Registration Number: 333-100925
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
FOURTH AMENDMENT TO
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SPONGETECH DELIVERY SYSTEMS, INC.
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(Name of small business
issuer in its charter)
Delaware 2840 54-2077231
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(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. / /
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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
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Shares of common stock
owned by existing
stockholders 4,485,000 $ 0.70 $ 3,139,500 $ 288.83
Resale of Shares of Common
Stock Underlying "A" Warrants 1,000,000 (2) 0.50 500,000 46.00
Resale of Shares of Common
Stock Underlying "B" Warrants 1,000,000 (2) 0.75 750,000 69.00
Resale of Shares of Common
Stock Underlying "C" Warrants 1,000,000 (2) 1.00 1,000,000 92.00
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TOTAL $ 4,589,500 $ 495.83
(1) Estimated solely for the purposes of computing the registration fee
pursuant to Rule 457.
(2) Pursuant to Rule 416 there are also registered hereby such additional
number of shares as may become issuable by reason of the anti-dilution
provisions of the Class A, Class B and Class C redeemable
warrants. These additional shares are not issuable by reason of the
anti-dilution provisions of other derivative securities we may issue in the
future.
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.
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these securities may not be sold until the registration statement filed with the
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Securities and Exchange Commission is effective. This prospectus is not an offer
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to sell, nor does it seek an offer to buy, these securities in any state where
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the offer or sale is not permitted.
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Subject to completion: Dated: January 14, 2004
PROSPECTUS
SPONGETECH DELIVERY SYSTEMS, INC.
7,485,000 SHARES OF COMMON STOCK
This prospectus relates to the resale by selling stockholders of 4,485,000
shares of our common stock presently owned by selling stockholders, and the
resale by Colebrook, Inc. of the 3,000,000 shares of our common stock underlying
our common stock purchase warrants which it owns. The offering will expire two
years from the date of the prospectus. None of our securities trades on any
securities market. Selling securityholders must sell their shares at $.70 per
share until a securities market quotes the shares. Thereafter, selling
securityholders, who are not affiliates, may sell their shares at market prices
or at privately negotiated prices. Selling securityholders who are affiliates
must 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 by the selling
stockholders. We have not retained any underwriter in connection with the sale
of our securities. We have paid, on behalf of the selling stockholders, the
expenses of the offering which we estimate at $97,055.
Of the shares registered:
o 4,485,000 are currently outstanding, and
o 3,000,000 shares are issuable upon the exercise of warrants.
The warrants are exercisable from the date our common stock commences to
trade on the OTC Bulletin Board or other national securities market as follows:
o 1,000,000 Class "A" Warrants exercisable at $.50 per warrant or an
aggregate of $500,000, exercisable for a period of three months from the
date our common stock commences trading;
o 1,000,000 Class "B" Warrants exercisable at $.75 per warrant or an
aggregate of $750,000 exercisable for a period of six months from the date
our common stock commences trading; and
o 1,000,000 Class "C" Warrants exercisable at $1.00 per warrant or an
aggregate of $1,000,000 exercisable for a period of nine months from the
date our common stock commences trading.
Colebrook may use this prospectus in connection with sales of up to
3,000,000 shares of our common stock underlying the warrants.
As you review the prospectus, you should carefully consider the matters
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described in "Risk Factors" beginning on page 6.
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Neither the Securities and Exchange Commission nor any state securities
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commission has approved or disapproved of these securities or passed on the
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accuracy or adequacy of the prospectus. Any representation to the contrary is
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a criminal offense.
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The date of the prospectus is , 2004.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary..................................................... 3
The Offering........................................................... 4
Summary Financial Information.......................................... 5
Risk Factors........................................................... 6
Capitalization......................................................... 9
Dividend Policy........................................................ 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 9
Business............................................................... 14
Management............................................................. 18
Executive Officers and Directors...................................... 18
Director Compensation................................................. 20
Executive Compensation................................................ 21
Indemnification of directors and executive office
and limitation of liability......................................... 22
Certain Related Party Transactions..................................... 23
Principal Stockholders................................................. 25
Description of Securities.............................................. 27
Common Stock.......................................................... 27
Preferred Stock....................................................... 28
Common Stock Purchase Warrants........................................ 28
Reports to Stockholders............................................... 29
Transfer Agent........................................................ 29
Selling Stockholders................................................... 29
Plan of Distribution of Shares of Existing Stockholders ............... 31
Colebrook's Plan of Distribution....................................... 32
Shares Eligible for Future Sale........................................ 33
Where You Can Find More Information.................................... 34
Legal Proceedings...................................................... 34
Legal Matters.......................................................... 34
Experts................................................................ 34
Index to Financial Statements.......................................... F-1
Financial Statements................................................... F-2
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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 June 18, 1999 under the name
Romantic Scents, Inc. as a wholly-owned subsidiary of RM Enterprises
International, Inc. We changed our name to RSI Enterprises, Inc. on June 12,
2001.
From our inception until December 2000, we, under the corporate name
Romantic Scents, and, subsequently, under the name, RSI Enterprises, were
involved in the distribution of bath and beauty products. We decided to leave
the bath and beauty product business to focus on the development and sale of
cleaning products based on hydrophilic sponges.
As part of a plan of recapitalization and funding, we undertook a series of
steps:
o On July 15, 2002, we, as RSI Enterprises, 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
Nexgen Acquisitions VIII, Inc. and thereby became its majority stockholder.
Nexgen Acquisitions VIII, Inc. changed its name to Spongetech Delivery
Systems, Inc. on October 9, 2002.
o On December 16, 2002, we changed our domicile to Delaware.
o On December 16, 2002, Spongetech Delivery Systems, Inc. (formerly Nexgen
Acquisitions VIII, 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, as Spongetech Delivery Systems, Inc., entered
into a securities purchase agreement with Colebrook, Inc. The agreement was
rescinded on June 2, 2003.
o On June 11, 2003, we sold 3,000,000 warrants to Colebrook for $1,000.
We are registering the resale of common stock owned by present
stockholders. Selling securityholders may sell their shares at $.70 per share
until the OTC Bulletin Board or other national securities market quotes the
shares. Thereafter, selling securityholders, who are not affiliates, must sell
their shares at market prices or at privately negotiated prices. Selling
stockholders who are affiliates must sell their shares at $.70 per share for the
duration of the offering.
3
We are also registering resale of the shares underlying the warrants
purchased by Colebrook. On June 11, 2003, Colebrook purchased 1,000,000 Class
"A", 1,000,000 Class "B" and 1,000,000 Class "C" warrants for an aggregate
purchase price of $1,000. The warrants are exercisable from the date of common
stock commences trading on the OTC Bulletin Board or other national securities
market. The Class "A" Warrants are exercisable at $.50 per warrant for three
months; the Class "B" Warrants are exercisable at $.75 per warrant for six
months; and the Class "C" Warrants are exercisable at $1.00 for nine months. We
used the $1,000 purchase price of the warrants for payment of office expenses.
We intend to use the proceeds from warrant exercise as follows (1):
Exercise of
"A" Warrant "B" Warrant "C" Warrant
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Product development (2) $100,000 $300,000 $400,000
Marketing (3) 100,000 300,000 400,000
Payment of accounts
payable and indebtedness 100,000 150,000 -0-
Working Capital 200,000 -0- 200,000
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Total: $500,000 $750,000 $1,000,000
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(1) Assumes that all product development, marketing and accounts payable come
from warrant exercise and not from operations.
(2) Products to be developed from prototype to manufacturing stages include
household cleaning products and personal care products
(3) Marketing will include infomercials and international markets.
Our executive offices are located at: Sunset Industrial Park, 50 20th
Street, Brooklyn, New York 11232; and our telephone number at that address is
(718) 788-4798.
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
Warrants outstanding.............. 3,000,000 warrants
Common stock outstanding after
exercise of outstanding warrants. 21,985,000 shares
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.
4
SUMMARY FINANCIAL INFORMATION
The following table sets forth our summary financial data for the fiscal
years ended May 31, 2003 and 2002, and for the six months ended November 30,
2003 and 2002, which are derived from our financial statements.
Six Months Ended
November 30, Year Ended May 31,
2003 2002 2003 2002
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Sales $ 2,123 $ 13,223 $ 342,019 $ 89,973
Cost of goods sold 5,136 4,164 299,617 121,643
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Gross profit (loss) (3,013) 9,059 42,402 (31,670)
Operating expenses 53,264 99,134 315,859 70,407
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Loss before income taxes (56,277) (90,075) (273,457) (102,077)
Income taxes 400 400 400
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Net loss $ (56,277) $ (90,475) $ (273,857) $ (102,477)
=========== =========== ========== =========
Net loss per share -
Basic and diluted $ (.00) $ (.01) $ (.02) $ (.01)
============ ============ ========== ==========
Weighted average common
shares outstanding 18,985,000 18,660,000 18,321,666 12,000,000
=========== =========== ========== ==========
November 30, 2003 May 31, 2003
----------------- ------------
unaudited
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Balance sheet data:
Total assets $ 35,016 $ 54,520
Total liabilities 444,061 407,289
Shareholders' equity (deficiency) (409,046) (352,769)
5
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 our 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
and the trading price of our common stock could decline. In such case, you could
lose all or part of your investment.
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 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 sold our common
stock purchase warrants to Colebrook. However, we can offer no assurance that
Colebrook will exercise any of them or a sufficient number of our warrants to
solve our financing needs. Consequently, we can provide no assurance that
financing, when necessary, will be available at all, or if available,
on acceptable terms. We have arranged for and received purchase order financing
for our orders with TurtleWax. However, there is no assurance that a factor
will advance funds for future purchase orders with TurtleWax 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; and if
we cannot raise funds or become profitable, we will be forced to suspend
operations.
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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.
The market place may be indifferent to our products; in which case our business
will fail.
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Our hydrophilic sponges, and products based on it, feature an internal
structure which holds detergents and waxes which are released only when
squeezed. However, 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. If we cannot generate sufficient revenues to cover our
cost of overhead, manufacturing and operating, we will fail.
