SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
(Mark One)
(X) Quarterly report pursuant to section 13 or 15 (d) of the Securities
Exchange Act of 1934, for the quarterly period ended April 30, 1996.
( ) 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.
(Exact name of registrant as specified in its charter)
New York #16-1433379
(State of Incorporation) (I.R.S. Employer ID No.)
Building 100A
Hackensack Avenue
Kearny, New Jersey 07032
(201) 465-5151
(Address of Principal Executive Offices
and Principal Place of Business and Telephone Number)
(Former name, former address and former fiscal year,
if changed since last report)
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 X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1996
Common stock, $.0001 par value 44,499,910 shares
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ECHO SPRINGS WATER CO., INC.
Index to Form 10-Q
Page
Item Number
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements:
Consolidated balance sheets -
April 30, 1996 and October 31, 1995 3
Consolidated statements of operations -
Three months ended April 30, 1996 and 1995 4
Six months ended April 30, 1996 and 1995 5
Consolidated statements of cash flows -
Six months ended April 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
April 30, October 31,
1996 1995
Current assets:
Cash $ 10,618 $ 57,224
Accounts receivable - net of allowance
for doubtful accounts of $30,000 in
1996 and $35,000 in 1995 313,496 279,128
Notes receivable, current portion 24,772 22,380
Inventories 31,306 39,909
Prepaid expenses 78,168 27,406
Total Current Assets 458,360 426,047
Notes receivable, net of current portion 147,028 157,857
Property, plant and equipment - net 1,339,880 1,395,090
Other assets 217,959 219,704
TOTAL ASSETS $2,163,227 $2,198,698
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current portion of debt $ 942,110 $ 830,544
Debentures 1,325,000 1,325,000
Accounts payable and accrued expenses 2,264,512 2,242,578
Customer deposits 225,500 211,900
Unearned revenues 19,516 49,400
Total Current Liabilities 4,776,638 4,659,422
Installment debt 5,577
TOTAL LIABILITIES 4,776,638 4,664,999
Shareholders' equity (deficiency):
Common stock, $.0001 par, 75,000,000
shares authorized; issued and
outstanding 44,499,910 shares
in 1996 and 41,499,910 shares in 1995 4,450 4,150
Additional paid-in capital 5,953,680 5,893,980
Accumulated deficit (8,571,541) (8,364,431)
Total Shareholders'
Equity (Deficiency) (2,613,411) (2,466,301)
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIENCY) $2,163,227 $2,198,698
The accompanying notes are an integral part of these consolidated financial
statements.
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ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30,
(UNAUDITED)
1996 1995
Revenues:
Gross sales $ 568,696 $ 611,003
Credits and allowances (2,356) (11,304)
Freight out (10,014) (12,228)
Other income 10,272 15,096
566,598 602,567
Costs and Expenses:
Cost of sales 219,273 229,846
Selling, general and
administrative 372,133 361,214
Interest 58,223 62,324
Amortization of other assets 1,219 1,219
Loss (gain) on sale of assets (2,160)
Total Costs and Expenses 648,688 654,603
Net loss $ (82,090) $ (52,036)
Net loss per share $ (.00) $ (.00)
Weighted average shares outstanding 42,499,910 41,499,910
The accompanying notes are an integral part of these consolidated financial
statements.
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ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30,
(UNAUDITED)
1996 1995
Revenues:
Gross sales $ 1,094,308 $ 1,222,127
Credits and allowances (6,675) (41,014)
Freight out (22,065) (24,437)
Other income 14,417 31,851
1,079,985 1,188,527
Costs and Expenses:
Cost of sales 438,933 473,088
Selling, general and
administrative 733,503 780,341
Interest 115,581 123,857
Amortization of other assets 2,438 2,438
Loss (gain) on sale of assets (3,360)
Total Costs and Expenses 1,287,095 1,379,724
Net loss $ (207,110) $ (191,197)
Net loss per share $ (.00) $ (.00)
Weighted average shares outstanding 41,999,910 41,499,910
The accompanying notes are an integral part of these consolidated financial
statements.
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ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30,
(UNAUDITED)
1996 1995
Operating Activities:
Net loss $(207,110) $(191,197)
Adjustments to reconcile net loss to
net cash used by
operating activities:
Depreciation and amortization 76,243 67,937
Loss (gain) on sale of assets (3,360)
Provision for doubtful accounts 3,000 (3,000)
Changes in assets and liabilities:
Accounts receivable (37,368) 19,229
Inventories 8,603 14,251
Prepaid expenses (50,762) (41,021)
Other assets (693) 650
Accounts payable and accrued
expenses 21,934 (118,439)
Customer deposits 13,600 3,800
Unearned revenues (29,884) (5,600)
Net Cash Used by
Operating Activities (205,797) (253,390)
Investing Activities:
Capital expenditures (18,595) (30,972)
Collections on notes receivable 8,437 13,906
Proceeds from sale of assets 3,360
Net Cash Used by
Investing Activities (6,798) (17,066)
Financing Activities:
Proceeds from issuance of
common stock 60,000
Repayment of debt (29,011) (45,633)
Increase in installment debt 135,000 83,000
Net Cash Provided
by Financing Activities 165,989 37,367
Net decrease in cash (46,606) (233,089)
Cash - beginning 57,224 247,824
CASH - ENDING $ 10,618 $ 14,735
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 9,765 $ 8,395
The accompanying notes are an integral part of these consolidated financial
statements.
