Registration Number: 333-100925
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
FIRST AMENDMENT TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SPONGETECH DELIVERY SYSTEMS, INC.
---------------------------------
(Name of small business
issuer in its charter)
Delaware 2840 54-2077231
----------------------- ---------------------------- -------------------
(State of incorporation (Primary Standard Industrial (I.R.S. Employer
or jurisdiction Classification Code Number) Identification No.)
of organization)
Sunset Industrial Park, 50 20th Street, Brooklyn, New York 11232 (718) 788-4798
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(Address and telephone number of principal executive offices)
Sunset Industrial Park, 50 20th Street, Brooklyn, New York 11232 (718) 788-4798
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(Address of principal place of business or intended principal place of business)
Michael L. Metter, Spongetech Delivery Systems, Inc.
Sunset Industrial Park, 50 20th Street, Brooklyn, New York 11232 (718) 788-4798
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(Name, address, and telephone number of agent for service)
Copies to:
Joel Pensley, Esq.
211 Schoolhouse Road
Norfolk, Connecticut 06058
Phone: (860) 542-1122
Fax: (626) 608-3076
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after
the effective date of the registration statement until such time that all of the
shares of common stock registered hereunder have been sold.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of Maximum Maximum
Each Class of Amount Offering Aggregate Amount of
Securities Being Being Price Per Offering Registration
Registered Registered Share (1) Price(1) Fee
-------------------------------------------------------------------------------
Shares of common stock 4,485,000 $ 0.70 $ 3,139,500 $ 288.83
Shares of common stock
underlying stock
purchase agreement 4,000,000 $ 0.50 $ 2,000,000 184.00
------------- ----------
TOTAL $ 5,139,500 $ 472.83
(1) Estimated solely for the purposes of computing the registration fee
pursuant to Rule 457.
The registrant hereby amends the registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that the registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
ii
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THE PROSPECTUS IS NOT AN OFFER
TO SELL, NOR DOES IT SEEK AN OFFER TO BUY, THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED.
Subject to completion: Dated January --, 2003
PROSPECTUS
SPONGETECH DELIVERY SYSTEMS, INC.
4,485,000 SHARES OF COMMON STOCK
UP TO 4,000,000 SHARES OF COMMON STOCK
This prospectus relates to the resale by the selling stockholders of
4,485,000 shares of our common stock. None of our securities trades on any
securities market. Selling stockholders may sell their shares at $.70 per share
until a securities market quotes the shares. Thereafter, selling stockholders,
who are not affiliates, may sell their shares at market prices or at privately
negotiated prices. Selling stockholders who are affiliates may sell their shares
at $.70 per share for the duration of the offering. We will not receive any of
the proceeds from the sale of the shares presently owned by the selling
stockholders We have not retained any underwriter in connection with the sale of
our securities.
Colebrook, Inc. may use this prospectus in connection with sales of up to
4,000,000 shares of our common stock.
We will not receive any of the proceeds from the sale of the shares by the
selling stockholders.
AS YOU REVIEW THE PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE MATTERS
DESCRIBED IN "RISK FACTORS" BEGINNING ON PAGE 5.
THE INFORMATION IN THE PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL, NOR DOES IT SEEK AN OFFER TO BUY, THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of the prospectus is , 2003.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary..................................................... 3
The Offering........................................................... 4
Summary Financial Information.......................................... 5
Risk Factors........................................................... 6
Use of Proceeds........................................................ 9
Capitalization......................................................... 9
Dividend Policy........................................................ 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 10
Business............................................................... 12
Management............................................................. 15
Executive Officers and Directors...................................... 15
Director Compensation................................................. 16
Executive Compensation................................................ 16
Indemnification of directors and executive officers
and limitation of liability......................................... 18
Certain Related Party Transactions..................................... 18
Principal Stockholders................................................. 19
Description of Securities.............................................. 21
Common Stock.......................................................... 21
Preferred Stock....................................................... 21
Reports to Stockholders............................................... 22
Transfer Agent........................................................ 22
Selling Stockholders................................................... 22
Plan of Distribution................................................... 22
Stock Purchase Agreement............................................. 23
Shares Eligible for Future Sale........................................ 26
Where You Can Find More Information.................................... 28
Legal Proceedings...................................................... 29
Legal Matters.......................................................... 29
Experts................................................................ 29
Index to Financial Statements.......................................... F-1
Financial Statements................................................... F-2
------------------------
You may rely only on the information contained in the prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. Neither the delivery of this prospectus nor sale of common
stock means that information contained in the prospectus is correct after the
date of the prospectus. This prospectus is not an offer to sell or solicitation
of an offer to buy these shares of common stock in any circumstances under which
the offer or solicitation is unlawful.
2
PROSPECTUS SUMMARY
We design, produce, market and distribute cleaning products for vehicular
use utilizing patented technology relating to sponges containing hydrophilic,
which are liquid absorbing, foam polyurethane matrices. Our products can be
pre-loaded with detergents and waxes which are absorbed in the core of the
sponge then released gradually during use. We have also designed and have
started to test market, but have not yet produced or sold, products using the
same hydrophilic technology for bath and home use.
We were incorporated in New York State on July 18, 1999.
As part of a plan of recapitalization and funding, we undertook a series of
steps:
o On July 15, 2002, we entered into a stock purchase agreement with Nexgen
Acquisitions VIII, Inc. (which changed its name to Spongetech Delivery
Systems, Inc.) under which our sole stockholder, RM Enterprises
International, received 12,000,000 shares of the holding company and became
its majority stockholder.
o On December 16, 2002, we changed our domicile to Delaware.
o On December 16, 2002, Nexgen Acquisitions VIII, Inc. (renamed Spongetech
Delivery Systems, Inc.) merged with and into us so that we became the
surviving company. Immediately subsequent to the merger, we changed our
name to Spongetech Delivery Systems, Inc.
o On December 26, 2002, we entered into a securities purchase agreement with
Colebrook, Inc. The agreement entitles us to issue up to $2 million of our
common stock to Colebrook from from time to time, of between $25,000 to
$50,000 each time, at our choice, at 70% of the market price of our stock,
over a two year period following the effective date of the registration
statement of which the prospectus is a part. Proceeds of stock sales will
be used for working capital.
Our executive officers are located at: Sunset Industrial Park, 50 20th
Street, Brooklyn, New York 11232; and our telephone number at that address is
(718) 788-4798.
3
THE OFFERING
Common stock outstanding.......... 18,985,000 shares
Shares offered by the selling
stockholders who are holders
of their shares as of the date
of the prospectus.............. 4,485,000 shares of common stock
Selling stockholder under
stock purchase agreement....... Colebrook, Inc.
Shares offered pursuant to
stock purchase agreement....... A maximum of 4,000,000 shares of common stock
Offering Price of Shares......... The shares underlying the stock purchase
agreement, being registered hereunder, are
being offered to Colebrook from time to time
at 70% of the then current market price.
Common stock to be outstanding
after the offering pursuant
to the stock purchase
agreement.................... 22,985,000 shares of common stock.
Pursuant to the terms of the stock purchase
agreement with Colebrook, we are not obli-
gated to sell any of our shares, unless it is
beneficial to us.
Use of proceeds................. The selling stockholders will receive the net
proceeds and we will receive none of the pro-
ceeds from the sale of the shares offered by
the prospectus. The proceeds of shares sold
to the investor pursuant to the securities
purchase agreement shall be used for working
capital.
4
SUMMARY FINANCIAL INFORMATION
The following table sets forth our summary consolidated financial data as
of May 31, 2002 and August 31, 2002 (unaudited) and for the periods ended May
31, 2002 and 2001, and August 31, 2002 and 2001, which are derived from our
financial statements.
Statement of Operations
Three Months Ended
August 31, Year Ended May 31,
2002 2001 2002 2001
----------- ----------- ----------- --------------
(unaudited) (unaudited)
----------- -----------
Sales $ 8,797 $ 15,669 $ 89,973 $ 11,790
Cost of goods sold 1,337 14,804 121,643 31,683
---------- ---------- ------------ -----------
Gross profit (loss) 7,460 865 (31,670) (19,893)
Operating expenses 18,540 26,342 70,407 177,997
---------- ---------- ------------ -----------
Loss before income taxes (11,080) (25,477) (102,077) (197,890)
Income taxes 400 373 400 428
---------- ---------- ------------ -----------
Net loss $ (11,480) $ (25,850) $ (102,477) $ (198,318)
========== ========== ============ ===========
Net loss per share
Basic and diluted NIL NIL $ (.01) $ (.02)
========== =========== ============ ===========
Weighted average common
shares outstanding 15,644,348 12,000,000 12,000,000 12,000,000
========== ========== ========== ==========
Balance sheet data:
Total assets $ 99,598 $ 89,633
Total liabilities 254,640 238,585
Shareholders' equity
(deficiency) (155,042) (148,952)
RISK FACTORS
You should carefully consider the following factors in addition to the
other information in this prospectus, including the financial statements and
related notes, before investing in the common stock. These risk factors are all
those which we believe are material to our business. Risks and uncertainties
that we do not presently know about or that we currently believe are immaterial
may also impair our business. If any of the following risks actually occurs, our
business, financial condition or results of operations will most likely suffer.
In such case, the trading price of our common stock could decline; and you could
lose all or part of your investment.
5
If we do not raise additional financing, there is a high risk that our
business will fail.
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We have suffered losses since our inception, have a significant
stockholders' equity deficiency, have minimal cash, have a working capital
deficiency and have only recently concluded our first material purchase orders.
If financing is not available or obtainable, our investors may lose a
substantial portion or all of their investment and our business may fail. We
have entered into a stock purchase agreement with an investor. However, we can
offer no assurance that we will be able to sell any stock pursuant to that
agreement to solve our financing needs. Consequently, we can provide no
assurance that additional financing, when necessary, will be available at all,
or if available, on acceptable terms. We have arranged for purchase order
financing for our orders with Turtle Wax. However, there is no assurance that
the finance company will advance funds for future purchase orders with Turtle
Wax or any other purchaser of our products. If we fail to raise additional
funds, we will may unable to fulfill orders, market our products, or make molds
for new products; and as a result our business may fail.
Our auditors have questioned our ability to continue as a going concern.
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Our independent auditor's report letter which accompanies our financial
statements states that our recurring net losses, working capital deficiency and
stockholders' equity deficiency raise substantial doubt about our ability to
continue as a going concern. If we are unable to increase our revenues while
containing costs, or decreasing costs while maintaining revenues or raising
substantial funds from third parties, we will be unable to continue as a going
concern and will be forced to suspend operations.
We experience competition from many companies and methodologies.
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We experience competition from many companies which manufacture soap
products, car care products, sponges and related applicators, as well as
manufacturers of power spray and other car wash products. Our bath and home care
products, if and when launched, will compete with major international soap and
detergent manufacturers as well as less well-know brands. Many of these
suppliers offer broader product lines and have substantially greater financial,
technical, marketing, distribution and other resources than we do. As a result,
we may not be able to market our products successfully and thus will not be able
to grow or even maintain our business.
The market place may be indifferent to our products.
----------------------------------------------------
Our hydrophilic sponge, and products based on it, feature an internal
structure which holds detergents and waxes which are released only in use.
Potential users may be satisfied with the cleaners, waxes and applicators they
are presently using. Thus, we may expend our financial and personnel resources
on design, marketing and advertising without generating concomitant revenues.
6
Price competition may undercut our marketing efforts.
-----------------------------------------------------
Although we believe that our automobile products offer features and
benefits not found in other car care products, other products, such as kitchen
detergent and cloths, are less expensive. Thus, vehicle owners may prefer to
save money and forgo the convenience of our hydrophylic sponges and choose not
to purchase them, jeopardizing our revenues and profitability.
We presently depend on one customer for almost all of our sales.
----------------------------------------------------------------
We have received two purchase orders for the supply of our automobile wash
and wax product to Turtle Wax. Although we are exploring and marketing our
product in other marketing channels for our automobile cleanser and wax product
and our child's bath and our home cleaning products, these channels have
generated little revenues to date for our automobile product and no revenues for
our other products and we can offer no assurance that they will ever be
commercially viable. In the event we cannot deliver or orders to Turtle Wax in
the quantity or of the quality desired or Turtle Wax does not enter into new
purchase orders after the completion of the existing orders, we may have no
existing business nor prospects for new business.
We depend on products made using one technology.
