1
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 July 3, 1999
AQUA CLARA BOTTLING AND DISTRIBUTION, INC.
FLORIDA EIN 84-1352529
1315 Cleveland Street
Clearwater, Florida 33755-5102
(727) 446-2999
www.aquaclara.com
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 [X] No [ ]
The registrant had 22,295,707 shares of common stock, no par value,
outstanding as of July 3, 1999.
2
Part I:
Financial Information
(Item 1)
Aqua Clara Bottling & Distribution, Inc.
And Subsidiary
Consolidated Balance Sheet
July 3, 1999 (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 284,279
Accounts receivable, net of allowance for
doubtful accounts of $10,000 14,797
Inventories 81,444
Prepaid expenses 287,325
Other current assets 26,586
-----------
Total Current Assets 694,431
Property, plant, and equipment, net of accumulated depreciation 1,865,581
Other assets 1,506
-----------
$ 2,561,518
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, trade 327,666
Accrued expenses 11,998
Current maturities of long-term debt 18,149
Current obligation under capital lease 3,526
Due to stockholders 155,308
Other current liabilities 14,233
-----------
Total current liabilities 530,880
Long-term debt, less current maturities 1,088,037
Obligation under capital lease, less current portion 11,205
-----------
$ 1,630,122
Stockholders' equity:
Preferred stock; no par value, 5,000,000 shares
authorized; 1,521 shares issued and outstanding 1,134,695
Common stock; no par value, 50,000,000 shares
authorized; 22,295,707 shares issued and outstanding 4,544,504
Additional paid-in capital 1,417,391
Accumulated deficit (6,165,193)
-----------
$ 931,396
$ 2,561,518
3
Financial Information
(Item 3)
Aqua Clara Bottling & Distribution, Inc.
And Subsidiary
Consolidated Statements of Operations
3 months ended 3 months ended
July 3 '99 July 4 '98
(unaudited) (unaudited)
Sales $ 103,474 $ 19,111
Cost of sales 62,957 29,864
------------ ------------
Gross profit 40,517 (10,753)
General, administrative, and sales expenses 530,288 249,809
------------ ------------
Operating loss (489,771) (260,562)
Other income (expense):
Interest expense (14,063) (6,617)
Interest and other income 0 3,256
Gain (loss) on sale of assets (10,415) 0
Other expense 7,753 0
------------ ------------
Net other income (expense) (16,725) (3,361)
Net loss (506,497) (263,923)
Dividends on preferred stock:
Amortization of intrinsic value of conversion rights
Unpaid 8.0% cumulative dividend 49,863
Net loss applicable to common stock $ (506,496) $ (313,786)
Basic loss per share $ (0.03) $ (0.05)
Weighted average common shares outstanding 19,250,055 6,271,622
4
Part 1
Financial Information
(Item 4)
Aqua Clara Bottling & Distribution, Inc.
And Subsidiary
Consolidated Statements of Stockholders' Equity
(unaudited)
Additional Accumu- Sub-
Preferred Stock Common Stock Paid-In lated scription
Shares Amount Shares Amount Capital Deficit Receivable
Balances, April 3, 1999 1,676 1,250,284 16,160,523 3,670,870 1,417,391 (5,658,697) --
Conversion of preferred
stock 155 (115,589) 1,244,783 115,589 -- -- --
Issuance of common stock
for services 4,890,401 758,045 -- -- --
Net loss for period (482,385)
Balances, July 3, 1999 1,521 1,134,695 22,295,707 4,544,504 1,417,391 (6,141,082) --
5
Part 1
Financial Information
(Item 5)
Aqua Clara Bottling & Distribution, Inc.
