SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of The Securities Exchange Act of 1934
For Quarter Ended: 3-31-96 COMMISSION file number: 0-20806
ECO2, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3087145
(State or other jurisdiction IRS Employer Identification No.
of incorporation or organization)
20005 S.E. Hawthorne Road, Hawthorne, FL 32640
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 352-481-0187
Former name, former address and former fiscal year, if changed since
last report: N/A.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes [x] No [ ]
As of May 23, 1996, the Company had outstanding 23,175,788 shares of its
common stock.
<PAGE>
PART I: Financial Information
Item 1 - Financial Statement
ECO2, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended March 31, 1996
CONTENTS
Financial Statements:
Consolidated Balance Sheet......................F-2 to F-3
Consolidated Statement of Operations...................F-4
Consolidated Statement of Changes in
Stockholders' Equity.................................F-5
Consolidated Statement of Cash Flows............F-6 to F-8
Notes to Financial Statements....................F-9 to F-15
F-1
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED BALANCE SHEET
ASSETS
March 31, September
1996 30, 1995
(Unaudited)
CURRENT ASSETS
Cash and Cash Equivalents (Including
Restricted Cash of $39,841 and
$1,424,733, respectively) $ 3,673,845 $ 5,405,938
Certificates of Deposit - Restricted 1,225,000 1,300,000
Accounts Receivable 3,039,584 1,745
Subscription Receivable - 62,500
Due on Convertible Debentures - 558,622
Investment in Gulfwest Oil Company 500,000 -
Inventory 4,868,302 1,333,283
Notes Receivable - Stockholder 95,961 92,586
Other Notes Receivable 1,719,055 -
Other Current Assets (Net of Allowance
for Doubtful Accounts of $7,336) 193,858 52,228
Total Current Assets 15,315,605 8,806,902
Property, Plant and Equipment (Net of
Accumulated Depreciation of $702,958
and $433,181, respectively) 2,137,496 1,236,325
Restricted Cash 52,000 52,000
Deferred Loan Acquisition Costs (Net of
Accumulated Amortization of $548,017
and $46,603, respectively) 1,409,410 937,013
Goodwill 1,349,796 -
Other Assets 32,148 750
Total Assets $20,296,455 $11,032,990
The accompanying notes are an integral part of the these consolidated
financial statements.
F-2
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED BALANCE SHEET
March 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, September
LIABILITIES 1996 30, 1995
(Unaudited)
CURRENT LIABILITIES
Accounts Payable $ 2,115,222 $ 194,678
Customer Deposits 100,000 100,000
Notes Payable - Stockholders 32,636 26,000
Capital Lease Obligations - 3,166
Current Portion Notes Payable 1,442,075 25,000
Interest Payable 135,717 38,736
Other Current Liabilities 78,061 72,463
Total Current Liabilities 3,903,711 460,043
LONG-TERM DEBT
Notes Payable - Stockholders,
Net of Current Portion 1,116,100 37,600
Notes Payable, Net of Current Portion - 50,000
Convertible Debentures 6,575,000 5,705,000
Total Long-Term Debt 7,691,100 5,792,600
Total Liabilities 11,594,811 6,252,643
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST, SPA FAUCET, INC. 624,706 -
STOCKHOLDERS' EQUITY
Preferred Stock (No Par Value,
Authorized 1,000,000 Shares,
None Issued and Outstanding) - -
Common Stock (Par Value $.01 Per Share,
Authorized 45,000,000 Shares, Issued
and Outstanding 17,006,355 and
5,385,864 Shares, respectively) 170,063 53,858
Additional Paid-In Capital 20,274,156 14,460,333
Deficit Accumulated During the
Development Stage (12,156,149) (9,118,918)
Unearned Compensation (177,083) (489,627)
Note Receivable - Exercise of Options
(Net of Allowance for Doubtful Notes
of $91,250 and $0, respectively) - (91,250)
8,110,987 4,814,396
Less: 10,000 Shares of Common Stock
in Treasury, at Cost (34,049) (34,049)
Total Stockholders' Equity 8,076,938 4,780,347
Total Liabilities and Stockholders' Equity $20,296,455 $11,032,990
The accompanying notes are an integral part of the these consolidated
financial statements.
