York. The Company
believes the complaint is without merit and intends to vigorously defend itself
17
in these actions, and believes that the eventual outcome of these matters will
not have a material adverse effect on the Company. However, the ultimate outcome
of these matters cannot be determined at this time.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
As of September 30, 2006, the Company's Directors, Executive Officers
and Scientific Advisory Board Members are:
Name Age Position(s) with the Company
David A. Conway 64 Director, Chairman, President, Chief
Executive Officer and Chief
Financial Officer
John J. Clarke ++ 64 Director
Ronald W. Hart + 63 Chairman, Scientific Advisory Board
Mohamed M. Salem + 55 Scientific Advisory Board
Marshall S. Sterman++ 75 Director
Richard Wilson + 80 Scientific Advisory Board
Mostafa K. Tolba + 84 Scientific Advisory Board
+ Members of the Scientific 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.
David A. Conway
Mr. Conway was elected to the Board of Directors in 1997 and joined the Company
as President and Chief Executive Officer in 1998. Previously, he held the
positions of President and 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 Company's 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, where he has been
employed since 1976, 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.)
Dr. Hart agreed to form the Board of Scientific Advisors in 2000 and became
Chairman at that time. Dr. Hart is an internationally recognized scientist and
scholar who was Director of the National Center for Toxicological Research and
18
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 (M.D./Ph.D.)
Dr. Salem was 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.
Marshall S. Sterman
Mr. Sterman was elected to the Board of Directors in 2000. Mr. Sterman is
President of the Mayflower Group, a Massachusetts based merchant bank, where he
has been employed since 1986. 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.)
Dr. Wilson was appointed to the Scientific Advisory Board in February 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.
Marshall S. Sterman and John J. Clarke are the members of the Company's Audit
Committee. The Board of Directors has determined that Mr. Sterman is an "audit
committee financial expert" as defined in Item 401(e) of Regulation S-B.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Name and Long-Term
Principal Position Annual Compensation Compensation
------------------ -------------------------------------------------- -----------------------
Securities
Other Restricted Underlying
Annual Stock Options/ All Other
Salary Bonus Compensation Award(s) SARs Compensation
Year ($) ($) ($) ($) (#) ($)
David A. Conway
President/CEO 2005 $350,000 -- -- -- -- --
2004 $303,750 -- -- -- 5,000,000 --
2003 $165,000 -- -- -- -- --
19
The Company did not issue any stock options or common stock appreciation rights
during fiscal 2005.
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 2005, 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 $267,500 due to him for this service as of December 31, 2005.
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.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's amended and restated certificate of incorporation and
bylaws eliminate, in certain circumstances, the liability of Directors for
breach of their fiduciary duty. This provision does not eliminate the liability
of a Director (i) for breach of the Director's duty of loyalty to the Company or
its stockholders (ii) for acts of omissions by the director not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) for
willful or negligent declaration of an unlawful dividend, stock purchase or
redemption; (iv) for transactions from which the Director derived an improper
personal benefit; or (v) for any act or omission occurring prior to the
effective date of the amended and restated certificate of incorporation.
The Company's amended and restated certificate of incorporation
provides generally for indemnification of the Directors and Officers to the full
extent permitted under Delaware law, and permits indemnification for all other
persons whom the Company is empowered to indemnify.
These provisions do not limit or eliminate our rights or those of any
stockholder to seek non-monetary relief, such as an injunction or rescission, in
the event of a breach of a Director's fiduciary duty. These provisions will not
alter a Director's liability under federal securities laws. Our amended and
restated bylaws also contain provisions indemnifying our directors and officers
to the fullest extent permitted by the Delaware General Corporation Law. We
believe that these provisions are necessary to attract and retain qualified
individuals to serve as Directors and officers.
Insofar as indemnification for liabilities arising under the Act may
be permitted to Directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
20
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is information as of November 3, 2006, 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,
all 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 November 3, 2006.
Common Stock Series A Series D Series F
Beneficially Owned(1) Preferred Stock Preferred Stock Convertible
Beneficially Beneficially Preferred Stock
Owned(1) Owned(1) Beneficially
Owned(1)
Shares % Shares % Shares % Shares %
------ - ------ - ------ - ------ -
David A. Conway (2) 25,110,782 12.6% -- -- -- -- -- --
Water Chef, Inc.
1007 Glen Cove Ave., Suite 1
Glen Head, NY 11545
Marshall S. Sterman 850,000 * -- -- -- -- -- --
46 Neptune Street
Beverly, MA 01915
John J. Clarke 1,381,700 * -- -- -- -- -- --
116B S. River Rd.
Bedford, NH 03110
Jerome Asher & Anne Asher -- -- 5,000 9.5% -- -- -- --
JTWROS
2701 N Ocean Blvd Apt E-202
Boca Raton, FL 33431
Robert D. Asher -- -- 5,000 9.5% -- -- -- --
72 Old Farm Road
Concord, MA 01742
John A. Borger -- -- -- -- 10,000 10.8% -- --
806 E Avenida Pico
Suite I PMB #262
San Clemente, CA 92673
C Trade Inc -- -- -- -- -- -- 9,375 21.6%
25-40 Shore Blvd., Ste. 9L
Astoria, NY 11102
Adir Elizier -- -- -- -- -- -- 2,848 6.6%
828 Dorian Court
Far Rockaway, NY 11691
Peter Hoffman -- -- -- -- -- -- 3,126 7.2%
7035 Vleigh Place
Flushing, NY 11367
21
Common Stock Series A Series D Series F
Beneficially Owned(1) Preferred Stock Preferred Stock Convertible
Beneficially Beneficially Preferred Stock
Owned(1) Owned(1) Beneficially
Owned(1)
Shares % Shares % Shares % Shares %
------ - ------ - ------ - ------ -
Robert Kaszovitz -- -- -- -- -- -- 10,000 23.0%
1621 51st Street
Brooklyn, NY 11204
Olshan Grundman Frome -- -- -- -- -- -- 5,000 11.5%
Rosenzweig & Wolosky LLP
65 East 55th Street
New York, NY 10022
Shirley M. Wan -- -- -- -- 6,000 6.5% -- --
5455 Chelsen Wood Dr.
Duluth, GA 30155
All executive officers and 27,342,482 13.7% -- -- -- -- -- --
directors as a Group (2)
* less than 1%
1. A person is deemed to be the beneficial owner of voting securities
that can be acquired by such person within 60 days after the record
date upon the exercise of options and warrants and the conversion of
convertible securities. Each beneficial owner's percentage of
ownership is determined by assuming that all options, warrants or
convertible securities held by such person (but not those held by any
other person) that are currently exercisable or convertible (i.e.,
that are exercisable or convertible within 60 days after the record
date) have been exercised or converted.
2. Includes 10,495,067 shares held in an IRA Trust.
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 340,000,000 shares of common
stock and 10,000,000 shares of preferred stock, of which 400,000 shares have
been designated Series A Preferred Stock, $.001 par value per share, 400,000
shares have been designated Series C convertible preferred stock, $.001 par
value per share, 400,000 shares have been designated Series D Preferred Stock,
$.001 par value per share, and 1,000,000 shares have been designated Series F
convertible preferred stock, $.001 par value per share.
Except as to certain matters discussed below or as proscribed by
applicable law, the holders of shares of all classes of the capital stock of the
Company vote together as a single class. The holders of our capital stock do not
have cumulative voting rights, which means that the holders of more than 50% of
the outstanding shares, voting for the election of directors, can elect all of
the directors to be elected, if they so choose, and, in that event, the holders
of the remaining shares will not be able to elect any of our directors.
22
The following description of our capital stock is based upon our
restated certificate of incorporation, amended and restated bylaws and
applicable provisions of law. We have summarized portions of our restated
certificate of incorporation and amended and restated bylaws below. The summary
is not complete. You should read our certificate of incorporation and amended
and restated bylaws for the provisions that are important to you.
Description of the Common Stock
As of November 3, 2006 there were 198,977,497 shares of common stock
outstanding which were held of record by approximately 816 shareholders.
Prior to filing the Certificate of Amendment on March 22, 2006
increasing our authorized capital stock to 350,000,000, we were authorized to
issue up to 200,000,000 shares of capital stock, consisting of up to 190,000,000
shares of common stock, par value $0.001 per share, and up to 10,000,000 shares
of preferred stock. There are presently 198,977,497 shares of common stock
outstanding. Total shares issuable upon the exercise of options, warrants and
conversion of preferred stock as of September 30, 2006 were 8,666,680.
Voting
Each holder of common stock is entitled to one vote for each share on
all matters to be voted upon by the holders of common stock.
Rights and Preferences
The holders of common stock: (i) have equal ratable rights to
dividends from funds legally available if and when declared by our Board of
Directors after all accrued but unpaid dividends have been paid to the holders
of the outstanding capital stock ranking senior to the common stock as to
dividends; (ii) are entitled to share ratably in all of our assets available for
distribution to the holders of common stock upon liquidation, dissolution or
winding up of our affairs; and (iii) do not have preemptive, subscription or
conversion rights, and there are no redemption or sinking fund provisions or
rights.
Our common stock is admitted for trading on the OTCBB under the symbol
"WTER.OB."
The transfer agent and registrar for our common stock is Computershare
Investor Services.
Delaware Anti-Takeover Law and Provisions of our Certificate of Incorporation
and Bylaws
Delaware Anti-Takeover Law
We are subject to Section 203 of the Delaware General Corporation Law.
Section 203 generally prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless:
o prior to the date of the transaction, the Board of Directors
of the corporation approved either the business combination
or the transaction which resulted in the stockholder
becoming an interested stockholder;
o the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining
the number of shares outstanding (i) shares owned by persons
who are directors and also officers and (ii) shares owned by
employee stock plans in which employee participants do not
have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or
exchange offer; or
o on or subsequent to the date of the transaction, the
business combination is approved by the board and authorized
at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3%
of the outstanding voting stock which is not owned by the
interested stockholder.
23
Section 203 defines a business combination to include:
o any merger or consolidation involving the corporation and
the interested stockholder;
o any sale, transfer, pledge or other disposition involving
the interested stockholder of 10% or more of the assets of
the corporation;
o subject to exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder; or
o the receipt by the interested stockholder of the benefit of
any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation.
In general, Section 203 defines an interested stockholder as any
entity or person beneficially owning 15% or more of the outstanding voting stock
of the corporation and any entity or person affiliated with, or controlling, or
controlled by, the entity or person. The term "owner" is broadly defined to
include any person that, individually, with or through that person's affiliates
or associates, among other things, beneficially owns the stock, or has the right
to acquire the stock, whether or not the right is immediately exercisable, under
any agreement or understanding or upon the exercise of warrants or options or
otherwise or has the right to vote the stock under any agreement or
understanding, or has an agreement or understanding with the beneficial owner of
the stock for the purpose of acquiring, holding, voting or disposing of the
stock.