6
We presently depend on one customer for almost all of our sales. If that
customer does not give us repeat orders, we will not be able to continue in
business.
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We have received five purchase orders for the supply of our automobile wash
and wax product from TurtleWax. We are exploring the marketing our product in
other marketing channels for our automobile cleanser and wax product and our
child's bath and our home cleaning products. However, these channels have
generated little revenues to date for our automobile product and no revenues for
our other products. We can offer no assurance that they will ever be
commercially viable. In the event we cannot deliver on orders to TurtleWax in
the quantity or of the quality desired or TurtleWax 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 and our business would fail.
We depend on products made using one technology; and products using different
technologies may attract customers jeopardizing our business prospects.
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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 not
developed 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.
Our license is limited to products for cleaning vehicles; and we may not be able
to expand our business into the sale of other products using the same
technology.
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Our license agreement with Dicon is limited to hydophilic sponges used to
clean and polish land, sea and air transportation vehicles. Our business plan
calls for us to expand our product line using hydrophilic sponges to areas of
personal hygiene and household cleaning. Although Dicon has orally agreed to
expand our license to cover personal hygiene and household cleaning products and
has produced samples of both products for us, we have no written assurance that
Dicon will expand our exclusive license to include the products we plan on
developing and marketing. If Dicon refuses to expand our license, we will be
unable to expand into new areas and our growth will be limited.
The patents on our licensed technology may not be able to be defended against
infringement; and, as a result, we may be unable to compete against companies
selling products using the same technology as we do.
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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 we may not be able to compete. If we cannot compete with
competitive products, our business will fail.
7
We depend on one manufacturer for all our products; and if that manufacturer is
unwiling or unable to produce our orders in the quantities required and at the
price and quality we require for sales, we will be unable to continue in
business.
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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 and would result in the decline or failure of our
business.
Our common stock may not be able to trade on the Over-the-Counter Bulletin
Board. If our stock is unable to trade on the OTCBB, our investors may be unable
to sell their shares publicly and, Colebrook, the holder of our warrants may be
unable or unwilling to exercise them jeopardizing our attempt to fund our
operations.
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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. If our shares do not trade on
the OTCBB, they may trade on the Pink Sheets, a non-automated market, with a
consequential lack of liquidity. In that event, our investors may be unable to
sell their shares publicly and, Colebrook, the holder of our warrants may be
unable or unwilling to exercise them jeopardizing our attempt to fund our
operations.
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
warrants.
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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. The price of our common stock may be lower than the exercise prices
of our warrants. Thus, the possibility of funding our ongoing operations will
ceease if an active trading market does not develop.
The sale of material amounts of our common stock could reduce the price of our
common stock and encourage short sales.
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If and when Colebrook, our warrantholder, exercises its warrants and sells
the common stock, our common stock price may decrease due to the additional
shares in the market. Stock issuances may encourage short sales, which could
place further downward pressure on the price of our common stock.
8
CAPITALIZATION
The following table sets forth our capitalization as of November 30, 2003
November 30,
2003
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Capitalization:
Common stock $.001 par value;
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 255,098
Deficit (683,129)
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Total capitalization $(409,046)
=========
Dividend Policy
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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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 2003 AND MAY 31, 2002
AND THE SIX MONTHS ENDED NOVEMBER 30, 2003 AND NOVEMBER 30, 2002
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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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 financial statements and their accompanying notes, included elsewhere in
this prospectus.
9
General
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We were formed on June 18, 1999, as Romantic Scents, Inc. On June 12, 2001,
we changed our name to RSI Enterprises, Inc.; and, on October 2, 2002, we
changed our name to Spongetech International Ltd. On July 15, 2002, we were
acquired by Spongetech Delivery Systems, Inc. (formerly Nexgen Acquisitions
VIII, Inc.). The transaction was accounted for as a reverse acquisition using
the purchase method of accounting, whereby the shareholder of Spongetech
International retained approximately 63% of our outstanding common stock. On
December 16, 2002, Spongetech International, Ltd. changed its domicile to
Delaware by merging with and into Spongetech Sub, Inc. Spongetech Sub's parent,
Spongetech Delivery Systems, Inc. then merged with and into Spongetech Sub so
that Spongetech Sub became the surviving corporation. Spongetech Sub then
changed its name to Spongetech Delivery Systems, Inc.
We distribute a line of hydrophilic polyurethane sponge cleaning and
polishing products.
Results of Operations
---------------------
Six Months Ended November 30, 2003 and 2002 (unaudited)
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Net sales for the six months ended November 30, 2003 were $ 2,123 as
compared to $ 13,223 for the six months ended November 30, 2002, a decrease of
$11,100 or 83.9%. Management attributes this decrease to delay in receiving
repeat orders from TurtleWax and Home Shopping Network, because we filled the
pipeline in fiscal 2003 and sales for our product will recommences the third
quarter of fiscal 2004. Our gross profit for the six months ended November 30,
2003 was $(3,013) or (141.9%) as compared to $9,059 or 68.5% for the six months
ended November 30, 2002. Management attributes this decrease in gross profit to
increases in packaging costs per unit for Internet sales that occurred during
the period ended November 30, 2003.
Operating expenses for the six months ended November 30, 2003 were $53,264
as compared to $99,134 for the six months ended November 30, 2002. The decrease
of $45,870 is the result of a decrease of accounting fees for the period.
Included in total; operating expenses were selling expenses of $25,052, general
and administrative expenses of $23,199 and interest of $5,013.
Selling expenses consisted of $20,445 in adverting, $1,055 in Internet
expense and $3,552 in commissions. General and administrative expenses for the
six months ended November 30, 2003 aggregated $23,199 consisting of office
expense - $3,104, telephone - $1,842, rent - $3,000, utilities - $200, factoring
fees and commissions - $2,515, accounting - $9,000 and travel - $3,538. We also
incurred $5,013 in interest expense.
Net loss for the six months ended November 30, 2003 was ($56,277) or ($.00)
per share as compared to a net loss of ($90,475) or ($.01) per share for the six
months ended November 30, 2002. These decreases were the result of greater
increases in selling expenses than increases in revenues for the six month
period ended November 30, 2003 compared to the six month period ended November
30, 2002.
10
Fiscal Years Ended May 31, 2003 and 2002
----------------------------------------
Net sales were $342,019 for the fiscal year ended May 31, 2003 as compared
to $89,973 for the fiscal year ended May 31, 2002. This increase is primarily
attributed to the sales to TurtleWax and Home Shopping Network during the third
and fourth quarters of fiscal 2003.
Cost of sales was $299,617 or 87.6% of net sales for the fiscal year ended
May 31, 2003 as compared to $121,643 or 135.2% of net sales for the fiscal year
ended May 31, 2002. The decrease as a percentage of sales in fiscal 2003
compared with fiscal 2004 is due to the start-up and development costs
associated with the product that was utilized during fiscal 2002 and not
repeated in fiscal 2003.
Operating expenses for the fiscal year ended May 31, 2003 increased to
$315,859 from $70,407 for the fiscal year ended May 31, 2002. This increase of
$245,452 was a result of increased expenses for professional fees, interest and
factoring fees, advertising and other administrative charges associated with
selling. Selling expenses for the fiscal year ended May 31, 2003 included
commissions of $36,000, Internet expense of $4,397, freight of $4,145 and
advertising of $10,719. General and administrative expenses for the year ended
may 31, 2003 included the value of services rendered by the officers of $58,500,
consulting expense of $10,000, management fees of $24,500, office expense of
$30,422, legal expense of $18,909, travel expenses of $5,539, offering expenses
of $87,305 and expenses relating to the factoring of our accounts receivable of
$9,913.
In fiscal 2003, we also issued an aggregate of 975,000 shares of common
stock valued at $.01 per share or $9,750 as follows: 775,000 shares to for legal
services related to the preparation of the registration statement and
amendments, 100,000 shares for consulting services relating to structuring the
offering and 100,000 shares to a company beneficially owned by our securities
counsely, for services related to structuring the offering.
Net loss for the fiscal year ended May 31, 2003 was ($273,857) or ($.02)
per share as compared to net loss of ($102,477) or ($.01) per share. The
increase in the net loss of $171,380 in fiscal 2003 compared to fiscal 2002 is
the result of the increase in expenses for professional fees, interest,
factoring fees and advertising and promotion expenses.
Liquidity and Capital Resources
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We had cash of $345 and $1,105 at November 30, 2003 and May 31, 2003,
respectively. During the six months ended November 30, 2003, net cash used by
operating activities aggregated $(39,525), primarily attributed to the net loss
of $56,277 less non-cash expenses of $4,284, and a difference of $51,993 which
was due to a decrease in accounts receivable of $1,296, a decrease in accounts
payable and accrued expenses of $4,099 and an increase in moneys advanced by
related parties of $15,271. Net cash provided by financing activities for the
six months ended November 30, 2003 aggregated $38,765, which was generated from
proceeds from loans and advances from related parties aggregating approximately
$25,600 and advances from the factor aggregating $13,165.
11
During the fiscal year ended May 31, 2003, net cash used in operating
activities aggregated $29,262 as compared to $43,285 used in the year ended May
31, 2002. Cash used in operations was reduced by non-cash items including
$58,500 in the value of contributed officer compensation, write-off of a
related party receivable of $2,190, depreciation of $10,567 and legal and
consulting expenses paid through the issuance of an aggregate of 975,000 shares
of common stock with a value of $9,750 or $.01 per share. Accounts receivable
increased by $1,395, inventory was reduced by 48,061, prepaid expenses decreased
by $118, accounts payable and accrued expenses increased by $84,655, income
taxes payable increased by $1,200 and funds from related parties increased by
$30,949.
Net cash used in investing activities during the fiscal year ended May 31,
2003 aggregated $7,700, as compared to $33,540 used in the fiscal year ended May
31, 2002. This decrease is attributed to the purchasing of office equipment in
the fiscal year ended May 31, 2003 versus the purchase of product molds in
fiscal 2002.
