UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-16165
AQUACELL TECHNOLOGIES, INC.
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(Name of small business issuer in its charter)
Delaware 33-0750453
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10410 Trademark Street, Rancho Cucamonga, CA 91730
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (909) 987-0456
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and will not be contained, to the best of
issuer's knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. [X]
The information required in Part III by Items 9, 10, 11 and 12 is
incorporated by reference to the issuer's proxy statement in connection with the
2002 Annual Meeting of Shareholders, which will be filed by the issuer within
120 days after the close of its fiscal year.
State issuer's revenues for its most recent fiscal year: $1,049,000
As of September 18, 2002, the aggregate market value of the issuer's Common
Stock (based on its reported last sale price on the American Stock Exchange)
held by non-affiliates of the issuer was $4,320,871.
At September 30, 2002, 8,601,224 shares of issuer's Common Stock were
outstanding.
PART I
ITEM 1. BUSINESS.
OVERVIEW
AquaCell Technologies, Inc. (the "Company") is engaged in the manufacture
and sale of products for water filtration and purification through our operating
subsidiaries, Global Water-Aquacell, Inc. and Water Science Technologies, Inc.
(WST). Our products address various water treatment applications for
industrial, commercial, institutional and residential purposes. These
applications range from providing purified drinking water- through our point-of-
use patented self-filling Purific (registered) Water Cooler and production
of water bottling plant equipment- to equipment for processing water for ultra-
pure purposes, such as micro-chip and pharmaceutical manufacturing. The Company
was incorporated in Delaware on March 19, 1997.
Our flagship product is our patented five-gallon self-refilling bottle
Purific water cooler, manufactured by our Global Water-Aquacell subsidiary.
The various filtration systems available on our cooler contain different
combinations of systems, which utilize sediment filters, reverse osmosis, carbon
block, multi-media filters and ultra-violet light. We replace traditional five-
gallon bottle water coolers with a permanently installed convenient alternative
where the bottle never needs changing and water bottles no longer need to be
delivered, stored or replaced. In addition, we replace water fountains where
users tend to have greater concerns as to sanitation and water quality.
WATER PURIFICATION INDUSTRY BACKGROUND
The highly fragmented water purification industry has thousands of companies
involved in various capacities, including companies which design fully
integrated systems for processing millions of gallons of water for municipal,
industrial, and commercial applications, down to the independent water delivery
route person.
According to an article appearing in The Wall Street Journal, water supply
businesses generate approximately $400 billion in revenue worldwide annually.
Demand for water purification has continued to grow nationally and
internationally due to economic expansion, scarcity of usable water, concern
about water quality and regulatory requirements. One of the fastest growing
segments of the industry is the drinking water segment, including point-of-use
filtration systems for providing purified drinking water and bottled drinking
water.
U.S. DRINKING WATER ANALYSIS
While many consumers use water filtration systems and drink bottled water for
improved taste, there are other more important reasons to do so.
Risks of Tap Water. Tap water, regardless of its source, may contain certain
contaminants that can affect one's health. Although municipalities are required
to provide drinking water which complies with the Safe Drinking Water Act, the
water supplied to homes from municipalities may contain startling levels of
chlorine in addition to bacteria, toxins and parasites. Although the water may
be purified upon leaving the treatment facility, impurities may be picked up
from the pipes used to transfer it to the tap. Lead may also leach into the
water from pipes, especially in older construction.
In the United States, water quality is being compromised by pollution, aging
municipal water systems, and contaminated wells and surface water. According to
an August 12, 2002 U.S. News and World Report article, researchers question
whether Americans are getting sick from their drinking water far more often than
is recognized. The report further states that the next five years will see more
new rules than have been adopted in all the years since the enactment of the
Safe Drinking Water Act in 1974.
Cost estimates for upgrading municipal water systems in the United States
range from $151 billion to $1 trillion, with projected costs as high as $6900
per household in some areas. Additionally, costs for protection stemming from
potential terrorism will cost $450 million for Congressional ordered
ulnerability studies, with an additional $1.6 billion needed for basic security
at pumping stations and treatment plants.
The awareness level of consumers of the potential hazards of drinking tap
water is continuously increasing, and we believe that more educated consumers
will be seeking to minimize such potential risks through the purchase of point-
of-use filtration systems. An article appearing in the September 2002 Water
Technology magazine, included predictions from point-of-use experts on the
industry's future. The article includes statements that the home water
treatment market will grow from its current 15 percent penetration to near 100%,
with every home having a point-of-use water drinking water system within the
next 20 years, as point-of-use equipment will become a regular solution to some
municipal water quality problems.
Risks of Bottled Water. While some people have resorted to drinking bottled
water as a safe alternative to tap water, even bottled water can contain
impurities. In February 1999, the Natural Resources Defense Council released an
extensive four year scientific study of bottled water sold in the United States,
titled "BOTTLED WATER: Pure Drink or Pure Hype?" This study included testing of
more than 1000 bottles of 103 brands of bottled water. One- third of the
bottled waters tested were found, in at least one test sample, to contain levels
of contamination that exceeded allowable limits under either state or bottled
water standards. Contaminants found in the bottled waters included synthetic
organic chemicals, bacteria and arsenic. The study further revealed that,
according to government and industry estimates, 25% to 40% of bottled water is
just tap water- sometimes with additional treatment, sometimes not. The
conclusion of the study was that bottled water is not necessarily any better
regulated, purer, or safer than most tap water.
OUR GLOBAL WATER-AQUACELL, INC. SUBSIDIARY
Our flagship product is our patented PURIFIC (registered) Water Cooler.
The Purific cooler is hooked up to a standard municipal water supply. The
water is filtered and purified through multiple step systems and the treated
water then automatically and continuously fills the permanently attached five
gallon bottle on the cooler. Our patents pertain to the attachment of the
bottle to the cooler, and the float valve in the bottle, providing the
automatic refilling.
The filtration systems available on the Purific cooler vary in complexity;
however, each system contains the proprietary multi-stage Aquacell Multi-Media
Filter set. These unique multi-media filters contain various medias known to
filter certain impurities from water, including activated carbon, activated
alumina, KDF (registered) and Environmental Protection Agency (EPA) registered
silver impregnated carbon, used to prohibit bacterial growth, a common problem
with simple carbon filters. EPA registration is given to a product only after
evidence is submitted to validate that the labeling claims are true and that it
does not impart over 50 ppb of silver to the treated water. EPA registration is
an important selling aid, as it makes the customer aware that the product is
established and reliable. The Aquacell was also involved in a study performed by
the EPA for effectiveness in removing various waterborne contaminants.
Purific Cooler Models:
We manufacture five different models of Purific water coolers with varying
complexity of filtration systems, designed to meet the needs of the customers to
which they are sold.
Purific 2001 - The Purific 2001 is equipped with our most comprehensive
triple purification and filtration system designed to protect against
potentially harmful foreign contaminates in drinking water. The system
features a pressure regulator and water monitor with an enclosed filtration case
that also serves as a leak detector with an automatic shutoff system. The target
market is corporations seeking the best possible water purification system in
light of the events of September 11, 2001.
Purific 500 - Our best selling system is equipped with the Aquacell multi
media and carbon block filtration in addition to either ultraviolet light or
reverse osmosis. The system includes a pressure regulator and water monitor.
The target market is Fortune 1000 companies. Our filtration systems on this
unit have been tested and validated by the Water Quality Association (WQA),
which is a trade association comprised of 2,600 members in the household,
commercial, industrial and small system water treatment industry, and has
earned the WQA Gold Seal of Approval.
Purific 300 - The Purific 300 combines Aquacell multi-media filtration with
either ultraviolet light or reverse osmosis. The target market is mid-size
companies who have moderate monthly bottled water bills.
Purific 100 - A basic Aquacell multi-media filtration combined with a
sediment filter comprises the filtration system. The target market is small
companies, or those seeking to primarily just improve the taste of the tap
water.
Purific 50 - Designed for the retail consumer market, the Purific 50 provides
Aquacell multi-media filtration.
Replacement Filters - We also sell replacement filters for our Purific water
coolers. The filtration systems on our patented water coolers require
replacement after 2,000 gallons of water have passed through the system or after
one year from the date of installation, whichever comes first. We contact our
customers on an regular basis to facilitate timely replacement of filters.
Customers with high water usage often stock replacement filters. The revenue
from replacement filters will be significant and will increase from year to year
as we sell more water coolers and other systems.
Advantages of the Purific Water Cooler
The Purific cooler's main advantages over bottled water are Cost, Convenience
and Quality. Since the tragic events of September 11, 2001 an additional
benefit of the Purific cooler has emerged, and that is the Security aspect of
eliminating potential risk of bottled water deliveries. Benefits of Purific
include:
. Saves money. Our self-filling cooler has been proven to save most
companies a considerable amount of money over the costs of bottled water
alternatives.
. No bottles to change. When changing water bottles, most people spill or
splash the water, and often a relatively strong person must be located to
change the bottle. Also, the cleanliness of the hands of the person
changing the bottle is an issue, since anything on their hands will end
up in the water.
. Reduce potential worker's compensation claims. Potential worker's
compensation claims from injuries due to lifting the 40-pound bottle can
be costly.
. No bottles to store. Replacement water bottles are cumbersome to store,
taking up a lot of valuable space in an office. The higher the rent, the
more it costs to store the water.
. Never run out of water. Since our Purific cooler continuously refills
itself as water is dispensed, the cooler always has water available when
needed.
