VIA AIRBORNE EXPRESS
August 12, 1997
Mr. H. Christopher Owings
Assistant Director
United States Securities and
Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
RE: ECHO SPRINGS WATER CO., INC.
(formerly Grudge Music Group, Inc.)
Form 10-KSB/A submitted in paper April 23, 1997
Form 10-QSB/A submitted in paper April 23, 1997
Commission File No. 0-17872
Dear Mr. Owings:
On behalf of Echo Springs Water Co., Inc. (the "Company"), we enclose herewith
amendments to Form 10-KSB/A and Form 10-QSB/A (filed in paper on April 23, 1997)
in response to your Comment Letter of May 22, 1997.
In response to such Comment Letter, please note the following:
1. As noted in the Company's response letter of April 23, 1997 and as
agreed with your Mr. Michael Smith via telephone on April 18, 1997, the
Company filed its amended Forms 10- KSB and 10-QSB in response to your
Comment Letter of March 28, 1997 in paper only and agreed to file such
amended Forms formally via the Edgar System upon receipt of your
agreement with and approval of our responses to such Comment Letter.
In continuation of such procedure, first, we are sending this response
letter via the Edgar System; second, we are sending hard copies of this
response letter, Form 10-KSB/A and Form 10-QSB/A by overnight mail; and
third, upon receipt of your agreement with and approval of our
responses to your Comment Letter of May 22, 1997 (which we would
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appreciate at your earliest convenience so that we will be able to file
our second quarter Form 10-QSB before its deadline of June 14, 1997),
we will immediately file Form 10- KSB/A and Form 10-QSB/A formally via
the Edgar System.
2. In order to substantiate accurate stock prices for the appropriate
periods, the Company obtained, from National Quotation Bureau, LLC, a
full listing of such prices for such periods and has revised the table
at PART II, Item 5. on page 11 of Form 10-KSB/A to present the
appropriate information as obtained.
The Company's offer to convert debt and accrued interest thereon for
shares of its Common Stock was dated June 4, 1996. The conversion value
of the shares was $2.50 while the closing bid price (ie - the
approximate market value) on that date was $2.125. Thus, the Company is
reflecting, in its consolidated financial statements for the fiscal
year ended October 31, 1996, an extraordinary gain of $328,950 [ie -
877,201 shares times ($2.50-$2.125)] on this transaction.
This comment has been complied with. See pages 12, 14, 16, 18, 19, 20,
28, 29 and 30 of Form 10-KSB/A.
3. The Company originally issued 200,000 shares of its Common Stock valued
at $25,000 to its President, Mr. Michael S. Rakusin in consideration
for prior services rendered by Mr. Rakusin to the Company. However, the
market value of such shares was in excess of the desired level of
compensation. Therefore, the Company is reducing the number of shares
to 10, 000 so that the market value of the shares ($26, 250) at the
date of the award (September 30, 1996) more closely approximates the
original intended value of the prior services.
This comment has been complied with. See pages 12, 16, 18, 19, 20, 29, 31,
32 and 33 of Form 10-KSB/A.
Thank you for your attention to this matter. Kindly acknowledge receipt of the
enclosed by stamping a copy of this letter and returning the same in the
stamped, self-addressed envelope provided.
Yours very truly,
/s/David W. Sass
David W. Sass
Enclosures
cc: Michael S. Rakusin
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[x] Annual report pursuant to section 13 or 15(d) of The Securities Exchange Act
of 1934 ("Exchange Act") [Fee Required]
For the fiscal year ended October 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 0-17872
ECHO SPRINGS WATER CO., INC.
(formerly known as Grudge Music Group, Inc.)
(Name of small business issuer in its charter)
New York 16-1433379
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Building 100A, Hackensack Avenue, Kearny, NJ 07032
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (201) 465-5151
Securities Registered under Section 12(b) of the Exchange Act:
None
Securities Registered under Section 12(g) of the Exchange Act:
Title of Each Class: Common Stock, Par Value $.0001
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes x . No .
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10- KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's net revenues for its most recent fiscal were $2,264,702.
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The aggregate market value of the issuer's voting stock held as of December 31,
1996 by non-affiliates of the issuer, based upon the average of the closing bid
and asked prices on that date, was approximately $4,866,900.
As at December 31, 1996, 2,907,149 shares of the issuer's Common Stock, $.0001
par value, were outstanding.
Transitional Small Business Disclosure Format (Check one):
Yes . No X .
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PART I
Item 1. Description of Business
Introduction
Echo Springs Water Co., Inc., and its wholly-owned subsidiaries, RG
Water Company, Inc., and Berkshire Acquisition Company, Inc., (collectively, the
"Company") is engaged in bottling and distributing its non-sparkling natural
spring water from naturally free-flowing springs located on the Company's
property in Burlington, New York. The Company's natural spring water is sold
both under the label "Echo Springs" and under private label distributor and
supermarket brands. The Company also leases water coolers to residential and
commercial customers and sells allied products such as coffee, tea and a wide
assortment of paper products to its commercial accounts.
The Company's products are primarily marketed and sold by its
in-house staff. To a lesser extent, sales to certain distributors and
supermarkets are made through independent commissioned sales representatives.
The Company also provides installation and service for its leased coolers.
The Company is highly dependent upon the Aramark Corporation
("Aramark"), one of the world's largest privately-held food service companies,
for the Company's sales of five-gallon bottled water. For the fiscal year ended
October 31, 1996, approximately $439,987 or 19.5% of gross sales was derived
from Aramark. Although orders for sales have been received, there can be no
assurance that commitments for any additional years will be awarded. The Company
will continue to be dependent upon revenues from this source in the immediate
future. The loss of this revenue source would have a material adverse impact
upon the Company.
At present, the Company has an established sales and distribution
network and an existing base of over 4,000 customers located in the New York
City Metropolitan area, New Jersey and upstate New York
History of the Company
The Company, 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, the Company discontinued its music
business in 1990.
In 1991 and 1992, the Company commenced its bottled water
business through the acquisition of two companies. In December
1991, the Company completed the acquisition of the assets of Echo
Springs Water Co., Inc. (now known as ESWC, Inc.) consisting of its
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present spring water source and a fully-automated natural spring water bottling
facility located in Burlington, New York.
In July 1992, the Company 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.
The Bottled Water Market
The bottled water market comprises three major segments: non-
sparkling, sparkling and imported water.
* 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.
The Company participates only in the non-sparkling, or still water
market. Non-sparkling bottled water is currently distributed through office and
home delivery, retail stores and vending machines. 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-theshelf
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. The Company
believes, however, that natural spring water has advantages over municipal water
because, unlike municipal water, natural spring water is not treated with
chlorine and other chemicals.
Products
The Company's natural spring water is sold in two bottle sizes:
one-gallon plastic bottles and five-gallon high density polyethylene recyclable
containers. The Company previously sold its natural spring water in 2.5 gallon
bottles, but has discontinued its sales in that size. Water sold under the "Echo
Springs" brand is packaged in both one-gallon and five-gallon bottles. Private
label water is sold only in one-gallon size bottles. Private label sales have
not been significant to date.
In addition, the Company leases water coolers and sells a wide
variety of allied products, including regular and decaffeinated 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
The Company purchases all of its coolers and bottle and plastic cap
requirements from major vendors. In the past, the Company 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 the Company will not experience similar delays in
the future. To date, such delays have not had a material adverse effect on
operations.
Substantially all of the Company'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
satisfactory terms could have a material adverse effect on the Company' s
business. The Company has not experienced any
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such problems. The Company also purchases certain allied products, such as
coffee, tea and a wide variety of paper products from numerous vendors. The
Company believes there are sufficient vendors from which to obtain these
products on competitive terms.