Net cash provided by financing activities for the fiscal year ended May 31,
2003 was $37,892 as compared to $76,943 during the fiscal year ended May 31,
2002. This decrease is primarily attributed to an increase in the support from
related parties and additional notes payable incurred during the fiscal year
ended May 31, 2003 of $51,500.
On June 11, 2003, we sold 3,000,000 warrants to Colebrook, Inc. Each
warrant entitles the holder to purchase one share of common stock on the
exercise of the warrant. We received $1,000, and issued 1,000,000 Class A
warrants exercisable for three months at $.50 per share, 1,000,000 Class B
warrants exercisable for six months at $0.75 per share, and 1,000,000 Class C
warrants exercisable for three months at $1.00 per share.
In December 2002, we entered into factoring and financing agreements with
Westgate Financial Corp. whereby substantially all accounts receivable were sold
to the factor during the fiscal year ended Mary 31, 2003. The factor charged the
Company fees as well as purchase guarantees, wire charges, letters of credit,
express mail, legal fees, and monthly services charges that the Company needed
to facilitate the purchase of product from Dicon. As of November 30, 2003, there
was no balance due to or from the factor.
We have also been funded by an increase in accounts payable and various
accruals representing moneys due other creditors aggregating $240,421 as of
November 30, 2003 and $243,920 as of May 31, 2003. An analysis of these amounts
due is as follows:
Accounts payable and accrued expenses consist of the following:
November 31, May 31,
2003 2003
------------ ----------
(unaudited)
Purchases $ 67,984 $ 69,223
Packaging material, molds and supplies 26,751 26,751
American Express - charge card 20,184 20,184
Professional fees 69,005 78,005
Freight charges 2,544 2,300
Other 5,154 3,415
--------- --------
Total accounts payable $ 191,622 $ 199,878
Accrued expenses
Commissions 36,000 36,000
Interest payable 12,799 8,042
--------- --------
Total accounts payable and
accrued expenses $ 240,421 $ 243,920
========= =========
12
The only material increase in accounts payable between the fiscal year
ended May 31, 2003 and May 31 2002 has been to accounting and professional fees.
Accruals have been provided relating to interest due on various loans and
notes payable aggregating $12,799 and $8,042 as of November 30, 2003 and May 31,
2003 respectively.
Although we are not a party to any lawsuit, Paradigm Solutions, Inc. has
threatened to sue us relating to a contract dated December 31, 2001 under which
Paradigm was to prepare and show a television infomercial of our vehicular
cleaning sponge products within 150 days of the contract date. Paradigm also had
exclusive marketing rights to our vehicular cleaning sponge during that period.
In the opinion of our management, Paradigm did not perform under the agreement.
Subsequently, we produced an infomercial and arranged for it to be shown on
Home Shopping Network and also arranged for the sale of our vehicular product to
TurtleWax. Paradigm has claimed commissions of $33,400 from these sales.
However, as of the date of the prospectus, it has not brought any action against
us. Management denies that we have any liability to Paradigm. Nonetheless, we
have accrued $36,000 on our financial statements as a contingent liability
representing the full amount of Paradigm's claim and estimated costs.
The working capital (deficiency) at November 30, 2003 was approximately
$(441,877) as compared to a working capital (deficiency) of approximately
$(389,885) at May 31, 2003. These factors create substantial doubt about 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 our ability to generate revenues
sufficient to continue pursuing our business purpose.
We continue to maintain our supply and requirement agreement with Dicon
Technologies, a manufacturing company that has technological know-how and
patented and proprietary information relating to hydrophilic foam sponges and
their applications. The agreement, which expires after six years after June 6,
2001 provides for two renewal periods, requires us to purchase all of our
requirements from Dicon; and Dicon has granted us exclusive worldwide rights to
distribute the products. Minimum annual purchase requirements are set forth in
the agreement. We have satisfied the minimum purchase requirements.
It is extremely difficult to itemize the price of each sponge purchased
from Dicon as the price charged includes the sponge or sponge kit, packaging,
storage and shipping. The price for each sponge or sponge kit, including these
ancillary items, ranged from $.85 to $1.42. The average price per sponge or
sponge kit was $1.12.
We have purchased the following sponge kits and sponges as of the date of
the prospectus.
25,000 kits, each consisting of a vehicular sponge, detail sponge and shames
168,600 vehicular sponges
4,500 detail sponges
2,200 shammes.
We have negotiated the purchase (which is subject to approval of the
rewriting of the packaging into Spanish and Portuguese) with a major importer to
South and Central America, for 500,000 units allocated as follows: 150,000
single sponges and 350,000 kits during the third and fourth quarter of fiscal
2004. In addition, we have received preliminary approval from Home Shopping
Network and TurtleWax to continue to sell our products during fiscal 2004. We
cannot guarantee that these negotiations will result in sales or that the sales
will be profitable.
We cannot warrant that the results from our operations will be sufficient
to support our liquidity requirements through May 31, 2004 and beyond.
13
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, as RSI Enterprises, Ltd., entered into a license agreement on July 1,
2001 on patented technology relating to hydrophilic polyurethane matrices on an
exclusive basis. The technology is owned by and is licensed from from H. H.
Brown Shoe Technologies, Inc., Greenwich, CT., (dba Dicon Technologies), a
majority-owned subsidiary of Berkshire Hathaway, Inc. which owns the patent
rights. Our license applies to the cleaning and polishing of land, sea and air
transportation vehicles. We have oral understanding but no written agreements
with Dicon which would permit us to develop products using the same spone
technology in household cleaning and personal care and other areas in additional
to transportation vehicles.
Our license is a continuing one for the full life of the design patent,
which was 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." The patent expires in 2017.
The license agreement mandates that we purchase our hydorphilic sponge
products from Dicon unless Dicon ceases its business operations, either totally
or with respect to the manufacture of the Molded Sponge Design within the scope
of the Design Invention. In that event, we are permitted to use other
manufacturers.
Pursuant to the license agreement, Dicon retains title to the technology;
thus, if the license expires, we have given up design rights to products what
develop using the licensed technology. Dicon pays all expenses in connection
with the filing and maintaining of the patent. 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 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.
14
Supply and Requirements Agreement
----------------------------------
Also on July 1, 2001, 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
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. However, we may renew for additional successive periods. We may
use other manufacturers in the event of a breach by Dicon or in the event of
force majeure which prevents production for 90 days. We have ordered in excess
of the minimum quantity for the first year of the contract and anticipate
continuing to order in excess of the minimum quantity for the foreseeable
future.
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 derived from
"Hydrophilic Urethane Chemistry." The hydrophilic system has two parts, a
hydrophilic pre-polymer phase and a water phase. During the 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. Dicon, our licensor and manufacturer, loads the inner
matrix of the sponge with specially formulated soaps and, in our licensed
automotive cleaning and polishing 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.
15
Sales and Marketing
-------------------
On September 17, 2002, we were issued a purchase order from TurtleWax for
our private label auto applicator and appropriate packaging containing the words
"TurtleWax Zip Wax" and the TurtleWax logo imprint as part of the sponge
itself. Total orders from TurtleWax to the date of the prospectus have
aggregated $321,570 of which $302,597 have been shipped. Periodic shipping of
product is on schedules set by TurtleWax.
We have shipped to Home Shopping Network under the brand "Spongetech"
merchandise priced at $19,268. We have received additional purchase orders from
Home Shopping Network of $25,000.
We have also inaugurated in December 2002 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.
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 as of the date of the prospectus of $17,975 of which we have
shipped $5,975. All units contain the logo of businesses such as a bank and an
automobile dealership.
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 exploring retail outlets to sell this product, ranging from
pharmacies to department stores. We intend to market directly. Dicon has orally
agreed to 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 prototypes of 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.
16
New Product Development
-----------------------
Our new product 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 product development activities.
Dicon, the holder of the patent, has orally agreed to extend its license to
encompass household cleaning products and personal hygiene products. It has
produced samples for us of our children's bath foam sponge and household
cleaning sponge.
New Marketing
-------------
We have agreed to sell an exporter of automotive products to South America
our vehicular sponge, subject ot the exporter's approval of the language in
Spanish and Portuguese of the packaging. TurtleWax and Home Shopping Network
have indicated that they will continuing their relaitonships with us and
expand the range of products to our home line. We cannot warrant that these
discussions will result in contracts or purchase orders.
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 two are 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. 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.
We compete on the basis of uniqueness of our sponge which combines
efficiency and effectiveness compared to other vehicular cleaning products. Our
product avoids the preparation and clean-up of using sponges, liquid soaps and
pails of water. It also avoids the mess and limited storage life of traditional
liquid and paste waxes. Also, our cleaning and wax product is much easier to
apply and does not have to buffed.
17
Our cleaning product is less expensive than the cost of a sponge and liquid
detergent. Our sponge which combines soap and wax is considerable cheaper than
the purchase of the individual cleaning and application products.
We are using Home Shopping Network both as a sales vehicle and for public
exposure to our vehicular product.
MANAGEMENT
Executive Officers and Directors
--------------------------------
The following table sets forth certain information regarding our executive
officers and directors:
Name Age Position Since
------------------------ --- ------------- ------
Michael Metter* 52 President
One Tinker Lane Chief Executive Officer
Greenwich, CT 06830 and a Director 5/2001
Steven Moskowitz* 39 Secretary
50 20th Street and a Director 6/1999
Brooklyn, New York 11232
Jerome Schlanger 48 Treasurer
50 20th Street and a Director 6/1999
Brooklyn, New York 11232
Frank Lazauskas 43 A Director 7/2001
51 Niagara Street
Newark, New Jersey 07105
Martin Pelman 57 Chief Financial Officer 3/2003
414 Eagle Rock Avenue and a Director
West Orange, New Jersey 07052
----------------
* Michael Metter and Steven Moskowitz are promoters of our company.