And Subsidiary
Consolidated Statements of Cash Flows
3 months ended 3 months ended
July 3, 1999 July 4, 1998
(unaudited) (unaudited)
Operating activities:
Net Income (Loss) $ (506,496) $ (263,923)
Provided by Operations:
Depreciation 27,128 5,950
Issuance of Stock for Services 758,045 0
(Gain) Loss on Disposal of Assets 5,578 0
Allowance for Doubtful Accounts 0 0
Effect - Accounting Principle 0 0
Change in Assets & Liabilities:
(INC) Decrease in Accounts Receivable 33,288 (18,192)
(INC) Decrease in Employee Advances 0 0
(INC) Decrease in Inventories (18,715) (45,001)
(INC) Decrease in Prepaid Expenses (287,325) (3,518)
(INC) Decrease in Other Assets 0 0
INC (DEC) in Accounts Payable (98,817) 61,964
INC (DEC) in Accrued Expenses (236,350) 21,317
INC (DEC) in Other Liabilities (12,459) 0
INC (DEC) in Shareholder Accrual (214,758) 0
----------- -----------
Total Adjustments (44,385) 22,520
Net Cash Provided by Operation (550,882) (241,403)
Cash Flows from Investing
Acquisition of Equipment 0 (399,073)
Proceeds from Sale of Equipment 0 0
Purchases of Investments 0 0
Sales of Investments 0 0
INC (DEC) in Other Assets 0 30,019
----------- -----------
Cash Provided (USED) in Capital 0 (369,054)
Proceeds from Stock Issues 0 0
Proceeds from Debt 1,075,000 0
Payments on Debt (249,799) (4,170)
Proceeds from Due to Stockholders 0 0
----------- -----------
Cash Provided (USED) Investing 825,201 (4,170)
Net INC (DEC) in Cash & CE 274,319 (614,627)
Cash & CE at Begin of Year 9,960 733,618
Cash & CE at End of Year 284,279 108,991
6
Aqua Clara Bottling & Distribution, Inc.
And Subsidiary
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
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 3, 1999.
The results of operations for the three-month period ended July 3,
1999 are not necessarily indicative of those to be expected for the entire
year.
Organization, Background, Sale of Assets, and Going Concern
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.
On July 29, 1996, Aqua Clara Bottling & Distribution, Inc.
(hereinafter referred to as "Aqua Clara" or the "Company") 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.
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's common stock for all 1,000,000 shares of the outstanding stock of
Pocotopaug. The accompanying consolidated financial statements have been based
on the assumption that the Companies were combined for all periods presented.
During the year ended April 3, 1999 the Company began producing 20 oz.
bottles of oxygenated water. The Company will need to generate additional sales
or obtain additional financing to fund its operations. These factors, combined
with the fact that the Company has not generated any positive cash flows from
operations, raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments
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.
In March 1999 the Company entered into an agreement with a major
distributor in the Northeastern United States for distribution of their 20 oz.
bottles of oxygenated water. Subsequent to April 3, 1999 the Company raised
$1,075,000 through the issuance of a Class B Preferred Debenture. Common stock
shares totaling 5,000,000 are held in an escrow account for when the debentures
are converted. The proceeds of this debenture were used to retire the mortgage
on the building and the 90-day note to stockholders. The remainder of the
proceeds will be used to fund operations.
7
Significant Accounting Policies
The consolidated financial statements include the accounts of Aqua
Clara Bottling & Distribution, Inc. and its wholly owned subsidiary, Pocotopaug
Investments, Inc. All significant inter-company accounts and transactions have
been eliminated.
The financial statements for previous years reflected the Company as
being in the development stage. The accompanying financial statements present
the Company as no longer being in the development stage.
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 the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash equivalents consist of all highly liquid debt instruments
purchased with a maturity of three months or less.
Inventories are 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.
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 in accordance with the statements issued by the
Securities and Exchange Commission.
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 straight-line methods over the estimated useful lives of the
assets. Property under capital leases is amortized over the shorter of the
lease terms or the estimated economic life of the property.
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 approximated
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 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 same remaining maturities.
Basic loss per share is based on the weighted average number of common
shares outstanding during each period. The Company implemented SFAS No. 128
"Earnings Per Share" during the year ended April 4, 1998.
8
In computing dilutive earnings per share, the following were excluded
because their effects were antidilutive.
Year ended April 3, 1999 - Preferred shares convertible into common
stock and 2,173,382 contingently issuable shares.
Year ended April 4, 1998 - Preferred shares convertible into common
stock, options on 250,000 shares and 600,000 contingently issuable
shares.