------------------------------------------------
Our automobile cleaning and waxing product, our child's bath product and
the household cleaning products depend on the use of licensed technology
relating to sponges incorporating a hydrophilic (liquid absorbing) polyurethane
matrix. A number of factors could limit our sales of these products, or the
profitability of such sales, including competitive efforts by other
manufacturers of similar products, shifts in consumer preferences or
introduction and acceptance of alternative product offerings. We have developed
no other products using other technologies and thus if our existing products or
others based on the same technology fail in the marketplace, our business would
fail.
The patents on our licensed technology may not be able to be defended against
infringement.
--------------------------------------------------------------------------------
In the event a competitor uses our licensed technology, our licensor may
not be able successfully to assert patent infringement claims. In that event, we
may encounter direct competition using the same technology on which our products
are based and may not be able to compete.
We depend on one manufacturer for all our products.
---------------------------------------------------
Our licensor is also our manufacturer. Our reliance on a sole supplier
involves several risks, including our potential inability to obtain adequate
supplies and reduced control over pricing and timely delivery. Although the
timeliness, quality and pricing of deliveries from our licensor has been
acceptable to date there can be no assurance that supplies will be available on
an acceptable basis or that delays in obtaining new suppliers will not have an
adverse effect. Our inability to obtain adequate supplies of hydrophilic
sponges, chemicals, packaging materials, or finished products would prevent us
from fulfilling orders.
7
Our stock may not be able to trade on the Over-the-Counter Bulletin Board or,
when and if established, the Bulletin Board Exchange.
--------------------------------------------------------------------------------
We intend that our securities trade on the Over-the-Counter Bulletin Board.
However, we can offer no assurance that our securities will so trade and, if
they do trade on the OTCBB, whether an active trading market will be established
or, if established, whether it can be maintained. The National Association of
Securities Dealers, Inc. has announced the formation of a new automated
marketplace, the Bulletin Board Exchange, and the eventual dissolution of the
OTCBB. We can offer no assurance that our securities will be accepted on the
BBX, if established, and, if they do not, our securities may trade on the Pink
Sheets, a non-automated market with a consequential lack of liquidity.
An active market for our common stock may not develop, making it difficult for
you to sell your stock and preventing us from raising money through our stock
purchase agreement.
--------------------------------------------------------------------------------
Prior to the date of the prospectus, there has been no public market for
our common stock. It is uncertain the extent to which a trading market will
develop or how liquid that market might become. An illiquid market for our stock
may result in price volatility and poor execution of buy and sell orders for
investors. Historically, stock prices and trading volumes for newly public
companies fluctuate widely for a number of reasons, including some reasons that
may be unrelated to their business or results of operations. The price of our
common stock may be low and our volume below that which we need to sell our
stock to the investor pursuant to the stock purchase agreement stock. Thus, the
possibility of funding our ongoing operations will ceease in the event an active
trading market does not develop.
The exercise of our put rights may substantially dilute the interests of other
security holders.
--------------------------------------------------------------------------------
We will issue shares to the investor upon exercise of our put rights at a
price equal to 70% of the average closing bid price for the five days preceding
the date we give notice of our intention to exercise a put. Accordingly, the
exercise of our put rights may result in substantial dilution to other holders
of our common stock. Depending on the price per share of our common stock during
the valuation periods of our puts, we may need to register additional shares for
resale to access the full amount of financing available. Registering additional
shares could have a further dilutive effect on the value of our common stock. If
we are unable to register the additional shares of common stock, we may
experience delays in, or be unable to, access some of the $2 million available
under our put rights.
The sale of material amounts of our common stock could reduce the price of our
common stock and encourage short sales.
--------------------------------------------------------------------------------
If and when we exercise our put rights and sell shares of our common stock
to the investor and if and to the extent that the investor sells the common
stock, our common stock price may decrease due to the additional shares in the
market. If the price of our common stock decreases, and if we decide to exercise
our right to put shares to Colebrook, we must issue more shares of our common
stock for any given dollar amount received. Stock issuances may encourage short
sales, which could place further downward pressure on the price of our common
stock.
8
USE OF PROCEEDS
We will not receive any proceeds from the sale of the stockholders' shares
offered by this prospectus. All proceeds from the sale of the stockholders'
shares will be for the accounts of the selling stockholders. Proceeds, if any,
from the sale of stock pursuant to the stock purchase agreement will be used for
working capital.
CAPITALIZATION
The following table sets forth our capitalization as of August 31, 2002.
August 31,
2002
-----------
(Unaudited)
Long-term debt $ 51,930
Stockholders' equity:
Common stock $.001 par value per share;
authorized 50,000,000 shares; issued
and outstanding 18,985,000 shares 18,985
Preferred stock, $.001 par value;
authorized 5,000,000 shares; no shares
issued and outstanding
Additional paid-in capital 190,448
Accumulated deficit (364,475)
Total stockholders' equity (deficiency) $ (155,042)
Total capitalization $ (103,112)
Dividend Policy
---------------
We have not declared or paid any cash dividends on our common stock and do
not anticipate paying any cash dividends in the foreseeable future.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 2002 AND MAY 31, 2001
Management's Discussion and Analysis of Financial Condition and Results of
Operations
--------------------------------------------------------------------------------
The following discussion includes forward-looking statements with respect
to our future financial performance. These forward-looking statements are
subject to various risks and uncertainties, including the factors described in
the section titled Risk factors and elsewhere in this prospectus, that could
cause actual results to differ materially from historical results or those
currently anticipated. You should read the following discussion together with
the consolidated financial statements and their accompanying notes, included
elsewhere in the prospectus.
General
We were incorporated in New York State on July 18, 1999. On July 15, 2002,
we entered into a stock purchase agreement under which we became a wholly-owned
subsidiary. Our sole stockholder, received 12,000,000 shares of the holding
company or approximately 63% of the outstanding common stock and became its
majority stockholder. On December 16, 2002, we changed our domicile to Delaware
and our parent company merged with and into us so that we became the surviving
company. As part of the merger, we changed our name to Spongetech Delivery
Systems, Inc.
We distribute a line of automobile cleaning products featuring hydrophilic
polyurethane sponge technology and have developed bath and home applications
using the same technology. Sponges of hydrophilic polyurethane are constructed
in a matrix pattern which can absorb liquids such as soaps, cleaning fluids and
waxes which are released only when the sponge is squeezed in use.
Results of Operations
Three Months Ended August 31, 2002 (unaudited) and 2001 (unaudited)
-------------------------------------------------------------------
Results of operations reflect total operating revenues of $8,797 and
$15,669 for the three months ended August 31, 2002 (unaudited) and 2001
(unaudited), respectively. This decrease of $6,872 is primarily attributed to
cash flow constraints, which interrupted our marketing efforts. Gross profit
increased from $865 for the three months ended August 31, 2001 to $7,460 for the
three months ended August 31, 2002. This increase is primarily attributed to
certain manufacturing charges paid in 2001, which did not occur in 2002.
Operating expenses decreased from $26,342 for the three months ended August 31,
2001 to $18,540 for the three months ended August 31, 2002. This decrease is
attributed to the significant reduction in marketing efforts, which include
customer samples and attendance at trade shows. Net loss was $11,480 and $25,850
for the three months ended August 31, 2002 (unaudited) and 2001 (unaudited),
respectively.
10
Because of the requirement that certain minimums must be manufactured per
order, our inventory as of August 31, 2002 was higher than needed for immediate
sales. Sales from the radio program, independent automotive parts stores and
promotional sales have increased but as of August 31, 2002 totaled only $8,797.
In addition, the purchase orders with Turtle Wax are drop-shipped directly to
the customer from the manufacturer and never constitute inventory. Thus the
ratio of sales to inventory is low. No sales have been or are contemplated to be
made to related parties.
Years Ended May 31, 2002 and 2001
---------------------------------
Operating revenues increased by $78,183 from $11,790 for the year ended May
31, 2001 as compared to $89,973 for the year ended May 31, 2002. This increase
is primarily attributed to the establishment of additional products and the
marketing efforts of the prior year. We posted gross losses of $31,670 and
$19,893 for the years ended May 31, 2002 and 2001, respectively. These gross
losses were attributed to manufacturing costs incurred in the development of new
sponge products. Operating expenses decreased from $177,997 for the year ended
May 31, 2001 to $70,407 for the year ended May 31, 2002. This decrease is
attributed to a significant decrease in marketing expenditures and consulting
services. Net loss was $102,477 and $198,318 for the years ended May 31, 2002
and 2001, respectively. This decrease in the net loss of $95,841 is the result
of the items mentioned above.
Liquidity and Capital Resources
-------------------------------
We had cash of $90 at August 31, 2002 and $100 at December 31, 2002. During
the three months ended August 31, 2002, net cash used in operating activities
aggregated $78. There were no investing or financing activities during the three
months ended August 31, 2002. Cash required for our operations has been provided
by our major stockholder as an additional capital contribution.
During the year ended May 31, 2002, net cash used in operating activities
aggregated $43,285 as compared to $115,896 used in the year ended May 31, 2001.
This decrease in the amount of cash used in operating activities is primarily
attributed to the decrease in net loss for the year ended May 31, 2002 as
compared to the net loss for the year ended May 31, 2001. Cash required for our
operations has been provided by our major stockholder as an additional capital
contribution.
Net cash used in investing activities during the year ended May 31, 2002
aggregated $33,540, as compared to $14,900 used in the year ended May 31, 2001.
This increase is attributed to the purchasing of office equipment of
approximately $10,000 and additional purchases of product molds aggregating
approximately $23,000.
Net cash provided by financing activities for the year ended May 31, 2002
was $76,943 as compared to $130,100 during the year ended May 31, 2001. This
decrease is primarily attributed to a reduction in the support from Spongetech
International's prior parent and no additional notes payable incurred during the
year ended May 31, 2002.
The working capital (deficiency) at August 31, 2002 was approximately
($144,000) as compared to the working capital (deficiency) of approximately
($137,000) at May 31, 2002. Total liabilities exceed total assets by
approximately $155,000 and $149,000 as of August 31, 2002 and May 31, 2002,
respectively. These factors create substantial doubt our ability to continue as
a going concern. The recovery of assets and the continuation of future
operations are dependent upon our ability to obtain additional debt or equity
financing and its ability to generate revenues sufficient to continue pursuing
its business purpose.
We cannot guarantee that the results from operations will be sufficient to
support our liquidity requirements through August 31, 2003 and beyond. There can
be no assurances that the above actions will be accomplished or whether they
will be adequate.
We have received purchase order financing for two Turtle Wax orders
aggregating $93,849. The finance company also guarantees the solvency of the
purchaser. The purchaser pays for the orders directly to the finance company;
and we receive the balance of the order after deduction of principal and
interest. The loans were guaranteed personally by Steven Moskowitz, our
Secretary.
11
BUSINESS
Our Company
-----------
We design, produce, market and distribute cleaning products for vehicular
and home use utilizing patented technology relating to hydrophilic (liquid
absorbent) foam polyurethane matrices.
The Technology
--------------
We entered into a license agreement on July 1, 2001 on patented technology
relating to hydrophilic polyurethane matrices on an exclusive basis from H. H.
Brown Shoe Technologies, Inc., Greenwich, CT., (dba Dicon Technologies), a
majority-owned subsidiary of Berkshire Hathaway, Inc. Our license is
co-extensive with a patent on technology jointly developed by one of our former
employees which covers the design, manufacture and use of a liquid-absorbent
layer in a "molded sponge design."
Pursuant to the license agreement, Dicon retained title to the technology
and paid all expenses in connection with the filing and maintaining of the
patent. Dicon granted a personal, exclusive, royalty-free worldwide right and
license to use and sell sponge of indefinite duration products incorporating the
technology. Certain minimum quantities of production, as set forth in a
requirements agreement with Dicon are needed to continue the license. Dicon has
the right, without restriction, to license its technology in areas other than
sponges. The license is a continuing one for the full life of the design patent.
The technology is also used to draw fluids out of a human body, such as
body odors, and store them in the polyurethane matrix. Shoe liners, incontinent
pads and nursing pads were originally contemplated as product embodiments of the
technology. Companies such as Payless Shoes and H. H. Brown Shoe Company (the
licensor) use the technology for inner soles to absorb sweat and odors. Revlon
is a licensee of the technology which it uses in a cosmetic make-up removal
product.
Our license is based on the discovery that if a sponge incorporating the
hydrophilic matrix is be filled with detergents and waxes, the matrix would
retain these cleaning and polishing agents which would only be released when the
sponge was squeezed. Thus, soap or wax could be retained for many uses and the
sponge could be rinsed after use without losing the cleaning agent or wax.