. No delivery problems. Deliveries of bottled water can disrupt office
operations, as well as pose potential security risks. Additionally, in
large office buildings wait time for freight elevators can delay bottled
water delivery by several hours, further adding to the inconvenience of
bottled water delivery.
. Freshly filtered and purified water. The quality of bottled water varies
greatly depending upon the source and whether or not it is filtered or
purified. Also, water which has been stored in certain areas can absorb
taste and odor through the bottle. The water in our Purific water cooler
maintains its freshness as it is constantly being replenished.
Marketing of the Purific Water Cooler
In October 2001, we signed a marketing agreement with Corbett Water
Technologies, Inc., a subsidary of S&B Technical, Inc., (CWT) for US marketing
and distribution of our Purific water coolers. CWT's sole business is
distribution of Purific coolers. Under the terms of the agreement, we own 15%
of Corbett Water Technologies, with the balance being owned by S&B Technical
Products.
Beginning in January 2002, CWT built a sales force through the recruiment
of experienced sales personnel from the largest bottled water delivery
companies for sales of Purific coolers, and will continue to increase in size
as additional sales people are recruited.
AquaCell and S&B Technical have also signed a joint venture agreement for
sales and manufacturing of Purific coolers outside the United States.
In June 2002, we signed a distribution agreement with Connecticut Water
Service, an investor-owned public water utility. Connecticut Water markets our
Purific cooler to its customers in Connecticut and other areas in New England.
Once this program is operating fully, it will be rolled out to other water
utility companies across the country.
Prior to signing these agreements, we sold our Purific coolers directly to
corporations, with an emphasis on Fortune 500 headquarter locations and the US
Government under a General Services Administration contract, to which we
continue to sell directly. Additionally, we have an arrangement with Roto-
Rooter Plumbers for the installation and sales of our Purific coolers. We
intend to maintain a small in-house sales force and rely on our marketing
partners for most of our sales.
OUR WATER SCIENCE TECHNOLOGIES, INC. SUBSIDIARY
In March 2002, AquaCell closed on its acquisition of Water Science
Technologies (WST), a Tempe, Arizona based manufacturer of integrated water
purification and treatment systems. WST is a wholly owned subsidiary of
AquaCell.
WST operates as a manufacturer of custom designed systems to meet a
variety of water purification and treatment needs. The company will continue
to manufacture certain custom systems for various applications, and
additionally, management intends to develop targeted product lines for four
specific markets, which we believe will position WST for long-term growth.
The first area of concentration is purification and bottling systems for
water bottling plants, both foreign and domestic. Bottled water is the fastest
growing segment of both the beverage industry and the water industry. WST has
manufactured numerous systems for bottling plants installed throughout the US,
and Central and South America including systems for brands such as Culligan,
O Premium, and numerous private-label supermarket brands.
The second area of concentration will be on systems to treat water for car
washes, providing environmentally friendly recycling and discharge, as well as
spot-free rinse. We currently supply such systems for use in car washes in a
regional southwest area, and will look to expand the program throughout the US.
The third product line will encompass the restaurant and food service
industry, providing protection of equipment and more consistent quality of food.
The fourth product line will target emergency drinking water systems,
including the recently designed portable system capable of converting swimming
pool water into drinking water.
We anticipate that these product lines will be marketed by marketing partners
with expertise in the corresponding industries.
OUR AQUACELL MEDIA, INC. SUBSIDIARY
In October 2001, we formed a new subsidiary, dedicated to the selling of
advertising space on the bottle label of the permanently attached five-gallon
bottle of our patented self-filling Purific (registered) Water Cooler.
We are in effect creating a water cooler billboard. Since the water cooler is
a known congregating location, we believe it is the perfect venue for
advertisers. The benefits to advertising on the Purific bottle label include a
high level of viewing frequency; no clutter from competing ads; and long viewing
time - since pages can't be turned, there is no channel surfing or mouse
clicking; and, it is inexpensive.
Since the bottle is permanently attached to the water cooler, the label -
which can be changed intermittently to coincide with advertising campaigns -
remains intact. The program will be rolled out to encompass targeted industries
such as health care, brokerage firms, travel agencies, salons, schools and
universities.
No operations were commenced during the year ended June 30, 2002.
Customers
Our Global Water customers currently include companies across a broad range
of industries including investment banking, consumer products, aerospace,
entertainment, banking, brokerage houses, manufacturing and insurance. Our
customers also include professional service providers and governmental agencies.
Our WST customers include a broad range of industries including water bottling,
car washes, and various manufacturing facilities.
Production, Raw Materials and Supplies
Our Products are manufactured in our 10,000 square foot manufacturing
facility located in Rancho Cucamonga, California, and the WST 8,300 square foot
facility located in Tempe, Arizona. Our California plant is located within a
100-mile radius of 95% of our suppliers allowing for just-in-time inventory. Our
product has a low cost of manufacturing. In our Global Water-Aquacell
subsidiary, less than 10% of product cost is in labor, allowing for high gross
profit margins because our operations do not require a large full time employee
base and, when needed, temporary employees are readily available.
Our facility utilizes manufacturing processes that follow the guidelines of
the Water Quality Association. The manufacturing process of our various products
includes utilization of injection-molded parts, for which we own the molds.
Multiple vendors have been identified as sources for parts and supplies for our
products and we do not anticipate any shortages of such materials.
We maintain a controlled low inventory of finished goods. Upon completion of
manufacture, each product undergoes quality assurance testing prior to shipping
and installation. The raw materials and components used in these products are
commonly available commodities such as off the shelf water coolers, water
bottles, various fittings, plastic tubing, wiring, valves, sediment filters,
reverse osmosis membrane filters and ultra-violet lights. Our products are
fabricated from these materials and assembled together with products bought from
other companies to form an integrated product. We do not depend on any single
supplier. If any supplier were to become unable to perform, we believe we could
readily find a substitute source. We are not a party to any material long-term
fixed price supply contracts.
Government Regulation
Federal, state, local and foreign environmental laws and regulations require
substantial expenditures and compliance with water quality standards and impose
liabilities for noncompliance. We believe that environmental laws and
regulations and their enforcement are, and will continue to be, a significant
factor affecting the marketability of our products. The treatment of drinking
water in the United States is governed by the Safe Drinking Water Act. The 1996
amendments to the Act emphasize risk-based standards for contaminants in
drinking water, afford small water supply systems operational flexibility and
provide assistance to water system infrastructures through a multi- billion-
dollar Drinking Water State Revolving Fund. The Fund program assists public
water systems with the financing of the costs of drinking infrastructure that is
necessary to achieve or maintain compliance with the Safe Drinking Water Act
requirements and to protect public health. The Fund, patterned after the State
Revolving Fund contained in the Clean Water Act, provides funding to the states
to establish a renewable source of financing for drinking water infrastructure
projects. The Fund program is designed to ensure that the drinking water
supplies in the United States remain safe and affordable, and that systems that
receive funding will be properly operated and maintained. Regulations under the
Safe Water Drinking Act also established maximum containment levels for a wide
variety of chemicals that may be present in drinking water treatment to meet
applicable standards.
Any changes in applicable regulations or their enforcement may affect our
operations by imposing additional regulatory compliance costs on our customers,
requiring modification of our products or affecting the market for our products.
To the extent that demand for our products are created by the need to comply
with such enhanced standards or their enforcement, any modification of the
standards or their enforcement may reduce demand, thereby adversely affecting
our business, financial condition or results of operations. The relaxation or
repeal of any such laws or regulations or the strict enforcement thereof could
also adversely affect our business and prospects. Conversely, changes in
applicable environmental requirements imposing additional regulatory compliance
requirements or causing stricter enforcement of these laws or regulations could
increase the demand for our products.
Competition
The drinking water purification industry is fragmented and highly competitive
due to the large number of businesses within certain product areas. We compete
with many companies that have greater market penetration, depth of product
line, resources and access to capital, all of which could be competitive
advantages. Competitors of our Global Water-Aquacell products include: bottled
water brands such as Arrowhead, Deer Park, Poland Spring, and Sparkletts;
water filtration system manufacturers such as Culligan, which is owned by US
Filter Corporation, Brita, which is owned by Clorox and Pur, which is owned by
Proctor and Gamble; and flat-top point-of-use water cooler manufacturers such as
Oasis, Cordley-Temprite, and Mutual of Omaha's innowave product. Competitors of
our WST subsidiary include water filtration systems manufacturers such as US
Filter, Ionics, and Osmonics.
While we believe that we can deliver our products on an economically
competitive basis, there can be no assurance in that regard. In addition, many
competitors have greater financial resources than us to finance their expansion
and internal growth opportunities. Consequently, we may encounter significant
competition in our efforts to achieve our strategic goals. There can be no
assurance that our competitors will not develop products that are superior to
ours or achieve greater market acceptance than our products. Competition could
have a material adverse effect on our ability to consummate arrangements with
customers or enter into strategic business alliances. Moreover, in response to
changes in the competitive environment, we may make certain pricing, service or
marketing decisions or enter into acquisitions or new ventures that could have a
material adverse effect on our business, financial condition and results of
operations.
Intellectual Property
We own a United States and Canadian patent on our automatic-refilling
purified bottle water cooler. These patents do not expire until November 20,
2006 and October 2, 2009, respectively. We have federally registered our
Purific and Water Science Technologies International trademarks and have pending
applications to federally register our "Never Change Another Bottle" logo and
AquaCell marks. We also conduct business in California under the name Global
Water Solutions, Inc. We intend to seek appropriate additional trademark or
servicemark registrations in connection with our product and service offerings.
