U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from ________________.to _________________
Commission file number 0-30544
WATERCHEF, INC.
--------------------------------------------------------------
(Exact name of small business issuer as specified in it charter)
Delaware 86-0515678
-------- ----------
(State of other jurisdiction (IRS Employer
of incorporation or organization) identification No.)
1007 Glen Cove Avenue, Suite 1, Glen Head, New York 11545
(Address of principal executive offices)
516-656-0059
(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the last practicable date.
OUTSTANDING AS OF JUNE 1, 2003
CLASS Common
----- ------
Par value $0.001 per share 89,559,886
WATERCHEF, INC.
INDEX
PART I - FINANCIAL INFORMATION: Page
----
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET (UNAUDITED) 2
At March 31, 2003
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) 3
For the Three Months Ended March 31, 2003 and 2002
For the Period January 1, 2002 (Inception) to
March 31, 2003
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY (UNAUDITED) 4
For the Three Months Ended March 31, 2003
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) 5
For the Three Months Ended March 31, 2003 and 2002
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 6 - 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11 - 13
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK N/A
ITEM 4 - CONTROLS AND PROCEDURES 13
PART II - OTHER INFORMATION:
ITEM 1 - LEGAL PROCEEDINGS 14
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS N/A
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES N/A
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5 - OTHER INFORMATION N/A
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURE 15
CERTIFICATION
EXHIBIT
1
WATERCHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED BALANCE SHEET
AT MARCH 31, 2003
(UNAUDITED)
ASSETS
------
CURRENT ASSETS:
Inventory $ 26,500
------------
TOTAL CURRENT ASSETS 26,500
------------
OTHER ASSETS:
Patents and trademarks - net of accumulated
amortization of $3,698 22,357
Other assets 3,162
------------
TOTAL OTHER ASSETS 25,519
------------
TOTAL ASSETS $ 52,019
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 332,692
Accrued expenses and other current liabilities 921,081
Notes payable (including accrued interest of $297,388) 981,358
Common stock to be issued 1,465,597
------------
TOTAL CURRENT LIABILITIES 3,700,728
LONG-TERM LIABILITIES:
Loans payable to shareholder (including accrued interest
of $63,452) 436,233
------------
TOTAL LIABILITIES 4,136,961
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock - $.001 par value; 10,000,000 shares
authorized; 325,500 shares issued and outstanding 326
Common stock - $.001 par value; 90,000,000 shares
authorized; 89,564,286 shares issued and 89,559,886
shares outstanding 89,564
Additional paid-in capital 12,755,839
Subscription receivable (37,300)
Treasury stock, at cost - 4,400 shares of common stock (5,768)
Accumulated deficit through December 31, 2001 (14,531,596)
Deficit accumulated during development stage (2,356,007)
------------
TOTAL STOCKHOLDERS' DEFICIENCY (4,084,942)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 52,019
============
See notes to condensed financial statements.
2
WATERCHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Period
March 31, January 1, 2002
----------------------------------- (Inception) to
2003 2002 March 31, 2003
------------ ------------ ---------------
(As Restated
See Note 2)
SALES $ -- $ 40,000 $ 40,000
COST OF SALES 24,000 17,280 270,430
------------ ------------ ------------
GROSS (LOSS) PROFIT (24,000) 22,720 (230,430)
GENERAL AND ADMINISTRATIVE EXPENSES 167,630 149,548 956,750
NON-DILUTION AGREEMENT TERMINATION COST 537,262 -- 746,197
INTEREST EXPENSE 37,369 37,368 216,480
LOSS ON SETTLEMENT OF DEBT -- -- 206,150
------------ ------------ ------------
NET LOSS (766,261) (164,196) (2,356,007)
PREFERRED STOCK DIVIDENDS (33,168) (27,075) (146,156)
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (799,429) $ (191,271) $ (2,502,163)
============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.01) $ (0.00)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 89,559,886 86,614,286
============ ============
See notes to condensed financial statements.
