UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[ ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended March 31, 1996
[ ] Transition Report pursuant to 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number 33-55254
ESSENTIAL RESOURCES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Nevada 87-0485317
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation) No.)
1800 East Sahara, Suite 107
Las Vegas, Nevada 89104
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602) 483-8700
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days
[ ] Yes [ ] No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Outstanding as of
Class March 31, 1996
- ------------------------------------- ------------------
$.001 par value Class A Common Stock 1,495,196 Shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
BASIS OF PRESENTATION
General
The accompanying financial statements reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of the financial
position and results of operations for the periods presented. All such
adjustments are of a normal and recurring nature. The nature of the operations
for any interim period are not necessarily indicative of the results attainable
in any full fiscal year.
Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of March 31, 1996, include the accounts
of the Company, (ERI), its wholly-owned subsidiaries Essential Nature Products
Pty Limited (ENP) and Collage International Health Pty Limited (CIH), and its
minority-owned (13.3%) subsidiary Queensland Essential Oils Limited (QEO). All
significant intercompany balances and transactions have been eliminated in
consolidation. The accounts of QEO are presented as a reverse acquisition,
similar to the pooling-of-interests method, because the Company has binding
commitments to acquire a controlling interest in QEO subsequent to the date of
these financial statements.
INCOME PER COMMON SHARE
Income per common share is computed using the weighted average number of common
shares outstanding.
MARKETABLE SECURITIES
Marketable securities consist of warrants for 7% non-redeemable, non-cumulative,
convertible, preferred shares in an Australian publicly-traded company. The
Company intends to use them as a short-term investments to be converted to cash
as required to meet current obligations. These securities are considered to be
"trading securities" as defined in SFAS 115.
ACCOUNTS RECEIVABLE
Accounts receivable consist of trade accounts receivable of $512,350 and amounts
to be recovered under the Australian Export Market Development Grant (EMDG)
program $51,606.
INVENTORY
Inventory consists of raw materials, finished goods, and goods on consignment in
retail outlets; and it is reported at the lower of cost or market value.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consist of equipment and fixtures used in the
production and distribution of the Company's products. Depreciation is
recognized over the estimated useful lives of three to ten years on a
straight-line basis.
TRADE NAMES
The trade names were purchased by the Company in January of the current year,
along with other assets used in the marketing subsidiary Collage International
Health Pty Limited. The trade names are being amortized over 20 years, or over
a shorter period of time where there is any reduction in their estimated earning
capacity.
FORMULATIONS
The formulations relate to the planned expansion of the Company's Tea Tree Oil
production and marketing activities. No amortization policy has yet been
established, since the Company is still developing its marketing plan for those
products. The formulations are shown at cost on the financial statements, and
are supported by an independent appraisal as to their market value.
LONG-TERM RECEIVABLES
Long-term receivables consist of notes receivable from Bellcap Pty Limited, a
private financial institution. The notes bear interest at 9.5% per year.
Interest and principal payments are to be paid from the proceeds of loan
agreements Bellcap has with individual growers operating farms on QEO's property
in North Queensland. The notes mature June 30, 2011, but the Company expects
full repayment within 7-9 years.
ORGANIZATION COSTS
Organization costs consist of consulting and other fees related to the start-up
operations of the QEO and ENP subsidiaries. These costs are amortized over 60
months.
DEFERRED INCOME
Deferred income consists of management fees paid annually in advance by
individual growers operating Tea Tree farms on QEO's property. The management
fees are recognized in income as they are earned throughout the year.
MINORITY INTEREST
The minority interest consists of 86.7% of the net assets and earnings of
Queensland Essential Oils Pty Limited. (See notes regarding principles of
consolidation and pro-forma financial statements.)
PRO-FORMA FINANCIAL STATEMENTS
Description of Transaction: An agreement was reached on May 13, 1996, with the
directors of QEO, whereby the Company (ERI) will acquire 50% of the outstanding
shares of QEO, effective May 1, 1996, in a stock-for-stock transaction. This
transaction results in ERI controlling 63.3% of QEO as of May 1, 1996.
Management Assumptions: The pro-forma consolidated balance sheet assumes that
ERI owned 63.3% of QEO as of March 31, 1996. The consolidated statements of
operations and cash flows assume that ERI owned 63.3% of QEO as of the beginning
of each period presented.
