U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the fiscal year ended September 30, 1996
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to _________
Commission file number 0-20826
ECO2, INC.
(Name of small business issuer in its charter)
DELAWARE 11-3087145
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20005 S.E. Hawthorne Road, Hawthorne, Florida, 32640
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 352-481-0187
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of class)
Class A Warrants
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X
No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB ( )
State issuer's revenues for its most recent fiscal year: $11,335
State the aggregate market value of the voting stock held by non-
affiliates computed by reference at the price at which the stock was sold, or
the average bid and asked prices of such stock, as of a specified date within
the past 60 days: $8,620,693 based on the average high and low price as of
February 3, 1997 of $.3125 per share.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: 27,749,848 shares of Common
Stock as of February 3, 1997
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (Check One): Yes No X
PART I
Item 1. Description of Business
Item 1. Business
ECO2, Inc. (the "Company" or "ECO") was formed under the laws of the
State of Delaware on December 4, 1991, under the name Energy Research
International Inc. and changed its name to ECO2, Inc. on May 7, 1992. Prior to
December 4, 1991, the Company's business was operated by two Florida
corporations, Energy Research International Inc. ("ERI Florida") formed on
November 22, 1989, and Energy Research International Sales, Inc. ("ERI
Sales"), formed on October 17, 1991. On February 19, 1992, ERI Delaware, Inc.
was formed as a wholly-owned subsidiary of the Company under the laws of the
State of Delaware. On July 1, 1992, ERI Florida and ERI Delaware merged, with
ERI Delaware as the surviving corporation, and the Company and ERI Sales
merged, with the Company as the surviving corporation (the "Mergers"). As a
result of the Mergers, ERI Sales and ERI Florida are deemed, for accounting
purposes, to have been the surviving entities.
The Company is a development stage company that was established to
provide integrated solid waste tire management services to governmental,
commercial and industrial customers. The Company has developed a modular scrap
resource tire recovery system (the "System"), which utilizes a pyrolysis
(indirect heat) process to recycle scrap tires into oil, carbon black, steel
and methane gas. The System employs a series of tire shredders and grinders in
combination with a closed energy recovery chamber ("ERC"). Management believes
that the system may also have application for the treatment and management of
wastes and the recovery of by-products relative to municipal sludge, medical
waste and other industrial processes contaminants.
The Company has constructed an operational scrap tire resource recovery
facility utilizing the System in Hawthorne, Florida. To date, the Company has
not sold any of the by-products listed above, except for an isolated sale of
carbon black, and has collected only limited tipping fees and limited revenues
from sales of crumb rubber.
In addition to the above activities, to the extent the Company obtains or
has access to sufficient resources, the Company, may seek acquisitions of
other companies or their business or related assets that expand or complement
the Company's waste handling activities, facilitates participation of the
Company in markets where shredding and pyrolysis by-products are sold or
represent products or services which are correlative to the Company's business
or operations.
The Company's Energy Resource Recovery System
The System integrates state-of-the-art technologies of feedstock
preparation (collection, sorting, shredding and grinding) with its patented
non-oxidizing process of tire pyrolysis. Historically, pyrolysis systems have
generally utilized either a reductive or oxidative technique. Both of these
techniques have, to date, been economically unfeasible because these methods
produce low-grade by-products at very high capital requirements and operating
costs. With the Company's non-oxidizing technique, tires are vaporized instead
of burned, utilizing heat in a continuous rotating cylinder which provides an
acid-free environment yielding higher quality by-products, at greater cost-
efficiency of operation than traditional pyrolysis methods.
The Company's facilities has been operating on a non-continuous basis
since May 16,1992. Since such date the Company has collected and shredded
limited numbers of automobile tires and has converted limited quantities of
shredded tires into tire derived fuel ("TDF"), carbon black, steel and methane
gas.
Sales and Marketing
The Company has commenced a marketing strategy aimed at attracting
qualified joint venture partners in the United States and Canada. Prospective
joint venture partners will be targeted, and thereafter screened, based on
their knowledge and experience in owning or operating environmental or
recycling facilities. The Company will also consider entering into joint
ventures with entities which can contribute usable land, buildings and/or
equipment in order to defray the costs and time delays involved in
establishing new facilities.
While exploring joint venture relationships, the Company plans to utilize
various international trading and marketing organizations for the direct sale
of its Systems to commercial and municipal customers outside the United States
and Canada. Some or all of the marketing efforts may require paying
commissions to third parties. In order to effect joint ventures and direct
sales of its Systems, the Company plans to promote its Company-owned tire
recycling facilities through the media, trade shows, trade magazines and the
direct solicitation of municipalities and commercial organizations.
The Company is a party to an agreement dated August 1, 1991 (the "Canada
Agreement") with Tire Recycling Canada, Inc. ("Tire Recycling") pursuant to
which the Company granted to Tire Recycling, for the payment of $100,000, a
right of first refusal to purchase a System at a price offered by a bona fide
third party purchaser and to utilize the System in Canada and the Canadian
Territories. Such payment is refundable at the request of Tire Recycling. The
right of first refusal expired on February 1, 1992, and Tire Recycling paid an
additional $10,000 to extend its right of first refusal until August 1, 1992.
In July 1992, the Company agreed to further extend the Canada Agreement for an
additional six months to January 31, 1993 for an additional non-refundable fee
of $15,000. On September 20, 1993 the Company notified Tire Recycling that
Tire Recycling was in violation of the Non-Disclosure Agreements signed with
the Company on May 22, 1991 and August 21, 1991. The Company is retaining the
initial deposit on the unpurchased equipment based on violations of the Non-
Disclosure Agreements. No claims have been asserted against the Company under
the terms of the Canada Agreement.
On July 14,1993, the Company entered into a Sales Agreement with Viking
Resources Inc. for the sale of Systems including related tire shredding and
carbon black bagging equipment. Pursuant to the Viking Agreement, Viking has
agreed to purchase one System with related equipment for $5,030,000. In
addition, Viking has been granted an option to purchase up to seven additional
Systems for installation at specified locations in the United States. Under
the terms of the Viking Agreement, the Company received a $100,000 promissory
note due January 1, 1994, of which $20,000 has been paid. The remainder of the
purchase price is due in installments of $1.75 million (due March 1, 1994),
$1.75 million (due when the System is 50% complete), and the balance of $1.43
million is due when the System is complete. On September 26, 1994, the Company
and Viking entered into a Stock Purchase and Exchange Agreement pursuant to
which the parties exchanged between each other 100,000 shares of their
respective shares of Common Stock. The public offering was not completed and
nor was the transaction consummated.
Research and Development; Manufacturing; Sources of Supply
The Company's manufacturing and research and development facility is
located in Hawthorne, Florida. The Company manufactures all components of the
System other than the shredders used in the first three phases of the
shredding process, which the Company purchases from Shred Pax Corporation.
(See "Certain Transactions") To date, the Company has only manufactured
components in limited quantities, and has assembled only one complete System,
which is the Company's operating system. Accordingly, the Company has written
off the inventory for the tire resource business.
The Company's manufacturing facilities and personnel are limited, and the
Company may not be able to produce systems in the quantities required to open
and maintain numerous tire recycling facilities. The Company may be required
to employ third parties to manufacture some or all of the components of the
System. There can be no assurance that the Company will be able to locate
qualified third party manufacturers or that Systems will be able to be
manufactured by such parties at prices which are advantageous to the Company.
Substantially all of the components of the Company's System are
manufactured from readily available raw materials. The Company has not
encountered any significant difficulties in purchasing supplies of principal
raw materials or finished goods. The Company believes that if any source of
raw materials or finished products becomes unavailable, alternative sources of
supply are available at comparable prices and delivery schedules. In the event
the Company is unable to find such alternative sources at a competitive price
and on a timely basis for the System, the Company could be materially
adversely effected.
The Company is currently increasing expenditures for in order to adapt
its pyrolysis technology for the treatment and management of wastes and the
recovery of by-products relative to municipal sludge.
Patent and Proprietary Rights
The Company owns a patent, which was assigned to the Company by Charles
Ledford, that covers certain aspects of its tire recycling process. The patent
pertains, in part, to the process by which tires are vaporized utilizing heat
in a continuous rotating cylinder. (See "the Company's Tires-To-Energy
Resource Recovery System") The patent was obtained by Mr. Ledford in 1992 and
expires in 2009. The Company's patent does not cover any of the individual
components of the Company's System, including the ERC, or the fundamental
principals which are inherent in all pyrolysis processes and systems. There
can be no assurance that the Company's patent will be upheld, or will afford
protection from material infringement. Furthermore, other entities may develop
competitive tire recycling processes which do not infringe on the Company's
patent. In addition, other entities in the recycling business have obtained
patents for other tire recycling processes including other processes utilizing
pyrolysis. The Company believes that it is not infringing on any such patents.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, through confidentiality agreements with employees,
consultants, and other parties. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors. In addition, the Company's
competitors or other third parties may develop proprietary inventions
necessary for the successful development of the Company's business, which may
require licensing and the payment of significant fees or royalties by the
Company for the pursuit of its business.
The Company has applied for a patent in Canada, but has not applied for
any other foreign patents. In the event that the Company commences foreign
sales of Systems, it may apply for patent protection in the foreign countries
in which such sales are made or the System will be located; however, the
Company believes that it is unlikely that it will be able to obtain foreign
patent protection on an existing System. In the absence of foreign patent
protection for its System there can be no assurance that the Company will be
able to prevent foreign competitors from developing, marketing and employing
similar tire recycling systems.
There is a trend towards litigation regarding patents and other
intellectual property rights. Although patent and intellectual property
disputes have often been settled through licensing or similar arrangements,
costs associated with such arrangements may be substantial, and there can be
no assurance that necessary licenses would be available to the Company on
satisfactory terms or at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing and selling its products, which
would have a material adverse effect on the Company's business, financial
condition, and results of operations.
Government Regulation
The Company's tire recycling and manufacturing activities are subject to
extensive and rigorous government regulation designed to protect the
environment from wastes and emissions and from hazardous substances,
particularly with respect to the emission of air pollutants, the discharge of
cooling water, the disposal of combustion residues and the storage of
hazardous substances. The Company's System is designed to limit the discharge
into the environment of noxious fumes and waste products; however, the flaring
off of methane gas causes the release of certain toxic materials into the
atmosphere. In addition, the Company's storage of raw materials and by-
products (particularly TDF), must conform to the requirements imposed by
environmental laws, including laws applicable to the storage of hazardous
waste.
The establishment and operation of plants for resource recovery are
subject to obtaining numerous permits and complying with environmental and
other regulations, both in the U.S. and most foreign countries. The process of
obtaining required regulatory approvals is lengthy, expensive, and uncertain.
Moreover, regulatory approvals, if granted, may include significant
limitations on the Company's operations The EPA and comparable state and local
regulatory agencies actively enforce environmental regulations and conduct
periodic inspections to determine compliance with regulations. Failure to
comply with applicable regulatory requirements can result in, among other
things, fines, suspensions of approvals, seizures or recall of products,
operating restrictions, and criminal prosecutions. Furthermore, changes in
existing regulations or adoption of new regulations could prevent the Company
from obtaining, or affect the timing of, regulatory approvals or impose costly
new procedures for compliance.
The effect of governmental regulation may be to delay for a considerable
period of time or to prevent the Company from developing its business as
planned and/or impose costly requirements on the Company, the result of which
may be to furnish an advantage to its competitors or to make it less
profitable, or unprofitable to operate. There can be no assurance that the
Company will be able to obtain necessary approvals, on a timely basis or at
all. Delays in receipt of or failure to receive such approvals or loss of
previously received approvals would adversely effect the Company and its
ability to generate revenue. There can be no assurance that additional
regulations will not be adopted or current regulations amended in such a
manner as will adversely affect the Company.
The Company's pyrolysis and manufacturing activities are subject to state
and local regulations. The establishment and operation of full-scale plants
for recycling will be subject to obtaining permits from state and local
regulatory boards. The Company's plant in Hawthorne, Florida is regulated at
the state and federal levels by the Florida Department of Environmental
Regulation ("DER") and the EPA, respectively. The Company obtained an
operating permit which permits the Company to recycle tires at its facility
utilizing pyrolysis. The Company has obtained a processing permit from the DER.