The restrictions in Section 203 do not apply to corporations that have
elected, in the manner provided in Section 203, not to be subject to Section 203
of the Delaware General Corporation Law or, with certain exceptions, which do
not have a class of voting stock that is listed on a national securities
exchange or authorized for quotation on the Nasdaq Stock Market or held of
record by more than 2,000 stockholders. Our certificate of incorporation and
amended and restated bylaws do not opt out of Section 203.
Section 203 could delay or prohibit mergers or other takeover or
change in control attempts with respect to us and, accordingly, may discourage
attempts to acquire us even though such a transaction may offer our stockholders
the opportunity to sell their stock at a price above the prevailing market
price.
Certificate of Incorporation and Bylaws
Provisions of our certificate of incorporation and amended and
restated bylaws may delay or discourage transactions involving an actual or
potential change in our control or change in our management, including
transactions in which stockholders might otherwise receive a premium for their
shares, or transactions that our stockholders might otherwise deem to be in
their best interests. Therefore, these provisions could adversely affect the
price of our common stock. Among other things, our restated certificate of
incorporation and amended and restated bylaws:
o provide that the authorized number of directors may be
changed only by resolution of the board of directors;
o provide that all vacancies, including newly created
directorships, may, except as otherwise required by law, be
filled by the affirmative vote of a majority of directors
then in office, even if less than a quorum; and
o do not provide for cumulative voting rights (therefore
allowing the holders of a majority of the shares of common
stock entitled to vote in any election of directors to elect
all of the directors standing for election, if they should
so choose).
24
LEGAL MATTERS
The validity of the securities offered under this prospectus will be
passed upon for us by Olshan Grundman Frome Rosenzweig & Wolosky LLP, New York,
New York. As of November 3, 2006, Olshan Grundman Frome Rosenzweig & Wolosky LLP
owns 5,000 shares of the Company's Series F convertible preferred stock.
EXPERTS
Our financial statements as of December 31, 2005, and for the years
ended December 31, 2005 and 2004 included in this registration statement have
been audited by Marcum & Kliegman LLP, an independent registered public
accounting firm, as stated in its report, appearing in this registration
statement and have been so included in reliance upon the report of such firm
given upon its authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document that we file at the Public Reference Room of the Securities
and Exchange Commission at 100 F Street, N.E., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. In addition, the
Securities and Exchange Commission maintains an Internet site at
http://www.sec.gov from which interested persons can access the reports, proxy
and information statements and other information that we electronically file
with the Securities and Exchange Commission.
You may obtain a copy of these filings at no cost, by writing or
telephoning us at the following:
Water Chef, Inc.
Attention: Investor Relations
1007 Glen Cove Avenue, Suite 1
Glen Head, New York 11545
Tel: (845) 794-4100
www.WaterChef.net
25
Index to Financial Statements of Water Chef, Inc.
Audited Financial Statements
----------------------------
Report of Independent Registered Public Accounting Firm................... F-2
Balance Sheet at December 31, 2005........................................ F-3
Statements of Operations for the years ended December 31, 2005
and 2004 and for the period January 1, 2002 to December 31, 2005.......... F-4
Statements of Stockholders' Deficiency for the period from
January 1, 2002 through December 31, 2005................................. F-5
Statements of Cash Flows for the years ended December 31, 2005
and 2004 and for the period January 1, 2002 to December 31, 2005.......... F-7
Notes to Financial Statements............................................. F-8
Unaudited Financial Statements
------------------------------
Condensed Balance Sheet (unaudited) at September 30, 2006........ F-21
Condensed Statements of Operations (unaudited) for the nine months
ended September 30, 2006 and 2005 and for the period January 1, 2002
to September 30, 2006..................................................... F-22
Condensed Statements of Stockholders' Deficiency (unaudited) for the
nine months ended September 30, 2006...................................... F-23
Condensed Statements of Cash Flows (unaudited) for the nine months
ended September 30, 2006 and 2006 for the period January 1, 2002 to
September 30, 2006........................................................ F-25
Notes to Condensed Financial Statements (unaudited)....................... F-26
F-1
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) as of December 31, 2005 and the related statements of
operations, stockholders' deficiency and cash flows for the years ended December
31, 2005 and 2004 and for the cumulative period from January 1, 2002
(commencement as a development stage company) to December 31, 2005. 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) as of December 31, 2005 and the results of its
operations and its cash flows for the years ended December 31, 2005 and 2004 and
for the cumulative period from January 1, 2002 (commencement as a development
stage company) to December 31, 2005 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 to the financial
statements, the Company has had recurring losses, and has a working capital and
stockholders' deficiency as of December 31, 2005. These conditions raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The 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 8, 2006
F-2
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
BALANCE SHEET
DECEMBER 31, 2005
ASSETS
CURRENT ASSETS:
Cash $ 244,595
Inventories 30,000
Prepaid expenses 22,964
------------
TOTAL CURRENT ASSETS 297,559
Patents and trademarks, Net 17,257
Deferred financing costs, Net 4,687
Other assets 3,162
------------
TOTAL ASSETS $ 322,665
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable (including related party of $4,842) $ 194,016
Accrued expenses and other current liabilities 324,173
Accrued compensation 537,417
Accrued consulting and director fees 549,083
Customer deposits 115,000
Notes payable (including accrued interest of $540,426) 1,208,286
Convertible promissory note including accrued interest
of $2,500 and net of debt discount of $112,800) 139,700
Fair-value of detachable warrants 31,900
Fair-value of embedded conversion option 150,300
Accrued dividends payable 147,470
------------
TOTAL CURRENT LIABILITIES 3,397,345
LONG-TERM LIABILITIES:
Loans payable to stockholder (including accrued
interest of $129,089) 501,870
------------
TOTAL LIABILITIES 3,899,215
------------
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.001 par value;
10,000,000 shares authorized;
235,585 shares issued and outstanding,
(liquidation preference $1,624,300) 236
Common stock, $.001 par value;
190,000,000 shares authorized;
181,779,000 shares issued;
181,774,600 shares outstanding 181,779
Additional paid-in capital 20,830,154
Treasury stock, 4,400 common shares, at cost ( 5,768)
Accumulated deficit through December 31, 2001 ( 14,531,596)
Deficit accumulated during development stage ( 10,051,355)
------------
TOTAL STOCKHOLDERS' DEFICIENCY ( 3,576,550)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 322,665
============
The accompanying notes are an integral part
of these financial statements.
F-3
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,
2005 2004 2005
------------- ------------- -------------
Sales $ 260,000 $ 56,290 $ 356,290
------------- ------------- -------------
Costs, Expenses and (Income):
Cost of sales 42,000 62,250 438,680
Selling, general and administrative -
including stock based compensation of
$53,827 and $473,878 for the year ended
December 31, 2005 and 2004, respectively
and $777,390 for the period from
January 1, 2002 to December 31, 2005 1,194,577 1,296,265 4,097,587
Non-dilution agreement termination costs -- (223,858) 2,462,453
Interest expense (including interest Expense
for related party of $23,868 in both years
2005 and 2004 and $95,472 for the period
January 1, 2002 to December 31, 2005) 244,191 150,228 726,008
Financing Costs - extension of warrants 74,700 -- 74,700
Loss on settlement of debt -- 2,407,867 2,614,017
Stock appreciation rights ( 121,340) 121,340 --
Change in fair value of warrants and
embedded conversion option (5,800) -- (5,800)
------------- ------------- -------------
1,428,328 3,814,092 10,407,645
------------- ------------- -------------
Net loss ( 1,168,328) ( 3,757,802) ( 10,051,355)
------------- ------------- -------------
Deemed dividend on preferred stock -- ( 2,072,296) ( 2,072,296)
Preferred stock dividends ( 66,436) ( 134,366) ( 466,666)
------------- ------------- -------------
( 66,436) ( 2,206,662) ( 2,538,962)
------------- ------------- -------------
Net loss applicable to
common stockholders $( 1,234,764) $( 5,964,464) $( 12,590,317)
============= ============= =============
Basic and Diluted Loss Per Common Share $( 0.01) $( 0.05)
============= =============
Weighted Average Common Shares Outstanding -
Basic and Diluted 166,132,433 121,549,857
============= =============
The accompanying notes are an integral part
of these financial statements.
F-4
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
June 30, 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
F-5
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
STATEMENT OF STOCKHOLDERS' DEFICIENCY
(Continued)
Preferred Stock Common Stock Additional
---------------------------- --------------------------- Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
-continued-
Proceeds from sale of common stock
March 31,2005
($0.05 per share) -- -- 200,000 200 9,800
June 30,2005
($0.05-$0.06 per share) -- -- 700,000 700 39,300
September 30,2005
($0.07-$0.10 per share) -- -- 2,455,357 2,455 202,545
December 31, 2005
($0.05-$0.07 Per share) -- -- 3,879,283 3,879 236,081
Common stock issued for services
March 31, 2005
($0.05-$0.10 Per share) -- -- 230,000 230 17,770
December 31, 2005
($0.05-$0.06 Per share) -- -- 407,500 408 21,219
Preferred stock dividend -- -- -- -- (66,436)
Extension of 1,666,667 warrants -- -- -- -- 74,700
Common stock issued for satisfaction of liabilities
September 30, 2005
($0.07 Per share) -- -- 571,428 571 39,429
December 31, 2005
($0.142 Per share) -- -- 100,000 100 14,100
Preferred stock converted to common stock
March 31, 2005 (55,970) (56) 2,518,800 2,519 (2,463)
June 30, 2005 (34,020) (34) 1,360,800 1,361 (1,327)
September 30, 2005 (286,650) (287) 13,382,583 13,383 (13,096)
December 31, 2005 (2,188) (2) 87,520 87 (85)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2005 235,585 $ 236 181,779,000 $ 181,779 $ 20,830,154
============ ============ ============ ============ ============
The accompanying notes are an integral part
of these financial statements.