Supply and Requirements Agreement
----------------------------------
Also on July 1, 2002, we entered into an exclusive worldwide supply and
requirements agreement with Dicon under which we must purchase from Dicon
certain minimum quantities of our sponges containing the Dicon hydrophilic
matrix as follows:
Annual Period Number of Sponge Products
------------- -------------------------
1st annual period 250,000
2nd annual period 500,000
and each succeeding
annual period 1,000,000
at the following prices:
Aggregate Purchases Price per spong product
------------------- ----------------------
50,000 to 100,000 $.817 sponge only
100,000 to 250,000 $.795 sponge only
Over 250,000 $.778 sponge only
12
In the event the minimum quantities are not ordered, we must pay Dicon
liquidated damages of $.20 per sponge for the deficiency. If we fail to pay the
damages promptly, our license becomes non-exclusive for subsequent periods.
Dicon may after the first annual period raise the prices it charges only if such
increase is based bona fide increases for material and labor plus an appropriate
markup for overhead. The agreement expires at the end of the third annual
period with options to renew for two additional successive periods.
Dicon has designed and installed specialized equipment for producing molded
foam products containing this superabsorbent polymer infused with detergents,
soaps and waxes used as an absorbing and cleaning sponge product. The agreement
sets forth minimum purchase requirements and pricing for the basic sponge
product. Using its patented processes, Dicon manufactures products derives from
"Hydrophilic Urethane Chemistry." The hydrophilic system has two parts, a
hydrophilic pre-polymer phase and a water phase. During this water phase,
various water soluble active ingredients are introduced into the products.
We are the assignee of a manufacturers representative agreement with Dicon
which was originally entered into by R M Enterprises our majority stockholder.
Pursuant to this agreement, we may introduce customers for additional
hydrophilic foam products directly on a commission basis.
Products
--------
We have designed specially configured sponges containing an outer contact
layer and an inner matrix. We load the inner matrix of the sponge with
especially formulated soaps and, in our automotive product, soap and wax. When
the sponge is applied to a surface with minimal pressure, the soap or soap and
wax are simultaneously applied to the surface. When the sponge is not in use,
the hydrophilic matrix holds the soap so that it does not leech out of the
sponge. We believe that our use of the patent has great marketing potential. We
can choose any variety of cleansers, including anti-bacterial and abrasive
soaps. Thus, we may fine-tune our products for use on different kinds of
vehicles. New vehicles or those prepared for classic car shows require a gentle
cleaner, whereas older cars which have developed a film over the paint or where
the paint has faded may require a cleanser containing a compounding substance, a
gentle abrasive. Depending on the use of our vehicular sponge, we may include a
wax, or may only include the cleanser.
Sales and Marketing
-------------------
On September 17, 2002, we were issued a purchase order from Turtle Wax for
our private label auto applicator and appropriate packaging containing the words
"Turtle Wax Zip Wax" and the Turtle Wax logo imprint as part of the sponge
itself. The total amount of the first purchase order is $62,475 with shipments
scheduled beginning January, 2003. Subsequently, we have received an additional
purchase order from Turtle Wax in the amount of $60,921 with shipping dates
beginning February, 2003.
We have already delivered a test order of 600 units and have placed orders
for the product pursuant to our supply agreement with Dicon. We have ordered the
packaging from unaffiliated suppliers. The product will be drop shipped to the
Turtle Wax warehouse in Chicago, Illinois.
We have also recently inaugurated an advertising program on the radio
program "Business Talk Radio" on the Jeff Brooks Show "On the Road." This is a
call-in nationally syndicated radio program on automobiles and related products.
Advertising is directed to our website (www.spongetech.com) and to our toll-free
number. We have retained a telemarketing company to take orders and use a
fulfillment house to pack and ship orders to customers. We pay the radio station
on a per item sold basis. We have not received significant orders from this
radio program and can give no assurances that it will become a successful
marketing channel.
13
We have entered into agreements with two distributors, one in the midwest
and one on the west coast. Their representatives visit and resell our automobile
sponge products to auto accessories stores - both independently-owned and chains
under the "Spongetech" brand name. We ship periodically to them. We have not
received significant orders from these distributors.
We have started selling our automotive sponge to a product marketer - a
logo and special message product company - which places unique promotional
advertising messages on our products for its customers. We have received
purchase orders which have aggregated, as of the date of this prospectus, 300
units containing the logo of businesses including a local bank and an automobile
dealership.
13
We have developed a children's bath foam sponge, with a "safe mesh" coating
which prevents tearing, in the shape of animals in various colors. The sponges,
which float, are infused with a gentle no-tear, non-irritating anti-bacterial
soap. The bath foam sponge does not lose its soap while it is floating in the
bath tub as the soap is retained by the inner hydrophilic matrix until the child
squeezes the sponge in use.
We are developing retail outlets to sell this product, ranging from
pharmacies to department stores. We intend to market directly. Dicon will
manufacture this product for us. We have not yet made sales and cannot offer any
assurances that sales will result from our proposed marketing campaign.
We have developed household cleaning sponges infused with anti-bacterial
bath and kitchen soaps. The products are being testing by a national detergent
manufacturer for possible use under its logo and brand. We cannot predict
whether or not the manufacturer will purchase our sponges and, if it does,
whether the product will succeed in the marketplace.
Research and Development
------------------------
Our research and development program consists principally of devising or
testing new products, improving the efficiency of existing ones, evaluating the
environmental compatibility of products and market testing. We estimate that our
management devoted 2,000 man hours to developing the product, packaging and
marketing. We did not pay cash compensation for research and development
activities.
Facilities
----------
Our corporate headquarters are located in an industrial park in Brooklyn,
New York where we share 2,000 square feet of equipped office space and 10,000
square feet of warehouse space with other companies affiliated with our major
shareholder. Expenses incurred in the operations of the facility, including
rent, telephone, and other office expenses, are allocated to us based on our
usage.
Employees
---------
We currently employ five people of whom three are business and sales
management, and the remainder staff.
Competition
-----------
We compete with international, national and local manufacturers and
distributors of soaps, detergents, waxes, sponges, cloths and other automotive,
household and bath products. Indirectly, in the automotive product area, we
compete with drive-through auto washes. Our competition, for the most part, has
brand recognition and large marketing and advertising budgets. Many competing
products are less expensive than ours to the consumer. We face major
multinational competition in our proposed household and children's bath product.
Although our product is unique and patented, we cannot predict its acceptance in
any of the marketplace for which they are designed.
14
MANAGEMENT
Executive Officers and Directors
--------------------------------
The following table sets forth certain information regarding our executive
officers and directors:
Name Age Position Since
------------------------ --- ------------- ---------
Michael Metter 51 President
One Tinker Lane Chief Executive Officer
Greenwich, CT 06830 and a Director 5/2001
Steven Moskowitz 38 Secretary
50 20th Street and a Director 6/1999
Brooklyn, New York 11232
Jerome Schlanger 46 Treasurer
50 20th Street and a Director 6/1999
Brooklyn, New York 11232
Frank Lazauskas 42 A Director 7/2001
51 Niagara Street
Newark, New Jersey 07105
Roger Eichenholtz 59 Chief Financial Officer
50 20th Street Chief Accounting Officer 8/2000
Brooklyn, New York 11232
----------------
Michael Metter was was a principal of Security Capital Trading, a business
and marketing consultancy from 1998 to April, 2001. From April, 2001 to the
present, he has been president of RM Enterprises, Inc., our majority
stockholder, a holding company which also is the sole shareholder of Flo
Weinberg Originals, a designer and distributor of women's clothing. From 1994 to
1998, he was President of First Cambridge Securities, a broker/dealer. From 1991
to 1994, Mr. Metter was a Vice-President of the following broker/dealers: Royce
Investment Group; Gruntal & Company from 1990 to 1991; Commonwealth Associates
from 1989 to 1990; Prudential-Bache Securities from 1988 to 1989; of D.H. Blair
& Company, 1981 to 1989. Prior to 1981, Mr. Metter served as an independent
consultant and buyer for retail department stores. From 1983 to 1985, he was the
owner of Metter Broadcasting which operated four radio stations. Mr. Metter
received his MBA in Finance in 1975 and his B.A. in Marketing and Accounting in
1973 from Adelphi University.
Steven Moskowitz served as Vice President Marketing and Business
Development for H. W. Carter & Sons, a distributor of children's clothing, from
1997 to 2002. He was President of the H. W. Carter & Sons division of
Evolutions, Inc. from 1996 to 1997. Mr. Moskowitz served in various capacities
at Smart Style Industries, a manufacturer and distributor of ladies' apparel,
from 1986 to 1996 from sales assistant to Vice President Sales and Marketing. He
received his B.S. in Management from Touro College in 1986.
Jerome Schlanger has been Vice-President, Consulting, for NEMA Consulting
since 1987 a business management consultant. From 1977 to 1987, he served as
Executive Vice President and Chief Operating Officer of B.T. Inc. a developer of
residential real estate. He received his B.S. in Business Administration from
Villanova University in 1978.
15
Roger Eichenholtz served as an Independent Principal, International
Communications Management, Inc., a provider of accounting, management and
financial services, from April 1996 to August, 2002. He served as Vice President
Finance, Viva Optique, Inc., a manufacturer and distributor of opthalmics, from
March, 1993 to April, 1996. From February, 1992 to March, 1993, he was principal
of Eichenholtz Associates, a financial consultant to medium and small
businesses. Mr. Eichenholzt was Vice President-Finance & Chief Operating Officer
of Mitchell Apparel Group, a clothing manufacturer and distributor, from June,
1986 to February, 1992. From May, 1985 to June, 1986, he served as Vice
President - Finance, MBW Advertising Network, Inc., an advertising agency. He
was Chief Financial Officer, Intermaritime Forwarding Company, Inc. from
January, 1979 to April, 1985, an international freight forwarder and custom
house broker. From November, 1972 to December, 1978, Mr. Eichenholtz was
Controller and Chief Financial Officer of CBA Industries, Inc./Today Newspapers,
Inc., a publisher of a weekly shopping newspaper and a distributor of
advertising inserts, from November, 1972 to December, 1978 and from April, 1970
to November, 1972, Controller of Botany Industries, Inc., a cloting manufacturer
and retailer. He was Senior Accountant at Coopers & Lybrand, certifed public
accountants, from October, 1966 to March, 1970. Mr. Eichenholtz received his BBA
in Accounting & Finance from Pace University in 1966; his MBA in Finance from
Pace University in 1969.
Frank Lazauskas is the founder and President of FJL Enterpreises, Inc., and
TNJ Enterprises, Inc., formed in 1999 and 1997 respectively, which own and
operate eight Dominos Pizza Stores. From 1986 to 1997, Mr. Lazauskas was the
founder and President of FJL Pizza, Inc. which operated the stores. From 1983 to
1986, Mr. Lazauskas was employed by RPM Pizza, Inc., the franchisee of 300
Dominoes Pizza stores, in positions progressively as area superviser, regional
operations manager, regional vice president and regional president. He received
his B.A. in Mathematics from Central Connecticut State University in 1983.
Director Compensation
---------------------
Our directors do not receive cash compensation for their services as
directors but are reimbursed for their reasonable expenses for attending board
and board committee meetings. Our board of directors has not established any
committees.
Executive Compensation
----------------------
The following table sets forth for the fiscal years ended May 31, 2002 and
2001, the compensation we paid to our Chief Executive Officer(s) and any other
executive officers who earned in excess of $100,000 based on salary and bonus.
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
====================================================================================================================
Other Annual Securities
Name and Principal Compensation Underlying
Position Year(1) Salary ($) Bonus ($) ($) Options/SARs (#)
====================================================================================================================
Michael Metter 05/31/02 -0- -0- -0- -0-
Chief Executive Officer 05/31/01 -0- -0- -0- -0-
16
Option Grants for the fiscal years ended May 31, 2002 and 2001
--------------------------------------------------------------
The following table sets forth information concerning the grant of stock
options to the named executive officer during the fiscal years ended May 31,
2002 and 2001.
Individual Grants
======================================================================================================================
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of
Shares Options Stock Price
Underlying Granted to Exercise Appreciation
Options Employees Price Per Expiration for Option Term
Name Granted in Year Share Date 5% 10%
======================================================================================================================
Michael Metter -0- -0-% - - - -
Aggregated Option Exercise for the fiscal years Ended May 31, 2002 and 2001 and
Fiscal Year-End Option Values
The following table sets forth information concerning the exercise of stock
options during the fiscal years ended May 31, 2002 and 2001 by the named
executive officer, and his options outstanding at the end of the transition
period.