Other Applications of the Company's Technology
The Company may explore other applications for pyrolysis; however, there
can be no assurance that the Company will succeed in developing any other
commercially useful applications for pyrolysis, or that the Company will be
able to generate any revenues or profits from any such other applications. The
Company's attempts to exploit any such other applications for pyrolysis would
be subject to risks and uncertainties of the types associated with development
stage companies employing unproven technology.
Employees
As of December 31, 1995, the Company employed approximately 25 persons on
a full-time basis. The Company is not party to any material labor contract or
collective bargaining agreement. To date, the Company has experienced no labor
stoppages, and management believes that relations with employees are
satisfactory.
Item 2. Description of Properties.
The Company currently occupies 1,464 square feet of office space at 20005
S.E. Hawthorne Road, Hawthorne, Florida 32640. The principal manufacturing
facilities and tire recycling facility, comprising 11,586 square feet, a
warehouse comprising 5,890 square feet and a drafting office and lab
comprising 1,000 square feet are also located at that address. The Company
leases its facilities for $60,000 per annum From Charles D. Ledford and Vivian
Ledford, both of whom are directors and officers of the Company, pursuant to a
five-year lease which may, at the Company's option, be extended until for an
additional five year term until July, 2006. The lease provides for an
automatic annual 5% increase. The Company believes that such facility is
adequate for the Company's current and anticipated operations.
Item 3. Legal Proceedings.
The Company is not a party to any pending legal proceedings and has no
knowledge that any such proceedings are threatened other than the following:
On January 23, 1997 Edward W. Miller filed suit against the Company, its
subsidiary Eco Jet, Inc., Charles and Vivian Ledford and others in Orange
County California Superior Court seeking damages in excess of $250,000 under
theories of breach of contract, breach of implied covenant of good faith and
fair dealing, tortious inducement of breach of an employment contract,
intention infliction of emotional distress and negligent misrepresentation and
for an accounting. The Company has not yet filed a responsive pleading, but
intends to vigorously defend the action.
On August 5, 1996, Stoneridge Capital, Ltd. And Great American Bancorp
filed suit against Eco2, Inc. and Charles Ledford in Orange County California
Superior Court seeking damagesin the amount of $166,000. Following the filing
of the lawsuit, Charles Ledford was dismissed as a defendant. The Company
denies that any commission is due.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
(a) The Company's Common Stock and the Warrants are traded on NASDAQ
under the symbol "TIRE" and "TIREW," respectively. Prior to October 22,1992,
there was no market for the Company's securities. The following table sets
for the high and low bid quotations for the Common Stock and the Warrants for
the periods indicated. These quotations reflect prices between dealers, do
not include retail mark-ups, mark-downs or commissions and may not necessarily
represent actual transactions.
Common Stock Warrants
High Low High Low
October 22-December 31, 1992 $10 1/4 $5 1/4 $2 3/4 $ 1/2
January 1-March 31, 1993 7 2 3/4 2 1/8 5/8
April 1-June 30, 1993 4 3/4 1 1/4 1 5/8 1/4
July 1, 1993-September 30, 1993 6 5/8 3 9/16 2 5/8
October 1-December 31, 1993 5 1/8 3 1/2 2 3/8 1
January 1-March 31, 1994 6 3/8 4 5/8 1 13/16 5/8
April 1-June 30, 1994 5 1/2 2 5/8 1 7/8 1/2
July 1-September 30, 1994 3 1/2 1 15/16 7/8 3/8
October 1-December 31, 1994 3 1/8 1 9/16 1 1/16 5/16
January 1-March 31, 1995 2 1/8 3/32 3/4 1/4
April 1-June 30, 1995 1 7/16 21/32 3/8 3/16
July 1-September, 1995 6 1/32 3/32 2 3/8 1/4
October 1-December 31, 1995 4 7/16 1 13/32 2 1/32 3/8
January 1-March 31, 1996 2 13/32 13/16 1 1/8 3/16
April 1-June 30, 1996 1 3/8 23/32 1 1/8 1/8
July 1-September, 1996 3/32 15/16 9/16 3/16
October 1-December 31, 1996 9/16 1/8 5/16 1/16
On February 3, 1997, the closing bid price for the Common Stock was .$.28125
and the closing bid price for the Warrants on January 28, 1997 was $.25.
(b) As of December 31, 1996, the approximate number of shareholders
of record of the Company's Common Stock and Warrants were 733 and 17,
respectively.
(c) The Company has never paid cash dividends on its Common Stock.
The Company presently intends to retain future earnings, if any, to finance
the expansion of its business and does not anticipate that any cash dividends
will be paid in the foreseeable future. Future dividend policy will depend on
the Company's earnings, capital requirements, expansion plans, financial
condition and other relevant factors.
PART II
Item 6. 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.
To date, the Company has built an operational facility used for
demonstrations and the production of by-products in limited quantities on a
noncontinuous basis for demonstration purposes only. The Company does not have
significant experience constructing Systems in the volume 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 Company's business, financial condition and
results of operations. 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.
During the fiscal year ending September 30, 1996, the Company ceased
attempting to use production and marketing efforts for the modular scrap tire
resource recovery system and related by-products. This decision was based on
the projected continued losses, liability to consummate sales of Systems and
insignificant demand for by-products. Accordingly, at September 30, 1996,
inventory (primarily shredders and reactors) has been written down to its
estimated net realizable value and results of operations for 1996 include a
charge of $1,333,283. During the year , the Company formed ECO2 Financial,
Inc. to seek additional investments and financial opportunities. See Note 3
for investments and matters related to business and inventory acquisitions
including losses on assets for sale.
As part of the evolutionary process, the Company is presently seeking
alternative uses for the modular resource recovery system in the garbage
recycling industry.
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, represent the remaining assets of the two companies
in Chapter 7, were purchased from a Chapter 7 Trustee for approximately
$1,932,030 (including fees of $90,000). In December 1996, the Company decided
to cease activity and sell the remaining assets. Accordingly, the purchase has
been treated as a temporary investment for accounting purposes. Through
September 30, 1996, the Company has advanced ECO Jet $1,005,042. The Company
has recorded a loss on assets held for sale of $2,790,042 and has included in
liabilities ($855,000), a provision for additional losses through January 31,
1997 when activities are expected to cease and for rentals through the
expiration of the related lease (March 31, 1997).
As of March 31, 1996, the Company paid $2,100,000 (including fees of
$100,000) to acquire 2,600,000 share of pre-split restricted common stock or
51% of Spa Faucet. The purchase is being treated as temporary investment for
accounting purposes. On October 31, 1996, the Company sold its interest in Spa
Faucet, Inc. for $2,500,000 net of commission of $500,000. The agreement
provides for monthly payments of $208,333 commencing November 1, 1996. As of
January 10, 1997, the Company has received only one payment.
During the year, the Company 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 $169,388. 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 primary shooting of one film has
been completed, however, this film ha s not been distributed and the Company
has exercised a lien to own the film. The Company has estimated that
$1,500,000 will be received through the sale of distribution rights less
$900,000 which represents $600,000 to pay unpaid bills relating to production
costs and an estimated $300,000 to complete the film. Losses related to those
investments approximate $2,400,000.
Results of Operations
This discussion should be read in conjunction with the audited financial
statements and notes thereto appearing in this 10-KSB. All comparisons within
the following discussion are to the previous fiscal year end. See "general"
above for leases during the year ended 9/30/96 related to jet skis, Spa Faucet
and films aggregating $4,706,354. In addition, the Company has written-off the
tire recovery system inventory of $1,657,149.
Total Company revenues for the fiscal year ended September 30, 1996
totaled $11,335, as compared to $133,675 for the year ended September 30,
1995, a decrease of $122,340. or 91.5%. The Company's revenues are derived
primarily from sales of the Company's crumb rubber products which have
significantly decreased over the last two fiscal years as the Company seeks
alternative use for its recovery system..
The Company's selling, general and administrative expenses increased
$458,167, or 16.1%, during the year ended September 30, 1996 to $3,307,998
from $2,849,831 during the 1995 fiscal year, primarily due to increased
payroll costs of approximately $250,000 in rent, marketing, and independent
agent agreements intended to provide the Company with leads for potential
investment and acquisition candidates and potential buyers, and to aid the
Company with respect to its investment and development strategy.
Salaries and employee benefits for the Company increased $389.31%, or
99%, for the year ended September 30, 1996, to $782,242 as compared to
$392,924 for the year ended September 30, 1995.
For the year ended September 30, 1996, the Company realized no contract
cancellation income compared with contract cancellation income of $20,000 for
the previous fiscal year. Contract cancellation income consists of non-
refundable deposits on canceled sales contracts.
Interest expense, during the year ended September 30, 1996, increased
$328,269 or 573.01% from $57,288 to $385,557 due to interest due on the
convertible debentures. Amortization expense relating to the debentures was
$1,300,000.
For the year ended September 30, 1996, the Company had an operating loss
of $9,509,610, a net loss of $10,876,592 and a loss per share of $.65 , as
compared to had an operating loss of $2,803,134, a net loss of $3,052,155 and
a loss per share of $0.89 for the fiscal year ended September 30, 1995. The
increases operating loss and net loss primarily resulted from the increase
losses incurred by the Company in connection with assets purchased by the
Company for investment, the write-off of recovery system inventory, interest
and amortization relating to the debentures
Liquid and Capital Resources
Cash flows used by operating activities of the Company for the years
ended September 30, 1996 and 1995 totaled 2,207,140 and $3,334,147,
respectively. The decrease in cash used is mainly attributable to the higher
net loss primarily from investment activities and increased general and
administrative expenses.
Cash flows used for investing activities of the Company for the years
ended September 30, 1996 and 1995 totaled $10,408,175 and $543,746,
respectively. The substantial increase in cash used is primarily due to the
purchase of assets previously used for its acquisition of $8,987,747
(including advances).
Cash flows provided by financing activities of the Company for the years
ended September 30, 1996 and 1995 totaled $8,461,226 and $8,916,104,
respectively. The cash needs of the Company were met by the sale of common
stock, the exercise of options and proceeds from the issuance of convertible
debentures in previous fiscal years. During fiscal year 1995 and 1994, the
Company sold 1,230,000 and 442,833 shares of its common stock in private sales
at prices ranging from $0.50 to $2.90 and $1.25 to $3.10, realizing net
proceeds of $1,384,299 and $907,418, respectively. In fiscal year 1995 and
1994, 485,000 and 240,000 options for common stock were exercised at prices
ranging from $1 to $3.50 and $2.13 to $5.50, realizing net proceeds of
$1,046,034 and $1,085,625, respectively. In the year ended September 30, 1995,
net proceeds from the sale of convertible debentures totaled $5,146,378
excluding $558,622 of funds received subsequent to the end of the fiscal year.
During 1996, the Company received net proceeds of the from the sale of
convertible debentures, of approximately $8,400,000.
The Company plans to meet its working capital requirements and to fund
the manufacture of full-scale plants with the proceeds received from the sale
of investments purchased in fiscal 1996 and from the sale of equipment using
the Company's pyrolysis technology, although the Company has not sold any
equipment to date and is directing its resource recovery system to other waste
products. The Company has signed various independent agent agreements to aid
in locating and securing contracts with other potential customers. To the
extent that the Company is successful in selling tire recycling systems or in
generating revenues from operations, its reliance on capital markets will be
proportionately reduced. There can be no assurances that the Company will be
successful in generating revenues as described herein, or that unforeseen
events will not occur which may reduce revenues below projected levels over
the next twelve months or increase expenses above the anticipated amounts.
The Company may require substantial additional funds to meet its
operational expenses, for seeking regulatory approvals, and for construction
of facilities. The proceeds by the Company from its previous financing and the
sale of its investment assets may not ultimately be sufficient for such
purposes. The Company may seek to raise additional funds through sales of
equity or debt, bank borrowing or collaborative or other arrangements with
corporate partners or from other sources. There can be no assurance that
sufficient financing will be available when needed or on terms acceptable to
the Company. Insufficient funds may require the Company to delay, scale-back
or eliminate its planned operations and programs.
Recent Pronouncements
In May 1993, the FASB issued Statement No. 114, "Accounting by Creditors
for Impaired of a Loan." SFAS No. 114 becomes effective for fiscal years
beginning after December 15, 1994 and defines certain measurement criteria for
impaired loans. The Company does not have any significant positions as a
creditor.
