UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[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 33-30980
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 $5,376,900.
As at December 31, 1996, 3,097,149 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.
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 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.
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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-the-shelf
bottled water sold through retail channels having the next highest per gallon
price and, finally, vended water, which has the lowest price per gallon.
Natural spring waters are not always free from contamination
problems. Springs can be contaminated with coliform (bacteria in
the water). Natural springs need to be monitored and tested on a
regular basis to make sure they are without contamination. To
date, the Company has had no contamination problems with its three
active springs. The Company's water has not been determined to be
better or less contaminated than municipal water. The Company
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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 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,
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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 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
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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 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
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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 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.
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
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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 $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 $21,000 first year fee, and, in
the event it has constructed a processing plant, the right to renew the lease
for an additional 20-year term on terms to be agreed upon by the parties. The
Company intends, as its needs require, to utilize the water from these springs
in its business. The water can be utilized without construction of a plant and
the Company has no immediate plans to build a plant on this property. Rent
expense under this lease was $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.
The first two actions involved a dispute concerning title to the
Company's land and facility located in Burlington, New York ("Property"). The
plaintiff sought a one-half interest in the Property and $17,000,000 in damages.
The plaintiff caused a lis pendens to be placed on the Property in connection
with such prior action.
In October, 1994, all of the plaintiff's claims against the Company
were dismissed except for claims of breach of contract and unjust enrichment. In
June, 1995 the Appellate Division, Third Department, dismissed the breach of
contract claim against the Company in the second action. It also dismissed all
of plaintiff's claims, and cancelled the lis pendens, in the first action. In
July and November of 1995, the Company moved to cancel the lis pendens and grant
judgment by default in the second action which was denied by the Court, but
granted in appeal by the Appellate
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Division on November 25, 1996, pursuant to which all claims against all
defendants were dismissed.
In June, 1996, plaintiff commenced a third action against Grey, the
former owners of the Property and the Company (essentially re-alleging the
claims asserted against them in the first and second actions). On November 25,
1996, the Court dismissed all claims against all defendants on the grounds that
they were the subject of the two earlier actions and that plaintiff is bound by
the dispositions of those actions. On January 16, 1997, the Appellate Division
affirmed the Company's motion for default judgment or cancellation of the notice
of pendency, leaving only the unjust enrichment cause of action pending in the
second lawsuit.
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 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 7/64 3/16
Second Quarter 7/64 3/16
Third Quarter 5/32 1/4
Fourth Quarter 9/64 19/64
Calendar Year 1995*:
First Quarter 1/16 3/32
Second Quarter 1/16 3/32
Third Quarter 1/16 3/32
Fourth Quarter 1/16 3/32
Calendar Year 1996:
First Quarter* 1/16 3/32
Second Quarter* 1/32 3/32
Third Quarter* 1/32 3/32
Fourth Quarter 1 1/2 2 1/2
</TABLE>
- -----------
*pre-reverse split
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 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
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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 $1,481,897 (60.6% 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 $28,000. A small reduction in administrative
staff and expenses of approximately $7,000 was offset by the start-up costs
related to the new corporate computer system of approximately $18,000 and
increased business development costs of approximately $16,000 to investigate new
potential business investments.
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 loss for Fiscal 1996 increased by $13,053 from $214,268 in Fiscal
1995 to $227,321 in Fiscal 1996.
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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.
The net loss for Fiscal 1995 decreased by $1,526,407 from $1,740,675 in
Fiscal 1994 to $214,268 in Fiscal 1995.
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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.
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.
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 believes that these factors provide
meaningful evidence as to the Company's ability to continue in operation for the
next fiscal year and support the going concern presentation in the accompanying
consolidated financial statements in favor of the liquidation basis. There can
be no assurance, however, that management will continue to be able to raise
sufficient capital or convert existing debt to equity or achieve profitable
operations going forward.
The Company has no plans or commitments for capital expenditures during
the next twelve months other than the ordinary equipment purchases which are
expected to be funded with additional installment debt.
The Company's business is subject to seasonal fluctuation, with summer
being the busiest season and winter the slowest. To date, seasonality has not
had any material effect on the Company's financial condition or results of
operations.
Item 7. Financial Statements.
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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 financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 12 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficiency and a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 12. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
CITRIN COOPERMAN & COMPANY, LLP
January 22, 1997
New York, New York
15
<PAGE>
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
<S> <C>
AS AT OCTOBER 31,
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 3,097,149 shares in
1996 and 1,659,996 shares in 1995 310 166
Additional paid-in capital 8,295,406 5,897,964
Accumulated deficit (8,591,752) (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
========= =========
See accompanying notes to consolidated financial statements.
16
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31,
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 1,481,897 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 2,492,023 2,781,477
--------- ---------
Net loss $ (227,321) $ (214,268)
========= =========
Net loss per share $ (.12) $ (.13)
========= =========
Weighted average shares
outstanding 1,929,759 1,659,996
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
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 loss $ (227,321) $(214,268)
Adjustments to reconcile
net loss to net cash used
by operating activities -
Depreciation and amortization 156,096 139,245
Loss on sale of assets 28,814 11,551
Provision for doubtful accounts (21,000) 8,000
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 (211,012) (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 2,193,006
Issuance of common stock to
officer under agreement 25,000
See accompanying notes to consolidated financial statements.
18
</TABLE>
<PAGE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
<TABLE>
<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 2,192,918 2,193,006
Shares purchased (48) (420) (420)
Shares issued to
officer under
agreement 200,000 20 24,980 25,000
Shares sold 360,000 36 179,964 180,000
Net loss (227,321) (227,321)
--------- --- --------- ---------- ---------
Balance at
October 31, 1996 3,097,149 $310 $8,295,406 $(8,591,752) $ (296,036)
========= === ========= ========== =========
</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, the Company sold its Utica
operation in January, 1994. As part of the sales agreement, the
new operation will purchase bottled water from the Company for
three years. The Company realized a gain on the sale of the
operation of $104,533 and, as part of the selling price,
received notes of $225,000. The first note is for $50,000
without interest, which will be converted to an interest-bearing
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. Sales
of bottled water to the new company in 1996 and 1995 amounted to
$49,233 and $39,924, respectively.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVENTORIES
-----------
Inventories consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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
====== ======
</TABLE>
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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
======= =======
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.
