ECHO SPRINGS WATER CO., INC.
HACKENSACK AVENUE, BUILDING 100A
KEARNY, NEW JERSEY 07032
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO
BE HELD ON OCTOBER 1, 1996 AT 10:00 A.M.
To the Shareholders of
Echo Springs Water Co., Inc.
Notice is hereby given that the Annual Meeting of Shareholders (the
"Meeting") of Echo Springs Water Co., Inc., a New York corporation (the
"Company"), will be held at the offices of the Company, Hackensack Avenue,
Building 100A, Kearny, New Jersey 07032 on October 1, 1996, at the hour of 10:00
a.m. local time for the following purposes:
(1) To elect three (3) Directors of the Company for the coming year;
(2) To consider and approve a proposal to effect a 25 for 1 reverse
stock split of the outstanding shares of Common Stock of the
Company; and
(3) To transact such other business as may properly come before the
Meeting.
Only shareholders of record at the close of business on September 6,
1996 are entitled to notice of and to vote at the meeting or any adjournment
thereof.
By Order of the Board of Directors
Michael S. Rakusin, President
Septmber 6, 1996
IF YOU WISH TO VOTE IN FAVOR OF EACH OF THE PROPOSALS AND FOR
THE NOMINEES PRESENTED, CHECK THE APPROPRIATE BOX AND SIGN,
DATE AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE
WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IN
ANY EVENT YOUR PROMPT RETURN OF A SIGNED AND DATED PROXY WILL
BE APPRECIATED.
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ECHO SPRINGS WATER CO., INC. Hackensack Ave., Bldg. 100A
Kearny, New Jersey 07032
October 1, 1996
PROXY STATEMENT
This Proxy Statement and the accompanying proxy are furnished by the
Board of Directors of the Company in connection with the solicitation of proxies
for use at the 1996 Annual Meeting of Shareholders (the "Meeting") referred to
in the foregoing notice. It is contemplated that this Proxy Statement, together
with the accompanying form of proxy and the Company's Annual Report for the
fiscal year ended October 31, 1995, will be mailed to shareholders on or about
September 9, 1996.
The record date for the determination of shareholders entitled to
notice of and to vote at the Meeting is September 6, 1996. On that date there
were issued and outstanding, 50,499,910 shares of Common Stock, par value $.0001
per share. The presence, in person or by proxy, of the holders of a majority of
the shares of Common Stock outstanding and entitled to vote at the Meeting is
necessary to constitute a quorum. In deciding all questions, a shareholder shall
be entitled to one vote, in person or by proxy, for each share held in his name
on the record date.
All proxies received pursuant to this solicitation will be voted
(unless revoked) at the Annual meeting of October 1, 1996, or any adjournments
thereof in the manner directed by a shareholder and, if no direction is made, in
favor of the Proposals. Any shareholder giving a proxy has the power to revoke
it any time prior to voting but a revocation will not be effective until the
Company has received a revoking instrument or a proper proxy of later date. Mere
attendance at the meeting, without such revoking instrument, will not revoke the
proxy.
The favorable vote of holders of a majority of the shareholders present
at the Meeting is required to approve all proposals.
As of the date of this Proxy Statement, the Board of Directors knows of
no matters other than the foregoing that will be presented at the Meeting. If
any other business should properly come before the Meeting, the accompanying
form of proxy will be voted in accordance with the judgment of the persons named
therein, and discretionary authority to do so is included in the proxies. All
expenses in connection with the solicitation of this proxy will be paid by the
Company. In addition to solicitation by mail, officers, directors and regular
employees of the Company who will receive no extra compensation for their
services, may solicit proxies by telephone, telegraph, or personal calls.
Management does not intend to use specially engaged employees or paid solicitors
for such solicitation. Management intends to solicit proxies which are held of
record by brokers, dealers, banks, or voting trustees, or their nominees, and
may pay the reasonable expenses of such record holders for completing the
mailing of solicitation materials to persons for whom they hold the shares. All
solicitation expenses will be borne by the Company.
SECURITY OWNERSHIP AND CERTAIN BENEFICIAL
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OWNERS AND MANAGEMENT
The following tabulation shows the security ownership as of August 31,
1996 of (i) each person known to the Company to be the beneficial owner of more
than 5% of the Company's outstanding Common Stock, (ii) each Director of the
Company, and (iii) all Directors and Officers as a group.
Amount
and Nature Approximate
Name of of Beneficial Percent
Beneficial Owner Ownership (1) of Class (2)
Michael S. Rakusin 5,693,980 (1) 11.2%
ESWC, Inc. 5,256,064 (2) 10.4%
All officers and director as a group
(three persons) 5,693,980 11.2%
- ----------------------------
(1) Includes 693,980 shares of common stock issuable upon exercise
of warrants, exercisable at $.25 per share and expiring on
October 31, 1996.
(2) The shareholders of ESWC, Inc. are Mr. Grey (a former officer
and director of the Company), Richard Schuttenhelm, Lorenzo
Ardito, and Kenneth and
Martha Harrington. Pursuant to an oral agreement, the shares
owned by the
ESWC, Inc. are voted based upon the decision of the holders
of 90% of the outstanding shares of ESWC, Inc.
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PROPOSAL ONE: ELECTION OF DIRECTORS
Management recommends that you vote in favor of the nominees
named to the Board of Directors
Three (3) directors are to be elected at the meeting for terms of one
year each and until their successors shall be elected and qualified. It is
intended that votes will be cast pursuant to such proxy for the election of the
three persons whose names are first set forth below unless authority to vote for
one or more of the nominees is withheld by the enclosed proxy, in which case it
is intended that votes will be cast for those nominees, if any, with respect to
whom authority has not been withheld. If all of the nominees should become
unable or unwilling to serve as a director, it is intended that the proxy be
voted, unless authority is withheld, for the election of such person, if any, as
shall be designated by the Board of Directors. Directors will be elected by a
majority of the votes cast at the Meeting.
The following information is submitted concerning the three nominees
for election, to serve as directors of the Company until the 1997 Annual Meeting
or until their successors are elected and have qualified.
NOMINEES FOR ELECTION
The following table sets forth information concerning each
nominee for director of the Company, each of which has been nominated to
continue as a director of the Company.
First
Became Principal
Name Age Director Occupation
Michael S. Rakusin 40 1987 President
Edward J. Metzger 39 --- Vice-President
Frank LaSala 73 --- ___________
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(1) Directors are elected at the annual meeting of shareholders and shall serve
until their successors are elected and qualified.
Michael S. Rakusin has been the Treasurer and a Director of Echo
Springs since 1987. He
was appointed Secretary in June 1987; Executive Vice President in November
1988; and President
in April 1991. From 1984 to March 1987, Mr. Rakusin was self-employed,
rendering financial and
accounting services. From 1976 to 1984, he was employed as an accountant by
J.M. Stern & Co.,
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Certified Public Accountants. Mr. Rakusin is a Certified Public Accountant
in the State of New
York. He earned a Bachelor of Business Administration Degree from the City
University of New York in 1976.
Edward Metzger has been an officer of Echo Springs since 1992. Mr.
Metzger joined Echo
Springs after serving as Vice-President of Stony Brook Springs Water, Inc, a
company whose assets
were acquired by Echo Springs. Mr. Metzger earned a Bachelor of Arts Degree
from Montclair
State College in 1984.
Frank LaSala has been active as an administrator of his own business,
Sal-Ma Instruments Corporation, for the past 45 years.
Executive Compensation
The following tabulation shows the total compensation paid by the
Company for services in all capacities during the fiscal year ended October 31,
1993, 1994 and 1995.
Annual Compensation(1)
Other
Name and Annual
Principal Position Year Salary Bonus Compensation
Michael S. Rakusin 1995 $80,300 0 0
President
1994 $89,117 0 0
1993 $60,000 0 0
Edward J. Metzger 1995 $82,000 0 0
Vice President
1994 $104,000 0 0 0
1993 $104,000 0 0 0
Long Term Compensation
Awards Payouts
Restricted All
Name and Year Stock Options LTIP Other
Principal Position Awards($) /SARs Payouts Compensation
Michael S. Rakusin 1995 0 0 0 0
President
1994 0 0 0 0
1993 0 0 0 0
Edward J. Metzger 1995 0 0 0 0
Vice President
1994 0 0 0 0
1993 0 0 0 0
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE
ELECTION OF THE THREE DIRECTORS HEREIN NAMED
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PROPOSAL TWO: APPROVAL OF TWENTY-FIVE FOR ONE
REVERSE STOCK SPLIT
Management recommends that you vote in favor of the proposed
reverse stock split
The Board of Directors of the Company has approved, subject to
shareholder approval, an amendment to the Company's Certificate of Incorporation
to effect a twenty-five-for-one reverse stock split pursuant to which each
twenty-five shares of the Company's Common Stock outstanding as of the end of
business on the Record Date will be replaced by one share of Common Stock
("Reverse Stock Split"). The Reverse Stock Split will reduce the number of
outstanding shares of Common Stock of the Company as of the record date from
50,499,910 to 2,019,996.
The affirmative vote of the holders of a majority of the shares of the
Common Stock outstanding on the Record Date will be required to approve the
Reverse Stock Split. As a result, abstentions will have the same effect as
negative votes.
Reasons for the Reverse Stock Split
The objectives of the Reverse Stock Split are to raise additional
capital, and adjust market capitalization of the Company to make the Common
Stock a more attractive vehicle for a possible primary offering of additional
shares of Common Stock to the public which may be expected to increase the
liquidity and broaden the marketability of the Company's Common Stock. The
Company also desires to become listed on NASDAQ.
Principle Effects
The Reverse Stock Split by itself will not affect the shareholders
proportionate equity interest in the Company or the rights of the shareholders
with respect to each share of Common Stock as to voting, dividends and other
matters. Since there is no consideration received by the Company in connection
with the Reverse Stock Split, the overall capital of the Company will not change
as a result of the Reverse Stock Split.
Effective Date; Delivery of New Certificates
If the Reverse Stock Split is approved by the shareholders, it will
become effective upon the filing of a Certificate of Amendment of the Company's
Certificate of Incorporation with the Secretary of State of the State of New
York which is expected to be effective as of the end of business on the date of
the Shareholders Meeting (the "Reverse Stock Split Record Date"). Subject to
such approval, on or about October 11, 1996 (the "Reverse Stock Split
Notification Date"), the Company will mail to each instructions on how to redeem
their present stock certificates for the Reverse Stock Split Common Stock
Certificates of the Company.