======================================================================================================================
Aggregate Option/SAR Exercises in Transition Period and TP-End Option/SAR Values
======================================================================================================================
Number of Securities
Underlying Unexercised
Options/SARs at TPY-End Value of Unexercised In-
Shares (#) the Money Options/SARs
Acquired on Value =========================== at TP-End ($)
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
======================================================================================================================
Michael Metter -0- -0- -0- -0- -0-
======================================================================================================================
17
Indemnification of directors and executive officers and limitation of liability
------------------------------------------------------------------------------
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act. As permitted by the Delaware General
Corporation Law, our amended certificate of incorporation includes a provision
that eliminates the personal liability of our directors for monetary damages for
breach of fiduciary duty as a director, except for liability (1) for any breach
of the director's duty of loyalty to our company or our stockholders, (2) for
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (3) under section 174 of the Delaware General
Corporation Law (regarding unlawful dividends and stock purchases) or (4) for
any transaction from which the director derived an improper personal benefit.
As permitted by the Delaware General Corporation Law, our Bylaws provide
that we are required to indemnify our directors and officers, consultants and
employees to the fullest extent permitted by the Delaware General Corporation
Law. Subject to certain very limited exceptions, we are required to advance
expenses, as incurred, in connection with a legal proceeding to the fullest
extent permitted by the Delaware General Corporation Law, subject to certain
very limited exceptions. The rights conferred in our bylaws are not exclusive.
We have not obtained directors' and officers' liability insurance.
CERTAIN RELATED PARTY TRANSACTIONS
We were incorporated in New York State on July 18, 1999 by RM Enterprises
International, Inc. which was issued 5,000 shares representing all our issued
and outstanding capital stock. On July 15, 2002, we entered into a stock
purchase agreement with Nexgen Acquisitions VIII, Inc. (which changed its name
to Spongetech Delivery Systems, Inc.) under which we became a wholly-owned
subsidiary. Our sole stockholder, RM Enterprises International, received
12,000,000 shares of the holding company and became its majority stockholder.
In September, 2002, the major stockholder of Nexgen Acquisitions VIII
transferred 2,000,000 shares to Robert Rubin, a beneficial owner of stock of RM
Enterprises.
On December 16, 2002, we changed our domicile to Delaware. On December 16,
2002, our parent company merged with and into us so that we becamse the
surviving company. Immediately subsequent to the merger, we changed our name to
Spongetech Delivery Systems, Inc.
We believe that these transactions were on terms as favorable as could have
been obtained from an unaffiliated third party. All future transactions we enter
into with our directors, executive officers and other affiliated persons will be
on terms no less favorable to us than can be obtained from an unaffiliated party
and will be approved by a majority of independent, disinterested members of our
board of directors, and who had access, at our expense, to our or independent
legal counsel.
18
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of the date of the prospectus by
each stockholder known by us to be the beneficial owner of more than 5% of our
common stock, each of our directors and executive officers and all executive
officers and directors as a group.
Shares of Common Stock Beneficially Owned(1)(2)
-----------------------------------------------
Name Title Number Percent
------------------ --------------- ----------- -------
RM Enterprises International,
Ltd. (3) 12,000,000 63.2%
50 20th Street
Brooklyn, New York 11232
Nexgen Holdings, Inc. (4) 2,791,000 14.7%
410 Park Avenue
Ndw York, New York 10022
Rubin Family Irrevocable
Stock Trust (5) 2,555,568 13.5%
25 Highland Boulevard
Dix Hills, New York 11746
Michael Metter (6) President -0- -0-%
One Tinker Lane
Greenwich, CT 06830
Steven Moskowitz (7) Secretary -0- -0-%
50 20th Street
Brooklyn, New York 11232
Jerome Schlanger (8) Treasurer 985,314 5.2%
50 20th Street
Brooklyn, New York 11232
Frank Lazauskas (9) A Director 883,654 4.4%
51 Niagara Street
Newark, New Jersey 07105
Kenneth Hubbard (10) 985,314 5.2%
19 Booth Court
Millbrook, New York 12545
Carole Klein (11) 985,314 5.2%
18 Aspen Way
Morristown, New Jersey 07960
Roger Eichenholtz (12) 135,260 0.7%
50 20th Street
Brooklyn, New York 11232
Officers and Directors 2,004,228 10.5%
(5 persons)
--------------------
19
(1) Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to
securities. Unless otherwise indicated below, the persons and entity named
in the table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable.
(2) The percentage of beneficial ownership is based on 18,985,000 shares of our
common stock outstanding as of the date of the prospectus.
(3) The control persons of RM Enterprises International, Ltd. are as follows:
Deborah Metter, The Mindy Moskowitz and Steven Moskowitz Trust, The Rubin
Family Irrevocable Stock Trust, Jerome and Madeline Schlanger, Frank
Lazauskas, Kenneth Hubbard and Carole Klein.
(4) The control person of Nexgen Holdings, Inc. is Guy Cohen.
(5) The beneficiaries of The Rubin Family Irrevocable Stock Trust are Linda
Rubin, Andrew Rubin and Lisa Rubin. The trust owns 2,000,000 shares of our
common stock and 4.623% of the capital stock of RM Enterprises.
(6) Deborah Metter, wife of Michael Metter, our President, is the beneficial
owner of 169,447 shares of our common stock representing 0.8% of our issued
and outstanding stock through her ownership of 1.41% of the capital stock
RM Enterprises. Michael Metter disclaims beneficial ownership of these
shares.
(7) The Mindy Moskowitz and Steven Moskowitz Trust for Mindy Moskowitz, Daniel
Moskowitz, Ilana Moskowits and Gitty Moskowitz is the beneficial owner of
1,591,598 shares of our common stock representing 6.7% of our issued and
outstanding stock through its ownership of 13.244% of the capital stock of
RM Enterprises. Steven Moskowitz, our Secretary, disclaims beneficial
ownership of these shares.
(8) Jerome and Madeline Schlanger, husband and wife, as joint tenants, own 8.2%
of the capital stock of RM Enterprises.
(9) Frank Lazauskas, a Director, owns 6.94% of the capital stock of RM
Enterprises.
(10) Kenneth Hubbard owns 8.2% of the capital stock of RM Enterprises.
(11) Carole Klein owns 8.2% of the capital stock of RM Enterprises.
(12) Roger Eichenholtz, an officer, owns 11.7% of the capital stock of RM
Enterprises.
20
DESCRIPTION OF SECURITIES
Common Stock
We are authorized to issue 50,000,000 shares of common stock, $.001 par
value per share, of which 18,985,000 shares are issued and outstanding as of the
date of the prospectus. Each outstanding share of common stock is entitled to
one vote, either in person or by proxy, on all matters that may be voted upon by
their holders at meetings of the stockholders.
Holders of our common stock (i) have equal ratable rights to dividends from
funds legally available therefore, if declared by our board of directors; (ii)
are entitled to share ratably in all of our assets available for distribution to
holders of common stock upon our liquidation, dissolution or winding up; (iii)
do not have preemptive, subscription or conversion rights, or redemption or
sinking fund provisions; and (iv) are entitled to one noncumulative vote per
share on all matters on which stockholders may vote at all meetings of our
stockholders. Cumulative voting for the election of directors is not provided
for in our amended certificate of incorporation, which means that the holders of
a majority of the shares voted can elect all of the directors then standing for
election.
Our certificate of incorporation provides that specified provisions may not
be repealed or amended except upon the affirmative vote of the holders of not
less than 2/3 of the outstanding stock entitled to vote. This provision would
enable the holders of more than 1/3 of our voting stock to prevent amendments to
the certificate of incorporation if they were favored by the holders of a
majority of the voting stock.
Preferred Stock
---------------
We may, subject to limitations prescribed by Delaware law, provide for the
issuance of up to 5,000,000 shares of our preferred stock in one or more series,
to establish from time to time the number of shares to be included in each such
series, to fix the rights, preferences and privileges of the shares of each
wholly unissued series and any qualifications, limitations or restrictions
thereon, and to increase or decrease the number of shares of any such series
(but not below the number of shares of such series then outstanding) without any
further vote or action by the stockholders. Our board of directors may authorize
the issuance of preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of our common
stock. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could, among
other things, have the effect of delaying, deferring or preventing a change in
control and may adversely affect the market price of the common stock and the
voting and other rights of the holders of common stock. We have no current plans
to issue any shares of preferred stock.
21
Reports to Stockholders
-----------------------
We intend to furnish our stockholders with annual reports containing
audited financial statements as soon as practicable after the end of each fiscal
year. Our fiscal year ends on May 31st.
Transfer Agent
--------------
We have appointed Olde Monmouth Stock Transfer Co. Inc., Atlantic
Highlands, New Jersey as transfer agent for our shares of common stock.
SELLING STOCKHOLDERS
We are registering 4,485,000 of the shares, which were owned by our
stockholders prior to the acquisition of the capital stock of Spongetech
International, Ltd. We will not receive any of the proceeds from sales of shares
offered under this prospectus.
All costs, expenses and fees in connection with the registration of the
selling stockholders' shares will be borne by us. All brokerage commissions, if
any, attributable to the sale of shares by selling stockholders will be borne by
selling stockholders.
The following table sets forth as of the date of the prospectus:
o the name of each selling stockholder;
o the number of selling stockholders;
o the aggregate number of shares owned by each selling stockholder; and
o the number of shares each member will own after the completion of the
offering made pursuant to the prospectus.
Shares Owned Prior Shares Owned After
Number of to the Offering the Offering
Shares --------------------- ------------------
Selling Stockholder Offered Number Percent Number Percent
-------------------- ----------- --------- ------- ------ -------
Shinya Araki 5,000 5,000 - -0- -0-%
Neil Foley 5,000 5,000 - -0- -0-%
Jean Geyer 10,000 10,000 - -0- -0-%
Emma Hass 8,000 8,000 - -0- -0-%
Melvin Koeller 5,000 5,000 - -0- -0-%
Malcom McGuire 10,000 10,000 - -0- -0-%
Sue Neil 8,000 8,000 - -0- -0-%
Kevin O'Hara 8,000 8,000 - -0- -0-%
Olson Jeweler 5,000 5,000 - -0- -0-%
Bettye Oustz 8,000 8,000 - -0- -0-%
Angelo Palmisano 5,000 5,000 - -0- -0-%
Linda Chadwick 5,000 5,000 - -0- -0-%
Carol Polevoy 8,000 8,000 - -0- -0-%
Philip Wong 8,000 8,000 - -0- -0-%
Neil Cox 8,000 8,000 - -0- -0-%
Richard Blundell 10,000 10,000 - -0- -0-%
22
Ken Heng 10,000 10,000 - -0- -0-%
Donna Lutsky 5,000 5,000 - -0- -0-%
Jay Lutsky 5,000 5,000 - -0- -0-%
Tanna Sessions 5,000 5,000 - -0- -0-%
Dean Sessions 5,000 5,000 - -0- -0-%
Patsy Sessions 5,000 5,000 - -0- -0-%
Michelle Brown 5,000 5,000 - -0- -0-%
James John 8,000 8,000 - -0- -0-%
Arden Amos 10,000 10,000 - -0- -0-%
Robert Sessions 5,000 5,000 - -0- -0-%
Robert Sonfield 10,000 10,000 - -0- -0-%
Margot Krimmel 10,000 10,000 - -0- -0-%
Bonnie Carol 10,000 10,000 - -0- -0-%
Max Krimmel 10,000 10,000 - -0- -0-%
Renegade Consulting 100,000 100,000 0.6% -0- -0-%
Sunburst Partners 100,000 100,000 0.6% -0- -0-%
Joel Pensley 775,000 775,000 4.1% -0- -0-%
Falcon Crest Capital,
Inc. 500,000 500,000 2.6% -0- -0-%
Nexgen Holdings, Inc. 2,791,000 2,791,000 14.7% -0- -0-%
410 Park Avenue
New York, NY 10022
Number of stockholders: 33
Stock Purchase Agreement
------------------------
This prospectus covers 4,000,000 shares of common stock issuable to
Colebrook under the stock purchase agreement. Colebrook is engaged in the
business of investing in publicly-traded equity securities for its own account.
Colebrook does not own any shares of our common stock. It is obligated to
purchase common stock under the stock purchase agreement; it has no other
commitments or arrangements to purchase or sell any of our securities.
On December 16, 2002, we entered into a stock purchase agreement with
Colebrook. The stock purchase agreement entitles us to issue and sell up to $2
million of our common stock to Colebrook following the effective date of this
registration statement, in tranches not to exceed $50,000. We refer to each
election by us to sell stock under the stock purchase agreement as a "put."