In March 1995, the FASB issued Statement No. 121 (SFAS 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." SFAS 121 becomes effective for fiscal years beginning after
December 15, 1995 and addresses the accounting for the impairment of long-
lived assets, certain identifiable intangibles, and goodwill related to those
assets to be held and used for long-lived assets and certain identifiable
intangibles to be disposed of. The Company believes this pronouncement will
not have a significant impact on the Company's financial statements.
In October 1995, the FASB issued Statement No. 123 (SFAS 123),
"Accounting for Stock Based Compensation." SFAS 123 becomes effective for
fiscal years beginning after December 15, 1995 and establishes financial
accounting and reporting standards for stock based employee compensation plans
and transactions in which an entity issues its instruments to acquire goods or
services from non-employees. The Company believes this pronouncement will not
have a significant impact on the Company's financial statement.
Item 7. Financial Statements and Supplementary Data
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED FINANCIAL STATEMENTS
For the Period of Inception (October 8, 1990)
to September 30, 1996 and the
Years Ended September 30, 1996 and 1995
CONTENTS
Report of Independent Auditors F2
Financial Statements:
Consolidated Balance Sheet F3-4
Consolidated Statement of Operations F5
Consolidated Statement of Changes in Stockholders' Equity F6-9
Consolidated Statement of Cash Flows F10-11
Notes to Financial Statements F12-28
-F1-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
ECO2, Inc. and Subsidiary
Hawthorne, Florida
We have audited the accompanying consolidated balance sheet of ECO2, Inc. and
Subsidiaries (a development stage enterprise) as of September 30, 1996, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the years ended September 30, 1996 and 1995
and for the period October 8, 1990 (inception) to September 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ECO2, Inc.
and Subsidiaries at September 30, 1996 and the results of their operations and
their cash flows for each of the years ended September 30, 1996 and 1995 and
for the period from October 8, 1990 (inception) to September 30, 1996, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the financial statements, at September 30, 1996, the Company has incurred
substantial losses since its inception, and the accompanying consolidated
balance sheet reflects an accumulated deficit of $19,995,510. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plan in regard to these matters is also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of the foregoing uncertainties.
Millward & Co. CPAs
Fort Lauderdale, Florida
December 13, 1996 (except for note 3
dated January 31, 1997)
-F2-
<PAGE>
<TABLE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED BALANCE SHEET
September 30, 1996
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash and Cash Equivalents (Including Restricted Cash of $167,852) $1,251,849
Certificates of Deposit - Restricted 950,000
Assets Available for Sale 3,967,670
Loans and Advances Due from Stockholder 99,414
Notes Receivable 201,425
Other Current Assets 60,558
Total Current Assets 6,530,916
Property, Plant and Equipment, at cost (Net of Accumulated
Depreciation of $472,757) 1,883,425
Restricted Cash 52,000
Deferred Loan Acquisition Costs 485,047
Total Assets $8,951,388
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
- -F3-
<PAGE>
<TABLE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED BALANCE SHEET
September 30, 1996
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
CURRENT LIABILITIES
Accounts Payable $153,526
Estimated Liability for Closing Jet Ski Operations 855,000
Customer Deposits 100,000
Interest Payable 140,390
Accrued Expenses 143,765
Total Current Liabilities 1,392,681
LONG-TERM DEBT
Convertible Debentures 2,300,000
Total Liabilities 3,692,681
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred Stock (No Par Value, Authorized
1,000,000 Shares, None Issued) -
Common Stock (Par Value $.01 Per Share, Authorized
45,000,000 Shares, Issued 25,103,655) 251,036
Additional Paid-In Capital 25,287,230
Deficit Accumulated During the Development Stage (19,995,510)
Unrealized Loss on Securities Held for Resale (250,000)
10,000 Shares of Common Stock in Treasury, at cost (34,049)
Total Stockholders' Equity 5,258,707
Total Liabilities and Stockholders' Equity $8,951,388
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
- -F4-
<PAGE>
<TABLE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF OPERATIONS
(Inception)
For the Year Ended Oct 8, 1990
September 30, to
1996 1995 Sept 30, 1996
<S> <C> <C> <C>
REVENUES $11,335 $133,675 $555,466
OPERATING EXPENSES
Selling, General and Administrative Expenses 3,307,998 2,936,809 12,611,663
Loss on Assets Held for Sale 4,706,354 - 4,706,354
Loss on Inventory Write Off 1,506,593 - 1,506,593
Total Operating Expenses 9,520,945 2,936,809 18,824,610
OPERATING LOSS (9,509,610) (2,803,134) (18,269,144)
OTHER INCOME (EXPENSE)
Interest Income 405,660 68,851 604,573
Interest Expense (385,557) (57,288) (710,835)
Amortization of Deferred Costs - Debentures (1,172,512) - (1,172,512)
Write Off of Note Receivable for Exercise
of Option (91,250) - (91,250)
Other 84,684 (46,089) 127,521
Contract Cancellation Income - 20,000 340,000
Loss on Underwriting Deposit - (240,000) (240,000)
Gain (Loss) on Marketable Securities and
Other Investments 22,611 28,648 2,611
Settlement Income (Expense) (73,760) - (406,473)
Loss on Disposal of Assets (156,858) (23,143) (180,001)
Total Other Income (Expense) (1,366,982) (249,021) (1,726,366)
NET LOSS $(10,876,592) $(3,052,155) $(19,995,510)
Net (Loss) per Common Share $(0.66) $(0.89)
Shares Used in Computation of Net
(Loss) Per Share 16,600,288 3,423,844
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
- -F5-
<PAGE>
<TABLE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
DEFICIT UNREALIZED
ACCUMULATED NOTE LOSS ON TOTAL
DURING RECEIVABLE SECURITIES STOCKHOLDERS'
COMMON STOCK PAID-IN DEVELOPMENT UNEARNED FOR EXERCISE AVAILABLE TREASURY EQUITY
ISSUED AMOUNT CAPITAL STAGE COMPENSATION OF OPTION FOR SALE STOCK (DEFICIT)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ENERGY RESEARCH INTERNATIONAL, INC.
Common Stock Issued
for Cash, on September 25, 1991 1 $- $5,001 $- $- $- $- $- $5,001
Net Loss - Period Ended
September 30, 1991 - - - (473,009) - - - - (473,009)
Balance, September 30, 1991 1 - 5,001 (473,009) - - - - (468,008)
Merger in July 1992 of
Energy Research
International, Inc. into
ECO2 , Inc. and
Subsidiary, Net (1) - (5,001) - - - - - (5,001)
ENERGY RESEARCH INTERNATIONAL SALES, INC.
Common Stock Issued:
For Cash, on
November 5, 1991,
$.0029 Per Share 253,998 2,540 (1,796) - - - - - 744
For Cash, on
January 24, 1992,
$6.76 Per Share 15,164 152 102,440 - - - - - 102,592
As Compensation, on
January 24, 1992,
$7.49 Per Share 32,224 322 241,178 - - - - - 241,500
In Exchange for
Loans, on
March 27, 1992,
$7.75 Per Share 39,806 398 308,098 - - - - - 308,496
Merger in July 1992 of
Energy Research
International Sales, Inc.
into ECO2, Inc.
and Subsidiary, Net (341,192) (3,412) (649,920) - - - - - (653,332)
ECO2 AND SUBSIDIARY
Issuance of $.01
Common Stock on
December 4, 1991,
Subsequently
Paid for Through
Cancellation of an
Obligation,
$.07 Per Share 163,489 1,635 9,865 - - - - - 11,500
Issuance of $.01
Common Stock on
December 27, 1991,
For Cash
of $9.38 Per Share Net
of Expenses
of $250,000 106,623 1,066 998,934 - - - - - 1,000,000
Contribution of
Capital on
March 27, 1992 - - 141,100 - - - - - 141,100
Effect of Merger
on ECO2 and Subsidiary,
July 1992; Issuance
of $.01 Common Stock,
$2.21 Per Share 299,900 2,999 660,335 - - - - - 663,334
Sale of Bridge
Shares, $.01 Common
Stock, $.67 Per Share,
Less Costs of
$90,000,
September 9, 1992 230,000 2,300 60,700 - - - - - 63,000
Transfer of Shares
Back to Corporation (110,110) (1,101) 1,101 - - - - - -
Issuance of $.01
Common Stock,
September 1992 as
Compensation;
$4.35 Per Share 115,098 1,151 499,344 - - - - - 500,495
Issuance of $.01
Common Stock,
September 1992;
$0.125 Per Share 20,000 200 50 - - - - - 250
Net Loss - Year Ended
September 30, 1992 - - - (1,682,086) - - - - (1,682,086)
Balance, October 1, 1992 825,000 8,250 2,371,429 (2,155,095) - - - - 224,584
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
(continued)
- -F6-
<PAGE>
<TABLE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
DEFICIT UNREALIZED
ACCUMULATED NOTE LOSS ON TOTAL
DURING RECEIVABLE SECURITIES STOCKHOLDERS'
COMMON STOCK PAID-IN DEVELOPMENT UNEARNED FOR EXERCISE AVAILABLE TREASURY EQUITY
ISSUED AMOUNT CAPITAL STAGE COMPENSATION OF OPTION FOR SALE STOCK (DEFICIT)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
October 1, 1992 825,000 8,250 2,371,429 (2,155,095) - - - - 224,584
Initial Public Offering
of Common Stock, 500,000
Shares at $9.10 Per Share,
Less Costs of $1,045,917,
October 22, 1992 500,000 5,000 3,499,083 - - - - - 3,504,083
Issuance of 225,000
Shares for Compensation
and Cash, Net of
Issuance Costs
of $10,000 225,000 2,250 602,721 - (221,615) - - - 383,356
Compensatory Stock
Option Granted
October 6, 1992 - - 220,000 - (220,000) - - - -
Issuance of 100,000
Shares for Stock Options
Exercised at $4.20
Per Share in July
and September 1993 100,000 1,000 419,000 - - - - - 420,000
Issuance of 25,000
Shares for Stock
Options Exercised
at $5.05 Per Share
in August 1993 25,000 250 126,000 - - - - - 126,250
Amortization of
Unearned Compensation - - - - 266,213 - - - 266,213
Net Loss - Year
Ended September 30, 1993 - - - (2,247,981) - - - - (2,247,981)
Balance,
September 30, 1993 1,675,000 16,750 7,238,233 (4,403,076) (175,402) - - - 2,676,50
Issuance of 75,000
Shares for Stock Options
Exercised at
$5.05 Per Share 75,000 750 378,000 - - (78,750) - - 300,000
Issuance of 88,000
and 73,500 Shares
at $3.10 Per Share
in January 1994 161,500 1,615 499,035 - - - - - 500,650
Issuance of 100,000
Shares for Stock
Options Exercised
at $5.50 Per Share 100,000 1,000 549,000 - - (12,500) - - 537,500
Issuance of 20,000
Shares for Langford
Settlement Valued at
$5 Per Share in
February 1994 20,000 200 99,800 - - - - - 100,000
Issuance of 5,000
Shares for Emery
Settlement at $2.436 Per
Share in March 1994 5,000 50 12,180 - - - - - 12,230
Issuance of 32,333
Shares for $3 Per
Share in March 1994 32,333 323 96,677 - - - - - 97,000
Issuance of 50,000
Shares for Stock Options
Exercised at $2.50 Per
Share in April 1994 50,000 500 124,500 - - - - - 125,000
Issuance of 125,000
Shares in Connection
with Employee Stock
Payment Plan at $1.69
through $3.09 Per Share 125,000 1,250 266,875 - - - - - 268,125
Issuance of 150,000
Shares at $1.25 Per
Share Less Costs to
Issue of $1,000
in August 1994 150,000 1,500 185,000 - - - - - 186,500
Issuance of 100,000
Shares at $1.3125 Per
Share Less Costs to
Issue of $7,982
in August 1994 100,000 1,000 122,268 - - - - - 123,268
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
- -F7-
<TABLE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
DEFICIT UNREALIZED
ACCUMULATED NOTE LOSS ON TOTAL
DURING RECEIVABLE SECURITIES STOCKHOLDERS'
COMMON STOCK PAID-IN DEVELOPMENT UNEARNED FOR EXERCISE AVAILABLE TREASURY EQUITY
ISSUED AMOUNT CAPITAL STAGE COMPENSATION OF OPTION FOR SALE STOCK (DEFICIT)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of 100,000
Shares in Exchange f
or 100,000 Share
Investment in Viking
Recycling, Inc.