The Company's fiscal year ends with the first Saturday in April.
During 1998 the AICPA issued Statement of Position (SOP) 98-5 that
requires companies to write-off start-up expenses in the year incurred and any
previously capitalized expenditures in the year adopted.
The Company adopted SOP 98-5 during the year ended April 3, 1999 and
recorded a $23,194 cumulative effect of a change in accounting principle as
required by the SOP ($0 per share).
Inventories consist of the following at July 3, 1999:
Raw materials $66,993
Finished goods 14,451
-------
$81,444
Property, plant, and equipment consist of the following at July 3,
1999:
Land $ 90,000
Building 926,520
Machinery and equipment 959,423
Vehicles 22,393
----------
1,998,336
Less accumulated depreciation (132,755)
----------
$1,865,851
The Company has reviewed its long-lived assets for impairment and has
determined that no adjustments to the carrying value of long-lived assets is
required.
Prepaid expenses for this fiscal year consist of marketing,
advertising, promotion of the product and company and the board of director
fees.
Due to stockholders' consists of the following at July 3, 1999:
Notes payable to stockholders due on demand with
interest accrued at 5% to 10% $ 36,274
Deferred salaries with interest accrued at 5% 119,034
--------
$155,308
Long-term debt at July 3, 1999 consists of:
Note payable: Secured 8% Series "B" Convertible
Debenture was raised in June 1999. Interest is
to be paid quarterly @ 8% per annum, with the
first payment due on 8/1/99 for $12,832.
The note will be converted into common stock.
Series "B" Convertible Debenture $ 1,075,000
9
Installment note payable; interest 10.5%;
payments $462 per month including interest;
collateralized by a vehicle 12,959
Installment note payable; interest 10.5%;
payments $627 per month including interest
[from five-gallon water business, will be
assumed in September]. 18,328
Long-term debt 1,106,186
Less current installments 18,149
Long-term debt, less current installments $ 1,088,037
During 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 Company remains contingently
liable. The principal payments required on these notes payable and obligations
under capital leases are approximately $45,487 at July 3, 1999.
At July 3, 1999 the Company is obligated under a long-term capital
lease for equipment. The following is a schedule by year of future minimum
lease payments under the capital lease.
2000 $ 4,439
2001 4,439
2002 4,439
2003 4,439
-------
Total lease payments 17,756
Less amount representing interest (6.5%) 2,165
-------
Present value of lease payments 15,591
Less current obligation 3,526
-------
Long-term capital lease obligation $12,065
At July 3, 1999 the Company rented vehicles and equipment under
operating leases. The following is a schedule by year of future minimum rental
payments required under operating leases that have an initial or remaining
noncancellable lease term in excess of one year as of July 3, 1999.
2000 $ 5,990
2001 4,998
2002 800
-------
$11,788
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 $2,087,000, which begin 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.
The components of deferred tax assets consist of the following at
April 3, 1999:
Deferred tax assets:
Start up costs $ 530,000
Net operating loss carryforwards 785,000
10
Gross deferred tax assets 1,315,000
Valuation allowance 1,315,000
----------
Total deferred tax assets $ --
Since inception, substantial changes of ownership of the Company have
occurred. Under federal tax law, these changes in ownership of the Company will
significantly restrict future utilization of the net operating loss
carryforwards. Other than the net operating losses, which have been limited
because of the change in ownership as described above, any other net operating
losses will expire if not utilized within beginning in years after 2011.
The Company has entered into agreements to issue stock subsequent to
April 3, 1999 for services to be performed during fiscal year 2000. The stock
to be issued is 1,165,000 shares at an estimated market value of approximately
$463,000.
11
Aqua Clara Bottling & Distribution, Inc.
And Subsidiary
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 year ended April 4, 1998, the
Company had $135,710 in sales from this business. Revenues were comprised of
cooler rentals and water sales, which terminated in March, 1998. With the
proceeds from its offering of Series A Preferred Stock, the Company entered the
PET bottled water market. The sales for the fiscal year ending April 3, 1999,
are $184,952. The lower than expected sales amount is the result of the
Company's inability to find a major distributor to purchase large quantities of
product until March, 1999. This agreement was reached too late in the year to
significantly affect annual sales figures.