Research and Development
We have not spent any material amount of money on research and development
during the last two fiscal years.
Employees
As of June 30, 2002, we had 27 employees. None of our employees are covered
under collective bargaining agreements although we do have employement
agreements with certain executives. Management believes we maintain a good
relationship with our employees.
ITEM 2. PROPERTIES.
Our principal executive office and our 10,000 square foot Global Water-
Aquacell manufacturing facility are located in Rancho Cucamonga, California
under a five-year lease that commenced on January 1, 1999 and expires on
December 31, 2003. That lease has an average annual base rent of $69,600. We
also maintain an 8300 square foot WST manufacturing facility in Tempe, Arizona
under a five (5) year lease that commenced on November 1, 2001 and expires on
October 31, 2006. That lease has an average annual base rent of $55,900. We
believe that, if necessary, alternative space is readily available at comparable
rates and on comparable terms with respect to all of our leased properties. We
also believe that we can obtain additional space necessary to support increases
in our future operation. We believe that the properties described above are
currently protected by adequate insurance.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock commenced quotation on the American Stock Exchange
on February 12, 2001 following its initial public offering. The following table
sets forth, for the periods indicated, the last sale prices for the Common Stock
as reported by American Stock Exchange:
Period High ($) Low ($)
----------------------------- -------- -------
Fiscal 2003
7/1/02 - 9/18/02........ 1.10 0.78
Fiscal 2002
Fourth Quarter.......... 3.04 0.83
Third Quarter........... 4.18 2.95
Second Quarter.......... 5.25 3.25
First Quarter........... 4.80 3.30
Fiscal 2001
Fourth Quarter.......... 5.07 4.00
Third Quarter........... 5.55 4.93
On September 18, 2002, the last sale price of the Common Stock as reported by
AMEX was $0.82. On September 18, 2002, there were 108 holders of record of the
Company's Common Stock and, the Company believes, over 400 beneficial owners
of the Company's Common Stock.
The Company presently intends to retain all earnings for the Company's
continued growth. Depending upon the Company's capital resources and needs, the
Company may pay cash dividends in the future. The payment of dividends, if any,
in the future is within the discretion of the Board of Directors and will depend
upon the Company's earnings, its capital requirements and financial condition,
and other relevant factors, although this may change based upon the foregoing
factors.
Recent Sales of Unregistered Securities
During the year ended June 30, 2002, the Company made the following sales of
unregistered securities:
Consideration Received and Exemption
Description of Underwriting or From
Date Title of Number Other Discounts to Market Price Registration If Option, Warrant or Convertible Security,
of Sale Security Sold Afforded to Purchasers Claimed Terms of Exercise or Conversion
------- -------------- ------- -------------------------------- ------------ -------------------------------------------------
7/13/01 Options to 124,500 Option granted under 4(2) Exercisable at $4.45 per share until 7/13/04 and
Purchase 1998 Incentive Plan- vesting over 3 year term.
Common Stock No cash received.
------- -------------- ------- -------------------------------- ------------ -------------------------------------------------
5/7/02 Options to 135,000 Option granted under 4(2) Exercisable at $1.15 per share.
Purchase 1998 Incentive Plan- 60,000 exercisable immediately through 5/7/07,
Common Stock No cash received. 75,000 exercisable through 5/7/07 and
vesting over a 5 year term.
------- -------------- ------- -------------------------------- ------------ -------------------------------------------------
5/15/02 Options to 146,000 Option granted under 4(2) All exercisable at $1.16 per share through
Purchase 1998 Incentive Plan- 5/15/07 and vesting over a 5 year term.
Common Stock No cash received.
------- -------------- ------- -------------------------------- ------------ -------------------------------------------------
8/20/01 Warrants to 75,000 No cash received 4(2) All exercisable at $4.40 per share.
Purchase until exercise.
Common Stock
------- -------------- ------- -------------------------------- ------------ -------------------------------------------------
9/19/01 Warrants to 100,000 No cash received 4(2) 50,000 exercisable at $4.50 per share and
Purchase until exercise. 50,000 exercisable at $5.50 per share.
Common Stock
------- -------------- ------- -------------------------------- ------------ -------------------------------------------------
9/19/01 Common Stock 10,000 Issued as compensation 4(2) --
under consulting agreement.
------- -------------- ------- -------------------------------- ------------ -------------------------------------------------
10/9/01 Warrants to 400,000 No cash received 4(2) 50,000 exercisable at $4.50 per share.
Purchase until exercise. 50,000 exercisable at $5.50 per share.
Common Stock 100,000 exercisable at $5.00 per share.
100,000 exercisable at $6.00 per share.
100,000 exercisable at $7.00 per share.
------- -------------- ------- -------------------------------- ------------ -------------------------------------------------
10/9/01 Common Stock 10,000 Issued as compensation 4(2) --
under consulting agreement.
------- -------------- ------- -------------------------------- ------------ -------------------------------------------------
3/19/02 Common Stock 258,589 Issued In exchange for all 4(2) --
outstanding shares of Water
Science Technologies, Inc. and
forgiveness of $189,755 of the
acquired company's debt.
------- -------------- ------- -------------------------------- ------------ -------------------------------------------------
5/16/02 Warrants to 100,000 No cash received 4(2) 100,000 exercisable at $3.30 per share.
Purchase until exercise.
Common Stock
------- -------------- ------- -------------------------------- ------------ -------------------------------------------------
5/16/02 Common Stock 120,000 Issued as compensation under 4(2) --
consulting agreement
------- -------------- ------- -------------------------------- ------------ -------------------------------------------------
5/31/02 Warrants to 50,000 No cash received 4(2) All exercisable at $1.05 per share.
Purchase until exercise.
Common Stock
------- -------------- ------- -------------------------------- ------------ -------------------------------------------------
6/10/02 Warrants to 200,000 No cash received 4(2) 100,000 exercisable at $3.00 per share.
Purchase until exercise. 100,000 exercisable at $5.00 per share.
Common Stock
------- -------------- ------- -------------------------------- ------------ -------------------------------------------------
6/10/02 Common Stock 100,000 Issued as compensation under 4(2) --
consulting agreement
------- -------------- ------- -------------------------------- ------------ -------------------------------------------------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
When used in this Form 10-KSB and in future filings by the Company with the
Commission, statements identified by the words "believe", "positioned",
"estimate", "project", "target", "continue", "will", "intend", "expect",
"future", "anticipates", and similar expressions express management's present
belief, expectations or intentions regarding the Company's future performance
within the meaning of the Private Securities Litigation Reform Act of 1995.
Readers are cautioned not to place undue reliance on any such forward-looking
statements, each of which speaks only as of the date made. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company has no obligations to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
Overview
The following discussions and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes presented following
the consolidated financial statements. The discussion of results, causes and
trends should not be construed to imply any conclusion that such results or
trends will necessarily continue in the future.
For the year ended June 30, 2002, revenues were $1,049,000, an increase of
$858,000 in comparison to the previous year's revenues of $191,000 or 449%. The
increased revenues in comparison to the previous year showed incremental growth
from quarter-to-quarter, as well as a significant increase in revenue in
comparison to each corresponding quarter from the previous year. Our gross
profit margin of our flagship Purific water cooler products, based on material
and direct labor costs, was maintained at approximately 57%.
This increase in revenues is a result of an increase in sales of Purific
(registered) Water Coolers, primarily attributable to the efforts of our
marketing partner, Corbett Water Technologies (Corbett Water), which occurred
mainly in the third and fourth quarters, as well as the acquisition of WST,
which contributed $382,000 to the revenues from the date of acquisition in
March 2002. Corbett Water has hired the top-producing salesmen from the
nation's leading bottled water suppliers in key markets for sales of the
Purific system. Corbett Water, which only sells and distributes our systems,
will continue to roll out its strategic plan and open up additional key markets
as they hire additional salesmen.
Under our sales and marketing agreement, our direct sales and marketing
expenses were eliminated and we are entitled to receive 15% of the net income
of Corbett Water.
In accordance with generally accepted accounting principles (GAAP), as
contained in SFAS-121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of", because Corbett Water was a newly
formed company we used alternative means to determine the value of our 15%
investment in Corbett Water. Accordingly, during the year ended June 30, 2002,
we were forced to recognize an impairment loss in the amount of $1,226,000.
We have already begun to see the benefits of our strategic partnership with
Corbett Water, and believe that our agreement places AquaCell in a unique and
strong position for future growth and enhancement of shareholder value. We
are of the opinion that future revenues and our 15% share of the net income
of Corbett Water will benefit AquaCell and validate the decision of management
in making this investment, despite the fact that we were forced to recognize
the impairment.
In accordance with our agreement with Corbett Water, we will continue to
directly sell to government entities through our GSA contract, our Roto-Rooter
program and certain retailers, as well as continue to sell to and support our
current customers, including Morgan Stanley, Bear Stearns, Merrill Lynch,
Lockheed Martin, United Technologies, Honeywell, Household Finance, Philip
Morris, Kraft Foods, Xerox, Duke Energy, Pacific Gas and Electric and other
smaller companies.
In October, 2001 we signed an agreement to acquire Arizona based Water
Science Technologies, Inc. (WST) for consideration consisting solely of common
stock with a value of $1,000,000 and closed this transaction on March 19, 2002.
AquaCell's management believes that the water industry's rapid growth is going
to continue and that the acquisition of WST puts us in a position to capitalize
on and increase our presence in the water industry, having now expanded our
product base and allowing us to no longer be a one product company. We believe
this acquisition will increase shareholder value as we streamline the product
offerings and begin to implement plans for WST's growth.