in September 1994 100,000 1,000 19,000 - - - - - 20,000
Issuance of 15,000
Shares for Stock Options
Exercised at $2.13
Per Share
in September 1994 15,000 150 31,725 - - (31,875) - - -
Amortization of
Unearned Compensation - - - - 172,755 - - 172,755
Net Loss - Year
Ended September 30, 1994 - - - (1,663,687) - - - (1,663,687)
Balance,
September 30, 1994 2,608,833 26,08 9,622,293 (6,066,763) (2,647) (123,125) - - 3,455,846
Issuance of 100,000
Shares at $1.06 Per
Share Less Costs to
Issue of $551
in December 1994 100,000 1,000 104,699 - - - - - 105,699
Principle Payment on
Notes Receivable
Exercise of Options
in November 1994 - - - - - 31,875 - - 31,875
Issuance of 480,000
Shares at $.945 Per
Share in February 1995 480,000 4,800 448,800 - - - - - 453,600
Issuance of 10,000
Shares for Consulting
Services at $1.125
Per Share in May 1995 10,000 100 11,150 - - - - - 11,250
Issuance of 300,000
Shares Pursuant to
Corporate Relations
Agreement at $1 Per
Share in May and
July 1995 300,000 3,000 297,000 - - - - - 300,000
Exercise of 400,000
Options Pursuant to
the Corporate Relations
Agreement at $1 to
$3 Per Share in July
and August 1995 400,000 4,000 744,534 - - - - - 748,534
Issuance of 120,000
Shares for Legal
Settlement at Par
in May 1995 120,000 1,200 (1,200) - - - - - -
Issuance of 325,000 Shares
in Connection with Employee
Stock Payment Plan
at $1.69 through $5.13
Per Share in July and
August 1995 325,000 3,250 1,471,477 - - - - - 1,474,727
Issuance of 85,000 Shares
or Stock Options
Exercised at
$3.50 Per Share 85,000 850 296,650 - - - - - 297,500
Issuance of 100,000
Shares Pursuant to
Consulting Agreement
at $1 Per Share
in September 1995 100,000 1,000 99,000 - (100,000) - - -
Issuance of 400,000
Shares at $.50 Per
Share Less Costs to
Issue of $500
in July 1995 400,000 4,000 195,500 - - - - - 199,500
Issuance of 40,998
Shares for Legal
Settlement at Par in
August 1995 40,998 410 (410) - - - - - -
Issuance of 16,033
Shares to Original
Stockholders for
Correction to Investment
at Par in August 1995 16,033 160 (160) - - - - - -
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
- -F8-
<TABLE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
DEFICIT UNREALIZED
ACCUMULATED NOTE LOSS ON TOTAL
DURING RECEIVABLE SECURITIES STOCKHOLDERS'
COMMON STOCK PAID-IN DEVELOPMENT UNEARNED FOR EXERCISE AVAILABLE TREASURY EQUITY
ISSUED AMOUNT CAPITAL STAGE COMPENSATION OF OPTION FOR SALE STOCK (DEFICIT)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of 250,000
Shares at $2.90 Per
Share Less Costs to
Issue of $100,000 in
August and September 1995 250,000 2,500 622,500 - - - - - 625,000
Issuance of 50,000
Shares for Stock
Options Exercised at
$2.50 Per Share
in July 1995 50,000 500 124,500 - - - - - 125,000
Issuance of 100,000
Shares Pursuant to an
Independent Agent
Agreement at $4.25 Per
Share in August 1995 100,000 1,000 424,000 - (425,000) - - - -
Purchase of 10,000
Treasury Shares at Cost - - - - - - - (34,049) (34,049)
Amortization of
Unearned Compensation - - - - 38,020 - - - 38,020
Net Loss - Year Ended
September 30, 1995 - - - (3,052,155) - - - - (3,052,155)
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 - - - - 489,627 - - - 489,627
Write Off of a Note
Receivable Exercise
of Option - - - - - 91,250 - - 91,250
Issuance of Stock on
Conversion of Debentures
at Various Prices
less Unamortized
Deferred Loan Acquisition
Costs Through Date
of Conversion 19,264,816 192,648 10,631,427 <f*> - - - - - 10,824,075
Issuance of 252,975
Additional Shares for
Contract Settlement 252,975 2,530 (2,530) - - - - - -
Issuance of 200,000
Shares Pursuant to
Consulting Agreement
at $1 Per Share 200,000 2,000 198,000 - - - - - 200,000
Change in Unrealized
Loss on Securities
Available for Sale - - - - - - (250,000) - (250,000)
Net Loss - - - (10,876,592) - - - - (10,876,592)
Balance,
September 30, 1996 25,103,655 $251,036 $25,287,230 $(19,995,510) $- $- $(250,000) $(34,049) $5,258,707
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
- -F9-
<PAGE>
<TABLE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
(Inception)
For the Year Ended Oct 8, 1990
September 30, to
1996 1995 Sept 30, 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(10,876,592) $(3,052,155) $(19,995,510)
Adjustments to Reconcile Net Loss to Net Cash Flows
From (Used in) Operating Activities:
Loss on Disposal of Assets 156,858 23,143 222,956
Inventory Write Off 1,506,593 - 1,506,593
Write off of note receivable 91,250 - 91,250
Bad Debt Expense - 7,336 15,275
Depreciation and Amortization 227,620 281,395 926,468
Amortization of Deferred Costs- Debentures 1,172,512 - 1,172,512
Settlement Expense (Income) - - 238,081
Compensation Expense 489,627 38,020 1,904,860
Loss on assets held for sale 3,731,930 - 3,731,930
Accrued interest income on note receivable (1,425) - (1,425)
Accrued interest on debentures 101,654 - 101,654
Receipt of common stock
dividend Re: Gulf West Oil Company, Inc. (17,671) - (17,671)
Realized (Gain) Loss on Marketable Securities - 38,137 22,423
Unrealized (Gain) Loss on Marketable Securities - (48,648) -
Issuance of Common Stock for Interest 242,469 - 242,469
Issuance of Common Stock for Consulting Services 200,000 311,250 511,250
Loss on Investment - 20,000 20,000
Changes in Operating Assets and Liabilities:
Accounts Receivable 1,745 7,917 (7,939)
Inventory (173,710) (26,671) (892,051)
Deferred Loan Acquisition Costs - (983,616) (983,616)
Other Current Assets (7,580) (29,191) (59,446)
Accounts Payable and Accrued Interest (41,222) 46,504 211,984
Estimated Liability for Closing Jet Ski 855,000 - 855,000
Accrued Expenses and Other Current Liabilities 71,302 32,432 229,505
Net Cash Flows Used in Operating Activities (2,269,640) (3,334,147) (9,953,448)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Fixed Assets (1,055,775) (67,457) (3,109,368)
Investment in Films (2,396,930) - (2,396,930)
Acquisition of Gulf West Oil Company, Inc. Common Stock (500,000) - (500,000)
Acquisition of Spa Faucet, Inc. Common Stock (2,100,000) - (2,100,000)
Purchase of Chapter 7 Assets (2,935,042) - (2,935,042)
(Purchase) Redemption of Certificates of Deposit 350,000 (1,300,000) (1,002,000)
Purchase of Marketable Securities - - (3,556,267)
Note Receivable From Gulf West Oil Company, Inc. (200,000) - (200,000)
Proceeds from Marketable Security Maturities - 953,079 3,533,844
Payments of commissions for financing (1,500,000) - (1,500,000)
Borrowings by Shareholder plus Accrued Interest (41,928) (6,750) (139,313)
Principle Repayments Shareholder Loans (28,500) (122,618) (442,234)
Other Proceeds - - 87,350
Net Cash Flows Used in Investing Activities (10,408,175) (543,746) (14,259,960)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Convertible Debentures 8,539,392 5,146,378 13,685,770
Proceeds from Loans Payable - - 761,945
Principle Repayments of Loans, Notes and Leases (78,166) (195,160) (851,662)
Net Proceeds from Sale of Common Stock, Stock Options
and Notes Receivable for Exercise of Options - 3,998,935 11,840,753
Purchase of Treasury Stock - (34,049) (34,049)
Subscription Receivable 62,500 - 62,500
Net Cash Flows Provided by Financing Activities 8,523,726 8,916,104 25,465,257
Net Increase (Decrease) in Cash and Cash Equivalents (4,154,089) 5,038,211 1,251,849
Cash and Cash Equivalents - Beginning of Period 5,405,938 367,727 -
Cash and Cash Equivalents - End of Period $1,251,849 $5,405,938 $1,251,849
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
- -F10-
<PAGE>
<TABLE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
(Inception)
For the Years Ended Oct 8, 1990
September 30, to
1996 1995 Sept 30, 1996
<S> <C> <C> <C>
SUPPLEMENTAL NONCASH FINANCING AND INVESTING ACTIVITIES:
Conversion of Convertible Debentures to Common Stock $13,780,000 $- $13,780,000
Valuation of Shares Issued for Compensation,
Interest and Other $442,469 $525,000 $1,791,684
Deferred Debt Costs Attributable to Convertible Debentures $3,173,985 $- $3,173,985
Receipt of Common Stock Dividend Re:
Gulf West Oil Company, Inc. $(17,671) $- $(17,671)
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 Capitalized Leases Payable $- $57,211 $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 $558,622
Subscription Receivable for Private Placement $- $62,500 $62,500
Transfer of Items to Inventory from Property,
Plant and Equipment $- $806,840 $806,840
SUPPLEMENTAL DISCLOSURES:
Interest Paid - Cash Basis $- $28,137 $234,237
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
- -F11-
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 1 - ORGANIZATION
ECO2, Inc. ("ECO") and its wholly owned subsidiary, ERI Delaware, Inc. ("ERI
Delaware") (collectively "the Company") were established to provide integrated
solid waste tire management services to governmental, commercial and
industrial customers. ECO was incorporated in Delaware on December 4, 1991
(formerly named Energy Research International, Inc.) and ERI Delaware was
incorporated in Delaware on February 19, 1992. The Company is a development
stage enterprise as the Company has not generated revenues from the sale of
its systems.
During the fiscal year ended September 30, 1996, the Company ceased attempting
to use production and marketing efforts for the modular scrap tire resource
recovery system and related by-products. This decision was based on the
projected continued losses, inability to consummate sales of systems and
insignificant demand for by-products. Accordingly, at September 30, 1996,
inventory (primarily shredders and reactors) has been written down to its
estimated net realizable value and results of operations for 1996 include a
charge of $1,506,593. During the year, the Company formed ECO2 Financial,
Inc. to seek additional investments and financial opportunities. See Note 3
for investments and matters related to business and inventory acquisitions
including losses on assets for sale.
As part of the evolutionary process, the Company is presently seeking
alternative uses for the modular resource recovery system in the garbage
recycling industry.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of ECO2, Inc. , its
wholly owned subsidiaries, ERI Delaware, Inc. and ECO2 Financial, Inc. All
significant intercompany transactions are eliminated in consolidation. The
financial statements include, at cost, shares of Spa Faucet, Inc., a 51% owned
company, which has been sold subsequent to September 30, 1996. Spa Faucet has
not been consolidated as the investment has been deemed temporary (see Note
3).
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments purchased with original maturities of
90 days or less to be cash equivalents.
-F12-
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments
The Company follows Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". This
statement requires classification of securities into three categories: held-
to-maturity, trading securities, and available for sale. The Company may
classify securities as available for sale when the intent of the Company does
not categorize such securities as either held to maturity or trading
securities. The Company's primary investments are considered temporary, are
being held for sale and are recorded at their net realizable value.
Deferred Loan Acquisition Costs
Deferred loan acquisition costs pertaining to each convertible debenture will
be amortized to operations over the one year and two year debenture term with
all unamortized costs charged to additional paid-in capital upon conversion.
Property, Plant and Equipment
Property, Plant and Equipment, acquired from outside sources, are recorded at
cost. Self-constructed assets are recorded based on the cost of labor and
materials. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from 3 to 10 years except
for the mobile home which is depreciated over 27 years. Expenditures for
maintenance and repairs are charged against operations as incurred.