F-3
<PAGE>
<TABLE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<CAPTION>
Inception
(Oct 8, 1990)
Six Months Ended March 31, Three Months Ended March 31, to March 31,
1996 1995 1996 1995 1996
<S> <C> <C> <C> <C> <C>
REVENUES $ 31,809 $ 62,331 $ 29,981 $ 31,451 $ 575,940
COST OF GOODS SOLD 25,998 - 25,998 - 25,998
GROSS PROFIT 5,811 62,331 3,983 31,451 549,942
OPERATING EXPENSES
Selling, General and Administrative Expenses 3,111,618 1,003,702 2,033,492 570,160 12,034,119
Research and Development Expense 521 68,201 314 40,778 381,685
Settlement (Income) Expenses - - - - 293,522
Total Operating Expenses 3,112,139 1,071,903 2,033,806 610,938 12,709,326
OPERATING LOSS (3,106,328) (1,009,572) (2,029,823) (579,487) (12,159,384)
OTHER INCOME (EXPENSE)
Interest Income 202,463 34,326 114,968 14,469 401,376
Interest Expense (205,925) (15,929) (167,090) (7,207) (531,203)
Other 11,863 (28,415) (1,441) (9,138) (23,682)
Contract Cancellation Income - - - - 340,000
Loss on Underwriting Deposit - - - - (240,000)
Unrealized Gain (Loss) on
Marketable Securities and
Other Investments 22,611 24,239 12,117 19,256 2,611
Settlement Income - - - - 39,191
Loss on Disposal of Assets (4,667) - - - (27,810)
Commissions 42,752 - 42,752 - 42,752
Total Other Income (Expense) 69,097 14,221 1,306 17,380 3,235
NET (LOSS) $(3,037,231) $ (995,351) $(2,028,517) $ (562,107) $(12,156,149)
Net (Loss) per Common and Common
Equivalent Share $ (.27) $ (.21) $ (.16) $ (.36)
Shares Used in Computation of Net
(Loss) Per Share 11,126,182 2,618,618 12,969,232 2,797,734
The accompanying notes are an integral part of the these consolidated
financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
DEFICIT
ACCUMULATED NOTE TOTAL
DURING RECEIVABLE STOCKHOLDERS'
COMMON STOCK PAID-IN DEVELOPMENT UNEARNED EXERCISE OF TREASURY EQUITY
ISSUED AMOUNT CAPITAL STAGE COMPENSATION OPTION STOCK (DEFICIT)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1995 5,385,864 $ 53,858 $14,460,333 $ (9,118,918) $(489,627) $ (91,250) $ (34,049) $4,780,347
Amortization of
Unearned
Compensation - - 312,544 - - 312,544
Allowance on Note
Receivable Exercise
of Option - - - - 91,250 - 91,250
Issuance of Stock on
Conversion of
Debentures in
October 1995 and
January March 1996
at Various Prices
less Amortization of
Deferred Loan
Acquisition Costs
through the Date of
Conversion 11,167,516 111,675 7,118,353 - - - - 7,230,028
Payment of $1.5
Million Upon the
Issuance of $15
Million in
Convertible
Debentures - (1,500,000) - - - - (1,500,000)
Issuance of 252,975
Shares for Settlement
per Contract at Par
in October 1995 252,975 2,530 (2,530) - - - - -
Issuance of 200,000
Shares Pursuant to a
Consulting Agreement
at $1 per Share in
October 1995 and
January 1996 200,000 2,000 198,000 - - - - 200,000
Net Loss - Six Months
Ended March 31, 1996 - - (3,037,231) - - - (3,037,231)
Balance, March 1, 1996 17,006,355 $170,063 $20,274,156 $(12,156,149) $(177,083) $ - $ (34,049) $8,076,938
</TABLE>
The accompanying notes are an integral part of the these consolidated
financial statements.