F-5(Con't)
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)
F-6
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
STATEMENT OF STOCKHOLDERS' DEFICIENCY
(Continued)
Accumulated Deficit
Deficit Accumulated
Stock Through During Total
Subscription Treasury December Development Stockholders'
Receivable Stock 31, 2001 Stage Deficiency
-continued- ------------ ------------ ------------ ------------ ------------
Proceeds from sale of common stock
March 31,2005
($0.05 per share) -- -- -- -- 10,000
June 30,2005
($0.05-$0.06 per share) -- -- -- -- 40,000
September 30,2005
($0.07-$0.10 per share) -- -- -- -- 205,000
December 31, 2005
($0.05-$0.07 Per share) -- -- -- -- 239,960
Common stock issued for services
March 31, 2005
($0.05-$0.10 Per share) -- -- -- -- 18,000
December 31, 2005
($0.05-$0.06 Per share) -- -- -- -- 21,627
Preferred stock dividend -- -- -- -- (66,436)
Extension of 1,666,667 warrants -- -- -- -- 74,700
Common stock issued for satisfaction of liabilities
September 30, 2005
($0.07 Per share) -- -- -- -- 40,000
December 31, 2005
($0.142 Per share) -- -- -- -- 14,200
Preferred stock converted to common stock
March 31, 2005 -- -- -- -- --
June 30, 2005 -- -- -- -- --
September 30, 2005 -- -- -- -- --
December 31, 2005 -- -- -- -- --
Net loss -- -- -- (1,168,328) (1,168,328)
------------ ------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 2005 -- $ (5,768) $(14,531,596) $(10,051,355) $ (3,576,550)
============ ============ ============ ============ ============
The accompanying notes are an integral part
of these financial statements.
F-6(Con't)
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,
2005 2004 2005
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,168,328) $(3,757,802) $(10,051,355)
Adjustments to reconcile net loss to
net cash used in operating activities
Amortization of patents 1,854 1,855 7,416
Interest expense - deferred financing 2,813 -- 2,813
Stock based compensation 53,827 473,878 777,390
Accretion of debt discount 75,200 -- 75,200
Change in fair value of warrants and
embedded conversion option ( 5,800) -- ( 5,800)
Loss on settlement of debt -- 2,407,867 2,614,017
Non-dilution agreement termination cost -- ( 223,858) 2,462,453
Inventory reserve -- -- 159,250
Write-off of stock subscription receivable -- -- 21,800
Financing costs - warrant extension 74,700 -- 74,700
Change in assets and liabilities
Inventory ( 30,000) 26,500 (30,000)
Prepaid expenses ( 5,851) ( 5,893) 33,536
Accounts payable, accrued expenses, accrued dividends,
accrued compensation, accrued consulting and director
fees, customer deposits and other current liabilities 422,350 265,998 1,472,139
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ( 579,235) ( 811,455) (2,386,441)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Reduction of stock subscription receivable 20,000 -- 65,700
Proceeds from sale of preferred stock -- 412,756 1,130,127
Proceeds from sale of common stock 494,960 377,600 972,560
Proceeds from sale of common stock to be issued -- -- 200,000
Deferred financing costs ( 7,500) -- ( 7,500)
Proceeds from convertible promissory note 250,000 -- 250,000
Repayment of notes payable ( 15,362) -- ( 15,362)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 742,098 790,356 2,595,525
----------- ----------- -----------
NET INCREASE(DECREASE)IN CASH 162,863 ( 21,099) 209,084
CASH AT BEGINNING OF YEAR 81,732 102,831 35,511
----------- ----------- -----------
CASH AT END OF YEAR $ 244,595 $ 81,732 $ 244,595
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 44,638 $ 20,000 $ 64,888
=========== =========== ===========
NON-CASH FINANCING ACTIVITIES:
COMPENSATION SATISFIED BY ISSUANCE OF COMMON STOCK $ -- $ 55,250 $ 55,250
=========== =========== ===========
COMMON STOCK ISSUED IN SATISFACTION OF LIABILITIES $ 40,000 $ 5,673,721 $ 5,713,721
=========== =========== ===========
The accompanying notes are an integral part
of these financial statements.
F-7
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. The Company's corporate headquarters is
in Glen Head, NY.
2. BASIS OF PRESENTATION AND CONTINUED OPERATIONS
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, 2005
represent the financial information cumulative, from inception/commencement,
required by Statement of Financial Accounting Standards ("SFAS") No. 7,
"Development Stage Enterprises."
Going Concern
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the Company as a going concern and the realization
of assets and the satisfaction of liabilities in the normal course of business.
The carrying amounts of assets and liabilities presented in the financial
statements do not purport to represent realizable or settlement values. The
Company incurred losses from operations of $1,168,328 and $3,757,802 for the
years ended December 31, 2005 and 2004, respectively. The Company has a working
capital deficit and a stockholders' deficiency of approximately $3,100,000 and
$3,577,000 at December 31, 2005, respectively. 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 result from the outcome of this uncertainty and these
adjustments may be material
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Patents and Trademarks - Patents and trademarks are amortized ratably over 9 to
14 years. The Company assesses the carrying value of its patents for impairment
each year. Based on its assessments, the Company did not incur any impairment
charges for the years ended December 31, 2005 and 2004, respectively.
Stock-Based Compensation - In December 2002, the Financial Accounting Standards
Board ("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 Company accounts 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 SFAS No.
123 had been applied for the periods ended December 31, 2005 and 2004 as
follows:
F-8
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
Years ended December 31,
2005 2004
------------- -------------
Net loss applicable to common
stockholders as reported $ ( 1,234,764) $ ( 5,964,464)
Add:
Stock-based employee compensation,
included in reported net loss -- --
Less:
Stock-based employee compensation,
net of tax effect determined under fair
value method for all awards (121,340) (169,870)
------------- -------------
Pro-forma net loss under fair
value method $ ( 1,356,104) $ ( 6,134,334)
============= =============
Basic and Diluted Net Loss per Common Share:
As reported $ (0.01) $ (0.05)
============= =============
Pro-forma $ (0.01) $ (0.05)
============= =============
Revenue Recognition - Revenues are recognized when product is shipped, title
passes and collectibility is reasonably assured. Allowances for estimated bad
debts, sales allowances and discounts are provided when such sales are recorded.
Inventories - Inventories consists of finished goods and are stated at the lower
of cost or market utilizing the first-in, first-out method. As of December 31,
2005, inventory was comprised of $30,000 of finished goods.
Shipping and Handling Costs - Shipping and handling costs are expensed as
incurred as part of cost of sales. These costs were deemed to be immaterial
during each of the reporting periods.
Advertising Costs - Advertising costs are expensed as incurred. Advertising
costs, which are included in selling, general and administrative expenses, were
deemed immaterial for the years ended December 31, 2005 and 2004, respectively.
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-9
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
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 options, warrants and
the conversion of preferred stock and convertible debt for the years ended
December 31, 2005 and 2004, were 21,270,105 and 34,230,804, respectively.
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.
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 maturities of these instruments.
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 fair value is
required.
Research and Development - Research and development costs 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 costs incurred during the
years ended December 31, 2005 and 2004, respectively.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("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 annual reporting period that begins after December 15, 2005.
The Company believes the adoption of this pronouncement will have a material
impact on the Company's financial statements, whereby the Company, upon
adoption, expects to record a charge for the granting of future employee stock
options.
In May 2005, the FASB issued SFAS No. 154 - Accounting for Change in Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. This
statement replaces APB Opinion No. 20, "Accounting Changes" and FASB Statement
No. 3 "Reporting Accounting Changes in Interim Financial Statements," and
changes the requirement for the accounting for and reporting changes in
accounting principles. This statement applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. This statement is
effective for accounting changes and corrects errors made in fiscal years
beginning after December 15, 2005.
F-10
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
The application of this pronouncement is not expected to have an impact on the
Company's financial position, results of operations, or cash flows.
In September 2005, the FASB ratified the following consensus reached in Emerging
Issues Task Force ("EITF") Issue 05-8 ("Income Tax Consequences of Issuing
Convertible Debt with a Beneficial Conversion Feature"): a) the issuance of
convertible debt with a beneficial conversion feature results in a basis
difference in applying FASB Statement of Financial Accounting Standards SFAS No.
109, Accounting for Income Taxes. Recognition of such a feature effectively
creates a debt instrument and a separate equity instrument for book purposes,
whereas the convertible debt is treated entirely as a debt instrument for income
tax purposes. b) the resulting basis difference should be deemed a temporary
difference because it will result in a taxable amount when the recorded amount
of the liability is recovered or settled. c) recognition of deferred taxes for
the temporary difference should be reported as an adjustment to additional
paid-in capital. This consensus is effective in the first interim or annual
reporting period commencing after December 15, 2005, with early application
permitted. The effect of applying the consensus should be accounted for
retroactively to all debt instruments containing a beneficial conversion feature
that are subject to EITF Issue 00-27,,"Application of Issue No. 98-5 to Certain
Convertible Debt Instruments" (and thus is applicable to debt instruments
converted or extinguished in prior periods but which are still presented in the
financial statements).
The application of this pronouncement is not expected to have an impact on the
Company's financial position, results of operations, or cash flows.
EITF reached a tentative conclusion on EITF Issue No. 05-1, "Accounting for the
Conversion of an Instrument that Becomes Convertible upon the Issuer's Exercise
of a Call Option" that no gain or loss should be recognized upon the conversion
of an instrument that becomes convertible as a result of an issuer's exercise of
a call option pursuant to the original terms of the instrument. The consensus
for EITF No. 05-1 has not been finalized.
The application of this pronouncement is not expected to have an impact on the
Company's financial position, results of operations, or cash flows.
In June 2005, the FASB ratified EITF Issue No. 05-2, "The Meaning of
`Conventional Convertible Debt Instrument' in EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in a
Company's Own Stock" ("EITF No. 05-2"), which addresses when a convertible debt
instrument should be considered `conventional' for the purpose of applying the
guidance in EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF
No. 00-19 for conventional convertible debt instruments and indicated that
convertible preferred stock having a mandatory redemption date may qualify for
the exemption provided under EITF No. 00-19 for conventional convertible debt if
the instrument's economic characteristics are more similar to debt than equity.
EITF No. 05-2 is effective for new instruments entered into and instruments
modified in periods beginning after June 29, 2005.
The Company has applied the requirements of EITF No. 05-2, (See Note 6) with
respect to the impact of this pronouncement on the Company's financial
statements.
In June 2005, the EITF reached consensus on Issue No. 05-6, "Determining the
Amortization Period for Leasehold Improvements" (EITF 05-6). EITF 05-6 provides
guidance on determining the amortization period for leasehold improvements
acquired in a business combination or acquired subsequent to lease inception.
The guidance in EITF 05-6 will be applied prospectively and is effective for
periods beginning after June 29, 2005. EITF 05-6 will not have a material impact
on the Company's consolidated financial position or results of operations.
F-11
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
In September 2005, the FASB ratified EITF Issue No. 05-7, "Accounting for
Modifications to Conversion Options Embedded in Debt Instruments and Related
Issues" ("EITF No. 05-7"), which addresses whether a modification to a
conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification and
whether a borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the debt
(for example, the modification reduces the conversion price of the debt). EITF
No. 05-7 is effective for the first interim or annual reporting period beginning
after December 15, 2005.
The Company is currently in the process of evaluating the effect that the
adoption of this pronouncement will have on its financial statements.
