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: 6-30-96 Commission file number: 0-20806
ECO2, Inc.
(Exact name of issuer as specified in its charter)
Delaware 11-3087145
(State or jurisdiction (IRS Employer
of incorporation) Identification No.)
20005 S.E. Hawthorne Road, Hawthorne, Florida 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
As of June 30, 1996, the Company had outstanding 22,596,745 shares of its
common stock.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
FINANCIAL STATEMENTS
Consolidated Balance Sheet F-2 to F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Stockholders' Equity F-5 to F-6
Consolidated Statements of Cash Flows F-7 to F-9
NOTES TO FINANCIAL STATEMENTS F-10 to F-18
F-1
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30,
1996
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents, including restricted cash
of $52,082 $ 2,423,534
Certificates of deposit - restricted 1,150,000
Accounts receivable 1,723,898
Inventory 5,181,005
Notes receivable - stockholder 97,639
Other notes receivable 2,452,965
Other current assets, net of allowance for doubtful accounts
of $7,336 317,189
Total current assets 13,346,230
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation
of $781,466 2,433,943
OTHER ASSETS
Restricted cash 54,687
Investment securities, available for sale, at fair value 464,285
Debt issue costs, net of accumulated amortization
of $238,961 526,037
Goodwill, net of accumulated amortization of $24,163 1,425,633
Other assets 26,093
Total other assets 2,496,735
TOTAL ASSETS $18,276,908
</TABLE>
The accompanying notes to financial statements
are an integral part of this consolidated financial statement.
F-2
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30,
1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Accounts payable $ 258,998
Customer deposits 100,000
Notes payable - stockholders 26,000
Current portion notes payable 1,459,657
Interest payable 117,612
Other current liabilities 156,777
Total current liabilities 2,119,044
LONG-TERM DEBT
Notes payable - stockholders, net of current portion 950,160
Convertible debentures 3,315,000
Total long-term debt 4,265,160
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 785,419
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 22,596,745 shares 225,967
Additional paid-in capital 24,361,976
Deficit accumulated during the development stage (13,340,061)
Unearned compensation (70,833)
Unrealized loss on securities available for sale (35,715)
11,141,334
Less: 10,000 shares of common stock in treasury, at cost (34,049)
Total stockholders' equity 11,107,285
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,276,908
</TABLE>
The accompanying notes to financial statements
are an integral part of this consolidated financial statement.
F-3
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
INCEPTION
(OCT. 8, 1990)
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30, TO JUNE 30,
1996 1995 1996 1995 1996
<S> <C> <C> <C> <C> <C>
REVENUES $ 2,686,621 $ 66,956 $ 2,718,430 $ 129,287 $ 3,262,561
COST OF GOODS SOLD 1,713,044 - 1,739,042 - 1,739,042
GROSS PROFIT 973,577 66,956 979,388 129,287 1,523,519
OPERATING EXPENSES
Selling, general and administrative expenses 1,904,258 522,222 5,015,876 1,550,924 13,938,377
Research and development expense 1,979 (223) 2,500 67,978 383,664
Settlement expenses - - - - 293,522
Total operating expenses 1,906,237 521,999 5,018,376 1,618,902 14,615,563
OPERATING LOSS (932,660) (455,043) (4,038,988) (1,489,615) (13,092,044)
OTHER INCOME (EXPENSE)
Interest income 106,686 11,902 309,149 46,228 508,062
Interest expense (121,588) (5,829) (327,513) (21,758) (652,791)
Other (45,008) (13,367) (33,145) (41,782) (68,690)
Contract cancellation income - - - - 340,000
Loss on underwriting deposit - - - - (240,000)
Realized gain on marketable securities
and other investments - 17,961 22,611 42,200 2,611
Settlement expense (73,760) - (73,760) - (34,569)
Loss on disposal of assets - - (4,667) - (27,810)
Commissions 10,075 - 52,827 - 52,827
Total other income (expense) (123,595) 10,667 (54,498) 24,888 (120,360)
NET LOSS BEFORE MINORITY INTEREST (1,056,255) (444,376) (4,093,486) (1,464,727) (13,212,404)
MINORITY INTEREST 127,657 - 127,657 - 127,657
NET LOSS $ (1,183,912) $ (444,376) $ (4,221,143) $ (1,464,727) $(13,340,061)
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE $ (.06) $ (.14) $ (.30) $ (.50)
SHARES USED IN COMPUTATION OF NET LOSS PER SHARE 18,709,917 3,278,723 13,965,138 2,958,053
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated financial statements.