In connection with the acquisition of WST, we recorded goodwill in the amount
of $1,301,000. At June 30, 2002, in accordance with GAAP, as contained in
SFAS-142, "Goodwill and Other Intangible Assets" we were forced to take an
impairment loss of $187,000, despite the fact that WST sales for the initial
quarter of ownership increased by 44% over the same period of the prior year and
WST made a profit of $32,000 for the three months ended June 30, 2002.
WST provides a wide range of products and services for water purification and
treatment, through systems capable of treating from ten, to millions of gallons
of water per day to address industrial, commercial, institutional and
residential needs. WST has designed and manufactured systems installed around
the world for a broad-range of applications and companies such as Intel,
Motorola, National Semiconductors, General Motors, Nissan, Honeywell, and Smith
Foods.
In June 2002, we signed a distribution agreement with Connecticut Water
Service, an investor-owned public water utility. Connecticut Water markets our
Purific cooler to its customers in Connecticut and other areas in New England.
Once this program is operating fully, it will be rolled out to other water
utility companies across the country.
Results of Operations
For the year ended June 30, 2002 consolidated revenues were $1,049,000
compared to $191,000 for the year ended June 30, 2001, representing an increase
of 449% over the prior year. Of this increase in revenues, $382,000 is
attributable to the revenues of WST from the date of acquisition in March 2002.
Net loss for the year ended June 30, 2002, including WST, was $3,804,000 or
$0.47 per share as compared to $3,061,000 or $0.48 per share for the same period
of the prior year. Adjusted for non-cash charges described below totaling
$2,098,000, the current year loss would have been $1,706,000, or $0.21 per
share. Non-cash charges for the prior year were $1,277,000 and the loss adjusted
for those charges was $1,784,000, or $0.28 per share.
As discussed in the Overview section of this Management Discussion and
Analysis, for the year ended June 30, 2002 GAAP rules compelled the Company to
record a one-time impairment loss on investment in the amount of $1,226,000 or
$0.15 per share for its investment in Corbett Water, and an impairment loss on
the goodwill from its WST acquisition of $187,000, or $0.02 per share. Absent
these charges, the loss for the year ended June 30, 2002 would have been
$2,391,000, or $0.29 per share. Of this amount, operating expenses consisting of
salaries and wages and other selling, general and administrative expenses,
exclusive of depreciation and amortization of $57,000 were $1,949,000 or $0.24
per share for the year ended June 30, 2002 as compared to $1,312,000 or $0.21
per share for the comparable prior year.
Also included in the loss was $467,000 or $0.06 per share representing legal,
accounting and other professional expenses for the year ended June 30, 2002
compared to $521,000 or $0.08 per share for the year ended June 30, 2001.
The loss also included $628,000 or $0.08 per share of stock based
compensation representing the amortization of common shares and warrants issued
in connection with consulting agreements, primarily for investment banking
purposes. Of the $628,000, $548,000 represents amortization in connection with
warrants. If exercised, these warrants could provide additional capital of
approximately $5,100,000 to the Company.
There was no amortization of debt discount for the year ended June 30, 2002
because the warrants issued in connection with the notes payable were exercised
and converted to equity through the retirement of the notes in December, 2000,
as compared to $853,000 for the year ended June 30, 2001 including $158,000
written off as a loss on extinguishment of debt. The Company incurred no
interest expense during the year ended June 30, 2002 as compared to $116,000
for the year ended June 30, 2001, and recognized interest income of $126,000 on
notes receivable for the year ended June 30, 2002 as compared to $56,000 for
the year ended June 30, 2001.
Liquidity and Capital Resources
During the year ended June 30, 2002 we financed our operations from the
proceeds of the initial public offering and the receipts of principal and
interest totaling $614,000 received from collection on notes receivable, as well
as collections of receivables in the normal course of business. A net increase
of related party loans amounted to $25,000 during the year.
Cash used by operations during the year ended June 30, 2002 amounted to
$789,000. Net loss of $3,804,000 was reduced by a non-cash impairment
loss on investment for our investment in Corbett Water, as discussed in the
Overview section of this Management Discussion and Analysis, in the amount of
$1,226,000, a goodwill impairment loss on our acquisition of WST, as discussed
in the Overview section, in the amount of $187,000, non-cash stock based
compensation in the amount of $628,000, depreciation and amortization of $57,000
and provision for bad debts in the amount of $1,000. Cash used by operations
was further decreased by accounts payable, accrued expenses, prepaid expenses
and inventories in the amount of $1,079,000. Cash used by operations was
further increased by changes in accounts receivable and customer deposits
amounting to $163,000.
Management believes that the future collections on notes receivable, cash
flows expected to be generated from future operations and through our credit
facility agreement will be sufficient to meet presently anticipated needs for
working capital and capital expenditures through at least the next 12 months;
however, there can be no assurance in that regard. The Company presently has no
material commitments for future capital expenditures.
We have granted warrants, subsequent to our initial public offering in
connection with consulting and marketing agreements that may generate additional
capital of up to approximately $6,800,000 if exercised. There is no assurance
that any of these warrants will be exercised and therefore, we may not realize
any monies from that source.
Cash provided from investing activities during the year ended June 30, 2002
represented principal collections on notes receivable of $498,000 reduced by
expenditures for property and equipment in the amount of $6,000, and increased
by the $25,000 cash balance of our acquired subsidiary.
For the year ended June 30, 2002, payments of principal and interest in the
amount of $987,000 have been made on the $1,750,000 notes receivable that were
restructured into installment notes.
ITEM 7. FINANCIAL STATEMENTS
See Financial Statements beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Form 8-K filed February 12, 2002 incorporated by reference herein.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See Item 12.
ITEM 10. EXECUTIVE COMPENSATION.
See Item 12.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See Item 12.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Items 9, 10, 11, and 12 is incorporated by
reference to the information included in the Company's definitive proxy
statement in connection with the 2002 Annual Meeting of Stockholders.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits Filed: Form 8-K dated April 5, 2002 and Form 8-K/A dated
May 30, 2002 incorporated by reference herein.
(b) Reports on Form 8-K: Form 8-K dated April 5, 2002 and Form 8-K/A dated
May 30, 2002.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: September 30, 2002 AQUACELL TECHNOLOGIES, INC.
(Registrant)
By: /s/ JAMES C. WITHAM
Name: James C. Witham
Title: Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signatures Title Date
/s/ James C. Witham Chairman of the Board of Directors September 30, 2002
James C. Witham and Chief Executive Officer
(Principal Executive Officer)
/s/ Karen B. Laustsen Director and President September 30, 2002
Karen B. Laustsen
/s/ Gary S. Wolff Director and Chief Financial Officer September 30, 2002
Gary S. Wolff (and Principal Accounting Officer)
/s/ Glenn Bergenfield Director September 30, 2002
Glenn Bergenfield
/s/ Dr. William DiTuro Director September 30, 2002
Dr. William DiTuro
AQUACELL TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT AUDITORS ........................................F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheet, June 30, 2002 .........................F-2
Consolidated Statements of Operations for the years ended
June 30, 2002 and 2001 .............................................F-3
Consolidated Statements of Stockholders' Equity (Deficiency)
for the years ended June 30, 2002 and 2001 .........................F-4
Consolidated Statements of Cash Flows for the years ended
June 30, 2002 and 2001 .............................................F-5
Notes to Consolidated Financial Statements ............................F-7
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of
Aquacell Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Aquacell
Technologies, Inc. and Subsidiaries as of June 30, 2002, and the
related consolidated statements of operations, stockholders' equity,
and cash flows for each of the two years in the period ended June 30,
2002. 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 out audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Aquacell Technologies, Inc. and Subsidiaries as of June 30, 2002,
and the results of their operations and their cash flows for each of
the two years in the period ended June 30, 2002 in conformity with
accounting principles generally accepted in the United States of
America.
WOLINETZ, LAFAZAN & COMPANY, P.C.
Rockville Centre, New York
September 27, 2002
F-1
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2002
ASSETS
Current assets:
Cash.........................................................$ 51,000
Notes receivable, including accrued interest of $ 25,000..... 545,000
Accounts receivable, net of allowance of $4,000.............. 191,000
Inventories.................................................. 102,000
Prepaid expenses and other current assets.................... 216,000
-------------
Total current assets.................................... 1,105,000
-------------
Property and equipment, net....................................... 63,000
Other assets:
Goodwill..................................................... 1,114,000
Investments.................................................. 274,000
Patents, net................................................. 120,000
Security deposits............................................ 17,000
Total other assets........................................... 1,525,000
-------------
$ 2,693,000
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................$ 718,000
Accrued expenses............................................. 199,000
Customer deposits............................................ 16,000
Loans payable to relatedparties.............................. 29,000
-------------
Total current liabilities............................... 962,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.00l;
10,000,000 shares authorized; no shares issued
Common stock, par value $.001;
40,000,000 shares authorized; 8,683,646 shares
issued....................................................... 9,000
Additional paid-in capital........................................ 13,041,000
Accumulated deficit............................................... (10,475,000)
-------------
2,575,000
Unamortized deferred compensation................................. (593,000)
Treasury stock, 82,422 shares at cost............................. (251,000)
-------------
1,731,000
-------------
Total stockholders' equity..............................$ 2,693,000
-------------
-------------
The accompanying notes are an integral part of these financial statements.
