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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 2, 1999 Commission File Number 333-44315
AQUA CLARA BOTTLING AND DISTRIBUTION CORPORATION
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FLORIDA 84-1352529
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(I.R.S. Employer
Identification No.)
1315 CLEVELAND STREET
CLEARWATER, FLORIDA 33755
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
727/446-2999
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Phone Number
www.aquaclara.com
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Website
Indicate by check mark whether the Registrant (1) has filed all report 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 Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[ ] No[ x]
The registrant had 15,130,156 shares of common stock, no par value,
outstanding as of February 5, 1999.
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PART I:
FINANCIAL INFORMATION
(ITEM 1)
AQUA CLARA BOTTLING AND DISTRIBUTION INC.
CONSOLIDATED BALANCE SHEET
ASSETS January 2, 1999
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,728
Accounts Receivable (less allowance of $10,000) 50,493
Inventories 48,950
Other current assets 5,389
----------
Total Current Assets 106,560
Property, Plant and Equipment (net) 1,975,021
Other Assets 22,961
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Total Assets $2,104,542
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LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 471,549
Accrued expenses 279,523
Notes payable 176,432
Current portion of long term debt 19,135
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Total current liabilities 946,639
Long-term debt due after one year 266,855
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Total Liabilities 1,213,494
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STOCKHOLDERS' EQUITY
Preferred Stock $1,450,212
Common Stock 3,633,442
Additional Paid in capital 1,417,391
Deficit Accumulated During development stage (5,609,997)
Total Stockholders' Equity 891,048
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Total Liabilities & Stockholders' Equity $2,104,542
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FINANCIAL INFORMATION
(ITEM 3)
AQUA CLARA BOTTLING AND DISTRIBUTION INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Inception thru
January 2, 1999
(unaudited)
Net sales $ 260,995
Cost of sales 150,701
-----------
Gross Profit 110,294
Selling and General and Administrative expenses 5,744,357
-----------
Net operating Loss (5,634,063)
Interest expense 59,922
Interest and Other income/expense (35,855)
-----------
Net Loss $(5,609,997)
===========
Net Loss Per Share $(.44)
===========
Weighted average common shares outstanding 12,650,253
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FINANCIAL INFORMATION
(ITEM 3)
AQUA CLARA BOTTLING AND DISTRIBUTION INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
9 months ended 9 months ended
January 2, 1999 January 3, 1998
(unaudited) (unaudited)
Net sales $ 116,491 $ 120,367
Cost of sales 111,814 122,092
Gross Profit 4,677 (1,725)
Selling and General and Administrative expenses 1,331,178 1,182,794
----------- -----------
Net operating income (1,326,501) (1,184,519)
Interest expense (20,956) 31,866
Interest and Other income/expense (6,889)
Net Loss $(1,354,346) $(1,216,385)
=========== ===========
Net Loss Per Share $(.11) $(.21)
=========== ===========
Weighted average common shares outstanding 12,650,253 5,890,031
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FINANCIAL INFORMATION
(ITEM 3)
AQUA CLARA BOTTLING AND DISTRIBUTION INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
3 months ended 3 months ended
January 2, 1999 January 3, 1998
(unaudited) (unaudited)
Net sales $ 21,669 $ 58,051
Cost of sales 8,158 101,397
----------- ----------
Gross Profit 13,511 (43,346)
Selling and General and Administrative expenses 809,883 687,873
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Net operating income (796,372) (731,219)
Interest expense (11,663) (8,171)
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Net Loss $ (808,035) $ (739,390)
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Net Loss Per Share $ (.06) $ (.13)
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Weighted average common shares outstanding 12,650,253 5,890,031
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PART 1
FINANCIAL INFORMATION
(ITEM 4)
AQUA CLARA BOTTLING AND DISTRIBUTION INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Deficit
Accumulated
Additional During
Preferred Stock Common Stock paid in development Subscription
Shares amount shares amount Capital stage Receivable
------ ------ --------- ---------- ---------- ----------- ------------
Issuance of common stock,
August 1995 500,000 $ 5,000 $ 15,250
Issuance of common stock for
services, August 1995 500,000 5,000 15,250
Net loss for the period (80,519)
----- ---------- ---------- ---------- ---------- ----------- --------
Balance, March 31, 1996 1,000,000 10,000 30,500
(80,519)
Adjustment for recapitalization,
December 1996 1,525,122 33,668 (30,500)
Issuance of common stock for
services, December 1996 279,500 139,750
Common stock issued for conversion
of notes Payable, March 1997 796,500 323,500
Common stock issued through
Regulation D offering March 1997 1,283,000 525,498 $(50,000)
Net loss for period (366,527)
----- ---------- ---------- ---------- ---------- ----------- --------
Balance, March 31, 1997 4,884,122 1,032,416 (447,046) (50,000)
Collection of subscription 50,000
receivable, April 1997 1,312,500 1,501,250
Stock issued through Regulation D
offering, December, 1997 2,500 $ 447,597 75,000 247,500 1,417,391
Amortization of the intrinsic value
of the conversion Rights of the
preferred stock 1,417,391 (1,417,391)
Net loss for period (2,203,714)
----- ---------- ---------- ---------- ---------- ----------- --------
Balance April 4, 1998 2,500 1,864,988 6,271,622 2,781,166 1,417,391 (4,068,151) 0
Stock issued through offering,
August, 1998 (unaudited) 250,000 437,500 (187,500)
Conversion of preferred stock
December, 1998 (556) (414,776) 6,128,631 414,776
Net loss for period (unaudited) (1,354,346)
----- ---------- ---------- ---------- ---------- ----------- --------
Balance January 2, 1999 1,944 $1,450,212 12,650,253 $3,633,442 $1,417,391 $(5,609,997) 0
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PART 1
FINANCIAL INFORMATION
(ITEM 5)
AQUA CLARA BOTTLING AND DISTRIBUTION INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
9 months ended 9 months ended,
January 2, 1999 January 3, 1998
(unaudited) (unaudited)
OPERATING ACTIVITIES
Net loss $(1,354,346) $(1,216,385)
Adjustments to reconcile net loss to cash used
In operating activities
Loss on investment 1,000
Depreciation and amortization 18,794 58,340
Issuance of common stock for services 548,750
Incurrence of debt for compensation 60,517
Decrease in:
Accounts receivable (32,802) (47,024)
Prepaid assets 397,948 (412,797)
Inventory (22,002) (3,684)
Increase in:
Accounts Payable 262,068 42,315
Accrued expenses 261,120 20,173
Deferred salary 56,447
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Total Adjustments 941,573 267,590
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Net cash used in operating activities (412,773) (948,795)
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INVESTING ACTIVITIES
Purchases of property, plant, and equipment (580,176) (185,654)
Increase in other assets (1,506) (298,733)
----------- -----------
Cash used for investing activities (581,682) (484,387)
FINANCING ACTIVITIES
Proceeds from customer deposits 17,016
Proceeds from notes payable to stockholders and
Incurrence of convertible debt 328,757
Proceeds from long-term debt and obligations
under capital lease 11,616 (312,727)
Net proceeds from issuance of Common stock 250,000 2,262,488
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Net cash & cash equivalents provided by financing activities 261,616 2,295,534
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Net increase (decrease) in cash (737,876) 862,352
Cash & cash equivalents beginning of period (3,572) 391,281
Cash & cash equivalents end of period $ 1,728 $ 1,253,633
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AQUA CLARA BOTTLING AND DISTRIBUTION CORPORATION
NOTES TO THE (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-QSB. Accordingly, certain
information and footnotes that are required by generally accepted accounting
principles for complete financial statement are not included herein. The
financial statements are prepared on a consistent basis (including normal
recurring adjustments) and should be read in conjunction with the consolidated
financial statement and related notes contained in the Annual Report for the
fiscal year ended April 4, 1998.
The results of operations for the three-month and nine-month periods
ended January 3, 1999 are not necessarily indicative of those to be expected
for the entire year.
BUSINESS
On August 17, 1995, Pocotopaug Investment, Inc. (hereinafter referred
to as "Pocotopaug") was incorporated under the laws of Florida for the purpose
of raising capital to fund the development of products for subsequent entry
into the bottled water industry. Pocotopaug has been in the development stage
since its formation.
On July 29, 1996, Aqua Clara Bottling and Distribution, Inc.
(hereinafter referred to as "Aqua Clara") was incorporated under the laws of
Colorado for the purpose of raising capital to fund the development of products
for subsequent entry into the bottled water industry. Aqua Clara has been in
the development state since its formation and was virtually inactive until the
time of its combination with Pocotopaug, as described below.
In December 1996, the stockholders of Pocotopaug gained control of
Aqua Clara and Aqua Clara acquired Pocotopaug in a business combination
accounted for as a reorganization of Pocotopaug. Pocotopaug became a wholly
owned subsidiary of Aqua Clara through the exchange of 1,690,122 shares of Aqua
Clara common stock for all 1,000,000 shares of the outstanding stock of
Pocotopaug. Upon the execution of this transaction, Aqua Clara had 2,525,122
shares outstanding. The accompanying consolidated financial statement have been
based on the assumption that the Companies were combined for all periods
presented.