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Shareholders should not retain their stock certificates representing shares of
Common Stock but should send them to the Company's transfer agent upon receipt
of the instructions. Thereafter, on or about October 11, 1996, the ("Reverse
Stock Split Payment Date"), the Company will mail a certificate representing the
number of Reverse Stock shares of Common Stock owned by the Shareholders. If the
Shareholders approve the Reverse Stock Split after October 1, 1996 due to
adjournment or postponement of the Shareholder Meeting, or if the Amended
Certificate is not filed on October 1, 1996, for other reasons, the Reverse
Stock Split Payment Date may be changed. Shareholders contemplating a sale
before the Reverse Stock Split Payment Date should consult their brokers as to
their entitlement to the Reverse Stock Shares.
Tax Consequences
The following discussion is included for general information only.
Shareholders should consult their personal tax advisors to determine the
particular consequences of the Reverse Stock Split, including the applicability
and effect of federal income and other taxes. No gain or loss will be recognized
for federal income tax purposes on the receipt of the Reverse Stock Split shares
of Common Stock. A holder's tax basis in the shares of Common stock held
immediately prior to the Reverse Stock Split is allocated proportionately among
the new shares issued as a result of the Reverse Stock Split. The holding period
of the shares of Reverse Stock Split Common Stock will include the period during
which the shares of Common Stock owned immediately prior to the Reverse Stock
Split were held.
THE BOARD OF DIRECTORS RECOMMEND A VOTE IN FAVOR OF PROPOSAL
TWO
MISCELLANEOUS
Audit Matters
The principal accountant who has been selected by the Company for the
coming fiscal year is Robbins, Greene, Horowitz, Lester & Co., LLP. It is
expected that a representative of Robbins, Greene, Horowitz, Lester & Co. will
be present at the Annual Meeting of Shareholders and will be available to
respond to appropriate questions.
The Company's 1995 Annual Report on Form 10k is being mailed to
shareholders with this Proxy Statement.
Proposals of Security Holders
Proposals of security holders intended to be presented at the 1996
Annual Meeting must be received by the Company for inclusion in the Company's
Proxy Statement and form of proxy relating to that meeting no later than January
31, 1997.
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Other Business
The Board of Directors knows of no business that will come before the
meeting for action except as described in the accompanying Notice of Meeting.
However, as to any such business, the persons designated as proxies will have
discretionary authority to act in their best judgment.
By Order of the Board of Directors
Michael S. Rakusin, President
September 6, 1996
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P R O X Y
ECHO SPRINGS WATER Co., INC.
(Solicited by The Board of Directors)
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a
shareholder in Echo Springs Water Co., Inc., a New York corporation ("Echo"),
does hereby constitute and appoint Michael S. Rakusin and Edward J. Metzger, and
each of them acting jointly, if more than one be present, to be the true and
lawful attorneys and proxies for the undersigned, to vote all shares of Echo
which the undersigned is entitled to vote, with all powers the undersigned would
possess if personally present, at the Annual Meeting of Shareholders of Echo to
be held on October 1, 1996, and at any adjournment or adjournments thereof, on
the following matters as designated below and, in other discretion, on such
other matters as may properly come before the meeting. This proxy will be voted
in the manner directed herein by the undersigned shareholder. If no direction is
made, this proxy will be voted FOR the following Proposals.
1. ELECTION OF MICHAEL RAKUSIN, EDWARD J. METZGER AND FRANK LaSALA
FOR all nominees listed above [] WITHHOLD AUTHORITY []
(except as marked to the contrary below)
(INSTRUCTION: To withhold authority to vote for any individual nominee, print
that nominee's name on the line provided below.)
----------------------------------------------------
2. THE APPROVAL OF A TWENTY-FIVE FOR ONE REVERSE STOCK SPLIT.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
OTHER MATTERS: Granting the proxies discretionary authority to vote upon any
other unforeseen matters which are properly brought before the meeting as
management may recommend.
The undersigned hereby revokes any and all other proxies heretofore given by the
undersigned and hereby ratifies all that the above named proxies or their
substitutes may do at such meetings, or at any adjournments thereof, by virtue
hereof.
Dated: , 1996
---------------------------
---------------------------
NOTE: This proxy expires eleven (11) months from this date unless
9
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otherwise stated herein. If you are signing
as a trustee, executor, guardian, fiduciary,
attorney-in-fact, etc., please also give
your full title and also state the name of
the stockholder of record for whom you act.
IMPORTANT: Please SIGN, DATE and RETURN this proxy in the enclosed envelope
as soon as possible.
10
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<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] Annual report pursuant to section 13 or 15(d) of the
Securities and Exchange Act of 1934 [Fee Required]
For the fiscal year ended October 31, 1995 or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to __________
Commission file number 33-30980
ECHO SPRINGS WATER CO., INC.
(formerly known as Grudge Music Group, Inc.)
(Exact Name of Registrant as specified in its Charter)
New York 16-1433379
(State or other Jurisdiction (I.R.S. Employer Identification
Incorporation or organization) Number)
Building 100-A, Hackensack Avenue, Kearny, New Jersey 07032
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (201) 465-5151
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes . No x .
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. The
aggregate market value by non-affiliates as of May 31, 1996 is $2,844,050.
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Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10K or any amendment to this
From 10K [ ].
Indicate the number of shares outstanding of each of the registrants classes of
common stock as of the latest practicable date. At May 31, 1996 there were
41,499,910 common shares outstanding.
2
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PART I
Item 1. Business
Introduction
Echo Springs Water Co., Inc. ("Company" or "Echo") is engaged in
bottling, marketing and distributing its natural spring water products from
naturally free-flowing springs located on Echo's property in Burlington, New
York. Echo's natural spring water is sold both under the label "Echo Springs"
and under private label supermarket brands. Echo also leases water coolers to
customers and sells allied products such as coffee, tea and a wide assortment of
paper products to its commercial accounts.
Echo's products are primarily marketed and sold by its in-house sales
staff. To a lesser extent, sales to certain supermarkets are made through
independent distributors. Echo also provides installation and service for its
leased coolers. Echo's customers consist primarily of a variety of business
establishments and supermarkets.
History of Echo
Echo, formerly Grudge Music Group, Inc., was incorporated in New York
in 1985 for the purpose of engaging in the music recording business. Due to
continuing losses from operations, Echo discontinued its music business in 1990.
In 1991 and 1992, Echo commenced its bottled water business through
the acquisition of two companies. In December 1991, Echo completed the
acquisition of the assets of Echo Springs Water Co., Inc. (now known as ESWC,
Inc.) consisting of its present spring water source and a fully automated
natural spring water bottling facility located in Burlington, New York.
In July 1992, Echo acquired the assets of Berkshire Springs of New
Jersey, Inc. (Berkshire), a distribution company that leases water coolers and
sells water and other allied products to both commercial and residential
customers in the State of New Jersey. At present, Echo services over 5,000
customers and has extended its delivery territory to the New York City
Metropolitan area.
The Bottled Water Market
The bottled water market comprises three major segments: non-
sparkling, sparkling and imported water.
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* Non-sparkling, or still, water contains no
carbonation and is consumed as an "alternative
to tap water." Non-sparkling water is
generally distributed directly to homes and
offices, through retail outlets and through
vending machines. Distinctions are often made
among brands of non-sparkling water based on
their source, level of mineral content and the
method of purification (distillation,
deionization or reverse osmosis).
* Sparkling water contains either natural or
artificial carbonation and is positioned to
compete in the broad "refreshment beverage"
field. Sparkling water includes domestic
sparkling water, club soda and seltzer, and is
typically sold through normal food and beverage
retail channels.
* Imported water, which includes both sparkling
and non-sparkling water produced and bottled
outside the U.S., is targeted to "image-
conscious consumers." Imported water is sold
through normal food and beverage retail
channels, typically at significantly higher
prices than other bottled water alternatives.
Non-sparkling bottled water is currently distributed through office
and home delivery, and retail stores. Within the non-sparkling segment, retail
pricing generally reflects the costs associated with the maintenance of each
distribution channel. As a result, bottled water delivered to the home or office
has the highest per gallon price, with off-the-shelf bottled water sold through
retail channels having the next highest per gallon price and, finally, vended
water, which has the lowest price per gallon.
Natural spring waters are not always free from contamination
problems. Springs can be contaminated with coliform (bacteria in the water).
Natural springs need to be monitored and tested on a regular basis to make sure
they are without contamination. To date, the Company has had no contamination
problems with its three active springs. The Company's water has not been
determined to be better or less contaminated than municipal water although the
Company believes that natural spring water has advantages over municipal water
since natural spring water is not treated with chlorine and other chemicals as
is municipal water.
Products
Echo's natural spring water is sold in three bottle sizes:
1 gallon, 2.5 gallon and 5 gallon high density polyethylene
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recyclable containers. Water sold under the "Echo Springs" brand is packaged in
all three size bottles. Private label water is sold only in 1 gallon and 2.5
gallon size bottles. Private label sales have not been significant to date.
In addition, Echo leases water coolers and sells a wide variety of
allied products, including regular and decaf coffee, coffee creamers and milk,
sugar, soups and paper products such as hot and cold paper cups and plastic
utensils. To date, revenues from such allied products have not been significant.
Suppliers
Echo does not manufacture any of the bottles, packaging material, or
coolers that it sells or leases. Echo purchases all of its bottle and plastic
cap requirements from major plastic bottle and cap vendors. In the past, Echo
has experienced delays from time to time in obtaining an adequate supply of
these materials due to its vendors inability to meet demand. While such delays
have become less frequent, there can be no assurance that Echo will not
experience similar delays in the future. To date, such delays have not had a
material adverse effect on operations.
In order to mitigate this risk, Echo uses a number of plastic bottle
vendors. Substantially all of Echo's water coolers are purchased from the
Cordley Temprite Division of Elkay Manufacturing. This supplier was selected
based on its reputation in the cooler industry, and its ability to meet delivery
deadlines on a cost efficient basis. Since there are only a few large cooler
manufacturers in the United States, the inability to obtain water coolers on
terms satisfactory to Echo could have a material adverse effect on Echo's
business. Echo has not experienced any such problems and believes its relations
with all of its suppliers are good. Echo also purchases certain allied products,
such as coffee, tea and a wide variety of paper products from numerous vendors.
Echo believes there are sufficient vendors from which to obtain these products
on competitive terms.
Marketing and Distribution
Echo markets its "Echo Springs" brand as a 100% pure natural spring
water. Echo believes that this distinguishes its water from many of its
competitors' water, much of which is either filtered municipal tap water or
purified water. To date, Echo has focused its marketing and sales efforts in the
New Jersey/New York City Metropolitan area, which it believes offers a
substantial market for growth. If the Company is successful in further
penetrating this market, of which there is no assurance, it intends to expand
its marketing and sales focus to the northeastern United States. Echo sells all
of its products through its own in-house sales force
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except for certain supermarket sales which are made through independent
distributors. Echo sells its products to offices, other commercial
establishments, residential customers and supermarkets. Echo distributes its
bottled water and allied products by means of its fleet of 8 trucks, 4 of which
are owned 2 of which are rented and 2 of which are leased.
