<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
-----------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended March 31, 1998
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the fiscal year ended ___________________
Commission File No. 0-18235
-------
ELDORADO ARTESIAN SPRINGS, INC.
-------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Colorado 84-0907853
- ----------------------------------------------------- --------------
(State or other jurisdiction of (I.R.S. Identification Number
incorporation or organization)
P.O. Box 445, Eldorado Springs, Colorado 80025
- ----------------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 499-1316
--------------
</TABLE>
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value Per Share
---------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers pursuant 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.[X]
State issuer's revenues for its most recent fiscal year.... $3,329,444
------------------
State the aggregate market value of the voting stock held by nonaffiliates of
the Registrant. The aggregate market value will be computed by reference to 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. (See definition of
affiliated in Rule 12b-2 of the Exchange Act)
Not available
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Common Stock, $.001 par value 2,995,495
----------------------------- -----------------------------------
Class Outstanding at June 29, 1998
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
(If the following documents are incorporated by reference, briefly describe
them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement: and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed
documents should be clearly described for identification purposes.
None.
<PAGE>
PART I
------
Item 1. Business.
- ------ --------
General
- -------
Eldorado Artesian Springs, Inc. (the "Company") was formed under the laws of the
State of Colorado on April 15, 1986, under the name Lexington Funding, Inc.
("Lexington"). Lexington was organized for the primary purpose of seeking
selected mergers or acquisitions with a small number of business entities
expected to be private companies, partnerships, or sole proprietorships. Prior
to April 1987, the primary activity of the Company was directed to
organizational efforts and obtaining initial financing. The Company sold
2,500,000 shares of its $.001 par value common stock at $.10 per share for total
proceeds of $250,000 in a public offering which closed on December 17, 1986.
Effective April 10, 1987, the Company acquired all of the shares of Eldorado
Artesian Springs, Inc. ("Eldorado") of Eldorado Springs, Colorado. Eldorado, a
Colorado corporation, was formed in 1983. The acquisition was accomplished by
the exchange of Company stock for all of the outstanding shares of Eldorado from
its shareholders, Douglas A. Larson, Jeremy S. Martin, Kevin M. Sipple, Raymond
Kerbaugh and Melvin Larson. Pursuant to the acquisition of Eldorado, Eldorado
shareholders received an aggregate of 28,080,000 shares of the Company's Common
Stock, representing 90% of outstanding shares of the Company after the
acquisition. The number of Company shares of stock exchanged in the acquisition
was determined through arms-length negotiations. In June 1988, Eldorado was
merged into Lexington pursuant to a statutory merger, and Lexington changed its
name to Eldorado Artesian Springs, Inc.
As a result of the Eldorado acquisition and subsequent merger, the primary
business of the Company is the bottling and sale of pure spring water which
emanates from springs located on property owned by the Company. In addition to
real property and the wells and springs thereon, and water rights, the Company
owns a bottling plant (including building and bottling equipment), delivery
trucks, associated containers and equipment, resort buildings, a mobile home
park, and an outdoor swimming pool which are located on the property.
Products
- --------
The Company's principal business is bottling and selling Artesian Spring Water.
The Company also owns and operates a resort/spa on its property during the
summer months and rents four single-family homes and mobile home spaces on the
property. The Company's water bottling operations account for 95.6% of revenues
of the Company's revenues.
Bottling
- --------
The Company owns and operates its bottling facilities. Total production and
warehousing space is approximately 12,000 square feet. There are three separate
fill lines in the facility.
Water is produced at two springs and eleven wells on the Company's property.
The well heads are in close proximity to the bottling operation. The source
water is bacteria-free as it emanates from the earth, and nothing is added to or
removed from the water during the bottling process. As safeguard to any
contamination, the water passes through a protective filter and an ultra-violet
light. The product is packaged only in glass or high quality plastic bottles,
and each one is sealed with a tamper evident cap. The PET bottle products have
ozone added to comply with FDA standards.
1
<PAGE>
Sales and Distribution
- ----------------------
The Company sells its products in five gallon, one gallon, 1.5 liter, 1.0 liter,
and 0.5 liter bottles. The Company operates its own fleet of delivery vehicles
selling all sizes off truck in quantities of less than full pallet configuration
to homes, offices, and retail outlets in the entire front range area of
Colorado. The Company also sells its products to major retail stores directly
through their warehouses and to several independent distributors who service
accounts located outside the area serviced by the Company fleet.
The five gallon sales and related cooler rentals represented approximately 78%
of revenues and the smaller sizes accounted for 15% of revenues during the most
recent fiscal year. Of the five gallon accounts, approximately 80% were home
accounts and 20% were commercial establishments.
At present the Company's products are available primarily in Colorado, with a
few exceptions in regions of states bordering Colorado. The Company's products
are the number one selling brand of Natural Spring Water in the state of
Colorado.
Marketing
- ---------
The Company focuses on three major areas in marketing its products; five gallon
sales, small package products, and brand name recognition.
The five gallon products are primarily sold through the acquisition of new
accounts attracted by personal sales representatives strategically located
throughout the area at local events. The efforts of this staff are augmented by
yellow pages, radio, and occasional television advertisements.
The smaller packages that are sold principally through retail chain stores are
effectively marketed by using point of purchase inducements to gain new trial,
usually in the form of discounts in price in conjunction with signage.
The Company attempts to build brand name awareness by sponsoring or
participating in many local events. Eldorado Artesian Springs is the sponsor of
the Boulder, Colorado July 4th Fireworks celebration, the Eldorado Springs
Cancer Research Run, and participates in part in many other local events.
Supplies
- --------
Water bottled by the Company comes from springs located on the Company's
property which have been flowing for many years. The Company does not foresee
any disruption of its operations as a result of supply problems. Suppliers of
the bottles do experience seasonal shortages resulting from resin shortages
which may increase prices. These shortages must be anticipated by management
and inventory safety stocks must be sufficient so as not to interrupt
production.
Seasonality of Business
- -----------------------
Sales tend to be mildly seasonal in the bottled water business. A ten to
fifteen percent differential in sales is normally experienced between the peak
summer months and the low winter months.
Competition
- -----------
There is active competition in the bottled water market. The Company's
competitors include more diversified corporations having substantially greater
assets and larger sales organizations than the Company, as well as other small
firms. The Company competes on the basis of customer service, product quality
and price. Management believes that the products' superior taste, competitive
pricing and unique packaging are significant factors in maintaining the
2
<PAGE>
Company's competitive position.
Environment
- -----------
The Company's bottling operations are subject to regulation by the Food and Drug
Administration of the federal government. These regulations are administered by
the Colorado Department of Public Health and Environment Consumer Protection
Division. Weekly product and source bacteriological tests are required and
annual inspections are performed.
The Company is also subject to regulation under the Colorado Primary Drinking
Water Regulations and the United States Safe Drinking Water Act. These
regulations pertain to the operation of the water utility system owned by the
Company that services the town of Eldorado Springs. These regulations are also
administered by the State of Colorado Health Department Drinking Water Division.
Regular periodic testing is also required for this operation.
Additionally, the Company operates the springs swimming pool which is also
subject to regulation by the State of Colorado. These regulations are
administered by the Boulder County Health Department and require periodic daily
testing and agency inspections.
It is the Company's understanding that it is in compliance with these
regulations as communicated by representatives of the responsible local
agencies.
Employees
- ---------
The Company employs 47 full-time employees and 14 seasonal employees during the
summer resort months.
Item 2. Properties.
- ------ ----------
The Company owns approximately 26 acres of land in Eldorado Springs, Colorado.
In addition to real property and the wells and springs thereon, and water
rights, the Company owns a bottling plant (including building and bottling
equipment), delivery trucks, associated containers and equipment, resort
buildings, a mobile home park, and an outdoor swimming pool which are located on
the property. Total production and warehousing space is approximately 12,000
square feet.
Item 3. Legal Proceedings.
- ------ -----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
No matters were submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year covered by this report.
3
<PAGE>
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ---------------------------------------------------------------------
The outstanding registered securities of the Company are currently quoted in the
"Pink Sheets" maintained by members of the National Association of Securities
Dealers, Inc., and are traded in the over-the-counter market.