In December 1997, the Company issued 2,500 shares of convertible
cumulative preferred stock through a private placement memorandum. The Company
raised $2,500,000 and incurred offering costs of $387,512. The Company issued
75,000 shares of common stock as compensation to a promoter of this offering.
These share were valued at their trading price of other common stock and
amounted to $247,500.
During the year ended April 4, 1998, the Company began its five-gallon
water business. In February 1998, the Company sold this portion of the
business. The assets disposed of consist of certain receivables, a vehicle, and
various equipment used in the Company's bottled water business. The total sales
price was approximately $352,394, which included the assumption of installment
notes payable of approximately $149,782 by the acquiring company. The Company
recognized a gain of approximately $33,000 on this sale.
As shown in the consolidated financial statements, the Company has
been a development stage enterprise since its inception. The revenues reflected
in the consolidated financial statements (prior to July 1998) are from initial
operations of a five-gallon water business, which was discontinued in March
1998. The Company is devoting its efforts to establishing its oxygenated water
business, and there have been no significant sales from these operations to
date.
Working capital is presently being supplied by the Board of Directors
who have loaned money to the Company for operational expenses and intend to
support the Company in the near future. These loans are being secured by assets
owned by the Company. However, there is no assurance that the Board of
Directors will continue to loan the Company money necessary to continue
operations. Outside investors are currently being sought; however, no plans or
arrangement are in place with respect to additional capital. The Company is
presently in contact with potential business partners that would fund the
Company and assist with volume required to make the operations profitable. The
Company must obtain additional financing to continue its operations. The
consolidated financial statements do not include any adjustment relating to the
recoverability and classification of recorded assets or amounts and
classifications of liabilities that might be necessary in the event the Company
cannot continue in existence. See Subsequent Events for an explanation of loan
transactions subsequent to January 2, 1999.
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SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Aqua
Clara Bottling and Distribution, Inc. and its wholly owned subsidiary,
Pocotopaug Investments, Inc. All significant intercompany accounts and
transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles 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 financial
statement and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company sometimes maintains cash balances in excess of the Federal
Deposit Insurance Corporation's insured limit of $100,000.
Cash equivalents consist of all highly liquid debt instruments
purchased with a maturity of three months or less.
Inventory is stated at the lower of cost (first-in, first-out) or
market.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the consolidated
financial statements carrying amounts of existing assets and liabilities and
their respective income tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized as income in the period that included the enactment date.
Organizational costs are amortized over a period of six years.
Shares of common stock issued for other than cash have been assigned
amounts equivalent to the estimated fair value of the service received until
the time the Company's stock began trading. At that time, the Company valued
the transactions based on quoted prices. The Company records shares as
outstanding at the time the Company becomes contractually obligated to issue
shares.
Property, plant, and equipment are recorded at cost. Depreciation is
calculated by the declining-balance and straight-line methods over the
estimated useful lives of the assets. Maintenance and repairs are charged to
operations when incurred. Betterments and renewals are capitalized. When
property, plant, and equipment are sold or otherwise disposed of, the asset
account and related accumulated depreciation account are relieved and any gain
or loss is included in operations. No significant depreciation has been taken
as of January 2, 1999 since the property, plant and equipment have just been
placed in service.
The Company applies APB Opinion 25 in accounting for its stock
options. The exercise price of these options exceeded the fair value of the
underlying common stock on the grant date and therefore, there are no
compensation costs included in the accompanying consolidated financial
statements.
Fair value estimates discussed herein are based upon certain market
assumptions and pertinent information available to management. The respective
carrying value of certain on-balance-sheet financial instruments approximate
their fair values. These financial instruments include cash, investment
securities, accounts payable, and accrued expenses. Fair values were assumed to
approximate carrying values for these financial instruments since they are
short-term in nature and their carrying amounts approximate fair values or they
are receivable or payable on demand. The fair value of the Company's long-term
debt is estimated based upon the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the
recapitalization the same remaining maturities.
The Company charges to retained earnings and credits its additional
paid-in capital for the amortization of the intrinsic value of the conversion
feature of its preferred stock and effective common stock dividends for stock
issued to third parties for less than trading value. Both transactions are in
accordance with the statement issued by the Securities and Exchange Commission.
Loss per share is based on the weighted average number of common
shares outstanding during each period after giving effect to the
recapitalization described above. The Company has implemented SFAS No. 128.
There is no effect on the prior loss per share amounts based on this statement.
In computing diluted earnings per share, the following were excluded because
their effects were antidilutive: options on 250,000 shares; preferred shares
convertible into common shares; and 600,000 contingently issuable shares.
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Advertising costs are expensed as incurred and amounted to
approximately $849,176 and $1,700 for the years ended April 4, 1998 and March
31, 1997 respectively. Advertising costs for the 9 month period ended January
2, 1999 was $2,207 compared to Advertising costs for period ended January 3,
1998 of $21,883 (unaudited). Advertising costs from inception approximated
$850,000 for the period from inception through January 2, 1999.
The Company changed its fiscal year-end to the first Saturday in April
beginning with the fiscal year ended April 4, 1998.
In the opinion of management, all adjustments, consisting only of
normal recurring adjustment necessary for a fair statement of (a) the results
of operations for the three-month and nine-month periods ended January 2, 1999
and January 3, 1998; (b) the financial position at January 2, 1999; (c) cash
flows for the nine-month periods ended January 2, 1999 and January 3, 1998 have
been made.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following:
January 2, 1999
(unaudited)
Land $ 90,000
Building 1,020,977
Machinery and equipment 851,858
Vehicles 30,392
----------
1,993,227
Less accumulated depreciation 18,206
----------
1,960,421
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NOTES PAYABLE AND LONG TERM DEBT
Mortgage payable; interest adjustable annually to
Prime (8.5% at March 31, 1998); payable $2,954 per January 2, 1999
Month including interest; unpaid principal of (unaudited)
Approximately $238,000 due 15, 2001; Collateralized by property
and plant $ 268,291
Stockholder notes payable; 6.0%; due on demand;
Unsecured 15,000
Stockholder notes payable; 5.0%; due on demand;
Secured by property, plant, equipment, all assets; 161,432
Note payable; 0%; due on demand
Secured by equipment 65,000
Installment notes payable; interest ranging from 10.5%
To 11.5%; payments aggregating $6,340 per month
Including interest; collateralized by vehicles 17,698
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527,421
Less amounts currently due 260,566
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266,855
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The following is a schedule by year of the principal payments required
on these notes payable and long-term debt (excluding the obligations under
capital lease) as of January (unaudited):
1999 $ 40,390
2000 26,104
2001 235,943
2002 2,586
During the year ended April 4, 1998, the Company sold the assets of
their five-gallon water business. The purchaser of these assets assumed the
notes payable and obligations under capital leases used by the Company to
finance these assets. The purchaser is responsible for making the payments on
these notes payable and obligations under capital leases; however, the
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Company remains contingently liable for any nonpayments on behalf of the
purchaser. The principal payments required on these notes payable and
obligations under capital leases are approximately $10,000 at January 2, 1999.
LEASE COMMITMENTS
Until July 1998 the Company rented its operating facility and still
leases various vehicles under operating leases that expire at various dates
from 1998 through 2002. The following is a schedule by year of future minimum
rental payments required under operating leases that have an initial or
remaining noncancelable lease term in excess of one year as of January 2, 1999
(unaudited).
1999 $ 12,000
2000 12,000
2001 4,000
Rent expense for the 9-month period ended January 2, 1999 was $19,488
and rent expense for the 9-month period ended January 3, 1998 was $21,883. Rent
expense from inception through January 2, 1999 was $49,932.
INCOME TAXES
No provision for income taxes is recorded due to the amount of tax
losses incurred since inception. The Company had unused net operating loss
carryforwards to carry forward against future years' taxable income of
approximately $1,258,000, which begins to expire in years after 2011. Temporary
differences giving rise to the deferred tax assets consist primarily of the
deferral and amortization of start-up costs for tax reporting purposes.
Management has established a valuation allowance equal to the amount of the
deferred tax assets due to the uncertainty of the Company's realization of this
benefit.
January 2, 1999
---------------
(unaudited)
Deferred tax assets:
Start up costs $ 663,000
Net operating loss carryforwards 675,000
----------
Gross deferred tax assets 1,338,000
Valuation allowance 1,388,000
----------
Total deferred tax asset $ 0
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Since inception, substantial changes of ownership of the Company have
occurred. Under federal tax law, this change in ownership of the Company will
significantly restrict future utilization of the net operating loss
carryforwards. Other than the net operating losses that have been limited
because of the change in ownership as described above, any other net operating
losses will expire if not utilized within 15 years of the year in which they
were incurred.
COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with terms ranging from one to
five years with its officers, which provide for minimum annual salaries. These
one-year agreements have automatic renewal provisions. The total salary
commitment under these agreements amounts to approximately $231,000 per year.
At January 2, 1999 the Company accrued approximately $137,156, in deferred
salaries related to these agreements. One of these officers resigned and,
therefore, reduced the annual future commitment of the Company by approximately
$77,000 per year.
During the year ended April 4, 1998, the Company entered into a "lead
generation/corporate relations agreement" with a term of one year which
required the Company to pay $400,000 on execution of the agreement and an
additional $400,000 contingent on the Company raising an additional $2,500,000
in a future common stock offering. The initial $400,000 payment was reflected
as a prepaid asset as of April 4, 1998. During the period ended January 2, 1999
(unaudited), Management determined that it was unlikely that the Company would
receive any future benefit of this amount and, therefore, expensed the
$400,000.
During the period ended January 2, 1999 (unaudited), a complaint
totaling approximately $235,000 was filed against the Company alleging that the
Company failed to pay for improvement made to the Company's production and
office building. Management of the Company has indicated that this complaint
centers on contested change orders. Management has recorded in payables
approximately $141,000, their estimate of the possible outcome of this
complaint.
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STOCK
In December 1996, the company issued 259,500 shares to individuals for
consulting services performed. These shares were valued at $.50 per share, In
addition, in April 1997, the Board of Directors approved the issuance of
750,000 shares to two of its officers for services rendered. These shares were
also valued at $.50 per share, Management's estimate of the fair market value
of the stock at that time.
The Company entered into two agreements for services to be performed
during the year ended April 4, 1998. Each agreement contained options to
acquire 200,000 shares of common stock at $.25 per share. These services were
valued at the difference between the fair market value of the underlying common
stock of the options on the date of grant and the $.25 per share exercise
price. These options were exercised and resulted in total cash consideration
paid to the Company of $100,000. The costs of these agreements were expensed
because the services were performed.
In April 1997, the Company issued 62,500 shares of common stock to
directors and employees for services rendered. These shares were valued at $.50
per share, the fair market value of the common stock.
The following is a summary of options, common stock issued for
services, and $100,000 received on exercise of the options during the year
ended April 4, 1998:
Month Number of shares Amount
----- ---------------- ------
April 1997 812,500 $406,250
September 1997 (including $100,000 received) 400,000 920,000
March 1998 100,000 175,000
--------- ----------
1,312,500 $1,501,250
========= ==========
In August 1998, the Company entered into two subscription agreement
with unrelated third parties to issue 1,000,000 shares for $1,000,000. Under
the terms of these agreements, the $1,000,000 was due in four equal
installments beginning in August 1998. Subsequent to the receipt of the first
installments ($250,000 total), this subscription agreement was cancelled and
the Company issued 250,000 shares of common stock to the individuals. At the
time the Company entered into the agreements, the stock was trading an $1.75
per share; consequently, the Company effectively recorded a $187,500 dividend
to these unrelated parties for the difference between the trading price and the
purchase price of these 250,000 shares which were issued at $1 per share.
During the year ended April 4, 1998, the Company issued 2,500 shares
of Series A convertible preferred stock. These shares are nonvoting, and the
holders are entitled to receive an eight-percent annual dividend and have a
liquidation preference of $1,300 per share. These preferred share are
convertible at any time at the option of the holder into common shares equal to
$1,000 divided by the lower of (i) 65 percent of the average market price of
the common stock for the five trading days prior to the conversion date, or
(ii) $1.875. The Series A preferred shares contain a provision that the Company
shall increase the conversion rate by five percent for each of the following
occurrences:
Failure to file a registration statement under the Securities Act of
1933 covering the common stock within 30 days of closing date;
Failure of the registration to become effective within 120 days of
closing date; and
Failure to issue the common shares within the time limits set forth in
the amended articles of incorporation.
These shares, if converted using the aforementioned 65 percent of the
average market price of the common stock as of April 4, 1998, would convert to
a maximum of 2,197,802 common shares. These shares, if converted at January 2,
1999 would convert to over 30,000,000 shares. Subsequent to April 4, 1998, the
Company failed to register the shares within the 120-day time frame, and the
maximum amount of shares increased to five percent as a result.
Considering the beneficial conversion feature of the 2,500 Series A
convertible preferred shares, the Company allocated $1,417,391 of the proceeds
raised from the issuance of these shares, which represents the intrinsic value
of the conversion feature to additional paid-in capital. The amortization of
this discount is charged against retained earnings and increases preferred
stock analogous to a dividend distribution based on the demand conversion.
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STOCK OPTIONS
As part of a "lead generation/corporate relations agreement" the
Company issued 250,000 options to acquire common stock. These options are
exercisable at the rate of 50,000 per year at prices ranging from $3.50 to
$7.00 or upon the Company's raising its next tranche of $2,500,000.
The Company applies APB Opinion 25 in accounting for its stock
options. The exercise price of these options exceeded the fair value of the
underlying common stock on the grant date and, therefore, there are no
compensation costs recognized under APB Opinion 25.
The options issued were for future services. Had compensation cost for
the options granted been determined based on the fair value at the grant date
under methods prescribed by FASB Statement No. 123, the Company would have
recorded a prepaid asset of approximately $359,000. This would be amortized as
compensation cost over the next five years as the services are provided to the
Company.
Following is a summary of stock option activity from inception through
January 2, 1999:
Number of Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at August 17, 1995 0
Granted during the year ended April 4, 1998 650,000 $ 2.08
Exercised 400,000 .25
------- -------
Outstanding at January 2, 1999 250,000 $ 5.00
======= =======
Following is a summary of options outstanding at January 2, 1999:
Exercise Number Weighted Average Remaining Exercise
Price of shares Contractual Life Date
-------- --------- -------------------------- -----------------
$ 3.50 50,000 1 November 17, 1998
$ 4.20 50,000 2 November 17, 1999
$ 4.70 50,000 3 November 17, 2000
$ 5.60 50,000 4 November 17, 2001
$ 7.00 50,000 5 November 17, 2002
The exercise date of the above options is the latter of the above
dates or the Company's raising its next tranche of $2,500,000.
The weighted average fair value of the options at their grant date
during the year ended April 4, 1998 was $4.14. The estimated fair value of each
option granted is calculated using the Black-Scholes option-pricing model. The
following summarizes the weighted average of the assumptions used in the model:
Risk-free interest rate 5.79%
Expected years until exercise 3
SUBSEQUENT EVENTS
During the period ended 01/02/99, two of the officers left the
Company, but remained on the Board of Directors. The remaining officer of the
Company entered into a series of equity transactions, which were not properly
authorized by the Board of Directors. These equity transactions included
authorization of 49,500,000 shares of Series B convertible stock, and the
authorization of options for 3,600,000 shares of common stock. It is the
opinion of the current Board of Directors that these equity transactions were
not properly authorized and, therefore, are not valid transactions. The B
Preferred Stock is not included in any calculations with regard to stock of the
Company.
The two officers who had previously left the Company returned and the
remaining officer resigned from the Company and the Board of Directors. The
remaining current Board of Directors then individually entered into a series of
promissory notes with the Company for unpaid salaries and cash advances
totaling $117,297. Subsequent to January 2, 1999 these notes have increased to
approximately $200,000. These notes are demand instruments at five-percent
interest and are secured by blanket security agreements on all of the assets of
the Company, UCC filings on the Company's non-realty assets and mortgages on
the Company's realty.
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On January 21, 1999 the Company reduced the legal fees and costs
($45,480) owed to its litigation counsel and its corporate counsel to a
promissory note. The promissory note is a demand instrument at 5% simple
interest. A mortgage on the Company's realty secures the note. The note,
security agreement, and mortgage include any future fees or costs advancements.
On February 11, 1999 the Company received a loan from a group of the
Company's shareholders, who are neither officers nor directors. Under the loan
terms $250,000 was made available over ninety days. The 10% interest rate is
payable in cash or stock. A blanket Security Agreement on all of the Company's
assets, a UCC filing on the Company's non-realty assets, and a mortgage on the
Company's realty secures the note. The note, security agreement, UCC filing and
mortgage include any future advancements of additional funds. As additional
consideration the Company will issue 25 shares of the to be created Series C
Convertible Preferred Stock to the loaning shareholders.
Subsequent to January 2, 1999, the Company's Board of Directors
decided to create a Series C Convertible Preferred Stock and authorize 500
shares of the Series C Convertible Preferred Stock. The C Preferred Stock is
not included in any calculations with regard to stock of the Company.
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AQUA CLARA BOTTLING AND DISTRIBUTION INC.