The Company's sales comparisons to previous years will not be an
indicator of any future growth patterns because the Company was still in the
development stage of launching its new product.
The Gross Profit for the period ended July 3, 1999, was $40,517. The
Selling and General Administrative expenses for the fiscal year were $530,288.
Non-recurring expenses included $200,000 for generation of funding the Series
"B" Debenture and the mortgage payoff of $264,097.
The Company does not intend to manufacture bottled 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 or attain profitability.
LIQUIDITY AND CAPITAL RESOURCES
Subsequent to April 3, 1999, the Company raised $1,075,000 through the
issuance of a Class B Preferred Debenture. The proceeds of this raise were used
to retire the First Mortgage on the plant and real estate and the demand note
described in the above paragraph. The remainder of the raise will be used to
finance continued operation of the Company.
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 additional capital
will be available to the Company when or if required.
Although the Company expects to have continued losses in the 2nd
quarter of fiscal year 2000, management believes that the losses will continue
to decrease and a break-even point could be reached in the 3rd or 4th quarter
of this year. Inflation has not had a significant impact on the Company's
results of operations.
12
BUSINESS AND PLAN OF OPERATION
GENERAL
Prior information pertaining to Aqua Clara Bottling & Distribution,
Inc. can be found in the Annual Report for the fiscal year ended April 3, 1999.
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.
During the year ending April 3, 1999, the Company began producing
20 oz. bottles of oxygenated water packaged in a PET container. The Company's
oxygen enriched bottled water is made by combining super purified water and
oxygen. Through water purification processing the source water is reduced to
1-2 parts per million of total dissolved solids and then oxygen is introduced
through a unique proprietary process. As a point of reference, the Food and
Drug Administration's (FDA) definition of distilled water is no more than 5
parts per million of total dissolved solids. The Company's oxygen enriched
water contains approximately 40 parts per million of oxygen. Normal tap water
contains approximately 3 parts per million of dissolved oxygen. As such, the
company's oxygen enriched bottled water contains approximately 1200% more
oxygen.
INDUSTRY OVERVIEW
The Company's primary focus is 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 are super markets, convenience
stores, mass merchants, gas station markets, health spas and vitamin/health
food stores.
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.
PRODUCTS
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 super markets, convenience stores, mass merchants, gas station
markets, health spas and vitamin/health food stores.
The Company's oxygen enriched bottled water is 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 is 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 is of distilled quality, although the distillation process is not
used.
13
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. 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 is one significant competitor, Clearly Canadian, producing
oxygen enriched bottled water. The Company knows of eight other entities that
are attempting to produce and distribute oxygen enriched bottled water. Except
for Clearly Canadian, none of the well-established traditional bottled water
distributors has an oxygen enriched bottled water product.
The Company's oxygen enriched water contains approximately 40 parts
per million of oxygen. Normal water contains approximately 3 parts per million
of oxygen. As such, the Company's oxygen enriched bottled water will contain
approximately 800% or more oxygen than conventional bottled water products.
There can be no assurance that the Company's products will achieve consumer
acceptance. Consumer preferences are inherently subjective and subject to
change.
Initially, the Company will not carbonate or flavor its water. After
the successful introduction of the 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 utilizes a distinctive bottle and
label for its water products.
STRATEGY
The company's objective is to build product markets in Florida and
then expand nationally. Aspects of the Company's strategy include the
following.
The Company's oxygen enriched small package bottled water product will
primarily be sold through retail outlets, including super markets, convenience
stores, mass merchants, gas station markets, health spas and vitamin/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.
PRODUCTION
The Company currently operates out of a building with approximately
14,000 sq. ft. under roof with an exposed four-bay loading dock sitting on 2.1
acres in Clearwater, Florida. Approximately 2,400 sq. ft. is utilized for
office facilities and the rest is used for bottling and warehouse operations.
The remodeling of the building was completed in fiscal year 1999 for
approximately $600,000.