F-5
<PAGE>
<TABLE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Inception
(Oct 8, 1990)
Six Months Ended March 31, to March 31,
1996 1995 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(3,037,231) $ (995,351) $(12,156,149)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Loss on Disposal of Assets 3,570 - 69,668
Bad Debt Expense 91,250 - 106,525
Depreciation and Amortization 1,144,116 123,651 1,842,964
Settlement Expenses (Income) - - 238,081
Compensation Expense 312,544 1,350 1,727,777
Realized (Gain) Loss on Marketable Securities (22,611) 29,413 (188)
Unrealized (Gain) Loss on Marketable Securities - (24,239) -
Consulting Services 200,000 - 511,250
Loss on Investment - - 20,000
Change in Operating Portion of Accruals:
Accounts Receivable (181,661) (81) (191,345)
Inventory (198,116) (14,842) (916,457)
Deferred Loan Acquisition Costs (1,333,924) - (2,317,540)
Underwriting Deposit - (240,000) -
Other Current Assets (50,906) (3,596) (102,772)
Accounts Payable and Accrued Interest 1,328,990 (26,784) 1,582,196
Accrued Expenses - - (10,895)
Customer Deposits - - 100,000
Interest Payable 35,561 - 35,561
Other Current Liabilities 5,598 (16,861) 74,696
Due on Convertible Debentures 558,622 - 558,622
Subscription Receivable 62,500 - 62,500
Other Assets (6,055) - (6,055)
Net Cash Used in Operating Activities (1,087,753) (1,167,340) (8,771,561)
</TABLE>
(Continued on next page)
The accompanying notes are an integral part of the these consolidated
financial statements.
F-6
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
[CAPTION]
<TABLE>
Inception
(Oct 8, 1990)
Six Months Ended March 31, to March 31,
1996 1995 1996
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Fixed Assets (538,432) (76,100) (2,592,055)
Proceeds from Sale of Fixed Assets - - 66,600
Purchase of Certificates of Deposit - - (1,300,000)
Proceeds from Certificate of Deposit Maturities 75,000 - 75,000
Purchase of Marketable Securities (8,732,058) - (12,288,325)
Proceeds from Marketable Security Maturities 8,754,669 620,918 12,288,513
Proceeds from Insurance - - 20,750
Borrowings by Shareholder plus Accrued Interest (3,375) (3,702) (100,760)
Principle Repayments Shareholder Loans (12,500) (56,384) (426,204)
Investment in Gulf West Oil (500,000) - (500,000)
Loans Made plus Accrued Interest (1,719,055) - (1,719,055)
Consolidation of Spa Faucet, net of cash acquired (2,524,692) - (2,524,692)
Purchase of Chapter 7 Assets (1,840,000) - (1,840,000)
Net Cash Provided by (Used in) Investing Activities (7,040,443) 484,732 (10,840,228)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds from Convertible Debentures 6,480,769 - 11,627,147
Proceeds from Loans Payable - - 761,945
Principle Repayments of Loans, Notes and Leases (84,666) (65,768) (858,162)
Net Proceeds from Sale of Common Stock, Stock
Options and Notes Receivable for Exercise
of Options - 591,174 11,840,753
Treasury Stock - - (34,049)
Net Cash Provided by Financing Activities 6,396,103 525,406 23,337,634
Net Increase (Decrease) in Cash and Cash Equivalents (1,732,093) (157,202) 3,725,845
Cash and Cash Equivalents - Beginning of Period 5,457,938 419,727 -
Cash and Cash Equivalents - End of Period - Unrestricted 3,634,004 210,525 -
Cash and Cash Equivalents - End of Period - Restricted 91,841 52,000 -
Cash and Cash Equivalents - End of Period - Total $ 3,725,845 $ 262,525 $ 3,725,845
</TABLE>
(Continued on next page)
The accompanying notes are an integral part of the these consolidated
financial statements.