3
WATERCHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
(UNAUDITED)
Preferred Stock Common Stock
------------------------- --------------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
For the Three Months Ended March 31, 2003:
----------------------------------------
Balance - January 1, 2003 270,500 $ 271 89,564,286 $ 89,564
Proceeds from sale of preferred stock 25,000 25 - -
Preferred stock issued for services 30,000 30 - -
Net loss - - - -
---------- ---------- ---------- ----------
Balance - March 31, 2003 325,500 $ 326 89,564,286 $ 89,564
========== ========== ========== ==========
Additional Stock
Paid-In Subscription Treasury
Capital Receivable Stock
----------- ------------ -----------
For the Three Months Ended March 31, 2003:
----------------------------------------
Balance - January 1, 2003 $12,700,894 $ (37,300) $ (5,768)
Proceeds from sale of preferred stock 24,975 - -
Preferred stock issued for services 29,970 - -
Net loss - - -
----------- ----------- -----------
Balance - March 31, 2003 $12,755,839 $ (37,300) $ (5,768)
=========== =========== ===========
Accumulated Deficit
Deficit Accumulated
Through During Total
December 31, Development Stockholders'
2001 Stage Deficiency
------------ ----------- ------------
For the Three Months Ended March 31, 2003:
----------------------------------------
Balance - January 1, 2003 $(14,531,596) $(1,589,746) $(3,373,681)
Proceeds from sale of preferred stock - - 25,000
Preferred stock issued for services - - 30,000
Net loss - (766,261) (766,261)
------------ ----------- -----------
Balance - March 31, 2003 $(14,531,596) $(2,356,007) $(4,084,942)
============ =========== ===========
See notes to condensed financial statements.
4
WATERCHEF, INC.
(A Development-Stage Company Commencing January 1, 2002)
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended For the Period
March 31, January 1, 2002
------------------------------------ (Inception) to
2003 2002 March 31, 2003
----------- ----------- --------------
(As Restated
See Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(766,261) $(164,196) $(2,356,007)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 463 463 2,316
Non-cash Compensation 30,000 -- 66,000
Non-dilution agreement termination cost 537,262 -- 746,197
Loss on settlement of debt -- -- 206,150
Inventory reserve -- -- 159,250
Changes in assets and liabilities:
Inventory -- 13,290 (26,500)
Prepaid expenses and other current assets -- 50,000 56,500
Accounts payable, accrued expenses
and interest 150,778 48,844 637,883
--------- --------- -----------
NET CASH USED IN OPERATING ACTIVITIES (47,758) (51,599) (508,211)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipt of stock subscription receivable -- -- 30,200
Proceeds from sale of preferred stock 25,000 -- 142,500
Proceeds from sale of common stock and
exercise of warrants -- 22,000 --
Proceeds from sale of common stock -- -- 100,000
Proceeds from sale of common stock
to be issued -- -- 200,000
--------- --------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,000 22,000 472,700
--------- --------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (22,758) (29,599) (35,511)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 22,758 35,512 35,511
--------- --------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ -- $ 5,913 $ --
========= ========= ===========
See notes to condensed financial statements.
5
WATERCHEF, INC.
(A Development State Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - DESCRIPTION OF BUSINESS
WaterChef, 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.
NOTE 2 - BASIS OF PRESENTATION AND ACCOUNTING POLICES
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 financial
statements do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary to make the financial statements not misleading have been
included. Operating results for the three-month period ended March 31, 2003 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. These financial statements should be read in
conjunction with the financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB, filed on May 23, 2003, for the year
ended December 31, 2002.
The Financial Accounting Standards Board ("FASB") issued FASB Interpretation No.
45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 addresses the
disclosures requirements of a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
FIN 45 also requires a guarantor to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN 45 are effective for our first
quarter ending March 31, 2003. The liability recognition requirements will be
applicable prospectively to all guarantees issued or modified after December 31,
2002.
The FASB issued Statement of Financial Standards ("SFAS") No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." This standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS No. 146 replaces the existing guidance provided by EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs incurred in a
restructuring)." SFAS No. 146 is to be applied prospectively to exit or disposal
actives initiated after December 31, 2002.
The FASB issued SFAS No. 148, "Accounting for Stock - Based
Compensation-Transition and disclosure - an amendment of FASB Statement No. 123"
that provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. The
provision of this Statement is effective for fiscal years ending after December
15, 2002. As of March 31, 2003, the Company has not issued any stock options.
The Company adopted the above pronouncements during the current quarter and
there was no material effect on the Company's financial statements.
6
WATERCHEF, INC.
(A Development State Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - BASIS OF PRESENTATION AND ACCOUNTING POLICES (Continued)
Restatement
-----------
As a result of certain adjustments to the annual 10-KSB financial statements for
the year ended December 31, 2002, the Company will be restating its Form 10-QSB
filings included in that period as soon as practicable. The March 31, 2002
results were restated as a result of such adjustments.
The Company has corrected an error relating to the accrual of directors fees and
the recording of certain other expenses and adjustments. The Company recorded a
reduction of expenses of $74,286 for the period ended March 31, 2002 as a result
of these adjustments.