Item 2. Management's discussion and analysis of financial condition
and results of operations.
RESULTS OF OPERATIONS
Three months ended March 31, 1996 and 1995.
No meaningful comparison as is possible since operations commenced in the
current form on January 1, 1996.
NET SALES
Net Sales for the three months were $1,452,839 and were above expectations for
the period after the acquisition of the assets generating these revenues.
Costs of sales were not unduly impacted by the fluctuating AUD$ exchange rate
vis-a-vis the US$ exchange rate when recognizing that all manufacturing is
undertaken in Australia with supply of raw material being purchased in both US$
and AUD$. Sales are expected to continue at their current levels, and only
significantly increase as new products come to market.
OPERATING EXPENSES
Operating expenses were controlled contained during the post acquisition period.
The Company's net earnings for the period reflect a rate of return on sales
that, in the ordinary course of business, the Company has been able to be
maintained.
Due to the recent acquisition and certain tax incentives available in Australia
(available to the subsidiary operating companies) the provision for income tax
has been reduced to $19,800.
PROFIT
The net earnings for the two principal entities were CIH $256,382 and QEO
$42,680.
In the case of CIH, this represented 27% of sales and should be able to be
maintained during the coming periods, given existing economic conditions
applying in the markets in which the Company operates.
QEO's profits will vary from quarter to quarter, because the harvesting of its
crop currently occurs two times per year, and adverse climatic conditions may
impact production of this agricultural crop.
Management Discussion
BUSINESS OVERVIEW
The Holding Company
Essential Resources, Inc. acts as the holding company for a number of separate
entities. Its future is as a holding Company in the acquisition and management
of entities associated with the manufacturing and marketing of human lifestyle
products, together with environment-friendly industrial products.
The Company is structured into two divisions: a consumer products division, and
an industrial products division.
Consumer Products Division
Within the consumer products division there are currently three separate
entities: Collage International Health Pty Ltd., Essential Nature Products Pty
Ltd., and Queensland Essential Oils Ltd.
Collage International Health Pty Ltd.
This entity was established to conduct the business operations acquired from
Collage International Pty Ltd. in January, 1996.
Collage International Health markets a range of health related products,
focusing on the Asian market place. These products are marketed under a number
of brand names: Mother Nature, Natures, Green, Munda, Natures Nest, and MN. The
current marketing is undertaken in Australia and internationally through Duty
Free stores and other specialist tax free stores, as well as direct marketing
via international airlines in-flight product catalogues and sales by the airline
concerned. In addition, the Company has established distribution in New
Zealand, Korea, Japan, Qatar, and the United States of America; and it is
negotiating distribution agreements for other Asian countries.
Essential Nature Products Pty Ltd.
Essential Nature Products was created to house the various Melaleuca
Alternifolia formulations acquired in January, 1996, and as a developer of new
health and life style products.
These products form the nucleus of a new product range, which will be marketed
through the existing distribution system of Collage International Health.
Essential Nature Products has a research and development activity underway
headed by Ms. Robin Kirby, a well-known
and highly respected Naturopath, who has published a number of literary works in
relation to health and well being.
Queensland Essential Oils Ltd.
The Company currently has an investment equivalent to approximately 13% of the
capital of this unlisted Public Company. It is the intention of the Company to
acquire majority control, if not total control of this particular entity.
Subsequent to the balance sheet date, the Company has reached agreement with the
directors of QEO to acquire an additional 50% of the outstanding shares of QEO,
resulting in ownership of approximately 63% effective May 1,1996.
Queensland Essential Oils Ltd, with its subsidiaries, is a developer of Tea Tree
Oil Plantations in the Northern Atherton Tablelands of Queensland, Australia and
has commenced to develop a commercial Tea Tree growing plantation. In
connection with this activity, Queensland Essential Oils has developed a Nursery
capacity to produce 7,000,000 seedlings per year and is currently developing its
steam distillation processing capacity for the production and processing of raw
Tea Tree Oil.