PART II
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's sales commenced in April 1997 with the introduction of
its 5-gallon bottled water service. In the nine months ended January 3, 1998
the Company had $120,307 in sales from this business. Revenues were comprised
of cooler rentals and water sales, which terminated in March 1998. The Company
intends with the proceeds of its recent offering of Series A Preferred Stock to
enter the PET bottled water market. The sales for the first nine months ending
January 2, 1999 are $116,491. This lower than expected sales level is because
the company has not been able to find a major supplier to purchase large
quantities of product. Although the company is presently talking to many large
interested customers, to date no contracts or purchase orders have been
completed. Unless a large customer is found, the next three months sales
figures will only show a modest increase.
The Company's sales comparisons to previous years will not be an
indicator of any future growth patterns because the Company is still in the
development stage of trying to launch a new product.
The gross profit for the period ended January 2, 1999 was $4,677 which
was due to the large amount of product given out as samples to try to introduce
the product into the market.
The Selling and General Administrative expenses for the nine-month
period ending January 2, 1999 were $1,331,178. Non-recurring expenses included
$400,000 for lead generation corporate/relations contract from the prior year
that was totally expensed in the current year.
Sales of PET products did not commence until July 1998. The Company
has no agreements in place with distributors for its PET bottled water products
and there can be no assurance as to future operating revenues from this
business. The Company sold its 5-gallon water business in March 1998 to
Clearidge, Inc., a Tennessee corporation located in Nashville Tennessee and a
competitor to the Company. Neither the Company nor any of its officer or
directors is affiliated with Clearidge. The purchase price of approximately
$352,394 was paid $186,400 in cash and $134,000 by the assumption of
installment notes payable, and includes accounts receivable, inventory,
equipment and deposits. See the notes to Consolidated Financial Statements. If
the 5-gallon water business had not been in existence for the years ended April
4, 1998 and March 31, 1997, the Company would have had no sales in either year,
and would have had $1,870,529 in general and administrative expenses and
$1,881,903 in net losses in fiscal 1998, compared to $315,985 and $366,527 in
general and administrative expenses and net loss, respectively.
The Company does not intend to manufacture PET water products without
firm orders in hand for its products. However, the Company intends to expend
costs over the next twelve months in advertising, marketing and distribution,
which amounts are expected to be expended prior to the receipt of significant
revenues. There can be no assurance as to when, if ever, the Company will
realize significant operating revenues nor attain profitability, if ever.
LIQUIDITY AND CAPITAL RESOURCES
As of January 2, 1999 the Company has a working capital deficit of
approximately $840,000. At January 2, 1999, the Company's daily operating cash
needs were being supplied by the Directors of the Company The current Directors
were making secured loans to the Company to keep the Company operations going.
The Directors were able to invest enough capital in the Company to keep the
Company open and operational until February 1999.
Subsequent to January 2, 1999 a group of the Company's shareholders
have loaned the Company $250,000 which is the needed capital to continue until
May 1, 1999. This loan, made on February 11, 1999, is secured by the assets of
the company and is a demand note.
It is planned to continue to search for investors or partners to
invest the additional monies required in keeping the Company operational. If
the Company can not attract additional capital then the ability of the Company
to continue is in doubt. The Company has no plans or arrangements in place with
respect to additional capital sources at this time. The Company has no lines of
credit available to it at this time. There is no assurance that the current
Board of Directors or the Company's other shareholders will loan additional
money necessary for operations.
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Although the Company expects to have losses in the fourth quarter, the
management believes that the losses will decrease and a break-even point could
be possible in the forth quarter of this year. Inflation has not had a
significant impact on the Company's results of operations.
BUSINESS AND PLAN OF OPERATION
GENERAL
Aqua Clara Bottling & Distributors, Inc., a Colorado corporation (the
"Company") organized on July 29, 1996 is the successor to Pocotopaug
Investment, Inc., a Florida corporation and the Company's operating subsidiary
("Pocotopaug"). Pocotopaug was organized in August 1995 by John S. McAvoy to
investigate the feasibility of producing and marketing non-sparkling drinking
water products. The Company produces and sells non-sparkling purified drinking
and distilled and natural water products.
Since April 1997, the Company has generated revenues from its 5 gallon
home and office delivery business, which was sold in March 1998, and the
Company now intends to focus its future operations in the sale of oxygen
enriched water packaged in PET containers ranging from .5 liter to 1.5 liters,
and to specialize in oxygen enriched water; with 40 parts per million (ppm) of
oxygen, compared to 7 ppm for tap water. Oxygen richness imparts a light and
crisp taste and management believes that oxygen enriched water is healthier,
although no studies have been made to underlie this conclusion.
According to Beverage Marketing (published by Beverage Marketing
Corp., located at 2670 Commercial Avenue, Mingo Junction, Ohio 43938), the
total U.S. market for bottled water has grown from 1.6 billion gallons sold in
1987 to over 3.1 billion gallons in 1996, and accounted for approximately $3.6
billion in wholesale sales during 1996 and non-sparkling water comprises over
87% of the U.S. bottled water market and generated $2.7 billion of wholesale
sales in 1996, and is expected to continue to grow in the future (Beverage
Marketing has no affiliation with the Company or any of its affiliates). PET
(an acronym for polyethylene terephthalate, a premium clear plastic) packaged
products comprise approximately 39% of the domestically produced non-sparkling
water market and have grown from approximately 83 million gallons in 1987 to
approximately 580 million gallons in 1996, representing a compounded annual
growth rate of approximately 24%. PET-packaged products accounted for
approximately $921 million of wholesale sales in 1996. According to Beverage
Marketing, PET bottled water is among the fastest growing beverage categories
in the United States. Contributing to the growth in consumption of
non-sparkling water are consumer trends including health and fitness awareness,
municipal tap water quality concern and maturing soft drink demand, as well as
consumer demand for convenience and innovative packaging.
INDUSTRY OVERVIEW
The U.S. bottled water market is comprised of three segments:
domestically produced non-sparkling water, domestically produced sparkling
water and imported water, which constituted approximately 65%, 21% and 14%,
respectively, of 1996 U.S. bottled water wholesale sales, according to Beverage
Marketing. The domestically produced non-sparkling water category includes
natural spring water obtained from naturally occurring springs, well water,
distilled water and purified water. Unlike other beverages, bottled water
serves both as a tap water substitute and a refreshment beverage.
Consumer Trends. Contributing to the growth in consumption of
non-sparkling water are consumer trends including health and fitness awareness,
municipal tap water quality concern and maturing soft drink demand, as well as
consumer demand for convenience and innovative packaging. Bottled water,
particularly when packaged in premium PET bottles with sport caps, appeals to
consumers who are sports enthusiasts or whose lifestyles are oriented to health
and fitness. According to Beverage Marketing, consumers' concern over the
quality of municipal water supplies has contributed to an increase in bottled
water consumption. Bottled water has also become an alternative to other
beverages, including soft drinks. According to Information Resources, Inc.
("IRI"), total U.S. gallons sold of soft drinks through food store channels has
increased approximately 10% from 1994 through 1996. (Information Resources
Inc., is located at 150 Clinton Street, Chicago, Illinois 60661 and has no
affiliation with the Company or any affiliate thereof.) Over the same time
period, gallons sold of ready-to-drink juices have increased approximately 1%.
In contrast, non-sparkling bottled water gallons sold have increased
approximately 21% from 1994 to 1996, according to Beverage Marketing. Bottled
spring water is natural and caffeine and additive free. These attributes and
the increased availability of convenient packaging for natural spring water
have contributed to the increase in bottled water consumption.
Distribution Channels. Non-sparkling bottled water is generally sold
to end users through four channels. According to Beverage Marketing, the total
share of the bottled water market for each channel is as follows: (I)
off-premise retail, which consists of supermarket, convenience store and drug
store chains and other similar retail outlets (44.9%); (ii) home and office
delivery
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which primarily consists of 5-gallon containers (39.0%); (iii) on-premise
retail, which includes restaurants, delicatessens and other similar sites
(8.3%); and (iv) vending (7.8%).
Non-sparkling bottled water is generally delivered to customer
locations through direct-store-delivery ("DSD") or warehouse distribution
systems. DSD involves delivery of the product directly to the store's location
where consumers may purchase the product. Warehouse distribution systems
involve the delivery of truckloads of palletized products to the warehouses of
regional customers which, in turn, deliver the product directly to the
customer's retail sales locations.
Private Label. Private label products have become increasingly popular
among retailers and other customers. For example, supermarket sales of private
label products grew 8.5% in 1996 versus 1.4% growth among branded products,
according to IRI. Retailers benefit from having a range of private label and
branded products as well as from the customer affinity developed from the
reinforcement of the retailer's own brand. Other non-retailing customers find
it more efficient to source products from a private label manufacturer than to
produce the products themselves. Both types of customers often choose private
label bottled water producers on the basis of price, consistent product
quality, packaging capability, distribution capability and customer service.