Since the Securities and Exchange Commission's rules applicable to "penny
stocks" went into effect in 1990, there have been no market makers in the
Company's stock, so no quotes are available. Management is actively seeking
market makers for its stock, but the rules which restrict trading in "Pink
Sheet" stocks have had the effect of diminishing market makers in the stock.
As of June 29, 1998, there were 179 holders of the Company's common stock.
No dividends have been declared or paid by the Company since inception and none
are contemplated at any time in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations.
- --------------
Financial Condition - Liquidity and Capital Resources
- -----------------------------------------------------
The cash flow position of the Company decreased during the fiscal year ended
March 31, 1998 compared to the previous year ended March 31, 1997. Year end
cash position totaled $70,166 compared to $244,765 at year end in 1997.
Significant expenditures were made to purchase and improve the bottling
equipment in order to increase bottling capacity and speed. In addition,
significant building improvements were made to increase the available space in
the bottling plant.
In June 1997, the Company completed the restructuring of the company debt. The
new debt structure provided a $1,200,000 loan secured by the Company's property,
a $300,000 loan for new equipment and plant reconstruction, and a $100,000
working capital revolving line of credit.
Revenues for the year ended March 31, 1998 increased by 25.9% from the previous
year, to $3,329,444. Industry averages in the bottled water market were up
between 10% and 11% in 1997 as reported by trade analysts.
The cost of goods sold increased 20.7% for the year ended March 31, 1998
compared to a year earlier. This cost increase is due to increase in overall
volume and a greater percentage of that volume being sold in smaller more costly
packaging.
Operating expenses for the year ended March 31, 1998 increased 33% compared to
18.7% for the year ended March 31, 1997. The Company installed a new computer
system during May 1997 that will have a positive effect on costs in delivery,
billing and inventory operations. However, the installation and training for the
new system has increased in operating expenses. Increases in wages and salaries
were 32.7% for the period ended March 31, 1998. This increase is due in part to
the additional expenses involved in the computer installation as well as the
increase in commissions for the new revenues generated. Part of this increase
is also due to an across the board pay increase for all employees that became
effective January 1998. The Company maintains a target of 1.0% of revenues for
bad debts. For the year ended March 31, 1998 the bad debt expense was 1.2% of
revenues which represents an increase of 46.9% over the previous period.
Management has taken steps to tighten credit policies on new accounts to avert
this problem in the future.
Accounts receivable increased 43% to $503,026 for the year end March 31, 1998.
This represents a total of 47.2 days sales in receivables based upon sales made
in the month of March 1998. This increase is a concern for management
4
<PAGE>
and more assertive efforts have been made to bring this back to the Company's
goal or target number of 38 days sales in receivables.
Subsequent to year end, the Company filed an Amendment to its Articles of
Incorporation with the State of Colorado to reflect a 12 to 1 reverse split that
was previously approved at a special meeting of the shareholders on March 23,
1998. On April 22, 1998, the Company completed a private placement of 300,000
shares of common stock at $2.75 per share. The Company received proceeds net of
offering costs of $688,750 from the private placement of which $150,000 was
placed in a joint account with Mills Financial Services, Inc. (the "Agent") for
a potential additional secondary stock offering. Upon the conclusion of the
private placement, the Company sold to the Agent for a total purchase price of
$100.00, warrants entitling the Agent to purchase 30,000 shares at an exercise
price of $3.30 per share. In addition, the Agent purchased a warrant to
purchase 250,000 shares at an exercise price of $11.00 per share.
The Company's current intention to use the net proceeds of the private placement
offering include replacing a five gallon bottling line to increase capacity from
160 bottles to 600 bottles per hour. Management intends to pursue a
distribution agreement with a major distributor of bottled water. The proceeds
will be utilized to pursue such relationship to expand the Company's internal
sales and distribution capabilities. In addition, the Company intends to lease
or construct a warehouse/distribution facility in the Denver, Colorado area.
On May 19, 1998, the Company registered 875,000 shares of common stock of the
Company pursuant to the 1997 Stock Option Plan (the "Plan"). The Plan provides
for the grant of stock options to employees, directors and consultants of the
Company.
Results of Operations
- ---------------------
For the year ended March 31, 1998, income before taxes decreased 37.2% to
$117,631. Income taxes for the year were $34,403 resulting in net income of
$83,228, down 45.4% from a year ago. The Company has invested in capital
equipment that will allow the Company to continue to compete in the marketplace
in the future.
Item 7. Financial Statements and Supplemental Data.
- ------ ------------------------------------------
Please see pages F-1 through F-13.
Item 8. Changes in and Disagreements with Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure.
- --------------------
There have been no disagreements between the Company and its independent
accountants on any matter of accounting principles or practices or financial
statement disclosure since the Company's inception.
5
<PAGE>
PART III
Item 9. Directors and Executive Officers of the Registrant.
- ------ --------------------------------------------------
The following table sets forth information with respect to directors, executive
officers, and significant employees of the Company. Directors serve for one
year terms. Each director is also a nominee for election to the Board of
Directors.
<TABLE>
<CAPTION>
Tenure as
Officer or
Name Age Position(s) Director
- ------------------- --- ----------- ----------
<S> <C> <C> <C>
Douglas A. Larson 42 President, Treasurer and
Director 1983 to present
Kevin M. Sipple 42 Vice-President, Secretary
and Director 1983 to present
Jeremy S. Martin 43 Vice-President and Director 1983 to present
</TABLE>
Business Experience
- -------------------
Douglas A. Larson was a co-founder of Eldorado Artesian Springs, Inc. in 1983.
He served as Secretary and Treasurer of the Company from 1983 until 1991, at
which time he became the President and Treasurer and continues to serve in those
capacities. Mr. Larson has been a member of the Board of Directors of the
Company since its founding. He is responsible for the oversight of financing
and accounting matters, corporate strategy, and corporate reports.
Kevin M. Sipple was a co-founder of Eldorado Artesian Springs, Inc. in 1983.
Mr. Sipple has served as Vice President and Secretary of the Company since 1991.
Prior thereto, he was President from 1985 to 1991 and Vice President from 1985
to 1991 and Vice President from 1983 - 1985. He has served on the Board of
Directors of the Company since 1983. Mr. Sipple is responsible for advertising
and marketing of the "PET" bottled water products.
Jeremy S. Martin was a co-founder of Eldorado Artesian Springs, Inc. in 1983.
He served as President of the Company from Company's founding until June 1985.
He has served as Vice-President since June, 1985 and has been a member of the
Board of Directors since the Company's founding. Mr. Martin is responsible for
overseeing service and deliveries of the Company's products, promotions and
public relations.
Family Relationships
- --------------------
There are no family relationships between any directors or executive officers of
the Company.
Item 10. Executive Compensation.
- ------- -----------------------
In the fiscal year ended March 31, 1998, no executive officer of the Company
received compensation exceeding $100,000. The Company's President, Douglas A.
Larson, received compensation of $66,831 for the fiscal year ended March 31,
1998. Directors of the Company are not compensated for their services as such.
6
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
The following table sets forth certain data with respect to the only persons
known by the Company to be the beneficial owners of more than five percent (5%)
of the outstanding shares of common stock of the Company as of March 31, 1998
and for all Officers and Directors as a group. The persons indicated are the
sole beneficial owners of the stock and possess sole voting and investment power
with respect to the shares indicated.
<TABLE>
<CAPTION>
Title Name and Address Percent
of of Amount and Nature of of
Class Beneficial Owners Beneficial Ownership Class
- -------- -------------------------- ----------------------- --------
<S> <C> <C> <C>
Common Kevin M. Sipple 715,720(1) 23.9%
43 Fowler Lane
Eldorado Springs, CO 80025
Douglas A. Larson 715,720(1) 23.9%
12 Baldwin Circle
Eldorado Springs, CO 80025
Jeremy S. Martin 715,720(1) 23.9%
2707 - 4th Street
Boulder, CO 80302
All Officers and
Directors as a
Group (three persons) 2,147,160(2) 71.7%
</TABLE>
____________________
(1) Does not include 47,950 shares held in escrow which are the subject of a
Stock Purchase Agreement with a principal shareholder.
(2) Does not include 143,851 shares held in escrow which are the subject of a
Stock Purchase Agreement with a principal shareholder.