18
Michael Metter, since April, 2001, has served as President of RM
Enterprises, Inc., our majority stockholder. He has been a director of Western
Power and Equipment Corp. (OTCBB) since February, 2003. Mr. Metter became
President of Azurel, Ltd. (OTCBB and subsequently Pink Sheets) in October, 2002
and COO in February, 2003. He resigned as President in February, 2003 and
resigned as COO on June 28, 2003. Since June 2002, Mr. Metter has served as
President and CEO of BusinessTalkRadio.net, a syndicated radio network based in
Greenwich, Connecticut. Since June, 2003, he as been chairman of the board of
Tiburon Capital Group, a privately held holding corporation. He was compliance
director of Securities Capital Trading, Inc., a broker-dealer, from October,
1998 to February, 2001 and President of Madison Capital from September, 1997 to
October, 1998. On April 19, 2001, Mr. Metter filed a petition in personal
bankruptcy and was discharged on December 14, 2001. From 1994 to May, 1997, he
was President of First Cambridge Securities, a broker/dealer. Mr. Metter was a
Vice-President of the following broker/dealers: Royce Investment Group, from
1991 to 1994; 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, has served, since April, 2001, as a director of RM
Enterprises, Inc., our majority stockholder. He has been a director of Western
Power and Equipment Corp.(OTCBB) since February 11, 2003. Since June, 2003, he
as been Chairman of the Board of Tiburon Capital Group, a privately held holding
corporation. He has served since May, 2000 as Vice-President ERC Corp., a
privately held marketing consultant. Mr. Moskowitz was CEO of Azurel, Ltd,
(OTCBB and subsequently Pink Sheets) from October 31, 2002 to October 10, 2003.
He served as Vice President, Marketing and Business Development for H. W. Carter
& Sons, a distributor of children's clothing, from 1987 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 children's apparel, from 1986 to 1987 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. He has served since April, 2001 as
a director of RM Enterprises, Inc., our majority stockholder. 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.
Martin Pelman served as Vice - President, Mergers and Acquisitions, of
Eagle Rock Capital, LLC from September, 2002 to July, 2003. He was Controller,
Quadlogic Controls Corporation, a manufacturer of electronic metering systems,
from June, 2000 to September, 2002. Mr. Pelman was Vice-President Finance, and
Chief Financial Officer of Tenney Engineering, Inc., a manufacturer of vacuum
testing chambers, from August, 1994 to December, 1999. Tenney Engineering filed
for Chapter 11 protection under the Federal Bankruptcy Act in August, 1997 which
was converted to Chapter 7 in December, 1999. Mr. Pelman received his B.S. in
Accounting from Long Island University in 1968 and has been New York State
licensed Certified Public Accountant since 1973.
19
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 supervisor, regional
operations manager, regional vice president and regional president. He received
his B.A. in Mathematics from Central Connecticut State University in 1983.
Roger Eichenholtz was our Chief Financial Officer from August 2000 to March
2003. He 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.
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.
Committee of the Board of Directors
-----------------------------------
On December 15, 2003, our board of directors established an audit committee
and appointed Martin Pelman and Frank Lasaskas to serve as the members of that
committee.
20
Executive Compensation
----------------------
The following table sets forth for the fiscal years ended May 31, 2003 and
2002, 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 05/31/03 -0- -0- -0- -0-
Chief Executive Officer 05/31/02 -0- -0- -0- -0-
Option Grants for the fiscal years ended May 31, 2003 and 2002
--------------------------------------------------------------
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-% - - - -
21
Aggregated Option Exercise for the fiscal years Ended May 31, 2003 and 2002 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, 2003 and 2002 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-
======================================================================================================================
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.
22
CERTAIN RELATED PARTY TRANSACTIONS
We were incorporated in New York State on July 18, 1999 as Romantic Scents,
Inc. by RM Enterprises International, Inc. which was issued 5,000 shares
representing all our issued and outstanding capital stock in consideration of
forming our company. RM Enterprises may be considered as a promoter. Michael
Metter, our President, and Steven Moskowitz, our Secretary, may also be
considered as our promoters. Aside from the shares of our common stock which it
received for our formation, RM Enterprises has received no additional
consideration from us for its activities related to our formation or business.
The control persons of RM Enterprises are
Richard Heller Chief Executive Officer
Michael Metter President
Steven Moskowitz Director
Jerome Schlanger Treasurer
Steven Moskowitz Director
Martin Pelman Secretary and Chief Financial Officer
The Mindy Moskowitz and
Steven Moskowitz Trust Stockholder (1)
Rubin Family Irrevocable
Stock Trust Stockholder (2)
Frank Lazauskas Stockholder
Kenneth Hubbard Stockholder
Carole Klein Stockholder
--------
(1) The Mindy Moskowitz and Steven Moskowitz Trust for Mindy Moskowitz, Daniel
Moskowitz, Ilana Moskowitz and Gitty Moskowitz is the owner of 13.2% of the
capital stock. Trustees are Mindy Moskowitz, wife, and Susan Weisman,
sister of Steven Moskowitz, our secretary. Steven Moskowitz disclaims
beneficial ownership of these shares.
(2) The trustees of The Rubin Family Irrevocable Stock Trust are Majorie Rubin
and Robert Shulman, CPA. The beneficiaries of The Rubin Family Irrevocable
Stock Trust are Linda Rubin, Andrew Rubin and Lisa Rubin. The The Rubin
Family Irrevocable Stock Trust owns 2,000,000 shares of our common stock
and 4.623% of the capital stock of RM Enterprises.
On July 15, 2002, we, under the name of RSI Enterprises, entered into a
stock exchange agreement with Nexgen Acquisitions under which we became a
wholly-owned subsidiary. Our sole stockholder, RM Enterprises, received
12,000,000 shares of the common stock of Nexgen Acquisitions VIII and became its
majority stockholder. Guy Cohen was the promoter of Nexgen Acquisitions; and he
received no additional consideration from us for his activities.
In June, 2002, we issued 775,000 shares to Joel Pensley, Esq. for legal
services related to the offering, including preparation of the registration
statement and all amendments, 100,000 shares to Sunburst Partners, Inc. for
consulting services relating to structuring the offering and 100,000 shares to
Renegade Consulting, Inc., beneficially owned by Joel Pensley, for services
related to structuring the offering. . The value of the shares was $.01 each.
The consulting services by Renegade Consulting and Sunburst have been performed.
23
On October 9, 2002, Nexgen Acquisitions VIII changed its name to Spongetech
Delivery Systems, Inc.
In September, 2002, the major stockholder of Nexgen Acquisitions VIII
transferred 2,000,000 shares to the Rubin Family Irrevocable Stock Trust, a
stockholder of RM Enterprises, but not a control person of RM Enterpriese,
300,000 shares to Eugene Dworkis, 200,000 shares to Maurice Horroch and 500,000
shares to Falcon Crest Capital, Inc.
On June 12, 2001, our name was changed to RSI Enterprises, Inc. and on
October 2, 2002 to Spongetech International, Ltd. On December 16, 2002, we
changed our domicile to Delaware. On December 16, 2002, Spongetech Delivery
Systems, Inc., our parent company, 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.
Michael Sorrentino, a former employee, loaned us $25,000 on February 21,
2001 payble on demand. We are accruing interest at the rate of 10% per annum.
The total amount due as of November 30, 2003, including accrued but unpaid
interest is $32,629. Mr. Sorrentino has not demanded payment. Between June 1,
2000 to May 31, 2001, RM Enterprises, our majority stockholder, loaned us during
the fiscal year ended May 31,2001, an aggregate of $51,930. We used the funds to
pay rent, telephone and other administrative expenses relating to our occupancy
of our headquarters premises. The loan does not bear interest. The maturity date
is May 31, 2004. From November, 2002, through November 30, 2003 RM Enterprises
loaned us an aggregate of $73,600, payable on demand. The loan does not bear
interest.
In January, 2003, we paid $24,500 to a company owned by the wife of Michael
Metter, our President, for marketing and promotional services. We market our
prducts on a radio talk show which is aired by BusinessTalkRadio.net, a
syndicated radio network of which Mr. Metter, is president
and CEO.
We believe that these transactions were on terms as favorable as could have
been obtained from unaffiliated third parties. 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.
24
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
New 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 Chief Accounting
Brooklyn, New York 11232 Officer and a
Director
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
Martin Pelman (12) Chief Financial 90,000 0.1%
414 Eagle Rock Avenue Officer and a
West Orange, New Jersey 07052 Director
Colebrook, Inc. (13) 3,000,000 13.6%
1640 West End Drive.
Point Pleasant, New Jersey
Officers and Directors 1,958,966 10.5%
(5 persons)
25
--------------------
(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 are as follows:
Richard Heller (Chairman of the Board of Directors)
Michael Metter (President)
Steven Moskowitz (Director)
The Mindy Moskowitz and Steven Moskowitz Trust (over 5% stock ownership)
The Rubin Family Irrevocable Stock Trust (over 5% stock ownership)
Jerome Schlanger (Director)
Frank Lazauskas (over 5% stock ownership)
Kenneth Hubbard (over 5% stock ownership)
Carole Klein (over 5% stock ownership)
Martin Pelman (Secretary/Treasurer and Chief Financial Officer)
(4) The control person of Nexgen Holdings, Inc. is Guy Cohen.
(5) The trustees of The Rubin Family Irrevocable Stock Trust are Majorie Rubin
and Robert Shulman, CPA. The beneficiaries of The Rubin Family Irrevocable
Stock Trust are Linda Rubin, Andrew Rubin and Lisa Rubin. The The Rubin
Family Irrevocable Stock 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 1.4% of the capital stock of
RM Enterprises. Michael Metter disclaims beneficial ownership of these
shares.
(7) The Mindy Moskowitz and Steven Moskowitz Trust for Mindy Moskowitz, Daniel
Moskowitz, Ilana Moskowitz 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 13.2% of the capital stock of
RM Enterprises. Trustees are Mindy Moskowitz, wife, and Susan Weisman,
sister of Steven Moskowitz, our secretary. Mr. Moskowitz disclaims
beneficial ownership of these shares.
(8) Jerome Schlanger owns 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.