Queensland Essential Oils Ltd and its subsidiaries will derive its income from
management and corporation fees (for the management of Tea Tree plantations on
behalf of other growers); occupation fees for the granting of rights to occupy
and derive income to certain plantations; sale of seedlings; management and
other fees in connection with the development of plantations on behalf of other
growers; and the marketing of Tea Tree Oil on behalf of other growers.
INDUSTRIAL PRODUCTS DIVISION
At this stage the industrial products division has not commenced
operations. However, it is anticipated that this activity will be
commenced in July, 1996.
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
MARCH 31, 1996
CONSOLIDATED BALANCE SHEET (UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 40,825
Marketable securities 504,843
Accounts receivable 563,956
Inventory 562,894
Prepaid Expenses 58,689
-----------
TOTAL CURRENT ASSETS 1,731,207
PROPERTY, PLANT, AND EQUIPMENT
Plant and equipment 181,407
Furniture and fixtures 55,568
Transportation equipment 4,632
-----------
241,607
Accumulated depreciation (1,897)
-----------
239,710
OTHER ASSETS
Trade names 390,273
Formulations 800,000
Long-term receivables 2,581,989
Organization costs 213,718
-----------
5,956,897
===========
CONSOLIDATED BALANCE SHEET (UNAUDITED) (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 501,318
Accrued expenses 230,730
Deferred income 849,782
-----------
1,581,830
MINORITY INTERESTS 1,420,143
SHAREHOLDERS' EQUITY
Common stock par value $.001,
25,000,000 shares authorized
1,495,196 shares issued and
outstanding 1,495
Additional paid-in capital 2,649,670
Retained earnings 303,759
-----------
TOTAL SHAREHOLDERS' EQUITY 2,954,924
-----------
5,956,897
===========
ESSENTIAL RESOURCES, INC. AND SUBSIDIARY
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
1996 1995
---------- --------
Sales $1,452,839 $ 0
Cost of sales 605,136 0
---------- --------
GROSS PROFIT 847,703 0
Operating Expenses
Sales and marketing 140,901 0
General and administrative 237,848 0
Consulting - related parties 39,210 0
Depreciation 1,897 0
---------- --------
419,856 0
---------- --------
OPERATING INCOME 427,847 0
Other Income (Expenses)
Exchange rate adjustment 61,073 0
Export Market Development Grant rebate 51,606 0
---------- --------
112,679 0
---------- --------
Earnings before income taxes 540,526 0
Income taxes (19,800) 0
---------- --------
Earnings before minority interest 520,726 0
Minority interest adjustment (278,224) 0
---------- --------
NET EARNINGS 242,502 0
========== ========
EARNINGS PER COMMON SHARE
Earnings before minority interest .37 0
Minority interest in earnings (.20) 0
---------- --------
NET EARNINGS .17 0
========== ========
Weighted average shares 1,402,836 1,000
========== ========
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings
--------- -------- ----------- ----------
Balance at
December 31, 1994
Net earnings 1,000,000 $ 1,000 $ $ (1,000)
--------- -------- ----------- ----------
Balance at
December 31,1995 1,000,000 1,000 (1,000)
Exchange stock for
assets 459,741 460 2,516,965
Exchange stock for
shares of sub-
sidiary 35,455 35 132,705 62,257
Net earnings 242,502
--------- -------- ---------- ----------
1,495,196 1,495 2,649,670 303,759
========= ======== ========== ==========
ESSENTIAL RESOURCES, INC. AND SUBSIDIARY
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
1996 1995
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 242,502 $ 0
Adjusting to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 17,961 0
Exchange rate adjustment (61,073) 0
Minority interest adjustment 278,224
Changes in assets and liabilities:
Accounts receivable (316,978) 0
Inventory 200,424 0
Prepaid expenses (58,689) 0
Accounts payable 66,082 0
Accrued expenses 55,096 0
Deferred income (16,325) 0
--------- ---------
TOTAL ADJUSTMENTS 164,722 0
--------- ---------
Net cash provided by operating activities 407,224 0
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (108,272) 0
Loan to private financial institution (503,341) 0
Organization costs capitalized (2,370) 0
--------- ---------
Net cash required for investing activities (613,983) 0
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of stock 226,037 0
--------- ---------
Net cash provided by financing activities 226,037 0
--------- ---------
NET INCREASE IN CASH 19,278 0
========= =========