Item 12. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
During the period covered by this Report, there were no transactions in which
the amount involved exceeded $60,000 between the Company and any director or
executive officer or any security holder known to own more than five percent of
the Company's stock, or any immediate family member of any of the foregoing
persons, and no such transactions are currently proposed.
PART IV
Item 13. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Documents filed as a part of this Report.
----------------------------------------
The following Exhibits and financial statement schedules are filed as exhibits
to this Report:
7
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description Location
- --------------------------- ----------------------------- --------------------------
<S> <C> <C>
2.1 Agreement and Plan of Incorporated by reference
Reorganization dated to Exhibit No. 2 to Form 8-K
April 10, 1987, among dated April 10, 1987
Lexington Funding, Inc.,
Eldorado Artesian Springs,
Inc., and the shareholders
of Eldorado Artesian Springs,
Inc.
2.2 Articles of Merger dated Incorporated by Reference
June 11, 1988, between to Exhibit No. 10.2 to
Lexington Funding, Inc., Form 10-K dated March 31,
and Eldorado Artesian 1988
Springs, Inc.
3 Articles of Incorporation Incorporated by reference to Exhibit No. 3 to the
and Bylaws Registration Statement (No. 33-6738-D)
3.1 Amended Articles of
Incorporation
10.1 Stock Purchase Agreement Incorporated by reference to Exhibit
dated November, 1991 by No. 2 to the Form 8-K dated
and among Douglas A. Larson, April 10, 1987
Kevin M. Sipple, Jeremy S.
Martin (collectively
"Purchasers") Raymond W.
Kerbaugh ("Seller") and
Eldorado Artesian Springs,
Inc. ("Company")
10.2 1997 Stock Option Plan
(b) Reports on Form 8-K.
-------------------
</TABLE>
No report on Form 8-K was filed during the last quarter of the period covered by
this report.
8
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ELDORADO ARTESIAN SPRINGS, INC.
By:/s/ Douglas A. Larson
---------------------------------------
Douglas A. Larson,
President and Principal
Executive Officer
Dated: June 29, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report is signed below by the following persons on behalf of the Company in the
capacities and on the dates indicated.
Name and Capacity Date
----------------- ----
/s/ Douglas A. Larson June 29, 1998
- ---------------------------------------------
Douglas A. Larson, President,
Treasurer and Director
/s/ Kevin M. Sipple June 29, 1998
- ---------------------------------------------
Kevin M. Sipple, Vice-President,
Secretary and Director
/s/ Jeremy S. Martin June 29, 1998
- ---------------------------------------------
Jeremy S. Martin, Vice-President and Director
9
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Independent Auditors' Report.............. F - 2
Financial Statements
Balance Sheet...................... F - 3
Statements of Operations........... F - 4
Statement of Stockholders' Equity.. F - 5
Statements of Cash Flows........... F - 6
Notes to Financial Statements............. F - 7
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Eldorado Artesian Springs, Inc.
Eldorado Springs, Colorado
We have audited the accompanying balance sheet of Eldorado Artesian Springs,
Inc. as of March 31, 1998, and the related statements of operations,
stockholders' equity and cash flows for the years ended March 31, 1998 and 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eldorado Artesian Springs, Inc.
at March 31, 1998, and the results of its operations and its cash flows for the
years ended March 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
Ehrhardt Keefe Steiner & Hottman PC
May 8, 1998 (except for Note 7
as to which the date is May 19, 1998)
Denver, Colorado
F-2
<PAGE>
Eldorado Artesian Springs, Inc.
Balance Sheet
March 31, 1998
<TABLE>
<CAPTION>
ASSETS
Current assets (Notes 3 and 4)
<S> <C>
Cash $ 70,166
Accounts receivable (Note 2)
Trade - net 498,320
Other 5,506
Inventories 122,701
Prepaid expenses and other 48,313
Deferred income taxes (Note 5) 16,829
----------
Total current assets 761,835
----------
Property, plant and equipment - net (Notes 2, 3 and 4) 1,525,370
----------
Other assets (Notes 2, 3 and 4)
Water rights - net 114,618
Other - net 54,898
----------
Total other assets 169,516
----------
$2,456,721
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 129,747
Accrued expenses (Note 2) 79,130
Line-of-credit (Note 4) 40,000
Deposits 49,178
Current maturities of long-term debt (Note 3) 123,005
----------
Total current liabilities 421,060
Long-term liabilities
Long-term debt (Note 3) 1,431,820
Deferred income taxes (Note 5) 52,921
----------
Total liabilities 1,905,801
----------
Commitments (Notes 3, 4 and 6)
Stockholders' equity (Note 7)
Common stock, par value $.001 per share; 50,000,000 shares
authorized; 32,344,948 issued and outstanding 32,345
Additional paid-in capital 265,225
Retained earnings 253,350
----------
550,920
----------
$2,456,721
==========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
March 31,
------------------------------------------
1998 1997
-------------------- --------------------
<S> <C> <C>
Revenue
Water and related $ 3,222,396 $ 2,527,866
Rentals 49,288 47,460
Pool 68,349 75,419
Returns and allowances (10,589) (6,224)
----------- -----------
Net revenue 3,329,444 2,644,521
Cost of goods sold exclusive of depreciation and amortization
----------- 415,263
501,288 -----------
-----------
Gross profit 2,828,156 2,229,258
----------- -----------
Operating expenses
Salaries and related 1,310,303 987,703
Administrative and general 557,892 437,375
Selling and delivery 422,462 288,681
Depreciation and amortization 277,914 217,977
----------- -----------
2,568,571 1,931,736
----------- -----------
Operating income 259,585 297,522
----------- -----------
Other income (expense)
Interest income 3,720 1,000
Loss on sale of asset (2,871) -
Interest expense (142,803) (111,308)
----------- -----------
(141,954) (110,308)
----------- -----------
Income before income taxes 117,631 187,214
----------- -----------
Provision for income taxes (Note 5)
Current 19,683 46,133
Deferred 14,720 16,929
----------- -----------
34,403 63,062
----------- -----------
Net income $ 83,228 $ 124,152
=========== ===========
Basic earnings per common share $ - $ -
=========== ===========
Weighted average number of shares outstanding 32,344,948 32,344,948
=========== ===========
</TABLE>
See notes to financial ststements.
F-4
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Statement of Stockholders' Equity
Years Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------------- Paid-in Retained
Shares Amount Capital Earnings Total
--------------- --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance - March 31, 1996 32,344,948 $32,345 $265,225 $ 45,970 $343,540
Net income for the year - - - 124,152 124,152
--------------- --------------- --------------- -------- --------
Balance - March 31, 1997 32,344,948 32,345 265,225 170,122 467,692
Net income for the year - - - 83,228 83,228
--------------- --------------- --------------- -------- --------
Balance - March 31, 1998 32,344,948 $32,345 $265,225 $253,350 $550,920
=============== =============== =============== ======== ========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
March 31,
-----------------------------------------------
1998 1997
----------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 83,228 $ 124,152
----------- ---------
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 277,914 217,977
Loss on sale of asset 2,871 -
Deferred income taxes 14,720 16,929
Changes in certain assets and liabilities -
Accounts receivable (221,480) (42,994)
Inventories (30,153) 3,662
Prepaid expenses and other (37,420) 5,890
Accounts payable 31,944 44,205
Accrued expenses (10,765) 8,942
Deposits 15,620 9,695
----------- ---------
43,251 264,306
----------- ---------
Net cash provided by operating activities 126,479 388,458
----------- ---------
Cash flows from investing activities
Purchase of property, plant and equipment (535,578) (176,207)
Proceeds from sale of asset 2,750 -
----------- ---------
Net cash flows used in investing activities (532,828) (176,207)
----------- ---------
Cash flows from financing activities
Net proceeds from line-of-credit 40,000 -
Additions to long-term debt 1,500,000 -
Loan fees and origination cost (19,776) -
Payments on long-term debt (1,288,474) (56,775)
----------- ---------
Net cash flows provided by (used in) financing activities
231,750 (56,775)
----------- ---------
Net (decrease) increase in cash (174,599) 155,476
Cash - beginning of year 244,765 89,289
----------- ---------
Cash - end of year $ 70,166 $ 244,765
=========== =========
</TABLE>
Supplemental disclosures of cash flow information:
Cash paid during the year for interest was $142,803 (1998) and $111,308
(1997).
