UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended December 31, 1996
[ ] Transition Report pursuant to 13 or 15(d) of the Securities Exchange
Act For the transition period from ________________ to ______________
Commission File Number 33-55254
Essential Resources, Inc.
-------------------------
(Exact name of Registrant as specified in its charter)
Nevada 87-0485317
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation) No.)
661 Palisades Avenue, Englewood Cliffs, New Jersey 07632
- -------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 567-9004
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days [X] Yes [ ] No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class April 16, 1997
- ------------------------------------ -----------------
$.001 par value Class A Common Stock 3,674,018 Shares
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements
Balance Sheets as of June 30, 1996 and December 31, 1996............ 1
Statement of Operations for the Six
Months and Three Months Ended December 31, 1996................... 2
Statement of Stockholders' Equity for
Six Months Ended December 31, 1996................................ 3
Statement of Cash Flows for the Six Months
Ended December 31, 1996........................................... 4
Summary of Accounting Policies and
Notes to Financial Statements..................................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 13
Part II. Other Information................................................... 16
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
1996 1996
---------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current:
Cash $ 218,195 $ 167,363
Receivables from factors 73,601 92,715
Accounts receivable 148,496 189,532
Inventories 329,597 657,440
Prepaid expenses 456,608 758,611
Deferred plantation management costs 62,299 182,731
Deferred acquisition costs 236,771
Other current assets 94,237 241,040
---------------- ---------------
Total current assets 1,383,033 2,526,203
---------------- ---------------
Property, plant and equipment, at cost less accumulated depreciation 76,291 275,590
Investment in Queensland Essential Oils Limited 133,250 142,578
Other assets 62,813 116,998
---------------- ---------------
$ 1,655,387 $ 3,061,369
---------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accruals and other $ 477,152 $ 841,455
Income taxes payable 91,000 171,000
Loans payable to related parties 525,113 450,828
Loans payable 478,558
Dividends payable 52,376 52,668
Current portion of capitalized lease obligations 29,031
Deferred income taxes 79,000 135,000
---------------- ---------------
Total current liabilities 1,224,641 2,158,540
---------------- ---------------
Accounts payable, long-term 98,680 27,980
Capitalized lease obligations 126,880
---------------- ---------------
Total liabilities 1,323,321 2,313,400
---------------- ---------------
Commitments and contingencies
Stockholders' equity
Common stock, $.001par value - shares authorized 25,000,000; issued
2,519,058 and 4,098,018 respectively 2,519 4,098
Additional paid-in capital 863,960 3,270,901
Retained earnings 370,182 47,308
Foreign currency translation adjustment 63,778 27,858
Receivable from Collage (488,548) (209,378)
Receivable from stockholder (1,633,823)
---------------- ---------------
811,891 1,506,964
Less: Treasury stock, 238,662 shares and 344,569 shares at cost respectively (479,825) (758,995)
---------------- ---------------
Total stockholders' equity 332,066 747,969
---------------- ---------------
$ 1,655,387 $ 3,061,369
---------------- ---------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
1
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Six
Months Months
Ended Ended
December 31, December 31,
1996 1996
----------------- ------------------
<S> <C> <C>
SALES $885,770 $2,073,312
COST OF SALES 284,697 794,574
----------------- ------------------
GROSS PROFIT 601,073 1,278,738
----------------- ------------------
OPERATING EXPENSES:
Selling, general and administrative 771,606 1,362,517
Depreciation 19,932 29,200
----------------- ------------------
TOTAL OPERATING EXPENSES 791,538 1,391,717
----------------- ------------------
OPERATING LOSS (190,465) (112,979)
OTHER INCOME (EXPENSE):
Export grant 39,780 79,390
Loss on foreign currency transactions (8,876) (15,516)
Interest expense (4,085) (25,025)
----------------- ------------------
NET LOSS BEFORE INCOME TAXES (163,646) (74,130)
INCOME TAXES - Australia 104,000 136,000
----------------- ------------------
NET LOSS ($267,646) ($210,130)
----------------- ------------------
Loss per common share ($0.08) ($0.08)
----------------- ------------------
Weighted average common shares outstanding 3,160,311 2,770,790
----------------- ------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
2
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended December 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Foreign
Common stock Additional currency Receivable
------------------------ paid-in Retained translation from
Shares Amount capital earnings adjustment Collage
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1996 2,519,058 $2,519 $863,960 $370,182 $63,778 ($488,548)
Net loss for the period (210,130)
Foreign currency translation
adjustment (35,920)
Issuance of shares pursuant to
