ECOMAT INC, 10KSB, 1998-06-11

ECOMAT INC
10KSB, 1998-06-11
PERSONAL SERVICES

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
[ ] Transition Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the fiscal year ended DECEMBER 31, 1997

COMMISSION FILE NO. 0-21613

ECOMAT, INC.

(Name of small business issue in its charter)

DELAWARE 13-3865026
(State of or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)

147 PALMER AVENUE
MAMARONECK, NEW YORK 10543-3632
(Address of Principal (Zip Code)
Executive Offices)

Issuer's telephone number: (914) 777-3600

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.0001 per share
(Title of Class)

Check whether the issuer (1) filed all reports required to be filed by
Sections 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

Issuer's revenues for its most recent fiscal year: $547,967.

The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the sale price of the Common Stock on
the Nasdaq SmallCap Market on June 8, 1998, was $1,203,800.

Number of shares outstanding of the issuer's common stock, as of June 8,
1998 was 3,606,800.

DOCUMENTS INCORPORATED BY REFERENCE: None

Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]

PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

ECOMAT, INC. (the "Company" or "Ecomat") is a Delaware corporation that
has been formed to develop the Ecomat concept -- an environmentally sound
solution to the current standard dry cleaning method that utilizes
percloroethylene ("perc"), which has been shown to have various toxic effects.
As of May 31, 1998, Ecomat had five active subsidiaries, four of which operated
Company-owned stores and the fifth being the franchisor of the Ecomat concept,
as follows:

1. ECOCLEAN SYSTEMS INTERNATIONAL, LTD. ("Ecoclean Systems")
operates a Company-owned store at 147 Palmer Avenue, Mamaroneck,
New York. Ecoclean Systems is a full-service Ecomat cleaners and
laundromat that opened on October 14, 1995. The facility is the
flagship store of the Company and the prototype for all Ecomat
full-service franchises.

2. 8TH STREET LAUNDROMAT, INC. ("8th Street") operates a
Company-owned store at 140 West 72 Street, New York, New York,
which is a laundromat as well as a drop-site for cleaning that is
processed at the 39 North Moore Street facility of ECO JOSH.

3. ECO JOSH, INC. ("ECO JOSH") was formed in April 1997 to acquire
substantially all of the assets and assume certain liabilities of
a laundromat and dry cleaning store at 39 North Moore Street, New
York, New York. This location was purchased to strengthen the
Company's presence in Manhattan and to serve as the cleaning
(processing) center for the Company's 8th Street store. The
purchase price was $200,000 in cash. The conversion of the
cleaning equipment from the dry-cleaning process to the
wet-cleaning process required an additional investment of
approximately $99,000.

4. ECO MAHWAH, INC. ("ECO MAHWAH") was formed in September 1997 to
acquire substantially all of the assets and assume the lease of a
cleaner located at 190 Franklin Turnpike, Mahwah, New Jersey.
This purchase was completed in reliance upon the conclusion of
negotiations and signing of a cluster development agreement for
Bergen County with a prospective franchisee, which is currently
in dispute. The

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purchase price consisted of a cash payment of $128,000. The
Company has invested additional funds in the amount of
approximately $78,000 for leasehold improvements and start up
expenses to complete the cleaning store and currently manages
this location as a Company-owned store pending resolution of the
franchise dispute. The Company is currently reviewing this matter
with counsel.

5. ECOFRANCHISING, INC. ("Ecofranchising") is the franchisor of the
Ecomat concept. The Company began offering franchises in October
1994. As of March 31, 1998, there were signed agreements for
cluster franchises in Long Island and Brooklyn, New York and
Austin, Texas and a single franchise in New York City. In
addition, three master franchise agreements are in place -- for
certain European countries (including the countries of the former
Soviet Union), Indonesia and Malaysia/Brunei. See "Franchise
Agreements."

The Company was incorporated on December 14, 1995 pursuant to the laws
of the State of Delaware. The Company is the successor to Diaber Laundromat,
Inc., a New York corporation ("Diaber"), which was incorporated on September 21,
1992. Diaber merged into the Company in order to effectuate a reincorporation in
the State of Delaware on March 29, 1996. The Company completed its initial
public offering of 1,200,000 shares of Common Stock in December 1996 at $5.00
per share.

The Company's executive offices are located at 147 Palmer Avenue,
Mamaroneck, NY 10543-3632. The Company's telephone number is (914) 777-3600.

RECENT DEVELOPMENTS

In early 1997, the Company (through its subsidiaries, ECO STU, INC. and
ECO YITZI, INC.) acquired a wet cleaning store in Ridgefield, Connecticut and a
drop-site facility for other cleaners located in Wilton, Connecticut, in an
effort to expand the Company's client base into Connecticut. The aggregate cost
of these acquisitions was $75,000 in cash and 12,539 shares of the Company's
Common Stock, of which 3,000 have been issued to date. Both operations were
closed during December 1997 and the customer base previously served by them is
currently being serviced by means of a route service system out of the Ecomat
facility in Mamaroneck, New York. Upon the closing of these facilities, the
Company realized a loss of approximately $130,000 from the write-off of
leasehold improvements and other tangible assets that was applied to the 1997
financial year.

Significant management changes have occurred during 1998. Diane Weiser,
who was Chief Executive Officer, President and Treasurer of the Company,
resigned on January 22, 1998. On February 20, 1998, Astrid Hindemith, who is a
director and, through a Swiss company wholly owned by her, the Company's
principal stockholder, was elected Chairman of the Board and Chief Executive
Officer of the Company. On February 20, 1998, Hans-Rudolf Kuchler was elected to
serve as interim President and Chief Operating Officer of the Company until a
satisfactory replacement can be found. See Item 9. "Directors, Executive
Officers, Promoters and Control Person; Compliance with Section 16(a) of the
Exchange Act." R. Keith Emerson, who joined the Company in 1996 as the Vice
President of Franchise Sales and Marketing, resigned on April 30, 1998. The
Company has commenced a search for a person with franchising experience to fill
this position.

Charles E.F. Millard, Michael H. Seid and Stanley Weinstein, who were
elected directors of the Company on August 31, 1997, resigned on March 4, 1998,
May 22, 1998 and February 19,

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1998, respectively. Mr. Kuchler and George W. Murphy were elected directors of
the Company on February 20, 1998. The Board of Directors currently consists
of Ms. Hindemith, Mr. Kuchler and Mr. Murphy.

FORWARD LOOKING STATEMENTS

Certain information contained in this Annual Report on Form 10-KSB,
including, without limitation, information appearing under Part I, Item I
(Business), and Part II, Item 6 (Management's Discussion and Analysis of
Financial Condition and Results of Operations), are forward-looking statements
(within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended). Factors set
forth that appear within the forward-looking statements, or in the Company's
other Securities and Exchange Commission filings, could affect the Company's
actual results and could cause the Company's actual results to differ materially
from those expressed in any forward-looking statements made in this Annual
Report on Form 10-KSB. In addition, the future development of the Company could
be adversely affected if the Company is unable to raise additional funds to
enable it to carry out its plan of operations. Other factors that could impact
its operations are its ability to implement cost savings measures, the effect of
such measures on its business plan and defaults by franchisees in respect of
their obligations to open stores or otherwise under the franchise agreements
currently in effect or adverse experience in signing new franchise agreements.

INDUSTRY OVERVIEW

The Commercial Laundry Industry

In the first half of this century, a thriving commercial laundry
industry conveniently picked up, processed and delivered laundry to millions of
households. It flourished because home-based laundering was a tedious chore that
involved boiling, scrubbing on a board, draining, refilling, and rinsing,
hanging on the line and ironing. With the advent of the home washer and dryer
and the coin-operated laundromat in the early 1950s and the creation of
wash-n-wear fabric in the 1960s, consumer demand for commercial laundering
declined. There are now over 30,000 coin-operated laundromats in the United
States. The newest trend of the 1980s and 1990s has been the increase in the
wash and fold valet service offered by many laundromats.

The Dry Cleaning Industry

The dry cleaning industry is very fragmented, with over 35,000 outlets,
of which approximately 95% are individually owned and operated and 98% consist
of less than four (4) stores, and is still very much a "Mom and Pop" industry.
It is characterized by a high fixed-cost structure and high labor content.
Management believes that these two factors have induced dry cleaners to compete
based on price in order to increase volume while trying to minimize labor costs.
This has led to high labor turnover rates, a lack of differentiation in the
industry and a high level of consumer dissatisfaction.

The most detrimental factor that adversely affects the dry cleaning
industry at present is its reliance on the cleaning solvent, percloroethylene,
known as "perc" for short. Perc has a variety of toxic effects, which have been
documented primarily in studies of dry cleaning workers and others exposed to
perc on the job. Excessive exposure to perc can cause damage to the central
nervous system, liver, kidneys and the reproductive system. The International
Agency for Research on

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Cancer has reclassified perc as a "probable human carcinogen" from a "possible
human carcinogen." In addition, the perc cleaning process produces contaminated
wastewater that must be disposed of.

Dry cleaning is far from a "dry" process. A traditional perc cleaner
sorts clothes by color and places them by 35 or 50 pound loads in a perc
machine. There are many types of perc machines; to a lay person they look like
large front-load washing machines. Instead of water, the clothes are soaked in
perc, which is an industrial degreaser, and go through a "wash" process. The
oldest system then requires that a person reach into the perc machine, pull out
the clothes soaked with perc and place them in an extractor which then
recaptures some of the perc to be used again and again. The clothes are then
dried in a special drier, which is vented to the outside air, thereby releasing
the perc directly into the atmosphere. Newer machines known as "fourth
generation" machines do not have this "transfer process." They are called
"dry-to-dry" perc machines. The dry cleaning industry, spurred by strong
environmental regulations in Europe, has begun to address the issue of perc
exposure to workers and consumers alike.

In October 1995, the Consumers Union of United States, Inc. released a
study that determined that even with modern, unvented, dry-to-dry perc machines,
serious perc pollution in the apartments above dry-cleaners still poses a clear
danger to the health of apartment dwellers. The study states that the approach
currently being pursued by New York State, requiring all dry cleaners to install
more modern dry cleaning equipment, will improve the situation from the older
equipment but will not guarantee acceptably low perc levels in the apartments'
air. The study recommends that dry cleaners be prohibited from operating in
residential buildings altogether and that people living above a dry cleaner get
their air tested regularly. On May 15, 1997, revisions to the perc dry cleaning
regulations adopted by the Department of Environmental Conservation of the State
of New York became effective. These regulations require, among other things,
that perc dry cleaners install, at their own expense, a spill-containment system
capable of containing 125% of the largest perc tank on the premises, upgrade
outdated machinery, post notice warnings of the dangers of perc that are
prepared and supplied by the Department of Environmental Protection in a
conspicuous location to inform building tenants and/or customers of the
potential health effects associated with exposure to perc, construct vapor
barriers that, at a minimum, enclose the dry cleaning equipment, adhere to
record keeping requirements, pay for semi-annual inspections and attend training
sessions.