22
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $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 $21,000 first year fee, and,
in the event it has constructed a processing plant, the right to
renew the lease for an additional 20-year term on terms to be
agreed upon by the parties. The Company intends, as its needs
require, to utilize the water from these springs in its
business. The water can be utilized without construction of a
plant and the Company has no immediate plans to build a plant on
this property. Rent expense under this lease was $33,426 and
$9,330 for the years ended October 31, 1996 and 1995,
respectively.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - CAPITAL AND OPERATING LEASES (CONTINUED)
----------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Minimum future lease payments are:
Operating Leases
Fiscal year ending 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
====== ====== =======
</TABLE>
NOTE 7 - INDEBTEDNESS
------------
<TABLE>
<CAPTION>
<S> <C> <C>
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 stockholder
with interest at 12% 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
======= =======
*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
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INDEBTEDNESS (CONTINUED)
------------------------
(a) During 1993, $1,300,000 of the mortgage was converted to
5,200,000 shares of common stock on the basis of four shares for
each dollar of debt and $80,000 was repaid. In addition, 500,000
shares of common stock were issued in settlement of $71,143 of
accrued interest and any additional unpaid interest. The
mortgagor has agreed to extend the maturity until December 31,
1995.
(b) Echo Springs Water Company, Inc., a related company,
borrowed $300,000 under a promissory note dated August 24, 1994.
The loan bears interest at 7% and principal and interest are
payable December 31, 1995. As additional consideration for the
loan, Echo Springs Water Company, Inc. was to issue 25,000
shares of its common stock to the note holder. In October 1994,
$25,000 of the borrowing was repaid. The proceeds of the
borrowings were lent to the Company under the same terms as with
the note holder.
(c) Holders of notes totalling $200,000 agreed to extend the
maturity date in exchange for shares of common stock of Echo
Springs Water Company, Inc. Shares which were to be issued equal
20% of the amount of the note extended divided by $3.00 per
share for an aggregate 13,333 shares. 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.
<TABLE>
<CAPTION>
<S> <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
====== =========
* 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.
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Group Shares Price Expiration Date
Investment banker 4,000 $20.25 March, 1997
Officer 27,759 4.20 October, 1998
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.
NOTE 10- INCOME TAXES
The Company files a consolidated federal income tax return with
its subsidiaries. As of October 31, 1996, the Company had net
operating loss carryforwards in excess of $8,000,000 for
financial as well as State and Federal tax purposes which expire
in varying amounts beginning in 2004.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Most of the claims in this litigation
have been dismissed by the courts. 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 of $227,321 and at October 31, 1996 had a working capital
deficiency of $1,954,160, an accumulated deficit of $8,591,752
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 achieve profitable operations.
The Company believes that these factors provide meaningful
evidence as to the Company's ability to continue in operation
for the next fiscal year and support the going concern
presentation in the accompanying consolidated financial
statements in favor of the liquidation basis. There can be no
assurance, however, that management will continue to be able to
raise sufficient capital or convert existing debt to equity or
to achieve profitable operations going forward.
NOTE 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, which 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 valued at $25,000 ($.125 per share) to Mr. Rakusin
in consideration for prior services rendered by Mr.
Rakusin to the Company.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 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 lenders
converted $1,700,022 of outstanding principal and unpaid
interest of $492,984, which was converted to 877,201 shares of
common stock. This transaction will reduce future interest
expense by approximately $173,000 per year.
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.
None
28
<PAGE>
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
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Michael S. Rakusin........... 40 President,
Treasurer, and
Director
Edward J. Metzger............ 39 Vice President -
Operations,
Secretary, and
Director
Frank A. LaSala............. 73 Director
</TABLE>
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 - - - - - $25,000 (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 200,000 shares of
its Common Stock valued at $25,000 ($0.125 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
30
<PAGE>
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. 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.
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 427,759(3) 13.7%
Edward J. Metzger 6,800 0.2%
Frank A. LaSala 1,920 0.1%
ESWC, Inc.
149 Main Street
Cooperstown,
NY 11326 210,243 6.8%
31
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
H.T. Ardinger, Jr.
9040 Governors Row
Dallas, TX 75247 398,127 12.9%
William Heim
8845 South Pleasant
Chicago, IL 60620 273,133 8.8%
Robert Moody, Jr.
601 Moody National
Bank Tower
Galveston, TX 77550 205,323 6.6%
Robert P. Gillings
7423 Ridge Boulevard
Brooklyn, NY 11209 290,000 9.4%
All Officers and
Directors as a
Group (three persons) 436,479(3) 14.0%
</TABLE>
(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.
(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 200,000 shares of its Common
Stock valued at $25,000 ($0.125 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.
32
<PAGE>
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.
33
<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
[27] Financial Data Schedule
34
<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: February 12, 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 February 12, 1997
Michael S. Rakusin Principal Executive,
Operating and Financial
Officer
/s/ Edward J. Metzger Vice President, Secretary February 12, 1997
Edward J. Metzger and Director
/s/ Frank A. LaSala Director February 12, 1997
Frank A. LaSala
<PAGE>
STATE OF NEW YORK )
) ss:
DEPARTMENT OF STATE)
I hereby certify that the annexed copy has been compared with the
original document in the custody of the Secretary of State and that the same is
a true copy of said original.
Witness my hand and seal of the Department of State on September 17,
1996.