conversion of debt 170,200 170 370,530
Net issuance of shares pursuant to
exercise of options 1,392,060 1,392 352,605
Receivable from stockholder 1,633,823
Issuance of shares for
consulting services 16,700 17 49,983
Dividends (112,744)
- ------------------------------------------------------------------------------------------------------------------------------
4,098,018 4,098 3,270,901 47,308 27,858 (488,548)
Purchase of treasury stock 279,170
- ------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 4,098,018 $4,098 $3,270,901 $47,308 $27,858 ($209,378)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Receivable Total
from Treasury stockholders'
stockholder stock equity
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, July 1, 1996 ($479,825) $332,066
Net loss for the period (210,130)
Foreign currency translation
adjustment (35,920)
Issuance of shares pursuant to
conversion of debt 370,700
Net issuance of shares pursuant to
exercise of options 353,997
Receivable from stockholder (1,633,823)
Issuance of shares for
consulting services 50,000
Dividends (112,744)
- -----------------------------------------------------------------------------------------
(1,633,823) (479,825) 747,969
Purchase of treasury stock (279,170)
- -----------------------------------------------------------------------------------------
Balance December 31, 1996 ($1,633,823) ($758,995) $747,969
- -----------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
3
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six
Months
Ended
December 31,
1996
---------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS ($210,130)
---------------
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 29,200
Deferred income taxes 56,000
Foreign currency transactions and adjustments (35,920)
(Increase) decrease in:
Receivable from factors (19,114)
Accounts receivable (41,036)
Inventories (327,843)
Prepaid expenses and other current assets (281,849)
Deferred plantation management costs (120,432)
Other assets (54,185)
Increase in:
Accounts payable, accruals and other 364,572
Income taxes payable 80,000
---------------
Total adjustments (350,607)
---------------
Net cash used in operating activities (560,737)
---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (66,620)
Investment in Queensland Essential Oils (9,328)
---------------
Net cash used in investing activities (75,948)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (112,452)
Loans payable 704,273
Capital lease payments (5,968)
---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 585,853
---------------
NET DECREASE IN CASH (50,832)
CASH, BEGINNING OF PERIOD 218,195
---------------
CASH, END OF PERIOD $ 167,363
---------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
4
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES - INFORMATION
AS OF DECEMBER 31, 1996 AND FOR THE PERIODS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED
Organization and Business Essential Resources, Inc. ("Essential"),
through its wholly- owned subsidiaries,
Collage International Health Pty Ltd.
("Collage International Health"),
Essential Nature Products Pty Ltd.
("Essential Nature Products"), Essential
Family Care, Inc. ("Essential Family")
and Essential Care USA, Inc. ("Essential
Care") collectively referred to
hereinafter as the "Company", develops,
markets and distributes a wide variety of
health, nutritional, beauty-aid and
lifestyle products derived from the
extracts and tissues of Asian- Pacific
region plants, flowers and animals. The
Company's products are sold primarily in
duty-free and tax-free stores in
Australia, New Zealand, Korea, Japan,
Egypt, Qatar and the United Kingdom.
Essential Family obtained the exclusive
manufacturing and distribution rights for
infant and toddler products under the
Lamaze brandname and is currently
developing numerous products for
distribution and sale under that
trademark.
Interim Financial Statements The financial statements for the Company
have been prepared in accordance with
generally accepted accounting principles
for interim financial information and
with the instructions to Form 10-Q and
Article 10 of Regulation S- X.
Accordingly, they do not include all of
the information and footnotes required by
generally accepted accounting principles
for complete financial statements. In the
opinion of management, all adjustments
(consisting of normal recurring accruals)
considered necessary for a fair
presentation have been included.
Operating results for the six month
period ended December 31, 1996 are not
necessarily indicative of the results
that may be expected for the year ended
June 30, 1997. All significant
intercompany balances and transactions
have been eliminated in consolidation.
For further information, refer to the
audited consolidated financial statements
of the Company as of June 30, 1996.
5
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES - INFORMATION
AS OF DECEMBER 31, 1996 AND FOR THE PERIODS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED
Principles of Consolidation The consolidated financial statements
include the accounts of Essential,
Essential Care and Essential Family, and
its wholly-owned Australian subsidiaries,
Essential Nature Products and Collage
International Health. All significant
intercompany balances and transactions
have been eliminated on consolidation.