F-4
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
DEFICIT UNREALIZED
ACCUMULATED NOTE LOSS ON TOTAL
DURING RECEIVABLE SECURITIES STOCKHOLDERS'
COMMON STOCK PAID-IN DEVELOPMENT UNEARNED EXERCISE OF AVAILABLE TREASURY EQUITY
ISSUED AMOUNT CAPITAL STAGE COMPENSATION OPTION FOR SALE STOCK (DEFICIT)
<S> <C> <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 - - - - 418,794 - - - 418,794
ALLOWANCE
ON NOTE
RECEIVABLE
EXERCISE OF
OPTION - - - - - 91,250 - - 91,250
ISSUANCE OF
STOCK ON
CONVERSION
OF DEBENTURES
IN OCTOBER
1995, JANUARY,
MARCH AND
JUNE, 1996 AT
VARIOUS PRICES
LESS
AMORTIZATION
OF DEFERRED
LOAN
ACQUISITION
COSTS THROUGH
THE DATE OF
CONVERSION 16,757,906 167,579 9,706,173 - - - - - 9,873,752
ISSUANCE
OF 252,975
SHARES FOR
SETTLEMENT
PER CONTRACT
AT PAR IN
OCTOBER 1995 252,975 2,530 (2,530) - - - - - -
</TABLE>
The accompanying notes to financial statements
are an integral part of this consolidated financial statement.
F-5
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited - Continued)
<TABLE>
<CAPTION>
DEFICIT UNREALIZED
ACCUMULATED NOTE LOSS ON TOTAL
DURING RECEIVABLE SECURITIES STOCKHOLDERS'
COMMON STOCK PAID-IN DEVELOPMENT UNEARNED EXERCISE OF AVAILABLE TREASURY EQUITY
ISSUED AMOUNT CAPITAL STAGE COMPENSATION OPTION FOR SALE STOCK (DEFICIT)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
CHANGE IN
UNREALIZED
LOSS ON
SECURITIES
AVAILABLE
FOR SALE - - - - - - (35,715) - (35,715)
NET LOSS,
nine months
ended June
30, 1996 - - - (4,221,143) - - - - (4,221,143)
BALANCE,
June
30, 1996 22,596,745 $ 225,967 $ 24,361,976 $(13,340,061) $ (70,833) $ - $ (35,715) $ (34,049) $ 11,107,285
</TABLE>
The accompanying notes to financial statements
are an integral part of this consolidated financial statement.