Marketing and Distribution
The Company markets its "Echo Springs" brand as a 100% pure natural
spring water. The Company believes that this distinguishes its water from many
of its competitors' water, many of which sell either filtered municipal tap
water or purified water. To date, the Company 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 can be no assurance, it intends
to expand its marketing and sales focus to the northeastern United States. The
Company sells all of its products through its own in-house staff except for
certain distributor and supermarket sales which are made through independent
commissioned sales representatives. The Company sells its products to offices,
other commercial establishments, residential customers and supermarkets. The
Company distributes its bottled water and allied products from its Kearny, New
Jersey warehouse by means of its fleet of eleven trucks, four of which are
owned, five of which are rented and two of which are leased. The Company also
leases a tractor and three trailers for delivery to its Kearny warehouse and to
certain distributors and supermarkets.
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, the Company 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. The Company 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. The Company'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. The
Company 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
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financial and management resources than the Company 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 December 31, 1996, the Company employed twenty-eight people,
six in production, fifteen in distribution, and seven in management and
administration. None of the Company's employees is subject to a collective
bargaining agreement and the Company believes that its relations with its
employees are satisfactory.
Government Regulation
The United States Food and Drug Administration ("FDA") regulates
bottled water as a food. Accordingly, the Company's bottled water must meet FDA
standards for 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 the Company'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 bottled water.
The health departments of the individual states also govern water purity and
safety, labeling of bottled water products and manufacturing practices of
producers.
The Company'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 ("Department of Health"). In order to receive
certification, a prospective manufacturer must
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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.
The cost to the Company to comply with government regulation consists
primarily of permits and water testing and amounted to approximately $28,000 for
the fiscal year ended October 31, 1996.
The Company currently has all required approvals and believes that
its bottling facilities are in substantial compliance with all applicable
government regulations.
Item 2. Description of Properties
The Company's principal facility consists of 150 acres of land
located in Burlington, New York, and owned by the Company, 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. The Burlington facility was
built, and bottling equipment installed, in 1990. The Company also leases
property in Edmeston, New York. 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 current production capacity of the bottling facility per
eight-hour shift is 1,400,000 four-pack crates per year of one-gallon bottles or
1,100,000 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 25% of capacity.
The Company draws its water from three developed natural springs at
Burlington and Edmeston. The Company's Burlington water sources flow at an
average rate of 26 gallons per minute. The Edmeston springs (described below)
have average flow rates of 50 and 60 gallons per minute. The Company believes
that its water is clean, refreshing and lightly mineralized.
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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 a
material adverse effect on the business of the Company.
The Company entered into a 20-year lease with an unaffiliated
landlord on September 14, 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 average capacity of approximately 58,000,000 gallons of
water per year. The Company applied for and received approval from the New York
State Department of Health to operate the springs on August 10, 1995. Based on
the amended agreement of July 19, 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 has paid an additional rent of $21,000 during the
first year. 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 additional $21,000 first year rent, 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 $33,426 and $9,330 for the years ended October 31, 1996 and 1995,
respectively.
The Company's principal offices are in Kearny, New Jersey where it
leases 23,000 square feet of office and warehouse space pursuant to a lease
expiring in March, 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
Kenneth T. Williams commenced two actions in March and April, 1994,
and a third action in June, 1996 in the Supreme Court of the State of New York,
County of Otsego, against certain parties, including the Company and certain of
its subsidiaries and affiliates, seeking a one-half interest in the Company's
land and facility located in Burlington, New York and $17,000,000 in damages.
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All three suits have been dismissed in their entirety except a claim,
for an unspecified amount, that the Company and the other defendants have been
unjustly enriched at Mr. Williams' expense. Due to Mr. Williams' failure to
timely take proceedings for judgment against the Company, it is not clear
whether this case will come to trial on the merits.
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 Company's consolidated financial statements.
In August, 1996, an action was commenced against the Company and
Messrs. Rakusin and Grey in the Supreme Court of the State of New York, Broome
County, demanding a judgment on a promissory note in the principal amount of
$50,000 issued by the Company and allegedly personally guaranteed by Messrs.
Rakusin and Grey. In December, 1996, the plaintiff was granted summary judgment
in this matter. The Company intends to pay all principal and interest due under
such note.
Item 4. Submission or Matters to a Vote of Security Holders
On October 1, 1996 the Company held its annual meeting of
shareholders, at which meeting, the shareholders were asked to elect three
directors and to approve a proposal to effect a 1-for- 25 reverse stock split of
the outstanding shares of common stock of the Company. The directors elected and
the votes cast were as follows:
Name Votes in Favor Votes Withheld
Michael S. Rakusin 42,101,212 50,800
Edward J. Metzger 42,102,712 49,300
Frank A. LaSala 41,996,712 115,300
The proposal to approve the reverse stock split was approved by the
shareholder vote as follows:
Votes in Favor Votes Against Abstained
41,215,676 870,900 24,260
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PART II
Item 5. Market for Company's Common Equity and Related
Stockholder Matters
The following table sets forth the high and low closing bid 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Low High
Calendar Year 1994*:
First Quarter $ .78 $3.91
Second Quarter .78 3.75
Third Quarter .50 3.50
Fourth Quarter .78 3.13
Calendar Year 1995*:
First Quarter .50 2.00
Second Quarter 1.50 1.56
Third Quarter 1.25 1.50
Fourth Quarter .75 1.25
Calendar Year 1996:
First Quarter* .63 1.25
Second Quarter* 1.00 2.25
Third Quarter* 1.25 3.00
Fourth Quarter 1.25 2.75
- -----------
</TABLE>
*recalculated after reverse split
At October 31, 1996, the Company had 318 holders of record of its
Common Stock.
The Company has paid no cash dividends on its Common Stock to date
and it does not anticipate declaring or paying any cash dividends in the
foreseeable future.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Fiscal Year Ended October 31, 1996 Compared to Fiscal Year Ended October 31,
1995.
Net revenues decreased $302,507 (11.8%) to $2,264,702 for the fiscal year
ended October 31, 1996 ("Fiscal 1996")from $2,567,209 for the fiscal year ended
October 31, 1995 ("Fiscal 1995"). The $353,520 decrease in
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gross sales was due primarily to four factors. The 2.5-gallon sales fell by
approximately $17,000 as this low-margin, low-volume product line was
discontinued in July, 1996. Sales of one gallons, another low-margin product,
decreased by approximately $139,000, largely due to a discontinuance of service
to three customers, including one bankruptcy. The third 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 fourth factor was a much cooler summer in 1996 compared to 1995. The
remaining increase in net revenues was accounted for primarily by three items.
Discounts earned upon the renegotiation and settlement of a few older payables
increased by approximately $24,000 and credits and allowances were reduced by
approximately $55,000. These gains were offset by a lower gain on unclaimed or
lost customer deposits of approximately $30,000.
Cost of sales for Fiscal 1996 was $865,255 (38.4% of gross sales) as
compared to $978,901 (37.6% of gross sales) for Fiscal 1995. This small
percentage increase was caused primarily by an approximately $24,000 increase in
rental expense relating to the Wheeler springs resulting from twelve months rent
in Fiscal 1996 versus three months in Fiscal 1995.
Selling, general and administrative expenses were $1,483,147 (65.5% of
net revenues) in Fiscal 1996 as compared to $1,542,160 (60.1% of net revenues)
in Fiscal 1995. A significant reduction in the sales and marketing staff in an
effort to better concentrate on the current customer base resulted in an overall
savings of approximately $158,000. However, delivery costs increased
approximately $49,000 primarily as a result of increased truck rental costs due
to a larger number of rental vehicles in the corporate fleet, in order to
improve the timeliness of product deliveries, combined with a 50% truck rental
price increase in May, 1996. Further, warehouse costs increased approximately
$21,000 due largely to increased cooler repair costs resulting from contracting
such repairs to a third party professional. Lastly, general and administrative
expenses rose by approximately $29,000, primarily as a result of approximately
$26,000 of additional compensation to the President in the form of common shares
issued in consideration of prior services.