The Company finished installation and startup of a medium-sized
bottling facility during the fiscal year ended April 3, 1999, at a total cost
of approximately $750,000. The bottling line is rated at 160 bottles/min., or,
practically, 1,080 24-bottle cases of 20 oz. bottled water each shift.
Upon delivery to the Company's facilities, the source water is passed
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 dissolved solids.
Water is oxygenated using the purest oxygen commercially available in a
proprietary process. The water is then treated with ultraviolet light, which
effectively kills bacteria and other micro-organisms before delivery to the
bottling area where the various products are filled and
14
capped. The filling room is supplied with pressurized air from high-capacity,
high-efficiency particulate filters, resulting in a clean filling and capping
environment.
The manufacturing process is designed to be highly automated. Bottles
are mechanically de-palletized, cleaned, filled and capped. The filled bottles
are automatically coded, labeled, tamper-banded (if applicable), 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 the warehouse
facility for future shipment. Most products are shipped within 48 to 72 hours
after production via common carriers.
The Company maintains exacting internal quality control standards.
Each shift's production is tested in Company laboratory facilities according to
FDA and IBWA standards, and random samples are submitted regularly to an
independent laboratory for confirmation testing.
WATER SOURCES
Under FDA guidelines, bottled water must contain fewer than 500 parts
per million ("ppm") of total dissolved solids. Varying amounts and types of
dissolved solids provide different tastes to water. The Company uses FDA and
International Bottled Water Association approved water sources.
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 a higher quality oxygen
enriched purified drinking water, innovative packaging and customer service.
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.
15
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 products satisfy all federal and state requirements and
the Company is proceeding with applications to obtain distribution permits 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.
16
Aqua Clara Bottling & Distribution, Inc.
And Subsidiary
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 S. McAvoy, Plaintiff vs.
Aqua Clara Bottling & Distribution, Inc., Olde Monmouth Stock Transfers, a New
Jersey Corporation, John. C. Plunkett, Rand L. Gray and Robert Guthrie,
Defendant, Case No. 99-004394-CI-011. The complaint is a multi part complaint
claiming Delcaratory Relief; Injunctive Relief; Breach of Fiduciary and
Statutory Duties; Breach of Contract Unpaid Promissory Notes; Breach of
Contract Unpaid Accrued Salary. The Plaintiff seeks removal of the restrictive
legends on stock held and $67,973.79 with regard to Notes and Accrued Salary.
The matter is pending arbitration. The matter is currently in settlement
discussions, with litigation pending.
17
Aqua Clara Bottling & Distribution, Inc.
And Subsidiary
Part II
Other Information
Item 2
Changes In Securities
Secured 8% Series "B" Convertible Debenture
The Company has issued 43 Secured 8% Series "B" Convertible Debenture
shares. The "B" Convertible Debenture is convertible at the option of the
holder at any time prior to payment in full of the principal balance of the
Debenture, to convert the Debenture in whole only, into fully paid and
non-assessable shares of Common Stock, no par value, of the Company (the
"Common Stock") at a conversion price equal to 65% of the three day average
closing bid price prior to the date of conversion. At the Corporation's option,
the amount of accrued and unpaid interest due as of the Conversion Date shall
not be subject to conversion but instead may be paid in cash as of the
Conversion Date. If the Corporation elects to convert the amount of accrued and
unpaid interest at the Conversion Date into Common Stock, the Common Stock
issued to the Holder shall be valued at the Conversion Price. The number of
shares of Common Stock due upon conversion shall be (i) the face amount of the
Debenture divided by (ii) the applicable Conversion Price.
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.
18
Aqua Clara Bottling & Distribution, Inc.
And Subsidiary
Part II
Other Information
Item 3
Defaults Upon Senior Securities
(NONE)
19
Aqua Clara Bottling & Distribution, Inc.
And Subsidiary
Part II
Other Information
Item 4
Submission of Matter to a Vote of Security Holders
(NONE)
20
Aqua Clara Bottling & Distribution, Inc.