---------------------------------
Special Deputy Secretary of State
<PAGE>
CERTIFICATE OF INCORPORATION
OF
COMPASS DISTRIBUTING INC.
Under Section 402 of the Business Corporation Law
IT IS HEREBY CERTIFIED THAT:
1. The name of the corporation is:
COMPASS DISTRIBUTING INC.
2. The purpose or purposes for which the corporation is
formed as follows, to wit:
To engage in any lawful act or activity for which the corporations may be formed
under the Business Corporation Law. The corporation is not formed to engage in
any act or activity requiring the consent or approval of any state official,
department, board, agency or other body without such consent or approval first
being obtained.
To own, operate, manage, acquire and deal in property, real and personal, which
may be necessary to the conduct of the business.
Without limiting any of the purposes or powers of the corporation it shall have
the power to do a ny one or more or all of the things set forth, and all other
things likely, directly or indirectly, to promote the interests of the
corporation. In the carrying on of its business it shall have the power to do
any and all things and powers which coo-partnership or natural person could do,
either as a principal, agent, representative, lessor, lessee or otherwise,
either alone or in conjunction with others, and in any part of the world. In
addition, it shall have and exercise all rights, powers and privileges now
belonging to or conferred upon corporations organized under the Business
Corporation Law.
3. The office of the corporation is to be located in the Town
of Orangetown, County of Rockland, State of New York.
4. The aggregate number of shares which the corporation shall have
authority to issue is 200 shares, no par value.
5. The Secretary of State is designated as agent of the corporation
upon whom process against it may be served. The post office address to which the
Secretary of State shall mail a copy of any process against the corporation
served upon him is:
Stern & Wynshaw
500 Fifth Avenue
Suite 4224
<PAGE>
New York, New York 10110
IN WITNESS WHEREOF, the undersigned incorporator, being at least
eighteen years of age, has executed and signed this Certificate of Incorporation
this 8th day of October, 1985.
Diane L. Foley
Diane L. Foley
33 Renesselaer Street
Albany, New York 12202
STATE OF NEW YORK )
) ss:
COUNTY OF ALBANY )
On this 8th day of October, 1985, before me personally came Diane L.
Foley to me known to be the individual described in and who executed the
foregoing instrument, and she duly acknowledged to me that she executed the
same.
Barbara Kinnaw
NOTARY PUBLIC, STATE OF NEW YORK
No. 4720956
Qualified in Albany County
Term Expires March 30, 1986 _________________________
<PAGE>
STATE OF NEW YORK )
) ss:
DEPARTMENT OF STATE)
I hereby certify that the annexed copy has been compared with the
original document in the custody of the Secretary of State and that the same is
a true copy of said original.
Witness my hand and seal of the Department of State on September 17,
1996.
---------------------------------
Special Deputy Secretary of State
<PAGE>
CERTIFICATE OF INCORPORATION
OF
COMPASS DISTRIBUTING INC.
FILED BY:
Stern & Wynshaw
500 Fifth Avenue., Suite 4224
New York, New York 10110
<PAGE>
STATE OF NEW YORK )
) ss:
DEPARTMENT OF STATE)
I hereby certify that the annexed copy has been compared with the
original document in the custody of the Secretary of State and that the same is
a true copy of said original.
Witness my hand and seal of the Department of State on September 17,
1996.
---------------------------------
Special Deputy Secretary of State
<PAGE>
CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION
OF
COMPASS DISTRIBUTING INC.
Under Section 805 of the Business Corporation Law
IT IS HEREBY CERTIFIED THAT:
1. The name of the corporation is COMPASS DISTRIBUTING INC.
2. The certificate of incorporation was filed by the
department of state on the 9th day of October, 1985.
3. The Certificate of Incorporation of this corporation is
hereby amended to effect the following change:
4. The Amendment to the certificate of Incorporation was authorized
first by the board of directors and then by the holders of all outstanding
shares entitled to vote thereon.
5. The certificate of Incorporation is hereby amended to
effect the following change:
The corporation is presently authorized to issue 200 shares no
par value, all of which are unissued and hereby eliminated The
corporation is adding 10,000,000 shares, at $0.0001 par value.
The corporation shall be authorized issue 10,000,000 shares at
$0.0001 par value.
6. In WITNESS WHEREOF, this certificate has been subscribed
this 15th day of June, 1987 by the undersigned.
------------------------------
Victor Gregory, President
------------------------------
Mary Ann Gregory, Secretary
<PAGE>
State of New York
County of New York
VICTOR GREGORY and MARY ANN GREGORY, being duly sworn depose and says, that they
are the President and Secretary, respectively, of Compass Distribution, Inc.,
the corporation named in the foregoing certificate. That they have read the
certificate and on information and belief knows the contents to be true.
----------------------------
Victor Gregory, President
----------------------------
Mary Ann Gregory, Secretary
Sworn to me this 15th
day of June, 1987
- ----------------------
Notary Public
<PAGE>
CERTIFICATE OF AMENDMENT
OF
COMPASS DISTRIBUTING, INC.
Filed By:
Warren Wynshaw
500 Fifth Avenue
Suite 4224
New York, New York 10110
<PAGE>
CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION
OF
COMPASS DISTRIBUTING INC.
Under Section 805 of the Business Corporation Law
IT IS HEREBY CERTIFIED THAT:
1. The name of the corporation is COMPASS DISTRIBUTING INC.
2. The certificate of incorporation was filed by the
department of state on the 9th day of October, 1985.
3. The Certificate of Incorporation of this corporation is
hereby amended to effect the following change:
To amend Paragraph (1) which sets forth the name of the corporation.
Paragraph (1) shall now read as follows:
(1) The name of the corporation is:
GRUDGE MUSIC GROUP, INC.
