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, 1997
[ ] Transition report pursuant to section 13 or 15(d) of The Securities
Exchange Act of 1934
For the transition period from _________ to __________
Commission file number 0-17872
ECHO SPRINGS WATER CO., INC.
(formerly known as Grudge Music Group, Inc.)
(Name of small business issuer in its charter)
New York 16-1433379
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Building 100A, Hackensack Avenue, Kearny, NJ 07032
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (973) 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 $1,917,444.
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The aggregate market value of the issuer's voting stock held as of December 31,
1997 by non-affiliates of the issuer, based upon the average of the closing bid
and asked prices on that date was approximately $3,520,100.
As at December 31, 1997 3,822,149 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
This Form 10-KSB contains forward-looking statements. Additional
written and oral forward-looking statements may be made by the Company from time
to time in Securities and Exchange Commission ("SEC") filings and otherwise. The
Company cautions readers that results predicted by forward-looking statements,
including, without limitation, those relating to the Company's future business
prospects, revenues, working capital, liquidity, capital needs and income are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those indicated in the forward-looking statements due to
risks and factors identified in this Form 10-KSB and as may be identified from
time to time in the Company's future filings with the SEC.
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
referred to as the "Company"), is engaged in bottling and distributing its
non-sparkling 100% natural spring water through its established sales and
distribution network to its existing base of approximately 4,000 customers
located in the New York City Metropolitan area, New Jersey, upstate New York,
eastern Pennsylvania (including the Greater Philadelphia area) and northern
Delaware. The Company markets its 100% natural spring water under its brand name
"Echo Springs" and also under certain private labels for third party
distribution. The Company bottles its drinking water at its NSF International
("NSF") "Certified Bottling Facility" from naturally free-flowing springs at the
source on the Company's property in Burlington, New York. The Company also
leases water coolers to its commercial and residential customers and sells
allied products such as coffee, tea and a wide assortment of paper products,
primarily to its commercial accounts.
The Company's products are marketed and sold primarily by its
in-house staff. The Company also provides installation and service for its
leased coolers and other equipment, such as brewers and refrigerators.
The Company is highly dependent upon the Aramark Corporation
("Aramark"), one of the world's largest privately-held food service companies,
for the Company's sales of five-gallon bottled water. For the fiscal year ended
October 31, 1997, approximately $714,828 or 34.7% of gross sales was derived
from Aramark. Although orders for sales have been received, there can be no
assurance that commitments for any additional years will be awarded. The Company
will continue to be dependent upon revenues from this source in the
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immediate future. The loss of this revenue source would have a material adverse
impact upon the Company.
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., a distribution company that leased water coolers and sold
water and other allied products to both commercial and residential customers in
the State of New Jersey.
The Bottled Water Market
The bottled water market comprises three major segments: non-
sparkling, sparkling and imported water.
* Non-sparkling, or still, water contains no
carbonation and is consumed as an
"alternative to tap water." Non-sparkling
water is generally distributed directly to
homes and offices, through retail outlets
and through vending machines.
Distinctions are often made among brands
of non-sparkling water based on their
source, level of mineral content and the
method of purification (ozonation,
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
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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 per-gallon price.
Natural spring waters are not always free from contamination
problems. Springs can be contaminated with coliform (bacteria in the water).
Natural springs need to be monitored and tested on a regular basis to make sure
they are without contamination. To date, the Company has had no contamination
problems with its three active springs. The Company's water has not been
determined to be better or less contaminated than municipal water. The Company
believes, however, that natural spring water has advantages over municipal water
because, unlike municipal water, natural spring water is not treated with
chlorine and other chemicals.
Products
The Company's natural spring water is sold in two bottle sizes:
one-gallon high-density polyethylene bottles and five-gallon polycarbonate
recyclable containers. Water sold under the "Echo Springs" brand is packaged in
both one-gallon and five-gallon bottles, as is private label water. 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, sugar, soups and a wide assortment of paper products such as hot and
cold 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, including Elkay
Manufacturing Company, Package Material Corp. and Portola
Packaging, Inc. In the past, the Company has experienced delays
from time to time in obtaining an adequate supply of these
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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 Company. 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, the Company has focused its marketing and
sales efforts in the New York City Metropolitan area, New Jersey, upstate New
York, eastern Pennsylvania (including the Greater Philadelphia area) and
northern Delaware, 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. The Company sells its products to offices, other commercial
establishments, residential customers and third party distributors. The Company
distributes its bottled water and allied products from its Kearny, New Jersey
warehouse by means of its fleet of ten leased trucks. The Company distributes
its bottled water from its Cherry Hill, New Jersey warehouse by means of two
leased trucks. The Company also leases a tractor and three trailers for delivery
to its Kearny and Cherry Hill warehouses and to certain third party
distributors.
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.
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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
Belmont Springs, Crystal, Kentwood, Polar, Willow and Talwonda Springs brands.
Employees
As of December 31, 1997, the Company employed thirty-one people, five
in production, sixteen in distribution, and ten 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 the 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
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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 water are tested. After
this review and testing, arrangements are made for the local county public
health unit to inspect the water bottling facilities.
The cost to the Company to comply with government regulation consists
primarily of permits and water testing and amounted to approximately $25,000 for
the fiscal year ended October 31, 1997.
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 owns its principal facility which consists of 150 acres
of land located in Burlington, New York, on which there is located a processing
facility consisting of 7,200 square feet and seven springs, of which three are
completed and in operation. 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
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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 from its two rented springs at 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.