F-6
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
INCEPTION
(OCT. 8, 1990)
NINE MONTHS ENDED JUNE 30, TO JUNE 30,
1996 1995 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss $ (4,221,143) $ (1,464,727) $ (13,340,061)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Loss on disposal of assets 6,001 - 72,099
Bad debt expense 91,250 - 106,525
Depreciation and amortization 1,354,048 186,637 2,052,896
Settlement expense - - 238,081
Compensation expense 418,794 1,973 1,834,027
Realized (gain) loss on
marketable securities (22,611) 43,343 (188)
Unrealized (gain) loss on
marketable securities - (46,553) -
Consulting services 200,000 86,250 511,250
Loss on investment - - 20,000
Minority interest 127,657 - 127,657
Change in operating portion of
accruals:
Accounts receivable 1,134,025 (34,737) 1,124,341
Inventory (420,819) (4,531) (1,139,160)
Deferred loan acquisition
costs - - (983,616)
Underwriting deposit - (240,000) -
Other current assets (174,237) 2,978 (226,103)
Accounts payable and accrued
interest (511,692) (45,276) (258,486)
Accrued expenses - - (10,895)
Customer deposits - - 100,000
Interest payable 315,770 - 315,770
Other current liabilities 68,772 (19,902) 137,870
Subscription receivable 62,500 - 62,500
Net cash used in operating
activities (1,571,685) (1,534,545) (9,255,493)
CASH FLOWS FROM INVESTING
ACTIVITIES
Acquisition of fixed assets (894,082) (81,681) (2,947,675)
Proceeds from sale of fixed
assets - - 66,600
Purchase of certificates of
deposit - - (1,300,000)
Proceeds from certificates of
deposit maturities 150,000 - 150,000
Purchase of marketable
securities (8,732,058) - (12,288,325)
Proceeds from marketable
security maturities 8,754,669 890,448 12,288,513
Proceeds from insurance - - 20,750
Borrowings by shareholder plus
accrued interest (5,053) (5,384) (102,438)
Principal repayments shareholder
loans (185,076) (86,436) (598,810)
Purchase of securities available
for sale (500,000) - (500,000)
Loans made plus accrued interest (2,452,965) - (2,452,965)
Consolidation of Spa Faucet,
net of cash acquired (2,592,274) - (2,592,274)
Purchase of Chapter 7 assets (1,930,000) - (1,930,000)
Net cash provided by
(used in) investing
activities (8,386,839) 716,947 (12,186,624)
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated financial statements.
F-7
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Continued)
<TABLE>
<CAPTION>
INCEPTION
(OCT. 8, 1990)
NINE MONTHS ENDED JUNE 30, TO JUNE 30,
1996 1995 1996
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES
Net proceeds from convertible
debentures $ 7,039,391 $ - $ 12,185,769
Proceeds from loans payable 17,582 4,222 779,527
Principal repayments of loans,
notes and leases (78,166) (77,827) (851,662)
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 6,978,807 517,569 23,920,338
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,979,717) (300,029) 2,478,221
CASH AND CASH EQUIVALENTS,
beginning of period 5,457,938 419,727 -
CASH AND CASH EQUIVALENTS,
end of period - unrestricted 2,423,534 67,698 2,423,534
CASH AND CASH EQUIVALENTS,
end of period - restricted 54,687 52,000 54,687
CASH AND CASH EQUIVALENTS,
end of period - total $ 2,478,221 $ 119,698 $ 2,478,221
SUPPLEMENTAL NONCASH FINANCING
AND INVESTING ACTIVITIES
Additional paid-in capital
from unearned compensatory/
stock options, less deferred
compensation of $28,435 and
$16,957, respectively $ - $ - $ 441,615
Additional paid-in capital
in exchange for compensation - 86,250 907,600
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 - - 469,508
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 - - 806,840
Conversion of convertible
debentures to common stock 9,873,752 - 9,873,752
Acquisition of Spa Faucet,
Inc. stock in exchange for
loan receivable reduction 1,000,000 - 1,000,000
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated financial statements.
F-8
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - Continued)
<TABLE>
<CAPTION>
INCEPTION
(OCT. 8, 1990)
NINE MONTHS ENDED JUNE 30, TO JUNE 30,
1996 1995 1996
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES
Interest paid - cash basis $ 74,371 $ 25,167 $ 308,608
ACQUISITION OF SPA FAUCET
Value of assets $ 4,930,867
Value of liabilities (3,163,683)
Goodwill 1,449,796
Minority interest (624,706)
$ 2,592,274<F1>
<FN>
<F1>
Represents cash paid of $2,100,000 less Spa Faucet cash of $48,398 plus amount
payable to ECO2, Inc. of $540,672.
</FN>
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated financial statements.
F-9
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
The information presented herein as of June 30, 1996, and for the three and
nine months ended June 30, 1996 and 1995, and the period from inception
through June 30, 1996, is unaudited.
(1) BASIS OF PRESENTATION:
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Rule 10-01 of
Regulations 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 adjustments) considered necessary for a fair
presentation have been included. Operating results for the three and nine
month periods ended June 30, 1996, are not necessarily indicative of the
results that may be expected for the year ending September 30, 1996. For
further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for the year ended
September 30, 1995.
(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.