26
(12) Martin Pelman owns 0.1% of the capital stock of RM Enterprises.
(13) Colebrook owns 3,000,000 warrants exercisable in 3,000,000 shares of our
common stock. Colebrook does not presently own any shares of our common
stock. Colebrook's beneficial owner is Gerard Rehrer.
Under rules adopted by the SEC, shares of common stock issuable pursuant to
warrants or options or upon conversion of convertible securities, to the
extent such warrants or options or convertible securities are currently
exercisable or convertible within 60 days of the date of the prospectus,
are treated as outstanding for computing the percentage of the person
holding such securities but are not treated as outstanding for computing
the percentage of any other person.
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
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 even if they were favored by the holders of a
majority of the voting stock.
27
Preferred Stock
---------------
We may, subject to limitations prescribed by Delaware law,
o provide for the issuance of up to 5,000,000 shares of our preferred stock
in one or more series,
o establish from time to time the number of shares to be included in each
such series,
o fix the rights, preferences and privileges of the shares of each wholly
unissued series and any qualifications, limitations or restrictions
thereon, and
o 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.
Common Stock Purchase Warrants
------------------------------
We have sold to Colebrook three classes of common stock warrants. Each
class is exercisable for a period commencing the date our common stock trades on
the OTC Bulletin Board of other national securities market. Each warrant
entitles the holder to purchase one share of our common stock as follows:
o the Class "A" Warrants for $.50 for three months from the commencement of
trading;
o the class "B" Warrants for $.75 for six months from the commencement of
trading; and
o the Class "C" Warrants for $1.00 for nine months from the commencement of
trading.
Colebrook may only exercise its warrants when there is a current effective
registration statement covering resale of the underlying shares of common stock.
If we are unable to maintain a current effective registration statement,
Colebrook will be unable to exercise its warrants and they may become valueless.
Warrants may be exercised by surrendering the warrant certificate, with the
form of election to purchase printed on the reverse side of the warrant
certificate properly completed and executed, together with payment of the
exercise price, to us. Warrants may be exercised in whole or from time to time
in part. If less than all of the warrants evidenced by a warrant certificate are
exercised, a new warrant certificate will be issued for the remaining number of
unexercised warrants.
28
Colebrook is protected against dilution of the equity interest represented
by the underlying shares of common stock upon the occurrence of certain events,
including, but not limited to, issuance of stock dividends. If we merge,
reorganize or are acquired in such a way as to terminate the warrants, they may
be exercised immediately prior to such action. In the event of liquidation,
dissolution or winding up, Colebrook, the holder of the warrants is not entitled
to participate in our assets.
For the life of the warrants, Colebrook is given the opportunity to profit
from a rise in the market price of our common stock. The exercise of the
warrants will result in the dilution of the then book value of our common stock
and would result in a dilution of the percentage ownership of then existing
stockholders. The terms upon which we may obtain additional capital may be
adversely affected during the period in which the warrants remain exercisable.
Colebrook may be expected to exercise the warrants at a time when we would, in
all likelihood, be able to obtain equity capital on terms more favorable than
those provided for by the warrants.
In the event the proceeds of warrant exercise are not sufficient for the
development and growth of our business, we may seek additional financing. We
believe that the proceeds of exercise of existing warrants will be sufficient
for such purpose and therefore do not expect to issue any additional securities
at this time. However, we may issue additional securities, incur debt or procure
other types of financing if needed. We have not entered into any agreements,
plans or proposals for such financing and have no plans to do so. If we require
additional financing, there is no guarantee that such financing will be
available to us or if available that such financing will be on terms acceptable
to us.
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 and
warrants.
SELLING STOCKHOLDERS
We are registering 4,485,000 of the shares, which are owned by our
stockholders. 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.
29
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;
o the number of shares each selling stockholder will own after the completion
of the offering made pursuant to the prospectus; and
o the number of selling stockholders.
Shares Owned Prior Shares Owned After
Number of to the Offering the Offering
Shares --------------------- ------------------
Selling Stockholder (1) 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-%
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 (2) 100,000 100,000 0.6% -0- -0-%
Sunburst Partners, Inc.(3) 100,000 100,000 0.6% -0- -0-%
Joel Pensley 775,000 775,000 4.1% -0- -0-%
Falcon Crest Capital,
Inc. (4) 500,000 500,000 2.6% -0- -0-%
Nexgen Holdings, Inc.(5) 2,791,000 2,791,000 14.7% -0- -0-%
------------------------------
1. Number of stockholders: 35
2. Joel Pensley, Esq., securities counsel, is the beneficial owner of Renegade
Consulting, Inc.
3. William Chin is the beneficial owner of Sunburst Partners, Inc.
4. Dale Shirley is the beneficial owner of Falcon Crest Capital, Inc.
5. The beneficial owner of Nexgen Holdings, Inc. is Guy Cohen. Its address is
410 Park Avenue New York, New York 10022.
30
PLAN OF DISTRIBUTION OF SHARES OF EXISTING STOCKHOLDERS
The selling securityholders may offer and sell the shares covered by the
prospectus from time to time. We will transferees or other successors-in-
interest in a post-effective amendment to the registration statement containing
the prospectus. 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. In addition, any shares that qualify for sale pursuant to Rule 144
may be sold under Rule 144 rather than pursuant to the prospectus.
The offering will expire two years from the date of the prospectus. None of
our securities trades on the OTC Bulletin Board or any national securities
market. Selling securityholders must sell their shares at $.70 per share until
our shares are quoted on the OTC Bulletin Board or other national securities
market. Thereafter, selling securityholders, who are not affiliates, may sell
their shares at market prices or at privately negotiated prices. Nexgen
Holdings, the only selling securityholder which is an affiliate, must sell its
shares at $.70 per share for the duration of the offering. We have spent $97,055
on offering expenses on behalf of the selling securityholders.
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.
31
We have agreed to indemnify the selling stockholders against certain
liabilities, including liabilities under the Securities Act.
We have agreed with the selling stockholders to keep the registration
statement of which the 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 date of the prospectus.
COLEBROOK'S PLAN OF DISTRIBUTION
Colebrook is free to offer and sell its shares of our common stock at such
times, in such manner and at such prices as it may determine on a best efforts
basis. The types of transactions in which the shares of our common stock are
sold may include transactions in the over-the-counter market (including block
transactions), negotiated transactions, or a combination of such methods of
sale. Colebrook has advised us that it has not entered into any agreement,
understanding or arrangement with any broker-dealers regarding the sale of its
shares, and does not have a coordinating broker acting in connection with the
proposed sale of our common stock.
Colebrook is an "underwriter" within the meaning of Section 2(a)(11) of the
Securities Act. Any commissions received by broker-dealers and any profit on the
resale of the shares of our common stock sold by them might be deemed to be
underwriting discounts or commissions.
Because Colebrook is an underwriter within the meaning of Section 2(a)(11)
of the Securities Act, it will be subject to prospectus delivery requirements.
We have informed Colebrook that the anti-manipulation rules of the SEC,
including Regulation M promulgated under the Securities Exchange Act of 1934,
will apply to its sales in the market, and have provided them with a copy of
such rules and regulations.
Regulation M may limit the timing of purchases and sales of any of the
shares of our common stock by Colebrook and any other person distributing our
common stock. The anti-manipulation rules under the Securities Exchange Act may
apply to sales of shares of our common stock in the market and to the activities
of Colebrook and its affiliates. Furthermore, Regulation M of the Securities
Exchange Act may restrict the ability of any person engaged in the distribution
of shares of our common stock to engage in market-making activities with respect
to the particular shares of common stock being distributed for a period of up to
five business days prior to the commencement of such distribution. All of the
foregoing may affect the marketability of our common stock and the ability of
any person or entity to engage in market-making activities with respect to our
common stock.
Rules 101 and 102 of Regulation M under the Securities Exchange Act, among
other things, generally prohibit certain participants in a distribution from
bidding for or purchasing for an account in which the participant has a
beneficial interest, any of the securities that are the subject of the
distribution. Rule 104 of Regulation M provides that no person, directly or
indirectly, may stabilize, effect any syndicate covering transaction, or impose
a penalty bid in connection with an offering of any security in contravention of
the rule's provisions.
32
Colebrook may not rely upon Rule 144 under the Securities Act for the sale
of our common shares in the open market since it is an underwriter within the
meaning of Section 2(a)(11) of the Securities Act and the safe-harbor provided
by Rule 144 is not available to underwriters of our common stock.
We will pay all expenses in connection with the registration and sale of
the common stock by Colebrook. Colebrook will pay all commissions, transfer
taxes and other expenses associated with their sales. The shares offered hereby
are being registered pursuant to our contractual obligations, and we have agreed
to pay the expenses of the preparation of this prospectus.
We have agreed to indemnify and reimburse Colebrook against any losses,
claims, damages or liabilities to which they may become subject under the
Securities Act of 1933, the Securities Exchange Act of 1934, or any other
federal or state law, insofar as such losses arise out of or are based upon (i)
any untrue statement or alleged untrue statement of a material fact contained in
a registration statement, or (ii) the omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein
not misleading.
We cannot issue additional shares to Colebrook upon exercise of warrants
that, when added to the shares Colebrook owns, will result in Colebrook holding
over 9.9% of our outstanding shares.
SHARES ELIGIBLE FOR FUTURE SALE
On the date of the prospectus, 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 the greater of
the number of shares which does not exceed the greater or 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.
33
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.
LEGAL PROCEEDINGS
We are not a party to any lawsuit.
We entered a contract with Paradigm Solutions, Inc. on December 31, 2001
under which Paradigm was to prepare and show a television infomercial of our
vehicular cleaning sponge within 150 days. Paradigm also had exclusive marketing
rights to our vehicular cleaning sponge during that period. Paradigm did not
perform under the agreement. Subsequently, our president produced an
infomercial and arranged for it to be shown on Home Shoppping Network and also
arranged for the sale of our vehicular product to TurtleWax. Paradigm has
claimed a commission based on these sales of $33,400 but as of the date of the
prospectus, has not brought any action. Although we deny any liability to
Paradigm, we have accrued $36,000 on our financial statements representing the
full amount of Paradigm's claim and estimated costs as a liability on our
financial statements.