As the Company controls its natural spring water sources, it is not
vulnerable to unanticipated factors which might otherwise arise if its was
dependent upon outside-owned sources. However, 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. These
two 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
Department of Health to operate the springs on August 10, 1995. Based on the
amended agreement of July 19, 1995, rent for the property is $.005 per gallon of
water extracted for the first five years (with minimum rent of $300 per week)
and $.01 per gallon for the following fifteen years (with minimum rent of $600
per week). The Company has paid an additional rent of $21,000 during the first
year. The Company has the right to build and operate a processing plant (which
will become the property of the landlord) on the property, in which case the
rent will increase to $.015 per gallon extracted. The Company also has the right
to terminate the lease without penalty after payment of rent aggregating
$100,000 plus the additional $21,000 first-year rent, and, in the event it has
constructed a processing plant, the right to renew the lease for an additional
20-year term on terms to be agreed upon by the parties. The Company intends, as
its needs require, to utilize the water from these springs in its business. The
water can be utilized
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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 $19,661 and $33,426
for the years ended October 31, 1997 and 1996, respectively.
The Company's principal offices are in Kearny, New Jersey where it
leases 20,290 square feet of office and warehouse space pursuant to a lease
expiring in March, 1998 and currently being renegotiated. The Company pays a
monthly rent of $5,495. The Company also rents the use of shared warehouse space
in Cherry Hill, New Jersey for a monthly rent of $1,200, pursuant to a lease
whose term expired in March, 1997 and continues thereafter on a month-to-month
basis. The Company believes that its current facilities are adequate for its
foreseeable needs.
Item 3. Legal Proceedings
Kenneth T. Williams commenced two actions in March and April, 1994,
and a third action in June, 1996 in the Supreme Court of the State of New York,
County of Otsego, against certain parties, including the Company and certain of
its subsidiaries and affiliates, seeking a one-half interest in the Company's
land and facility located in Burlington, New York and $17,000,000 in damages.
All three suits have been dismissed in their entirety except a claim,
for an unspecified amount, that the Company and the other defendants have been
unjustly enriched at Mr. Williams' expense. Due to Mr. Williams' failure to
timely take proceedings for judgment against the Company, it is not clear
whether this case will come to trial on the merits.
Management is of the opinion that there is no material exposure to
the Company and therefore, no provision has been made for any possible loss in
the Company's consolidated financial statements.
Item 4. Submission or Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Company's Common Equity and Related
Stockholder Matters
The following table sets forth the high and low closing bid prices
for the periods indicated as reported by the National Association of Securities
Dealers Automated Quotation System (NASDAQ) between dealers and do not include
retail mark-ups, mark-downs, or commissions and do not necessarily represent
actual
transactions.
Low High
Calendar Year 1995*:
First Quarter $ .50 $2.00
Second Quarter 1.50 1.56
Third Quarter 1.25 1.50
Fourth Quarter .75 1.25
Calendar Year 1996:
First Quarter* .63 1.25
Second Quarter* 1.00 2.25
Third Quarter* 1.25 3.00
Fourth Quarter 1.25 2.75
Calendar Year 1997:
First Quarter 1.25 2.63
Second Quarter .75 1.25
Third Quarter .75 1.50
Fourth Quarter .81 1.25
- -----------
*recalculated after reverse split
At December 31, 1997, the Company had 292 holders of record of its
Common Stock.
The Company has paid no cash dividends on its Common Stock to date
and it does not anticipate declaring or paying any cash dividends in the
foreseeable future.
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Item 6. Management's Discussion and Analysis
of Financial Condition and Results of Operations
For the Fiscal Year Ended October 31, 1997 Compared with the Fiscal
Year Ended October 31, 1996
Gross sales decreased $194,901 (8.7%) to $2,058,067 for the fiscal
year ended October 31, 1997 ("Fiscal 1997") from $2,252,968 for the fiscal year
ended October 31, 1996 ("Fiscal 1996"). Five-gallon sales to Aramark Corporation
increased by approximately $274,000, due to increased sales of approximately
$52,000 to their continuing New York and New Jersey operations plus the
Company's expansion into this customer's Pennsylvania locations, which accounted
for the remaining approximately $222,000. However, five-gallon and allied
product sales to and rental income from the Company's regular customer base fell
by approximately $111,000, $63,000 and $62,000, respectively, largely due to a
deliberate discontinuance of service to marginal customers and a lack of sales
and marketing staff as the Company concentrated its efforts toward the Aramark
business as this business requires no capital investment outlay for cooler
equipment and provides its own sales and marketing at no additional cost to the
Company. 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 and
one quarts, other low-margin products, decreased by approximately $207,000 and
$9,000, respectively, largely due to a discontinuance of service to one
supermarket customer and the loss of one of the Company's distributors which
completed its own bottling facility in July, 1997. A $7,000 decrease in regular
customer credits and allowances was offset by approximately $118,000 in
discounts attributable to a half-price discount offered to Aramark for three
months (March 10 through June 8, 1997) and a $0.15 discount per bottle for the
nine months thereafter as an incentive to obtain their Pennsylvania business.
Other income in Fiscal 1996 included approximately $32,000 of discounts earned
upon the renegotiation and settlement of five older payables, which event did
not recur in Fiscal 1997. The remaining decrease in other income resulted
primarily from a lower gain on unclaimed or lost customer deposits as a result
of a more accurate method of estimation.