ECOMAT'S OPERATIONS

The Ecomat System

The Ecomat system uses a combination of cleaning techniques. These
include multi-process wet cleaning methods that were studied by the
Environmental Protection Agency ("E.P.A.") and described in a September 1993
E.P.A. report entitled "Multi-process Wet-Cleaning--Cost and Comparison of
Conventional Dry-Cleaning and An Alternative Process." The study concluded that
the wet cleaning process was superior to the traditional dry cleaning method in
four of the six areas used to compare the two methods (customer satisfaction,
cleanliness, appearance and odor). It rated equal to traditional dry cleaning in
the other two areas (shrinkage and cost).

Instead of using a perc machine, Ecomat's wet cleaning system consists
of a specialized washer and a heat and humidity-sensitive dryer, both of 35 or
50 pound capacity. With the introduction of special non-toxic cleaning products,
the Ecomat cleaner washes garments in water. Water is one of the best known
cleaning solvents in the world. It can remove water-based stains, such as
perspiration, that perc cannot because perc is only a degreaser. Grease-based
stains are

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removed equally well by the Ecomat spotting products. The Company has also
developed its own techniques of treating particular fabrics that can be
problematic to both "dry" and "wet" cleaners alike. "Wet cleaning" as opposed to
"dry cleaning" is a method for deep cleaning fabrics using water, steam and
non-toxic cleaning agents rather than toxic solvents, and natural bleaching
agents, such as hydrogen peroxide, rather than chlorine-based bleaches. The
special techniques that the Company has developed include the tumbling of
garments to loosen soil, the choice of a water-based cleaning method (which can
include steaming, mechanical wet cleaning, machine-washing), specialized drying
with humidity control and finishing of garments with robotic steam finishing
equipment.

The Ecomat system has achieved a significant reduction of hazardous
waste emissions when compared to a traditional dry cleaner. Because of the
Company's cleaning methods, management believes an Ecomat facility can be safely
located in mixed residential and commercial buildings. By contrast, high
concentrations of perc contamination have been detected especially in dairy
products, when a traditional dry cleaner is located next to a food store.

Ecomat laundromats use and will continue to use state-of-the-art, energy
and water-efficient front-load washers that are controlled by proprietary
hardware and software that have been developed by the Company for optimal
energy, productivity and cost efficiency.

The Strategic Plan of Operations

The Company's objective is to develop, nationally and internationally,
recognition of the ECOMAT cleaners and laundromat concept as an environmentally
friendly alternative to the traditional dry cleaning process. To accomplish this
objective, the Company's strategy is to maintain a core of strategically located
Company-owned stores that serve as exhibition and training centers and to expand
its sales of master and cluster franchise agreements and individual franchises.
The Company also intends to capitalize on the recognized trend by consumers
towards perc-free cleaning by offering conversion franchises.

Store Configuration

Ecomat Company-owned stores and franchises have the following basic
configurations, thereby enabling the selection of the type of facility best
suited to a particular location:

An Ecomat Cleaners, which includes a full on-premises cleaning plant
and wash and fold services.

An Ecomat Laundromat, which includes self-service coin-operated
laundry machines and wash and fold services and may include television, vending
machines, mail boxes and other amenities. Such a facility may also serve as a
drop-off site for cleaning services.

An Ecomat Drop-Site, which consists of a drop-off site for cleaning
combined with a wash and fold facility.

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Franchise Operations

Under the form of franchise agreement pursuant to which the Company
intends to offer franchises for additional locations in the United States, the
franchisee will be required to pay, at the time the agreement is signed, a
non-refundable fee of $18,000 for the first Ecomat Cleaners location and $15,000
for the first Ecomat Laundromat location. Additional locations in the same
geographic area (a "cluster franchise") can be obtained against the payment of a
fee at a declining rate. The franchise fee for adding a Drop-Site is $5,000. The
franchise fee for a first Conversion franchise, which allows existing
dry-cleaning stores to convert to the Ecomat wet-cleaning, perc-free process, is
$12,000. The franchise agreement provides for a term of ten years (with three
5-year renewal options) and payment to the Company of a royalty fee of 6%. The
franchise agreements currently in effect provide for royalty fees ranging from
4 1/2% to 5 1/2%.

The start-up investment required for an Ecomat Cleaners or Ecomat
Laundromat franchise in the United States ranges from $150,000 to $250,000, for
a Conversion from $70,000 to $150,000 and for a Drop-Site from $20,000 to
$35,000, in each case based on size and location.

U.S. franchisees are obligated to spend 3% of gross revenue on local
advertising. Additionally, under the current franchise agreement, the Company
reserves the right to establish a regional or national advertising fund and to
collect for payment into this fund 2% of gross revenue from the franchisee to be
used to develop and implement advertising and promotional plans, materials and
activities on behalf of the Ecomat facilities in the franchise program.

The Company also offers master franchise agreements for territories
outside the United States. Franchise fees and royalties under these agreements
vary depending on the demographics of the specific territory.

Each franchisee must comply with the standards, specifications and
procedures of the Ecomat system. The franchise agreement sets forth various
requirements regarding signage, equipment, service, hours of operation, cleaning
techniques and computerization. The Company has the right to terminate a
franchise for a variety of reasons, including a franchisee's failure to make
payments when due or failure to adhere to the Company's policies and standards.

With respect to all franchise agreements, revenues for initial franchise
fees are recognized on a pro rata basis as facilities are opened and when all
material obligations or conditions relating to the agreement have been
substantially satisfied.

As of April 30, 1998, there were signed franchise agreements for three
cluster franchises (one each on Long Island and Brooklyn, New York and Austin,
Texas). In addition, there is one Ecomat self-service Laundromat and Drop-Site
facility franchise at Avenue B in Brooklyn, New York. The Long Island cluster
franchise opened an Ecomat Cleaners and Laundromat in April 1997 and, under the
development agreement, was required to open two satellite locations in 1997. As
of May 31, 1998, these additional locations have not been opened and no default
action has been taken by the Company to date. Under the Brooklyn franchise, an
Ecomat Cleaners and Laundromat has been opened and two satellite locations are
required to be opened, one in 1998 and one in 1999. The Austin cluster franchise
opened its first facility, an Ecomat Cleaners and Laundromat, in March 1998 and
is required to open four Drop-Sites, including one that originally was to have
been opened by the end of 1997, two in 1998 and one in 1999. The Company has
agreed to a one-year delay in the schedule due to problems in finding suitable
locations. A cluster franchise in Boulder, Colorado,

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which was signed in January 1997, was canceled due to personal circumstances of
the franchisee. Two New Jersey cluster franchises originally signed in 1995 were
defaulted because of franchisee's failure to open on schedule. A Westchester
County, New York cluster franchise that was signed in 1996 defaulted in March
1997 for non-performance.

The master franchise agreement for Europe was entered into in January
1996 with Palatin AG ("Palatin"), a Swiss corporation that is wholly-owned by
the Chairman of the Board and Chief Executive Officer of the Company and that
owns 43.22% of the outstanding stock of the Company. See Part II, Item 12
- --"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." Palatin is required to open
facilities pursuant to a seven-year development schedule as follows: Year 1
(commencing July 26, 1998)=1, year 2=28, year 3=44, year 4=50, year 5=56, year
6=56, year 7=56. Laundry and cleaning facilities may be opened and operated
either by affiliates of Palatin or by unaffiliated franchisees licensed by
Palatin. The agreement provides that Ecomat will not establish or operate, nor
license any other party to establish or operate, Ecomat cleaning facilities in
any (i) core country (Austria, Germany and Switzerland) until the end of the
development schedule as long as Palatin is in compliance with the development
schedule for such country (but in no event in less than 3 years for any such
country), or (ii) non-core country until the end of the development schedule, as
long as Palatin is operating in such non-core country at least 10% of all
facilities required to be operating in such non-core country. The agreement
provides for a non-refundable master franchise agreement fee of $120,000 (all of
which has been paid), ongoing monthly royalty fees in the amount of 1.5% of
gross sales from all facilities and 25% of the franchisee fee charged to each
unaffiliated franchisee and requires that 3% of the gross sales of each laundry
or cleaner be spent on local advertising. Under the agreement, the Company is
required to provide training and assistance with site selection and other
operational matters. Revenue from the master franchise agreement will be
recognized on a pro rata basis as each of the anticipated facilities subject to
the agreement is opened. As of May 31, 1998, no facilities have been opened
under this master franchise and the parties are currently discussing an
extension of the development schedule.

The master franchise agreement for Indonesia, signed on April 15, 1997,
provides for the opening of facilities pursuant to a seven-year development
schedule as follows: Year 1=2 clusters, year 2=3 clusters, year 3=3 clusters,
year 4=3 clusters, year 5=3 clusters, year 6=5 clusters and year 7=6 clusters.
Each cluster is for a minimum of 3 locations. Revenue from such master franchise
agreement will be recognized on a pro rata basis as each of the anticipated
facilities subject to the agreement is opened. As of May 31, 1998, no facility
has been opened.

The master franchise for Malaysia/Brunei, signed on March 27, 1997, is
required to open facilities pursuant to an eight-year development schedule as
follows: Year 1=one facility, year 2=2 facilities, year 3=3 facilities, year 4=5
facilities, year 5=5 facilities, year 6=7 facilities, year 7=7 facilities and
year 8=7 facilities. Revenue from such master franchise agreement will be
recognized on a pro rata basis as each of the anticipated facilities subject to
the agreement is opened. The first primary facility opened in November 1997.

Service, Quality and Customer Satisfaction

Ecomat quality service has and will continue to include personal
attention to the specialized care needs of each individualized garment,
convenient locations, easily accessible pick-up and delivery, hours that cater
to busy schedules, self-service and drop-off facilities, and bright attractive
store designs that meet the requirements of the Americans with Disabilities Act.