Consolidation. The trend toward consolidation in the bottled water
industry is evidenced by the reduction in the number of bottled water filling
locations and the corresponding increase in volume produced at most locations
over the past ten years. According to Beverage Marketing, in 1996 there were
approximately 350 filling locations in the United States versus approximately
425 in 1986, a decrease of 17.6%. The number of filling locations with sales
over $75 million doubled to eight from 1995 to 1996. Larger companies are
seeking to expand their share within a market, obtain broader distribution and
achieve economies of scale with larger volume production.
PRODUCTS
Five-Gallon Home and Office Delivery. Although the focus of the
Company's business will be the production and distribution of oxygen enriched
water, the Company had an active 5-gallon home and office delivery business.
The Company delivered spring, purified drinking and distilled waters to
Pinellas County businesses and homeowners. Pinellas County is located
approximately six miles west of Tampa, Florida on the west central coast of
Florida. The Company owned and rented state-of-the art water coolers, which it
rented to its 5-gallon customers. The Company began its 5-gallon distribution
business in April, 1997. The Company sold this business in March 1998.
Oxygen Enriched Bottled Water. The Company's primary focus will be the
production/distribution of oxygen enriched bottled water in small package, PET,
containers ranging in size from .5 liter to 1.5 liters. The points of purchase
will include grocery stores, convenience stores, gas station markets, health
spas and vitamin/health food stores.
The Company's oxygen enriched bottled water will be made by combining
super purified water and oxygen. Through water purification processing the
source water will be reduced to 1-2 parts per million of total dissolved solids
and then oxygen will be introduced through a unique, proprietary process. As a
point of reference, the Food and Drug Administration's (FDA) definition of
distilled water is 5 parts per million or less of total dissolved solids. As
such, the base water will be of distilled quality, although the distillation
process will not be used.
The Company's market research, undertaken by a non-affiliated research
firm, has indicated that no specific medical claims have to be made to
consumers with regard to its product. According to this market research the
public will readily accept the necessity and benefits of both highly purified
water and oxygen.
There are no significant competitors producing oxygen enriched bottled
water. The Company knows of two other entities that are attempting to produce
and distribute oxygen enriched bottled water. None of the well-established
traditional bottled water distributors has an oxygen enriched bottled water
product.
The Company's oxygen enriched water will contain approximately 40
parts per million of oxygen. Normal water contains approximately 7 parts per
million of oxygen. As such, the Company's oxygen enriched bottled water will
contain approximately 500 - 600% more oxygen than conventional bottled water
products. Oxygen is literally the breath of life; oxygen is a natural energizer
and body purifier. Oxygen is odorless and tasteless, as well as non-carbonated.
As such, the Company's water tastes like a fine premium bottled water - light
and crisp. Oxygen does not produce the unhealthy "jolt" associated with
caffeine products. Rather, it is believed to create a feeling of physical well
being and mental clarity. There can be no assurance, however, that the
Company's products will achieve consumer acceptance. Consumer preferences are
inherently subjective and subject to change.
Oxygen is currently in the public view as an "additive" to a range of
consumer products. There are currently oxygen bars in Toronto, New York City
and the Los Angeles area. Oxygen in beverages has received recent widespread
media coverage through television, radio and print media.
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Initially, the Company will not carbonate or flavor its water. After
the introductions of Company's oxygen enriched bottled water product, the
introduction of a new product with natural flavoring or carbonation will be
considered. Likewise, the Company will consider the infusion of beneficial
herbs. The Company will also consider the production of super oxygen enriched
sports drinks, providing even higher levels of oxygen, to be marketed at a
higher price. The Company will utilize a distinctive bottle and label for its
water products.
STRATEGY
The Company's objective is to build product-enriched water in Florida,
concentrating on the Tampa area, and then expand nationally. Aspects of the
Company's strategy include the following.
The Company intends to enter into distribution agreements with 2-4
non-affiliated partners. The Company intends to use these distributors, as well
as its own production/distribution facility, as operational models. The Company
then intends to expand into multiple markets.
The Company's oxygen enriched small packaged bottled water product
will primarily be sold through retail outlets, including convenience stores,
gas station markets, grocery stores, health food stores, and health spas.
However, secondary distribution will be effected through vending and private
labeling. Neither vending nor private labeling have the attendant costs of
direct retailing, while they do have the benefit of increasing the production
volume and thereby increasing the production margins.
Although the Company will distribute its own product in certain areas,
primarily the Company will sell to qualified third party distributors. These
third party distributors will have the right to distribute to retail outlets in
defined geographic areas. A large number of potential distributors have already
contacted the Company regarding potential distribution of its oxygen enriched
bottled water. The Company is discussing distribution possibilities at this
time but has no contracts for distribution.
PRODUCTION
The three components of production are the building, the water
processing and bottling equipment, and the labor force.
Building. The Company currently owns a 10,800 sq. foot building
located on 2.1 acres in Clearwater. The Company has completed the remodeling
and is in full production as of July 1, 1998. The building has a small mortgage
of approximately $275,000. The remodeling costs were approximately $600,000. At
the present time a dispute over the balance due to pay for the remodeling is
being addressed. The disputed amount is approximately $100,000. (see legal
proceedings)
Equipment. The Company has investigated and inspected various
equipment to comprise various sized plants. The equipment can be divided into
two general categories - water processing and bottling. The water processing
equipment will not vary significantly from plant to plant, while the bottling
equipment will vary depending on the size of the plant to be constructed. A
medium size plant is capable of producing 2,560 cases per 8-hour shift, while
running at 80% capacity. The Company is under contract for delivery of all of
the equipment.
Water processing and bottling equipment for a medium size plant costs
approximately $750,000. These costs include shipping, installation and initial
technical training. The equipment, including material handling equipment,
bottling and labeling equipment, conveyor systems and water treatment systems,
was received and installed in April, 1998. The plant's equipment has been fully
installed and is fully operational as of July 1, 1998. The equipment is running
as expected.
Labor Force. The larger and faster the bottling line, the less
manpower is required due to increased automation. In general, the bottling
facility will require four employees per shift.
WATER SOURCES
Under FDA guidelines, bottled water must contain fewer than 500 parts
per million ("ppm") in total dissolved solids. Varying amounts of solids
provide different tastes to water. The Company uses FDA and International
Bottled Water Association approved water sources.
Upon delivery to the Company's facilities, the source water runs
through a number of filtration, ion exchange, and reverse osmosis processes by
which it is reduced to a very pure 1-2 parts per million of total dissolved
solids. Water is oxygenated by first removing dissolved gasses from the water
following which medical grade oxygen is infused through a proprietary process.
The water is then treated with ultraviolet light, which effectively kills
bacteria and other micro-organism before delivery to the bottling area where
the various products are filled and capped. The residual ozone in the bottled
products sanitizes the containers as well as
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the water, making certain the water is pure. The clean room is filled and
pressurized with air from two high-volume HEPA (High Efficiency Particulate
Air) air handlers that filter 99.97% of particulates out of the air.
The manufacturing process is designed to be highly automated. Bottles
are mechanically de-palletized, cleaned, rinsed, filled and capped. The bottles
are automatically labeled, tamper banded, assembled and packed in cases. After
palletizing and stretch wrapping, the product is either loaded directly onto a
truck for immediate shipment or is stored in a warehouse for future shipment.
Most products are shipped within 48 to 72 hours after production via outside
carriers.
The Company will maintain exacting internal quality control standards.
Each batch of water will be tested according to FDA and International Bottled
Water Association standards.
COMPETITION
The bottled water industry is highly competitive. According to
"Beverage Marketing", there are approximately 350 bottled water filling
locations in the United States with sales increasingly concentrated among the
larger firms. According to "Beverage Marketing", the ten largest bottled water
companies accounted for approximately 58.4% of wholesale dollar sales in 1996.
Nearly all of the Company's competitors are more experienced, have greater
financial and management resources and have more established proprietary
trademarks and distribution networks than the Company. On a national basis, the
Company competes with bottled water companies such as The Perrier Group of
America, Inc. (which includes Arrowhead Mountain Spring Water, Poland Spring,
Ozarka Spring Water, Zephyrhills Natural Spring Water, Deer Park, Great Bear
and Ice Mountain) and Great Brands of Europe (which includes Evian Natural
Spring Water and Dannon Natural Spring Water). The Company also competes with
numerous regional bottled water companies located in the United States and
Canada. Aqua Clara has chosen to compete by focusing on innovative packaging,
customer service and pricing.
SEASONALITY
The market for bottled water is seasonal, with approximately 70% of
sales taking place in the seven months of April through October inclusive. As a
result of seasonality, the Company's staffing and working capital requirements
will vary during the year.