Cost of sales for Fiscal 1997 was $745,711 (36.2% of gross sales) as
compared to $865,255 (38.4% of gross sales) for Fiscal 1996. This 2.2 percentage
point improvement is comprised of a 3.4 percentage point gain due primarily to
the above-noted reductions in the sales of low-margin product lines, offset by a
1.2 percentage point increase caused by the above-noted decrease in the
equipment rental portion of gross sales.
Selling, general and administrative expenses were $1,844,299
in Fiscal 1997 as compared to $1,483,147 in Fiscal 1996. Delivery
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and warehouse costs increased approximately $93,000. The Pennsylvania operations
amounted to approximately $120,000. The disposal of the Company's remaining
owned vehicles resulted in an increase in truck rental costs of approximately
$39,000 which was offset by a similar reduction in maintenance and repairs and
insurance expenses. Also, while Kearny staff levels remained similar, a change
in the staff mix resulted in reduced labor costs of approximately $28,000.
Advertising and promotion costs increased approximately $27,000 and related
primarily to the Company's Aramark business. Further, general and administrative
expenses rose by approximately $240,000. Increased clerical costs accounted for
approximately $30,000. The market value of common stock issued to an officer
under agreement was $166,250. Professional fees increased $60,000. These
increases were offset by reduced travel and entertainment expenses of
approximately $12,000.
Interest expense decreased from $189,782 in Fiscal 1996 to $52,063 in
Fiscal 1997, primarily as a result of the October, 1996 debt-to-equity
conversion. Amortization of other assets of $4,876 in Fiscal 1997 and Fiscal
1996 related to the amortization of water rights. Other income of $87,447 in
Fiscal 1997 and $78,400 in Fiscal 1996 related to non-recurring operating items.
The loss on disposal of assets in Fiscal 1997 related primarily to
the writing down of certain water coolers, bottles and brewers and furniture and
fixtures to realizable value based upon a detailed review of these asset
categories.
The net loss before extraordinary gain for Fiscal 1997 increased by
$511,049 from $228,571 in Fiscal 1996 to $739,620 in Fiscal 1997.
For the Fiscal Year Ended October 31, 1996 Compared with the 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 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
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older payables increased by approximately $24,000 and credits and allowances
were reduced by approximately $55,000. These gains were offset by a lower gain
on unclaimed or lost customer deposits of approximately $30,000.
Cost of sales for Fiscal 1996 was $865,255 (38.4% of gross sales) as
compared to $978,901 (37.6% of gross sales) for Fiscal 1995. This small
percentage increase was caused primarily by an approximately $24,000 increase in
rental expense relating to the Wheeler springs resulting from twelve months rent
in Fiscal 1996 versus three months in Fiscal 1995.
Selling, general and administrative expenses were $1,483,147 (65.5%
of net revenues) in Fiscal 1996 as compared to $1,542,160 (60.1% of net
revenues) in Fiscal 1995. A significant reduction in the sales and marketing
staff in an effort to better concentrate on the current customer base resulted
in an overall savings of approximately $158,000. However, delivery costs
increased approximately $49,000 primarily as a result of increased truck rental
costs due to a larger number of rental vehicles in the corporate fleet, in order
to improve the timeliness of product deliveries, combined with a 50% truck
rental price increase in May, 1996. Further, warehouse costs increased
approximately $21,000 due largely to increased cooler repair costs resulting
from contracting such repairs to a third party professional. Lastly, general and
administrative expenses rose by approximately $29,000, primarily as a result of
approximately $26,000 of additional compensation to the President in the form of
common shares issued in consideration of prior services.
Interest expense decreased from $247,694 in Fiscal 1995 to $189,782
in Fiscal 1996 primarily as a result of the $200,000 8% mortgage note payable
under litigation being eliminated at October 31, 1995 and the effect of the debt
conversion described in Note 14 to the consolidated financial statements.
Amortization of other assets of $4,876 in Fiscal 1996 and Fiscal 1995 related to
the amortization of water rights. Other income of $78,400 in Fiscal 1996 and
$3,705 in Fiscal 1995 related to non-recurring operating items.
The net operating loss for Fiscal 1996 increased by $14,303 from
$214,268 in Fiscal 1995 to $228,571 in Fiscal 1996. The net income for Fiscal
1996 was $100,379 after an extraordinary gain on debt restructuring of $328,950.
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.
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During the fiscal years ended October 31, 1997 and 1996, the Company
had negative cash flows from operating activities of $359,586 and $270,514,
respectively. Investing activities used cash of $240,746 in Fiscal 1997 and
$44,695 in Fiscal 1996, primarily for the acquisition of property and equipment.
The Company has financed its operating and investing activities during these
periods primarily through the issuance of common stock and installment debt.
In 1996, the Company completed a conversion of debt of $1,700,022
and accrued interest thereon of $492,984 for 877,201 (post 1-for-25 reverse
split) shares of its Common Stock in conversion of $2,193,006 of indebtedness to
thirteen (13) investors, each an "accredited investor" within the meaning of
Regulation D of the Securities Act of 1933, as amended, realizing an
extraordinary gain of $328,950 as indicated in Note 14 to the Consolidated
Financial Statements.