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Customers are and will be helped by a trained and courteous staff.
Research shows that while there are low switching barriers for the customer, the
majority of customers are not particularly price sensitive. Management believes
that this, coupled with the consumer's perception of poor quality and service in
the traditional dry cleaner, presents an opportunity for an Ecomat facility to
differentiate itself through superior customer retention, brand name, increased
revenue and decreased costs.

Training and Development

The Company has developed operations manuals that cover all areas of
technical and operational performance. The manuals guide the operator through
garment cleaning techniques, delivery services, merchandising and promotions.

The Company offers an extensive training program (which includes
pre-opening and post-opening training) for its franchisees and their staffs,
including education of management in the operation of a business. The Company
continually updates all training programs and manuals to offer the most
up-to-date information available.

Targeted Marketing

The Company's marketing programs target the delivery area of each store
or franchise location, making use of direct mail promotions, leaflets and local
media advertising. The Company has produced its own CD-Rom, which can be run in
every Company-owned and franchise unit. The CD-Rom is interactive and allows the
Company to track customer preferences through direct feedback to the Company's
corporate headquarters, enabling the Company to adjust its marketing based on
these preferences. The CD-Rom includes most of the television, radio and print
coverage that has ever appeared about Ecomat. It also gives the viewer a 3-D
tour of a full-service Ecomat facility and a demonstration of the different
configurations of Ecomat franchises available. The Company utilizes the CD-ROM
at industry and franchise shows. The CD-Rom format allows the Company to bring
the Ecomat concept directly to the viewer, whether it be at a meeting, large
convention or one-on-one encounter.

The Company has established a web site on the Internet
(http://www.ecomat.com) that presents most of the information from the CD-ROM.
Ecomat has made available, through its web site, its Direct Clean service, which
offers convenient pick-up and delivery, via UPS or other carriers, in all areas
of the United States.

SUPPLIERS

The Company is not dependent upon any one single supplier and believes
that, if the relationship with any supplier terminates, the Company will be able
to purchase the materials and equipment currently purchased from it at
comparable prices elsewhere.

COMPETITION

Despite attempts by various companies at consolidation and at
franchising, the dry cleaning industry remains very fragmented. Of over 35,000
dry cleaners currently in the United States, 95% are individually owned and
operated and 98% consist of less than four stores. It is estimated that
approximately 6,000 dry cleaning stores are using alternative cleaning methods
to perc, with most of these using odorless petroleum-based solvents. Recent
estimates are that approximately 200 cleaners

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in the United States are using wet-cleaning methods. A new method for cleaning
clothes using liquid carbon dioxide is reportedly under development. Several
large companies are engaged in efforts to develop environmentally friendly
alternative cleaning methods.

GOVERNMENTAL REGULATION

Since the Company's operations do not include the use of perc,
management believes that its facilities are subject to no special governmental
regulations whatsoever. Normal building code procedures for filing building
plans and obtaining plumbing and electrical permits, compliance with fire and
safety rules and water usage are the extent to which Ecomat facilities must
comply, all within the bounds of appropriate zoning rules and regulations.

RESEARCH AND DEVELOPMENT

Ecomat's Cleaners and Laundromats have recently been equipped with a
"Smart Card" technology-based payment system instead of the old-fashioned coin
acceptors. This system eliminates the problems associated with collection and
handling of coins, insures strict cash control and provides a number of enhanced
marketing tools, such as off-peak pricing and frequent-user incentives.

Franchises are and will be equipped with a custom-designed point of sale
("POS") accounting system. The system is interconnected into a network of
IBM-compatible personal computers and is expandable to accommodate as many POS
terminals (registers) and accounting computers as a store may need. The POS
system has all information required to complete the sale (items, prices, payment
types, discounts etc.) pre-programmed, so the clerks only need a minimal
training to successfully operate the register. It is flexible enough to handle
cash, credit card, pre-paid, paid on pickup and net 30-type payments, split
sales, promotional items, pre-set price matrixes and other advanced operations,
and includes many laundromat/cleaner-specific functions, such as automatically
generated driver's log and tagging of the garments. Customer information is also
accumulated and can be used for mailings, promotions and other purposes.

All information from POS operations is automatically transferred for
further processing into the accounting part of the system, which is capable of
automating all financial operations within a store. Included are general ledger,
accounts receivable, accounts payable, purchasing, inventory control and payroll
modules, as well as system maintenance files and utilities. The information
posted to the ledgers from POS operations is processed to produce a wide variety
of reports to assure that owners receive the information necessary to
successfully run their business. An owner can also easily design custom reports
to suit its specific needs.

INTELLECTUAL PROPERTY

The Company applied for registration of its Ecoclean service mark and
Ecomat service mark and has received notices of allowance from the U.S. Patent
and Trademark Office. In addition, the Company has been granted trademark
registration of its Ecomat and Design service mark and registration of The
Cleaner Choice service mark. The Company applied for registration of its Ecomat
trademark with the European Community Trademark office on April 1, 1997.

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EMPLOYEES

As of April 30, 1998, the Company employed 24 persons, of whom 18 were
store employees, and 6 were corporate personnel. Some of the store employees
work part-time and many are paid on an hourly basis. None of the Company's
employees are covered by a collective bargaining agreement.

ITEM 2. DESCRIPTION OF PROPERTIES.

The Company (through its Ecofranchising subsidiary) leases approximately
10,000 square feet at 147 Palmer Avenue in Mamaroneck, New York, which consists
of 5,000 square feet for its flagship store that serves as prototype for all
Ecomat full-service franchises and 5,000 square feet for its executive offices.
The lease term commenced on March 15, 1995 and expires on March 14, 2005. The
annual rental increases each year from $112,500 in the first year to $146,787 in
the last year of the term. The Company has the option to extend the term for one
five-year period. Total rental expense for the years ended December 31, 1996 and
1997 was $134,333 and $167,900, respectively.

The Company (through its 8th Street subsidiary) leases approximately
2,500 square feet at 140 West 72nd Street, New York, New York, which houses an
Ecomat Laundromat and Drop-Site for cleaning. The lease term expires on May 31,
2003. Total rental expense for the years ended December 31, 1996 and 1997 were
$81,718 and $68,049, respectively. The annual rental will increase by 4.5% in
each subsequent year.

The Company (through its ECO JOSH subsidiary) leases approximately 3,000
square feet at 39 North Moore Street, New York, New York, which houses an Ecomat
Cleaners. The lease term expires on January 31, 2006. The annual rental
increases from $49,440 in 1997 to $62,628 in the last year of the term. Total
rental expense for the year ended December 31, 1997 was $44,070.

The Company (through its ECO MAHWAH subsidiary) also leases
approximately 2,500 square feet at 190 Franklin Turnpike, Mahwah, New Jersey
07430, which houses an Ecomat Cleaners. This facility was leased in November
1997 with the intention of subsequent transfer to a potential franchisee. The
lease term expires on July 31, 1998. The monthly rental is $4,000 a month for
the remaining term of the lease. The Company has options to renew the lease for
four additional three-year periods.

The Company (through its ECO STU subsidiary) leased approximately 800
square feet located at 457 Main Street, Ridgefield, Connecticut. The facilities
were used as a satellite store. This lease was terminated in December 1997, when
this location was converted into a mobile route service. Total rental expense
for the year ended December 31, 1997 was $22,584.

The Company (through its ECO YITZI subsidiary) leased approximately
1,200 square feet located at 239 Danbury Road, Wilton, Connecticut. The
facilities were used as a satellite store. This location was closed in January
1998, when this location was converted into a mobile route service. Total rental
expense for the year ended December 31, 1997 was $14,772.

ITEM 3. LEGAL PROCEEDINGS

An action was commenced against subsidiaries of the Company in August
1997 after certain leased premises were vacated. The complaint seeks $109,350 in
damages plus costs. The answer

-11-

asserted affirmative defenses and counterclaims. No further action has been
taken by the plaintiff and the Company understands that the premises were
re-leased shortly after they were vacated by the subsidiary. Except as set forth
above, the Company is not a party to any litigation or governmental proceedings
other than routine litigation that is incidental to its business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no matters submitted to a vote of the Company's
securityholders during the fourth quarter of 1997.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's Common Stock commenced trading on the Nasdaq SmallCap
Market on December 10, 1996. The Common Stock is quoted and traded on the Nasdaq
SmallCap Market under the symbol ECMTE. The Company has been advised by The
Nasdaq Stock Market, Inc. that it presently does not meet certain of the
requirements for continued listing of the Common Stock on the Nasdaq SmallCap
Market. A hearing is scheduled for June 18, 1998 at which the Company will be
given the opportunity to demonstrate its ability to regain and sustain
compliance with the applicable criteria. There can be no assurance that the
Common Stock will continue to be listed on The Nasdaq SmallCap Market.

The following table sets forth the range of high asked and low bid
quotations for the Company's Common Stock for the period December 10, 1996
through December 31, 1997, the first quarter and the second quarter (through May
31) of 1998 as reported by the Nasdaq SmallCap Market. The quotes represent
inter-dealer prices without adjustment or mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions. The trading volume of the
Company's Common Stock fluctuates and may be limited during certain periods. As
a result, the liquidity of an investment in the Common Stock may be adversely
affected.
<TABLE>
<CAPTION>

High Asked Low Bid
---------- -------
<S> <C> <C>
December 10 - December 31, 1996 7 3/8 5 1/8

1997
----

First Quarter 7 5 1/8
Second Quarter 7 5 7/8
Third Quarter 7 1/4 5 5/8
Fourth Quarter 9 4 1/4

1998
----

First Quarter 5 1 1/2
Second Quarter (through June 8) 3 1/8 1/2
</TABLE>

-12-

On June 8, 1998 the sale price of the Common Stock as reported on the
Nasdaq SmallCap Market was $1. As of June 8, 1998 there were 3,606,800 shares of
Common Stock outstanding, held of record by approximately 42 record holders.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

RESULTS OF OPERATIONS

Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996

Revenues. Total revenue for the year ended December 31, 1997 was
$547,967 compared to $415,498 in the previous year. Revenue from Company-owned
stores for 1997 was $392,327 compared to $411,413 in 1996 and franchise revenue
and royalties amounted to $155,640 compared to $4,085 in 1996. None of the
Company-owned stores has generated sufficient revenues to achieve profitability.
The two stores acquired in early 1997 (see Item 1. "Description of
Business--Recent Developments") were closed in late 1997 on recognition that the
area could be serviced more efficiently out of the Ecomat facility in
Mamaroneck, New York by means of a route service system. The Company acquired a
full-service cleaning facility at 39 N. Moore Street in Manhattan in April 1997
and simultaneously converted the 72nd Street facility to a drop-site satellite
location of that operation. Management is addressing both organizational issues
and promotional efforts to improve results. Franchise revenue also lagged behind
projections and management is in the process of increasing the quality and
efficiency of the sales efforts and strengthening the franchise support
functions.