Seasonality
In the beverage industry, sales typically increase in the second and
third calendar quarters. In order to help minimize the impact of seasonality on
sales in the future, Echo will seek to expand its distribution of allied
products by increasing its marketing of such products to its bottled water
customers.
Competition
The bottled water market is highly competitive. Echo competes in the
non-sparkling segment of the bottled water market directly with other office
delivery water companies and indirectly with companies that provide water
vending machines and with off- the-shelf marketers. Echo's water products
compete not only with other bottled water products but also with other types of
beverages, including soft drinks, coffee, beer, wine and fruit juices. Echo
competes with vended water and off-the-shelf marketers on the basis of (1)
quality (2) taste, (3) the convenience of on site delivery, and (4) the features
offered by the water dispenser (i.e. the ability to have heated, chilled or room
temperature water, depending on the type of dispenser rented). Such competition
includes bottlers and distributors of water products, several of which are more
experienced and have greater financial and management resources than Echo and
have established proprietary trademarks, distribution facilities and bottling
facilities.
Many bottled water companies in the United States are owned by
European or Japanese companies. Nestle (Swiss) owns the Perrier, Great Bear,
Poland Springs, Ozarka, Oasis, Zephyrhills, Arrowhead, Calistoga, Ice Mountain
and Volvic brands. BSN Group (French) owns the Evian Brand. Anjou (French) owns
the Sierra Springs and Hinckley & Schmitt brands. Suntory (Japanese) owns the
Belmont Springs, Crystal, Kentwood, Polar, Willow and Talwonda Springs brands.
Employees
As of May 31, 1996 Echo employed 29 people, seven of which were in
production, 14 in distribution, and eight in management and administration. None
of Echo's employees is subject to a collective bargaining agreement and Echo
believes that its relations with its employees are satisfactory.
6
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Government Regulation
The United States Food and Drug Administration ("FDA") regulates
bottled water as a food. Accordingly, Echo's bottled water must meet FDA
standards for good manufacturing practices and chemical and biological purity.
Furthermore, these standards undergo a continuous process of revision. The
labels affixed to bottles and other packaging of the water are subject to FDA
restrictions on health and nutritional claims for foods.
In addition, all drinking water must meet United States Environmental
Protection Agency standards established under the Safe Drinking Water Act
("SDWA") for mineral and chemical concentration. The 1986 amendments to the SDWA
mandated the establishment of new drinking water quality and treatment
regulations.
Bottled water must originate from an "approved source" in accordance
with standards prescribed by the state health department in each of the states
in which Echo's products are sold. The source must be inspected and the water
sampled, analyzed and found to be of safe and wholesome quality. There are
annual "compliance monitoring tests" of both the source and the water. The
health departments of the individual states also govern water purity and safety,
labeling of bottled water products and manufacturing practices of producers.
Echo's water supply is located in the State of New York, which
requires a bottled water manufacturer to be certified by the New York State
Department of Health. In order to receive certification, a prospective
manufacturer must submit an application, together with a detailed report
prepared by a licensed professional engineer. The application includes the
manner of development of the source, the sanitation methods to be used in the
bottling operation, the water treatment proposed, the laboratory control of
water quality which will be provided, detailed engineering plans of the bottling
facility and water source, and a flow diagram from source through bottling
operation.
The application, report and proposed labels and caps are reviewed by
the Department of Health. In addition, samples of the water are tested. After
this review and testing, arrangements are made for the local county public
health unit to inspect the water bottling facilities. Echo currently has all
required approvals and believes that its bottling facilities are in substantial
compliance with all applicable government regulations.
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Item 2. Properties
The Company's principal facility consists of 150 acres of land
located in Burlington, New York on which there is located a processing facility
consisting of 7,200 square feet and seven springs, of which three are completed
and in operation. Although the Company has no present plans to develop the four
uncompleted springs, in order to do so it would be necessary to landscape the
area, cap the springs, run an underground pipe from the springs to the bottling
facility and obtain approval from the New York State Department of Health. The
Company estimates that this process would take three to four months to complete.
Until developed, management is not able to estimate the additional capacity that
these springs would provide.
The Company draws its water from three developed natural springs. The
Company's Burlington water sources each flow at the rate of 76 gallons per
minute. The Edmeston springs (described below) each have a flow rate of 96
gallons per minute. The Company believes that its water is clean, refreshing and
lightly mineralized.
The Company is dependent upon the natural springs for the water which
it bottles and sells. Natural occurrences beyond the control of the Company
including, but not limited to, drought, which prevents the natural springs from
recharging themselves, and other occurrences, such as contamination of the
springs or failure of the water supply to comply with all applicable
governmental requirements for mineral and chemical concentration, could have
material adverse effect on the business of the Company.
The Company's bottling facility and springs are located on its
property in Burlington, New York, which enables the Company to bottle its water
products at the source. The facility was built, and bottling equipment
installed, in 1990.
The current production capacity of the bottling facility per seven
hour shift is 800,000 cases per year of 1 gallon bottles or 370,000 cases per
year of 2 1/2 gallon bottles or 1 1/2 million five gallon bottles per year,
which exceeds the Company's projected needs for the foreseeable future. The
plant currently operates one shift per day, five days per week, representing
approximately 20% of capacity.
The Company entered into a 20 year lease with an unaffiliated
landlord commencing September 1, 1994 for 41.686 of land located in the town of
Edmeston, State of New York, on which are located two developed springs. The
springs have a combined capacity of approximately 52,000,000 gallons of water
per year. The Company applied for and received approval from the New York State
Department of Health to operate the springs in 1995. Based on the amended
agreement effective July 1, 1995, rent for the property is
8
<PAGE>
$.005 per gallon of water extracted for the first five years (with minimum rent
of $300 per week) and $.01 per gallon for the following fifteen years with
minimum rent of $600 per week). The Company is also required to pay an
additional $21,000 during the first year with a deposit of $5,000 and the
balance in 12 equal installments. The Company has the right to build and operate
a processing plant (which will become the property of the landlord) on the
property in which case the rent will increase to $.015 per gallon extracted. The
Company also has the right to terminate the lease without penalty after payment
of rent aggregating $100,000 plus the $21,000 first year fee, and, in the event
it has constructed a processing plant, the right to renew the lease for an
additional 20-year term on terms to be agreed upon by the parties. The Company
intends, as its needs require, to utilize the water from these springs in its
business. The water can be utilized without construction of a plant and the
Company has no immediate plans to build a plant on this property. Rent expense
under this lease was $9,330 and $6,080 for the years ended October 31, 1995 and
1994, respectively.
The Company's principal executive offices are in Kearny, New Jersey
where it leases 23, 000 square feet of office and warehouse space pursuant to a
lease expiring in February 1998. The Company pays a monthly rent of $5,495. The
Company believes that its current facilities are adequate for its foreseeable
needs.
Item 3. Legal Proceedings
In March and April 1994 Kenneth T. Williams commenced two actions in
the Supreme Court of the State of New York, County of Otsego, against the
Company and certain of its subsidiaries and affiliates. The Company became aware
of such litigation and accepted service in June 1994. The actions involve a
dispute concerning title to the Company's land and facility located in
Burlington, New York ("Property"); the plaintiff seeks a one-half interest in
the Property and $17,000,000 in damages. The actions are primarily based upon
the same factual allegations made in a prior action instituted in the same court
in 1991 (which has been dismissed) between the plaintiff and Frank Grey, an
officer, director and stockholder of the Company, and the prior owners of the
Property regarding the termination of a joint venture arrangement between the
plaintiff and Mr. Grey and the alleged breach of a purported agreement regarding
the sale of the Property between the owners of the Property on the one hand and
the plaintiff and Mr. Grey on the other. The plaintiff has caused a lis pendens
to be placed on the Property in connection with such prior action.
The Property was ultimately purchased by ESC and then sold to a subsidiary
of the Company subject to the lis pendens in the first action. The Company's
management believes that the plaintiff's
9
<PAGE>
claims are without merit. In a motion for dismissal decided in October, 1994,
all of the plaintiff's claims against the Company were dismissed except for
claims of breach of contract and unjust enrichment. The Company appealed this
decision and in June 1995, the Appellate Division, Third Department dismissed
the breach of contract claim against the Company and canceled the lis pendens in
the first action. The Company intends to move to cancel the lis pendens in the
second action.
ESWC and Frank Grey have agreed to indemnify the Company for any
expense, loss or damage suffered or incurred by the Company (including any
amounts paid in settlement) as a result of the Company's being a party to the
action. An aggregate of 150,000 shares of the Company's Common Stock owned by
ESWC (100,000 shares, 50,000 of which were loaned by Michael S. Rakusin) and
Frank Grey (50,000 shares) has been pledged as security for such
indemnification. In the event a claim for indemnification is not satisfied, the
Company's sole recourse against ESWC is the pledged stock. The Company may seek
recourse directly against Mr. Grey to the extent that a claim exceeds $275,000
and is not satisfied in full by the pledged stock, valued at the time a claim is
made. No assurance can be given as to the value to the Company of the pledged
shares at the time a claim for indemnification might be made or that in the
event Mr. Grey is called upon to make payment under his indemnity that he will
have sufficient net worth to meet his obligation thereunder. Accordingly, there
can be no assurance that the Company will be reimbursed in part or in full, for
any expenses, damages, or losses incurred in connection with these lawsuits and
therefore, an adverse result in any of these actions could have a material
adverse effect on the business of the Company.
Item 4. Submission of Matters to Vote of Security Holders
Not Applicable.
10
<PAGE>
PART II
Item 5. Market Registrant's Common Equity and Related Stockholder
Matters
The following table sets forth the high and low prices for the
periods indicated as reported by the National Association of Securities Dealers
Automated Quotation System (Nasdaq) between dealers and do not include retail
mark-ups, mark-downs, or commissions and do not necessarily represent actual
transactions.