At October 31, 1997, the Company had a working capital deficiency of
$1,883,659. 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,
1997 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. While
the doubling of its asset and equity listing requirements during 1997 by the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
caused a delay in the Company's plans, such offering is expected to take place
during Fiscal 1998. The Company intends to use a portion of the proceeds of the
proposed public offering to seek and consummate acquisitions of companies in the
bottled water and allied products business. No assurance can be given that the
Company will be successful in identifying potential acquisitions or, if made,
that such acquisitions will have a beneficial effect on the Company. The Company
has no current agreement to acquire any business or property, or intent to
acquire any specific business or property.
The Company believes that these factors provide meaningful evidence
as to the Company's ability to continue in operation for the next fiscal year
and support the going concern presentation in
15
<PAGE>
the accompanying Consolidated Financial Statements in favor of the liquidation
basis. There can be no assurance, however, that management will continue to be
able to raise sufficient capital or convert existing debt to equity or to
achieve profitable operations going forward.
The Company has no plans or commitments for capital expenditures
during the next twelve months other than the ordinary equipment purchases which
are expected to be funded with additional installment debt. The Company is close
to settling its prior years' unpaid payroll taxes and, upon agreement, intends
to pay such amounts from additional borrowings.
The Company's business is subject to seasonal fluctuation, with
summer being the busiest season and winter the slowest. To date, seasonality has
not had any material effect on the Company's financial condition or results of
operations.
New Accounting Standards
Recently, the Financial Accounting Standards Board issued Statements
(SFAS No. 128, 130 and 131) related to Earnings per Share, Reporting
Comprehensive Income and Segment Disclosures. The Earnings per Share Statement
will be adopted in fiscal 1998 and is not expected to have a material change in
the Company's per share calculation. The Comprehensive Income and Segment
Disclosures Statements, which have effective dates in fiscal 1999, are not
expected to have an impact on the Company.
16
<PAGE>
Item 7. Financial Statements.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Echo Springs Water Co., Inc.
We have audited the accompanying consolidated balance sheets of Echo
Springs Water Co., Inc. and subsidiaries as at October 31, 1997 and 1996 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, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
12 to the consolidated financial statements, the Company has suffered recurring
losses from operations and has a working capital deficiency and a net capital
deficiency that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 12. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
CITRIN COOPERMAN & COMPANY, LLP
January 21, 1998
New York, New York
17
<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1996
---- ----
ASSETS
Current assets:
Cash $ 170,288 $ 44,631
Accounts receivable - net of
allowance for doubtful accounts
of $9,000 in 1997 and $14,000 in 1996 255,675 257,212
Notes receivable, current portion 29,842 26,010
Inventories 25,753 34,221
Prepaid expenses 22,620 30,178
--------- ---------
Total current assets 504,178 392,252
Notes receivable, net of current portion 132,254 159,868
Property, plant and equipment - net 1,187,029 1,278,230
Other assets 353,970 220,026
--------- ---------
TOTAL ASSETS $2,177,431 $2,050,376
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Installment debt $ 624,000 $ 552,153
Debentures 25,000 50,000
Accounts payable and accrued expenses 1,419,074 1,513,582
Customer deposits 304,800 213,000
Unearned revenues 14,963 17,677
--------- ---------
Total current liabilities 2,387,837 2,346,412
--------- ---------
Shareholders' equity (deficiency):
Common stock, $.0001 par value,
75,000,000 shares authorized; issued
and outstanding 3,822,149 shares in
1997 and 2,907,149 shares in 1996 382 291
Additional paid-in capital 8,792,884 7,967,725
Accumulated deficit (9,003,672) (8,264,052)
--------- ---------
Total shareholders' equity
(deficiency) (210,406) (296,036)
--------- ---------
TOTAL LIABILITIES AND SHARE-
HOLDERS' EQUITY (DEFICIENCY) $2,177,431 $2,050,376
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996
1997 1996
---- ----
Revenues:
Gross sales $2,058,067 $2,252,968
Credits and allowances (123,979) (12,734)
Freight out (45,863) (43,154)
Other income 29,219 67,622
--------- ---------
1,917,444 2,264,702
--------- ---------
Costs and expenses:
Cost of sales 745,711 865,255
Selling, general and
administrative 1,844,299 1,483,147
Interest 52,063 189,782
Amortization of other
assets 4,876 4,876
Other expenses (income) - net (87,447) (78,400)
Loss on disposal of assets 97,562 28,613
--------- ---------
Total costs and
expenses 2,657,064 2,493,273
--------- ---------
Loss before extraordinary gain (739,620) (228,571)
Gain on debt restructuring 328,950
--------- ---------
Net income (loss) $ (739,620) $ 100,379
========= =========
Loss per share before
extraordinary gain $ (.22) $ (.12)
Extraordinary gain per share .17
--------- ---------
Net income (loss) per share $ (.22) $ .05
========= =========
Weighted average shares
outstanding 3,412,566 1,913,925
========= =========
See accompanying notes to consolidated financial statements.