EITF Issue No. 05-4 "The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument Subject to EITF Issue No. 00-19, `Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" ("EITF No. 05-4") addresses financial instruments, such as stock purchase
warrants, which are accounted for under EITF 00-19 that may be issued at the
same time and in contemplation of a registration rights agreement that includes
a liquidated damages clause. The consensus for EITF No. 05-4 has not been
finalized. In November 2005 the Company issued a convertible promissory note, a
registration rights agreement and warrants (See Note 6). Based on the
interpretive guidance in EITF Issue No. 05-4, Due to certain factors and the
liquidated damage provision in the registration rights agreement, the Company
determined that the embedded conversion option and the warrants are derivative
liabilities and the registration statement becoming effective on January 30,
2006, the value of the registration rights was deemed to be de minims.
4. PATENTS AND TRADEMARKS
Patents and trademarks as of December 31, 2005 consist of the following:
Patents $ 24,500
Trademarks 1,555
--------
Total cost 26,055
--------
Accumulated amortization (8,798)
--------
Patents and Trademarks, Net $ 17,257
========
Amortization expense for the years ended December 31, 2005 and 2004 was $1,854
and $1,855, respectively. The following table presents the Company's estimate
for amortization expense for each of the five succeeding years and thereafter.
2006 $ 1,854
2007 1,854
2008 1,854
2009 1,854
2010 1,854
2011 and thereafter 7,987
--------
$ 17,257
========
F-12
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
5. NOTES PAYABLE
Notes payable and accrued interest at December 31, 2005 consist of the
following:
(a) $ 177,116
(b) 846,533
(c) 184,637
--------------
Total $ 1,208,286
==============
(a) 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 $93,893 in interest is $177,116, at December 31, 2005. No demands
for repayment have been made by the note holder.
(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
$446,533 in interest, is $846,533 at December 31, 2005.
(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, 2005, the balance of the convertible
promissory note principal was $184,637 and no interest was owed
6. CONVERTIBLE PROMISSORY NOTES
In November 2005, the Company entered into a Convertible Promissory Note
agreement for $250,000. The Convertible Promissory Noted bears interest at a
rate of 8% per annum and will mature in March 2006. The Company granted 430,000
warrants to the holder, which are exercisable at $0.14 per share and have a life
of three years. The warrants carry a cashless exercise provision.
The note included certain conversion features as follows:
o convertible at any time after the maturity date, at the option of the
holder,
o convertible at 85% of the average of the three 3 lowest closing bid
prices for the common stock, for the ten trading days ending on the
trading day immediately before the conversion date.
F-13
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
The Convertible Promissory Note agreement required the Company to file a
registration statement no later than sixty business days and no less than the
amount of subscribed shares, and to cause the registration statement relating to
the registrable securities to become effective the earlier of five business days
after notice from the Securities and Exchange Commission that the registration
statement may be declared effective, or (b) one hundred twenty days.
The Convertible Promissory Note agreement included a liquidated damages clause,
which stipulates if the registration statement is not filed by the filing date
or declared effective by the effective date, then upon failure of either event
the subscriber shall be entitled to liquidated damages, payable in cash, in the
sum of one percent (1%) of the principal amount of the Note:
a. for each 30 day period after the filing date that transpires
until the date that the Company files the registration statement,
and
b. for each 30 day period after the effective date that transpires
until such date as the registration statement is declared
effective.
The gross proceeds of $250,000 were recorded net of a discount of $188,000. The
debt discount consisted of $47,200 related to the warrants and $140,800 related
to the embedded conversion option. The warrants and the embedded conversion
option were accounted for under EITF issue No. 00-19 "Accounting for Derivative
Financial Instruments Index to and Potentially Settled in a Company's Own Stock"
and EITF 05-4, view A "The effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument." Due to certain factors and the liquidated
damage provision in the registration rights agreement, the Company determined
that the embedded conversion option and the warrants are derivative liabilities.
Accordingly, the warrants and the embedded conversion option will be marked to
market through earnings at the end of each reporting period. Due to the fact
that the registration statement became effective on January 30, 2006, the value
of the registration rights was deemed to be de minims. The warrants and the
conversion option are valued using the Black-Scholes valuation model. For the
year ended December 31, 2005, the Company reflected a gain of $5,800
representing a change in the value of the warrants and conversion option. The
debt discount of $188,000 is being accreted over a period of four months and as
a result, a charge of $75,200 was recorded for the year ended December 31, 2005.
This Convertible Promissory Note is secured by 4,000,000 shares held by an
officer of the Company. The balance due under this note at December 31, 2005 is
$250,000 plus accrued interest of $2,500. The Company incurred fees of
approximately $7,500 at the closing date of the note. These costs have been
capitalized as of December 31, 2005 as deferred financing costs and will be
amortized to interest expense over the life of the note and for the year ended
December 31, 2005, $2,813 has been amortized.
7. 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 $129,089. 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, 2007 at
the earliest. The Company has reported the obligation as a long-term liability
on the balance sheet.
F-14
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
8. 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, 2005, the Company recorded the following
transactions:
a. Cash
During the year ended December 31, 2005, the Company received $494,960 for
7,234,640 shares of its common stock.
b. Services
During 2005, the Company issued to various parties an aggregate of 637,500
shares of its common stock for a value of $39,627 in connection with
professional services.
c. Conversion of preferred stock into common stock
During year ended December 31, 2005, the Company issued to various parties an
aggregate of 17,349,703 shares of its common stock in connection with the
conversion of preferred stock.
d. Settlement of debt
During year ended December 31, 2005, the Company issued to a note holder 571,428
for the settlement $40,000 of debt.
e. Extension of debt
In November 2005, the Company issued 100,000 shares of its common stock for a
value of $14,200 to a note holder for an agreement to defer requesting payment
for a period of one month. The principal amount of the note is $400,000, and
accrued interest is approximately $423,000.
F-15
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
9. 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, 2005, outstanding preferred shares were as follows:
Liquidation
Current Preference
Annual Total Dividend (including
Authorized Outstanding Par Dividend Dividend Arrearage dividend
Shares Shares Value Requirement Arrearage Per Share arrearage)
Series A 400,000 52,500 $ 53 $ 52,500 $ 570,100 $ 10.86 $1,095,100
Series D 2,000,000 93,000 93 55,800 529,200 5.69 529,200
Series F 1,000,000 90,085 90 32,986 147,263 1.13 --
---------- ---------- ---------- ---------- ----------
235,585 $ 236 $ 141,286 $1,246,563 $1,624,300
========== ========== ========== ========== ==========
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.
F-16
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
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 of 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 provided 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 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
dividends of $66,436 and $41,915 for each of the years ended December 31, 2005
and 2004, respectively.
10. 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 $0.25 and expire in five
years. Those options were converted to stock appreciation rights (the
"Conversion") in November 2004. The Conversion consisted 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.
F-17
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
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. In June 2005, the Company extended for the second time the life of
the warrants for one year. The Company recorded an additional charge of $74,700,
which has been included in the statements of operations.
The fair value of each stock option, or warrant granted, is estimated on the
date of grant using the Black-Scholes option-pricing model. During the year
ended December 31, 2005, the Company granted 433,00 warrants in connection with
the Convertible Promissory Note [Note 6]. The Company did not grant, nor issue
any options in the year ended December 31, 2005. The Company did not grant, nor
issue, options or warrants in the year ended December 31, 2004.
The following tables illustrate the Company's warrant issuances and balances
outstanding as of, and during the years ended December 31, 2005 and 2004:
Shares Underlying Weighted Average
Warrants Exercise Price
----------------- ----------------
Outstanding at December 31, 2003 1,166,667 $ 0.15
Granted - -
Expired - -
Exercised - -
----------------- ---------------
Outstanding at December 31, 2004 1,666,667 $ 0.15
Granted 433,000 0.14
Expired - -
Exercised - -
----------------- ---------------
Outstanding at December 31, 2005 2,099,667 $ 0.15
================= ===============
F-18
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
The following is additional information with respect to the Company's warrants
as of December 31, 2005:
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 2,099,667 10 Months $ 0.15 2,099,667 $ 0.15
========= ============ ============ ======= ============ ============
11. LEASES
The Company's lease for its administrative facilities located in Glen Head, New
York is on a month to month basis.
Rent expense, for the years ended December 31, 2005 and 2004 was $30,189 and
$29,246, respectively.
12. LITIGATION
In the normal course of business, the Company may be involved in legal
proceedings in the ordinary course of business. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance. The Company
currently is not involved in any legal proceedings which are not in the ordinary
course of business.
13. 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, 2005 and 2004, 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 state and local
taxes based on capital were immaterial for each of the years ended December 31,
2005 and 2004.
The effective tax rate differs from the statutory rate of 34% due to the
increase of the valuation allowance.
The Company has net operating loss carry-forwards for federal income tax
purposes totaling approximately $17,822,000 at December 31, 2005. These
carry-forwards expire between the years 2009 through 2025. 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.
F-19
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO FINANCIAL STATEMENTS
Continued
The valuation allowance 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 $6,950,000 is provided. The valuation allowance increased
approximately $50,000 during 2005 related to increased net operating losses.
14. MAJOR CUSTOMERS
Sales for the years ended December 31, 2005 and 2004 were $260,000 and $56,290,
respectively. During the year ended December 31, 2005, the Company recognized
the sale of five PureSafe Water Station Systems. Four of these were purchased
for use in Ecuador and the fifth system was purchased by a humanitarian buyer to
be used as part of the tsunami relief effort in Sri Lanka. In addition, Water
Chef received deposits totaling $115,000 during 2005 for relief effort systems
that will be shipped in 2006.
15. COMMITMENTS AND CONTINGENCIES
In January 1, 2004, the Company entered into a 5 year employment agreement with
its Chief Executive Officer ("Employee"). The Company agreed to pay to the
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 for 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. As of
December 31, 2005, approximately $442,400 was owed and is included on the
balance sheet as part of accrued compensation.
In March 9, 2004, the Company extended for two additional years 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. For each of the years ended December 31,
2005 and 2004, the Company has incurred a charge of $120,000, which has been
included in the statement of operations as part of selling general and
administrative costs. In addition, the director earned approximately $25,000 of
director fees.
16. CREDIT RISK
The Company maintains its cash in accounts with major financial institutions in
the United States. From time to time, these balances may exceed the amounts of
insurance provided on such deposits. As of December 31, 2005, the Company has a
credit risk exposure of approximately $153,700.
17. SUBSEQUENT EVENTS
On March 14, 2006, the shareholders of the Company approved an increase in the
authorized capital stock of the Company from 200 million shares to 350 million
shares, comprised of 340 million shares of common stock and 10 million shares of
preferred stock.