TRADEMARKS
The Company has registrations in the U.S. Patent and Trademark Office
for the trademarks that it uses, including Aqua Clara. The Company believes
that its common law and registered trademarks have significant value and
goodwill and that some of these trademarks are instrumental in its ability to
create demand for and market its products. There can be no assurance that the
Company's common law or registered trademarks do not or will not violate the
proprietary rights of others, that they would be upheld if challenged or that
the Company would, in such an event, not be prevented from using the
trademarks, any of which could have an adverse effect on the Company. (see
legal proceedings)
REGULATION
The Company's operations are subject to numerous federal, state and
local laws and regulations relating to its bottling operations, including the
identity, quality, packaging and labeling of its bottled water. The Company's
bottled water must satisfy FDA standards, which may be periodically revised,
for chemical and biological purity. The Company's bottling operations must meet
FDA "good manufacturing practices," and the labels affixed to the Company's
products are subject to FDA restrictions on health and nutritional claims. In
addition, bottled water must originate from an "approved source" in accordance
with federal and state standards.
State health and environmental agencies, such as the Florida
Department of Agriculture and consumer services, also regulate water quality
and the manufacturing practices of producers.
The Company's current products satisfy Florida and Federal
requirements and its proposed products will satisfy all applicable state and
federal requirements in all 50 states. These laws and regulations are subject
to change, however, and there can be no assurance that additional or more
stringent requirements will not be imposed on the Company's operations in the
future. Although the Company believes that its water supply, products and
bottling facilities are and will be in substantial compliance with all
applicable governmental regulations, failure to comply with such laws and
regulations could have a material adverse effect on the Company.
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Y2K
The Company is conducting an ongoing review of its computer systems
and those of its vendors, suppliers and customers to determine compliance with
the Y2K issue. As of this date, it appears that all systems are in compliance
but there can be no complete assurance of this. The Company plans to continue
its ongoing investigations.
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AQUA CLARA BOTTLING AND DISTRIBUTION INC.
PART II
OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings, except
as set forth below.
Civil litigation in the Circuit Court of the Sixth Judicial Circuit in
and for Pinellas County, Florida, was filed by JOHN C. PLUNKETT, RAND L. GRAY,
AND ROBERT GUTHRIE, on behalf of themselves and all other similarly situated
stockholders of AQUA CLARA BOTTLING & DISTRIBUTION, INC., a Colorado
corporation, Plaintiffs vs. AQUA CLARA BOTTLING & DISTRIBUTION, INC., a
Colorado corporation, Defendants, Case No: 98-7528CI-007. This case was a
three-count action consisting of a demand for Injunctive Relief, Declaratory
Action, and a count for Shareholder Inspection of Documents. The case was filed
on November 18, 1998. A hearing was held on November 19, 1998 which resulted in
an "Order on Temporary Injunctive Relief", and a subsequent "Order of Referral
to Mediation", dated November 20, 1998. During the litigation, John McAvoy,
President and Chairman of the Board resigned, the three named plaintiffs
resumed their position on the board, and the case was voluntarily dismissed on
December 15, 1998. A final Disposition Form was filed with the clerk of the
court December 21, 1998. Subsequent to January 2, 1999, the court has entered
an entry of dismissal.
Civil litigation in the County Court of the Sixth Judicial Circuit in
and for Pinellas County, Florida, was filed by SGN, Inc., Plaintiff, vs. Aqua
Clara Bottling & Distribution, Inc. a Colorado corporation, Defendant, Case No:
98-2478-SP-19-F. It is a two-count complaint served on December 28, 1998,
consisting of Open Account and Breach of Contract. The Plaintiff seeks payment
on alleged open invoices for commissions due in the amount of $4,900 further
alleging that the invoices are the result of contract for sales representation
throughout the East Coast of the United States. Subsequent to January 2, 1999,
settlement has been reached, dismissing the litigation and releasing both
parties from any further contractual obligations or liabilities.
Civil litigation in the Circuit Court of the Eighteenth Judicial
Circuit, in and for Seminole County, Florida, was filed by Mainstream
Construction Group, Inc., a Florida Corporation, Plaintiff vs. Aqua Clara
Bottling & Distribution, Inc., Defendant, Case No. 98-2336-CA-15-B. The
complaint is a two-count complaint for Breach of an Oral Contract and Quantum
Meruit. The Plaintiff seeks $236,938 alleging the Company failed to pay for
improvements to the corporation's production and office building. The Company
may be liable for $141,000 of improvements to the property. The dispute appears
to be centered on contested change orders. The matter is pending arbitration.
Civil litigation in the United States District Court for the Middle
District of Florida by Life International Products, Inc., a California
Corporation, Plaintiff vs. Aqua Clara Bottling and Distribution, Inc., and
Corporate Relations Group, Inc. Florida Corporations, Defendants, Case No:
98-411 CIV FTM 26. The three-count complaint alleges causes of action
consisting of False and Deceptive Advertising, Common Law Unfair Competition,
and Injunctive Relief. The Company filed a Motion to Dismiss the Complaint that
was granted on February 17, 1998. As of December 15, 1998 Life International
has refiled this suit in another county of Florida. The Company believes that
the Company will prevail again.
Donald Huggins and Gerald Couture, two individuals that were allegedly
appointed to the Company board of directors by former President and Chairman of
the Board, John McAvoy, asserted that they were properly appointed to the
reconstituted board and were current board members. The Company Board of
Directors consisting of Messrs. Plunkett, Gray and Guthrie have taken a
contrary position. The Company entered into a settlement agreement, dated
February 2, 1999, with Messrs. Couture and Huggins by which they relinquished
any claim to status as member of the Board of Directors or officers. The
agreement requires the Company to transfer to them 100,000 shares of
unregistered common stock, with the rights to inclusion in any new
registrations, to such additional shares as will prevent the dilution of their
interest, and to redemption for $10,000 after six months if they so desire.
Thomas Vinton and Dennis Zweig have contacted the Company with
allegations that certain representations, which were made to them by the former
President and Chairman of the Board, John McAvoy, and upon which they relied in
making investments of $125,000 each in the Company, were not accurate. They have
offered to settle all outstanding claims for 125 share each of the to be created
Series C Convertible Preferred. The Company and its legal counsels are
evaluating the claim and their offer of settlement.
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AQUA CLARA BOTTLING AND DISTRIBUTION INC.
PART II
OTHER INFORMATION
ITEM 2
CHANGES IN SECURITIES
STOCK OPTIONS (11/3/98) AND THE SERIES B CONVERTIBLE PREFERRED STOCK
The Company's Articles of Incorporation authorize the Company to issue
super voting preferred stock converted from common stock. The written minutes
of the Board of Directors meeting held August 21, 1998 indicate that the
Company authorized a Series B Convertible Preferred Class. On September 18,
1998 Articles of Amendment Filed to Determine Rights of Shares (Certificate of
Determination) were filed with the Colorado Secretary of State authorizing
4,500,000 shares of Series B Convertible Preferred Shares. On October 12, 1998
John S. McAvoy, CEO, President and Director, gave notice of his intent to
convert 45,000 shares of Common Stock into 4,500,000 shares of B Preferred. On
November 10, 1998 an Amendment to the Articles of Amendment Filed to Determine
Rights of Shares (Certificate of Determination) was filed with the Colorado
Secretary of State increasing the Series B Convertible Preferred Class from
4,500,000 shares to 49,500,000 shares. On December 14, 1998 the Articles of
Amendment to the Articles of Incorporation cancelled the Series B Convertible
Preferred Class and reconverted any Preferred B Stock to the original number of
Common Shares.
The Company's position is that no such authorization action was taken
by the Board of Directors on August 21, 1998 and/or done in accordance with the
Articles and ByLaws of the Company. Further, the issuance of the B Preferred
Stock was not done in accordance with the Certificate of Determination.
Therefore, all subsequent actions by John S. McAvoy and anyone deriving
authority from his actions were without Board authorization and approval.
At the present time the Company's position is that no B Preferred
Stock can be outstanding. There are no individuals claiming to be holders of B
Preferred Stock. The B Preferred Stock is not included in any calculations with
regard to stock of the Company.
On November 3, 1998 Messrs. McAvoy, Huggins and Couture, acting as the
Board of Directors approved an option program for 6,000,000 shares of
non-dilutable Common Stock at an option price of ten cents per share with a
cashless exercise provision; issued options for 1,500,000, 750,000 and 750,000
shares to John S. McAvoy, Gerald Couture and Donald Huggins, respectively, and
issued options to six employees in the total amount of 600,000 shares. Messrs.
McAvoy, Huggins and Couture have rejected and/or waived their options.
The Company's position is that any such attempt to create a stock
option program or to issue stock options by John S. McAvoy and anyone deriving
authority from his actions were without Board authorization and approval for
the reasons stated above. These options are not included in any calculations
with regard to stock of the Company.
Subsequent to January 2, 1999, the Company entered into a settlement
agreement, dated February 2, 1999, with Messrs. Couture and Huggins by which
they relinquished any claim to status as members of the Board of Directors or
officers.