F-7
<PAGE>
<TABLE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Inception
(Oct 8, 1990)
to
Six Months Ended March 31, March 31,
1996 1995 1996
<S> <C> <C> <C>
SUPPLEMENTAL NONCASH FINANCING AND INVESTING ACTIVITIES:
Additional Paid-In Capital from unearned Compensatory/Stock
Options, Less Deferred Compensation of $0
and $93,750, Respectively $ - $ - $ 441,615
Additional Paid-In Capital in Exchange for Compensation $ - $ - $ 382,600
Additional Paid-In Capital in Exchange for Loans $ - $ - $ 308,496
Prior Expenses of Initial Public Offering Charged to
Additional Paid-In Capital $ - $ - $ 131,827
Acquisition of Land in Exchange for Mortgage Payable $ - $ - $ 125,000
Acquisition of Fixed Asset in Exchange for Notes
and Leases Payable $ - $ - $ 412,297
Acquisition of Viking Stock in Exchange for Stock $ - $ - $ 20,000
Return of Equipment in Exchange for Relief of
Related Payable $ - $ - $ 27,860
Due on Convertible Debentures $ - $ - $ 558,622
Subscription Receivable for Private Placement $ - $ - $ 62,500
Transfer of Items to Inventory from Property
Plant and Equipment $ - $ - $ 914,624
Conversion of Convertible Debentures to Common Stock $ 7,230,028 $ - $ 7,230,028
Acquisition of Spa Faucet, Inc. Stock in Exchange for
Loan Receivable Reduction $ 1,000,000 $ - $ 1,000,000
SUPPLEMENTAL DISCLOSURES:
Interest Paid - Cash Basis $ 16,572 $ 1,765 $ 237,964
ACQUISITION OF SPA FAUCET:
Value of Assets $ 4,930,867
Value of Liabilities (3,131,265)
Goodwill 1,349,796
Minority Interest (624,706)
$ 2,524,692 <F1>
<FN>
<F1>
Represents cash paid of $2,000,000 less Spa Faucet cash of $48,398 plus amount payable to ECO2, Inc.
of $573,090.
</FN>
The accompanying notes are an integral part of the these consolidated
financial statements.
F-8
</TABLE>
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
NOTE 1 - INTERIM FINANCIAL INFORMATION
The unaudited consolidated financial statements and related notes have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations.
The accompanying consolidated financial statements and related notes should be
read in conjunction with the audited financial statements of the Company, and
notes thereto, for the fiscal year ended September 30, 1995.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods presented.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ECO2, Inc., its
wholly-owned subsidiaries, ERI Delaware, Inc., ECO Jet Systems, Inc. and ECO2
Financial, Inc., and its 51% owned subsidiary, Spa Faucet, Inc. Spa Faucet,
Inc. is included on a consolidated basis as the Company has a majority voting
interest in the stock and maintains a seat on the Board of Directors of Spa
Faucet, Inc. All significant intercompany transactions are eliminated in
consolidation.
NOTE 3 - INVESTMENTS AND WHOLLY-OWNED SUBSIDIARIES
Spa Faucet, Inc.
As of March 31, 1996, the Company paid $2,000,000 to acquire 2,600,000 shares
or 51% of the outstanding common shares of Spa Faucet, Inc., a public company
in the business of manufacturing and distributing decorative faucets and
accessories. Spa Faucet, Inc. has been consolidated in the accompanying
financial statements. The excess purchase price over assets acquired totalled
$1,349,796 and is being amortized straight-line over 15 years.
Gulfwest Oil Company, Inc.
On February 29, 1996, the Company acquired 1,000 10% shares of preferred stock
of Gulfwest Oil Company, Inc. for $500,000. At any time after twelve months,
the Company can convert the preferred shares into shares of common stock at the
greater of 65% of the average closing bid prices of common shares for 30
consecutive days prior to notification to convert or $3.50 per common share.
F-9
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
NOTE 3 - INVESTMENTS AND WHOLLY-OWNED SUBSIDIARIES (Continued)
ECO Jet Systems, Inc.
On March 4, 1996, the Company formed ECO Jet Systems, Inc. to acquire at a
bankruptcy auction the assets (primarily inventory) of a jet ski manufacturer.