F-20
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED BALANCE SHEET
AT SEPTEMBER 30, 2006
(UNAUDITED)
ASSETS
------
CURRENT ASSETS:
Cash $ 26,117
Prepaid expenses 5,988
------------
TOTAL CURRENT ASSETS 32,105
------------
OTHER ASSETS:
Patents and trademarks - net of accumulated
amortization of $10,188 15,867
Other assets 3,162
------------
TOTAL OTHER ASSETS 19,029
------------
TOTAL ASSETS $ 51,134
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 187,316
Accrued expenses and other current liabilities 175,017
Accrued compensation 532,417
Accrued consulting and director fees 421,833
Notes payable (including accrued interest of $318,654) 970,552
Accrued dividends payable 189,871
------------
TOTAL CURRENT LIABILITIES 2,477,006
LONG-TERM LIABILITIES:
Loans payable to stockholder (including accrued interest
of $146,990) 519,771
------------
TOTAL LIABILITIES 2,996,777
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock - $.001 par value; 10,000,000
shares authorized; 188,917 shares issued and outstanding,
(liquidation preference $2,159,500) 189
Common stock - $.001 par value; 340,000,000 shares
authorized; 198,977,497 shares issued and 198,973,097
shares outstanding 198,977
Additional paid-in capital 23,125,664
Treasury stock, at cost - 4,400 shares of common stock (5,768)
Deficit accumulated through December 31, 2001 (14,531,596)
Deficit accumulated during development stage (11,733,109)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (2,945,643)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 51,134
============
See notes to condensed financial statements.
F-21
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended For the Period
September 30, September 30, January 1,2002
------------------------------ ---------------------------- to September
2006 2005 2006 2005 30, 2006
------------- ------------- ------------- ------------- -------------
SALES $ -- $ -- $ 115,000 $ 260,000 $ 471,290
------------- ------------- ------------- ------------- -------------
COST OF SALES 21,000 21,000 93,000 42,000 531,680
SELLING, GENERAL AND ADMINISTRATIVE -
including stock based compensation of
$0, and $0 for the three months ended
September 30, 2006 and 2005 and $767,699 and
$18,000 for the nine months ended
September 30, 2006 and 2005, and $1,545,089
for the period January 1, 2002 to
September 30, 2006, respectively 118,335 275,299 1,282,272 920,505 5,379,859
NON-DILUTION AGREEMENT TERMINATION COST -- -- -- -- 2,462,453
INTEREST EXPENSE (Including interest expense to
related party of $5,967 and $17,901 for the
three and nine months ended September 30, 2006
and 2005, respectively and $113,373 for the
period January 1, 2002 to September 30, 2006 43,018 37,182 234,882 112,296 960,890
FINANCING COST - EXTENSION OF WARRANTS -- -- -- 74,700 74,700
LOSS ON SETTLEMENT OF DEBT -- -- -- -- 2,614,017
STOCK APPRECIATION RIGHTS - REDUCTION IN VALUE -- -- -- (121,340) --
CHANGE IN FAIR VALUE OF WARRANTS AND EMBEDDED
CONVERSION OPTION -- -- 186,600 -- 180,800
------------- ------------- ------------- ------------- -------------
182,353 333,481 1,796,754 1,028,161 12,204,399
------------- ------------- ------------- ------------- -------------
NET LOSS (182,353) (333,481) (1,681,754) (768,161) (11,733,109)
------------- ------------- ------------- ------------- -------------
DEEMED DIVIDEND ON PREFERRED STOCK -- -- -- -- (2,072,296)
PREFERRED STOCK DIVIDENDS -- (34,909) (42,401) (121,552) (509,067)
------------- ------------- ------------- ------------- -------------
-- (34,909) (42,401) (121,552) (2,581,363)
------------- ------------- ------------- ------------- -------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (182,353) $ (368,390) $ (1,724,155) $ (889,713) $ (14,314,472)
============= ============= ============= ============= =============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.00) $ (0.00) $ (0.01) $ (0.01)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 198,795,306 168,354,650 191,550,874 161,884,506
============= ============= ============= =============
See notes to condensed financial statements.
F-22
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
Preferred Stock Common Stock Additional
---------------------------- --------------------------- Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
BALANCE - JANUARY 1, 2006 235,585 $ 236 181,779,000 $ 181,779 $ 20,830,154
Proceeds from sale of common stock
($0.07 per share) March 21, 2006 -- -- 3,600,000 3,600 246,400
($0.08 - $0.10 per share) May 8, 2006 -- -- 3,769,230 3,769 276,231
($0.10 per share) June 28, 2006 -- -- 100,000 100 9,900
($0.07 per share) August 17, 2006 -- -- 400,000 400 27,600
Common stock issued for services
($0.06 per share) March 21, 2006 -- -- 250,000 250 14,750
($0.05 per share) May 8, 2006 -- -- 450,000 450 22,050
($0.15 per share) June 6, 2006 -- -- 166,666 166 24,833
Common stock issued in repayment of debt
($0.11 per share) February 13, 2006 -- -- 438,785 439 48,046
($0.08 per share) April 3, 2006 -- -- 614,131 614 50,790
($0.08 per share) April 6, 2006 -- -- 1,959,631 1,960 154,614
($0.10 - $0.15 per share) June 6, 2006 -- -- 3,583,334 3,583 390,517
Preferred stock converted to common stock
during the quarter ended June 30, 2006 (46,668) (47) 1,866,720 1,867 (1,820)
Reclassification of derivative liabilities upon
conversion of debt -- -- -- -- 368,800
4,000,000 Warrants granted for services,
May 18, 2006 -- -- -- -- 464,000
2,500,000 Warrants granted for services,
May 24, 2006 -- -- -- -- 241,200
Preferred stock dividend -- -- -- -- (42,401)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - SEPTEMBER 30, 2006 188,917 $ 189 198,977,497 $ 198,977 $ 23,125,664
============ ============ ============ ============ ============
See notes to condensed financial statements.
F-23
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
(Continued)
Deficit Deficit
Accumulated Accumulated
Treasury Through During Total
Stock December Development Stockholders'
-at cost 31, 2001 Stage Deficiency
------------ ------------ ------------ ------------
BALANCE - JANUARY 1, 2006 $ (5,768) $(14,531,596) $(10,051,355) $ (3,576,550)
Proceeds from sale of common stock
($0.07 per share) March 21, 2006 -- -- -- 250,000
($0.08 - $0.10 per share) May 8, 2006 -- -- -- 280,000
($0.10 per share) June 28, 2006 -- -- -- 10,000
($0.07 per share) August 17, 2006 -- -- -- 28,000
Common stock issued for services
($0.06 per share) March 21, 2006 -- -- -- 15,000
($0.05 per share) May 8, 2006 -- -- -- 22,500
($0.15 per share) June 6, 2006 -- -- -- 24,999
Common stock issued in repayment of debt
($0.11 per share) February 13, 2006 -- -- -- 48,485
($0.08 per share) April 3, 2006 -- -- -- 51,404
($0.08 per share) April 6, 2006 -- -- -- 156,574
($0.10 - $0.15 per share) June 6, 2006 -- -- -- 394,100
Preferred stock converted to common stock
during the quarter ended June 30, 2006 -- -- -- --
Reclassification of derivative liabilities upon
conversion of debt -- -- -- 368,800
4,000,000 Warrants granted for services, May 18, 2006 -- -- -- 464,000
2,500,000 Warrants granted for services, May 24, 2006 -- -- -- 241,200
Preferred stock dividend -- -- -- (42,401)
Net loss -- -- (1,681,754) (1,681,754)
------------ ------------ ------------ ------------
BALANCE - SEPTEMBER 30, 2006 $ (5,768) $(14,531,596) $(11,733,109) $ (2,945,643)
============ ============ ============ ============
See notes to condensed financial statements.
F-24
WATER CHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended For the Period
September 30, January 1, 2002
-------------------------- to September
2006 2005 30, 2006
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,681,754) $ (768,161) $(11,733,109)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of patents 1,390 1,390 8,806
Interest expense - deferred financing 4,687 -- 7,500
Stock-based compensation 767,699 18,000 1,545,089
Accretion of debt discount 112,800 -- 188,000
Change in fair value of warrants and
embedded conversion option 186,600 -- 180,800
Loss on settlement of debt -- -- 2,614,017
Non-dilution agreement termination cost -- -- 2,462,453
Inventory reserve -- -- 159,250
Write-off of stock subscription receivable -- -- 21,800
Financing cost - warrant extension -- 74,700 74,700
Changes in assets and liabilities:
Inventory 30,000 (30,000) --
Prepaid expenses 16,976 8,359 50,512
Accounts payable, accrued expenses and
other current liabilities, accrued
compensation, accrued consulting and
director fees accrued dividends and
customer deposits (208,914) 341,863 1,263,225
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (770,516) (353,849) (3,156,957)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock subscription receivable -- 20,000 65,700
Proceeds from sale of preferred stock -- -- 1,130,127
Proceeds from sale of common stock 568,000 255,000 1,540,560
Proceeds from sale of common stock
to be issued -- -- 200,000
Deferred financing costs -- -- (7,500)
Proceeds from convertible promissory note -- -- 250,000
Repayment of notes payable (15,962) -- (31,324)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 552,038 275,000 3,147,563
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH (218,478) (78,849) (9,394)
CASH AT BEGINNING OF PERIOD 244,595 81,732 35,511
----------- ----------- -----------
CASH AT END OF PERIOD $ 26,117 $ 2,883 $ 26,117
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Compensation satisfied by issuance of
common stock -- 40,000 55,250
=========== =========== ===========
Common stock issued for settlement of debt
and accrued interest $ 650,563 $ -- $ 6,364,284
=========== =========== ===========
Reclassification of derivative liabilities
upon conversion of debt $ 368,800 $ -- $ 368,800
=========== =========== ===========
See notes to condensed financial statements.
F-25
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - DESCRIPTION OF BUSINESS
Water Chef, Inc. (the "Company"), is a Delaware corporation currently engaged in
the design and marketing of water dispensers and purification equipment both
inside and outside the United States. The Company's corporate headquarters are
located in Glen Head, New York.
NOTE 2 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information. Accordingly, these interim financial
statements do not include all of the information and footnotes required for
annual financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary to make the
financial statements not misleading have been included.
The operating results for the nine-month period ended September 30, 2006 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2006. These financial statements should be read in conjunction with
the financial statements and footnotes thereto for the year ended December 31,
2005, included elsewhere herein this document.
DEVELOPMENT STAGE COMPANY
The Company is in the development stage as defined by Statement of Financial
Accounting Standards ("SFAS") Statement No. 7, "Accounting and Reporting for
Development Stage Companies." To date, the Company has generated limited sales
and has devoted its efforts primarily to developing its products, implementing
its business and marketing strategy and raising working capital through equity
financing or short-term borrowings.
REVENUE RECOGNITION
The Company recognizes its revenues when the product is shipped and or title
passes and collection is reasonably assured.