Low High
Calendar Year 1994:
First Quarter 7/64 3/16
Second Quarter 7/64 3/16
Third Quarter 5/32 1/4
Fourth Quarter 9/64 19/64
Calender Year 1995:
First Quarter 1/16 3/32
Second Quarter 1/16 3/32
Third Quarter 1/16 3/32
Fourth Quarter 1/16 3/32
Calendar Year 1996:
First Quarter 1/32 1/16
11
<PAGE>
Item 6. Selected Financial Data
Year Ended
10/31/91
Operating Data
Discontinued Operations:
Total Revenue -0-
Costs and Expenses -0-
Income Tax-Deferred -0-
Income Tax-Current -0-
Net Income (Loss) (1,601,342)
Loss per Share (1) (.19)
Balance Sheet Data
Total Assets 438,703
Long Term Debt 838,500
Total Liabilities 1,244,516
Shareholders' Equity (Deficit) (805,813)
Year Ended
10/31/92
Operating Data
Total Revenue $1,009,411
Costs and Expenses 3,020,602
Net Loss (2,011,191)
Loss per Share (1) (.21)
Balane Sheet Data
Total Assets $2,568,923
Long Term Debt 1,830,011
Total Liabilites 5,385,927
Shareholders' Equity
(Deficit) (2,817,004)
Year Ended
10/31/93
Operating Data
Total Revenue $2,424,098
Costs and Expenses 3,501,547
Net Loss (1,077,449)
Loss per Share (1) (.09)
Balance Sheet Data
Total Assets $2,784,356
Long Term Debt 119,639
Total Liabilities 3,322,714
Shareholders' Equity
(Deficit) (538,358)
12
<PAGE>
Year Ended
10/31/94
Operating Data
Total Revenue $2,682,367
Costs and Expenses 4,423,042
Net Loss (1,740,675)
Loss per Share (1) (.04)
Balance Sheet Data
Total Assets $2,744,088
Long Term Debt 53,948
Total Liabilities 4,996,121
Shareholders' Equity
(Deficit) (2,252,033)
Year Ended
10/31/95
Operating Data
Total Revenue $2,567,209
Costs and Expenses 2,781,477
Net Loss (214,268)
Loss per Share (1) (.01)
Balance Sheet Data
Total Assets $2,198,698
Long Term Debt 5,527
Total Liabilities 4,664,999
Shareholders' Equity
(Deficit) (2,466,301)
(1) Earnings (Loss) Per Share. Loss per share computations are
computed based on the weighted number of shares outstanding for the
period.
13
<PAGE>
Item 7. Managements' Discussion and Analysis of Financial Condition
and Results of Operations.
Fiscal Year Ended October 31, 1995 Compared to Fiscal Year Ended
October 31, 1994
Net revenues decreased $115,158 (4.3%) from $2,682,367 for the fiscal year
ended October 31, 1995 ("Fiscal 1995") to $2,567,209 for the fiscal year ended
October 31, 1994 ("Fiscal 1994"). The $85,053 decrease in gross sales was due
primarily to two factors. First, the sales mix in Fiscal 1995 showed increases,
totaling $74,296, in more profitable five gallon and coffee service sales offset
by decreases, toatlling $133,537, in less profitable 2.5 gallon and one gallon
sales. The second contributing factor was a discontinuance of service to
marginal customers in the New York City suburbs. The remaining decrease in net
revenues related primarily to a reduced gain on unclaimed or lost customer
deposits in Fiscal 1995 to $46,257 from $78,971 in Fiscal 1994.
Cost of sales for Fiscal 1995 was $978,901 (37.6% of gross sales) as
compared to $1,090,011 (40.5% of gross sales) for Fiscal 1994. This decrease
resulted largely from two factors. The first factor was the shift in sales mix
noted above which was further enhanced by shifting the packaging of the
remaining 2.5 gallon and one gallon sales from disposable cardboard boxes to
reusable plastic crates.
Selling, general and administrative expenses were $1,542,160 (60.1% of net
revenues) in Fiscal 1995 as compared to $1,872,906 (69.8% of net revenues) in
Fiscal 1994. $192,903 of this $330,746 total decrease represented a significant
reduction in the sales and marketing staff in an effort to better concentrate on
the current customer base while a further $135,884 resulted from a streamlining
of the administrative staff and expenses. The remaining $1,959 saving was
achieved in the delivery and warehouse operations.
Interest expense increased from $220,223 in Fiscal 1994 to $247,694 in
Fiscal 1995 primarily as a result of the full-year effect on 1994 borrowings.
The $200,000 mortgage note payable under litigation was not eliminated until
year end in Fiscal 1995. Amortization of other assets of $4,876 in Fiscal 1995
and Fiscal 1994 related to the amortization of water rights. The remaining
Fiscal 1994 amortization costs related to deferred charges which were fully
amortized as at October 31, 1994.
In Fiscal 1994, the Company wrote-off $739,707 of costs incurred for the
proposed merger and public offering which were subsequently withdrawn. Other
income of $3,705 in Fiscal 1995 and other expenses of $318,895 in Fiscal 1994
related primarily to non-recurring operating items.
The loss on sale of assets of $11,551 in Fiscal 1995 resulted primarily
from the disposition of the property under litigation while the gain on sale of
assets of $99,794 in Fiscal 1994 resulted primarily from the sale of the Utica
operation.
14
<PAGE>
The net loss for Fiscal 1995 decreased by $1,526,407 from $1,740,675 in
Fiscal 1994 to $214,268 in Fiscal 1995.
Fiscal Year Ended October 31, 1994 Compared to Fiscal Year Ended
October 31, 1993
Net revenues increased $258, 269 (or 10.7%) from $2,424, 098 for the
fiscal year ended October 31, 1993 ("Fiscal 1993") to $2,682,367 for the fiscal
year ended October 31, 1994 ("Fiscal 1994"). This increase was due primarily to
a low price increase in its bottled water instituted in January 1994 and
increased sales of allied products of approximately $52,000 and was partially
offset by sale of the Utica operation which resulted in a decrease in revenues
of approximately $78,000 for Fiscal 1994. The price increase did not result in a
loss of customers. The Company's prices are Generally below those of its
competitors and management therefore believes that it has more price flexibility
than its competitors.
Cost of sales for Fiscal 1994 was $1,090,011 (40.7% of revenues) as
compared to $1,099,695 (45.4% of revenues) for Fiscal 1993 due primarily to
lower overtime salaries, reduced real estate taxes and a reduction in
depreciation in Fiscal 1994 which offset the increases due to the increase in
sales volume. Such cost reductions and the above described price increase
resulted in the lower cost of sales percentage.
Selling, general and administrative expenses were $1,872,906 (69.8% of
revenues) in Fiscal 1994 as compared to $1,754,536 (72.4% of revenues) in Fiscal
1993. Such increase of $118,370 resulted from the hiring of additional sales and
marketing staff and drivers.
Interest expense increased from $192,981 in Fiscal 1993 to $220,223 in
Fiscal 1994. Total debt at October 31 1994 was approximately $435,000 more than
at October 31, 1993. Amortization of other assets increased in Fiscal 1994 to
$281,094 from $216,609 in Fiscal 1993 due to the increased financing costs.
In Fiscal 1994 the Company wrote-off $739,707 of costs incurred for the
proposed merger and public offering which were subsequently withdraw .
Other expenses of $318,895 in Fiscal 1994 and $237,726 in Fiscal 1993
related primarily to non-recurring operating cost.
Net loss for Fiscal 1994 was $1,740,675 as compared to $1,077,449 for
Fiscal 1993.
15
<PAGE>
Fiscal Year Ended October 31, 1993 Compared to Fiscal Year Ended
October 31, 1992
Net sales increased by 140% from $1,009,411 for the fiscal year ended
October 31, 1992 ("Fiscal 1992") to $2,424,098 for the fiscal year ended October
31, 1993 ("Fiscal 1993") . This increase reflects the first full year of
operation of Echo in the bottled water business as compared to operations for
only part of Fiscal 1992.
Cost of sales for Fiscal 1993 was $1,099,695 (46% of revenues) as compared
to $762,821 (76% of revenues) for Fiscal 1992. The improvement in gross margin
was primarily due to increased sales of five gallon bottles, which have higher
gross margins than the smaller size containers.
Selling, general and administrative expenses were $1,754,536 for Fiscal
1993 as compared to $1,382,702 for Fiscal 1992. As a percentage of revenues,
selling, general and administrative expenses decreased to 72% for Fiscal 1993
from 137% in Fiscal 1992. This increased operating efficiency was due primarily
to Echo's consolidating of its administrative offices and distribution
facilities, and substantial employee layoffs in connection therewith, following
its acquisition of Berkshire Springs of NJ, Inc. in July 1992.
Interest expense decreased from $267,271 in Fiscal 1992 to $192,981 in
Fiscal 1993 as a result of the repayment of current indebtedness and conversion
of debt to equity in Fiscal 1993. Total indebtedness at October 31, 1993 was
approximately $2,000,000 less than at October 31, 1992. Amortization of other
assets increased in Fiscal 1993 to $216,609 from $71,622 in Fiscal 1992 due to
the increased debenture costs and the amortization for the full year of certain
water rights and a non-compete agreement, both of which had only minor
amortization in Fiscal 1992.
Net write-downs of assets consisting of adjustments made to the value of
certain assets and intangibles acquired during the fiscal year was $518,598 in
Fiscal 1992.
Other expenses of $237,726 in Fiscal 1993 related primarily to
non-recurring operating costs.
Net loss for Fiscal 1993 was $1,077,449 as compared to $2,011,191 for
Fiscal 1992.
16
<PAGE>
Liquidity and Capital Resources
The Company had an accumulated deficit of $8,150,163 at October 31,
1994 and $8,364,431 at October 31, 1995. The Company has experienced substantial
cash flow problems and a lack of liquidity that have had a material adverse
effect on its operations. In addition, the Company has incurred substantial
short-term debt to fund operations over the last several years. The Company
commenced its bottled water business in December 1991 and its revenues have
increased from $1,009,411 for Fiscal 1992 to $2,682,367 for Fiscal 1994,
although there was a small (4%) decrease to $2,567,209 for Fiscal 1995.
Since its inception, the Company`s primary sources of liquidity have
been the proceeds of its initial public offering, cash generated from sales,
issuance of debentures, and borrowing from its officers.
During the past three fiscal years, the Company had negative cash flow
from operations of $139,699, $40,045 and $321,084, respectively. Investing
activities used cash of $48,181 in Fiscal 1995, $267,602 in Fiscal 1994 and
$169,089 in Fiscal 1993 primarily for the acquisition of property and equipment.
The Company has financed its operations and investing activities during these
years primarily through the issuance of installment debt.
At October 31, 1995, the Company had a working capital deficiency of
$4,233,375. Short-term credit sources are limited to trade credit on purchases
and services. The report issued by the Company's accountants that accompanies
the Company`s consolidated financial statements for the period ended October 31,
1995 states that there is a substantial doubt about the Company`s ability to
continue as a going concern.
Considerations which tend to mitigate the question of going concern
include management`s successful efforts in raising funds through private
placements, the ability to renegotiate and restructure long-term financing with
major creditors, past and present efforts to convert debt to equity and the
ability to acquire, restructure and develop the bottled water business which it
believes will be able to achieve profitable operations. The Company believes
that these factors provide meaningful evidence as to the Company's ability to
continue in operation for the next fiscal year and support the going concern
presentation in the accompanying consolidated financial statements in favor of
the liquidation basis. There can be no assurance, however, that management will
continue to be able to raise sufficient capital or convert existing debt to
equity or achieve profitable operations going forward.
17
<PAGE>
The Company has no plans or commitments for capital expenditures during
the next twelve months other than the ordinary equipment purchases which are
expected to be funded with additional instalment debt.
