STATE OF NEW YORK

SUPREME COURT FOR MANHATTAN COUNTY

Aquamatrix, Inc., a Delaware corporation, )

)
Plaintiff, ) Case no.
v. )
)
H.H. Brown Shoe Technologies, Inc., dba Dicon )
Technologies and Wayne Celia, )
)
Defendants. )

COMPLAINT

Aquamatrix, Inc. (“Aquamatrix”), a Delaware corporation, for its complaint against H.H.

Brown Shoe Technologies, Inc., dba Dicon Technologies (“Dicon”) and Wayne Celia, states as

follows:

Parties and Jurisdiction

1. Aquamatrix maintains its chief place of business at 305 Madison Ave., Suite 4510,

New York, NY 10165. Aquamatrix is a holding corporation that owns 100 percent of the stock of

Hydrogel Design Systems, Inc. (“Hydrogel”). Hydrogel manufactures gel products that

principally have personal and medical uses.

2. Dicon is a Delaware corporation maintaining its chief place of business in

Greenwich, Connecticut. Dicon is a manufacturer of shoes, cosmetics, and various other personal

care products. Dicon is a subsidiary of Berkshire Hathaway, Inc.

3. Wayne Celia (“Celia”) was at all relevant times the President of the Dicon

Technologies Division of H.H. Brown Shoe Technologies, Inc. Celia is a resident of

____________ County, New Jersey.

LITIGATIONCOMPLAINT122107
 4. Celia served on the board of directors of Aquamatrix. As a member of

Aquamatrix’s board, and as a representative of Dicon, Celia regularly met with Aquamatrix

executives at their offices in New York City and participated with Aquamatrix in investor

presentations conducted in New York City.

5. Additionally, Dicon maintains a continuous presence in the State of New York.

Dicon operates six “SuperShoes” retail stores in New York and has significant other contacts with

firms and people in the state of New York.

6. This action concerns multiple breaches by Celia of the duty of care he owed to

Aquamatrix as a director and the fraud and negligent misrepresentations made by Celia and Dicon

in their dealings with Aquamatrix.

Background

7. In late 2004, Wayne Celia (“Celia”) was appointed to the board of directors of

Nesco, Inc., which subsequently changed its name to Aquamatrix, Inc. At the time, Celia was the

President of the Dicon division of H.H. Brown, a manufacturer of shoes, cosmetics, and various

other personal care products. Celia was appointed to the board of Aquamatrix because of his

background in foam products which are used in markets complimentary to Aquamatrix’s gel

products. Celia served on the board of Aquamatrix in the course of his serving as president of

Dicon.

8. As a member of the Aquamatrix board, Celia had access to all business records and

plans of Aquamatrix and Hydrogel, Inc., its sole subsidiary at the time.

9. Dicon had existing manufacturing capacity for foam products that were either sold

directly to consumers or which were incorporated into other consumer products. In early 2005,

Dicon sought to outsource the manufacture of its products and, accordingly, to divest itself of its

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foam manufacturing assets. Dicon sought to outsource the manufacture of its foam products to

two firms: a Chinese joint-venture partner and a U.S. licensed manufacturer for, among other

things, foam that would be incorporated into products sold under U.S. government contracts.

10. Through Celia, Dicon proposed to sell two lines of its foam manufacturing

equipment to Aquamatrix, or to a subsidiary of Aquamatrix, to license certain manufacturing

technologies to Aquamatrix, and then to purchase finished foam product from Aquamatrix. In

describing to Aquamatrix the benefits it would enjoy if it acquired the Dicon manufacturing

assets, Celia assured Aquamatrix that the foam business would produce enough revenue and cash

flow to make the company self-sufficient while the existing hydrogel business grew, and that “the

addition of hydrophilic technology will provide Aquamatrix’s Hydrogel subsidiary with a broader

base of products to offer the existing customers and new ones.”