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 fiscal years ended May 31, 2003 and 2002
have been included herein in reliance upon the report of Drakeford & Drakeford,
Fredericksburg, Virginia, independent certified public accountants, and upon the
authority of Drakeford & Drakeford, as experts in accounting and auditing.
Drakeford & Drakeford are licensed auditors in the State of New York.
34
SPONGETECH DELIVERY SYSTEMS, INC.
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
SIX MONTHS ENDED NOVEMBER 30, 2003 (unaudited) AND 2002 (unaudited)
AND YEARS ENDED MAY 31, 2003 AND 2002
PAGE
----
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS
BALANCE SHEETS AS OF NOVEMBER 30, 2003 (unaudited)
AND MAY 31, 2003 F-3
STATEMENTS OF OPERATIONS - SIX MONTHS ENDED NOVEMBER 30, 2003
(unaudited) AND 2002 (unaudited) AND YEARS ENDED
MAY 31, 2003 AND 2002 F-4
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY) -
SIX MONTHS ENDED NOVEMBER 30, 2003 (unaudited) and YEARS
ENDED MAY 31, 2003 AND 2002 F-5
STATEMENTS OF CASH FLOWS - SIX MONTHS ENDED NOVEMBER 30, 2003
(unaudited) AND 2002 (unaudited) AND YEARS ENDED
MAY 31, 2003 AND 2002 F-6-7
NOTES TO FINANCIAL STATEMENTS F-8-18
F-1
INDEPENDENT AUDITORS' REPORT
DRAKEFORD & DRAKEFORD, LLC
CERTIFIED PUBLIC ACCOUNTANTS
A LIMITED LIABILITY CORPORATION
ACCOUNTANTS AND CONSULTANTS
554 Duncan Road
Royston, Georgia 30622
License: GA 3424
Telephone: 540-361-7090
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To the Audit Committee
Shareholders
Directors of Spongetech Delivery Systems, Inc.
We have audited the accompanying balance sheet of Spongetech Delivery
Systems, Inc. as of May 31, 2003, and the related statements of operations,
changes in shareholders' equity (deficiency), and cash flows for the fiscal
years ended May 31, 2003 and 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted 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 financial position of Spongetech Delivery Systems,
Inc. as of May 31, 2003, and the results of its operations and its cash flows
for the fiscal years ended May 31, 2003 and 2002 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred net losses of
approximately $273,857 and $102,477 for the fiscal years ended May 31, 2003 and
2002. At May 31, 2003, current liabilities exceed current assets by
approximately $364,885, and total liabilities exceed total assets by
approximately $353,039. 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 notes 1 and 12).
/s/Drakeford & Drakeford, LLC
December 18, 2003
Royston, Georgia
F-2
SPONGETECH DELIVERY SYSTEMS, INC.
BALANCE SHEETS
November 30, May 31,
2003 2003
------------ --------
(unaudited)
ASSETS
Current Assets
Cash $ 345 $ 1,105
Accounts receivable trade 1,395 1,395
Receivable from factor 444 13,608
Inventories 444 1,296
--------- ---------
Total current assets 2,184 17,404
Property and equipment 32,831 37,116
Total assets $ 35,016 $ 54,520
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities
Accounts payable and
accrued expenses $ 240,421 $ 243,920
Income taxes payable 1,600 1,600
Due to related parties 125,540 110,269
Loans payable 26,500 26,500
Loans payable to related parties 50,000 25,000
---------- ----------
Total liabilities 444,061 407,289
---------- ----------
Shareholders' Equity (Deficiency)
Common stock, $.001 par value;
Authorized 50,000,000 shares;
issued and outstanding 18,985,000
and 18,985,000 shares as of
November 30, 2003 and May 31,
2003, respectively 18,985 18,985
Preferred stock $.001 par value;
Authorized 5,000,000 shares;
no shares issued and outstanding
Additional paid-in capital 255,098 255,098
Deficit (683,129) (626,852)
--------- ---------
Total shareholders' equity (deficiency) (409,046) (352,769)
---------- ----------
Total liabilities and shareholders'
equity (deficiency) $ 35,016 $ 54,520
========== ==========
See Independent Auditors' Report and notes to financial statements.
F-3
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF OPERATIONS
For the For the
Six Months Ended year ended
November 30, May 31,
------------------------ --------------------
2003 2002 2003 2002
---------- ----------- -------- --------
(unaudited) (unaudited)
Sales $ 2,123 $13,223 $342,019 $ 89,973
Cost of goods sold 5,136 4,164 299,617 121,643
----------- --------- -------- -----------
Gross profit (loss) (3,013) 9,059 42,402 (31,670)
----------- --------- -------- -----------
Operating expenses
Selling 25,052 1,781 55,261 15,982
General and
Administrative
expenses 23,199 94,707 245,088 51,711
Non cash consideration
Legal expenses 7,750
Consulting 2,000
Interest expense 5,013 2,646 5,760 2,714
--------- -------- -------- ----------
Total operating expenses 53,264 99,134 315,859 70,407
--------- -------- -------- ---------
Loss before provision
for income taxes (56,277) (90,075) (273,457) (102,077)
Other income and expenses
Interest expense 400 400 400
-------- -------- --------- ---------
Total income and
expense 400 400 400
Net loss $(56,277) $ (90,475) $(273,857) $ (102,477)
========= ========== ========== ===========
Basic and diluted (loss)
per common stock
Net loss per share -
basic and diluted $(.00) $ (.01) $ (.02) (.01)
========== ========= ========== ===========
Weighted average common
shares outstanding 18,985,000 18,660,000 18,321,666 12,000,000
========== ========== ========== ==========
See Independent Auditors' Report and notes to financial statements.
F-4
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DEFICIENCY)
Total
Additional Shareholders'
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)
Contributions - - 86,943 - 86,943
Net loss for year
ended May 31, 2002 - - - (102,477) (102,477)
---------- ------- ------- --------- ---------
12,000,000 12,000 192,043 (352,995) (148,952)
Issuance of
common stock 6,010,000 6,010 (4,220) - 1,790
Value of services
contributed by
officers - - 58,500 - 58,500
Issuance of shares
As non cash
Consideration 975,000 975 8,775 - 9,750
Net loss for the
year ended
May 31, 2003 (273,857) (273,857)
---------- ------- ------- --------- ---------
Balance -
May 31, 2003 18,985,000 $ 18,985 $ 255,098 $(626,852) $(352,769)
Unaudited
Net loss for
The six
months ended
November 30, 2003 (56,277) (56,277)
---------- -------- --------- --------- ---------
Balances
November 30, 2003 18,985,000 $ 18,985 $ 255,098 $(683,129) $(409,046)
========== ======== ========= ========== ==========
See Independent Auditors' Report and notes to financial statements.
F-5
SPONGETECH DELIVERY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
For the six
Months Ended For the
November 30, Year Ended May 31,
------------- -----------------
2003 2002 2003 2002
(unaudited) (unaudited)
Operating Activities
Net loss $(56,277) $(90,475) $(273,857) $(102,477)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Value of contributed officer compensation 39,000 58,500
Bad debt 13,909
Write off of related party receivable 2,190
Noncash compensation-legal and consulting fees 9,750
Depreciation 4,284 6,932 10,567 8,308
Interest expense added to loan principal 1,250 2,390
Changes in operating assets and liabilities
Accounts receivable 1,296 (169) (1,395) (13,909)
Inventories 1,771 48,061 (47,164)
Prepaid expense and other current assets 118 259
Accounts payable and accrued expenses (4,099) 58,499 84,655 95,399
Income taxes payable 400 1,200
Due to related parties 15,271 15,138 30,949
-------- -------- ------- --------
Net cash provided by (used in)
operating activities (39,525) 32,346 (29,262) (43,285)
-------- -------- ------- --------
Investing Activities
Acquisition of property and equipment (14,350) (7,700) (33,540)
-------- -------- ------- --------
Net cash used in investing activities - (14,350) (7,700) (33,540)
-------- -------- ------- --------
Financing Activities
Proceeds from factor, net 13,165 (13,608)
Proceeds of note payable - related party 25,600 51,500
Proceeds from loan payable - other
Proceeds from additional paid-in capital 76,943
Deferred offering costs (15,000)
-------- -------- ------- --------
Net cash provided by
financing activities 38,765 (15,000) 37,892 76,943
Net increase (decrease) in cash (760) 2,996 930 11
Cash - beginning 1,105 175 175 57
-------- -------- ------- --------
Cash - end $ 345 3,171 $1,105 $ 175
======== ======== ======= ========
Supplemental Information
Interest paid 500 $ 110 $ 110
Income taxes paid $ - $ - $ - $ -
Noncash Transactions
Assets abandoned
Parent company debt contributed
to additional paid-in capital $ 10,000
Issuance of common stock 5,390
See Independent Auditors' Report and notes to financial statements.
F-6
SPONGETECH DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1 - Summary of Significant Accounting Policies
Company History
Spongetech Delivery Systems, Inc. (the "Company") was formed on June 18,
1999, as Romantic Scents, Inc. On June 12, 2001, the Company changed its name to
RSI Enterprises, Inc., and, on October 2, 2002, changed its name to Spongetech
International Ltd. On July 15, 2002, the Company was acquired by Spongetech
Delivery Systems, Inc. (formerly Nexgen Acquisitions VIII, Inc.). The
transaction was accounted for as a reverse acquisition using the purchase method
of accounting, whereby RM Enterprises, Inc., the shareholder of the Company,
retained approximately 63% of the Company's outstanding common stock. On
December 16, 2002, the Company changed its domicile to Delaware by merging with
and into Spongetech Sub, Inc. Spongetech Sub's parent, Spongetech Delivery
Systems, Inc., then merged with and into Spongetech Sub so that Spongetech Sub
became the surviving corporation, and changed its name to Spongetech Delivery
Systems, Inc.