Cash paid during the year for income taxes was $33,844 (1998) and $44,445
(1997).
Supplemental disclosure of noncash investing activity:
During the year ended 1998, equipment was acquired through a capital lease
for $41,050.
See notes to financial statements.
F-6
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------
Organization
- ------------
Eldorado Artesian Springs Inc. (the "Company") is a Colorado corporation which
primarily sells bottled artesian spring water and rents water dispensers. The
Company also rents housing, and during the summer months, it operates a natural
artesian spring pool. The Company grants credit to its customers, substantially
all of whom are located in Colorado.
Inventories
- -----------
Inventories consist primarily of water bottles and packaging and are stated at
the lower of cost or market, on a first-in, first-out basis.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are stated at cost. Machinery, equipment,
furniture and fixtures are depreciated using various methods over their
estimated useful lives which range from three to seven years. Buildings and
improvements are depreciated using the straight-line method over their estimated
useful lives which range from fifteen to thirty-nine years.
Other Assets
- ------------
Other assets consisting of water rights, customer list, loan fees, slotting fees
and plate costs are carried at cost and are being amortized on the straight-line
basis over five to forty years.
Deposits
- --------
Deposits consist primarily of deposits on bottles.
Revenue and Expense
- -------------------
Revenue is recognized on the sale of its products as customer shipments are
made. Returns are recognized when the product is received. Rental revenue is
recognized on a monthly basis upon commencement of the lease agreement.
F-7
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- --------------------------------------------------------------------------------
Basic Earnings Per Share
- ------------------------
During the year ended March 31, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
No. 128). SFAS 128 established new definitions for calculating and disclosing
basic and diluted earnings per share. Basic earnings per share is based upon
the weighted average number of shares outstanding as defined in SFAS 128. No
diluted earnings per share is presented as no there are no potential dilutive
common shares. As required by SFAS 128, disclosure of subsequent events which
would have had an effect on the number of shares outstanding is contained in
Note 7.
Reclassifications
- -----------------
Certain amounts for the year ended March 31, 1997 have been reclassified to
conform with the 1998 presentation.
Use of 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 and disclosure of
contingent 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.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts of financial instruments including cash, accounts
receivable, line-of-credit, accounts payable, deposits and accrued expenses
approximated fair value as of March 31, 1998 because of the relatively short
maturity of these instruments.
Due to rates currently available to the Company for debt which are similar to
terms on the remaining maturities, the fair value of existing debt approximates
carrying value.
Advertising Costs
- -----------------
Advertising costs are expensed as incurred.
F-8
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
NOTE 2 - SELECTED BALANCE SHEET INFORMATION
- -------------------------------------------
<S> <C>
Accounts receivable
Trade $ 508,320
Less allowance for doubtful accounts (10,000)
-----------
$ 498,320
===========
Property, plant and equipment
Land $ 225,194
Buildings and improvements 1,101,748
Machinery and equipment 1,706,460
Vehicles 19,831
Office furniture and fixtures 84,250
-----------
3,137,483
Less accumulated depreciation (1,612,113)
-----------
$ 1,525,370
===========
Other assets
Water rights $ 179,500
Less accumulated amortization (64,882)
-----------
$ 114,618
===========
Other $ 66,671
Less accumulated amortization (11,773)
-----------
$ 54,898
===========
Accrued expenses
Property taxes $ 20,973
Sales tax 9,408
Income taxes 16,597
Payroll and payroll taxes 32,152
-----------
$ 79,130
===========
</TABLE>
F-9
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - LONG-TERM DEBT
- -----------------------
<TABLE>
<CAPTION>
Note Payable to Bank
- --------------------
<S> <C>
Note payable to bank due June 20, 2012, interest at bank prime plus .5% (9% at
March 31, 1998). Monthly principal and interest payments of $12,244 with all
unpaid principal and interest due at maturity. Collateralized by substantially
all assets of the Company and assignment of rents. $1,167,692
Note payable to bank due June 20, 2002, interest at 9.75%, monthly principal and
interest payments of $6,346 with all unpaid principal and interest due at
maturity. Collateralized by substantially all assets of the Company and
assignment of rents. 263,797
Capital Lease
- -------------
Capital lease for equipment. Monthly minimum lease payments of $1,992, due April
1, 2002. 82,286
Capital lease for equipment. Monthly minimum lease payments of $1,354, due April
25, 1998. 41,050
----------
$1,554,825
==========
</TABLE>
The cost of equipment under capital lease at March 31, 1998 was $143,305 with
accumulated depreciation of $25,404.
Future maturities of long-term debt at March 31, 1998 are:
<TABLE>
<CAPTION>
Notes
Year Ending March 31, Payable Leases Total
- --------------------- ----------- ------------ ------------
<S> <C> <C> <C>
1999 $ 96,448 $ 38,803 $ 135,251
2000 103,756 40,157 143,913
2001 114,122 40,157 154,279
2002 125,525 25,263 150,788
2003 79,087 15,286 94,373
Thereafter 912,551 - 912,551
----------- ------------ ------------
1,431,489 1,591,155 159,666
Less amount representing interest - (36,330) (36,330)
----------- ------------ ------------
Total principal 1,431,489 123,336 1,554,825
Less current portion (96,448) (26,557) (123,005)
----------- ------------ ------------
$1,335,041 $ 96,779 $1,431,820
=========== ============ ============
</TABLE>
F-10
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - LINE-OF-CREDIT
- -----------------------
The Company entered into an agreement with a bank for a line-of-credit of
$100,000 due June 20, 1998. The interest rate is calculated at prime plus 1%
which was 9.5% at March 31, 1998. Interest is payable monthly and the line is
collateralized by substantially all of the assets of the Company. The
outstanding balance at March 31, 1998 was $40,000.
NOTE 5 - INCOME TAXES
- ---------------------
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax basis of assets
and liabilities using the enacted tax rates in effect for the year in which the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
The net current and long-term deferred tax in the accompanying balance sheet
includes the following deferred tax assets and liabilities.
<TABLE>
<CAPTION>
March 31,
1998
-------------------
<S> <C>
Current deferred tax asset $ 16,829
Current deferred tax liability -
-------------------
Net current deferred tax asset $ 16,829
===================
Long-term deferred tax asset $ -
Long-term deferred tax liability 52,921
-------------------
Net long-term deferred tax liability $ 52,921
===================
</TABLE>
F-11
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES (CONTINUED)
- ---------------------------------
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
For the Years Ended
March 31,
-----------------------------------
1998 1997
------------ ----------
<S> <C> <C>
Current -
Federal $15,925 $38,486
State 3,758 7,647
------------- ----------
$19,683 $46,133
============= ==========
Deferred -
Federal $13,112 $14,123
State 1,608 2,806
------------- ----------
$14,720 $16,929
============= ==========
</TABLE>
The following is a reconciliation of income taxes at the Federal Statutory rate
with income taxes recorded by the Company.
<TABLE>
<CAPTION>
Years Ended
March 31,
-----------------------------------
1998 1997
------------- ----------
<S> <C> <C>
Computed income taxes at statutory rate - net of surtax $31,503 $57,862
State income taxes, net of Federal income tax benefit and
other 2,900 5,200
------------- ----------
$34,403 $63,062
============= ==========
</TABLE>
Deferred taxes are recorded based upon differences between the financial
statement and tax basis of assets and liabilities and available tax credit
carryforwards. Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
March 31,
1998
-------------------
<S> <C>
Differences related to fixed assets $ (43,366)
Differences related to other assets (9,555)
Allowance for doubtful accounts 3,633
Alternative minimum tax and ITC credit carryforward 13,196
-------------------
$ (36,092)
===================
</TABLE>
F-12
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - COMMITMENTS
- --------------------
The Company has various long-term leases for delivery trucks. The following is
a schedule by year of future minimum lease payments as of March 31, 1998.
<TABLE>
<CAPTION>
Year Ending March 31,
---------------------
<S> <C>
1999 $131,739
2000 112,314
2001 63,668
2002 38,086
2003 8,268
Thereafter -
---------
$354,075
=========
</TABLE>
Total rental expense for 1998 and 1997 was $133,948 and $96,800, respectively.