The Company`s business is subject to seasonal fluctuation, with summer
being the busiest season and winter the slowest. To date, seasonality has not
had any material effect on the Company`s financial condition or results of
operations.
Item 8. Financial Statements and Supplementary Data
(See Financial Statements included elsewhere herein)
Item 9. Disagreements of Accounting and Financial Disclosure
There were no disagreements on any manner of accounting principles or
practices of financial statement disclosure during the 24 month period prior to
the date of the most recent financial statements included herein.
PART III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers and Directors
The following individual is the present executive officer and director
of Echo. Each director will hold office until the next annual meeting of the
stockholders and until his successor is elected and qualified. Officers are
elected by, and serve at the pleasure of the Board of Directors.
Name Age Position
Officers and Directors
Michael S. Rakusin............. 40 President, Treasurer and
Director
Michael S. Rakusin has been the Treasurer and a Director of Echo since
1987. He was appointed Secretary in June 1987; Executive Vice President in
November 1988; and President in April 1991. From 1984 to March 1987, Mr. Rakusin
was self-employed, rendering financial and accounting services. From 1976 to
1984, he was
18
<PAGE>
employed as an accountant by J.M. Stern & Co., Certified Public
Accountants. Mr. Rakusin is a Certified Public Accountant in the
State of New York. He earned a Bachelor of Business Administration
Degree from the City University of New York in 1976.
Item 11. Executive Compensation
The following table provides certain summary information concerning the
compensation paid or accrued by Echo and its subsidiaries to or on behalf of
Echo's Chief Executive Officer and the other named executive officers of Echo
for services rendered in all capacities to Echo and its subsidiaries for the
fiscal years ended October 31, 1993, 1994 and 1995.
Summary Compensation Table
Name and Principal Annual Compensation
Position
Other
Annual
Compen-
Year Salary Bonus sation
Michael S. Rakusin 1995 $80,300 - -
President 1994 $89,117 - -(1)
1993 $60,000 - -
Edward Metzger 1995 $82,000 - -
Vice President 1994 $104,000 - -
1993 $104,000 - -
Name and Principal Long-Term Compensation
Position Awards Payouts
Restricted
Stock Options/
Year Award(s) SARs
Michael S. Rakusin 1995 - -
President 1994 - -
1993 - -
Edward Metzger 1995 - -
1994 - -
1993 - -
19
<PAGE>
Name and Principal Long-Term Compensation
Position Awards Payouts
All
Other
LTIP Compen-
Year Payouts sation
Michael S. Rakusin 1995 - -
President 1994 - -
1993 - -
Edward Metzger 1995 - -
Vice President 1994 - -
1993 - -
(1) In November 1993, the Company issued 2,500,000 shares of its common
stock valued at $25,000 ($0.01 per share) to Mr. Rakusin in
consideration for prior services rendered by Mr. Rakusin to the
Company.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth as of May 31, 1996 the number of shares
of Common Stock of Echo and the percentage of that class owned beneficially,
within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act
of 1934, as amended, and the percentage of Echo's voting power owned by (I) all
stockholders known by Echo to beneficially own more than five percent of Echo's
Common Stock; (ii) each director of Echo; and (iii) all directors and officers
as a group. All shares set forth in the following table are entitled to one vote
per share and the named beneficial owners have sole voting and investment power.
Each percentage set forth in the following table assumes the exercise of all
stock options exercisable by the named individual or group as of May 31, 1996 or
within 60 days thereafter.
Name and Address Number of Shares
of Beneficial Owner Owned Beneficially Percentage
Michael S. Rakusin 5,693,980(1) 13.5%
Building 100-A, Hackensack Avenue
Kearny, New Jersey 07032
ESWC, Inc. 5,256,064 (2) 12.7%
149 Main Street
Cooperstown, New York 12236
All directors and officers 5,693,980 13.5%
as a group (three persons)
- ---------------------------
20
<PAGE>
(1) Includes 693,980 shares of common stock issuable upon exercise of
warrants, exercisable at $.25 per share and expiring on October 31,
1996.
(2) The stockholders of ESWC, Inc. are Mr. Grey (a former officer
and director of the Company), Richard Schuttenhelm, Lorenzo
Ardito and Kenneth and Martha Harrington. Pursuant to an oral
agreement, the shares owned by ESWC, Inc. are voted based upon
the decision of the holders of 90% of the outstanding shares
of ESWC, Inc.
Item 13. Certain Transactions and Related Transactions
NONE
PART IV
Item 14. Exhibits. Financial Statements.
Schedules and Reports of Form 8-K
(A)(1) The following financial statements are included in Part II, Item 8:
Report of Independent Certified Public Accountants.
Consolidated Financial Statements -
Consolidated Balance Sheet for October 31, 1994 and 1995.
Consolidated Statement of Operations for the Years Ended
October 31, 1995, 1994 and 1993
Consolidated Statement of Shareholder's Equity (Deficiency) for the
Years Ended October 31, 1995, 1994 and 1993
Consolidated Statement of Cash Flows for the Years Ended
October 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
Schedules are omitted for the reason that they are not required, are
not applicable, or the required information is shown on the financial statements
or notes thereto.
(B) Reports on Form 8-K - Not applicable.
(C) Exhibits. The following exhibits are filed as part of the Company's
report. Where such filing is made by incorporation by reference (I/B/R) to a
previously filed statement or report, such statement or report is identified in
parenthesis.
21
<PAGE>
Official Exhibit
Number
Description Page Number
[3] (a) (1) Certificate of Incorporation I/B/R
(Filed with Form S-18)
[3] (a) (2) Certificate of Amendment to I/B/R
Certificate of Incorporation
(Filed with Form S-18)
[3] (b) By-Laws I/B/R
(Filed with Form S-18)
22
<PAGE>
Board of Directors and Shareholders
Echo Springs Water Co., Inc.
Independent Auditors' Report
We have audited the accompanying consolidated balance sheet of Echo
Springs Water Co., Inc. and subsidiaries as at October 31, 1995 and 1994 and the
related consolidated statements of operations, shareholders' equity (deficiency)
and cash flows for each of the three years in the period ended October 31, 1995.
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 aforementioned consolidated financial statements
present fairly, in all material respects, the financial position of Echo Springs
Water Co., Inc. and subsidiaries as at October 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1995 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficiency and a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 13. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
ROBBINS, GREENE, HOROWITZ, LESTER & CO., LLP
New York, New York
May 10, 1996, except
Note 16 which is
dated June 5, 1996
23
<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED BALANCE SHEET
AS AT OCTOBER 31,
1995
ASSETS
Current Assets:
Cash $ 57,224
Accounts receivable - net of
allowance for doubtful accounts
of $35,000 in 1995 and $27,000 in 1994 279,128
Notes receivable, current portion 22,380
Inventories 39,909
Prepaid expenses 27,406
--------
Total Current Assets 426,047
Notes receivable, net of current portion 157,857
Property, plant and equipment - net 1,395,090
Other assets 219,704
TOTAL ASSETS $2,198,698
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of debt $ 830,544
Debentures 1,325,000
Accounts payable and accrued expenses 2,242,578
Customer deposits 211,900
Unearned revenues 49,400
---------
Total Current Liabilities 4,659,422
Installment debt 5,577
Total Liabilities 4,664,999
Shareholders' Equity (Deficiency):
Common stock, $.0001 par,
75,000,000 shares authorized; issued
and outstanding 41,499,910 shares in
1995 and 1994 4,150
Additional paid-in capital 5,893,980
Accumulated deficit (8,364,431)
---------
Total Shareholders' Equity
(Deficiency) (2,466,301)
TOTAL LIABILITIES AND SHARE-
HOLDERS' EQUITY (DEFICIENCY) $2,198,698
See accompanying notes to consolidated financial statements.
24
<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED BALANCE SHEET
AS AT OCTOBER 31,
1994
ASSETS
Current Assets: $ 247,824
Cash
Accounts receivable - net of
allowance for doubtful accounts
of $35,000 in 1995 and $27,000 in 1994 275,296
Notes receivable, current portion 47,285
Prepaid expenses 15,763
613,633
Notes receivable, net of current portion 176,114
Property, plant and equipment - net 1,729,249
Other assets 225,092
TOTAL ASSETS $2,744,088
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of debt $ 984,893
Debentures 1,325,000
Accounts payable and accrued expenses 2,377,980
Customer deposits 193,000
Unearned revenues 61,300
---------
Total Current Liabilities 4,942,173
Installment debt 53,948
Total Liabilities 4,996,121
Shareholders' Equity (Deficiency):
Common stock, $.0001 par,
75,000,000 shares authorized; issued
and outstanding 41,499,910 shares in
1995 and 1994 4,150
Additional paid-in capital 5,893,980
Accumulated deficit (8,150,163)
---------
Total Shareholders' Equity
(Deficiency) (2,252,033)
TOTAL LIABILITIES AND SHARE-
HOLDERS' EQUITY (DEFICIENCY) $2,744,088
See accompanying notes to consolidated financial statements.
25
<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31,
1995
Revenues:
Gross sales $ 2,606,488
Credits and allowances (67,241)
Freight out (50,745)
Other income 78,707
----------
2,567,209
Costs and Expenses:
Cost of sales 978,901
Selling, general and
administrative 1,542,160
Interest 247,694
Amortization of other
assets 4,876
Write-off of deferred
merger and public offering
costs
Other expenses (income) - net (3,705)
Loss (gain) on sale
of assets 11,551
Total Costs and
Expenses 2,781,477
Net loss $ (214,268)
==========
Net loss per share $ (.01)
==========
Weighted average shares
outstanding 41,499,910
See accompanying notes to consolidated financial statements.
26
<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31,
1994 1993
---- ----
Revenues:
Gross sales $ 2,691,541 $ 2,511,970
Credits and allowances (61,073) (61,781)
Freight out (51,309) (61,797)
Other income 103,208 35,706
---------- ----------
2,682,367 2,424,098
---------- ----------
Costs and Expenses:
Cost of sales 1,090,011 1,099,695
Selling, general and
administrative 1,872,906 1,754,536
Interest 220,223 192,981
Amortization of other
assets 281,094 216,609
Write-off of deferred
merger and public offering
costs 739,707
Other expenses (income) - net 318,895 237,726
Loss (gain) on sale
of assets (99,794)
Total Costs and
Expenses 4,423,042 3,501,547
---------- ----------
Net loss $(1,740,675) $(1,077,449)
========== ==========
Net loss per share $ (.04) $ (.09)
========== ==========
Weighted average shares
outstanding 41,466,577 12,075,447
========== ==========
See accompanying notes to consolidated financial statements.