And Subsidiary
Part II
Other Information
Item 5
Other Information
Management
The following table sets forth the names, ages, and offices held with
the Company by its directors and executive officers, as of July 3, 1999:
Name Position Director Since Age
- ---- -------- -------------- ---
E. J. Mersis Chairman, Chief 1999 55
Executive Officer
John C. Plunkett President, Chief 1997 51
Operations Officer
Robert F. Guthrie Secretary, Director 1997 65
Renato P. Mariani Director 1999
John Thomas Director 1999
All directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
There are no agreements with respect to the election of directors. The Company
has compensated its directors for service on the Board of Directors through the
end of fiscal year 2000 by the awarding of 50,000 shares of registered common
stock to each director. Any non-employee director of the Company is reimbursed
for reasonable expenses incurred for attendance at meetings of the Board of
Directors and any committee of the Board of Directors. The Executive Committee
of the Board of Directors, to the extent permitted under Colorado law,
exercises all of the power and authority of the Board of Directors in the
management of the business and affairs of the Company between meetings of the
Board of Directors. Each executive officer serves at the discretion of the
Board of Directors.
The business experience of each of the persons listed above during the past
five years is as follows:
Mr. Emanuel J. Mersis is the Chairman, and Chief Executive Officer of
the Company. Mr. Mersis has over 27 years experience as a top performing CEO
and senior executive with strong domestic and international expertise in
consumer packaged goods. He served Westvaco Corporation, a $3 billion dollar
Fortune 500 paper, consumer packaging and chemical company since 1998. Mr.
Mersis was the President and CEO of Signature Brands LLC (a joint venture of
McCormick and Co., Inc. and Pioneer Products, Inc.) from 1987 to 1998.
John C. Plunkett is the President and Chief Operations Officer of the
Company. Mr. Plunkett has over 20 years experience in the engineering
consulting industry and 10 years experience in real estate management. Mr.
Plunkett has been associated with the Company as an officer and director since
its inception and became President in 1998. Mr. Plunkett is a graduate of the
U.S. Naval Academy with a degree in Naval Engineering.
Robert F. Guthrie 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.
21
Mr. Renato P. Mariani has served as Director of the Company since May,
1999. Mr. Mariani is the President of Eagle Diversified, Inc.
Mr. John Thomas has served as Director of the Company since June,
1999. Mr. Thomas is the President of FloTech, Inc.
The Company does not have a bonus, profit sharing, or deferred
compensation plan for the benefit of its employees, officers or directors.
Beginning with the fiscal year ending April 2, 2000, the Company began
compensating its directors.
CERTAIN TRANSACTIONS
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 subordinated their mortgages, where filed, to the
mortgage of the loaning shareholders.
Subsequent to April 3, 1999, the Company on June 25, 1999, paid off
the loan described above, retiring the note.
22
Aqua Clara Bottling & Distribution, Inc.
And Subsidiary
Part II
Other Information
Item 6
Exhibits and Reports
Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation (1)
3.2 Articles of Amendment for Series A Preferred Stock (1)
3.3 Bylaws (1)
4.1 Class B Debenture
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 (3)
10.4 Lead Generation/Corporate Relations Agreement dated May 24, 1999 with
Corporate Relations Group, Inc.
10.5 Installment secured promissory notes (1)
10.6 Modification of Installment secured promissory notes (4)
16.1 Letter from BDO Seidman (3)
21.1 Subsidiaries
23.1 Letters from Pender Newkirk & Company (5)
23.2 Letters from Tedder, James, Worden & Associates, P.A. (5)
27 Financial Data Schedules
(b) Reports on Form 8-K:
5.0 Opinion Regarding Legality, dated May 13, 1999 (6)
23.0 Letter on Audited Financial Information, dated June 11, 1999 (6)
(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
(5) Incorporated by reference to Annual Report Form 10-KSB April 3, 1999
(6) Incorporated by reference to S-8 Filed June 11, 1999
23
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: September 23, 1999 AQUA CLARA BOTTLING & DISTRIBUTION, INC.
By: /s/ EMANUEL J. MERSIS
------------------------------------
Emanuel J. Mersis
Chairman, Chief Executive Officer