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
MARCH 31, 1996
PRO-FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 40,825
Marketable securities 504,843
Accounts receivable 563,956
Inventory 562,894
Prepaid Expenses 58,689
----------
TOTAL CURRENT ASSETS 1,731,207
PROPERTY, PLANT, AND EQUIPMENT
Plant and equipment 181,407
Furniture and fixtures 55,568
Transportation 4,632
----------
241,607
Accumulated depreciation (1,897)
----------
239,710
OTHER ASSETS
Trade names 390,273
Formulations 800,000
Long-term receivables 2,581,989
Organization costs 213,718
----------
5,956,897
==========
PRO-FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED) (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 501,318
Accrued expenses 230,730
Deferred income 849,782
----------
1,581,830
MINORITY INTERESTS 601,145
SHAREHOLDERS' EQUITY
Common stock par value $.001,
25,000,000 shares authorized
1,655,469 shares issued and
outstanding 1,655
Additional paid-in capital 3,308,056
Retained earnings 464,211
----------
TOTAL SHAREHOLDERS' EQUITY 3,773,922
----------
5,956,897
==========
ESSENTIAL RESOURCES, INC. AND SUBSIDIARY
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
PRO-FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
1996 1995
---------- ------
Sales $1,452,839 $ 0
Cost of sales 605,136 0
---------- ------
GROSS PROFIT 847,703 0
Operating Expenses
Sales and marketing 140,901 0
General and administrative 237,848 0
Consulting - related parties 39,210 0
Depreciation 1,897 0
---------- ------
419,856 0
---------- ------
OPERATING INCOME 427,847 0
Other Income (Expenses)
Exchange rate adjustment 61,073 0
EMDG rebate 51,606 0
---------- ------
112,679 0
---------- ------
Earnings before income taxes 540,526 0
Income taxes (19,800) 0
---------- ------
Earnings before minority interest 520,726 0
Minority interest adjustment (117,772) 0
---------- ------
NET EARNINGS 402,954 0
========== ======
EARNINGS PER COMMON SHARE
Earnings before minority interest .31 0
Minority interest in earnings (.07) 0
---------- ------
NET EARNINGS .24 0
========== ======
Weighted average shares 1,655,469 1,000
========== ======
ESSENTIAL RESOURCES, INC. AND SUBSIDIARY
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
PRO-FORMA CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
1996 1995
--------- ------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 402,954 $ 0
Adjusting to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 17,961 0
Exchange rate adjustment (61,073) 0
Minority interest adjustment 117,772
Changes in assets and liabilities:
Accounts receivable (316,978) 0
Inventory 200,424 0
Prepaid expenses (58,689) 0
Accounts payable 66,082 0
Accrued expenses 55,096 0
Deferred income (16,325) 0
--------- ------
TOTAL ADJUSTMENTS 4,270 0
--------- ------
Net cash provided by operating activities 407,224 0
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (108,272) 0
Loan to private financial institution (503,341) 0
Organization costs capitalized (2,370) 0
--------- ------
Net cash required for investing activities (613,983) 0
--------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of stock 226,037 0
--------- ------
Net cash provided by financing activities 226,037 0
--------- ------
NET INCREASE IN CASH 19,278 0
========= ======
ESSENTIAL RESOURCES, INC. AND SUBSIDIARIES
PRO-FORMA CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings
--------- ------ ---------- ---------
Balance at
December 31, 1994
Net earnings 1,000,000 $1,000 $ $ (1,000)
--------- ------ ---------- ---------
Balance at
December 31,1995 1,000,000 1,000 (1,000)
Exchange stock for
assets 459,741 460 2,516,965
Exchange stock for
shares of sub-
sidiary 195,728 195 791,091 62,257
Net earnings 402,954
--------- ------ ---------- ---------
1,655,469 1,655 3,308,056 464,211
========= ====== ========== =========
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal Proceedings
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no matters submitted to a vote of security holders
for the period covered by this Report.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits
None.
Reports on Form 8-K - The Registrant filed a report on Form 8-K
relating to an event occurring as of January 30, 1996.
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.
ESSENTIAL RESOURCES, INC.
By: /s/ PHILLIP COOK
-------------------
Phillip Cook,
President, Chief
Executive and
Financial Officer
Dated: May 16, 1996