F-2
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
-----------------------------
2002 2001
------------- -------------
Revenue:
Net sales................................................................ $ 1,042,000 $ 185,000
Rental income............................................................ 7,000 6,000
------------- -------------
1,049,000 191,000
Cost of sales.............................................................. 565,000 82,000
------------- -------------
Gross profit............................................................... 484,000 109,000
------------- -------------
Selling, general and administrative expenses:
Salaries and wages....................................................... 999,000 602,000
Legal, accounting and other professional expenses........................ 467,000 521,000
Stock based compensation................................................. 628,000 -
Other.................................................................... 1,007,000 764,000
Impairment loss on investment............................................ 1,226,000 -
Impairment loss on goodwill.............................................. 187,000 -
Reduction of notes receivable carrying amount to fair value.............. - 365,000
------------- -------------
4,514,000 2,252,000
------------- -------------
Loss from operations before other income (expense)....................... (4,030,000) (2,143,000)
------------- -------------
Other income (expense):
Amortization of debt discount............................................ - (695,000)
Interest expense......................................................... - (116,000)
Interest income.......................................................... 126,000 56,000
Other income............................................................. 100,000 -
------------- -------------
226,000 (755,000)
------------- -------------
Net loss before extraordinary item......................................... (3,804,000) (2,898,000)
Accretion of redemption amount of redeemable common stock.................. - (5,000)
------------- -------------
Net loss attributable to common stockholders before extraordinary item..... (3,804,000) (2,903,000)
------------- -------------
Extraordinary item - Loss on extinguishment of debt........................ - (158,000)
------------- -------------
Net loss attributable to common stockholders............................... $ (3,804,000) $ (3,061,000)
------------- -------------
------------- -------------
Net loss per common share - basic and diluted:
Net loss attributable to common stockholders before extraordinary item.. $ (0.47) $ (0.46)
Extraordinary item - Loss on extinguishment of debt..................... - (0.02)
------------- -------------
Net loss attributable to common stockholders.............................. $ (0.47) $ (0.48)
------------- -------------
------------- -------------
Weighted average shares outstanding - basic and diluted................... 8,149,000 6,339,000
------------- -------------
------------- -------------
The accompanying notes are an integral part of these financial statements.
F-3
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Common Stock
------------------ Additional Unamortized
Number Par Paid-in Deferred Accumulated Treasury
of Shares Value Capital Compensation Deficit Stock Total
--------- ------- ------------ ------------ ------------- ---------- -------------
Balances - July 1, 2000................... 5,003,250 $ 5,000 $ 1,436,000 $ (3,610,000) $ (2,169,000)
Issuance of 200,000 common stock
warrants in connection with private
loan offering........................... 834,000 $ (634,000) 200,000
Exercise of warrants to purchase
common stock through
retirement of notes payable -
private loan offering................... 1,295,000 1,000 1,294,000 1,295,000
Return of redeemable common stock
to stockholder's equity................. 135,000 154,000 154,000
Conversion of $500,000 note payable
into shares of common stock............. 100,000 500,000 500,000
Accrued officers'/stockholders'
salaries contributed to additional
paid-in capital......................... 214,000 214,000
Sale of common stock in initial public
offering, net of costs of $1,360,000.... 1,200,000 1,000 4,639,000 4,640,000
Issuance of common stock warrants
for services to the company............. 370,000 (370,000) 0
Amortization of deferred costs............ 696,000 696,000
Net loss for the year ended
June 30, 2001........................... (3,061,000) (3,061,000)
--------- ------- ------------ ------------ ------------- ---------- -------------
Balances - June 30, 2001.................. 7,733,250 7,000 9,441,000 (308,000) (6,671,000) 2,469,000
Issuance of common stock for
consulting services to the
company................................. 240,000 324,000 (324,000) 0
Issuance of common stock warrants
for services to the company............. 589,000 (589,000) 0
Amortization of deferred costs............ 628,000 628,000
Issuance of common stock for
investment in Corbett Water
Technologies, Inc....................... 451,807 1,000 1,499,000 1,500,000
Issuance of common stock for
acquisition of Water Science
Technologies, Inc., including
55,337 shares issued to vendors of
acquired company........................ 258,589 1,000 1,188,000 1,189,000
Surrender of 82,422 shares of common
stock by officers in payment of
principal and interest on notes
receivable............................. $(251,000) (251,000)
Net loss for the year ended
June 30, 2002........................... (3,804,000) (3,804,000)
--------- ------- ------------ ------------ ------------- ---------- -------------
Balances - June 30, 2002.................. 8,683,646 $ 9,000 $ 13,041,000 $ (593,000) $(10,475,000) $(251,000) $ 1,731,000
The accompanying notes are an integral part of these financial statements.
F-4
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30
-----------------------------
2002 2001
------------- -------------
Cash flows from operating activities:
Net loss................................................................... $ (3,804,000) $ (3,061,000)
Adjustment to reconcile net loss to net cash used in operating activities:
Accretion of redemption amount........................................... - 5,000
Impairment loss on investment............................................ 1,226,000 -
Impairment loss on goodwill.............................................. 187,000 -
Reduction of notes receivables carrying amount to fair value............. - 365,000
Stock based compensation................................................. 628,000 62,000
Interest expense, including extraordinary expense of $158,000,
related to amortization of discount on debt for fair value of stock
warrants issued....................................................... - 852,000
Provision for bad debts.................................................. 1,000 -
Depreciation and amortization............................................ 57,000 54,000
Changes in:
Accounts receivable...................................................... (120,000) 5,000
Accrued interest receivable.............................................. - (55,000)
Prepaid expenses and other current assets................................ 80,000 (293,000)
Inventories.............................................................. 55,000 (17,000)
Security deposits........................................................ - (2,000)
Accounts payable......................................................... 457,000 (556,000)
Accrued expenses......................................................... 487,000 (347,000)
Customer deposits........................................................ (43,000) -
Accrued interest payable................................................. - (117,000)
------------- -------------
Net cash used in operating activities.................................... (789,000) (3,105,000)
------------- -------------
Cash flows from investing activities:
Investments in notes receivable.......................................... - (1,983,000)
Collections on notes receivable.......................................... 498,000 -
Purchase of property and equipment....................................... (6,000) (20,000)
Cash balance of acquired subsidiary...................................... 25,000 -
------------- -------------
Net cash provided by (used in) investing activities...................... 517,000 (2,003,000)
------------- -------------
Cash flows from financing activities:
Sales of common stock.................................................... - 6,000,000
Offering costs paid...................................................... - (742,000)
Proceeds from notes payable-private loan offering........................ - 200,000
Loans and advances from officers, stockholders and others, net........... 25,000 (10,000)
Payment of notes payable................................................. - (44,000)
------------- -------------
Net cash provided by financing activities................................ 25,000 5,404,000
------------- -------------
Increase (decrease) in cash................................................ (247,000) 296,000
Cash, beginning of year.................................................... 298,000 2,000
------------- -------------
Cash, end of year.......................................................... $ 51,000 $ 298,000
------------- -------------
------------- -------------
The accompanying notes are an integral part of these financial statements.
F-5
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year Ended June 30
-----------------------------
2002 2001
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest................................................... $ - $ 226,000
Supplemental schedule of non-cash investing and financing activities:
Conversion of redeemable common stock into equity.......................... $ - $ 154,000
Application of deferred offering costs against proceeds of offering........ $ - $ 618,000
Note receivable payments of principal and interest made by offiders/
directors with their shares of the Company's common stock recorded as
treasury stock........................................................... $ 251,000 $ -
Issuance of common stock in connection with investment..................... $ 1,500,000 $ -
Issuance of common stock and warrants for services to the Company.......... $ 913,000 $ 370,000
Debt discount arising from issuance of warrants............................ $ - $ 834,000
Contribution to capital of accrued officers'/stockholders' compensation.... $ - $ 214,000
Common stock warrants exercised by exchange of notes payable............... $ - $ 1,295,000
Conversion of note payable into common stock............................... $ - $ 500,000
Issuance of common stock to acquire subsidiary............................. $ 1,000,000 $ -
Issuance of common stock to satisfy indebtedness to acquired subsidiary's
vendors.................................................................. $ 189,000 $ -
Principal payments on notes receivable by conversion of accrued officers
salaries................................................................. $ 349,000 $ -
The accompanying notes are an integral part of these financial statements.
F-6
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
Note A - Description of Business
Aquacell Technologies, Inc. was incorporated in Delaware on March
19, 1997 and its principal business activity is the manufacture and
sale of products for water filtration and purification. The Company
conducts substantially all of its business in the United States.
As shown in the accompanying financial statements, the Company
has incurred substantial net losses since inception and utilized
substantial cash in operating activities. The Company expects its
operations will provide sufficient cash flows through June 30, 2003.
There is no assurance, however, that profitable operations will ever be
attained or that the Company will ever attain positive cash flow.
Note B - Summary of Significant Accounting Policies
[1] Principles of consolidation:
The accompanying consolidated financial statements include the
accounts of Aquacell Technologies, Inc., and its wholly owned
subsidiaries (the "Company"). Such subsidiaries are Global Water
Aquacell, Inc., incorporated December 21, 1998, and Water Science
Technologies, Inc., acquired on March 19, 2002. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
[2] Inventories:
Inventories are carried at the lower of cost, determined using
the FIFO (first-in, first-out) method or market.
[3] Property and equipment:
Property and equipment is stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the related assets which
approximates three to five years.
[4] Investments:
Investment in a privately held corporation is carried using the
cost method of accounting.
[5] Goodwill:
Goodwill represents the excess of the purchase price over the
fair value of net assets of a business acquired. The Company has
adopted Statements of Financial Accounting Standards No. 142 (SFAS
142), "Goodwill and Other Intangible Assets".