11. On July 10, 2005, Celia met with Matt Harriton, the President and Chief Executive

Officer of Aquamatrix, and Ron Kuzon, a consultant of Aquamatrix, to discuss the details of the

purchase by Aquamatrix (or its Hydrogel subsidiary) of the foam manufacturing assets of Dicon.

In advance of the meeting, Celia provided to the Aquamatrix representatives an agenda that listed,

as discussion points for the meeting, equipment, licenses, and manufacturing and distribution

rights. The agenda described a proposed business arrangement between Dicon and Aquamatrix’s

subsidiary Hydrogel concerning the manufacture and sale of foam products. Prior to and during

the meeting, Celia represented that, if Hydrogel acquired Dicon’s foam manufacturing assets,

Dicon would purchase foam products from Hydrogel of not less than $4 million a year. Celia

further represented that Dicon would pay for foam product that Hydrogel produced at prices

sufficient to give Hydrogel a gross profit margin of 30 to 40 percent.

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 12. The July 10, 2005 meeting went well and a few days later Celia advised

Aquamatrix that he was “in the process of drawing up a draft agreement for us to move ahead.”

In the meanwhile, anticipating that the parties would reach an agreement, Celia sought to

establish a working relationship between the plant operations people of Dicon and Aquamatrix.

By August 10, 2005, Hydrogel operations staff had visited Dicon’s plant to evaluate the space

requirements associated with moving Dicon’s manufacturing operations to Hydrogel.

13. An agreement under which Dicon would sell significant manufacturing assets to

Aquamatrix’s Hydrogel subsidiary was negotiated between Dicon and Aquamatrix during

September 2005. Initially, Dicon proposed to sell equipment, and to license related technology,

for the manufacture of hydrophilic urethane foam and gel products (referred to herein as “foam

products”). During the course of negotiations, Dicon also offered to sell equipment and to license

related technology for the manufacture of Dicon’s “Dryz” products. During these negotiations,

Dicon, through Celia, represented that the Dryz production would be highly profitable to

Hydrogel.

14. A definitive agreement between Dicon and Hydrogel was signed on October 3,

2005. In that agreement, Hydrogel agreed to purchase the two lines of production equipment

from Dicon for $620,000 and was granted the exclusive right to manufacture in North America

certain foam products for Dicon. Dicon assured Aquamatrix and Hydrogel that the exclusive

North American manufacturing right was valuable because significant quantities of Dicon foam

products, either because of customer requirements or time limitations, had to be produced in the

United States.

15. Hydrogel subsequently created Foam Manufacturing, Inc. (“Foam”) as a new

subsidiary to receive the assets and business being transferred by Dicon. Throughout late 2005,

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Hydrogel worked to implement its agreement with Dicon and to establish Foam as an operating

company. During this time, Dicon, through Celia, represented to Aquamatrix and Hydrogel that

within six months from completion of the transfer of the equipment to Foam that Dicon would be

purchasing about $350,000 a month in product from Foam.

16. By December 2005, Celia was leading the transition effort for both Dicon and the

Aquamatrix companies. On December 4, 2005, Celia forwarded to Aquamatrix a detailed

“Hydrogel/Dicon USA” plan for the transfer and expansion of the business. In addition to

providing an action plan for the transaction, Celia forecast that the Aquamatrix companies would

enjoy sales of $3.45 million in the first year after the transfer and $5.355 million in the second

year.

17. In order to fund Hydrogel and Foam’s purchase of the Dicon production lines and

the costs of starting production, Aquamatrix needed to raise significant additional capital. Aware

of this need, Celia supplied Aquamatrix with a steady supply of financial projections and

descriptions of new business opportunities that the Aquamatrix companies would enjoy once the

transition was complete. For instance, on December 4, 2005, Celia described several business

opportunities for Hydrogel he was working on, concluding that there was “great interest on the

Hydrogel midsole with a number of customers, HHB, Fila and Nike.”