19
<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1996
---- ----
Operating activities:
Net income (loss) $ (739,620) $ 100,379
Adjustments to reconcile
net income (loss) to net cash used
by operating activities -
Extraordinary gain (328,950)
Depreciation and amortization 169,803 156,096
Loss on disposal of assets 97,562 28,814
Provision for doubtful accounts (5,000) (21,000)
Stock issued for compensation 166,250 26,250
Debt reduction for expense recovery (45,000)
Changes in assets and liabilities -
Accounts receivable 6,537 20,166
Inventories 8,468 5,688
Prepaid expenses 7,558 (2,772)
Other assets (31,722) 11,450
Accounts payable and accrued expenses (83,508) (236,012)
Customer deposits 91,800 1,100
Unearned revenues (2,714) (31,723)
--------- ---------
Net cash used by operating
activities (359,586) (270,514)
--------- ---------
Investing activities:
Capital expenditures (185,110) (68,409)
Deposits on equipment (93,240)
Collections on notes receivable 23,782 18,479
Proceeds from disposal of assets 13,822 5,235
--------- ---------
Net cash used by investing
activities (240,746) (44,695)
--------- ---------
Financing activities:
Proceeds from issuance of common stock 584,000 180,000
Purchase of common stock (420)
Increase in installment debt 732,000 312,153
Repayment of installment debt (576,153) (171,099)
Deferred public offering costs (13,858) (18,018)
--------- ---------
Net cash provided
by financing activities 725,989 302,616
--------- ---------
Net increase (decrease) in cash 125,657 (12,593)
Cash - beginning 44,631 57,224
--------- ---------
CASH - ENDING $ 170,288 $ 44,631
========= =========
Supplemental Cash Flow Information:
Interest paid $ 41,714 $ 45,292
Conversion of accounts
receivable to notes receivable 22,750
Conversion of other assets to
notes receivable 1,370
Conversion of debt and interest
to common stock, net of extraordinary
gain of $328,950 in 1996 75,000 1,864,056
See accompanying notes to consolidated financial statements.
</TABLE>
20
<PAGE>
ECHO SPRINGS WATER CO., INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996
<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,
1995 1,659,996 $166 $5,897,964 $(8,364,431) $(2,466,301)
Shares issued upon
conversion of debt
and interest 877,201 88 1,863,968 1,864,056
Shares purchased (48) (420) (420)
Shares issued to
officer under
agreement 10,000 1 26,249 26,250
Shares sold 360,000 36 179,964 180,000
Net income 100,379 100,379
--------- --- --------- ---------- ----------
Balance at
October 31, 1996 2,907,149 291 7,967,725 (8,264,052) (296,036)
Shares issued to
officer under
agreement 190,000 19 166,231 166,250
Shares issued upon
conversion of debt 75,000 7 74,993 75,000
Shares sold 650,000 65 583,935 584,000
Net loss (739,620) (739,620)
--------- --- --------- ---------- ----------
Balance at
October 31, 1997 3,822,149 $382 $8,792,884 $(9,003,672) $ (210,406)
========= === ========= ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
21
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business
Echo Springs Water Co., Inc. ("the Company"), through its
subsidiaries, is engaged principally in the distribution of
bottled water and allied products. The Company bottles water
from its own natural springs in Burlington, NY for direct
distribution and sale to business and residential customers as
well as for other bottled water distributors.
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 principally of items held for sale, which
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 $42,245 in 1997 and $61,730 in 1996.
Depreciation of plant and equipment is provided by the
straight-line method over the estimated economic useful lives of
the various asset groups ranging from 5 to 40 years.
Impairment of Long-Lived Assets
The Company adopted provisions of Statement of Financial
Accounting Standards No. 121 (Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of)
during 1997. The effect of adopting this standard was not
material. The Company periodically reviews its long-lived assets
to assess recoverability and to ensure that the carrying values
of such long-lived assets have not been impaired.
22
<PAGE>
ECHO SPRINGS WATER CO., INC.
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, 1997 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 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.
Statements of Cash Flows
For purposes of the statements 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, 1997 or 1996.
Financial Instruments and Credit Risks The carrying amounts of
cash, accounts receivable, and 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,
1997, the Company had uncollateralized receivables with one
distributor approximating $100,000, which represents 39% of the
Company's trade accounts balance. During the years ended October
31, 1997 and 1996, sales to this customer amounted to
approximately 35% and 20%, respectively, of the Company's gross
sales. No other customer accounted for more than 10% of gross
sales.
NOTE 2 - NOTES RECEIVABLE
In efforts to consolidate operations, in January, 1994, the
Company sold its commercial and residential water distribution
business in Utica and related assets, with a book value of
$120,467, to an unrelated party for $225,000 and realized a gain
on the sale of $104,533. As part of the sales agreement, the new
operation will purchase bottled water from the Company for three
years. The purchase price was satisfied with two notes. The
first note is for $50,000 without interest, which will be
converted to a three-year, 6% term loan upon repayment
23
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - NOTES RECEIVABLE (CONTINUED)
of the second note unless repaid sooner. The second note was
renegotiated in 1996 with the inclusion of approximately $24,000
of accounts receivable and other assets owed to the Company and
is now payable at $2,788 per month, including interest at 6%,
through June, 2001. Note payments continue to be received by the
Company in accordance with payment terms and no provision for
uncollectible amounts is required at this time. Sales of bottled
water to the new company in 1997 and 1996 amounted to $52,337
and $49,233, respectively.
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
October 31,
1997 1996
Bottles $ $ 1,722
Product held for sale 16,585 16,415
Supplies 9,168 16,084
------ ------
$25,753 $34,221
====== ======
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized as follows:
October 31,
1997 1996
Land $ 150,000 $ 150,000
Buildings and improvements 362,298 362,298
Water coolers, bottles and
brewers 754,084 918,730
Machinery and equipment 397,345 335,069
Vehicles 10,500 60,850
Furniture and fixtures 77,874 127,128
--------- ---------
1,752,101 1,954,075
Less: accumulated
depreciation and
amortization 565,072 675,845
--------- ---------
$1,187,029 $1,278,230
========= =========
NOTE 5 - OTHER ASSETS
Other assets are comprised of the following:
October 31,
1997 1996
Water rights $205,000 $205,000
Accumulated amortization 38,405 33,529
------- -------
Net water rights 166,595 171,471
Deposits 155,499 30,537
Deferred public offering costs 31,876 18,018
------- -------
$353,970 $220,026
======= =======
Included in deposits at October 31, 1997 is $93,240 representing
deposits on machinery for a new bottle line which is to cost
$99,100.