PREFERRED STOCK - SERIES C CONVERTIBLE
The Company's Articles of Incorporation authorize the issuance of
5,000,000 shares of preferred stock, no par value. Subsequent to January 2,
1999, the Company's Board of Directors decided to create a Series C Convertible
Preferred Stock and authorize 500 shares of the Series C Convertible Preferred
Stock. The Company intends to issue 25 shares to the shareholders pursuant to
the terms of the $250,000 loan. See Certain Transactions. The company may issue
125 shares each to Thomas Vinton and Dennis Zweig in settlement of their
claims. See Legal Proceedings. The Series C Convertible Preferred will
essentially have the same terms and conditions as the Series A Convertible
Preferred, which is convertible, at the option of the holder, into shares of
common stock at an initial Conversion Rate, subject to adjustments, at a number
of shares of Common Stock equal to $1,000 divided by the lower of (i)
Sixty-Five Percent (65%) of the average Market Price of the Common Stock for
the five trading days immediately prior to the Conversion Date (defined below)
or (ii) $1.875, increased proportionally for any reverse stock split and
decreased proportionally for any forward stock split or stock dividend. Market
Price for any date shall be the closing bid price of the Common Stock on such
date, as reported by the National Association of
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Securities Dealers Automated Quotation System ("NASDAQ") or the closing bid
price in the over-the-counter market if other than NASDAQ. The holders of
Series C Preferred have no voting rights, and have a liquidation preference of
$1,300 per share over the Common Stock. Dividends on the Series C Preferred are
payable at the rate of 8% per annum ($80 per share of Series C Preferred Stock)
payable on each July 1, in either cash, or in the option of the Company, Common
Stock valued at the Conversion Rate. The holders of the Series C Preferred
Stock have the right to receive, at the time of conversion, additional penalty
shares equal to an additional 5% if the Company does not deliver certificates
representing the Common Stock within 5 days of the date of conversion.
The C Preferred Stock is not included in any calculations with regard
to stock of the Company
The Company's Board of Directors has authority, without action by the
shareholders, to issue all or any portion of the authorized but unissued
preferred stock in one or more series and to determine the voting rights,
preferences as to dividends and liquidation, conversion rights, and other
rights of such series. The Company considers it desirable to have preferred
stock available to provide increased flexibility in structuring possible future
acquisitions and financing and in meeting corporate needs which may arise. If
opportunities arise that would make desirable the issuance of preferred stock
through either public offering or private placements, the provisions for
preferred stock in the Company's Articles of Incorporation would avoid the
possible delay and expense of a shareholder's meeting, except as may be
required by law or regulatory authorities. Issuance of the preferred stock
could result, however, in a series of securities outstanding that will have
certain preferences with respect to dividends and liquidation over the Common
Stock which would result in dilution of the income per share and net book value
of the Common Stock. Issuance of additional Common Stock pursuant to any
conversion right, which may be attached to the terms of any series of preferred
stock, may also result in dilution of the net income per share and the net book
value of the Common Stock. The specific terms of any series of preferred stock
will depend primarily on market conditions, terms of a proposed acquisition or
financing, and other factors existing at the time of issuance. Therefore, it is
not possible at this time to determine in what respect a particular series of
preferred stock will be superior to the Company's Common Stock or any other
series of preferred stock, which the Company may issue. The Board of Directors
may issue additional preferred stock in future financing, but has no current
plans to do so at this time.
The issuance of Preferred Stock could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company.
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24
AQUA CLARA BOTTLING AND DISTRIBUTION INC.
PART II
OTHER INFORMATION
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
(NONE)
24
25
AQUA CLARA BOTTLING AND DISTRIBUTION INC.
PART II
OTHER INFORMATION
ITEM 4
SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
(NONE)
25
26
AQUA CLARA BOTTLING AND DISTRIBUTION INC.
PART II
OTHER INFORMATION
ITEM 5
OTHER INFORMATION
MANAGEMENT
The following table sets forth certain information with respect to the
executive officers and directors of the Company. Each director holds such
position until the next annual meeting of the Company's shareholders and until
his respective successor has been elected and qualified. All officers devote
full time to the Company. The Company's Board of Directors may remove with or
without cause any of the Company's officers at any time.
DIRECTORS AND EXECUTIVE OFFICERS
The members of the Board of Directors of the Company serve until the
next annual meeting of stockholders, or until their successors have been
elected. The officers serve at the pleasure of the Board of Directors. The
following are the directors and executive officers of the Company.
John C. (Jack) Plunkett, 50, has been a Director and the
President/Chief Executive Officer/Chief Operating Officer since December 1998.
Prior to that Mr. Plunkett was a Director and the Vice President/Secretary/COO
since November 1, 1996. Mr. Plunkett has over twenty-five years of Business
management experience.
Rand L. Gray, 52, has been a Director and the Chief Financial Officer
since July 1997. Mr. Gray became the Treasurer in December 1998. Mr. Gray has
been an accountant and business manager for over twenty-five years.
Robert Guthrie, 64, has served as Director of the Company since May,
1997. Mr. Guthrie became the Secretary in December 1998. Mr. Guthrie is an
attorney licensed to practice in Florida with affairs in Seminole, Florida. Mr.
Guthrie also serves as a Director of the Pinellas Community Bank.
The Company also retains consultants with experience in the bottled
water industry on the issues of processing and bottling. All consulting
contracts are oral and at will and the total amount incurred for consulting
fees is less than $20,000.
The Company agreed to grant stock options to Mr. Plunkett and Gray in
the amount of 500,000 and 250,000 shares, respectively, in connection with
prior consulting agreements approved by the Board of Directors in December
1996. The Company has extended the one-year Amended Employment Agreements with
Messrs. Plunkett and Gray, providing for salaries of $77,000 each. Pursuant to
the terms of the original Amended Employment Agreements, dated January 20,
1998, the Company has reduced the accrued and unpaid 1997-98 salaries of
Messrs. Plunkett ($50,000) and Gray ($39,000) to promissory notes and secured
their interest with the assets of the Company. During October through December
1998 the Company received emergency loans from Messrs. Plunkett ($6,000), Gray
($8,000) and Guthrie ($5,000), which were reduced to promissory notes and
secured with the assets of the Company.
Subsequent to January 2, 1999, the Company on January 21, 1999 reduced
the remainder of the accrued and unpaid 1997-98 salaries of Messrs. Plunkett
($8,881.38) and Gray ($9,948.43) to promissory notes subject to the continuing
security interests. During January 1998 the Company received emergency loans
from Messrs. Plunkett ($7,762.79) and Gray ($19,407.74), which amounts were
reduced to promissory notes on January 21, 1999 subject to the continuing
security interests.
Subsequent to January 2, 1999, in a cost-cutting effort on March 1,
1999 the Company asked Mr. Gray to resign his full time position as Chief
Financial Officer and Treasurer. The Company and Mr. Gray agreed to mutually
terminate Mr. Gray's employment agreement.
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SUBSEQUENT MANAGEMENT EVENTS - CONTROL DISPUTE
The Company's Articles of Incorporation authorizes the Company to
issue super voting preferred stock converted from common stock. During August,
September, and October 1998 John S. McAvoy, the then President of the Company,
initiated a purposed authorization and issuance of 4,500,000 new Series B
Convertible Preferred Shares to himself. In October 1998, Mr. McAvoy took the
position that the other officers of the Company had resigned and on October 28,
1998 he executed a Consent action, exercising his purported rights as a holder
of 1,800,000 shares of Common Stock and 4,500,000 super voting stock, removing
Messrs. Plunkett, Gray and Guthrie from the Board of Directors, and electing
Donald Huggins and Gerald Couture. The Company's position is that since the
Colorado Business Corporation Act requires that shareholder consent actions, to
be valid, must be unanimous, that Mr. McAvoy's actions, assuming he held any
Series B Preferred, were insufficient to remove these three directors. In
November, the unauthorized board purportedly increased the number of authorized
Series B Preferred to 49,500,000 and issued options to purchase 3,600,000
shares of Common Stock at $.10 per share. On October 30, 1998 the Board of
Directors removed John S. McAvoy as President and elected Mr. Plunkett as
President. On December 15, 1998 the Company filed an amendment to its Articles
of Incorporation with the Colorado Secretary of State to eliminate the Series B
Preferred as an authorized class of stock. The Company cancelled the options.
Mr. McAvoy resigned as an officer and director November 24, 1998. Mr. Huggins
and Couture relinquished any claim to status as officers or directors in an
agreement with the Company dated February 2, 1999. See Legal Proceedings.
The Board of Directors, consisting of Messrs. Plunkett, Gray and
Guthrie are in control of the plant, offices and accounts of the company.
CERTAIN TRANSACTIONS
Mr. McAvoy founded Pocotopaug Investment, Inc. ("Pocotopaug") as a
Florida Corporation in August 1995. (Pocotopaug means "Clearwater" in a local
Indian dialect). Pocotopaug was capitalized in 1996 by $323,500 in bridge
loans. John C. Plunkett, an officer and director, invested $20,000 in bridge
loans. Unless otherwise noted, all references to the Company in this Prospectus
include the consolidated entity of Aqua Clara and Pocotopaug.