STOCK BASED COMPENSATION
Prior to January 1, 2006, the Company accounted for employee stock transactions
in accordance with Accounting Principles Board, APB Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company had adopted the pro forma disclosure
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
For Stock-Based Compensation."
Effective January 1, 2006, the Company adopted SFAS No. 123R "Share Based
Payment." This statement is a revision of SFAS No. 123, and supersedes APB
Opinion No. 25, and its related implementation guidance. SFAS No. 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 No. 123R, SBP awards will result in a charge to
operations that will be measured at fair value on the awards grant date, based
on the estimated number of awards expected to vest over the service period.
The Company adopted SFAS No. 123R, "Share Based Payment," using the modified
-prospective-transition method. As of January 1, 2006, the Company had no
unvested employee stock options. During the three and nine months ended
September 30, 2005, the Company did not grant any employee stock options;
therefore, no table has been disclosed to illustrate the effect on the pro forma
Net loss and pro forma net loss per share as if the Company had applied the fair
value recognition provisions of SFAS No. 123.
NOTE 3 - GOING CONCERN
The accompanying condensed financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has incurred recurring
losses from operations, an accumulated deficit since its inception of
approximately $26,265,000 and has a working capital deficiency of approximately
$2,445,000 at September 30, 2006. 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, settling its
existing debt by issuing shares of its common stock and raising additional
capital through future issuance of stock and or debentures. However, there can
be no assurance that the Company will be able to obtain sufficient funds to
continue the development of its product, marketing plan and distribution
network.
The accompanying financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going concern.
F-26
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - RECENT ACCOUNTING STANDARDS
In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 155, which is an amendment of SFAS No. 133 and 140. This Statement; a)
permits fair value re-measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation, b)
clarifies which interest-only strip and principal-only strip are not subject to
the requirements of SFAS 133, c) establishes a requirement to evaluate interests
in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, d) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives, e) amends SFAS
140 to eliminate the prohibition on a qualifying special-purpose entity from
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. This Statement is effective
for financial statements for fiscal years beginning after September 15, 2006.
Earlier adoption of this Statement is permitted as of the beginning of an
entity's fiscal year, provided the entity has not yet issued any financial
statements for that fiscal year. Management is evaluating if this Statement will
have a significant impact on the financial statements of the Company.
In March 2006, the FASB issued SFAS No. 156, which amends FASB Statement No.
140. This Statement establishes, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. This Statement
amends SFAS No. 140 to require that all separately recognized servicing assets
and servicing liabilities be initially measured at fair value, if practicable.
This Statement permits, but does not require, the subsequent measurement of
separately recognized servicing assets and servicing liabilities at fair value.
An entity that uses derivative instruments to mitigate the risks inherent in
servicing assets and servicing liabilities is required to account for those
derivative instruments at fair value. Under this Statement, an entity can elect
subsequent fair value measurement to account for its separately recognized
servicing assets and servicing liabilities. By electing that option, an entity
may simplify its accounting because this Statement permits income statement
recognition of the potential offsetting changes in fair value of those servicing
assets and servicing liabilities and derivative instruments in the same
accounting period. This Statement is effective for financial statements for
fiscal years beginning after September 15, 2006. Earlier adoption of this
Statement is permitted as of the beginning of an entity's fiscal year, provided
the entity has not yet issued any financial statements for that fiscal year.
Management believes that the adoption of this Statement will not have a
significant impact on its financial statements.
In September 2006, the FASB issued SFAS No. 157, "Accounting for Fair Value
Measurements." SFAS No. 157 defines fair value, and establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosure about fair value measurements. SFAS No. 157 is effective for the
Company for financial statements issued subsequent to November 15, 2007. The
Company does not expect the new standard to have any material impact on the
financial position and results of operations.
NOTE 5 - CONVERTIBLE PROMISSORY NOTES
In November 2005, the Company entered into a Convertible Promissory Note
agreement for $250,000 which included 430,000 warrants, which are exercisable at
$0.14 per share and have a life of three years. The warrants carry a cashless
exercise provision. The Convertible Promissory Note bore interest at a rate of
8% per annum and matured in March 2006.
The note included certain conversion features as follows:
o convertible at any time after the maturity date, at the option of the holder,
o convertible at 85% of the average of the three 3 lowest closing bid prices
for the common stock, for the ten trading days ending on the trading day
immediately before the conversion date.
The Convertible Promissory Note agreement required the Company to file a
registration statement no later than sixty business days from the date of the
agreement and no less than the amount of subscribed shares, and to cause the
registration statement relating to the registrable securities to become
effective the earlier of five business days after notice from the Securities and
Exchange Commission that the registration statement may be declared effective,
or (b) one hundred twenty days.
F-27
The Convertible Promissory Note agreement included a liquidated damages clause,
which stipulates if the registration statement is not filed by the filing date
or declared effective by the effective date, then upon failure of either event
the subscriber shall be entitled to liquidated damages, payable in cash, in the
sum of one percent (1%) of the principal amount of the Note:
a. for each 30 day period after the filing date that transpires until the date
that the Company files the registration statement, and
b. for each 30 day period after the effective date that transpires until such
date as the registration statement is declared effective.
The gross proceeds of $250,000 were recorded net of a discount of $188,000. The
debt discount consisted of $47,200 related to the warrants and $140,800 related
to the embedded conversion option. The warrants and the embedded conversion
option were accounted for under EITF issue No. 00-19 "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock" and EITF 05-4, View A "The effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument." Due to certain factors and the liquidated
damage provision in the registration rights agreement, the Company determined
that the embedded conversion option and the warrants are derivative liabilities.
Accordingly, the warrants and the embedded conversion option will be marked to
market through earnings at the end of each reporting period. Due to the fact
that the registration statement became effective on January 30, 2006, the value
F-28
WATER CHEF, INC.
(A Development Stage Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - CONVERTIBLE PROMISSORY NOTES (continued)
of the registration rights was deemed to be de minimis. The warrants and the
conversion option are valued using the Black-Scholes valuation model. For the
period ended September 30, 2006, the Company reflected a loss of $186,600
representing the change in the value of the warrants and conversion option.
During the nine months ended September 30, 2006, the Company charged to interest
expense $112,800 for the remaining debt discount.
During the nine months ended September 30, 2006, the Company issued 3,012,547
shares of common stock for the settlement of the debt and accrued interest. As a
result of the conversion the Company recorded a reclass to equity of $368,800
for the derivative liabilities.
This Convertible Promissory Note was secured by 4,000,000 shares held by an
officer of the Company. At the date of conversion the officer was released from
the security interest.
NOTE 6 - NET LOSS PER SHARE OF COMMON STOCK
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 warrants and
conversion of preferred stock for the nine months ended September 30, 2006 and
2005 were 8,666,680 and 17,256,233, respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company leases its administrative facilities, located in Glen Head, New
York, on a month-to-month basis.
Consulting Agreement
--------------------
On May 18, 2006, the Company entered into an agreement with a consultant for
services. The agreement provides consideration of $6,000 per month. The term of
the agreement is on a month to month basis. In addition the Company granted
4,000,000 warrants. The warrants fully vested on the date of the grant, have a
life of 3 years and are exercisable at $0.10 per share.
NOTE 8 - COMMON STOCK ISSUED
Cash
----
During the nine months ended September 30, 2006, the Company raised $568,000
through the sale of 7,869,230 shares of common stock.
Services
--------
During the nine months ended September 30, 2006, the Company issued 866,666
shares of common stock for services for a value of $62,499.
On May 18, 2006, the Company granted 4,000,000 warrants to a consultant for
services. The warrants fully vested on the date of the grant, have a life of 3
years and are exercisable at $0.10 per share. The Company incurred a stock based
compensation charge of $464,000.
On May 24, 2006, the Company granted 2,500,000 warrants to two directors for
services. The warrants fully vested on the date of the grant, have a life of 3
years and are exercisable at $0.15 per share. The Company incurred a stock based
compensation charge of $241,200.
Debt
----
During the nine months ended September 30, 2006, the Company issued 6,595,881
shares of common stock for debt and accrued interest of $650,563.
F-29
Conversion of preferred stock into common stock
-----------------------------------------------
During the nine months ended September 30, 2005, the Company issued to various
parties 1,866,720 shares of common stock in connection with the conversion of
46,668 shares of preferred stock.
NOTE 9- MAJOR CUSTOMERS / CREDIT RISK
During the nine months ended September 30, 2006, the Company sold two systems to
one customer and recognized revenues of $115,000. During the nine month period
ended September 30, 2005, the Company sold five systems to two customers and
recognized revenue of $260,000. The Company had no sales during each of the
three months ended September 30, 2006 and 2005.
The Company maintains cash deposits with financial institutions, which from time
to time may exceed federally insured limits. The Company has not experienced any
losses and believes it is not exposed to any significant credit risk from cash.
NOTE 10 CONTINGENCIES
On July 14, 2006, Funding Group, Inc. filed a complaint with the Supreme Court
of the State of New York in New York County seeking damages due to an alleged
breach of contract related to a $25,000 loan made by the plaintiff to the
Company. On October 11, 2006, the Company filed a counter claim against Funding
Group, Inc. with the Supreme Court of the State of New York. The Company
believes the complaint is without merit and intends to vigorously defend itself
in these actions, and believes that the eventual outcome of these matters will
not have a material adverse effect on the Company. However, the ultimate outcome
of these matters cannot be determined at this time.
NOTE 11 - SUBSEQUENT EVENTS
On October 17, 2006, the Company entered into a Convertible Promissory Note for
proceeds of $300,000. The loan has a stated interest rate of 8% per annum and
matures on February 17, 2007. The Company issued a warrant for 882,352 shares of
the Company's common stock, exercisable at $0.085 per share and has a life of
three years. The note and accrued interest is convertible at any time after the
maturity date into shares of the Company's common stock at a conversion price
equal to the current marked price multiplied by eighty-five percent (85%).
The Convertible Promissory Note agreement requires the Company to file a
registration statement no later than thirty business days from the date of the
agreement and no less than the amount of subscribed shares, and to cause the
registration statement relating to the registrable securities to become
effective the earlier of five business days after notice from the Securities and
Exchange Commission that the registration statement may be declared effective,
or (b) one hundred twenty days.
The Convertible Promissory Note agreement included a liquidated damages clause,
which stipulates if the registration statement is not filed by the filing date
or declared effective by the effective date, then upon failure of either event
the subscriber shall be entitled to liquidated damages, payable in cash, in the
sum of one percent (1%) of the principal amount of the Note:
a. for each 30 day period after the filing date that transpires until the date
that the Company files the registration statement, and
b. for each 30 day period after the effective date that transpires until such
date as the registration statement is declared effective.
The Company will account for the above transaction in accordance with EITF issue
No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock." The Company has determined that
the embedded conversion option and the warrants are derivative liabilities.