27
<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31,
1995
Operating Activities:
Net loss $(214,268)
Adjustments to
reconcile net loss
to net cash used
by operating
activities:
Depreciation and
amortization 139,245
Loss (gain) on sale
of assets 11,551
Stock issued for
services and
interest
Provision for
doubtful accounts 8,000
Changes in assets
and liabilities:
Accounts receivable (11,832)
Inventories 7,376
Prepaid expenses (11,643)
Other assets 512
Accounts payable
and accrued expenses (75,640)
Customer deposits 18,900
Unearned revenues (11,900)
--------
Net Cash Used
By Operating
Activities (139,699)
Investing Activities:
Capital expenditures (85,210)
Collections on notes
receivable 23,342
Proceeds from sale of
assets 13,687
Net Cash Used By
Investing
Activities (48,181)
Financing Activities:
Proceeds from issuance
of common stock
Deferred financing costs
Increase in installment
debt 124,336
Repayment of debt (127,056)
Proceeds from debentures
Net Cash Provided
(Used) By Financing
Activities (2,720)
Net increase (decrease)
in cash (190,600)
Cash - beginning 247,824
CASH - ENDING $ 57,224
See accompanying notes to consolidated financial statements.
28
<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31,
1994 1993
---- ----
Operating Activities: Net loss ($1,740,675) $(1,007,449)
Adjustments to
reconcile net loss
to net cash used
by operating
activities:
Depreciation and
amortization 395,890 455,934
Loss (gain) on sale
of assets (99,794)
Stock issued for
services and
interest 27,000 99,699
Provision for
doubtful accounts (3,000) (70,000)
Changes in assets
and liabilities:
Accounts receivable 6,568 (28,659)
Inventories 63,260 62,702
Prepaid expenses 59,994 (59,120)
Other assets (6,309) (37,560)
Accounts payable
and accrued expenses 1,274,908 305,911
Customer deposits (15,387) 46,958
Unearned revenues (2,500) (19,500)
---------- ----------
Net Cash Used
By Operating
Activities (40,045) (321,084)
---------- ----------
Investing Activities:
Capital expenditures (290,273) (209,089)
Collections on notes
receivable 21,421
Proceeds from sale of
assets 1,250 40,000
---------- ----------
Net Cash Used By
Investing
Activities (267,602) (169,089)
---------- ----------
Financing Activities:
Proceeds from issuance
of common stock 81,000
Deferred financing costs (60,000) (140,764)
Increase in installment
debt 600,022
Repayment of debt (195,216) (549,644)
Proceeds from debentures 1,240,000
---------- ----------
Net Cash Provided
(Used) By Financing
Activities 344,806 630,592
---------- ----------
Net increase (decrease)
in cash 37,159 140,419
Cash - beginning 210,665 70,246
---------- ----------
CASH - ENDING $ 247,824 $ 210,665
========== ==========
See accompanying notes to consolidated financial statements.
29
<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
Common Stock
Shares Amount
Balance at October
31, 1992 9,645,950 $ 965
Net loss
Shares issued in
connection with
E Debentures 4,960,000 496
Shares issued for
conversion of
B, C and D
Debentures 11,384,000 1,138
Return of shares by
officer (3,087,945) (309)
Reissuance to officer
under agreement 19,905 2
Shares issued for
settlement of amounts
due shareholders 5,420,000 542
Issuance of stock 648,000 65
Shares issued for
prior borrowing 340,000 34
Shares issued for
consulting
services 2,500,000 250
Conversion of
mortgage to
stock 5,200,000 520
Conversion of debt 100,000 10
Conversion of
accrued interest:
Debentures 1,170,000 117
Mortgage 500,000 50
---------- -----
Balance at October
31, 1993 38,799,910 3,880
Net loss
Shares issued for
prior debt 200,000 20
Shares issued to
officer under
agreement 2,500,000 250
---------- -----
Balance at October 31,
1994 41,499,910 4,150
Net loss
Balance at October 31,
1995 41,499,910 $4,150
========== =====
See accompanying notes to consolidated financial statements.
30
<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
Paid-In Accumulated
Capital Deficit
Balance at October
31, 1992 $2,514,070 $(5,332,039)
Net loss (1,077,449)
Shares issued in
connection with
E Debentures 49,104
Shares issued for
conversion of
B, C and D
Debentures 1,309,362
Return of shares by
officer 309
Reissuance to officer
under agreement 197
Shares issued for
settlement of amounts
due shareholders 159,458
Issuance of stock 80,935
Shares issued for
prior borrowing 42,466
Shares issued for
consulting
services 24,750
Conversion of
mortgage to
stock 1,299,480
Conversion of debt 71,990
Conversion of
accrued interest:
Debentures 244,036
Mortgage 71,093
Balance at October
31, 1993 5,867,250 (6,409,488)
Net loss (1,740,675)
Shares issued for
prior debt 1,980
Shares issued to
officer under
agreement 24,750
Balance at October 31,
1994 5,893,980 (8,150,163)
Net loss (214,268)
Balance at October 31,
1995 $5,893,980 $(8,364,431)
===================== ==========
See accompanying notes to consolidated financial statements.
31
<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
Total
Shareholders'
Equity
(Deficiency)
Balance at October
31, 1992 $(2,817,004)
Net loss (1,077,449)
Shares issued in
connection with
E Debentures 49,600
Shares issued for
conversion of
B, C and D
Debentures 1,310,500
Return of shares by
officer
Reissuance to officer
under agreement 199
Shares issued for
settlement of amounts
due shareholders 160,000
Issuance of stock 81,000
Shares issued for
prior borrowing 42,500
Shares issued for
consulting
services 25,000
Conversion of
mortgage to
stock 1,300,000
Conversion of debt 72,000
Conversion of
accrued interest:
Debentures 244,153
Mortgage 71,143
Balance at October
31, 1993 (538,358)
Net loss (1,740,675)
Shares issued for
prior debt 2,000
Shares issued to
officer under
agreement 25,000
Balance at October 31,
1994 (2,252,033)
Net loss (214,268)
Balance at October 31,
1995 $(2,466,301)
==========
See accompanying notes to consolidated financial statements.
32
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Echo Springs Water Co., Inc. (formerly Grudge Music Group,
Inc.) ("the Company"), through its subsidiaries, is
engaged principally in the distribution of bottled water
and allied products. The Company bottles water from its
own natural springs in Burlington, NY for direct
distribution and sale to business and residential
customers as well as for wholesale to supermarkets and
other bottled water distributors.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:
Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Revenue Recognition
Revenue from equipment rental is recognized based on the period
in which it is earned and unearned revenue is recorded for the
portion billed in advance. Revenues from product sales are
recognized upon shipment to the wholesaler or delivery to the
customer, as applicable.
Inventories
Inventories consist of items held for sale or rental, including
water coolers and bottles which have not yet been put into
service, and are valued at the lower of cost or market with cost
being determined on the basis of the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Additions,
renewals and improvements are capitalized. Asset and accumulated
depreciation accounts are relieved for dispositions with any
resulting gain or loss reflected in earnings. Maintenance and
repairs are charged to expense as incurred. Maintenance and
repairs expense amounted to $39,716 in 1995, $57,667 in 1994 and
$67,266 in 1993. Depreciation of plant and equipment is provided
by the straight-line method over the estimated economic useful
lives of the various asset groups as follows:
Buildings and improvements 5-40 years
Machinery and equipment 5-20 years
Furniture and fixtures 7 years
Vehicles 5 years
Water coolers, bottles
and brewers 4-10 years
33
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During 1994, the Company reviewed the useful lives assigned to
various assets and determined that such lives were not providing
an accurate measure of the expected use of the assets and,
therefore, extended the estimated useful lives of most assets.
As a result of this change in estimate, the Company reduced
depreciation expense by approximately $147,000 for the year
ended October 31, 1994.
Other Assets
Financing costs are capitalized when incurred and amortized over
the term of the related indebtedness. Any unamortized costs are
charged to equity at the time of conversion of the related debt
to common stock. Deferred consulting costs and intangible assets
are amortized by the straight-line method for the various asset
groups as follows:
Water rights 40 years
Non-compete agreements 2 years
Deferred consulting costs 2 years
Income Taxes
In February 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes." Adoption of SFAS 109 had no
impact on the financial statements of the Company as all
deferred tax benefits from the use of net operating loss
carryforwards are offset by valuation allowances.
Loss Per Common and Equivalent Share Loss per share is based
upon the weighted average number of shares outstanding during
each period. There were 41,499,910, 41,466,577 and 12,075,447
weighted average shares of common stock outstanding for the
years 1995, 1994 and 1993, respectively.
Supplemental loss per share assuming the conversion of
convertible debentures as of the date of issuance was $(.01) for
1995, $(.04) for 1994 and $(.04) for 1993.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. There
were no cash equivalents at October 31, 1995 or 1994.
NOTE 2 - SALE OF UTICA OPERATION
In efforts to consolidate operations, the Company sold its Utica
operation in January 1994. As part of the sales agreement, the
new operation will purchase bottled water from the Company for
three years. The Company realized a gain on the sale of the
operation of $104,533 and as part of the selling price received
notes of $225,000 payable at $3,180 per month, including
interest at 6%, through March 2001. Sales of the Utica operation
included in revenues in 1994 and 1993 were $15,675 and $118,049,
respectively. Sales of bottled water to the new company in 1995
and 1994 amounted to $39,924 and $24,196, respectively.
34
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVENTORIES
Inventories consist of the following:
October 31,
1995 1994
---- ----
Bottles $ 2,094 $ 6,606
Product held
for sale 18,298 22,742
Supplies 19,517 17,937
------ ------
$39,909 $47,285
====== ======
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
October 31,
1995 1994
---- ----
Land $ 150,000 $ 150,000
Buildings and
improvements 362,298 355,350
Water coolers,
bottles and
brewers 864,068 801,183
Machinery and
equipment 373,588 368,711
Vehicles 60,850 50,350
Furniture and
fixtures 124,862 124,862
--------- ---------
1,935,666 1,850,456
Less: accumulated
depreciation and
amortization 540,576 406,207
--------- ---------
NET 1,395,090 1,444,249
Assets under
litigation 285,000
--------- ---------
$1,395,090 $1,729,249
========= =========
NOTE 5 - OTHER ASSETS
Other assets are comprised of the following:
October 31,
1995 1994
---- ----
Water rights $205,000 $205,000
Accumulated
amortization 28,653 23,777
------- -------
Net deferred
charges 176,347 181,223
Security
deposits 43,357 43,869
------- -------
$219,704 $225,092
======= =======
Deferred charges of $576,521 for financing costs, non-compete agreement and
consulting costs were fully amortized at October 31, 1994 and written off in
1995.
35
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - CAPITAL AND OPERATING LEASES
Capital Leases
The Company leases machinery and equipment under capital leases
that are included under the caption "Property, Plant and
Equipment" in the accompanying balance sheet at October 31, 1995
and 1994 as follows:
1995 1994
---- ----
Machinery and equipment $50,000 $50,000
Accumulated depreciation 13,707 11,462
------ ------
Total $36,293 $38,538
====== ======
Operating Leases
The Company leases office and warehouse facilities under an
operating lease expiring March 31, 1998. Rental expense for
office and warehouse facilities amounted to $65,943 in 1995,
$68,943 in 1994 and $89,148 in 1993.