[6] Patents:
The value of patents is amortized over nine years, their
remaining useful lives at date of acquisition, using the straight-line
method. Patents at June 30, 2002, are stated net of accumulated
amortization of approximately $77,000. Amortization expense was
$22,000 for the years ended June 30, 2002 and 2001, respectively.
[7] Revenue recognition:
Revenues are recorded at the time our products are shipped unless
we agreed to install the products, in which case we recognize revenue
at the time of installation. Rental income from coolers is recognized
on a straight-line basis over the term of the rental agreement.
F-7
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2002
Note B - Summary of Significant Accounting Policies - (continued)
[8] Advertising:
Advertising costs are expensed as incurred. Advertising expense
for the years ended June 30, 2002 and 2001, was approximately $42,000
and $10,000, respectively.
The costs of direct response advertising, whose primary purpose
is to elicit sales to customers and that should result in probable
future benefits are capitalized. Advertising costs capitalized at
June 30, 2002, and included in prepaid expenses were approximately
$93,000. These costs will be amortized when placed into service.
[9] 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 the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
[10] Income taxes:
The Company accounts for income taxes using the asset and
liability method described on SFAS No. 109, "Accounting For Income
Taxes", the objective of which is to establish deferred tax assets and
liabilities for the temporary differences between the financial
reporting and the tax bases of the Company's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are
realized or settled. A valuation allowance related to deferred tax
assets is recorded when it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
[11] Net loss per common share:
Loss per common share is based upon the weighted average number
of common shares outstanding during the year including redeemable
common stock. Diluted loss per common share is the same as basic loss
per share, as the effects of potentially dilutive securities (see
Notes I [4] and I [6]) are antidilutive.
[12] Long-lived assets:
The Company accounts for the impairment and disposition of long-
lived assets in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-lived Assets to Be Disposed Of." In accordance
with SFAS No. 121, long-lived assets to be held are reviewed whenever
events or changes in circumstances indicate that their carrying value
may not be recoverable. The Company periodically reviews the carrying
value of long-lived assets to determine whether or not an impairment
to such value has occurred, and has determined that as of June 30,
2002, that impairment, where appropriate, was recorded in the
financial statements.
[13] Concentrations of credit risk:
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
investments, trade accounts receivables, and notes receivable. The
Company performs ongoing credit evaluations of its customers'
financial condition, but does not require collateral to support such
receivables.
The Company utilizes a limited number of suppliers for certain
components used in its products but has no long-term supply contracts
with them.
F-8
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
June 30, 2002
Note B - Summary of Significant Accounting Policies - (continued)
[14] Financial instruments:
The carrying amounts of the Company's cash, notes receivables,
accounts receivable, accounts payable, customer deposits and loans
payable to related parties, approximate fair value.
[15] Reclassifications:
Certain reclassifications have been made to the 2001 financial
statements in order to conform to the current year presentation.
[16] New accounting pronouncements:
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and
Other Intangible Assets."
SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001 as
well as all purchase method business combinations completed after June
30, 2001. SFAS No. 141 also specifies criteria that intangible assets
acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. The Company has adopted
SFAS 141 for the year ended June 30, 2002.
SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested
for impairment at least annually. SFAS No. 142 also requires that
intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 121. The Company
has adopted SFAS No. 142 for the year ended June 30, 2002.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 amends existing
accounting guidance on asset impairment and provides a single accounting
model for long-lived assets to be disposed of. Among other provisions,
the new rules change the criteria for classifying an asset as held-for-sale.
The standard also broadens the scope of business to be disposed of that qualify
for reporting as discontinued operations, and changes the timing of recognizing
losses on such operations. The provisions of SFAS 144 will be effective for
the Company's fiscal year 2003. The Company is currently in process of
evaluating the potential impact that the adoption of SFAS 144 will have on its
consolidated financial position and results of operations.
Note C - Inventories:
Inventories consist of the following at June 30, 2002:
Raw materials.................................... $ 89,000
Work in progress................................. 10,000
Completed product................................ 3,000
----------
$ 102,000
----------
----------
F-9
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
June 30, 2002
Note D - Property and Equipment
Property and equipment is summarized as follows at June 30, 2002:
Furniture and fixtures........................... $ 35,000
Equipment - office............................... 95,000
Machinery and equipment.......................... 122,000
Leasehold improvements........................... 10,000
Rental units..................................... 9,000
----------
271,000
Less accumulated depreciation.................... (208,000)
----------
$ 63,000
----------
----------
Depreciation expense was $35,000 and $32,000 for the year ended
June 30, 2002 and 2001, respectively.
Note E - Notes Receivable
At June 30, 2002, the notes receivable consist of $50,000 from a
non-affiliated party and $835,000 non-director/employee stockholders
and entities owned by them at an annual interest rate of 8%. Notes
totaling $1,750,000, maturing August 16, 2001, were extended to
September 16, 2001. At September 16, 2001, the notes were
restructured into twelve-month installment notes collateralized by
marketable securities with the first installment due October 16, 2001.
Officer/stockholders of Aquacell, have personally guaranteed up to
$1,750,000 of the notes and have offered as collateral designated
assets and have paid $568,000 in principal and $32,000 in interest
through contribution of salaries in the amount of $349,000 and
surrender of 82,422 shares of the Company's common stock, valued at
$251,000, at June 30, 2002. Such shares have been recorded as
treasury stock. The Company has recorded an adjustment to reflect a
reduction in the estimated fair value of these notes of $365,000 at June
30, 2001. The balance of the notes are unsecured and mature between
March 2002 and October 2002. Interest receivable at June 30, 2002, amounted
to $5,000 from a non-affiliated party and $20,000 from non-director/employee
stockholders and entities owned by them and is due at maturity.
Note F - Loans Payable to Related Parties
Loans payable to Related Parties consist of unsecured demand
interest free loans of $29,000 at June 30, 2002.
Note G - Notes Payable- Private Loan Offerings
Notes payable-private loan offerings represented the proceeds
from the sale of units in four private loan offerings. The first loan
offering commenced in November 1998 and was terminated September 1,
1999. The offering consisted of thirty units, each unit consisting of
a $25,000 six-month promissory note with interest at 10% per annum and
three-year warrants to purchase 25,000 shares of the Company's common
stock at exercise prices of $1.00 and $2.00 per share. A total of
twenty-one units were sold yielding gross proceeds of $525,000 through
June 30, 1999, seventeen with warrants at $1.00 per share and four
with warrants at $2.00 per share. The warrants were valued using the
Black-Scholes valuation method using the following assumptions: risk-
free interest rates ranging from 4.43% to 5.09%, volatility of 1%, and
a term of three years. On September 1, 1999, the warrants exercisable
at $2.00 per share were repriced to $1.00 per share. In connection
with the repricing, the Company recorded an additional debt discount
based upon the estimated value of the warrants totaling $16,000. The
warrants were valued utilizing the Black-Scholes valuation method
using the following assumptions: a risk-free interest rate of 5.82%,
volatility of 1% and a term of three years. There was no amortization
of the debt discount for the years ended June 30, 2002 and 2001.
The Company sold five units in the second loan offering commenced
in October 1999 and completed in February 2000. Each unit consisted
of a $100,000 six-month promissory note with interest at 10% per annum
and three-year warrants to purchase 100,000 shares of the Company's
common stock at an exercise price of $1.00 per share. The Company
recorded a debt discount based upon the estimated value of the
warrants totaling $83,000. The warrants were valued using the Black-
Scholes valuation method using the following assumptions: risk-free
interest rates ranging from 6.01% to 6.71%, volatility of 1%, and a
term of three years. There was no amortization of the debt discount
for the years ended June 30, 2002 and 2001.
The Company sold two units in the third loan offering commenced
in February 2000 and terminated on March 25, 2000, raising gross
proceeds of $70,000. Each unit consisted of a $35,000 six-month
promissory note with interest at 10% per annum and three-year warrants
to purchase 35,000 shares of the Company's common stock at an exercise
price of $1.00 per share. The Company recorded a debt discount based
upon the estimated value of the warrants totaling $12,000. The
warrants were valued utilizing the Black-Scholes valuation method
using the following assumptions: risk-free interest rates ranging from
6.50% to 6.57%, volatility of 1% and a term of three years. During
the year ended June 30, 2001, amortization of the debt discount
amounted to $6,000.
F-10
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
June 30, 2002
Note G - Notes Payable- Private Loan Offerings - (continued)
The Company sold two units in the fourth loan offering commenced
July 1, 2000 and completed July 17, 2000, raising gross proceeds of
$200,000. Each unit consisted of a $100,000 six-month promissory note
with interest at 10% per annum and three-year warrants to purchase
100,000 shares of the Company's common stock at an exercise price of
$1.00 per share. The Company recorded a debt discount based upon
the estimated value of the warrants totaling $834,000. The warrants
were valued utilizing the Black-Scholes valuation method using the
following assumptions: risk-free interest rate of 6.30%, volatility of
1% and a term of three years. During the year ended June 30, 2001,
amortization of the debt discount amounted to $676,000.
On December 11, 2000, the holders of private loan offering
warrants agreed to exercise 1,295,000 warrants upon the effectiveness
of the IPO (Note I [2]). The offering was declared effective,
although not traded, on December 13, 2000. The settlement of the
exercise price was realized through the retirement of the balance of
$1,295,000 of the notes payable-private loan offerings. The
unamortized debt discount at this date, in the amount of $158,000, was
reflected as an extraordinary loss on extinguishment of debt in the
accompanying consolidated statement of operations.