At December 31, 1997, the Company has recorded approximately $609,006 of
deferred franchise revenue relating to franchises sold by the Company through
December 1997 compared to $373,085 at December 31, 1996.

Facilities Operating Costs. The cost of Company-owned cleaning/laundry
facilities increased from $579,362 in 1996 to $1,008,873 in 1997. Approximately
$324,400 of the increase of $429,511 were directly related to the operations of
the four facilities newly acquired in 1997, including the two facilities in
Connecticut that were closed at the end of the year. These four facilities added
approximately $142,000 to compensation, $81,000 to rent, $17,000 to supplies and
$22,000 to maintenance and repairs.

Advertising and Promotion-Franchise Sales. Following the public offering
at the end of 1996, the Company stepped up very significantly its promotion
efforts for franchise sales. As a result, the related expenses in 1997 increased
to $325,671 from $56,715 in 1996.

General Administrative Expenses. The Company's general and
administrative expenses increased sharply from $805,163 in 1996 to $1,537,245 in
1997. Professional and consulting fees accounted for 54% or $392,117 of the
total increase and consisted of legal and accounting fees associated with
fulfilling the obligations of a public company and the engagement of outside
consultants for public relations, investor relations and for the franchise sales
promotion programs. Compensation for additional franchise sales and support
staff contributed $139,199 to the increase. Other administrative expenses
included approximate increases of $39,000 for Directors and Officers liability
insurance, $42,000 for travel expenses, $31,000 for communication expenses,
$24,000 for dues and subscriptions and transfer agent fees, $27,000 for
recruiting fees and $25,000 for maintenance and repairs. A one-time write off of
a note payable for equipment sold in the amount of

-13-

$49,000 is also included in this item. Management recently reviewed the expense
development and took steps to substantially cut general and administrative
expenses and bring promotion expenses in line with a better focused franchise
expansion program.

Interest Expense and Interest Income. Interest expense decreased to
$63,790 in 1997 from $96,357 for 1996 due to partial repayment of a note to
Palatin in January 1997. Other income increased to $123,094 in 1997 from $9,352
in 1996 as a result of interest income earned on the proceeds of the public
offering pending their use.

Net Loss. The net loss of the Company was $2,724,193 ($0.76 per share)
for the year ended December 31, 1997 and $1,253,180 ($0.51 per share) for the
year ended December 31, 1996 reflecting the substantially higher costs and
expenses incurred by the Company as outlined above that outstripped the $132,469
increase in revenues. The Company expects to continue to incur losses until it
is able to generate adequate revenue from franchise sales and from Company-owned
stores to offset expenses. The Company has implemented cost savings measures,
including termination of outside consultants, reductions in staff, renegotiation
of certain purchases and improvements in inventory management and customer
service procedures in an attempt to narrow future operating losses.

Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995

Revenues. The Company had revenues for the year ended December 31, 1996
consisting of income from the Company-owned stores totaling approximately
$411,000 and approximately $196,000 for the year ended December 31, 1995. Such
revenues were not sufficient to cover facilities costs of producing such
revenues. The amount of revenues required to cover fixed facilities costs varies
by location and is dependent on market factors, such as rental, payroll,
utilities and similar operating costs.

The increase in cleaning and laundry revenue of approximately $215,000
or 110% principally was due to increased volume associated with the revenue
generated from the Mamaroneck store, which opened in October 1995. The revenue
generated in 1996 from the Mamaroneck store totaled approximately $162,000
compared to $20,000 in 1995. The revenue from the 8th Street store increased
from approximately $175,000 in 1995 to $248,000 in 1996.

At December 31, 1996, the Company has recorded approximately $373,000 of
deferred franchise revenue relating to franchises sold by the Company through
December 31, 1996. The deferred franchise fees, net of the $92,000 franchise
fees receivable, have been collected. Two franchise sites have opened and $4,085
has been recognized as income. This includes franchise development fees of
$3,750 and the balance consists of royalties.

Facilities Operating Costs. The costs of cleaning/laundry facilities
increased from $337,000 in 1995 to $579,000 in 1996 or 72%. This increase was
primarily due to new costs from operating the Mamaroneck facility including
supplies, rent, utilities and payroll costs amounting to $322,000.

Advertising and Promotion-Franchise Sales. Advertising and promotion
expenses decreased from $101,000 to $57,000 or 44% from 1995 to 1996. This was
due to the fact that the 1995 expenditures for CD-ROM production, which is used
for trade shows, did not recur in 1996. Those expenses amounted to approximately
$50,000 in 1995.

-14-

General and Administrative Expenses. The Company's general and
administrative expenses increased from $757,000 to $805,000 or 6% from December
31, 1995 to December 31, 1996. This increase was primarily due to the increase
in compensation expense from $261,000 to $332,000 or 27% from 1995 to 1996.
Compensation expense increased principally due to the following reasons: (i)
increases under certain employment agreements and (ii) the hiring of the Vice
President of Franchise Sales. Rent expense (other than rent relating to
cleaning/laundry facilities) decreased from approximately $107,000 to $77,000
from 1995 to 1996. This decrease can be attributed to the allocation of a
significant portion of rent towards the Mamaroneck store facility throughout
1996. This allocation was lower in 1995, when the utilization of space for
cleaning purposes was lower. The Company accounts for rent expense on a straight
line basis over the respective terms of the Company's leases. The excess of the
rent expense over the required lease payment is reflected as deferred rent
payable on the Company's balance sheet.

Interest Expense. Interest expense increased from approximately $30,000
to $96,000 principally due to two notes payable in 1996 and generally higher
average outstanding note payable balances throughout 1996 as compared to 1995.
One of the notes, amounting to $290,000, was paid in full in December 1996. In
January 1997, the Company paid $1,000,000 of principal for the note payable to
the majority shareholder.

Net Loss. The net loss of the Company was $1,253,000 ($0.51 per share)
for the year ended December 31, 1996 and $1,119,000 ($0.47 per share) for the
year ended December 31, 1995. The Company expects to incur continuing losses
until it is able to generate adequate revenue from franchise sales and/or
substantial revenues from the Company-owned stores.

LIQUIDITY AND CAPITAL RESOURCES

During the years ended December 31, 1997 and 1996, the Company used
approximately $2,139,000 and $791,000 respectively of cash in operations.
Proceeds from the 1996 public offering were used to finance the operating loss,
the repayment of $1,000,000 to Palatin and for investments in new locations in
the amount of approximately $403,000 and $454,000 for equipment. Cash and
cash-equivalents at year-end was $377,764 in 1997 compared to $4,307,955 in
1996. Palatin and other Swiss investors have loaned an additional $700,000 to
the Company during 1998 to date. See Part II, Item 12 -- "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS." There can be no assurance that Palatin or any other
entity will be willing to loan funds to the Company to cover expected future
operating losses.

YEAR 2000 ISSUE

Based upon review of it's computer operations, the Company has
determined that it's costs related to the Year 2000 problem will be
insignificant. The Company's Point of Sale and accounting system is based on
advanced accounting software that is fully Year 2000 compliant.

ITEM 7. FINANCIAL STATEMENTS.

See financial statements following Item 13 of this Annual Report on Form
10-KSB.

-15-

ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.

DIRECTORS AND EXECUTIVE OFFICERS

The names and ages of the directors and executive officers of the
Company are set forth below:

Name Age Position(s) with the Company
<S> <C> <C>
Astrid Hindemith........52 Chairman of the Board and Chief Executive Officer
Hans-Rudolf Kuchler.....60 President and Chief Operating Officer
George W. Murphy........56 Director
Yuri Lumelskiy..........31 Vice President, Information Systems
Troy Morano.............29 Director of Operations

</TABLE>

BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS

Astrid Hindemith was elected Chairman of the Board and Chief Executive Officer
on February 20, 1998. She became a Director in December 1995 and served as a
Director of Diaber since 1993. Ms. Hindemith is a licensed attorney in Zurich,
Switzerland and has been self-employed as a consultant since 1990. From 1992 to
present she has been President and sole shareholder of Palatin, a Swiss
corporation involved in investing that is a principal stockholder of the
Company. See Item 11. "Security Ownership of Certain Beneficial Owners and
Management." She received her law degree from the University of Zurich in 1990.

Hans-Rudolf Kuchler, a management consultant, was elected President and Chief
Operating Officer and a Director on February 20, 1998. Mr. Kuchler was the
Senior Executive Officer for Union Bank of Switzerland in New York (1974-87) and
of Swiss Volksbank, New York (1988-93) and Executive Vice President and Chief
Operating Officer USA for the British private banking firm Coutts & Co.
(1993-94) before forming his own management consulting firm.

George W. Murphy was elected a Director on February 20, 1998, Mr. Murphy is
Treasurer, Controller and Chief Financial Officer of G.F. Dobson Co. and certain
affiliated companies, which are engaged in various aspects of property and
casualty insurance. During 1996, Mr. Murphy was employed by Lee-Nolan
Associates, an insurance and financial services company affiliated with
Massachusetts Mutual, where he specialized in insurance and estate planning for
small businesses and high net worth individuals. From 1989 to 1994 he was
employed as Executive Vice President and Chief Operating Officer of SwissRe
Holding (North American) Inc., the holding company for the North American
operations of SwissRe, the Swiss reinsurer, with responsibility for the North
American Group's cost control and budgeting system. From 1969 to 1989, Mr.
Murphy served as

-16-

Senior Vice President and Treasurer of SwissRe Advisers Inc. with responsibility
for developing and managing the Group's cash management system.

Yuri Lumelskiy has served the Company and Diaber as the Director of Management
Information Systems since April 1995. Mr. Lumelskiy is an experienced electrical
and computer engineer with two Master's Degrees (Polytechnic University and
University of Kiev both in Electrical Engineering) in these areas. His primary
focus is in development and implementation of computerized control systems and
database and accounting software. This allows Ecomat to offer its franchisees
custom computer equipment that is best suited to their needs. Prior to his
current position with Ecomat, Mr. Lumelskiy spent four years (from July 1991 to
April 1995) as a Chief Engineer with Enabling Devices, Inc., a developer and
manufacturer of specialized equipment for the handicapped.

