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 January 31, 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 January 31, 1996
Common stock, $.0001 par value 41,499,910 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 -
January 31, 1996 and October 31, 1995 3
Consolidated statements of operations -
Three months ended January 31, 1996 and 1995 4
Consolidated statements of cash flows -
Three months ended January 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
January 31, October 31,
1996 1995
Current assets:
Cash $ 5,331 $ 57,224
Accounts receivable - net of allowance
for doubtful accounts of $17,000 in
1996 and $35,000 in 1995 286,577 279,128
Notes receivable, current portion 22,717 22,380
Inventories 35,272 39,909
Prepaid expenses 94,329 27,406
Total Current Assets 444,226 426,047
Notes receivable, net of current portion 152,483 157,857
Property, plant and equipment - net 1,372,310 1,395,090
Other assets 219,016 219,704
--------- ---------
TOTAL ASSETS $2,188,035 $2,198,698
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current portion of debt $ 885,559 $ 830,544
Debentures 1,325,000 1,325,000
Accounts payable and accrued expenses 2,320,179 2,242,578
Customer deposits 220,000 211,900
Unearned revenues 25,798 49,400
--------- ---------
Total Current Liabilities 4,776,536 4,659,422
Installment debt 2,820 5,577
--------- ---------
TOTAL LIABILITIES 4,779,356 4,664,999
--------- ---------
Shareholders' equity (deficiency):
Common stock, $.0001 par, 75,000,000
shares authorized; issued and
outstanding 41,499,910 shares
in 1996 and 1995 4,150 4,150
Additional paid-in capital 5,893,980 5,893,980
Accumulated deficit (8,489,451) (8,364,431)
--------- ---------
Total Shareholders'
Equity (Deficiency) (2,591,321) (2,466,301)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIENCY) $2,188,035 $2,198,698
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31,
(UNAUDITED)
1996 1995
---- ----
Revenues:
Gross sales $ 525,612 $ 611,124
Credits and allowances (4,319) (29,710)
Freight out (12,051) (12,209)
Other income 4,145 16,755
---------- ----------
513,387 585,960
---------- ----------
Costs and Expenses:
Cost of sales 219,661 243,242
Selling, general and
administrative 361,369 419,127
Interest 57,358 61,533
Amortization of other asset 1,219 1,219
Loss (gain) on sale of assets 1,200)
----------
Total Costs and Expenses 638,407 725,121
---------- ----------
Net loss $ (125,020) $ (139,161)
========== ==========
Net loss per share $ (.00) $ (.00)
========== ==========
Weighted average shares outstanding 41,499,910 41,499,910
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31,
(UNAUDITED)
1996 1995
---- ----
Operating Activities:
Net loss $(125,020) $(139,161)
Adjustments to reconcile net loss to
net cash used by
operating activities:
Depreciation and amortization 37,667 33,642
Loss (gain) on sale of assets (1,200)
Provision for doubtful accounts (10,000) (7,000)
Changes in assets and liabilities:
Accounts receivable 2,551 23,913
Inventories 4,637 7,594
Prepaid expenses (66,923) (64,690)
Other assets (531) 726
Accounts payable and accrued
expenses 77,601 (150,535)
Customer deposits 8,100 900
Unearned revenues (23,602) (2,000)
-------- --------
Net Cash Used by
Operating Activities (96,720) (296,611)
-------- --------
Investing Activities:
Capital expenditures (13,668) (7,687)
Collections on notes receivable 5,037 7,276
Proceeds from sale of assets 1,200
--------
Net Cash Used by
Investing Activities (7,431) (411)
-------- --------
Financing Activities:
Repayment of debt (22,742) (21,548)
Increase in installment debt 75,000 78,000
-------- --------
Net Cash Provided by
Financing Activities 52,258 56,452
-------- --------
Net decrease in cash (51,893) (240,570)
Cash - beginning 57,224 247,824
-------- --------
CASH - ENDING $ 5,331 $ 7,254
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 1,262 $ 4,629
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
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 financial
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 opinion of the
management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair
statement of the results for interim periods. 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 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.
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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<PAGE>
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 January
31, 1996 consist of the following:
January October
31, 1996 31, 1995
Bottles $ 2,694 $ 2,094
Product held for sale 14,697 18,298
Supplies 17,881 19,517
------ ------
$35,272 $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:
January October
31, 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 373,588 373,588
Vehicles 60,850 60,850
Furniture and fixtures 124,862 124,862
--------- ---------
1,949,334 1,935,666
Less: accumulated depreciation
and amortization 577,024 540,576
--------- ---------
$1,372,310 $1,395,090
========= =========
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<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4 - OTHER ASSETS
------------
Other assets at October 31, 1995 and January 31, 1996 are
comprised of the following:
January October
31, 1996 31, 1995
Water rights $205,000 $205,000
Accumulated amortization 29,872 28,653
------- -------
Net deferred charges 175,128 176,347
Security deposits 43,888 43,357
------- -------
$219,016 $219,704
======= =======
NOTE 5 - INDEBTEDNESS
------------
Installment Debt
During 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.
January October
Debentures 31, 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 January 31, 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 carryfor- wards are
offset by valuation allowances.
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<PAGE>
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 $125,020 and for the three months
ended January 31, 1996. At October 31, 1995, the Company had a
net capital deficiency of $2,466,301 and $2,591,321 at January
31, 1996. 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 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 $ 444,226 $ $ 444,226
Other assets 1,743,809 1,743,809
--------- ---------- ---------
$2,188,035 $ $2,188,035
========= ========== =========
Current
liabilities $4,776,536 $(2,500,162) $2,276,374
Installment
debt 2,820 2,820
Shareholders'
Equity
(Deficiency) (2,591,321) 2,500,162 (91,159)
--------- ---------- ---------
$2,188,035 $ - 0 - $2,188,035
========= ========== =========
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 collected.
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<PAGE>
ECHO SPRINGS WATER CO., INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31, 1996 COMPARED WITH THE
THREE MONTHS ENDED JANUARY 31, 1995
Net revenues decreased $72,573 (12.4%) to $513,387 for the three months ended
January 31, 1996 ("1996") from $585,960 for the three months ended January 31,
1995 ("1995"). The $85,512 decrease in gross sales was due primarily to two
factors. First, the less profitable 2.5 gallon and one gallon sales decreased by
approximately $55,000 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 $11,500.
Cost of sales for 1996 was $219,661 (41.8% of gross sales) as compared to
$243,242 (39.8% 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 $361,369 (70.4% of net
revenues) in 1996 as compared to $419,127 (71.5% of net revenues) in 1995.
$52,878 of this $57,758 total decrease represented a significant reduction in
the sales and marketing staff in an effort to better concentrate on the current
customer base. A further $16,496 resulted from a streamlining of the
administrative staff and expenses which was offset to some extent by the
start-up costs related to the new corporate computer system of approximately
$9,000 and increased business development costs of approximately $3,000 to
investigate potential new business investments. The offsetting increase of
$11,616 occurred in the delivery and warehouse operations and resulted primarily
from increased maintenance and repairs.
Interest expense decreased from $61,533 in 1995 to $57,358 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 decreased by $14,141 from $139,161 in 1995 to $125,020 in
1996.
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<PAGE>
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 debentures, and
borrowings from its officers.
During the three months ended January 31, 1996 and 1995, the Company had
negative cash flows from operating activities of $96,720 and $296,611,
respectively. Investing activities used cash of $7,431 in 1996 and $411 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 January 31, 1996, the Company had a working capital deficiency of $4,332,310.
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 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.
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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<PAGE>
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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<PAGE>
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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