The assets, representing the remaining estates of the two companies in Chapter
7, were purchased from a Chapter 7 Trustee for $1,840,000. ECO Jet Systems
will manufacturer and distribute small two stroke engines and jet pumps for the
marine industry, Watercraft engines and race boats, and Kawasaki jet skis and
parts. ECO Jet Systems has been consolidated in the accompanying financial
statements. There was no significant sales activity since the inventory was
acquired.
ECO2 Financial, Inc.
ECO2 Financial, Inc. incorporated December 28, 1995 with one share of $.001 par
value common stock authorized and outstanding, was organized to provide
financing on a short-term basis to qualified candidates and companies per
specifically tailored agreements. ECO2 Financial, Inc. has been consolidated
in the accompanying financial statements.
NOTE 4 - CASH
Unsecured Balances:
The FDIC insures balances of up to $100,000. As of March 31, 1996, the Company
has unsecured balances in a bank approximating $4,449,206.
NOTE 5 - INVENTORY
Inventory consists of the following:
March 31, September
1996 30, 1995
Raw Materials $1,861,503 $ -
Work in Progress 657,597 657,597
Finished Goods 2,316,534 653,018
Supplies 32,668 22,668
$4,868,302 $1,333,283
The breakdown by consolidated company is as follows:
ECO2 $1,502,876
Jet Systems 1,861,503
Spa Faucet 1,503,923
$4,868,302
F-10
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
NOTE 6 - NOTES RECEIVABLE
Other
ECO2 Financial, Inc. loaned funds for the production of two motion picture
films pursuant to two letters of credit with maximum available funds of
$2,227,542 and $200,000. Outstanding funds accrue interest at the prime rate
plus two percent, are due on demand and are collateralized by all cash,
property, intangibles and instruments of each movie plus are personally
guaranteed by the signor on the notes. The loans plus accrued interest total
$1,614,753 and $75,767 at March 31, 1996, respectively.
In addition on March 11, 1996, ECO2 Financial, Inc. approved $50,000 to be
loaned to finance construction of a personal residence to be repaid with
interest at the prime rate plus 3% by June 11, 1996. At March 31, 1996, the
note receivable totalled $28,535.
Other notes receivable at March 31, 1996 pursuant to the previously described
notes totals $1,719,055.
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
The Company made modifications to the shredder and premises and purchased
equipment or added equipment through consolidation totalling $1,000,151 during
the quarter ended March 31, 1996.
NOTE 8 - NOTES PAYABLE
As a result of consolidation with Spa Faucet, Inc., the financial statements
reflect additional debt.
Stockholders
Notes payable stockholders includes $1,097,636 of notes maturing in 1998
accruing interest at the prime rate plus one percent per annum.
Other
Current portion notes payable includes $1,442,075 of borrowings pursuant to a
line of credit. Borrowings under the line are payable in full 150 days from
the date of the cash advance together with interest at the prime rate plus one
percent per annum. The line is available through February 15, 1997 and is
secured by standby letters of credit totalling $1,500,000.
F-11
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO FINANCIAL STATEMENTS
March 31, 1995
NOTE 9 - CONVERTIBLE DEBENTURES
In the quarter ended March 31, 1996, the Company sold $5,175,000 of 9%
convertible debentures eligible at the option of the debtee for conversion to
common stock 45 days after the issuance date. Upon conversion, the debenture
holder is to receive common shares equal to the value of the convertible
debentures plus accrued interest divided by the market price of the common
stock. The market price shall be 65% of the average closing bid price of the
common stock for five business days immediately preceding the conversion date.
Shares equal to 120% of the shares which would have been issued on the date of
the subscription are to be held with an escrow agent. Costs to issue are
equal to 10% of the debentures.
At March 31, 1996, shares of common stock were held in escrow anticipating
conversion and, deferred loan acquisition costs of $1,409,410 have been
recorded. The deferred loan acquisition costs pertaining to each convertible
debenture will be amortized to operations over the debenture term with all
remaining unamortized costs charged to additional paid in capital upon
conversion. Interest on unconverted debentures is payable quarterly through
maturity, December 31, 1997, at which time all debentures will be converted to
common stock. If the market price of the common stock is $.82 or less at
maturity, the Company may redeem all or part of the debentures for 110% of the
value of the debentures plus accrued interest on that date.