Interest expense decreased from $247,694 in Fiscal 1995 to $189,782 in
Fiscal 1996 primarily as a result of the $200,000 8% mortgage note payable under
litigation being eliminated at October 31, 1995 and the effect of the debt
conversion described in Note 14 to the consolidated financial statements.
Amortization of other assets of $4,876 in Fiscal 1996 and Fiscal 1995 related to
the amortization of water rights. Other income of $78,400 in Fiscal 1996 and
$3,705 in Fiscal 1995 related to non-recurring operating items.
The net operating loss for Fiscal 1996 increased by $14,303 from $214,268
in Fiscal 1995 to $228,571 in Fiscal 1996. The net income for Fiscal 1996 was
$100,379 after an extraordinary gain on debt restructuring of $328,950.
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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, totaling $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 (See Note 2 to Consolidated Financial Statements).
The net loss for Fiscal 1995 decreased by $1,526,407 from $1,740,675 in
Fiscal 1994 to $214,268 in Fiscal 1995.
12
<PAGE>
Liquidity and Capital Resources
The Company's primary sources of liquidity have been cash generated from
sales, issuance of common stock, debentures and installment debt, and borrowings
from its officers.
During the fiscal years ended October 31, 1996 and 1995, the Company had
negative cash flows from operating activities of $270,514 and $139,699,
respectively. Investing activities used cash of $44,695 in Fiscal 1996 and
$48,181 in Fiscal 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 common stock and installment debt.
In 1996, the Company completed a conversion of debt of $1,700,022 and
accrued interest thereon of $492,984 for 877,201 (post 1-for-25 reverse split)
shares of its Common Stock in conversion of $2,193,006 of indebtedness to
thirteen (13) investors, each an "accredited investor" within the meaning of
Regulation D of the Securities Act of 1933, as amended, realizing an
extraordinary gain of $328,950 as indicated in Note 14 to the Consolidated
Financial Statements.
At October 31, 1996, the Company had a working capital deficiency of
$1,954,160. 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,
1996 states that there is a substantial doubt about the Company's ability to
continue as a going concern.
As indicated in Note 7 to the Consolidated Financial Statements, certain
of the Company's indebtedness is in default. Although the debt is in default and
therefore currently due, the debtholders have informally agreed to wait for
payment until completion of the proposed public offering noted below.
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.
In June, 1996, the Company entered into negotiations to consummate a
public offering with minimum gross proceeds of approximately $4,000,000. Such
offering is expected to take place during Fiscal 1997. The Company intends to
use a portion of the proceeds of the proposed public offering to seek and
consummate acquisitions of companies in the bottled water and allied products
business. No assurance can be given that the Company will be successful in
identifying potential acquisitions or, if made, that such acquisitions will have
a beneficial effect on the Company. The Company has no current agreement to
acquire any business or property, or intent to acquire any specific business or
property.
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
13
<PAGE>
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.
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 is close to
settling its prior years' unpaid payroll taxes and, upon agreement, intends to
pay such amounts from additional borrowings.
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.
New Accounting Standards
In October, 1995, the Financial Accounting Standards Board adopted
Statement No. 123 (Accounting for Stock-Based Compensation), effective for
fiscal years beginning after December 15, 1995. Under this Statement, companies
can elect, but are not required, to recognize compensation expense for all
stock-based awards, using a fair value methodology. The Company will implement
the disclosures-only provisions as allowed by this Statement in fiscal 1997 and
will continue to measure compensation expense in accordance with Accounting
Principles Board Opinion No. 25 (Accounting for Stock Issued to Employees).
In March, 1995, the Financial Accounting Standards Board adopted
Statement No. 121 (Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of), effective for fiscal years beginning after
December 15, 1995. Management does not believe that adopting Statement No. 121
in fiscal 1997 will have a material effect on the Company's financial position.
14
<PAGE>
Item 7. Financial Statements.
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, 1996 and 1995 and the
related consolidated statements of operations, shareholders' equity (deficiency)
and cash flows for the years then ended. 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, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
12 to the consolidated 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 12. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Notes 13 and 14 to the consolidated financial
statements, the Company's 1996 valuation of stock compensation previously
reported at $25,000 has been revised to $26,250 and an extraordinary gain of
$328,950 has been recorded on the conversion of debt and interest. These
revisions were made subsequent to the issuance of the financial statements and
the accompanying consolidated financial statements have been restated to reflect
these corrections.
CITRIN COOPERMAN & COMPANY, LLP
New York, New York
January 22, 1997, except for Notes 13 and 14, as to which the date is May
28, 1997
15
<PAGE>
ECHO SPRINGS WATER CO. INC.
CONSOLIDATED BALANCE SHEET
AS AT OCTOBER 31,
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
----- ----
ASSETS
Current Assets:
Cash $ 44,631 $ 57,224
Accounts receivable - net of
allowance for doubtful accounts
of $14,000 in 1996 and $35,000 in 1995 257,212 279,128
Notes receivable, current portion 26,010 22,380
Inventories 34,221 39,909
Prepaid expenses 30,178 27,406
--------- ---------
Total Current Assets 392,252 426,047
Notes receivable, net of current portion 159,868 157,857
Property, plant and equipment - net 1,278,230 1,395,090
Other assets 220,026 219,704
--------- ---------
TOTAL ASSETS $2,050,376 $2,198,698
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of debt $ 552,153 $ 830,544
Debentures 50,000 1,325,000
Accounts payable and accrued expenses 1,513,582 2,242,578
Customer deposits 213,000 211,900
Unearned revenues 17,677 49,400
--------- ---------
Total Current Liabilities 2,346,412 4,659,422
Installment debt 5,577
Total Liabilities 2,346,412 4,664,999
--------- ---------
Shareholders' Equity (Deficiency):
Common stock, $.0001 par,
75,000,000 shares authorized; issued
and outstanding 2,907,149 shares in
1996 and 1,659,996 shares in 1995 291 166
Additional paid-in capital 7,967,725 5,897,964
Accumulated deficit (8,264,052) (8,364,431)
--------- ---------
Total Shareholders' Equity
(Deficiency) (296,036) (2,466,301)
-------- ---------
TOTAL LIABILITIES AND SHARE-
HOLDERS' EQUITY (DEFICIENCY) $2,050,376 $2,198,698
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
ECHO SPRINGS WATER CO. INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31,
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1996 1995
---- ----
Revenues:
Gross sales $2,252,968 $2,606,488
Credits and allowances (12,734) (67,241)
Freight out (43,154) (50,745)
Other income 67,622 78,707
--------- ---------
2,264,702 2,567,209
--------- ---------
Costs and Expenses:
Cost of sales 865,255 978,901
Selling, general and
administrative 1,483,147 1,542,160
Interest 189,782 247,694
Amortization of other
assets 4,876 4,876
Other expenses (income) - net (78,400) (3,705)
Loss (gain) on sale
of assets 28,613 11,551
--------- ---------
Total Costs and
Expenses 2,493,273 2,781,477
--------- ---------
Loss before extraordinary
gain (228,571) (214,268)
Gain on debt restructuring 328,950 _________
---------
Net income (loss) $ 100,379 $(214,268)
======== ========
Loss per share before
extraordinary gain (.12) (.13)
Extraordinary gain per share .17 _________
---------
Net income (loss) per share $ .05 $ (.13)
======== =========
Weighted average shares
outstanding 1,913,925 1,659,996
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
ECHO SPRINGS WATER CO. INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Total