At December 13, 2000, interest accrued on these notes amounted to
$162,000. The accrued interest was paid during March 2001 utilizing
proceeds from the IPO. Interest expense (excluding amortization of
debt discount) during the year ended June 30, 2001, amounted to
$56,000.
Note H - Note Payable- Union Labor Life Insurance Company
On January 1, 1999, the Company closed a $500,000 note and
warrant purchase agreement with the Union Labor Life Insurance Co.
("ULLICO"). Under the terms of the agreement, the Company issued a
six-month senior note, with interest at the rate of 10% per annum and
a warrant to purchase 500,000 shares of the Company's common stock to
be exercisable for a four-year period at $1.00 per share. The
maturity date was subsequently extended to April 30, 2000. The
Company estimated the fair value of these warrants to be $86,000,
utilizing the Black-Scholes valuation method using the following
assumptions: a risk-free interest rate of 4.76%, volatility of 1% and
a term of four years. Such amount was amortized to interest expense
over the six-month term of the note. Amortization amounted to $5,000
and $81,000 during the years ended June 30, 2001 and 2000,
respectively. At January 1, 2000, interest accrued at December 31,
1999 in the amount of $17,000 was added to principal on the note and
the rate was changed to 15% per annum from January 1, 2000. On May 4,
2000 the note was extended to July 30, 2000 and accrued interest at
April 30, 2000 in the amount of $26,000 was added to principal on the
note. In connection with the note extension, the Company issued
50,000 warrants to ULLICO at an exercise price of $5.00 per share and
expiring on January 11, 2003. The Company recorded a debt discount
based upon the estimated value of the warrants totaling $39,000. The
warrants were valued utilizing the Black-Scholes valuation method
using the following assumptions: a risk-free interest rate of 6.74%,
volatility of 1% and a term of 2.58 years. Subsequently, the note's
maturity was extended to October 31, 2000, then to March 31, 2001.
During the year ended June 30, 2001, amortization of the debt discount
amounted to $13,000. Interest expense (excluding amortization of debt
discount) in relation to this loan amounted to $50,000 during the year
ended June 30, 2001. On February 12, 2001, Union Labor Life Insurance
Company, converted $500,000 of the $543,000 balance of the note into
100,000 shares of common stock at $5.00 per share. The balance of the
note and the accrued interest were paid during March 2001 utilizing
the proceeds from the IPO.
Note I- Equity Transactions
[1] Contribution to capital:
On February 9, 2001, three officers/stockholders and directors
agreed to contribute to capital accrued salaries totaling $214,000.
F-11
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2002
Note I- Equity Transactions - (continued)
[2] Initial public offering:
On February 9, 2001, the Company completed its IPO, selling
1,200,000 shares of common stock at $5.00 per share, raising the
proceeds, net of costs, of $4,640,000. In connection with the IPO the
Company sold to the underwriter, for consideration of $100, warrants
to purchase an aggregate of 120,000 shares of common stock at an
exercise price of $8.25 per share. The warrants will be exercisable
for a four-year period commencing February 9, 2002.
[3] Redeemable common stock:
In connection with the purchase of KABB, Inc./Aquacell
International, Inc. (consideration for which included 200,000 share of
the Company's common stock), an option was granted to the holder of
135,000 shares of common stock to put the stock back to the Company at
a price of $1.00 per share plus interest at 7% per annum if the
Company had not registered its common stock in an IPO by December 21,
2000. Through December 13, 2000 (the date of registration), interest
had been accrued in the amount of $19,000, and the shares (which had
previously been excluded from stockholders' equity) were returned to
stockholders' equity upon the completion of the IPO.
[4] Stock option plan:
During August 1998, the Company adopted the 1998 Incentive Stock
Plan (the "Plan") under which options (either incentive or
nonqualified), stock appreciation rights, stock and other awards,
covering an aggregate amount of 1,000,000 shares of common stock, may
be granted to officers, directors, employees and consultants of the
Company. The exercise price established for any awards granted under
the Plan, shall be determined by a Compensation Committee appointed by
the Company's Board of Directors. The exercise price of incentive
stock options cannot be less than 100% (110% for 10% or greater
shareholder employees) of the fair market value ("FMV") at the date of
grant and the exercise price of nonqualified options cannot be less
than 85% of the FMV at the date of grant. The exercise period of
incentive options cannot extend beyond 10 years from the date of grant
and nonqualified options cannot extend beyond 15 years from the date
of grant.
During January 2002, the Board of Directors adopted a Director's
Option Plan covering an aggregate amount of 500,000 shares of common
stock. As of June 30, 2002, no options have been granted from this
plan.
Transactions under the 1998 Incentive Stock Plan are as follows:
Year Ended June 30
---------------------------------------------------
2002 2001
------------------------- ------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------------------------- ------------------------
Balance July 1.......... 148,000 $ 3.06 305,000 $ 1.00
Options granted...... 406,000 2.17 70,000 5.35
Options cancelled.. (3,000) 2.59 (227,000) 1.00
-------- ---------
Balance, June 30........ 551,000 $ 2.41 148,000 $ 3.06
-------- ---------
-------- ---------
Exercisable, June 30.... 196,000 $ 2.60 136,000 $ 3.24
-------- ---------
-------- ---------
F-12
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2002
Note I - Equity Transactions - (continued)
[4] Stock option plan: (continued)
The following table presents information relating to stock
options outstanding at June 30, 2002:
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------
Weighted-
Weighted- Average
Average Remaining Weighted-Average
Exercise Price Shares Exercise Price Life in Years Shares Exercise Price
-------------- ------- -------------- ------------- ------- ----------------
$ 1.00 75,000 2.2 66,000
1.15 135,000 4.9 60,000
1.16 146,000 4.9
4.45 125,000 2.0
5.35 70,000 1.7 70,000
------- ------------- -------
551,000 $ 2.41 3.5 196,000 $ 2.60
------- -------
------- -------
If the options had been accounted for under SFAS 123, net loss
attributable to common stockholders for the years ended June 30, 2002
and 2001, would have been $ (4,064,000) or $(0.50) per common
share, and $(3,188,000) or $(0.51) per common share, respectively.
The fair value of options granted during the years ended June 30, 2002
and 2001, was $0.64 and $1.81 per share on the date of grant,
respectively. The options were valued utilizing the Black-Scholes
valuation method using the following assumptions: risk-free interest
rate of 3.1% and 4.99%, volatility of 33% and 42% and expected lives
of five and three years, respectively.
[5] Issuances of common stock in connection with consulting
agreements:
In connection with a six-month consulting agreement (see Note I (6))
the Company issued 10,000 shares of its common stock valued at $34,000.
The value of the stock is being amortized over the six-month life of the
agreement. Amortization amounted to $34,000 during the year ended June 30, 2002.
In connection with a six-month consulting agreement (see Note I (6))
the Company issued 10,000 shares of its common stock valued at $42,000.
The value of the stock is being amortized over the six-month life of the
agreement. Amortization amounted to $42,000 during the year ended June 30, 2002.
In connection with a five-year consulting agreement (see Note I (6))
the Company issued 120,000 shares of its common stock valued at $150,000.
The value of the stock is being amortized over the five-year life of the
agreement. Amortization amounted to $4,000 during the year ended June 30, 2002.
In connection with a five-year consulting agreement (see Note I (6))
the Company issued 100,000 shares of its common stock valued at $98,000.
The value of the stock is being amortized over the five-year life of the
agreement. Amortization amounted to $2,000 during the year ended June 30, 2002.
[6] Warrants
In connection with a financial consulting agreement, the Company issued a
warrant to purchase 200,000 shares of the Company's common stock to be
exercisable for a five-year period at $4.20 per share. The Company estimated
the fair value of these warrants to be $370,000, utilizing the Black-Scholes
valuation method using the following assumptions: a risk-free interest rate of
4.99%, volatility of 42% and a term of five years. Such amount is being
amortized to consulting expense over six months. Amortization amounted to
$308,000 and $62,000 during the years ended June 30, 2002 and 2001,
respectively.
F-13
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2002
Note I-Equity Transactions-(continued)
[6] Warrants (continued)
In connection with a three-year consulting agreement, entered into in
August 2001, the Company issued a warrant to purchase 75,000 shares of the
Company's common stock to be exercisable for a three-year period at $4.40 per
share. The Company estimated the fair value of these warrants to be $110,000,
utilizing the Black-Scholes valuation method using the following assumptions: a
risk-free interest rate of 4.58%, volatility of 42%, and a term of three years.
Such amount is being amortized to expense over three years. Amortization
amounted to $32,000 during the ended year June 30, 2002.
In connection with a six-month consulting agreement, entered into in
September 2001, the Company issued warrants to purchase 100,000 shares of the
Company's common stock to be exercisable for a three-year period (50,000 at
$4.50 per share and 50,000 at $5.50 per share). The Company estimated the fair
value of these warrants to be $79,000, utilizing the Black-Scholes valuation
method using the following assumptions: a risk-free interest rate of 5.99%,
volatility of 42%, and a term of three years. Such amount is being amortized to
expense over six months. Amortization amounted to $79,000 during the year ended
June 30, 2002.
In connection with a six-month consulting agreement, entered into in
October 2001, the Company issued warrants to purchase 100,000 shares of the
Company's common stock to be exercisable for a three-year period (50,000 at
$4.50 per share and 50,000 at $5.50 per share). The Company estimated the fair
value of these warrants to be $83,000, utilizing the Black-Scholes valuation
method using the following assumptions: a risk-free interest rate of 3.1%,
volatility of 33.33%, and a term of three years. Such amount is being amortized
to expense over six months. Amortization amounted to $83,000 during the year
ended June 30, 2002.