NOTE 10 - STOCKHOLDERS' EQUITY
Convertible Debentures
In the quarter ended March 31, 1996, the Company sold $5,175,000 of 9%
convertible debentures (see Note 9). Pursuant to this agreement, 4,325,032
shares of common stock were placed with an escrow agent. Of the total
debentures issued, $1,600,000 were converted to 2,561,784 shares of common
stock.
Also in the quarter ended March 31, 1996, $2,200,000 of convertible debentures
issued in the quarter ended December 31, 1995 were converted into 3,305,817
shares of common stock including 691,370 additional shares issued pursuant to
anti-dilution clauses in the contract.
Other Stock Issuances
In January 1996, 100,000 shares were issued pursuant to a consulting agreement
(see Note 12).
F-12
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO FINANCIAL STATEMENTS
March 31, 1995
NOTE 11 - RELATED PARTY TRANSACTIONS
On January 1, 1996, the Company signed an agreement with Planet Earth
Recycling Center, Inc., which is wholly-owned by the son and daughter-in-law
of the president of the Company, to receive ground rubber in exchange for
labor services. As of March 31, 1996, no ground rubber or services have been
received or performed pursuant to this contract.
On December 12, 1995, the Company signed a consulting agreement with a board
member and son-in-law to the President of the Company to perform due diligence
investigations, perform business development and marketing activities and to
perform environmental compliance due diligence. The agreement is for six
months to May 15, 1996 with compensation of $2,500 per month.
The Company rents office space for its office and research plant from the
President. During the quarter ended March 31, 1996, the Company paid rent of
$18,837 for this space.
Included in the accompanying financials is $42,645 and $29,277 of commissions
and interest earned through lending activities with Spa Faucet, Inc.,
respectively prior to the Company's acquisition described in Note 3.
NOTE 12 - AGREEMENTS
In September 1995, the Company signed a consulting agreement to provide the
Company with leads for potential investment or acquisition candidates and
potential buyers and to aid the Company with respect to its investment and
development strategy. The agreement is effective for three months and
requires the issuance of 300,000 shares, 100,000 of these shares have been
issued as of September 30, 1995. The shares are valued at the fair market
value at the date of the agreement; $1 per share or an aggregate of $300,000.
During the quarters ended March 31, 1996 and December 31, 1995, an additional
100,000 shares each were issued with $100,000 charged to compensation expense
in each quarter.
In October 1995, the Company signed a one-year agreement with a consulting
firm which is to find and represent the Company in merger and acquisition and
investment decisions. The consultant would receive a one-time fee for any
transaction organized by the consulting firm which is entered into by the
Company. The fee is to be determined at the date of such transaction.
On October 2, 1995, the Company signed a consulting agreement to provide
consulting services on behalf of the Company in connection with identifying
and evaluating potential merger or acquisition candidates, assisting in the
negotiation of a resulting merger or acquisition and identifying lenders and
assisting in the negotiation of debt and equity
F-13
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO FINANCIAL STATEMENTS
March 31, 1995
NOTE 12 - AGREEMENTS (Continued)
financing. The agreement is effective for three years to October 2, 1998 and
requires the compensation to be paid upon the occurrence of specific events.
First, in the event the Company obtains debt or equity financing in the
minimum aggregate amount of fifteen million dollars through introductions made
by the consultant, the Company agrees to pay the consultant in cash, an amount
equal to ten percent of the first fifteen million in funds received by the
Company, within ten days of funding the five percent for all subsequent funds
received by the Company through introductions made by the consultant. Second,
in the event a merger or acquisition between the Company and an entity
identified by the consultant is consummated, the surviving corporation agrees
to compensate the consultant in cash, in the amount of five percent of the
aggregate cash actually received by the surviving corporation from the
exercise of any warrants outstanding at the time of such merger or
acquisition, such compensation to be paid from time to time upon exercise of
such warrants. Third, upon the closing of the merger or acquisition between
the Company and any merger or acquisition candidates, the surviving
corporation agrees to issue to the consultant or its designees an aggregate of
common stock, in the names and denominations specified in writing by the
consultant, equal to four and one half percent of the common stock then issued
and outstanding of the surviving corporation. As of March 31, 1996, fifteen
million dollars was raised through the issuance of convertible debentures
arranged by the consultant. Of the total $1,500,000 due pursuant to this
agreement, $190,000 was paid and $1,310,000 has been accrued at March 31,
1996.