Aqua Clara Bottling and Distribution, Inc., was incorporated on July
29, 1996 in the State of Colorado and issued 835,000 shares of common stock
(including 192,650 shares to Mr. McAvoy) and 27,500 shares of preferred stock
to various investors for total consideration of $3,167.50. The preferred stock
has since been retired. The offering was made under Rule 504 as an offering
exempt from registration under the Securities Act of 1933.
On November 1, 1996, the director and officer of Aqua Clara, Danny L.
Wey, resigned and was replaced by Messrs. McAvoy and Plunkett. On November 23,
1996, Aqua Clara issued 1,645,250 shares of common stock to Mr. McAvoy in
exchange for all of the outstanding shares of Pocotopaug and issued 44,872
shares to Danny L. Wey. Mr. Wey subsequently has sold all of his unrestricted
shares on the public market and continues to hold the remaining 104,706
restricted shares held by him pursuant to Rule 144.
On March, 1997, the Pocotopaug bridge investors exchanged their
$323,500 in convertible debt into 796,500 shares of Company common stock under
Rule 504, including Mr. Plunkett who received 80,000 shares. In December 1996,
the Company issued 1,029,500 shares to 7 persons for services rendered valued
at $100,950. From December 27, 1996 to March 1997, the Company issued 1,283,000
shares of common stock in an offering under Rule 504 for $.50 per share, to 35
persons.
In December, 1997, the Company issued 20,000 restricted shares of
common stock to Olympus Capital for consulting services rendered prior to
September 30, 1997. In October 1997, the Company paid $375,000 and agreed to
issue 75,000 restricted shares to Olympus Capital, Inc. for the purpose of
assisting the Company in identifying investors willing to invest capital into
the Company in connection with the $2,500,000 private placement. Management has
netted theses costs against the proceeds and has allocated a portion of the net
proceeds as a cost of the 75,000 shares issued.
In September, 1997, the Company issued 200,000 shares of restricted
common stock to each of Gulf Atlantic Publishing and Arrow Marketing for
advertising services and creative design of marketing materials respectively,
and issued 25,000 shares for services to each of Robert Guthrie (a director)
and Richard Chrzanowski.
Gulf Atlantic Publishing and Arrow Marketing purchased 400,000 shares
at $.25 per share pursuant to an option agreement.
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On November 17, 1997 the Company entered into a Lead
Generation/Corporate Relations Agreement with Corporate Relations Group ("CRG")
pursuant to which the Company has paid CRG $400,000 and by which the Company
has agreed to pay CRG an additional $400,000 upon the Company raising its next
tranche of $2,500,000. Additionally, the Company agreed to issue options to
purchase 250,000 shares of common stock under the following terms:
Number of Shares Exercise Price Expiration Date
- ---------------- -------------- ---------------
50,000 $3.50 11/17/98
50,000 4.20 11/17/99
50,000 4.70 11/17/00
50,000 5.60 11/17/01
50,000 7.00 11/17/02
Subsequent to year-end the Company entered into two subscription
agreements to issue 250,000 shares for $250,000. Under the terms of these
agreements, the $250,000 was paid and the stock was issued and was included in
this statement.
At this time the Company does not anticipate requiring any additional
financing with CRG, and under the terms of the agreement the Company would
therefore have no further monetary obligations to CRG.
The Company agreed to issue 100,000 restricted shares to CRG, such
shares to be returned should the Company file and cause to be effective a
registration statement for the shares underlying the options within 120 days of
the date of the agreement (these shares have been issued). CRG was also granted
piggyback rights for these shares, which have been escrowed with the Company's
legal counsel. Under its agreement with the Company, CRG has agreed to perform
financial public relations services for the Company, consisting of
disseminating information about the Company to the investing public, for
$400,000 paid in cash in December 1997. Under the Core Broker program
undertaken by CRG, the Company will be required to host a due diligence trip
for up to ten retail brokers who demonstrate an interest in the Company's
Common Stock.
Mr. John McAvoy has loaned the Company amounts for working capital.
The loans are represented by promissory notes due on demand and bearing
interest of 6%. None of the loans have been repaid. The total owed is $15,000
with $1,500 loaned on March 15, 1996, $9,000 loaned on April 17, 1996, $4,000
loaned on July 19, 1996, and $500 loaned without a formal promissory note.
Mr. John McAvoy has (unsecured) Deferred salary of $46,480 as of
January 2, 1999.
Mr. John C. Plunkett's spouse is a significant stockholder in a
corporation, which has asserted an oral contract to distribute the Company's
product.
Pursuant to the terms of the original Amended Employment Agreements
dated January 20, 1998, on December 15, 1998 the Company reduced the accrued
and unpaid 1997-98 salaries of Messrs. Plunkett ($50,000) and Gray ($39,000) to
promissory notes and secured their interest with the assets of the Company. On
January 21, 1999 the Company reduced the remainder of the accrued and unpaid
1997-98 salaries of Messrs. Plunkett ($8,881.38) and Gray ($9,948.43) to
promissory notes subject to the continuing security interests. The promissory
notes are demand instruments at 5% simple interest. A blanket Security
Agreement on all of the Company's assets, a UCC filing on the Company's
non-realty assets, and a mortgage on the Company's realty secures each note.
Each note, security agreement, UCC filing and mortgage includes any future
accrued and unpaid salary.
During October through December 1998 the Company received emergency
loans from Messrs. Plunkett ($7,500), Gray ($8,000) and Guthrie ($5,000), which
amounts were reduced to promissory notes and secured with the assets of the
Company. During January 1998 the Company received emergency loans from Messrs.
Plunkett ($7,762.79) and Gray ($19,407.74), which amounts were reduced to
promissory on January 21, 1999 subject to the continuing security interests.
The promissory notes are demand instruments at 5% simple interest. A blanket
Security Agreement on all of the Company's assets, a UCC filing on the
Company's non-realty assets, and a mortgage on the Company's realty secures
each note. Each note, security agreement, UCC filing and mortgage includes any
future advancements of additional funds.
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29
Subsequent to January 2, 1999 the Company on January 21, 1999 reduced
the legal fees and costs ($45,480) owed to its litigation counsel, Mr. Michael
C. Berry, and its corporate counsel, Mr. Michael Geo. F. Davis, to a promissory
note. The promissory note is a demand instrument at 5% simple interest. A
mortgage on the Company's realty secures the note. The note, security
agreement, and mortgage include any future fees or costs advancements.
Subsequent to January 2, 1999 the Company on February 11, 1999
received a loan from a group of the Company's shareholders, who are neither
officers nor directors. Under the loan terms $250,000 was made available over
ninety days. The 10% interest rate is payable in cash or stock. A blanket
Security Agreement on all of the Company's assets, a UCC filing on the
Company's non-realty assets, and a mortgage on the Company's realty secures the
note. The note, security agreement, UCC filing and mortgage include any future
advancements of additional funds. Messrs. Plunkett, Gray, Guthrie and
Berry/Davis have subordinated their mortgages, where filed, to the mortgage of
the loaning shareholders. As additional consideration the Company will issue 25
shares of the to be created Series C Convertible Preferred Stock to the loaning
shareholders.
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30
AQUA CLARA BOTTLING AND DISTRIBUTION INC.
PART II
OTHER INFORMATION
ITEM 6
EXHIBITS AND REPORTS
EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3. Certificate of Incorporation and Bylaws
3.1 Articles of Incorporation(1)
3.2 Articles of Amendment for Series A Preferred Stock(1)
3.3 Bylaws(1)
10. Material Contracts
10.1 Amended Employment Agreement with John McAvoy(1)
10.2 Amended Employment Agreement with John C. Plunkett(2)
10.3 Amended Employment Agreement with Rand L. Gray(2)
10.4 Lead Generation/Corporate Relations Agreement dated November 17, 1997 with Corporate Relations Group, Inc. (1)
10.5 Extract of Board Resolutions dated April 3, 1997 and letter agreement with respect to Plunkett and Gray
consulting agreements(3)
10.6 Installment secured promissory notes(1)
10.7 Modification of Installment secured promissory notes(4)
16.1 Letter from BDO Seidman(3)
27 Financial Data Schedule (for SEC use only)
(b) REPORTS ON FORM 8-K: NONE
(1) Incorporated by reference to the original filing of the Registration Statement on Form SB-2, File No. 333-44315
(the "Registration Statement")
(2) Incorporated by reference to Amendment Number 1 of the Registration Statement
(3) Incorporated by reference to Amendment Number 2 of the Registration Statement
(4) Incorporated by reference to Amendment Number 4 of the Registration Statement
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: April 1, 1999 AQUA CLARA BOTTLING & DISTRIBUTION, INC.
By: /s/ John C. Plunkett
------------------------------------
John C. Plunkett
President and duly
authorized Officer
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