In connection with a distribution agreement (See Note N), the Company
issued warrants to purchase 300,000 shares of the Company's common stock to be
exercisable for a five-year period (100,000, 100,000, and 100,000 at exercise
prices of $5.00, $6.00, and $7.00, per share respectively). The Company
estimated the fair value of these warrants to be $283,000, utilizing the Black-
Scholes valuation method using the following assumptions: a risk-free interest
rate of 3.1%, volatility of 33.33%, and a term of five years. Such amount is
being amortized to expense over five years. Amortization amounted to $42,000
during the ended year June 30, 2002.
In connection with a five-year consulting agreement, entered into in May
2002, the Company issued a warrant to purchase 100,000 shares of the Company's
common stock to be exercisable for a five-year period at $1.25 per share. The
Company estimated the fair value of these warrants to be $9,000, utilizing the
Black-Scholes valuation method using the following assumptions: a risk-free
interest rate of 3.1%, volatility of 33.33%, and a term of five years. Such
amount is being amortized to expense over five years. Amortization was
insignificant during the year ended June 30, 2002.
In connection with a one-year consulting agreement, entered into in May
2002, the Company issued a warrant to purchase 50,000 shares of the Company's
common stock to be exercisable for a five-year period at $1.05 per share. The
Company estimated the fair value of these warrants to be $18,000, utilizing the
Black-Scholes valuation method using the following assumptions: a risk-free
interest rate of 3.1%, volatility of 33.33%, and a term of five years. Such
amount is being amortized to expense over one year. Amortization amounted to
$2,000 during the year ended June 30, 2002.
In connection with a five-year consulting agreement, entered into in June
2002, the Company issued warrants to purchase 200,000 shares of the Company's
common stock to be exercisable for a five-year period (100,000 and 100,000 at
exercise prices of $3.00 and $5.00, per share, respectively). The Company
estimated the fair value of these warrants to be $6,000, utilizing the Black-
Scholes valuation method using the following assumptions: a risk-free interest
rate of 3.1%, volatility of 33.33%, and a term of five years. Such amount is
being amortized to expense over five years. Amortization was insignificant
during the year ended June 30, 2002.
F-14
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - (Continued)
June 30, 2002
Note I - Equity Transactions - (continued)
[6] Warrants (continued)
At June 30, 2002, the Company had warrants outstanding as follows:
Exercise Price Shares Expiration Date
--------------- ---------- ---------------
$ 1.00 500,000 January 2003
5.00 50,000 January 2003
4.40 75,000 August 2004
4.50 50,000 September 2004
5.50 50,000 September 2004
4.50 50,000 October 2004
5.00 100,000 October 2006
5.50 50,000 October 2004
6.00 100,000 October 2006
7.00 100,000 October 2006
4.20 200,000 May 2006
8.25 120,000 February 2006
3.30 100,000 May 2007
1.05 50,000 May 2007
3.00 100,000 June 2007
5.00 100,000 June 2007
----------
1,795,000
----------
----------
At June 30, 2002, the weighted average exercise price of the
outstanding warrants was $3.56 and the weighted average remaining
contractual life of the warrants was 2.56 years.
[7] Shares reserved:
At June 30, 2002, the Company has reserved 2,466,000 shares for
issuance upon exercise of options and warrants.
Note J - Acquisition:
On March 19, 2002, the Company completed the acquisition of 100% of the
issued and outstanding common stock of Water Science Technologies, Inc., a
privately owned Arizona Corporation ("WST"). WST has operated as a manufacturer
of custom design water purification and treatment systems. The purchase price
was the issuance of 203,252 shares at a price of $4.92 per share, for a total
of $1,000,000, as calculated by taking the average closing price of Aquacell
common stock on the five business days immediately preceding the signing of the
agreement of October 23, 2001. In addition, the Company issued 55,337 shares of
its common stock at $3.43 per share to WST vendors as calculated by taking the
average closing price of Aquacell common stock for five days immediately
preceding the closing on March 19, 2002.
The transaction has been accounted for under the purchase method.
Accordingly, the consolidated balance sheet include the assets and liabilities
of WST at June 30, 2002 and the consolidated statements of operations from
March 19, 2002, the acquisition resulted in excess cost over fair value of net
assets acquired of $1,301,000. Pursuant to the provisions of SFAS 142, the
Company recorded an impairment loss of $187,000, for the year ended June 30,
2002. Such impairment loss resulted from the Company's determination of fair
value using present value cash flow analysis.
On the basis of a proforma consolidation of the results of operations as
if the acquisition had taken place at July 1, 2000, unaudited consolidated net
revenues, net loss, and loss per share for the year ended June 30, 2002, would
have been approximately $1,516,000, $(3,938,000), and $(0.48); and for the year
ended June 30, 2001, would have been approximately $1,344,000, $(3,042,000),
and $(0.45), respectively.
F-15
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2002
Note K - Income Taxes
At June 30, 2002, the Company had available federal net operating
loss caryyforwards to reduce future taxable income, if any of
approximately $6,600,000. The net operating loss carryforwards expire
at various dates through 2022.
At June 30, 2002, the Company has a deferred tax asset of approximately
$2,840,000, representing the benefit of its net operating loss carryforwards.
The Company has not recorded a tax benefit because realization of the benefit
is uncertain and therefore a valuation allowance has been fully provided against
the deferred tax asset. The difference between the federal statutory rate of
34% and the Company's effective tax rate of 0% is due to an increase in the
valuation allowance of $720,000 and $680,000 in 2002 and 2001, respectively.
Note L-Commitments and Contingencies
[1] Lease commitments:
The Company occupies office space in California and Arizona, under
noncancellable operating leases. As of At June 30, 2002, future minimum
commitments under office and equipment leases are as follows:
Year Ending June 30,
2003 $ 143,000
2004 107,000
2005 70,000
2006 65,000
2007 20,000
---------
$ 405,000
Rent expense amounted to $131,000 and $89,000 for the years ended At
June 30, 2002 and 2001, respectively.
[2] Consulting agreements:
On May 21, 2001, the Company entered into a financial consulting agreement
with a registered broker-dealer. The agreement provides for a fee consisting of
$1,000 per month over a five-year period and the grant of warrants (See Note I
(6)). The agreement also provides the option to prepay all or a portion of the
fee on a non-refundable basis and either party may terminate the agreement after
six months upon written notice. As of June 30, 2002 the Company has paid
$20,000 in connection with this agreement.
On October 9, 2001, the Company entered into distribution (See Note N) and
joint venture agreements with two privately held companies. In connection with
the distribution agreement, which grants exclusive North American distribution
and marketing rights, excluding existing customers and existing distribution
agreements, the Company acquired 15% of a privately held company in exchange for
451,807 shares of common stock of the Company. The Company applies the cost
method of accounting in connection with this 15% investment. The Company
granted warrants (100,000, 100,000, and 100,000 at exercises prices of $5.00,
$6.00, and $7.00 per share, respectively) in connection with the distribution
agreement. In connection with the joint-venture agreement, the agreement was
modified and Aquacell's initial ownership of 45% was reduced to 19% ownership of
all net profits, with no responsibility for funding any of the manufacturing or
marketing costs, with the remaining 81% owned by the other privately held
company.
[3] Employment agreements
The Company has employment agreements with various executives and
employees of the Company which expire at various dates through February, 2006.
These agreements provide for aggregate minimum salaries of $624,000 for the year
ending June 30, 2003. The agreements also provide for incentive bonuses based
upon achievement of certain milestones. No bonuses have been paid under these
agreements as of June 30, 2002.
F-16
AQUACELL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2002
Note L-Commitments and Contingencies (continued)
[3] Employment agreements (continued)
The Company entered into a five-year employment contract with one of the
officers of WST. The contract calls for a minimum annual salary of $100,000 to
take effect July 1, 2002.
Note M-Impairment Loss On Investment
In connection with our 15% investment in Corbett Water Technologies, Inc.,
(See Note N) the Company recognized an impairment loss of $1,226,000 in
accordance with generally accepted accounting principles (GAAP), as contained in
the provisions of SFAS-121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of".
Note N-Related Party Transactions
Included in net sales are sales to an affiliate, pursuant to a
distribution agreement, aggregating approximately $452,000 for the year ended
June 30, 2002 (See Notes I (6) and K (2)).
Included in trade accounts receivable are accounts receivable from an
affiliate of approximately $83,000 (See Note K (2)).
Note O-Major Customers and Suppliers
During the year ended June 30, 2002, the Company sold approximately 43%
of its products to an affiliate (See Notes K (2) and N).
During the years ended June 30, 2002 and 2001, the Company purchased
approximately 39% and 25% respectively, of its materials from one vendor.
Note P-Subsequent Events
(1) On August 24, 2002, the Company entered into a credit facility agreement
to finance the receivables of its largest customer (See Notes N and O). The
agreement is for a one-year term, and calls for interest at the rate of 18 1/4%
per annum in addition to the payment of certain processing fees. As
compensation under the agreement, the lender was granted warrants to purchase
160,000 shares of common stock, at an exercise price of $.78 per share, whose
total value is estimated at approximately $43,000. The financing is
collateralized by accounts receivable (See Notes E and K (3)).
(2) During September 2002, three officers/stockholders contributed accrued
salaries totaling $153,000, as payment under the guaranty provisions of certain
notes receivable (See Notes L and K (3)).
F-17