Troy Morano joined the Company in March 1997 as Director of Operations. Since
March 1991 Mr. Morano worked for Blimpie International. Since 1993, he was
Director of Operations and Development for New Jersey.

There are no family relationships between the officers and directors of
the Company.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.

Michael H. Seid, who was a director of the Company from September 29,
1997 through May 22, 1998, did not file an initial report of ownership on Form 3
with the Securities and Exchange Commission.

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth the aggregate compensation paid by the
Company for the years ended December 31, 1997, 1996 and 1995 to Diane Weiser,
who was its chief executive officer until her resignation on January 22, 1998.
No employee received annual compensation exceeding $100,000 in the aggregate
in any of such years.

Name and Principal Position Year Salary
- --------------------------- ---- ------
<S> <C> <C>
Diane Weiser 1997 $73,346
Chief Executive Officer, 1996 55,000
President and Treasurer 1995 50,000
</TABLE>

DIRECTOR COMPENSATION

Each director of the Company is entitled to receive a fixed annual fee
of $5,000 plus $750 for each meeting attended.

-17-

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information, as of April 30, 1998 with
respect to the beneficial ownership of the outstanding shares of the Company's
Common Stock by (i) any holder of more than five percent (5%) of the outstanding
shares; (ii) the Company's officers and directors; and (iii) the directors and
officers of the Company as a group. A person is deemed to be a beneficial owner
of any securities of which that person has the right to acquire beneficial
ownership within 60 days.

Approximate
Name and Address Amount and nature Percentage (%) of
of Beneficial Owner (2) Beneficial Ownership (1) Class
- ----------------------- ------------------------ -----

<S> <C> <C>
Diane Weiser (3) 840,000 23.27%
Palatin, AG (4) 1,560,000 43.22%
Astrid Hindemith (3), (4) 2,400,000(4) 66.54%

All officers and directors as
a group (five (5) persons) 2,403,000 66.62%
</TABLE>

(1) Beneficial ownership as reported in the table above has been determined in
accordance with Item 403 of Regulation S-B of The Securities Act of 1933 and
Rule 13(d) - 3 of The Securities Exchange Act.

(2) The address of each stockholder shown above is c/o Ecomat, Inc., 147 Palmer
Avenue, Mamaroneck, NY 10543.

(3) Ms. Weiser resigned her positions of President, Chief Executive Officer,
Secretary, Treasurer and Director of the Company on January 22, 1998.
Ms. Hindemith has a right of first refusal to purchase the shares owned by
Ms. Weiser and holds an irrevocable proxy with respect to such shares.

(4) Includes 1,560,000 shares of Common Stock held by Palatin, a Swiss company
wholly owned by Ms. Hindemith, Chairman of the Board and Chief Executive Officer
of the Company.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

As of December 31, 1997, the Company was indebted in the amount of
$342,211 to Palatin, a Swiss corporation that is wholly owned by Astrid
Hindemith, Chairman of the Board and Chief Executive Officer of the Company and
a principal stockholder. The highest amount outstanding during 1997 was
$1,320,847. The debt is evidenced by a promissory note bearing interest at 7%
per annum that is payable on December 31, 1998. Palatin has the right at
maturity to convert such debt into shares of Common Stock at a purchase price
equal to the book value of the Company's Common Stock on the date of the most
recent fiscal quarter ended prior to conversion ($.054 at December 31, 1997). An
additional $700,000 has been loaned to the Company by Palatin and other Swiss
investors during 1998. Such loan bears interest at 7% and is due on demand. The
Company and Palatin are discussing the possible conversion of such loan into
preferred stock of the Company.

As of December 31, 1997, the Company was indebted in the amount of
$75,898 to Diane Weiser, who was Chief Executive Officer, President and
Treasurer and a director of the Company

-18-

until her resignation on January 22, 1998 and remains a principal stockholder.
The highest amount outstanding during 1997 was $75,898. The debt is evidenced by
a promissory note bearing interest at 7% per annum that is payable on December
9, 1998. Ms. Weiser has the right to convert, at maturity, the balance of the
indebtedness owed to her into shares of Common Stock at a purchase price equal
to the book value of the Company's Common Stock on the date of the most recent
fiscal quarter ended prior to conversion.

The Company has entered into a master franchise agreement with Palatin
(which, as the master franchisee, may either establish its own facilities that
utilize the Ecomat system or license others to do so), for the development of
the Ecomat concept in Europe. See Part I, Item 1 -- "DESCRIPTION OF BUSINESS --
Ecomat's Operations -- Franchise Agreements." The master franchise agreement was
approved at the time it was entered into by all of the disinterested directors.
Management believes that the terms of the master franchise agreement with
Palatin are fair and reasonable in all respects.

There are currently no additional transactions contemplated between the
Company and its officers, directors, employees and affiliates. Any such
transactions in the future will be on terms no less favorable to the Company
than can be obtained from unaffiliated parties. Any such transactions will be
subject to the approval of a majority of the disinterested members (to such
transaction) of the Board of Directors (i.e, members of the Board who are not
directly or indirectly parties to such transaction, or, if such transaction
involves an entity, who are not officers or directors of, or have any beneficial
ownership or financial interests in, such other entity).

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)(1) FINANCIAL STATEMENTS.

The following financial statements are included in Part II, Item 7:
<TABLE>
<S> <C>
Index to Financial Statements F- 1
Report of Independent Certified Public Accountants F- 2
Consolidated Balance Sheet F- 3
Consolidated Statement of Operations F- 4
Consolidated Statement of Stockholders' Equity (deficiency) F- 5
Consolidated Statement of Cash Flows F- 6
Notes to Consolidated Financial Statements F- 7 - F- 16

</TABLE>

(a) (2) EXHIBITS
<TABLE>
<S> <C>
3.1 - Certificate of Incorporation of the Company*

3.5 - By-Laws of the Company*

4.1 - Specimen Certificate for shares of Common Stock*

10.1 - 1996 Incentive Stock Option and Stock Appreciation Rights Plan*
</TABLE>

-19-

<TABLE>
<S> <C>
10.2 - 1996 Non-Qualified Stock Option Plan*

10.3 - Agreement of Lease for Premises located at 147 Palmer Avenue, Mamaroneck, NY 10543*

10.4 - Master Franchise Agreement, dated January 26, 1996, between Ecofranchising, Inc.
and Palatin, AG*

10.5 - Cluster Development Agreement and Attachments, dated February 23, 1996, between
P.E.B. Inc. and Ecofranchising, Inc.**

10.6 - Cluster Development Agreement and Attachments, dated March 25, 1996, between
Community Wetcleaners, Inc. and Ecofranchising, Inc.**

10.7 - Operating Agreement and Attachments, dated June 19, 1996, between Vincent Nimson
and Ecofranchising, Inc.**

10.8 - Cluster Development Agreement and Attachments, dated September 30, 1996, between
John W. Henderson, Jr. and Ecofranchising, Inc.**

10.9 - Master License Agreement, dated April 15, 1997, between Ecofranchising, Inc. and
PT Pranasakti Dewanta.***

10.10 - Master License Agreement, dated March 27, 1997, between Ecofranchising, Inc. and
Elite-Fame SDN BHD***

21 - Subsidiaries of the Company

27 - Financial Data Schedule (in EDGAR filing only)

* Incorporated by Reference to the Company's Registration Statement on
Form SB-2, No. 333-1524.

** In accordance with Rule 202 of Regulation S-T, these
documents were filed in paper format pursuant to a
continuing hardship exemption.

*** Incorporated by reference to the Company's Form 10-KSB for the year
ended December 31, 1996.
</TABLE>

(b) REPORTS ON FORM 8-K

The Company did not file any reports on Form 8-K during the fourth
quarter of fiscal 1997.

-20-

<PAGE>

<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants................................. F-2

Consolidated financial statements

Consolidated balance sheets................................................... F-3

Consolidated statements of operations......................................... F-4

Consolidated statement of stockholders' equity................................ F-5

Consolidated statements of cash flows......................................... F-6

Notes to consolidated financial statements.................................... F-7 - F-22
</TABLE>

F-1

REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS

Board of Directors
ECOMAT, INC. AND SUBSIDIARIES

We have audited the accompanying consolidated balance sheets of Ecomat, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Ecomat, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
their operations, and their consolidated stockholders' equity and their
consolidated cash flows for each of the two years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.

As more fully described in Note B, the Company has incurred significant
operating losses since inception. This factor, among others, raises substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note B. The consolidated
financial statements do not include any adjustments that might result from this
uncertainty.

GRANT THORNTON LLP
GRANT THORNTON LLP

New York, New York
May 25, 1998

F-2

ECOMAT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,

<TABLE>
<CAPTION>
ASSETS 1997 1996
----------- -------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 377,764 $ 4,307,955
Investments 415,055
Accounts receivable and advances, net of
allowances of $3,386 and $10,782 31,478 45,126
Franchise fees receivable 15,360 26,054
Notes receivable 8,079
Prepaid expenses 62,430 69,186
- ------------ ------------
Total current assets 910,166 4,448,321
Property and equipment, net 1,068,084 644,796
Franchise fees receivable 282,240 66,196
Notes receivable 188,120
Other assets 134,980 35,505
----------- ------------
$ 2,583,590 $ 5,194,818
=========== ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
Notes payable, current portion $ 663,341 $ 1,000,000
Accounts payable and accrued expenses 696,756 280,744
Prepaid laundry revenue 12,000 11,934
------------ ------------
Total current liabilities 1,372,097 1,292,678
Notes payable, net of current portion 202,385 392,597
Deferred rent payable 204,756 179,830
Deferred franchise revenue 609,006 373,085
---------- ----------

2,388,244 2,238,190

Commitments and contingencies

Stockholders' equity
Preferred stock, $.0001 par value; authorized, 1,000,000
shares; no shares issued and outstanding - -
Common stock, $.0001 par value; authorized, 25,000,000
shares; issued and outstanding, 3,606,800 and
3,600,000 shares 361 360
Additional paid-in capital 6,404,377 6,441,467
Accumulated deficit (6,209,392) (3,485,199)
----------- ----------
195,346 2,956,628
----------- -----------
$ 2,583,590 $ 5,194,818
=========== ===========
</TABLE>

The accompanying notes are an integral part of these statements.