18. Although by mid-December Hydrogel was late in making the initial $50,000

payment to Dicon for the equipment, Celia assured the Aquamatrix companies that Dicon could

be flexible. In fact, Celia was so sure that any payment delays could be dealt with that on

December 29, 2005 he sent to Aquamatrix an updated presentation prepared by Dicon that

described in detail how the Aquamatrix companies would benefit from its arrangement with

Dicon. The presentation forecast that the Aquamatrix companies would enjoy new revenues from

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the arrangement of almost $6 million in the first year and over $11 million thereafter. The

presentation listed in detail prospective new business and even discussed how new business could

be obtained from existing customers of the Aquamatrix companies.

19. While impressed with the projections Celia had provided, Aquamatrix questioned

Celia as to why there was no historic sales data that supported the level of sales Celia had

projected for the Aquamatrix companies. Celia assured Aquamatrix that the projections were

reliable, and he further committed himself to helping Aquamatrix raise the capital required for the

venture. On February 3, 2006 Celia assured a fellow Aquamatrix board member that “I have

done everything I said I would do for our partnership. Let alone, you truly have to realize that my

involvement at this point in this fund raising really crosses the line.”

20. In fact, Dicon and Celia were the principal authors of written material given to

prospective Aquamatrix investors. In late March 2006, Celia and Dicon prepared for an

Aquamatrix investor meeting a comprehensive presentation that described in glowing terms the

business opportunities for Aquamatrix that would result from its venture with Dicon and provided

detailed operational information.

21. On March 23, 2006, Aquamatrix advised Celia that Aquamatrix had identified a

potential investor in its business and requested volume projections from Celia. Celia promised

Aquamatrix that it would have hard orders and projections the next day, and that “looks like we

will deliver initial blanket orders between $500-700k … Understand, that in addition to the

blanket order there will be constant interim orders against projections.…” A few days later, on

March 28, 2006, Celia projected a “ramp-up of 50-70k April, May 125k and June 160k. Keep

going until you reach 300k and more …”

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 22. Aquamatrix continued to meet with prospective investors through the spring of

2006. It also obtained bridge loan financing from its officers and directors to fund the payments

owed by Hydrogel to Dicon. In fact, as a result of the projections and assurances provided by

Dicon and Celia, Aquamatrix raised from its officers and directors, and advanced to Hydrogel and

Foam for investment in the venture with Dicon, over $1 million in 2006. Aquamatrix also sought

to raise capital from unaffiliated investors, and in that regard on April 21, 2006 Aquamatrix

requested Celia’s attendance at a meeting with a prospective investor. Celia agreed: “I think it

can only help to have HHB’s support. I’m sure that it will lend creditability to your efforts.”

23. In early 2006, as new investors were sought, the parties worked to relocate the

Dicon production lines to a new facility leased by Foam. Celia was intimately involved with the

details of the move, and advised the Aquamatrix companies on a number of operational issues,

including environmental permits, and gave directions to Aquamatrix personnel on the installation

and start-up of the equipment.

24. The Aquamatrix companies completed installation of the first production line

purchased from Dicon in early May 2006. Because the equipment did not work as Dicon had

warranted, production was lost until it was convenient for Dicon to address the production

problems.

25. Moreover, Aquamatrix’s expectations, based on the representations of Dicon and

Celia, of significant orders of product from Dicon to produce on the line were totally unmet.

From the start, Dicon failed to provide orders for product at anywhere near the levels described in

the various projections it had provided to Aquamatrix.

26. Additionally, the Aquamatrix companies suffered significant downtime in

operating the equipment purchased from Dicon because Celia and Dicon had given false

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information about the equipment’s operating requirements and condition. For instance, it

required twice as much electricity to operate the equipment as Dicon had warranted, resulting in

two lost weeks of production and an expenditure of $170,000 to upgrade the plant’s electrical

capacity. Also, some of the equipment was in exhausted condition and required replacement or

expensive repairs. Celia and Dicon had represented that the equipment was in newly refurbished

condition in its negotiations with Aquamatrix.