NOTE 7 - SUBSEQUENT EVENTS
- --------------------------
Reverse Stock Split
- -------------------
On April 1, 1998, the Company filed with the state to amend its articles of
incorporation to reflect a 12 to 1 reverse stock split that was previously
approved by a vote of the shareholders.
Private Placement
- -----------------
Subsequent to year end, April 22, 1998, the Company completed a private
placement of 300,000 shares of common stock at $2.75 per share. The Company
received proceeds net of offering costs of $688,750 from the private placement
of which $150,000 was placed in a joint account with the placement agent for a
potential additional private placement.
Stock Option Plan
- -----------------
On May 19, 1998, the Company registered 875,000 shares of common stock of the
Company pursuant to the 1997 stock option plan (the Plan). The Plan provides
for the grant of stock options to employees, directors and consultants of the
Company. From time to time, the board may grant options to advance the interest
of the Company.
In connection with the private placement, the Company issued a warrant to
purchase 30,000 and 250,000 shares of common stock at $3.30 and $11.00 per
share, respectively. Both warrants expire on April 22, 2003.
F-13
<PAGE>
EXHIBIT 3.1
FOR OFFICE USE ONLY 002
MAIL TO: SECRETARY OF STATE
CORPORATIONS SECTION
1560 BROADWAY, SUITE 200
DENVER, CO 80202
(303) 894-2251
MUST BE TYPED FAX (303) 894-2242
FILING FEE: $25.00
MUST SUBMIT TWO COPIES
---
ARTICLES OF AMENDMENT
PLEASE INCLUDE A TYPED TO THE
SELF-ADDRESSED ENVELOPE ARTICLES OF INCORPORATION
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
FIRST: The name of the corporation is ELDORADO ARTESIAN SPRINGS, INC.
--------------------------------
SECOND: The following amendment to the Articles of Incorporation was adopted on
March 23, 1998, as prescribed by the Colorado Business Corporation Act, in the
- --------------
manner marked with an X below:
_____ No shares have been issued or Directors Elected - Action by
Incorporators
_____ No shares have been issued but Directors Elected - Action by
Directors
_____ Such amendment was adopted by the board of directors where shares
have been issued and shareholder action was not required.
__X__ Such amendment was adopted by a vote of the shareholders. The number
of shares voted for the amendment was sufficient for approval.
ARTICLE XIV is hereby added to the Articles of Incorporation, as follows:
ARTICLE XIV
Stock Split
Each twelve shares of the Corporation's Common Stock issued at the time
these Articles of Amendment to Articles of Incorporation are filed and
accepted by the Colorado Secretary of State shall be and hereby are
automatically changed and reclassified without further action into one
share of the Corporation's Common Stock, provided that no fractional shares
shall be issued to any shareholder pursuant to such change and
reclassification. The Corporation shall issue to each shareholder who would
otherwise be entitled to a fractional share as a result of such change and
reclassification a whole share in lieu of a fractional share.
THIRD: If changing corporate name, the new name of the corporation is
Not applicable
- --------------
FOURTH: The manner, if not set forth in such amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the amendment
shall be effected, is as follows:
Set forth in the amendment.
If these amendments are to have a delayed effective date, please list that
date:______________________________
(Not to exceed ninety (90) days from the date of filing)
ELDORADO ARTESIAN SPRINGS, INC.
-------------------------------
Signature /s/ Douglas A. Larson
---------------------
Title President
---------------------
<PAGE>
EXHIBIT 10.2
ELDORADO ARTESIAN SPRINGS, INC.
1997 STOCK OPTION PLAN
(Amended to reflect 12-1 reverse stock split effected 4/1/98)
I. PURPOSE
The ELDORADO ARTESIAN SPRINGS, INC. STOCK OPTION PLAN ("PLAN") provides
for the grant of Stock Options to employees, directors and consultants of
Eldorado Artesian Springs, Inc. (the "COMPANY"), and such of its subsidiaries
(as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended
(the "CODE")), as the Board of Directors of the Company (the "BOARD") shall from
time to time designate ("PARTICIPATING SUBSIDIARIES") in order to advance the
interests of the Company and its Participating Subsidiaries through the
motivation, attraction and retention of key personnel.
II. INCENTIVE STOCK OPTIONS AND NON-INCENTIVE STOCK OPTIONS
The Stock Options granted under the Plan may be either:
a) Incentive Stock Options ("ISOS") which are intended to be
"Incentive Stock Options" as that term is defined in Section 422 of the
Code; or
b) Nonstatutory Stock Options ("NSOS") which are intended to be
options that do not qualify as "Incentive Stock Options" under Section 422
of the Code.
All Stock Options shall be ISOs only to the extent specified in the Option
Agreement. Subject to the other provisions of the Plan, a Participant may
receive ISOs and NSOs at the same time, provided that the ISOs and NSOs are
clearly designated as such, and the exercise of one does not affect the exercise
of the other.
Except as otherwise expressly provided herein, all of the provisions and
requirements of the Plan relating to Stock Options shall apply to ISOs and NSOs.
III. ADMINISTRATION
The Plan shall be administered by the Board, or by a committee composed
solely of two or more directors ("COMMITTEE") each of whom is a Non-Employee
Director. The Committee or the Board, as the case may be, shall have full
authority to administer the Plan, including authority to interpret and construe
any provision of the Plan and any Stock Options granted thereunder, and to adopt
such rules and regulations for administering the Plan as it may deem necessary
in order to comply with the requirements of the Code or in order that Stock
Options that are intended to be ISOs will be classified as incentive stock
options under the Code, or in order to conform to any regulation
<PAGE>
or to any change in any law or regulation applicable thereto. The Board shall
have the power to reprice and accelerate the vesting of Stock Options. The Board
may reserve to itself any of the authority granted to the Committee as set forth
herein, and it may perform and discharge all of the functions and
responsibilities of the Committee at any time that a duly constituted Committee
is not appointed and serving. All references in this Plan to the "Committee"
shall be deemed to refer to the Board whenever the Board is discharging the
powers and responsibilities of the Committee, and to any special committee
appointed by the Board to administer particular aspects of this Plan.
All actions taken and all interpretations and determinations made by the
Committee in good faith (including determinations of Fair Market Value) shall be
final and binding upon all Participants, the Company and all other interested
persons. No member of the Committee shall be personally liable for any action,
determination or interpretation made in good faith with respect to this Plan,
and all members of the Committee shall, in addition to their rights as
directors, be fully protected by the Company with respect to any such action,
determination or interpretation. Rule 16b-3 under the Securities Exchange Act
of 1934 (the "EXCHANGE ACT") provides that the grant of a stock option to a
director or officer of a company will be exempt from the provisions of Section
16(b) of the Exchange Act if the conditions set forth in that Rule are
satisfied. Unless otherwise specified by the Committee, grants of Stock Options
hereunder to individuals who are officers or directors of the Company shall be
made in a manner that satisfies the conditions of that Rule.
IV. DEFINITIONS
4.1. "STOCK OPTION." A Stock Option is the right granted under the Plan
------------
to an Employee, director, or consultant to purchase, at such time or times and
at such price or prices ("OPTION PRICE") as are determined by the Committee, the
number of shares of Common Stock determined by the Committee.
4.2. "COMMON STOCK." A share of Common Stock means a share of authorized
------------
common stock of the Company.
4.3. "FAIR MARKET VALUE." If the Common Stock is traded publicly, the
-----------------
Fair Market Value of a share of Common Stock on any date shall be the average of
the representative closing bid and asked prices, as quoted by the National
Association of Securities Dealers, Inc. through NASDAQ (its automated system for
reporting quotes), for the date in question, or, if the Common Stock is listed
on the NASDAQ National System or is listed on a national stock exchange, the
officially quoted closing price on NASDAQ or such exchange, as the case may be,
on the date in question. If there is no market for the Common Stock, the Fair
Market Value of a share of Common Stock on any date shall be determined in good
faith by the Committee after such consultations with outside legal, accounting
and other experts as the Committee may deem advisable, and the Committee may
maintain a written record of its method of determining such value.