We may begin exercising puts on the date of effectiveness of this
prospectus and continue for a two year period. To exercise a put, we must have
an effective registration statement on file with the SEC covering the resale to
the public by Colebrook of any shares that it acquires under the stock purchase
agreement. Also, we must give Colebrook a one trading day advance notice of the
date on which we intend to exercise a particular put. The notice must indicate
the number of shares of common stock we intend to sell to Colebrook and the
aggregate price of the shares covered by the put.
We cannot issue additional shares to Colebrook that, when added to the
shares Colebrook owns will result in Colebrook holding over 9.9% of our
outstanding shares upon completion of the put.
Colebrook will pay us 70% of the market price for each share of our common
stock under each put. Market price is defined as the average closing bid price
of our common stock during the five trading days preceding the date of the
notice.
23
Limitations and Conditions to our Put Rights
---------------------------------------------
Our ability to put shares of our common stock, and Colebrook's obligation
to purchase the shares, is subject to the satisfaction of certain conditions.
These conditions, among others, include:
o we have satisfied all obligations under the stock purchase agreement;
o our common stock is quoted and traded on the O.T.C. Bulletin Board, or
listed on Nasdaq or the American Stock Exchange or an exchange;
o our representations and warranties in the stock purchase agreement are
accurate as of the date of each put;
o we have reserved for issuance a sufficient number of shares of our
common stock to satisfy our obligations to issue shares under any put;
o the registration statement for the shares we will be issuing to
Colebrook is effective as of the put date and no stop order with
respect to the registration statement is in effect;
o a minimum of seven trading days from the date of a prior put before
exercising a subsequent put has passed;.and
o our trading volume averages at least 25,000 shares per day during the
five trading days preceding the put notice;
Colebrook is not required to acquire and pay for any additional shares of
our common stock once it has acquired $2 million worth of put shares.
Additionally, Colebrooks is not required to acquire and pay for any shares
of common stock with respect to any particular put for which, between the date
we give advance notice of an intended put and the date the particular put
closes:
o we announce or implemente a stock split or combination of our common
stock;
o we pay a dividend on our common stock;
o we make a distribution of all or any portion of our assets or
evidences of indebtedness to the holders of our common stock; or
o we consummate a major transaction, such as a sale of all or
substantially all of our assets or a merger or tender or exchange
offer that results in a change in control.
24
We may not require Colebrook to purchase any put shares if:
o we, or any of our directors or executive officers, have engaged in a
transaction or conduct related to us that resulted in:
o an SEC enforcement action, administrative proceeding or civil lawsuit;
or
o a civil judgment or criminal conviction or for any other offense that,
if prosecuted criminally, would constitute a felony under applicable
law;
o we file for bankruptcy or any other proceeding for the relief of
debtors;
o we breach covenants contained in the stock purchase agreement.
Termination
-----------
We may terminate our right to initiate further puts or terminate the stock
purchase agreement at any time by providing Colebrook with written notice of our
intention to terminate. However, any termination will not affect any other
rights or obligations we have concerning the stock purchased.
Right of Indemnification
------------------------
We have agreed to indemnify Colebrook including its owners, employees,
investors and agents, from all liability and losses resulting from any
misrepresentations or breaches we make in connection with the stock purchase
agreement or the registration statement.
Effect on our Outstanding Common Stock
--------------------------------------
The issuance of common stock under the stock purchase agreement will not
affect the rights or privileges of existing holders of common stock except that
the issuance of shares will dilute the economic and voting interests of each
shareholder.
We cannot determine the exact number of shares of our common stock issuable
under the stock purchase agreement and the resulting dilution to our existing
shareholders, which will vary with the extent to which we utilize the stock
purchase agreement and the market price of our common stock. The potential
effects of any dilution on our existing shareholders include the significant
dilution of the current shareholders' economic and voting interests in us.
The table below includes information regarding ownership of our common
stock by Colebrook as of the date of the prospectus and the number of shares
that it may sell under the prospectus. The actual number of shares of our common
stock issuable to Colebrook under our Put rights is subject to adjustment and
could be materially less or more than the amount contained in the table below,
depending on factors which we cannot predict at this time, including, among
other factors, the future price of our common stock.
25
Shares Shares Percent
Beneficially Beneficially of Class
Owned Prior Owned After Owned
to the Shares the After the
Offering Offered(1) Offering Offering
------------ ---------- ------------- ----------
Colebrook, Inc. -0- 4,000,000(2) 4,000,000 -0-
(1) Assumes that Colebrook will sell all of the shares of common stock it owns
and will purchase all the stock offered under the securities purchase
agreement. We cannot assure you that Colebrook will sell all or any of
these shares.
(2) Represents up to 4,000,000 shares of common stock issuable to Colebrook
under the stock purchase agreement; however, we are not obligated to sell
any put shares to Colebrook nor do we intend to sell any put shares to
Colebrook unless it is beneficial to us. The put shares would not be deemed
beneficially owned within the meaning of Sections 13(d) and 13(g) of the
Exchange Act before their acquisition by Colebrook It is expected that
Colebrook will not beneficially own more than 9.9% of our outstanding stock
at any one time.
PLAN OF DISTRIBUTION
The shares covered by this prospectus may be offered and sold from time to
time by the selling stockholders. The term "selling stockholders" includes
donees, pledgees, transferees or other successors-in-interest selling shares
received after the date of the prospectus from a selling stockholder as a gift,
pledge, partnership distribution or other non-sale related transfer. Selling
stockholders will act independently of us in making decisions with respect to
the timing, manner and size of each sale. Sales may be made on one or more
exchanges or in the over-the-counter market or otherwise, at prices and under
terms then prevailing or at prices related to the then current market price or
in negotiated transactions. Selling stockholders may sell their shares by one or
more of, or a combination of, the following methods:
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to the prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
o block trades in which the broker-dealer so engaged will attempt to
sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction; and
o in privately negotiated transactions.
In addition, any shares that qualify for sale pursuant to Rule 144 may be
sold under Rule 144 rather than pursuant to the prospectus.
26
To the extent required, the prospectus may be amended or supplemented from
time to time to describe a specific plan of distribution. In connection with
distributions of the shares or otherwise, the selling stockholders may enter
into hedging transactions with broker-dealers or other financial institutions.
In connection with such transactions, broker-dealers or other financial
institutions may engage in short sales of the common stock in the course of
hedging the positions they assume with the selling stockholders. The selling
stockholders may also sell their common stock short and redeliver the shares to
close out such short positions. Selling stockholders may also enter into option
or other transactions with broker-dealers or other financial institutions which
require the delivery to such broker-dealer or other financial institution of
shares offered by this prospectus, which shares such broker-dealer or other
financial institution may resell pursuant to the prospectus (as supplemented or
amended to reflect such transaction). Selling stockholders may also pledge
shares to a broker-dealer or other financial institution, and, upon a default,
such broker-dealer or other financial institution, may effect sales of the
pledged shares pursuant to this prospectus (as supplemented or amended to
reflect such transaction).
In effecting sales, broker-dealers or agents engaged by selling
stockholders may arrange for other broker-dealers to participate. Broker-dealers
or agents may receive commissions, discounts or concessions from the selling
stockholders in amount to be negotiated immediately prior to the sale.
In offering the shares covered by the prospectus, selling stockholders and
any broker-dealers who execute sales for the selling stockholders may be deemed
to be "underwriters" within the meaning of the Securities Act in connection with
such sales. Any profits realized by selling stockholders and the compensation of
any broker-dealer may be deemed to be underwriting discounts and commissions.
In order to comply with the securities laws of certain states, shares must
be sold in such jurisdictions only through registered or licensed brokers or
dealers. In addition, in certain states, shares may not be sold unless they have
been registered or qualified for sale in the applicable state or an exemption
from the registration or qualification requirement is available and is complied
with.
We have advised the selling stockholders that the anti-manipulation rules
of Regulation M under the Exchange Act may apply to sales of shares in the
market and to the activities of the selling stockholders and their affiliates.
In addition, we will make copies of this prospectus available to the selling
stockholders for the purpose of satisfying the prospectus delivery requirements
of the Securities Act. Selling stockholders may indemnify any broker-dealer
participating in transactions involving the sale of the shares against certain
liabilities, including liabilities arising under the Securities Act.
At the time a particular offer of shares is made, if required, a prospectus
supplement will be distributed that will set forth the number of shares being
offered and the terms of the offering, including the name of any underwriter,
dealer or agent, the purchase price paid by any underwriter, any discount,
commission and other item constituting compensation, any discount, commission or
concession allowed or reallowed or paid to any dealer, and the proposed selling
price to the public.
We have agreed to indemnify the selling stockholders against certain
liabilities, including certain liabilities under the Securities Act.
27
We have agreed with the selling stockholders to keep the registration
statement of which this prospectus constitutes a part effective until the
earlier of:
o such time as all of the shares covered by this prospectus have been
disposed of pursuant to and in accordance with the Registration
Statement or
o two years from the effective date of the registration statement.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the effectiveness of the registration statement, 4,485,000 shares of
common stock owned by our stockholders, will be freely tradable without
restriction under the Securities Act. None of these shares are held by our
"affiliates" as that term is defined in Rule 144 under the Securities Act. We
have outstanding 18,985,000 shares of our common stock.
Shares of our common stock held by affiliates will be eligible for sale in
the public market, subject to certain volume limitations and the expiration of
applicable holding periods under Rule 144 under the Securities Act. In general,
under Rule 144, persons who have beneficially owned restricted shares for at
least one year are entitled to sell within any three-month period a number of
shares which does not exceed the greater of 1% of the number of shares of common
stock then outstanding (which will equal approximately 189,850 shares) or the
average weekly trading volume of the common stock during the four calendar weeks
preceding the filing of a Form 144 with the SEC relating to sales of common
stock. Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a person who has not been one of our affiliates at any
time during the three months preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
We can offer no assurance that an active public market in our shares will
develop. Future sales of substantial amounts of our shares (including shares
issued upon exercise of outstanding options) in the public market could
adversely affect market prices prevailing from time to time and could impair our
ability to raise capital through the sale of our equity securities.
WHERE YOU CAN FIND MORE INFORMATION
We have not previously been required to comply with the reporting
requirements of the Securities Exchange Act. We have filed with the SEC a
registration statement on Form SB-2 to register the securities offered by the
prospectus. The prospectus is part of the registration statement, and, as
permitted by the SEC's rules, does not contain all of the information in the
registration statement. For further information about us and the securities
offered under the prospectus, you may refer to the registration statement and to
the exhibits and schedules filed as a part of the registration statement. You
can review the registration statement and its exhibits at the public reference
facility maintained by the SEC at Judiciary Plaza, Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference facility. The registration statement is also
available electronically on the World Wide Web at http://www.sec.gov.
28
LEGAL PROCEEDINGS
We are not a party to nor are we aware of any existing, pending or
threatened lawsuits or other legal actions.
LEGAL MATTERS
Certain legal matters, including the legality of the issuance of the shares
of common stock offered herein, are being passed upon for us by our counsel,
Joel Pensley, Esq., 211 Schoolhouse Road, Norfolk, Connecticut 06058. Mr.
Pensley is the beneficial owner of 775,000 shares of our common stock; he is
also the beneficial owner of Renegade Consulting, Inc., the holder of 100,000
shares.
EXPERTS
Our financial statements for the years ended May 31, 2002 and 2001 have
been included herein and in the registration statement in reliance upon the
report of DDK & Company LLP, New York, New York, independent certified public
accountants, appearing elsewhere herein, and upon the authority of DDK & Company
LLP as experts in accounting and auditing.
29
INDEX TO FINANCIAL STATEMENTS
SPONGETECH DELIVERY SYSTEMS, INC.