Change in Fiscal Year In January 1996, the Company elected to
change from a December 31 to a June 30
year-end to correspond to the fiscal year
of its Australian subsidiaries.
Earnings Per Common Share Primary and fully diluted earnings per
common share are computed using the
treasury stock method, modified for stock
options outstanding in excess of 20% of
the total outstanding shares of common
stock. Under this method, the aggregate
number of shares outstanding reflects the
assumed use of proceeds from the
hypothetical exercise of the outstanding
options and warrants, unless the effect
on earnings is anti-dilutive. The assumed
proceeds are used to repurchase shares of
common stock at the average market value
during the period to a maximum of 20% of
the shares outstanding. The balance of
the proceeds, if any, is used to reduce
outstanding debt and invest in treasury
bills with the assumed interest expense
savings and interest income being added
to the results of operations for the
reported period.
Fully diluted earnings per share also
reflects the assumed use of proceeds from
the hypothetical exercise of options to
purchase common stock at the ending
market price for the reported period.
Inventories Inventories are valued at the lower of
cost or market. Cost for raw materials
and finished goods are determined by the
first-in, first-out (FIFO) method.
6
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES - INFORMATION
AS OF DECEMBER 31, 1996 AND FOR THE PERIODS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED
Property, Plant and Equipment Assets are stated at cost. Depreciation
and amortization is computed over the
estimated useful lives of the assets on
the straight-line method for financial
reporting purposes.
Foreign Currency Translation The Company's subsidiaries in Australia
use the Australian dollar as the
functional currency and translate all
assets and liabilities at period-end
exchange rates, all income and expense
accounts at average rates and record
adjustments resulting from the
translation as a separate component of
stockholders' equity titled, "Foreign
currency translation adjustments."
Export Grants Grants received from the Australian
government relating to expenses incurred
in connection with export market
development are recognized as income when
conditions for receipt are met.
Taxes on Income The Company does not provide taxes on
unremitted earnings of its Australian
subsidiaries since the Company's
intention is to indefinitely reinvest
these earnings.
Fair Value of
Financial Instruments The carrying value of financial
instruments at December 31, 1996,
including cash, trade and other
receivables, accounts payable, other
payables and loans payable to related
parties, approximate fair value due to
the timing of expected settlement of
these financial instruments.
7
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - INFORMATION
AS OF DECEMBER 31, 1996 AND FOR THE PERIODS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED
1. Receivables from Factors The Company factors certain of its trade
accounts receivable, with recourse, up to
maximums established by the factors for
individual accounts.
2. Inventories Inventories are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1996
(Unaudited)
-----------------------------------------------------------
<S> <C> <C>
Raw materials $117,141 $ 249,484
Packaging and supplies 108,140 180,834
Finished goods 104,316 227,122
-----------------------------------------------------------
Total $329,597 $ 657,440
======== =========
</TABLE>
3. Property, Plant and
Equipment Property, plant and equipment are
summarized by major classifications as
follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1996
(Unaudited)
-------------------------------------------------------------
<S> <C> <C>
Plant and equipment $40,765 $ 47,429
Display equipment 31,978 47,649
Office equipment 10,065 46,965
Furniture and fixtures 7,703 16,749
Motor vehicles 2,066 2,051
Equipment under capital
leases 166,233
-------------------------------------------------------------
92,577 321,076
Less:
Accumulated depreciation 16,286 45,486
------- --------
Total $76,291 $275,590
======= ========
</TABLE>
4. Dividends Payable On September 12, 1996, dividends payable
on October 30, 1996 of $.05 per share of
common stock (on a post-split basis) were
declared.
5. Commitments and
Contingencies (a) In August 1996, the Company entered into
an agreement to purchase 200,000
kilograms of tea tree oil annually for a
period of ten years.
8
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - INFORMATION
AS OF DECEMBER 31, 1996 AND FOR THE PERIODS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED
(b) The Company has an oral agreement (which
terminates in April 1997) to purchase for
approximately $1,000,000 the 248.6 acres
of plantation land currently being leased
by Queensland Oils. Closing is subject to
execution of an agreement satisfactory to
the Company, delivery of clear title to
the property and the securing of
Australian Government Foreign Investment
Review Board approval (Australian law
prohibits ownership of land by foreign
corporations without government
approval). The Company does not currently
possess sufficient funds for this
purchase and is currently seeking equity
and/or asset based financing to purchase
the property. There can be no assurance
that the Company will be able to obtain
such funding.
