FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1998
Commission File Number: 33-6738-D
Eldorado Artesian Springs, Inc.
(Exact name of registrant as specified in its charter as amended)
Colorado 84-0907853
- ---------------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.
incorporation Or organization)
PO Box 445, Eldorado Springs, Colorado 80025
- ---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
(303)499-1316
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number shares of common stock outstanding at the latest practicable date,
September 30, 1998: 2,995,495.
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
INDEX
Page
----
Part I - Financial Information
Item 1 - Financial Statements
Balance Sheets September 30, 1998 (Unaudited) and
March 31, 1998 .......................................................F - 1
Unaudited Statements of Operations For the Three and
Six Months Ended September 30, 1998 and September 30, 1997 ...........F - 2
Unaudited Statements of Cash Flows For the Six Months Ended
September 30, 1998 and September 30, 1997 ............................F - 3
Notes to Unaudited Financial Statements ...............................F - 4
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................F - 6
Part II - Other Information ..............................................F - 10
Signature Page ...........................................................F - 11
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Balance Sheets
September 30, March 31,
1998 1998
----------- -----------
(Unaudited)
Assets
Current assets
Cash ........................................... $ 322,611 $ 70,166
Accounts receivable
Trade, net .................................... 590,469 498,320
Other ......................................... 7,361 5,506
Inventories .................................... 128,992 122,701
Prepaid expenses and other ..................... 16,080 48,313
Deferred income taxes .......................... 4,633 16,829
---------- ----------
Total current assets ...................... 1,070,146 761,835
---------- ----------
Property, plant & equipment - net ................ 1,802,353 1,525,370
---------- ----------
Other assets
Water rights - net ............................. 112,374 114,618
Restricted cash ................................ 125,000 -
Deferred offering costs ........................ 25,499 --
Other, net ..................................... 54,898 54,898
---------- ----------
Total other assets .. ..................... 317,771 169,516
---------- ----------
$3,190,270 $2,456,721
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ............................... $ 124,885 $ 129,747
Accrued expenses ............................... 67,760 79,130
Line-of-credit .................................. - 40,000
Deposits ....................................... 45,407 49,178
Current maturities of long-term debt ........... 162,755 123,005
---------- ----------
Total current liabilities ................. 400,807 421,060
Long-term liabilities
Long-term debt ................................. 1,439,908 1,431,820
Deferred income taxes .......................... 47,011 52,921
---------- ----------
Total liabilities ......................... 1,887,726 1,905,801
---------- ----------
Stockholders' equity
Common stock, par value $.001 per share;
50,000,000 shares authorized; 2,995,495
issued and outstanding ........................ 2,995 2,695
Additional paid-in capital ..................... 984,656 294,875
Retained earnings .............................. 314,893 253,350
---------- ----------
1,302,544 550,920
---------- ----------
$3,190,270 $2,456,721
========== ==========
See notes to unaudited financial statements.
F - 1
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------ ----------- ------------ ------------
1998 1997 1998 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue
Waterand related ............ $ 1,034,959 $ 852,644 $ 1,913,422 $ 1,587,893
Pool ........................ 59,701 46,648 83,030 68,388
Rentals ..................... 12,450 19,025 23,350 30,890
----------- ----------- ----------- -----------
Net revenue ................ 1,107,110 918,317 2,019,802 1,687,171
Cost of goods sold ........... 161,207 140,525 285,044 259,391
----------- ----------- ----------- -----------
Gross profit ................. 945,903 777,792 1,734,758 1,427,780
----------- ----------- ----------- -----------
Operating expenses
Salaries and related ........ 440,966 362,677 788,242 658,655
Administrative and general .. 202,520 142,886 365,706 229,806
Selling and delivery ........ 120,879 84,424 277,043 196,629
Depreciation and amortization 96,068 56,863 160,377 113,956
----------- ----------- ----------- -----------
860,433 646,850 1,591,368 1,199,046
----------- ----------- ----------- -----------
Operating Income ............. 85,470 130,942 143,390 228,734
----------- ----------- ----------- -----------
Other Income (expense)
Interest income ............. 5,419 1,686 9,994 2,967
Interest expense ............ (35,929) (36,027) (73,995) (70,781)
----------- ----------- ----------- -----------
(30,510) (34,341) (64,001) (67,814)
----------- ----------- ----------- -----------
Net Income before Income
taxes ....................... 54,960 96,601 79,389 160,920
Provision for income taxes ... 10,702 19,958 17,846 32,548
----------- ----------- ----------- -----------
Net income and comprehensive
income ...................... $ 44,258 $ 76,643 $ 61,543 $ 128,372
=========== =========== =========== ===========
Basic earnings per common
share ....................... $ 0.02 $ 0.03 $ 0.02 $ 0.05
=========== =========== =========== ===========
Weighted average number of
shares outstanding .......... 2,926,264 2,695,495 2,961,069 2,695,495
=========== =========== =========== ===========
</TABLE>
See notes to unaudited financial statements.