Nature of Operations
The Company distributes a line of hydrophilic polyurethane sponge cleaning
and polishing products.
Basis of Presentation/Going Concern
The financial statements have been prepared for purposes of registration
with the Securities and Exchange Commission ("SEC"), 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 fiscal
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 its 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 November 30, 2003 and
for the six months ended November 30, 2003 and 2002, 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 operations and cash flows for the six months ended November 30, 2003
and 2002.
F-7
SPONGETECH DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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.
Offering Costs
Offering costs incurred by the Company in connection with the proposed
registration statement are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred. For the fiscal years ended May
31, 2003 and 2002, advertising costs totaled $10,719 and $3,700, respectively.
For the six months ended November 30, 2003 and 2002, advertising costs
totaled $17,500 and $280, respectively.
F-8
SPONGETECH DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1 - Summary of Significant Accounting Policies (Continued)
Shipping and Handling Costs
Shipping and handling costs are included in selling expenses. For the
fiscal years ended May 31, 2003 and 2002, shipping and handling costs totaled
$21,333 and $2,726, respectively. For the six months ended November 30, 2003 and
2002, shipping and handling costs totaled $ -0- and $197, 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 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
results of operations, financial position or cash flows.
F-9
SPONGETECH DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
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 of kobligations 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 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 results of operations, financial position or cash flows.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Among other provisions, this Statement eliminates the requirement that gains and
losses from extinguishment of debt be classified as extraordinary items. The
Company will adopt SFAS 145 in fiscal 2003, and has determined it will not
impact the Company's financial position, results of operations or cash flows.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This Statement requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred, rather than when a company commits to an exit plan as was
previously required. SFAS 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The Company will adopt SFAS 146 in fiscal
2003, and has determined it will not impact the Company's financial position,
results of operations or cash flows.
F-10
SPONGETECH DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1 - Summary of Significant Accounting Policies (Continued)
Recent Accounting Pronouncements (Continued)
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair-value-based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS 123 and SFAS 148.
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees and
Indebtedness of Others," was issued. This interpretation requires the initial
recognition and initial measurement, on a prospective basis only, to guarantees
issued or modified after December 31, 2002. Additionally, certain disclosures
requirements are effective for financial statements ending after December 15,
2002. There were no disclosures required of the Company in the fiscal 2002 and
2003 financial statements.
In January 2003, FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities," ("VIE's") was issued. This interpretation clarifies
situations in which entities shall be subject to consolidation. This
interpretation is effective for all VIE's created after January 31, 2003. The
Company does not believe that the adoption of this interpretation will have any
impact on its financial statements.
2 - Property and Equipment
Property and equipment is summarized as follows:
Estimated
Useful Lives November 30, May 31,
Years 2003 2003
------------ ------------ ---------
(unaudited)
Furniture and fixtures 5 - 7 $ 761 $ 761
Machinery and equipment 5 - 7 17,828 17,828
Molds 5 38,312 38,312
-------- --------
56,901 56,901
Less: Accumulated depreciation 24,070 19,785
-------- --------
$ 32,831 $ 37,116
======== ========
Depreciation expense for the fiscal years ended May 31, 2003 and 2002 was
$10,567 and $8,308, respectively. Depreciation expense for the six months ended
November 30, 2003 and 2002 was $4,284 and $6,932, respectively.
F-11
SPONGETECH DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
3 - Stock Purchase Agreement / Public Offering
On July 15, 2002, Spongetech Delivery Systems (formerly Nexgen Acquisitions
VIII) entered into an agreement with RM Enterprises International, to acquire
the Company, its wholly-owned subsidiary 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 Company is registering with the Securities and Exchange Commission on
Form SB-2 4,485,000 shares of its common stock, $.001 par value each, for resale
by existing shareholders and 3,000,000 shares underlying three classes of
warrants. The Company has agreed to pay all registration costs of the offering
and will receive no proceeds from the resale of its common stock (see note 12).
The following are the proforma financial statements as of the fiscal year
ended May 31, 2002 and 2003:
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
=========== ========== ========= ==========
F-12
SPONGETECH DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
3 - Stock Purchase Agreement / Public Offering (continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY)
Current Liabilities
Accounts payable and
accrued expenses $ 158,865 $ - $ - $ 158,865
Income taxes payable
400 400 - 800
----------- ---------- --------- ----------
Total current
liabilities 159,265 400 - 159,665
Loans and note
payable to related
parties 79,320 - - 79,320
----------- ---------- --------- ----------
Total liabilities 238,585 400 - 238,985
----------- ---------- --------- ----------
Shareholders' Equity
(Deficiency)
Common stock, stated at
par value 12,000 6,010 - 18,010
Additional paid-in
capital 192,043 54,090 (58,310) 187,823
Deficit (352,995) (58,310) 58,310 (352,995)
----------- ---------- --------- ----------
Total shareholders'
equity (deficiency) (148,952) 1,790 - (147,162)
----------- ---------- --------- ----------
Total liabilities and
shar holders' equity
(deficiency) $ 89,633 $ 2,190 $ - $ 91,823
----------- ---------- --------- ----------
F-13
SPONGETECH DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
3 - Stock Purchase Agreement / Public Offering (Continued)
Year Ended May 31, 2003
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 57,910 - 109,621
Interest 2,714 - - 2,714
----------- -------- ------- -----------
70,407 57,910 - 128,317
----------- -------- ------- -----------
Loss before
provision for
income taxes (102,077) (57,910) - (159,987)
Income taxes 400 400 - 800
----------- -------- ------- -----------
Net loss $ (102,477) $ (58,310) $ - $ (160,787)
=========== ========== ======= ===========
4 - Due to/from Factor
During December 2002, the Company entered into factoring and financing
agreements whereby substantially all accounts receivable were sold to the factor
on a pre-approved non-recourse basis (except as to customer claims). Factoring
commissions were generally charged at the rate of 1.25% of factored sales,
(minimum $15,000 per annum), and the factor advanced up to 80% of the aggregate
purchase price of the receivables after deducting factoring charges. Such
advances bore interest at 2% above a designated bank's prime rate. The factor
also charged the Company for purchase guarantees, wire charges, letters of
credit, express mail, legal fees, and monthly services charges that the Company
needed to facilitate the purchase of product from Dicon. Amounts advanced by the
factor were collateralized by all present and future accounts receivable,
inventories, and general intangibles of the Company. A director of the Company
personally guaranteed performance under the agreement. As of November 30, 2003,
all advances by the factor had been repaid and there is no outstaning balance
due to or from the factor.
F-14
SPONGETECH DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
4 - Due to/from Factor (continued)
November 30, May 31,
2003 2003
----------- -------
Total Advances from factor $ 399,136 $ 385,529
Total Accounts receivable factored 399,136 399,137
--------- -------
Due to factor $ -0- $ 13,608
========== ==========
5 - Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
November 31, May 31,
2003 2003
------------ ----------
(unaudited)
Purchases $ 67,984 $ 69,223
Packaging material, molds and supplies 26,751 26,751
American Express - charge card 20,184 20,184
Professional fees 69,005 78,005
Freight charges 2,544 2,300
Interest 12,799 8,042
Commission payable 36,000 36,000
Other 5,154 3,415
--------- ---------
Total $ 240,421 $ 243,920
========= ==========
6 - Note Payable - Related Party
During the year ended May 31, 2001, a former employee of the Company loaned
$25,000 to the Company. The note bears interest at 10% per annum and principal
and interest are payable upon demand. However, the loan is classified as a
short-term obligation because it is expected to be repaid within one year.
Related interest expense for the fiscal years ended May 31, 2003 and 2002 was
$2,500 and $2,500, respectively, and for the six months ended November 30, 2003
and 2002 was $1,250 and $1,250, respectively. At November 30, 2003 and May 31,
2002, accrued and unpaid interest of $6,797 and $5,547, respectively, has been
added to the loan principal.
7 - 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 and the estimated monthly amount of this allocation is
approximately $2,500 per month. Management believes these allocations are
reasonable. At November 30, 2003 and May 31, 2003, the Company has a
non-interest bearing liability, aggregating $51,930, payable to one of these
related parties. At May 31, 2003, the related party agreed to extend the
maturity date to July, 2004.
F-15
SPONGETECH DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
7 - Related Party Transactions (continued)
During the six months ended November 30, 2003 a related party advanced
funds to the Company to cover operating expenses, of which approximately $12,126
is payable to the related party. This loan is non interest bearing and is
payable upon demand.
At November 30, 2003 and May 31, 2003, the Company has a non-interest
bearing liability to its major stockholder of $61,484 and $44,314 respectively
payable on demand.
In January 2003, the Company paid $24,500 for marketing and promotional
services rendered by an affiliated company.
During the year ended May 31, 2003, a related party advanced funds to cover
operating expenses aggregating $1,500. This loan is non interest bearing and is
payable upon demand.
8 - Loan Payable - Other
On January 13, 2003, a nonaffiliated company advanced to the Company a
working capital line of credit in the amount of $25,000. As of November 30,
2003, advances aggregating an additional $25,000 were made to the Company for a
total amount due of $50,000. The line bears interest at 7% per annum and was
originally due on May 15, 2003. This line has been extended to July, 2004. For
the six months ended November 30, 2003 and for the year ended May 31, 2003,
interest accrued and expensed was $656 and $1,532 respectively.
9 - Capital Stock/Additional Paid-in Capital
The Company is authorized to issue 50,000,000 shares of common stock, $.001 par
value per share. Each outstanding share of common stock is entitled to
one vote, either in person or by proxy, on all matters that may be voted upon by
their holders at meetings of the stockholders. Holders of common stock
(i) have equal ratable rights to dividends from funds legally available
therefore, if declared by the Company's board of directors;
(ii) are entitled to share ratably in all of our assets available for
distribution to holders of common stock upon the Company's liquidation,
dissolution or winding up;
(iii) do not have preemptive, subscription or conversion rights, or redemption
or sinking fund provisions; and
(iv) are entitled to one noncumulative vote per share on all matters on which
stockholders may vote at all meetings of stockholders.