On August 28, 1995, the Company signed an agreement with an independent agent
pursuant to which the agent received 100,000 shares of common stock as entire
compensation for any sale arranged by the agent during the one-year term
expiring August 28, 1996. The contract is valued at $425,000 based on the
fair market value of the common stock on the contract date. In the quarter
ended March 31, 1996, three months of amortization, $106,250, has been
expensed and $177,083 has been included as unearned compensation as a
deduction from stockholders' equity.
On October 24, 1995, the Company signed a one-year independent agent agreement
pursuant to which the agent is to receive 10% of the gross proceeds on the
sale of reactors and shredder equipment and 5% of the gross proceeds on the
sale of generator and other equipment. The price of a system, as defined in
the agreement is approximately $5,690,000. The agent's territory is worldwide
excluding areas specifically delineated by the Company. During the quarter
ended December 31, 1995, $130,000 of advance commissions were charged to
expense as a result of non-performance on the agreement. Management plans to
actively pursue collection.
F-14
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO FINANCIAL STATEMENTS
March 31, 1995
NOTE 12 - AGREEMENTS (Continued)
As of December 31, 1995, ECO2 Financial, Inc. signed an agreement with Spa
Faucet, Inc. to provide up to $1,000,000 of financing at the New York prime
rate plus 2% per annum. The receivables of Spa Faucet, Inc. are collateral
with the loan not to exceed 80% of said receivables. Amounts due to the
Company pursuant to this agreement have been eliminated in consolidation.
NOTE 13 - COMMITMENTS
Employment Agreements
ECO Jet Systems has entered into a three-year employment agreement with its
plant manager. This agreement became effective February 29, 1996. Pursuant
to the agreement, the plant manager receives $76,000 per year plus a bonus
equal to 10% of the first one million in pretax profits and 2.5% of the excess
over one million in pretax profits. This agreement contains a noncompete
covenant effective for three years subsequent to the termination of the
agreements.
NOTE 14 - CONTINGENT LIABILITIES
The Company is contingently liable under an irrevocable standby letter of
credit for $52,000 with the Environmental Protection Agency which expires
December, 1996. The letter is collateralized by a certificate of deposit in
the amount of $52,000 which is included in restricted cash.
Three dissenting stockholders who disagreed with the merger of the
corporations have potential claims against Charles Ledford, the president of
ECO2. The Company has defended on the basis that indispensable parties
including the corporation have not been joined. The Company has deemed it
premature to assess the value of their claims, however if the stockholders are
successful their claims relate to approximately 14,000 of the Company's
shares. In August 1995, the Company issued 40,998 shares to the three
stockholders in settlement of the aforementioned claims. The Company issued
those shares in connection with prior antidilution provisions. In January
1996, two of the dissenting stockholders accepted the aforementioned shares
plus additional cash paid of $38,536 total to cover the difference between the
fair market value of the shares on the date sold and $3, the guaranteed fair
market value per the original agreements. The Company is unsure whether the
remaining dissenting stockholder will accept this settlement.
NOTE 15 - SUBSEQUENT EVENTS
In April and May 1996, $950,000 of convertible debentures were converted into
1,671,629 shares of common stock.
In April 1996, $671,837 was loaned pursuant to the production of the two
motion picture films (see Note 6).
F-15
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The Company began operations on December 4, 1991, and has
operated as a development stage enterprise. During this time,
the Company completed the construction and implementation of an
operational scrap tire resource recovery facility at its
headquarters in Hawthorne, Florida. Furthermore, as a
development stage enterprise, the Company has focused its
efforts on financial planning, raising capital, research and
development, establishing sources of supply, developing markets,
organizing the corporation, and developing its business plan.
Recently, the company has made several investments to diversify
its operations.