24
</TABLE>
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - CAPITAL AND OPERATING LEASES
Operating Leases
The Company leases office and warehouse facilities under an
operating lease expiring March 31, 1998 and a second facility on
a month to month basis. Rental expense for office and warehouse
facilities amounted to $76,743 in 1997 and $65,943 in 1996.
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
$281,089 in 1997 and $214,265 in 1996.
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. These two springs have a combined average
capacity of approximately 58,000,000 gallons of water per year.
The Company applied for and received approval from the New York
State Department of Health to operate the springs on August 10,
1995. Based on the amended agreement of July 19, 1995, rent for
the property is $.005 per gallon of water extracted for the
first five years (with minimum rent of $300 per week) and $.01
per gallon for the following fifteen years (with minimum rent of
$600 per week). The Company has paid an additional rent of
$21,000 during the first year. The Company has the right to
build and operate a processing plant (which will become the
property of the landlord) on the property, in which case the
rent will increase to $.015 per gallon extracted. The Company
also has the right to terminate the lease without penalty after
payment of rent aggregating $100,000 plus the additional $21,000
first-year rent, and, in the event it has constructed a
processing plant, the right to renew the lease for an additional
20-year term on terms to be agreed upon by the parties. The
Company intends, as its needs require, to utilize the water from
these springs in its business. The water can be utilized without
construction of a plant and the Company has no immediate plans
to build a plant on this property. Rent expense under this lease
was $19,661 and $33,426 for the years ended October 31, 1997 and
1996, respectively.
Minimum future lease payments are:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Operating Leases
Fiscal year ending October 31, Office Equipment Land
1998 $27,476 $ 72,340 $ 15,600
1999 24,720 15,600
2000 6,180 19,500
2001 31,200
2002 31,200
2003 and thereafter 397,800
------ ------- -------
Total minimum payments $27,476 $103,240 $510,900
====== ======= =======
25
</TABLE>
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
NOTE 7 - INDEBTEDNESS
1997 1996
---- ----
Installment Debt
Note payable September, 1998
with interest at prime plus 2%,
secured by all assets of the Company $500,000 $
Advance payable to shareholder
with interest at 12% (b) 282,153
Notes payable with interest at 18%
due December 31, 1995 (*) 100,000 150,000
Unsecured term loan due in monthly
installments of $3,000 including
interest through June, 1998 24,000
Mortgage note payable, with 8.0%
interest payable quarterly,
principal due December, 1995 (a) 120,000
------- -------
TOTAL DEBT 624,000 552,153
CURRENT PORTION 624,000 552,153
------- -------
NET LONG-TERM PORTION $ -0- $ -0-
======= =====
(a) During October, 1997, the mortgage was reduced by $45,000 to
recover legal expenses incurred by the Company and expensed in
prior years. Such recovery is reflected in other expenses
(income) for the year ended October 31, 1997. The $75,000
balance of the mortgage was satisfied by the issuance of 75,000
shares of common stock valued at $1.00 per share (the then
current market value).
(b) Michael S. Rakusin, the President, a Director and principal
shareholder of the Company, advances funds to the Company for
working capital purposes. Such advances increase and decrease as
funds are needed and available. Interest expense on such loans
for the fiscal years ended October 31, 1997 and 1996 amounted to
$16,847 and $18,428, respectively.
1997 1996
---- ----
Debentures
8% Series D convertible ($12.50 of principal per share)
subordinated debentures maturing December 31,
1995 (*) $25,000 $50,000
====== ======
*Obligations in default as to principal and interest. Portions
of the debt and interest were converted into common stock of
the Company (Note 14).
26
</TABLE>
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
October 31,
1997 1996
Accounts payable $ 529,212 $ 564,385
Accrued expenses 272,643 294,947
Wages payable 14,300 40,527
Interest payable 82,635 100,130
Payroll taxes payable 450,526 461,751
Sales taxes payable 69,758 51,842
--------- ---------
$1,419,074 $1,513,582
========= =========
</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.
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 and for 4,000 shares at an
exercise price of $20.25 per share expired in March, 1997.
27
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10- INCOME TAXES
At October 31, 1997, the estimated maximum amount of net
operating loss carryforward available to reduce future taxable
income is approximately $8,925,000, expiring from 2004 through
2012. Deferred tax benefits from the use of net operating loss
carryforwards of approximately $3,000,000 are offset by a
corresponding amount of valuation allowance since it is more
likely than not that all or some portion of the deferred tax
asset will not be realized.
Tax benefits that would have been provided for the years ended
October 31, 1997 and 1996 on the loss before extraordinary gain
of $250,000 and $77,800, respectively, and the taxes on the
extraordinary gain for the year ended October 31, 1996 of
approximately $111,800, have been offset by corresponding
changes in the valuation allowance.