Common Stock Shareholders'
Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficiency)
Balance at October 31,
1994 1,659,996 $166 $5,897,964 $(8,150,163) $(2,252,033)
Net loss (214,268) (214,268)
--------- --- ------------------ ---------- ---------
Balance at October 31,
1995 1,659,996 166 5,897,964 (8,364,431) (2,466,301)
Shares issued upon
conversion of debt
and interest 877,201 88 1,863,968 1,864,056
Shares purchased (48) (420) (420)
Shares issued to
officer under
agreement 10,000 1 26,249 26,250
Shares sold 360,000 36 179,964 180,000
Net income 100,379 100,379
--------- --- --------- --------- --------
Balance at
October 31, 1996 2,907,149 $291 $7,967,725 $(8,264,052) $ (296,036)
========= === ========= ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
ECHO SPRINGS WATER CO. INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31,
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1996 1995
---- ----
Operating Activities:
Net income (loss) $ 100,379 $(214,268)
Adjustments to reconcile
net income (loss) to net cash used
by operating activities -
Extraordinary gain (328,950)
Depreciation and amortization 156,096 139,245
Loss on sale of assets 28,814 11,551
Provision for doubtful accounts (21,000) 8,000
Stock issued for compensation 26,250
Changes in assets and liabilities -
Accounts receivable 20,166 (11,832)
Inventories 5,688 7,376
Prepaid expenses (2,772) (11,643)
Other assets 11,450 512
Accounts payable and accrued expenses (236,012) (75,640)
Customer deposits 1,100 18,900
Unearned revenues (31,723) (11,900)
--------- --------
Net Cash Used By Operating
Activities (270,514) (139,699)
--------- --------
Investing Activities:
Capital expenditures (68,409) (85,210)
Collections on notes receivable 18,479 23,342
Proceeds from sale of assets 5,235 13,687
--------- --------
Net Cash Used By Investing
Activities (44,695) (48,181)
--------- --------
Financing Activities:
Proceeds from issuance of common stock 180,000
Purchase of common stock (420)
Increase in installment debt 312,153 124,336
Repayment of installment debt (171,099) (127,056)
Deferred public offering costs (18,018)
---------
Net Cash Provided
(Used) By Financing Activities 302,616 (2,720)
--------- --------
Net decrease in cash (12,593) (190,600)
Cash - beginning 57,224 247,824
--------- --------
CASH - ENDING $ 44,631 $ 57,224
========= ========
Supplemental Cash Flow Information:
Interest paid $ 45,292 $ 20,071
Conversion of accounts
receivable to notes receivable 22,750
Conversion of other assets to
notes receivable 1,370
Conversion of debt and interest
to common stock, net of extraordinary
gain of $328,950 1,864,056
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Echo Springs Water Co., 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 $61,730 in 1996 and $39,716 in 1995.
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 10-20 years
Furniture and fixtures 7 years
Vehicles 5 years
Water coolers, bottles
and brewers 6-10 years
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------
(CONTINUED)
Other Assets
The allocated cost of the acquisition of water rights in 1991
was capitalized and is being amortized by the straight-line
method over 40 years. Costs associated with the proposed public
offering (Note 14)are being deferred at October 31, 1996 and
will be offset against the proceeds of such offering upon
completion or charged to expense should such offering not be
completed.
Income Taxes
All deferred tax benefits from the use of net operating loss
carryforwards are offset by valuation allowances in the
accompanying consolidated financial statements.
Loss Per Common and Equivalent Share Loss per share is based
upon the weighted average number of shares outstanding during
each period. All share and per share amounts give effect to a
1-for-25 reverse stock split in October, 1996.
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, 1996 or 1995.
Financial Instruments and Credit Risks The carrying amounts of
cash, accounts receivable, accounts payable, and accrued
expenses approximate fair value. However, it was not practicable
to estimate the fair value of other financial instruments
principally, installment debt and debentures - because quoted
market prices do not exist and an estimate could not be made
through other means without incurring excessive costs.
Concentrations of credit risk with respect to receivables are
limited due to the large number of customers. As of October 31,
1996, the Company had uncollateralized receivables with one
distributor approximating $65,000, which represents 24% of the
Company's trade accounts balance. During the years ended October
31, 1996 and 1995, sales to this customer amounted to
approximately 20% and 12%, respectively, of the Company's gross
sales. No other customer accounted for more than 10% of gross
sales.
NOTE 2 - NOTES RECEIVABLE
----------------
In efforts to consolidate operations, in January, 1994, the
Company sold its commercial and residential water distribution
business in Utica and related assets, with a book value of
$120,467, to an unrelated party for $225,000 and realized a gain
on the sale of $104,533. As part of the sales agreement, the new
operation will purchase bottled water from the Company for three
years. The purchase price was satisfied with two notes. The
first
21
<PAGE>
NOTE 2 - NOTES RECEIVABLE (CONTINUED)
note is for $50,000 without interest, which will be converted to a
three-year, 6% term loan upon repayment of the second note unless
repaid sooner. The second note was renegotiated in 1996 with the
inclusion of approximately $24,000 of accounts receivable and other
assets owed to the Company and is now payable at $2,788 per month,
including interest at 6%, through June, 2001. Note payments continue to
be received by the Company in accordance with payment terms and no
provision for uncollectible amounts is required at this time. Sales of
bottled water to the new company in 1996 and 1995 amounted to $49,233
and $39,924, respectively.
NOTE 3 - INVENTORIES
-----------
Inventories consist of the following:
October 31,
1996 1995
Bottles $ 1,722 $ 2,094
Product held
for sale 16,415 18,298
Supplies 16,084 19,517
------ ------
$34,221 $39,909
====== ======
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment are summarized as follows:
October 31,
1996 1995
Land $ 150,000 $ 150,000
Buildings and improvements 362,298 362,298
Water coolers, bottles and
brewers 918,730 864,068
Machinery and equipment 335,069 373,588
Vehicles 60,850 60,850
Furniture and fixtures 127,128 124,862
--------- ---------
1,954,075 1,935,666
Less: accumulated
depreciation and
amortization 675,845 540,576
--------- ---------
$1,278,230 $1,395,090
========= =========
NOTE 5 - OTHER ASSETS
------------
Other assets are comprised of the following:
October 31,
1996 1995
Water rights $205,000 $205,000
Accumulated amortization 33,529 28,653
------- -------
Net deferred charges 171,471 176,347
Security deposits 30,537 43,357
Deferred public offering costs 18,018
-------
$220,026 $219,704
======= =======
22
<PAGE>
NOTE 5 - OTHER ASSETS (CONTINUED)
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.
NOTE 6 - CAPITAL AND OPERATING LEASES
----------------------------
Capital Leases
The Company leased machinery and equipment under capital leases
that were included under the caption "Property, Plant and
Equipment" in the accompanying balance sheet at October 31, 1995
with a book value of $36,293. The equipment was disposed of in
1996.
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 1996 and
$65,943 in 1995.
In addition the Company leases vehicles and various office
equipment under operating leases that extend until February,
2000. Rental expenses under equipment leases amounted to
$214,265 in 1996 and $150,575 in 1995.
The Company entered into a 20-year lease with an unaffiliated
landlord on September 14, 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 average
capacity of approximately 58,000,000 gallons of water per year.
The Company applied for and received approval from the New York
State Department of Health to operate the springs on August 10,
1995. Based on the amended agreement of July 19, 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 has paid an additional rent of
$21,000 during the first year. 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 additional $21,000
first year rent, 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 $33,426 and $9,330 for the years ended October 31, 1996 and
1995, respectively.