F - 2
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
September 30,
----------------------------
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
Cash flows from activities
Net income .................................. $ 61,543 $ 128,372
----------- -----------
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization .............. 160,377 113,956
Deferred income taxes ...................... 6,286 --
Changes in certain assets and liabilities
Accounts receivable ....................... (94,004) (165,356)
Inventories ............................... (6,291) (31,058)
Prepaid expenses and other ................ 32,233 1,126
Accounts payable .......................... (4,862) 34,073
Accrued expenses .......................... (11,370) (27,347)
Deposits .................................. (3,771) (2,524)
----------- -----------
78,598 (77,130)
----------- -----------
Net cash provided by operating activities 140,141 51,242
----------- -----------
Cash flows from investing activities
Purchase of property and equipment .......... (435,116) (236,327)
----------- -----------
Net cash flows used in investing
activities ............................. (435,116) (236,327)
----------- -----------
Cash flows from financing activities
Proceeds from additions to long-term debt ... 146,125 1,500,000
Payments on long-term debt .................. (98,287) (1,232,830)
Payments on line-of-credit .................. (40,000) --
Proceeds from sale of common stock .......... 825,000
Loan fees and origination cost .............. -- (18,196)
Costs related to issuance of common stock ... (134,919) --
Restricted cash ............................. (125,000) --
Deferred offering cost ...................... (25,499) --
----------- -----------
Net cash flows provided by financing
activities ............................. 547,420 248,974
----------- -----------
Net increase in cash .......................... 252,445 63,889
Cash - beginning of period .................... 70,166 244,765
----------- -----------
Cash - ending of period ....................... $ 322,611 $ 308,654
=========== ===========
</TABLE>
Supplemental disclosures of cash flow information: Cash paid for interest for
the six months ended September 30, 1998 and 1997 was $73,995 and $70,781,
respectively. Cash paid for income taxes for the six months ended September
30, 1998 and 1997 was $14,011 and $10,132, respectively.
See notes to unaudited financial statements.
F - 3
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Notes to Unaudited Financial Statements
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Interim Unaudited Financial Statements
- --------------------------------------
The financial statements are unaudited and reflect all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the financial position and operating
results for the interim periods. The results of operations for the six months
ended September 30, 1998 and 1997 are not necessarily indicative of the results
of the entire year. The financial statements included herein are presented in
accordance with the requirements of Form 10-QSB and consequently do not include
all of the disclosures normally made in the registrant's annual Form 10-KSB
filing. These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Form 10-KSB
for the year ended March 31, 1998.
Certain amounts for the periods ended June 30, 1997 and September 30, 1997 have
been reclassified to conform with the 1998 presentation.
Note 2 - Recently Issued Accounting Pronouncements
- --------------------------------------------------
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), which establishes standards
for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income, be reported in a financial statement that is displayed
with the same prominence as other financial statements. Currently the Company's
only component, which would comprise comprehensive income, is its results of
operations. SFAS 130 is effective for financial statements for periods beginning
after December 15, 1997, and requires comparative information for earlier
periods to be restated.
Note 3 - Stockholders' Equity
- -----------------------------
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. All prior period comparative information
has been restated to reflect the reverse stock split.
Private Placement
- -----------------
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 approximately $690,000 from the private placement of which
$150,000 was placed in a joint account with the placement agent for a potential
additional private placement, of which $25,000 has been utilized and is
reflected as deferred offering costs.
F - 4
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Notes to Unaudited Financial Statements
Note 3 - Stockholders' Equity (continued)
- -----------------------------------------
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 interest of
the Company.
Additionally, 346,500 options are outstanding that were issued to employees. All
of the options were issued with an option price of $2.75 per share, fair market
value at the date of grant. Such options expire on September 10, 2007
Warrants
- --------
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 - 5
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This filing contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 and the Company intends that such forward-looking
statements be subject to the safe harbors created thereby. These forward-looking
statements include the plans and objectives of management for future operations,
including plans and objectives relating to services offered by and future
economic performance of the Company.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties that might adversely affect the
Company's operating results in the future in a material way. Such risks and
uncertainties include but are not limited to the following: ability to secure
debt and equity financing, interest rate fluctuations, effects of regional
economic and market conditions, labor and marketing costs, operating costs,
packaging costs, intensity of competition, ability to obtain additional water
rights, legal claims and the contingencies associated with year 2000 compliance.