4.4. "EMPLOYEE." An Employee is an employee of the Company or any
--------
Participating Subsidiary.
2
<PAGE>
4.5. "PARTICIPANT." A Participant is an Employee, director or consultant
-----------
to whom a Stock Option is granted.
4.6. "NON-EMPLOYEE DIRECTOR." A Non-Employee Director is a person who
---------------------
satisfies the definition of a "non-employee director" set forth in Rule 16b-3
under the Exchange Act or any successor rule or regulation, as it may be amended
from time to time.
4.7 "CORPORATE TRANSACTION." A Corporate Transaction shall mean one or
---------------------
more of the following transactions unless persons who were holders of
outstanding voting capital stock of the Company which was outstanding
immediately prior to such transaction are immediately after such transaction
holders of 51% or more of the outstanding voting capital stock of the surviving
or acquiring entity (or equivalent equity interest if the entity is not a
corporation): (i) a merger, consolidation or acquisition (ii) a share exchange
(with or without a stockholder vote) in which 95% or more of the outstanding
capital stock of the Company is exchanged for capital stock of another
corporation; or (iii) the sale, transfer or other disposition of all or
substantially all of the Company's assets.
4.8 "SECURITIES ACT." Securities Act shall mean the Securities Act of
--------------
1933, as amended.
4.9 "CHANGE IN CONTROL." Change in Control shall mean any of the following
-----------------
events occurring after October 27, 1997.
A. If any one Person (as defined below), in a single transaction or in
a series of transactions shall purchase or otherwise acquire or become the
beneficial owner of securities of the Company representing sixty percent (60%)
or more of the combined voting power of the Company's then outstanding voting
securities (including any voting securities issuable upon conversion of
convertible securities of the Company held by such Person).
B. If at any annual or special meeting of Company stockholders
following a contested election the Board of Directors of the Company shall cease
to be an Authorized Board. For purposes of this paragraph, a "CONTESTED
ELECTION" shall mean (i) an election contest subject to Rule 14a-11 under the
Exchange Act or (ii) an election which would have been subject to Rule 14a-11 if
at the time of such election the Company had securities registered pursuant to
Section 12 of the Exchange Act.
C. If a change of control of the Company (i) required to be reported
in accordance with Item 6 of Schedule 14A under the Exchange Act, or (ii) which
would be required to be reported in accordance with Item 6 of Schedule 14A if at
the time of such election the Company had securities registered pursuant to
Section 12 of the Exchange Act, has otherwise occurred, unless a Constitutional
Majority of an Authorized Board approves the change of control and specifically
waives the application of this section.
D. A dissolution or liquidation of the Company.
3
<PAGE>
E. A sale of all or substantially all the Company's assets.
F. A determination by the Board or the Committee (as applicable), in
its sole discretion, that there has been a change in control of the Company.
For purposes of this Section 4.9 "PERSON" shall have the meaning set
forth in Sections 13(d) and 14(d)(2) of the Exchange Act, as in effect on the
date thereof, and shall include, without limitation, any "AFFILIATE" or
"ASSOCIATE" of such Person (as those terms are used in Rule 12b-2 under the
Exchange Act); provided, however, that the term "Person" shall not include the
Company or any trustee or other fiduciary holding securities under any employee
benefit plan of the Company. For purposes of this Section 4.9, (i) beneficial
ownership shall be computed in accordance with Rule 13d-3 under the Exchange
Act; and (ii) "AUTHORIZED BOARD" shall mean a Board of Directors of the Company
of which a number of directors equal to a majority of the authorized number of
directors constituting the entire Board, including vacancies (a "CONSTITUTIONAL
MAJORITY"), were either members of the Board of Directors on October 27, 1997 or
were nominated or elected a director by a Constitutional Majority at the date of
nomination or election of an Authorized Board.
4.10 "INITIAL PUBLIC OFFERING". "Initial Public Offering" shall mean the
-------------------------
Company's first offering of securities to the public which is registered
pursuant to the Securities Act.
V. ELIGIBILITY AND PARTICIPATION
Grants of ISOs may be made to Employees of the Company or any Participating
Subsidiary. Grants of NSOs may be made to Employees or directors of, or
consultants to, the Company or any Participating Subsidiary. Any director of
the Company or of a Participating Subsidiary who is also an Employee shall also
be eligible to receive ISOs. The Committee shall from time to time determine
the Participants to whom Stock Options shall be granted, the number of shares of
Common Stock subject to each Stock Option to be granted to each such
Participant, and the Option Price of such Stock Options, all as provided in this
Plan. The Option Price of any ISO shall be not less than the Fair Market Value
of a share of Common Stock on the date on which the Stock Option is granted, and
the Option Price of an NSO shall be not less than eighty percent (80%) of the
Fair Market Value on the date the NSO is granted. If an ISO is granted to an
Employee who then owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or any parent or subsidiary
corporation of the Company, the Option Price of such ISO shall be at least 110%
of the Fair Market Value of the Common Stock subject to the ISO at the time such
ISOs are granted, and such ISO shall not be exercisable after five years after
the date on which it was granted. Each Stock Option shall be evidenced by a
written agreement ("OPTION AGREEMENT") containing such terms and provisions as
the Committee may determine, subject to the provisions of this Plan.
4
<PAGE>
VI. SHARES OF COMMON STOCK SUBJECT TO THE PLAN
6.1. Maximum Number. The maximum aggregate number of shares of Common
--------------
Stock that may be made subject to Stock Options shall be 875,000 authorized
shares. To the extent the aggregate Fair Market Value (determined as of the
time the ISO is granted) of the stock with respect to which ISOs are exercisable
for the first time by an individual in a particular calendar year exceeds
$100,000, such excess Stock Options shall be treated as NSOs. If any shares of
Common Stock subject to Stock Options are not purchased or otherwise paid for
before such Stock Options expire, such shares may again be made subject to Stock
Options.
6.2. Capital Changes. In the event any changes are made to the shares of
---------------
Common Stock (whether by reason of reorganization, recapitalization, stock
dividend, stock split, combination of shares, exchange of shares, change in
corporate structure or otherwise), appropriate adjustments shall be made in:
(i) the number of shares of Common Stock theretofore made subject to Stock
Options, and in the Option Price of said shares; and (ii) the aggregate number
of shares which may be made subject to Stock Options in the future. If any of
the foregoing adjustments shall result in a fractional share, the fraction shall
be disregarded, and the Company shall have no obligation to make any cash or
other payment with respect to such a fractional share.
VII. EXERCISE OF STOCK OPTIONS
7.1 Time of Exercise. Subject to the provisions of the Plan, the
----------------
Committee, in its discretion, shall determine the time when a Stock Option, or a
portion of a Stock Option, shall become exercisable, and the time when a Stock
Option, or a portion of a Stock Option, shall expire. Such time or times shall
be set forth in the Option Agreement evidencing such Stock Option. Unless
otherwise specified in an Option Agreement, a Stock Option shall become
exercisable (i) with respect to 20% of the shares subject thereto on the
anniversary of the date of grant, and (ii) with respect to 1/48th of the shares
subject thereto at the end of each month after the first anniversary of the date
of grant, (so that all Stock Options are fully vested five (5) years after the
date of grant) subject to continued employment with the Company or a
Participating Subsidiary and Section 7.4 hereof. A Stock Option shall expire,
to the extent not exercised, no later than the tenth anniversary of the date on
which it was granted. The Committee may accelerate the vesting of any
Participant's Stock Option by giving written notice to the Participant. Upon
receipt of such notice, the Participant and the Company shall amend the Option
Agreement to reflect the new vesting schedule. The acceleration of the exercise
period of a Stock Option shall not affect the expiration date of that Stock
Option.
7.2 Exchange of Outstanding Stock. The Committee, in its sole discretion,
-----------------------------
may permit a Participant to (i) surrender to the Company whole shares of Common
Stock previously acquired by the Participant and/or (ii) request that the
Company withhold whole shares of Common Stock issuable upon exercise of the
Stock Option, as part or full payment for the exercise of a Stock Option. Such
surrendered or withheld shares shall be valued at their Fair Market Value on the
date of exercise. Shares credited to a Participant shall again be available for
grant under the Plan.