Accordingly, the warrants and the embedded conversion option will be recorded at
fair market value and marked to market through earnings at the end of each
reporting period.
This Convertible Promissory Note was secured by 4,000,000 shares held by an
officer of the Company.
F-30
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee or agent to the Registrant. The
Delaware General Corporation Law provides that Section 145 is not exclusive of
other rights to which those seeking indemnification may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Section 5.1 of the Registrant's amended and restated bylaws and Section 8 of our
restated certificate of incorporation provide that the Registrant shall
indemnify its directors and officers, and may indemnify its employees and other
agents, to the fullest extent permitted by the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases, redemptions or
other distributions, or (iv) for any transaction from which the director derived
an improper personal benefit. The Registrant's certificate of incorporation
provides for such limitation of liability.
The Registrant maintains standard policies of insurance under which
coverage is provided (a) to its directors, officers, employees and other agents
against loss rising from claims made by reason of breach of duty or other
wrongful act, and (b) to the Registrant with respect to payments which may be
made by the Registrant to such officers and directors pursuant to the above
indemnification provision or otherwise as a matter of law.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses (other than
selling commissions and other fees to be paid to the underwriters) which will be
paid by the Registrant in connection with the issuance and distribution of the
securities being registered. With the exception of the Securities and Exchange
Commission ("SEC") registration fee, all amounts shown are estimates.
SEC registration fee..............................$ 71.69
Legal fees and expenses........................... 10,000.00
Accounting fees and expenses...................... 5,000.00
Miscellaneous expenses............................ 4,928.31
-----------------
Total...............................$ 20,000.00
=================
II-1
Item 26. Recent Sales of Unregistered Securities.
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Purchaser Price Per Purchase Amount Class Date of Purchase # of Shares
Share
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Nicholas Anagnastopoulos $1.00 $12,750 Series F 11/11/2003 7,500
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Haralambos Kostopoulos $1.00 $4,250 Series F 11/11/2003 2,500
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Jonathan McDermott $1.00 $4,000 Series F 11/11/2003 2,500
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Robert Kaszovits $1.00 $20,000 Series F 12/10/2003 10,000
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Seymour Yanovsky $1.00 $4,040 Series F 12/10/2003 2,188
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Daniel Alkobi $1.00 $1,155 Series F 12/10/2003 625
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Yacob Alcoby $1.00 $1,155 Series F 12/10/2003 625
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Yair Matan $1.00 $3,465 Series F 12/10/2003 1,875
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Abraham Hershkovitz $1.00 $1,735 Series F 12/10/2003 939
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
David Rappaport $1.00 $5,775 Series F 12/10/2003 3,125
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Leonard Fuchs $1.00 $4,620 Series F 12/10/2003 2,500
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Carlos Correas $1.00 $1,155 Series F 12/10/2003 625
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Mike Liebhard $1.00 $575 Series F 12/10/2003 313
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Mike Majerovic $1.00 $3,695 Series F 12/10/2003 2,000
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Dror Magori $1.00 $865 Series F 12/10/2003 469
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Chaim Majerovic $1.00 $230 Series F 12/10/2003 175
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
II-2
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Purchaser Price Per Purchase Amount Class Date of Purchase # of Shares
Share
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Eligio Majerovic $1.00 $8,000 Series F 12/10/2003 4,250
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Marshall Sterman $1.00 Compensation Board Series F 12/10/2003 12,500
Svc. - $25,000 Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Olshan Grundman $1.00 Compensation Legal Series F 12/10/2003 5,000
Services - $16,000 Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Moneesh Bakshi $1.00 Translating Service - Series F 12/10/2003 50
$200 Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Mohammad Mamaun $1.00 Translating Service Series F 12/10/2003 50
-$200 Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Leonard Cohen $1.00 $50,000 Series F 12/30/2003 25,000
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Kollel Metzioynim Lhoroah $1.00 $12,000 Series F 12/30/2003 5,000
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Gregory Simonelli $1.00 $7,000 Series F 12/30/2003 2,500
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Jaime Asaro $1.00 $7,000 Series F 12/30/2003 2,500
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Jack Neiman $1.00 $3,500 Series F 12/30/2003 1,250
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Harris Tunick $1.00 $3,500 Series F 12/30/2003 1,250
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Gian Ciarniello $1.00 $1,400 Series F 12/30/2003 500
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Barry Moscowitz $1.00 Commission - $6,000 Series F 12/30/2003 3,000
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Barnett Fine $1.00 $7,000 Series F 01/06/2004 2,500
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Howard Fine $1.00 $1,400 Series F 01/06/2004 500
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Haichel Esther $1.00 $60,000 Series F 01/06/2004 30,000
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
The Resnick Group $1.00 Fee for annual acctg. Series F 01/06/2004 8,125
svc. -$26,000 Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
II-3
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Purchaser Price Per Purchase Amount Class Date of Purchase # of Shares
Share
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Peter Hoffman $1.00 $3,750 Series F 01/15/2004 1,563
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Rafael Moas $1.00 $3,750 Series F 01/15/2004 1,563
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
David Fried $1.00 $475 Series F 01/15/2004 195
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Dror Magori $1.00 $475 Series F 01/15/2004 195
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Florence Gut $1.00 $825 Series F 01/15/2004 344
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Dror Magori $1.00 $1,850 Series F 02/05/2004 463
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Meryl Hagler $1.00 $3,575 Series F 02/05/2004 893
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
David Fried $1.00 $3,575 Series F 02/05/2004 893
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Ezra Moas $1.00 $1,000 Series F 02/05/2004 250
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Morris Sabbach $1.00 $1,000 Series F 02/05/2004 250
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Jac Steinberger $1.00 $3,075 Series F 02/05/2004 770
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Abraham Rotban $1.00 $1,855 Series F 02/05/2004 465
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Raimond Irni $1.00 Compensation Series F 02/05/2004 1,000
Commission - $4,000 Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Arnold Fonseca $1.00 $50,000 Series F 03/30/2004 19,231
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Eliezer Ely $1.00 $2,480 Series F 03/30/2004 1,240
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Moische Koffman $1.00 $2,325 Series F 03/30/2004 1,162
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Harold Friedman $1.00 $775 Series F 03/30/2004 388
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
II-4
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Purchaser Price Per Purchase Amount Class Date of Purchase # of Shares
Share
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Aaron Groner $1.00 $310 Series F 03/30/2004 155
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Abraham Kiplinsky $1.00 $775 Series F 03/30/2004 388
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Annette Hunter $1.00 $50,000 Series F 03/30/2004 25,000
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Eugenie Trott $1.00 $200,000 Series F 03/30/2004 41,668
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Marshall Sterman $1.00 Compensation - $20,000 Series F 03/30/2004 6,250
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
John. J. Clarke $1.00 Compensation - $20,000 Series F 03/30/2004 6,250
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
C. Trade Inc. $1.00 Compensation - $40,000 Series F 03/30/2004 9,375
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
A. Elizier $1.00 Comp. Web design - Series F 03/30/2004 1,765
$3,500 Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
E. McInerney $1.00 Commission - $20,000 Series F 03/30/2004 4,168
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
T. Mendirotta $1.00 Commission - $25,000 Series F 03/30/2004 12,500
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Haicel Esther $1.00 $12,500 Series F 05/20/04 15,625
Preferred
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Philip Koch $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
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
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
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Richard Barsom $0.12 Comp. Marketing Svc. Common 08/06/2004 50,000
- $6,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
II-5
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Purchaser Price Per Purchase Amount Class Date of Purchase # of Shares
Share
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Marshall Sterman $0.12 Comp. Fin'l Consult. Common 08/06/2004 200,000
- $24,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
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
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Kellel Metzioynim $0.08 $34,600 Common 08/20/2004 450,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
George Feinsod $0.10 Comp. Tax Prep Fees - Common 08/20/2004 100,000
$10,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Samaritan Group Intl. $0.05 Fee for UN Admission Common 09/08/2004 500,000
- $25,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
IMSCO/ F. Weston $0.05 Fee for UN Admission Common 09/08/2004 1,000,000
- $50,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
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
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
WW Trading Int'l $0.075 Comp. Commissions - Common 10/06/2004 200,000
$15,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Annette Hunter $0.075 Comp. Commissions - Common 10/06/2004 100,000
$7,500
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Rudolf Schindler $0.10 Comp. Accrued Payroll Common 10/29/2004 311,100
- $31,110
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
WW Trading Int'l $0.08 $25,000 Common 10/29/2004 312,500
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Raimind Irni $0.05 Commission - $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
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Jason Lyons $0.08 Commission - $5,000 Common 11/24/2004 62,500
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
II-6
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Purchaser Price Per Purchase Amount Class Date of Purchase # of Shares
Share
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Richard Barsom $0.08 Comp. Mktg Services - Common 11/24/2004 150,000
$12,000
------------------------------------- ------------- ----------------------- ------------ ----------------- ------------
Rudolf W. Schindler $0.155 Comp./Accrued Payroll Common 12/17/2004 100,000
- $15,500
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Leonard Cohen $0.10 $35,000 Common 12/17/2004 350,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Haichel Esther $0.10 $40,000 Common 12/17/2004 400,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Lyons Capital Group LLC $0.05 Commission - $5,000 Common 3/21/2005 100,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Leonard Cohen $0.05 $10,000 Common 3/21/2005 200,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
The Resnick Druckman Group LLC $0.10 Comp. for Accounting Common 3/21/2005 130,000
Fees - $13,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Segoes Trading $0.08 $40,000 Common 4/18/05 500,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Haichel Esther $.05 Commission - $10,000 Common 5/12/05 200,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
WWD Intl. Trading $0.08 $25,000 Common 7/6/05 312,500
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
LMWW FBO J. Kyle Bass IRA $0.10 $20.000 Common 7/6/05 200.000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Hayman Partners $0.10 $30,000 Common 7/6/05 300,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Ian Wallace $0.10 $25,000 Common 7/7/05 250,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
H. Partners $0.10 $25,000 Common 7/8/05 250,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Steven Kessler $0.07 $25,000 Common 7/11/05 357,143
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
4 Clean Waters Ltd $0.07 Reduction of note Common 7/11/05 571,428
payable - $40,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Samuel Glass $0.07 $25,000 Common 7/11/05 357,143
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
WWD Trading Intl. $0.07 $30,000 Common 8/2/05 200,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
William Duncan $0.07 $16,000 Common 8/4/05 228,571
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Salvatore LoBue $0.07 $27,625 Common 10/21/05 394,643
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Anthony Giambrone $0.07 $48,000 Common 10/21/05 685,714
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Roger Borsett $0.06 Commission - $7,500 Common 10/21/05 125,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
II-7
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Purchaser Price Per Purchase Amount Class Date of Purchase # of Shares
Share
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Resnick Druckman Group LLC $0.05 Comp. for Accounting Common 10/21/05 132,500
Fees - $6,625
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Occidental Engr. Consult. N/A Defer demand for note Common 11/1/05 100,000
payable
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Salvatore LoBue $0.07 $24,335 Common 11/08/05 347,643
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Simplified Employee Pension $0.075 $35,000 Common 11/23/05 466,667
FBO Laura A. Fonseca
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
James K. Tse $0.065 $25,000 Common 11/29/05 384,616
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
KML $0.05 $30,000 Common 12/14/05 600,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Max Ollech $0.05 $50,000 Common 12/14/05 1,000,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Raimond Irni $0.05 Commission - $7,500 Common 12/14/05 150,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Southridge Partners LP $0.11 $48,485 Common 2/7/05 438,785
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Robert Kaszovitz $0.07 $91,000 Common 3/20/06 1,300,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Abraham Kaszovitz $0.07 $17,500 Common 3/20/06 250,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Isaac Kaszovitz $0.07 $17,500 Common 3/20/06 250,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Jacob Kaszovitz $0.07 $17,500 Common 3/20/06 250,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Akiva Kaszovitz $0.07 $17,500 Common 3/20/06 250,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Chumie Kaszovitz $0.07 $17,500 Common 3/20/06 250,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Schaul Neumann $0.07 $17,500 Common 3/20/06 250,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Max Ollech $0.07 $56,000 Common 3/20/06 800,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Resnick Druckman Group $0.06 Comp. for Accounting Common 3/20/06 250,000
Fees - $15,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Southridge Partners LP $0.08 $51,403 Common 3/24/06 614,131
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Southridge Partners LP $0.08 $156,574 Common 4/5/06 1,959,631
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Robert Kaszovitz $0.065 $90,000 Common 5/5/06 1,384,615
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Max Ollech $0.065 $90,000 Common 5/5/06 1,384,615
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
II-8
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Purchaser Price Per Purchase Amount Class Date of Purchase # of Shares
Share
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Shaul Kochan $0.10 $100,000 Common 5/5/06 1,000,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Raimond Irni $0.067 Commission - $30,000 Common 5/5/06 450,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
John J. Clarke $0.15 Compensation for Common 6/6/06 75,000
Board service -
$11,250
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Marshall S. Sterman $0.15 Compensation for Common 6/6/06 75,000
Board service -
$11,250
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Ronald W. Hart $0.15 Compensation for Common 6/6/06 75,000
Advisory Board
service - $11,250
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Occidental Engineering Consultants $0.08 Forebearance Common 6/6/06 3,000,000
Agreement - $242,880
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
Jonathan McDermott $0.10 $10,000 Common 6/12/06 100,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
KML $0.07 $28,000 Common 8/2/06 400,000
------------------------------------ ------------- ----------------------- ------------ ----------------- ------------
The Company issued these shares in reliance on 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.