(c) The Company entered into a sales
agreement as of November 15, 1996 with
C.B. & P. Pty Ltd. ("C.B.P."), which is
an overseas wholly-owned subsidiary of
China National Export Bases Development
Corporation, a state owned enterprise of
the Peoples Republic of China. The
contract covers the period November 15,
1996 to February 15, 1998 (a total of 27
months) for the supply principally of
Omega-3 oil capsules under the Company's
brand - Mother Nature. The agreement
provides for a minimum purchase of
$3,750,000 for the first 15 months of the
agreement. As a result of changes in the
Peoples Republic of China approval
policies in December 1996, the initial
shipment of $1,600,000 has been
rescheduled to commence June 1997. There
can be no assurances that the Company
will obtain these approvals on a timely
basis, or at all, which could result in
further delays in shipments or an
inability for the Company to fulfill the
sales agreement.
6. Stockholders' Equity Stock Split
On August 14, 1996, the Company's Board
of Directors approved a two-for-one split
of the common stock. The additional
shares resulting from the stock split
were distributed on September 23, 1996,
to all stockholders of record at the
close of business on August 26, 1996. The
consolidated balance sheet as of December
31, 1996 and the consolidated statement
of stockholders' equity for the six
months ended December 31, 1996 reflect
the recording of the stock split as if it
had occurred on January 1, 1996.
9
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - INFORMATION
AS OF DECEMBER 31, 1996 AND FOR THE PERIODS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED
Further, all references in the
consolidated financial statements to
average number of shares outstanding and
related prices, per share amounts and
stock option data have been restated for
all periods to reflect the stock split.
7. Related Party
Transactions In January 1996, the Company acquired
assets consisting of inventories,
receivables, plant and equipment from
Collage in consideration of the issuance
of 448,148 shares of common stock. In
June 1996, Collage agreed to transfer
238,662 of such shares to the Company in
consideration of the Company's assumption
of payment of certain trade payables of
Collage totalling approximately $479,825
which has been classified as treasury
stock at June 30, 1996. At December 31,
1996, $27,980 of such payables are
classified as long-term since certain
vendors have agreed to accept payment
from the proceeds of sale of the treasury
shares. In addition, in July 1996,
Collage pledged the balance (185,338) of
its shares of the Company's common stock
as security for monies owed by Collage to
the Company for purchases of goods
totalling $488,548. The $488,548
receivable from Collage, a stockholder,
has been classified as a reduction of
stockholders' equity at December 31,
1996. Under the agreement the Company is
entitled to 1/7 of the 185,338 shares
pledged each month commencing September
1996, for each month in which Collage
fails to pay the Company for the
indebtedness. Collage failed to pay the
Company for the payments due September
1996 to December 1996 and, accordingly,
the Company is entitled to 105,907 of
such shares to date which have been
classified as treasury stock as of
December 31, 1996. In addition, the
allocable portion of the receivable from
Collage has been reclassified to treasury
stock.
The accompanying consolidated statement
of operations for the six months ended
December 31, 1996 does not include any
compensation to the Company's Chief
Executive Officer since the Company did
not pay and it did not accrue any
compensation to him since it was not
obligated to do so. An employment
agreement for the period subsequent to
December 31, 1996 is currently being
negotiated.
On November 25, 1996, Mr. Cook, the
Company's
10
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - INFORMATION
AS OF DECEMBER 31, 1996 AND FOR THE PERIODS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED
Chairman agreed to tender warrants to
purchase 1,587,143 shares of Common
Stock, exercisable at a price of $2.50
per share until March 31, 2001, in
exchange for 653,529 shares of the
Company's Common Stock. Such tender was
made in consideration of the Company's
agreement to accept payment for the
653,529 shares pursuant to the terms of a
ten-year 8.5% promissory note in the
principal amount of $1,633,822.50. In
January 1997, Mr. Cook pledged such
shares to Lionhart Global Appreciation
Fund ("Lionhart") to secure payment of
the Lionhart Debentures and certain other
obligations under the Company's agreement
with Lionhart.