F-3

ECOMAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues
Cleaning and laundry services $ 392,327 $ 411,413
Franchise revenue 143,414 4,085
Royalty revenue 12,226
------------ ------------
547,967 415,498
------------ ------------
Costs and expenses
Facilities operating costs
Compensation 429,977 235,229
Advertising and promotion 30,014 45,494
Supplies 64,930 25,024
Rent 210,019 138,554
Utilities 69,397 76,647
Other 204,536 58,414
----------- ------------
1,008,873 579,362
----------- ------------
Advertising and promotion - franchise sales 325,671 56,715
----------- ------------
General and administrative expenses
Compensation 471,328 332,129
Rent 107,355 77,498
Professional and consulting fees 450,192 58,075
Other 508,370 337,461
----------- ------------
1,537,245 805,163
----------- ------------
Depreciation and amortization 211,573 126,550
----------- ------------
Total costs and expenses 3,083,362 1,567,790
---------- -----------
Loss on disposition and impairment of assets 226,201
----------- -----------

Operating loss (2,761,596) (1,152,292)
---------- ----------
Other income (expense)
Other income 123,094 9,352
Interest expense (63,790) (96,357)
------------ -------------
59,304 (87,005)
------------ -------------
Loss before provision for income taxes (2,702,292) (1,239,297)
Income taxes 21,901 13,883
------------ ------------
Net loss $(2,724,193) $(1,253,180)
========== ==========
Net loss per share - basic and diluted $(.76) $(.51)
==== ====
Weighted average shares outstanding 3,604,097 2,449,180
========== ==========
</TABLE>

The accompanying notes are an integral part of these statements.

F-4

ECOMAT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

Years ended December 31, 1996 and 1997

<TABLE>
<CAPTION>
Total
Additional deficit in
Preferred Common paid-in Accumulated stockholders'
Description stock stock capital deficit equity
----------- ----- ----- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, - $240 $1,609,760 $(2,232,019) $ (622,019)
1995

Issuance of shares in a public
offering, net of related - 120 4,831,707 - 4,831,827
costs

Net loss - 1996 - - (1,253,180) (1,253,180)
--- ----- ---------- ----------- ----------

Balance at December 31, 1996 - 360 6,441,467 (3,485,199) 2,956,628
===

Additional public offering
costs (80,340) (80,340)

Common stock issuance - 1 43,250 43,251

Net loss - 1997 - - (2,724,193) (2,724,193)
--- ----- ---------- ----------- ----------

BALANCE AT DECEMBER 31, 1997 - $361 $6,404,377 $(6,209,392) $ 195,346
=== ===== ========== =========== ===========
</TABLE>

The accompanying notes are an integral part of this statement.

F-5

ECOMAT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
-------- -------
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,724,193) $(1,253,180)
Adjustments to reconcile net loss to net cash used in
operating activities

Depreciation and amortization 211,573 126,550
Loss on disposition of assets 226,201 -
Noncash compensation 25,250
Deferred rent payable 24,926 18,760
Changes in assets and liabilities
Current receivables and prepaid expenses 23,019 (201,362)
Other assets and long-term receivables (604,148) (4,045)
Accounts payable and accrued expenses and prepaid 416,078 144,770
revenue
Accrued interest payable 26,479 75,004
Deferred revenue 235,921 302,019
----------- -----------
Net cash used in operating activities (2,138,894) (791,484)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (454,420) (30,928)
Sale of property and equipment 114,868
Acquisition of subsidiaries (403,000)
Investment in certificate of deposit (415,055)
----------- ------------
Net cash used in investing activities (1,157,607) (30,928)
---------- ------------
Cash flows from financing activities
Proceeds from the issuance of shares in a public
offering, net of related costs (80,340) 4,831,827
Payment of note payable (1,050,895) (290,000)
Proceeds from notes payable 497,545 578,093
----------- -----------
Net cash (used in) provided by financing activities (633,690) 5,119,920
----------- -----------
Net (decrease) increase in cash and cash equivalents (3,930,191) 4,297,508

Cash and cash equivalents - beginning of year 4,307,955 10,447
---------- ------------
Cash and cash equivalents - end of year $ 377,764 $ 4,307,955
=========== ==========

Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $37,310 $15,000
====== ======
Income taxes $10,645 $3,885
====== ======

Noncash investing activities:
During 1997, the Company issued 3,000 shares of common
stock, which were valued at $18,000 in relation to an acquisition
of a dry cleaning/laundromat facility.
</TABLE>

The accompanying notes are an integral part of these statements.

F-6

ECOMAT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1997 and 1996

NOTE A - ORGANIZATION AND NATURE OF BUSINESS

Ecomat, Inc. (the "Company" or "Ecomat"), a Delaware corporation, was formed
on December 14, 1995 to serve as the successor by merger (the "Merger") to
Diaber Laundromat, Inc. ("Diaber"). The Merger of the Company and Diaber
took place effective March 29, 1996. In connection with the Merger, each
share of the Company's common stock (a total of 10) converted into 240,000
shares of the Company's common stock, resulting in the issuance of 2,400,000
shares of common stock, all of which were issued and outstanding. During
December 1996, the Company completed an initial public offering of 1,200,000
shares of common stock at $5.00 per share.

The Merger was accounted for at historical cost in a manner similar to a
pooling-of-interests accounting as the entities included in the Merger were
under common control. The accompanying financial statements reflect the
effects of the Merger described above.

The Company, through its seven wholly-owned subsidiaries, operates and
franchises environmentally sound cleaning and laundromat facilities. The
Company and its franchisees are dependent upon various third-party
manufacturers and suppliers to provide laundromat and wet cleaning
equipment, as well as specialized finishing and cleaning products.

NOTE B - BASIS OF PRESENTATION

The Company has incurred losses of approximately $6,200,000 since inception,
including approximately $2,700,000 and $1,300,000 for the fiscal years ended
December 31, 1997 and 1996, respectively. The Company's consolidated
financial statements have been prepared on the basis that it is a going
concern, which contemplates the realization of assets and satisfaction of
liabilities in the ordinary course of business. These continued operating
losses, among other factors, raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from this
uncertainty.

F-7

ECOMAT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997 and 1996

NOTE B (CONTINUED)

Management's plans for dealing with these matters include some or all of the
following:

Management is in discussion with the Company's principal stockholder about
an injection of additional funds in the approximate amount of $1,000,000,
which would be in addition to the $650,000 bridge financing already provided
by the Company's principal stockholder in the first four months of 1998. The
Company also has retained a strategic and financial advisory firm to advise
on alternatives for restructuring and redirecting ECOMAT, Inc. to better
achieve the stated strategy and objectives, including possible synergetic
combinations, and to evaluate potential mergers.

Additionally, the Company has plans to reorganize its senior management
entirely and to strengthen its franchise sales and support staff and
functions. Subsequent to year-end, management has addressed expense control
aspects and has established a more focused franchise program.

The ultimate outcome of the items discussed above is not known at the
present time.

NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Basis of Combination

The consolidated financial statements include the Company, Diaber and
its seven wholly-owned subsidiaries. All intercompany transactions have
been eliminated in consolidation.

2. Revenue Recognition

Revenue from Company-owned stores is recognized in the period in which
related cleaning and laundry services are sold.

The Company's standard single franchise agreement requires the
franchisee to pay an initial nonrefundable fee, as well as a royalty
based on a percentage of sales, and is for a ten-year period. Revenue
derived from initial franchise fees is recognized when the franchise
store opens and when all material services or conditions relating to the
sale have been substantially completed. Royalties are recognized in the
same period in which related franchise store revenue is generated.

F-8

ECOMAT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997 and 1996

NOTE C (CONTINUED)

A cluster franchise agreement provides for a franchise to operate
multiple locations from a central facility within a given geographic
area.

A master franchise agreement is used for foreign locations and is
designed for a country or group of countries constituting a "territory."
The master franchisee sub-franchises Ecomat units or clusters within the
territory and/or operates stores owned by the master franchisee.

Revenues derived from initial franchise fees for cluster franchises and
master franchises are recognized on a pro-rata basis (based on the
anticipated number of facilities expected to be opened) as facilities,
subject to the terms of the agreement, are opened and when all material
obligations or conditions relating to the agreement have been
substantially satisfied.

The Company also recognizes default franchise revenues from prospective
franchisees who make nonrefundable payments to the Company and who
subsequently abandon their efforts or who are not in compliance with the
terms of the franchise agreement. In 1997, revenues from defaults
amounted to approximately $80,000, substantially all of which were from
one franchisee.

At December 31, 1997 and 1996, the Company had approximately $609,000
and $373,000, respectively, of deferred revenue relating to initial
franchise fees (including a master franchise fee) for which the related
franchise stores have not yet opened.

3. Property and Equipment

Property and equipment are stated at cost. Depreciation is determined on
the straight-line method over the estimated useful lives of the assets
(ranging from 5 to 10 years). Maintenance and repairs are expensed as
incurred.

4. Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.

F-9

ECOMAT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997 and 1996

NOTE C (CONTINUED)

5. Investments

Investments consist of certificates of deposit with an original maturity
of one year. These amounts are considered held to maturity and are
stated at amortized cost, which approximates fair market value.

6. Income Taxes

Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and for income tax net operating loss
carry forwards. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

7. Impairment of Long-Lived Assets

It is the Company's policy to annually review long-lived assets such as
property, equipment and goodwill for impairment. The Company measures
the impairment by considering a number of factors including: (i) current
operating results for the location pertaining to the applicable asset,
(ii) future operating results of the applicable location, and (iii) any
other material factors that affect the continuity of the applicable
location.

8. Net Loss Per Share

Basic and diluted loss per share is calculated by dividing the net loss
by the weighted average number of shares of common stock outstanding
during each period. The adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," had no material impact on the
presentation of loss per share for the periods presented. Stock options
have been excluded from the calculation of diluted loss per share as
their effect would have been antidilutive. (See Note J.)

F-10

ECOMAT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997 and 1996

NOTE C (CONTINUED)

The supplemental pro forma loss per share for 1996 is based upon (i)
2,449,180 weighted average shares of common stock outstanding and (ii)
the number of shares (216,904) whose proceeds would be necessary to
repay certain debt of the Company (Note E). The supplemental pro forma
loss per share was $.47 for the year ended December 31, 1996.

9. Use of Estimates

In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.

10. Research and Development Costs

The Company expenses all costs related to research and development as
incurred.

11. Intangible Assets

The Company capitalizes all amounts in excess of fair market value of
specifically identifiable assets as goodwill. Goodwill is amortized over
its expected useful life, most frequently five years.