Income Taxes
The Company accounts for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards No. 109 Accounting for Income
Taxes. Deferred income taxes are determined based upon the difference between
the financial statement carrying amount and the tax basis of assets and
liabilities using tax rates expected to be in effect in the years in which the
differences are expected to reverse.
Restricted Cash
Certain stock issuances, in accordance with the Employee Stock Payment Plan
registered pursuant to Regulation S-8 of the Securities and Exchange
Commission, require the proceeds to be segregated and used only for payment of
payroll. Cash and certificates of deposit restricted for this purpose at
September 30, 1996 total $1,117,372.
Revenue Recognition
Revenue from sales of shredders and reactors are recognized upon installation
and customer acceptance. Revenue from the sale of other products is
recognized upon shipment to the customer. The Company has had no significant
revenue to date.
-F13-
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development
The shredder and the Company's energy recovery chamber reactor unit have been
under development for the past three years. The research and development of
the system was financed by related party loans and a public offering and
subsequent financing. These research and development costs are being expensed
as incurred. The Company's plant operation primarily relates to maintaining
and upgrading existing equipment and further development of the resource
recovery system. During 1996 and 1995, such plant costs were $911,230 and
$954,790, respectively and are included in selling and general administrative
expenses.
Recent Pronouncements
In March 1995, the FASB issued Statement No. 121 (SFAS 121), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," SFAS 121 becomes effective for fiscal years beginning after December 15,
1995 and addresses the accounting for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used for long-lived assets and certain identifiable intangibles to be
disposed of. The Company believes this pronouncement will not have a
significant impact on the Company's financial statements and believes that
write downs of certain assets (Note 3) would not have been materially
different.
In October 1995, the FASB issued Statement No. 123 (SFAS 123), "Accounting for
Stock Based Compensation". SFAS 123 becomes effective for fiscal years
beginning after December 15, 1995 and establishes financial accounting and
reporting standards for stock based employee compensation plans and
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees. The Company believes this pronouncement will
not have a significant impact on the Company's financial statement.
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125, ("SFAS 125"), "Accounting for Transfers of Servicing of Financial Assets
and Extinguishment of Liabilities". FAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments
of liabilities based on a financial-components approach that focuses on
control. SFAS 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996
and is to be prospectively applied. The Company believes that the adoption of
SFAS 125 will have no impact on its financial statements.
Net Loss Per Share
Net loss per share in fiscal 1996 and 1995 is calculated using the weighted
average number of common shares outstanding during the period. Other shares
issuable upon the exercise of stock options and warrants and debt conversions
have been excluded from this computation because the effect of their inclusion
would be anti-dilutive.
-F14-
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial Instruments and Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations
of credit risk are primarily cash and temporary investments and accounts
receivable. The Company invests its excess cash in both deposits and high
quality short-term liquid money market instruments with major financial
institutions and the carrying value approximates market value. The Company
has a policy of placing its excess cash in investment grade short-term
government or money-market instruments. The Company realized losses related
to these investments of $0 and $45,699 for the years ended of September 30,
1996 and 1995, respectively. The Company does not have significant trade
receivables.
In addition, at September 30, 1996, the Company had $1,146,332 in a financial
institution, of which the excess over $100,000 is not covered by FDIC
insurance and which, therefore, did not limit the Company's amount of credit
exposure.
Also at September 30, 1996, the Company had $1,012,372 in a brokerage money
market account of which the excess over $500,000 is not covered by SPIC
insurance and which, therefore, did not limit the Company's amount of credit
exposure.
Going Concern Considerations
Since inception, the Company has incurred substantial losses and, as of
September 30, 1996, has an accumulated deficit of $19,995,510. During the
year ended September 30, 1996, the Company lost $10,876,592 and at September
30, 1996, the Company continued to be in the development stage. These matters
raise substantial doubt about the Company's ability to continue as a going
concern.
The Company expects to realize the proceeds from certain assets available for
sale and seek possible business opportunities. In addition, management plans
to reduce operating costs and seek additional financing. There can be no
assurance that the Company will successfully sell assets held for sale, at
current carrying values, reduce operating costs and raise additional capital
if such assets are not realized..
NOTE 3 - ASSETS AVAILABLE FOR SALE
<TABLE>
Included in assets available for sale are the following at September 30, 1996:
<CAPTION>
Original Investments Carrying
Advances and Value at Loss on
Accruals September 30, 1996 Assets
<S> <C> <C> <C>
Jet Ski Assets <f(a)> $ 3,792,042 $ 1,000,000 $ 2,792,042
Spa Faucet, Inc. <f(b)> 2,100,000 2,100,000 -
Gulfwest Oil
Company, Inc. <f(c)> 517,670 517,670 -
Film (d) 2,514,312 600,000 1,914,312
$ 8,924,024 4,217,670 $ 4,706,354
Unrealized loss on
Gulfwest Oil Company, Inc. Securities 250,000
$ 3,967,670
</TABLE>
-F15-
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 3 - ASSETS AVAILABLE FOR SALE (Continued)
[FN]
<f(a)> Jet Ski
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, represents the remaining assets of the two companies in Chapter 7,
were purchased from a Chapter 7 Trustee for approximately $1,932,000
(including fees of $90,000). In December 1996, the Company decided to cease
activity and sell the remaining assets. Accordingly, the purchase has been
treated as a temporary investment for accounting purposes. Through September
30, 1996, the Company has advanced ECO Jet $1,005,042. The Company has
recorded a loss on assets held for sale of $2,792,042 and has included in
liabilities ($855,000), a provision for additional losses through January 31,
1997 when activities are expected to cease and for rentals through the
expiration of the related lease (March 31, 1997).
<f(b)> Spa Faucet, Inc.
As of March 31, 1996, the Company paid $2,100,000 (including fees of $100,000)
to acquire 2,600,000 shares of pre-split restricted common stock or 51% of Spa
Faucet. The purchase is being treated as a temporary investment for
accounting purposes. On October 31, 1996, the Company sold its interest in
Spa Faucet, Inc. for $2,500,000 net of commission of $500,000. The agreement
provides for monthly payments of $208,333 commencing November 1, 1996. As of
January 10, 1997, the Company has received only one payment. The shares were
sold to an investment group led by Spa Faucet's president, Leonard Sudman.
<f(c)> Investment Securities
On February 29, 1996, the Company acquired 1,000 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 restricted
common stock. The Company's investment securities are classified as
"available for sale." Accordingly, unrealized gains and losses are excluded
from earnings and reported as a separate component of stockholders' equity.
As of September 30, 1996, the common stock investment in Gulfwest Oil Company,
Inc. had a cost of $517,671 and a fair value of $267,671. The Company has
recorded a valuation allowance of $250,000. Such amounts have been reflected
in the accompanying statement of stockholders' equity. The Company's chairman
is a director of Gulfwest Oil.
On September 4, 1996, the Company issued a $200,000 note to Gulf West Oil
Company, Inc. bearing interest at a rate of 10% per annum and payable in 60
days. As of January 30, 1997, the Company has received $50,000. Accordingly,
$150,000 is past due on that date.
<f(d)> Films
During the year, the Company 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 $169,388. 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 primary shooting on one film has
been completed, however, this film has not been distributed and the Company
has exercised a lien to own the film. The Company has estimated that
$1,500,000 will be received through the sale of distribution rights less
$900,000 which represent $600,000 to pay unpaid bills relating to production
costs and an estimated $300,000 to complete the film. Losses related to these
investments approximate $2,000,000.
-F16-
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at September 30, 1996:
Leasehold Improvements $ 967,738
Vehicles 211,705
Shop Equipment 702,846
Laboratory Equipment 61,248
Security Equipment 4,504
Office Furniture and Equipment 112,941
Mobile Home 19,972
Trailers 103,728
Total Equipment 2,184,682
Less: Accumulated Depreciation (472,757)
Equipment Net 1,711,925
Land 171,500
Total Property, Plant and Equipment $ 1,883,425
Depreciation for fixed assets amounted to $189,850 and $243,625 for the years
ended September 30, 1996 and 1995, respectively. The Company's facilities are
located on property owned by the Company's President (see Note 9 Related
Parties).
NOTE 5 - CONVERTIBLE DEBENTURES
During the year ended September 30, 1996, the Company sold $10,375,000 of 9%
convertible debentures eligible at the option of the holder for conversion to
common stock 45 days after the issuance date at the defined market price of
the common stock. Market price shall be 65% of the average closing bid price
of the common stock for the five business days immediately preceding the
conversion date. The Company is entitled, at its option, to redeem all or
part of the debentures by paying the holder the excess of the market price and
the higher number of shares of common stock that would be issuable on
conversion. The Company is entitled to redeem, at its option, all or part of
the debentures and accrued interest being converted if at the time of such
conversion, the market price is $.82 or less by paying the holder 110% of the
fair amount of the debenture being converted.
-F17-
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 5 - CONVERTIBLE DEBENTURES (Continued)
In addition, during the year ended September 30, 1995, the Company sold
$5,705,000 of 9% convertible debentures eligible at the option of the debtee
for conversion to common stock 41 days after the issuance date. Upon
conversion, the debtee is to receive the greater number of shares of the
fraction having the dollar amount of the note to be converted plus accrued
interest as the numerator and 65% of the average closing bid prices of the
common stock for the five trading days prior to the date of conversion or the
fraction having the dollar amount of the note to be converted plus accrued
interest as the numerator and 65% of the average of the closing bid prices of
the common stock for the five trading days prior to the date of the
subscription as the denominator. In no event shall the conversion price be
reduced below $1.30.
At September 30, 1996, 2,646,154 shares of common stock were held in escrow
anticipating conversion, the demands based on the formula in the debenture
agreements require additional shares to be issued. The deferred loan
acquisition costs pertaining to each convertible debenture will be amortized
to operations over the one year and two year debenture term with all remaining
unamortized costs charged to additional paid in capital upon conversion.
Subsequent to September 30, 1996 the outstanding debenture holders demanded
shares aggregating approximately 7,000,000 shares. The Company has not
honored their request.
<TABLE>
Summary of debentures issued pursuant to Regulation S :
<CAPTION>
Deferred
Net Loan Shares Issued
Face Amount Proceeds Acquisition Upon
Due of Issuance Costs Conversion
<S>
Debentures issued <C> <C> <C> <C>
September 30, 1995 5,705,000 $4,721,384 <f(a)> $ 983,616
Amortization - 1995 46,303 <f(b)>
Balance
September 30, 1995 5,705,000 937,313
Debentures issued
November 1995 5,200,000 $4,000,000 1,200,000
January 1996 5,175,000 $3,980,769 1,194,231
Financing commission <f(b)> 1,500,000
Amortization 1996 (1,172,512)
Debentures converted
into Shares
(including shares
issued for
service contract) (13,780,000) (3,173,985) <f(c)> 19,264,816
Shares issued for accrued
interest
Balance
September 30, 1996 $ 2,300,000 485,047
<FN>
<f(a)> Includes subscription receivable of $558,622. Proceeds were received
during the year ended September 30,1996.
<f(b)> The Company was obligated to pay a fee of $1,500,000 when and aggregate
$15,000,000 of funding was received, accordingly, in February 1996 when
this occurred, $1,500,000 was charged to deferred loan acquisition costs
and is being amortized as described above.
<f(c)> Unamortized amount charged to additional paid-in capital upon conversion
</TABLE>
-F18-
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 6 - CUSTOMER DEPOSITS
As of September 30, 1996, the Company is retaining a $100,000 refundable
deposit on a canceled contract with a Canadian entity based on non-disclosure
violations of the sales agreement. No claims have been asserted by the
Canadian entity. The full deposit has been recorded as a liability pending
formal resolution of this matter.
During the year ended September 30, 1995, a sales agreement for the purchase
of reactor units was canceled at the option of the depositor. Previous non-
refundable deposits of $20,000 received in the year ended September 30, 1993
were recorded as contract cancellation income in 1995.
NOTE 7 - INCOME TAXES
To date the Company has incurred tax operating loses and therefore has
generated no income tax liabilities. As of September 30, 1996 the Company has
generated net operating loss carryforwards totaling approximately $11,360,000
which are available to offset future taxable income, if any, through 2011. As
the utilization of such operating losses for tax purposes is not assured, the
deferred tax asset has been fully reserved through the recording of a 100%
valuation allowance. These operating losses may be limited to the extent an
"ownership change" occurs including the conversion of debentures in 1996.