8. Subsequent Events
Sale of Convertible Debentures
In January 1997, the Company sold a total of $1,750,000 of Convertible
Debentures due January 15, 2000, to Lionhart. The Debentures bear interest at
the rate of 8% per annum, payable monthly. The Debentures are convertible into
shares of Common Stock commencing 75 days after the closing at a price equal to
the lesser of $2.681 or 70% of the closing bid price of the Common Stock for the
five trading days immediately preceding the date of conversion. All Debentures
not sooner converted are automatically convertible into shares of the Company's
Common Stock three years after the closing date. In connection with the
transaction, Lionhart also received warrants to purchase a total of 652,174
shares of Common Stock, exercisable at a price of $4.60, until January 15, 2000.
Lionhart also received certain registration rights in connection with the shares
of Common Stock issuable upon conversion of the Debentures and upon exercise of
the Lionhart Warrants. Payment of the Debentures and other obligations arising
as a result of the transaction is secured by 485,529 shares of the Company's
Common Stock owned by the Company's Chairman. The Company has the right to
redeem the Debentures at any time after April 14, 1997.
9. Statements of Cash Flows Supplemental Disclosures of Cash Flow
Information:
-------------------------------------
Cash paid during the six months ended
December 31, 1996 for:
Interest $25,025
Taxes -
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
---------------------------------
Capital lease obligations of $161,879
were incurred for equipment during the
six months ending December 31, 1996.
11
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - INFORMATION
AS OF DECEMBER 31, 1996 AND FOR THE PERIODS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED
During the quarter ended September 30,
1996 the Company issued 170,200 shares
pursuant to conversion of debt in the
amount of $370,700 and issued 165,826
shares pursuant to the exercise of
warrants for services rendered in the
quarter ($23,200) and services to be
rendered in later quarters ($92,800).
During the quarter ended December 31,
1996 (i) the Company issued 1,462,857
options to consultants for services to be
rendered in conjunction with the
completion of specific projects. The
valuation of these options were
calculated to be $465,871 and are
classified as deferred costs; (ii) the
Company issued 1,226,234 shares pursuant
to the exercise of warrants; and (iii) an
additional 16,700 shares for consulting
services rendered in the quarter
($30,000) and services to be rendered in
later quarters ($20,000).
12
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - INFORMATION
AS OF DECEMBER 31, 1996 AND FOR THE PERIODS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Effective January 1, 1996 the Company acquired certain assets of
Collage in a transaction accounted for as a reverse acquisition. The following
discussion and analysis of financial condition and results of operations are for
the three month period ending September 30, 1996 (post acquisition) compared to
the three month period ending September 30, 1995 (pre-acquisition).
(dollars in Three months Six months Three months Six months
thousands) ending ending ending ending
December 31, December 31, December 31, December 31,
1996 1996 1995 1995
(Unaudited)
-------------------------------------------------------
Sales $ 886 $2,073 $ 728 $1,456
Cost of Sales 285 795 239 478
------ ------ ------ ------
Gross Profit 601 1,278 489 978
------
Operating Expenses 791 1,391 400 800
------ ------ ------ ------
Operating
Income/(Loss) (190) (113) 89 178
Other
Income/(Expense) 27 39 (3) (7)
------ ------ ------ ------
Net Income/(Loss)
Before Taxes (163) (74) 86 171
------ ------ ------ ------
Income Taxes -
Australia 104 136 30 59
------ ------ ------ ------
Net Income/(Loss) $ (267) $ (210) $ 56 $ 112
====== ====== ====== ======
Results of Operations
Sales increased by approximately $617,000 (42.3%) and approximately
$158,000 (21.7%) for the six month and three month periods ended December 31,
1996 as compared to the same periods ended December 31, 1995. The increase in
sales was primarily due to sales to additional customers, in particular Korean
Airlines, as a result of increased sales and marketing efforts by the Company.
The gross profit percentage declined by 10% for both the six month and
three month periods ended December 31, 1996 as compared to the same periods
ended December 31, 1995. The reduction in gross margin was due to the Company's
pricing strategies to increase sales to new
13
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - INFORMATION
AS OF DECEMBER 31, 1996 AND FOR THE PERIODS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED
customers as well as existing customers. This strategy enabled the Company to
increase gross margin contribution by approximately $300,000 (30.7%) and
approximately $112,000 (22.9%) for the six month and three month periods ended
December 31, 1996 as compared to the same periods ended December 31, 1995.