5
<PAGE>
7.3. Use of Promissory Note; Exercise Loans. The Committee may, in its
--------------------------------------
sole discretion, impose terms and conditions, including conditions relating to
the manner and timing of payments, on the exercise of Stock Options. Such terms
and conditions may include, but are not limited to, permitting a Participant to
deliver to the Company his promissory note as full or partial payment for the
exercise of a Stock Option. The Committee, in its sole discretion, may
authorize the Company to make a loan to a Participant in connection with the
exercise of Stock Options, or authorize the Company to arrange or guarantee
loans to a Participant by a third party. Any loan by the Company or acceptance
of a promissory note shall be made in accordance with the corporate law of the
Company's state of incorporation.
7.4. Termination of Employment before Exercise. If the employment of a
-----------------------------------------
Participant who was an employee of the Company or a Participating Subsidiary
when the Stock Option was granted shall terminate for any reason other than the
Participant's death or disability, any Stock Option granted to the Participant,
to the extent then exercisable under the applicable Option Agreement(s), shall
remain exercisable after the termination of the Participant's employment for a
period of three (3) months (but not later than the specified expiration date).
If the Participant's employment is terminated because the Participant is
disabled within the meaning of Section 22(e)(3) of the Code, any Stock Option
granted to the Participant, to the extent then exercisable under the applicable
Option Agreement(s), shall remain exercisable after the termination of his
employment for a period of twelve (12) months (but not later than the specified
expiration date). If the Participant dies while employed by the Company or a
Participating Subsidiary, or during the three-month or twelve-month periods
referred to above, his Stock Options may be exercised by the Participant's
estate, duly appointed representative or beneficiary who acquires the Stock
Options by will or by the laws of descent and distribution, to the extent that
they were exercisable on the date of cessation of his employment, but no further
installments of the Participant's Stock Options will become exercisable and each
of the Participant's Stock Options shall terminate on the first anniversary of
the date of the Participant's death (but not later than the specified expiration
dates). If a Stock Option is not exercised during the applicable period, it
shall be deemed to have been forfeited and of no further force or effect.
Notwithstanding the foregoing provisions of this Section 7.4, but subject
to the other provisions of this Plan, the Option Agreement may specify longer
periods for exercise of a NSO or ISO (unless to do so in the case of an ISO
would cause the ISO not to qualify as an incentive stock option pursuant to
Section 422 of the Code) after any such an event.
Upon action of the Committee in its sole discretion, except as provided in
a written employment or consulting agreement of the Company or a Participating
Subsidiary with the Participant, which is referenced in the Option Agreement,
any Stock Option shall terminate immediately, and may not be exercised, (i) if
prior to the date of exercise Participant is terminated for cause as an Employee
of the Company or its Participating Subsidiary, or if not an Employee, for cause
as a director or consultant for the Company or its Participating Subsidiary; or
(ii) if subsequent to a Participant's termination and prior to the expiration of
the term of the Stock Option conditions arise or are discovered with respect to
a Participant that would have constituted cause for termination. "CAUSE" shall
have the meaning given to it in the Participant's written employment,
6
<PAGE>
consultant or director agreement with the Company or Participating Subsidiary.
If no such written agreement exists, "cause" shall mean (i) dishonesty which is
not the result of an inadvertent or innocent mistake with respect to the Company
or any of its subsidiaries; (ii) willful misfeasance or nonfeasance of duty
intended to injure or having the effect of injuring in some material fashion the
reputation, business or business relationships of the Company or any of its
subsidiaries or any of their respective officers, directors or employees; (iii)
conviction upon a charge of any crime involving moral turpitude or a crime other
than a vehicle offense which could reflect in some material fashion unfavorably
upon the Company or any of its subsidiaries; or (iv) willful or prolonged
absence from work by the Participant (other than by reason of disability due to
physical or mental illness) or failure, neglect or refusal by the Participant to
perform his duties and responsibilities without the same being corrected upon
twenty (20) days prior written notice. In addition, unless specifically provided
otherwise in reference to this Plan in a written employment, consultant or
director agreement with the Company or Participating Subsidiary, "cause" for
purposes of this Section 7.4 shall exist (and termination of the Stock Option
may occur even if not so provided in the written employment, consultant or
director agreement with the Company or Participating Subsidiary) if the
Participant materially breaches any provision of an agreement with the Company
or any of its subsidiaries with respect to obligations regarding non-
competition, confidentiality, non-solicitation of customers, and non-hire of
customers and employees of the Company or a Subsidiary.
7.5. Disposition of Forfeited Stock Options. Any shares of Common Stock
--------------------------------------
subject to Stock Options forfeited by a Participant shall not thereafter be
eligible for purchase by the Participant, but may be made subject to Stock
Options granted to other Participants.
7.6. Conditions of Exercise. Notice of exercise shall be in the form
----------------------
attached to the Option Agreement and shall, in the discretion of the Company,
contain a representation, in the form provided by the Company, that the shares
are being purchased for investment only and not for resale or distribution, and
such other representations and agreements as the Company may reasonably require,
and may in addition require as a condition of exercise that the Participant
execute any stockholders agreement which is to be applicable to either: (i)
holders of 70% or more of the capital stock of the Company or (ii) holders of
70% or more of the Stock Options granted under this Plan. The Company may also
require as a condition of exercise that the Participant will agree, if requested
by the Company in connection with a public offering of the Company's securities,
to adhere to lock-up arrangements between the Company and an underwriter
involved in such public offering.
VIII. NO CONTRACT OF EMPLOYMENT
Nothing in this Plan shall confer upon the Participant the right to
continue as an employee, consultant or director of the Company or any
Participating Subsidiary, nor shall it interfere in any way with the right of
the Company, or any Participating Subsidiary, to discharge the Participant at
any time for any reason whatsoever, with or without cause. Nothing in this
Article VIII shall affect any rights or obligations of the Company or any
Participant under any written contract of employment.
7
<PAGE>
IX. NO RIGHTS AS A STOCKHOLDER
A Participant shall have no rights as a stockholder with respect to any
shares of Common Stock subject to a Stock Option. Except as provided in Section
6.2, no adjustment shall be made in the number of shares of Common Stock issued
to a Participant, or in any other rights of the Participant upon exercise of a
Stock Option by reason of any dividend, distribution or other right granted to
stockholders for which the record date is prior to the date of exercise of the
Participant's Stock Option. The Committee, the Board and the Company have no
continuing duty to provide a Participant with information concerning the
Company.
X. ASSIGNABILITY
No Stock Option granted under this Plan, nor any other rights acquired by
Participant under this Plan, shall be assignable or transferable by a
Participant, other than by will or the laws of descent and distribution.
Notwithstanding the preceding sentence, the Committee, in its sole discretion,
may permit the assignment or transfer of an NSO and the exercise thereof by a
person other than a Participant, on such terms and conditions as the Committee
in its sole discretion may determine. Any such terms shall be set forth in the
Option Agreement. In the event of a Participant's death, the Stock Option may
be exercised by the personal representative of the Participant's estate or by
the successor or successors in interest determined under the Participant's will
or under the applicable laws of descent and distribution. The terms of any
rights under this Plan in the hands of a transferee or assignee shall be
determined as if held by the Participant and shall be of no greater extent or
term than if the transfer or assignment had not taken place.
XI. CORPORATE TRANSACTIONS AND CHANGES IN CONTROL
11.1. At least ten (10) days prior to the consummation of a Corporate
Transaction, the Company shall give Participants written notice of the proposed
Corporate Transaction. The vesting schedules of all Stock Options shall
automatically be accelerated so that the Stock Options shall become exercisable
as to those shares which could be purchased under those vesting schedules 12
months after the date of consummation of the Corporation Transaction. In
addition, at the sole discretion of the Committee, the vesting schedule of some
or all other Stock Options may be accelerated so that all or any portion of
Stock Options outstanding under the Plan immediately prior to the consummation
of the Corporate Transaction shall, for all purposes under this Plan, become
exercisable as of such time. If a Corporate Transaction is to occur, in lieu of
allowing a Participant to exercise the Participant's Stock Options, the Board
may, in its sole discretion, require some or all Participants to accept a cash
payment in consideration for the termination of the Participant's Stock Options.