The components of the net deferred tax asset are as follows:
Deferred Tax Liability:
Depreciation $ 47,400
Unrealized Gain on Securities 17,000
Total Deferred Tax Liability 64,400
________
Deferred Tax Assets:
Consulting Expense 173,000
Allowance for Inventory Loss and
Assets Held for Sale 2,265,000
Net Operating Loss Carryforward 3,862,000
Research and Development Credit 32,500
Total Deferred Tax Assets 6,332,500
Net Deferred Tax Assets 6,268,100
Valuation Allowance 6,268,100
Net Deferred Tax $ -
-F19-
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 7 - INCOME TAXES (Continued)
The net operating loss carryforwards are scheduled to expire as follows:
Expiration Date
2006 $ 752,000
2007 1,190,000
2008 1,972,000
2009 1,585,000
2010 2,521,000
2011 3,340,000
$ 11,360,000
Reconciliation of the federal tax rate to the Company's effective rate:
Effective federal tax rate 34.0% 34.0%
Operating losses with no current tax benefit (37.7%)
(34.0%)
Permanent difference - amortization of deferred costs 3.7% -
Effective tax rate 0% 0%
NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES
Consulting Agreements
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
$15,000,000 through introductions made by the consultant, the Company agrees
to pay the consultant in cash, and 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. $1,500,000 was paid in
accordance with this agreement for arranging for the sale of convertible
debentures and $190,000 for the acquisitions of Spa Faucet, Inc. and the Jet
Ski assets (Note 3).
-F20-
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
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.
Employment Agreements
On June 28, 1996, the Company canceled a previous employment agreement and
entered into a five-year employment agreement with its President and Chief
Executive Officer, effective July 1, 1996. The agreement provides 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 of $.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. The President has
received a bonus during the year ended September 30, 1996 of $25,000.
On June 28, 1996, the Company entered into a five-year employment agreement
with its Secretary - Treasurer, the wife of the President, effective July 1,
1996. The agreement provides for an annual salary of $90,000 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 of $.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
50,000 common shares for $.80 per common share. All options shall accumulate.
A bonus of $10,000 was paid during the year ended September 30, 1996.
On June 28, 1996, the Company entered into a five-year employment agreement
with its Plant Manager, the son of the President, effective July 1, 1996.
The agreement provides for an annual salary of $80,000 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 of $.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
50,000 common shares for $.80 per common share. All options shall accumulate.
The Company has entered into a five-year employment agreement with the son-in-
law of the President to administrate the jet ski operations. This agreement
became effective June 1, 1996. Pursuant to this agreement, this individual
receives $125,000 per year with annual increases to reflect increases in the
Consumer Price Index. The Company will provide and maintain an automobile
having a cost of not greater than $20,000 and is reimbursed for his living
expenses on the Company's behalf in connection with his move to California for
the jet ski operation. The jet ski operation is being closed and the Company
expects the employment will be terminated in February, 1997. Prior to this
employment agreement, he was paid consulting fees of $2,500 per month.
-F21-
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued)
The Company also entered into a five-year employment agreement with its former
Chief Financial Officer. This agreement became effective upon the completion
of the public offering on October 22, 1992. The agreement could be canceled
upon 30 days notice and the payment of one year's salary. Pursuant to the
agreement, the Chief Financial Officer would receive an initial payment of
$100,000 and a salary of $5,500 per month. In June, 1993, the Chief Financial
Officer resigned from all offices held with the corporation
and the employment agreement was replaced with a consulting agreement
with an entity owned by the former Chief Financial Officer with identical
terms and conditions. On July 25, 1994, the consulting agreement was modified
to require a retainer payment of $10,000 per month. In September 1995, this
consulting agreement was canceled for a settlement payment of $400,000. (See
Note 9 for additional related party transactions.)
Independent Agent Agreement
On April 13, 1995, the Company signed a two-year agreement with an independent
agent pursuant to which the agent is to receive 14% on sales of reactor
equipment and 8% on the sale of shredder equipment in China.
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 year ended
September 30, 1996, $130,000 of advance commissions were charged to expense as
a result of non-performance on the agreement and as expected future benefit.
Management plans to actively pursue collection.
Lease Commitments
The Company leases office space in Hawthorne, Florida, on a year to year basis
pursuant to a lease which expired July 6, 1993. Such lease is renewable
annually at amounts to be negotiated for up to nine one year terms by annual
request in writing. On July 6, 1996, the lease was renegotiated for $5,000 a
month. The lease is renewable annually at amounts to be negotiated for up to
five years. Rent expense for the years ended September 30, 1996 and 1995 was
$43,940 and $37,961. (See Note 9 - related party transactions.)
Litigation
On January 23, 1997, a former employee filed suit against the Company, certain
officers, and others in Orange County California Superior Court seeking
damages in excess of $250,000 under theories of breach of contract, breach of
implied covenant of good faith and fair dealing, tortious inducement of breach
of an employment contract, intention infliction of emotional distress and
negligent misrepresentation and for an accounting. The Company has not yet
filed a responsive pleading, but intends to vigorously defend the action.
On August 5, 1996, two entities filed suit against the Company in Orange
County California Superior Court seeking damages in the amount of $166,000.
The Company denies that any commission is due.
No amounts have been accrued for litigation.
-F22-
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company rents space for its office and research plant from the President.
During the period ended September 30, 1996, the Company paid rent of $43,940
for this space. On July 6, 1996, a five-year lease was entered into with
monthly payments of $5,000 (see Note 8).
On March 11, 1996, ECO2 Financial, Inc. approved $50,000 to be loaned to
finance construction of a personal residence, sold by a related party, to be
repaid with interest at the prime rate plus 3% by June 11, 1996. The note was
repaid during the year ended September 30, 1996.
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. The agreement provides for Planet Earth to
provide tires for the demonstration of the Company's plant in return for labor
provided to Planet Earth. Labor provided by the Company approximated $80,000
for the year ended September 30, 1996 without reimbursement. Planet Earth is
located at the Company's facilities.
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 was for six months to May 15, 1996, with compensation of $2,500 per
month (see Note 8 - Employment Agreements).
Included in selling, general and administrative expenses for the years ended
September 30, 1996 and 1995 is $0 and $2,603, respectively in compensation
expense relating to services rendered on behalf of the Company by certain
stockholders for which the Company issued shares of common stock as
compensation for such services.
In September 1995, the Company purchased $63,600 of equipment with cash loaned
to the Company by the President. The note is unsecured, non-interest bearing
and requires weekly payments of $500 starting October 6, 1995.
In September 1995, the Company paid two directors $30,000 each upon
resignation from the Board as compensation for previous services rendered.
(See Note 13 for additional related party transactions.)
Loans and advances due from stockholders consists of the following at
September 30, 1996:
Balance - October 1, 1995 - Due from Officer - advances $ 92,586
Balance - October 1, 1995 - Due to Officer - loan 63,600
28,986
Payments 28,500
Amounts Paid on Behalf of President 35,179
Accrued interest on receivable 6,749
Ending Balance - September 30, 1996 $ 99,414
-F23-
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 9 - RELATED PARTY TRANSACTIONS (Continued)
At September 30, 1996, notes receivable from stockholders consisted of two
notes for $64,749 and $33,618 dated May 20, 1993 and December 1, 1992,
respectively, plus $968 in a non-interest bearing receivable as of September
30, 1996. Interest is calculated at 9% per annum and $24,335 in interest is
included in notes receivable at September 30, 1996. Amounts paid on behalf of
the President represent amounts originally expensed on the Company's books and
subsequently adjusted. See also commitments - employment agreements - Note 8.
NOTE 10 - STOCKHOLDERS' EQUITY
Stock Options
Stock Option Plan
In September, 1992, the Company adopted an Incentive and Non-qualified Stock
Option Plan ("the Plan"). The Plan is administered by a Stock Option
Committee appointed by the Board of Directors. A total of 158,500 shares of
common stock have been reserved for issuance under the Plan. Options granted
under the Plan will not be transferable except by bequest or the laws of
descent. Options granted to employees will terminate upon termination of
employment, except in limited circumstances relating to retirement, death or
disability and at the discretion of the Committee.
On October 6, 1992, the Committee granted a non-qualified option to the
President and Chairman to purchase 75,000 shares of common stock, exercisable
at $2.50 per share commencing April 6, 1993. These options resulted in
charges to compensation expense of $187,500 in fiscal year ended September 30,
1993. In April 1994, 25,000 options were exercised at an exercise price of
$2.50 per share or $62,500. In July 1995, the remaining 50,000 options were
exercised at an exercise price of $2.50 per share or $125,000.
Also, on October 6, 1992, the Committee granted a non-qualified option to the
Chief Financial Officer to purchase 65,000 shares of common stock. This
agreement was assigned to Associated Energies, Inc. (a company owned by the
former chief financial officer) in June, 1993 when the Chief Financial Officer
resigned from all offices held with the Company. The options are exercisable
at $2.50 per share. The Company recorded unearned compensation of $32,500
which has been expensed. The options vest as follows:
25,000 shares - October 6, 1993
25,000 shares - October 6, 1994
15,000 shares - October 6, 1995
Pursuant to these stock options, amortization of compensation in the amount of
$2,603 and $8,954 has been recognized during the year ended September 30, 1996
and 1995, respectively, In April 1994, 25,000 options were exercised at an
exercise price of $2.50 per share or $62,500.
-F24-
<PAGE>
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
Other Stock Options
In September 1995, the Company registered 80,000 shares to be reserved for a
consultant to the Company and two directors. The 50,000 options available to
the consultant are exercisable for five years through July 15, 2000 at $2 per
share (less than fair market value). The 15,000 options available to each of
the two directors are exercisable for three years through September 10, 1997
and July 15, 1998, respectively, at $2 per share. None of these options were
exercised as of September 30, 1996. See commitments - employment agreements -
Note 9.
Treasury Stock
In August 1995, the Company purchased 10,000 shares of common stock for the
treasury. The treasury stock has been recorded at cost of $34,049.
Public Offering
On October 6, 1992, 30,000 options were granted to three outside directors at
an exercise price of $2 per share expiring September 10, 1997.
On October 22, 1992, the Company completed a public offering of 500,000 units
at a cost of $9.10 per unit. Each unit consisted of one share of common stock
and one warrant to purchase a share of common stock at $10.80 per share
commencing October 22, 1993. This warrant exercise price was amended to $.62
per warrant at September 30, 1995 as a result of anti-dilution provisions
resulting from additional stock issuances. Gross proceeds of $4,550,000 were
reduced by associated costs and consulting fees of approximately $1,046,000.
The underwriter has the right to purchase up to 50,000 additional shares of
stock. The underwriter's option is exercisable for a four-year period
commencing one year from the date of the offering, at a price equal to 165% of
the initial public offering price.
Issuance of Common Stock as Commission
On April 22, 1993, the Company registered with the Securities and Exchange
Commission 525,000 additional shares of stock associated with a contract. This
contract was for public relations services from Equity Ventures Ltd., Inc. In
exchange for such services, the Company granted options for 125,000 shares.
The options were all exercised on April 29, 1993, at $1.50 per share,
representing a $1.00 discount to the market price on that date. Compensation
expense of $125,000 was charged to operations for the discount in 1993.
Consulting 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
required the issuance of 300,000 shares, 100,000 of these shares have been
issued. The shares are valued at the fair market value at the date of the
agreement; $1 per share or an aggregate of $300,000. In fiscal 1996, 200,000
shares were issued in connection with the consulting agreement for the term of
three months until December 31, 1995.
-F25-
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
Issuance of Stock for Lobbying Services
On June 10, 1993, the Company registered with the Securities and Exchange
Commission 100,000 additional shares of stock associated with a contract for
lobbying services. The contractor is an entity owned by the Chief Financial
Officer of the Company who resigned all offices held with the corporation on
October 23, 1993. These shares were issued June 15, 1993 and unearned
compensation was charged for the fair market value ($221,615) of the shares
and was amortized over a one-year period.