4. The amendment to the certificate of incorporation was authorized
first by the board of directors and then by vote of a majority of all
outstanding shares entitled to vote thereon.
IN WITNESS WHEREOF, the undersigned hereby affirms that the statements
made herein are true under the penalties of perjury.
Dated: July 17, 1989
- ------------------------ -------------------------
Victor C. Gregory Michael Rakkusin
President Secretary
<PAGE>
CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION
OF
COMPASS DISTRIBUTION INC.
FILED BY: Warren Wynshaw, Esq.
500 Fifth Avenue, Suite 4224
New York, New York 10110
<PAGE>
STATE OF NEW YORK )
) ss:
DEPARTMENT OF STATE)
I hereby certify that the annexed copy has been compared with the
original document in the custody of the Secretary of State and that the same is
a true copy of said original.
Witness my hand and seal of the Department of State on September 17,
1996.
---------------------------------
Special Deputy Secretary of State
<PAGE>
To the Honorable, The Secretary of State of
the State of New York:
PLEASE TAKE NOTICE that pursuant to the provisions of Section 203-a of
the Tax Law, as amended, the Commissioner of Taxation and Finance of the State
of New York does hereby certify that GRUDGE MUSIC GROUP, INC. a corporation
organized under the laws of the State of New York under date of OCTOBER 9, 1985,
and heretofore dissolved by proclamation published on DECEMBER 24, 1991,
pursuant to the provisions of section 203-a of the tax law, has paid all
franchise taxes, penalties and interest charges accrued against it.
IN WITNESS WHEREOF, the Commission of Taxation and Finance has caused
this certificate to be executed and the official seal of the Department of
Taxation and Finance of the State of New York affixed hereto this THIRTY-FIRST
day of OCTOBER, ONE THOUSAND NINE HUNDRED NINETY-TWO.
COMMISSIONER OF
TAXATION AND FINANCE
By: __________________________
Deputy Tax Commissioner
<PAGE>
In the Matter
of the
ANNULMENT
of the
DISSOLUTION
of
GRUDGE MUSIC GROUP, INC.
Pursuant to the provisions of Section
203-a of the Tax law
-------------------------------------
CERTIFICATE OF
PAYMENT OF TAXES
-------------------------------------
McLAUGHLIN & STERN, BALLEN and BALLEN
122 EAST 42ND STREET
NEW YORK, NY 10168
<PAGE>
STATE OF NEW YORK )
) ss:
DEPARTMENT OF STATE)
I hereby certify that the annexed copy has been compared with the
original document in the custody of the Secretary of State and that the same is
a true copy of said original.
Witness my hand and seal of the Department of State on September 17,
1996.
---------------------------------
Special Deputy Secretary of State
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
GRUDGE MUSIC GROUP, INC.
(Pursuant to Section 805 of the Business Corporation Law)
The undersigned being the President and Secretary of GRUDGE
MUSIC GROUP, INC., hereby certify::
1. The name of the corporation is GRUDGE MUSIC GROUP, INC.
2. Certificate of its incorporation was filed by the
Department of State on the October 9, 1985 under the name of
COMPASS DISTRIBUTING..
3. The amendments of the Certificate of Incorporation of the
corporation effected by this Certificate of Amendment are as
follows:
-To change the name of the corporation;
-To increase the aggregate number of shares the
corporation is authorized to issue by adding an additional
65,000,000 shares.
4. To accomplish the foregoing amendments, Paragraph "1" of
the Certificate of Incorporation is amended to read as follows:
"1. The name of the corporation is ECHO SPRINGS WATER
CO., INC."
5. Paragraph "4" of the Certificate of Incorporation is
amended to read as follows:
"4. The aggregate number of shares which the corporation
<PAGE>
shall have authority to issue is 75,000,000 shares,
at $0.0001 par value."
6. This Amendment to the Certificate was authorized first by vote at a
meeting of the Board of Directors and then by vote of at least a majority of all
outstanding shares of the corporation entitled to vote on the said amendment of
the Certificate of Incorporation.
IN WITNESS WHEREOF, we have subscribed this Certificate this 26th day
of September, 1993, and do hereby affirm, under the penalties of perjury, that
the statements contained therein have been examined by us and are true and
correct.
--------------------------------
MICHAEL RAKUSIN, President
--------------------------------
DAVID W. SASS, Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
GRUDGE MUSIC GROUP, INC.
(Pursuant to Section 805 of the Business Corporation Law)
McLaughlin & Stern, Alkalay
Handler, Robbins and Herman
308 Lexington Avenue
New York, New York 10168
<PAGE>
STATE OF NEW YORK )
) ss:
DEPARTMENT OF STATE)
I hereby certify that the annexed copy has been compared with the
original document in the custody of the Secretary of State and that the same is
a true copy of said original.
Witness my hand and seal of the Department of State on September 17,
1996.
---------------------------------
Special Deputy Secretary of State
<PAGE>
NY DEPARTMENT OF STATE DIVISION OF CORPORATION
Statement of Addresses and Directors, Part A
Corporation Name:
<PAGE>
IMPORTANT NOTICE
A New York Corporation which is no longer conducting business should file a
Certificate of Dissolution pursuant to section 1003 of the Business Corporation
Law and a foreign corporation no longer conducting business in New York State
should file a Surrender of Authority pursuant to section 1310 or a Termination
of Existence pursuant to Section 1311 of the Business Corporation Law. An
inactive corporation continues to accrue tax liability and possible interest and
penalties until formally dissolved, surrendered or terminated. Questions
regarding the filing of these certificates should be directed to the NYS
Department of State Division of Corporations, 162 Washington Avenue, Albany, NY
12231-0001 or by calling 518-473-2492. You are also advised to request
Publication 110 "Information and Instructions for Termination of Business
Corporations" from the Department of Taxation and Finance. Requests for this
publication may be made by phone within New York State by calling 1-800-462-8100
or from outside of New York State by calling (518) 438-1073. Mail requests
should be addressed to NYS Department of Taxation & Finance Taxpayer Assistance
Bureau, W.A. Harriman Campus, Albany, NY 12227.