23
<PAGE>
NOTE 6 - CAPITAL AND OPERATING LEASES (CONTINUED)
----------------------------------------
Minimum future lease payments are:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Operating Leases
Fiscal year ending October 31, Office Equipment Land
------------------------------ ------ --------- ----
1997 $65,943 $34,020 $ 15,600
1998 27,476 24,720 15,600
1999 24,720 15,600
2000 6,180 19,500
2001 31,200
2002 and thereafter 429,000
------ ------ -------
Total minimum payments $93,419 $89,640 $526,500
====== ====== =======
NOTE 7 - INDEBTEDNESS
------------
1996 1995
---- ----
Installment Debt
Secured time note, with interest at 9.0%, payable in 36 monthly
installments of $954 including interest. Final installment
originally due April 1997, repaid
in 1996. $ $ 15,119
Secured time notes, at 12.0%,
payable in 36 monthly installments
of $6,072 including interest 57,509
Advance payable to shareholder
with interest at 12% (d) 282,153 60,000
Capitalized lease obligations 8,471
Notes payable with interest at 18%
due December 31, 1995 (c) (*) 150,000 300,022
Notes payable with interest at 7%
due December 31, 1995 (b) (*) 275,000
Mortgage note payable, with 8.0%
interest payable quarterly,
principal due December 1993 (a) (*) 120,000 120,000
------- -------
TOTAL DEBT 552,153 836,121
CURRENT PORTION 552,153 830,544
------- -------
NET LONG-TERM PORTION $ $ 5,577
======= =======
</TABLE>
*Obligations in default as to principal and interest. Portions
of the debt and interest were converted into common stock of
the Company. (Note 14).
24
<PAGE>
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 company formed for the
purposes of a proposed merger and public offering in 1994,
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 debt was assumed by the
Company under the same terms as with the note holder upon
failure of the proposed merger and public offering and, in 1996,
such debt and related interest was converted to common stock of
the Company.
(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. Holders of notes totalling
$50,000 have sued the company for payment and have received
judgment which they are currently trying to enforce.
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 was
not consummated.
(d) Michael S. Rakusin, the President, a Director and principal
shareholder of the Company, advances funds to the Company for
working capital purposes. Such advances increase and decrease as
funds are needed and available. Interest expense on such loans
for the fiscal years ended October 31, 1996 and 1995 amounted to
$18,428 and $7,062, respectively.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1996 1995
---- ----
Debentures
8% Series D convertible
subordinated debentures
maturing December 31, 1995 (*) $50,000 $ 85,000
10% Series E debentures
maturing December 31, 1995 (*) 1,240,000
------ ---------
TOTAL $50,000 $1,325,000
====== =========
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INDEBTEDNESS (CONTINUED)
------------------------
* Obligations in default as to principal and interest.
Portions of the debt and interest were converted into
common stock of the Company. (Note 14).
The convertible subordinated debentures are convertible into
common stock at $12.50 per share.
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
-------------------------------------
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
<S> <C>
October 31,
1996 1995
Trade payables $ 564,385 $ 649,983
Accrued expenses 294,947 573,507
Wages payable 40,527 41,263
Interest payable 100,130 451,373
Payroll taxes payable 461,751 494,670
Sales taxes payable 51,842 31,782
--------- ---------
$1,513,582 $2,242,578
========= =========
</TABLE>
The Company is presently negotiating for settlement of 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
------------
On October 1, 1996, the stockholders approved a 1-for-25 reverse
stock split of the outstanding shares of common stock of the
Company. The par value, $.0001, and authorized shares,
75,000,000, were not changed. The then outstanding common stock
of 50,499,910 shares were converted to 2,019,996 shares of
common stock. All references in the accompanying financial
statements to the number of common shares and per share amounts
give effect to the reverse stock split.
At October 31, 1996, the Company has warrants outstanding that
allow the holders to purchase shares of common stock as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Group Shares Price Expiration Date
Investment banker 4,000 $20.25 March, 1997
Officer 27,759 4.20 October, 1998
</TABLE>
In partial settlement of prior debts, the Company granted an
officer warrants to purchase 27,759 shares of common stock at a
price of $12.50 per share, which warrants were to expire October
31, 1993 and were extended an additional year in 1993. In 1994,
the warrants were extended an additional two years and the
exercise price reduced to $6.25 per share and, in 1996, the
warrants were again extended for two years and the exercise
price reduced to $4.20 per share.
Other warrants for 20,120 shares at an excise price of $6.25 per
share expired as at October 31, 1996.
26
<PAGE>
NOTE 10- INCOME TAXES
At October 31, 1996, the estimated maximum amount of net
operating loss carryforward available to reduce future taxable
income is approximately $8,200,000, expiring from 2004 through
2010. Deferred tax benefits from the use of net operating loss
carryforwards of approximately $2,780,000 are offset by a
corresponding amount of valuation allowance since it is more
likely than not that all or some portion of the deferred tax
asset will not be realized.
Taxes (benefits) that would have been provided for the year
ended October 31, 1996 on the loss before extraordinary gain and
the extraordinary gain of approximately $(77,800) and $111,800,
respectively, have been offset by corresponding changes in the
valuation allowance.
The approximate amounts of net operating loss carryforward and
the year of expiration are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Amount Year of Expiration
$ 460,000 2004
1,160,000 2005
1,600,000 2006
2,000,000 2007
1,050,000 2008
1,730,000 2009
200,000 2010
</TABLE>
NOTE 11- LITIGATION
The Company and its affiliates are defendants in actions
involving a dispute concerning title to the Company's land and
facility located in Burlington, New York ("Property") in which
the plaintiff seeks a one-half interest in the Property and
$17,000,000 in damages. All three suits have been dismissed in
their entirety except a claim, for an unspecified amount, that
the Company and the other defendants have been unjustly enriched
at Mr. Williams' expense. Due to Mr. Williams' failure to timely
take proceedings for judgment against the Company, it is not
clear whether this case will come to trial on the merits.
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.
NOTE 12- GOING CONCERN
For the year ended October 31, 1996, the Company sustained a
loss before extraordinary gain of $228,571 and at October 31,
1996 had a working capital deficiency of $1,954,160, an
accumulated deficit of $8,264,052 and deficit net worth of
$296,036. 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
27
<PAGE>
NOTE 12- GOING CONCERN (CONTINUED)
achieve profitable operations. The Company intends to use a
portion of the proceeds of the proposed public offering (Note
14) to seek and consummate acquisitions of companies in the
bottled water and allied products business. No assurance can be
given that the Company will be successful in identifying
potential acquisitions or, if made, that such acquisitions will
have a beneficial effect on the Company. The Company has no
current agreement to acquire any business or property, or intent
to acquire any specific business or property. 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 13- EMPLOYMENT AGREEMENT
In October, 1996, Michael S. Rakusin, the President, a Director
and principal shareholder of the Company, entered into a
three-year employment agreement with the Company, effective upon
completion of the proposed public offering. There is no renewal
option. The agreement provides for, among other things, an
annual salary of $120,000 and a non-competition clause during
the term of his employment by the Company and for one year
following the termination of such employment.
On September 30, 1996, the Company issued 200,000 shares of its
common stock at a value of $25,000 ($.125 per share) to Mr.
Rakusin in consideration for prior services rendered by Mr.
Rakusin to the Company. Subsequent to the issuance of the
consolidated financial statements, the valuation of the share
price was reevaluated and the accompanying consolidated
financial statements have been restated to reflect the market
value of the shares at $2.625 per share and a reduction in the
number of shares to 10,000 for a total consideration of $26,250.
The $26,250 has been charged to compensation for the year ended
October 31, 1996, increasing the previously reported loss by
$1,250.
NOTE 14 - PROPOSED PUBLIC OFFERING
In June, 1996, the Company entered into negotiations to
consummate a public offering with minimum gross proceeds of
approximately $4,000,000. As part of the negotiations, on June
4, 1996, the Company asked their lenders to convert outstanding
debt and unpaid interest thereon into shares of common stock of
the Company at a conversion ratio of $2.50 per share, the then
estimated fair market value of the shares. The lenders converted
$1,700,022 of outstanding principal and unpaid interest of
$492,984, which was converted to 877,201 shares of common stock.
Subsequent to the issuance of the consolidated financial
statements, the valuation of the share price was reevaluated and
the accompanying consolidated financial statements have been
restated to reflect the market value of the shares at $2.125 per
share resulting in an extraordinary gain on the restructuring of
the debt of $328,950. This transaction will reduce future
interest expense by approximately $173,000 per year.