In accordance with a public relations and stock option agreement with Equity
Ventures Ltd., Inc. 575,000 stock options were made available. Of these,
100,000 and 25,000 options were exercised at $4.20 and $5.05, respectively, in
the year ended September 30, 1993. In the year ended September 30, 1994, an
additional 190,000 options were granted of which 75,000 options were exercised
at $5.05 per share, 100,000 options were exercised at $5.50 per share and
15,000 options were exercised at a discounted price of $2.13 per share.
During the year ended September 30, 1994, the Company received proceeds of
$706,725 and notes receivable for $123,125 with interest accruing at 7% per
annum payable to the Company upon demand. During the year ended September 30,
1995, the final 85,000 options available pursuant to the agreement were
exercised at a discounted rate of $3.50 per share or $297,500. $31,875 of the
$123,125 notes receivable was satisfied. The remaining amount of $91,250 was
written off and charged to operations during the year ended September 30,
1996.
Authorized Shares
The Articles of Incorporation were amended in December 1996 to authorize an
additional 30,000,000 shares of common stock for issuance. Total authorized
common shares at September 30, 1996 are 45,000,000.
Other Stock Issuances
In January 1994, 88,000 and 73,500 shares were issued to two companies at
$3.10 per share or $500,650, pursuant to Regulation S of the Securities Act of
1933.
In February and March 1994, 20,000 and 5,000 shares, respectively, were issued
in connection with the settlement of lawsuits with two stockholders.
In March 1994, 32,333 shares were issued for $3 per share or $97,000.
In August 1994, the Company issued 150,000 shares to two companies in exchange
for net cash of $186,500. Also, an additional 100,000 shares were issued to a
third company for net cash of $123,268. Such shares were issued pursuant of
Regulation S of the Securities Act of 1933.
In September 1994, the Company exchanged 100,000 shares for 100,000 shares of
Viking Recycling, Inc. (a development stage enterprise) stock with cost valued
by the Company of $20,000 which approximates market. This investment was
expensed in the year ended September 30, 1995 as it has been determined that
Viking Recycling will not become a public company. The shares are considered
to be of no value to the Company.
-F26-
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
In December 1994, the Company completed a private placement of 100,000 shares
of common stock at $1.06 per share or $105,699.
In February 1995, the Company completed a private placement of 480,000 shares
of common stock at $.945 per share or $453,600.
In May 1995, 10,000 shares of common stock were issued for consulting services
at $1.125 per share or $11,250.
Also in May 1995, 120,000 shares were issued pursuant to a legal settlement.
The legal settlement required an aggregate share price be maintained which was
recorded in 1994.
In July 1995, the Company issued 400,000 shares in a private placement with
two entities for $.50 per share and received net proceeds of $199,500.
In August and September 1995, the Company issued 250,000 shares in a private
placement with two entities for $2.90 per share less cost to issue of
$100,000.
In August 1995, the Company issued 40,998 shares to the three stockholders in
settlement of the prior claims. The Company issued those shares in connection
with prior antidilution provisions. In May 1996, three dissenting
stockholders accepted the aforementioned shares plus additional cash paid of
$73,760 total to account for 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 and has been charged to settlement expenses.
In August 1995, 16,033 shares were issued to four original stockholders whom
the Company determined did not receive the appropriate number of shares based
on their initial investment.
Employee Stock Payment Plan
The Company established an Employee Stock Payment Plan (the Plan) for the
purpose of issuing shares, which are registered on Form 8, of its common stock
to participants in payment and full satisfaction of wages and/or benefits to
which they already are or otherwise may become entitled for services rendered
or to be rendered as employees or former employees of the Company. Pursuant
to the plan, 325,000 shares were issued in July and August 1995 at prices
ranging from $1.69 to $5.13 or net proceeds to the plan of $1,474,727. In the
year ended September 30, 1994, 125,000 shares were issued at prices ranging
from $1.69 to $3.09 per share or net proceeds to the plan of $268,125. The
net proceeds are restricted to the payment of wages and/or benefits.
Consultant Stock Payment Plan
The Company established a Consultant Stock Payment Plan (Consultant Plan) for
the purpose of issuing shares of its common stock as payment for services
rendered or to be rendered by consultants as per future agreements to be
approved by the Company. Of the 500,000 shares available pursuant to the
plan, 200,000 shares have been issued pursuant to two consulting agreements.
-F27-
ECO2, INC. AND SUBSIDIARIES
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE 10 - STOCKHOLDERS' EQUITY (Continued)
Stock Purchase Agreement:
On November 30, 1994, the Company entered into a Stock Purchase Agreement with
Recovery Corporation of America (Recovery) to acquire four of its
subsidiaries, (i) Bio-Medical Services, Inc. (d/b/a Recovery Corporation of
North Carolina, (ii) Resource Power Development Corp. (d/b/a Recovery
Corporation of Florida), (iii) Recovery Corporation of Arkansas, and (iv)
MediGen of Pennsylvania, Inc., all of which were engaged in the medical waste
disposal business.
Under the Agreement, the Company was to acquire all of the issued and
outstanding securities of the Companies in exchange for the delivery of
100,000 restricted shares of its common stock; 500,000 restricted shares of
preferred stock of a subsidiary of the Company with a stated value of
$1,000,000 convertible into an equal number of shares of Company common stock;
and warrants to purchase 500,000 restricted shares of the common stock of the
Company at $5.00 per share. This agreement was rescinded in December 1994,
per mutual agreement between the parties.
Underwriting Agreement:
On December 14, 1994, the Company entered into an Underwriting Agreement with
respect to the issuance of bonds. The Issuer of the bonds was to be an
offshore corporation who will be offering its debentures to institutional
investors outside the U.S. The offering was to be on a best efforts basis and
the proceeds (net of sinking fund requirements) will be used to provide loans
to the Company. The Company has paid $240,000 non-refundable deposit towards
the aggregate non-accountable expenses allowance of the Underwriter. That
financing was not completed, accordingly, at September 30, 1995 the Company
charged the non-refundable deposit to operations.
Corporate Relations Agreement
In April 1995, the Company signed a Lead Generation/Corporate Relations
Agreement. The agreement is effective for one year and requires the issuance
of 300,000 unrestricted common shares of the Company as defined in the
agreement. The shares issued and to be issued have been valued at the fair
market value at the date of the agreement; $1.00 per share or an aggregate of
$300,000. As of September 30, 1995, all 300,000 shares have been issued. In
addition, the agreement provides for options to purchase 400,000 shares of the
Company's common stock at various times and at prices approximating or in
excess of quoted market values. All options were exercised in July 1995
yielding $748,000 to the Company. All costs relating to this agreement,
$300,000, have been expensed as of September 30, 1995 as the agreement was
canceled. The consultant was paid a commission of $190,000 for the
acquisition of Spa Faucet and Jet Ski.
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 years
ended September 30, 1996 and 1995, amortization of $389,583 and $35,417, has
been expensed.
-F28-
<PAGE>
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers, directors and persons who beneficially own more
than 10% of the Company's Common Stock to file initial reports of ownership
and reports of changes in ownership with the Securities and Exchange
Commission ("SEC"). Such persons are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms filed by such persons.
Based solely on the Company's review of such forms furnished to the
Company and written representation from certain reporting persons, the Company
believes that during the fiscal year ended September 30, 1996, all filing
requirements applicable to the Company's executive officers, directors and
more than 10% shareholders were complied with.
The names and ages of the Company's directors and executive officers are
as follows:
Name Position(s) with Company Age
Charles D. Ledford Chairman of the Board, Chief 63
Executive Officer, Chief Financial
Officer and President
Vivian Ledford Secretary, Treasurer and Director 60
Mark Napier, Jr. Director,
Russel McElmurry Director 53
The Company's directors are elected at the annual meeting of
stockholders and hold office for one year and until their successors are
elected and qualified. The Company's officers are appointed by the Board of
Directors and serve at the Pleasure of the Board. The Company currently has no
audit, compensation or nominating committees.
Set forth below is a biographical description of each director and
executive office of the Company.
Charles D. Ledford has been a director of the Company and its Chairman of
the Board, Chief Executive Officer and President since its inception on
December 4, 1991. From 1980 to until the Company's inception, Mr. Ledford was
a self-employed consulting engineer. Since 1976, Mr. Ledford has been active
in research and development and the study of the application of pyrolysis in
business. In 1981, he patented a process of conversion of hardwood sawdust
into "liquid smoke" (used by the food industry) through the iuse of pyrolysis.
In 1992, he patented a process converting scrap rubber tires into carbon black
and fuel oil through the process of pyrolysis. Mr. Ledford's previous
experience includes mechanical and electrical engineering positions with two
Fortune 500 companies.
Vivian Ledford has been a director of the Company since September 1995
and Secretary and Treasurer since its inception in 1991. Mrs. Ledford is the
wife of Charles Ledford.
Mark Napier, Jr. Is president of Kral Enterprises, Inc. an
engineering consulting business and and its unincoprorated predecessor. Prior
to founding Kral, Mr. Napier was employed by AT&T
Technologies, Inc. as an engineer.
Russell McElmurry has been president of McElmurry Chemical, a supplier of
food sanitation chemicals since 1980.
Denis Lampiasi resigned as a director on August 5, 1996. Mr. Napier and
Mr. McElmurry were elected to fill vacancies in the Board by the remaining
members on September 16, 1996.
Item 11. Executive Compensation
Executive compensation is determined by the Board of Directors. All
compensation paid by the Company for services rendered during the three fiscal
years ended September 30, 1994, 1995 and 1996 for each executive officer is
set forth in the following table:
SUMMARY COMPENSATION TABLE
(three fiscal years ended September 30, 1994, 1995 and 1996)
Annual Long Term
Compensation Compensation
Other All
Name and Annual Other
Principal Position Year Salary Bonus Compensation Compensation
Charles Ledford 1996 $168,750 $25,000 -0- $36,058
Chief Executive Officer 1995 $125,000 -0- $7,200 -0-
PresidentDirector 1994 $106,250 $1,200 $7,200 -0-
Vivian Ledford 1996 $64,100 $10,000 -0- $07,200
Treasurer, 1995 $36,800 $ 500 -0- -0-
Secretary and Director 1994 $36,400 $ 500 -0- -0-
Denis Lampiasi 1996 $42,789 -0- -0- -0-
Director 1995 -0- -0- -0- -0-
1994 -0- -0- -0- -0-
On June 28, 1996, the Company canceled a previous employment agreement
and entered into a five-year employment agreement with Charles Ledford
effective July 1, 1996. The agreement provides 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 of $.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. The President has
received a bonus during the year ended September 30, 1996 of $25,000.
On June 28, 1996, the Company entered into a five-year employment
agreement with its Vivian Ledford, the wife of the President, effective July
1, 1996. The agreement provides for an annual salary of $90,000 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 of $.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
50,000 common shares for $.80 per common share. All options shall accumulate.
A bonus of $10,000 was paid during the year ended September 30, 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information, as of February 3, 1997, with
respect to all stockholders known by the Company to be the beneficial owners
of more than 5% of its outstanding Common Stock, and all directors and
officers as a group. Except as noted below, each person has sole voting and
investment powers with respect to the shares shown.
Names and Address Amount and Nature Approximate % of Class
of Individual or of Beneficial Ownership
Identity of Group
Charles Ledford 163,630<F1> .59%
20005 S.E. Hawthorne Road
Hawthorne, Florida 32640
Vivian Ledford 163,630<F1> .59%
20005 S.E. Hawthorne Road
Hawthorne, Florida 32640
Lark Napier, Jr. -0- 0%
333 7th Way
Interlachen, FL 32148
Russell McElmurry -0- 0%
6106 Percheron Trail
Summerfield, N.C. 27358
All Officers 163,630 .59%
and Directors
as a group(4 Persons)
[FN]
<F1> Held by Charles Ledford and Vivian Ledford as tenants by the entireties.
Item 13. Certain Relationships and Related Transactions.
On July 6, 1992, the Company entered into a one year renewable lease with
Charles D. Ledford and his wife, Vivian Ledford, Secretary of the Company, to
lease its facility located in Hawthorne, Florida. The Company pays rent in the
amount of $30,000 annually for the property. Such lease, which expires July 6,
1994, includes annual renewal options through July 6, 2002, with a 5% increase
in the annual rent upon each such renewal. Such renewals are solely at the
option of the Company. During the years ended September 30, 1993 and 1992, the
Company paid rent of $31,800 and $18,678, respectively, for such facilities.