(3) SUBSIDIARIES:
SPA FAUCET, INC.
The Company owns 51% of the outstanding common shares of Spa Faucet, Inc., a
public company in the business of manufacturing and distributing decorative
faucets and accessories (see Note 4).
ECO JET SYSTEMS, INC.
ECO Jet Systems, Inc. (ECO Jet) is a wholly owned subsidiary of ECO2. ECO Jet
is in the business of manufacturing and distributing small two-stroke engines
and jet pumps for the marine industry, Watercraft engines and race boats, jet
skis and Kawasaki jet ski parts (see Note 4).
ECO2 FINANCIAL, INC.
ECO2 Financial, Inc. incorporated December 28, 1995, with one share of $.001
par value common stock authorized and outstanding, is a wholly owned
subsidiary of ECO2. ECO2 Financial was organized to provide financing on a
short-term basis to qualified candidates and companies per specifically
tailored agreements.
F-10
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(4) BUSINESS ACQUISITIONS:
SPA FAUCET, INC.
On March 31, 1996, the Company acquired 51% of the outstanding common shares
of Spa Faucet, Inc., a public company in the business of manufacturing and
distributing decorative faucets and accessories. The Company paid $2,100,000
for the 2,600,000 shares and accounted for the acquisition using the purchase
method of accounting. The results of operations of Spa Faucet, Inc. are
included in the accompanying consolidated financial statements since the date
of acquisition. The total cost of the acquisition of $2,100,000 exceeded the
fair value of net assets of Spa Faucet, Inc. by $1,449,796. The excess is
being amortized on the straight-line method over 15 years.
The pro forma results listed below are unaudited and reflect purchase price
accounting adjustments assuming the acquisition occurred at October 1, 1994:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995
<S> <C> <C>
Revenues $ 7,144,449 $ 4,887,333
Net loss $ (4,076,371) $ (1,811,137)
Net loss per common share $ (.22) $ (.61)
Weighted average number of
shares outstanding 18,709,917 2,958,053
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire period
presented. In addition, it is not intended to be a projection of future
results.
ECO JET SYSTEMS, INC.
On March 4, 1996, the Company formed ECO Jet to acquire at a bankruptcy
auction the assets (primarily inventory and fixed assets) 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
$1,930,000, including costs of acquisition. This acquisition has been
accounted for using the purchase method of accounting. The results of
operations of ECO Jet are included in the accompanying consolidated financial
statements since the date of acquisition. Based on information currently
available, the Company has allocated the entire purchase price of $1,930,000
to inventory. Prior financial information is not available to present pro
forma results.
F-11
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(5) CONCENTRATIONS OF CREDIT RISK:
Significant concentrations of credit risk for all financial instruments owned
by the Company as of June 30, 1996 are as follows:
(a) DEMAND DEPOSITS--The Company has demand deposits in banks which
are insured by the Federal Deposit Insurance Corporation up to $100,000. At
June 30, 1996, the bank balances in four different banks totaled
$3,708,755. The Company has no policy of requiring collateral or other
security to support its deposits.
(b) ACCOUNTS RECEIVABLE--The Company's accounts receivable consist of
amounts due primarily from retail businesses located primarily in the United
States. The Company has no policy requiring collateral or other security to
support its accounts receivable.
(6) INVENTORY:
Inventory consists of the following as of June 30, 1996:
<TABLE>
<S> <C>
Raw materials $ 1,700,164
Work in progress 1,428,135
Finished goods 2,040,415
Supplies 12,291
$ 5,181,005
</TABLE>
The breakdown by consolidated company is as follows as of June 30, 1996:
<TABLE>
<S> <C>
ECO2 $ 1,501,856
ECO Jet Systems 1,850,938
Spa Faucet 1,828,211
$ 5,181,005
</TABLE>
(7) OTHER NOTES RECEIVABLE:
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 signer on the notes. The loans plus accrued interest total
$2,288,104 and $164,860 at June 30, 1996, respectively.