SPONGETECH DELIVERY SYSTEMS, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
THREE MONTHS ENDED AUGUST 31, 2002 (unaudited) AND 2001 (unaudited)
AND YEARs ENDED MAY 31, 2002 AND 2001
PAGE
----
INDEPENDENT AUDITORS' REPORT F 2
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS AS OF AUGUST 31, 2002 (unaudited)
AND MAY 31, 2002 3
STATEMENTS OF OPERATIONS - THREE MONTHS ENDED
AUGUST 31, 2002 (unaudited) AND 2001 (unaudited) AND
YEARS ENDED MAY 31, 2002 AND 2001 4
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICEINCY) -
THREE MONTHS ENDED AUGUST 31, 2002 (unaudited) and YEARS
ENDED MAY 31, 2002 AND 2001 5
STATEMENTS OF CASH FLOWS - THREE MONTHS ENDED AUGUST 31, 2002
(unaudited) AND 2001 (unaudited) AND YEARS ENDED
MAY 31, 2002 AND 2001 6 - 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 -17
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Spongetech Delivery Systems, Inc.
and Subsidiary
We have audited the accompanying consolidated balance sheet of Spongetech
Delivery Systems, Inc. and Subsidiary as of May 31, 2002, and the related
consolidated statements of operations, changes in shareholders' equity
(deficiency), and cash flows for the years ended May 31, 2002 and 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Spongetech
Delivery Systems, Inc. and Subsidiary as of May 31, 2002, and the consolidated
results of its operations and its consolidated cash flows for the years ended
May 31, 2002 and 2001 in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has incurred
net losses of approximately $102,000 and $198,000 for the years ended May 31,
2002 and 2001. At May 31, 2002, current liabilities exceed current assets by
approximately $137,000, and total liabilities exceed total assets by
approximately $149,000. These factors create substantial doubt about the
Company's ability to continue as a going concern. The recovery of assets and
continuation of future operations are dependent upon the Company's ability to
obtain additional debt or equity financing and its ability to generate revenues
sufficient to continue pursuing its business purposes. (See note 9).
August 15, 2002
/s/DDK & Company LLP
DDK & Company LLP
F-2
SPONGETECH DELIVERY SYSTEMS, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
August 31, May 31,
2002 2002
----------- ---------
(unaudited)
ASSETS
Current Assets
Cash $ 97 $ 175
Accounts receivable 545 -
Inventories 48,020 49,357
Due from related parties 10,384 118
---------- ---------
Total current assets 59,046 49,650
Property and equipment, at cost, less
accumulated depreciation of $12,649
and $9,218 as of August 31, 2002
and May 31, 2002, respectively 36,552 39,983
Deferred offering costs 4,000 -
---------- ----------
Total assets $ 99,598 $ 89,633
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Accounts payable and accrued expenses $ 168,355 $ 158,865
Note payable - related party 28,015 27,390
Income taxes payable 1,600 400
Due to related parties 4,740 -
------- -------
Total current liabilities 202,710 186,655
Due to related party 51,930 51,930
-------- --------
Total liabilities 254,640 238,585
-------- --------
Shareholders' Equity (Deficiency)
Common stock, $.001 par value; authorized
50,000,000 shares; issued and outstanding
18,985,000 and 12,000,000 shares as of
August 31, 2002 and May 31, 2002,
respectively 18,985 12,000
Preferred stock $.001 par value; authorized
5,000,000 shares; no shares issued and
outstanding - -
Additional paid-in capital 190,448 192,043
Deficit (364,475) (352,995)
--------- ---------
Total shareholders' equity (deficiency) (155,042) (148,952)
--------- ---------
Total liabilities and shareholders' equity
(deficiency) $ 99,598 $ 89,633
========= ========
See notes to consolidated financial statements.
F-3
SPONGETECH DELIVERY SYSTEMS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
August 31, Year Ended May 31,
--------------------- ---------------------
2002 2001 2002 2001
--------- ---------- -------- --------
(unaudited)(unaudited)
Sales $ 8,797 $ 15,669 $ 89,973 $ 11,790
Cost of goods sold 1,337 14,804 121,643 31,683
-------- --------- --------- ---------
Gross profit (loss) 7,460 865 (31,670) (19,893)
-------- --------- ---------- ----------
Operating expenses
Selling 176 13,601 15,982 50,416
General and administrative 17,238 12,006 51,711 127,034
Interest 1,126 735 2,714 547
------ ------ ------ --------
18,540 26,342 70,407 177,997
-------- --------- ---------- ----------
Loss before provision for income
taxes (11,080) (25,477) (102,077) (197,890)
Income taxes 400 373 400 428
-------- -------- ---------- ---------
Net loss $ (11,480) $ (25,850) $ (102,477) $ (198,318)
========= ======== ========= ==========
Basic and diluted (loss) per
common stock
Net loss per share -
basic and diluted NIL NIL $ (.01) $ (.02)
========= ======== ========= ==========
Weighted average common
shares outstanding 15,644,348 12,000,000 12,000,000 12,000,000
========== ========== ========== ==========
See notes to consolidated financial statements.
F-4
SPONGETECH DELIVERY SYSTEMS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
Three Months Ended August 31, 2002 (Unaudited)
and Years Ended May 31, 2002 and 2001
Total
Additional Shareholder's
Number of Capital Paid-In Equity
Shares Stock Capital Deficit (Deficiency)
--------- ------- ---------- ------- --------------
Balance - June 1, 2000 12,000,000 $ 12,000 $ - $ (52,200) $ (40,200)
Net loss for year ended
May 31, 2001 - - - (198,318) (198,318)
---------- ------- ------- --------- ---------
12,000,000 12,000 - (250,518) (238,518)
Contributions - - 105,100 - 105,100
---------- ------- ------- --------- ---------
Balance - May 31, 2001 12,000,000 12,000 105,100 (250,518) (133,418)
Net loss for year ended
May 31, 2002 - - - (102,477) (102,477)
---------- ------- ------- --------- ---------
12,000,000 12,000 105,100 (352,995) (235,895)
Contributions - - 86,943 - 86,943
---------- ------ ------- -------- ---------
Balance - May 31, 2002 12,000,000 12,000 192,043 (352,995) (148,952)
Issuance of common stock 6,985,000 6,985 (1,595) - 5,390
Net loss for three months
ended August 31, 2002 - - - (11,480) (11,480)
---------- --------- --------- ---------- -----------
Balance - August 31, 2002 18,985,000 $ 18,985 $ 190,448 $(364,475) $ (155,042)
========== ======== ========= ========== ===========
See notes to consolidated financial statements.
F-5
SPONGETECH DELIVERY SYSTEMS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended Year Ended
August 31, May 31,
------------------ --------------
2002 2001 2002 2001
---------- ----------- --------- ----------
(unaudited) (unaudited)
----------- ----------- ---------- ----------
Operating Activities
Net loss $ (11,480) $ (25,850) $ (102,477) $ (198,318)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities
Bad debts - - 13,909 -
Depreciation 3,431 2,076 8,308 1,241
Interest expense added to loan
principal 625 625 2,390 -
Changes in operating assets and
liabilities
Accounts receivable (545) - (13,909) 894
Inventories 1,337 (26,867) (47,164) 19,861
Prepaid expense and other
current assets - 259 259 (259)
Accounts payable and accrued
expenses 9,490 56,994 95,399 47,714
Income tax payable 400 400 - -
Due to related parties (3,336) - - 12,971
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities (78) 7,637 (43,285) (115,896)
--------- --------- --------- ---------
Investing Activities
Acquisition of property and
equipment - (33,540) (33,540) (14,900)
--------- --------- --------- ---------
Net cash used in investing
activities - (33,540) (33,540) (14,900)
--------- --------- --------- ---------
See notes to consolidated financial statements.
F-6
SPONGETECH DELIVERY SYSTEMS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Ended Year Ended
August 31, May 31,
------------------- -------------------
2002 2001 2002 2001
--------- --------- ------- ---------
(unaudited) (unaudited)
---------- ----------- -------- ----------
Financing Activities
Proceeds of note payable - related
party - - - 25,000
Proceeds from additional paid-in
capital - 26,850 76,943 105,100
--------- --------- -------- ---------
Net cash provided by
financing activities - 26,850 76,943 130,100
--------- --------- -------- ---------
Net increase (decrease) in cash (78) 947 118 (696)
Cash - beginning 175 57 57 753
--------- --------- -------- ---------
Cash - end $ 97 $ 1,004 $ 175 $ 57
========= ========= ======== ==========
Supplemental Information
Interest paid $ 500 $ - $ 110 $ 547
Income taxes paid $ - $ - $ - $ -
Noncash Transactions
Assets abandoned $ - $ - $ - $ 1,991
Parent company debt
contributed to additional paid-in
capital $ - $ 10,000 $ 10,000 $ -
Issuance of common stock $ 5,390 $ - $ - $ -
See notes to consolidated financial statements.
F-7
SPONGETECH DELIVERY SYSTEMS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended May 31, 2002 and 2001 and
Three Months Ended August 31, 2002 (Unaudited)
1 - Summary of Significant Accounting Policies
Nature of Operations
Spongetech Delivery Systems, Inc. ("SDS"), formerly known as Nexgen
Acquisitions VIII, Inc., a Delaware corporation, was incorporated on February 5,
2002. At May 31, 2002, SDS was inactive. On July 15, 2002, SDS acquired all the
outstanding shares of Spongetech International, Ltd. ("SIL") (formerly RSI
Enterprises, Inc. and Romantic Scents, Inc.), a New York corporation,
incorporated on July 18, 1999. SIL has developed a line of hydrophilic
polyurethane auto, bath, beauty and home applicators and has commenced
distribution of its automotive product.
Basis of Presentation / Going Concern
The consolidated financial statements have been prepared for purposes of
registration with the Securities and Exchange Commission ("SEC"). The
consolidated financial statements include the accounts of SDS, the registrant,
and its wholly-owned subsidiary SIL (collectively, the "Company") with all
significant intercompany accounts and transactions eliminated, and have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplates continuation of the Company as a
going concern. However, the Company has sustained substantial operating losses
in recent years, current liabilities exceed current assets, and total
liabilities exceed total assets. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The recovery of assets and
continuation of future operations are dependent upon the Company's ability to
obtain additional debt or equity financing and its ability to generate revenues
sufficient to continue pursuing its business purposes. The Company is actively
pursuing financing to fund future operations.
Interim Financial Information (Unaudited)
The interim financial statements of the Company as of August 31, 2002 and
for the three months ended August 31, 2002 and 2001, included herein, have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the SEC. The unaudited interim financial statements include all adjustments,
consisting of normal recurring adjustments, considered necessary for a fair
presentation of the results for the interim periods presented. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations relating
to interim financial statements. In the opinion of management, the accompanying
unaudited statements reflect all adjustments necessary to present fairly the
results of its operations and its cash flows for the three months ended August
31, 2002 and 2001.
F-8
SPONGETECH DELIVERY SYSTEMS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended May 31, 2002 and 2001 and
Three Months Ended August 31, 2002 (Unaudited)
1 - Summary of Significant Accounting Policies (Continued)
Accounts Receivable
Accounts receivable have been adjusted for all known uncollectible
accounts.
Inventories
Finished products inventories are carried at cost, principally first-in,
first-out, but not in excess of market.
Property and Equipment
Property and equipment are carried at cost. Depreciation has been provided
using straight-line and accelerated methods over the estimated useful lives of
the assets. Repairs and maintenance are expensed as incurred, and renewals and
betterments are capitalized.
Deferred Income Taxes
The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences of temporary differences between the
carrying amounts and the income tax bases of assets and liabilities and the
effect of future income tax planning strategies to reduce any deferred income
tax liability.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.
Deferred Offering Costs
Deferred offering costs incurred by the Company in connection with the
proposed registration statement will be offset against additional paid-in
capital upon the completion of the registration, if successful, or charged to
operations if abandoned.
Advertising Costs
Advertising costs are expensed as incurred. For the years ended May 31,
2002 and 2001, advertising costs totaled $3,700 and $26,900, respectively. For
the three months ended August 31, 2002 and 2001, no advertising costs were
incurred.
F-9
SPONGETECH DELIVERY SYSTEMS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended May 31, 2002 and 2001 and
Three Months Ended August 31, 2002 (Unaudited)
1 - Summary of Significant Accounting Policies (Continued)
Shipping and Handling Costs
Shipping costs are included in selling expenses. For the years ended May
31, 2002 and 2001, shipping costs totaled $2,726 and $644, respectively. For the
three months ended August 31, 2002 and 2001, shipping costs totaled $- and $56,
respectively.
Net Income (Loss) Per Share
Per share data has been computed and presented pursuant to the provisions
of SFAS No. 128, earnings per share. Net income (loss) per common share - basic
is calculated by dividing net income (loss) by the weighted average number of
common shares outstanding during the period. Net income (loss) per common share
- diluted is calculated by dividing net income (loss) by the weighted average
number of common shares and common equivalent shares for stock options
outstanding during the period.
Recent Accounting Pronouncements
New accounting statements issued, and adopted by the Company, include the
following:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, "Business Combinations" ("SFAS 141"), which requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting. As a result, use of the pooling-of-interests
method is prohibited for business combinations initiated thereafter. SFAS 141
also establishes criteria for the separate recognition of intangible assets
acquired in a business combination. The adoption of SFAS 141 did not have a
material impact on the Company's consolidated results of operations, financial
position or cash flows
In July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), which requires that goodwill and certain other
intangible assets having indefinite lives no longer be amortized to earnings,
but instead be subject to periodic testing for impairment. Intangible assets
determined to have definitive lives will continue to be amortized over their
useful lives. This Statement is effective for the Company's 2003 fiscal year.