The cumulative effect of the preceding adjustments on net loss and net loss per
share for the period ended March 31, 2002 is as follows:
As
Previously As
Reported Adjusted
---------- ----------
Net loss applicable to common stock $ (265,557) $ (191,271)
========== ==========
Net loss per share $(0.00) $(0.00)
====== ======
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 suffered recurring
losses and has a working capital deficiency of approximately $3,674,000 at March
31, 2003. 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. The accompanying financial statements do
not include any adjustments that might be necessary should the Company be unable
to continue as a going concern.
7
WATERCHEF, INC.
(A Development State Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - RECENT ACCOUNTING STANDARDS
The following pronouncements have been issued by the FASB.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." In general, a variable interest entity is a corporation, partnership,
trust or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to support its
activities. FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activist or entitled to receive a majority of the
entity's residual returns or both. The consolidated requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003.
Certain of the disclosure requirements apply in all financial statements issued
after January 31, 2002, regardless of when the variable interest entity was
established.
In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provision of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003 should continue to be applied in accordance with their
respective effective dates. In addition, certain provision relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to existing contracts as well as new contracts entered
into after June 30, 2003.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for classification and measurement in the statement of
financial position of certain financial instruments with characteristics of both
liabilities and equity. It requires classification of a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and, otherwise, is effective at the beginning of the first
interim period beginning after June 15, 2003.
Management does not believe that the adoption of any of these pronouncements
will have a material effect on the Company's financial statements.
8
WATERCHEF, INC.
(A Development State Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - NON-DILUTION AGREEMENT TERMINATION COST
In May 2002, the Company agreed to issue to the Company's President and Chief
Executive Officer and to related parties of such an aggregate of 14,923,958
shares of its common stock, in connection with the voluntary surrender of a
non-dilution agreement that the President had entered into with the Company in
June 1997. These shares are not included in the loss-per-share calculations.
Since the issuance of these shares is subject to stockholder approval, the
measurement date for purposes of valuation will be established when such
stockholder approval has been obtained. Accordingly, the Company is utilizing
variable accounting to determine the value of these shares and the related
liability is included in common stock to be issued. The value of these shares as
of March 31, 2003 is $746,197.
NOTE 6 - NET INCOME (LOSS) PER SHARE OF COMMON STOCK
Basic net income (loss) per share of common stock is computed based on the
weighted average number of common shares outstanding during the periods
presented.
Diluted net income per share of common stock is computed based on the weighted
average number of common shares outstanding during the periods presented, plus
any dilutive common stock equivalents. Common stock equivalents consisting of
warrants were not included in the calculation of loss per share for the three
months ended March 31, 2003 and 2002 because their inclusion would have been
antidilutive. Total shares issuable upon the exercise of warrants and the
conversion of preferred stock for the three months ended March 31, 2003 and 2002
were 8,025,398 and 1,666,667, respectively. These shares have been excluded from
loss per share calculations as they are antidilutive. In addition, common stock
to be issued upon stockholder approval of the increase in the authorized stock
of the Company, aggregating 36,711,629 shares are also excluded from loss per
share calculations.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company's lease for its administrative facilities located in Glen Head, New
York expired in September 2001. The Company has been leasing such facilities
since the expiration on a month-to-month basis.
The Company was a defendant in an action, brought by a customer, relating to a
series of contracts that the Company entered into. These contracts were with the
Company's discontinued water cooler and filter operation. Such operations were
sold in November 2001, however legal actions with regard to the operations prior
to sale, remain the Company's responsibility. The customer claims that the
Company breached these contracts by shipping certain goods that did not conform
to the contract. Most of the damages that the customer seeks consist of lost
business profits. Company management and legal counsel believe that the action
is without merit. However, due to the costs in defending the Company in such a
legal action, Company management opted for a settlement in 2003 as the most cost
effective manner to handle this matter. The Company has agreed to pay the
customer $27,500 payable over nine months. In the event the Company fails to
make their settlement payments, a stipulated judgment of $71,000, less any
payment made to such time, would be in effect. The settlement calls for a pledge
of preferred stock to serve as collateral. During the three months ended March
31, 2003, $6,500 has been paid.
9
WATERCHEF, INC.