------------------------------------
Filing Period and Penalty: The filing period is the calendar month during which
the original certificate of incorporation or application for authority was filed
or the effective date that corporate existence began if stated in the
certificate of incorporation. Failure to timely file this statement will be
reflected in the departments records as past due or delinquent and may later
subject the corporation to a fine of $750. See section 409 of the Business
Corporation Law.
Filing Fee: The statutory filing fee is $50. Checks and money
orders must be made payable to the "Department of State." DO NOT
mail cash.
Send entire form completed and with $50.00 fee in the self-mailer envelope to
the Department of State, Division of Corporations, 162 Washington Avenue,
Albany, NY 12231-0001.
- -------------------------------------------------------------------
Statement of Addresses and Directors, Part C
IN WITNESS WHEREOF, this certificate has been authorized this 17th day
of May, 1994, by the undersigned who affirms that the statements made herein are
true under the penalties of perjury.
David W. Sass
Signature
Secretary
<PAGE>
<PAGE>
BY-LAWS
OF
ECHO SPRINGS WATER CO., INC.
(a New York corporation)
ARTICLE I
SHAREHOLDERS
l. CERTIFICATES REPRESENTING SHARES. Certificates representing shares shall set
forth thereon the statements prescribed by Section 508, and, where applicable,
by Sections 505, 616, 620, 709, and 1002, of the Business Corporation Law and by
any other applicable provision of law and shall be signed by the Chairman or a
Vice Chairman of the Board of Directors, if any, or by the President or a
Vice-President and by the Secretary or an Assistant Secretary or the Treasurer
or an Assistant Treasurer and may be sealed with the corporate seal or a
facsimile thereof. The signatures of the officers upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent or registered
by a registrar other than the corporation itself or its employee, or if the
shares are listed on a registered national security exchange. In case any
officer who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer at the date of its issue.
A certificate representing shares shall not be issued until the full amount of
consideration therefor has been paid except as Section 504 of the Business
Corporation Law may otherwise permit.
The corporation may issue a new certificate for shares in place of any
certificate theretofore issued by it, alleged to have been lost or destroyed,
and the Board of Directors may require the owner of any lost or destroyed
certificate, or his legal representative, to give the corporation a bond
sufficient to indemnify the corporation against any claim that may be made
against it on account of the alleged loss or destruction - of any such
certificate or the issuance of any such new certificate.
2. FRACTIONAL SHARE INTERESTS. The corporation may issue certificates for
fractions of a share where necessary to effect transactions authorized by the
Business Corporation Law which shall entitle the holder, in proportion to his
fractional holdings, to exercise voting rights, receive dividends, and
participate in liquidating distributions; or it may pay in cash the fair value
of fractions of a share as of the time when those entitled to receive such
fractions are determined; or it may issue scrip in registered or bearer form
over the manual or facsimile signature of an officer of the corporation or of
its agent, exchangeable as therein provided for full shares, but such scrip
shall not entitle the holder to any rights of a shareholder except as therein
provided.
3. SHARE TRANSFERS. Upon compliance with provisions restricting the
transferability of shares, if any, transfers of shares of the corporation shall
be made only on the share
<PAGE>
record of the corporation by the registered holder
thereof, or by his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary of the corporation or with a transfer
agent or a registrar, if any, and on surrender of the certificate or
certificates for such shares properly endorsed and the payment of all taxes due
thereon.endorsed and the payment of all taxes due thereon.
4. RECORD DATE FOR SHAREHOLDERS. For the purpose of determining the shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or to express consent to or dissent from any proposal
without a meeting, or for the purpose of determining shareholders entitled to
receive payment of any dividend or the allotment of any rights, or for the
purpose of any other action, the directors may fix, in advance, a date as the
record date for any such determination of shareholders. Such date shall not be
more than fifty days nor less than ten days before the date of such meeting, nor
more than fifty days prior to any other action. If no record date is fixed, the
record date for the determination of shareholders entitled to notice of or to
vote at a meeting of shareholders shall be at the close of the business on the
day next preceding the day on which notice is given, or, if no notice is given,
the day on which the meeting is held; the record date for determining
shareholders for any purpose other than that specified in the preceding clause
shall be at the close of business on the day on which the resolution of the
directors relating thereto is adopted. When a determination of shareholders of
record entitled to notice of or to vote at any meeting of shareholders has been
made as provided in this paragraph. such determination shall apply to any
adjournment thereof, unless directors fix a new record date under this paragraph
for the adjourned meeting.
5. MEANING OF CERTAIN TERMS. As used herein in respect of the right to notice of
a meeting of shareholders or a waiver thereof or to participate or vote thereat
or to consent or dissent in writing in lieu of a meeting, as the case may be,
the term "share" or"shares" or "shareholder" or "shareholders" refers to an
outstanding share or shares and to a holder or holders of record of outstanding
shares when the corporation is authorized to issue only one class of shares, and
said reference is also intended to include any outstanding share or shares and
any holder or holders of record of outstanding shares of any class upon which or
upon whom the certificate of incorporation confers such rights where there are
two or more classes or series of shares or upon which or upon whom the Business
Corporation Law confers such rights notwithstanding that the certificate of
incorporation may provide for more than one class or series of shares, one or
more of which are limited or denied such rights thereunder.
6. SHAREHOLDER MEETINGS. TIME. The annual meeting shall be held on the date
fixed, from time to time, by the directors, provided, that the first annual
meeting shall be held on a date within thirteen months after the formation of
the corporation, and each successive annual meeting shall be held on a date
within thirteen months after the date of the preceding annual meeting. A special
meeting shall be held on the date fixed by the directors except when the
Business Corporation Law confers the night to fix the date upon shareholders.