28
<PAGE>
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act.
Directors and Executive Officers
The following individuals are the present directors and executive
officers of the Company. Each director will hold office until the next annual
meeting of the shareholders 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
Michael S. Rakusin........... 40 President,
Treasurer, and
Director
Edward J. Metzger............ 39 Vice President
- Operations,
Secretary, and
Director
Frank A. LaSala............. 73 Director
Michael S. Rakusin is a founder of the Company and has been
President and a Director since inception, and Treasurer 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., 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 J. Metzger joined the Company in July, 1992 as Vice President
Operations. He was elected a Director in October, 1996.
From 1988 to July, 1992, he was Senior Vice President of Berkshire
Springs of N.J., Inc. (doing business as Stony Brook Spring Water) in charge of
all operations, including routes, customer service, cooler repair and warehouse
activities. The assets of Berkshire were acquired by the Company in July, 1992.
Frank A. LaSala has been a Director of the Company since October, 1996.
Mr. LaSala has been a principal of his own business, Sal-Ma Instruments
Corporation, a company engaged in manufacturing sophisticated machinery for the
aerospace industry, for the past 45 years.
29
<PAGE>
Item 10. Executive Compensation
The following table provides certain summary information concerning the
compensation paid or accrued by the Company to or on behalf of its Chief
Executive Officer and the other named executive officer of the Company for
services rendered in all capacities to the Company and its subsidiaries for the
fiscal years ended October 31, 1996, 1995 and 1994.
Summary Compensation Table
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Name and Principal Long-Term Compensation
Position Annual Compensation Awards Payouts
Other
Annual Restricted All Other
Compen- Stock Options/ LTIP Compen-
Year Salary Bonus sation Award(s) SARs Payouts sation
---- ------ ----- ------ -------- ---- ------- ------
Michael S. Rakusin 1996 $80,200 - - - - - $26,250(1)
President
1995 $81,288 - - - - - -
1994 $87,006 - - - - - -
Edward J. Metzger 1996 $80,200 - - - - - -
Vice President
1995 $83,000 - - - - - -
1994 $104,200 - - - - - -
</TABLE>
(1) On September 30, 1996, the Company issued 10,000 shares of its
Common Stock valued at $26,250 ($2.625 per share) to Mr.
Michael S. Rakusin, the President, a Director and principal
shareholder of the Company in consideration for prior services
rendered by Mr. Rakusin to the Company.
For the fiscal years ended October 31, 1996 and 1995, none of the
directors of the Company have received or were accrued compensation of any kind
for their services rendered in such capacities to the Company. As of December
31, 1996, there are no outstanding options or warrants held by any officer or
director of the Company except for warrants held by Michael S. Rakusin, the
President, a Director and principal shareholder of the Company, to purchase
27,759 shares of Common Stock at $4.20 per share. These warrants were issued in
October, 1990 and expire on October 31, 1998.
Michael S. Rakusin, the President, a Director and principal shareholder
of the Company, has entered into a three-year employment agreement with the
Company in October, 1996 which will commence on the closing of the proposed
public offering. There is no renewal option. The agreement provides for, among
other things, an annual salary of $120,000 and a non-competition clause during
the term of his employment by the Company and for one (1) year following the
termination of such employment.
30
<PAGE>
The Company has no standard arrangement pursuant to which its directors
are compensated in their capacity as directors. The Company does not have a
compensation or audit committee of the Board.
Item 11. Security Ownership of Certain Beneficial Owners
and Management.
The following table sets forth as of December 31, 1996, the number of
shares of Common Stock of the Company and the percentage of that class owned
beneficially, within the meaning of Rule 13d-3 promulgated under the Exchange
Act, and the percentage of the Company's voting power owned by (i) all
shareholders known by the Company to beneficially own more than five percent of
the Company's Common Stock; (ii) each director of the Company; 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 December 31, 1996 or within 60 days thereafter.
Name and Address Number of Shares
of Beneficial Owner(1) Owned Beneficially(2) Percentage
Michael S. Rakusin 237,759(3) 8.1%
Edward J. Metzger 6,800 0.2%
Frank A. LaSala 1,920 0.1%
ESWC, Inc.
149 Main Street
Cooperstown,
NY 11326 210,243 7.2%
H.T. Ardinger, Jr.
9040 Governors Row
Dallas, TX 75247 398,127 13.7%
William Heim
8845 South Pleasant
Chicago, IL 60620 273,133 9.4%
Robert Moody, Jr.
601 Moody National
Bank Tower
Galveston, TX 77550 205,323 7.1%
Robert P. Gillings
7423 Ridge Boulevard
Brooklyn, NY 11209 290,000 10.0%
All Officers and
Directors as a
Group (three persons) 246,479(3) 8.4%
--------------
(1) Unless otherwise indicated, the address of each shareholder
listed is c/o Echo Springs Water Co., Inc., Building 100A,
Hackensack Avenue, Kearny, NJ 07032.
31
<PAGE>
(2) Pursuant to the rules and regulations of the Securities
and Exchange Commission, shares of Common Stock that an
individual or group has a right to acquire within 60 days
pursuant to the exercise of warrants are deemed to be
outstanding for the purposes of computing the percentage
ownership of such individual or group, but are not deemed
to be outstanding for the purposes of computing the
percentage ownership of any other person shown in the
table.
(3) Includes 27,759 shares of common stock issuable pursuant to
warrants exercisable at $4.20 per share and expiring on
October 31, 1998.
Item 12. Certain Relationships and Related Transactions
On September 30, 1996, the Company issued 10,000 shares of its Common
Stock valued at $26,250 ($2.625 per share) to Mr. Michael S. Rakusin, the
President, a Director and principal shareholder of the Company in consideration
for prior services rendered by Mr. Rakusin to the Company.
On October 1, 1996, the Company entered into a three-year
employment agreement with Mr. Rakusin. See "Executive
Compensation."
On October 1, 1996, the Company extended Mr. Rakusin's warrants to
purchase 27,759 shares of the Company's Common Stock, from October 31, 1996 to
October 31, 1998 and established an exercise price of $4.20.
At October 31, 1996, Mr. Rakusin, had advanced a total of $282,153 to the
Company, evidenced by the Company's 12% note payable to Mr. Rakusin, which funds
were used by the Company for working capital.
32
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K.
Schedules and Reports of Form 8-K
(A)(1) The following financial statements are included in Part II,
Item 7:
Independent Auditors' Report
Consolidated Balance Sheet as at October 31, 1996 and 1995.
Consolidated Statement of Operations for the Years Ended October
31, 1996 and 1995
Consolidated Statement of Shareholders' Equity (Deficiency) for
the Years Ended October 31, 1996 and 1995
Consolidated Statement of Cash Flows for the Years Ended October
31, 1996 and 1995
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.
Official Exhibit
Number Description Page Number
[3] (a) Certificate of Incorporation
and all amendments thereto
[3] (b) By-Laws
[4] Form of Common Stock Certificate
[10] Form of Employment Agreement with Michael S.
Rakusin
[27] Financial Data Schedule
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, Echo Springs Water Co., Inc. has caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
Dated: June , 1997
ECHO SPRINGS WATER CO., INC.
By: /s/ Michael S. Rakusin
Michael S. Rakusin
President
Pursuant to the requirements of the Exchange Act, this report has been
signed by the following persons on behalf of the issuer and in the capacities
and on the date indicated:
Name Titles Date
/s/ Michael S. Rakusin President and Director June , 1997
Michael S. Rakusin Principal Executive,
Operating and Financial
Officer
/s/ Edward J. Metzger Vice President, Secretary June , 1997
Edward J. Metzger and Director
/s/ Frank A. LaSala Director June , 1997
Frank A. LaSala
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, Echo Springs Water Co., Inc. has caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
Dated: June , 1997
ECHO SPRINGS WATER CO., INC.