27. In fact, the equipment failed to conform to the warranties Dicon had made in the

Agreement. For both lines of equipment, Dicon warranted that the equipment would produce

product that would satisfy certain defined specifications. The equipment fell far short of meeting

those specifications, requiring Aquamatrix to spend thousands of dollars to upgrade the

equipment to the level warranted by Dicon. Not only did Aquamatrix incur the cost of the

upgrades, but it also lost valuable production time.

28. Aquamatrix worked steadily in late 2006 and early 2007 to locate additional

capital that would, among other things, support the venture with Dicon. Celia was intimately

involved in this effort to raise new capital. In February 2007, he prepared for an “Aquamatrix

Investor Presentation” for distribution to potential investors. In March 2007, Celia prepared a

comprehensive investor presentation for Aquamatrix that projected revenues on product lines

acquired from Dicon of almost $4.9 million. Based on these projections, Aquamatrix was

successful in raising capital in early 2007 of over $4 million, over one million of which was

directly spent on the Dicon joint venture.

29. After Foam had installed the production line for the foam product, it began

installation of the second line for the Dryz product. Installation of the Dryz line was completed in

March 2007. Again, however, Dicon failed to order the quantity of products that could be

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produced from the line that it had repeatedly promised, including promises made just several

weeks before the completion of the Dryz line. In fact, Dicon ordered less than 10 percent of the

volume it had projected as recently as February 2007.

30. On March 13, 2007, an Aquamatrix board member challenged Celia on the failure

of Dicon to issue the expected orders: “This sort of shortfall as against an already extremely

reduced forecast will not lend confidence to anyone in the financing community about the ability

to hit the quarter, much less the forecast you handed out for the year that shows a nearly three

times jump from these numbers to where we would have to be to achieve those. I do hope that we

can find a customer to fill this ‘hole.’” Celia replied that he “understood” and represented that the

Aquamatrix companies would receive orders from Dicon of at least $275,000 in May and June of

2007. In fact, Aquamatrix received orders of only $125,000.

31. Aquamatrix now understands that sales were much lower than Celia and Dicon had

projected because (i) Dicon had in fact never used the volume of foam products on which the

projections were based and (ii) Dicon ordered most of the foam product from another joint

venture it had entered into with a company in China. The involvement of the Aquamatrix

companies with the business they were promised was largely limited to unloading, storing,

packing, and loading for Dicon the finished goods manufactured in China. Even for these

services, which required that Aquamatrix lease additional space at its facility in Trenton, New

Jersey, Dicon has refused to pay a market rate.

32. Not only did Dicon fail to deliver the orders it had promised, but the

representations it and Celia had made regarding the cost of producing Dicon products on the

equipment sold to the Aquamatrix companies proved to be vastly understated. Instead of

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enjoying margins in the range of 30 to 40 percent, Aquamatrix in fact experienced negative

margins on the product.

33. To bolster sales, in early 2007 Aquamatrix sought to hire a senior sales executive

for the products that could be manufactured with the equipment purchased from Dicon. Celia had

advised the Aquamatrix board that he had identified a qualified candidate and that he would

negotiate employment terms with the candidate of behalf of Aquamatrix. Instead, Celia caused

Dicon to hire the candidate.

34. Celia resigned from Aquamatrix’s board on March 13, 2007.

35. By June 2007, the orders from Dicon had trickled to a small fraction of the

business promised by Celia and Dicon. Relying on Celia’s and Dicon’s projections, Aquamatrix

had invested in a plant that had much greater capacity than what was needed, and accordingly

much higher fixed operating costs that what Aquamatrix could afford. Although Aquamatrix

supported the operation and covered its losses for several months, by September 2007 in could no

longer do so and thus closed the Trenton plant and all operations run on the equipment acquired

from Dicon.

COUNT I: BREACH OF DUTY OF LOYALTY (CELIA)

36. As a director of Aquamatrix, Celia owed a duty of loyalty to the corporation which

prohibited him from using his relationship with the corporation to his personal advantage.