In addition the Company leases vehicles and various office
equipment under operating leases that extend until August 2004.
Rental expenses under equipment leases amounted to $150,575 in
1995, $103,278 in 1994 and $25,796 in 1993.
The Company entered into a 20-year lease with an unaffiliated
landlord commencing September 1, 1994 for 41.686 acres of land
located in the town of Edmeston, State of New York, on which are
located two developed springs. The springs have a combined
capacity of approximately 52,000,000 gallons of water per year.
The Company applied for and received approval from the New York
State Department of Health to operate the springs in 1995. Based
on the amended agreement effective July 1, 1995, rent for the
property is $.005 per gallon of water extracted for the first
five years (with minimum rent of $300 per week) and $.01 per
gallon for the following fifteen years (with minimum rent of
$600 per week). The Company is also required to pay an
additional $21,000 during the first year with a deposit of
$5,000 and the balance in 12 equal installments. The Company has
the right to build and operate a processing plant (which will
become the property of the landlord) on the property in which
case the rent will increase to $.015 per gallon extracted. The
Company also has the right to terminate the lease without
penalty after payment of rent aggregating $100,000 plus the
$21,000 first year fee, and, in the event it has constructed a
processing plant, the right to renew the lease for an additional
20-year term on terms to be agreed upon by the parties. The
Company intends, as its needs require, to utilize the water from
these springs in its business. The water can be utilized without
construction of a plant and the Company has no immediate plans
to build a plant on this property. Rent expense under this lease
was $9,330 and $6,080 for the years ended October 31, 1995 and
1994, respectively.
36
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - CAPITAL AND OPERATING LEASES (CONTINUED)
Minimum future lease payments are:
Capital
Fiscal year ending Leases
1996 $8,869
1997
1998
1999
2000
2001 and thereafter
Total minimum payments 8,869
Less: amount
representing interest 398
Present value of
minimum payments $8,471
Operating Leases
Fiscal year ending Office Equipment
------------------ ------ ---------
1996 $ 65,943 $61,836
1997 65,943 50,580
1988 27,476 24,432
1999 24,432
2000 17,306
2001 and thereafter
Total minimum payments $159,362 $178,586
======= =======
Less: amount
representing interest
Present value of
minimum payments
Operating Leases
Fiscal year ending Land
------------------ ----
1996 $ 27,600
1997 15,600
1988 15,600
1999 15,600
2000 19,200
2001 and thereafter 460,800
-------
Total minimum payments $554,400
=======
Less: amount
representing interest
Present value of
minimum payments
37
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTE 7 - INDEBTEDNESS
1995
Installment Debt
Secured time notes, with interest at
7.4% and 9.0%, payable in 24 and 36
monthly installments of $623 and
$954 including interest. Final
installment due April 1997. 15,119
Secured time notes, at 12.0%,
payable in 36 monthly installments
of $6,072 including interest (*) 57,509
Advance payable to stockholder
with interest at 12%. 60,000
Capitalized lease obligations 8,471
Notes payable with interest at 18%
due December 31, 1995 (c) (*) 300,022
Notes payable with interest at 7%
due December 31, 1995 (b) (*) 275,000
Mortgage note payable, with 8.0% interest payable quarterly,
principal due November 1993 under litigation (See note 11)
Mortgage note payable, with 8.0%
interest payable quarterly,
principal due December 1993 (a) (*) 120,000
-------
TOTAL DEBT 836,111
CURRENT PORTION 830,544
NET LONG-TERM PORTION $ 5,577
=======
* Obligations are currently in default as to principal and
interest (Note 16).
38
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTE 7 - INDEBTEDNESS (continued)
1994
Installment Debt
Secured time notes, with interest at
7.4% and 9.0%, payable in 24 and 36
monthly installments of $623 and
$954 including interest. Final
installment due April 1997. $ 27,839
Secured time notes, at 12.0%,
payable in 36 monthly installments
of $6,072 including interest (*) 94,493
Advance payable to stockholder with interest at 12%.
Capitalized lease obligations 21,487
Notes payable with interest at 18%
due December 31, 1995 (c) (*) 300,022
Notes payable with interest at 7%
due December 31, 1995 (b) (*) 275,000
Mortgage note payable, with 8.0% interest payable quarterly,
principal due November 1993 under litigation (See note 11)
200,000
Mortgage note payable, with 8.0%
interest payable quarterly,
principal due December 1993 (a) (*) 120,000
-------
TOTAL DEBT 1,038,841
CURRENT PORTION 984,893
NET LONG-TERM PORTION $ 53,948
=========
* Obligations are currently in default as to principal and
interest (Note 16).
39
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INDEBTEDNESS (CONTINUED)
(a) During 1993, $1,300,000 of the mortgage was converted to
5,200,000 shares of common stock on the basis of four shares for
each dollar of debt and $80,000 was repaid. In addition, 500,000
shares of common stock were issued in settlement of $71,143 of
accrued interest and any additional unpaid interest. The
mortgagor has agreed to extend the maturity until December 31,
1995.
(b) Echo Springs Water Company, Inc., a related company,
borrowed $300,000 under a promissory note dated August 24, 1994.
The loan bears interest at 7% and principal and interest are
payable December 31, 1995. As additional consideration for the
loan, Echo Springs Water Company, Inc. was to issue 25,000
shares of its common stock to the note holder. In October 1994,
$25,000 of the borrowing was repaid. The proceeds of the
borrowings were lent to the Company under the same terms as with
the note holder.
(c) Holders of notes totalling $200,000 agreed to extend the
maturity date in exchange for shares of common stock of Echo
Springs Water Company, Inc. Shares which were to be issued equal
20% of the amount of the note extended divided by $3.00 per
share for an aggregate 13,333 shares.
Shares of Echo Springs Water Company, Inc. to be issued under
(b) and (c) above were not issued and there was an offer made
to rescind the transaction since the contemplated offering
(Note 15) was not consumated.
The secured time notes and mortgages are secured by the related
property, plant and equipment of the Company. The Company has
further provided security interests to the lenders in
inventories, accounts receivable and substantially all of the
assets of the Company.
1995 1994
---- ----
Debentures
8% Series D convertible
subordinated debentures
maturing December 31, 1995 * $ 85,000 $ 85,000
10% Series E debentures
maturing December 31, 1995 * 1,240,000 1,240,000
--------- ---------
TOTAL $1,325,000 $1,325,000
========= =========
* Obligations are currently in default as to principal and
interest (Note 16).
The series E debentures consist of 1,240 units, with each unit
consisting of a $1,000 series E debenture and 4,000 shares of
common stock which shares were issued during fiscal 1993.
The convertible subordinated debentures are convertible into
common stock at $.50 per share.
40
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
October 31,
1995 1994
Trade payables $ 649,983 $ 584,844
Accrued expenses 573,507 813,648
Wages payable 41,263 48,595
Interest payable 451,373 293,879
Due to officer 88,300
Payroll taxes payable 494,670 519,976
Sales taxes payable 31,782 28,738
--------- ---------
$2,242,578 $2,377,980
========= =========
The Company is presently negotiating for settlement of current
and prior years' unpaid payroll taxes. No provision has been
made for any possible interest and penalties thereon, as
management is of the opinion that such amounts, if any, will not
be material.
NOTE 9 - COMMON STOCK
At October 31, 1995, the Company has warrants outstanding that
allow the holders to purchase shares of common stock as follows:
Group Shares Price Expiration Date
-----
Investment banker 100,000 $.81 March 1997
Officer 693,980 .25 October 1996
Series B debentures 460,500 .25 October 1996
Others 42,500 .25 October 1996
The Company borrowed various amounts from Michael S. Rakusin, an
officer, over the years, and settled an aggregate of $693,980
(including accrued interest of $37,475) indebtedness to Mr.
Rakusin by the issuance to him of an aggregate of 5,551,840
shares of common stock of the Company, including 1,466,320
shares for debt and interest in fiscal 1991, on the basis of 8
shares for each $1.00 indebtedness as well as the aforementioned
warrants to purchase 693,980 shares of common stock at a price
of $.50 per share, which warrants were to expire October 31,
1993 and were extended an additional year in 1993.
In 1994 the warrants expiring October 1994 were extended an
additional two years and the exercise price reduced to $.25 per
share.
In January 1993, Mr. Rakusin contributed 3,087,945 common shares
to the Company to satisfy the terms of an agreement reached with
the management.
41
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - COMMON STOCK (CONTINUED)
During 1993, the Company issued additional common shares upon
the increase in the authorized shares of the Company to
75,000,000 shares as follows:
# of Shares
Conversion of debentures 11,384,000
Conversion of interest on debentures 1,170,000
Conversion of ESWC mortgage (Note 8) 5,200,000
Conversion of interest on mortgage (Note 8) 500,000
Issued in connection with issuance
of Series E debentures (Note 8) 4,960,000
Vendor settlement 100,000
Amounts due to shareholders 5,420,000
Reissuance to officer under agreement
at $.01 per share 19,905
Shares sold during year at $.125 per share 648,000
Shares issued for services at $.01 per share 2,500,000
Shares issued for prior borrowings at
$.125 per share 340,000
Total 32,241,905
Amounts due to shareholders at October 31, 1992 represented the
shares to be issued in connection with various transactions
during fiscal 1992 for which the shares could not be issued due
to the limitation caused by insufficient authorized shares to
consummate these transactions. Mr. Rakusin loaned shares to the
Company to complete certain of the transactions, and the balance
of the shares were shares needed to complete the respective
transactions. The following shares were issued in 1993 upon the
increase in the authorized number of shares.
Per Share Payable
# of Shares Value Amount
ESWC acquisition 2,000,000 $.01 $20,000
Rich Bach 2,500,000 .01 25,000
Berkshire acquisition 670,000 .125 83,750
Vendor settlement 250,000 .125 31,250
------ -------
5,420,000 $160,000
========= =======
During fiscal 1993, 3,684,000 shares were issued upon conversion
of Series B ($.125 per share) debentures, $127,153 of accrued
interest was waived and 460,500 warrants were issued.
Additionally, 7,500,000 shares and 200,000 shares were issued
upon conversion of the Series C ($.10 per share) and D ($.50 per
share) debentures, respectively, and 1,170,000 shares were
issued for accrued interest of $117,000.
NOTE 10- INCOME TAXES
The Company files a consolidated federal income tax return with
its subsidiaries. As of October 31, 1995, the Company had net
operating loss carryforwards in excess of $8,000,000 for
financial as well as State and Federal tax purposes which expire
in varying amounts beginning in 2004.