Operating expenses increased by approximately $591,000 (73.9%) and
approximately $391,000 (97.8%) for the six month and the three month periods
ended December 31, 1996 as compared to the same periods ended December 31, 1995.
The increase in expenses were primarily due to the increase in sales and
marketing efforts for existing geographical regions and the commencement of
marketing efforts in the United States through the Company's wholly owned
subsidiary, Essential Care and Essential Family commencing November 1996 in
connection with the development of products to be distributed under the Lamaze
trademark which the Company obtained in November 1996. The three months ended
December 31, 1996 includes a management fee of $75,000 charged to Australian
operations by Essential Resources, Inc. for administration, operational and
financial services. The expenses attributable to the Company's sales and
marketing efforts in the United States represented $320,00 of the $391,000
increase for the comparable three months ended December 31, 1996 versus December
31, 1995.
The Company's net income before income taxes for the Australian export
business increased by $197,000 (87.7%) and decreased by $24,000 (75.0%) for the
six month and the three month periods ended December 31, 1996 as compared to the
same periods ended December 31, 1995. The increases were primarily attributable
to the increase in gross profit as described above.
Net income before income taxes decreased by $245,000 and by $249,000 for
the six month and the three month periods ended December 31, 1996 as compared to
the same periods ended December 31, 1995 primarily due to initial sales and
marketing expenses for the development of the United States markets.
Liquidity and Capital Resources
The Company's working capital increased by approximately $209,000 from
June 30, 1996 to December 31, 1996 primarily due to an increase in current
assets of $1,143,000, which includes $236,771 of deferred charges relating to
the completion of a specific project, offset by an increase in current
liabilities of $934,000.
The increase in current assets from June 30, 1996 to December 31, 1996
consisted primarily of an increase in inventory of $327,000, an increase in
prepaid expenses of $302,000 and an increase in deferred acquisition costs of
$236,771 (as explained above). The increase in current liabilities consisted
primarily of an increase in accounts payable of $364,000 and an increase in
loans payable of $478,558.
On November 25, 1996, Mr. Cook, the Company's Chairman agreed to tender
warrants to purchase 1,587,143 shares of Common Stock, exercisable at a price of
$2.50 per share until March
14
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - INFORMATION
AS OF DECEMBER 31, 1996 AND FOR THE PERIODS
ENDED DECEMBER 31, 1995 AND 1996 IS UNAUDITED
31, 2001, in exchange for 653,529 shares of the Company's Common Stock. Such
tender was made in consideration of the Company's agreement to accept payment
for the 653,529 shares pursuant to the terms of a ten-year 8.5% promissory note
in the principal amount of $1,633,822.50. In January 1997, Mr. Cook pledged such
shares to Lionhart to secure payment of the Lionhart Debentures and certain
other obligations under the Company's agreement with Lionhart.
In January 1997, the Company received net proceeds of a private
placement of $1,750,000. See Note 8 - Subsequent Events.
15
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
Part II. Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securityholders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports to Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
16
<PAGE>
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Essential Resources, Inc. April 16, 1997
- -------------------------
Registrant
By: /s/ Phillip G. Cook
----------------------
Phillip G. Cook
President, Chief Executive
Officer, Chief Financial
Officer and Chairman of the
Board and a Director (Principal
Executive and Financial Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE AUDITED FINANCIAL
STATEMENTS OF ESSENTIAL RESOURCES, INC. FOR THE QUARTER ENDED DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 167,363
<SECURITIES> 0
<RECEIVABLES> 189,532
<ALLOWANCES> 0
<INVENTORY> 657,440
<CURRENT-ASSETS> 241,040
<PP&E> 320,808
<DEPRECIATION> 45,218
<TOTAL-ASSETS> 3,061,369
<CURRENT-LIABILITIES> 2,158,540
<BONDS> 958,417
0
0
<COMMON> 4,098
<OTHER-SE> 743,871
<TOTAL-LIABILITY-AND-EQUITY> 3,061,369
<SALES> 885,770
<TOTAL-REVENUES> 885,770
<CGS> 284,697
<TOTAL-COSTS> 791,538
<OTHER-EXPENSES> 26,819
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (163,646)
<INCOME-TAX> 104,000
<INCOME-CONTINUING> (267,646)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (267,646)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
<FN>
The schedule contains summary financial information extracted from the
consolidated financial statements of Essential Resources, Inc. and Subsidiaries
and is qualified in its entirety by reference to such financial statements.
</TABLE>