PLACE. Annual meetings and special meetings shall be held at such place, within
or without the State of New York, as the directors may, from time to time, fix.
Whenever the directors
<PAGE>
shall fall to fix such place, or, whenever shareholders entitled to call a
special meeting shall call the same, the meeting shall be held at the office of
the corporation in the State of New York.
CALL. Annual meetings may be called by the directors or by any officer
instructed by the directors to call the meeting. Special meetings may be called
in like manner except when the directors are required by the Business
Corporation Law to call a meeting, or except when the shareholders are entitled
by said Law to demand the call of a meeting.
NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER OF NOTICE. Written notice of all
meetings shall be given. stating the place, date, and hour of the meeting, and,
unless it is an annual meeting, indicating that it is being issued by or at the
direction of the person or persons calling the meeting. The notice of an annual
meeting shall state that the meeting is called for the election of directors and
for the transaction of other business which may properly come before the
meeting, and shall (if any other action which could be taken at a special
meeting is to be taken at such annual meeting) state the purpose or purposes.
The notice of a special meeting shall in all instances state the or purposes for
which the meeting, is called and, at any such meeting, only such business may be
transacted which is related to the purpose or purposes set forth in the notice.
If the directors shall adopt, amend, or repeal a By-Law regulating an impending
election of directors, the notice of the next meeting for election of directors
shall contain the statements prescribed by Section 601(b) of the Business
Corporation Law. If any action is to be taken which would, if taken, entitle
shareholders to receive payment for their shares, the notice shall include a
statement of that purpose and to that effect and shall be accompanied by a copy
of Section 623 of the Business Corporation Law or an outline of its material
terms. A copy of the notice of any meeting shall be given, personally or by
first class mail, not less than ten days nor than fifty days before the date of
the meeting, unless the lapse of the prescribed period of time shall have been
waived, to each shareholder- at his record address or at such other address
which he may have furnished by request in writing to the Secretary of the
corporation. In lieu of giving a copy of such notice personally or by first
class mail as aforesaid, a copy of such notice may be given by third class mail
not fewer than twenty-four nor more than fifty days before the date of the
meeting. Notice by mail shall be deemed to be given when deposited, with postage
thereon prepaid, in a post office or official depository under the exclusive
care and custody of the United States post office department. If a meeting is
adjourned to another time or place, and, if any announcement of the adjourned
time or place is made at the meeting, it shall not be necessary to give notice
of the adjourned meeting unless the directors, after adjournment, fix a new
record date for the adjourned meeting. Notice of a meeting need not be given to
any shareholder who submits a signed waiver of notice before or after the
meeting. The attendance of a shareholder at a meeting without protesting prior
to the conclusion of the meeting the lack of notice of such meeting shall
constitute a waiver of notice by him.
SHAREHOLDER LIST AND CHALLENGE. A list of shareholders as of the record date,
certified by the Secretary or other officer responsible for its preparation or
by the transfer agent, if any, shall be produced at any meeting of shareholders
upon the request thereat or prior thereto of any shareholder. If the right to
vote at any meeting is challenged, the inspectors of election, if any, or the
person presiding thereat, shall require such list of shareholders to be produced
as evidence of the right of the persons challenged to vote at such meeting, and
all
<PAGE>
persons who appear from such list to be shareholders entitled to vote
thereat may vote at such meeting. CONDUCT OF MEETING. Meetings of the
shareholders shall be presided over by oneuch
CONDUCT OF MEETING. Meetings of the shareholders shall be presided over by one
of the following officers in the order of seniority and if present and acting -
the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, the
President, a Vice-President, or, if none of the foregoing is in office and
present and acting, by a chairman to be chosen by the shareholders. The
Secretary of the corporation, or in his absence, an Assistant Secretary, shall
act as secretary of every meeting, but if neither the Secretary nor an Assistant
Secretary is present the chairman of the meeting shall appoint a secretary of
the meeting.
PROXY REPRESENTATION. Every shareholder may authorize another person or persons
to act for him by proxy in all matters in which a shareholder is entitled to
participate, whether by waiving notice of any meeting, voting or participating
at a meeting, or expressing consent or dissent without a meeting. Every proxy
must be signed by the shareholder or his attorney-in-fact. No proxy shall be
valid after the expiration of eleven months from the date thereof unless
otherwise provided in the proxy. Every proxy shall be revocable at the pleasure
of the shareholder executing it, except as otherwise provided by the Business
Corporation Law.
INSPECTORS APPOINTMENT. -ne directors, in advance of any meeting, may, but need
not, appoint one or more inspectors to act at the meeting or any adjournment
thereof. If an inspector or inspectors are not appointed, the person presiding
at the meeting may, but need not, appoint one or more inspectors. In case any
person who may be appointed as an inspector fails to appear or act, the vacancy
may be filled by appointment made by the directors in advance of the meeting or
at the meeting by the person presiding thereat. Each inspector, if any, before
entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector at such meeting with strict
impartiality and according to the best of his ability. The inspectors, if any,
shall determine the number o' shares outstanding and the voting power of each,
the shares represented at the meeting, the existence of a quorum, the validity
and effect of proxies, and shall receive votes, ballots, or consents, hear and
determine all challenges and questions arising in connection with the right to
vote, count and tabulate all votes, ballots, or consents, determine the result,
and do such acts as are proper to conduct the election or vote with fairness to
all shareholders. On request of the person presiding at the meeting or any
shareholder, the inspector or inspectors, if any, shall make a report in writing
of any challenge, question or matter deter-mined by him or them and execute a
certificate of any fact found by him or them.