Overview
Eldorado Artesian Springs, Inc. (Eldorado) is a Colorado based company that is
primarily involved in the bottling and marketing of "natural" artesian spring
water. The spring is located in the foothills of the Colorado Rocky Mountains
and is surrounded by thousands of acres of state and city park land, assuring a
well protected source. The artesian springs located on the Company's property,
emanate from one of the most unique geologic sources in the world. The water is
naturally purified as it rises up through many layers of sandstone under its own
artesian pressure. Eldorado Artesian Spring water is bottled at the source in
its natural state and is not chemically treated in any way. Currently,
Eldorado's operations consist of its home/commercial delivery business (5 gallon
bottles) and the PET (polyethylene terephtalate, a premium clear plastic
container) consumer business.
Beverage industry analysts reveal that bottled water is the fastest growing
major category in the entire industry. The bottled water industry as whole is a
$3.9 billion business and is currently growing at a rate of 9% to 10% per year.
The PET segment of the bottled water industry is currently a $600 million
business and is growing at a much faster rate (at an estimated 20% to 30% per
year) than the industry as a whole. Analysts expect just the PET segment of the
industry to reach $3 billion in wholesale sales over the next ten years, which
is an indicated rate of growth of 17% annually.
F - 6
<PAGE>
Results of Operations
Revenues for the six months ended September 30, 1998 increased 19.7% to
$2,019,802 versus $1,687,171 for the same period in 1997. A substantial portion
of the increase in sales is due to increased volume to existing customers as
well as from sales to new customers. Sales of five gallon products increased by
18%, one gallon products increased by 24% and sales of the smaller PET packages
increased by 48%. Five gallon products generated the majority of the increase in
overall revenues. Revenues for the five gallon products increased $224,790 to
$1,524,377 for the period ending September 30, 1998 versus $1,299,587 for the
period ending September 30, 1997.
For the first six months of fiscal 1998, cost of goods sold was $285,044
compared to $259,391 in fiscal year 1997 resulting in gross profits of
$1,734,758, or 85.9% of sales, and $1,427,780, or 84.6% of sales, respectively.
For the three months ended September 1998, Cost of Goods Sold was $161,207 in
1998 compared to $140,525 in 1997 resulting in gross profits of $945,903, or
85.4% of sales, and $777,792, or 84.7% of sales, respectively. This increase in
gross profit for the respective six and three month periods was due to an
increase in sales volume of five gallon product which has a higher margin. In
addition, the Company's sales continue to increase in the higher margin home and
office sales.
For the first six months of fiscal year 1998 compared to the corresponding
period in fiscal year 1997, total operating expenses were $1,591,368 and
$1,199,046, respectively, an increase of $392,322 or 32.7%. Salaries and related
expenses were $788,242 for the period ending September 30, 1998, an increase of
19.7% over the same period of fiscal 1997 which was primarily attributable to
the increase in sales. Selling, general and administrative expenses increased by
$216,314 or 50.7%. Advertising and promotional expenses increased by 46% the six
month period in 1998 compared to the corresponding period of fiscal 1997.
Advertising and promotional expenses are associated with the both the home and
office delivery as well as the retail-size category. The increase in advertising
and promotional expenses was due to the increased expenses associated with
increased market penetration and brand awareness. The Company plans to continue
to spend significant amounts in the future for advertising and promotions to
develop brand recognition and increase market penetration but no assurance can
be given that increases in spending will result in higher sales. Legal and
accounting expenses increased $31,586 over the same period a year ago. These
additional costs are associated with the private placement on April 22, 1998 as
well as the proposed secondary public offering. Depreciation and amortization
increased 68.9% and 40.7% for the six month and three months ended September 30,
1998, which was attributable to recent machinery and equipment purchases.
Net interest expense increased $3,214 for the first six months of 1998. The
increase in interest expense was a result of increased borrowing to finance
additional machinery and equipment.
The Company's net income for the first six months of 1998 was $61,543 compared
to net income of $83,228 for the year ended March 31, 1998. Net income for the
three months ended September 30, 1998 was $44,258.