The Company believes that the terms of the lease are at least comparable to
the terms which could be obtained from an unaffiliated third party.
Mr. Ledford assigned his patent relating to the tire pyrolysis process to
the Company upon the execution of his employment agreement in July 1992. (See
"Management-Employment Agreements") The patent was obtained by Mr. Ledford in
1992 and expires in 2009.
During 1991, Robert Mitchell loaned $100,000 to the Company. Such loan
was payable on demand and accrued interest at the rate of 18% per annum. The
proceeds of this loan and $370,000 of other loans were utilized for the
development and construction of the Company's facility. In March 1992, Mr.
Mitchell converted his loan into shares of ERI Sales which were exchanged in
the Mergers for 41,284 shares of the Company's Common Stock.
On January 13, 1992, Doug Davis, Steven Barnhardt and Donald Schmidt,
shareholders of ERI Sales, received 30 shares, 15 shares and 3.3 shares,
respectively, of common stock of ERI Sales in exchange for services rendered
to ERI Sales. (Such shares of ERI Sales were subsequently exchanged for
20,472, 10,236, and 2,252 shares,, respectively, of the Company's Common Stock
pursuant to the Mergers and following the Reverse Splits; however, Steven
Barnhardt did not vote in favor of the Merger of ERI Sales with ECO2, and
accordingly, his ERI Sales shares were not exchanged pursuant to the Mergers.
(See "Business-Legal Proceedings")
Al Kaczmarek, one of the Company's former directors, was the owner and
President of Shred Pax Corporation ("Shred Pax"), the manufacturer of three of
the shredder components of the Company's System. In January 1992, the Company
purchased shredding equipment from Shred Pax for a price of $226,000. In
addition, on October 1, 1992, the Company and Shred Pax entered into an
agreement with Premium Enterprises, Inc. ("Premium") pursuant to which Premium
will purchase from the Company shredding equipment manufactured by Shred Pax.
In order to fulfill the contract with Premium, the Company will purchase the
subject shredding equipment from Shred Pax. The Company intends to purchase
additional shredding equipment from Shred Pax in the future. Such shredding
equipment may be used by the Company as part of its planned tire recycling
operations, sold as part of Systems or resold by the Company independent of
any System sales. The terms upon which the Company purchases such additional
shredding equipment will be subject to negotiations between the Company and
Shred Pax. The Company believes that such purchases will not be on terms any
less advantageous than those which would be available to the Company from
another party.
In May 1993, the Company acquired equipment consisting of shredders from
Shred Pax Corporation for a purchase price of $455,000, representing Shred Pax
Corporation's wholesale price for such equipment (i.e., a 25% discount from
its published price list.) The Company, in turn, made a drop shipment of such
equipment to a non-related third party in May 1993 for a selling price of
$600,000.
The Company leases its facilities located at at 20005 S.E. Hawthorne
Road, Hawthorne, Florida 32640 for $60,000 per annum From Charles D. Ledford
and Vivian Ledford, both of whom are directors and officers of the Company,
pursuant to a five-year lease which may, at the Company's option, be extended
until for an additional five year term until July, 2006. The lease provides
for an automatic annual 5% increase. The Company believes that such facility
is adequate for the Company's current and anticipated operations.
In September 1994, the Company purchased various equipment from an
affiliate of Mr. Charles Ledford in exchange for promissory notes in the
amount of $125,054 with interest at 10% per annum payable on demand.
In September 1995, the Company purchased $63,600 of equipment with cash
loaned to the Company by Mr. Charles Ledford. The note issued to Mr. Ledford
is unsecured, non-interest bearing and requires weekly payments of $500
commencing October 6, 1995.
PART IV.
Item 14. Exhibits and Reports on From 8-K.
Exhibit No. Page
Exhibits DESCRIPTION
1.1 Underwriting Agreement date October 22, 1992, between Elliot
Allen & CO., Inc. and Registrant <F2>
2.1 Articles of Merger ERI Sales into ECO2, filed July 1,1992<F1>
2.2 Plan and Agreement of Merger of ERI Sales into ECO2, filed
July 1, 1992 <F1>
2.3 Articles of Merger of ERI Florida into ERI Delaware, filed
July 1, 1992 <F1>
2.4 Plan and Agreement of Merger of ERI Florida into ERI Delaware
filed July 1, 1992 <F1>
3.1 Restated Certificate of Incorporation of Registrant <F1>
3.2 By-laws of Registrant <F1>
3.3 Certificate of Amendment of Certificate of Incorporation of
Registrant, filed August 4, 1992 <F1>
3.4 Certificate of Amendment of Certificate of Incorporation of
Registrant, filed September 25, 1992 <F1>
4.1 Unit Purchase Option dated October 29, 1992, between Elliot
Allen & Co. , Inc. and Registrant <F2>
4..2 Warrant Agreement between the Company and North America
Transfer Co. dated October 29, 1992 <F2>
4.3 Subscription Agreement between On-site Environmental, Inc.
and Registrant, dated September 9, 1992 <F1>
4.4 Bridge Note issued to On-site Environmental, Inc. dated
September 9, 1992 <F1>
4.5 Option Agreements with Associated Energies, Inc., Al
Kaczamarek, John O'Brien and Alev Ross <F7>
10.1 Sales Agreement by and between ERI Florida, and Premium
Enterprises, Inc. dated September 11, 1991 <F1>
10.2 Agreement by and between Tire Recycling Canada, Inc. a
Canadian Corporation and ERI Florida dated August 1, 1991
<F1>
10.3 1992 Incentive and Non-Qualified Stock Option Plan dated
September 16, 1992 <F1>
10.4 Form of Stock Option Agreement <F1>
10.5 Employment Agreement by and between Charles D. Ledford and
Registrant, dated July 15, 1992 <F1>
10.6 Employment Agreement by and between Mike M. Mustafoglu and
the Company dated September 25, 1992 <F1>
10.7 Consulting Agreement by and between W.C. Emery and
Registrant
dated March 27, 1992 <F1>
10.8 Commission Agreement by and between Robert C. Langford and
Registrant, dated March 27, 1992 <F1>
10.9 Financial Advisory and Investment Banking Agreement between
Registrant and Elliot Allen & Co., Inc., dated October
29, 1992 <F2>
10.10 Lease Agreement among Charles Ledford, Vivian Ledford, and
Registrant, dated July 6, 1992 <F1>
10.11 Equipment Purchase Agreement by and among ECO2, Inc. Shred
Pax Corporation and Premium Enterprises, Inc. dated
October 1, 1992 <F1>
10.12 Sales Agreement by and between Thomas A. Dardas and
Registrant dated February 1, 1993 <F3>
10.13 Exclusive License Agreement by and between Thomas A.
Dardas
and Registrant dated February 1, 1993 <F3>
10.14 Client Services Agreement between Equity Ventures Ltd.,
Inc
and Registrant, dated April 19, 1993 <F4>
10.15 Advertising Contract between Wall Street Marketing Group
Inc. and Registrant, dated May 3, 1993 <F4>
10.16 Option Agreement between Equity Ventures Ltd., Inc. and
Registrant, dated May 4, 1993 <F4>
10.17 Letter to Registrant from EnviroTrux Co., Inc. dated June
28, 1993 <F5>
10.19 Promissory Note executed by Resource Recovery, Inc. in
favor of Registrant in the original principal amount of
$100,000 dated July 13, 1993 <F5>
10.20 Amendments to Exclusive License Agreement between Thomas A.
Dardas and Registrant Dated July 14, 1993 <F5>
10.21 Consulting Agreement with Associated Energies, Inc. <F8>
10.22 Sales Agreement with Viking Recycling Inc. <F8>
10.23 Mediation Settlement Agreement with Robert C. Langford <F9>
10.24 Settlement Agreement with Emery Enterprises, Inc. <F10>
10.25 Letter of Agreement with Air Liquide America Corporation
<F10>
10.26 Management Consulting Agreement with TransGlobal Financial
Corporation <F11>
10.27 Financial Services Consulting Agreement with TransGlobal
Financial Corporation <F11>
10.28 ECO2 Employee Stock Payment Plan <F11>
10.29 Stock Purchase Agreement between Recovery Corporation and
Recovery Acquisition Corp. <F12>
10.30 Preliminary Underwriting Agreement between CFO Capital, S.A. and the
Company <F13>
10.31 Stock Purchase Agreement dated November 28, 1994 with Recovery
Corporation of America <F14>
10.32 Corporate Relations Agreement with Corporate Relations Group, Inc.
<F15>
10.33 Independent Agent Agreement with Acceptance & Fiduciary Services,
S.A. <F16>
10.34 Sales Agreement and Related contracts with Wastemasters, Inc. <F16>
10.35 Agreement dated September 22, 1995 with TransGlobal Financial
Corporation with Mike M. Mustafoglu, Alev Ross and John O'Brien
<F17>
10.36 Consulting Agreement dated September 29, 1995 with MarketMedia, Inc.
<F18>
16.01 Letter from Coopers & Lybrand to the Securities and Exchange
Commission <F3>
16.02 Letter from Davis Monk & Company to the Securities and Exchange
Commission <F>
21.01 Subsidiaries of the Registrant <F13>
27 Financial Data Schedule
[FN]
<F1> Previously filed as an exhibit to Registrant's Registration Statement on
Form S-1 (Reg. No. 33-49390) which became effective on October 22, 1992 and
incorporated herein by reference.
<F2> Previously filed as an exhibit to Registrant's Report on Form 10-K for
the fiscal year ended September 30, 1992 and incorporated herein by reference.
<F3> Previously filed as a exhibit to Registrant's Quarterly Report of Form
10-Q for the Quarterly period ended December 31, 1992 and incorporated herein
by reference.
<F4> Previously filed as an exhibit to Registrant's Registration Statement on
Form S-8 which became effective on April 22, 1993 and incorporated herein by
reference.
<F5> Previously filed as an exhibit to Registrant's Current Report on Form 8-K
under date of June 28, 1993 and incorporated herein by reference.
<F6> Previously filed as an exhibit to Registrant's Current Report on Form 8-K
under the date of September 30, 1993 and incorporated herein by reference.
<F7> Previously filed as an exhibit to Registrant's Registration Statement on
Form S-8 which became effective on December 28, 1993 and incorporated herein
by reference.
<F8> Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993 and incorporated herein by
reference.
<F9> Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarterly period ended December 31, 1993 and incorporated herein
by reference.
<F10> Filed as an exhibit to Registrant's Post Effective Amendment No. 1 to
its Registration Statement dated May 10, 1994 and incorporated herein by
reference.
<F11> Filed as an exhibit to Registrant's Quarterly Report On Form 10-Q for
the quarterly period ended June 30, 1994 and incorporated herein by reference.
<F12> Filed as an exhibit to Registrant's Current Report on Form 8-K dated
December 7, 1994 and incorporated herein by reference.
<F13> Filed as an exhibit to Registrant's Report on Form 10-K for the fiscal
year ended September 30, 1994.
<F14> Filed as an exhibit to Registrant's Current Report on Form 8-K under
date of November 30, 1994 and incorporated herein by reference.
<F15> Filed as an exhibit to Registrant's Current Report on Form 8-K dated
April 10, 1995 and incorporated herein by reference.
<F16> Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1995 and incorporated herein by reference.
<F17> Filed as an exhibit to Registrant's Current Report on Form 8-K dated
September 29, 1995 and incorporated herein by reference.
<F18> Filed as an exhibit to Registrant's Registration Statement on Form S-3
dated October 13, 1995 and incorporated herein by reference.
Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the last
quarter of the Company's 1996 fiscal year.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant) ECO2, INC.
By (Signature and Title)____/s/__________________________________
CHARLES D. LEDFORD, President,
Chief Executive Officer, Chief Financial Officer,
and Principal Accounting Officer
Date: February 7, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
Signature Title Date
Chief Executive Officer, Principal
Executive, Financial and Accounting Officer
___________/s/_______________ Chairman of the Board, February 7, 1997
CHARLES D. LEDFORD Chief Executive Officer
Chief Operating Officer
Chief Financial Officer
___________/s/_______________ Director February 7, 1997
VIVIAN LEDFORD
___________/s/_______________ Director February 7, 1997
LARK NAPIER, JR.
______________________________ Director February 7, 1997
RUSSELL MCELMURRY