QUORUM. Except for a special election of directors pursuant to Section 603(b) of
the Business Corporation Law, and except as herein otherwise provided, the
holders of a majority of the outstanding shares shall constitute a quorum at a
meeting of shareholders for the transaction of any business. When a quorum is
once present to organize a meeting, it is not broken by the subsequent
withdrawal of any shareholders. The shareholders present may adjourn the meeting
despite the absence of a quorum.
VOTING. Each share shall entitle the holder thereof to one vote. In the election
of directors, a plurality of the votes cast shall elect. Any other action shall
be authorized by a
<PAGE>
majority of the votes cast except where the Business
Corporation Law prescribes ' a different proportion of votes.s cast except
where the Business Corporation Law prescribes ' a different
proportion of votes.
7. SHAREHOLDER ACTION WITHOUT MEETINGS. Whenever shareholders are required or
permitted to take any action by vote, such action may be taken without a meeting
on written consent, setting forth the action so taken, signed by the holders of
all shares.
ARTICLE II
GOVERNING BOARD
1. FUNCTIONS AND DEFINITIONS. The business of the corporation shall be managed
under the direction of a governing board, which is herein referred to as the
"Board of Directors" or "directors" notwithstanding that the members thereof may
otherwise bear the titles of trustees, managers, or governors or any other
designated title, and notwithstanding that only one director legally constitutes
the Board. The word "director" or "directors" likewise herein refers to a member
or to members of the governing board notwithstanding the designation of a
different official title or titles. The use of the phrase "entire board" herein
refers to the total number of directors which the corporation would have if
there were no vacancies.
2. QUALIFICATIONS AND NUMBER. Each director shall be at least eighteen years of
age. A director need not be a shareholder, a citizen of the United States, or a
resident of the State of New York. The initial Board of Directors shall consist
of persons. Thereafter, the number of directors constituting the entire board
shall be at least three, except that, where all the shares are owned
beneficially and of record by less than three shareholders, the number of
directors may be less than three but not less than the number of such
shareholders. Subject to the foregoing limitation and except for the first Board
of Directors, such number may be fixed from time to time by action of the
shareholders or of the directors, or, if the number is not so fixed, the number
shall be The number of directors may be increased or decreased by action of
shareholders or of the directors, provided that any action of the directors to
effect such increase or decrease shall require the vote of a majority of the
entire Board. No decrease shall shorten the term of any incumbent director.
3. ELECTION AND TERM. The first Board of Directors shall be elected by the
incorporator or incorporators and shall hold office until the first annual
meeting of shareholders and until their successors have been elected and
qualified. Thereafter, directors who are elected at an annual meeting of
shareholders, and directors who are elected in the interim by the shareholders
to fill vacancies and newly created directorships, shall hold office until the
next annual meeting of shareholders and until their successors have been elected
and qualified; and directors who are elected in the interim by the directors to
fill vacancies and newly created directorships shall hold office until the next
meeting of shareholders at which the election of directors is in the regular
order of business and until their successors have been elected and qualified. In
the interim between annual meetings of shareholders or of special meetings of
shareholders called for the election of directors, newly created directorships
and any vacancies in the Board of Directors, including vacancies resulting from
the removal of directors for cause or without cause, may be filled by the vote
of the remaining directors then in office, although less than a quorum exists.
<PAGE>
4. MEETINGS.
TIME. Meetings shall be held at such time as the Board shall fix, except that
the first meeting of a newly elected Board shall be held as soon after its
election as the directors may conveniently assemble.
PLACE. Meetings shall be held at such place within or without the State of New
York as shall be fixed by the Board.
CALL. No call shall be required for regular meetings for which the time and
place have been fixed. Special meetings may be called by or at the direction of
the Chairman of the Board, if any, of the President, or of a majority of the
directors in office.
NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for regular
meetings for which the time and place have been fixed. Written, oral, or any
other mode of notice of the time and place shall be given for special meetings
in sufficient time for the convenient assembly of the directors thereat. The
notice of any meeting need not specify the purpose of the meeting. Any
requirement of furnishing a notice shall be waived by any director who signs a
waiver of notice before or after the meeting, or who attends the meeting without
protesting, prior thereto or at its commencement, the lack of notice to him.
QUORUM AND ACTION. A majority of the entire Board shall constitute a quorum
except when a vacancy or vacancies prevents such majority, whereupon a majority
of the directors in office shall constitute a quorum, provided such majority
shall constitute at least one- third of the entire Board. A majority of the
directors present, whether or not a quorum is present, may adjourn a meeting to
another time and place. Except as herein otherwise provided, the act of the
Board shall be the act, at a meeting duly assembled, by vote of a majority of
the directors present at the time of the vote, a quorum being, present at such
time.
Any one or more members of the Board of Directors or of any committee thereof
may participate in a meeting of said Board or of any such committee by means of
a conference telephone or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time, and
participation by such means shall constitute presence in person at the meeting.
CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if present and
acting, shall preside at all meetings. Otherwise, the President, if present and
acting, or any other director chosen by the Board, shall preside.
5. REMOVAL OF DIRECTORS. Any or all of the directors may be removed for cause or
without cause by the shareholders. One or more of the directors may be removed
for cause by the Board of Directors.
6. COMMITTEES. Whenever the Board of Directors shall consist of more than
<PAGE>
three members, the Board of Directors, by resolution adopted by a majority of
the entire Board of Directors, may designate from their number three or more
directors to constitute an Executive Committee and other committees, each of
which, to the extent provided in the resolution designating it, shall have the
authority of the Board of Directors with the exception of any authority the
delegation of which is prohibited by Section 712 of the Business Corporation
Law.ss Corporation Law.
7. WRITTEN ACTION. Any action required or permitted to be taken by the Board of
Directors or by any committee thereof may be taken without a meeting if all of
the members of the Board of Directors or of any committee thereof consent in
writing to the adoption of a resolution authorizing the action. The resolution
and the written comments thereto by the members of the Board of Directors or of
any such committee shall be filed with the minutes of the proceedings of the
Board of Directors or of any such committee.