However, goodwill and intangible assets acquired after June 30, 2001 are subject
immediately to the non-amortization and amortization provisions of this
Statement. The adoption of SFAS 142 did not have an impact on the Company's
consolidated results of operations, financial position or cash flows.
F-10
SPONGETECH DELIVERY SYSTEMS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended May 31, 2002 and 2001 and
Three Months Ended August 31, 2002 (Unaudited)
1 - Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements (Continued)
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), which provides the accounting requirements
for retirement obligations associated with tangible long-lived assets. This
Statement requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. This Statement is
effective for the Company's 2003 fiscal year, and early adoption is permitted.
The adoption of SFAS 143 did not have a material impact on the Company's
consolidated results of operations, financial position or cash flows.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which excludes from
the definition of long-lived assets goodwill and other intangibles that are not
amortized in accordance with SFAS 142. SFAS 144 requires that long-lived assets
to be disposed of by sale be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS 144 also expands the reporting of discontinued
operations to include components of an entity that have been or will be disposed
of rather than limiting such discontinuance to a segment of a business. This
Statement is effective for the Company's 2003 fiscal year, and early adoption is
permitted. The adoption of SFAS 144 did not have a material impact on the
Company's consolidated results of operations, financial position or cash flows.
2 - Property and Equipment
Property and equipment is summarized as follows:
Estimated
Useful Lives - August 31, May 31,
Years 2002 2002
------------ ---------- ---------
(unaudited)
Furniture and fixtures 5 - 7 $ 761 $ 761
Machinery and equipment 5 - 7 10,128 10,128
Molds 5 38,312 38,31
-------- --------
49,201 49,201
Less: Accumulated depreciation 12,649 9,218
--------- --------
$ 36,552 $ 39,983
========= ========
Depreciation expense for the years ended May 31, 2002 and 20001 was $8,308
and $1,241, respectively. Depreciation expense for the three months ended August
31, 2002 and 2001 was $3,431 and $2,077, respectively.
F-11
SPONGETECH DELIVERY SYSTEMS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended May 31, 2002 and 2001 and
Three Months Ended August 31, 2002 (Unaudited)
3 - Stock Purchase Agreement
On July 15, 2002, SDS entered into an agreement with RM Enterprises
International, Inc., a Delaware corporation, to acquire its wholly-owned
subsidiary SIL. On that date, SDS acquired all of the common stock of SIL for
12,000,000 shares of its $.001 par value common stock. The transaction was
structured as a tax free exchange and was accounted for as a reverse
acquisition, using the purchase method of accounting.
The following are the proforma financial statements as of May 31, 2002 and
for the year then ended, and the income statement for the three months ended
August 31, 2002:
May 31, 2002
RSI Nexgen
Enterprises, Acquisitions Proforma Proforma
Inc. VIII, Inc. Adjustments Combined
------------ ------------ ----------- ----------
ASSETS
Current Assets
Cash $ 175 $ - $ - $ 175
Inventories 49,357 - - 49,357
Due from affiliate - 2,190 - 2,190
Due from related parties 118 - - 118
------------- ----------- ----------- -----------
Total current assets 49,650 2,190 - 51,840
Property, plant, and equipment, net 39,983 - - 39,983
------------- --------- ----------- ------------
Total assets $ 89,633 $ 2,190 $ - $ 91,823
============= ========= =========== ============
LIABILITIES AND SHAREHOLDER'S EQUITY
(DEFICIENCY)
Current Liabilities
Accounts payable and accrued
expenses $ 158,865 $ - $ - $ 158,865
Note payable - related party 27,390 - - 27,390
Income taxes payable 400 400 - 800
------------ ---------- ---------- -----------
Total current liabilities 186,655 400 - 187,055
Due to related party 51,930 - - 51,930
------------ --------- --------- ----------
Total liabilities 238,585 400 - 238,985
============ ========= ========= ===========
F-12
SPONGETECH DELIVERY SYSTEMS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended May 31, 2002 and 2001 and
Three Months Ended August 31, 2002 (Unaudited)
3 - Stock Purchase Agreement (Continued)
Shareholders' Equity (Deficiency)
Common stock, stated at par value 12,000 6,010 - 18,010
Additional paid-in capital 192,043 1,971 (6,191) 187,823
Deficit (352,995) (6,191) 6,191 (352,995)
------------ --------- ---------- -----------
Total shareholders' equity
(deficiency) (148,952) 1,790 - (147,162)
------------ --------- --------- ----------
Total liabilities and shareholders'
equity (deficiency) $ 89,633 $ 2,190 $ - $ 91,823
============ ========== ========= ===========
Year Ended May 31, 2002
RSI Nexgen
Enterprises, Acquisitions Proforma Proforma
Inc. VIII, Inc. Adjustments Combined
------------- ------------- ----------- --------
Sales $ 89,973 $ - $ - $ 89,973
Cost of goods sold 121,643 - - 121,643
---------- -------- ------ ----------
Gross profit (loss) (31,670) - - (31,670)
---------- -------- ------ ----------
Operating expenses
Selling 15,982 - - 15,982
General and administrative 51,711 5,791 - 57,502
Interest 2,714 - - 2,714
---------- -------- ------ ----------
70,407 5,791 - 76,198
---------- -------- ------ ----------
Loss before provision for
income taxes (102,077) (5,791) - (107,868)
Income taxes 400 400 - 800
---------- -------- ------ ----------
Net loss $ (102,477) $ (6,191) $ - $ (108,668)
========== ========= ====== ===========
F-13
SPONGETECH DELIVERY SYSTEMS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended May 31, 2002 and 2001 and
Three Months Ended August 31, 2002 (Unaudited)
3 - Stock Purchase Agreement (Continued)
Three Months Ended August 31, 2002 (Unaudited)
RSI Nexgen
Enterprises, Acquisitions Proforma Proforma
Inc. VIII, Inc. Adjustments Combined
------------ ------------ ----------- --------
Sales $ 8,797 $ - $ - $ 8,797
Cost of goods sold 1,337 - - 1,337
-------- ------ ------ ----------
Gross profit (loss) 7,460 - - 7,460
-------- ------ ------ ----------
Operating expenses
Selling 176 - - 176
General and administrative 17,238 5,775 - 23,013
Interest 1,126 - - 1,126
-------- ------ ------ ----------
18,540 5,775 - 24,315
-------- ------ ------ ----------
Loss before provision
for income taxes (11,080) (5,775) - (16,855)
Income taxes 400 400 - 800
--------- -------- ------ ----------
Net loss $ (11,480) $(6,175) $ - $ (17,655)
======== ======== ====== ==========
4 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
August 31, May 31,
2002 2002
(unaudited)
----------- ---------
Purchases $ 112,018 $ 112,018
American Express - charge card 17,882 19,622
Professional fees 33,978 22,748
Freight charges 3,394 3,394
Other 1,083 1,083
--------- ----------
$ 168,355 $ 158,865
========= ==========
F-14
SPONGETECH DELIVERY SYSTEMS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended May 31, 2002 and 2001 and
Three Months Ended August 31, 2002 (Unaudited)
5 - Note Payable - Related Party
During the year ended May 31, 2001, a relative of one of the parent
company's shareholders loaned $25,000 to the Company. The note bears interest at
10% per annum and is payable upon demand. Related interest expense for the years
ended May 31, 2002 and 2001 was $2,500 and $547, respectively, and for the three
months ended August 31, 2002 and 2001 was $625 and $625, respectively. At August
31, 2002 and May 31, 2002, unpaid interest of $625 and $2,390, respectively, has
been added to the loan principal.
6 - Related Party Transactions
The Company shares its facility with other related businesses. Expenses
incurred in the operations of the facility, including rent, telephone, and other
office expenses, were allocated to the various businesses. The allocations were
based on usage. Management believes these allocations are reasonable. At August
31, 2002 and May 31, 2002, the Company has a non-interest bearing liability,
aggregating $51,930, payable to one of these related parties. At May 31, 2002,
the related party agreed to extend the maturity date to January 2004.
Accordingly, this liability has been reclassified as long-term debt.
At May 31, 2001, the Company has a non-interest bearing liability to its
parent of $10,000, which was contributed to additional paid-in capital during
the year ended May 31, 2002.
7 - Additional Paid-in Capital
During the years ended May 31, 2002 and 2001, SIL's former parent
contributed $86,943 and $105,100, respectively, as additional paid-in capital.
F-15
SPONGETECH DELIVERY SYSTEMS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended May 31, 2002 and 2001 and
Three Months Ended August 31, 2002 (Unaudited)
8 - Deferred Income Taxes
At August 31, 2002 and May 31, 2002, the Company has approximately $363,000
and $351,000, respectively, of net operating loss carryforwards available, which
expire in various years through May 31, 2022. The significant component of the
Company's deferred tax asset as of August 31, 2002 and May 31, 2002 is as
follows:
August 31, May 31,
2002 2002
----------- ---------
(unaudited)
Non-Current
Net operating loss carryforwards $ 163,000 $ 158,000
Valuation allowance for deferred tax asset 163,000 158,000
---------- ----------
$ - $ -
========== ==========
SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax asset will not be realized.
At August 31, 2002 and May 31, 2002, a valuation allowance for the full amount
of the net deferred tax asset was recorded.
The reconciliation of reported income tax expense (benefit) to the amount
of income tax expense that would result from applying domestic federal income
taxes at the statutory rate is as follows:
August 31, May 31,
2002 2002
----------- ----------
(unaudited)
Statutory federal income tax (benefit) $ (4,000) $ (35,000)
State and local income tax (benefit) - net of
federal benefit (1,000) (12,000)
Valuation allowance 5,000 47,000
---------- -----------
$ - $ -
========== ===========
F-16
SPONGETECH DELIVERY SYSTEMS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended May 31, 2002 and 2001 and
Three Months Ended August 31, 2002 (Unaudited)
9 - Supply and License Agreements
In July 2001, the Company entered into a supply and requirement agreement
with Dicon Technologies ("Dicon"), a manufacturing company that has
technological know-how and patented and proprietary information relating to
hydrophilic foam materials (sponges) and their applications. The agreement,
which expires after three years provides for two renewal periods, requires the
Company to purchase all of their requirement from Dicon, and Dicon grants
exclusive worldwide rights to distribute the products. Minimum annual purchase
requirements are set forth in the agreement. The Company has satisfied the
minimum purchase requirement for the first year.
The Company and Dicon have also entered into an exclusive license agreement
for certain molded hydrophilic foam products which the Company helped develop,
with super absorbent polymer and detergent soaps and waxes used for the cleaning
and polishing of land, sea and transportation vehicles. The term of the
agreement is for the full life of any design patent, which may be issued on the
molded sponge design.
10 - Subsequent Events
As part of a plan of recapitilization and funding, the Company undertook a
series of steps as follows:
In December 2002, the SDS and its subsidiary each merged into a newly
formed Delaware corporation. The surviving corporation changed its name to
Spongetech Delivery Systems, Inc.("Spongetech").
On December 26, 2002, Spongetech entered into a securities purchase
agreement. The agreement entitles Spongetech to issue up to $2 million of its
common stock from time to time, in blocks of between $25,000 to $50,000 each, at
a price per share calculated by a formula based on Spongetech's stock price. The
securities purchase agreement terminates two years following the effective date
of the registration of the shares. Proceeds of stock sales will be used for
working capital.
9 - Supply and License Agreements
In July 2001, the Company entered into a supply and requirement agreement
with Dicon Technologies ("Dicon"), a manufacturing company that has
technological know-how and patented and proprietary information relating to
hydrophilic foam materials (sponges) and their applications. The agreement,
which renews annually, requires the Company to purchase all of its requirement
from Dicon, and Dicon grants exclusive worldwide rights to distribute the
products. Minimum annual purchase requirements are set forth in the agreement.
The Company has satisfied the minimum purchase requirement for the first year.
The Company and Dicon have also entered into an exclusive license agreement
for certain molded hydrophilic foam products which the Company helped develop,
with super absorbent polymer and detergent soaps and waxes used for the cleaning
and polishing of land, sea and transportation vehicles. The term of the
agreement is for the full life of any design patent which may be issued on the
molded sponge design.
10 - Subsequent Events
As part of a plan of recapitilization and funding, the Company undertook a
series of steps as follows:
In December 2002, the Company and its subsidiary each merged into a newly
formed Delaware corporation. The surviving corporation charged its name to
Spongetech Delivery Systems, Inc.