The termination shall occur immediately prior to the consummation of the
Corporate Transaction and the cash payment shall be equal to the difference
between the price per share of Common Stock in the Corporate Transaction as
determined by the Board and the exercise price of a Participant's Stock Options.
All Stock Options, to the extent not previously exercised, shall terminate upon
the consummation of such Corporate Transaction and cease to be exercisable
unless expressly assumed by the successor corporation or parent thereof.
Provided, however, that if the Corporate Transaction is to be accounted for as a
"pooling-of-interest," then unexercised stock
8
<PAGE>
options shall be exchanged for similar options of the acquiror or surviving
entity or voting common stock of the acquiror or surviving entity based on the
value of the options, as and to the extent required by APB No. 16, accounting
pronouncements of the Securities and Exchange Commission, and other
authoritative principles and pronouncements concerning pooling-of-interest
accounting. Notwithstanding the foregoing, the vesting of a Participant's Stock
Options shall not be accelerated (if and to the extent requested in writing by
the Participant) upon a Corporate Transaction if the participant is a
"disqualified individual" as that term is defined in Section 280G of the
Internal Revenue Code.
11.2. The vesting schedules of all Stock Options shall be automatically
accelerated so that the Stock Options shall become exercisable as to all shares
subject to the Stock Options if the Participant's employment is terminated
without cause by the Company within one (1) year following a Change in Control.
"Without cause" means that "cause" did not exist as defined in Section 7.4.
11.3 The employment, consulting or directorship agreement, or the Option
Agreement of a Participant may contain terms which vary from Sections 11.1 and
11.2 upon approval of the Board and the Committee.
XII. AMENDMENT
The Board of Directors may from time to time alter, amend, suspend or
discontinue the Plan, including, where applicable, any modifications or
amendments as it shall deem advisable in order that ISOs will be classified as
incentive stock options under the Code, or in order to conform to any regulation
or to any change in any law or regulation applicable thereto; provided, however,
that no such action shall adversely affect the rights and obligations with
respect to Stock Options at any time outstanding under the Plan; and provided
further that no such action shall, without the approval of the stockholders of
the Company, (i) increase the maximum number of shares of Common Stock that may
be made subject to Stock Options (unless necessary to effect the adjustments
required by Section 6.2), (ii) materially modify the requirements as to
eligibility for participation in the Plan, or (iii) materially increase the
benefits accruing to Participants under the Plan.
XIII. REGISTRATION OF OPTIONED SHARES
The Stock Options shall not be exercisable unless the purchase of such
optioned shares is pursuant to an applicable effective registration statement
under the Securities Act and applicable state securities laws or unless, in the
opinion of counsel to the Company, the proposed purchase of such optioned shares
would be exempt from the registration requirements of the Securities Act and
from the registration or qualification requirements of applicable state
securities laws. Any certificates for such shares shall bear such legends as
deemed appropriate by the Committee.
9
<PAGE>
XIV. WITHHOLDING TAXES
14.1 Satisfaction of Withholding Obligations. The Company or
----------------------------------------
Participating Subsidiary may take such steps as it may deem necessary or
appropriate for the withholding of any taxes or funds which the Company or the
Participating Subsidiary is required by any law or regulation of any
governmental authority, whether federal, state or local, domestic or foreign, to
withhold in connection with any Stock Options (collectively, "WITHHOLDING
OBLIGATIONS"). Such steps may include, by way of example only and not
limitation, (i) requiring a Participant to remit to the Company in cash an
amount sufficient to satisfy such Withholding Obligations; (ii) allowing the
Participant to tender to the Company shares of Common Stock, the Fair Market
Value of which at the tender date the Committee determines to be sufficient to
satisfy such Withholding Obligations; (iii) withholding shares of Common Stock
otherwise issuable upon the exercise of a Stock Option and which have a Fair
Market Value at the exercise date sufficient to satisfy such Withholding
Obligations; or (iv) any combination of the foregoing.
14.2 Securities Law Restrictions on Satisfaction of Withholding
----------------------------------------------------------
Obligations. Notwithstanding any other provisions of the Plan, a Participant who
- -----------
is subject to Section 16(b) of the Exchange Act shall not be permitted to
satisfy Withholding Obligations in the manner set forth in clauses (ii) or (iii)
of Section 14.1 hereof prior to the expiration of six months after the date on
which the applicable Stock Option was granted, except in the event of the death
or Disability of the Participant, unless the Company is advised by its counsel
that such elections may be permitted pursuant to Section 16 of the Exchange Act
or any rule or interpretation of the U.S. Securities and Exchange Commission
thereunder. Except with the consent of the Committee, a Participant who is
subject to Section 16(b) of the Exchange Act may not satisfy Withholding
Obligations in the manner set forth in clauses (ii) or (iii) of Section 14.1
other than (i) during the 10-day window period beginning on the third business
day following the date of release for publication of the Company's quarterly and
annual summary statements of sales and earnings and ending on the twelfth
business day following such date or (ii) at least six months prior to the date
as of which the income attributable to the exercise of such Stock Option is
recognized under the Code.
14.3 Notification of Inquiries and Agreements. Each Participant shall
----------------------------------------
notify the Company in writing within 10 days after the date such Participant (i)
first obtains knowledge of any Internal Revenue Service inquiry, audit,
assertion, determination, investigation, or question relating in any manner to
the value of any shares of Common Stock or Stock Options granted or received
hereunder; (ii) includes or agrees (including, without limitation, in any
settlement, closing or other similar agreement) to include in gross income with
respect to any shares of Common Stock or Stock Options received or granted
hereunder (A) any amount in excess of the amount reported on Form 1099 or Form
W-2 to such Participant by the Company, or (B) if no such Form was received, any
amount; (iii) exercises, sells, disposes of, or otherwise transfers (other than
to such Person's successors, heirs, executors or administrators, as the case may
be) a Stock Option acquired pursuant to this Plan; or (iv) sells, disposes of,
or otherwise transfers (other than to such Person's successors, heirs, executors
or administrators, as the case may be) shares of Common Stock acquired pursuant
to the exercise of an Incentive Stock Option within the Disqualified Period.
Upon request, a Participant shall provide to the Company any information or
document relating to any event described in the preceding sentence which the
Company (in its sole discretion) requires in order to calculate and substantiate
any change in the Company's tax liability as a result of such event.
"DISQUALIFIED PERIOD" means, in the case of any Incentive Stock Option, the
period beginning on the date such Stock Option is granted and ending on the
later of the date (i) two years after the date such Stock Option is granted, or
(ii) one year after the transfer of any Common Stock to a Participant pursuant
to the exercise of such Stock Option.
10
<PAGE>
XV. BROKERAGE ARRANGEMENTS
The Committee, in its discretion, may enter into arrangements with one or
more banks, brokers or other financial institutions to facilitate the
disposition of shares acquired upon the exercise of Stock Options including,
without limitation, arrangements for the simultaneous exercise of Stock Options
and the sale of shares acquired upon exercise.
XVI. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board nor the submission of the
Plan to stockholders of the Company for approval shall be construed as creating
any limitations on the power or authority of the Board to adopt such other or
additional incentive or other compensation arrangements of whatever nature as
the Board of Directors may deem necessary or desirable or preclude or limit the
continuation of any other plan, practice or arrangement for the payment of
compensation or fringe benefits to employees generally, or to any class or group
of employees, which the Company or any Participating Subsidiary now has lawfully
put into effect, including, without limitation, any retirement, pension, savings
and stock purchase plan, insurance, death and disability benefits and executive
short-term or long-term incentive plans.
XVII. EFFECTIVE DATE
This Plan was adopted by the Board of Directors on September 10, 1997 and
became effective on that date subject to the approval of the Company's
stockholders within twelve (12) months thereafter. However, if such approval is
not obtained all provisions of this Plan, and all grants hereunder, shall
nevertheless be effective except that all ISOs shall be NSOs. No Stock Options
shall be granted subsequent to ten years after the effective date of the Plan.
Stock Options outstanding subsequent to ten years after the effective date of
the Plan shall continue to be governed by the provisions of the Plan.
11
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 70,166
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<RECEIVABLES> 508,320
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<CURRENT-ASSETS> 761,835
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<TOTAL-COSTS> 501,288
<OTHER-EXPENSES> 2,568,571
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