ARTICLE III
OFFICERS
The directors may elect or appoint a Chairman of the Board of Directors, a
President, one or more Vice-Presidents, a Secretary, one or more Assistant
Secretaries, a Treasurer, one or more Assistant Treasurers, and such other
officers as they may determine. The President may but need not be a director.
Any two or more offices may be held by the same person except the offices of
President and Secretary; or, when all of the issued and outstanding shares of
the corporation are owned by one person, such person may hold all or any
combination of offices.
Unless otherwise provided in the resolution of election or appointment, each
officer shall hold office until the meeting of the Board of Directors following
the next annual meeting of shareholders and until his successor has been elected
and qualified.
Officers shall have the powers and duties defined in the resolutions appointing
them-
The Board of Directors may remove any officer for cause or without cause.
ARTICLE IV
STATUTORY NOTICES TO SHAREHOLDERS
The directors may appoint the Treasurer or other fiscal officer and/or the
Secretary or any other officer to cause to be prepared and furnished to
shareholders entitled thereto any special financial notice and/or any financial
statement, as the case may be, which may be required by any provision of law,
and which, more specifically, may be required by Sections 510, 511, 515, 516,
517, 519, and 520 of the Business Corporation Law.
<PAGE>
ARTICLE V
BOOKS AND RECORDS
The corporation shall keep correct and complete books and records of account and
shall keep minutes of the proceedings of the shareholders, of the Board of
Directors, and/of any committee which the directors may appoint, and shall keep
at the office of the corporation in the State of New York or at the office of
the transfer agent or registrar, if any, in said State, a record containing the
names and addresses of all shareholders, the number and class of shares held by
each, and the dates when they respectively became the owners of record thereof
Any of the foregoing books, minutes, or records may be in written form or in any
other form capable of being converted into written form within a reasonable
time.
ARTICLE VI
CORPORATE SEAL
The corporate seal, if any, shall be in such form as the Board of Directors
shall prescribe.
ARTICLE VII
FISCAL YEAR
The fiscal year of the corporation shall be fixed, and shall be subject to
change from time to time, by the Board of Directors.
ARTICLE VIII
CONTROL OVER BY-LAWS
The shareholders entitled to vote in the election of directors or the directors
upon compliance with any statutory requisite may amend or repeal the By-Laws and
may adopt new By-Laws, except that the directors may not amend or repeal any
By-Law or adopt any new By-Law, the statutory control over which is vested
exclusively in the said shareholders or in the incorporators. By-Laws adopted by
the incorporators or directors may be amended or repealed by the said
shareholders.
<PAGE>
The undersigned incorporator certifies that he has examined the foregoing
By-Laws and has adopted the same as the first By-Laws of the corporation; that
said By-Laws contain specific and general provisions, which, in order to be
operative, must be adopted by the incorporator or incorporators or the
shareholders entitled to vote in the election of directors; and that he has
adopted each of said specific and general provisions in accordance with the
requirements of the Business Corporation Law.
<PAGE>
COMMON STOCK COMMON STOCK
PAR VALUE $.0001 PAR VALUE $.0001
SHARES
SEE REVERSE FOR CERTAIN
DEFINITIONS AND LIMITATIONS CUSIP
ECHO SPRINGS WATER CO., INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF NEW YORK
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, OF
ECHO SPRINGS WATER CO., INC.
(hereinafter called the Corporation) transferable on the books of
the Corporation or by the holder hereof, in person or by duly
authorized Attorney, upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and
registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
Countersigned and Registered:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
Transfer Agent and Registrar
AUTHORIZED SIGNATURE
SECRETARY
PRESIDENT
The following abbreviations, when used in the inscription on the
face of this certificate, shall be constured as though they were
written out in full according to applicable laws or regulations:
<PAGE>
TEN COM - as tentnants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as
tenants in common
UNIF GIFT MIN ACT - Custodian
(Cust) (Minor)
Under Uniform Gifts to Minor Act
(State)
Addtional abbreviations may also be used though not in the above
list.
For Value received hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(NAME AND ADDRESS OF TRANSFEREE SHOULD BE PRINTED OR TYPEWRITTEN)
Shares
of the Common Stock represented by the within Certificate and do
hereby irrevocably constitute and appoint
Attorney
to transfer the said stock on the books of the within-named
Corporation with full power of substitution in the premises.
<PAGE>
Dated
SIGNATURE
Signature(s) Guaranteed
By
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (Banks, Stockbrokers, Savings and Loan Associations
and Credit Unions WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE PROGRAM) PURSUANT TO S.E.C. RULE 17Ad-1 5.
NOTICE: The signature of this assignment must correspond with
name(s) as written upon the face of the certificate in every
particular without alteration or enlargement or any change
whatever.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
audited consolidated financial statements of the Company for the year
ended October 31, 1996 and is qualified in its entirety by reference to the
Form 10-KSB for Fiscal 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-1-1995
<PERIOD-END> OCT-31-1996
<CASH> 44,631
<SECURITIES> 0
<RECEIVABLES> 271,212
<ALLOWANCES> 14,000
<INVENTORY> 34,221
<CURRENT-ASSETS> 392,252
<PP&E> 1,954,075
<DEPRECIATION> 675,845
<TOTAL-ASSETS> 2,050,376
<CURRENT-LIABILITIES> 2,346,412
<BONDS> 0
0
0
<COMMON> 310
<OTHER-SE> (296,346)
<TOTAL-LIABILITY-AND-EQUITY> 2,050,376
<SALES> 2,252,968
<TOTAL-REVENUES> 2,264,702
<CGS> 865,255
<TOTAL-COSTS> 865,255
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 189,782
<INCOME-PRETAX> (227,321)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (227,321)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> 0
</TABLE>