To date, the Company has built an operational facility
used for demonstrations and the production of by-products in
limited quantities on a non-continuous basis for demonstration
purposes only. The Company does not have significant experience
constructing Systems in the volumes that may be necessary for
the Company to achieve significant revenues. The Company may
encounter difficulties in increasing its production capacity or
in hiring and training additional personnel to construct Systems
and produce and sell by-products in commercial quantities in a
timely manner. Difficulties in meeting regulatory requirements,
interruptions in the supply of tires or in the products used to
build additional Systems, difficulties in expanding from the
prototype facility to full-scale plants or in manufacturing the
parts needed to establish additional plants, as well as other
production problems could have a material adverse effect on the
Company's business, financial condition and results of
operations. To the extent that the Company is unable to
generate significant operating revenues and achieve
profitability, the Company may be prevented from expanding its
operations and may utilize a greater percentage of its available
resources for working capital purposes.
The primary source of the Company's revenues is the sale
of crumb rubber and rubber products and tire tipping fees. To
date, the Company has sold only limited amounts of these items,
as the facility operates on a non-continuous basis for
demonstration purposes only. The Company also produces fiber,
carbon black, steel and fuel oil from the tires processed,
however, significant sales of such items has not commenced.
Results of Operations
This discussion should be read in conjunction with the
unaudited financial statements and notes thereto appearing in
this Form 10-QSB. All comparisons within the following
discussion are to the quarter ended March 31, 1995.
Total company revenues for the quarter ended March 31,
1996, totaled $29,981, as compared to $31,451 for the quarter
ended March 31, 1995, a decrease of $1,470. The decrease was
primarily due to a reduction in demand for the Company's crumb
rubber products.
The Company's selling, general and administrative expenses
increased $1,463,332 during the quarter ended March 31, 1996 to
$2,033,492 from $570,160 for the quarter ended March 31, 1995.
Research and development costs, during the quarters ended
March 31, 1996, and 1995, decreased $40,744 from $40,778 to
$314, respectively, reflecting the Company's substantial
reduction of research and development relating to the Systems'
production of rubber, rubber products and rubber bi-products.
Interest expense during the quarter ended March 31, 1996,
increased $159,883 from $7,207 to $167,090 due to interest due
on the convertible debentures.
For the quarter ended March 31, 1996, the Company had an
operating loss of $2,029,823, a net loss of $2,028,517, and a
loss per share of $.16, as compared to an operating loss of
$579,487, a net loss of $562,102, and a loss per share of $.36
for the quarter ended March 31, 1995. The increased operating
loss and net loss primarily resulted from the increase in
selling, general and administrative expenses in conjunction with
lower revenues and the absence of significant contract
cancellation income in the quarter ended March 31, 1995.
Liquidity and Capital Resources
Cash flows used by operating activities of the Company for
the six month periods ended March 31, 1996, and March 31, 1995,
totaled $1,087,753 and $1,167,340, respectively.
Cash flows used by investing activities of the Company for
the six month periods ended March 31, 1996 totaled $7,040,443.
Cash flows provided by financing activities of the Company
for the six month period ended March 31, 1996, and March 31,
1995, totaled $6,396,103 and $525,406, respectively. The cash
needs of the Company were met by the proceeds from the issuance
of convertible debentures. In the six month period ended March
31, 1996, net proceeds from the sale of convertible debentures
totaled $8,754,669.
The Company has sufficient funds to meet its operating
expenses, regulatory approvals, and for construction facilities.
Revenue
The Company received no significant revenues from the sale
of bi-products during the current period. Interest income
increased by approximately $100,000 as a result of investing the
proceeds of the sale of debentures.
PART II: Other Information
Item 6. Exhibits and Reports on Form 8-K
None.
(a) Exhibits
Exhibit Description Page
(27) Financial Data Schedule
(b) Reports on Form 8-K None
Report of Form 8-K, Item 2, filed March 20, 1996.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated: May 23, 1996
/s/ Charles Ledford
Charles Ledford,
President, Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
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<MULTIPLIER> 1
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Sep-30-1995
<PERIOD-END> Mar-31-1996
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