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ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The interim financial statements are prepared pursuant to the
requirements for reporting on Form 10-Q. The October 31, 1995
balance sheet data was derived from audited finan cial
statements and together with the interim financial statements
and notes thereto should be read in conjunction with the
financial statements and notes included in the Company's
latest annual report on Form 10-K. In the opin ion of the
management, the interim financial statements reflect all
adjustments of a normal recurring nature neces sary for a fair
statement of the results for interim peri ods. The current
period results of operations are not necessarily indicative of
results which ultimately will be reported for the full fiscal
year.
BUSINESS
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 whole
sale to supermarkets and other bottled water distributors.
REVENUE RECOGNITION
Revenue from equipment rental is recognized based on the
period in which it is earned and unearned revenue is re corded
for the portion billed in advance. Revenues from product sales
are recognized upon shipment to the wholesal er or delivery to
the customer, as applicable.
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
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ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE
Net loss per share is based upon the weighted average number
of shares outstanding during the period.
NOTE 2 - INVENTORIES
Inventories are valued at the lower of cost or market on the
first-in first-out basis and at October 31, 1995 and April 30,
1996 consist of the following:
April October
30, 1996 31, 1995
Bottles $ 1,210 $ 2,094
Product held for sale 14,976 18,298
Supplies 15,120 19,517
$31,306 $39,909
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and
depreciated by the straight-line method over the estimated
useful lives of the assets of 4 - 40 years and consist of the
following:
April October
30, 1996 31, 1995
Land $ 150,000 $ 150,000
Buildings and improvements 362,298 362,298
Water coolers, bottles and
brewers 877,736 864,068
Machinery and equipment 376,773 373,588
Vehicles 60,850 60,850
Furniture and fixtures 126,604 124,862
1,954,261 1,935,666
Less: accumulated depreciation
and amortization 614,381 540,576
$1,339,880 $1,395,090
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ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4 - OTHER ASSETS
Other assets at October 31, 1995 and April 30, 1996 are
comprised of the following:
April October
30, 1996 31, 1995
Water rights $205,000 $205,000
Accumulated amortization 31,091 28,653
Net deferred charges 173,909 176,347
Security deposits 44,050 43,357
$217,959 $219,704
NOTE 5 - INDEBTEDNESS
Installment Debt
During fiscal 1993, $1,300,000 of a $1,500,000 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 mortgagee has agreed to extend the
maturity until December 31, 1995.
April October
Debentures 30, 1996 31, 1995
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
$1,325,000 $1,325,000
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.
The Company is currently in default as to principal and
interest on its debt (Note 8).
NOTE 6 - INCOME TAXES
The Company files a consolidated federal income tax return
with its subsidiaries. As of April 30, 1996, 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. All deferred tax
benefits from use of net operating loss carryforwards are
offset by valuation allowances.
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ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7 - GOING CONCERN
The Company sustained a loss of $214,268 for the fiscal year
ended October 31, 1995 and $207,110 for the six months ended
April 30, 1996. At October 31, 1995, the Company had a net
capital deficiency of $2,466,301 and $2,613,411 at April 30,
1996. These facts raise substantial doubt about the Company's
ability to continue as a going concern. Consider ations 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 abili ty to acquire,
restructure and develop the bottled water business which it
believes will be able to achieve profit able 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 consoli dated 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 8 - 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 January 31, 1996 the
proforma balance sheet would have been as follows:
Historical Adjustment Proforma
Current assets $ 458,360 $ $ 458,360
Other assets 1,704,867 1,704,867
$2,163,227 $ $2,163,227
Current
liabilities $4,776,638 $(2,551,162) $2,225,476
Shareholders'
Equity
(Deficiency) (2,613,411) 2,551,162 (62,249)
$2,163,227 $ - 0 - $2,163,227
In March 1996, 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 col lected.
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ECHO SPRINGS WATER CO., INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1996 COMPARED WITH THE
SIX MONTHS ENDED APRIL 30, 1995
Net revenues decreased $108,542 (9.1%) to $1,079,985 for the six months ended
April 30, 1996 ("1996") from $1,188,527 for the six months ended April 30, 1995
("1995"). The $127,819 decrease in gross sales was due primarily to two factors.