By: ________________________
Michael S. Rakusin
President
Pursuant to the requirements of the Exchange Act, 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
_____________________ President and Director June , 1997
Michael S. Rakusin Principal Executive,
Operating and Financial
Officer
______________________ Vice President, Secretary June , 1997
Edward J. Metzger and Director
_______________________ Director June , 1997
Frank A. LaSala
GE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(X) Quarterly report pursuant to section 13 or 15 (d) of the Securi ties
Exchange Act of 1934, for the quarterly period ended January 31, 1997.
( ) 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 01-17872
ECHO SPRINGS WATER CO., INC.
(Exact name of small business issuer 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
(Address of Principal Executive Offices)
(201) 465-5151
(Issuer's Telephone Number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (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 issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
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 February 28, 1997
Common stock, $.0001 par value 3,507,149 shares
Transitional Small Business Disclosure Format Yes No X
<PAGE>
ECHO SPRINGS WATER CO., INC.
Index to Form 10-QSB
Page
Item Number
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements:
Consolidated balance sheets -
January 31, 1997 and October 31, 1996 3
Consolidated statements of operations -
Three months ended January 31, 1997 and 1996 4
Consolidated statements of cash flows -
Three months ended January 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
January 31, October 31,
1997 1996
Current Assets:
Cash $ 15,613 $ 44,631
Accounts receivable - net of allowance
for doubtful accounts of $14,000 in
1997 and in 1996 234,191 257,212
Notes receivable, current portion 26,402 26,010
Inventories 26,845 34,221
Prepaid expenses 76,363 30,178
--------- ---------
Total Current Assets 379,414 392,252
Notes receivable, net of current portion 153,119 159,868
Property, plant and equipment - net 1,240,842 1,278,230
Other assets 219,160 220,026
--------- ---------
TOTAL ASSETS $1,992,535 $2,050,376
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of debt $ 572,153 $ 552,153
Debentures 50,000 50,000
Accounts payable and accrued expenses 1,581,407 1,513,582
Customer deposits 215,600 213,000
Unearned revenues 17,132 17,677
--------- ---------
Total Current Liabilities 2,436,292 2,346,412
--------- ---------
Shareholders' Equity (Deficiency):
Common stock, $.0001 par, 75,000,000
shares authorized; issued and
outstanding 2,907,149 shares
in 1997 and 1996 291 291
Additional paid-in capital 7,967,725 7,967,725
Accumulated deficit (8,411,773) (8,264,052)
--------- ---------
Total Shareholders'
Equity (Deficiency) (443,757) (296,036)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIENCY) $1,992,535 $2,050,376
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 3 -
<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31,
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1996
---- ----
Revenues:
Gross sales $ 444,476 $ 525,612
Credits and allowances (2,652) (4,319)
Freight out (8,949) (12,051)
Other income (134) 4,145
---------- ----------
432,741 513,387
---------- ----------
Costs and Expenses:
Cost of sales 188,795 219,661
Selling, general and
administrative 373,834 361,369
Interest 17,474 57,358
Amortization of other assets 1,219 1,219
Loss (gain) on sale of assets (860) (1,200)
---------- ----------
Total Costs and Expenses 580,462 638,407
---------- ----------
Net loss $ (147,721) $ (125,020)
========== ==========
Net loss per share $ (.05) $ (.08)
========== ==========
Weighted average shares outstanding 2,907,149 1,659,996
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31,
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1996
---- ----
Operating Activities:
Net loss $(147,721) $(125,020)
Adjustments to reconcile net loss to
net cash used by
operating activities:
Depreciation and amortization 39,869 37,667
Loss (gain) on sale of assets (860) (1,200)
Provision for doubtful accounts (10,000)
Changes in assets and liabilities -
Accounts receivable 23,021 2,551
Inventories 7,376 4,637
Prepaid expenses (46,185) (66,923)
Other assets (353) (531)
Accounts payable and accrued
expenses 67,825 77,601
Customer deposits 2,600 8,100
Unearned revenues (545) (23,602)
-------- --------
Net Cash Used by
Operating Activities (54,973) (96,720)
-------- --------
Investing Activities:
Capital expenditures (1,262) (13,668)
Collections on notes receivable 6,357 5,037
Proceeds from sale of assets 860 1,200
-------- --------
Net Cash Provided (Used) by
Investing Activities 5,955 (7,431)
-------- --------
Financing Activities:
Increase in installment debt 20,000 75,000
Repayment of installment debt (22,742)
-------- --------
Net Cash Provided by
Financing Activities 20,000 52,258
-------- --------
Net decrease in cash (29,018) (51,893)
Cash - beginning 44,631 57,224
-------- --------
CASH - ENDING $ 15,613 $ 5,331
======== ========
SUPPLEMENTAL INFORMATION:
Interest paid $ 927 $ 1,262
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- 5 -
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
BASIS OF PRESENTATION
The interim consolidated financial statements are prepared
pursuant to the requirements for reporting on Form 10-QSB. The
October 31, 1996 balance sheet data was derived from audited
consolidated financial statements and together with the
interim consolidated financial statements and notes thereto
should be read in conjunction with the consolidated financial
statements and notes included in the Company's latest annual
report on Form 10-KSB/A. In the opinion of management, the
interim consolidated 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. ("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.
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.
LOSS PER SHARE
Net loss per share is based upon the weighted average number
of shares outstanding during each period. All share and per
share amounts give effect to a 1-for-25 reverse stock split in
October, 1996.
- 6 -
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2 - INVENTORIES
-----------
Inventories are valued at the lower of cost or market on the
first-in, first-out basis and at October 31, 1996 and January
31, 1997 consist of the following:
January October
31, 1997 31, 1996
Bottles $ 2,168 $ 1,722
Product held for sale 12,672 16,415
Supplies 12,005 16,084
------ ------
$26,845 $34,221
====== ======
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment are recorded at cost and
depreciated by the straight-line method over the estimated
economic useful lives of the various asset groups of 5 - 40
years and consist of the following:
January October
31, 1997 31, 1996
Land $ 150,000 $ 150,000
Buildings and improvements 362,298 362,298
Water coolers, bottles and
brewers 918,730 918,730
Machinery and equipment 335,068 335,069
Vehicles 60,850 60,850
Furniture and fixtures 128,391 127,128
--------- ---------
1,955,337 1,954,075
Less: accumulated depreciation
and amortization 714,495 675,845
--------- ---------
$1,240,842 $1,278,230
========= =========
- 7 -
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4 - OTHER ASSETS
------------
Other assets at October 31, 1996 and January 31, 1997 are
comprised of the following:
January October
31, 1997 31, 1996
Water rights $205,000 $205,000
Accumulated amortization 34,748 33,529
------- -------
Net deferred charges 170,252 171,471
Security deposits 30,890 30,537
Deferred public offering costs 18,018 18,018
------- -------
$219,160 $220,026
======= =======
NOTE 5 - INDEBTEDNESS
------------
The Company is currently in default as to principal and
interest on its debt and debentures except for advances
payable to stockholder of $282,153 at October 31, 1996 and
$302,153 at January 31, 1997. Although the debt is in default
and therefore currently due, the debtholders have informally
agreed to wait for payment until completion of the proposed
public offering. (See Note 7).
NOTE 6 - INCOME TAXES
------------
The Company files a consolidated federal income tax return
with its subsidiaries. At October 31, 1996, the estimated
maximum amount of net operating loss carryforward available to
reduce future taxable income is approximately $8,200,000,
expiring from 2004 through 2010. Deferred tax benefits from
the use of net operating loss carryforwards of approximately
$2,780,000 are offset by a corresponding amount of valuation
allowance since it is more likely than not that all or some
portion of the deferred tax asset will not be realized.