(A Development State Company Commencing January 1, 2002)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
In May 2001, the Company entered into a distribution agreement with a company
(the "Sub-distributor") based in the County of Jordan. The Sub-distributor has
agreed to purchase no fewer than 100 units of the Company's "Pure Safe Water
Station", in the calendar year commencing January 1, 2002. A minimum purchase of
50 units is required to be purchased in each of the subsequent years commencing
January 1, 2002 and 2003, respectively. During the year ended December 31, 2001,
18 units were shipped under this agreement. The sale will be recognized when the
Company receives payments. The Company has recorded the cost of the inventory
shipped in cost of sales, since the return of the items is uncertain. The
Sub-distributor agreement has been cancelled by the Company because of failure
to meet pre-established minimum thresholds. A criminal complaint has been lodged
against the former Sub-Distributor, two management employees of the Jordan
National Bank, and the Jordan National Bank for their actions in perpetrating a
fraud. A trial date has not yet been set.
NOTE 8 - SUBSEQUENT EVENT
Management authorized the Company to raise up $ 550,000 through a private
placement by issuing 10% two-year convertible preferred instruments. The
preferred, designated as Series F, and providing for one million shares in
total, will be convertible into shares of Waterchef's common stock at such time
as the stockholders of the corporation approve an increase in the authorized
capital stock of the corporation.
10
ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OR PLAN OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with the Company's
Financial Statements and related Footnotes.
Forward-Looking Statements
--------------------------
Management's discussion and analysis of financial condition and results of
operations and other sections of this Report contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. We intend for the
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. All statements regarding the
Company's expected financial position, business and financing plans are
forward-looking statements. Such forward-looking statements are identified by
use of forward-looking words such as "anticipates," "believes," "plans,"
"estimates," "expects," and "intends" or words or phrases of similar expression.
These forward-looking statements are subject to various assumptions, risks and
uncertainties, including but not limited to, changes in political and economic
conditions, demand for the Company's products, acceptance of new products,
technology developments affecting the Company's products and to those discussed
in the Company's filings with the Securities and Exchange Commission.
Accordingly, actual results could differ materially from those contemplated by
the forward-looking statements.
Introduction
------------
Until the fourth quarter of 2001 Water Chef was engaged in the manufacture and
marketing of water coolers and water purification and filtration products. In
the fourth quarter of 2001, the Company negotiated 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
who either do not have access to municipal water treatment systems, or for those
whose systems have been compromised, either by environmental factors or by
faulty design or maintenance.
Results of Operations
---------------------
As a result of certain adjustments to the annual 10-KSB financial statements for
the year ended December 31, 2002, the Company will be restating its Form 10-QSB
filings included in those periods, which were effected as soon as practicable.
The March 31, 2002 results were restated as a result of such adjustments.
With the sale of these assets consummated in December 2001, The Company made the
strategic decision to exit the water cooler and consumer filter segments of its
business in order to concentrate its resources on the development of the market
for the PureSafe Water Station.
For the three months ended March 31, 2003 WaterChef reported no revenues,
compared to revenues of $40,000 reported for the period ended March 31, 2002.
Cost of sales for the three month periods ended March 31, 2003 and March 31,
2002 were $24,000 and $17,280 respectively, an increase of 39%.
Selling, general and administrative expenses for the three months ended March
31, 2003 were $167,630, compared to $149,548 for the year earlier period, an
increase of 12%, primarily due to higher marketing costs.
The net loss for the period ended March 31,2003 was $766,261 compared to
$164,196 in the period ended March 31, 2002.
11
Liquidity and Capital Resources
-------------------------------
At March 31, 2003 the Company had a working capital deficiency of approximately
$3,674,000. In addition the Company continues to suffer recurring losses. 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. The accompanying financial statements do
not include any adjustments that might be necessary should the Company be unable
to continue as a going concern.
During the three months ended March 31, 2003 the Company raised $25,000 from the
sale of preferred stock.
We are of the opinion that cash on hand and the cash to be generated from the
anticipated sales of the PureSafe Water Station will be sufficient to meet our
future cash requirements.
Settlements
-----------
In second quarter 2002 the Company reached a negotiated settlement in an action
brought by certain debenture holders (the "Bridge Lenders") in New Hampshire
Superior Court. The Company and the Bridge Lenders settled this dispute for a
total $497,500 payable in shares of the Company's common stock. The number of
shares of common stock to be paid was determined by dividing $497,500 by the
average daily trading price of WaterChef common over a thirty (30)-day
measurement period. Due to these requirements the Company is obligated to issue
17,037,671 shares of common stock. The total authorized common stock of the
Company does not provide a sufficient number of authorized but unissued shares
to fulfill the terms of the settlement agreement. As such the Company has
recorded these 17,037,671 shares to be issued as a liability in common stock to
be issued for $497,500 as of March 31, 2003.