F-12
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(8) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following as of June 30, 1996:
<TABLE>
<S> <C>
Leasehold improvements $ 924,567
Vehicles 252,151
Shop equipment 764,338
Shredders 63,236
Reactor 251,453
Tooling and molds 386,957
Trailers 73,452
Laboratory equipment 18,136
Office furniture and equipment 220,821
Mobile home 19,972
Security equipment 4,504
Displays 64,322
Total equipment 3,043,909
Less: Accumulated depreciation (781,466)
Equipment, net 2,262,443
Land 171,500
Total property, plant and equipment, net $ 2,433,943
</TABLE>
The breakdown by consolidated company is as follows:
<TABLE>
<S> <C>
ECO2 $ 1,673,085
Spa Faucet 500,463
ERI 186,052
ECO Jet Systems 74,343
$ 2,433,943
</TABLE>
(9) INVESTMENT SECURITIES:
On February 29, 1996, the Company acquired 1,000 10% shares of convertible
preferred stock of Gulfwest Oil Company, Inc. for $500,000. On June 24, 1996,
the Company converted the preferred stock into 142,857 shares of common stock.
The Company's investment securities are classified as "available for sale."
Accordingly, unrealized gains and losses and the related deferred income tax
effects are excluded from earnings and reported as a separate component of
stockholders' equity. As of June 30, 1996, the common stock investment in
Gulfwest Oil Company, Inc. had a cost of $500,000 and a fair value of
$464,285. Accordingly, an unrealized loss of $35,715 has been reflected in
the accompanying statement of stockholders' equity.
F-13
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(10)NOTES PAYABLE:
STOCKHOLDERS
Notes payable stockholders includes $976,160 of notes maturing in 1998,
accruing interest at the prime rate plus one percent per annum.
OTHER
Current portion notes payable includes $1,469,657 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 totaling $1,500,000.
(11)CONVERTIBLE DEBENTURES:
Activity in convertible debentures and related debt issue costs since
September 30, 1995, is as follows:
<TABLE>
<S> <C>
CONVERTIBLE DEBENTURES OUTSTANDING, September 30,
1995 $ 5,705,000
AMOUNTS CONVERTED (into 16,757,906 common shares) (12,765,000)
AMOUNTS ISSUED 10,375,000
CONVERTIBLE DEBENTURES OUTSTANDING, June 30, 1996 $ 3,315,000
SHARES HELD IN ESCROW, June 30, 1996 3,301,738
DEBT ISSUE COSTS, September 30, 1995 $ 937,013
AMOUNTS CHARGED TO PAID IN CAPITAL UPON CONVERSION (3,128,141)
AMORTIZATION EXPENSE, nine months ended (1,177,066)
COSTS INCURRED 3,894,231
DEBT ISSUE COSTS, June 30, 1996 $ 526,037
</TABLE>
F-14
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(11)CONVERTIBLE DEBENTURES: (Continued)
The above debentures are 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.
The debt issue 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.
(12)STOCKHOLDERS' EQUITY:
CONVERTIBLE DEBENTURES
During the nine months ended June 30, 1996, $12,765,000 in convertible
debentures were converted to 16,757,906 shares of common stock.
OTHER STOCK ISSUANCES
In October 1995 and January 1996, 100,000 shares (total 200,000 shares) were
issued pursuant to a consulting agreement (see Note 14).
(13)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 June 30, 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 June 30, 1996, the Company paid rent of
$27,609 for this space.
F-15
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(13)RELATED PARTY TRANSACTIONS: (Continued)
Included in the accompanying financials are $52,827 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 4.
(14)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 financing. The agreement is
effective for two years, to October 2, 1997, 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, and 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, and $1,500,000 was paid in
accordance with this agreement.
F-16
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(14)AGREEMENTS: (Continued)
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 June 30, 1996, three months of amortization, $106,250, has been expensed
and $70,833 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.
As of December 31, 1995, ECO2 Financial, Inc. signed an agreement with Spa
Faucet, Inc. to provide up to $2,000,000 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.