- 8 -
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7 - GOING CONCERN
-------------
The Company sustained losses of $228,571 (before extraordi
nary gain) for the fiscal year ended October 31, 1996 and
$147,721 for the three months ended January 31, 1997. The
Company had deficit net worths of $296,036 at October 31, 1996
and $443,757 at January 31, 1997. In addition, the Company was
in default on principal and interest payments on a substantial
portion of its debt. These facts raise sub stantial 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. In June, 1996, the Company entered into
negotiations to consummate a public offering with minimum
gross proceeds of approximately $4,000,000. The Company
intends to use a portion of the proceeds of the proposed
public offering to seek and consum mate acquisitions of
companies in the bottled water and allied products business.
No assurance can be given that the Company will be successful
in identifying potential acquisitions or, if made, that such
acquisitions will have a beneficial effect on the Company. The
Company has no cur rent agreement to acquire any business or
property, or intent to acquire any specific busines or
property. The Company believes that these factors provide
meaningful evidence as to the Company's ability to continue in
opera tion 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 February, 1997, the Company sold 600,000 shares of its
common stock in private transactions at $1.00 per share for
aggregate gross proceeds of $600,000.
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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, 1997 COMPARED WITH THE
THREE MONTHS ENDED JANUARY 31, 1996
Net revenues decreased $80,646 (15.7%) to $432,741 for the three months ended
January 31, 1997 ("1997") from $513,387 for the three months ended January 31,
1996 ("1996"). The $81,136 decrease in gross sales was due primarily to four
factors. The 2.5-gallon sales fell by approximately $5,000 as this low-margin,
low-volume product line was discontinued in July, 1996. Sales of one gallons,
another low-margin product, decreased by approximately $16,000, largely due to a
discon tinuance of service to one supermarket customer. Sales of allied products
fell by approximately $21,000 due to reduced emphasis on this lower volume
aspect of the business, primarily as a result of the reduction in the sales and
marketing staff. The fourth contributing factor was a deliberate discontinuance
of service to marginal custom ers as determined from a customer-by-customer
review in setting up the new corporate computer system. The small improvements
in credits and allowances and freight out were largely offset by reduced gains
on unclaimed or lost customer deposits.
Cost of sales for 1997 was $188,795 (42.5% of gross sales) as compared to
$219,661 (41.8% of gross sales) for 1996. This small percentage increase was
caused primarily by an approximately $29,000 decrease in the equipment rental
portion of gross sales as a result of the discon tinuance of service to marginal
customers.
Selling, general and administrative expenses were $373,834 in 1997 as compared
to $361,369 in 1996. A reduction in the sales and marketing staff in an effort
to better concentrate on the current customer base resulted in an overall
savings of approximately $12,000. However, delivery and warehouse costs
increased approximately $6,000, primarily as a result of increased truck rental
costs due to a larger number of rental vehicles in the corporate fleet, in order
to improve the timeliness of product deliveries, combined with a 50% truck
rental price increase in May, 1996. Further, general and administrative expenses
rose by approximately $18,000. A small increase in adminis trative staff and
expenses accounted for approximately $6,000. The investor relation costs of the
debt-to-equity conversion and the reverse stock split amounted to another
approximately $6,000 and the final factor was increased business development
costs of approximately $6,000 to investigate new potential business investments.
Interest expense decreased from $57,358 in 1997 to $17,474 in 1996, primarily as
a result of the October, 1996 debt-to-equity conversion. Amortization of other
assets of $1,219 in 1997 and 1996 related to the amortization of water rights.
The net loss for 1997 increased by $22,701 from $125,020 in 1996 to $147,721 in
1997.
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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 cash generated from sales,
issuance of common stock, debentures, and installment debt, and borrowings from
its officers.
During the three months ended January 31, 1997 and 1996, the Company had
negative cash flows from operating activities of $54,973 and $96,720,
respectively. Investing activities provided cash of $5,955 in 1997, primarily
from collections on notes receivable, and used cash of $7,431 in 1996, 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, 1997, the Company had a working capital deficiency of $2,056,878.
Short-term credit sources are limited to trade credit on purchases and services.
The report issued by the Company's accoun tants that accompanies the Company's
Consolidated Financial Statements for the year ended October 31, 1996 states
that there is a substantial doubt about the Company's ability to continue as a
going concern.
As indicated in Note 5 to the accompanying Consolidated Financial Statements,
certain of the Company's indebtedness is in default. Although the debt is in
default and therefore currently due, the debtholders have informally agreed to
wait for payment until comple tion of the proposed public offering noted below.
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.
In June, 1996, the Company entered into negotiations to consummate a public
offering with minimum gross proceeds of approximately $4,000,000. Such offering
is expected to take place during Fiscal 1997. The Company intends to use a
portion of the proceeds of the proposed public offering to seek and consummate
acquisitions of companies in the bottled water and allied products business. No
assurance can be given that the Company will be successful in identi fying
potential acquisitions or, if made, that such acquisitions will have a
beneficial effect on the Company. The Company has no current agreement to
acquire any business or property, or intent to acquire any specific business or
property.
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.
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 is close to settling its
prior years' unpaid payroll taxes and, upon agreement, intends to pay such
amounts from additional borrowings.
- 11 -
<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 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.
- 12 -
<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-KSB/A for the year ended October 31,
1996.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits - Financial Data Schedule
b. Reports on Form 8-K
NONE
- 13 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the issuer has duly caused this report to be signed on its behalf by
the undersigned, hereunto duly authorized.
ECHO SPRINGS WATER CO., INC.
(Issuer)
By
Michael S. Rakusin
President
Dated: June , 1997
- 14 -
<PAGE>
ECHO SPRINGS WATER CO., INC.
FINANCIAL DATA SCHEDULE
FOR THE THREE MONTHS ENDED JANUARY 31, 1997
This schedule contains summary financial information extracted from the
financial statements for the three months ended January 31, 1997 and is
qualified in its entirety by reference to such financial statements.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Item # Item Description Amount
5-02(1) Cash and cash items $ 15,613
5-02(2) Marketable securities - 0 -
5-02(3)(a)(1) Notes and accounts receivable-trade 248,191
5-02(4) Allowances for doubtful accounts 14,000
5-02(6) Inventory 26,845
5-02(9) Total current assets 379,414
5-02(13) Property, plant and equipment 1,955,337
5-02(14) Accumulated depreciation 714,495
5-02(18) Total assets 1,992,535
5-02(21) Total current liabilities 2,436,292
5-02(22) Bonds, mortgages and similar debt - 0 -
5-02(28) Preferred stock-mandatory redemption - 0 -
5-02(29) Preferred stock-no
mandatory redemption - 0 -
5-02(30) Common stock 310
5-02(31) Other stockholders' equity (444,067)
5-02(32) Total liabilities and
stockholders' equity 1,992,535
5-03(b)(1)(a) Net sales of tangible products 432,875
5-03(b)(1) Total revenues 432,741
5-03(b)(2)(a) Cost of tangible goods sold 188,795
5-03(b)(2) Total costs and expenses applicable
to sales and revenues 188,795
5-03(b)(3) Other costs and expenses - 0 -
5-03(b)(5) Provision for doubtful
accounts and notes - 0 -
5-03(b)(8) Interest and amortization
of debt discount 17,474
5-03(b)(10) Income before taxes and
other items (147,721)
5-03(b)(11) Income tax expense - 0 -
5-03(b)(14) Income/loss continuing operations - 0 -
5-03(b)(15) Discontinued operations - 0 -
5-03(b)(17) Extraordinary items - 0 -
5-03(b)(18) Cumulative effect-changes
in accounting principles - 0 -
5-03(b)(19) Net income or loss (147,721)
5-03(b)(20) Earnings per share-primary (0.05)
5-03(b)(20) Earnings per share-fully diluted - 0 -
</TABLE>
- 15 -
<PAGE>