The approximate amounts of net operating loss carryforward and
the year of expiration are as follows:
Amount Year of Expiration
$ 460,000 2004
1,160,000 2005
1,600,000 2006
2,000,000 2007
1,050,000 2008
1,730,000 2009
200,000 2010
725,000 2012
NOTE 11- LITIGATION
The Company and its affiliates are defendants in actions
involving a dispute concerning title to the Company's land and
facility located in Burlington, New York ("Property") in which
the plaintiff seeks a one-half interest in the Property and
$17,000,000 in damages. All three suits have been dismissed in
their entirety except a claim, for an unspecified amount, that
the Company and the other defendants have been unjustly enriched
at Mr. Williams' expense. Due to Mr. Williams' failure to timely
take proceedings for judgment against the Company, it is not
clear whether this case will come to trial on the merits.
Management is of the opinion that there is no material exposure
to the Company and therefore, no provision has been made for any
possible loss in the accompanying consolidated financial
statements.
NOTE 12- GOING CONCERN
For the year ended October 31, 1997, the Company sustained a
loss before extraordinary gain of $739,620 and at October 31,
1997 had a working capital deficiency of $1,883,659, an
accumulated deficit of $9,003,672 and deficit net worth of
$210,406. In addition, the Company was in default on principal
and interest payments on a portion of its debt (Note 7). These
facts raise substantial doubt about the Company's ability to
continue as a going concern.
28
<PAGE>
ECHO SPRINGS WATER CO., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12- GOING CONCERN (CONTINUED)
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 intends to use a portion of the proceeds of the
proposed public offering (Note 14) to seek and consummate
acquisitions of companies in the bottled water and allied
products business. No assurance can be given that the Company
will be successful in identifying potential acquisitions or, if
made, that such acquisitions will have a beneficial effect on
the Company. The Company has no current agreement to acquire any
business or property, or intent to acquire any specific business
or property. The Company believes that these factors provide
meaningful evidence as to the Company's ability to continue in
operation for the next fiscal year and support the going concern
presentation in the accompanying consolidated financial
statements in favor of the liquidation basis. There can be no
assurance, however, that management will continue to be able to
raise sufficient capital or convert existing debt to equity or
to achieve profitable operations going forward.
NOTE 13- EMPLOYMENT AGREEMENT
In October, 1996, Michael S. Rakusin, the President, a Director
and principal shareholder of the Company, entered into a
three-year employment agreement with the Company, effective upon
completion of the proposed public offering (Note 14). There is
no renewal option. The agreement provides for, among other
things, an annual salary of $120,000 and a non-competition
clause during the term of his employment by the Company and for
one year following the termination of such employment.
On September 30, 1996, the Company issued 10,000 shares of its
common stock at a value of $26,250 ($2.625 per share, the then
current market value) and on October 1, 1997, the Company issued
190,000 shares of its common stock at a value of $166,250 ($.875
per share, the then current market value) to Mr. Rakusin in
consideration for prior services rendered by Mr. Rakusin to the
Company.
29
<PAGE>
ECHO SPRINGS WATER CO., INC.
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, on June
4, 1996, the Company asked their lenders to convert outstanding
debt and unpaid interest thereon into shares of common stock of
the Company at a conversion ratio of $2.50 per share. The
lenders converted $1,700,022 of outstanding principal and unpaid
interest of $492,984, which was converted to 877,201 shares of
common stock. The market value of the shares at $2.125 per share
resulted in an extraordinary gain on the restructuring of the
debt of $328,950. While the doubling of its asset and equity
listing requirements during 1997 by the National Association of
Securities Dealers Automated Quotation System caused a delay in
the Company's plans, the proposed offering is expected to take
place during Fiscal 1998.
30
<PAGE>
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act.
Directors and Executive Officers
The following individuals are the present directors and executive
officers of the Company. Each director will hold office until the next annual
meeting of the shareholders and until his successor is elected and qualified.
Officers are elected by, and serve at the pleasure of the Board of Directors.
Name Age Position
Michael S. Rakusin........... 41 President, Treasurer,
and Director
Edward J. Metzger............ 40 Vice President-
Operations, Secretary,
and Director
Frank A. LaSala............. 74 Director
Michael S. Rakusin is a founder of the Company and has been
President and a Director since inception, and Treasurer since 1987.
He was appointed Secretary in June, 1987; Executive Vice President
in November, 1988; and President in April, 1991. From 1984 to
March, 1987, Mr. Rakusin was self-employed, rendering financial and
accounting services. From 1976 to 1984, he was employed as an
accountant by J.M. Stern & Co., Certified Public Accountants. Mr.
Rakusin is a Certified Public Accountant in the State of New York.
He earned a Bachelor of Business Administration Degree from the
City University of New York in 1976.
Edward J. Metzger joined the Company in July, 1992 as Vice President -
Operations. He was elected a Director in October, 1996. From 1988 to July, 1992,
he was Senior Vice President of Berkshire Springs of N.J., Inc. ("Berkshire")
(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
31
<PAGE>
manufacturing sophisticated machinery for the aerospace industry,
for the past 45 years.
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, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Summary Compensation Table
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 1997 $90,400 - - - - - $166,250(1)
President
1996 $80,200 - - - - - $26,250(2)
1995 $81,288 - - - - - -
Edward J. Metzger 1997 $83,200 - - - - - -
Vice President
1996 $80,200 - - - - - -
1995 $83,000 - - - - - -
</TABLE>
(1) On October 1, 1997, the Company issued 190,000 shares of its Common
Stock, valued at $166,250 ($0.875 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.