First, the less profitable 2.5 gallon and one gallon sales decreased by
approximately $73,000 due largely to a discontinuance of service to three
customers, including one bankruptcy. The second contributing factor was a
deliberate discontinuance of service to marginal customers as determined from a
customer-by-customer review in setting up the new corporate computer system. The
remaining decrease in net revenues related primarily to reduced credits and
allowances offset by a lower gain on unclaimed or lost customer deposits of
approximately $22,000.
Cost of sales for 1996 was $438,933 (40.1% of gross sales) as compared to
$473,088 (38.7% of gross sales) for 1995. This percentage increase was caused
primarily by small increases in freight in and labor costs.
Selling, general and administrative expenses were $733,503 (67.9% of net
revenues) in 1996 as compared to $780,341 (69.8% of net revenues) in 1995.
$83,642 of the net $46,838 decrease represented a significant reduction in the
sales and marketing staff in an effort to better concentrate on the current
customer base. This was offset by increased costs in the delivery and warehouse
operation of $41,510 which resulted primarily from increased labor and vehicle
costs to improve the timeli ness of product deliveries. The remaining $4,707
decrease resulted from a streamlining of the administrative staff and expenses
offset to some extent by the start-up costs related to the new corporate
computer system of approximately $15,000 and increased business development
costs of approximately $13,000 to investigate potential new business invest
ments.
Interest expense decreased from $123,857 in 1995 to $115,581 in 1996 primarily
as a result of the $200,000 8% mortgage note payable under litigation being
eliminated at October 31, 1995. Amortization of other assets of $2,438 in 1996
and 1995 related to the amortization of water rights.
The net loss for 1996 increased by $15,913 from $191,197 in 1995 to $207,110 in
1996.
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ECHO SPRINGS WATER CO., INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1996 COMPARED WITH THE
THREE MONTHS ENDED APRIL 30, 1995
Net revenues decreased $35,969 (6.0%) to $566,598 for the three months ended
April 30, 1996 ("1996) from $602,567 for the three months ended April 30, 1995
("1995"). The $42,307 decrease in gross sales was due primarily to two factors.
First, the less profitable 2.5 gallon and one gallon sales decreased by
approximately $18,000 due largely to a discontinuance of service to two
customers, including one bankruptcy. The second contributing factor was a
deliberate discontinuance of service to marginal customers as determined from a
customer-by-customer review in setting up the new corporate computer system. The
remaining change in net revenues related primarily to a lower gain on unclaimed
or lost customer deposits of approximately $10,500 offset by increased discounts
earned of approximately $8,000 and reduced credits and allowances.
Cost of sales for 1996 was $219,273 (38.6% of gross sales) as compared to
$229,846 (37.6% of gross sales) for 1995. This percentage increase was caused
primarily by small increases in freight in and labor costs.
Selling, general and administrative expenses were $372,133 (65.7% of net
revenues) in 1996 as compared to $361,214 (59.9% of net revenues) in 1995. A
significant reduction in the sales and marketing staff in an effort to better
concentrate on the current customer base resulted in a decrease of $30,763. This
savings was offset by increased costs in the delivery and warehouse operation of
$29,895 which resulted primarily from increased labor and vehicle costs to
improve the timeliness of product deliveries as well as by start-up costs
related to the new corporate computer system of approximately $6,000 and
increased business development costs of approximately $10,000 to investigate
potential new business investments.
Interest expense decreased from $62,324 in 1995 to $58,223 in 1996 primarily as
a result of the $200,000 8% mortgage note payable under litigation being
eliminated at October 31, 1995. Amortization of other assets of $1,219 in 1996
and 1995 related to the amortization of water rights.
The net loss for 1996 increased by $30,054 from $52,036 in 1995 to $82,090 in
1996.
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ECHO SPRINGS WATER CO., INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been the proceeds of its initial
public offering, cash generated from sales, issuance of deben tures, and
borrowings from its officers.
During the six months ended April 30, 1996 and 1995, the Company had negative
cash flows from operating activities of $205,797 and $253,390, respectively.
Investing activities used cash of $6,798 in 1996 and $17,066 in 1995 primarily
for the acquisition of property and equipment. The Company has financed its
operating and investing activities during these periods primarily through the
issuance of installment debt.
At April 30, 1996, the Company had a working capital deficiency of $4,318,278.
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 year 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 financ ing 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 liquida tion
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.
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 installment 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.
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ECHO SPRINGS WATER CO., INC.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
There have been no new legal proceedings or material changes
to legal proceedings during the period from those reported in
the Company's Form 10-K for the year ended October 31, 1995.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits - None
b. Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ECHO SPRINGS WATER CO., INC.
(Registrant)
By Michael S. Rakusin
Chief Executive Officer &
Chief Financial Officer
Date: June 27, 1996
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