37. Celia repeatedly breached the duty of loyalty owed to Aquamatrix by knowingly

and/or negligently making false representations regarding the business and profits that

Aquamatrix would enjoy if it purchased certain assets of Dicon, and by misrepresenting the

condition of the assets. By making the false representations, Celia induced Aquamatrix to cause

Hydrogel and Foam to enter into the Agreement with Dicon and to commit themselves to the

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outlays required thereunder and induced Aquamatrix to borrow funds that were advanced to

Hydrogel and Foam to fund the Dicon venture.

38. Celia, as President of Dicon, further breached the duly of loyalty owed to

Aquamatrix by diverting to Dicon a senior marketing candidate that Celia had undertaken to

recruit for Aquamatrix.

39. Celia sought to receive personal benefit from the actions of Aquamatrix that were

induced by his false representations. As President of Dicon and with his own compensation tied

to the success of Dicon, Celia benefited from Dicon’s sale of assets to the Aquamatrix companies.

Celia succeeded in removing from the books of Dicon manufacturing assets that he knew were

low performing, and dragging down Dicon’s overall return on assets, a measurement of

performance for which Celia was personally responsible.

40. Celia also sought to receive personal benefit by diverting to Dicon the senior

marketing executive that he had undertaken to recruit for Aquamatrix. After the transfer of its

manufacturing assets to the Aquamatrix companies, Dicon retained its marketing and sales

functions for which it needed new senior marketing talent. As the President of Dicon, any

improvement in Dicon’s sales and marketing efforts would redound to Celia personally.

41. As a direct consequence of Celia’s breaches of loyalty, Aquamatrix suffered injury

by investing over $2 million in a subsidiary specially created to receive the Dicon assets that

failed.

42. At all times in his dealings with Aquamatrix, and in serving as a member of the

board of directors of Aquamatrix, Celia was performing his duties as an employee and senior

officer of Dicon and was working for the benefit of Dicon. Dicon aided and abetted the breach of

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the duty of loyalty committed by Celia and is thus responsible for the misconduct of Celia alleged

herein.

WHEREFORE, Aquamatrix prays for judgment against Celia and Dicon in an amount

greater than $2 million plus interest and attorneys’ fees.

COUNT II: FRAUD

43. In order to induce Aquamatrix to financially support it and its subsidaries’ venture

with Dicon, including providing funds so that Hydrogel and Foam could pay the purchase price

for the equipment purchased from Dicon and providing funds to support the working capital

needs associated with the Dicon venture, Dicon, through its President, Celia, represented to

Aquamatrix that (i) Dicon would annually purchase from the Aquamatrix companies not less than

$4 million of product manufactured by them with the equipment, (ii) the costs of manufacturing

the Dicon foam products on the equipment would allow the Aquamatrix companies to earn a

gross margin of at least 30 percent, and (iii) the equipment was in a newly refurbished condition.

Not only were these representations untrue, but Dicon and Celia knew or should have known that

they were untrue at the time the representations were made. Aquamatrix relied on the

representations in its decision to invest over $2 million into Hydrogel and Foam to fund the

venture with Dicon.

WHEREFORE, as a consequence of the fraud committed by Dicon and Celia, Aquamatrix

has suffered losses in excess of $2 million for which it seeks judgment, plus interest and

attorneys’ fees.

COUNT III: NEGLIGENT MISREPRESENTATION

44. At the time it was negotiating with Aquamatrix for it or its subsidiaries to enter

into the Agreement, and as Aquamatrix invested over $2 million in Hydrogel and Foam to fund

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the purchase, installation, and modification of the equipment sold to them under the Agreement,

Dicon, through its President, Celia, represented to Aquamatrix that (i) Dicon would annually

purchase from the Aquamatrix companies not less than $4 million of product manufactured by

them with the equipment and (ii) the costs of manufacturing the specified foam products on the

equipment would allow the Aquamatrix companies to earn a gross margin of at least 30 percent.

Not only were these representations untrue, but Dicon should have known that they were untrue at

the time the representations were made. Aquamatrix relied on the representations in its decision

to invest over $2 million into Hydrogel and Foam to fund the venture with Dicon.

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