(15)COMMITMENTS:
EMPLOYMENT AGREEMENTS
On June 28, 1996, the Company entered into a five year employment agreement
with its President and Chief Executive Officer, effective July 1, 1996. The
agreement calls for an annual salary of $300,000 with annual increases to
reflect increases in the Consumer Price Index. The agreement also granted the
employee an option to purchase up to 200,000 common shares of the Company for
a price $.80 per share beginning July 1, 1996 and ending on the sixth
anniversary of the effective date of this agreement. Additionally, on each
anniversary of this agreement, so long as the employee is employed by the
Company, the employee shall receive an additional option to purchase up to
200,000 common shares for $.80 per common share. All options shall
accumulate.
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 $75,000 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
agreement.
F-17
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(16)CONTINGENT LIABILITIES:
The Company is contingently liable under an irrevocably 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.
(17)SUBSEQUENT EVENTS:
In July 1996, $450,000 of convertible debentures were converted into 879,122
shares of common stock.
F-18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following information should be read in conjunction with the unaudited
consolidated financial statements included herein.
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced cash flow deficiencies of $2,979,717 ($1,571,685 from
operations and $8,386,839 from investing activities, offset by cash flow of
$6,978,807 from investing activities) during the nine months ended June 30,
1996. However, the Company has unrestricted cash of $2,371,452 as of June 30,
1996. This cash is considered adequate to finance any future losses from
operations for at least the next year. The major changes in cash flows
related to business acquisitions, purchases of investment securities and loans
receivable. These investments were funded primarily through the issuance of
convertible debentures.
The Company's balance sheet at June 30, 1996 reflected the impact of working
capital changes, business acquisitions and the issuance of convertible
debentures.
RESULTS OF OPERATIONS
Three months ended June 30, 1996 compared to three months ended June 30, 1995.
Revenues and cost of goods sold increased due to the acquisition of two
businesses, a distributor of decorative faucets and a manufacturer of jet skis
and their components, at the beginning of the quarter. These acquisitions
resulted in an increase in gross profit of $986,198.
Selling, general and administrative expenses increased due to the two business
acquisitions noted above ($1,203,042) and due to the amortization of debt
issue costs (128,360).
Interest income increased due to additional cash funds on hand and due to
loans made to other companies.
Interest expenses increased due to the convertible debentures outstanding
during the quarter.
Minority interest increased due to the business acquisition at the beginning
of the quarter.
Nine months ended June 30, 1996 compared to nine months ended June 30, 1995.
Revenues increased due to the business acquisitions at the beginning of the
third quarter ($2,708,648) offset by the decrease in tire tipping fees in 1996
($76,232) and the decrease in shredder product sales in 1996 ($51,932).
Cost of sales increased primarily due to the business acquisitions at the
beginning of the third quarter ($1,722,450).
Selling, general and administrative expenses increased primarily due to the
two business acquisitions ($1,203,042) and increased amortization expense
related to debt issue costs ($1,177,066).
Interest income increased due to more funds available for investment
Interest expense increased due to the convertible debentures outstanding
during the period.
<PAGE>
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.
ECO2, INC.
(registrant)
Dated: August 19, 1996
/s/ Charles D. Ledford
CHARLES D. LEDFORD, President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from Financial Statements for the nine months ended June 30, 1996, and is
qualified in its entirety by reference to such form 10QSB for quarterly period
ended June 30, 1996
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Sep-30-1995
<PERIOD-END> Jun-30-1996
<CASH> 3,573,534
<SECURITIES> 464,285
<RECEIVABLES> 1,723,898
<ALLOWANCES> 0
<INVENTORY> 5,181,005
<CURRENT-ASSETS> 13,346,230
<PP&E> 3,215,409
<DEPRECIATION> 781,466
<TOTAL-ASSETS> 18,276,908
<CURRENT-LIABILITIES> 2,119,044
<BONDS> 0
<COMMON> 225,967
0
0
<OTHER-SE> 10,881,318
<TOTAL-LIABILITY-AND-EQUITY> 18,276,908
<SALES> 2,718,430
<TOTAL-REVENUES> 2,718,430
<CGS> 1,739,042
<TOTAL-COSTS> 5,018,376
<OTHER-EXPENSES> (111,572)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 327,513
<INCOME-PRETAX> (4,221,143)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,221,143)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,221,143)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