12. Fourth Quarter Adjustments

Certain adjustments recorded in the fourth quarter of 1997 may pertain
to earlier quarters. Management has not yet determined the impact, if
any, on the first three quarters of 1997.

F-11

ECOMAT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997 and 1996

NOTE D - PROPERTY AND EQUIPMENT

Property and equipment as of December 31, 1997 and 1996 are summarized as
follows:

<TABLE>
<CAPTION>
1997 1996
----------- ------
<S> <C> <C>
Laundry equipment $678,792 $389,160
Computer equipment 104,678 42,153
Leasehold improvements 430,017 412,161
Furniture and fixtures 156,397 54,146
Automobiles 60,775 5,250
-------- --------

1,430,659 902,870
Less accumulated depreciation and amoritzation 362,575 258,074
----------- --------
$1,068,084 $644,796
========== ========
</TABLE>

Depreciation and amortization expense on property and equipment aggregated
approximately $211,000 and $127,000 for the years ended December 31, 1997
and 1996, respectively.

In December 1997, the Company closed two Company-owned stores, resulting in
a write-off of leasehold improvements totalling approximately $8,000. In
addition during 1997, the Company sold certain equipment to franchisees in
which a net gain of approximately $27,000 was recognized.

NOTE E - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses as of December 31, 1997 and 1996 are
summarized as follows:

<TABLE>
<CAPTION>
1997 1996
--------- ------
<S> <C> <C>
Payroll and payroll taxes $53,859 $ 19,738
Professional fees 154,705 20,464
Rent 14,799 35,180
Advertising 132,026
Insurance premiums 28,754 74,127
Other payables 312,613 131,235
-------- --------
$696,756 $280,744
======== ========
</TABLE>

F-12

ECOMAT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997 and 1996

NOTE F - NOTES PAYABLE

Notes payable consist of the following:

<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Note payable - majority stockholder (a) $215,000 $1,215,000
Note payable - officer/stockholder (b) 70,870 71,836
Chase term loan payable (c) 176,667
Chase business revolving credit account (d) 181,234
Notes payable (auto) (2) - Ford Credit (e) 34,324
Note payable (auto) - Chase (f) 9,192
Note payable - Medallion (g) 46,199
Accrued interest 132,240 105,761
------- ----------
865,726 1,392,597
Less current portion 663,341 1,000,000
------- ----------
Notes payable, net of current portion $202,385 $ 392,597
======= ==========
</TABLE>

- ---------------
(a) The note is subject to the following terms:

<TABLE>
<S> <C>
Amount (including interest) $342,000 was outstanding as of December 31, 1997.
Interest 7% per annum
Maturity $215,000 plus interest due in December 1998.
Conversion The note is convertible into common stock at a
price equal to the book value of the Company (as
defined) within certain limitations as defined in
the note.
</TABLE>

(b) The Company has a note payable to an officer/principal stockholder/director
in the amount of $70,870 at December 31, 1997. The note bears interest at 7% per
annum and matures in December 1998 and is convertible into common stock at a
price equal to the book value of the Company (as defined) within certain
limitations as defined in the note.

(c) The note is subject to the following terms: Interest - prime plus .25% per
annum; monthly payment - $3,333.33 (plus interest); maturity date - May 2002.
The prevailing rate of interest at December 31, 1997 was 8.75%. The note is
collateralized by the Company's investment in a certificate of deposit. Since
the Company was in violation of certain covenants pertaining to this note, the
entire amount due has been classified as current as of December 31, 1997.

(d) The credit line is subject to the following terms: Interest - prime plus
.25% per annum; monthly payment - 1/36 of the outstanding principal amount as of
the date of last loan drawn (plus interest). The prevailing rate of interest at
December 31, 1997 was 8.75%. The note is collateralized by the Company's
investment in a certificate of deposit.

(e) The notes are subject to the following terms: Interest - 11.75% per annum;
monthly payment - $465.28 (including interest); maturity date - October 2001.
The notes are collateralized by certain of the Company's automobiles.

(f) The note is subject to the following terms: Interest - 10.95% per annum;
monthly payment - $398.76 (including interest); maturity date - February 2000.
The note is collateralized by certain of the Company's automobiles.

(g) The note is subject to the following terms: Interest - 13% per annum;
monthly payment - $1,134.54 (including interest); maturity date - May 2002.

F-13

ECOMAT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997 and 1996

NOTE G - INCOME TAXES

At December 31, 1997, the Company had net operating loss carryforwards of
approximately $5,900,000 for income tax purposes expiring through 2012. The
Company's ability to utilize net operating losses may be limited due to
changes in ownership resulting from the shares issued in the IPO, additional
issuances of the Company's common stock or other changes in ownership, as
defined in Internal Revenue Code Section 382 and related regulations.

For financial statement purposes, a valuation allowance equal to the amount
of the net deferred tax asset at December 31, 1997 and 1996 has been
recognized, as the realization of such deferred tax assets is uncertain.

Components of the Company's deferred tax assets (liabilities) are as
follows:

1997 1996
---------- ---------

Interest expense $ 53,000 $ 42,000
Lease obligation 82,000 72,000
Net operating loss carryforwards 2,360,000 1,280,000
----------- ----------
2,495,000 1,394,000
Valuation allowance (2,495,000) (1,394,000)
----------- ----------
Net deferred tax asset $ - $ -
=========== ==========

NOTE H - COMMITMENTS

1. Lease Commitments

The Company has entered into various operating leases for its executive
office, Company-owned stores and franchisee stores, as well as certain
equipment expiring at various times through the year 2006.

F-14

ECOMAT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997 and 1996

NOTE H (CONTINUED)

Aggregate future minimum lease payments required under noncancellable
operating leases at December 31, 1997 are as follows:

<TABLE>
<CAPTION>
LEASE Subleasing
PAYMENTS income
------------ -------------
<S> <C> <C>
1998 $ 327,467 $ (23,248)
1999 307,175 (24,127)
2000 316,561 (25,050)
2001 318,392 (25,990)
2002 328,775 (26,964)
Thereafter 694,782 (110,328)
---------- --------
Total future minimum lease payments required $2,293,152 $(235,707)
========== ========
</TABLE>

Total rent expense for the years ended December 31, 1997 and 1996
amounted to approximately $317,000 and $216,000 (net of subleasing
income of $4,000 and $0), respectively. Rent expense is charged on a
straight-line basis over the respective terms of the lease. The excess
of rent expense over the required lease payments is reflected as
deferred rent payable as of December 31, 1997 and 1996.

The Company is currently in negotiations to terminate a lease for one of
the closed locations. Management believes that they will be successful
in terminating the lease for less than $10,000. Lease obligations on
this lease have been included in the minimum lease agreement schedule
above.

2. Employment Agreements

The Company entered into a five-year employment agreement commencing
April 1, 1997 and ending March 31, 2002, with the Manager of Information
Systems. The agreement calls for a base salary of $84,000 per annum,
which is to be reviewed annually and increased as deemed appropriate by
the Board of Directors. The agreement also calls for an annual
performance bonus of 3,000 shares of the Company's stock and the
granting of stock options for 75,000 shares having an exercise price of
$5.25 per share exercisable in 15,000-share blocks each year for five
years, beginning April 1, 1998. The first grant was made on July 1, 1997
in accordance with the agreement. Subsequent grants will take place on
April 1, 1998, April 1, 1999, April 1, 2000 and April 1, 2001. Under
this employment agreement, employment terminates upon death or total
disability of the employee and may be terminated by the Company for
cause.

F-15

ECOMAT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997 and 1996

NOTE H (CONTINUED)

The Company entered into a five-year employment agreement commencing
January 15, 1996 and ending January 14, 2000, with its Vice President of
Franchise Sales and Marketing. Under this employment agreement, this
individual received an annual base salary of $93,000. In addition,
annually, he had the right to receive common stock based upon the
Company meeting certain net income amounts as detailed in the agreement.
The employee voluntarily resigned from the Company effective April 30,
1998, releasing the Company from any obligations under the terms of the
agreement.

NOTE I - RELATED PARTY TRANSACTIONS

The Company and a director (who also controls a corporation that is the
principal stockholder of the Company) entered into a Master Franchise
Agreement dated January 27, 1996 that gives the director the right to (i)
establish and operate cleaning facilities in Europe and (ii) license other
unaffiliated parties to establish and operate cleaning facilities in Europe.
At December 31, 1997 and 1996, the Company has recorded the master franchise
fee of $120,000 as deferred franchise revenue and will recognize the fee on
a pro rata basis as facilities subject to the agreement are opened.

In the first quarter of 1997, the principal stockholder was repaid
$1,000,000 of her note payable (see Note E) from the proceeds of the IPO.

NOTE J - STOCK OPTION PLANS

In January 1996, the directors and stockholders of the Company adopted the
1996 Incentive Stock Option and Stock Appreciation Rights Plan ("Incentive
Option Plan") and the 1996 Non-Qualified Stock Option (the "Nonqualified
Option Plan"), collectively the "Plans." Pursuant to the Incentive Option
Plan, key employees and directors are eligible to receive incentive stock
options, stock appreciation rights ("SARs") and nonqualified options.
Pursuant to the Nonqualified Option Plan, key employees, directors,
consultants, distributors, professional and independent contractors are
eligible to receive nonqualified options. The Plans will be administered by
the Board of Directors or an appointed committee which will determine the
recipients of such grants. The Incentive Option

F-16

ECOMAT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997 and 1996

NOTE J (CONTINUED)

Plan and the Nonqualified Option Plan each provide for options covering
2,000,000 shares of the Company's common stock to be granted under the
Plans. As permitted by the provisions of Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation," the Company has adopted the Accounting Principles Board
Opinion No. 25 or intrinsic value method of accounting for employee stock
options. Accordingly, the determined fair value of stock options granted
will be disclosed rather than recognized in the financial statements. As of
December 31, 1997, no options have been granted under the Plan.

During 1997, the Company granted 75,000 options to purchase its common stock
to an employee of the Company. The Company measures compensation in
accordance with the provisions of APB Opinion No. 25 in accounting for its
stock compensation plans. Accordingly, compensation cost of approximately
$7,000 has been recorded for options granted to the employee in the year
ended December 31, 1997 as a result of the exercise price of $5.25 being
less than the market price of $5.875 at the date of grant. The fair value of
each option granted has been estimated on the grant date using the
Black-Scholes option valuation model. The following assumptions were made in
estimating fair value:

Dividend yield 0%

Risk-free interest rate 6%

Volatility 70%

Expected life 6 years

At December 31, 1997, the Company had outstanding 75,000 options with an
exercise price of $5.25 per share, of which none were exercisable.