The Company is authorized to issue of up to 5,000,000 shares of preferred
stock,$.001 par value per share, 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.
F-16
SPONGETECH DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
9 - Capital Stock/Additional Paid-in Capital (continued)
During the fiscal years ended May 31, 2002 and 2001, the Company's major
stockholder and former parent contributed $86,943 and $105,100, respectively, as
additional paid-in capital.
10 - Deferred Income Taxes
At November 30, 2003 and May 31, 2003, the Company has approximately
$674,789 and $618,512, respectively, of net operating loss carryforwards
available, which expire in various fiscal years through May 31, 2022. The
significant component of the Company's deferred tax asset as of November 30,
2003 and May 31, 2003 is as follows:
November 30, May 31,
2003 2003
------------ -----------
(unaudited)
Non-Current
Net operating loss carryforwards $ 256,420 $ 235,035
Valuation allowance for
deferred tax asset (256,420) (235,035)
--------- ---------
$ - $ -
========= =========
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 November 30, 2003 and May 31, 2003, a valuation allowance for the full amount
of the net deferred tax asset was recorded.
11 - Commitments and Contingencies
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 six 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 requirements.
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.
F-17
SPONGETECH DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
11 - Commitments and Contingencies (continued)
Employment Contracts
The Company is currently negotiating with two executives to establish
employment contracts. No terms of these negotiations have been disclosed.
Concentration
For the year ended May 31, 2003, sales to one customer aggregated
approximately 87% of total sales.
For the six months ended November 30, 2003, the Company's sales were
derived from various individual internet customers.
Contingent Liability
The Company entered into an agreement on December 31, 2001 with Paradigm
Solutions, Inc. under which Paradigm was to prepare and show a television
infomercial of the Company's vehicular cleaning sponge products within 150 days
of the contract date. Paradigm also had exclusive marketing rights to the
Company's vehicular cleaning sponge during that period. In the opinion of the
Company's management, Paradigm did not perform under the agreement.
Subsequently, the Company produced an informercial and arranged for it to be
shown on Home Shopping Network and also arranged for the sale of our vehicular
product to TurtleWax. Paradigm has claimed commissions of $33,400 from these
sales. However, as of the date of the prospectus, it has not brought any action
against the Company. Management denies that the Company has any liability to
Paradigm. Nonetheless, the Company has accrued $36,000 on the financial
statements as a contingent liability representing the full amount of Paradigm's
claim and estimated costs.
12 - Recapitilization and Funding
As part of a plan of recapitilization and funding, the Company undertook a
series of steps as follows:
On December 26, 2002, the Company entered into a securities purchase
Agreement with the Colebrook, Inc. The agreement entitled 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. This agreement was rescinded in June 2003.
On June 11, 2003, the Company sold warrants for an aggregate of $1,000 to
Colebrook, Inc. Each warrant entitles the owner to purchase one share of common
stock on the exercise of the warrant. The Company received $1,000, and issued
one million Class A warrants exercisable for three months at $.50 per share, one
million Class B warrants exercisable for six months at $0.75 per share, and one
million Class C warrants exercisable for nine months at $1.00 per share.
F-18
SPONGETECH DELIVERY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
The Company applied the $1,000 proceeds from the sale of the warrants to
office expenses. The Company intends to use the proceeds from warrant exercise
as follows:
Exercise of
"A" Warrant "B" Warrant "C" Warrant
----------- ------------ ------------
Product development (2) $100,000 $300,000 $400,000
Marketing (3) 100,000 300,000 400,000
Payment of acounts
payable and indebedness 100,000 150,000 -0-
Working Capital 200,000 -0- 200,000
--------- ---------- -----------
Total: $500,000 $750,000 $1,000,000
F-19
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 2,400,000 SHARES OF COMMON STOCK
-----------------------
PROSPECTUS
____________________
-------- ----, 2004
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................................................. 85,005
Printing and Engraving.......................................... 1,000
Blue Sky Qualification Fees and Expenses........................ 1,000
Transfer Agent Fee.............................................. 1,000
Miscellaneous................................................... 1,000
--------
Total.................................................... $ 97,055
--------
---------------------
* Counsel was issued 775,000 shares of common stock for legal services in
connection with the registration statement and related legal matters.
II-5
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
We were incorporated in New York State as Romantic Scents, Inc. on July 18,
1999. We changed our name to RSI Enterprises, Inc. on June 12, 2001.
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 consulting, expense reimbursement and provision of office
space valued at $.01 per share. 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.,
beneficially owned by Joel Pensley, securities counsel, for consulting services.
These shares were valued at $.01 per share.
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 were sophisticated investors and that they acquired the
securities for their own accounts. A legend was placed on the stock certificates
stating that the securities had not been registered under the Securities Act and
could not be sold or otherwise transferred without an effective registration or
an exemption therefrom.
In June, 2002, Nexgen Acquisitions accepted subscriptions from 30 people at
$.01 per share for an aggregate of 219,000 shares.
These securities were sold under the exemption from registration provided
by Rule 504 under Section 3(b) 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 investors were informed
that Nexgen Acquisitions VIII intended to enter into a business combination with
RSI Enterprises. All purchasers represented in writing that they were
sophisticated investors and that they acquired the securities for their own
accounts. A legend was placed on the stock certificates stating that the
securities had not been registered under the Securities Act and could be sold or
otherwise transferred without an effective registration or an exemption
therefrom.
On July 15, 2002, we entered into a stock purchase agreement with Nexgen
Acquisitions VIII under which we became a wholly-owned subsidiary; and our sole
stockholder, RM Enterprises International, received 12,000,000 shares of Nexgen
Acquisitions VIII, Inc. and became its majority stockholder.
On October 9, 2002, the name of Nexgen Acquisitions VIII was changed to
Spongetech Delivery Systems, Inc.
On December 16, 2002, we changed our domicile to Delaware by merging into
our wholly-owned subsidiary, Spongetech Sub, Inc. On December 16, 2002,
Spongetech Delivery Systems, Inc. merged with and into us (under the name
Spongetech Sub) so that we became the surviving company. Immediately subsequent
to the merger, we changed our name to Spongetech Delivery Systems, Inc.
On June 11, 2003, we sold 3,000,000 warrants, equally divided into three
classes, to Colebrook, Inc. for $1,000 under Regulation D to the Securities Act
of 1933.
II-6
ITEM 27 EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Certificate of Incorporation of Nexgen VIII, Inc.(1)
3.2 Certificate of Amendment of Nexgen VIII, Inc. changing name to
Spongetech Delivery Systems, Inc.(1)
3.3 By-Laws of Spongetech Delivery Systems, Inc.(1)
3.4 Certificate of Incorporation of Romantic Scents, Inc. (2)
3.5 Certificate of Amendment changing name of Romantic Scents, Inc. to
RSI Enterprises, Inc. (2)
3.7 Certificate of Amendment changing name of RSI Enterprises, Inc. to
Spongetech Enterprises Internatioal, Inc. (2)
3.6 Certificate of Incorporation of Merger Sub, Inc. (2)
3.7 Merger Certificate between Spongetech Delivery Systems and Merger
Sub, Inc. (2)
3.8 Merger Certificate between Spongetech Enterprises International, Inc.
and Merger Sub, Inc. (2)
3.9 Certificate of Amendment changing name of Merger Sub, Inc. to
Spongetech Delivery Systems, Inc. (2)
4.1 Specimen Certificate of Common Stock(1)
4.2 Warrant Certificate (3)
4.3 Warrant Agreement with Colebrook, Inc. and Olde Monmouth Stock
Transfer Co., Inc. (3)
5.1 Opinion of Counsel(1)
5.2 Revised Opinion of Counsel (2)
5.3 Revised Opinion of Counsel (3)
5.4 Revised Opinion of Counsel (4)
10.1 Stock Purchase Agreement by and among Nexgen Acquisitions VIII,
Inc., RM Enterprises International, Inc. and RSI Enterprises, Inc.(1)
10.2 Stock Purchase Agreement by and between Spongetech Delivery Systems,
Inc. and Colebrook, Inc. (2)
10.3 License Agreement dated July 1, 2001 with Dicon Technologies (2)
10.4 Supply and Requirements Agreement dated July 1, 2001 with Dicon
Technologies (2)
II-7
10.5 Manufacturer's Representative Agreement dated July 1, 2001 with Dicon
Technologies (2)
10.6 Extension of debt letter by Romantic Moments, Inc. dated August 15,
2002 (4)
10.7 Terms of oral understanding with Dicon Technologies to expand
license (5)
10.8 Factoring Agreement with Westgate (4)
23.1 Accountant's Consent (5)
23.2 Counsel's Consent to Use Opinion (4)
------------------
(1) Previously filed as an exhibit to registration statement on Form SB-2
filed November 1, 2002
(2) Previously filed as an exhibit to first amendment to registration
statement on Form SB-2 filed January 13, 2003
(3) Previously filed as an exhibit to second amendment to registration
statement on Form SB-2 filed April 11, 2003
(4) Previously filed as an exhibit to third amendment to registration
statement on Form SB-2 filed July 8, 2003
(5) Filed with this amendment
II-8
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.
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.
II-9
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 9, 2004 By: /s/ Michael Metter
----------------------------
Michael Metter
President,
Chief Executive Officer
January 9, 2004 By: /s/ Martin Pelman
---------------------------
Martin Pelman
Chief Financial Officer
January 9, 2004 By: /s/ Jerome Schlanger
---------------------------
Jerome Schlanger
Treasurer
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 9, 2004
Chief Executive Officer
and a Director
/s/Steven Moskowitz
---------------------
Steven Moskowitz Secretary and a Director January 9, 2004
/s/ Jerome Schlanger
---------------------
Jerome Schlanger Treasurer and a Director
Chief Accounting Officer January 9, 2004
/s/Frank Lazauskas
---------------------
Frank Lazauskas A Director January 9, 2004
/s/Martin Pelman
---------------------
Martin Pelman A Director and Chief
Financial Officer
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