42
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11- LITIGATION
In November 1991, the Company, through a wholly-owned
subsidiary, purchased substantially all of the net operating
assets of HSF which was formerly engaged in the packaging and
distribution of natural spring water. In May 1992, prior to
commencing production from the HSF spring, the Company
discovered through routine testing that the spring appeared to
be contaminated. The Company accordingly suspended all scheduled
interest payments on the mortgage note to HSF. Based upon its
investigation, the Company believes that the HSF spring is not
commercially viable. Inasmuch as the spring was not operating
when it was acquired, there was no loss of customers. The assets
had been written down to management's estimate of the net
realizable value of the underlying property. In September 1992,
HSF commenced an action against the Company to collect payment
due it under the mortgage agreement. The Company filed a
response and counterclaim against HSF. HSF's motion for summary
judgement was denied in an order dated March 30, 1994. The
litigation was settled in 1995 with the Company returning the
property and being released from the related debt. A loss of
$12,738 was recorded for the year ended October 31, 1995 as a
result of the settlement.
In the first quarter of 1993 a lessor brought action against
Berkshire Springs of NJ, Inc., ("Berkshire") and the Company in
connection with the lease of certain EDP systems and equipment.
The lessor was seeking to collect back lease and maintenance
payments owed by Berkshire in excess of $140,000. The Company
asserts that it assumed no interest in this asset or the related
liability in connection with its purchase of Berkshire. Such
items were specifically excluded from the purchase. This suit
was settled in May 1993 requiring the Company to pay $22,500.
In an adversary proceeding pending against the Company in a
Chapter 7 bankruptcy case in the U.S. Bankruptcy Court re:
National Mountain Spring Water Corp. ("Debtor"), the Chapter 7
Trustee sought judgement for certain damages in an unspecified
amount for debts alleged to have been incurred by the Debtor
estate during the four-month period in 1992 that the Company was
operating the Debtor's business pursuant to a management
agreement. The Trustee's complaint also alleged that certain
assets of the Debtor were converted by the Company and sought
compensatory and punitive damages in an unspecified amount for
the alleged conversion, as well as damages in an amount not less
than $155,000, which represents the difference between the
amount for which the Company was formerly willing to purchase
the Debtor's business and the amount for which the business was
ultimately sold to a third party. In October 1994, the parties
agreed to a settlement pursuant to which the Company paid the
Trustee the sum of $60,000 in six equal monthly payments,
commencing November, 1994 in full settlement of the action. Such
agreement was approved by the bankruptcy court in May 1995. In
such adversary proceeding, the Company also settled a claim
regarding its alleged responsibility for the payment of one of
the Debtor's accounts payable. Such proceeding was settled for
$40,000, all of which has been paid, and such settlement was
approved by the bankruptcy court.
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ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11- LITIGATION (CONTINUED)
In March and April 1994, Kenneth T. Williams commenced actions
in the Supreme Court of the State of New York, County of Otsego
against the Company and certain of its affiliates. The Company
and its affiliates became aware of such litigation and accepted
service in June 1994. The actions involve a dispute concerning
title to the Company's land and facility located in Burlington,
New York ("Property"); the plaintiff seeks a one-half interest
in the Property and $17,000,000 in damages. The actions are
primarily based upon the same factual allegations made in prior
actions instituted in the same court in 1991 (which is still
pending) between the plaintiff and Frank Grey, an officer,
director and shareholder of the Company, and the prior owners of
the Property regarding the termination of a joint venture
arrangement between the plaintiff and Mr. Grey and the alleged
breach of a purported agreement regarding the sale of the
Property between the owners of the Property on the one hand and
the plaintiff and Mr. Grey on the other. The plaintiff has
caused a lis pendens to be placed on the Property in connection
with such litigation.
The Property was ultimately purchased by ESWC and then sold to a
subsidiary of the Company subject to the lis pendens in the
first action. The Company's management believes that the
plaintiff's claims are without merit. In a motion for dismissal
decided in October, 1994, all of the plaintiff's claims against
the Company were dismissed except for claims of breach of
contract and unjust enrichment. The Company appealed this
decision and in June 1995, the Appellate Division, Third
Department dismissed the breach of contract claim against the
Company and cancelled the lis pendens in the first action. The
Company intends to move to cancel the lis pendens in the second
action.
ESWC and Frank Grey have agreed to indemnify the Company for any
expense, loss or damage suffered or incurred by the Company
(including any amounts paid in settlement) as a result of the
Company's being a party to the action. An aggregate of 150,000
shares of the Company's Common Stock owned by ESWC (100,000
shares, 50,000 of which were loaned by Michael Rakusin) and
Frank Grey (50,000 shares) has been pledged as security for such
indemnification. In the event a claim for indemnification is not
satisfied, the Company's sole recourse against ESWC is the
pledged stock. The Company may seek recourse directly against
Mr. Grey to the extent that a claim exceeds $275,000 and is not
satisfied in full by the pledged stock, valued at the time a
claim is made. No assurance can be given as to the value to the
Company of the pledged shares at the time a claim for
indemnification might be made or that in the event Mr. Grey is
called upon to make payment under his indemnity that he will
have sufficient net worth to meet his obligation thereunder.
Accordingly, there can be no assurance that the Company will be
reimbursed in part or in full, for any expenses, damages, or
losses incurred in connection with these lawsuits.
The outcome of such litigation is uncertain at this time;
however, management is of the opinion that there is no material
exposure to the Company, and, therefore, no provision has been
made for any possible loss in the accompanying consolidated
financial statements.
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ECHO SPRINGS WATER CO., INC.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12- CASH FLOW SUPPLEMENTAL DISCLOSURES
Presented below is supplemental cash flow information, including
noncash investing and financing activities, for the years ended
October 31,:
1995
Cash paid for interest was $20,071.
1994
Issuance of common stock to officer under agreement $25,000.
Sale of Utica assets of $138,887 net of liabilities
assumed of $18,420 for notes receivable $250,000.
Computer equipment additions financed and deducted
from additions of assets and debt were $30,000.
Cash paid for interest was $25,258.
1993
Conversion of debt and interest to common stock $3,100,796.
Issuance of common stock for deferred costs $74,600. Vehicle
additions financed and deducted from additions of assets and
debt were $13,858. Cash paid for interest was $52,688.
NOTE 13- GOING CONCERN
For the year ended October 31, 1995, the Company sustained a
loss of $214,268 and at October 31, 1995 had a working capital
deficiency of $4,233,375, an accumulated deficit of $8,364,431
and deficit net worth of $2,466,301. In addition, the Company
was in default on principal and interest payments on a
substantial portion of its debt. These facts raise substantial
doubt about the Company's ability to continue as a going
concern. Considerations which tend to mitigate the question of
going concern include management's successful efforts in raising
funds through private placements, the ability to renegotiate and
restructure long-term financing with major creditors, past and
present efforts to convert debt to equity and the ability to
acquire, restructure and develop the bottled water business
which it believes will be able to achieve profitable operations.
The Company believes that these factors provide meaningful
evidence as to the Company's ability to continue in operation
for the next fiscal year and support the going concern
presentation in the accompanying consolidated financial
statements in favor of the liquidation basis. There can be no
assurance, however, that management will continue to be able to
raise sufficient capital or convert existing debt to equity or
to achieve profitable operations going forward.
NOTE 14- EMPLOYMENT AGREEMENT
On November 15, 1993, the Company and Echo Springs Water
Company, Inc. ("Echo Springs") entered into a three-year
employment agreement with Michael S. Rakusin commencing with the
closing of the Echo Springs public offering of securities noted
below. As part of the agreement, the Company issued to Mr.
Rakusin 2,500,000 shares of common stock valued at $25,000 ($.01
per share) for past services which were returnable to the
Company in the event Mr. Rakusin voluntarily terminated his
agreement with the Company. The Board of Directors voted to
permit Mr. Rakusin to retain such shares although all other
45
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ECHO SPRINGS WATER CO., INC.
terms and conditions of the employment agreement were
discontinued.
NOTE 15- PROPOSED MERGER AND PUBLIC OFFERING
The Company entered into an agreement of merger with Acqua
Group, Inc. ("Acqua"), which was approved by the shareholders in
August 1994, and subject to the completion of a public offering
of securities by Echo Springs pursuant to a letter of intent
dated October 11, 1993 with an underwriter which contemplated an
offering resulting in gross proceeds of approximately
$8,333,331. Both the Company and Acqua were to be merged into
wholly-owned subsidiaries of Echo Springs in a merger which was
to be accounted for as a pooling of interest.
In December 1994, Echo Springs' application to include its
securities on the NASDAQ System was denied. Subsequently, Echo
Springs' registration statement with respect to the proposed
offering of common stock was withdrawn and the merger agreement
expired and was not renewed. Costs and expenses of the proposal
merger and public offering that had previously deferred of
$739,707 were written off.
NOTE 16- SUBSEQUENT EVENTS
In June 1996, the Company entered into negotiations to consumate
a public offering with minimum gross proceeds of approximately
$4,000,000. As part of the negotiations, the Company has asked
their lenders to convert outstanding debt and unpaid interest
thereon into shares of common stock of the Company at a
conversion ratio of ten cents per share. The conversion would
extend to $2,020,022 of outstanding principal and unpaid
interest of $571,576 through June 30, 1996 assuming full
conversion, which would be converted to 25,915,980 shares of
common stock. This transaction would reduce future interest
expense by approximately $204,000 per year.
Had this transaction been completed at October 31, 1995 the
proforma balance sheet would have been as follows:
Historical Adjustment Proforma
Current assets $ 426,047 $ $ 426,047
Other assets 1,772,651 1,772,651
--------- ---------- ---------
$2,198,698 $ $2,198,698
========= ========== =========
Current
liabilities $4,659,422 $(2,449,162) $2,210,260
Installment
debt 5,577 5,577
Shareholders'
Equity
(Deficiency) (2,446,301) 2,449,162 (17,139)
--------- ---------- ---------
$2,198,698 $ - 0 - $2,198,698
========= ========== =========
In March 1995, three individuals subscribed for 9,000,000
shares of the Company's common stock at $.02 per share for an
aggregate of $180,000. To date, $60,000 has been collected.
46
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, Echo Springs Water Co., Inc. has caused this report to
be signed on its behalf by the undersigned, hereunto duly authorized.
Dated: June 20, 1996
ECHO SPRINGS WATER CO., INC.
By: /s/ Michael S. Rakusin
President
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
Name Titles Date
/s/Michael S. Rakusin President, Treasurer June 20, 1996
Michael S. Rakusin and Director
<PAGE>
McLAUGHLIN & STERN, LLP
260 Madison Avenue
New York, New York 10016
(212) 448-1100
September 10, 1996
Securities and Exchange Commission
Washington, D.C.
Re: Echo Springs Water Co., Inc.
Gentlemen:
Enclosed please find definitive proxy statements for the above corporation
as mailed to shareholders today.
Very truly yours,
David W. Sass