On December 26, 2002, the Company entered into a securities purchase
agreement. The agreement entitles the Company to issue up to $2 million of its
common stock from time to time, in blocks of between $25,000 to $50,000 each, at
a price per share calculated by a formula based on the Company's stock price.
The securities purchase agreement terminates two years following the effective
date of the registration of the shares. Proceeds will be used for working
capital.
F-17
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM
THAT CONTAINED IN THIS PROSPECTUS. THE SELLING STOCKHOLDERS LISTED IN THIS
PROSPECTUS ARE OFFERING TO SELL, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS
WHERE OFFERS AND SALES ARE PERMITTED.
Until --------, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
SPONGETECH DELIVERY SYSTEMS, INC.
4,485,000 SHARES OF COMMON STOCK
UP TO 4,000,000 SHARES OF COMMON STOCK
____________________
PROSPECTUS
____________________
-------- ----, 2003
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law provides for the indemnification of
the officers, directors and corporate employees and agents of Spongetech
Delivery Systems, Inc. (the "Registrant") under certain circumstances as
follows:
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS; INSURANCE.
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all
the circumstance of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the Court of Chancery or such court
shall deem proper.
(c) To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action,
suit or proceeding referred to in subsections (a) and (b) of this section,
or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorney's fees) actually and
reasonably incurred by him in connection therewith.
II-1
(d) Any indemnification under subsections (a) and (b) of this section (unless
ordered by a court) shall be made by the corporation only as authorized in
the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because
he has met the applicable standard of conduct set forth in subsections (a)
and (b) of this section. Such determination shall be made (1) by the board
of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if such a
quorum is not obtainable, or, even if obtainable a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or
(3) by the stockholders.
(e) Expenses incurred by an officer or director in defending any civil,
criminal, administrative or investigative action, suit or proceeding may be
paid by the corporation in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on behalf of such
director to repay such amount if it shall ultimately be determined that he
is not entitled to be indemnified by the corporation as authorized in this
section. Such expenses including attorneys' fees incurred by other
employees and agents may be so paid upon such terms and conditions, if any,
as the board of directors deems appropriate.
(f) The indemnification and advancement expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
his official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have power to purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted
against him and incurred by him in any such capacity or arising out of his
status as such, whether or not the corporation would have the power to
indemnify him against such liability under this section.
(h) For purposes of this Section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers and
employees or agents so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, shall stand in the same position under this section
with respect to the resulting or surviving corporation as he would have
with respect to such constituent corporation as he would have with respect
to such constituent corporation if its separate existence had continued.
II-2
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan;
and references to "serving at the request of the corporation" shall include
any service as a director, officer, employee or agent of the corporation
which imposes duties on, or involves services by, such director, officer,
employee, or agent with respect to an employee benefit plan, its
participants, or beneficiaries; and a person who acted in good faith and in
a manner he reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted
in a manner "not opposed to the best interests of the corporation" as
referred to in this section.
(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this section shall, unless otherwise provided when authorized
or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors, and administrators of such person.
Articles Eighth and Ninth of the Registrant's certificate of incorporation
provide as follows:
EIGHTH
The personal liability of the directors of the Corporation is hereby
eliminated to the fullest extent permitted by the provisions of paragraph (7) of
subsection (b) of Section 102 of the Delaware General Corporation Law, as the
same may be amended and supplemented.
NINTH
The Corporation shall, to the fullest extent permitted by the provisions of
Section 145 of the Delaware General Corporation Law, as the same may be amended
and supplemented, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any by-law, agreement,
vote of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action In another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person. The foregoing right of
indemnification shall in no way be exclusive of any other rights of
indemnification to which such person may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors, or otherwise.
Article XII of the Registrant's by-laws provides as follows:
ARTICLE XII--INDEMNIFICATION OF DIRECTORS AND OFFICERS
1. Indemnification. The corporation shall indemnify any person who was or
is a party or is threatened to be made a party to any proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that such person is or was a
director, trustee, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, trustee, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
II-3
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe such person's conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, by itself, create a presumption that the person did not act in good
faith and in a manner which the person reasonably believed to be in or not
opposed to the best interest of the corporation, and with respect to any
criminal action or proceeding, had reasonable cause to believe that such
person's conduct was lawful.
2. Derivative Action. The corporation shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in the corporation's favor by reason of the fact that such person is or
was a director, trustee, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, trustee, officer,
employee or agent of any other corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the corporation; provided, however, that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for gross negligence or
willful misconduct in the performance of such person's duty to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine upon application that, despite circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses as such court shall deem proper. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, by itself, create a presumption that
the person did not act in good faith and in a manner which the person reasonably
believed to be in or not opposed to the best interest of the corporation.
3. Successful Defense. To the extent that a director, trustee, officer,
employee or agent of the corporation has been successful, on the merits or
otherwise, in whole or in part, in defense of any action, suit or proceeding
referred to in paragraphs 1 and 2 above, or in defense of any claim, issue or
matter therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith.
4. Authorization. Any indemnification under paragraph 1 and 2 above (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director,
trustee, officer, employee or agent is proper in the circumstances because such
person has met the applicable standard of conduct set forth in paragraph 1 and 2
above. Such determination shall be made (a) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, (b) by independent legal counsel (selected by one or
more of the directors, whether or not a quorum and whether or not disinterested)
in a written opinion, or (c) by the stockholders. Anyone making such a
determination under this paragraph 4 may determine that a person has met the
standards therein set forth as to some claims, issues or matters but not as to
others, and may reasonably prorate amounts to be paid as indemnification.
II-4
5. Advances. Expenses incurred in defending civil or criminal actions,
suits or proceedings shall be paid by the corporation, at any time or from time
to time in advance of the final disposition of such action, suit or proceeding
as authorized in the manner provided in paragraph 4 above upon receipt of an
undertaking by or on behalf of the director, trustee, officer, employee or agent
to repay such amount unless it shall ultimately be determined by the corporation
that the payment of expenses is authorized in this Section.
6. Nonexclusivity. The indemnification provided in this Section shall not
be deemed exclusive of any other rights to which those indemnified may be
entitled under any law, by-law, agreement, vote of stockholders or disinterested
director or otherwise, both as to action in such person's official capacity and
as to action in another capacity while holding such office, and shall continue
as to a person who has ceased to be a director, trustee, officer, employee or
agent and shall insure to the benefit of the heirs, executors, and
administrators of such a person.
7. Insurance. The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, trustee, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, trustee, officer, employee or agent of any
corporation, partnership, joint venture, trust or other enterprise, against any
liability assessed against such person in any such capacity or arising out of
such person's status as such, whether or not the corporation would have the
power to indemnify such person against such liability.
8. "Corporation" Defined. For purpose of this action, references to the
"corporation" shall include, in addition to the corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had the power and authority to indemnify its directors, trustees, officers,
employees or agents, so that any person who is or was a director, trustee,
officer, employee or agent of such of constituent corporation will be considered
as if such person was a director, trustee, officer, employee or agent of the
corporation.
ITEM 25. EXPENSES OF ISSUANCE AND DISTRIBUTION.
The other expenses paid or payable by the Registrant in connection with the
issuance and distribution of the securities being registered are estimated as
follows:
Securities and Exchange Commission Registration Fee............. $ 300
Legal Fees...................................................... 7,750*
Accounting Fees................................................. 20,000
Printing and Engraving.......................................... 1,000
Blue Sky Qualification Fees and Expenses........................ 1,000
Transfer Agent Fee.............................................. 1,000
Miscellaneous................................................... 1,000
--------
Total.................................................... $ 32,050
--------
* Counsel was issued 775,000 shares of common stock for legal services in
connection with the registration statement related legal matters.
===========
II-5
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
We were incorporated in New York State on July 18, 1999.
On July 15, 2002, we entered into a stock purchase agreement with Nexgen
Acquisitions VIII, Inc. under which our sole stockholder, RM Enterprises
International, received 12,000,000 shares of the holding company and became its
majority stockholder.
Nexgen Acquisitions VIII, Inc. was formed on February 5, 2002. On April 24,
2002, it issued 5,791,000 shares of its common stock to Nexgen Holdings, Inc.,
in consideration of expense reimbursement and provision of office space. In
June, 2002, it issued 775,000 shares to Joel Pensley, Esq. for legal services,
100,000 shares to Sunburst Partners, Inc. for consulting services and 100,000
shares to Renegade Consulting, Inc., benefically owned by Joel Pensley, for
consulting services. In June, 2002, it accepted subscriptions from 30 people at
$.01 per share of an aggregate of 219,000 shares.
On December 16, 2002, we changed our domicile to Delaware. On December 16,
2002, Nexgen Acquisitions VIII, Inc. (renamed Spongetech Delivery Systems, Inc.)
merged with and into us so that we becamse the surviving company. Immediately
subsequent to the merger, we changed our name to Spongetech Delivery Systems,
Inc.
These securities were sold under the exemption from registration provided
by Section 4(2) of the Securities Act. Neither the Registrant nor any person
acting on its behalf offered or sold the securities by means of any form of
general solicitation or general advertising. All purchasers represented in
writing that they acquired the securities for their own accounts. A legend was
placed on the stock certificates stating that the securities have not been
registered under the Securities Act and cannot be sold or otherwise transferred
without an effective registration or an exemption therefrom.
ITEM 28. UNDERTAKINGS.
The Registrant undertakes:
(1) To file, during any period in which offers or sales are being made,
post-effective amendment to this registration statement (the
"Registration Statement"):
(i) To include any prospectus required by Section 10 (a) (3) of the
Securities Act of 1933 (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the Effective Date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in this
registration statement, including (but not limited to) the
addition of an underwriter.
To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
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To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be treated as
a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to any provisions contained in its Certificate of
Incorporation, or by-laws, or otherwise, the Registrant has been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certified that it has reasonable grounds to believe that it meets all
of the requirements of the filing on Form SB-2 and authorized the registration
statement to be signed on its behalf by the undersigned, in Brooklyn, New York.
SPONGETECH DELIVERY SYSTEMS, INC.
January 13, 2003 By: /s/ Michael Metter
----------------------------
Michael Metter
President,
Chief Executive Officer
January 13, 2003 By: /s/ Roger Eichenholtz
---------------------------
Roger Eichenholtz
Chief Financial Officer
Chief Accounting Officer
In accordance with the requirements of the Securities Act of 1933, the
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATED
------------------------- --------------------------- ------------------
/s/Michael Metter
---------------------
Michael Metter President January 13, 2003
Chief Executive Officer
and a Director
/s/Steven Moskowitz
---------------------
Steven Moskowitz Secretary and a Director January 13, 2003
/s/ Jerome Schlanger
---------------------
Jerome Schlanger Treasurer and a Director January 13, 2003
/s/Frank Lazauskas
---------------------
Frank Lazauskas A Director January 13, 2003
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Certificate of Incorporation of Nexgen VIII, Inc.*
3.2 Certificate of Amendment of Nexgen VIII, Inc. changing name to
Spongetech Delivery Systems, Inc.*
3.3 By-Laws of Spongetech Delivery Systems, Inc.*
3.4 Certificate of Incorporation of Romantic Scents, Inc.
3.5 Certificate of Amendment changing name of Romantic Scents, Inc. to
RSI Enterprises, Inc.
3.7 Certificate of Amendment change name of RSI Enterprises, Inc. to
Spongetech Enterprises Internatioal, Inc.
3.6 Certificate of Incorporation of Merger Sub, Inc.
3.7 Merger Certificate between Spongetech Delivery Systems and Merger
Sub, Inc.
3.8 Merger Certificate between Spongetech Enterprises International, Inc.
and Merger Sub, Inc.
3.9 Certificate of Amendment Changing name of Merger Sub, Inc. to
Spongetech Delivery Systems, Inc.
4.1 Specimen Certificate of Common Stock*
5.1 Opinion of Counsel
10.1 Stock Purchase Agreement by and among Nexgen Acquisitions VIII,
Inc., RM Enterprises International, Inc. and RSI Enterprises, Inc.*
10.2 Stock Purchase Agreement by and between Spongetech Delivery Systems,
Inc. and Colebrook, Inc.
10.3 License Agreement dated July 1, 2001 with Dicon Technologies
10.4 Supply and Requirements Agreement dated July 1, 2001 with Dicon
Technologies
10.5 Manufacturer's Representative Agreement dated July 1, 2001 with Dicon
Technologies
23.1 Accountant's Consent
23.2 Counsel's Consent to Use Opinion*
------------------
* Previously filed as an exhibit to registration statement on Form SB-2 filed
November 1, 2002
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