(2) On September 30, 1996, the Company issued 10,000 shares of its Common
Stock, valued at $26,250 ($2.625 per share), to Mr.Michael S.Rakusin,
the President, a Director and principal shareholder of the Company in
consideration for prior services rendered by Mr. Rakusin to the
Company.
32
<PAGE>
For the fiscal years ended October 31, 1997 and 1996, 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, 1997, there are no outstanding options or warrants held by any officer or
director of the Company except for warrants held by Michael S. Rakusin, the
President, a Director and principal shareholder of the Company, to purchase
27,759 shares of Common Stock at $4.20 per share. These warrants were issued in
October, 1990 and expire on October 31, 1998.
Michael S. Rakusin, the President, a Director and principal
shareholder of the Company, has entered into a three-year employment agreement
with the Company in October, 1996 which will commence on the closing of the
proposed public offering. There is no renewal option. The agreement provides
for, among other things, an annual salary of $120,000 and a non-competition
clause during the term of his employment by the Company and for one (1) year
following the termination of such employment.
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, 1997, 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, 1997 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) 11.1%
Edward J. Metzger 6,800 0.2%
Frank A. LaSala 1,920 0.1%
33
<PAGE>
ESWC, Inc.
149 Main Street
Cooperstown,
NY 11326 210,243 5.5%
H.T. Ardinger, Jr.
9040 Governors Row
Dallas, TX 75247 364,000 9.5%
Robert Moody, Jr.
601 Moody National
Bank Tower
Galveston, TX 77550 205,323 5.4%
Robert P. Gillings
7423 Ridge Boulevard
Brooklyn, NY 11209 290,000 7.6%
All Officers and
Directors as a
Group (three persons) 436,479(3) 11.3%
- --------------
(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 10,000 shares of its Common
Stock, valued at $26,250 ($2.625 per share), to Mr. Michael S. Rakusin, the
President, a Director and principal shareholder of the Company in consideration
for prior services rendered by Mr. Rakusin to the Company.
On October 1, 1996, the Company entered into a three-year
employment agreement with Mr. Rakusin. See "Executive
Compensation."
34
<PAGE>
On October 1, 1996, the Company extended Mr. Rakusin's warrants to
purchase 27,759 shares of the Company's Common Stock, from October 31, 1996 to
October 31, 1998 and established an exercise price of $4.20.
At October 31, 1996, Mr. Rakusin, had advanced a total of $282,153 to
the Company, evidenced by the Company's 12% note payable to Mr. Rakusin, which
funds were used by the Company for working capital. These funds were fully
repaid by the Company to Mr. Rakusin during the fiscal year ended October 31,
1997.
On October 1, 1997, the Company issued 190,000 shares of its Common
Stock, valued at $166,250 ($0.875 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.
PART IV
Item 13. Exhibits and Reports on Form 8-K.
Schedules and Reports on Form 8-K
(A)(1) The following financial statements are included in Part II,
Item 7:
Independent Auditors' Report
Consolidated Balance Sheets as at October 31, 1997 and 1996.
Consolidated Statements of Operations for the Years Ended October
31, 1997 and 1996
Consolidated Statements of Shareholders' Equity (Deficiency) for
the Years Ended October 31, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended October
31, 1997 and 1996
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.
35
<PAGE>
Official Exhibit
Number Description
[3](a) Certificate of Incorporation and all amendments
thereto, incorporated by reference to the same
exhibit number to the Registrant's Annual Report on
Form 10-KSB for the year ended October 31,
1996
[3] (b) By-Laws, incorporated by reference to the same
exhibit number to the Registrant's Annual Report on
Form 10- KSB for the year ended October 31, 1996
[4] Form of Common Stock Certificate, incorporated by
reference to the same exhibit number to the
Registrant's Annual Report on Form 10-KSB for the
year ended October 31, 1996
[10] Form of Employment Agreement with Michael S. Rakusin,
incorporated by reference to the same exhibit number
to the Registrant's Annual Report on Form 10-KSB for
the year ended October 31,
1996
[27] Financial Data Schedule
36
<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 11, 1998
ECHO SPRINGS WATER CO., INC.
By:/s/ Michael S. Rakusin
President
Pursuant to the requirements of the Exchange Act, this report has
been signed by the following persons on behalf of the Registrant and in the
capacities and on the date indicated:
Name Titles Date
/s/ Michael S. Rakusin President and Director February 11, 1998
Michael S. Rakusin Principal Executive,
Operating and Financial
Officer
Edward J. Metzger Vice President, Secretary February 11, 1998
Edward J. Metzger and Director
Frank A. LaSala Director February 11, 1998
Frank A. LaSala
<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, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-1-1996
<PERIOD-END> OCT-31-1997
<CASH> 170,288
<SECURITIES> 0
<RECEIVABLES> 264,675
<ALLOWANCES> 9,000
<INVENTORY> 25,753
<CURRENT-ASSETS> 504,178
<PP&E> 1,752,101
<DEPRECIATION> 565,072
<TOTAL-ASSETS> 2,177,431
<CURRENT-LIABILITIES> 2,387,837
<BONDS> 0
0
0
<COMMON> 382
<OTHER-SE> (210,788)
<TOTAL-LIABILITY-AND-EQUITY> 2,177,431
<SALES> 1,888,225
<TOTAL-REVENUES> 1,917,444
<CGS> 745,711
<TOTAL-COSTS> 745,711
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,063
<INCOME-PRETAX> (739,620)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (739,620)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> 0
</TABLE>