F-17

ECOMAT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997 and 1996

NOTE J (CONTINUED)

Had compensation costs been determined under SFAS No. 123, net loss would
have been as follows:

<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1997 1996
----------- --------
(in thousands)
<S> <C> <C>
As reported $(2,724,193) $(1,253,180)
Pro forma for SFAS No. 123 (2,761,597) (1,253,180)

Loss per share - basic and diluted
As reported $(.76) $(.51)
Pro forma for SFAS No. 123 $(.77) $(.51)
</TABLE>

During the initial phase-in period of SFAS No. 123, such compensation
expense may not be representative of the future effects of applying these
statements.

NOTE K - CONCENTRATION OF CREDIT RISK

The Company maintains its cash balances in one financial institution in New
York. These balances are insured by the Federal Deposit Insurance
Corporation up to $100,000.

NOTE L - THE FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated values of the Company's financial instruments are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1997 December 31, 1996
-------------------------- ---------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE amount value
------------- -------- ----------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $377,764 $377,764 $4,307,955 $4,307,955
Investments 415,055 415,055 N/A N/A
Notes receivable 196,199 SEE BELOW N/A N/A
Notes payable 865,726 SEE BELOW 1,392,597 See below
</TABLE>

F-18

ECOMAT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997 and 1996

NOTE L (CONTINUED)

Cash and Cash Equivalents and Investments

The carrying amounts approximate the fair values because of the short
maturity of those instruments.

Notes Receivable and Payable

It was not practicable to estimate the fair value of the Company's notes
receivable and payable because information relating to the value of
investments with similar terms and financial models to evaluate credit to
similar businesses is not readily available.

NOTE M - OTHER ASSETS

Other assets as of December 31, 1997 and 1996 are summarized as follows:

<TABLE>
<CAPTION>
1997 1996
--------- ------

<S> <C> <C>
Deposits on equipment $ 40,925
Security deposits 45,431 $34,407
Trademarks 19,439
Organization costs 2,745
Other 30,469
--------- -------
136,264 37,152
Less accumulated amortization (1,284) (1,647)
--------- -------

$134,980 $35,505
========= =======
</TABLE>

Amortization expense on other assets aggregated approximately $1,000 for
each of the years ended December 31, 1997 and 1996.

During 1997, the Company wrote off intangible and other assets in relation
to two company-owned stores that were closed in December 1997. In addition,
the Company wrote off goodwill on another store acquired in 1997. The total
write-offs for the above locations amounted to approximately $236,000 in
1997. (See Note P.)

F-19

ECOMAT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997 and 1996

NOTE N - NOTES RECEIVABLE

<TABLE>
<S> <C>
Notes receivable consist of the following as of December 31, 1997:

Franchisee note receivable - interest bearing (a) $131,199
Franchisee note receivable - noninterest bearing (b) 65,000
--------

196,199
Less current portion (8,079)
--------

$188,120
========
</TABLE>
---------------
(a) The Company has a note receivable from a franchisee, $46,199 of which is
payable in monthly payments of $1,134.54 through May 2002. Payments include
interest at 13% per annum. The balance of $85,000, plus 13% interest, is
payable in June 2002.

(b) The Company has a noninterest-bearing note receivable from a franchisee,
payable by September 16, 2002.

NOTE O - ECO MAHWAH

Eco Mahwah, Inc. was formed in September 1997 to acquire substantially all
of the assets and assume the lease of Ivy League Cleaners Inc. located at
190 Franklin Turnpike, Mahwah, New Jersey. This purchase was completed in
reliance upon the conclusion of negotiations and signing of a cluster
development agreement for Bergen County with a prospective franchisee, which
is currently in dispute. The purchase price consisted of a cash payment of
$128,000. The Company has invested additional funds in the amount of
approximately $78,000 for leasehold improvements and start-up expenses to
complete the cleaning store and currently manages this location as a
company-owned store pending resolution of the franchise dispute. The Company
is currently reviewing this matter with counsel.

NOTE P - ACQUISITIONS

During 1997, the Company acquired the assets and business of four dry
cleaning/laundromat locations, including Eco Mahwah as described in Note O,
for aggregate cash consideration of $403,000. The accounts of the acquired
businesses have been consolidated with the Company's financial statements as
of the date of the acquisitions.

F-20

ECOMAT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997 and 1996

NOTE P (CONTINUED)

As of December 31, 1997, two of these locations were closed, for which the
Company recorded a loss on disposition of approximately $130,000. The
Company also recorded an impairment of approximately $106,000 for certain
intangibles in relation to another acquisition. (See Notes D and M.)

Unaudited pro forma results for the Company's operations, combined with
acquisitions consummated in 1997, have not been included because management
believes such presentation is not material to the consolidated statement of
operations of the Company.

NOTE Q - SIGNIFICANT NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

The Financial Accounting Standards Board released Statement of Financial
Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive
Income," governing the reporting and display of comprehensive income and its
components, and Statement of Financial Accounting Standards No. 131 ("SFAS
No. 131"), "Disclosures About Segments of an Enterprise and Related
Information," requiring that all public businesses report financial and
descriptive information about their reportable operating segments. The
Company will implement SFAS No. 130 and SFAS No. 131 as required in 1998.
The impact of adopting SFAS No. 130 is not expected to be material to the
consolidated financial statements or notes to consolidated financial
statements. Management is currently evaluating the effect of SFAS No. 131 on
consolidated financial statement disclosures.

The American Institute of Certified Public Accountants' Accounting Standards
Executive Committee recently issued Statement of Position 98-5 ("SOP 98-5"),
"Reporting on the Costs of Start-up Activities." SOP 98-5 requires that
costs of start-up activities, including organization costs, be expensed as
incurred. Start-up activities are broadly defined and include one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a
new class of customer or beneficiary, initiating a new process in an
existing facility, commencing some new operation, and organizing a new
entity. SOP 98-5 is generally effective for financial statements for fiscal
years beginning after December 15, 1998, with initial application reported
as the cumulative effect of a change in accounting principle. The Company
does not anticipate that SOP 98-5 will have any material impact on the
Company's financial statements.

F-21

ECOMAT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1997 and 1996

NOTE R - LEGAL PROCEEDINGS

An action was commenced against subsidiaries of the Company in August 1997
after certain leased premises were vacated. The complaint seeks $109,350 in
damages plus costs. The answer asserted affirmative defenses and
counterclaims. No further action has been taken by the plaintiff and the
Company understands that the premises were re-leased shortly after they were
vacated by the subsidiary. Management believes that the suit is without
merit and has, accordingly, not reflected any amounts on the financial
statements for the lawsuit.

F-22

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on June 11, 1998.

ECOMAT, INC.

By: /s/ Astrid Hindemith
Astrid Hindemith
Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
in the capacities on June 11, 1998.

Signature Title Date

/s/ Astrid Hindemith Chairman of the Board
Astrid Hindemith and Chief Executive Officer
and Principal Financial
Officer and Principal
Accounting Officer

/s/ Hans-Rudolf Kuchler Director
Hans Rudolf Kuchler

/s/ George W. Murphy Director
George W. Murphy

EXHIBIT INDEX

Exhibit
Number Exhibit
- ------- -------
<S> <C>
3.1 Certificate of Incorporation of the Company*

3.5 By-Laws of the Company*

4.1 Specimen Certificate for shares of Common Stock*

10.1 1996 Incentive Stock Option and Stock Appreciation Rights Plan*

10.2 1996 Non-Qualified Stock Option Plan*

10.3 Agreement of Lease for Premises located at 147 Palmer Avenue,
Mamaroneck, NY 10543*

10.4 Master Franchise Agreement, dated January 26, 1996, between
Ecofranchising, Inc. and Palatin, AG*

10.5 Cluster Development Agreement and Attachments, dated February 23, 1996,
between P.E.B. Inc. and Ecofranchising, Inc.**

10.6 Cluster Development Agreement and Attachments, dated March 25, 1996,
between Community Wetcleaners, Inc. and Ecofranchising, Inc.**

10.7 Operating Agreement and Attachments, dated June 19, 1996, between
Vincent Nimson and Ecofranchising, Inc.**

10.8 Cluster Development Agreement and Attachments, dated September 30,
1996, between John W. Henderson, Jr. and Ecofranchising, Inc.**

10.9 Master License Agreement, dated April 15, 1997, between Ecofranchising,
Inc. and PT Pranasakti Dewanta***

10.10 Master License Agreement, dated March 27, 1997, between Ecofranchising,
Inc. and Elite-Fame SDN BHD***

21 Subsidiaries of the Company

27 Financial Data Schedule (in EDGAR filing only)

</TABLE>

* Incorporated by Reference to the Company's Registration Statement on Form
SB-2, No. 333-1524.

** In accordance with Rule 202 of Regulation S-T, these documents were filed
in paper format pursuant to a continuing hardship exemption.

*** Incorporated by reference to the Company's Form 10-KSB for the year ended
December 31, 1996.

<PAGE>

EXHIBIT 21

LIST OF SUBSIDIARIES

Name State of Incorporation
---- ----------------------
<S> <C>
8TH STREET LAUNDROMAT, INC. Delaware
ECOCLEAN SYSTEMS INTERNATIONAL, LTD. Delaware
ECOFRANCHISING, INC. Delaware
ECO JOSH, INC. Delaware
ECO MAHWAH, INC. Delaware
ECO STU, INC. Delaware
ECO YITZI, INC. Delaware

</TABLE>

<PAGE>

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 377,764
<SECURITIES> 0
<RECEIVABLES> 42,943
<ALLOWANCES> 3,386
<INVENTORY> 0
<CURRENT-ASSETS> 910,166
<PP&E> 1,430,659
<DEPRECIATION> 362,575
<TOTAL-ASSETS> 2,583,590
<CURRENT-LIABILITIES> 1,372,097
<BONDS> 865,726
<COMMON> 361
0
0
<OTHER-SE> 6,404,377
<TOTAL-LIABILITY-AND-EQUITY> 2,583,590
<SALES> 535,741
<TOTAL-REVENUES> 547,967
<CGS> 0
<TOTAL-COSTS> 3,083,362
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63,790
<INCOME-PRETAX> (2,702,292)
<INCOME-TAX> 21,901
<INCOME-CONTINUING> (2,724,193)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,724,193)
<EPS-PRIMARY> (.76)
<EPS-DILUTED> (.76)

</TABLE>