Item 27. Exhibits.
(a) Exhibits:
Number Description of Exhibit
------ ----------------------
3.1 Amended and Restated By-Laws of Water Chef, Inc. -
Incorporated herein by reference to Exhibit 3(ii) to the
Form 10-KSB/A filed November 17, 2003.
3.2 Amended and Restated Certificate of Incorporation of Water
Chef, Inc. - Incorporated herein by reference to Exhibit 3.2
to the Form SB-2 filed January 24, 2005.
3.3 Certificate of Amendment of Restated Certificate of
Incorporation of Water Chef, Inc. dated August 2, 1993 -
Incorporated herein by reference to Exhibit 3.3 to the Form
SB-2 filed January 24, 2005.
3.4 Certificate of Amendment of Restated Certificate of
Incorporation of Water Chef, Inc. dated August 2, 1992 -
Incorporated herein by reference to Exhibit 3.4 to the Form
SB-2 filed January 24, 2005.
3.5 Certificate for Renewal and Revival of Certificate of
Incorporation - Incorporated herein by reference to Exhibit
3.5 to the Form SB-2 filed January 24, 2005.
3.6 Certificate of Amendment of Restated Certificate of
Incorporation of Water Chef, Inc. dated February 20, 2002 -
Incorporated herein by reference to Exhibit 3.6 to the Form
SB-2 filed January 24, 2005.
3.7 Certificate of Correction filed to correct a certain error
in the Certificate of Amendment of the Restated Certificate
of Incorporation of Water Chef, Inc. dated May 7, 2004 -
Incorporated herein by reference to Exhibit 3.7 to the Form
SB-2 filed January 24, 2005.
4.1 Certificate of Designation of Series A Preferred Stock of
Water Chef, Inc. - Incorporated herein by reference to
Exhibit 4.1 to the Form 10-KSB/A filed November 17, 2003.
II-9
Number Description of Exhibit
------ ----------------------
4.2 Certificate of Designation of Series C convertible preferred
stock of Water Chef, Inc. - Incorporated herein by reference
to Exhibit 4.2 to the Form 10-KSB/A filed November 17, 2003.
4.3 Certificate of Designation of Series D Preferred Stock of
Water Chef, Inc. - Incorporated herein by reference to
Exhibit 4.3 to the Form 10-KSB/A filed November 17, 2003.
4.4 Certificate of Designation of Series F convertible preferred
stock of Water Chef, Inc. - Incorporated herein by reference
to Exhibit 4.4 to the Form SB-2 filed January 24, 2005.
4.5 Series B Warrant to Purchase Common Stock and Allonge to and
Amendment and Extension of Common Stock Purchase Warrant -
Incorporated herein by reference to Exhibit 4.4 to the Form
10-KSB/A filed November 17, 2003.
4.6 Series B Second Allonge to and Amendment and Extension of
Common Stock Purchase Warrant - Incorporated herein by
reference to Exhibit 4.6 to the Form SB-2 filed January 24,
2005.
4.7 Subordinated Debentures - Incorporated herein by reference
to Exhibit 4.5 to the Form 10-KSB/A filed November 17, 2003.
5.1* Opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP
10.1 Subdistributorship Agreement dated May 18, 2001 between 4
Clean Waters LTD. and the Company - Incorporated herein by
reference to Exhibit 10.2 to the Form 10-KSB/A filed
November 17, 2003.
10.2 Convertible Promissory Note dated November 17, 2000 to 4
Clean - Lindh Joint Venture by the Company - Incorporated
herein by reference to Exhibit 10.1 to the Form 10-KSB/A
filed November 21, 2004.
10.3 Preliminary Agreement, dated September 8, 2004 by, and
among, Water Chef, Inc., Samaritan Group International, and
International Multiracial Shared Cultural Organization
(IMSCO) - Incorporated herein by reference to Exhibit 10.1
to the Form 10-QSB filed November 17, 2004.
10.4 Loan Agreement, dated as of November 16, 2005, by and
between Water Chef, Inc. and Southridge Partners LP -
Incorporated herein by reference to Exhibit 99.1 to the Form
8-K filed November 23, 2005.
10.5 Registration Rights Agreement, dated as of November 16,
2005, by and between Water Chef, Inc. and Southridge
Partners LP - Incorporated herein by reference to Exhibit
99.2 to the Form 8-K filed November 23, 2005.
10.6 Promissory Note issued by Water Chef, Inc. on November 16,
2005 to Southridge Partners LP for the principal sum of
$250,000 - Incorporated herein by reference to Exhibit 99.3
to the Form 8-K filed November 23, 2005.
10.7 Three Year Warrant issued to Southridge Partners LP, dated
November 16, 2005, to purchase 430,000 shares of common
stock at a price of $0.14 per share - Incorporated herein by
reference to Exhibit 9.4 to the Form 8-K filed November 23,
2005.
10.8 Forbearance Agreement dated as of May 8, 2006, by and
between Occidental Engineering Consultants Limited and Water
Chef, Inc. - Incorporated herein by reference to Exhibit
10.11 to the Registration Statement on Form SB-2 filed May
15, 2006.
10.9 Registration Rights Agreement dated as of May 8, 2006, by
and between Occidental Engineering Consultants Limited and
Water Chef, Inc. - Incorporated herein by reference to
Exhibit 10.11 to the Registration Statement on Form SB-2
filed May 15, 2006.
10.10 Loan Agreement, dated as of October 11, 2006, by and between
Water Chef, Inc. and Southridge Partners LP - Incorporated
herein by reference to Exhibit 99.1 to the Form 8-K filed
October 19, 2006.
II-10
Number Description of Exhibit
------ ----------------------
10.11 Registration Rights Agreement, dated as of October 11, 2006,
by and between Water Chef, Inc. and Southridge Partners LP -
Incorporated herein by reference to Exhibit 99.1 to the Form
8-K filed October 19, 2006.
10.12 Promissory Note issued by Water Chef, Inc. on October 11,
2006 to Southridge Partners LP for the principal sum of
$300,000 - Incorporated herein by reference to Exhibit 99.1
to the Form 8-K filed October 19, 2006.
10.13 Three Year Warrant issued to Southridge Partners LP, dated
October 11, 2006, to purchase 882,352 shares of common stock
at a price of $0.085 per share - Incorporated herein by
reference to Exhibit 99.1 to the Form 8-K filed October 19,
2006.
23.1* Consent of Marcum & Kliegman LLP
23.2* Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP
(contained in Exhibit 5.1).
24.1* Powers of Attorney (included on the signature page of this
Registration Statement).
* filed herewith
Item 28. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by section 10(a)(3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) (ss.230.424(b) of this chapter) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
NOTE: Small business issuers do not need to give the statements in paragraphs
(a)(1)(i) and (a)(1)(ii) of this Item if the registration statement is on Form
S-3 or Form S-8 (ss.ss.239.13 or 239.16b of this chapter), and the information
required to be included in a post-effective amendment is incorporated by
reference from periodic reports filed by the small business issuer under the
Exchange Act.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-11
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this registration
statement to be signed on its behalf by the undersigned, in the City of New
York, State of New York, on November 9, 2006.
WATER CHEF, INC.
By: /s/ David A. Conway
---------------------------------
David A. Conway
Chairman of the Board,
President,
Chief Executive Officer
and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David A. Conway as his true and lawful
attorney-in-fact with full power of substitution and resubstitution for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments, including post-effective amendments, to this registration statement,
and any related registration statement filed pursuant to Rule 462(b) of the
Securities Act of 1933, as amended, and to file the same, with exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact or
their substitutes, each acting along, may lawfully do or cause to be done by
virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ David A. Conway Chairman of the Board, November 9, 2006
----------------------------- President,
David A. Conway Chief Executive Officer
and Chief Financial Officer
(Principal Executive Officer
and Principal Financial and
Accounting Officer)
/s/ Marshall S. Sterman Director November 9, 2006
-----------------------------
Marshall S. Sterman
/s/ John J. Clarke, Jr. Director November 9, 2006
-----------------------------
John J. Clarke, Jr.
II-12