F - 7
<PAGE>
Liquidity and Capital Resources
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. The intention for the use of
proceeds of the private placement include replacing a five gallon bottling line
to increase capacity from 160 bottles to 600 bottles per hour. By the end of
September 1998, 100% of the bottling equipment was installed and being utilized.
Proceeds from the private placement are being utilized to expand the Company's
internal sales and distribution capabilities. In addition, the Company is
actively looking to lease or construct a warehouse/distribution facility in the
Denver, Colorado area in order to add additional warehouse space.
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. As of September 30, 1998, 346,500 options are outstanding that were
issued to employees.
The Company has traditionally financed operations with debt. With the
restructuring of debt in June 1997, the Company has been able to improve the
bottling/warehouse facilities by expanding floor space and adding additional
high speed bottling equipment. With the proceeds from a secondary public
offering as well as additional debt the company plans to continue to finance
capital expenditures.
Accounts receivable increased 18.7% to $597,830 for the six months ended
September 30, 1998. This represents 52.6 days sales in receivables. This
increase is a concern for management and serious efforts have been made to bring
receivables back to the targeted level of 38 days. Expenses for bad debts are
expected to be 0.07% of revenues for the year end March 31, 1999 and management
has taken this into account for the six months ended September 30, 1998.
Management has implemented a water rights augmentation program to acquire
additional water rights in order to provide for a forecasted increase in water
sales. Management is currently in negotiations to acquire additional water
rights. The acquisition of these water rights will be at a significant cost to
the Company.
The Company also plans to lease or purchase a plastics molding facility and the
necessary molds to produce their own supply of PET bottles and to sell the
bottles to other companies. In order to handle the increase in business, the
Company will need to acquire additional off-site warehouse space. The Company is
looking to either lease or construct space in order to store raw materials and
finished goods. In addition, the Company will be improving the existing bottling
and office facilities.
F - 8
<PAGE>
The Company is poised to achieve significant growth via the expansion of its
retail PET business into new geographic markets. The PET segment of the bottled
water business is the fastest growing segment of the bottled water market. In
order to accomplish broader distribution of the PET products, the Company will
need additional working capital for marketing investments for such things as
slotting fees and marketing promotions. As the Company grows and expands its
retail distribution there will be a need to add an additional brand marketing
executive.
Year 2000 Compliance
The Company is in the process of developing and finalizing plans to address the
Year 2000 computer problem and to begin converting their computer systems to be
Year 2000 compliant. The Year 2000 problem is the result of computer programs
being written using two digits rather than four to define the applicable year.
The Company presently believes that with upgrades to existing software and
possibly some replacement, the Year 2000 problem will not pose significant
operational problems for their computer systems. However, if such upgrades and
replacements are not completed timely or effectively implemented, the Year 2000
problem could have a material impact on the operations of the Company. The
Company expects to incur internal staff costs and consulting fees, as well as
the cost of the software upgrades and replacement as a part of this effort.
However, until the Company's plans are finalized, management is not able to
reasonably estimate the costs of achieving Year 2000 compliance.
F - 9
<PAGE>
ELDORADO ARTESIAN SPRINGS, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No legal proceedings have been filed on behalf of or against the Company, nor
have any claims been made.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
There have been no defaults on any securities. The Company has no obligations
with regard to dividends and no preferred stock.
Item 4. Submission of Matters to a Vote of the Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
F - 10
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELDORADO ARTESIAN SPRINGS, INC.
By: /s/ Douglas Larson
Douglas A. Larson, President
By: /s/ Kevin M. Sipple
Kevin M. Sipple, Secretary
F - 11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-30-1998
<CASH> 322,611
<SECURITIES> 0
<RECEIVABLES> 607,830
<ALLOWANCES> 10,000
<INVENTORY> 128,992
<CURRENT-ASSETS> 1,070,146
<PP&E> 3,569,699
<DEPRECIATION> 1,767,346
<TOTAL-ASSETS> 3,190,270
<CURRENT-LIABILITIES> 400,807
<BONDS> 0
0
0
<COMMON> 2,995
<OTHER-SE> 1,299,549
<TOTAL-LIABILITY-AND-EQUITY> 3,190,270
<SALES> 1,913,422
<TOTAL-REVENUES> 2,019,802
<CGS> 285,044
<TOTAL-COSTS> 285,044
<OTHER-EXPENSES> 1,591,368
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,995
<INCOME-PRETAX> 79,389
<INCOME-TAX> 17,846
<INCOME-CONTINUING> 61,543
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,543
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