In addition to the above settlement with Bridge Lenders who participated in the
legal action, the Company settled its obligation with those Bridge Lenders who
did not participate in the legal action. These lenders had total debentures of
$75,000, plus accrued interest of $9,850 for a total of $84,850 as of the
settlement date. In conjunction with the above settlement, the Company settled
these remaining debentures, plus accrued interest, with the issuance of 750,000
shares of common stock valued at $21,900. As of March 31, 2003 the 750,000
shares have not been issued as the Company does not currently have a sufficient
number of authorized and unissued shares to complete the settlement and has
recorded these 750,000 shares to be issued as a liability in common stock to be
issued for $21,900 as of March 31, 2003.
During 2002 the Company agreed to issue stock for the voluntary surrender by the
Company's President and CEO of his anti-dilution agreement. Such cost is
expected to be satisfied by the issuance of 14,923,958 shares of the Company's
common stock, upon approval by the Company's shareholders of the proposed
increase in the authorized common stock of the Company. As such the Company has
recorded these 14,923,958 shares to be issued as a liability in common stock to
be issued for $ 746,197 as of March 31, 2003.
The Company intends to request approval of its stockholders for an increase in
the authorized common stock of the Corporation from 100,000,000 to 200,000,000
shares. Upon approval, the issuance of the shares of common stock described
above will increase the outstanding common stock of the Corporation to
approximately 128,000,000 shares, in satisfaction of many of the above
obligations. This increase in the outstanding will dilute the ownership interest
of current shareholders and will adversely earnings per share and may result in
a lower market value for the Company's stock.
12
Recent Accounting Standards
---------------------------
The following pronouncements have been issued by the Financial Accounting
Standards Board ("FASB").
In January 2003, the FASB issued Interpretation 46, Consolidation of Variable
Interest Entities. In general, a variable interest entity is a corporation,
partnership, trust or any other legal structure used for business purposes that
either (a) does not have equity investors with voting rights, or (b) has equity
investors that do not provide sufficient financial resources to for the entity
to support its activities. Interpretation 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns, or both. The consolidation
requirements of Interpretation 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established.
In April 2003, Financial Accounting Standards Board , "FASB", issued Statement
of Financial Accounting Standard, SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under
Statement 133. This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003 should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to existing contracts as well as new contracts entered
into after June 30, 2003.
Management does not believe that the adoption of any of these pronouncements
will have a material effect on the Company's financial statements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation of our disclosure controls and procedures conducted
within 90 days of the date of filing this quarterly report on Form 10-QSB, our
Chief Executive Officer and the Chief Financial Officer have concluded that our
disclosure controls and procedures (as defined in Rules 13a-(c) and 15d-(c)
promulgated under the Securities Exchange Act of 1934 are effective.
(b) Changes in Internal Controls
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation, and no corrective actions with regard to significant deficiencies
and material weaknesses were taken.
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PART 11 - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company was a defendant in an action, brought by a customer, relating to a
series of contracts the Company entered into. These contracts were with the
Company's discontinued water cooler and consumer filter operation. These
segments were sold in December, 2001, however legal actions with regard to these
operations prior to the sale remain the Company's responsibility. The customer
claimed breach of contract, maintaining that the Company shipped goods that did
not meet the customer's specification. The customer sought damages in the form
of lost opportunity and lost business profits. A negotiated settlement was
reached calling for payment by WaterChef of $27,500, with payment of $3,500 in
February and $3,000 per month payable for eight consecutive months thereafter.
During the three months ended March 31, 2003 $6,500 has been paid.
The Company is plaintiff in a criminal action brought before the court in the
Kingdom of Jordan, seeking full payment for PureSafe Water Stations shipped to a
customer in Jordan, related costs and damages. Jordanian counsel has been
retained and is confident that the Company will prevail.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULT ON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
A preliminary Proxy for the purpose of increasing the authorized common stock of
the Corporation was submitted to the SEC, whose questions and comments are being
addressed before resubmission. Upon approval by the SEC, the proxy will be
mailed to the shareholders and a vote by the shareholders will be scheduled.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
99.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C.ss.1350,
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 - Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
On June 2, 2003 the Company filed an Amended Form 8-K announcing the dismissal
of their previous Certifying Accountants, and the engagement of their current
Certifying Accountants commencing for the year ended December 31, 2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
WaterChef, Inc.
June 6, 2003 /s/ David A. Conway
Date
David A. Conway
President, Chief Executive
Officer, and Chief Financial
Officer
(Principal Operating Officer)
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